You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report. This discussion contains forward-looking statements that involve risks and uncertainties, including those described in the section titled "Special Note Regarding Forward Looking Statements." Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled "Risk Factors." Overview We aim to enable exceptional scientific outcomes by commercializing transformative products for researchers to unlock deep, unbiased biological information. Our initial product, the Proteograph Product Suite (Proteograph), will leverage our proprietary engineered nanoparticle (NP) technology to provide unbiased, deep, rapid and large-scale access across the proteome. Our Proteograph Product Suite is an integrated solution that is comprised of consumables, our SP100 automation instrument and the Proteograph Analysis Suite software. Our Proteograph solution provides an easy-to-use workflow, which has the potential to make proteomic profiling, and the analysis of the thousands of samples needed to characterize the complex, dynamic nature of the proteome, accessible for nearly any laboratory. We believe that characterizing and understanding the full complexity of the proteome is foundational for accelerating biological insights and will lead to broad potential end-markets for proteomics, encompassing basic research and discovery, translational research, diagnostics and applied applications. This full understanding of the complexity of the proteome requires large-scale, unbiased and deep interrogation of thousands of samples across time, which we believe is unavailable with the proteomic approaches available today. We believe that our Proteograph has the potential to enable researchers to perform proteomics studies at scale, similar to the manner in which next generation sequencing (NGS) technologies have transformed genomics. Since we were incorporated in 2017, we have devoted substantially all of our resources to research and development activities, including with respect to our Proteograph Product Suite, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, building our commercial infrastructure and providing general and administrative support for these activities. Our ability to generate product revenue sufficient to achieve profitability, if ever, will depend on the successful commercialization of our Proteograph. We plan to commercialize our Proteograph utilizing a three phase commercialization plan that has been shown to be effective and optimal for introducing disruptive products in numerous life sciences technology markets, including NGS. We have completed the first Collaboration phase, during which we signed collaboration agreements with a small number of key opinion leaders in proteomics, whose assessment and validation of products can significantly influence other researchers in their respective markets. We recently commenced the second, or Limited Release, phase of our commercialization plan, and have generated our first revenues from product sales during the second quarter of 2021. We will continue to target sales of our Proteograph Product Suite to select sites performing large-scale proteomics or genomics research. We will work closely with these sites, which we expect will serve as models for the rest of the market, to exemplify applications that demonstrate the unique value proposition of our Proteograph. We expect this phase to continue through 2021 and lead into the third phase of commercialization, Broad Release, in early 2022. We are commercializing our Proteograph Product Suite as an integrated solution comprising consumables, our SP100 automation instrument and software. Our commercial strategy will focus on growing adoption by the research community of our Proteograph, expanding the installed base and increasing utilization to generate revenue from the purchase of Proteograph consumables. We expect a highly efficient sales model since our Proteograph solution does not have a large capital expenditure component and our workflow integrates with most existing proteomics laboratories' workflows and also complements large-scale genomics research. We intend to broadly commercialize our Proteograph Product Suite through a direct sales channel inthe United States , and through both direct and distributor sales channels in regions outsidethe United States . Given our stage of commercialization, we are currently in the early stages of building sales, marketing, support and product distribution 20 -------------------------------------------------------------------------------- capabilities. We intend to build the necessary infrastructure for these activities inthe United States ,European Union , theUnited Kingdom , and potentially other countries and regions, includingAsia-Pacific , as we execute on our three phase commercialization strategy for our Proteograph. We leverage well-established unit operations to formulate and manufacture our NPs and to assemble our assay kits at our facilities inRedwood City, California . We procure some of our consumables, including components of our NPs, from third-party manufacturers, which includes the commonly-available raw materials needed for manufacturing our proprietary engineered NPs. We are currently manufacturing using our pilot line and building out our manufacturing capabilities as we ramp towards broad release. We obtain some of the reagents and components used in our Proteograph Product Suite workflow from third-party suppliers. While some of these reagents and components are sourced from a single supplier, these products are readily available from numerous suppliers. While we currently handle packaging of our Proteograph assay and the related consumables, in the future, we may have our packaging outsourced to a third-party. While we currently plan to handle filling of our Proteograph assay reagents both internally and externally, in the future, we may have some of our internal filling outsourced to a third-party. We conduct vendor and component qualification for components provided by third-party suppliers and quality control tests on all of our NPs. We will need to substantially expand our NP manufacturing capabilities to enable the successful commercialization of our Proteograph. We have designed our SP100 automation instrument and have outsourced the manufacturing of our SP100 toHamilton Company , a leading manufacturer of automated liquid handling workstations. We have entered into a non-exclusive agreement with Hamilton that covers the manufacturing of our SP100 and its continued supply on a purchase order basis. The agreement has an initial term that runs three years following our commercial launch. Pricing for the supply of our SP100 automation instrument is on a fixed schedule during the initial term of the agreement, with tiered pricing dependent upon the number of units purchased in a twelve-month period. OnDecember 8, 2020 , we completed our IPO, in which we sold 10,592,106 shares of Class A common stock at a price of$19.00 per share, resulting in net proceeds of$183.9 million after deducting offering costs, underwriting discounts and commissions. Concurrent with the IPO, we issued 7,105,262 shares of our common stock in a private placement for net proceeds of$130.3 million after deducting underwriting discounts and commissions. OnFebruary 1, 2021 , we completed an underwritten public offering of 1,650,000 shares of our Class A common stock at a public offering price of$67.00 per share. We received net proceeds of$103.0 million after deducting offering costs, underwriting discounts and commissions of$7.6 million . During the six months endedJune 30, 2021 and 2020, we incurred a net loss of$33.0 million and$11.6 million , respectively. As ofJune 30, 2021 , we had an accumulated deficit of$88.4 million and cash, cash equivalents, and investments of$517.8 million . We expect to continue to incur significant and increasing losses and do not expect positive cash flows from operations for the foreseeable future. We expect our expenses to increase significantly in connection with our ongoing activities, as we: •continue to develop and commercialize our Proteograph Product Suite; •attract, hire and retain qualified personnel; •establish a sales, marketing, service, support and distribution infrastructure as part of our commercialization efforts; •build-out and expand our in-house NP manufacturing capabilities; •continue to engage in research and development of other products and enhancements to our Proteograph Product Suite; •implement operational, financial and management information systems; •obtain, maintain, expand, and protect our intellectual property portfolio; and •build the infrastructure to operate as a public company. 21 --------------------------------------------------------------------------------
PrognomIQ
InAugust 2020 , we transferred certain assets related to human disease testing toPrognomIQ, Inc. (PrognomIQ), a new wholly-owned subsidiary, in exchange for all of its outstanding equity interests. Following the transfer, we completed a pro-rata distribution to our stockholders of most of the shares of capital stock of PrognomIQ. Following the distribution and a subsequent$55.0 million equity financing of PrognomIQ, we hold approximately 19% of the outstanding capital stock in PrognomIQ. The rationale for this transaction was to enable the growth of ecosystems around new applications that leverage unbiased, deep and large-scale proteomic information. The transaction allows us to remain focused on our core strategy, which is to be a provider, rather than a consumer, of proteomics solutions to all customers across these ecosystems. By focusing on our role as a provider of proteomics solutions, we are no longer potentially competing with, or creating the perception that we are competing with, our customers. Our relationship with PrognomIQ does not preclude us from selling our Proteograph Product Suite to any customer in any geography, nor does it preclude our customers from using our Proteograph in any way. PrognomIQ has indicated that it plans to combine the protein data from our Proteograph solution with genomics and other -omics data, to create a multi-omics approach to health and disease testing. We believe PrognomIQ's use of proteomics and the potential for other similar companies that use proteomics in their research and products will help us drive the adoption of our Proteograph Product Suite in these applications. We have entered into certain agreements with PrognomIQ.Omid Farokhzad , Chief Executive Officer and Chair of our board of directors, serves as the Chair of PrognomIQ's board of directors.Philip Ma , Ph.D., our former Chief Business Officer, serves as the Chief Executive Officer of PrognomIQ.Dr. Ma has fully transitioned to PrognomIQ and remains our consultant throughApril 2022 . In addition, three of our other employees have also transitioned to PrognomIQ. We will be providing general transition services and support, including laboratory and office space to PrognomIQ during the transition period. We anticipate these services to continue through the first half of 2021. We granted PrognomIQ a non-exclusive license to certain patents and patent applications that we own and a non-exclusive sublicense to certain patent applications we exclusively licensed from BWH, in each case relating to our core technology, to develop, manufacture and commercialize licensed products for the field of human diagnostics on a worldwide basis. In consideration of the non-exclusive sublicense to certain patent applications licensed from BWH, PrognomIQ paid us a low-five digit figure, and would pay a low single digit royalty, in an amount equivalent to what we would have to pay under our license with BWH, on net sales of sublicensed products beginning with the first commercial sale of a sublicensed product during the term of the agreement. We do not view these amounts to be material to our financial condition and results of operations nor do we expect these amounts to be material to us in the future. In accordance with the non-exclusive license agreement with PrognomIQ, we entered into a supply agreement with PrognomIQ inJune 2021 . The PrognomIQ supply agreement provides that we will supply PrognomIQ with the Proteograph Product Suite and associated consumables. COVID-19 Pandemic As a result of the COVID-19 pandemic, we could experience disruptions that could severely impact our business. For example, we have experienced longer lead times from Hamilton for orders of our SP100 automation instruments and may experience delays and longer lead times from our other suppliers of critical hardware, instrumentation and consumables used for product development and manufacturing operations. Pandemic precautions and preventative measures may also impact our commercialization plans due to restrictions on our customers' ability to access laboratories, causing delays in the delivery and installation of our Proteograph products, training such customers on our products, and their ability to conduct research. The ongoing build-out of our expansion facilities may also be delayed by COVID-related restrictions. Furthermore, COVID-19 has adversely affected the broader economy and financial markets, resulting in an economic downturn that could curtail the research and development budgets of our customers, our ability to hire additional personnel and our financing prospects. Any of the foregoing could harm our operations and we cannot anticipate all the ways in which it could be adversely impacted by health epidemics such as COVID-19. For additional details, see the section titled "Risk Factors." 22 -------------------------------------------------------------------------------- Components of Results of Operations Revenue We generate revenue from product sales, which includes sales of our Proteograph Product Suite and associated consumables as well as our platform evaluation agreements. In addition, we generate revenue from performing services and the receipt of grant revenue for the reimbursement of research-related expenses. Our revenue is primarily generated domestically. We intend to focus our commercial efforts inthe United States and expect to grow our international presence. A portion of our revenue is generated by sales to a related party and we anticipate a portion of our revenue to continue to be generated by such related party. Our grant-funded activities are expected to decrease as a percentage of total revenue as we continue to ramp up commercialization of our Proteograph Product Suite and our product offerings. Cost of Revenue We utilize third-party manufacturers for production of our SP100 instrument and we manufacture our NPs and assemble our assay kits internally. Cost of goods sold consists primarily of costs of the components of Proteograph Product Suite, including the SP100, consumables and software, and distribution-related expenses such as logistics and shipping costs. Research and Development Expenses Research and development, or R&D, expenses include cost associated with performing services under research and development service contracts and research and development of our technology and product candidates. R&D expenses consist primarily of employee compensation, including stock-based compensation, and related benefits, laboratory supplies used for in-house research, consulting costs, costs related to clinical studies for the collection of biological samples for research use, which relate to the assets transferred to PrognomIQ, and allocated overhead, including rent, depreciation, information technology and utilities. We plan to increase our investment in our R&D efforts related to our Proteograph Product Suite, our product development pipeline and our proprietary engineered NP and other technologies. Therefore, we expect R&D expenses will increase in absolute dollars in future periods as we incur expenses associated with hiring additional personnel, purchasing supplies and materials, and the allocation of facility expense associated with the ongoing build-out of our expansion facilities to support our R&D efforts. Selling, General and Administrative Expenses Selling, general and administrative expenses consist primarily of employee compensation, including stock-based compensation, and related benefits for executive management, sales and marketing, finance, administration and human resources, legal, allocated overhead, professional service fees and other general overhead costs to support our operations. We expect to incur additional selling, general and administrative expenses as we continue to invest in our personnel as we grow our commercial operations and with the additional costs incurred as a result of operating as a public company, including accounting, human resources, legal, insurance and investor relations costs. As a result, we expect selling, general and administrative expenses to increase in absolute dollars in future periods. Interest Income Interest income consists of interest earned on cash, cash equivalents and investments. 23 -------------------------------------------------------------------------------- Results of Operations Comparisons of the Three Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the periods presented: Three Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Revenue: Product $ 837 $ -$ 837 * Related party 380 - 380 * Grant 117 71 46 65 % Total revenue 1,334 71 1,263 1779 % Cost of revenue: Product 504 - 504 * Related party 82 - 82 * Total cost of revenue 586 - 586 * Gross profit 748 71 677 954 % Operating expenses: Research and development 6,935 4,536 2,399 53 % Selling, general and administrative 10,484 1,902 8,582 451 % Total operating expenses 17,419 6,438 10,981 171 % Loss from operations (16,671) (6,367) (10,304) 162 % Other income (expense): Interest income 55 250 (195) (78) % Interest expense - - - * Other expense - - - * Total other income 55 250 (195) (78) % Net loss$ (16,616) $ (6,117) $ (10,499) 172 % * Not meaningful Revenue Three Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Revenue $ 1,334$ 71 $ 1,263 1779 % Revenue increased by$1.3 million , or 1779%, from$0.1 million during the three months endedJune 30, 2020 to$1.3 million during the three months endedJune 30, 2021 , due to sales of products related to our Proteograph Product Suite in the three-months endedJune 30, 2021 . Revenue recognized primarily consisted of sales of the Proteograph SP100 instrument and assay kits, platform evaluations, and services, of which$0.4 million was related to related parties. Revenue related to our grant-funded activities related to our SBIR grant from theNIH increased modestly between the two periods. 24 --------------------------------------------------------------------------------
Cost of Revenue Three Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Cost of revenue $ 586 $ -$ 586 * Cost of revenue for the three months endedJune 30, 2021 was$0.6 million compared to$0 for the three months endedJune 30, 2020 , primarily due to the first sales of our Proteograph Product Suite. Cost of revenue related to our Proteograph Product Suite consist of costs of the SP100 instrument, assay kits and other related costs, including labor and overhead. Research and Development Three Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Research and development$ 6,935 $ 4,536 $ 2,399 53 % R&D expenses increased by$2.4 million , or 53%, from$4.5 million during the three months endedJune 30, 2020 to$6.9 million during the three months endedJune 30, 2021 . The increase was primarily due to an increase in product development efforts related to our Proteograph Product Suite, including$1.0 million in employee compensation costs and other related costs,$0.9 million in stock-based compensation due to growth in research and development personnel and$1.0 million related to the expansion of facilities and maintenance and depreciation of laboratory equipment. This was offset by a decrease in prototype materials of$(0.4) million and clinical study fees of$(0.2) million related to the costs associated with the ramp down of site enrollment for clinical studies related to the collection of biological samples for research use. These clinical studies are related to the assets transferred to PrognomIQ. Selling, General and Administrative Three Months Ended June 30, Change 2021 2020 Amount %
(dollars in thousands)
Selling, general and administrative
451 % Selling, general and administrative expenses increased by$8.6 million , or 451% , from$1.9 million during the three months endedJune 30, 2020 to$10.5 million during the three months endedJune 30, 2021 , due to a$1.9 million increase in employee compensation and other related expenses, and a$4.4 million stock-based compensation increase and$0.2 million in facility and other related expenses, as a result of an increase in personnel, including the addition of key members of executive management. Other increases are attributable to$0.3 million in marketing costs related to the Limited Release phase of our commercial plan, and costs related to becoming a publicly traded company including a$0.3 million increase in professional and consulting fees related to accounting and audit services, a$0.3 million increase in corporate and patent legal matters, and a$1.1 million increase in general business expenses which includes insurance premiums. Total Other Income Three Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Total other income $ 55$ 250 $ (195) (78) % 25
-------------------------------------------------------------------------------- Total other income decreased by$0.2 million , or 78%, from$0.3 million during the three months endedJune 30, 2020 to$0.1 million during the three months endedJune 30, 2021 . Short-term interest rate yields decreased significantly during fiscal year 2020 and remained low during the first half of fiscal year 2021. These decreases were partially offset quantitatively by higher amounts of cash invested in money market funds andU.S. Treasury securities during fiscal year 2020 and the first half of fiscal year 2021 as a result of multiple private and public financing events. Comparisons of the Six Months EndedJune 30, 2021 and 2020 The following table summarizes our results of operations for the periods presented: Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Revenue: Product $ 837 $ -$ 837 * Related party 380 - 380 * Grant 179 248 (69) (28) % Total revenue 1,396 248 1,148 463 % Cost of revenue Product 504 - 504 * Related party 82 - 82 * Total cost of revenue 586 - 586 * Gross profit 810 248 562 227 % Operating expenses: Research and development 13,162 8,758 4,404 50 % Selling, general and administrative 20,816 3,682 17,134 465 % Total operating expenses 33,978 12,440 21,538 173 % Loss from operations (33,168) (12,192) (20,976) 172 % Other income (expense): Interest income 123 582 (459) (79) % Interest expense - - - * Other expense - - - * Total other income 123 582 (459) (79) % Net loss$ (33,045) $ (11,610) $ (21,435) 185 % * Not meaningful Revenue Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Revenue $ 1,396$ 248 $ 1,148 463 % Revenue increased by$1.1 million , or 463%, from$0.2 million during the six months endedJune 30, 2020 to$1.4 million during the six months endedJune 30, 2021 , due to sales of products related to our Proteograph Product Suite in the three-months endedJune 30, 2021 . Revenue recognized primarily consisted of sales of the Proteograph SP100 instrument and assay kits, platform evaluations, and services, of which$0.4 million was related to related parties. Revenue related to our grant-funded activities related to our SBIR grant from theNIH declined between the two periods. 26 --------------------------------------------------------------------------------
Cost of Revenue Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Cost of revenue $ 586 $ -$ 586 * Cost of revenue for the six-months endedJune 30, 2021 was$0.6 million compared to$0 for the six months endedJune 30, 2020 , primarily due to the first sales of our Proteograph Product Suite. Cost of revenue related to our Proteograph Product Suite consist of costs of the SP100 instrument, assay kits and other related costs, including labor and overhead. Research and Development Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Research and development$ 13,162 $ 8,758 $ 4,404 50 % R&D expenses increased by$4.4 million , or 50%, from$8.8 million during the six months endedJune 30, 2020 to$13.2 million during the six months endedJune 30, 2021 . The increase was primarily due to an increase in product development efforts related to our Proteograph Product Suite including$1.5 million in employee compensation and other related costs and$1.8 million in stock-based compensation due to growth in research and development personnel,$1.7 million related to the expansion of facilities and maintenance and depreciation of laboratory equipment, and$0.3 million in professional and consulting fees. This was offset by a decrease in prototype materials of$(0.4) million as we enter the Limited Release phase of our commercial plan and a decrease in clinical study fees of$(0.6) million related to the costs associated with the ramp down of site enrollment for clinical studies related to the collection of biological samples for research use. These clinical studies are related to the assets transferred to PrognomIQ. Selling, General and Administrative Six Months Ended June 30, Change 2021 2020 Amount %
(dollars in thousands)
Selling, general and administrative
465 % Selling, general and administrative expenses increased by$17.1 million , or 465%, from$3.7 million during the six months endedJune 30, 2020 to$20.8 million during the six months endedJune 30, 2021 , primarily due to a$4.0 million increase in employee compensation and other related expenses, and a$8.5 million stock-based compensation increase, as a result of an increase in personnel, including the addition of key members of executive management. Other increases are attributable to$0.5 million in marketing costs and$0.1 million in travel costs related to the Limited Release phase of our commercial plan, and costs related to becoming a publicly traded company including a$0.9 million increase in professional and consulting fees related to accounting and audit services, a$0.7 million increase in corporate and patent legal matters, and a$2.1 million increase in general business expenses which includes insurance premiums and state and local business taxes. Total Other Income Six Months Ended June 30, Change 2021 2020 Amount % (dollars in thousands) Total other income $ 123$ 582 $ (459) (79) % 27
-------------------------------------------------------------------------------- Total other income decreased by$0.5 million , or 79%, from$0.6 million during the six months endedJune 30, 2020 to$0.1 million during the six months endedJune 30, 2021 . Short-term interest rate yields decreased significantly during fiscal year 2020 and remained low during the first half of fiscal year 2021. These decreases were partially offset quantitatively by higher amounts of cash invested in money market funds andU.S. Treasury securities during fiscal year 2020 and the first half of fiscal year 2021 as a result of multiple private and public financing events. Liquidity and Capital Resources Since the date of our incorporation, we have not generated significant revenue from product sales and have incurred significant operating losses and negative cash flows from operations. Our operations have been funded primarily through the sale and issuance of equity securities since inception. We anticipate that we will continue to incur net losses and do not expect positive cash flows from operations for the foreseeable future. However, based on our cash on hand, we believe we will have adequate liquidity over the next twelve months following the date of this Quarterly Report to operate our business and to meet our cash requirements. In connection with our IPO, we sold 10,592,106 shares of Class A common stock and received net proceeds of$183.9 million after deducting offering costs, underwriting discounts and commissions. Concurrent with the IPO, we issued 7,105,262 shares of our common stock in a private placement for net proceeds of$130.3 million after deducting underwriting discounts and commissions. OnFebruary 1, 2021 , we completed an underwritten public offering of 1,650,000 shares of our Class A common stock and received net proceeds of$103.0 million after deducting offering costs, underwriting discounts and commissions. Cash Flows The following table summarizes our cash flows for the periods indicated: Six Months Ended June 30, 2021 2020 (in thousands) Net cash used in operating activities$ (25,222) $ (9,853) Net cash provided by (used in) investing activities (52,263)$ 10,271 Net cash provided by financing activities
114,756
Operating Activities During the six months endedJune 30, 2021 , cash used in operating activities was$25.2 million , which was attributable to a net loss of$(33.0) million and a net change in our net operating assets and liabilities of$(6.1) million , partially offset by non-cash charges of$13.9 million . Non-cash charges primarily consisted of$12.5 million in stock-based compensation,$1.0 million of depreciation and amortization and$0.4 million of net amortization of premiums on available-for-sales securities. The change in our net operating assets and liabilities was primarily due to an increase in inventory levels of$2.1 million , an increase in prepaid expenses, including insurance, of$2.8 million related to being a public company and an increase in accounts receivable and related party receivables of$1.2 million from commercial sales and other receivables. During the six months endedJune 30, 2020 , cash used in operating activities was$9.9 million . which was attributable to a net loss of$(11.6) million and a net change in our net operating assets and liabilities of$(0.4) million offset by non-cash charges of$2.2 million . Non-cash charges primarily consisted of$1.4 million in stock-based compensation and$0.7 million of depreciation and amortization. The change in our net operating assets and liabilities was primarily due to a decrease of$0.5 million in accrued expenses and an increase in other receivables of$0.3 million , partially offset by an increase in deferred revenue of$0.3 million and an increase in deferred rent of$0.3 million . 28 -------------------------------------------------------------------------------- Investing Activities During the six months endedJune 30, 2021 , cash used in investing activities was$52.3 million , which related to purchases of available-for-sale securities, net of proceeds from maturities of$(49.3) million and$(2.9) million in payments primarily for laboratory equipment. During the six months endedJune 30, 2020 , cash provided by investing activities was$10.3 million , which related to proceeds from maturities, net of purchases of available-for-sale securities of$13.8 million , offset by$(3.5) million in payments primarily for laboratory equipment. Financing Activities During the six months endedJune 30, 2021 , cash provided by financing activities was$114.8 million . This was attributable to net proceeds of$103.0 million from issuance of common stock upon our follow-on offering, net of issuance costs of$(7.6) million , and$11.4 million in short-swing profits from a beneficial owner. During the six months endedJune 30, 2020 , cash provided by financing activities was approximately$55.0 million , which was primarily attributable to proceeds from sale of Series D-1 convertible preferred stock, net of issuance costs. Contractual Obligations The following table summarizes our contractual obligations as ofDecember 31, 2020 : Payments due by period Less than More than Total 1 year 1-3 years 3-5 years 5 years (in thousands) Operating lease obligations$ 20,367 $ 795 $ 3,063 $ 3,717 $ 12,792 In addition, we enter into agreements as a part of normal course of business with various vendors, which are generally cancellable without material penalty upon written notice. Payments associated with these agreements are not included in this table of contractual obligations. Our operating lease obligations reflect our lease obligations for our headquarters facility inRedwood City, California . InJune 2020 , we amended the lease agreement for this facility to expand the office and laboratory space covered by the lease, extend the lease throughFebruary 2032 , and increase the annual base rent for the expanded premises. Upon occupancy of the expansion facility that is anticipated to occur in the fourth quarter of 2021, the annual base rent will be$0.9 million in the first 12 months of the lease term (subject to an abatement period of nine months), and increases on an annual basis to$1.2 million in the final 12 months of the lease term. The amendment also provides for tenant incentives in the amount of$2.4 million . InApril 2021 , we entered into a lease amendment for this facility to further expand the office and laboratory space for an approximate term of 11-years. Payments associated with this operating lease agreement will result in additional operating lease obligations not included in the above table of approximately$160,000 per month plus operating expenses. We have certain purchase commitments related to its inventory management with certain manufacturing suppliers wherein the Company is required to purchase the amounts forecasted in a blanket purchase order within a certain time period. The contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude orders for goods and services entered into in the normal course of business that are not enforceable or subject to change. These outstanding commitments amounted to$5.1 million as ofJune 30, 2021 . These payments are not included in the table of contractual obligations above. 29 -------------------------------------------------------------------------------- Off-Balance Sheet Arrangements Since the date of our incorporation, we have not engaged in any off-balance sheet arrangements, as such term is defined in the rules and regulations of theSEC . Critical Accounting Policies, Significant Judgments and Use of Estimates The discussion and analysis of our financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance withUnited States generally accepted accounting principles. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, and the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements, as well as revenue and expenses incurred during the reporting periods. 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. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management's judgments and estimates. There have been no significant changes in our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in the section titled "Management's Discussion and Analysis of Financial Condition and Operations" included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . Emerging Growth Company Status We are an emerging growth company, as defined in 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. Other exemptions and reduced reporting requirements under the JOBS Act for emerging growth companies include presentation of only two years audited financial statements in a registration statement for an initial public offering, an exemption from the requirement to provide an auditor's report on internal controls over financial reporting pursuant to the Sarbanes-Oxley Act, an exemption from any requirement that may be adopted by thePublic Company Accounting Oversight Board regarding mandatory audit firm rotation, and less extensive disclosure about our executive compensation arrangements. We have elected to use the extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that (i) we are no longer an emerging growth company or (ii) we affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our condensed consolidated financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates. We will remain an emerging growth company under the JOBS Act until the earliest of (i) the last day of our first fiscal year in which we have total annual gross revenue of$1.07 billion or more, (ii) the date on which we have issued more than$1.0 billion of non-convertible debt instruments during the previous three fiscal years or (iii) the date on which we are deemed a "large accelerated filer" under the rules of theSEC with at least$700.0 million of outstanding equity securities held by non-affiliates, or (iv) the last day of the fiscal year following the fifth anniversary of completion of our initial public offering. We anticipate that we will no longer qualify as an emerging growth company as ofDecember 31, 2021 and expect to become a "large accelerated filer" under the rules of theSEC with at least$700.0 million of outstanding equity securities held by non-affiliates. Recent Accounting Pronouncements See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report for more information about recent accounting pronouncements, the timing of their adoption, and our 30 -------------------------------------------------------------------------------- assessment, to the extent we have made one yet, of their potential impact on our financial condition of results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk We have exposure to interest rate risk that relates to our cash, cash equivalents, and investments held in money market funds andU.S. Treasury securities. The goals of our investment policy are liquidity and capital preservation. We believe that we do not have any material exposure to changes in the fair value of these assets as a result of changes in interest rates due to the short-term nature of our cash, cash equivalents, and investments. Item 4. Controls and Procedures Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer (CEO), and Chief Financial Officer (CFO), we evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in theSEC's rules and forms, and that such information is accumulated and communicated to our management, including the CEO and the CFO, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as ofJune 30, 2021 because of the material weakness in internal controls further discussed below. Notwithstanding the material weakness, our management, including our CEO and CFO, has concluded that our unaudited condensed consolidated financial statements, included in this Quarterly Report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that a reasonable possibility exists that a material misstatement of our annual or interim financial statements would not be prevented or detected on a timely basis. Specifically, our management determined that, as ofJune 30, 2021 , we have material weaknesses in each of the following components of the "Internal Control-Integrated Framework" (2013), issued by theCommittee of Sponsoring Organizations of theTreadway Commission : •insufficient accounting personnel to enable segregation of duties relating to the general ledger, disbursement, and certain accounting functions; •no formalized processes or controls for account reconciliations, including independent review of such reconciliations, or related financial statement analysis prepared in conformity with generally accepted accounting principles inthe United States (U.S. GAAP); and •an insufficient complement of accounting personnel with the necessaryU.S. GAAP technical expertise to timely identify and account for complex or non-routine transactions or to formalize accounting policies, memoranda, or controls for such transactions. These material weaknesses could result in a misstatement of account balances or disclosures that would result in a material misstatement of our annual or interim consolidated financial statements that may not be prevented or detected, and accordingly, it was determined that these control deficiencies constitute material weaknesses. Remediation Plan 31 -------------------------------------------------------------------------------- We have begun to take certain actions to address the control deficiencies in our financial reporting, including hiring three finance department employees with appropriate expertise, including our Chief Financial Officer and our Controller, and retaining an accounting consulting firm to provide additional depth and breadth to our technical accounting and financial reporting capabilities. We have also begun to review and document our accounting and financial processes and internal controls, build out our financial management and reporting systems infrastructure, and further develop and formalize our accounting policies and financial reporting procedures, which includes ongoing senior management review and establishing our audit committee oversight. In addition, we have commenced work with a consulting firm to assist in the design effectiveness and testing of our internal controls and we plan to hire an additional four finance and accounting personnel during 2021 to assist in executing on these specific functions, of which we have hired two personnel as ofJune 30, 2021 . Inherent Limitations on Effectiveness of Controls Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Changes in Internal Control over Financial Reporting Except for the identification of the material weaknesses and the remediation plan described above, there were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) under the Exchange Act) during the quarter endedJune 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 32
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