The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and the related notes and other financial information
included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report
on Form 10-K for the fiscal year ended December 31, 2021 filed with the
Securities and Exchange Commission (the "SEC") on February 24, 2022 (the "Annual
Report"). 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 II, 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 Quarterly Report
on Form 10-Q and in our Annual Report.
Overview
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 advance
standard of care for cancer patients and drive eventual broad use clinically. We
believe that our tests can meaningfully improve outcomes for cancer patients,
and estimate that an annual market opportunity of approximately $30 billion
could materialize in the U.S. in the future.
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 that is actionable by oncologists 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 Clinic
and in the first quarter of 2022, we announced one with the Moores Cancer Center
at UC San Diego Health. In these collaborations, we provide clinical diagnostic
testing 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 250,000 human samples, of which more than 150,000 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 U.S. Department of
Veterans Affairs Million Veteran Program (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
States and we have delivered over 150,000 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, $181.6 million of which we
had recognized as revenue as of March 31, 2022. 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 to be followed by a formal request for proposal ("RFP")
process and a potential new contract to be awarded sometime late in the third
quarter of 2022. We are aware that the VA MVP recently initiated a request for
information process seeking potential sources to provide high-throughput whole
genome sequencing services. However, we are not certain whether there will be a
RFP process in 2022. Accordingly, we do not currently expect to receive any new
orders from the VA MVP this year or 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 VA MVP with a value
comparable to that of our current contract and historical contracted orders, our
revenue from the VA MVP will continue to decline significantly, and will cease
after the second quarter of 2022. Given the strong growth we have already
experienced in our oncology business in 2021 and the first quarter of
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2022, and the large market opportunity we see in this space for our technology
and offerings, 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 Park to a new facility in Fremont, California. We plan to begin
moving into the new facility 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 Park location. The new facility
is intended to allow for expansion of our laboratory for clinical testing to
support biopharma customers, clinical diagnostic testing and pursuit of U.S.
Food and Drug Administration (the "FDA") approval for our tests. 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.
Our operations have been impacted, and may be impacted in the future, by the
ongoing COVID-19 pandemic. For example, the previous shelter-in-place order and
health orders negatively impacted productivity, disrupted our business, and
slowed research and development activities due to limited 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 disrupt in the future, 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 have been delayed in sending us samples 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 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.
Components of Operating Results
Revenue
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 tests with 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 services
and 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 have derived a substantial portion of our revenue from sales of
our DNA sequencing and data analysis services to the VA MVP. However, we
currently do not anticipate deriving such substantial portions of our revenue
from the VA MVP going forward. 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. Most 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
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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 Expenses
Research and development expenses consist of costs incurred for the research and
development of our services and products and costs related to conducting studies
and collaborations with partners to validate the clinical utility of our
offerings. 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.
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 services and products and expand collaborations for
clinical validation to secure reimbursement opportunities.
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.
Interest Income and Interest Expense
Interest income consists primarily of interest earned on our cash and cash
equivalents and short-term investments. Interest expense in 2022 is the
recognition of imputed interest on noninterest bearing loans.
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. We expect our foreign currency exchange gains and losses
to continue to fluctuate in the future due to changes in foreign currency
exchange rates.
Results of Operations
The following sets forth, for the periods presented, our unaudited condensed
consolidated statements of operations and selected financial data (in thousands,
except share and per share data):
Three Months Ended March 31,
2022 2021
Revenue $ 15,227 $ 20,881
Costs and expenses
Cost of revenue 10,949 13,454
Research and development 17,098 9,496
Selling, general and administrative 15,486 10,421
Total costs and expenses 43,533 33,371
Loss from operations (28,306 ) (12,490 )
Interest income 144 95
Interest expense (59 ) -
Other income (expense), net 19 (12 )
Loss before income taxes (28,202 ) (12,407 )
Provision for (benefit from) income taxes 7 (3 )
Net loss $ (28,209 ) $ (12,404 )
Net loss per share, basic and diluted $ (0.63 ) $ (0.29 )
Weighted-average shares outstanding, basic and diluted 44,995,752 42,265,596
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March 31, December 31,
2022 2021
Cash and cash equivalents, and short-term investments $ 266,540 $ 287,064
Working capital 254,184 286,918
Total assets 380,647 396,528
Total debt 3,552 3,494
Long-term obligations 54,088 54,914
Total liabilities 93,932 86,227
Total stockholders' equity 286,715 310,301
Revenue
The following table shows revenue by customer type (in thousands):
Three Months Ended March 31, Change
2022 2021
VA MVP $ 3,501 $ 13,210 (73%)
All other customers 11,726 7,671 53%
Total revenue $ 15,227 $ 20,881 (27%)
The following table shows concentration of revenue by customer:
Three Months Ended March 31,
2022 2021
Natera, Inc. 27% *
VA MVP 23% 63%
Pfizer Inc. 11% 12%
* Less than 10% of revenue
VA MVP
The decrease of $9.7 million in revenue from the VA MVP in the first quarter of
2022 was primarily due to a decrease in the volume of samples we tested in this
period. As of March 31, 2022, we had a remaining backlog of $4.1 million under
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 second
quarter 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
with the VA MVP and it 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 2021 had
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 to be followed by a formal RFP process and a potential new
contract to be awarded sometime late in the third quarter of 2022. We are aware
that the VA MVP recently initiated a request for information process seeking
potential sources to provide high-throughput whole genome sequencing services.
However, we are not certain whether there will be a RFP process in 2022.
Accordingly, we are not currently expecting to receive any new orders from the
VA MVP this year or 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 continue to decline significantly, and will cease after the second quarter
of 2022.
All other customers
The increase of $4.1 million in revenue from all other customers in the first
quarter of 2022 was driven primarily by strong demand from large pharmaceutical
customers for our NeXT Platform services and products, which resulted in an
increase in the volume of samples we tested during this period. Revenue from
Natera, Inc. ("Natera") contributed $3.9 million of the increase in revenue from
all other customers 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 services and products, which includes
revenue from Natera, was $7.8 million in the first quarter of 2022, compared to
$4.3 million in the first quarter of 2021, an increase of $3.5 million.
Based on the relatively large dollar value of orders received from all other
customers throughout fiscal 2021 and the first quarter of 2022, we anticipate
that revenue from all other customers will make up the majority of our total
revenue in fiscal year 2022.
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Costs and Expenses
Three Months Ended March 31, Change
2022 2021
(in thousands)
Cost of revenue $ 10,949 $ 13,454 (19%)
Research and development 17,098 9,496 80%
Selling, general and administrative 15,486 10,421 49%
Total costs and expenses $ 43,533 $ 33,371 30%
Cost of revenue
The $2.5 million decrease in cost of revenue in the first quarter of 2022 was
primarily due to lower levels of revenue, partially offset by higher labor
costs, equipment costs, and facilities costs. The specific components of the
decrease were a $3.5 million decrease in raw materials costs due to lower
revenue levels and favorable customer mix, and a $1.2 million decrease in
indirect costs due to a higher utilization of our laboratory for research and
development activities, partially offset by a $1.2 million increase in labor
costs as a result of increased headcount, a $0.6 million increase in the cost of
laboratory supplies and consumables, and a $0.4 million increase in depreciation
and maintenance on lab equipment.
Research and development
The $7.6 million increase in research and development in the first quarter of
2022 was primarily due to new service and product development, increased hiring
to build our clinical and medical infrastructure, and the cost of testing
samples for clinical validation work. The specific components of the increase
were a $3.9 million increase in personnel-related costs primarily related to
increased headcount, a $2.6 million increase in sample processing costs incurred
in our laboratory for new service and product development, a $0.7 million
increase in IT and fixed facilities costs, and a $0.4 million increase in
depreciation and maintenance on research and development equipment.
Selling, general and administrative
The $5.1 million increase in selling, general and administrative in the first
quarter of 2022 was primarily due to expansion of our commercial team. The
specific components of the increase were a $2.8 million increase in
personnel-related costs related to increased headcount, a $1.1 million increase
in professional services (including corporate insurance, audit fees, and legal
expenses), a $0.8 million increase in facilities costs driven by our new Fremont
facility, and a $0.4 million increase in other sales activities.
Interest Income, Interest Expense, and Other Income (Expense), Net
Three Months Ended March 31, Change
2022 2021
Interest income $ 144 $ 95 52%
Interest expense (59 ) - 100%
Other income (expense), net 19 (12 ) NM
Total $ 104 $ 83
Interest income and interest expense
The increase in interest income in the first quarter of 2022 was driven by
increased yields on our investments during this period and higher average cash
and investment balances after our follow-on equity offering in January 2021.
Interest expense in the first quarter of 2022 is the recognition of imputed
interest on noninterest bearing loans.
Other income (expense), net
Other income (expense), net in the first quarter of 2022 consisted mainly of
foreign currency remeasurements. Other income (expense), net in the first
quarter of 2021 consisted of foreign currency remeasurements and a realized loss
on the sale of a marketable debt security, each individually insignificant.
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Liquidity and Capital Resources
The following tables present selected financial information and cash flow
information (in thousands):
March 31, December 31,
2022 2021
Cash and cash equivalents, and short-term investments $ 266,540 $ 287,064
Property and equipment, net 30,600 19,650
Contract liabilities 3,461 3,982
Working capital 254,184 286,918
Three Months Ended March 31,
2022 2021
Net cash used in operating activities $ (11,357 ) $ (11,743 )
Net cash used in investing activities
(3,161 ) (82,544 )
Net cash provided by financing activities 515 162,849
From our inception through March 31, 2022, we have funded our operations
primarily from $279.0 million in net proceeds from our follow-on equity
offerings in August 2020 and January 2021, $144.0 million in net proceeds from
our IPO in June 2019, and $89.6 million from issuance of redeemable convertible
preferred stock, as well as cash from operations and debt financings. As of
March 31, 2022, we had cash and cash equivalents of $91.6 million and short-term
investments of $175.0 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 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 Quarterly Report
on Form 10-Q, 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 2022 pursuant to
which we could offer and sell additional shares of our common stock up to an
aggregate amount of $100.0 million through 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 investments portfolio is primarily invested in highly rated
securities, with the primary objective of minimizing the potential risk of
principal loss. Our investment policy generally requires securities to be
investment grade and limits the amount of credit exposure to any one issuer.
As of March 31, 2022, cash and cash equivalents held by foreign subsidiaries was
$2.4 million. Our intent is to indefinitely reinvest funds held outside the
United States and 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 the first quarter of 2022, cash used in operating activities of $11.4
million was a result of $28.2 million of net loss, partially offset by non-cash
adjustments to net income of $9.0 million (the most significant non-cash expense
was $4.8 million of stock-based compensation) and a net positive change in
operating assets and liabilities of $7.8 million (of which $4.9 million was due
to collections of accounts receivable).
During the first quarter of 2021, cash used in operating activities of $11.7
million was a result of $12.4 million of net loss and a net negative change in
operating assets and liabilities of $4.8 million (of which $2.8 million was
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 $5.5 million (the most significant non-cash expense was $3.1
million of stock-based compensation).
During the first quarter of 2022, cash used in investing activities was $3.2
million due to $8.6 million in property and equipment purchases, partially
offset by net proceeds from short-term investments of $5.4 million. Cash
provided by financing activities of $0.5 million during the same period
consisted of proceeds from stock option exercises.
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During the first quarter of 2021, cash used in investing activities was $82.5
million due to net purchases of short-term investments of $82.1 million and $0.4
million in property and equipment purchases. Cash provided by financing
activities of $162.8 million during the same period consisted of $162.3 million
in net proceeds from our January 2021 follow-on offering, and $0.9 million in
proceeds from stock option exercises, partially offset by $0.3 million of
offering costs.
Material Cash Requirements
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 $266.5 million as of March 31, 2022, as well as anticipated cash
receipts from customers. To fund our material cash requirements in the short-
and long-term, we may also 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.
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 $50 and $55 million in 2022 and between $10 and $15 million in each
of the next two fiscal years. In connection with our new headquarters and
laboratory facility in Fremont, California, we expect to spend between $35 and
$40 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 $83.7 million
as of March 31, 2022. The timing of these future payments, by year, can be found
in Part I, Item 1 of this Form 10-Q 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 million of computer hardware,
internal use software licenses, and related ongoing support. We are required to
make payments of $1.86 million in each of 2022 and 2023. No payments were due in
the first quarter of 2022. Further discussion of this transaction can be found
in Part I, Item 1 of this Form 10-Q 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. As of March 31, 2022, we had approximately $3.4 million in customer
deposits, including $2.8 million from 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.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with
U.S. GAAP. The preparation of these condensed 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 condensed consolidated
financial statements. Therefore, we consider these to be our critical accounting
policies and estimates.
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There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended December
31, 2021 under the caption "Critical Accounting Policies and Estimates" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, set forth in Part II, Item 7.
Recent Accounting Pronouncements
See the sections titled "Summary of Significant Accounting Policies-Recent
Accounting Pronouncements" and "-Recent Accounting Pronouncements Not Yet
Adopted" in Note 2 to our unaudited condensed consolidated financial statements
for additional information.
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