What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-06 compared with 2022-03-01 · 64 added, 71 removed, 196 unchanged (41% of the section changed)

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Our mission is to imagine and pioneer new ways to decode the secrets of the proteome to improve human health.

Our initial product, the Proteograph Product Suite (Proteograph), leverages our proprietary engineered nanoparticle (NP) technology to provide unbiased, deep, rapid and large-scale access to the proteome.

The Proteograph Product Suite is an integrated solution that is comprised of consumables, an automation instrument and software.

We believe that characterizing and understanding the full complexity of the proteome is foundational for accelerating biological insights and will lead to broad potential end-markets for proteomics, encompassing basic research and discovery, translational research, diagnostics and applied applications.

This full understanding of the complexity of the proteome and its dynamic nature requires large-scale, unbiased and deep interrogation of thousands of samples across time, which we believe is unavailable with the proteomic approaches available today.

We believe that the Proteograph Product Suite has the potential to enable researchers to perform these proteomics studies at scale.

Our first product, the Proteograph TM Product Suite (Proteograph), leverages our proprietary engineered nanoparticle (NP) technology to provide unbiased, deep, rapid and large-scale access to the proteome.

The Proteograph Product Suite is an integrated solution that includes consumables, an automation instrument and software.

We believe that broader access to the proteome is essential, not only to understanding its complexity and accelerating biological insights, but also to expanding end-markets.

These markets may include basic research and discovery, translational research, diagnostics and applied applications.

To comprehend the complexity and dynamic nature of the proteome, researchers must perform population-scale, deep, unbiased interrogation of biological samples over time.

We believe that this level of interrogation was not previously feasible and that the Proteograph can enable researchers to perform these types of proteomics studies.

Since we were incorporated in 2017, we have devoted substantially all of our resources to research and development activities, including with respect to the Proteograph Product Suite, building our commercial infrastructure including manufacturing, operations, sales and marketing and service and support functions, establishing and maintaining our intellectual property portfolio, hiring personnel, raising capital, becoming a publicly-traded company, and providing general and administrative support for these activities.

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We are commercializing the Proteograph Product Suite as an integrated solution comprised of consumables, our SP100 automation instrument and software.

Our commercial strategy is focused on growing adoption by the research community of the Proteograph, expanding the installed base and increasing utilization to generate revenue from the purchase of the Proteograph consumables.

We expect a highly efficient sales model because our workflow integrates with most existing proteomics laboratories’ workflows and also complements large-scale genomics research.

We are broadly commercializing the Proteograph Product Suite through a direct sales channel in the United States, and through both direct and distributor sales channels in regions outside the United States.

Given our recent launch of broad commercialization, we have built, and will continue to build, sales, marketing, support and product distribution capabilities.

We will continue to build the necessary infrastructure for these activities in the United States, European Union, the United Kingdom, and other countries and regions, including Asia-Pacific, as we execute on our broad release commercialization strategy for the Proteograph.

Since we are in the early stages of commercialization, we have built, and will continue to build our sales, marketing, support and product distribution capabilities.

In addition, we will continue to build the necessary infrastructure for these activities in the United States, European Union, the United Kingdom, and other countries and regions, including Asia-Pacific, as we execute on our commercialization strategy for the Proteograph.

We leverage well-established unit operations to formulate and manufacture our NPs at our facilities in Redwood City, California.

We procure certain components of our consumables from third-party manufacturers, which includes the commonly-available raw materials needed for manufacturing our proprietary engineered NPs.

We are currently manufacturing using our pilot line and building out our manufacturing capabilities as we enter broad commercial availability.

We are currently manufacturing using our production-scale and pilot lines and continue to build out our manufacturing capabilities to support broad commercial availability of our products.

We obtain some of the reagents and components used in the Proteograph workflow from third-party suppliers.

While some of these reagents and components are sourced from a single supplier, these products are readily available from numerous suppliers.

While we perform some filling and packaging of the Proteograph assay and the related consumables, in the future, we may have our filling and packaging outsourced to a third-party.

While some of these reagents and components are currently sourced from a single supplier, these products are readily available from numerous suppliers.

While we currently perform some filling and packaging of the Proteograph assay and the related consumables, we may eventually have

our filling and packaging outsourced to a third party.

We conduct vendor and component qualification for components provided by third-party suppliers and quality control tests on our NPs.

We have designed our SP100 automation instrument and have outsourced the manufacturing of our SP100 to Hamilton Company, a leading manufacturer of automated liquid handling workstations.

We have entered into a non-exclusive agreement with Hamilton that covers the manufacturing of our SP100 automation instrument and its continued supply on a purchase order basis.

We designed the SP100 automation instrument and have outsourced its manufacturing to Hamilton Company, a leading manufacturer of automated liquid handling workstations.

We have entered into a non-exclusive agreement with Hamilton that covers the manufacturing of the SP100 automation instrument and its continued supply on a purchase order basis.

The agreement has an initial term that runs three years following our commercial launch.

Pricing for the supply of our SP100 is on a fixed schedule during the initial term of the agreement, with tiered pricing dependent upon the number of units purchased in a twelve-month period.

We have the option to extend the term of the agreement with Hamilton upon written notice at the end of the initial term;

provided that prices are only fixed during the initial term of the agreement.

Hamilton has represented to us that it maintains ISO 9001 and ISO 13485 certification.

On December 8, 2020, we completed our IPO, in which we sold 10,592,106 shares of Class A common stock at a price to the public of $19.00 per share, resulting in net proceeds of $183.9 million after deducting offering costs, underwriting discounts and commissions.

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• attract, hire and retain qualified personnel;

• continue to build our sales, marketing, service, support and distribution infrastructure as part of our broad commercialization efforts;

• continue to build our sales, marketing, service, support and distribution infrastructure as part of our commercialization efforts;

• build-out and expand our in-house NP manufacturing capabilities;

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Following the transfer, we completed a pro-rata distribution to our stockholders of most of the shares of capital stock of PrognomiQ.

Following the distribution and a subsequent $55.0 million equity financing of PrognomIQ, we hold approximately 19% of the outstanding capital stock in PrognomIQ as of December 31, 2021.

Following the distribution and two subsequent equity financings of PrognomiQ totaling $102 million, we hold approximately 15% of the outstanding capital stock in PrognomiQ as of December 31, 2022.

The rationale for this transaction was to enable the growth of ecosystems around new applications that leverage unbiased, deep and large-scale proteomic information.

The transaction allows us to remain focused on our core strategy, which is to be a provider, rather than a consumer, of proteomics solutions to all customers across these ecosystems.

By focusing on our role as a provider of proteomics solutions, we are no longer potentially competing with, or creating the perception that we are competing with, our customers.

By focusing on our role as a provider of proteomics solutions, we are no longer potentially competing

with, or creating the perception that we are competing with, our customers.

Our relationship with PrognomiQ does not preclude us from selling the Proteograph Product Suite to any customer in any geography, nor does it preclude our customers from using the Proteograph in any way.

PrognomIQ has indicated that it plans to combine the protein data from the Proteograph solution with genomics and other -omics data, to create a multi-omics approach to health

and disease testing.

PrognomiQ has indicated that it plans to combine the protein data from the Proteograph solution with genomics and other -omics data, to create a multi-omics approach to health and disease testing.

We believe PrognomiQ’s use of proteomics and the potential for other similar companies which use proteomics in their research and products will help us drive the adoption of the Proteograph Product Suite in these applications.

We have entered into certain agreements with PrognomiQ.

Omid Farokhzad, Chief Executive Officer and Chair of our board of directors, serves as the Chair of PrognomIQ’s board of directors.

Philip Ma, Ph.D.

our former Chief Business Officer serves as the Chief Executive Officer of PrognomIQ.

Ma has fully transitioned to PrognomIQ, but will remain our consultant through April 2022.

In addition, three of our other employees also transitioned to PrognomIQ.

We provided general transition services and support, including laboratory and office space to PrognomIQ during the transition period.

Omid Farokhzad, our Chief Executive Officer and President, and Chair of our board of directors, also serves as the Chair of PrognomiQ’s board of directors.

Philip Ma, Ph.D., our former Chief Business Officer, serves as the Chief Executive Officer and President of PrognomiQ.

Ma has fully transitioned to PrognomiQ, he will continue to consult until April 2023 at which time, Dr.

Ma’s consulting agreement will automatically renew for subsequent one year terms unless and until terminated.

We granted PrognomiQ a non-exclusive license to certain patents and patent applications that we own and a non-exclusive sublicense to certain patent applications we exclusively licensed from Brigham and Women’s Hospital (BWH), in each case relating to our core technology, to develop, manufacture and commercialize licensed products for the field of human diagnostics on a worldwide basis.

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As a result of the COVID-19 pandemic, we could experience disruptions that could severely impact our business.

For example, we have experienced longer lead times from Hamilton for orders of our SP100 automation instruments and may experience delays and longer lead times from our other suppliers of critical hardware, instrumentation and consumables used for product development, manufacturing and commercial operations.

Pandemic precautions and preventative measures may also impact our commercialization plans due to restrictions on our customers’ ability to access laboratories, causing delays in the delivery and installation of the Proteograph products, training such customers on our products, and their ability to conduct research.

We have experienced delays in our ability to access customers in certain countries with strict COVID-19 policies to provide installation and training services.

The ongoing build-out of our expansion facilities may also be delayed by COVID-related restrictions.

Furthermore, COVID-19 has adversely affected the broader economy and financial markets, resulting in an economic downturn that could curtail the research and development budgets of our customers, our ability to hire additional personnel and our financing prospects.

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We generate revenue from product sales, including sales of the Proteograph Product Suite, which consists of an instrument with embedded software essential to the instrument’s functionality and associated consumables as well as our platform evaluation agreements.

In addition, we may at times generate revenue from performing services and the receipt of grant revenue for the reimbursement of research-related expenses.

In addition, we may at times generate revenue from performing services, the receipt of grant revenue for the reimbursement of research-related expenses, and lease arrangements.

Our revenue is primarily generated domestically.

We intend to focus our commercial efforts in the United States and expect to grow our international presence.

A portion of our revenue is generated by sales to a related party and we anticipate a portion of our revenue to continue to be generated by sales to such related party.

A portion of our revenue is generated by sales to related parties and we anticipate a portion of our revenue to continue to be generated by sales to such related parties.

Our grant-funded activities are expected to decrease as a percentage of total revenue as we decrease grant-funded activities and continue to ramp up commercialization of the Proteograph Product Suite.

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We utilize third-party manufacturers for production of our SP100 instrument and we manufacture our NPs and assemble our assay kits internally.

Cost of goods sold consists primarily of costs of the components of Proteograph Product Suite, including the SP100 instrument with embedded software essential to the instrument’s functionality, and consumables, and distribution-related expenses such as logistics and shipping costs.

In addition, cost of revenue includes stock-based compensation and related employee benefits and allocated overhead.

Cost of goods sold consists primarily of costs of the components of the Proteograph Product Suite, including the SP100 instrument with embedded software essential to the instrument’s functionality, and consumables, and distribution-related expenses such as logistics and shipping costs.

In addition, cost of revenue includes stock-based compensation and related employee benefits, allocated overhead and write-downs or impairments of obsolete inventory.

Research and Development Expenses

Research and development, or R&D, expenses include cost associated with performing services under research and development service contracts and research and development of our technology and product candidates.

R&D expenses consist primarily of employee compensation, including stock-based compensation, and related employee benefits, laboratory supplies used for in-house research, consulting costs, costs related to clinical studies for the collection of biological samples for research use, which relate to the assets transferred to PrognomIQ, and allocated overhead, including rent, depreciation, information technology and utilities.

Research and development, or R&D, expenses include costs associated with performing services under research and development service contracts and research and development of our technology and product candidates.

R&D expenses consist primarily of employee compensation, including stock-based compensation, and related employee benefits, laboratory supplies used for in-house research, consulting costs, costs related to clinical studies for the collection of biological samples for research use and allocated costs, rent, depreciation, information technology, and utilities.

We plan to increase our investment in our R&D efforts related to the Proteograph Product Suite, our product development pipeline and our proprietary engineered NP and other technologies.

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Related party 1,989 863 1,126 130 %

Grant and other 457 — 457 100 %

Total cost of revenue 8,400 3,205 5,195 162 %

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Research and development 45,797 29,121 16,676 57 %

general and administrative 45,764 15,363 30,401 198 %

Selling, general and administrative 58,531 45,764 12,767 28 %

Total operating expenses 104,328 74,885 29,443 39 %

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Net loss $ (92,966) $ (71,169) $ (21,797) 31 %

* Not meaningful

Year ended December 31, Change

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Revenue increased by $8.9 million, or 134%, from $6.6 million in 2021 to $15.5 million in 2022, due to sales of products related to the Proteograph Product Suite in the year ended December 31, 2022.

Revenue recognized primarily consisted of sales of the Proteograph SP100 instrument, consumable kits and platform evaluations, of which $2.3 million was attributed to related parties and $0.5 million was attributable to a research-related service agreement.

Revenue related to our grant-funded activities related to our Small Business Innovation Research (SBIR) grant from the National Institutes of Health Grant (NIH) decreased between the two periods by ($0.1) million and research collaboration revenue decreased by ($0.3) million.

Revenue recognized primarily consisted of sales of the Proteograph SP100 instrument, consumable kits and platform evaluations, of which $5.2 million was attributed to related parties.

Revenue related to grant and other consisted of our grant-funded activities related to our Small Business Innovation Research (SBIR) grant from the National Institutes of Health Grant (NIH), which increased between the two periods by $45,000 and $0.5 million respectively, and lease arrangements where we are the lessor.

Cost of Revenue

Year ended December 31, Change

2021 2020 Amount %

(dollars in thousands)

Cost of revenue $ 8,400 $ 3,205 $ 5,195 162 %

Cost of revenue for the year ended December 31, 2021 was $3.2 million compared to $0 for the year ended December 31, 2020, primarily due to the initial sales of the Proteograph Product Suite.

Cost of revenue related to the Proteograph Product Suite consist of costs of the SP100 instrument, consumable kits and other related costs, including labor and overhead.

Cost of revenue increased by $5.2 million, or 162%, from $3.2 million in 2021 to $8.4 million in 2022, primarily due to sales of the Proteograph Product Suite.

Grant and other cost of revenue was attributed to the lease of the SP100 instruments.

Cost of revenue related to the Proteograph Product Suite consists of costs of the SP100 instrument, consumable kits and other related costs, including labor and overhead.

Research and Development

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Research and development $ 45,797 $ 29,121 $ 16,676 57 %

R&D expenses increased by $10.2 million, or 54%, from $18.9 million in 2020 to $29.1 million in 2021.

The increase was primarily due to an increase in product development efforts related to the Proteograph Product Suite including $11.1 million in employee compensation costs and other related expenses, including stock-based compensation.

This was offset by a decrease in clinical study fees of ($0.8) million related to the costs associated with the ramp down of site enrollment for clinical studies related to the collection of biological samples for research use.

These clinical studies are related to the assets transferred to PrognomIQ.

Research and development expenses increased by $16.7 million, or 57%, from $29.1 million in 2021 to $45.8 million in 2022.

The increase was primarily due to an increase in product development efforts related to the Proteograph Product Suite including $5.6 million increase in employee compensation costs and other related expenses, and a $4.7 million increase in stock-based compensation, due to growth in research and development personnel, and a $4.0 million increase in allocated overhead related to the allocation of facility expense associated with the build-out of our expansion facilities to support our R&D efforts.

Other increases include costs related to general business expenses of $1.0 million, which include IT support services and expensed software, a $0.7 million increase in laboratory expenses and a $0.8 million increase in depreciation of laboratory equipment.

Selling, General and Administrative

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Selling, general and administrative expenses increased by $12.8 million, or 28%, from $45.8 million in 2021 to $58.5 million in 2022, primarily due to a $4.5 million increase in employee compensation and other related expenses, and a $3.8 million increase in stock-based compensation.

Other increases are attributable to $0.8 million in marketing costs related to the Limited Release phase of our commercial launch, and costs related to becoming a publicly traded company including a $4.2 million increase in professional and consulting fees related to accounting and audit services, and a $4.7 million increase in general business expenses which includes insurance premiums.

Other increases include a $3.4 million increase in professional service and consulting fees primarily related to international expansion, a $0.6 million increase in general business expenses, and a $0.5 million increase in depreciation due to our facility expansion.

Total Other Income

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Total other income $ 4,269 $ 304 $ 3,965 1304 %

Total other income decreased by ($0.6) million or (65%), from $0.9 million in 2020 to $0.3 million in 2021.

Short-term interest rate yields decreased significantly during fiscal year 2020 and remained low during fiscal year 2021.

These decreases were partially offset quantitatively by higher amounts of cash invested in money market funds and U.S.

Treasury securities during fiscal year 2020 and fiscal year 2021 as a result of multiple private and public financing events.

Total other income increased by $4.0 million, or 1304%, from $0.3 million in 2021 to $4.3 million in 2022.

The increase was due to higher rates of interest earned on cash invested in money market funds, U.S.

Treasury securities, commercial paper and corporate securities in 2022.

Liquidity and Capital Resources

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Net cash provided by financing activities 3,893 116,634

Net increase (decrease) in cash, cash equivalents and restricted cash $ (100,591) $ 316,100

Net decrease in cash, cash equivalents and restricted cash $ (179,605) $ (100,591)

Operating Activities

In 2022, cash used in operating activities was $60.8 million, attributable to a net loss of $93.0 million, partially offset by a net change in our net operating assets and liabilities of $7.4 million and non-cash charges of $39.6 million.

Non-cash charges primarily consisted of $25.9 million in stock-based compensation, $2.6 million of depreciation and amortization, $1.2 million of net amortization of premiums on available-for-sales securities and $1.0 million of non-cash operating lease expense.

The change in our net operating assets and liabilities was primarily due to an increase in inventory levels of $3.6 million, an increase in accounts receivable of $2.5 million and a decrease of $0.6 million in accrued research and development and partially offset by an increase in accounts payable of $1.6 million.

Non-cash charges primarily consisted of stock-based compensation of $33.7 million, $3.9 million of depreciation and amortization and $2.0 million of non-cash operating lease expense.

The change in our net operating assets and liabilities was primarily due to an increase in inventory levels of $1.6 million for anticipated revenue growth, an increase in accounts receivable of $2.3 million from higher sales, an increase in prepaid expenses and other current assets of $0.7 million, an increase in other receivables of $0.5 million, an increase in other assets of $0.4 million and a decrease of $1.6 million in accounts payable.

In 2021, cash used in operating activities was $46.3 million, attributable to a net loss of $71.2 million, partially offset by a net change in our net operating assets and liabilities of $5.9 million and non-cash charges of $30.7 million.

Non-cash charges primarily consisted of $7.3 million in stock-based compensation, $1.6 million of depreciation and amortization and $0.3 million of net amortization of premiums on available-for-sales securities.

The change in our net operating assets and liabilities was primarily due to increased accrued liabilities related to employee-related compensation of $1.3 million, and professional, consulting and legal fees related to our initial public offering of $1.1 million.

The change in our net operating assets and liabilities was primarily due to an increase in inventory levels of $3.6 million, an increase in accounts receivable of $2.5 million and a decrease of $0.6 million in accrued research and development, which was partially offset by an increase in accounts payable of $1.6 million.

Investing Activities

In 2021, cash used in investing activities was $170.9 million, which related to cashflow used in purchases of available-for-sale securities, net of proceeds from maturities of ($164.0) million, in addition to ($6.9) million in payments primarily for laboratory equipment.

In 2020, cash used in investing activities was $34.6 million, which related to cashflows provided by purchases of available-for-sale securities, net of proceeds from maturities of $30.0 million, in addition to $4.5 million in payments primarily for laboratory equipment.

In 2022, cash used in investing activities was $122.7 million, which related to purchases of available-for-sale securities, net of proceeds from maturities, of $112.6 million, in addition to $10.3 million in payments primarily for laboratory equipment.

In 2021, cash used in investing activities was $170.9 million, which related to purchases of available-for-sale securities, net of proceeds from maturities, of $164.0 million, in addition to $6.9 million in payments primarily for laboratory equipment.

Financing Activities

In 2022, cash provided by financing activities was $3.9 million.

This was primarily attributable to net proceeds of $103.0 million from issuance of common stock upon our follow-on offering, net of issuance costs, $11.4 million in short-swing profits from a beneficial owner and $1.9 million from the exercise of stock options.

This was attributable to net proceeds from the exercise of stock options of $3.1 million and $0.8 million of proceeds from the issuance of common stock in connection with our employee stock purchase plan.

In 2021, cash provided by financing activities was $116.6 million.

This was attributable to net proceeds of $183.9 million from issuance of common stock upon initial public offering, net of issuance costs, net proceeds of $130.3 million from the concurrent private placement, net of issuance costs, and net proceeds of $54.9 million from the issuance of Series D-1 convertible preferred stock, net of issuance costs.

Contractual Obligations

We enter into agreements as a part of normal course of business with various vendors, which are generally cancellable without material penalty upon written notice.

Payments associated with these agreements are not included in this discussion of contractual obligations.

Our operating lease obligations reflect our lease obligations for our headquarters facility in Redwood City, California.

In June 2020, we amended the lease agreement for this facility to expand the office and laboratory space covered by the lease, extend the lease through February 2032, and increase the annual base rent for the expanded premises.

Upon occupancy of the expansion facility that is anticipated to occur in the first quarter of 2022, the annual base rent will be $0.9 million in the first twelve months of the lease term (subject to an abatement period of nine months), and increases on an annual basis to $1.2 million in the final twelve months of the lease term.

The amendment also provides for tenant incentives in the amount of $2.4 million.

In April 2021, we entered into a lease amendment for this facility to further expand the office and laboratory space for an approximate term of eleven years.

Payments associated with this operating lease agreement will result in additional operating lease obligations not included in the above paragraph of approximately $160,000 per month plus operating expenses.

We have certain purchase commitments related to our inventory management with certain manufacturing suppliers wherein the Company is required to purchase the amounts forecasted in a blanket purchase order within a certain time period.

The contractual obligations represent future cash commitments and liabilities under agreements with third parties and exclude orders for goods and services entered into in the normal course of business that are not enforceable or subject to change.

These outstanding commitments amounted to $ 5.5 million as of December 31, 2021.

This was attributable to net proceeds of $103.0 million from issuance of common stock upon initial public offering, net of issuance costs, $11.4 million in short-swing profits from a beneficial owner and $1.9 million from the exercise of stock options.

Critical Accounting Policies, Significant Judgments and Use of Estimates

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Cash received from customers in advance of product shipment or providing services is recorded as a contract liability.

Our contracts with our customer generally do not include rights of return or a significant financing component.

Our contracts with our customer generally do not include rights of return.

At times,we may enter into arrangements with payment terms which exceed one year from the transfer of control of the product or service.

In such cases, we assess whether the arrangement contains a significant financing component.

If a significant financing component exists, the transaction price is adjusted for the financing portion of the arrangement, which is recorded as interest income over the payment term using the effective interest method.

We do not assess whether a significant financing component exists when, at contract inception, the period between the transfer of control to a customer and final payment is one year or less.

We have elected the practical expedient to account for shipping and handling activities that occur after the customer has obtained control as a fulfillment activity.

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If the product or service has no history of sales or if the sales volume is not sufficient, we rely upon prices set by management, adjusted for applicable discounts.

A portion of our revenue relates to lease arrangements.

Standalone lease arrangements are outside the scope of Accounting Standards Codification (ASC) 606, Revenue Contracts with Customer and are therefore accounted for in accordance with ASC 842, Leases .

Each of these contracts is evaluated as a lease arrangement, either as an operating lease or a sales-type finance lease using the lease classification guidance.

Stock-Based Compensation

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis