TALIS BIOMEDICAL CORPORATION The following discussion and analysis of our financial condition and results of
operations should be read together with our unaudited condensed financial
statements and related notes included elsewhere in this Quarterly Report and our
audited financial statements and the related notes and the discussion under the
heading "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in our Annual Report on Form 10-K for the fiscal year ended
Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide material information relevant to an assessment of our financial condition and results of operations, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. This section is designed to focus on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations, as well as matters that are reasonably likely based on management's assessment to have a material impact on future operations.
Overview
Our primary focus is to transform diagnostic testing through innovative molecular diagnostic products that enable customers to deploy accurate, reliable, low cost and rapid molecular testing at the point-of-care for infectious diseases and other conditions.
We are developing the Talis One system which leverages expertise across
chemistry, biology, engineering and software to create a fully integrated,
cloud-enabled and portable molecular diagnostic solution that customers can
rapidly deploy when and where needed. The Talis One system incorporates core
proprietary technologies into a compact, easy-to-use instrument, that employs
single use test cartridges and software, including a central cloud database,
which are designed to work together to provide levels of testing accuracy
equivalent to a central laboratory. We intend to commercialize the Talis One
system as an integrated solution comprising single use consumables, an
instrument and software. Our commercial strategy will focus on building and
expanding an installed base of Talis One systems to generate revenue from the
purchase of such products. Our first commercial test will be the Talis One
COVID-19 Test System, which is a rapid point-of-care molecular diagnostic to
detect SARS-CoV-2 directly from a patient sample in less than 30 minutes. We are
developing assays for the detection of other respiratory infections that could
be included as a panel test with the Talis One COVID-19 Test System as well as
tests for infections related to women's health and STIs. In
Our products will require marketing authorization from the FDA prior to
commercialization. On
We have invested in automated cartridge manufacturing lines, the first of which began to come on-line in the first quarter of 2021. We are currently validating the performance of those automated cartridge manufacturing lines. These manufacturing lines are located at our contract manufacturers' sites and are operated by our contract manufacturing partners. We have also received components to build 5,000 Talis One instruments from our instrument contract manufacturer.
We outsource essentially all of our manufacturing. Design work, prototyping and pilot manufacturing are performed in-house before outsourcing to third-party contract manufacturers. Our outsourced production strategy is intended to drive rapid scalability. Certain of our suppliers of components and materials are single source suppliers. To support our anticipated commercial launch, we have invested in automated cartridge manufacturing production lines for our Talis One cartridges. Those assets deemed to have an alternative future use have been capitalized as property and equipment while those assets determine to not have an alternative future use have been expensed.
Since our inception in 2013, we have devoted substantially all our efforts to research and development activities, manufacturing capabilities, raising capital, building our intellectual property portfolio, providing general and administrative support for these operations, and more recently, providing selling support as the need has arisen. We have principally financed our operations through
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the issuance and sale of shares of our convertible preferred stock to outside
investors in private equity financings as well as the issuance of convertible
promissory notes and receipts from government grants. Prior to our initial
public offering, we received
We have incurred recurring losses since our inception, including net losses of
•
continue the research and development of our platform and assays for additional diseases;
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initiate clinical trials for, or additional preclinical development of, our Talis One system;
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further develop and refine the manufacturing processes for our Talis One system and potentially the design of our Talis One system;
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change or add manufacturers or suppliers of materials used for our Talis One system;
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seek marketing authorizations;
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seek to identify and validate diagnostic assays for other disease states;
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obtain, maintain, protect and enforce our intellectual property portfolio;
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expand and deploy a sales force;
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seek to attract and retain new and existing skilled personnel;
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create additional infrastructure to support our operations as a public company and incur increased legal, accounting, investor relations and other expenses; and
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experience delays or encounter issues with any of the above.
In addition, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need substantial additional funding to support our operating activities. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt and grant revenue. Adequate funding may not be available to us on acceptable terms, or at all.
If we are unable to obtain funding, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all.
As of
On
COVID-19 pandemic
Since it was reported to have surfaced in
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and governments around the world, including in
We expect that COVID-19 precautions will directly or indirectly impact the timeline for some of our planned clinical trials for our non-COVID-19 related products in development, and we are continuing to assess the potential impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and clinical trials, as well as on our industry and the healthcare system.
As a result of the outbreak, many companies have experienced disruptions in their operations and in markets served. We are considered an essential business and therefore the impact to our operations has been limited. To date, we have initiated some and may take additional temporary precautionary measures intended to help ensure our employees' well-being and minimize business disruption. For the safety of our employees and their families, we have temporarily reduced the presence of our employees in our labs. Certain of our third-party service providers have also experienced shutdowns or other business disruptions. We are continuing to assess the impact of the COVID-19 pandemic on our current and future business and operations, including our expenses and planned clinical trial and other development timelines, as well as on our industry and the healthcare system.
As a result of the COVID-19 pandemic, or similar pandemics and outbreaks, we have and may in the future experience severe disruptions, including:
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interruption of or delays in receiving products and supplies from the third parties we rely on to, among other things, manufacture components of our instruments, due to staffing shortages, production slowdowns or stoppages and disruptions in delivery systems, which may impair our ability to sell our products and consumables;
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limitations on our business operations by the local, state, or federal government that could impact our ability to sell or deliver our instruments and consumables;
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delays in customers' purchasing decisions and negotiations with customers and potential customers;
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business disruptions caused by workplace, laboratory and office closures and an increased reliance on employees working from home, travel limitations, cyber security and data accessibility limits, or communication or mass transit disruptions; and
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limitations on employee resources that would otherwise be focused on the conduct of our activities, including because of sickness of employees or their families or the desire of employees to avoid contact with large groups of people.
Three vaccines for COVID-19 have been authorized for emergency use by the FDA as
of
Components of our results of operations
Revenue
To date, we have not generated any revenue from sales of our Talis One system. We expect to generate revenue in the future from product sales of our Talis One instruments and single use cartridges. Our business model is focused on driving the adoption of the Talis One system. Customers would gain access to our instrument via a direct sales model or a reagent rental model. Under direct platform sales, our customers would directly purchase our Talis One instrument and make subsequent independent purchases of our cartridges. This would include, during our early customer engagements, a fully paid workflow license to practice the desired workflow(s) in a specific field of use. In addition, we would also offer platform support to the extent customers require further system and workflow optimization following platform implementation. When we place a system under a reagent rental agreement, we plan to install equipment in the customer's facility without a fee and the customer agrees to purchase our cartridges at a stated price over the term of the reagent rental agreement. Some of these agreements could include minimum purchase commitments. Under a reagent rental model, we plan to retain title to the equipment and such title is transferred to the customer at the conclusion of the initial arrangement. The cost of the instrument under the agreement is expected to be recovered in the fees charged for consumables, to the extent sold, over the term of the agreement.
We cannot predict when, or to what extent we will generate revenue from the commercialization and sale of our system. While we have obtained EUA for our Talis One COVID-19 Test System, we have not generated any revenue from the sales of such system. We rely, and expect to continue to rely, on third parties for the manufacture of the Talis One system and our tests, as well as for commercial supply. Our contract manufacturers may not have the ability to produce quality product at scale to meet commercial
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demand which could delay commercialization efforts. Further, we may not succeed in maintaining regulatory approval for the Talis One COVID-19 Test System or obtaining regulatory approval for other products. Growth and predictability of recurring revenue is impacted by the timing of commercialization and expansion of our products. It is our goal and expectation that recurring revenue will grow over time, both in absolute dollars and as a percentage of our revenue.
Product revenue, net
In
Grant revenue
For the three months ending
The NIH Contract for the RADx initiative expired on
Under the
These grants are not in the scope of the contracts with customers accounting guidance as the government entities and/or government-sponsored entities are not customers under the agreements.
Cost of product sold
We began to recognize costs of product sold in
Operating expenses
Research and development expenses
Research and development expenses consist primarily of internal and external costs incurred for our research activities, the development of our platform, investment in manufacturing capabilities as well as costs incurred pursuant to our government grants and include:
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salaries, benefits and other related costs, including stock-based compensation expense, for personnel engaged in research and development functions;
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the cost of laboratory supplies and developing and manufacturing of our platform;
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contract services, other outside costs and costs to develop our technology capabilities;
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facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs;
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cost of outside consultants, including their fees and related travel expenses, engaged in research and development functions;
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expenses related to regulatory affairs; and
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fees related to our scientific advisory board.
Until future commercialization is considered probable and the future economic benefit is expected to be realized, we do not capitalize pre-launch inventory costs prior to completion of marketing authorization unless the regulatory review process has progressed to a point that objective and persuasive evidence of regulatory approval is sufficiently probable, and future economic benefit can be asserted. We record such costs to research and development costs, or if used in marketing evaluations, record such cost to selling, general and administrative expense. A number of factors are taken into consideration, based on management's judgment, including the
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current status in the regulatory approval process, potential impediments to the approval process, anticipated research and development initiatives and risk of technical feasibility, viability of commercialization and marketplace trends.
Prior to receiving an EUA and until future commercialization is considered probable, costs of property and equipment related to scaling up our manufacturing capacity for commercial launch are recorded to research and development expense when the asset does not have an alternative future use.
Research and development activities are central to our business model. We focus our research and development efforts on the Talis One COVID-19 Test System and the development of respiratory panels and tests for infections related to women's and sexual health. We expect to continue to incur significant research and development expenses in the future as we continue the research and development of our platform and assays for other infectious diseases and disease states, initiate clinical trials for future tests, further develop and refine the manufacturing processes for our platform, and continue commercialization efforts. There are numerous factors associated with the successful commercialization of any assay we may develop in the future for other diseases or disease states, including future trial design and various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development.
Selling, general and administrative expenses
Selling, general and administrative expenses consist primarily of salaries and other related costs, including stock-based compensation, for personnel in our executive, finance, sales, product management, corporate and business development and administrative functions. Selling, general and administrative expenses also include professional fees for legal, patent, accounting, information technology, auditing, tax and consulting services, travel expenses and facility-related expenses, which include direct depreciation costs and allocated expenses for rent and maintenance of facilities and other operating costs.
Other income (expense)
Other income (expense), net consists primarily of interest income on cash deposits held at financial institutions, gains and losses on holdings invested in money market funds, and unrealized and realized foreign exchange gains and losses.
Results of operations
Comparison for the three months ended
The following table summarizes our results of operations:
Three Months Ended March 31,
(in thousands) 2022 2021 Change
Revenue
Grant revenue $ 874 $ 7,000 $ (6,126 )
Product revenue, net 2,313 - 2,313
Total revenue, net 3,187 7,000 (3,813 )
Cost of product sold 3,521 - 3,521
Gross profit (loss) (334 ) 7,000 (7,334 )
Operating expenses:
Research and development 20,703 60,193 (39,490 )
Selling, general and administrative 11,930 7,327 4,603
Total operating expenses 32,633 67,520 (34,887 )
Loss from operations (32,967 ) (60,520 ) 27,553
Other income/(expense), net (84 ) 28 (112 )
Net loss and comprehensive loss
Product revenue, net, cost of product sold and gross profit (loss)
We began to generate sales during
Grant revenue
Grant revenue for the three months ended
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Research and development expenses
Research and development expenses were
Substantially all of our research and development expenses incurred for the
three months ended
Selling, general and administrative expenses
Selling, general and administrative expenses were
Liquidity and capital resources
Sources of liquidity
Through
On
As of
On
Future funding requirements
We do not have any commercial-scale manufacturing facilities and expect to rely on third parties to manufacture the Talis One system and related cartridges. We have entered into, and expect to enter into additional, agreements with contract manufacturers to support our manufacturing scale up. We have engaged a third-party logistics provider to manage the movement of materials between suppliers and contract manufacturers and for finished goods warehousing.
We do not expect to generate any meaningful revenue until we commercialize our Talis One system and, until we can generate a sufficient amount of revenue from the commercialization of the Talis One system and third-party products that we sell, including the Antigen Tests, if ever, we expect to finance our future cash needs through public or private equity offerings or debt financings.
To date, our primary uses of cash have been to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses. We have made a prepayment to the landlord of one of our leased properties in advance of commencement. We currently have no other ongoing material financing commitments, such as other lines of credit or guarantees. We expect to incur significant research and development and commercialization expenses related to program sales, marketing, manufacturing and distribution to the extent that such sales, marketing and distribution are not the responsibility of any future collaborators. We expect to incur additional costs associated with operating as a public company. Accordingly, we may choose to obtain additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
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Since our inception, we have incurred significant losses and negative cash flows
from operations. We have an accumulated deficit of
We have based our projections of operating capital requirements on assumptions that may prove to be incorrect, and we may use all our available capital resources sooner than we expect. Because of the numerous risks and uncertainties associated with research, development and commercialization of the Talis One system, we are unable to estimate the exact amount of our operating capital requirements. Our future capital requirements will depend on many factors, including:
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our ability to maintain an EUA for our Talis One COVID-19 Test System;
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our ability to receive, and the timing of receipt of future regulatory approval for other products;
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our ability to manufacture the Talis One COVID-19 Test System at scale to meet market demand;
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the effectiveness and availability of the three vaccines that were authorized as
of
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the amount of capital, and related timing of payments, required to build sufficient inventory of our Talis One system and test cartridges in advance of and during commercial launch;
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the costs and timing of future commercialization activities, including manufacturing, marketing, sales and distribution, for the Talis One system;
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limitations of, or interruptions in, the quality or quantity of materials from our third-party suppliers;
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our ability to implement an effective manufacturing, marketing and commercialization operation;
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the scope, progress, results and costs of our ongoing and planned operations;
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the costs associated with expanding our operations;
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the number and development requirements of assays for other diseases or disease states that we may pursue;
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intervention, interruptions or recalls by government or regulatory agencies;
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enhancements and disruptive advances in the diagnostic testing industry;
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our estimates and forecasts of the market size addressable by our Talis One system;
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security breaches, data losses or other disruptions affecting our information systems;
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the regulatory and political landscape upon the launch of our commercialization of the Talis One system;
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the revenue, if any, received from commercial sales of our products if approved, including additional working capital requirements if we pursue a reagent rental model for our Talis One instrument, or from commercial sales of third-party products, including the Antigen Tests;
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the costs to defend any shareholder suits or other third-party litigation;
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our ability to establish strategic collaborations; and
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the costs and timing of preparing, filing and prosecuting patent applications, maintaining and enforcing our intellectual property rights and defending any intellectual property-related claims.
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Cash flows
The following table summarizes our cash flows for each of the periods presented:
Three Months Ended March 31,
2022 2021
(in thousands)
Net cash used in operating activities $ (43,758 ) $ (22,485 )
Net cash used in investing activities (507 ) (698 )
Net cash provided by financing activities 314 233,479
Net increase (decrease) in cash, cash equivalents and
restricted cash $ (43,951 ) $ 210,296
Operating activities
During the three months ended
During the three months ended
Investing activities
During the three months ended
Financing activities
During the three months ended
During the three months ended
Contractual obligations and commitments
Leases
See Note 6. Commitments and contingencies, to our unaudited condensed financial
statements included in Item 1 of this Quarterly Report for a summary of our
operating lease commitments as of
In
Manufacturing production lines
In 2020, the Company began developing production lines to automate the
production of its Talis One cartridges for the COVID-19 assay with the intention
to scale up its manufacturing capabilities to meet demand. These commitments
represent firm commitments relating to the scale-up of manufacturing capacity
for Talis One cartridges, primarily attributed to investments in production
lines. We expect to incur commitments, in the normal course of business, related
to the scale up of production lines of
Purchase commitments
Purchase obligations include agreements to purchase goods or services that are
enforceable and legally binding to us and that specify all significant terms.
Purchase obligations exclude agreements that are cancelable without penalty.
Recognition of purchase obligations occurs when products or services are
delivered. We have purchase commitments of
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Our purchase commitments are incurred in the normal course of business and made
up of
Apart from the contracts with payment commitments that we have reflected above, we have entered into other contracts in the normal course of business with certain contract manufacturing organizations and other third parties for manufacturing services. Payments due upon cancellation consist only of payments for services provided and expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation.
Critical accounting policies and significant judgments and estimates
This discussion and analysis of financial condition and results of operation is
based on our unaudited condensed financial statements, which have been prepared
in accordance with accounting principles generally accepted in
Our critical accounting policies and estimates are discussed in our Annual
Report. Changes in our critical policies and estimates during the three months
ended
Revenue Recognition
Product revenue, net
The Company generates revenues from its sales of the Antigen Tests. These revenues are recorded net of sales returns and discounts which are estimated at the time of sale. The Company has recognized sales to customers from two primary customer types: (i) direct customers, including hospitals, urgent care centers, physician, retail and public health clinics, and (ii) sub-distributors. The Company has not generated material revenue from sales to government organizations. The Company recognizes revenue under Accounting Standards Codification Topic 606 (ASC 606), Revenue from Contracts with Customers, when a customer obtains control of promised goods or services, in transaction price that reflects the consideration which the entity expects to receive in exchange for those goods or services. Transaction price does not include amounts subject to uncertainties unless it is probable that there will be no significant reversal of revenue when the uncertainty is resolved. Variable consideration is recognized at an amount we believe is not subject to significant reversal and is adjusted at each reporting period if the most likely amount of expected consideration changes or becomes fixed. For example, we must estimate future product returns at the time of sale. The expected value is determined based on sales data, product expiration dates and levels of inventory, contractual terms with customers, and any new or anticipated changes in sales strategies or regulations. We believe this provides a reasonable basis for recognizing revenue, however, actual results could differ from estimates and significant changes in estimates could impact our results of operations in future periods.
Inventory
The Company values its inventory at the lower of cost or net realizable value and determines the cost of inventory using the first-in, first-out method. Lower of cost or net realizable value is evaluated by considering obsolescence, excessive levels of inventory, deterioration and other factors.
In order to assess the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements compared to current or committed inventory levels. The Company periodically reviews its inventories for shelf life, excess or obsolescence and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than the carrying value, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Amounts written-down due to unmarketable inventory are recorded in cost of product sold and a new lower-cost basis for the inventory is established. Excess and obsolete inventory is primarily based on estimated forecasted sales, usage levels, and expiration dates.
Recently issued accounting pronouncements
Recently issued accounting policies and estimates are discussed in our Annual Report.
Recently adopted accounting standards
In
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Company early adopted ASU 2016-13 on
Emerging growth company status
In
We may take advantage of these exemptions for up to the last day of the fiscal
year ending after the fifth anniversary of our initial public offering or such
earlier time that we are no longer an emerging growth company. We would cease to
be an emerging growth company on the date that is the earliest of (1) the last
day of the fiscal year in which we have total annual gross revenues of
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