The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes and other financial information
included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report
on Form 10-K for the fiscal year ended
Report”). In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates, and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. You should review the sections
titled “Note Regarding Forward-Looking Statements” for a discussion of
forward-looking statements and in Part II, Item 1A, “Risk Factors” for a
discussion of factors that could cause actual results to differ materially from
the results described in or implied by the forward-looking statements contained
in the following discussion and analysis and elsewhere in this Quarterly Report
on Form 10-Q and in our Annual Report.
Overview
We strive to develop the most comprehensive and actionable cancer genomic tests
in the world to help patients live better and longer lives. We believe we have
one of the most discerning technologies to both characterize and monitor cancer
– with the aim of driving a new paradigm for cancer management and guiding care
from biopsy through the life of the patient. Our assays combine tumor-and-normal
profiling with proprietary algorithms to deliver advanced insights even as
cancer evolves over time. Our products are designed to detect recurrence at the
earliest timepoints, enable selection of targeted therapies based on
ultra-comprehensive genomic profiling, and enhance biomarker strategy for drug
development.
Today, our platforms are routinely used by many of the largest oncology-focused
pharmaceutical companies for analysis of patient samples in their clinical
trials and drug development programs. Our advanced genomic sequencing and
analytics also support the development of personalized cancer vaccines and other
next-generation cancer immunotherapies. For example, we are providing genomic
testing to Moderna, Inc. (“Moderna”) in its ongoing clinical trials evaluating a
personalized cancer vaccine. In addition, we partner with diagnostics companies
by providing our advanced tumor profiling and analysis capabilities as an input
to their products. More recently, we launched new diagnostic offerings for the
clinical setting and are preparing for future expansion in the clinical
diagnostics market. Finally, we have also pursued non-cancer related business
opportunities, specifically within the population sequencing market, by
providing whole genome sequencing (“WGS”) services under contract with the
Department of Veterans Affairs Million Veteran Program
As part of one of our new strategies for 2023 and beyond, we are working with a
growing number of leading cancer centers and world-class academic research
institutions to build and publish the clinical evidence-base to support our
products and our key indications. Specifically, because of the high sensitivity
of our technology, we aim to focus on three indications in the next 2-3 years:
immunotherapy (IO) monitoring, breast cancer, and lung cancer. We have announced
collaborations with
and Criterium and the
building the evidence-base for our technology and these indications. If the key
opinion leaders (“KOLs”) we are collaborating with have a positive experience
using our platform, we are optimistic this will support broader use of our
platform by other KOLS, as well as clinicians in the future.
Our work in oncology is underpinned by our experience and capacity for
next-generation sequencing at scale. We have the capacity to sequence and
analyze approximately 200 trillion bases of DNA per week in our facility. We
believe that our capacity is already larger than most cancer genomics companies,
and we continue to build automation and other infrastructure to scale further as
demand increases. To date, we have sequenced more than 320,000 human samples, of
which more than 160,000 were whole human genomes.
In
California
that extends to 2036 for the 100,000 square foot facility, which is
approximately triple the amount of space than our
facility allows for expansion of our laboratory for testing to support
pharmaceutical customers and clinical diagnostic testing. In addition, the new
space is intended to support the expansion of research and development efforts
to bring leading edge products and services to the marketplace. Our
office currently continues to house our Clinical Laboratory Improvement
Amendments of 1988 (“CLIA”)-certified and
(“CAP”)-accredited laboratory and we expect to move our laboratory operations
from
First Quarter 2023 Highlights
Total revenue increased 24%, or
compared to the first quarter of 2022, driven by higher sales to Natera under
our partnership to provide advanced tumor analysis for use in Natera’s minimal
residual disease (“MRD”) testing offerings. Revenue from pharma tests,
enterprise, and other customers was
compared to
driven by higher sales to Natera. Revenue from population sequencing was
million
quarter of 2022, due to a reduction in the value of annual task orders received
from the VA MVP in the past two years.
We announce new product offerings, business developments, and research
collaborations at various times during the year. Significant announcements
during the first quarter of 2023 included the following:
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•
Sharpened our strategic focus to “Win in MRD”, for cancer types that are hard to
detect such as early-stage breast cancer, early-stage lung cancer, and
immunotherapy monitoring. In addition, we expect to establish partnerships with
companies that are in need of our ultra-sensitive MRD technology and have a
commercial infrastructure to be successful in penetrating the market.
•
Announced a headcount reduction of approximately 30% and the decision to close
operations in
approximately
to contribute to reducing our 2023 cash usage to approximately
which is expected to be down from
•
Announced a partnership with Moderna to leverage our NeXT Platform for
supporting Moderna’s personalized cancer vaccine development for clinical trial
success, including for their Phase 3 melanoma trial which is evaluating
mRNA-4157/V940 in combination with Merck & Co., Inc.’s Keytruda. We provide
genomic test results to Moderna, leveraging our proprietary ACE coverage
augmentation technology, which is exome-scale.
•
Announced a collaboration with
and the
tumor-informed liquid biopsy assay for the TRACERx study, a groundbreaking lung
cancer initiative, to identify and track MRD potentially before recurrence is
detected through standard of care technologies.
•
Presented new data to highlight NeXT Personal’s ultra-sensitivity in four
posters at the
2023, including initial findings from research with
Hamburg-Eppendorf
to predict responses or resistance to immunotherapy earlier than imaging.
•
Extended partnership with AstraZeneca to use NeXT Personal to explore
ultra-sensitive MRD measurement, including clinically relevant and personalized
variant tracking, for clinical research and drug development.
•
Partnered with Criterium and the
conduct a prospective clinical trial to validate the clinical performance of the
NeXT Personal assay to evaluate MRD and subsequent recurrence in patients with
early-stage, resectable triple negative breast cancer (TNBC).
•
Appointed
addition to his role as President. Promoted
Officer, in addition to his role as Chief Financial Officer. Promoted
Chen
Officer. All changes effective
Components of Operating Results
Revenue
We derive our revenue primarily from sales of advanced sequencing and analytics
to the following four groups of customers:
•
Pharma tests and services includes sales of testing services and data analytics
for clinical trials and research to pharmaceutical companies in support of their
drug development programs.
•
Enterprise sales includes sales of tumor profiling and diagnostic tests directly
to other businesses as an input to their products. Revenue from our partnership
with Natera to provide advanced tumor analysis for use in Natera’s MRD test
currently makes up substantially all of the revenue in this category.
•
Population sequencing includes sales of genomic sequencing services and data
analytics to support large-scale genetic research programs. All of the revenue
in this category is from our partnership with the VA MVP.
•
Other includes sales of genomic tests and analytics to universities and
non-profits. This category also includes sales of diagnostics tests ordered by
healthcare providers for cancer patients, which was insignificant to date in
2023.
Our ability to increase revenue will depend on our ability to further increase
sales to these groups of customers and expand our customer base within each
group. To do this, we are developing a growing set of state-of-the-art services
and products, advancing our operational infrastructure, building our regulatory
credentials, focusing our marketing efforts on large pharmaceutical companies,
and seeking additional partnerships such as ours with Natera. We sell through a
small direct sales force. We also anticipate increasing our revenue in the
future through entrance into the clinical diagnostics market and have begun
building our regulatory, clinical, and reimbursement capabilities, including
hiring a national clinical sales force.
We have one reportable segment from the sale of sequencing and data analysis
services. Most of our revenue to date has been derived from sales in
States
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Table of Contents Costs and Expenses Cost of Revenue
Cost of revenue consists of raw materials costs, personnel costs (salaries,
bonuses, stock-based compensation, payroll taxes, and benefits), laboratory
supplies and consumables, depreciation and maintenance on equipment, and
allocated facilities and information technology (“IT”) costs. We expect cost of
revenue to increase as our revenue grows. We expect variability in our gross
margins over the medium term due to fluctuating population sequencing revenue,
investments in new capabilities such as automation of laboratory workflows,
processing of diagnostic tests for the clinical market while we work to secure
reimbursement, and costs related to our new
long-term, we anticipate higher gross margins as growing revenue leads to
economies of scale.
Research and Development Expenses
Research and development expenses consist of costs incurred for the research and
development of our services and products and costs related to conducting studies
and collaborations with partners to validate the clinical utility of our
offerings. The expenses primarily consist of personnel costs (salaries, bonuses,
stock-based compensation, payroll taxes, and benefits); laboratory supplies and
consumables; costs of processing samples for research, product development,
collaborations, and studies; depreciation and maintenance on equipment; and
allocated facilities and IT costs. We include in research and development
expenses the costs to further develop software we use to operate our laboratory,
analyze the data it generates, and automate our operations.
We expense our research and development costs in the period in which they are
incurred. We expect to increase our research and development expenses overall as
we expand collaborations for clinical validation to secure reimbursement and
develop our NeXT Personal test as an LDT for the clinical diagnostics market,
partially offset by cost reductions from our first quarter 2023 reduction in
workforce and anticipated savings from our closure of operations in
Selling, General and Administrative Expenses
Selling expenses consist of personnel costs (salaries, commissions, bonuses,
stock-based compensation, payroll taxes, and benefits), customer support
expenses, direct marketing expenses, and market research. Our general and
administrative expenses include costs for our executive, accounting, finance,
legal, and human resources functions. These expenses consist of personnel costs
(salaries, bonuses, stock-based compensation, payroll taxes, and benefits),
corporate insurance, audit and legal expenses, consulting costs, and allocated
facilities and IT costs. We expense all selling, general and administrative
costs as incurred.
We expect our selling, general and administrative expenses to decrease
significantly in the medium term as a result of the 2023 reduction in workforce,
partially offset by investments in our diagnostic sales outreach efforts.
Restructuring and Other Charges
Restructuring and other charges consists of restructuring charges in connection
with our 2023 reduction in workforce and charges in connection with the closure
of our
Interest Income and Interest Expense
Interest income consists primarily of interest earned on our cash and cash
equivalents and short-term investments. Interest expense is the recognition of
imputed interest on noninterest bearing loans.
Other Income (Expense), Net
Other income (expense), net consists primarily of foreign currency exchange
gains and losses.
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Table of Contents Results of Operations
The following sets forth, for the periods presented, our unaudited condensed
consolidated statements of operations and selected financial data (in thousands,
except share and per share data):
Three Months Ended March 31, 2023 2022 Revenue$ 18,860 $ 15,227 Costs and expenses Cost of revenue 14,130 10,949 Research and development 16,573 17,098 Selling, general and administrative 14,097 15,486 Restructuring and other charges 3,885 - Total costs and expenses 48,685 43,533 Loss from operations (29,825 ) (28,306 ) Interest income 1,253 144 Interest expense (47 ) (59 ) Other income (expense), net (26 ) 19 Loss before income taxes (28,645 ) (28,202 ) Provision for income taxes 14 7 Net loss$ (28,659 ) $ (28,209 ) Net loss per share, basic and diluted $ (0.61 )$ (0.63 )
Weighted-average shares outstanding, basic and diluted 46,740,270 44,995,752
March 31, 2023 December 31, 2022 Cash and cash equivalents, and short-term investments$ 148,939 $ 167,658 Working capital 148,629 166,568 Total assets 272,180 292,700 Total debt 2,643 2,596 Long-term obligations 44,405 41,430 Total liabilities 78,548 74,561 Total stockholders' equity 193,632 218,139 Revenue
The following table shows revenue by customer type (in thousands):
Three Months Ended March 31, Change 2023 2022 Pharma tests and services$ 6,333 $ 7,562 (16%) Enterprise sales 9,458 4,116 130% Population sequencing 3,005 3,501 (14%) Other 64 48 33% Total revenue$ 18,860 $ 15,227 24% The following table shows customers that made up at least 10% of total revenue in each period presented: Three Months Ended March 31, 2023 2022 Natera, Inc. 50% 27% VA MVP 16% 23% Pfizer Inc. * 11% * Less than 10% of revenue Pharma tests and services
Revenue from pharma tests and services decreased 16%, or
first quarter of 2023. This was primarily the result of non-recurring projects
with certain customers as well as variability in timing and spending levels on
clinical trial projects by our pharmaceutical customers in general. For example,
we completed a
customers in the same period in 2022 with no projects completed for the same
customer in the current quarter. Additionally, revenue recognized for one of our
biobank customers decreased by
are strategically shifting away from low-margin customer projects.
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Table of Contents Enterprise sales
Revenue from enterprise sales increased 130%, or
quarter of 2023 primarily due to an increase in the volume of samples we tested
for Natera for use in Natera’s MRD testing offerings, partially offset by lower
selling prices as a result of volume-based tiered pricing. The number of samples
processed increased over 150% in the first quarter of 2023 as compared to the
same period of 2022.
Population sequencing
Population sequencing revenue is made up entirely of sales to the VA MVP. The
decrease of 14%, or
quarter of 2023 was due to a reduction in the value of annual task orders
received from the VA MVP in the past two years. Specifically, we received task
orders with values exceeding
the annual task order received from the VA MVP was
the annual task order received from the VA MVP was
order was the last task order received under our prior contract with the VA MVP,
which is now expired. Our conversion of orders into revenue necessarily declined
beginning in the fourth quarter of 2021 through the second quarter of 2022,
which is when we completed the fulfillment of all outstanding task orders under
the prior contract.
In
providing them WGS services. The performance period under the new contract
includes a base period of one year, with four one-year renewal option periods
that may be exercised upon discretion of the VA MVP. We concurrently received an
initial task order with a value of up to
recognized
million
2023.
Other
Other revenue increased 33%, or less than
2023 due to higher revenue from university research projects.
Costs and Expenses Three Months Ended March 31, Change 2023 2022 (in thousands) Cost of revenue$ 14,130 $ 10,949 29% Research and development 16,573 17,098 (3%) Selling, general and administrative 14,097 15,486 (9%) Restructuring and other charges 3,885 - 100% Total costs and expenses$ 48,685 $ 43,533 12% Cost of revenue
The increase in cost of revenue of 29% or
2023 was primarily due to higher revenue levels as well as higher fixed
laboratory costs.
Specific components of the increase were a
materials costs to support higher revenue levels, a
facilities costs and maintenance on lab equipment, a
laboratory supplies and consumables (enterprise customer orders require more
supplies to process as compared to other customer categories), and a
million
Research and development
The decrease in research and development expenses of 3%, or
first quarter of 2023 was primarily due to cost savings from our 2023 reduction
in workforce.
Specific components of the decrease were a
personnel-related costs primarily related to the 2023 reduction in workforce, a
product development and collaboration activities, and a
other expenses, partially offset by a
facilities costs as a result of the R&D function moving into our new
facility and consequently receiving a share of such facility costs.
Selling, general and administrative
The decrease in selling, general and administrative expenses of 9%, or
million
2023 reduction in workforce.
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Specific components of the decrease were a
personnel-related costs primarily related to the 2023 reduction in workforce, a
into our new
facility costs that were previously allocated to SG&A, partially offset by a
(primarily driven by our new
professional services (primarily higher legal expenses), and a
increase in sales-related expenses.
Restructuring and other charges
The
quarter of 2023 is comprised of
reduction in workforce and
The workforce reduction affected nearly 100 employees and was substantially
completed by the end of the first quarter of 2023. We recognized
expenses during the quarter in connection with these terminations, comprised of
separation pay and healthcare benefits payable in cash. We do not expect to
incur any material additional costs in connection with the terminations.
During the first quarter of 2023, expenses of
connection with
to separation pay for the 12 employees located in
cash. Substantially all of the terminations have been completed by the end of
the first quarter, along with the related cash outlays. The remaining
million
assets and impairments of other assets. We may incur additional costs as closure
activities continue throughout 2023, however, such future costs are not expected
to be significant.
Interest Income, Interest Expense, and Other Income (Expense), Net
Three Months Ended March 31, Change 2023 2022 Interest income $ 1,253$ 144 770% Interest expense (47 ) (59 ) (20%) Other income (expense), net (26 ) 19 NM Total $ 1,180$ 104
Interest income and interest expense
The increase in interest income in the first quarter of 2023 was due to
increased yields on our investments. Interest expense in both periods presented
was the recognition of imputed interest on noninterest bearing loans.
Other income (expense), net
Other income (expense), net during the periods presented consisted mainly of
foreign currency remeasurements.
Liquidity and Capital Resources
The following tables present selected financial information and cash flow
information (in thousands):
March 31, 2023 December 31, 2022 Cash and cash equivalents, and short-term investments$ 148,939 $ 167,658 Property and equipment, net 61,446 61,935 Contract liabilities 6,263 1,264 Working capital 148,629 166,568 Three Months Ended March 31, 2023 2022 Net cash used in operating activities$ (15,745 ) $ (11,357 ) Net cash provided by (used in) investing activities 13,793 (3,161 ) Net cash provided by financing activities - 515
From our inception through
primarily from
offerings in
our IPO in
preferred stock, as well as cash from operations and debt financings. As of
investments of
We have incurred net losses since our inception. We anticipate that our current
cash and cash equivalents and short-term investments, together with cash
provided by operating activities, are sufficient to fund our near-term capital
and operating needs for at least the next 12 months.
We have based these future funding requirements on assumptions that may prove to
be wrong, and we could utilize our available capital resources sooner than we
expect. If our available cash balances and anticipated cash flow from operations
are insufficient to
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satisfy our liquidity requirements, including because of lower demand for our
services or other risks described in this Quarterly Report on Form 10-Q, we may
seek to sell additional common or preferred equity or convertible debt
securities, enter into an additional credit facility or another form of
third-party funding or seek other debt financing. We filed a prospectus
supplement in
shares of our common stock up to an aggregate amount of
an at-the-market offering program. The sale of equity and convertible debt
securities may result in dilution to our stockholders and, in the case of
preferred equity securities or convertible debt, those securities could provide
for rights, preferences or privileges senior to those of our common stock. The
terms of debt securities issued or borrowings pursuant to a credit agreement
could impose significant restrictions on our operations. Additional capital may
not be available on reasonable terms, or at all.
Our short-term investments portfolio is primarily invested in highly rated
securities, with the primary objective of minimizing the potential risk of
principal loss. Our investment policy generally requires securities to be
investment grade and limits the amount of credit exposure to any one issuer.
As of
United States
to fund our domestic operations. We announced the closure of our
operations in the current quarter and plan to repatriate any cash balances back
to our headquarters by the end of 2023. Additionally, if in the future, we
encounter a significant need for liquidity domestically or at a particular
location that we cannot fulfill through borrowings, equity offerings, or other
internal or external sources, or the cost to bring back the money is not
significant from a tax perspective, we may determine that cash repatriations are
necessary or desirable. Repatriation could result in additional material taxes.
These factors may cause us to have an overall tax rate higher than other
companies or higher than our tax rates have been in the past.
During the three months ended
of
non-cash expenses of
amortization) and a net positive change in working capital of
(primarily due to a
During the three months ended
activities was
short-term investments, partially offset by
equipment purchases.
Material Cash Requirements
Our material cash requirements in the short- and long-term consist primarily of
variable costs of revenue, operating expenditures, capital expenditures,
property leases, and other. We plan to fund our material cash requirements with
our existing cash and cash equivalents and short-term investments, which
amounted to
receipts from customers. To fund our material cash requirements in the short-
and long-term, we may also seek to sell additional common or preferred equity or
convertible debt securities, enter into an additional credit facility or another
form of third-party funding or seek other debt financing.
Variable costs of revenue. From time to time in the ordinary course of business,
we enter into agreements with vendors for the purchase of raw materials,
laboratory supplies and consumables to be used in the sequencing of customer
samples. However, we generally do not have binding and enforceable purchase
orders beyond the short term, and the timing and magnitude of purchase orders
beyond such period is difficult to accurately project. We currently expect
spending in this area to increase in 2023 relative to 2022 to support expected
higher levels of revenue.
Operating expenditures. Our primary use of cash relates to paying employees,
spend on professional services, spend related to research and development
projects, and other costs related to our research and development, selling,
general and administrative functions. We currently expect to decrease our spend
in these areas as a result of our first quarter 2023 workforce reduction. On a
long-term basis, we manage future cash requirements relative to our long-term
business plans.
Capital expenditures. Capital expenditures are expected to decrease
significantly from 2022 levels as we have substantially completed the one-time
build-out of our new headquarters and laboratory facility in
as of the end of 2022. Going forward, our capital expenditures are expected to
consist primarily of laboratory equipment and computer equipment. We currently
expect capital expenditures to be between
the years 2023, 2024, and 2025.
Property leases. Our noncancelable operating lease payments were
as of
in Part I, Item 1 of this Form 10-Q in the Notes to Unaudited Condensed
Consolidated Financial Statements in Note 7, “Leases.”
Other. As of
the purchase of
licenses, and related ongoing support. In connection with the loans, we made
payments of
31, 2023
second and third quarters of 2023, respectively, and
Further discussion of these transactions can be found in Part I, Item 1 of this
Form 10-Q in the Notes to Unaudited Condensed Consolidated Financial Statements
in Note 6, “Loans.”
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Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
requires us to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenue, costs and expenses, and related disclosures.
Our estimates are based on our historical experience and on various other
factors that we believe are reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
An accounting policy is deemed to be critical if it requires an accounting
estimate to be made based on assumptions about matters that are highly uncertain
at the time the estimate is made, if different estimates reasonably could have
been used, or if changes in the estimate that are reasonably possible could
materially impact the financial statements. We believe that the assumptions and
estimates associated with revenue recognition, stock-based compensation, and
leases have the greatest potential impact on our condensed consolidated
financial statements. Therefore, we consider these to be our critical accounting
policies and estimates.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended
31, 2022
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, set forth in Part II, Item 7.
Recent Accounting Pronouncements
See the section titled “Summary of Significant Accounting Policies-Recent
Accounting Pronouncements” in Note 2 to our unaudited condensed consolidated
financial statements for additional information.
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