ADAPTIVE BIOTECHNOLOGIES CORPORATION You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and related notes and the other financial information appearing elsewhere in this Annual Report on Form 10-K, as well as the other financial information we file with theSEC from time to time. Some of the information contained in this discussion and analysis 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 Annual Report on Form 10-K, 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. This section generally discusses 2019 and 2018 items and year-to-year comparisons between 2019 and 2018. Discussions of 2017 items and year-to-year comparisons between 2018 and 2017 may be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our prospectus for our initial public offering, datedJune 26, 2019 filed with theSEC onJune 27, 2019 . Overview We are advancing the field of immune-driven medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease. Our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient's immune system and understand precisely how it detects and treats disease in that patient. We capture these insights in our dynamic clinical immunomics database, which is underpinned by computational biology and machine learning, and use them to develop and commercialize clinical products and services that we are tailoring to each individual patient. We have two commercial products and services and a robust pipeline of clinical products and services that we are designing to diagnose, monitor and enable the treatment of diseases such as cancer, autoimmune conditions and infectious diseases. Our immune medicine platform is the foundation for our expanding suite of products and services. The cornerstone of our platform and core immunosequencing product, immunoSEQ, serves as our underlying research and development engine and generates revenue from academic and biopharmaceutical customers. Our first clinical diagnostic product, clonoSEQ, is the first test authorized by the FDA for the detection and monitoring of MRD in patients with MM and ALL and is being validated for patients with other blood cancers. Leveraging our collaboration with Microsoft to create the TCR-Antigen Map, we are also developing a diagnostic product, immunoSEQ Dx, that may enable early detection of many diseases from a single blood test. We have established proof of concept for immunoSEQ Dx in acute Lyme disease, such that we can proceed to clinical validation, and continue to pursue signals for other disease states. Our therapeutic product candidates, being developed under the Genentech Agreement, leverage our platform to identify specific immune cells to develop into cellular therapies in oncology. Since our inception, we have devoted a majority of our resources to research and development activities to develop our immune medicine platform, which enables the delivery of our products and services for life sciences research, clinical diagnostics and drug discovery customers. For our life science research customers, we provide two categories of products and services using immunoSEQ, our core sequencing and immunomics tracking technology. First, we provide immunosequencing services, the revenue from which we record as sequencing revenue. Second, we provide certain research customers professional support, for which we may receive payments upon those customers achieving specified milestones. We record these support activities as development revenue. For our clinical diagnostics customers, we sell our clonoSEQ diagnostic tests, which include our immunosequencing services and are thus recorded as sequencing revenue. In the future, we intend to sell other diagnostics products and services, which we also expect to record as sequencing revenue. For our current drug discovery collaborator,Genentech , we screen, identify and characterize TCRs in support of our collaboration. We record revenue from this collaboration as development revenue. Historically, we have sold immunoSEQ as a fee-for-service offering to academic centers and biopharmaceutical customers and further deepened those relationships over time by supporting their development initiatives. These research offerings have comprised the majority of our revenue to date, although our business is pursuing broader opportunities. As we continue to expand the use of our clonoSEQ diagnostic tests, develop and commercialize immunoSEQ Dx and develop and commercialize therapeutic product candidates with our drug discovery collaborator, we expect our mix of revenue to shift to clinical products and services, which we believe will become our largest sources of revenue. We are actively pursuing opportunities to deepen our relationships with current customers and initiate relationships with new customers. We have an experienced, specialty salesforce that is targeting department heads, laboratory directors, principal investigators, core facility directors, clinicians, payors and research scientists and pathologists at leading academic institutions, biopharmaceutical companies, research institutions and contract research organizations. As MRD assessment becomes standard practice for patient management across a range of blood cancers, we believe it will be essential for clinicians and patients to have access to a highly accurate, sensitive and standardized MRD assessment tool. We are focused on establishing and maintaining collaborative relationships with payors, developing health economic evidence and building billing and patient access infrastructure to expand reimbursement coverage for our clinical diagnostics. We continue to seek expanded coverage of our clonoSEQ diagnostic test and, in 2019, we successfully expanded coverage through contractual agreements or positive medical policies with Medicare and several of the largest national private health insurers inthe United States . 83 -------------------------------------------------------------------------------- We generated revenue of$85.1 million and$55.7 million for the years endedDecember 31, 2019 and 2018, respectively. Our net losses were$68.6 million and$46.4 million for the years endedDecember 31, 2019 and 2018, respectively. We have funded our operations to date principally from the sale of convertible preferred stock and common stock, including the sale of common stock in our initial public offering, and, to a lesser extent, sequencing and development revenue. As ofDecember 31, 2019 and 2018, we had cash, cash equivalents and marketable securities of$682.3 million and$165.0 million , respectively. InDecember 2018 , we entered into the Genentech Agreement pursuant to which we received a$300.0 million initial upfront payment inFebruary 2019 , may be eligible to receive approximately$1.8 billion over time, including payments upon achievement of specified development, regulatory and commercial milestones, and may receive additional royalties on sales of products commercialized under this agreement. Initial Public Offering OnJuly 1, 2019 , we completed our initial public offering in which we issued and sold 17,250,000 shares of common stock, including shares issued upon the exercise in full of the underwriters' over-allotment option, at a public offering price of$20.00 per share. We received$315.9 million in net proceeds, after deducting underwriting discounts and commissions of$24.1 million and offering expenses of$5.0 million . Immediately prior to the completion of our initial public offering, 93,039,737 shares of convertible preferred stock then outstanding converted into an equivalent number of shares of common stock.
Components of Results of Operations
Revenue
We derive our revenue from two sources: (1) sequencing revenue and (2) development revenue.
Sequencing revenue. Sequencing revenue reflects the amounts generated from providing sequencing services through immunoSEQ to research customers and from providing testing services through clonoSEQ to clinical and research customers.
For our research customers, which include biopharmaceutical customers and academic institutions, delivery of the sequencing results may include some level of professional support and analysis. Terms with biopharmaceutical customers generally include non-refundable upfront payments, which we record as deferred revenue. For all customers, we recognize revenue as we deliver sequencing results. From time to time, we offer discounts in order to gain rights and access to certain datasets. Revenue is recognized net of these discounts and costs associated with these services are reflected in cost of revenue. For our clinical customers, we derive revenue from providing our clonoSEQ test report to ordering physicians. We bill commercial payors and medical institutions based on tests delivered to ordering physicians. Amounts paid for clonoSEQ diagnostic tests by commercial payors and medical institutions vary based on respective reimbursement rates and patient responsibilities, which may vary from our targeted list price. To date, the majority of our clonoSEQ diagnostic test revenue has been received from medical institutions. We recognize clinical revenue by evaluating customer payment history, contracted reimbursement rates, if applicable, and other adjustments to estimate the amount of revenue that is collectible. Until 2019, we did not have reimbursement available to us through any government payors for clonoSEQ. InJanuary 2019 , clonoSEQ received Medicare coverage aligned with the FDA label and NCCN guidelines for longitudinal monitoring in MM and ALL. We bill Medicare for an episode of treatment when we deliver the first eligible test results. This billing contemplates all necessary tests required during a patient's treatment cycle, which is currently estimated at approximately four tests per patient, including the initial sequence identification test. Revenue is recognized at the time the initial billable test result is delivered and is based upon cumulative tests delivered to date. Any unrecognized revenue from the initial billable test is recorded as deferred revenue and recognized as we deliver the remaining tests in a patient's treatment cycle. Development revenue. Development revenue primarily represents regulatory or development support services, other than sequencing revenue, that we provide to biopharmaceutical customers who seek access to our platform to support their therapeutic development activities. Additionally, we generate development revenue from the achievement of regulatory milestones. We enter into collaboration and similar agreements with these customers. When these agreements include sequencing activities, we separately classify those activities as sequencing revenue. These agreements may also include substantial non-refundable upfront payments, which we recognize as development revenue over time as we perform the respective services. We expect revenue to increase over the long term, particularly as the mix of revenue migrates to clinical diagnostics and drug discovery. The pace by which this mix migrates will be determined by the level of customer adoption and frequency of use of our products and services. Our revenue may fluctuate from period to period due to the uncertain nature of delivery of our products and services, the achievement of milestones by us or our customers, timing of expenses incurred, changes in estimates of total anticipated costs related to our Genentech Agreement and other events not within our control, such as the delivery of customer samples or customer decisions to no longer pursue their development initiatives. 84
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Cost of Revenue
Cost of revenue includes the cost of materials, personnel-related expenses (comprised of salaries, benefits and share-based compensation), shipping and handling, equipment and allocated facility costs associated with processing samples and professional support for our sequencing revenue. Allocated facility costs include depreciation of laboratory equipment, allocated facility occupancy and information technology costs. Costs associated with processing samples are recorded as expense, regardless of the timing of revenue recognition. As such, cost of revenue and related volume does not always trend in the same direction as revenue recognition and related volume. Additionally, costs to support our Genentech Agreement are a component of our research and development activities. We expect cost of revenue to increase in absolute dollars as we grow our sequencing volume but the cost per sample to decrease over the long term due to the efficiencies we may gain as sequencing volume increases from improved utilization of our laboratory capacity, automation and other value engineering initiatives.
Research and Development Expenses
Research and development expenses consist of laboratory materials costs, personnel-related expenses, allocated facility costs, information technology and contract service expenses. Research and development activities support further development and refinement of existing assays and products, discovery of new technologies and investments into our immune medicine platform. We also include in research and development expenses the costs associated with software development activities to support laboratory scaling and workflow, as well as development of applications to support future commercial opportunities. We are currently conducting research and development activities for several products and services, and we typically use our laboratory materials, personnel, facilities, information technology and other development resources across multiple development programs. Additionally, certain of these research and development activities benefit more than one of our product opportunities. We do not track research and development expenses by specific product candidates. A component of our research and development activities is supporting clinical and analytical validations to obtain regulatory approval for future clinical products and services. Additionally, the costs to support ourGenentech Agreement are a component of our research and development activities. Some of these activities have generated and may in the future generate development revenue. We expect our research and development expenses to continue to increase in absolute dollars as we innovate and expand the application of our platform. However, we expect research and development expenses to decrease as a percentage of revenue in the long term, although the percentage may fluctuate from period to period due to the timing and extent of our development and commercialization efforts. Sales and Marketing Expenses Sales and marketing expenses consist primarily of personnel-related expenses for commercial sales, account management, marketing, reimbursement, medical education and business development personnel that support commercialization of our platform products. In addition, these expenses include external costs such as advertising expenses, customer education and promotional expenses, market analysis expenses, conference fees, travel expenses and allocated facility costs. We expect our sales and marketing expenses to increase in absolute dollars as we expand our commercial sales, marketing and business development teams and increase marketing activities to drive awareness and adoption of our products and services. However, we expect sales and marketing expenses to decrease as a percentage of revenue in the long term, subject to fluctuations from period to period due to the timing and magnitude of these expenses.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related expenses, including share-based compensation, salaries and benefits for our personnel in executive, legal, finance and accounting, human resources and other administrative functions, including third-party billing services. In addition, these expenses include insurance costs, external legal costs, accounting and tax service expenses, consulting fees and allocated facilities costs. We expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount and incur costs associated with operating as a public company, including expenses related to legal, accounting, regulatory matters, maintaining compliance with exchange listing and requirements of theSEC , director and officer insurance premiums and investor relations. Though expected to increase in absolute dollars, we expect these expenses to decrease as a percentage of revenue in the long term as revenue increases. 85
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Results of Operations
The following table sets forth our results of operations for the periods
presented:
Year Ended December 31,
2019 2018 2017
(in thousands)
Revenue
Sequencing revenue $ 43,519 $ 32,978 $ 22,759
Development revenue 41,552 22,685 15,689
Total revenue 85,071 55,663 38,448
Operating expenses
Cost of revenue 22,274 19,668 15,680
Research and development 70,705 39,157 31,995
Sales and marketing 38,453 24,486 16,765
General and administrative 30,332 20,409 15,949
Amortization of intangible assets 1,698 1,699 1,694
Restructuring - - 840
Total operating expenses 163,462 105,419 82,923
Loss from operations (78,391 ) (49,756 ) (44,475 )
Interest and other income, net 9,785 3,309 1,644
Net loss (68,606 ) (46,447 ) (42,831 ) Fair value adjustment to Series E-1 convertible preferred stock options (964 ) 102
135
Net loss attributable to common shareholders
Comparison of the Years Ended
Revenue
Year Ended December 31, Change Percent of Revenue
(in thousands, except percentages) 2019 2018 $ % 2019 2018
Revenue
Sequencing revenue $ 43,519 $ 32,978 $ 10,541 32 % 51 % 59 %
Development revenue 41,552 22,685 18,867 83 49 41
Total revenue $ 85,071 $ 55,663 $ 29,408 53 % 100 % 100 %
Total revenue was $85.1 million for the year ended December 31, 2019 compared to
$55.7 million for the year ended December 31, 2018 , representing an increase of
$29.4 million , or 53%.
Sequencing revenue increased to $43.5 million for the year ended December 31,
2019 , representing an increase of $10.5 million , or 32%. The increase in
sequencing revenue was attributable to an increase of approximately $6.3 million
in revenue generated from biopharmaceutical and academic customers, inclusive of
a decrease in revenue recognized from cancelled customer projects of $1.5
million , and a $4.2 million increase in revenue generated from clinical
customers.
Research sequencing volume increased by 18% to 35,491 sequences delivered in the
year ended December 31, 2019 from 30,200 sequences delivered in the year ended
December 31, 2018 . Clinical sequencing volume increased by 48% to 10,168
clinical tests delivered in the year ended December 31, 2019 from 6,867 clinical
tests delivered in the year ended December 31, 2018 .
Development revenue increased to $41.6 million for the year ended December 31,
2019 , representing an increase of $18.9 million , or 83%. The increase was
primarily attributable to $35.1 million of revenue generated from the Genentech
Agreement, which generated no revenue in 2018, partially offset by a $7.1
million decrease in development revenue generated from translational agreements
and a $9.1 million decrease in development revenue generated from MRD
agreements, which includes an $8.0 million decrease in regulatory milestones.
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Cost of Revenue
Year Ended December 31, Change Percent of Revenue
(in thousands, except percentages) 2019 2018 $ % 2019 2018
Cost of revenue $ 22,274 $ 19,668 $ 2,606 13 % 26 % 35 %
Cost of revenue was $22.3 million for the year ended December 31, 2019 , compared
to $19.7 million for the year ended December 31, 2018 , representing an increase
of $2.6 million , or 13%. The increase in cost of revenue was primarily
attributable to an increase of $1.5 million in the cost of overhead due to the
production laboratory expansion and a $1.0 million increase in the cost of
materials due to increased sample volumes.
Research and Development
Year Ended December 31, Change Percent of Revenue
(in thousands, except percentages) 2019 2018 $ % 2019 2018
Research and development $ 70,705 $ 39,157 $ 31,548 81 % 83 % 70 %
The following table presents disaggregated research and development expenses by cost classification for the periods presented:
Year Ended December 31,
(in thousands) 2019 2018 Change
Research and development materials and allocated
production laboratory expenses $ 32,114 $ 14,741 $ 17,373
Personnel expenses 27,570 18,166 9,404
Allocable facilities and information technology 3,510 2,849 661
expenses
Software and cloud services expenses 2,443 1,280 1,163 Depreciation and other expenses 5,068 2,121 2,947 Total$ 70,705 $ 39,157 $ 31,548 Research and development expenses were$70.7 million for the year endedDecember 31, 2019 , compared to$39.2 million for the year endedDecember 31, 2018 , representing an increase of$31.5 million , or approximately 81%. The increase was primarily attributable to$17.4 million in additional cost of materials and allocated production laboratory expenses, which primarily related to supporting our TCR drug discovery efforts, TCR-Antigen Map development and clonoSEQ development. Sales and Marketing Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2019 2018 $ % 2019 2018 Sales and marketing$ 38,453 $ 24,486 $ 13,967 57 % 45 % 44 % Sales and marketing expenses were$38.5 million for the year endedDecember 31, 2019 , compared to$24.5 million for the year endedDecember 31, 2018 , representing an increase of$14.0 million , or 57%. The increase was primarily attributable to$8.2 million in additional personnel costs,$2.9 million in additional travel, entertainment and customer event related expenses and$2.4 million in additional consulting and marketing fees. General and Administrative Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2019 2018 $ % 2019 2018 General and administrative$ 30,332 $ 20,409 $ 9,923 49 % 36 % 37 %
General and administrative expenses were
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Interest and Other Income, Net
Year Ended December 31 , Change
(in thousands, except percentages) 2019 2018
$ %
Interest and other income, net
Interest and other income, net was$9.8 million for the year endedDecember 31, 2019 , compared to$3.3 million for the year endedDecember 31, 2018 , representing an increase of$6.5 million , or approximately 196%. The increase was primarily attributable to an$8.8 million increase in interest earned on and investment amortization of a larger portfolio, partially offset by the$2.3 million impact of revaluing a convertible preferred stock warrant liability in 2019.
Quarterly Results of Operations
The following tables set forth our unaudited condensed quarterly statements of operations data for each of the eight quarters in the 24-month period endedDecember 31, 2019 . The information for each of these quarters has been prepared in accordance with GAAP and on the same basis as our audited financial statements included elsewhere in this Annual Report on Form 10-K. In the opinion of management, the financial information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of results of operations data for these periods. This data should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Our historical quarterly operating results are not necessarily indicative of our operating results for the full year or any future period. Three Months Ended December 31, September 30, June 30, March 31, 2019 2019 2019 2019 (unaudited) (in thousands, except per share amounts) Revenue Sequencing revenue$ 13,888 $ 11,683 $ 11,865 $ 6,083 Development revenue 10,321 14,375 10,273 6,583 Total revenue 24,209 26,058 22,138 12,666 Operating expenses Cost of revenue 5,951 5,601 5,734 4,988 Research and development 21,189 20,506 16,527 12,483 Sales and marketing 12,640 9,099 8,897 7,817 General and administrative 8,189 8,477 6,662 7,004 Amortization of intangible assets 428 428 423 419 Total operating expenses 48,397 44,111 38,243 32,711 Loss from operations (24,188 ) (18,053 ) (16,105 ) (20,045 ) Interest and other income, net 3,577 4,103 446 1,659 Net loss (20,611 ) (13,950 ) (15,659 ) (18,386 ) Fair value adjustment to Series E-1 convertible preferred stock options - - (710 ) (254 ) Net loss attributable to common$ (20,611 ) $ (13,950 ) $ (16,369 ) $ (18,640 ) shareholders Net loss per share attributable to common shareholders, basic and diluted$ (0.17 ) $ (0.11 )$ (1.23 ) $ (1.45 ) 88
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Three Months Ended
December 31, September 30, June 30, March 31,
2018 2018 2018 2018
(unaudited)
(in thousands, except per share amounts)
Revenue
Sequencing revenue $ 10,454 $ 8,463 $ 8,281 $ 5,780
Development revenue 6,738 8,725 3,287 3,935
Total revenue 17,192 17,188 11,568 9,715
Operating expenses
Cost of revenue 5,275 5,360 5,044 3,989
Research and development 11,067 9,783 9,452 8,855
Sales and marketing 8,071 6,039 5,329 5,047
General and administrative 6,495 4,739 4,632 4,543
Amortization of intangible assets 428 428 424 419
Total operating expenses 31,336 26,349 24,881 22,853
Loss from operations (14,144 ) (9,161 ) (13,313 ) (13,138 )
Interest and other income, net 873 869 820 747
Net loss (13,271 ) (8,292 ) (12,493 ) (12,391 )
Fair value adjustment to Series E-1
convertible preferred
stock options 104 (4 ) (2 ) 4
Net loss attributable to common $ (13,167 ) $ (8,296 ) $ (12,495 ) $ (12,387 )
shareholders
Net loss per share attributable to
common shareholders,
basic and diluted $ (1.03 ) $ (0.66 ) $ (1.01 ) $ (1.01 ) Liquidity and Capital Resources
We have incurred losses since inception and have incurred negative cash flows from operations from inception throughDecember 31, 2018 . As ofDecember 31, 2019 , we had an accumulated deficit of$365.5 million . We have funded our operations to date principally from the sale of convertible preferred stock and common stock, including the sale of common stock in our initial public offering, and, to a lesser extent, sequencing and development revenue. InDecember 2018 , we entered into the Genentech Agreement pursuant to which we received a$300.0 million initial upfront payment inFebruary 2019 , may receive approximately$1.8 billion over time, including payments upon achievement of specified development, regulatory and commercial milestones, and may receive additional royalties on sales of products commercialized under this agreement. As ofDecember 31, 2019 , we had cash, cash equivalents and marketable securities of$682.3 million . We believe our cash flows from operations and our existing cash, cash equivalents and marketable securities will be sufficient to fund our operating expenses and capital expenditure requirements through at least the next 12 months. We may consider raising additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons. We plan to utilize the existing cash, cash equivalents and marketable securities on hand primarily to fund our commercial and marketing activities associated with our clinical products and services, continued research and development initiatives for our pipeline candidates and drug discovery initiatives, ongoing investments into our immune medicine platform and scaling of our laboratory operations with our anticipated growth. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to liquidity and capital preservation. Currently, our funds are held in money market funds and marketable securities consisting ofU.S. government debt securities, commercial paper and corporate bonds. As revenue from sales of immunoSEQ and clonoSEQ is expected to grow, we expect our accounts receivable and inventory balances to increase. Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements. Moreover, we expect to incur additional costs associated with operating as a public company, including expenses related to legal, accounting, regulatory matters and exchange listing andSEC compliance matters, as well as director and officer insurance premiums and investor relations. 89 -------------------------------------------------------------------------------- If our available cash, cash equivalents and marketable securities balances and anticipated cash flow from operations are insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing. The sale of equity and convertible debt securities may result in dilution to our shareholders 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.
Cash Flows
The following table summarizes our uses and sources of cash for the years ended
Year Ended December 31,
2019 2018
Net cash provided by (used in) operating activities
736
Net cash provided by financing activities 319,916 1,248 Operating Activities Cash provided by operating activities during the year endedDecember 31, 2019 was$205.4 million , which was primarily attributable to a net change in our operating assets and liabilities of$254.9 million , non-cash share-based compensation of$13.1 million , non-cash depreciation and amortization of$3.3 million and a$2.3 million fair value adjustment of our convertible preferred stock warrant liability due to an increase in valuation of our common stock, partially offset by a net loss of$68.6 million . The net change in our operating assets and liabilities reflects an increase in deferred revenue of$266.9 million , primarily due to the$300.0 million upfront payment byGenentech , and an increase in accounts payable and accrued liabilities of$6.1 million , primarily due to increased headcount and the growth in operating expenditures and timing of vendor payments. These increases were partially offset by an increase in accounts receivable of$7.8 million , primarily due to an increase in clinical billings, as well as an increase in revenue paid in arrears rather than upfront by biopharmaceutical customers, an increase in prepaid expenses and other current assets of$8.6 million , primarily due to prepaid software, prepaid insurance and interest receivables, an increase in inventory of$1.2 million to support growth in lab operations and$0.6 million in security deposits. Cash used in operating activities during the year endedDecember 31, 2018 was$32.3 million , which was primarily attributable to a net loss of$46.4 million , partially offset by non-cash share-based compensation of$11.1 million and non-cash depreciation and amortization of$4.8 million , and a net change in our operating assets and liabilities of$1.7 million . The net change in our operating assets and liabilities reflects an increase in inventory of$3.0 million to support growth in our laboratory, an increase in accounts payable and accrued liabilities of$2.2 million due to increased headcount, a decrease of$0.6 million in deferred revenue due to increased development revenue and a decrease of$0.5 million in deferred rent due to increases in cash rental payments. Investing Activities Cash used in investing activities during the year endedDecember 31, 2019 was$481.7 million , which was primarily attributable to purchases of marketable securities of$884.2 million and purchases of property and equipment of$11.2 million , partially offset by proceeds from maturities of marketable securities of$413.7 million . Cash provided by investing activities during the year endedDecember 31, 2018 was$0.7 million , which was primarily attributable to proceeds from maturities of marketable securities of$153.5 million , partially offset by purchases of marketable securities of$146.5 million and purchases of property and equipment of$6.3 million . Financing Activities Cash provided by financing activities during the year endedDecember 31, 2019 was$319.9 million , which was primarily attributable to proceeds from the initial public offering, net of underwriting discounts and commissions, of$320.9 million and proceeds from the exercise of stock options of$4.1 million , partially offset by payment of deferred initial public offering costs of$5.0 million . Cash provided by financing activities during the year endedDecember 31, 2018 was$1.2 million , which was primarily attributable to proceeds from the exercise of stock options. 90
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Contractual Obligations and Commitments
The following table summarizes our contractual obligations as ofDecember 31, 2019 , which represents contractually committed future obligations (in thousands): Expected Payments by Period More Than Total 2020 2021-2022 2023-2024 5 Years Operating lease obligations(1)$ 143,903 $ 4,352 $ 19,443 $ 22,961 $ 97,147 Purchase commitments(2) 10,173 5,043 4,870 40 220 Total$ 154,076 $ 9,395 $ 24,313 $ 23,001 $ 97,367
(1) Operating lease obligations reflect remaining minimum commitments for our
office and laboratory spaces in
Please see Note 10 of our financial statements for additional information
pertaining to operating lease commitments.
(2) Purchase commitments include commitments for cloud data storage through our
collaboration with Microsoft, commitments to support clinical trials
utilizing clonoSEQ, software and service license commitments, and minimum
commitments for laboratory material suppliers.
Furthermore, in connection with one of our lease agreements, we entered into a
letter of credit of
Net Operating Loss Carryforwards
Utilization of our NOL carryforwards and credits may be subject to a substantial
annual limitation due to the ownership change limitations provided by Section
382 of the Internal Revenue Code of 1986 ("Section 382") and similar state
provisions. The annual limitation may result in the expiration of NOL
carryforwards and credits before utilization. If there should be an ownership
change, our ability to utilize our NOL carryforwards and credits could be
limited. We have completed a Section 382 analysis and have determined there are
no permanent limitations on the utilization of approximately $225.4 million of
our federal NOLs as of December 31, 2018 . Under the newly enacted federal income
tax law, federal net operating losses incurred in 2018 and future years may be
carried forward indefinitely, but the deductibility of such federal NOL is
subject to an annual limitation. Net operating losses generated prior to 2018
are eligible to be carried forward up to 20 years. Based on the available
objective evidence, management determined that it was more likely than not that
the net deferred tax assets would not be realizable as of December 31, 2019 .
Accordingly, management applied a full valuation allowance against net deferred
tax assets as of December 31, 2019 .
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies and Estimates
We have prepared our financial statements in accordance with GAAP. Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities and related disclosures at the date of the financial statements, as well as revenue and expense recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and or other relevant assumptions that we believe to be reasonable under the circumstances. Estimates are used in several areas, including, but not limited to, estimates of progress to date for certain performance obligations and transaction price for certain contracts with customers, share-based compensation, including the fair value of stock, the provision for income taxes, including related reserves, and goodwill, among others. These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management's estimates. While our significant accounting policies are described in more detail in Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue Recognition
Our development and sequencing revenue arrangements may include upfront payments for the performance of services in the future, which have both fixed and variable consideration. Non-refundable upfront fees and funding for related development services are generally considered fixed consideration, while milestone payments are identified as variable consideration.
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In determining the appropriate amount of revenue to recognize as we fulfill our
obligations under these agreements, we perform the following steps to determine
the amount of revenue to be recognized: (1) identification of contract or
contracts; (2) determination of whether the promised goods or services are
performance obligations, including whether they are distinct in the context of
the contract; (3) measurement of the transaction price, including the constraint
on variable consideration; (4) allocation of the transaction price to the
performance obligations based on estimated selling prices; and (5) recognition
of revenue when (or as) we satisfy each performance obligation.
A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer and is the unit of account in Accounting Standard
Codification ("ASC") Topic 606, Revenue from Contracts with Customers. Our
performance obligations include sequencing services and services associated with
regulatory submission and approval processes. Significant management judgment is
applied to determine (1) the measurement of the transaction price, including the
constraint on variable consideration, (2) the allocation of the transaction
price to the performance obligations and (3) the appropriate input or output
based method to recognize revenue and the extent of progress to date.
We include the unconstrained amount of estimated variable consideration in the
transaction price. The amount included in the transaction price is constrained
to the amount for which it is probable that a significant reversal of cumulative
revenue recognized will not occur. At the end of each subsequent reporting
period, we re-evaluate the estimated variable consideration included in the
transaction price and any related constraint and, if necessary, adjust our
estimate of the overall transaction price.
To determine the allocation of the transaction price to the performance obligations, we apply the adjusted market assessment approach. Using this approach, we evaluate the market in which we sell the services and estimate the price that a customer in that market would be willing to pay for those services.
To select the measure of progress, we consider the expectations of the performance period which may be based on customer-dependent estimates of samples or internal estimates of the performance period based on both the customer and our expected development timeframes. We regularly review our expectations of the extent of progress, including whether any variable consideration is no longer constrained, and, if any changes in estimates are made, we recognize revenue using the cumulative catch-up method.
Share-Based Compensation
We measure share-based compensation expense for stock options granted to our employees and non-employee directors on the date of grant and recognize the corresponding compensation expense of those awards over the requisite service period, which is generally the vesting period of the respective award. We estimate the fair value of stock options granted to our employees and non-employee directors on the grant date, and the resulting share-based compensation expense, using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The assumptions used to calculate the fair value of our stock options were:
Fair value of common stock
Prior to the closing of our initial public offering, the fair value of our common stock issuable upon exercise of stock options was determined by our board of directors, with input from management and independent third-party valuations, as discussed in "-Common Stock Valuations" below. For valuations of option grants made after the closing of our initial public offering, our board of directors determines the fair value of each share of common stock based on the closing price of our common stock on the date of grant or other relevant determination date, as reported on The Nasdaq Global Select Market.
Expected term
Our expected term represents the period that our stock options are expected to be outstanding. The expected term of options granted to employees and non-employee directors is determined using the "simplified" method, as illustrated in ASC Topic 718, Compensation-Stock Compensation, as we do not have sufficient exercise history to determine a better estimate of expected term. Under this approach, the expected term is based on the midpoint between the vesting date and the end of the contractual term of the option.
Expected volatility
As we do not have sufficient trading history for our common stock, the expected
volatility is based on the historical volatility of our publicly traded industry
peers utilizing a period of time consistent with our estimate of the expected
term. The comparable companies are chosen based on their similar size, stage in
the life cycle or area of specialty.
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Risk-free interest rate
We utilize a risk-free interest rate in the option valuation model based onU.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the options. Expected dividend yield
We do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the option valuation model.
Black-Scholes assumptions
The estimated fair value of options granted during the periods presented was
estimated using the Black-Scholes option-pricing model with the following
assumptions:
Year Ended December 31,
2019 2018
Grant date fair value $7.80 - $47.81 $6.55
Expected term (in years) 5.27 - 6.08 6.08 - 10.00
Risk-free interest rate 1.4% - 2.5% 2.6% - 3.0%
Expected volatility 64.3% - 72.9% 65.0% - 69.2%
Expected dividend yield - -
As of
We use judgment in evaluating the assumptions related to our share-based compensation on a prospective basis. As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future share-based compensation expense. AtDecember 31, 2019 , unrecognized share-based compensation expense related to unvested stock options was$33.3 million , which was expected to be recognized over a remaining weighted-average period of 2.9 years.
Common Stock Valuations
For periods prior to the closing of our initial public offering, the estimated fair value of the common stock issuable upon exercise of our stock options was determined by our board of directors, with input from management, considering our most recently available third-party valuations of common stock and our board of directors' assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant, which intended all options granted to be exercisable at a price per share not less than the fair value per share of our common stock issuable upon exercise of those options on the date of grant. We believe our board of directors had the relevant experience and expertise to determine the fair value of our common stock. Prior to our initial public offering, given the absence of a public trading market for our common stock, the valuations of our common stock were determined in accordance with the guidelines outlined in theAmerican Institute of Certified Public Accountants Practice Aid , Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The assumptions we used in the valuation model were based on future expectations combined with management's judgment. In the absence of a public trading market, our board of directors, with input from management, exercised significant judgment and considered numerous objective and subjective factors to determine the fair value of our common stock as of the date of each option grant, including the following factors:
• independent valuations performed at periodic intervals by an independent
third-party valuation firm;
• the prices, rights, preferences and privileges of our convertible
preferred stock relative to our common stock;
• our operating and financial performance, forecasts and capital resources;
• current business conditions;
• the hiring of key personnel;
• our stage of commercialization;
• the status of research and development efforts;
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• the likelihood of achieving a liquidity event for the shares of common
stock issuable upon exercise of these stock options, such as an initial
public offering or sale of our company, given prevailing market
conditions;
• any adjustment necessary to recognize a lack of marketability for our
common stock;
• trends and developments in our industry;
• the market performance of comparable publicly traded technology
companies; and
• the U.S. and global economic and capital market conditions.
In valuing our common stock prior to the closing of our initial public offering,
we utilized a hybrid methodology that includes a probability-weighted expected
return method ("PWERM") and an option pricing method ("OPM"), which is a highly
complex and subjective valuation methodology. Under a PWERM, the fair market
value of the common stock is estimated based upon an analysis of future values
for the enterprise assuming various future outcomes. Within one of those
potential outcomes, we utilized the OPM. The OPM treats the rights of the
holders of convertible preferred stock and common stock as equivalent to that of
call options on any value of the enterprise above certain break points of value
based upon the liquidation preferences of the holders of preferred stock, as
well as their rights to participation and conversion. Based on the timing and
nature of an assumed liquidity event in each scenario, a discount for lack of
marketability either was or was not applied to each scenario, as appropriate. We
then probability-weighted the value of each expected outcome to arrive at an
estimate of fair value per share of common stock.
For valuations after the closing of our initial public offering, our board of
directors determines the fair value of each share of common stock based on the
closing price of our common stock on the date of grant or other relevant
determination date, as reported on The Nasdaq Global Select Market.
Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. We assess goodwill for impairment annually onOctober 1 and upon any occurrence of triggering events or substantive changes in circumstances that could indicate a potential impairment. We evaluate goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. We evaluate certain qualitative factors such as macroeconomic conditions, the market and industry in which we operate, cost factors, overall financial performance and other relevant entity-specific events to determine if there are any negative trends or events that could indicate impairment. Key assumptions in this analysis include anticipated demand for our products and services, including industry and regulatory changes, future revenue growth and cash, cash equivalents and marketable securities on hand. These assumptions are determined based on our historical performance and management's forecasted results. Management's estimates of forecasted results are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. If we determine that it is more likely than not that the fair value of our reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we perform a quantitative goodwill impairment test.Goodwill impairment exists when the estimated fair value of our one reporting unit is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations. To date, we have not recognized any impairment of goodwill.
JOBS Act Accounting Election
We are an "emerging growth company" within the meaning of the JOBS Act. The JOBS Act allows an emerging growth company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. We have elected to use this extended transition period and, as a result, our financial statements may not be comparable to companies that comply with public company effective dates. We also intend to rely on other exemptions provided by the JOBS Act, including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. We will remain an emerging growth company until the earliest of (1)December 31, 2024 (2) the last day of the fiscal year in which we have total annual gross revenue of at least$1.07 billion , (3) the last day of the fiscal year in which we are deemed to be a "large accelerated filer" as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded$700.0 million as of the last business day of the second fiscal quarter of such year or (4) the date on which we have issued more than$1.0 billion in non-convertible debt securities during the prior three-year period.
Recent Accounting Pronouncements
See Note 2 to the financial statements included elsewhere in this Annual Report on Form 10-K for more information.
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