Personalis, Inc. 2019 Q3 Form 10-Q Summary
Business Context and Reporting Period
Personalis is a cancer genomics company providing sequencing and data-analysis services to biopharmaceutical customers and the U.S. Department of Veterans Affairs Million Veteran Program (VA MVP). The filing covers the three and nine months ended September 30, 2019, and was filed November 13, 2019. The company completed its initial public offering in June 2019 and trades on Nasdaq under PSNL.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $17.2 million | $11.7 million | $47.1 million | $24.6 million |
| Gross profit | $5.6 million | $4.5 million | $15.5 million | $7.0 million |
| Gross margin | 32.8% | 38.5% | 33.0% | 28.3% |
| Loss from operations | $(5.7) million | $(1.8) million | $(15.2) million | $(10.6) million |
| Net loss | $(6.9) million | $(3.6) million | $(18.4) million | $(16.3) million |
| Net loss per share | $(0.22) | $(1.19) | $(1.35) | $(5.33) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(20.5) million | $2.4 million |
- Q3 revenue increased 47%, driven primarily by a 98% increase in VA MVP revenue to $12.9 million. Nine-month revenue increased 91%, with VA MVP revenue rising 139% to $29.8 million.
- Q3 gross margin declined year over year as costs of revenue grew 60%, faster than revenue growth. Nine-month gross margin improved versus the prior year because of operating scale and higher revenue.
- Research and development expense increased 47% in Q3 and 50% for the nine-month period, reflecting new product, laboratory, automation, and infrastructure development.
- Selling, general and administrative expense increased 126% in Q3 and 107% for the nine-month period, primarily due to headcount, stock-based compensation, professional services, and public-company costs.
- Q3 net loss included a $1.7 million loss on debt extinguishment. Nine-month other expense also included a $1.4 million increase in the fair value of preferred-stock warrant liabilities.
- At September 30, 2019, cash and cash equivalents were $87.0 million and short-term investments were $40.3 million, for total cash and marketable securities of approximately $127.3 million. Total assets were $159.7 million and stockholders’ equity was $111.4 million.
- The company had no short-term debt at quarter end. It repaid the $20.0 million Growth Capital Loan in August 2019 and recorded the related debt-extinguishment loss.
- Nine-month investing cash outflows were $46.7 million, including $40.2 million invested in available-for-sale debt securities and $6.5 million of capital expenditures. Financing cash inflows were $134.5 million, primarily from the IPO.
Material Changes Versus the Prior Comparable Period
- The June 2019 IPO issued 9.1 million shares at $17.00 per share and generated approximately $139.8 million of net proceeds after underwriting discounts and offering expenses. The preferred stock automatically converted into common stock.
- Shares outstanding increased substantially, with 31.1 million weighted-average shares in Q3 2019 versus 3.1 million in Q3 2018. The lower per-share loss therefore reflects both the change in total loss and the post-IPO share count.
- Customer deposits and other contract liabilities declined to $33.7 million from $42.9 million at December 31, 2018. Contracted but unrecognized revenue was $82.5 million at September 30, 2019, which management expected to recognize over the following 18 months.
- The company adopted the new lease standard on January 1, 2019 and recorded operating lease right-of-use assets of $2.2 million at quarter end, with total operating lease liabilities of $2.3 million.
- The company announced a new $38.1 million VA MVP task order in September 2019.
- Revenue concentration increased investor exposure to the VA MVP: it represented 75% of Q3 revenue and 63% of nine-month revenue. The top five customers represented 93% and 92%, respectively.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- No formal revenue, earnings, or margin guidance is provided in the filing. Management stated that cash, cash equivalents, and marketable securities, together with expected operating resources, should fund operations for at least the next 12 months.
- Management expects continued losses and negative operating cash flow while it scales laboratory capacity, infrastructure, sales activities, and research and development. The company has incurred operating losses and negative operating cash flow every year since inception.
- Customer prepayments create a potential liquidity contingency. Contract liabilities included approximately $31.2 million from one customer, and the company may be required to refund deposits if customers cancel or reduce future services.
- The VA MVP contract is subject to government funding, sample volumes, customer demand, and potential termination for convenience. Pricing and sample timing may fluctuate materially.
- The company relies on limited or sole-source suppliers, including Illumina for sequencers, reagents, and related maintenance. Supply interruptions or a supplier transition could disrupt operations and require revalidation of tests and regulatory materials.
- The company’s tests are marketed primarily as laboratory-developed tests and may face increased FDA, CLIA, state, or international regulatory requirements. Changes could require additional validation, clearance, approval, expense, or delay.
- Management reported that disclosure controls and procedures were not effective at September 30, 2019 because previously identified material weaknesses in accounting personnel, technical accounting expertise, and segregation of duties had not been fully remediated. A new CFO and additional accounting personnel were hired, but the controls had not been fully tested.
- No material legal proceedings were reported. The filing identifies broad risks related to competition, intellectual property, data privacy and cybersecurity, laboratory quality, clinical and regulatory changes, customer concentration, capital needs, and stock-price volatility.
Most Important Facts for Investors to Verify
- Whether VA MVP funding, task orders, sample volumes, pricing, and renewal options support the reported revenue trajectory and reduce customer concentration over time.
- Whether the $82.5 million of contracted but unrecognized revenue is converted into revenue and cash within the expected 18-month period.
- Whether the company can reduce operating cash burn and improve gross margins as sequencing volume and infrastructure scale.
- Whether the reported cash and investments remain sufficient after considering customer-deposit refund obligations, capital expenditures, and continuing losses.
- Whether the material weakness in internal controls is fully remediated and independently tested in later filings.
- Whether regulatory developments affecting laboratory-developed tests, genetic data, and personalized cancer diagnostics increase compliance costs or delay commercialization.
- The potential dilution from approximately 4.7 million outstanding options, employee stock purchase rights, and outstanding warrants.