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 endedDecember 31, 2021 filed with theSEC onMarch 15, 2022 (Annual Report). Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" section of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the "Risk Factors" section of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled "Special Note Regarding Forward-Looking Statements." Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is designed to provide material information relevant to an assessment of 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 point-of-care 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 assay 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. We initially planned that our first commercial test would be the stand-alone Talis One COVID-19 assay, which is a rapid point-of-care molecular diagnostic to detect SARS-CoV-2 directly from a patient sample in less than 30 minutes. However, due to the declining market demand for polymerase chain reaction (PCR) COVID-19 tests and increased demand for at-home over the counter antigen COVID-19 tests inthe United States , we suspended our commercial investment in the stand-alone Talis One COVID-19 assay. We have refocused the Company on the development and commercialization of women's health and sexually transmitted infections (STI) tests on the Talis One system, where we believe our on-board sample preparation capabilities and turnaround time can deliver greater clinical impact, with plans to develop and launch a panel assay for the detection of Chlamydia trachomatis (CT), Neisseria gonorrhoeae (NG) and Trichomoniasis vaginalis (TV). InJanuary 2022 , in order to generate revenue to support our operations and sales forces, we began purchasing and distributing third-party COVID-19 antigen tests (Antigen Tests) as an authorized distributor. We intend to conclude this program, upon the earlier of (i) selling our limited remaining Antigen Tests and (ii) the expiration date of the Antigen Tests. Our products will require marketing authorization from the FDA prior to commercialization. OnNovember 5, 2021 , we received an EUA from the FDA for the emergency use of the Talis One system for our COVID-19 test, which we refer to as the Talis One COVID-19 Test System, and onMay 12, 2022 , we received the CE Mark authorization for the Talis One COVID-19 Test System under the European In-Vitro Diagnostic Devices Directive (IVDD). Due to the COVID-19 global pandemic, we obtained marketing authorization for our Talis One COVID-19 Test System under an EUA. After assessing current market dynamics, including the lack of demand for PCR COVID-19 tests inthe United States , and the current financial environment, we suspended commercial investment in the stand-alone Talis One COVID-19 assay, as we believe the investments required to commercialize inthe United States COVID-19 market outweigh the potential economic return. OnAugust 23, 2022 , in response to our withdrawal request filed onAugust 12, 2022 , the FDA revoked our EUA for the stand-alone Talis One COVID-19 assay, as we no longer plan to pursue commercialization of the stand-alone Talis One COVID-19 assay inthe United States . For our women's health and STI tests, we plan to pursue 510(k) clearance or other forms of marketing authorization under theFDA's standard medical device authorities. 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 which are located at our contract 18 -------------------------------------------------------------------------------- manufacturers' sites and are operated by our contract manufacturing partners. Based on recent improvements in our manufacturing process, including our ability to manufacture at scale with acceptable invalid rates and first pass yields, we have resumed investigational use only (IUO) system evaluations of the Talis One system in order to gain user experience and feedback on the platform's physical components, workflow and software. 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 a commercial launch, we have invested in automated cartridge manufacturing production lines for our Talis One cartridges. Those assets deemed to have an alternative future use have been capitalized as property and equipment while those assets determined to not have an alternative future use have been expensed. 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 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$351.5 million from investors in our preferred stock financings and the sale of convertible promissory notes that converted in such financings. Additionally, onFebruary 17, 2021 , we raised$232.5 million (after deducting underwriting discounts, commissions and offering expenses) through an initial public offering to finance operations going forward. We have incurred recurring losses since our inception, including net losses of$86.1 million and$163.4 million for the nine months endedSeptember 30, 2022 and 2021, respectively. As ofSeptember 30, 2022 , we had an accumulated deficit of$451.0 million . We expect to continue to generate operating losses and negative operating cash flows for the foreseeable future if and as we:
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continue the research and development of our platform and assays for multiple 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 additional disease states;
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obtain, maintain, protect and enforce our intellectual property portfolio;
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re-establish 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, if we obtain marketing authorization for our platform, we expect to incur significant commercialization expenses related to product manufacturing, marketing, sales and distribution. As a result, we will need substantial additional funding to support our operating activities. Until such time as we can generate significant revenue from product sales, if ever, we expect to finance our operating activities through a combination of equity offerings, debt and grant revenue. Adequate funding may not be available to us on acceptable terms, or at all. If we are unable to obtain funding, we will be forced to delay, reduce or eliminate some or all of our research and development programs, product portfolio expansion or commercialization efforts, which could adversely affect our business prospects, or we may be unable to continue operations. Although we continue to pursue these plans, there is no assurance that we will be successful in obtaining sufficient funding on terms acceptable to us to fund continuing operations, if at all. As ofSeptember 30, 2022 , we had unrestricted cash and cash equivalents of$143.8 million . Based on our planned operations, we expect that our unrestricted cash and cash equivalents of$143.8 million as ofSeptember 30, 2022 will be sufficient to fund our operations through at least the next 12 months from the date our condensed financial statements are issued. Given our recent reductions in force and other expense reductions planned this year, we expect to fund operations into 2025. This target could change as we gain more clarity on the timing and trajectory of the Talis One system launch. We may need substantial additional funding to 19 -------------------------------------------------------------------------------- support our continuing operations and pursue our long-term business plan. We may seek additional funding through the issuance of our common stock, other equity or debt financings, or collaborations or partnerships with other companies. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our research efforts for our assays and development and manufacturing activities. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital as and when needed would compromise our ability to execute on our business plan and may cause us to significantly delay or scale back our operations. InAugust 2022 , in connection with our refocus on the women's health and STI markets, we implemented a reduction in force, of approximately 35% of our employees, designed to align our remaining resources to focus on (i) developing women's health and STI assays on the Talis One system, (ii) our internal manufacturing expertise to support our strategic plans and (iii) reducing costs and preserving cash to extend our runway to commercialize our women's health and STI assays. We incurred$1.5 million of expenses related to the reduction in force during the three months endedSeptember 30, 2022 . This is in addition to$1.0 million of expenses incurred in the first quarter related to theMarch 2022 reduction in force, substantially all of which consisted of one-time charges related to the staff reduction, including cash expenditures and other costs. Going forward, we estimate annualized savings of$12.0 million in compensation expenses related to thisAugust 2022 reduction in force.
COVID-19 pandemic
Since it was reported to have surfaced inDecember 2019 , a novel strain of coronavirus (COVID-19) spread across the world and was declared a pandemic by theWorld Health Organization . Efforts to contain the spread of COVID-19 intensified in 2020 and 2021 and governments around the world, including inthe United States ,Europe andAsia , implemented travel restrictions, social distancing requirements, stay-at-home orders and delayed the commencement of non-COVID-19-related clinical trials, among other restrictions. As a result, the current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and has been affecting our employees, communities and business operations, as well as contributing to significant volatility and negative pressure on theU.S. economy and in financial markets. The COVID-19 pandemic continues to drive volatility in global economic conditions as governments around the world implement various measures to slow and control the ongoing spread of the virus. Resurgences in COVID-19 infections or new strains of the virus may affect our operations. We continue to evaluate 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 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, 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.
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, following regulatory approval. 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
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--------------------------------------------------------------------------------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 an EUA for our Talis One COVID-19 Test System and the CE Mark authorization under the IVDD, the EUA was revoked inAugust 2022 by the FDA following our withdrawal request. We have not generated any revenue from the sales of such system, and we do not intend to invest in the commercialization of the stand-alone Talis One COVID-19 assay due to current commercial market dynamics for PCR COVID-19 tests inthe United States . 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 demand which could delay commercialization efforts. Further, we may not succeed in obtaining regulatory approval for our women's health and STI products, or any other future assays. 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 InJanuary 2022 , we began distributing the Antigen Tests. We currently derive all of our product revenue from the sales of the Antigen Tests in accordance with the provisions of Accounting Standards Codifications (ASC), Topic 606, Revenue from Contracts with Customers. Our product revenue is recognized upon the transfer of control of our test kits to the customer. We intend to conclude this program, upon the earlier of (i) selling our limited remaining Antigen Tests and (ii) the expiration date of the Antigen Tests.
Grant revenue
For the nine months endedSeptember 30, 2022 and 2021, our revenue from government grants includes aMay 2018 grant from theNIH to support our advancement of a Diagnostics via Rapid Enrichment, Identification, and Phenotypic Antibiotic Susceptibility Testing of Pathogens from Blood project (NIH grant), aJuly 2020 subaward grant from theUniversity of Massachusetts Medical School for Phase 1 of theNIH's Rapid Acceleration of Diagnostics - Advanced Technology Platforms (RADx) initiative and a contract from theNIH directly for Phase 2 of the RADx initiative (NIH Contract).
The NIH Contract for the RADx initiative expired on
Under theNIH grant, we recognized$0.3 million during the nine months endedSeptember 30, 2022 . There is the possibility of an additional$1.0 million in payments throughApril 2023 . 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; and
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expenses related to regulatory affairs.
Until future commercialization is considered probable and the future economic benefit is expected to be realized, we do not capitalize pre-launch inventory costs and costs of property and equipment 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 pre-launch inventory costs to research and development expenses, or if used in marketing evaluations, record such cost to selling, general and administrative expense. We record property and equipment costs to research and development expenses when the asset does not have an alternative future use. A number of factors are taken into consideration, based on management's judgment, including the current status in the regulatory approval process, potential impediments to the approval process, anticipated research and development initiatives and risk of technical feasibility, viability of commercialization and marketplace trends. Research and development activities are central to our business model. We previously focused our research and development efforts on the stand-alone Talis One COVID-19 assay but have refocused on the development of assays and tests for women's health and STIs. 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, information technology, 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 expenses and allocated expenses for rent and maintenance of facilities and other operating expenses. 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 September 30,
(in thousands) 2022 2021 Change
Revenue
Grant revenue $ 66 $ 218 $ (152 )
Product revenue, net 730 - 730
Total revenue, net 796 218 578
Cost of product sold 1,236 - 1,236
Gross profit (loss) (440 ) 218 (658 )
Operating expenses:
Research and development 17,521 25,841 (8,320 )
Selling, general and administrative 8,825 12,792 (3,967 )
Total operating expenses 26,346 38,633 (12,287 )
Loss from operations (26,786 ) (38,415 ) 11,629
Other income/(expense), net 765 (3 ) 768
Net loss and comprehensive loss $ (26,021 ) $ (38,418 ) $ 12,397
Grant revenue
Grant revenue for the three months ended September 30, 2022 and 2021 relates to
the NIH grants and the RADx initiative. During the three months ended September
30, 2022 and 2021, $0.1 million and $0.2 million of revenue was recognized
related to our NIH grant, respectively.
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--------------------------------------------------------------------------------Product revenue, net, cost of product sold and gross profit (loss)
We began to generate sales duringJanuary 2022 after we entered into a distribution agreement to sell the Antigen Tests. We intend to conclude this program, upon the earlier of (i) selling our limited remaining Antigen Tests and (ii) the expiration date of the Antigen Tests and will no longer generate sales following conclusion of this program. The increase in product revenue and cost of product sold is due to increased volume in units sold whereas we did not conduct product revenue generating activities during the same period in 2021.
Research and development expenses
Research and development expenses for the three months endedSeptember 30, 2022 and 2021 were$17.5 million and$25.8 million , respectively, a decrease of$8.3 million . Substantially all of our research and development expenses incurred were related to the development of and manufacturing scale-up for the Talis One system including rapid, point-of-care molecular diagnostic tests to detect COVID-19 as well as other respiratory, women's health and sexual health tests. The decrease of$8.3 million was primarily driven by expense declines of$3.0 million for the automation of consumable manufacturing,$7.3 million in instrument component costs as we near completion of the scale-up project and$1.0 million due to lower personnel related expenses including salaries and benefits and stock-based compensation expenses as a result of our August reduction in force, partially offset by$3.3 million in additional depreciation expense due to acceleration of the useful life of certain lab equipment as a result of manufacturing changes brought about by the decision to no longer pursue the commercialization of the stand-alone Talis One COVID-19 assay inthe United States .
Selling, general and administrative expenses
Selling, general and administrative expenses were$8.8 million for three months endedSeptember 30, 2022 , compared to$12.8 million for the three months endedSeptember 30, 2021 , a decrease of$4.0 million . The decrease was primarily due to lower personnel related expenses including salaries and benefits and stock-based compensation expenses as a result of our March reduction in force.
Comparison for the nine months ended
The following table summarizes our results of operations:
Nine Months Ended September 30,
(in thousands) 2022 2021 Change
Revenue
Grant revenue $ 1,010 $ 7,335 $ (6,325 )
Product revenue, net 3,545 - 3,545
Total revenue, net 4,555 7,335 (2,780 )
Cost of product sold 6,059 - 6,059
Gross profit (loss) (1,504 ) 7,335 (8,839 )
Operating expenses:
Research and development 55,589 140,529 (84,940 )
Selling, general and administrative 29,933 30,102 (169 )
Total operating expenses 85,522 170,631 (85,109 )
Loss from operations (87,026 ) (163,296 ) 76,270
Other income/(expense), net 943 (86 ) 1,029
Net loss and comprehensive loss $ (86,083 ) $ (163,382 ) $ 77,299
Grant revenue
Grant revenue for the nine months ended September 30, 2022 and 2021 relates to
the NIH grants and the RADx initiative. During the nine months ended September
30, 2022 , $0.7 million of revenue was recognized related to meeting milestones
under our RADx initiative and $0.3 million of revenue was recognized related to
our NIH grant. During the nine months ended September 30, 2021 , $7.0 million of
revenue was recognized related to the RADx initiative and $0.3 million was
recognized related to our NIH grant. The RADx initiative expired on January 30,
2022 .
Product revenue, net, cost of product sold and gross profit (loss)
We began to generate sales during
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--------------------------------------------------------------------------------Research and development expenses
Research and development expenses for the nine months endedSeptember 30, 2022 and 2021 were$55.6 million compared to$140.5 million , a decrease of$84.9 million . Substantially all of our research and development expenses incurred for the periods were related to the development and manufacturing scale-up for the Talis One system including rapid, point-of-care molecular diagnostic tests to detect COVID-19 as well as other respiratory, women's health and sexual health tests. The decrease of$84.9 million was primarily driven by expense declines of$53.0 million for the automation of consumable manufacturing and$37.0 million in instrument component costs as we near completion of the scale-up project, partially offset by higher salary and wages of$0.6 million ,$1.1 million in additional occupancy costs, and$3.3 million in additional depreciation expense due to acceleration of the useful life of certain lab equipment as a result of manufacturing changes brought about by the decision to no longer pursue the commercialization of the stand-alone Talis One COVID-19 assay inthe United States .
Selling, general and administrative expenses
Selling, general and administrative expenses for the nine months endedSeptember 30, 2022 were$29.9 million compared to$30.1 million for the nine months endedSeptember 30, 2021 , a decrease of$0.2 million . The decrease was primarily due to lower personnel related expenses, including salaries and benefits and stock-based compensation expenses as a result of ourMarch 2022 reduction in force.
Liquidity and capital resources
Sources of liquidity
We have funded our operations primarily through public equity offerings, private placements of equity securities and through government grants.
OnFebruary 17, 2021 , we completed our initial public offering (IPO), pursuant to which we issued and sold 13,800,000 shares of our common stock and an additional 2,070,000 shares pursuant to the exercise in full by the underwriters of their option to purchase additional shares of our common stock, at a public offering price of$16.00 per share. The net proceeds from the IPO were$232.5 million after deducting underwriting discounts and commissions and other offering expenses. As ofSeptember 30, 2022 , we had unrestricted cash and cash equivalents of$143.8 million . We believe our unrestricted cash and cash equivalents balance as ofSeptember 30, 2022 is sufficient for our operations for at least the next 12 months based on our existing business plan and our ability to control the timing of significant expense commitments. Given our recent reductions in force and other expense reductions planned this year, we expect to fund operations into 2025. This target could change as we gain more clarity on the timing and trajectory of the Talis One system launch. InAugust 2022 , in connection with our refocus on the women's health and STI markets, we implemented a reduction in force, of approximately 35% of our employees, designed to align our remaining resources to focus on (i) developing women's health and STI assays on the Talis One system, (ii) our internal manufacturing expertise to support our strategic plans and (iii) reducing costs and preserving cash to extend our runway to commercialize our women's health and STI assays. We incurred$1.5 million of expenses related to the reduction in force during the three months endedSeptember 30, 2022 . This is in addition to$1.0 million of expenses incurred in the first quarter related to theMarch 2022 reduction in force, substantially all of which consisted of one-time charges related to the staff reduction, including cash expenditures and other costs. Going forward, we estimate annualized savings of$12.0 million in compensation expenses related to thisAugust 2022 reduction in force.
Nasdaq Deficiency Notice
OnJuly 27, 2022 , we received a notice (the "Notice") fromThe Nasdaq Stock Market ("Nasdaq") that we were not in compliance with Nasdaq Listing Rule 5450(a)(1), as the minimum bid price of our common stock had been below$1.00 per share for 31 consecutive business days as of the date of the Notice. The Notice has no immediate effect on the listing or trading of our common stock, which will continue to trade at this time on the Nasdaq Global Market under the symbol "TLIS." We have a period of 180 calendar days, or untilJanuary 23, 2023 to regain compliance with the minimum bid price requirement. To regain compliance, the minimum bid price of our common stock must meet or exceed$1.00 per share for at least ten consecutive business days during this 180 calendar day period. In the event we do not regain compliance byJanuary 23, 2023 , we may be eligible for an additional 180 calendar day grace period if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for the Nasdaq Capital Market, with the exception of the minimum bid price, and provide written notice to Nasdaq of our intention to cure the deficiency during the second compliance period. If we do not regain compliance within the allotted compliance periods, our common stock could result in delisting. In that event, we may appeal such delisting determination to a hearings panel. 24 --------------------------------------------------------------------------------
We intend to actively monitor the bid price of our common stock and will consider available options to regain compliance with the Nasdaq listing requirements, including a reverse stock split.
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 assay 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 unless and until we obtain regulatory approval of and commercialize our Talis One system. Until we can generate a sufficient amount of revenue from the commercialization of 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, accrued expenses and operating lease costs. 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. Since our inception, we have incurred significant losses and negative cash flows from operations. We have an accumulated deficit of$451.0 million throughSeptember 30, 2022 . We expect to incur substantial additional losses in the future as we conduct and expand our research and development, manufacturing and commercialization activities. Based on our planned operations, we expect that our unrestricted cash and cash equivalents of$143.8 million as ofSeptember 30, 2022 , will be sufficient to fund our operations for at least 12 months after our condensed financial statements are issued. Given our recent reductions in force and other expense reductions planned this year, we expect to fund operations into 2025. This target could change as we gain more clarity on the timing and trajectory of the Talis One system launch. However, we may need to raise additional capital through equity or debt financing, or potential additional collaboration proceeds prior to achieving commercialization of our products. Our ability to continue as a going concern is dependent upon our ability to successfully secure sources of financing and ultimately achieve profitable operations. 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 receive, and the timing of receipt of future regulatory approval for our products;
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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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our ability to manufacture the Talis One system at scale to meet eventual market demand, if any;
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the amount of capital, and related timing of payments, required to build sufficient inventory of our Talis One system and assay 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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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 any future commercial launch of the Talis One system;
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the revenue, if any, received from commercial sales of our products, if and when 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.
Cash flows
The following table summarizes our cash flows for each of the periods presented:
Nine Months Ended September 30,
2022 2021
(in thousands)
Net cash used in operating activities $ (86,593 ) $ (130,643 )
Net cash used in investing activities (1,566 ) (1,879 )
Net cash provided by financing activities 406 233,759
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (87,753 ) $ 101,237
Operating activities
During the nine months ended September 30, 2022 , net cash used in operating
activities was $86.6 million , resulting from our net loss of $86.1 million , a
decrease in accounts payable and accrued expenses of $9.5 million driven by the
substantial completion of our manufacturing scale-up project, and an increase in
inventory of $2.0 million related to the purchase of the Antigen Tests. These
outflows were partially offset by non-cash items of $4.1 million of stock-based
compensation, $5.3 million of depreciation and amortization, and $2.0 million of
non-cash lease expense.
During the nine months ended September 30, 2021 , cash used in operating
activities was $130.6 million , resulting primarily from our net loss of $163.4
million and other long-term assets of $1.0 million partially offset by increases
in our accrued expenses and accounts payable of $14.8 million , a decrease in our
prepaid expenses of $11.4 million , and non-cash items of $7.6 million , comprised
of stock-based compensation of $6.0 million , amortization of our right-of-use
assets on operating leases of $1.0 million , and depreciation expense of $0.6
million . The increase in our accrued expenses and accounts payable of $14.8
million was primarily associated with our manufacturing scale-up project.
Investing activities
During the nine months endedSeptember 30, 2022 and 2021, we used$1.6 and$1.9 million of cash for investing activities related to purchases of property and equipment, respectively. Financing activities During the nine months endedSeptember 30, 2022 , net cash provided by financing activities was$0.4 million related to proceeds from stock option exercises and stock purchases pursuant to the Company's employee stock purchase plan. During the nine months endedSeptember 30, 2021 , net cash provided by financing activities was$233.8 million , primarily consisting of$232.6 million of proceeds from the issuance of common stock in our initial public offering,$0.8 million in proceeds from stock option exercises, and$0.4 million in proceeds from common stock issued pursuant to the Company's employee stock purchase plan.
Contractual obligations and commitments
Leases
See Note 5. 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
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--------------------------------------------------------------------------------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$3.9 million as ofSeptember 30, 2022 . Our purchase commitments are incurred in the normal course of business and made up of$3.1 million related to Talis One cartridges and$0.8 million for Talis One instruments, all of which are expected to be incurred by 2023. 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 inthe United States . The preparation of financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and assumptions.
Our critical accounting policies and estimates are discussed in our Annual
Report. Changes in our critical policies and estimates during the nine months
ended
Revenue Recognition
Product revenue, net
We generate revenue from our sales of the Antigen Tests. These revenues are recorded net of sales returns and discounts which are estimated at the time of sale. We have 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. We have not generated material revenue from sales to government organizations. We recognize 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
We value our 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, we are required to make judgments as to future demand requirements compared to current or committed inventory levels. We periodically review our 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. Inventory write-offs 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
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In June 2016 , the FASB issued ASU 2016-13, Financial Instruments - Credit Losses
to require the measurement of expected credit losses for financial instruments
held at the reporting date based on historical experience, current conditions
and reasonable forecasts. The main objective of this ASU is to provide financial
statement users with more decision-useful information about the expected credit
losses on financial instruments and other commitments to extend credit held by a
reporting entity at each reporting date. We early adopted ASU 2016-13 on January
1, 2022 with no impact on our accumulated deficit, current financial position,
results of operations and comprehensive loss or cash flows.
Emerging growth company status
InApril 2012 , the JOBS Act was enacted. Section 107 of the JOBS Act provides that an emerging growth company may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we may adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-public companies instead of the dates required for other public companies. 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$1.235 billion or more; (2)December 31, 2026 ; (3) the date on which we have issued more than$1.0 billion in nonconvertible debt during the previous three years; or (4) the date on which we are deemed to be a large accelerated filer under the rules of theSEC .
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