TALIS BIOMEDICAL CORPORATION The following discussion and analysis of our financial condition and results of operations should be read together with our audited financial statements financial statements and related notes included elsewhere in this Annual Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk factors" section of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the "Risk factors" section of this Annual Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special note regarding forward-looking statements."
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide material information relevant to an assessment of the Company's financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. This section is designed to focus on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management's assessment to have a material impact on future operations.
Overview
Our primary focus is to transform diagnostic testing through innovative molecular diagnostic products that enable customers to deploy accurate, reliable, low cost and rapid molecular testing at the point-of-care for infectious diseases and other conditions.
We are developing the Talis One system (Talis One, the Talis One system or platform), that leverages expertise across chemistry, biology, engineering and software, to create a fully integrated, and cloud-enabled, portable molecular diagnostic solution that customers can rapidly deploy when are where needed. The Talis One system incorporates core proprietary technologies into a compact, easy-to-use instrument, that utilizes single use test cartridges and software, including a central cloud database, which are designed to work together to provide levels of testing accuracy equivalent to a central laboratory. We intend to commercialize Talis One system as an integrated system comprising single use consumables, an instrument and software. Our commercial strategy will focus on building and expanding an installed base of Talis One instruments and driving utilization of our Talis One assay kits to generate revenue from the purchase of such products. Subject to marketing authorization, our first commercial test will be a rapid point-of-care molecular diagnostic to detect SARS-CoV-2 directly from a patient sample in less than 30 minutes (COVID-19 test). We are also developing assays for the detection of other respiratory infections that could be included as a panel test with our COVID-19 test as well as tests for infections related to women's health and sexually transmitted infections.
Our products will require marketing authorization from the FDA prior to
commercialization. Due to the COVID-19 global pandemic, we plan to pursue
marketing authorization for our COVID-19 test under an EUA rather than initially
pursuing 510(k) clearance or other forms of marketing authorization under the
We have invested in automated cartridge manufacturing lines capable of producing one million Talis One cartridges per month for the COVID-19 assay, which are scheduled to begin to come on-line in the first quarter of 2021 and we expect will scale to full capacity through 2021. These manufacturing lines will be located at our contract manufacturers' sites and operated by our contract manufacturing partners. We have also ordered 5,000 Talis One instruments from our instrument contract manufacturer through the first half of 2021.
Since our inception in 2013, we have devoted substantially all our efforts to research and development activities, manufacturing capabilities, raising capital, building our intellectual property portfolio and providing general and administrative support for these operations. We have principally financed our operations through the
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issuance and sale of shares of our convertible preferred stock to outside
investors in private equity financings as well as the issuance of convertible
promissory notes and receipts from government grants. Prior to our initial
public offering we received
We have incurred recurring losses since our inception, including net losses of
• continue the research and development of our platform and assays for
additional diseases;
• initiate clinical trials for, or additional preclinical development of,
our platform;
• further develop and refine the manufacturing processes for our platform;
• change or add manufacturers or suppliers of materials used for our platform;
• seek marketing authorizations;
• seek to identify and validate diagnostic assays for other disease states;
• obtain, maintain, protect and enforce our intellectual property portfolio;
• hire and deploy a salesforce;
• seek to attract and retain new and existing skilled personnel;
• create additional infrastructure to support our operations as a public
company and incur increased legal, accounting, investor relations and
other expenses; and
• experience delays or encounter issues with any of the above.
In addition, if we obtain marketing authorization for our platform, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need substantial additional funding to support our operating activities. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt and grant revenue. Adequate funding may not be available to us on acceptable terms, or at all.
If we are unable to obtain funding, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.
As of
We outsource essentially all of our manufacturing. Design work, prototyping and pilot manufacturing are performed in-house before outsourcing to third party contract manufacturers. Our outsourced production strategy is intended to drive rapid scalability and avoid the high capital outlays and fixed costs related to constructing and operating a manufacturing facility. Certain of our suppliers of components and materials are single source suppliers.
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To support our anticipated commercial launch, we have invested in automated cartridge manufacturing production lines for our Talis One cartridges. Those assets deemed to have an alternative future use have been capitalized as property and equipment while those assets determined to not have an alternative future use have been expensed. The automated cartridge manufacturing lines are capable of producing one million Talis One cartridges per month, which we expect will scale to full capacity through 2021.
COVID-19 pandemic
Since it was reported to have surfaced in
We expect that COVID-19 precautions will directly or indirectly impact the timeline for some of our planned clinical trials for our non-COVID-19 related products in development and we are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system.
As a result of the outbreak, many companies have experienced disruptions in their operations and in markets served. We are considered an essential business and therefore the impact to our operations has been limited. To date, we have initiated some and may take additional temporary precautionary measures intended to help ensure our employees' well-being and minimize business disruption. For the safety of our employees and their families, we have temporarily reduced the presence of our employees in our labs. Certain of our third-party service providers have also experienced shutdowns or other business disruptions. We are continuing to assess the impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and planned clinical trial and other development timelines, as well as on our industry and the healthcare system.
As a result of the COVID-19 pandemic, or similar pandemics and outbreaks, we have and may in the future experience severe disruptions, including:
• interruption of or delays in receiving products and supplies from the
third parties we rely on to, among other things, manufacture components
of our instruments, due to staffing shortages, production slowdowns or
stoppages and disruptions in delivery systems, which may impair our
ability to sell our products and consumables;
• limitations on our business operations by the local, state, or federal
government that could impact our ability to sell or deliver our
instruments and consumables;
• delays in customers' purchasing decisions and negotiations with
customers and potential customers;
• business disruptions caused by workplace, laboratory and office closures
and an increased reliance on employees working from home, travel
limitations, cyber security and data accessibility limits, or
communication or mass transit disruptions; and
• limitations on employee resources that would otherwise be focused on the
conduct of our activities, including because of sickness of employees or
their families or the desire of employees to avoid contact with large
groups of people.
Three vaccines for COVID-19 have been authorized for emergency use by the FDA as
of
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Components of our results of operations
Revenue
To date, we have not generated any revenue from sales of our Talis One system. If our development efforts for our system are successful and result in regulatory approval, we expect to generate revenue in the future from product sales of our Talis One instruments and single use cartridges. Our business model is focused on driving the adoption of the Talis One system. Customers would gain access to our instrument via a direct sales model or a reagent rental model. Under direct platform sales, our customers would directly purchase our Talis One instrument and make subsequent independent purchases of our cartridges. This would include, during our early customer engagements, a fully paid workflow license to practice the desired workflow(s) in a specific field of use. In addition, we would also offer platform support to the extent customers require further system and workflow optimization following platform implementation. When we place a system under a reagent rental agreement, we plan to install equipment in the customer's facility without a fee and the customer agrees to purchase our cartridges at a stated price over the term of the reagent rental agreement. Some of these agreements could include minimum purchase commitments. Under a reagent rental model, we plan to retain title to the equipment and such title is transferred to the customer at no additional charge at the conclusion of the initial arrangement. The cost of the instrument under the agreement is expected to be recovered in the fees charged for consumables, to the extent sold, over the term of the agreement.
We cannot predict if, when, or to what extent we will generate revenue from the commercialization and sale of our system. We may never succeed in obtaining regulatory approval for our system. Growth and predictability of recurring revenue is impacted by the mix between these options. It is our goal and expectation that recurring revenue will grow over time, both in absolute dollars and as a percentage of our revenue.
Grant revenue
To date, all of our revenue has been derived from government grants, which
includes an
These grants are not in scope of Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (ASC 606) as the government entities and/or government-sponsored entities are not customers under the agreements.
Grant funds received from third parties are recorded as revenue if we are deemed to be the principal participant in the arrangement. If we are not the principal participant, the funds from grants are recorded as a reduction to research and development expense. Reimbursable costs paid prior to being billed are recorded as unbilled grant receivables. Funds received in advance are recorded as deferred grant revenue. Our management has determined that we are the principal participant under our grant agreements, and accordingly, we record amounts earned under these arrangements as grant revenue.
Operating expenses
Research and development expenses
Research and development expenses consist primarily of internal and external costs incurred for our research activities, the development of our platform, investment in manufacturing capabilities as well as costs incurred pursuant to our government grants and include:
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• salaries, benefits and other related costs, including stock-based
compensation expense, for personnel engaged in research and development
functions;
• the cost of laboratory supplies and developing and manufacturing of our
platform;
• contract services, other outside costs and costs to develop our
technology capabilities;
• facility-related expenses, which include direct depreciation costs and
allocated expenses for rent and maintenance of facilities and other
operating costs;
• cost of outside consultants, including their fees and related travel
expenses, engaged in research and development functions;
• expenses related to regulatory affairs; and
• fees related to our scientific advisory board.
We expense research and development costs as incurred. Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks using information provided to us by our vendors. Payments for these activities are based on the terms of the individual agreements, which may differ from the pattern of costs incurred, and are reflected in our financial statements as prepaid or accrued research and development expenses. Nonrefundable advance payments for goods or services to be received in the future for use in research and development activities are recorded as prepaid expenses and expensed as the related goods are delivered or the services are performed.
Until future commercialization is considered probable and the future economic benefit is expected to be realized we do not capitalize pre-launch inventory costs prior to completion of marketing authorization unless the regulatory review process has progressed to a point that objective and persuasive evidence of regulatory approval is sufficiently probable, and future economic benefit can be asserted. We record such costs to research and development costs, or if used in marketing evaluations reported to general and administrative expense. A number of factors are taken into consideration, based on management's judgment, including the current status in the regulatory approval process, potential impediments to the approval process, anticipated R&D initiatives and risk of technical feasibility, viability of commercialization and marketplace trends.
Prior to receiving an EUA, costs of property and equipment related to scaling up our manufacturing capacity for commercial launch are recorded to research and development expense when the asset does not have an alternative future use.
Research and development activities are central to our business model. We expect that our research and development expenses will continue to increase for the foreseeable future as we initiate clinical trials for our platform, ramp-up our manufacturing and commercialization efforts and continue to discover and develop platforms and assays for other infectious diseases and disease states. There are numerous factors associated with the successful commercialization of any assay we may develop in the future for other diseases or disease states, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development.
General and administrative expenses
General and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, corporate and business development and administrative functions. General and administrative expenses also include professional fees for legal, patent, accounting, information technology, auditing, tax and consulting services, travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
We expect that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development and potential commercialization and sales of our platform. We also expect to incur increased expenses associated with being a public company, including costs of
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accounting, audit, legal, regulatory and tax compliance services, director and officer insurance costs, and investor and public relations costs.
Other income (expense)
Other income (expense), net primarily consists of interest expense on a
convertible promissory note held during 2019 as well as the change in estimated
fair value of our convertible notes. We elected the fair value option to account
for these convertible notes and fluctuations in the estimated fair value of our
convertible notes were based on the remeasurement at each reporting period until
conversion and/or settlement. In
Results of operations
Comparison for the twelve months ended
The following table summarizes our results of operations:
Twelve Months Ended
December 31,
(in thousands) 2020 2019 Change
Grant revenue $ 10,938 $ 3,977 $ 6,961
Operating expenses:
Research and development 89,019 23,812 65,207
General and administrative 13,103 6,864 6,239
Total operating expenses 102,122 30,676 71,446
Loss from operations (91,184 ) (26,699 ) (64,485 )
Other (expense) income, net 54 (775 ) 829
Net loss and comprehensive loss $ (91,130 ) $ (27,474 ) $ (63,656 )
Grant revenue
Our revenue for the twelve months ended
Research and development expenses
Substantially all of our research and development expenses incurred for the
twelve months ended
Research and development expenses were
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increase over the near term as we continue to scale up our manufacturing capacity in anticipation of commercial launch of the Talis One system.
The ramp up of the Company's manufacturing efforts, which began in the middle of
2020, is expected to result in a significant increase in our research and
development expenses through regulatory approval and launch of our initial
products is achieved. As of
General and administrative expenses
General and administrative expenses were
Other income (expense)
Other income was
Liquidity and capital resources
Sources of liquidity
On
Since inception and through
In the second half of 2020, we were awarded a
Between
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As of
Future funding requirements
We do not have any commercial-scale manufacturing facilities, and expect to rely on third parties to manufacture the Talis One system and related cartridges. We have entered into, and expect to enter into additional, agreements with contract manufacturers to support our manufacturing scale up. We will also need engage third-party logistics providers to manage the movement of materials between suppliers and contract manufacturers and for finished goods warehousing. We also intend to invest in additional manufacturing capacity to meet market demand if the Talis One system is approved for marketing. The ramp up of these manufacturing efforts, which began in the middle of 2020, is expected to result in a significant increase in our research and development expenses until regulatory approval of our products is achieved.
We do not yet have any products approved for sale, and we have never generated any revenue from contracts with customers. We do not expect to generate any meaningful revenue unless and until we obtain regulatory approval of and commercialize our Talis One system. Until we can generate a sufficient amount of revenue from the commercialization of Talis One system, if ever, we expect to finance our future cash needs through public or private equity offerings or debt financings.
To date, our primary uses of cash have been to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We currently have no other ongoing material financing commitments, such as other lines of credit or guarantees. We have recently increased our spending on automated cartridge manufacturing scale-up and instrument manufacturing, and expect expenses related to manufacturing to increase significantly as we prepare for a potential commercial launch as early as the second quarter of 2021. We expect our expenses to increase in connection with our ongoing activities, particularly as we continue the research and development of, continue or initiate clinical trials of, and seek marketing approval for, our platform. In addition, if we obtain marketing approval for our platform, we expect to incur significant commercialization expenses related to program sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of any future collaborators. We expect to incur additional costs associated with operating as a public company. Accordingly, we may choose to obtain additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
Since our inception, we have incurred significant losses and negative cash flows
from operations. We have an accumulated deficit of
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect and we may use all our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of the Talis One system, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:
• our ability to receive, and the timing of receipt of, an EUA for our
COVID-19 test;
• the effectiveness and availability of the three vaccines that were
authorized as of March 2021 ;
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• the amount of capital, and related timing of payments, required to build
sufficient inventory of our Talis One system and test cartridges in
advance of and during commercial launch;
• the costs and timing of future commercialization activities, including
manufacturing, marketing, sales and distribution, for our platform if we
receive marketing approval;
• limitations of, or interruptions in, the quality or quantity of
materials from our third party suppliers;
• our ability to implement an effective manufacturing, marketing and
commercialization operation;
• the scope, progress, results and costs of our ongoing and planned operations;
• the costs associated with expanding our operations;
• the number and development requirements of assays for other diseases or
disease states that we may pursue;
• intervention, interruptions or recalls by government or regulatory agencies;
• enhancements and disruptive advances in the diagnostic testing industry;
• our estimates and forecasts of the market size addressable by our Talis
One system;
• security breaches, data losses or other disruptions affecting our
information systems;
• the regulatory and political landscape upon the launch of our
commercialization of the Talis One system;
• the revenue, if any, received from commercial sales of our products if
approved, including additional working capital requirements if we pursue
a reagent rental model for our Talis One instrument;
• our ability to establish strategic collaborations; and
• the costs and timing of preparing, filing and prosecuting patent
applications, maintaining and enforcing our intellectual property rights
and defending any intellectual property-related claims.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
Year Ended December 31,
2020 2019
(in thousands)
Cash used in operating activities $ (87,024 ) $ (24,326 )
Cash used in investing activities (8,201 ) (578 )
Cash provided by financing activities 246,754 39,613
Net increase in cash and restricted cash $ 151,529 $ 14,709
Operating activities
During the year ended
During the year ended
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Investing activities
During the years ended
Financing activities
During the year ended
During the year ended
Contractual obligations and commitments
The following table summarizes our non-cancellable contractual obligations at
Payments due by period
Less than 1 to 3
(in thousands) Total 1 year years
Operating leases(1)(4) $ 698 $ 693 $ 5
Purchase commitments(2) 60,361 60,361 -
Manufacturing production lines(3) 41,615 41,615 -
Total $ 102,674 $ 102,669 $ 5 (1) Represents minimum contractual lease payments on our real estate lease in
(2) Represents firm purchase commitments in the normal course of business of
cartridges, respectively.
(3) Represents firm commitments relating to the scale-up of manufacturing
capacity for Talis One cartridges, primarily attributed to investments in
production lines.
(4) In
for office space in Redwood City, California , with expected occupancy to
commence in the fourth quarter of 2021. In January 2021 , we also entered
into a lease that expires in February 2033 for laboratory space in Chicago,
Illinois , with expected occupancy to commence in the second quarter of 2021.
Between June 2020 and August 2020 , we executed and amended a LOC with JPMC
for up to $33.0 million , as terms of collateral that were required by one of
our contract manufacturing organizations. The LOC was set to expire on
December 31, 2020 but automatically extended to December 31, 2021 when we
did not terminate the agreement 90 days prior to the original expiration
date.
Apart from the contracts with payment commitments that we have reflected in the table, we have entered into other contracts in the normal course of business with certain contract manufacturing organizations and other third parties for manufacturing services. Payments due upon cancellation consist only of payments for services provided and expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation.
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Critical accounting policies and significant judgments and estimates
This management's discussion and analysis of financial condition and results of
operations is based on our financial statements, which have been prepared in
accordance with generally accepted accounting principles in
While our significant accounting policies are described in greater detail in Note 2 to our financial statements appearing within Item 8 of this Annual Report, we believe that the following accounting policies are those most critical to the judgments and estimates used in the preparation of our financial statements.
Equity transactions
We record convertible preferred stock at fair value on the dates of issuance, net of issuance costs. We have classified convertible preferred stock as temporary equity in the accompanying balance sheets due to terms that may require redemption of the shares in cash upon certain change in control events that are not solely within our control, including our sale or transfer. The carrying values of the convertible preferred stock will be adjusted to their liquidation preferences at such time it becomes probable that such a redemption triggering event will occur. We also evaluate our convertible preferred stock to determine where any of their contractual terms require bifurcation and separate recognition from the underlying shares in accordance with the embedded derivative accounting guidance.
Between
When mezzanine equity-classified preferred shares are extinguished, the difference between (1) the fair value of the consideration transferred to the holders of the preferred shares (i.e., the cash or the fair value of new instruments issued) and (2) the carrying amount of the preferred shares (net of issuance costs) are subtracted from (or added to) net income (loss) to arrive at income available to common stockholders in the calculation of earnings per share attributable to our common stockholders. In addition to the effect on earnings per share attributable to our common stockholders, extinguishment accounting will result in adjustments within equity but will not result in recognition of any amounts in net income (loss).
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The estimated fair value of our convertible preferred stock, for purposes of
evaluating the extinguishment resulting from the Equity Transactions, was based
on the guidelines outlined in the
• a contemporaneous independent valuation of our common stock performed at
periodic intervals by an independent third-party valuation firm;
• prices at which we sold shares of convertible preferred stock and the
superior rights and preferences of the convertible preferred stock
relative to our common stock;
• timing and likelihood of achieving a liquidity event, such as an initial
public offering or sale of our company in light of prevailing market
conditions;
• volatility as estimated based on the average volatility for comparable
publicly traded diagnostic companies over a period equal to the expected
term of a liquidity event (comparable companies are chosen based on
their similar size, stage in the life cycle or area of specialty); and
• a risk-free interest rate based on the U.S. Treasury zero coupon issues
corresponding with the estimated period of time to a liquidity event.
The assumptions underlying these valuations represent our management's best estimates based on application of these approaches and careful consideration of advice from a third-party valuation firm. Such estimates involve inherent uncertainties and the application of significant judgment.
Grant revenue
Grants awarded to us for research and development by government entities are outside the scope of the contracts with customers and contributions guidance. This is because these granting entities are not considered to be customers and are not receiving reciprocal value for their grant support provided to us. These grants provide us with payments for certain types of expenditures in return for research and development activities or for meeting certain development milestones over a contractually defined period. For efforts performed under these grant agreements, our policy is to recognize revenue when it is reasonably assured that the grant funding will be received as evidenced through the existence of a grant arrangement, amounts eligible for reimbursement are determinable and have been incurred and paid, the applicable conditions under the grant arrangements have been met, and collectability of amounts due is reasonably assured. Costs of grant revenue are recorded as a component of research and development expenses in our statements of operations and comprehensive loss.
Grant funds received from third parties are recorded as revenue if we are deemed to be the principal participant in the arrangement. If we are not the principal participant, the funds from grants are recorded as a reduction to research and development expense. Reimbursable costs paid prior to being billed are recorded as unbilled grant receivables. Funds received in advance are recorded as deferred grant revenue. We have determined that we are the principal participant under our grant agreements, and accordingly, we record amounts earned under these arrangements as grant revenue.
Research and development expenses
Research and development costs are expensed as incurred. Research and development expenses include certain payroll and personnel expenses, laboratory supplies, consulting costs, external contract research and development expenses, allocated overhead and facility occupancy costs. Costs to develop our technologies, including software, are recorded as research and development expense except for costs that meet the criteria to be capitalized as internal-use software costs. These expenses relate to both our sponsored programs as well as costs
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incurred pursuant to grants. Non-refundable advance payments made for goods or services that will be used or rendered for future research and development activities are deferred and capitalized and recognized as expense as the goods are received or the related services are rendered.
We do not capitalize pre-launch inventory costs until future commercialization is considered probable and the future economic benefit is expected to be realized. Capitalizing pre-launch inventory costs will not occur prior to obtaining an EUA or other FDA clearance or marketing authorization unless the regulatory review process has progressed to a point that objective and persuasive evidence of regulatory approval is sufficiently probable, and future economic benefit can be asserted. We record such costs as research and development expenses, or if used in marketing evaluations records such costs as general and administrative expenses. A number of factors are taken into consideration, based on our management's judgment, including the current status in the regulatory approval process, potential impediments to the approval process, anticipated research and development initiatives and risk of technical feasibility, viability of commercialization and marketplace trends.
In 2020, we began developing production lines to automate the production of our
Talis One cartridges for the COVID-19 assay with the intention to scale up our
manufacturing capabilities to meet the high demand expected in response to the
COVID-19 pandemic. In Q2 2021, we plan to submit a request for EUA to the FDA
for our Talis One system with COVID-19 molecular diagnostic assay for the
automated detection of nucleic acid from the SARS-CoV-2 virus in nasal swab
samples from individuals suspected of COVID-19 by their healthcare provider
Approximately
For certain research and development services where we have not yet been invoiced or otherwise notified of actual cost from the third-party contracted service providers, we are required to estimate the extent of the services that have been performed on our behalf and the associated costs incurred at each reporting period. The majority of our service providers invoice us monthly in arrears for services performed. We make estimates of our accrued expenses as of each balance sheet date in our financial statements based on facts and circumstances at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary.
Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period. To date, there have not been any material adjustments to our prior estimates of accrued research and development expenses.
Fair value option
We have elected the fair value option to account for our convertible notes that were issued during and settled during 2019 and recorded these convertible notes at fair value with changes in fair value recorded as a component of other income (expense), net in the statement of operations and comprehensive loss. As a result of applying the fair value option, direct costs and fees related to the convertible notes were expensed as incurred and were not deferred. We concluded that it was appropriate to apply the fair value option to the convertible notes because there were no non-contingent beneficial conversion options related to the convertible notes. The probability-adjusted model used in valuing the fair value of our convertible debt is based on significant unobservable inputs, including but not limited to:
• Timing and probability of a qualified financing event, which is defined
as financing event through the issuance of shares for total gross
proceeds of at least $45.0 million in cash;
• discount rates; and
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• fair value of the underlying convertible preferred stock.
Increases or decreases in the fair value of the convertible notes can result
from updates to assumptions such as the expected timing or probability of a
qualified financing event, or changes in discount rates. Judgment is used in
determining these assumptions as of the initial valuation date and at each
subsequent reporting period. Updates to assumptions could have a significant
impact on our results of operations in any given period. The convertible notes
were settled in
Stock-based compensation
We measure stock-based compensation expense for stock options granted to our employees and directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. Our stock-based payments include stock options. Stock-based compensation expense is recognized over the requisite service period, which is generally the vesting period, on a straight-line basis. From time to time, we may grant stock options to employees, including executive officers, that vest upon the satisfaction of both service-based and performance-based vesting conditions. We recognize stock-based compensation over the requisite service period using the accelerated attribution method for awards with a performance condition if the performance condition is deemed probable of being met. Stock-based compensation expense is classified in the accompanying statements of operations and comprehensive loss based on the function to which the related services are provided. We recognize stock-based compensation expense for the portion of awards that have vested. Forfeitures are recorded as they occur.
We estimate the fair value of stock options granted to our employees and directors on the grant date, and the resulting stock-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of subjective assumptions which determine the fair value of stock option awards. These assumptions include:
• Expected term. The expected term of options represents the period of
time that options are expected to be outstanding. Our historical stock
option exercise experience does not provide a reasonable basis upon
which to estimate an expected term due to lack of sufficient data. For
granted "at-the-money" stock options, we estimate the expected term by
using the simplified method. The simplified method calculates the
expected term as the average of the time-to-vesting and the contractual
life of the options.
• Expected volatility. Prior to our IPO, there has been no public market
for our common stock, and as a result we do not have any trading history
of our common stock, expected volatility is estimated based on the
average volatility for comparable publicly traded diagnostic companies
over a period equal to the expected term of the stock option grants. The
comparable companies are chosen based on their similar size, stage in
the life cycle or area of specialty.
• Risk-free interest rate. The risk-free interest rate is based on the
U.S. Treasury zero coupon issues in effect at the time of grant for
periods corresponding with the expected term of the stock option grants.
• Expected dividend yield. We have never paid dividends on our common
stock and have no plans to pay dividends on our common stock. Therefore,
we use an expected dividend yield of zero.
Prior to our IPO, there has been no public market for our common stock. As such,
the estimated fair value of the common stock underlying our stock options was
determined by our board of directors, with input from management, considering
our most recently available third-party valuations of common stock and our board
of directors' assessment of additional objective and subjective factors that it
believed were relevant, and factors that may have changed from the date of the
most recent valuation through the date of the grant, which intended all options
granted 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. We
believe that our board of directors has the relevant experience and expertise to
determine the fair value of our common stock. Prior to our initial public
offering, given the absence of a public trading market for our common stock, the
valuations of our common stock were determined in accordance with the guidelines
outlined in the
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value of common stock at each valuation date. In accordance with the Practice Aid, our board of directors considered the following methods:
• Current value method. Under the Current Value Method, our value is
determined based on our balance sheet. This value is then first
allocated based on the liquidation preference associated with preferred
stock issued as of the valuation date, and then any residual value is
assigned to the common stock.
• Option-pricing method. Under the option-pricing method, shares are
valued by creating a series of call options with exercise prices based
on the liquidation preferences and conversion terms of each equity
class. The estimated fair values of the preferred and common stock are
inferred by analyzing these options.
• Probability-weighted expected return method. The probability-weighted
expected return method, is a scenario-based analysis that estimates
value per share based on the probability-weighted present value of
expected future investment returns, considering each of the possible
outcomes available to us, as well as the economic and control rights of
each share class.
The assumptions we use in the valuation model are based on future expectations combined with management judgment. In the absence of a public trading market, our board of directors with input from management exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:
• contemporaneous independent valuations performed at periodic intervals
by an independent third-party valuation firm;
• the prices at which we sold shares of preferred stock and the superior
rights and preferences of the preferred stock relative to our common
stock at the time of each grant;
• the progress of our research and development programs, including the
status and results of preclinical studies for our platform;
• our stage of development and commercialization and our business strategy;
• external market conditions affecting the diagnostics industry and trends
within the diagnostics industry;
• the lack of an active public market for our common stock; and
• the likelihood of achieving a liquidity event, such as an initial public
offering or sale of our company in light of prevailing market
conditions.
The assumptions underlying these valuations represented our board of directors and management develop best estimates based on application of these approaches and the assumptions underlying these valuations, giving careful consideration to the advice from our third-party valuation expert. Such estimates involve inherent uncertainties and the application of significant judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our equity-based compensation could be materially different. Following the closing of our initial public offering, our board of directors will determine the fair market value of our common stock based on its closing price as reported on the date of grant on the primary stock exchange on which our common stock is traded.
In
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The intrinsic value of all outstanding options as of
Off-balance sheet arrangements
As of
Recently issued accounting pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our audited financial statements included within Item 8 of this Annual Report.
Emerging growth company status
In
In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:
• reduced disclosure about the compensation paid to our executive officers;
• not being required to submit to our stockholders' advisory votes on
executive compensation or golden parachute arrangements;
• an exemption from the auditor attestation requirement in the assessment
of our internal control over financial reporting pursuant to the
Sarbanes-Oxley Act; and
• an exemption from new or revised financial accounting standards until
they would apply to private companies and from compliance with any new
requirements adopted by the Public Company Accounting Oversight Board
requiring mandatory audit firm rotation.
We may take advantage of these exemptions for up to the last day of the fiscal
year ending after the fifth anniversary of our initial public offering or such
earlier time that we are no longer an emerging growth company. We would cease to
be an emerging growth company on the date that is the earliest of (1) the last
day of the fiscal year in which we have total annual gross revenues of
We are also a "smaller reporting company" meaning that the market value of our
stock held by non-affiliates is less than
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exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation.
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