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 or set forth elsewhere in this report, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties relating to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. 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 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 may be found in Part II, Item 7 under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Overview We are advancing the field of immune medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease. We believe the adaptive immune system is nature's most finely tuned diagnostic and therapeutic for most diseases, but the inability to decode it has prevented the medical community from fully leveraging its capabilities. Our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient's immune system and aims to understand precisely how the immune system 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 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 biopharmaceutical and academic 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, ALL and CLL and is also available as a CLIA-validated LDT for patients with other lymphoid cancers. We are using the TCR-Antigen Map to develop research solutions and diagnostic products, such as immunoSEQ T-MAP and T-Detect, formerly known as immunoSEQ Dx. T-Detect COVID, for which we have applied for EUA, confirms past SARS-CoV-2 infection, the virus that causes COVID-19, and is also the first indication for the T-Detect product line. We are finalizing clinical validation of T-Detect for acute Lyme disease, have identified a clinical signal for Crohn's disease and continue to pursue signals for other disease states, in parallel. Our therapeutic product candidates, being developed under theGenentech Agreement, leverage our platform to identify specific receptors on immune cells to develop into cellular therapies in oncology. We also recently extended our platform to identify highly potent neutralizing antibodies against SARS-CoV-2 and we believe this differentiated approach may be leveraged across multiple disease states.
Since our inception, we have devoted a majority of our resources to research and development activities to develop our immune medicine platform.
For our life sciences research customers, we provide two categories of products and services using immunoSEQ. 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 nonrefundable upfront or recurring payments. We may receive additional payments upon those customers achieving specified milestones. Revenue related to these activities are recorded as development revenue. For our clinical diagnostics customers, we sell our clonoSEQ diagnostic test and T-Detect COVID test, which include our immunosequencing services and are thus recorded as sequencing revenue. In the future, we intend to sell other diagnostics products and services, including other indications for T-Detect, 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. 90 -------------------------------------------------------------------------------- Historically, we have sold immunoSEQ as a fee-for-service offering. 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 T-Detect 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 have successfully expanded coverage through contractual agreements or positive medical policies with Medicare and several of the largest national private health insurers inthe United States . We generated revenue of$98.4 million and$85.1 million for the year endedDecember 31, 2020 and 2019, respectively. Our net losses were$146.2 million and$68.6 million for the year endedDecember 31, 2020 and 2019, respectively. We have funded our operations to date principally from the sale of convertible preferred stock and common stock and, to a lesser extent, sequencing and development revenue. As ofDecember 31, 2020 and 2019, we had cash, cash equivalents and marketable securities of$806.8 million and$682.3 million , respectively.
Follow-On Offering
InJuly 2020 , we completed an underwritten public offering of our common stock in which we issued and sold 7,200,000 shares of common stock at a public offering price of$40.00 per share. We received$271.8 million in net proceeds, after deducting underwriting discounts and net offering expenses paid by us.
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 testing services through clonoSEQ to clinical and research customers and from providing sequencing services through immunoSEQ to research customers.
For our clinical customers, we derive revenue from providing our clonoSEQ test report to ordering physicians. We bill medical institutions and commercial and government payors based on tests delivered to ordering physicians. Amounts paid for clonoSEQ diagnostic tests by medical institutions and commercial and government payors vary based on respective reimbursement rates and patient responsibilities, which may differ 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. For our clonoSEQ coverage under Medicare, we bill 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 recognition commences 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 or when it becomes remote that a patient will receive additional testing and we have not delivered our estimate of total tests. 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. 91 -------------------------------------------------------------------------------- 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. 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. Additionally, we generate development revenue from the achievement of regulatory milestones. 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. Due to the ongoing uncertainties related to the COVID-19 pandemic, we may continue to experience variability in revenue in the near term as our customers' abilities to procure samples for their research initiatives change, as customer initiatives evolve and as clinical testing is impacted.
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 and make increased investments in laboratory automation and facilities, 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. If our sample volume throughput is reduced as a result of the COVID-19 pandemic or otherwise, cost of revenue as a percentage of total revenue may be adversely impacted due to fixed overhead costs.
Research and Development Expenses
Research and development expenses consist of laboratory materials costs, personnel-related expenses, equipment costs, allocated facility costs, information technology expenses and contract service expenses. Research and development activities support further development and refinement of existing assays and products, discovery of new technologies and investments in our immune medicine platform. We also include in research and development expenses the costs associated with software development of applications to support future commercial opportunities, as well as development activities to support laboratory scaling and workflow. 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. While the pace and priorities of our research and development initiatives may continue to be impacted by the COVID-19 pandemic, we expect to continue to increase expenses in both the near and long-term to support our ongoing initiatives, which include our initiatives with respect to COVID-19. 92 --------------------------------------------------------------------------------
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 facility costs.
We expect our general and administrative expenses to continue to increase in absolute dollars as we increase headcount. 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.
Statements of Operations Data and Other Financial and Operating Data
The following table sets forth our statements of operations data and other financial and operating data for the periods presented:
Year Ended December 31, 2020 2019 2018 (in thousands, except share and per share amounts) Statements of Operations Data: Revenue Sequencing revenue $ 41,439 $ 43,519$ 32,978 Development revenue 56,943 41,552 22,685 Total revenue 98,382 85,071 55,663 Operating expenses Cost of revenue 22,530 22,274 19,668 Research and development 116,072 70,705 39,157 Sales and marketing 61,358 38,453 24,486 General and administrative 49,536 30,332 20,409 Amortization of intangible assets 1,703 1,698 1,699 Total operating expenses 251,199 163,462 105,419 Loss from operations (152,817 ) (78,391 ) (49,756 ) Interest and other income, net 6,590 9,785 3,309 Net loss (146,227 ) (68,606 ) (46,447 ) Fair value adjustment to Series E-1 convertible preferred stock options - (964 ) 102
Net loss attributable to common shareholders $ (146,227 ) $
(69,570 )$ (46,345 ) Net loss per share attributable to common shareholders, basic and diluted $ (1.11 ) $ (1.01 )$ (3.67 ) Weighted-average shares used in computing net loss per share attributable to common shareholders, basic and diluted 131,216,468 69,165,315 12,629,778 Other Financial and Operating Data: Adjusted EBITDA (1) $ (119,584 ) $ (57,476 )$ (32,607 ) (1) Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest and other income, net, income tax (expense) benefit, depreciation and amortization and share-based compensation expenses. Please refer to "Adjusted EBITDA" below for a reconciliation between Adjusted EBITDA and net loss, the most directly comparable GAAP financial measure, and a discussion about the limitations of Adjusted EBITDA. 93 --------------------------------------------------------------------------------
Comparison of the Years Ended
Revenue Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2020 2019 $ % 2020 2019 Revenue Sequencing revenue$ 41,439 $ 43,519 $ (2,080 ) (5 )% 42 % 51 % Development revenue 56,943 41,552 15,391 37 58 49 Total revenue$ 98,382 $ 85,071 $ 13,311 16 100 % 100 % Total revenue was$98.4 million for the year endedDecember 31, 2020 , compared to$85.1 million for the year endedDecember 31, 2019 , representing an increase of$13.3 million , or 16%. Sequencing revenue decreased to$41.4 million for the year endedDecember 31, 2020 , representing a decrease of$2.1 million , or 5%. The decrease in sequencing revenue was attributable to an$8.6 million decrease in revenue generated from biopharmaceutical and academic customers, inclusive of a$0.9 million decrease in revenue recognized from cancelled customer projects, which was partially offset by a$6.5 million increase in revenue generated from clinical customers. This increase was inclusive of a$0.6 million increase in revenue related to Medicare that was recognized from our deferred revenue because of our determination that additional testing for specific patients was remote. Research sequencing volume decreased by 36% to 22,663 sequences delivered in the year endedDecember 31, 2020 from 35,491 sequences delivered in the year endedDecember 31, 2019 . The reduction in research sequencing volume was driven partly by the expiration of a translational agreement with a biopharmaceutical customer in the fourth quarter of 2019 and trial enrollment delays and project deferrals from our biopharmaceutical and academic customers. The impact of the COVID-19 pandemic on the operating capacity of our biopharmaceutical and academic customers was a large contributing factor to trial enrollment delays. Clinical sequencing volume increased by 50% to 15,216 clinical tests delivered in the year endedDecember 31, 2020 from 10,168 clinical tests delivered in the year endedDecember 31, 2019 . Development revenue increased to$56.9 million for the year endedDecember 31, 2020 , representing an increase of$15.4 million , or 37%. The increase was primarily attributable to a$17.7 million increase in revenue generated from the Genentech Agreement, partially offset by a$2.0 million decrease in revenue generated from translational agreements. Cost of Revenue Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2020 2019 $ % 2020 2019 Cost of revenue$ 22,530 $ 22,274 $ 256 1 % 23 % 26 % Cost of revenue was$22.5 million for the year endedDecember 31, 2020 , compared to$22.3 million for the year endedDecember 31, 2019 , representing an increase of approximately$0.3 million , or 1%. The increase was primarily attributable to a$5.8 million increase in labor and overhead costs, a$0.8 million increase in cost of materials resulting from product mix and a$0.6 million increase in biopharmaceutical partner support and other expenses, all of which were mostly offset by a$5.9 million decrease related to higher usage of our production laboratory to process research and development samples versus revenue samples, as well as a$1.1 million decrease in materials cost resulting from decreased revenue sample volume. Research and Development Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2020 2019 $ % 2020 2019 Research and development$ 116,072 $ 70,705 $ 45,367 64 % 118 % 83 % 94
--------------------------------------------------------------------------------
The following table presents disaggregated research and development expenses by cost classification for the periods presented:
Year Ended December 31, (in thousands) 2020 2019 Change Research and development materials and allocated production laboratory expenses$ 50,561 $ 32,114 $ 18,447 Personnel expenses 44,969 27,570 17,399 Allocable facilities and information technology 5,277 3,510 1,767 expenses Software and cloud services expenses 3,521 2,443 1,078 Depreciation and other expenses 11,744 5,068 6,676 Total$ 116,072 $ 70,705 $ 45,367 Research and development expenses were$116.1 million for the year endedDecember 31, 2020 , compared to$70.7 million for the year endedDecember 31, 2019 , representing an increase of$45.4 million , or 64%. The increase was primarily attributable to an$18.4 million increase in cost of materials and allocated production laboratory expenses, a$17.4 million increase in personnel costs and a$6.7 million increase in depreciation and other expenses. The increase in cost of materials and allocated production laboratory expenses was primarily related to supporting investments in our T-Detect and TCR-Antigen Map development and immune medicine platform, as well as our drug discovery efforts. Sales and Marketing Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2020 2019 $ % 2020 2019 Sales and marketing$ 61,358 $ 38,453 $ 22,905 60 % 62 % 45 % Sales and marketing expenses were$61.4 million for the year endedDecember 31, 2020 , compared to$38.5 million for the year endedDecember 31, 2019 , representing an increase of$22.9 million , or approximately 60%. The increase was primarily attributable to$14.5 million in additional personnel costs and$8.7 million in additional marketing expenses. Our clonoSEQ marketing efforts were the largest driver of this$8.7 million increase, followed by increased shared corporate marketing services and, to a lesser extent, additional marketing expenses related to T-Detect and life sciences research. These increases were partially offset by a$1.9 million decrease in travel and customer event related expenses. General and Administrative Year Ended December 31, Change Percent of Revenue (in thousands, except percentages) 2020 2019 $ % 2020 2019 General and administrative$ 49,536 $ 30,332 $ 19,204 63 % 50 % 36 % General and administrative expenses were$49.5 million for the year endedDecember 31, 2020 , compared to$30.3 million for the year endedDecember 31, 2019 , representing an increase of$19.2 million , or 63%. The increase was primarily attributable to a$10.9 million increase in personnel costs, a$4.6 million increase in legal, accounting and tax fees and a$2.3 million increase in insurance costs, both of which were largely due to the effect of operating as a public company for the full year endedDecember 31, 2020 .
Interest and Other Income, Net
Year EndedDecember 31 ,
Change
(in thousands, except percentages) 2020 2019 $ %
Interest and other income, net
Interest and other income, net was$6.6 million for the year endedDecember 31, 2020 , compared to$9.8 million for the year endedDecember 31, 2019 , representing a decrease of$3.2 million , or 33%. The decrease was primarily attributable to a$5.6 million decrease in net interest income and investment amortization resulting from reductions in interest rates and related yields, partially offset by the$2.3 million impact of revaluing a convertible preferred stock warrant liability in the year endedDecember 31, 2019 . 95 --------------------------------------------------------------------------------
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net loss adjusted for interest and other income, net, income tax (expense) benefit, depreciation and amortization and share-based compensation expenses.
Management uses Adjusted EBITDA to evaluate the financial performance of our business and the effectiveness of our business strategies. We present Adjusted EBITDA because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry and it facilitates comparisons on a consistent basis across reporting periods. Further, we believe it is helpful in highlighting trends in our operating results because it excludes items that are not indicative of our core operating performance.
Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation, or as a substitute for analysis of our results as reported under GAAP. We may in the future incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. In particular, we expect to incur meaningful share-based compensation expense in the future. Other limitations include that Adjusted EBITDA does not reflect:
• all expenditures or future requirements for capital expenditures or contractual commitments; • changes in our working capital needs;
• income tax (expense) benefit, which may be a necessary element of our
costs and ability to operate;
• the costs of replacing the assets being depreciated and amortized, which
will often have to be replaced in the future; • the non-cash component of employee compensation expense; and
• the impact of earnings or charges resulting from matters we consider not
to be reflective, on a recurring basis, of our ongoing operations.
In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
The following is a reconciliation of our net loss to Adjusted EBITDA for the periods presented (in thousands):
Year Ended December 31, 2020 2019 2018 Net loss$ (146,227 ) $ (68,606 ) $ (46,447 ) Interest and other income, net (6,590 ) (9,785 ) (3,309 ) Depreciation and amortization expense 8,472 7,791 6,000 Share-based compensation expense (1) 24,761 13,124 11,149 Adjusted EBITDA$ (119,584 ) $ (57,476 ) $ (32,607 ) (1) Represents share-based compensation expense related to option and restricted stock unit awards. See Note 13 to our financial statements included elsewhere in this Annual Report on Form 10-K for details on our share-based compensation expense.
Liquidity and Capital Resources
We have incurred losses since inception and have incurred negative cash flows from operations from inception throughDecember 31, 2018 , and again in the year endedDecember 31, 2020 . As ofDecember 31, 2020 , we had an accumulated deficit of$511.6 million . We have funded our operations to date principally from the sale of convertible preferred stock and common stock and, to a lesser extent, sequencing and development revenue. As ofDecember 31, 2020 , we had cash, cash equivalents and marketable securities of$806.8 million . We believe 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. 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. This additional capital may not be available on reasonable terms, or at all. 96
-------------------------------------------------------------------------------- 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 and ongoing investments in our immune medicine platform. We also expect to make increased capital expenditures in the near term related to the expansion of our office and laboratory space and expect to increase investment in laboratory equipment and operations to support our anticipated growth. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to capital preservation and liquidity. Currently, our funds are held in money market funds and marketable securities consisting ofU.S. government debt securities and corporate bonds. Our contractual obligations as ofDecember 31, 2020 include operating lease obligations of$149.6 million , reflecting the minimum commitments for our office and laboratory spaces inSeattle, Washington andSouth San Francisco, California , a commitment to an office lease inNew York City ,New York and a commitment for server space inSeattle, Washington . See Note 10 to our financial statements included elsewhere in this Annual Report on Form 10-K for more information, including the timing of cash payments related to these lease obligations. Additionally, we have purchase commitments for cloud data storage through our collaboration with Microsoft, software and service license commitments, which are generally fulfilled within one to three years, royalty commitments and minimum commitments for laboratory material suppliers, which are generally fulfilled within one year. Furthermore, in connection with one of our lease agreements, we have an existing letter of credit of$2.1 million with one of our existing financial institutions. While we may experience reductions in our revenue in the near term as a result of the COVID-19 pandemic or otherwise, as long-term revenue from sales of our current and future products and services 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.
Cash Flows
The following table summarizes our uses and sources of cash for the years ended
Year EndedDecember 31, 2020 2019
Net cash (used in) provided by operating activities
(117,044 ) (481,697 ) Net cash provided by financing activities 293,587 319,916 Operating Activities Cash used in operating activities during the year endedDecember 31, 2020 was$149.7 million , which was primarily attributable to a net loss of$146.2 million and a net change in our operating assets and liabilities of$40.8 million , which were partially offset by non-cash share-based compensation of$24.8 million , non-cash depreciation and amortization of$9.2 million and noncash lease expense of$3.3 million . The net change in our operating assets and liabilities was primarily due to a$43.4 million reduction in deferred revenue primarily related to revenue recognized from the Genentech Agreement, a$5.0 million increase in inventory, a$1.4 million increase in prepaid expenses and other current assets and a$0.9 million decrease in operating lease liabilities. These changes were partially offset by an increase in accounts payable and accrued liabilities of$7.5 million and a reduction in accounts receivable, net of$2.6 million . 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.
Investing Activities
Cash used in investing activities during the year endedDecember 31, 2020 was$117.0 million , which was primarily attributable to purchases of marketable securities of$695.0 million and purchases of property and equipment of$18.8 million , partially offset by proceeds from sales and maturities of marketable securities of$596.7 million . 97
-------------------------------------------------------------------------------- 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 . Financing Activities Cash provided by financing activities during the year endedDecember 31, 2020 was$293.6 million , which was primarily attributable to$271.8 million in proceeds, after deducting underwriting discounts and net offering expenses paid by us, received from our underwritten public offering completed inJuly 2020 , as well as$21.7 million in proceeds from the exercise of stock options. Cash provided by financing activities during the year endedDecember 31, 2019 was$319.9 million , which was primarily attributable to proceeds from our 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 .
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 for changes in ownership throughDecember 31, 2018 and an analysis is ongoing for ownership changes throughDecember 31, 2020 . Based on these analyses, we do not expect to have any permanent limitations on the utilization of our federal NOLs. Under the TCJA, 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 ofDecember 31, 2020 . Accordingly, management applied a full valuation allowance against net deferred tax assets as ofDecember 31, 2020 . InMarch 2020 , under the newly enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), NOLs arising in tax years beginning afterDecember 31, 2017 and beforeJanuary 1, 2021 may be carried back to each of the five tax years preceding the tax year of the loss. Additionally, the CARES Act temporarily removes the 80% limitation, reinstating it for tax years beginning after 2020. However, none of these provisions have an impact on our tax provision.
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.
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) identify the contract or contracts; (2) determine whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (3) measure the transaction price, including the constraint on variable consideration; (4) allocate the transaction price to the performance obligations based on estimated selling prices; and (5) recognize revenue when (or as) we satisfy each performance obligation. 98 -------------------------------------------------------------------------------- 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. For our collaboration withGenentech , we estimate the extent of progress using a proportional performance model that uses an input method based on costs incurred relative to the total estimated costs of research and development efforts to pursue both the Shared Product and Personalized Product pathways. These estimates are based on our internal estimates and development timeframes, which are subject to revision based on the potential outcomes for both product pathways, decisions made byGenentech , regulatory feedback or other factors not currently known. 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 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 grant date 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.
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. 99
--------------------------------------------------------------------------------
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 grant date 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, 2020 2019 2018 Fair value of common stock$17.68 -$55.23 $7.80 -$47.81 $6.55 Expected term (in years) 5.27 - 6.08 5.27 - 6.08 6.08 - 10.00 Risk-free interest rate 0.4% - 1.7% 1.4% - 2.5% 2.6% - 3.0% Expected volatility 70.5% - 73.3% 64.3% - 72.9% 65.0% - 69.2% Expected dividend yield - - -
We account for forfeitures as they occur, rather than estimate expected forfeitures over the vesting period of the respective grant.
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. As ofDecember 31, 2020 , unrecognized share-based compensation expense related to unvested stock options was$74.9 million , which was expected to be recognized over a remaining weighted-average period of 3.0 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 market 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 ofPrivately-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; • 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 100
--------------------------------------------------------------------------------
• theU.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.
Recent Accounting Pronouncements
See Note 2 to our financial statements included elsewhere in this Annual Report on Form 10-K for more information.
© Edgar Online, source