The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes and other financial information included elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. You should review the sections titled "Special Note Regarding Forward-Looking Statements" for a discussion of forward-looking statements and in Part I, Item 1A, "Risk Factors" for a discussion of factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis and elsewhere in this Annual Report on Form 10-K.
Personalis'strategy is to develop some of the world's most advanced genetic tests for cancer. Today our tests are routinely used by many of the largest oncology-focused pharmaceutical companies for analysis of patient samples from their clinical trials. More recently, we have also begun to work with a growing number of leading cancer centers for clinical diagnostic use of our tests. We believe that adoption and publication by these key opinion leaders will develop an advanced standard of care for cancer patients and eventual broad use in a community hospital setting. We believe that our tests can meaningfully improve outcomes for cancer patients, and we estimate that the market opportunity for our tests for therapy selection and monitoring is approximately $30 billionin the U.S.In December 2021, we launched NeXT Personal, a next-generation, tumor-informed liquid biopsy assay designed to detect and quantify MRD and recurrence in patients previously diagnosed with cancer. NeXT Personal is designed to deliver industry-leading MRD sensitivity down to the 1 part-per-million range, an approximately 10- to 100-fold improvement over other available technologies. NeXT Personal leverages whole genome sequencing of a patient's tumor to identify up to 1,800 specially-selected somatic variants that are subsequently used to create a personalized liquid biopsy panel for each patient. We believe this enables earlier detection across a broader variety of cancers and stages, including typically challenging early stage, low mutational burden, and low-shedding cancers. NeXT Personal is also designed to simultaneously detect and quantify clinically relevant mutations in ctDNA that may be used in the future to help guide therapy, when cancer is detected. These include known targetable cancer mutations, drug resistance mutations, and new variants which can emerge and change over time, especially under therapeutic pressure. We consider this approach not just "tumor-informed", but "comprehensively tumor-informed". Our ultimate goal is not just to detect cancer, but to provide key information over the entire course of the patient's disease. We believe this can be better for patients, more informative for pharmaceutical customers, and a larger business opportunity for us. Our strategy is to work with world-class medical institutions. To that end, in the fourth quarter of 2021, we announced a collaboration with the Mayo Clinicand in the first quarter of 2022, we announced one with the Moores Cancer Centerat UC San Diego Health. In these collaborations, we provide clinical diagnostic testing and research sequencing and analysis services using our tissue-based NeXT Dx test. We have begun to test clinical patient samples and are excited about the opportunity to work with these renowned cancer centers. If we achieve a favorable reimbursement decision for our NeXT Dx test from MolDx, we may also generate revenue in the future from some of these collaborations. Given the advanced nature of our NeXT Dx test, we believe it is a good fit for high-end cancer centers, which have a dual mandate for both clinical care and research. If these key opinion leaders have a positive experience using our tests, we are optimistic that this will also support broader use of our platform by other clinicians in the future. We have the capacity to sequence and analyze approximately 200 trillion bases of DNA per week in our facility. We believe that capacity is already larger than most cancer genomics companies, and we continue to build automation and other infrastructure to scale further as demand increases and in support of our NeXT Liquid Biopsy, NeXT Dx Test and NeXT Personal offerings. To date, we have sequenced more than 235,000 human samples, of which more than 145,000 were whole human genomes. In parallel with the development of our platform technology, we have also pursued business within the population sequencing market, and we have provided whole genome sequencing services under contract with the VA MVP, which has enabled us to innovate, scale our operational infrastructure, and achieve greater efficiencies in our lab. The VA MVP is the largest population sequencing effort in the United Statesand we have delivered over 140,000 whole human genome sequence datasets to the VA MVP to date. The cumulative value of task orders received from the VA MVP since inception is approximately $186 million, $178.1 millionof which we had recognized as revenue as of December 31, 2021. In September 2021, we received a task order from the VA MVP with a value of up to approximately $9.7 million, which was significantly less than in prior years. At that time, we expected the reduced order amount was to be followed by a formal RFP process and a potential new contract to be awarded sometime late in the third quarter of 2022. However, recent discussions with our contacts at the VAMVP indicate that there will be no RFP process in 2022. Accordingly, we do not expect to receive any new orders from the VA MVP this year nor to recognize any revenue from the VA MVP beyond the current order and contract. Unless we receive an additional task order and/or enter into a new services agreement with the VAMVP with a value comparable to that of our current contract and historical contracted orders, our revenue from the VA MVP is expected to decline significantly in 2022 and future periods. Given the strong growth we have already experienced in our oncology business in 2021, and the large market opportunity we see in this space, we plan to focus primarily on cancer as we go forward. In August 2021, we announced that we will relocate our corporate headquarters from Menlo Parkto a new facility in Fremont, Californiaand we plan to beginning moving into it in the third quarter of this year. We signed a 13.5-year lease for the 100,000 square foot facility, which is approximately double the amount of space in our current Menlo Parklocation. The new facility is intended to allow for expansion of our laboratory for clinical testing to support biopharma customers and clinical diagnostic testing. In addition, the new space is intended to support the expansion of research and development efforts to bring leading edge products and services to the marketplace. The new facility will also provide more office space for our selling, general and administrative workforce. 62 -------------------------------------------------------------------------------- Our operations have been impacted by the ongoing COVID-19 pandemic. For example, the previous shelter-in-place order and health orders have negatively impacted productivity, disrupted our business, and slowed research and development activities due to us limiting access to our laboratory space that would otherwise be used by our research and development group, and, to the extent such orders return in similar or more stringent form, they may continue to cause such effects on our operations. The COVID-19 pandemic has also disrupted, and may continue to disrupt, the ability of our suppliers to fulfill our purchase orders in a timely manner or at all. Additionally, we are aware of increased demand in the market for certain consumables used in COVID-19 test kits and vaccines. We use such consumables in our operations, and we have faced, and may face in the future, difficulties in acquiring such consumables if our suppliers prioritize orders related to COVID-19. Several of our customers, including the VA MVP, were delayed in sending us samples in the prior year due to the inability to collect or ship samples during the COVID-19 pandemic, and these and additional customers may be disrupted from collecting samples or sending purchase orders and samples to us in the future. While authorities in many areas have lifted or relaxed pandemic-related restrictions, in some cases they have subsequently re-imposed various restrictions after observing an increased rate of COVID-19 cases as the global COVID-19 pandemic continues to rapidly evolve and to present serious health risks. There is no guarantee when or if all such restrictions and recommendations will be eliminated, such that we and our customers, manufacturers and suppliers will be able to safely resume operations consistent with our pre-COVID-19 operations. The full extent of the impact of the COVID-19 pandemic on our business, operations and plans remains uncertain and will depend on future developments that cannot be predicted at this time. Such developments include the continued spread of the Omicron variant in the U.S.and other countries and the potential emergence of other SARS-CoV-2 variants that may prove especially contagious or virulent, the ultimate duration of the pandemic and the resulting impact on our business and other third parties with whom we do business, and the effectiveness of actions taken globally to contain and treat the disease. A continued and prolonged public health crisis such as the COVID-19 pandemic could have a material negative impact on our business, financial condition, and operating results.
Factors affecting our performance
We believe that several important factors have had and which we believe will continue to have an impact on our operating performance and results of operations, including:
• The continued development of the genomic testing market. Our
performance depends on the willingness of biopharmaceutical customers to
continue to seek more comprehensive molecular information to further develop
effective cancer therapies.
• Increased adoption of our products and solutions by existing customers.
Our performance depends on our ability to retain and expand adoption
with existing customers. Because our technology is new, some customers
start using our platform by launching pilot studies involving a small
number of samples to gain experience with our service. As a result,
historically, a significant portion of our revenue comes from
customers. We believe that our ability to convert initial pilots into
larger orders from existing customers have the potential to drive
substantial long-term income. We expect there to be variations in
the number of samples they choose to test each quarter. • Adoption of our products and solutions by new customers. While new customers initially may not account for significant revenue, we believe that they have the potential to grow substantially over the long term as
they gain confidence in our service. Our ability to attract new customers
is critical to our long-term success. Our publications, posters and presentations at scientific conferences lead to engagement at the scientific level with potential customers who often make the initial decision to gain experience with our platform. Accessing these new customers through scientific engagement and marketing to gain initial buy-in is critical to our success and gives us the opportunity to demonstrate the utility of our platform.
• Our revenues and costs are affected by the volume of samples we receive
customers from period to period. Timing and sample size
shipments received after orders have been placed vary. Since
sample shipments can be large and are often received from a third party,
the time of arrival can be difficult to predict in the short term.
Although our long-term performance is not affected, we are seeing
quarter-to-quarter volatility due to these factors. Samples arriving
later than expected may not be processed in the proposed quarter and
generate revenue the following quarter. Since many of our customers
request defined turnaround times, we employ project managers to coordinate and manage the complex process from sample receipt to sequencing and delivery of results. • Investment in product innovation to support growth. Investment in
research and development, including the development of new products and
capabilities are essential to establishing and maintaining our leadership position.
We have invested heavily in our NeXT platform, introducing new
additional products and capabilities over the past two years, including
NeXT Liquid Biopsy (exome-wide liquid biopsy platform), NeXT Dx Test
(comprehensive cancer genomic profiling test enabling advanced composite
biomarkers for the treatment of cancer), NeXT SHERPA and NeXT NEOPS (neoantigen
prediction capabilities) and NeXT Personal (liquid biopsy offer for
personalized tumor follow-up for patients). We are currently investing in
the development of future new product offerings, including NeXT CDx
(diagnostic test) and NeXT database (comprehensive analysis of tumor immunogenomics
database). We also collaborate with key opinion leaders in the field of cancer
centers, such as
support the clinical utility of our platform. We believe this work is
critical to gaining customer adoption and expect our investments in these efforts to increase. 63
• Leverage our operational infrastructure. We have invested a lot
and will continue to invest, in our sample processing capabilities and commercial infrastructure. With our current operating model and infrastructure, we can increase our production and commercialize new
generations of our platform, but as our volumes continue to grow, we
will ultimately have to invest in additional production capacity. We
we expect to increase our revenues and spread our costs over a greater volume of
services. In addition, we may invest significant amounts in infrastructure to support new products resulting from our research and development activities.
Components of operating results
We derive our revenue primarily from sequencing and data analysis services to support the development of next-generation cancer therapies and to support large-scale genetic research programs. We support our customers by providing high-accuracy, validated genomic sequencing and advanced analytics. Many of these analytics are related to state-of-the-art biomarkers, including those relevant to immuno-oncology therapeutics such as checkpoint inhibitors. Our revenue is primarily generated through contracts with companies in the pharmaceutical industry, healthcare organizations, and government entities. Our ability to increase revenue will depend on our ability to further penetrate this market. To do this, we are developing a growing set of state-of-the-art products, advancing our operational infrastructure, expanding our international presence, building our regulatory credentials, and expanding our targeted marketing efforts. We sell through a small direct sales force. Since 2018, we derived a substantial portion of our revenue from sales of our DNA sequencing and data analysis services to the VA MVP. However, we do not anticipate deriving such substantial portions of our revenue from the VA MVP in future periods. Our contract with the VA MVP does not include specific testing turnaround times. Therefore, we have the ability to modulate the volume of samples processed for the VA MVP up or down to complement sample volumes from all other customers, which can vary from period to period. We have one reportable segment from the sale of sequencing and data analysis services. Substantially all of our revenue to date has been derived from sales in
the United States. Costs and Expenses Cost of Revenue Cost of revenue consists of raw materials costs, personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, depreciation and maintenance on equipment, and allocated facilities and information technology ("IT") costs. We expect cost of revenue to increase as our revenue grows, and in the short term cost of revenue may outpace revenue growth as we invest in expanding our laboratory capacity, including additional costs associated with our future laboratory in Fremont, California. Over time the cost per sample processed is expected to decrease due to economies of scale we may gain as volume increases, automation initiatives, and other cost reductions.
Research and development costs
Research and development expenses consist of costs incurred for the research and development of our products. These expenses consist primarily of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), laboratory supplies and consumables, costs of processing samples for research purposes, depreciation and maintenance on equipment, and allocated facilities and IT costs. We include in research and development expenses the costs to further develop software we use to operate our laboratory, analyze the data it generates, and automate our operations. These expenses also include costs associated with our collaborations, which we expect to increase over time. We expense our research and development costs in the period in which they are incurred. We expect to increase our research and development expenses as we continue to develop new products and incur additional costs associated with our future headquarters in
Selling, general and administrative expenses
Selling expenses consist of personnel costs (salaries, commissions, bonuses, stock-based compensation, payroll taxes, and benefits), customer support expenses, direct marketing expenses, and market research. Our general and administrative expenses include costs for our executive, accounting, finance, legal, and human resources functions. These expenses consist of personnel costs (salaries, bonuses, stock-based compensation, payroll taxes, and benefits), corporate insurance, audit and legal expenses, consulting costs, and allocated facilities and IT costs. We expense all selling, general and administrative costs as incurred. We expect our selling expenses will continue to increase in absolute dollars, primarily driven by our efforts to expand our commercial capability and to expand our brand awareness and customer base through targeted marketing initiatives with an increased presence both within and outside
the United States. We expect general and administrative expenses to increase as we scale our operations and incur additional costs associated with ramping up our new headquarters facility in Fremont, California. 64
Interest income and interest expense
Interest income consists primarily of interest earned on our cash and cash equivalents and short-term investments. Interest income increased significantly beginning in the second half of 2019 as a result of us investing proceeds from the initial public offering of our common stock in
June 2019(our "IPO"). Since the first quarter of 2020, our interest income has been adversely impacted by declines in yields on debt securities. Interest expense in 2021 is the recognition of imputed interest on noninterest bearing loans. Interest expense in 2019 and prior years consisted of cash and non-cash interest costs related to previously outstanding loans. Loss on Debt Extinguishment We incurred a loss on debt extinguishment in 2018 resulting from changes in the maturity dates of convertible notes issued in 2017. We also incurred a loss on debt extinguishment in 2019 upon the payoff of the Growth Capital Loan. See Note 6 to our consolidated financial statements included elsewhere in this annual report. Other Income (Expense), Net Other income (expense), net consists primarily of foreign currency exchange gains and losses, and realized gains or losses associated with sales of marketable securities. In 2019, other income (expense), net also consisted of changes in fair value of a convertible preferred stock warrant liability. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
Trending Financial Information
The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Item 8 of Part II, "Financial Statements and Supplementary Data". Historical results are not necessarily indicative of future results. Year Ended December 31, 2021 2020 2019 2018 2017 Consolidated Statements of Operations: (in thousands, except share and per share data) Revenue
$ 85,494 $ 78,648 $ 65,207 $ 37,774 $ 9,393Costs and expenses Cost of revenue 53,837 58,534 43,127 25,969 11,736 Research and development 49,312 28,568 22,418 14,304 9,919 Selling, general and administrative 47,698 33,692 22,080 11,271 9,901 Total costs and expenses 150,847 120,794 87,625 51,544 31,556 Loss from operations (65,353 ) (42,146 ) (22,418 ) (13,770 ) (22,163 ) Interest income 367 949 1,620 293 100 Interest expense (184 ) (2 ) (1,133 ) (1,894 ) (1,303 ) Loss on debt extinguishment - - (1,704 ) (4,658 ) - Other income (expense), net (42 ) (24 ) (1,440 ) 150 (227 ) Loss before income taxes (65,212 ) (41,223 ) (25,075 ) (19,879 ) (23,593 ) Provision for income taxes 14 57 9 7 5 Net loss $ (65,226 ) $ (41,280 ) $ (25,084 ) $ (19,886 ) $ (23,598 )Net loss per share, basic and diluted $ (1.49 ) $ (1.20 ) $ (1.39 ) $ (6.49 ) $ (7.78 )Weighted-average shares outstanding, basic and diluted 43,886,730 34,374,903 18,011,470 3,063,157 3,031,636 December 31, 2021 2020 2019 2018 2017 Consolidated Balance Sheet Data: (in
Cash and cash equivalents, and short-term investments
$ 287,064 $ 203,290 $ 128,289 $ 19,744 $ 22,617Working capital 286,918 180,083 89,616 (28,291 ) (22,262 ) Total assets 396,528 244,842 157,291 41,670 33,563 Total debt 3,494 - - 4,996 17,506 Long-term obligations 54,914 9,261 639 804 1,183 Total liabilities 86,227 49,897 50,601 58,654 50,171 Redeemable convertible preferred stock - - - 89,404 75,995 Total stockholders' equity (deficit) 310,301 194,945 106,690 (106,388 ) (92,603 ) 65
This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year ended
December 31, 2020.
The following table presents revenues by customer type (in thousands):
Years Ended December 31, Change 2021 2020 2019 2021 vs 2020 2020 vs 2019 VA MVP
$ 45,671 $ 56,154 $ 43,545-19% 29% All other customers 39,823 22,494 21,662 77% 4% Total revenue $ 85,494 $ 78,648 $ 65,2079% 21%
The following table shows the revenue concentration by customer:
Year Ended December 31, 2021 2020 2019 VA MVP 53% 71% 67% Natera, Inc. 10% * * Pfizer Inc. * * 13% * Less than 10% of revenue VA MVP The decrease of
$10.5 millionin revenue from the VA MVP in 2021 was primarily due to a decrease in the volume of samples we tested in the period. As of December 31, 2021, we had a remaining backlog of $7.6 millionunder our current contract with the VA MVP, including the task order received in September 2021. We expect to convert such amount into revenue during the first three quarters of 2022. The recognition of significant revenue from the VA MVP in future periods after the completion of our current backlog is contingent on receipt of a new contract. The VA MVP may not award us a new contract. Further, the value of any such potential new contract may be lower than our current contract and historical contracted orders from the VA MVP, and/or the scope or nature of the services required under any such new contract may change such that we are unable to serve the VA MVP in the future. The task order received in September 2021had a value of up to approximately $9.7 million, which represents a substantial decline compared to historical contracted orders. At that time, we expected the reduced order amount was to be followed by a formal RFP process and a potential new contract to be awarded sometime late in the third quarter of 2022. However, recent discussions with our contacts at the VA MVP indicate that there will not be an RFP process in 2022. Accordingly, we are not planning on receiving any new orders from the VA MVP this year or expecting to recognize any revenue beyond the current order and contract. Unless we receive an additional task order and/or enter into a new services agreement with the VA MVP with a value comparable to that of our current contract and historical contracted orders, our revenue from the VA MVP will decline significantly in 2022 and future periods.
All other customers
The increase of
$17.3 millionin revenue from all other customers in 2021 was driven primarily by strong demand from large pharmaceutical customers for our NeXT Platform products, which resulted in an increase in the volume of samples we tested during 2021. Revenue from Natera contributed $8.6 millionof the increase due to increased sample receipts under our agreement to provide advanced tumor analysis for use in Natera's MRD testing offerings. Revenue derived from our NeXT Platform products, which includes revenue from Natera, was $27.9 millionin 2021, compared to $8.2 millionin 2020, an increase of $19.7 million.
Based on the relatively large dollar value of orders received from all other customers throughout fiscal 2021, we expect revenue from all other customers to make up the majority of our total revenue in fiscal year 2022.
Costs and Expenses Year Ended December 31, Change 2021 2020 2019 2021 vs 2020 2020 vs 2019 (in thousands) Cost of revenue
$ 53,837 $ 58,534 $ 43,127-8% 36% Research and development 49,312 28,568 22,418 73% 27% Selling, general and administrative 47,698 33,692 22,080 42% 53% Total costs and expenses $ 150,847 $ 120,794 $ 87,62525% 38% 66
The decrease in cost of revenue in 2021, despite a revenue increase in the same period, was primarily due to favorable customer mix and efficiencies within our laboratory operations. Raw materials costs were lower, relative to revenue, for non-VA MVP customer orders, resulting in favorable customer mix in 2021. We also observed more efficient sample processing overall in 2021, including less labor and overhead required per sample processed, which was favorable for both VA MVP and non-VA MVP orders. The cost components related to the
$4.7 milliondecrease in cost of revenue in 2021 were a $3.2 milliondecrease in raw materials costs due to favorable customer mix, a $3.1 milliondecrease in indirect costs due to a higher utilization of our laboratory for research and development activities, and a $0.3 milliondecrease in the cost of laboratory supplies and consumables, partially offset by a $1.1 millionincrease in labor costs as a result of increased headcount, and a $0.8 millionincrease in depreciation and maintenance on lab equipment. Research and development The $20.7 millionincrease in research and development in 2021 was primarily due to development of new products and lab automation efforts and consisted of a $12.1 millionincrease in personnel-related costs primarily related to increased headcount, a $5.1 millionincrease in sample processing costs incurred in our laboratory for new product development, a $2.0 millionincrease in IT and fixed facilities costs, a $1.0 millionincrease in depreciation and maintenance on research and development equipment, and a $0.5 millionincrease in consulting fees.
Selling, general and administrative expenses
$14.0 millionincrease in selling, general and administrative in 2021 was primarily due to a $8.6 millionincrease in personnel-related costs related to increased headcount, a $2.6 millionincrease in professional services (including corporate insurance, audit fees, and legal expenses), a $1.6 millionincrease in rent expense primarily related to our new Fremontfacility, and a $1.2 millioncharge in connection with the modification of stock options held by two non-employee board members.
Interest income, interest expense and other expenses, net
Year Ended December 31, Change 2021 2020 2019 2021 vs 2020 2020 vs 2019 (in thousands) Interest income
$ 367 $ 949 $ 1,620-61% -41% Interest expense (184 ) (2 ) (1,133 ) NM -100% Loss on debt extinguishment - - (1,704 ) - -100% Other expense, net (42 ) (24 ) (1,440 ) 75% -98% Total $ 141 $ 923 $ (2,657 )
Interest income and interest expense
The decrease in interest income in 2021 was driven by declines in yields on debt securities, partially offset by higher average cash and investment balances subsequent to our follow-on equity offerings in
August 2020and January 2021. Interest expense in 2021 is the recognition of imputed interest on noninterest bearing loans. Other expense, net
Other expenses, net in 2021 and 2020, included gains and losses on foreign exchange transactions and revaluations.
Cash and capital resources
The following tables present selected financial information and statistics at the dates and for the years ended
December 31, 20212020
Cash and cash equivalents, and short-term investments
$ 287,064 $ 203,290 $ 128,289Property and equipment, net 19,650 11,834 14,106 Contract liabilities 3,982 21,034 35,977 Working capital 286,918 180,083 89,616 Year Ended December 31, 2021 2020 2019 Net cash used in operating activities $ (70,828 ) $ (42,653 ) $ (18,069 )Net cash used in investing activities (60,069 ) (65,143 ) (81,579 ) Net cash provided by financing activities 169,700 121,268 134,948 67 -------------------------------------------------------------------------------- From our inception through December 31, 2021, we have funded our operations primarily from $279.0 millionin net proceeds from our follow-on equity offerings in August 2020and January 2021, $144.0 millionin net proceeds from our IPO in June 2019, and $89.6 millionfrom issuance of redeemable convertible preferred stock, as well as cash from operations and debt financing. As of December 31, 2021, we had cash and cash equivalents in the amount of $105.6 millionand short-term investments in the amount of $181.5 million. We have incurred net losses since our inception. We anticipate that our current cash and cash equivalents and short-term investments, together with cash provided by operating activities, are sufficient to fund our near-term capital and operating needs for at least the next 12 months. We have based these future funding requirements on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we expect. If our available cash balances, net proceeds from the offerings and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, including because of lower demand for our services or other risks described in this Annual Report on Form 10-K, such as the COVID-19 pandemic, we may seek to sell additional common or preferred equity or convertible debt securities, enter into an additional credit facility or another form of third-party funding or seek other debt financing. We filed a prospectus supplement in January 2022pursuant to which we could offer and sell additional shares of our common stock up to an aggregate amount of $100.0 millionthrough an at-the-market offering program. The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. Additional capital may not be available on reasonable terms, or at all.
Our short-term investment portfolio is primarily invested in highly rated securities, with the primary aim of minimizing the potential risk of loss of capital. Our investment policy generally requires securities to be of high quality and limits the degree of credit exposure to any given issuer.
December 31, 2021, cash and cash equivalents held by foreign subsidiaries was $2.1 million. Our intent is to indefinitely reinvest funds held outside the United Statesand our current plans do not demonstrate a need to repatriate them to fund our domestic operations. However, if in the future, we encounter a significant need for liquidity domestically or at a particular location that we cannot fulfill through borrowings, equity offerings, or other internal or external sources, or the cost to bring back the money is not significant from a tax perspective, we may determine that cash repatriations are necessary or desirable. Repatriation could result in additional material taxes. These factors may cause us to have an overall tax rate higher than other companies or higher than our tax rates have been in the past. During 2021, cash used in operating activities of $70.8 millionwas a result of $65.2 millionof net loss and a net negative change in operating assets and liabilities of $31.1 million(of which $17.1 millionwas related to reductions in outstanding customer prepayments as we fulfilled the related revenue contracts and $12.1 milliondue to an increase in accounts receivable), partially offset by non-cash adjustments to net income of $25.5 million(the most significant non-cash expenses were $14.4 millionof stock-based compensation and $6.0 millionof depreciation and amortization). During 2020, cash used in operating activities of $42.7 millionwas a result of $41.3 millionof net loss and a net negative change in operating assets and liabilities of $17.2 million(of which $14.9 millionwas related to reductions in outstanding customer prepayments as we fulfilled the related revenue contracts), partially offset by non-cash negative adjustments to net income of $15.8 million(the most significant non-cash expenses were $8.2 millionof stock-based compensation and $5.8 millionof depreciation and amortization). During 2021, cash used in investing activities was $60.1 milliondue to net purchases of short-term investments of $49.0 millionand $11.1 millionin payments for property and equipment. Cash provided by financing activities of $169.7 millionduring the same period consisted of $162.3 millionnet proceeds from our January 2021follow-on offering, $5.2 millionproceeds from loans, and $4.4 millionproceeds from stock option exercises and purchases under our Employee Stock Purchase Plan ("ESPP"), partially offset by $1.9 millionrepayments of loans and $0.3 millionof offering costs. During 2020, cash used in investing activities was $65.1 milliondue to net purchases of short-term investments of $61.9 millionand $3.2 millionin payments for property and equipment. Cash provided by financing activities of $121.3 millionduring the same period consisted of $117.5 millionnet proceeds from our August 2020follow-on offering, $4.2 millionproceeds from stock option exercises and purchases under our ESPP, partially offset by $0.4 millionof offering costs.
Material cash needs
Our material cash requirements in the short- and long-term consist primarily of capital expenditures, variable costs of revenue, operating expenditures, property leases, and other. We plan to fund our material cash requirements with our existing cash and cash equivalents and short-term investments, which amounted to
$287.1 millionas of December 31, 2021, as well as anticipated cash receipts from customers. Capital expenditures. We expect to increase capital expenditures in future periods to support our global growth initiatives. Such expenditures are expected to consist primarily of facility renovations and improvements, laboratory equipment, and computer equipment. We currently expect capital expenditures to be between $55and $65 millionin 2022 and between $10and $15 millionin each of the next two fiscal years. In connection with our new headquarters and laboratory facility in Fremont, California, we expect to 68 -------------------------------------------------------------------------------- spend between $45and $50 million(net of expected landlord reimbursements) in combined leasehold improvements, renovations, administrative, and other costs through the end of 2022. This is the reason for greater expected capital expenditures in 2022 as compared to the following two years. Variable costs of revenue. From time to time in the ordinary course of business, we enter into agreements with vendors for the purchase of raw materials, laboratory supplies and consumables to be used in the sequencing of customer samples. However, we generally do not have binding and enforceable purchase orders beyond the short term, and the timing and magnitude of purchase orders beyond such period is difficult to accurately project. Another primary use of cash within variable costs of revenue relates to paying our workforce. We currently expect spend to decrease in 2022 but increase in years thereafter to support revenue growth. Operating expenditures. Our primary use of cash relates to paying employees, spend on professional services, spend related to research and development projects, and other costs related to our research and development, selling, general and administrative functions. We currently expect to increase our spend in these areas to support our business growth in 2022. On a long-term basis, we manage future cash requirements relative to our long-term business plans. Property leases. Our noncancelable operating lease payments were $84.6 millionas of December 31, 2021. The timing of these future payments, by year, can be found in Part II, Item 8 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 7, "Leases." Other. During the second quarter of 2021, we entered into two noninterest bearing loans to finance the purchase of $5.6 millionof computer hardware, internal use software licenses, and related ongoing support. We made payments of $1.86 millionin 2021. We are required to make payments of $1.86 millionin each of 2022 and 2023. Further discussion of this transaction can be found in Part II, Item 1 of this Form 10-K in the Notes to Consolidated Financial Statements in Note 6, "Loans." Certain of our customers prepay us for a portion of the services that they expect to order from us before they place purchase orders and we deliver those services. In some cases, this prepayment can be substantial and may be paid months or a year or more in advance of these customers providing samples to us and before our delivery of the services to which some or all of the deposit relates. As of December 31, 2021, we had approximately $3.8 millionin customer deposits, including $3.3 millionfrom one customer. We are generally not required by our contracts to retain these deposits in cash or otherwise and we have generally used these deposits to make capital expenditures and fund our operations. When a customer that has prepaid us for future services cancels its contract with us, reduces the level of services that it expects to receive, or we determine that a prepayment is no longer necessary, we will repay that customer's deposit. We do not expect such repayments to require material amounts of cash.
Significant Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
U.S.GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. We believe that the assumptions and estimates associated with revenue recognition, stock-based compensation, and leases have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. Revenue Recognition We generate our revenue from selling sequencing and data analysis services. We agree to provide services to our customers through a contract, which may be in the form of a combination of a signed agreement, statement of work and/or a purchase order. We have evaluated the performance obligations contained in contracts with customers to determine whether any of the performance obligations are distinct, such that the customers can benefit from the obligations on their own, and whether the obligations can be separately identifiable from other obligations in the contract. For the significant majority of our contracts to date, the customer orders a specified quantity of a sequencing; therefore, the delivery of the ordered quantity per the purchase order is accounted for as one performance obligation. Our contracts include only one performance obligation-the delivery of the sequencing and data analysis services to the customer. Fees for our sequencing and data analysis services are predominantly based on a fixed price per sample. The fixed prices identified in the arrangements only change if a pricing amendment is agreed with a customer. In limited cases we provide our customers a discount if samples received above a certain volume are purchased. In such cases, the discount applies prospectively. We have analyzed such discounts if they represent a material right provided to a customer. We have concluded that such discounts generally do not represent a material right provided to a customer since they are not deemed to be incremental to the pricing offered to the customer or are not enforceable options to acquire additional goods. As a result, these discounts do not constitute a material right and do not meet the definition of a separate performance obligation, except in limited instances. We do not offer retrospective discounts 69
or discounts. Thus, the entire transaction price, net of any discount, is allocated to a single performance obligation. Therefore, upon delivery of the services, no performance obligation remains.
Contracts that contain multiple distinct performance obligations would require an allocation of the transaction price to each performance obligation based on a relative stand-alone selling price basis. Sometimes we deliver sequencing results in two or more batches; however, since the quantity delivered per batch of each individual test per sales order in these instances is in the same ratio as in the original sales order, allocating the transaction price on a relative stand-alone selling price basis would have no impact on the revenue recognized in any period presented. We recognize revenue when control of the promised services is transferred to our customers. Management has determined that customers obtain control when the sequencing and data analysis service results are delivered to customers. Revenue is recorded net of sales or other transaction taxes collected from clients and remitted to taxing authorities. A customer contract liability will arise when we have received payments from its customers in advance, but has not yet provided genome and exome sequencing and data analysis services to a customer and satisfied its performance obligations. We record a customer contract liability for performance obligations outstanding related to payments received in advance for customer deposits. We expect to satisfy these remaining performance obligations and recognize the related revenue upon providing sequencing and data analysis services.
All of our revenue and trade receivables are generated by contracts with customers and substantially all of our revenue is from
Payment Terms Payment terms and conditions vary by contract and customer. Our standard payment terms are typically less than 90 days from the date of invoice. In instances where the timing of our revenue recognition differs from the timing of its invoicing, we have determined that our contracts do not include a significant financing component. The primary purposes of our invoicing terms are to provide customers with simplified and predictable ways of purchasing our services and provide payment protection for us.
For options granted to employees, non-employees, and directors, stock-based compensation is measured at grant date based on the fair value of the award. We determine the grant-date fair value of options using the Black-Scholes option-pricing model, except for certain performance-based awards for which an alternative valuation method may be used. We determine the fair value of restricted stock unit awards using the closing market price of the Company's common stock on the date of grant. The grant-date fair value of awards is amortized over the employees' requisite service period on a straight-line basis, or the non-employees' vesting period as the goods are received or services rendered. Forfeitures are accounted for as they occur. Additionally, our ESPP is deemed to be a compensatory plan and therefore is included in stock-based compensation expense. Estimating the fair value of equity-settled awards as of the grant date using valuation models, such as the Black-Scholes option-pricing model, is affected by assumptions regarding a number of complex variables. Changes in the assumptions can materially affect the fair value and ultimately how much stock-based compensation expense is recognized. These inputs are subjective and generally require significant analysis and judgment to develop.
• Expected Duration – The expected duration assumption represents the
weighted-average period that the stock-based awards are expected to be outstanding. We have elected to use the "simplified method" for estimating the expected term of the options, whereby the expected term equals the arithmetic average of the vesting term and the original contractual term of the option.
• Expected Volatility – For all stock options granted to date,
volatility was estimated based on an average historical stock price volatility of a peer group of publicly traded companies as we did not
have sufficient trading history for our own common stock. For the purposes of
identifying these peer companies, we considered the industry, stage of
development, size, and financial leverage of potential comparable companies.
• Expected dividend yield – The Black-Scholes option pricing model
calls a single expected dividend yield as an input. We currently have
no history or expectation of paying cash dividends on our common stock. • Risk-Free Interest Rate-The risk-free interest rate is based on the yield
U.S. Treasuryzero-coupon issues similar in duration to the expected term of the award.
Differential borrowing rate
Lease liabilities are recognized at the present value of the fixed lease payments, reduced by landlord incentives, using a discount rate based on the Company's current borrowing rate at the lease commencement date (the incremental borrowing rate), unless the rate implicit in the lease is readily determinable. 70 -------------------------------------------------------------------------------- In
August 2021, we entered into a 13.5-year lease for our new corporate headquarters. We estimated our incremental borrowing rate as the rate implicit in the lease was not readily determinable. To determine the incremental borrowing rate, we estimated our credit rating by comparing certain financial ratios and metrics of the Company to those of other issuers with publicly available credit ratings from Standard & Poor's(S&P). We then adjusted yields from publicly traded corporate bonds of companies of similar size and credit rating over a term approximating the term of our lease for the nature of the collateral. Our concluded incremental borrowing rate for this lease was 5.8%, which resulted in a lease liability and right-of-use asset of $44.7 million.
Accounting election of the JOBS law
December 31, 2021, we were a smaller reporting company and eligible to take advantage of the same reduced disclosures that an emerging growth company, as defined in the Jumpstart Our Business Startups Act (the "JOBS Act"), could avail itself to. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We had irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and therefore, are subject to the same new or revised accounting standards as other public companies that are not smaller reporting companies or emerging growth companies.
Recent accounting pronouncements
See the sections entitled “Summary of Significant Accounting Policies – Recent Accounting Pronouncements” and “Recent Accounting Pronouncements Not Yet Adopted” in Note 2 to our Consolidated Financial Statements for additional information.
Item 7A. Quantitative and qualitative information on market risk.
As a “small reporting company”, we are not required to provide the information under this heading.
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