PROGENITY, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our financial statements and notes
thereto and other financial information included elsewhere in this Annual
Report. Some of the information contained in this discussion and analysis
includes forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those described in or implied by
these forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those identified below and those
discussed in the section titled "Risk Factors" included elsewhere in this Annual
Report.
Overview
We are a biotechnology company innovating in the oral delivery of
biotherapeutics. Our drug-device combinations could enable new treatment
approaches in two main areas:
•
Targeted delivery of therapeutics to the site of disease in the gastrointestinal
("GI") tract, designed to improve outcomes for patients with Inflammatory Bowel
Disease ("IBD"); and
•
Systemic delivery of biotherapeutics, designed to replace injection with
needle-free, oral capsules.
Our mission is to improve human health through a more advanced approach to
biotherapeutic delivery.
Our historical operations included a licensed
Amendment
in the molecular testing markets serving women's health providers in the
obstetric, gynecological, fertility, and maternal fetal medicine specialty
areas. Previously, our core business was focused on the prenatal carrier
screening and noninvasive prenatal test market, targeting preconception planning
and routine pregnancy management for genetic disease risk assessment. Through
our affiliation with
liability partnership doing business as
operations also included anatomic and molecular pathology testing products in
Strategic Transformation and Factors Affecting Our Performance
In
Transformation") pursuant to which we are refocusing our efforts on our robust
research and development pipeline to better position the business for future
growth. The Strategic Transformation includes the closure of our genetics
laboratory in
reduction in force and other cost-cutting measures and operational improvements.
Prior to the closure of our genetics laboratory in
generated revenue by providing tests through our
throughout most of the second quarter of 2021. We received payments for such
tests from payors, laboratory distribution partners, and self-paying
individuals, and more than 95% of payments for our tests we received through
reimbursement. We received reimbursement from several distinct channels:
commercial third-party payors, laboratory distribution partners, and government
health benefits programs such as Medicare and Medicaid. Due to the typical lag
in payment following performance of a test, we expect to continue to receive
reimbursement payments for a period of time following the closure of the
laboratory.
In the second quarter of 2020, we added COVID-19 testing to our offering and
began offering COVID-19 testing nationally in
longer performing COVID-19 testing following the shut-down of our laboratory
operations.
We are engaged in research and development activities with respect to tests
under development and precision medicine product candidates. Following the
Strategic Transformation, we are devoting substantially all of our resources to
developing and perfecting our intellectual property rights, conducting research
and development activities (including undertaking preclinical and clinical
studies of our precision medicine product candidates), conducting clinical
trials of our most advanced precision medicine product candidates, organizing
and staffing our company, business planning and raising capital. We do not have
any precision medicine products approved for sale, and we have not generated any
revenue from precision medicine product sales.
Our business involves significant investment in research and development
activities for the development of new products. We intend to continue investing
in our pipeline of new products and technologies. We expect our investment in
research and development to increase as we pursue regulatory approval of our
Targeted Therapeutics and Oral Biotherapeutics product candidates and expand our
pipeline of diagnostics device product candidates. The achievement of key
development milestones is a key factor in evaluating our performance.
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We expect to continue to incur significant expenses and increasing operating
losses in the near term. While we materially reduced our spend profile as a
result of the Strategic Transformation in 2021, we expect our expenses may
increase in connection with our ongoing activities, as we:
•
continue to advance the preclinical and clinical development of our lead
Targeted Therapeutics and Oral Biotherapeutics product candidates;
•
initiate preclinical studies and clinical trials for additional Targeted
Therapeutics and Oral Biotherapeutics product candidates that we may identify in
the future;
•
increase personnel and infrastructure to support our clinical development,
research and manufacturing efforts;
•
build out and expand our in-house process development and engineering and
manufacturing capabilities for R&D and clinical purposes;
•
continue to develop, perfect and defend our intellectual property portfolio; and
•
incur additional legal, accounting or other expenses in operating our business,
including the additional costs associated with operating as a public company.
We do not expect to generate significant product revenue unless and until we
successfully complete development and obtain regulatory and marketing approval
of, and begin to sell, one or more of our Targeted Therapeutics and Oral
Biotherapeutics product candidates, which we expect will take several years. We
expect to spend a significant amount in development costs prior to such time. We
may never succeed in achieving regulatory and marketing approval for our
precision medicine product candidates. We may obtain unexpected results from our
preclinical and clinical trials. We may elect to discontinue, delay or modify
preclinical and clinical trials of our precision medicine product candidates. A
change in the outcome of any of these variables with respect to the development
of a product candidate could mean a significant change in the costs and timing
associated with the development of that product candidate. Accordingly, until
such time as we can generate significant product revenue, if ever, we expect to
continue to seek private or public equity and debt financing to meet our capital
requirements. There can be no assurance that such funding may be available to us
on acceptable terms, or at all, or that we will be able to commercialize our
precision medicine product candidates. In addition, we may not be profitable
even if we commercialize any of our precision medicine product candidates.
Key Components of Our Results of Operations
We are providing the following summary of our revenues, research and development
expenses and general and administrative expenses to supplement the more detailed
discussion below. This summary excludes our revenues, research and development
expenses, selling and marketing, general and administrative and other expenses
associated with our Laboratory Operations, which are reported within loss from
discontinued operations.
Revenue
Historically, all of our revenue has been derived from molecular laboratory
tests, principally from the sale of NIPT, genetic carrier screening, and
pathology molecular testing. If our development efforts for our precision
medicine product candidates or other products under development are successful
and result in regulatory approval, we may generate revenue from future product
sales. If we enter into license or collaboration agreements for any of our
precision medicine product candidates, other pipeline products or intellectual
property, we may generate revenue in the future from payments as a result of
such license or collaboration agreements. We cannot predict if, when, or to what
extent we will generate revenue from the commercialization and sale of our
precision medicine product candidates or from license or collaboration
agreements. We may never succeed in obtaining regulatory approval for any of our
precision medicine product candidates.
Research and Development
Research and development expenses consist primarily of costs associated with
developing new products, including our preeclampsia test and our precision
medicine product candidates. Research and development expenses also consist of
personnel expenses, including salaries, bonuses, stock-based compensation
expense, benefits, consulting costs, and allocated overhead costs. Research and
development costs are expensed as incurred.
We plan to continue investing in research and development activities for the
foreseeable future as we focus on our Targeted Therapeutics and Oral
Biotherapeutics programs through preclinical studies and clinical trials. We
also expect our investment in research and development to increase as we pursue
regulatory approval of our product candidates and as we seek to expand our
pipeline of product candidates.
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Product candidates in later stages of clinical development generally have higher
development costs than those in earlier stages of clinical development,
primarily due to the increased size and duration of later-stage clinical trials.
While we plan to partner with large pharmaceutical companies, especially for the
later stage clinical work, we still expect our research and development expenses
to increase over the next several years as we conduct additional preclinical
studies and clinical trials, including later-stage clinical trials, for our
current and future product candidates and pursue regulatory approval of our
product candidates. The process of conducting the necessary preclinical and
clinical research to obtain regulatory approval is costly and time consuming.
The actual probability of success for our product candidates may be affected by
a variety of factors including:
•
the safety and efficacy of our product candidates;
•
early clinical data for our product candidates;
•
investment in our clinical programs;
•
the ability of collaborators to successfully develop our licensed product candidates; • competition; • manufacturing capability; and • commercial viability.
We may never succeed in achieving regulatory approval for any of our product
candidates due to the uncertainties discussed above. We are unable to determine
the duration and completion costs of our research and development projects or
when and to what extent we will generate revenue from the commercialization and
sale of our product candidates, if ever.
Due to the impact of the COVID-19 pandemic and work-from-home policies and other
operational limitations mandated by federal, state, and local governments as a
result of the pandemic, certain of our research and development activities have
been delayed and may be further delayed. For more information on risks related
to COVID-19, see "Risk Factors-The ongoing COVID-19 pandemic could further
materially affect our operations, as well as the business or operations of third
parties with whom we conduct business. Our business could be adversely affected
by the effects of other future health epidemics or pandemics in regions where we
or third parties on which we rely have significant business operations."
Selling and Marketing
Selling and marketing expenses consist primarily of personnel costs, including
salaries, commissions, bonuses, stock-based compensation expense, and benefits
for our sales and marketing team. Selling and marketing expenses also include
costs for communication, advertising, conferences, other marketing events, and
allocated overhead costs. We expect selling and marketing expenses to decrease
for the foreseeable future as a result of the closure of our Laboratory
Operations in
General and Administrative
General and administrative expenses consist primarily of personnel costs,
including salaries, bonuses, stock-based compensation expense, and benefits, for
our finance and accounting, legal, human resources, and other administrative
teams. Additionally, these expenses include professional fees of audit, legal,
and recruiting services. Following the listing of our common stock on Nasdaq, we
incurred additional expenses as a result of operating as a public company,
including costs to comply with the rules and regulations applicable to companies
listed on a
reporting obligations pursuant to the rules and regulations of the
addition, as a public company, we expect to continue to incur increased expenses
in the areas of insurance, investor relations, and professional services.
Furthermore, we will continue to incur expenses related to maintaining
compliance with the stipulations of the government settlement and the legal
costs associated with the
Proceedings" in this Annual Report. Despite such expenses, we expect our overall
general and administrative expenses to decrease for the foreseeable future as a
result of the closure of our Laboratory Operations in
our
Interest Income (Expense), Net
Interest income (expense), net is primarily attributable to borrowings under our
Credit Agreement (as defined below), our outstanding mortgages and capital lease
agreements, and interest income earned from our cash and cash equivalents.
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Loss on Warrant Liability
Loss on warrant liability consists of changes in the fair value of our
liability-classified warrants to purchase common stock.
Other Income (Expense), Net
Other income (expense), net primarily consists of changes in the fair value of
our embedded derivative liability related to the convertible notes, loss on
extinguishment of our obligations outstanding under the Credit and Security
Agreement, as amended, in the fourth quarter of 2020, loss on extinguishment of
convertible note in the second quarter of 2020, inducement loss on our
Convertible Notes, and changes in fair value of short-term investments.
Income Tax Provision
We account for income taxes under the asset-and-liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis, and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
We recognize the effect of income tax positions only if those positions are more
likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is more than 50% likely of being realized. Changes in
recognition or measurement are recognized in the period in which the change in
judgment occurs. Valuation allowances are established, when necessary, to reduce
deferred tax assets to the amount expected to be realized. Due to losses
generated in the past and projected future taxable losses anticipated in the
future, we established a 100% valuation allowance on net deferred tax assets.
On
the CARES Act, was enacted. The CARES Act includes several significant
provisions for corporations, including the usage of net operating losses,
interest deductions and payroll benefits. Corporate taxpayers may carryback net
operating losses, or NOLs, originating during 2018 through 2020 for up to five
years. During the three months ended
benefit of
the CARES Act legislation for taxes paid in years 2013, 2014, 2015, and 2017. We
agreed to pay 65% of any tax refund received in excess of
single year, along with other civil settlements, damages awards, and tax
refunds, to accelerate payments to the government in connection with our
government settlement. During the year ended
tax refund of
under the CARES Act. As of
million
Part I, Item 3. "Legal Proceedings-Federal Investigations" in this Annual
Report. There is no additional carryback for the year ended
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Results of Operations.
Comparison of Years Ended
Year Ended
December 31,
2021 2020
(in thousands)
Statement of Operations Data:
Revenues $ 1,247 $ 162
Cost of sales - -
Gross profit 1,247 162
Operating expenses:
Research and development 45,785 47,743
Selling and marketing 4,758 5,949
General and administrative 68,541 54,089
Total operating expenses 119,084 107,781
Loss from operations (117,837 ) (107,619 )
Interest income (expense), net (12,636 ) (9,915 )
Loss on warrant liability
(54,157 ) - Other income (expense), net 5,990 (25,084 ) Loss before income taxes (178,640 ) (142,618 ) Income tax benefit (119 ) (37,532 )
Loss from continuing operations (178,521 ) (105,086 )
Loss from discontinued operations (68,891 ) (87,442 )
Net loss
$ (247,412 ) $ (192,528 ) Revenue
As a result of the classification of the Company's Laboratory Operations to
discontinued operations, all revenue from Laboratory Operations has been
classified as discontinued operations. The remaining revenue is related to
license and collaboration agreements.
Cost of Sales
As a result of the classification of the Company's Laboratory Operations to
discontinued operations, all cost of sales from Laboratory Operations has been
classified as discontinued operations.
Research and Development Expenses
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Research and development $ 45,785 $ 47,743 $ (1,958 ) (4.1 )%
The decrease in research and development expenses was primarily attributable to
a decrease in supplies costs and consulting costs, partially offset by an
increase in salary and benefits.
Selling and Marketing Expenses
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Selling and marketing $ 4,758 $ 5,949 $ (1,191 ) (20.0 )%
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The decrease in selling and marketing expenses was primarily attributable to a
decrease in salary and benefits due to the Strategic Transformation, partially
offset by an increase in consulting fees and advertising expense.
General and Administrative Expenses
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
General and administrative $ 68,541 $ 54,089 $ 14,452 26.7 %
The increase in general and administrative expenses was primarily attributable
to an increase in consulting professional fees as part of the Strategic
Transformation restructuring, legal fees related to general corporate and patent
litigation matters, salary and benefits due to new equity awards and business
insurance costs related to our director and officer insurance premiums.
Interest Income (Expense), Net
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Interest income (expense), net
The increase in interest expense, net was due to the extinguishment of the Term
Loan and the issuance of the convertible notes in
Loss on Warrant Liability
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Loss on warrant liability $ 54,157 $ - $ 54,157 100.0 %
The loss on warrant liability is attributable to issuances, exercises and
remeasurement of liability classified warrants during the year ended December
31, 2021 .
Other Income (Expense), Net
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Other income (expense), net $ 5,990 $ (25,084 ) $ 31,074 *
* The change is more than 100%
The change in other income (expense), net was primarily due to a
gain related to a decrease in the fair value of our embedded derivative
liability related to the convertible notes during year ended 2021 and a loss on
extinguishment of debt associated with the exchange of our obligations under the
Credit and Security Agreement, as amended, for convertible notes issued to the
same related party, and a loss on extinguishment of debt associated with the
conversion of an unsecured promissory note into shares of common stock upon
completion of the IPO in 2020 that did not reoccur in 2021.
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Income Tax Benefit
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Income tax benefit $ 119 $ 37,532 $ (37,413 ) (99.7 )%
The tax benefit during the year ended
due to the NOL carryback provisions available under the CARES Act legislation
enacted in
full valuation allowance on net deferred tax assets due to losses generated in
2018 and projected taxable losses anticipated in the future.
Discontinued Operations
Year Ended
December 31, Increase/
2021 2020 (Decrease) % Change
(in thousands)
Loss from discontinued operations
In connection with the Strategic Transformation, we began reporting the results
of our Laboratory Operations in discontinued operations. The decrease in loss
was attributable to a decrease in revenues and cost of sales due to a decrease
in volumes of
the sale of
in this Annual Report for additional information regarding discontinued
operations.
Liquidity and Capital Resources.
Since our inception, our primary sources of liquidity have been generated by our
operations, sales of common stock, preferred stock, warrants to purchase common
stock and preferred stock and cash from debt financings, including convertible
notes.
As of
convertible notes, net outstanding of
of
we had a net loss of
million
capital needs, capital expenditures, dividends, research and development, and
general corporate needs.
While we have greatly reduced our cash burn following the Strategic
Transformation and we are forecasting our spend to be less than our current cash
and cash equivalents for the next 12 months, we have not yet built a track
record for our lower spend profile. As a result, we have not completely
eliminated the risks surrounding our ability to fund our operations for at least
12 months from the issuance date of the consolidated financial statements for
the year ended
result, there is substantial doubt about our ability to continue as a going
concern for 12 months following the issuance date of the consolidated financial
statements for the year ended
additional capital through equity offerings and/or debt financings or from other
potential sources of liquidity, which may include new collaborations, licensing
or other commercial agreements for one or more of our research programs or
patent portfolios. Adequate funding, if needed, may not be available to us on
acceptable terms, or at all. 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 other operations. If any of these events occur, our
ability to achieve our operational goals would be adversely affected. Our future
capital requirements and the adequacy of available funds will depend on many
factors, including those described in "Risk Factors." Depending on the severity
and direct impact of these factors on us, we may be unable to secure additional
financing to meet our operating requirements on terms favorable to us, or at
all. Our ability to raise additional funds may be adversely impacted by
potential worsening global economic conditions and the recent disruptions to,
and volatility in, the credit and financial markets in
worldwide resulting from the ongoing COVID-19 pandemic.
Credit and Security Agreements, Series B Preferred Stock, and Convertible Notes
On
"Credit Agreement") with a fund managed by Athyrium, as collateral agent and a
lender. The Credit Agreement provided for a term loan of
issuance of Series B Preferred Stock, and the issuance of a warrant to purchase
Series B Preferred Stock, (the "Series B Preferred Stock Purchase Warrant"). The
Credit Agreement was discharged in
of convertible notes described below. The Credit Agreement contained customary
covenants, including a requirement to maintain a minimum unrestricted cash
balance at all times of at least
our tangible and intangible property assets, with the exception of our
intellectual property. The term loan accrued interest at a rate per annum equal
to 9.5% and was due
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During the year ended
term loan of
In connection with the IPO, on
Purchase Warrant became exercisable for 400,160 shares of common stock.
On
Series B Stock Purchase Agreement executed on
Opportunities III Acquisition 2 LP, a fund managed by Athyrium and
our former Chairman and Chief Executive Officer, for an aggregate purchase price
of
Preferred Stock at a purchase price of
On
(the "Credit Agreement Amendment") with the collateral agent and lender party
thereto, providing for the payment of interest due and payable as of
2020
payment of interest due and payable as of
B Preferred Stock in the event our IPO had not been consummated by such date.
Pursuant to the Credit Agreement Amendment, we concurrently entered into a
Series B Preferred Stock Subscription Agreement (the "Subscription Agreement")
with the lender, which provided for the issuance of 967,130 shares of Series B
Preferred Stock at a subscription price of
interest due and payable as of
forth in the Credit Agreement Amendment. The Subscription Agreement further
provided for a potential additional issuance of shares of Series B Preferred
Stock as payment for the interest due and payable under the Credit Agreement as
of
with the amount of shares to be determined at such time.
On
with Athyrium Opportunities III Acquisition 2 LP, pursuant to which we issued an
additional 4,444,444 shares of Series B Preferred Stock at
an aggregate purchase price of
On
Opportunities 2020 LP, a fund managed by Athyrium, pursuant to which we issued
and sold an unsecured convertible promissory note with an annual interest rate
of 8.0% and in an aggregate principal amount of
note had a maturity date of
holder into shares of our common stock at a per share conversion price of the
lesser of
issuance and sale of the convertible note, we entered into (i) the Second
Amendment to the Credit Agreement (the "Second Credit Agreement Amendment"),
dated
indebtedness and the making of payments, in each case, in respect of the
convertible note, among other matters, and (ii) the Second Amendment to Series B
Preferred Stock Warrant, dated
restrictive exercise provisions in the Series B Preferred Stock Purchase
Warrant. In
converted into 1,250,000 shares of common stock and all obligations under the
convertible note were extinguished.
In
pursuant to Rule 144A under the Securities Act, we issued a total of
million
Convertible Notes were issued pursuant to, and are governed by, an indenture
("Indenture"), dated as of
Bank of New York Mellon Trust Company, N.A.
are due on
and accrue interest at a rate per annum equal to 7.25% payable semi-annually in
arrears on
1, 2021
The Convertible Notes are our senior, unsecured obligations and are (i) equal in
right of payment with our existing and future senior, unsecured indebtedness;
(ii) senior in right of payment to our existing and future indebtedness that is
expressly subordinated to the Notes; (iii) effectively subordinated to our
existing and future secured indebtedness, to the extent of the value of the
collateral securing that indebtedness; and (iv) structurally subordinated to all
existing and future indebtedness and other liabilities, including trade
payables, and (to the extent we are not a holder thereof) preferred equity, if
any, of our subsidiaries.
At any time, noteholders may convert their Convertible Notes at their option
into shares of our common stock, together, if applicable, with cash in lieu of
any fractional share, at the then-applicable conversion rate. The initial
conversion rate is 278.0094 shares of common stock per
of Convertible Notes, which represents an initial conversion price of
approximately
Notes before
additional cash payment representing the present value of any remaining interest
payments on the Convertible Notes through
and conversion price are subject to customary adjustments upon
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the occurrence of certain events. In addition, if certain corporate events that
constitute a Make-Whole Fundamental Change (as defined in the Indenture) occur,
then the conversion rate will, in certain circumstances, be increased for a
specified period of time.
The Convertible Notes are redeemable, in whole and not in part, at our option at
any time on or after
principal amount of the Convertible Notes to be redeemed, plus accrued and
unpaid interest, if any, to, but excluding, the redemption date, but only if the
last reported sale price per share of the our common stock exceeds 130% of the
conversion price on (i) each of at least 20 trading days, whether or not
consecutive, during the 30 consecutive trading days ending on, and including,
the trading day immediately before the date we send the related redemption
notice; and (ii) the trading day immediately before the date we send such
notice. In addition, calling the Convertible Notes will constitute a Make-Whole
Fundamental Change, which will result in an increase to the conversion rate in
certain circumstances for a specified period of time.
The Convertible Notes have customary provision relating to the occurrence of
Events of Default (as defined in the Indenture), which include the following:
(i) certain payment defaults on the Convertible Notes (which, in the case of a
default in the payment of interest on the Convertible Notes, will be subject to
a 30-day cure period); (ii) our failure to send certain notices under the
Indenture within specified periods of time; (iii) our failure to comply with
certain covenants in the Indenture relating to the Company's ability to
consolidate with or merge with or into, or sell, lease or otherwise transfer, in
one transaction or a series of transactions, all or substantially all of our
assets and assets of our subsidiaries, taken as a whole, to another person; (iv)
a default by us in our other obligations or agreements under the Indenture or
the Convertible Notes if such default is not cured or waived within 60 days
after notice is given in accordance with the Indenture; (v) certain defaults by
us or any of our subsidiaries with respect to indebtedness for borrowed money of
at least
of our subsidiaries for the payment of at least
are not discharged or stayed within 60 days after the date on which the right to
appeal has expired or on which all rights to appeal have been extinguished; and
(vii) certain events of bankruptcy, insolvency and reorganization involving us
or any of our significant subsidiaries. As of
compliance with all such covenants.
In
holders of Convertible Notes to exchange an aggregate of
amount for 8,513,850 shares of our common stock. In addition, we issued an
aggregate of 427,804 shares of common stock to certain investors in
consideration for a waiver of certain contractual lock-up provisions to which we
agreed to in connection with prior offerings of its securities.
In addition to the transaction discussed above, holders of Convertible Notes
exchanged an aggregate of
our common stock during the year ended
PIPE Financings
In
placement with certain institutional and accredited investors, pursuant to which
the purchasers purchased an aggregate of 4,370,629 units representing (i)
4,370,629 shares of the Company's common stock, par value
(ii) warrants to purchase up to 4,370,629 shares of common stock. The purchase
price for each unit was
exercisable for cash at an exercise price of
adjustments as provided under the terms of the warrants. The warrants are
immediately exercisable for cash and expire on the fifth anniversary of the date
of issuance. If exercised for cash, the warrants would result in additional
gross proceeds to us of approximately
In
placement with certain institutional and accredited investors, pursuant to which
the purchasers have agreed to purchase an aggregate of 16,194,332 units
representing (i) 16,194,332 shares of the Company's common stock, par value
purchase up to 16,194,332 shares of common stock. The purchase price for each
unit was
The transaction closed on
exercisable at an exercise price of
provided under the terms of the warrants, and expire on the fifth anniversary of
the date of issuance. The pre-funded warrants are exercisable at an exercise
price of
the warrants would result in additional gross proceeds to us of approximately
Registered Offerings
In
common stock and (ii) warrants to purchase 40,000,000 shares of common stock in
an underwritten public offering. Each share was sold together with one warrant
to purchase one share of common stock at a combined public offering price of
approximately
discounts and commissions and other offering expenses payable by the Company.
The warrants have an exercise price of
time, and will expire
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five years following the date of issuance. The agreement also allowed for the
purchase of up to an additional 6,000,000 shares at the option of the
underwriters, which was partially exercised for warrants to purchase an
aggregate of 1,932,000 shares of common stock.
In
institutional and accredited investors relating to the offering and sale of
13,333,334 shares of common stock at a purchase price of
registered direct offering. We received approximately
proceeds, after deducting placement agent fees and other offering expenses
payable by the Company.
At-The-Market Sales Agreement and Offering
In
Agreement") with
LLC
having an aggregate offering price of up to
"at the market" offerings through the Agents. Sales of the shares of common
stock, if any, will be made at prevailing market prices at the time of sale, or
as otherwise agreed with the Agents. The Agents will receive a commission from
the Company of up to 3.0% of the gross proceeds of any shares of common stock
sold under the Sale Agreement. During the three months ended
we received net proceeds of
offering expenses, from the sale of 1,763,754 shares under the Sale Agreement.
We sold such shares at a weighted average purchase price of
Mortgages
In
the purpose of acquiring a facility located in
previously leased by us and is used primarily for laboratory testing and
research purposes. The outstanding balance was
2020
mortgage with
outstanding on Avero Diagnostic's property located in
used primarily for laboratory testing. The outstanding balance was
as of
consolidated balance sheet. The mortgage was paid off in
the sale of
Cash Flows
Our primary uses of cash are to fund our operations and research and development
as we continue to grow our business. We expect to continue to incur operating
losses in future periods as our operating expenses increase to support the
growth of our business. We expect that our research and development expenses
will continue to increase as we focus on developing innovative products,
including our preeclampsia test and our precision medicine product candidates,
through preclinical studies and clinical trials. We also expect our investment
in research and development to increase as we pursue regulatory approval of our
product candidates and as we seek to expand our pipeline of product candidates.
We expect selling and marketing and general and administrative expenses to
decrease as a result of the closure of our Laboratory Operations and the sale of
our
timing of when we pay expenses, as reflected in the change in our outstanding
accounts payable and accrued expenses.
The following table summarizes our cash flows for the periods indicated (in
thousands):
Year Ended
December 31,
2021 2020
Cash used in operating activities
Cash used in investing activities
(1,242 ) (4,944 )
Cash provided by financing activities 165,049 229,722
Operating Activities
Net cash used in operating activities in the year ended
primarily attributable to a
million
by an
stock-based compensation expense and an
cash outflow from changes in operating assets and liabilities was attributable
to a
other long-term liabilities. Additionally, net cash used in operating activities
from discontinued operations contributed
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Net cash used in operating activities in the year ended
primarily attributable to a
million
by
derivative liability fair value,
convertible notes and
cash outflow from changes in operating assets and liabilities was primarily
attributable to a
liabilities and
assets, offset by
cash used in operating activities from discontinued operations contributed
million
Investing Activities
Net cash used in investing activities during the year ended
was attributable to
million
ended
property and equipment and
Financing Activities
Net cash provided by financing activities during the year ended
2021
issuance of common stock warrants,
issuance of common stock, and
common stock warrants, partially offset by
insurance financing and
Net cash provided by financing activities during the year ended
2020
issuance of common stock,
convertible notes and
B Preferred Stock, partially offset by
financing.
Critical Accounting Policies and Significant Judgments and Estimates
Our management's discussion and analysis of our financial condition and results
of operations is based on our financial statements, which have been prepared in
conformity with GAAP. The preparation of financial statements in accordance with
GAAP requires management to make estimates and assumptions about future events
that affect the amounts of assets and liabilities reported, disclosures about
contingent assets and liabilities, and reported amounts of revenue and expenses.
These estimates and assumptions are based on management's best estimates and
judgment. Management regularly evaluates its estimates and assumptions using
historical experience and other factors; however, actual results could differ
materially from these estimates and could have an adverse effect on our
financial statements.
While our significant accounting policies are more fully described in the notes
to our consolidated financial statements elsewhere in this annual report, we
believe that the accounting policies discussed below are most critical to
understanding and evaluating our historical and future performance.
Assets Held for Sale and Discontinued Operations
Assets classified as held for sale are reported at the lower of their carrying
value or fair value less costs to sell. Depreciation and amortization of assets
ceases upon designation as held for sale. Discontinued operations comprise
activities that were disposed of, discontinued or held for sale at the end of
the period, represent a separate major line of business that can be clearly
distinguished for operational and financial reporting purposes and represent a
strategic business shift having a major effect on the Company's operations and
financial results according to Accounting Standard Codification ("ASC") Topic
205, Presentation of Financial Statements. We have included all of our revenues
and expenses for the
to as the Laboratory Operations, as discontinued operations and all assets and
liabilities as held for sale.
Revenue Recognition
Revenue is primarily derived from providing molecular laboratory tests to
customers. We invoice and collect from third-party payors, laboratory services
intermediaries, and self-paying individuals. Third-party payors include
commercial payors, such as health insurance companies, health maintenance
organizations and government payors, such as Medicare and Medicaid in
States
and delivery of test results to the customer.
In accordance with ASC 606, we follow a five-step process to recognize revenue:
(i) identify the contract with the customer; (ii) identify the performance
obligations; (iii) determine the transaction price; (iv) allocate the
transaction price to the performance obligations; and (v) recognize revenue when
the performance obligations are satisfied. We have evaluated our contracts with
healthcare insurers, government payors, laboratory partners, and patients and
identified a single performance obligation in those contracts, the delivery of a
test result. We satisfy our performance obligation at a point in time upon the
delivery of the test result, at which point control is transferred to the
customer, and we can bill for the tests. The amount of revenue recognized
reflects the amount
81
--------------------------------------------------------------------------------
of consideration to which we expect to be entitled, or the transaction price,
and considers the effects of variable consideration, which is discussed below.
The transaction price is an estimate and may be fixed or variable. Variable
consideration includes reimbursement from healthcare insurers, government
payors, and patients and is adjusted for estimates of disallowed cases,
discounts, and refunds using the expected value approach. Tests billed to
healthcare insurers and directly to patients can take up to six months to
collect and we may be paid less than the full amount billed or not be paid at
all. For insurance carriers and government payors, we utilize the expected value
approach using a portfolio of relevant historical data for payors with similar
reimbursement experience. The portfolio estimate is developed using historical
reimbursement data from payors and patients, as well as known current
reimbursement trends not reflected in the historical data. Such variable
consideration is included in the transaction price only to the extent it is
probable that a significant reversal in the amount of cumulative revenue
recognized will not occur when the uncertainties with respect to the amount are
resolved. We monitor these estimates at each reporting period based on actual
cash collections in order to assess whether a revision to the estimate is
required. Both the initial estimate and any subsequent revision to the estimate
contain uncertainty and require the use of judgment in the estimation of the
transaction price and application of the constraint for variable consideration.
If actual results in the future vary from our estimates, we will adjust these
estimates, which would affect revenue and earnings in the period such variances
become known. The consideration expected from laboratory partners is generally a
fixed amount.
Common Stock Warrant Liability
We account for the common stock warrants issued as part of the
financing as freestanding liability instruments in accordance with applicable
accounting guidance based on the specific terms of the warrant agreement. As
these warrants are classified as liabilities, they are remeasured each period
until settled or until classified as equity. Any resulting gain or loss related
to the change in the fair value of the warrant liability is recorded to gain
(loss) on warrant liability on the consolidated statements of operations.
Changes in our inputs and assumptions, such as our stock price and the estimated
volatility of common stock, could result in material changes in the valuation in
future periods.
Risk-Free Interest Rate-The risk-free interest rate is calculated using the
average of the published interest rates of
maturities that are commensurate with the expected term.
Expected Volatility-Given the limited period of time our stock has been traded
in an active market, the expected volatility is estimated by taking the average
historical volatility for industry peers, consisting of several public companies
in the Company's industry that are similar in size, stage, or financial
leverage, over a period of time commensurate with the expected term of the
awards.
Fair Value of Common Stock-The fair value of our common stock is the closing
price of our common stock on the date of valuation.
Expected Term-The expected term represents the remaining contractual term of the
warrant.
AtDecember 31, 2021 , the fair value of warrant liability of$18.7 million , was estimated using the Black-Scholes Model with the following inputs and assumptions: December 31, 2021 Risk-free interest rate 1.30 % Expected volatility 91.9 % Stock price $ 2.09 Expected life (years) 4.6
Embedded Derivative Related to Convertible Notes
In December of 2020, we issued Convertible Notes due in
a conversion option which was required to be bifurcated upon issuance and then
periodically remeasured to fair value separately as an embedded derivative. The
conversion option includes additional interest payments payable to the
noteholders if converted prior to
simulation model to determine the fair value of the embedded features, which
incorporates inputs including the common stock price, volatility of common
stock, and time to maturity. The embedded feature will be remeasured to fair
value at each balance sheet date with a resulting gain or loss related to the
change in the fair value being recorded to other income (expense), net in the
consolidated statements of operations. As of
of the embedded derivative was zero, as presented in our consolidated balance
sheet. Changes in our assumptions used to value the embedded derivative, such as
our stock price and the estimated volatility of common stock, could result in
material changes in the valuation in future periods.
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Stock-Based Compensation
We calculate the fair value of stock options using the Black-Scholes option
pricing valuation model, which incorporates various assumptions including
assumptions including volatility, expected term, and risk-free interest rate.
Compensation related to service-based awards are recognized starting on the
grant date on a straight-line basis over the vesting period, which is typically
four years.
Determining the grant date fair value of options using the Black-Scholes option
pricing model requires management to make assumptions and judgments. If any of
the assumptions used in the Black-Scholes model change significantly,
stock-based compensation for future awards may differ materially compared with
the awards granted previously. The Company's key inputs and assumptions are as
follows:
Fair Value of Common Stock-Prior to the IPO, our common stock was not publicly
traded, therefore we estimated the fair value of common stock. Following the
IPO, the fair value of our common stock for awards with service-based vesting is
the closing price of our common stock on the date of grant or other relevant
determination date.
Expected Term-The expected term represents the period that the stock-based
awards are expected to be outstanding. We determines the expected term using the
simplified method. The simplified method deems the term to be the average of the
time-to-vesting and the contractual life. For stock options granted to
non-employees, the expected term equals the remaining contractual term of the
option from the vesting date. For the ESPP, the expected term is the period of
time from the offering date to the purchase date.
Expected Volatility-Given the limited period of time our stock has been traded
in an active market, the expected volatility is estimated by taking the average
historical volatility for industry peers, consisting of several public companies
in the Company's industry that are similar in size, stage, or financial
leverage, over a period of time commensurate with the expected term of the
awards.
Risk-Free Interest Rate-The risk-free interest rate is calculated using the
average of the published interest rates of
maturities that are commensurate with the expected term.
Dividend Rate-The dividend yield assumption is zero, as the Company has no plans
to pay dividends.
The following assumptions were used for the Black-Scholes option valuation
model:
Year ended
December 31,
2021 2020
Risk-free interest rate 0.6% - 1.4% 0.4% - 1.7%
Expected volatility 52.9% - 77.0% 57.0% - 71.0%
Expected dividend yield -
-
Expected life (years) 3.0 - 6.3 4.0 - 6.3
other assets acquired in a business combination that are not individually
identified and separately recognized.
tested annually for impairment at the reporting unit level, or more frequently
when events or changes in circumstances indicate that fair value of the
reporting unit has been reduced to less than its carrying value. We may choose
to perform a qualitative assessment to determine whether it is more likely than
not that the fair value of a reporting unit is less than its carrying amount as
a basis for determining whether it is necessary to perform a quantitative
assessment.
If a quantitative assessment is deemed necessary, we compare the fair value of
the reporting unit with its carrying amount, including goodwill. An impairment
loss will be recognized if the reporting unit's carrying amount exceeds its fair
value, to the extent that it does not exceed the total carrying amount of
goodwill.
Intangible assets consist of identifiable intangible assets acquired through
acquisitions. Identifiable intangible assets include payor relationships, trade
names, and noncompete agreements. We amortize intangible assets using the
straight-line method over their useful lives. We amortize noncompete covenants
using the straight-line method over the terms of the related agreements. We
review for impairment of intangible assets with estimable useful lives whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. No impairment existed as of
There are no intangible assets remaining as of
included as part of the sale of
83
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Recent Accounting Pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies" to the
consolidated financial statements included in this Annual Report for information
on recently issued accounting pronouncements.
JOBS Act Accounting Election
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. We have elected to use this extended
transition period and, as a result, our financial statements may not be
comparable to companies that comply with public company effective dates. We also
intend to rely on other exemptions provided by the JOBS Act, including without
limitation, not being required to comply with the auditor attestation
requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended.
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