PERSONALIS, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K and our final prospectus filed with theSecurities and Exchange Commission (the "SEC") pursuant to Rule 424(b) under the Securities Act of 1933, as amended, onJune 20, 2019 (the "Prospectus"). In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the sections titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and in Part I, Item 1A, "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K and in our Prospectus. This section of this Form 10-K generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Prospectus.
Overview
We are a growing cancer genomics company transforming the development of next-generation therapies by providing more comprehensive molecular data about each patient's cancer and immune response. We designed our NeXT Platform to adapt to the complex and evolving understanding of cancer, providing our biopharmaceutical customers with information on all of the approximately 20,000 human genes, together with the immune system, in contrast to many cancer panels that cover roughly 50 to 500 genes. In parallel with the development of our platform technology, we have also provided population sequencing services under contract with theU.S. Department of Veterans Affairs (the "VA") Million Veteran Program (the "VA MVP"), which has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab. We are also developing a complementary liquid biopsy assay that analyzes all of the approximately 20,000 human genes versus the more narrowly focused liquid biopsy assays that are currently available. By combining technological innovation, operational scale, and regulatory differentiation, our NeXT Platform is designed to help our customers obtain new insights into the mechanisms of response and resistance to therapy as well as new potential therapeutic targets. Our platform enhances the ability of biopharmaceutical companies to unlock the potential of conducting translational research in the clinic rather than with pre-clinical animal models or cancer cell lines. We also announced inJanuary 2020 a diagnostic based on our NeXT Platform that we envision being used initially by both leading clinical cancer centers as well as biopharmaceutical companies. We generated revenues of$65.2 million ,$37.8 million , and$9.4 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. In 2019, 67% of our revenues were generated from theU.S. Department of Veterans Affairs (the "VA") Million Veteran Program (the "VA MVP") as compared to 49% in 2018. Non-VA MVP revenues increased by 13% in 2019 compared to 2018. We also incurred net losses of$25.1 million ,$19.9 million and$23.6 million for the years endedDecember 31, 2019 , 2018, and 2017, respectively. As ofDecember 31, 2019 , we had$128.3 million in cash and cash equivalents, and short-term investments. From inception throughDecember 31, 2019 , we have funded our operations primarily through cash from operations, redeemable convertible preferred stock issuances, debt issuances, and proceeds from our initial public offering. We expect that our existing cash and cash equivalents, and short-term investments will provide sufficient funds to sustain operations through at least the next 12 months. We have based these estimates on assumptions that may prove to be wrong, and we could exhaust our available capital resources sooner than we expect.
Factors Affecting Our Performance
We believe there are several important factors that have impacted, and that we expect will continue to impact, our operating performance and results of operations, including:
• The continued development of the market for genomic-based tests. Our
performance depends on the willingness of biopharmaceutical customers to
continue to seek more comprehensive molecular information to develop more
efficacious cancer therapies.
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• Increasing adoption of our products and solutions by existing customers.
Our performance depends on our ability to retain and broaden adoption
with existing customers. Because our technology is novel, some customers
begin using our platform by initiating pilot studies involving a small
number of samples to gain experience with our service. As a result,
historically a significant portion of our revenues has come from existing
customers. We believe that our ability to convert initial pilots into
larger orders from existing customers has the potential to drive
substantial long-term revenue. We expect there may be some variation in
the number of samples they choose to test each quarter.
• Adoption of our products and solutions by new customers. While new
customers initially may not account for significant revenues, we believe
that they have the potential to grow substantially over the long term asthey gain confidence in our service. Our ability to engage new customers
is critical to our long-term success. Our publications, posters and
presentations at scientific conferences lead to engagement at the
scientific level with potential customers who often make the initial
decision to gain experience with our platform. Accessing these new
customers through scientific engagement and marketing to gain initial
buy-in is critical to our success and gives us the opportunity to
demonstrate the utility of our platform.
• Our revenues and costs are affected by the volume of samples we receive
from customers from period to period. The timing and size of sample
shipments received after orders have been placed is variable. Since
sample shipments can be large, and are often received from a third party,
the timing of arrival can be difficult to predict over the short term.
Although our long-term performance is not affected, we do see
quarter-to-quarter volatility due to these factors. Samples arriving
later than expected may not be processed in the quarter proposed and
result in revenue the following quarter. Since many of our customers
request defined turnaround times, we employ project managers to
coordinate and manage the complex process from sample receipt to
sequencing and delivery of results.
• Investment in product innovation to support commercial growth. Investment
in research and development, including the development of new products is
critical to establish and maintain our leading position. In particular,
we have invested in NeoantigenID, a neoantigen characterization report,
ImmunogenomicsID, a broad biomarker report, and ImmunoID NeXT, our
universal cancer immunogenomics platform. We are also collaborating with
key opinion leaders from academic cancer centers, such as Inova Health
System , Stanford Medicine, and the Parker Institute for Cancer
Immunotherapy , to support the utility of our platform. We believe thiswork is critical to gaining customer adoption and expect our investments
in these efforts to increase. We believe utility for our product may
result in additional expenditures to develop and market new products,
including a diagnostic or database.
• Leverage our operational infrastructure. We have invested significantly,
and will continue to invest, in our sample processing capabilities and
commercial infrastructure. With our current operating model and
infrastructure, we can increase our production and commercialize newgenerations of our platform, but as our volumes continue to increase we
will ultimately need to invest in additional production capabilities. We
expect to grow our revenues and spread our costs over a larger volume of
services. In addition, we may invest significant amounts in
infrastructure to support new products resulting from our research and
development activities.
In addition to the factors described above, as our headquarters and laboratory
operations are located in San Mateo County, California , our operations have been
impacted by the ongoing COVID-19 pandemic. On March 16, 2020 , the Health Officer
of the County of San Mateo (the "Health Officer") issued a shelter-in-place
order (the "San Mateo Order"), which directed all businesses to cease
non-essential operations at physical locations in the county. The San Mateo
Order also directed all individuals living in the county to shelter at their
place of residence with limited exceptions. The intent of the San Mateo Order is
to slow the spread of COVID-19 to the maximum extent possible. The San Mateo
Order became effective on March 17, 2020 and will continue to be in effect
through April 7, 2020 , or until it is extended, rescinded, superseded, or
amended in writing by the Health Officer. Similar orders were issued in
neighboring counties, including Santa Clara County , such that the substantial
majority of our employees are subject to a shelter-in-place order. While the San
Mateo Order allows for continued operation of so-called Essential Businesses,
which includes certain critical healthcare operations and services, to comply
with the San Mateo Order, we are prioritizing the fulfillment of customer orders
to those related to time-sensitive healthcare projects, such as in-process
clinical trials, and will fulfill other customer orders to the extent we have
the ability to do so with limited laboratory staffing. In addition, on March 19,
2020 , the Governor of California and the State Public Health Officer and
Director of the California Department of Public Health ordered all individuals
living in the State of California to stay at their place of residence for an
indefinite period of time (subject to certain exceptions to facilitate
authorized necessary activities) to mitigate the impact of the COVID-19 pandemic
(the "California Order" and, together with the San Mateo Order, the "Orders").
Other states in the United States , including Massachusetts and New York , have
followed suit by issuing orders with similar goals and restrictions.
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Beyond the immediate impact of the Orders to our operations, the ongoing
COVID-19 pandemic, the Orders, and similar orders issued by other authorities to
impose restrictions intended to mitigate the impact of the COVID-19 pandemic,
may disrupt our supply chain, including our ability to acquire raw materials,
disrupt customer demand, reduce our ability to receive customer samples on a
normal basis, disrupt our customer and vendor relationships, divert management
attention, and negatively impact employee productivity due to work-from-home
policies. The scope and duration of such impact is highly uncertain. We are
unable to predict or quantify the impact of any potential disruption to our
supply chain, changes in consumer demand, or any other actions that may become
necessary as events unfold.
Components of Operating Results
Revenues
We derive our revenues primarily from sequencing and data analysis services to support the development of next-generation cancer therapies and to support large scale genetic research programs. We support our customers by providing high-accuracy, validated genomic sequencing and advanced analytics. Many of these analytics are related to state-of-the-art biomarkers, including those relevant to immuno-oncology therapeutics such as checkpoint inhibitors. Our revenues are primarily generated through contracts with companies in the pharmaceutical industry, healthcare organizations, and government entities. Our ability to increase our revenues will depend on our ability to further penetrate this market. To do this, we are developing a growing set of additional state-of-the-art products, advancing our operational infrastructure, building our regulatory credentials and expanding our targeted marketing efforts. Unlike diagnostic or therapeutic companies, we have not to date sought reimbursement through traditional healthcare payors. We sell through a small direct sales force. We have one reportable segment from the sale of sequencing and data analysis services. Substantially all of our revenues to date have been derived from sales inthe United States . Costs and Expenses Costs of revenues Costs of revenues consist of production material costs, personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and information technology ("IT") and facility costs. We expect the costs of revenues to increase as our revenues grow, but the cost per unit of data delivered to decrease over time due to economies of scale we may gain as volume increases, automation initiatives, and other cost reductions.
Research and development expenses
Research and development expenses consist of costs incurred for the development of our products. These expenses consist primarily of payroll and personnel costs (salaries, bonuses, benefits, and stock-based compensation), costs of consumables, laboratory supplies, depreciation and service maintenance on capitalized equipment, and IT and facility costs. These expenses also include costs associated with our collaborations, which we expect to increase over time.
We expense our research and development expenses in the period in which they are incurred. We expect to increase our research and development expenses as we continue to develop new products.
Selling, general, and administrative expenses
Selling expenses consist of personnel costs, customer support expenses, direct marketing expenses, educational and promotional expenses, and market research. Our general and administrative expenses include costs for our executive, accounting, finance, legal, and human resources functions. These expenses consist of personnel costs, audit and legal expenses, consulting costs, and IT and facility costs. We expense all selling, general, and administrative expenses as incurred. We expect our selling expenses will continue to increase in absolute dollars, primarily driven by our efforts to expand our commercial capability and to expand our brand awareness and customer base through targeted marketing initiatives with an increased presence both within and outsidethe United States . We also expect general and administrative expenses will increase as we scale our operations. Interest Income 61
-------------------------------------------------------------------------------- Interest income consists primarily of interest earned on our cash and cash equivalents, and short-term investments. Interest income increased significantly in 2019 as a result of us investing proceeds from the IPO. We expect a continued higher level of interest income in 2020 for this reason.
Interest Expense
Interest expense primarily consists of cash and non-cash interest costs related to our term loan, convertible promissory notes, revolving loan, and growth capital loan. We record costs incurred in connection with the issuance of debt as a direct deduction from the debt liability. We amortize these costs over the term of our debt agreements as interest expense in our consolidated statements of operations. After the payoff of our growth capital loan inAugust 2019 , we no longer have any outstanding debt and have not incurred interest expense from that point forward. Loss on Debt Extinguishment We incurred loss on debt extinguishment in 2018 resulting from changes in the maturity dates of the convertible notes issued in 2017. We also incurred loss on debt extinguishment in 2019 upon the payoff of the growth capital loan. See Note 6 to our consolidated financial statements included elsewhere in this annual report. Other (Expense) Income, Net Other (expense) income, net consists of changes in the fair value of the compound derivative instrument, changes in fair value of convertible preferred stock warrant liability, and foreign currency exchange gains and losses. Future periods will not include changes in fair value of the compound derivative instrument, due to extinguishment of the related convertible notes, nor will future periods include changes in fair value of convertible preferred stock warrants, due to the conversion of such warrants to common stock warrants. See Notes 6 and 10 included elsewhere in this annual report for further discussion of these two items. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
Results of Operations
The following table sets forth our consolidated statements of income data (in
thousands):
Year Ended December 31,
2019 2018 2017
Revenues $ 65,207 $ 37,774 $ 9,393
Costs and expenses
Costs of revenues 43,127 25,969 11,736
Research and development 22,418 14,304 9,919
Selling, general and administrative 22,080 11,271 9,901
Total costs and expenses 87,625 51,544 31,556
Loss from operations (22,418 ) (13,770 ) (22,163 )
Interest income 1,620 293 100
Interest expense (1,133 ) (1,894 ) (1,303 )
Loss on debt extinguishment (1,704 ) (4,658 ) -
Other (expense) income, net (1,440 ) 150 (227 )
Loss before income taxes (25,075 ) (19,879 ) (23,593 )
Provision for income taxes (9 ) (7 ) (5 )
Net loss $ (25,084 ) $ (19,886 ) $ (23,598 )
Net loss per share, basic and diluted $ (1.39 ) $ (6.49 ) $ (7.78 )
Weighted-average shares outstanding, basic
and diluted 18,011,470 3,063,157 3,031,636
Revenues
The following table shows revenues by customer type (in thousands):
Year Ended December 31, Percentage change
2019 2018 2017 2019 vs 2018 2018 vs 2017
VA MVP $ 43,545 $ 18,601 $ 421 134 % 4,318 %
All other customers 21,662 19,173 8,972 13 % 114 %
Total revenues $ 65,207 $ 37,774 $ 9,393 73 % 302 %
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The following table shows our concentration of revenues by customer:
Year Ended December 31,
2019 2018 2017
VA MVP 67 % 49 % *
Pfizer Inc. 13 % 10 % *
Merck & Co., Inc. * 12 % 11 %
Customer A * * 13 %
Customer B * * 10 %
* Less than 10% of revenues
VA MVP
The increase in 2019 revenues from the VA MVP was driven by an increase in the
volume of samples we tested in the period, partially offset by lower prices per
sample.
All Other Customers
The increase in 2019 revenues from all other customers was primarily due to an
increase in the volume of samples we tested in relation to the sequencing and
data analysis services we provided to our customers.
Costs and Expenses
Year Ended December 31, Percentage change
2019 2018 2017 2019 vs 2018 2018 vs 2017
(in thousands)
Costs of revenues $ 43,127 $ 25,969 $ 11,736 66 % 121 %
Research and development 22,418 14,304 9,919 57 % 44 %Selling, general and administrative 22,080 11,271 9,901
96 % 14 %
Total costs and expenses $ 87,625 $ 51,544 $ 31,556 70 % 63 %
Costs of revenues
The increase in 2019 was primarily due to the increase in revenues discussed
above. The cost components related to the increase in costs of revenues were an
$11.7 million increase in production materials, a $2.2 million increase related
to personnel costs including salaries, bonuses, benefits, and stock-based
compensation expenses, a $1.6 million increase in depreciation and service
maintenance on capitalized equipment, a $0.5 million increase in the consumption
cost of consumables and laboratory supplies, a $0.9 million increase in IT and
facility costs, and a $0.3 million increase in other costs.
Research and development
The increase in 2019 was primarily due to increased development activities for new product offerings, lab and automation development costs, and IT and facility costs. Research and development expenses increased due to an increase of$4.0 million in personnel-related expenses, including salaries, bonuses, benefits, and stock-based compensation expenses, a$2.8 million increase in laboratory and automation supplies consumed, a$1.2 million increase in depreciation, service maintenance on capitalized equipment, and cost of expensed equipment, and$0.2 million increase in other costs.
Selling, general and administrative
The increase in 2019 was due to a$7.3 million increase in personnel-related expenses including salaries, bonuses, benefits, and stock-based compensation expenses primarily related to increased headcount, a$3.0 million increase in professional services primarily related to public company-related costs (including corporate insurance, audit fees, and legal expenses), and a$0.5 million increase in other costs. 63
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Interest income, interest expense, and loss on debt extinguishment
Year Ended December 31, Percentage change
2019 2018 2017 2019 vs 2018 2018 vs 2017
(in thousands)
Interest income $ 1,620 $ 293 $ 100 453 % 193 %
Interest expense (1,133 ) (1,894 ) (1,303 ) (40 )% 45 %
Loss on debt extinguishment (1,704 ) (4,658 ) - (63 )% NM
Total interest income, interest
expense and loss on debt
extinguishment $ (1,217 ) $ (6,259 ) $ (1,203 )
Interest income
The increase in 2019 was due to investments of proceeds from our IPO.
Interest expense
The lower interest expense in 2019 was due to the repayment of the$20 million growth capital loan inAugust 2019 , which resulted in no further outstanding debt for the remainder of the year, as well as 2018 including significant interest expense from the Convertible Notes and Revolving Loan.
Loss on debt extinguishment
The$1.7 million loss on debt extinguishment in 2019 resulted from the extinguishment of our$20 million Growth Capital Loan facility. The$4.7 million loss on debt extinguishment in 2018 resulted from changes in the maturity dates of the Convertible Notes issues in 2017. Other (expense) income, net Year Ended December 31, Change $ 2019 2018 2017 2019 vs 2018 2018 vs 2017 (in
thousands)
Changes in fair values of warrants for Series B and Series C convertible preferred stock$ (1,403 ) $ (391 ) $ (64 ) $ (1,012 ) $ (327 ) Changes in fair value of the compound derivative instrument - 574 (162 ) (574 ) 736 Other (37 ) (33 ) (1 ) (4 ) (32 )
Total other (expenses) income, net
Other expenses, net in 2019 were primarily comprised of a$1.4 million increase in the fair values of warrants for Series B and Series C redeemable convertible preferred stock. Other income, net in 2018 was primarily comprised of a$0.6 million decrease in fair value of the compound derivative instrument, partially offset by a$0.4 million increase in the fair values of warrants for Series B and Series C redeemable convertible preferred stock.
Liquidity and Capital Resources
The following table presents selected financial information and statistics as of
and for the years ended
Year Ended December 31,
2019 2018 2017
(in thousands)Cash and cash equivalents, and short-term
investments$ 128,289 $ 19,744 $ 22,617 Property and equipment, net 14,106 11,452 6,342 Contract liabilities 35,977 42,897 24,690 Total debt - 4,996 17,506 Working capital 89,616 (28,291 ) (22,262 )
Cash (used in) provided by operating
activities (18,069 ) 5,572
290
Cash used in investing activities (81,579 ) (7,852
) (5,158 )
Cash provided by (used in) financing
activities 134,948 (591 ) 16,404
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-------------------------------------------------------------------------------- From our inception throughDecember 31, 2019 , we have funded our operations primarily from$144.0 million in net proceeds from our initial public offering inJune 2019 and$89.6 million from issuance of redeemable convertible preferred stock, as well as cash from operations and debt financing. OnMarch 22, 2019 , we received$20.0 million in gross cash proceeds from a growth capital loan. As ofDecember 31, 2019 , we had cash and cash equivalents in the amount of$55.0 million . We have incurred net losses since our inception. We anticipate that our current cash and cash equivalents and marketable securities, together with cash provided by operating activities are sufficient to fund our near-term capital and operating needs for at least the next 12 months. We have based these future funding requirements on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If our available cash balances, net proceeds from the offering and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our services or other risks described in this annual report, we may seek to sell additional common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. Additional capital may not be available on reasonable terms, or at all. OnMarch 22, 2019 , we entered into a growth capital loan (the "Growth Capital Loan") with TriplePoint to provide for a$20.0 million growth capital loan facility and as ofJune 30, 2019 , had drawn down the full$20.0 million available under the facility. We used$5.1 million of the Growth Capital Loan to repay, in its entirety, all amounts outstanding under the Revolving Loan. Borrowings under the Growth Capital Loan bore interest at a floating rate of prime, plus 5.00%, for borrowings up to$15.0 million and the prime rate plus 6.50% for borrowings greater than$15.0 million . Under the agreement, we were required to make monthly interest-only payments throughApril 1, 2020 and required to make 36 equal monthly payments of principal, plus accrued interest, fromApril 1, 2020 throughMarch 1, 2023 , when all unpaid principal and interest was to become due and payable. The agreement allowed voluntary prepayment of all, but not part, of the outstanding principal at any time prior to the maturity date, subject to a prepayment fee of 1.00% of the outstanding balance if prepaid in months one through 12 of the loan term. In addition to the final payment, we paid an amount equal to 2.75% of each principal amount drawn under this growth capital loan facility. In connection with the Growth Capital Loan, we issued a warrant to purchase 65,502 shares of common stock to TriplePoint at an exercise price of$9.16 per share exercisable for seven years fromMarch 22, 2019 . We recorded the issuance-date fair value of the warrant of$0.6 million and fees paid to TriplePoint of$0.3 million as a debt discount, which was amortized over the term of the Growth Capital Loan using the effective interest method. Upon issuance, the Growth Capital Loan had an effective interest rate of 15.23% per year. Interest expense for the year endedDecember 31, 2019 was$1.0 million .
On
Our short-term investments portfolio is primarily invested in highly rated securities, with the primary objective of minimizing the potential risk of principal loss. Our investment policy generally requires securities to be investment grade and limits the amount of credit exposure to any one issuer.
During 2019, cash used by operating activities of$18.1 million was a result of$25.1 million of net loss and the net negative change in operating assets and liabilities of$7.3 million , partially offset by non-cash negative adjustments to net income of$14.3 million .
Cash used by investing activities of
Cash provided by financing activities of$134.9 million during 2019 consisted primarily of$139.8 million of proceeds from initial public offering, net of underwriting discounts and commissions,$1.4 million of proceeds from issuance of common stock under employee stock plans, and net proceeds from the issuance of a Growth Capital Loan of$20.0 million , partially offset by cash used to repay a revolving loan and issue and repay the Growth Capital Loan of$26.3 million . 65
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Investments in property and equipment
The Company's capital expenditures were
Debt
We previously entered into various forms of convertible debt and revolving loans to finance our operations prior to our IPO. After our IPO, we paid off all remaining debt and now have zero outstanding debt balances as of 2019.
Further information regarding the Company's debt issuances can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, "Borrowings." Contractual Obligations
As a "smaller reporting company", we are not required to provide this disclosure.
Off-balance Sheet Arrangements
We did not have any off-balance sheet arrangements as of
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses, and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that the assumptions and estimates associated with the accounting policies discussed below have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates.
Revenue Recognition
Adoption of ASC Topic 606, "Revenue from Contracts with Customers"
OnJanuary 1, 2017 , we early adopted the new accounting standard ASC Topic 606 using the full retrospective method. Results for reporting periods beginning afterJanuary 1, 2017 , are presented under ASC Topic 606. The impact of adopting ASC Topic 606 was not material on our consolidated financial statements.
Revenue Recognition
We generate our revenues from selling sequencing and data analysis services. We
agree to provide services to our customers through a contract, which may be in
the form of a combination of a signed agreement, statement of work and/or a
purchase order.
Upon adoption of ASC Topic 606, we have evaluated the performance obligations
contained in contracts with customers to determine whether any of the
performance obligations are distinct, such that the customers can benefit from
the obligations on their own, and whether the obligations can be separately
identifiable from other obligations in the contract. For all of our contracts to
date, the customer orders a specified quantity of a sequencing; therefore, the
delivery of the ordered quantity per the purchase order is accounted for as one
performance obligation. Our contracts include only one performance
obligation-the delivery of the sequencing and data analysis services to the
customer.
Fees for our sequencing and data analysis services are predominantly based on a
fixed price per sample. The fixed prices identified in the arrangements only
change if a pricing amendment is agreed with a customer. In limited cases we
provide our customers a discount if samples received are above a certain volume
are purchased. In such cases, the discount applies prospectively. We have
analyzed such discounts if they represent a material right provided to a
customer. We have concluded that such discounts do not represent a material
right provided to a customer since they are not deemed to be incremental to the
pricing offered to the customer, or are not enforceable options to acquire
additional goods. As a result, these discounts do not constitute a material
right and do not meet the definition of a separate performance obligation. We do
not offer retrospective discounts or rebates. Accordingly, all of
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the transaction price, net of any discounts, is allocated to one performance
obligation. Therefore, upon delivery of the services, there are no remaining
performance obligations.
Contracts that contain multiple distinct performance obligations would require
an allocation of the transaction price to each performance obligation based on a
relative stand-alone selling price basis. Sometimes we deliver sequencing
results in two or more batches; however, since the quantity delivered per batch
of each individual test per sales order in these instances is in the same ratio
as in the original sales order, allocating the transaction price on a relative
stand-alone selling price basis would have no impact on the revenue recognized
in any period presented.
We recognize revenue when control of the promised services is transferred to our
customers. Management applies judgment in evaluating when a customer obtains
control of the promised service, which is when the sequencing and data analysis
service results are delivered to customers, at an amount that reflects the
consideration to which we expect to be entitled to in exchange for those
services. Revenue is recorded net of sales or other transaction taxes collected
from clients and remitted to taxing authorities.
A customer contract liability will arise when we have received payments from its
customers in advance, but has not yet provided genome and exome sequencing and
data analysis services to a customer and satisfied its performance obligations.
We record a customer contract liability for performance obligations outstanding
related to payments received in advance for customer deposits. We expect to
satisfy these remaining performance obligations and recognize the related
revenues upon providing sequencing and data analysis services.
All of our revenues and trade receivables are generated from contracts with
customers and substantially all of our revenues are derived from
Payment Terms
Payment terms and conditions vary by contract and customer. Our standard payment terms are typically less than 90 days from the date of invoice. In instances where the timing of our revenue recognition differs from the timing of its invoicing, we have determined that our contracts do not include a significant financing component. The primary purposes of our invoicing terms are to provide customers with simplified and predictable ways of purchasing our services and provide payment protection for us.
Convertible Preferred Stock Warrants
We accounted for warrants to purchase shares of our redeemable convertible preferred stock as liabilities at their estimated fair value because the warrants may have obligated us to transfer assets to the holders at a future date upon a deemed liquidation event. The warrants were recorded at fair value upon issuance and were subject to remeasurement to fair value at each period end, with any fair value adjustments recognized in the consolidated statements of operations and comprehensive loss. We adjusted the warrant liability for changes in fair value until the conversion of redeemable convertible preferred stock into common stock.
Common Stock Warrants
Our common stock warrants are classified as equity as they meet all criteria for equity classification. The common stock warrants were recorded at fair value upon issuance, or conversion to common stock warrants in the case of our convertible preferred stock warrants, as additional paid-in-capital in the consolidated balance sheets. The common stock warrants are not subsequently remeasured.
Convertible Instruments
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities. Applicable GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under other GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
Stock-Based Compensation
We account for stock-based compensation arrangements with employees, using a
fair value-based method, for costs related to all stock-based payments including
stock options and stock awards. Our determination of the fair value of stock
options on the date of grant utilizes the Black-Scholes option-pricing model.
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The fair value of the option granted is recognized over the period during which
an optionee is required to provide services in exchange for the option award,
known as the requisite service period which usually is the vesting period, on a
straight-line basis.
Estimating the fair value of equity-settled awards as of the grant date using
valuation models, such as the Black-Scholes option-pricing model, is affected by
assumptions regarding a number of complex variables. Changes in the assumptions
can materially affect the fair value and ultimately how much stock-based
compensation expense is recognized. These inputs are subjective and generally
require significant analysis and judgment to develop.
• Expected Term-The expected term assumption represents the
weighted-average period that the stock-based awards are expected to be
outstanding. We have elected to use the "simplified method" for
estimating the expected term of the options, whereby the expected term
equals the arithmetic average of the vesting term and the original
contractual term of the option.
• Expected Volatility-For all stock options granted to date, the volatility
data was estimated based on a study of publicly traded industry peer
companies. For purposes of identifying these peer companies, we
considered the industry, stage of development, size, and financial
leverage of potential comparable companies.
• Expected Dividend Yield-The Black-Scholes option-pricing valuation model
calls for a single expected dividend yield as an input. We currently have
no history or expectation of paying cash dividends on our common stock.
• Risk-Free Interest Rate-The risk-free interest rate is based on the yield
available on U.S. Treasury zero-coupon issues similar in duration to the
expected term of the equity-settled award.
We estimated the fair value of the time-based employee stock options using the
Black-Scholes option-pricing model based on the date of grant with the following
assumptions:
Common Stock Valuations
The estimated fair value of the common stock underlying our stock options was
determined at each grant date by our board of directors, with input from
management. All options to purchase shares of our common stock are intended to
be exercisable at a price per share not less than the per-share fair value of
our common stock underlying those options on the date of grant.
In the absence of a public trading market for our common stock prior to our IPO,
on each grant date, we developed an estimate of the fair value of our common
stock based on the information known to us on the date of grant, upon a review
of any recent events and their potential impact on the estimated fair value per
share of the common stock, and in part on input from an independent third-party
valuation firm. As provided in Section 409A of the U.S. Internal Revenue Code of
1986, as amended (the "Code"), we generally relied on our valuations for up to
12 months unless we experienced a material event that would have affected the
estimated fair value per common share.
Our valuations of our common stock were determined in accordance with the
guidelines outlined in the American Institute of Certified Public Accountants
Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as
Compensation (the "Practice Aid"). The methodology to determine the fair value
of our common stock included estimating the fair value of the enterprise using
the "backsolve" method, which estimates the fair value of our company by
reference to the value and preferences of our last round of financing, as well
as our capitalization.
The assumptions used to determine the estimated fair value of our common stock were based on numerous objective and subjective factors, combined with management's judgment, including external market conditions affecting the pharmaceutical and biotechnology industry and trends within the industry:
• our stage of development;
• the rights, preferences, and privileges of our redeemable convertible
preferred stock relative to those of our common stock;
• the prices at which we sold shares of our redeemable convertible
preferred stock;
• our financial condition and operating results, including our levels of
available capital resources;
• the progress of our research and development efforts, our stage of
development, and business strategy;
• equity market conditions affecting comparable public companies; and
• general U.S. market conditions and the lack of marketability of our
common stock.
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-------------------------------------------------------------------------------- The Practice Aid identifies various available methods for allocating enterprise value across classes and series of capital stock to determine the estimated fair value of common stock at each valuation date. In accordance with the Practice Aid, we considered the following methods:
• Income approach. The income approach attempts to value an asset or
security by estimating the present value of the future economic benefits
it is expected to produce. These benefits can include earnings, cost
savings, tax deductions, and disposition proceeds from the asset. Anindication of value may be developed in this approach by discounting
expected cash flows to their present value at a rate of return that
incorporates the risk-free rate for the use of funds, the expected rateof inflation over the asset's holding period, and the risks associated
with realizing the cash flows in the amounts and at the times projected.
The discount rate selected is typically based on rates of return
available from alternative investments of similar type and quality as of
the valuation date. The most commonly employed income approach to
valuation is the discounted cash flow analysis.
• Market Approach. The market approach attempts to value an asset or
security by examining observable market values for similar assets orsecurities. Sales and offering prices for comparable assets are adjusted
to reflect differences between the asset being valued and the comparable
assets, such as, location, time and terms of sale, utility, and physical
characteristics. When applied to the valuation of equity, the analysis
may include consideration of the financial condition and operating
performance of the company being valued relative to those of publicly
traded companies or to those of companies acquired in a single
transaction, which operate in the same or similar lines of business.
• Cost Approach. The cost approach to valuation is based upon the concept
of replacement cost as an indicator of value and the notion that an
investor would pay no more for an asset than what it would cost toreplace the asset with one of equal utility. The cost approach estimates
value based upon the estimated cost of replacing or reproducing the
asset, less adjustments for physical deterioration and functional
obsolescence, if relevant. When applied to an enterprise, a type of costapproach referred to as the Net Asset Method is sometimes employed. This
method measures the value of equity as the sum of the values of its
assets reduced by the sum of the values of its liabilities. The resulting
equity is reflective of a 100% ownership interest in the business. This
approach is frequently used in valuing holding companies.
Based on our early stage of development and other relevant factors, we
considered all three approaches and chose to apply both income and market
approaches in our analyses. We determined these approaches were the most
appropriate methods for allocating our enterprise value to determine the
estimated fair value of our common stock for valuations performed for periods up
to our IPO. In determining the estimated fair value of our common stock, our
board of directors also considered the fact that our stockholders could not
freely trade our common stock in the public markets. Accordingly, we applied
discounts to reflect the lack of marketability of our common stock based on the
weighted-average expected time to liquidity. The estimated fair value of our
common stock at each grant date reflected a non-marketability discount partially
based on the anticipated likelihood and timing of a future liquidity event.
Following our IPO, our board of directors determines the fair value of our common stock based on the closing quoted market price of our common stock on the date of grant.
Income Taxes We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial statement reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards and are measured using the enacted tax rates and laws that will be in effect when such items are expected to reverse. Deferred income tax assets are reduced, as necessary, by a valuation allowance when management determines it is more likely than not that some or all of the tax benefits will not be realized. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position's sustainability and is measured at the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We have elected to account for the tax on Global Intangible Low-Taxed Income, enacted as part of the Tax Cuts and Jobs Act as a component of tax expense in the period in which the tax is incurred.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business
Startups Act (the "JOBS Act"). Under the JOBS Act, emerging growth companies can
delay adopting new or revised accounting standards issued subsequent to the
enactment of the JOBS Act until such time as those standards apply to private
companies. We have irrevocably elected not to avail ourselves of this exemption
from new or revised accounting standards, and therefore, we will be subject to
the same new or revised accounting standards as other public companies that are
not emerging growth companies.
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Recent Accounting Pronouncements
See the sections titled "Summary of Significant Accounting Policies-Recent Accounting Pronouncements" and "-Recent Accounting Pronouncements Not Yet Adopted" in Note 2 to our consolidated financial statements for additional information.
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