GUARDANT HEALTH, INC. You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, beliefs, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A, "Risk Factors," of our Annual Report on Form 10-K for the year endedDecember 31, 2019 and in Part II, Item 1A, "Risk Factors" of our Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 .
Overview
We are a leading precision oncology company focused on helping conquer cancer globally through use of our proprietary blood tests, vast data sets and advanced analytics. We believe that the key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which we intend to enable by a routine blood draw, or liquid biopsy. OurGuardant Health Oncology Platform is designed to leverage our capabilities in technology, clinical development, regulatory and reimbursement to drive commercial adoption, accelerate drug development, improve patient clinical outcomes and lower healthcare costs. In pursuit of our goal to manage cancer across all stages of the disease, we launched our Guardant360 and GuardantOMNI liquid biopsy-based tests for advanced stage cancer. Our Guardant360 test, launched in 2014, has been used by more than 7,000 oncologists, over 50 biopharmaceutical companies and all 28 National Comprehensive Cancer Network, or NCCN, Centers. More than 150,000 Guardant360 tests have been performed to date. Using data collected from our Guardant360 tests, we have also developed our GuardantINFORM platform to further accelerate precision oncology drug development by biopharmaceutical companies by offering them an in-silico research platform to further unlock insights into tumor evolution and treatment resistance across various biomarker-driven cancers. Our GuardantOMNI test, launched in 2017, has been used by our biopharmaceutical customers as a comprehensive genomic profiling tool to help accelerate clinical development programs in both immuno-oncology and targeted therapy. Our Guardant360 and GuardantOMNI tests fuel development of our LUNAR program. Our LUNAR-1 assay is intended to address identification of those who are likely to benefit from adjuvant treatment, detection of minimal residual disease in the blood of cancer patients after surgery, and surveillance of patients who have completed curative cancer treatment to potentially detect recurrence at an earlier stage, and was launched in 2018 for research use and in late 2019 for investigational use. To help demonstrate the utility of our LUNAR-1 assay, we have initiated multiple clinical trials to evaluate recurrence-free survival in patients who receive ctDNA-directed therapy as compared to the current standard-of-care active surveillance. We are developing our LUNAR-2 assay to address early cancer detection in screening eligible asymptomatic individuals and higher risk individuals. Recent data reported at the 2019 National Colorectal Cancer Roundtable shows that although the percentage ofU.S. adults who are up to date with recommended colorectal cancer screening has gradually increased from approximately 65% in 2012 to approximately 69% in 2018, this falls short of the 80% screening compliance goal set by theCenters for Disease Control and Prevention . Our LUNAR-2 assay recently demonstrated an average sensitivity of approximately 90%, with specificity of approximately 97%, in a case-control cohort of 113 recently diagnosed patients with stages I, II or III colorectal cancer and 88 colonoscopy-screened negative controls. Recent data reported at the 2020American Society of Clinical Oncology (ASCO) Annual Meeting shows improved performance of the LUNAR-2 assay to detect early-stage colorectal cancer in average-risk adults. In a blinded cohort analysis of colonoscopy screened negative patients (n=88) and patients newly diagnosed with early stage colorectal cancer (n=113) using a further optimized, integrated genomic and epigenomic analysis, the LUNAR-2 assay demonstrated overall sensitivity of 90.3% and overall specificity of 96.6%. Recent data presented at the 2020American Association for Cancer Research (AACR) Virtual Annual Meeting shows that the LUNAR-2 assay achieved 90% sensitivity and 94% specificity in detecting early-stage colorectal cancer. When restricting analysis of the controls to those who were negative for colorectal cancer by colonoscopy (n=74), the LUNAR-2 assay demonstrated improved specificity (99%) with no reduction in sensitivity. Our GuardantOMNI test has a broader 500-gene panel, including genes associated with homologous recombination repair deficiency and biomarkers for immuno-oncology applications, such as tumor mutational burden and microsatellite instability, and has achieved comparable analytical performance in clinical studies, including for translational science applications in collaboration with several biopharmaceutical companies, including AstraZeneca, Bristol-Myers Squibb, Merck MSD, Merck KGaA of Darmstadt,Germany and Pfizer. 36 -------------------------------------------------------------------------------- Table of Contents Our Guardant360 and GuardantOMNI tests have each been designated by the FDA as a breakthrough device for use as a companion diagnostic in connection with certain specified therapeutic products of our biopharmaceutical customers. Among other things, designation as a breakthrough device provides for priority review by the FDA and more interactive communication with the FDA during the development process. Our Guardant360 and GuardantOMNI tests are both being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen,Janssen Biotech and Radius Health. We perform our Guardant360, GuardantOMNI and other tests in our clinical laboratory located inRedwood City, California . Our laboratory is certified pursuant to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by theCollege of American Pathologists , or CAP, permitted by theNew York State Department of Health , or NYSDOH, and licensed inCalifornia and four other states. The analytical and clinical data that we have generated in our efforts to establish clinical utility, combined with the support we have developed with key opinion leaders, or KOLs, in the oncology space have led to positive coverage decisions by a number of commercial payers. Our Guardant360 test is currently covered by Cigna,Priority Health , multipleBlue Cross Blue Shield plans as well as the health plans associated with eviCore, which have adopted policies that specifically cover Guardant360 test for non-small cell lung cancer, or NSCLC, which we believe gives us a competitive advantage with these payers. InJuly 2018 ,Palmetto GBA , or Palmetto, the Medicare Administrative Contractor, or MAC, responsible for administering Medicare's Molecular Diagnostic Services Program, or MolDx, issued a local coverage determination, or LCD, for our Guardant360 test for qualifying NSCLC patients. Subsequently in 2018,Noridian Healthcare Solutions , or Noridian, a participant in MolDx and the MAC responsible for adjudicating claims inCalifornia , where our laboratory is located, also finalized its LCD for our Guardant360 test. Pursuant to this Noridian LCD, inSeptember 2018 , we began to submit claims for reimbursement for Guardant360 clinical testing performed for NSCLC patients covered under the LCD, and inOctober 2018 , we began to receive payments for these services from Medicare. InDecember 2019 , Palmetto finalized its expanded LCD for our Guardant360 test to provide limited Medicare coverage for use of Guardant360 for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin. InMay 2019 , Noridian also issued an expanded draft LCD for our Guardant360 test consistent with the expanded draft LCD issued by Palmetto inMarch 2019 . InMay 2020 , Noridian issued a coverage article and confirmed limited Medicare coverage for our Guardant360 test for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin. Noridian also retired the expanded draft LCD issued inMay 2019 as being superseded by the coverage article. We estimate that approximately 85% of Medicare patients are covered under the coverage article issued by Noridian inMay 2020 . Certain commercial insurance payors have issued decisions to cover the use of Guardant360 for patients with NSCLC. For the three months endedJune 30, 2020 and 2019, respectively, approximately 42% and 46% of ourU.S. clinical tests were for patients tested for NSCLC, and for the six months endedJune 30, 2020 and 2019, respectively, approximately 43% and 46% of ourU.S. clinical tests were for patients tested for NSCLC. Inthe United States , we market our tests to clinical customers through our sales organization, which is engaged in sales efforts and promotional activities primarily targeting oncologists and cancer centers. Outsidethe United States , we market our tests to clinical customers through distributors and direct contracts with healthcare institutions. We also market our tests to biopharmaceutical customers globally through our business development team, which promotes the broad utility of our tests throughout drug development and commercialization. Additionally, we have established a joint venture with SoftBank to accelerate commercialization of our products including inAsia , theMiddle East andAfrica , with our initial focus being onJapan . Our products are currently marketed in approximately 40 countries. The recent global outbreak of coronavirus 2019, or COVID-19, has disrupted, and we expect will continue to disrupt, our operations. To protect the health and well-being of our workforce, partners, vendors and customers, we have provided free COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followedCalifornia's "shelter in place" public health orders and the guidance from theCenters for Disease Control and Prevention . Employees who can perform their duties remotely are asked to work from home and those on site are asked to follow our social distance guidelines. Our sales, marketing and business development efforts are also constrained by our operational response to the COVID-19 pandemic. We expect to continue to adjust our operational norms in an effort to help slow the spread of 37 -------------------------------------------------------------------------------- Table of Contents COVID-19 in the coming months, including complying with government directives and guidelines as they are modified and supplemented. The COVID-19 global pandemic also has started to negatively affect, and we expect will continue to negatively affect, our revenue and our clinical studies. For example, cancer patients may have more limited access to hospitals, healthcare providers and medical resources as they take steps to control the spread of COVID-19. Our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized. As a result of the COVID-19 pandemic, beginning in the latter half ofMarch 2020 , we have been receiving fewer samples for testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Further, our clinical studies, especially those such as our ECLIPSE trial and the COBRA study that are deemed as preventive care or are not part of a standard of care, as well as our development services arrangements with our biopharmaceutical customers, are expected to take longer to complete, if at all, than what we expected before the outbreak of the COVID-19 pandemic. The limited availability of broad-based COVID-19 diagnostic testing has hindered recovery efforts to date. As a result, in earlyApril 2020 we initiated a feasibility assessment that has included our research and development team working to determine our ability to bring a new COVID-19 test to market utilizing our current laboratory facilities, as well as our outreach to potential public and private partners for their assistance in operationalizing such test. As part of the initial progress of this assessment, inJune 2020 we submitted an Emergency Use Authorization (EUA) package to the FDA for our nasopharyngeal Guardant-19 SARS-CoV-2 test, or Guardant-19 test. We launched the Guardant-19 test as a CLIA-certified test operating under theFDA's emergency use authorization to test our employees and made it available to a limited number of third parties for testing. However, we cannot predict the extent to which the Guardant-19 test will be used by third parties and have not yet determined the scale and financial elements of this program. The ultimate impact of the COVID-19 pandemic on our business and financial condition will depend on many factors, including the duration of the outbreak and the mitigation requirements affecting our operations, and healthcare delivery and society in general. As a result, we expect our revenue and results of operations to be adversely affected until testing, treatments and vaccines substantially eliminate the impact of the COVID-19 pandemic. We generated total revenue of$66.3 million and$54.0 million for the three months endedJune 30, 2020 and 2019, respectively, and$133.8 million and$90.6 million for the six months endedJune 30, 2020 and 2019, respectively. We also incurred net losses of$49.7 million and$11.3 million for the three months endedJune 30, 2020 and 2019, respectively, and$81.6 million and$32.7 million for the six months endedJune 30, 2020 and 2019, respectively. We have funded our operations to date principally from the sale of our stock and revenue from our precision oncology testing and development services. InJune 2020 , we completed an underwritten public offering, where we sold 4,312,500 shares of our common stock at a price of$84.00 per share and received net proceeds of approximately$354.6 million after deducting underwriting discounts, commissions and offering expenses payable by us. As ofJune 30, 2020 , we had cash, cash equivalents and marketable securities of$1.1 billion . Factors affecting our performance We believe there are several important factors that have impacted and that we expect will impact our operating performance and results of operations, including: •Testing volume, pricing and customer mix. Our revenue and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of tests that we perform for patients on behalf of clinicians and the number of tests we perform for biopharmaceutical companies. Our performance depends on our ability to retain and broaden adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. Customer mix for our tests has the potential to significantly affect our results of operations, as the average selling price for biopharmaceutical sample testing is currently higher than our average selling price for clinical tests because we are not a contracted provider for, or our tests are not covered by clinical patients' insurance for, the majority of the tests that we perform for patients on behalf of clinicians. Approximately 37% and 38% of ourU.S. clinical tests for the three months endedJune 30, 2020 and 2019, respectively, and approximately 37% and 38% of ourU.S. clinical tests for the six months endedJune 30, 2020 and 2019, respectively, were for Medicare beneficiaries. 38 -------------------------------------------------------------------------------- Table of Contents •Regulatory approval. Our Guardant360 test was the first comprehensive liquid biopsy test approved by NYSDOH. In addition, we believe our facility was the first comprehensive liquid biopsy laboratory to be CLIA-certified, CAP-accredited and NYSDOH-permitted. In the fourth quarter of 2019, we submitted a premarket approval, or PMA, application to seek theFDA's approval of our Guardant360 test to be used as a companion diagnostic, initially in connection with one therapeutic product of a biopharmaceutical customer, and to provide tumor mutation profiling for cancer patients with solid tumors. InFebruary 2020 , we submitted an additional module of the PMA application for our Guardant360 test to the FDA. Medicare's National Coverage Determination for Next Generation Sequencing established in 2018 and subsequently updated in 2020 provides coverage for molecular diagnostic tests such as our Guardant360 test, if, among other criteria, such tests are offered within their FDA-approved companion diagnostic labeling. We believe that this establishes a competitive advantage for tests receiving FDA approval and that FDA approval will be increasingly necessary for diagnostic tests to gain adoption, both inthe United States and abroad. We believe FDA approval, if obtained, will help increase adoption of our tests and facilitate favorable reimbursement decisions by Medicare and commercial payers. We also intend to pursue regulatory approvals in specific markets outside ofthe United States , including inEurope ,Japan andChina . Any negative regulatory decisions or changes in regulatory requirements affecting our business could adversely impact our operations and financial results. •Payer coverage and reimbursement. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. Payment from commercial payers can vary depending on whether we have entered into a contract with the payers as a "participating provider" or do not have a contract and are considered a "non-participating provider." Payers often reimburse non-participating providers, if at all, at a lower amount than participating providers. We have received a substantial portion of our revenue from a limited number of commercial payers, most of which have not contracted with us to be a participating provider. We have received reimbursement for tests of patients with a variety of cancers, though for amounts that on average are significantly lower than for participating providers. We have experienced situations where commercial payers proactively reduced the amounts they were willing to reimburse for our tests, and in other situations, commercial payers have determined that the amounts they previously paid were too high and have sought to recover those perceived excess payments by deducting such amounts from payments otherwise being made. When we contract with a payer to serve as a participating provider, reimbursements by the payer are generally made pursuant to a negotiated fee schedule and are limited to only covered indications or where prior approval has been obtained. Becoming a participating provider can result in higher reimbursement amounts for covered uses of our test and, potentially, no reimbursement for non-covered uses identified under the payer's policies or the contract. As a result, the potential for more favorable reimbursement associated with becoming a participating provider may be offset by a potential loss of reimbursement for non-covered uses of our tests. Current Procedural Terminology, or CPT, coding plays a significant role in how our Guardant360 test is reimbursed both from commercial and governmental payers. Changes to the codes used to report the Guardant360 test to payers may result in significant changes in its reimbursement. If our Guardant360 test receives approval from the FDA, we may be required to obtain a new code to report the Guardant360 test on claims submitted toU.S. payers. If a coding change were to occur, payments for certain uses of the Guardant360 test could be reduced or eliminated by such payers. Cigna,Priority Health , multipleBlue Cross Blue Shield plans as well as the health plans associated with eviCore adopted policies that cover our Guardant360 test for the majority of NSCLC patients we test. If their policies were to change in the future to cover additional cancer indications, we anticipate that our total reimbursement would increase. InSeptember 2018 , we began to submit claims to Medicare for reimbursement with respect to Guardant360 clinical tests performed for NSCLC patients covered under the 2018 Noridian LCD, and inOctober 2018 , we began to receive payments from Medicare for these clinical tests. InMarch 2020 , we began to receive reimbursement from Medicare for claims submitted, with respect to Guardant360 clinical tests performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin other than NSCLC. InMay 2020 , Noridian issued a coverage article and confirmed limited Medicare coverage for our Guardant360 test for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin who meet the criteria of Medicare's National Coverage Determination for Next Generation Sequencing established inMarch 2018 . Noridian also retired the draft LCD issued inMay 2019 as being superseded by the coverage article. Future actions taken by Noridian or Palmetto may change Medicare coverage for our Guardant360 test. We estimate total coverage inthe United States for the Guardant360 test to be more than 180 million lives, including Medicare beneficiaries and members of several commercial health plans. If we fail to obtain or maintain coverage and adequate reimbursement from third-party payers, including from Medicare, we may be unable to increase our testing volume and revenue as expected. Retrospective reimbursement adjustments, such as deductions from further payments and clawbacks, can also negatively impact our revenue and cause our financial results to fluctuate. Due to the inherent variability of the insurance landscape, historic 39 -------------------------------------------------------------------------------- Table of Contents success of, and payments from, appeals of reimbursement denials by payers are not indicative of future success of and payments from such appeals. •Biopharmaceutical customers. Our revenue also depends on our ability to attract new, and to maintain and expand relationships with existing, biopharmaceutical customers, and we expect to increase our sales and marketing expense in furtherance of this goal. As we continue to develop these relationships, we expect to support a growing number of clinical trials both inthe United States and internationally. If our relationships expand with biopharmaceutical customers, we believe we may continue to have opportunities to offer our platform to such customers for companion diagnostic development, novel target discovery and validation as well as clinical trial enrollment, and to grow into other business opportunities. For example, we believe that our genomic data, in combination with clinical outcomes or claims data, has revenue-generating potential, supporting novel drug development and companion diagnostic development. •Research and development. A significant aspect of our business is our investment in research and development, including the development of new products, such as those being developed as part of our LUNAR program. In particular, we have invested heavily in clinical studies, including more than 50 clinical outcomes studies, the largest-ever liquid-to-tissue concordance study, and a prospective interventional clinical utility study demonstrating clinical overall response rates in line with tissue biopsy approaches. Our clinical research has resulted in over 150 peer-reviewed publications. With respect to our LUNAR program, we initiated a prospective screening study, which we refer to as the ECLIPSE trial, aiming to recruit approximately 10,000 patients and evaluate the performance of our LUNAR-2 assay in detecting colorectal cancer in average-risk adults, and in collaboration with a National Clinical Trials Network group, initiated a prospective multi-center randomized controlled trial, which we refer to as the COBRA study, in approximately 1,400 patients with resected stage II colon cancer to use our LUNAR-1 assay to evaluate recurrence-free survival in patients who receive ctDNA-directed therapy as compared to the current standard-of-care active surveillance. Furthermore, we are collaborating with investigators from multiple academic cancer centers, includingMD Anderson Cancer Center , theUniversity of Colorado ,Memorial Sloan Kettering Cancer Center ,Massachusetts General Cancer Center ,Wake Forest Cancer Center and theUniversity of California San Francisco , as well as several international institutions. The COVID-19 global pandemic has negatively impacted, and is expected to continue to negatively impact, the recruitment for clinical studies, especially those that are deemed as preventive care or are not part of a standard of care, including the ECLIPSE trial and the COBRA study. We believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers, and expect our investments in clinical studies to increase. We expect to increase our research and development expense with the goal of fueling further innovation. •International expansion. A component of our long-term growth strategy is to expand our commercial footprint internationally, and we expect to increase our sales and marketing expense to execute on this strategy. We currently offer our tests in countries outsidethe United States primarily through distributor relationships or direct contracts with hospitals. InMay 2018 , we formed and capitalized a joint venture,Guardant Health AMEA, Inc. , which we refer to as the Joint Venture, with SoftBank, relating to the sale, marketing and distribution of our tests generally outside theAmericas andEurope . We expect to rely on the Joint Venture to accelerate commercialization of our products inAsia , theMiddle East andAfrica , with our initial focus being onJapan . That effort could be negatively impacted by the COVID-19 global pandemic. •General and administrative expense. Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our general and administrative expense, and in particular, our stock-based compensation expense. For example, inMay 2020 , our Board of Directors approved the grant of a long-term market-based restricted stock unit award to our Chief Executive Officer and our President and Chief Operating Officer (the "Founders"). The Founders each received a grant of 1,695,574 market-based restricted stock units which consist of three separate tranches and the vesting of each tranche is subject to the closing price of our common stock closing price being maintained at or above a pre-determined stock price goal for a period of 30 consecutive calendar days any time during the seven-year performance period. Our equity awards, including the Founders' market-based restricted stock units, are intended to retain and incentivize employees to lead us to sustained, long-term superior financial and operational performance. The market-based restricted stock units, in particular, were designed to focus the Founders on our long-term operational and strategic development, including the successful development and commercialization of our LUNAR program. While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address. See Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended 40 -------------------------------------------------------------------------------- Table of ContentsDecember 31, 2019 , and Part II, Item 1A, "Risk Factors" of our Quarterly Report on Form 10-Q for the period endedMarch 31, 2020 , for more information. Non-GAAP Financial Measure Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), a non-GAAP financial measure is a key metric to assess period-to-period comparison in evaluating the performance of our core business by removing the impact of income (expenses) attributable to material non-cash items, specifically stock-based compensation and fair value remeasurements due to the subjectivity, management judgment, and market fluctuations involved around these amounts. We exclude certain other items because we believe that these income (expenses) do not reflect expected future operating expenses. Additionally, certain items are inconsistent in amounts and frequency, making it difficult to perform a meaningful evaluation of our current or past operating performance. "Adjusted EBITDA" is defined by us as net loss attributable toGuardant Health, Inc. common stockholders before: (i) interest income, (ii) interest expense, (iii) provision for (benefit from) income taxes, (iv) depreciation and amortization expense, (v) other (income) expense, net, (vi) stock-based compensation expense, (vii) Adjustments relating to non-controlling interest and contingent consideration and, if applicable in a reporting period, and (viii) acquisition-related expenses, and other non-recurring items. Our use of Adjusted EBITDA as a non-GAAP financial measure is not intended to be considered in isolation from, as substitute for, or as superior to, the corresponding financial measure prepared in accordance with GAAP and you should not consider it in isolation or substitute for analysis of our results reported under GAAP. There are limitations inherent in non-GAAP financial measures because they exclude charges and credits that are required to be included in a GAAP presentation, and do not present the full measure of our recorded costs against its revenue. In addition, our definition of non-GAAP financial measures may differ from non-GAAP measures used by other companies. The following table reconciles net loss attributable toGuardant Health, Inc. common stockholders (which is the most directly comparable GAAP operating financial measure) to Adjusted EBITDA. Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Net loss attributable to Guardant Health, Inc. common stockholders$ (54,639) $ (11,600) $ (82,368) $ (37,651) Adjustments: Interest income (2,640) (3,099) (5,958) (5,584) Interest expense 10 287 22 580 Other (income) expense, net (2,285) 51 (2,076) (96) Provision for (benefit from) income taxes 34 (1,207) 48 (1,181) Depreciation and amortization 3,805 2,657 7,109 5,011 Stock-based compensation expense 25,815 3,215 32,153 6,398 Adjustments relating to noncontrolling interest and contingent consideration 4,900 300 610 5,000 Acquisition related expenses (1) - 422 9,707 422 Adjusted EBITDA (non-GAAP)$ (25,000) $ (8,974) $ (40,753) $ (27,101) (1) For the six months endedJune 30, 2020 , acquisition related expenses consist of a dispute settlement expense of$1.2 million and IPR&D technology write off for$8.5 million incurred for the three months endedMarch 31, 2020 in connection with a settlement and a license purchase agreement. For the three and six months endedJune 30, 2019 , acquisition related expenses of$0.4 million primarily include certain diligence, accounting, and legal expenses incurred related to our Bellwether acquisition. 41 -------------------------------------------------------------------------------- Table of Contents Components of results of operations
Revenue
We derive our revenue from two sources: (i) precision oncology testing and (ii) development services. Precision oncology testing. Precision oncology testing revenue is generated from sales of our Guardant360 and GuardantOMNI tests to clinical and biopharmaceutical customers. Inthe United States , throughJune 30, 2020 , we generally performed tests as an out-of-network service provider without contracts with health insurance companies. We submit claims for payment for tests performed for patients covered byU.S. private payers. We submit claims to Medicare for reimbursement for Guardant360 clinical testing performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin who meet the criteria of Medicare's National Coverage Determination for Next Generation Sequencing established inMarch 2018 . Tests for patients covered by Medicare represented approximately 37% and 38% ofU.S. tests performed during the three months endedJune 30, 2020 and 2019, respectively, and 37% and 38% ofU.S. tests performed during the six months endedJune 30, 2020 and 2019, respectively. We also provide precision oncology testing to biopharmaceutical customers under contracts for which all recognition criteria are met, and we have recognized revenue on an accrual basis for those services. Development services. Development services revenue represents services, other than precision oncology testing, that we provide to biopharmaceutical companies and large medical institutions. It includes companion diagnostic development and regulatory approval services, clinical trial referrals and liquid biopsy testing development and support. We collaborate with biopharmaceutical companies in the development and clinical trials of new drugs. As part of these collaborations, we provide services related to regulatory filings with the FDA to support companion diagnostic device submissions for our liquid biopsy panels. Under these arrangements, we generate revenue from progression of our collaboration efforts, as well as from provision of on-going support. Development services revenue can vary over time as different projects start and complete. Costs and operating expenses Cost of precision oncology testing. Cost of precision oncology testing generally consists of cost of materials, direct labor, including bonus, benefit and stock-based compensation; equipment and infrastructure expenses associated with processing liquid biopsy test samples, including sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples; freight; curation of test results for physicians; and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Costs associated with performing our tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to the tests. Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the patents. While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors. We expect the cost of precision oncology testing to generally increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions. Cost of development services. Cost of development services includes costs incurred for the performance of development services requested by our customers. For development of new products, costs incurred before technological feasibility has been achieved are reported as research and development expenses, while costs incurred thereafter are reported as cost of revenue. Cost of development services will vary depending on the nature, timing and scope of customer projects. Research and development expense. Research and development expenses consist of costs incurred to develop technology and include salaries and benefits including stock-based compensation, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, other outside costs and costs to develop our technology capabilities. Research and development expenses also include costs related to activities performed under contracts with biopharmaceutical companies before technological feasibility has been achieved. Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or 42 -------------------------------------------------------------------------------- Table of Contents services are rendered. Costs to develop our technology capabilities are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs. We expect that our research and development expenses will continue to increase in absolute dollars as we continue to innovate and develop additional products, expand our genomic and medical data management resources and conduct our ongoing and new clinical trials with a particular focus on our LUNAR program. Sales and marketing expense. Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, medical affairs, as well as business development personnel who are focused on our biopharmaceutical customers. These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel expenses and stock-based compensation, as well as marketing and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales force, increase our presence within and outside ofthe United States , and increase our marketing activities to drive further awareness and adoption of our Guardant360 and GuardantOMNI tests. General and administrative expense. Our general and administrative expenses include costs for our executive, accounting and finance, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, travel expenses and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase in absolute dollars, primarily due to increased stock-based compensation expense, including resulting from the market-based restricted stock units granted to our Founders inMay 2020 , increased headcount and increased costs associated with operating as a growing public company, including expenses related to legal, accounting, regulatory, maintaining compliance with exchange listing and requirements of theSEC , director and officer insurance premiums and investor relations. These expenses, though expected to increase in absolute dollars, are expected to decrease modestly as a percentage of revenue in the long term, though they may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses being incurred. Interest income Interest income consists of interest earned on our cash, cash equivalents and marketable securities. Interest expense Interest expense consists primarily of interest from finance leases or capital leases and royalty obligations. Other income (expense), net Other income (expense), net consists of foreign currency exchange gains and losses and the relief fund grant from theDepartment of Health and Human Services , or HHS, under theU.S. Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. 43
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Table of Contents
Results of operations The following table set forth the significant components of our results of operations for the periods presented.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2019 2020 2019
(unaudited)
(in thousands)
Revenue:
Precision oncology testing $ 50,991 $ 42,064 $ 111,237 $ 70,901
Development services 15,344 11,911 22,608 19,729
Total revenue 66,335 53,975 133,845 90,630
Costs and operating expenses:
Cost of precision oncology testing(1) 17,809 14,650 36,000 25,673
Cost of development services 4,626 2,183 6,941 4,695
Research and development expense(1) 36,319 19,532 73,335 35,848
Sales and marketing expense(1) 25,015 19,439 50,130 37,246
General and administrative expense(1) 37,186 13,439 56,971 26,100
Total costs and operating expenses 120,955 69,243 223,377 129,562
Loss from operations (54,620) (15,268) (89,532) (38,932)
Interest income 2,640 3,099 5,958 5,584
Interest expense (10) (287) (22) (580)
Other income (expense), net 2,285 (51) 2,076 96
Loss before provision for income taxes (49,705) (12,507) (81,520) (33,832)
Provision for (benefit from) income taxes 34 (1,207) 48 (1,181)
Net loss $ (49,739) $ (11,300) $ (81,568) $ (32,651) (1)Amounts include stock-based compensation expense as follows:
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
(unaudited)
(in thousands)
Cost of precision oncology testing $ 407 $ 126 $ 710 $ 296
Research and development expense 2,622 1,428 4,986 2,638
Sales and marketing expense 2,167 646 3,965 1,472
General and administrative expense 20,619 1,015 22,492 1,992
Total stock-based compensation expense $ 25,815 $ 3,215 $ 32,153 $ 6,398
44--------------------------------------------------------------------------------
Table of Contents Comparison of the Three Months EndedJune 30, 2020 and 2019 Revenue Three Months Ended June 30, Change 2020 2019 $ % (unaudited) (in thousands) Precision oncology testing$ 50,991 $ 42,064 $ 8,927 21 % Development services 15,344 11,911 3,433 29 % Total revenue$ 66,335 $ 53,975 $ 12,360 23 % Total revenue was$66.3 million for the three months endedJune 30, 2020 compared to$54.0 million for the three months endedJune 30, 2019 , an increase of$12.4 million , or 23%. Precision oncology testing revenue increased to$51.0 million for the three months endedJune 30, 2020 from$42.1 million for the three months endedJune 30, 2019 , an increase of$8.9 million , or 21%. This increase in precision oncology testing revenue was primarily due to an increase in average selling price per test as a result of expanded coverage of our tests for clinical customers, plus$2.6 million in revenue received during the three months endedJune 30, 2020 from Medicare for samples processed in 2019 up from$1.4 million in revenue received during the three months endedJune 30, 2019 from Medicare for samples processed in 2018. Precision oncology revenue from tests for clinical customers was$39.6 million in the three months endedJune 30, 2020 and$21.8 million in the three months endedJune 30, 2019 , respectively. Tests for clinical customers increased to 13,694 for the three months endedJune 30, 2020 from 11,875 for the three months endedJune 30, 2019 mainly due to an increase in the number of physicians ordering Guardant360 tests. InMarch 2020 , we began to receive reimbursement from Medicare for claims submitted with respect to Guardant360 clinical tests performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin other than NSCLC. InMay 2020 , Noridian issued a coverage article and confirmed limited Medicare coverage for our Guardant360 test for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin who meet the criteria of Medicare's National Coverage Determination for Next Generation Sequencing established inMarch 2018 . Precision oncology revenue from tests for biopharmaceutical customers was$11.4 million in the three months endedJune 30, 2020 and$20.2 million in the three months endedJune 30, 2019 , respectively. Tests for biopharmaceutical customers decreased to 2,805 for the three months endedJune 30, 2020 from 5,285 for the three months endedJune 30, 2019 primarily due to the timing and progression of clinical trials and studies which resulted in fluctuation in the number of samples received for testing. The average selling price of biopharmaceutical tests was$4,054 for the three months endedJune 30, 2020 , up from$3,827 for the three months endedJune 30, 2019 due to a greater proportion of such tests being the GuardantOMNI test, which has a higher selling price than the Guardant360 test. As a result of the COVID-19 pandemic, beginning in the latter half ofMarch 2020 , we began receiving fewer samples for testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic. Our future sample volumes and precision oncology revenue may be adversely impacted by the COVID-19 pandemic depending on the duration and severity of the pandemic. Development services revenue increased to$15.3 million for the three months endedJune 30, 2020 from$11.9 million for the three months endedJune 30, 2019 , an increase of$3.4 million , or 29%. This increase in development services revenue was due to new collaboration projects from biopharmaceutical customers for companion diagnostic development and regulatory approval services during the three months endedJune 30, 2020 . Our development services arrangements with biopharmaceutical customers and development services revenue may be adversely impacted by the COVID-19 pandemic in future periods. 45 -------------------------------------------------------------------------------- Table of Contents Costs and operating expenses Cost of revenue Three Months Ended June 30, Change 2020 2019 $ % (unaudited) (in thousands) Cost of revenue$ 22,435 $ 16,833 $ 5,602 33 % Gross profit$ 43,900 $ 37,142 Gross margin 66 % 69 % Cost of revenue was$22.4 million for the three months endedJune 30, 2020 compared to$16.8 million for the three months endedJune 30, 2019 , an increase of$5.6 million , or 33%. Cost of precision oncology testing revenue was$17.8 million for the three months endedJune 30, 2020 compared to$14.7 million for the three months endedJune 30, 2019 , an increase of$3.2 million , or 22%. This increase in cost of precision oncology testing was attributable to an increase in sample volumes and was primarily due to a$3.2 million increase in production labor and overhead costs. Cost of development services was$4.6 million for the three months endedJune 30, 2020 compared to$2.2 million for the three months endedJune 30, 2019 , an increase of$2.4 million , or 112%. This increase in cost of development services was primarily due to an increase in material and labor costs related to companion diagnostic development and regulatory approval service contracts. Gross margin for the three months endedJune 30, 2020 was 66% compared to 69% for the three months endedJune 30, 2019 . The decrease in gross margin was primarily due to overall increase in the costs related to companion diagnostic programs. We expect our gross margin to be adversely impacted by the COVID-19 pandemic for the affected periods.
Research and development expense
Three Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Research and development $ 36,319 $ 19,532 $ 16,787 86 %
Research and development expenses were $36.3 million for the three months ended
June 30, 2020 compared to $19.5 million for the three months ended June 30,
2019 , an increase of $16.8 million , or 86%. This increase in research and
development expense was primarily due to an increase of $7.5 million in
personnel-related costs for employees in our research and development group,
including a $1.2 million increase in stock-based compensation, as we increased
our headcount to support continued investment in our technology. The increase is
also attributable to an increase of $4.7 million in material costs, an increase
of $2.6 million in development consulting fees, an increase of $1.5 million
related to allocated facilities and information technology infrastructure costs
and an increase of $0.2 million in office administrative costs as we increased
our headcount to support continued investment in our technology.
Sales and marketing expense
Three Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Sales and marketing $ 25,015 $ 19,439 $ 5,576 29 %
46-------------------------------------------------------------------------------- Table of Contents Selling and marketing expenses were$25.0 million for the three months endedJune 30, 2020 compared to$19.4 million for the three months endedJune 30, 2019 , an increase of$5.6 million , or 29%. This increase was primarily due to an increase of$3.9 million in personnel-related costs, including a$1.5 million increase in stock-based compensation, associated with the expansion of our commercial organization. The increase is also attributable to an increase of$1.3 million in professional service expenses related to marketing activities, an increase of$1.2 million related to allocated facilities and information technology infrastructure costs, offset by a decrease of$0.7 million related to office administrative costs as a result of the COVID-19 pandemic. General and administrative expense Three Months Ended June 30, Change 2020 2019 $ % (unaudited) (in thousands) General and administrative$ 37,186 $ 13,439 $ 23,747 177 % General and administrative expenses were$37.2 million for the three months endedJune 30, 2020 compared to$13.4 million for the three months endedJune 30, 2019 , an increase of$23.7 million , or 177%. This increase was primarily due to an increase of$20.6 million in personnel-related costs, including a$19.6 million increase in stock-based compensation primarily in connection with the issuance of market-based restricted stock units to our Founders as well as an increase in our headcount, an increase of$1.6 million in professional service expenses related to outside legal, accounting, consulting and IT services, and an increase of$1.3 million related to allocated facilities and information technology infrastructure cost. We expect our general and administrative expenses to significantly increase in the near term primarily due to the expense recognition associated with the market-based restricted stock units. Interest income Three Months Ended June 30, Change 2020 2019 $ % (unaudited) (in thousands) Interest income$ 2,640 $ 3,099 $ (459) (15) % Interest income was$2.6 million for the three months endedJune 30, 2020 compared to$3.1 million for the three months endedJune 30, 2019 , a decrease of$0.5 million , or 15%. This decrease was primarily due to a significant decrease in interest rate as theU.S. Federal Reserve made emergency cuts and lowered the risk-free interest rate to nearly zero, partially offset by an increase in cash, cash equivalents and marketable securities during the three months endedJune 30, 2020 primarily as a result of cash proceeds from our follow-on public offering completed inJune 2020 . Interest expense Three Months Ended June 30, Change 2020 2019 $ % (unaudited) (in thousands) Interest expense$ (10) $ (287) $ 277 (97) % Interest expense was immaterial for the three months endedJune 30, 2020 compared to$0.3 million for the three months endedJune 30, 2019 , a decrease of$0.3 million , or 97%. This decrease was primarily due to the settlement of all outstanding balances inMarch 2020 related to the patent license agreement entered into inJanuary 2017 . 47 --------------------------------------------------------------------------------
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Other income (expense), net
Three Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Other income (expense), net $ 2,285 $ (51) $ 2,336 *
For the three months ended June 30, 2020 , other income (expense), net included
receipt of $1.8 million from HHS's relief fund under the CARES Act and foreign
currency exchange gains of $0.2 million . Other income (expense), net included
foreign currency exchange losses of $0.1 million for the three months ended June
30, 2019 .
Provision for (benefit from) income taxes
Three Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Provision for (benefit from) income
taxes $ 34 $ (1,207) $ 1,241 *
* Not meaningful
Provision for income taxes was immaterial for the three months ended June 30,
2020 . Benefit from income taxes for the three months ended June 30, 2019 relates
primarily to the release of a valuation allowance of $1.2 million associated
with nondeductible intangible assets recorded as part of the acquisition of
Bellwether Bio, Inc. , partially offset by state minimum income tax and income
tax on our earnings in foreign jurisdictions.
Comparison of the Six Months Ended June 30, 2020 and 2019
Revenue
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Precision oncology testing $ 111,237 $ 70,901 $ 40,336 57 %
Development services 22,608 19,729 2,879 15 %
Total revenue $ 133,845 $ 90,630 $ 43,215 48 %
Total revenue was $133.8 million for the six months ended June 30, 2020 compared
to $90.6 million for the six months ended June 30, 2019 , an increase of $43.2
million , or 48%.
Precision oncology testing revenue increased to $111.2 million for the six
months ended June 30, 2020 from $70.9 million for the six months ended June 30,
2019 , an increase of $40.3 million , or 57%. This increase in precision oncology
testing revenue was primarily due to an increase in tests performed, an increase
in average selling price per test for similar reasons as noted above, plus $4.1
million in revenue received from Medicare for samples processed in 2019 up from
$1.4 million in revenue received during the six months ended June 30, 2019 from
Medicare for samples processed in 2018. Precision oncology revenue from tests
for clinical customers was $77.6 million in the six months ended June 30, 2020
and $39.0 million in the six months ended June 30, 2019 , respectively. Tests for
clinical customers increased to 28,951 for the six months ended June 30, 2020
from 21,396 for the six months ended June 30, 2019 mainly due to an increase in
the number of physicians ordering Guardant360 tests. In March 2020 , we began to
receive reimbursement from Medicare for claims submitted with respect to
Guardant360 clinical tests performed for qualifying patients diagnosed with
solid tumor cancers of non-central nervous system origin other than NSCLC. In
May 2020 , Noridian issued a coverage article and confirmed limited Medicare
coverage for our Guardant360 test for qualifying patients diagnosed with solid
tumor cancers of non-central nervous system origin
48
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who meet the criteria of Medicare's National Coverage Determination for Next
Generation Sequencing established in March 2018 .
Precision oncology revenue from tests for biopharmaceutical customers was $33.6
million in the six months ended June 30, 2020 and $31.9 million in the six
months ended June 30, 2019 , respectively. Tests for biopharmaceutical customers
decreased to 8,071 for the six months ended June 30, 2020 from 9,046 for the six
months ended June 30, 2019 primarily due to the timing and progression of
clinical trials and studies which resulted in fluctuation in the number of
samples received for testing. The average selling price of biopharmaceutical
tests was $4,169 for the six months ended June 30, 2020 , up from $3,529 for the
six months ended June 30, 2019 due to a greater number of such tests being the
GuardantOMNI test, which has a higher selling price than the Guardant360 test.
As a result of the COVID-19 pandemic, beginning in the latter half of March
2020 , we began receiving fewer samples for testing on a daily average basis from
our clinical and biopharmaceutical customers than before the outbreak of the
COVID-19 pandemic. Our future sample volumes and precision oncology revenue may
be adversely impacted by the COVID-19 pandemic for the affected periods.
Development services revenue increased to $22.6 million for the six months ended
June 30, 2020 from $19.7 million for the six months ended June 30, 2019 , an
increase of $2.9 million , or 15%. This increase in development services revenue
was due to progression of collaboration projects from biopharmaceutical
customers for companion diagnostic development and regulatory approval services
completed during the six months ended June 30, 2020 . We expect our development
services arrangements with biopharmaceutical customers and development services
revenue to be adversely impacted by the COVID-19 pandemic depending on the
duration and severity of the pandemic.
Cost of Revenue and Gross Margin
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(dollars in thousands)
Cost of revenue $ 42,941 $ 30,368 $ 12,573 41 %
Gross profit $ 90,904 $ 60,262
Gross margin 68 % 66 %
Cost of revenue was $42.9 million for the six months ended June 30, 2020
compared to $30.4 million for the six months ended June 30, 2019 , an increase of
$12.6 million , or 41%.
Cost of precision oncology testing revenue was $36.0 million for the six months
ended June 30, 2020 compared to $25.7 million for the six months ended June 30,
2019 , an increase of $10.3 million , or 40%. This increase in cost of precision
oncology testing was attributable to an increase in sample volumes and was
primarily due to a $7.0 million increase in production labor and overhead costs
and a $3.3 million increase in material costs.
Cost of development services was $6.9 million for the six months ended June 30,
2020 compared to $4.7 million for the six months ended June 30, 2019 , an
increase of $2.2 million , or 48%. This increase in cost of development services
was primarily due to an increase in labor costs related to companion diagnostic
development and regulatory approval service contracts.
Gross margin for the six months ended June 30, 2020 was 68% compared to 66% for
the six months ended June 30, 2019 . Gross margin improvement reflects the impact
of increased average selling price per test. Our gross margin may be adversely
impacted by the COVID-19 pandemic depending on how long the pandemic lasts and
the severity of the situation in coming quarters.
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Operating Expenses
Research and development expense
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Research and development $ 73,335 $ 35,848 $ 37,487 105 %
Research and development expenses were $73.3 million for the six months ended
June 30, 2020 compared to $35.8 million for the six months ended June 30, 2019 ,
an increase of $37.5 million , or 105%. This increase in research and development
expense was primarily due to an increase of $11.9 million in personnel-related
costs for employees in our research and development group, including a $2.3
million increase in stock-based compensation, as we increased our headcount to
support continued investment in our technology, an increase of $8.5 million
relating to IPR&D technology expensed in connection with a patent license
acquisition that occurred in March 2020 , an increase of $7.2 million in material
costs related to various programs, an increase of $6.2 million in development
consulting fees, an increase of $2.3 million related to allocated facility and
information technology infrastructure costs and an increase of $0.7 million in
office administrative costs as we increased our headcount to support continued
investment in our technology.
Sales and marketing expense
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Sales and marketing $ 50,130 $ 37,246 $ 12,884 35 %
Selling and marketing expenses were $50.1 million for the six months ended June
30, 2020 compared to $37.2 million for the six months ended June 30, 2019 , an
increase of $12.9 million , or 35%. This increase was primarily due to an
increase of $9.1 million in personnel-related costs, including a $2.5 million
increase in stock-based compensation, associated with the expansion of our
commercial organization, an increase of $2.1 million in professional service
expenses related to marketing activities and an increase of $1.9 million related
to allocated facility and information technology infrastructure costs, offset by
a decrease of $0.2 million related to office administrative costs as a result of
the COVID-19 pandemic.
General and administrative expense
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
General and administrative $ 56,971 $ 26,100 $ 30,871 118 %
General and administrative expenses were $57.0 million for the six months ended
June 30, 2020 compared to $26.1 million for the six months ended June 30, 2019 ,
an increase of $30.9 million , or 118%. This increase was primarily due to an
increase of $23.8 million in personnel-related costs, including a $20.5 million
increase in stock-based compensation primarily in connection with the issuance
of market-based restricted stock units to our Founders as well as an increase in
our headcount, an increase of $2.2 million in professional service expenses
related to outside legal, accounting, consulting and IT services, an increase of
$2.4 million related to allocated facilities and information technology
infrastructure costs, an increase of $1.2 million related to settlement costs in
connection with a patent license acquisition that occurred in March 2020 , and an
increase of $0.9 million in office administrative costs. We expect our general
and administrative expenses to significantly increase in near term primarily due
to the expense recognition associated with the market-based restricted stock
units.
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Interest income
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Interest income $ 5,958 $ 5,584 $ 374 7 %
Interest income was $6.0 million for the six months ended June 30, 2020 compared
to $5.6 million for the six months ended June 30, 2019 , an increase of $0.4
million , or 7%. This increase was primarily due to a significant increase in
cash, cash equivalents and marketable securities related to the receipt of cash
proceeds from our follow-on public offering completed in June 2020 , offset by a
significant decrease in interest rate as the U.S. Federal Reserve made emergency
cuts and lowered the risk-free interest rate to nearly zero.
Interest expense
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Interest expense $ (22) $ (580) $ 558 (96) %
Interest expense was immaterial for the six months ended June 30, 2020 compared
to $0.6 million for the six months ended June 30, 2019 , a decrease of $0.6
million , or 96%. This decrease was primarily due to the settlement of all
outstanding balances in March 2020 related to the patent license agreement
entered into in January 2017 .
Other income (expense), net
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Other income (expense), net $ 2,076 $ 96 $ 1,980 *
For the six months ended June 30, 2020 , other income (expense), net included
receipt of $1.8 million received from HHS's relief fund under the CARES Act and
foreign currency exchange losses of $0.1 million . Other income (expense), net
included foreign currency exchange gains of $0.1 million for the six months
ended June 30, 2019 .
Provision for (benefit from) income taxes
Six Months Ended June 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Provision for (benefit from) income
taxes $ 48 $ (1,181) $ 1,229 *
* Not meaningful
Provision for income taxes was immaterial for the six months ended June 30,
2020 . Benefit from income taxes for the six months ended June 30, 2019 relates
primarily to the release of a valuation allowance of $1.2 million associated
with nondeductible intangible assets recorded as part of the acquisition of
Bellwether Bio, Inc. , partially offset by state minimum income tax and income
tax on our earnings in foreign jurisdictions.
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Liquidity and capital resources
We have incurred losses and negative cash flows from operations since our
inception, and as of June 30, 2020 , we had an accumulated deficit of $435.2
million . We expect to incur additional operating losses in the near future and
our operating expenses will increase as we continue to invest in clinical trials
and develop new product offerings from our research programs, including our
LUNAR program, expand our sales organization, and increase our marketing efforts
to drive market adoption of our Guardant360 and GuardantOMNI tests. Our capital
expenditure requirements could also increase if we build additional laboratory
capacity.
We have funded our operations to date principally from the sale of stock, and
revenue from precision oncology testing and development services. As of June 30,
2020 , we had cash and cash equivalents of $164.7 million and marketable
securities of $919.3 million . Cash in excess of immediate requirements is
invested in accordance with our investment policy, primarily with a view to
provide liquidity while ensuring capital preservation. Currently, our funds are
held in marketable securities consisting of United States treasury securities
and corporate bonds.
Based on our current business plan, we believe our current cash, cash
equivalents and marketable securities and anticipated cash flows from
operations, will be sufficient to meet our anticipated cash requirements over at
least the next 12 months from the date of this report. We may consider raising
additional capital to expand our business, to pursue strategic investments, to
take advantage of financing opportunities or for other reasons. As revenue from
precision oncology testing and development services is expected to grow
long-term, 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.
If our available cash, cash equivalents and marketable securities and
anticipated cash flows from operations are insufficient to satisfy our liquidity
requirements including because of lower demand for our products as a result of
lower than currently expected rates of reimbursement from our customers or other
risks described in our Form 10-K for the year ended December 31, 2019 and our
Form 10-Q for the quarter ended March 31, 2020 , we may seek to sell additional
common or preferred 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
stockholders and, in the case of preferred equity securities or convertible
debt, those securities could provide for rights, preferences or privileges
senior to those of our common stock. The terms of debt securities issued or
borrowings pursuant to a credit agreement could impose significant restrictions
on our operations. If we raise funds through collaborations and licensing
arrangements, we might be required to relinquish significant rights to our
platform technologies or products or grant licenses on terms that are not
favorable to us. Additional capital may not be available to us on reasonable
terms, or at all.
Cash flows
The following table summarizes our cash flows for the periods presented:
Six Months Ended June 30,
2020 2019
(unaudited)
(in thousands)
Net cash used in operating activities
Operating activities Cash used in operating activities during the six months endedJune 30, 2020 was$36.6 million , which resulted from a net loss of$81.6 million and net change in our operating assets and liabilities of$7.1 million , partially offset by non-cash charges of$52.0 million . Non-cash charges primarily consisted of$32.2 million of stock-based compensation,$8.5 million of charge of in-process research and development costs with no alternative future use,$7.1 million of depreciation and amortization,$3.4 million of right-of-use assets amortization, and$1.1 million of amortization of premium on investment. The net change in our operating assets and liabilities was primarily the result of a$5.2 million increase in inventory, a$3.9 million payment of operating lease liabilities, a$2.5 million 52 -------------------------------------------------------------------------------- Table of Contents decrease in accounts payable, a$1.8 million decrease in accrued expenses and a$0.8 million decrease in deferred revenue, partially offset by a$6.9 million decrease in accounts receivables. Cash used in operating activities during the six months endedJune 30, 2019 was$18.1 million , which resulted from a net loss of$32.7 million , partially offset by non-cash charges of$10.5 million and net change in our operating assets and liabilities of$4.0 million . Non-cash charges primarily consisted of$5.0 million of depreciation and amortization,$6.4 million of stock-based compensation, and$1.6 million of right-of-use assets amortization, partially offset by$1.3 million of amortization of discount on investment and$1.2 million of benefit from income tax differences. The net change in our operating assets and liabilities was primarily the result of a$3.4 million increase in accounts payable due to timing of payment, a$2.9 million increase in accrued expenses, a$1.4 million receipt of tenant improvement allowance net of payment of operating lease liabilities, and a$0.7 million increase in accrued compensation due to increased personnel, partially offset by a$5.0 million increase in inventory due to higher testing volumes. Investing activities Cash used in investing activities during the six months endedJune 30, 2020 was$304.7 million , which resulted primarily from purchases of marketable securities of$465.3 million , purchases of property and equipment of$19.1 million and purchases of intangible assets and capitalized license obligations of$17.9 million , partially offset by maturities of marketable securities of$197.5 million . Cash used in investing activities during the six months endedJune 30, 2019 was$305.2 million , which resulted primarily from purchases of marketable securities of$418.8 million , business acquisition, net of cash acquired, of$9.8 million and purchases of property and equipment of$5.8 million , partially offset by maturities of marketable securities of$129.2 million . Financing activities Cash provided by financing activities during the six months endedJune 30, 2020 was$362.8 million , which was primarily due to proceeds from a follow-on offering of our common stock, net of underwriting discounts and commissions and offering expenses payable by us, of$354.6 million , proceeds from issuances of common stock under employee stock purchase plan of$4.0 million and proceeds from exercise of stock options of$3.5 million . Cash provided by financing activities during the six months endedJune 30, 2019 was$357.4 million , which was primarily due to proceeds from a public offering of our common stock, net of underwriting discounts and commissions and offering expenses payable by us, of$349.7 million , proceeds from exercise of stock options of$5.5 million , and proceeds from issuances of common stock under employee stock purchase plan of$1.9 million . Contractual obligations and commitments Except as set forth in Note 9, Commitments and Contingencies, of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in "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 . Off-balance sheet arrangements As ofJune 30, 2020 , we have not had any off-balance sheet arrangements as defined in the rules and regulations of theSEC . Critical accounting policies and estimates We have prepared our financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Our preparation of these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for 53 -------------------------------------------------------------------------------- Table of Contents making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are described in more detail in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements. Revenue recognition We derive revenue from the provision of precision oncology testing services provided to our ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to our biopharmaceutical customers. Precision oncology services include genomic profiling and the delivery of other genomic information derived from our platform. Development services include companion diagnostic development, information solutions and laboratory services. We currently receive payments from commercial third-party payors, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies and research institutes. EffectiveJanuary 1, 2019 , we began recognizing revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, or ASC 606. Revenues are recognized when control of services is transferred to customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. Precision oncology testing We recognize revenue from the sale of our precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians. Most precision oncology tests requested by clinical customers are sold without a written agreement; however, we determine an implied contract exists with our clinical customers. We identify each sale of our liquid biopsy test to clinical customer as a single performance obligation. With the exception of certain limited contracted arrangements with insurance carriers and other institutions where the transaction price is fixed, a stated contract price does not exist and the transaction price for each implied contract with our clinical customers represents variable consideration. We estimate the variable consideration under the portfolio approach and consider the historical reimbursement data from third-party payers and patients, as well as known current or anticipated reimbursement trends not reflected in the historical data. We monitor the estimated amount to be collected in the portfolio at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the estimate and any subsequent revision contain uncertainty and require the use of judgment in the estimation of the variable consideration and application of the constraint for such variable consideration. We analyze actual cash collections over the expected reimbursement period and compare it with the estimated variable consideration for each portfolio and any difference is recognized as an adjustment to estimated revenue after the expected reimbursement period, subject to assessment of the risk of future revenue reversal. Revenue from sales of precision oncology tests to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume over a defined period. We identify our promise to transfer a series of distinct liquid biopsy tests to biopharmaceutical customers as a single performance obligation. Precision oncology tests to biopharmaceutical customers are generally billed at a fixed price for each test performed. For agreements involving testing volume to be satisfied over a defined period, revenue is recognized over time based on the number of tests performed as the performance obligation is satisfied over time. Results of our precision oncology services are delivered electronically, and as such there are no shipping or handling fees incurred by us or billed to customers. Development services We perform development services for our biopharmaceutical customers utilizing our precision oncology information platform. Development services typically represent a single performance obligation as we perform a significant integration service, such as analytical validation and regulatory submissions. The individual promises are not separately identifiable from other promises in the contracts and, therefore, are not distinct. However, under certain contracts, a biopharmaceutical customer may engage us for multiple distinct development services which are both capable of being distinct and separately identifiable from other promises in the contracts and, therefore, distinct performance obligations. 54 -------------------------------------------------------------------------------- Table of Contents We collaborate with pharmaceutical companies in the development and clinical trials of new drugs. As part of these collaborations, we provide services related to regulatory filings with the FDA to support companion diagnostic device submissions for our liquid biopsy panels. Under these collaborations, we generate revenue from achievement of milestones, as well as provision of on-going support. These collaboration arrangements include no royalty obligations. For development services performed, we are compensated through a combination of an upfront fee and performance-based non-refundable regulatory and other developmental milestone payments. The transaction price of our development services contracts typically represents variable consideration. Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be managed to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone. In making this assessment, we consider our historical experience with similar milestones, the degree of complexity and uncertainty associated with each milestone, and whether achievement of the milestone is dependent on parties other than us. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is updated at each reporting period as a revision to the estimated transaction price. We recognize development services revenue over the period in which biopharmaceutical research and development services are provided. Specifically, we recognize revenue using an input method to measure progress, utilizing costs incurred to-date relative to total expected costs as its measure of progress. We also assess the changes to the total expected cost estimates as well as any incremental fees negotiated resulting from changes to the scope of the original contract in determining the revenue recognition at each reporting period. For development of new products or services under these arrangements, costs incurred before technological feasibility is reached are included as research and development expenses in our condensed consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services. Contracts with multiple performance obligations Contracts with biopharmaceutical customers may include multiple distinct performance obligations, such as provision of precision oncology testing, biopharmaceutical research and development services, and clinical trial enrollment assistance, among others. We evaluate the terms and conditions included within our contracts with biopharmaceutical customers to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together. We first identify material promises, in contrast to immaterial promises or administrative tasks, under the contract and then evaluates whether these promises are both capable of being distinct and distinct within the context of the contract. In assessing whether a promised service is capable of being distinct, we consider whether the customer could benefit from the service either on its own or together with other resources that are readily available to the customer, including factors such as the research, development, and commercialization capabilities of a third party and the availability of the associated expertise in the general marketplace. In assessing whether a promised service is distinct within the context of the contract, we consider whether we provide a significant integration of the services, whether the services significantly modify or customize one another, or whether the services are highly interdependent or interrelated. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin. Variable interest entity We review agreements we enter into with third party entities, pursuant to which we may have a variable interest in the entity, in order to determine if the entity is a variable interest entity, or VIE. If the entity is a VIE, we assess whether or not we are the primary beneficiary of that entity. In determining whether we are the primary beneficiary of an entity, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. If we determine we are the primary beneficiary of a VIE, we consolidate the statements of operations and financial condition of the VIE into our consolidated financial statements. Accounting for the consolidation is based on our determination if the VIE meets the definition of a business or and asset. Assets, liabilities and noncontrolling interests, excluding goodwill, of VIEs that are not determined to be businesses are recorded at fair value in our financial statements upon consolidation. Assets and liabilities that we have transferred to a VIE, after, or shortly before the date we became the primary 55 -------------------------------------------------------------------------------- Table of Contents beneficiary are recorded at the same amount at which the assets and liabilities would have been measured if they had not been transferred. Our determination about whether we should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event. InMay 2018 , we and an affiliate of SoftBank formed and capitalized the Joint Venture for the sale, marketing and distribution of our tests in the JV Territory. We expect to rely on the Joint Venture to accelerate commercialization of our products inAsia , theMiddle East andAfrica , with an initial focus onJapan . The Joint Venture is deemed to be a VIE and we are identified as the primary beneficiary of the VIE. Consequently, we have consolidated the financial position, results of operations and cash flows of the Joint Venture in our financial statements and all intercompany balances have been eliminated in consolidation. The joint venture agreement also includes a put-call arrangement with respect to the shares of the Joint Venture held by SoftBank and its affiliates. SoftBank will have a put right to cause us to purchase all shares of the Joint Venture held by SoftBank and its affiliates, and we will have a call right to purchase all such shares in the event of (i) certain material disagreement relating to the Joint Venture or its business that may seriously affect the ability of the Joint Venture to perform its obligations under the joint venture agreement or may otherwise seriously impair the ability of the Joint Venture to conduct its business in an effective matter, other than one relating to the Joint Venture's business plan or to factual matters that may be capable of expert determination; (ii) the effectiveness of our initial public offering, a change in control, the seventh anniversary of the formation of the Joint Venture, or each subsequent anniversary of each of the foregoing events; or (iii) a material breach of the joint venture agreement by the other party that goes unremedied within 20 business days. Unless the shares of the Joint Venture are publicly traded and listed on a nationally recognized stock exchange; the purchase price per share of the Joint Venture in these situations will be determined by a third-party valuation firm on the assumption that the sale is on an arm's-length basis on the date of the put or call notice. The third-party valuation firm may evaluate a range of factors and employ assumptions that are subjective in nature, which could result in the fair value of SoftBank's interest in the Joint Venture being determined to be materially different from what has been recorded in our condensed consolidated financial statements, including those included elsewhere in this Quarterly Report on Form 10-Q. In the event we exercise our call right, the fair value of the Joint Venture will be deemed to be no less than an amount that yields a 20% internal rate of return on each tranche of capital invested by SoftBank and its affiliates in the Joint Venture, taking into account all proceeds received by SoftBank and its affiliates arising from their shares through such date. In the event SoftBank exercises its put right and the fair value of the Joint Venture is determined to be greater than 40% of our fair value, we will only be required to purchase the number of shares of the Joint Venture held by SoftBank and its affiliates having an aggregate value equal to the product of 40% of our fair value and the pro rata portion of the outstanding shares of the Joint Venture held by SoftBank and its affiliates. We may pay the purchase price for the shares of the Joint Venture in cash, in shares of our common stock, or in a combination thereof. In the event we exercise the call right, SoftBank will choose the form of consideration. In the event SoftBank exercises the put right, we will choose the form of consideration. The noncontrolling interest held by SoftBank contains embedded put-call redemption features that are not solely within our control and has been classified outside of permanent equity in our consolidated balance sheets. The put-call feature embedded in the redeemable noncontrolling interest do not currently require bifurcation as it does not meet the definition of a derivative and is considered to be clearly and closely related to the redeemable noncontrolling interest. The noncontrolling interest is considered probable of becoming redeemable as SoftBank has the option to exercise its put right to sell its equity ownership in the Joint Venture to us on or after the seventh anniversary of the formation of the Joint Venture, on each subsequent anniversary of the IPO and under certain other circumstances. We elected to recognize the change in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period. Stock-based compensation After the adoption of Accounting Standards Update 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting onJanuary 1, 2019 , we measure stock-based compensation expense for stock options granted to our employees, directors, and nonemployee consultants on the date of grant and recognize the corresponding compensation expense of those awards over the period that the related services are rendered, which is generally the vesting period of the respective award. Compensation expense for stock options with performance metrics is calculated based upon expected achievement of the metrics specified in the grant. 56 -------------------------------------------------------------------------------- Table of Contents We estimate the fair value of stock options granted to our employees, directors, and nonemployee consultants and stock purchase rights under our 2018 Employee Stock Purchase Plan 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 fair value of our stock options were: Expected term Our expected term represents the period that our stock options are expected to be outstanding. After the adoption of Accounting Standards Update 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting onJanuary 1, 2019 , the expected term of stock options issued to employees, directors and nonemployee consultants is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term. Expected volatility Prior to the commencement of trading of our common stock on the Nasdaq Global Select Market onOctober 4, 2018 in connection with the IPO, there was no active trading market for our common stock. Due to limited historical data for the trading of our common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies in the same industry plus our expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty. Risk-free interest rate The risk-free interest rate is based on theU.S. treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants. Expected dividend yield We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we use an expected dividend yield of zero. Black-Scholes assumptions The weighted-average assumptions used in our Black-Scholes option-pricing model were as follows for stock option granted to our employees, directors and nonemployees for the periods presented: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 (unaudited) Expected term (in years) 5.50 - 6.10 5.50 - 6.16 5.50 - 6.10 5.50 - 6.22 Expected volatility 66.5% - 68.5% 66.9% - 68.3% 66.5% - 73.3% 66.7% - 68.3% Risk-free interest rate 0.4% - 0.4% 1.9% 0.4% - 1.6% 1.9% - 2.7% Expected dividend yield -% -% -% -% For market-based restricted stock units, we derive the requisite service period using the Monte Carlo simulation model. The estimated fair value of the market-based restricted stock units was determined using a Monte Carlo simulation model which requires the use of assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. Stock-based compensation expense will be recorded regardless of achieving the market conditions or not. If the related market condition is achieved earlier than its expected derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal. The assumptions used to calculate the fair value of our market-based restricted stock units were as follows: Fair Value of Common Stock The fair value of our common stock is determined by the closing price, on the date of grant, of its common stock, which is traded on the Nasdaq Global Select Market. 57 -------------------------------------------------------------------------------- Table of Contents Expected Volatility Due to limited historical data for the trading of the our common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies and implied volatility of publicly traded options in the same industry plus our expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty. Expected Term The expected term represents the derived service period for the respective tranches which has been estimated using the Monte Carlo simulation model. Risk-Free Interest Rate The risk-free interest rate is based on theU.S. Treasury rate, with maturities similar to the expected term of the market-based restricted stock units. Risky Rate The risky rate represents our cost of equity. Expected Dividend Yield We do not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero. Discount for Lack of Marketability The discount for lack of marketability represents the discount applied for post vest term restrictions and has been derived using the Monte Carlo simulation model. The following assumptions were used to calculate the stock-based compensation for market-based restricted stock units: a weighted-average expected life of 0.83 - 2.07 years; expected volatility of 65.5%; a risk-free interest rate of 0.5%; a zero dividend yield; a risky rate (cost of equity) of 16%; and a discount for post-vesting restrictions of 10.4% - 14.5%. We recognize stock-based compensation expense net of forfeitures as they occur. We will continue to use judgment in evaluating the assumptions related to our stock-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 stock-based compensation expense. Recent accounting pronouncements See Note 2, Summary of Significant Accounting Policies, to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information. Item 3. Quantitative and Qualitative Disclosures About Market Risk We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Interest rate risk We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents and marketable securities. As ofJune 30, 2020 , we had cash and cash equivalents of$164.7 million held primarily in cash deposits and money market funds. Our marketable securities are held inU.S. government debt securities,U.S. government agency bonds and corporate bonds. As ofJune 30, 2020 , we had short-term marketable securities of$773.2 million and long-term marketable securities of$146.1 million . Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates inthe United States . As ofJune 30, 2020 , a hypothetical 100 basis point increase in interest rates would have resulted in an approximate$6.1 million decline of the fair value of our available-for-sale securities and a hypothetical 100 basis point decrease in interest rates would have resulted in an approximate$1.0 million increase of the fair value of our 58 -------------------------------------------------------------------------------- available-for-sale securities. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur. Foreign currency risk The majority of our revenue is generated inthe United States . ThroughJune 30, 2020 , we have generated an insignificant amount of revenues denominated in foreign currencies. As we expand our presence in the international market, our results of operations and cash flows are expected to increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. As ofJune 30, 2020 , the effect of a hypothetical 10% change in foreign currency exchange rates would not be material to our financial condition or results of operations. To date, we have not entered into any hedging arrangements with respect to foreign currency risk. As our international operations grow, we will continue to reassess our approach to manage our risk relating to fluctuations in currency rates. Item 4. Controls and Procedures Evaluation of disclosure controls and procedures Our Chief Executive Officer, or CEO, and our Chief Financial Officer, or CFO with the participation of other members of our management, have evaluated the effectiveness of our "disclosure controls and procedures" (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as ofJune 30, 2020 , and our CEO and our CFO have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Changes in internal control There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that a number of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness. Limitations on effectiveness of controls and procedures Our management, including our CEO and our CFO, believes that our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives and are effective at the reasonable assurance level. However, our management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the controls. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. 59
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