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. Our Guardant 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. 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. We launched our Guardant360 and GuardantOMNI liquid biopsy-based tests for advanced stage cancer. These tests fuel development of our treatment selection, cancer survivors with surveillance, asymptomatic individuals eligible for cancer screening and individuals at a higher risk for developing cancer with early detection. 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. In addition, we are developing our LUNAR-2 assay to address early cancer detection in screening eligible asymptomatic individuals and higher risk individuals. 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. InSeptember 2020 , we dual-launched our Guardant360 CDx and Guardant360 LDT tests. Our Guardant360 CDx test was the first comprehensive liquid biopsy test approved by theU.S. Food and Drug Administration , or the FDA, to provide tumor mutation profiling for cancer patients with solid tumors and to be used as a companion diagnostic initially in connection with one therapeutic product of a biopharmaceutical customer. We generated total revenue of$74.6 million and$60.8 million for the three months endedSeptember 30, 2020 and 2019, respectively, and$208.4 million and$151.5 million for the nine months endedSeptember 30, 2020 and 2019, respectively. We also incurred net losses of$71.7 million and$13.1 million for the three months endedSeptember 30, 2020 and 2019, respectively, and$153.2 million and$45.7 million for the nine months endedSeptember 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. As ofSeptember 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 38 -------------------------------------------------------------------------------- Table of Contents covered by clinical patients' insurance for, the majority of the tests that we perform for patients on behalf of clinicians. Approximately 37% and 39% of ourU.S. clinical tests for the three months endedSeptember 30, 2020 and 2019, respectively, and approximately 37% and 38% of ourU.S. clinical tests for the nine months endedSeptember 30, 2020 and 2019, respectively, were for Medicare beneficiaries. •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. Precision oncology revenue from tests for clinical customers is calculated based on our expected cash collections, using the estimated variable consideration. The variable consideration is estimated based on historical collection patterns as well as the potential for changes in future reimbursement behavior by one or more payers. Estimation of the impact of the potential for changes in reimbursement requires significant judgment and considers payer' past patterns of changes in reimbursement as well as any stated plans to implement changes. Any cash collections over the expected reimbursement period exceeding the estimated variable consideration is recorded in future periods based on actual cash received. 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. Because we are not contracted with these payers, they determine the amount that they are willing to reimburse us for any of our tests and they can prospectively and retrospectively adjust the amount of reimbursement, adding to the complexity in estimating the variable consideration. 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. In addition, Z-Code Identifiers are used by certain payers, including under Medicare's Molecular Diagnostic Services Program, or MolDx, to supplement CPT codes for molecular diagnostics tests such as our Guardant360 test. Changes to the codes used to report the Guardant360 test to payers may result in significant changes in its reimbursement. If a coding change were to occur, including as a result of the FDA approval of our Guardant360 test, payments for certain uses of the Guardant360 test could be reduced, put on hold, 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. For the three months endedSeptember 30, 2020 and 2019, respectively, approximately 44% and 42% of ourU.S. clinical tests were for patients tested for NSCLC, and for the nine months endedSeptember 30, 2020 and 2019, respectively, approximately 43% and 45% of ourU.S. clinical tests were for patients tested for NSCLC. InSeptember 2018 , we began to receive payments from Medicare for Guardant360 clinical tests performed for NSCLC patients. 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. Following the FDA approval of our Guardant360 CDx test, a new Z-Code Identifier is expected to be issued, and a new pricing is expected to be established under MolDx for the Guardant360 CDx test. While we expect to continue to submit claims to Medicare for Guardant360 LDT clinical tests performed for such qualifying patients using the existing Z-Code Identifier, Medicare has instructed us to not submit claims to Medicare for Guardant360 CDx clinical tests until the new code is issued for the Guardant360 CDx test and the corresponding pricing is established. This new pricing for Guardant360 CDx clinical tests could be different from the current pricing for Guardant360 LDT clinical tests which could affect our future revenue. Due to the inherent variability and unpredictability of the reimbursement landscape, including related to the amount that payers reimburse us for any of our tests, previously recorded revenue adjustments are not indicative of future revenue adjustments from actual cash collections, which may fluctuate significantly. This variability and unpredictability could increase the risk of future revenue reversal and result in our failing to meet any previously publicly stated guidance we may provide. •Biopharmaceutical customers. Our revenue also depends on our ability to attract, maintain and expand relationships with biopharmaceutical customers. As we continue to develop these relationships, we expect to support a growing number of clinical trials globally and continue to have opportunities to offer our platform to such customers for development services, including companion diagnostic development, novel target discovery and validation, as well as clinical trial enrollment. For example, our Guardant360 and GuardantOMNI tests are 39 -------------------------------------------------------------------------------- Table of Contents both being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen,Janssen Biotech and Radius Health. •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 as we believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers. 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. We have expended considerable resources, and expect to increase such expenditures over the next few years, to support our research and development programs 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 . •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. Our equity awards, including market-based restricted stock units, are intended to retain and incentivize employees to lead us to sustained, long-term superior financial and operational performance. •COVID-19 Global Pandemic. The 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 . 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, 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. We launched our Guardant-19 test and received theFDA's emergency use authorization for use in the detection of the novel coronavirus. The test is being offered to our employees and select partner organizations our CLIA-certified clinical laboratory. 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. 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 endedDecember 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 40 -------------------------------------------------------------------------------- Table of Contents (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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 Net loss attributable to Guardant Health, Inc. common stockholders$ (77,670) $ (12,790) $ (160,038) $ (50,441) Adjustments: Interest income (2,313) (4,286) (8,271) (9,870) Interest expense 8 280 30 860 Other (income) expense, net (345) (179) (2,421) (275) Provision for (benefit from) income taxes 68 (202) 116 (1,383) Depreciation and amortization 4,353 2,952 11,462 7,963 Stock-based compensation expense 55,198 5,484 87,351 11,882 Adjustments relating to noncontrolling interest and contingent consideration 6,070 (300) 6,680 4,700 Acquisition related expenses (1) - - 9,707 422 Adjusted EBITDA (non-GAAP)$ (14,631) $ (9,041)
(1) For the nine months endedSeptember 30, 2020 , acquisition related expenses consist of a dispute settlement expense of$1.2 million and an IPR&D technology write off of$8.5 million incurred during the three months endedMarch 31, 2020 in connection with a settlement and a license purchase agreement. For the nine months endedSeptember 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 and other. 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 , throughSeptember 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 39% ofU.S. tests performed during the three months endedSeptember 30, 2020 and 2019, respectively, and 37% and 38% ofU.S. tests performed during the nine months endedSeptember 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 and other. Development services and other revenue primarily 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 setup, monitoring and maintenance, 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 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 and other 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 and other. Cost of development services and other primarily 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 and other 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 Chief Executive Officer and our President and Chief Operating Officer 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, payments due in relation to the settlement of a patent dispute, net of credit 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 -------------------------------------------------------------------------------- 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 Nine Months Ended September 30, September 30, 2020 2019 2020 2019 (unaudited) (in thousands) Revenue: Precision oncology testing$ 60,384 $ 52,147 $ 171,621 $ 123,048 Development services and other 14,185 8,701
36,793 28,430
Total revenue 74,569 60,848
208,414 151,478
Costs and operating expenses:
Cost of precision oncology testing(1) 16,699 16,578
52,699 42,251
Cost of development services and other 4,488 1,936
11,429 6,631
Research and development expense(1) 36,245 24,569
109,580 60,417
Sales and marketing expense(1) 25,095 18,802
75,225 56,048
General and administrative expense(1) 66,294 16,440
123,265 42,540
Total costs and operating expenses 148,821 78,325 372,198 207,887 Loss from operations (74,252) (17,477) (163,784) (56,409) Interest income 2,313 4,286 8,271 9,870 Interest expense (8) (280) (30) (860) Other income (expense), net 345 179 2,421 275 Loss before provision for income taxes (71,602) (13,292)
(153,122) (47,124)
Provision for (benefit from) income taxes 68 (202) 116 (1,383) Net loss$ (71,670) $ (13,090) $ (153,238) $ (45,741)
(1)Amounts include stock-based compensation expense as follows:
Nine Months Ended
Three Months Ended September 30, September 30,
2020 2019 2020 2019
(unaudited)
(in thousands)
Cost of precision oncology testing $ 428 $ 266 $ 1,138 $ 562
Research and development expense 2,369 2,066 7,355 4,704
Sales and marketing expense 2,320 1,458 6,285 2,930
General and administrative expense 50,081 1,694 72,573 3,686
Total stock-based compensation expense
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Table of Contents Comparison of the Three Months EndedSeptember 30, 2020 and 2019 Revenue Three Months Ended September 30, Change 2020 2019 $ % (unaudited) (in thousands) Precision oncology testing $ 60,384$ 52,147 $ 8,237 16 % Development services and other 14,185 8,701 5,484 63 % Total revenue $ 74,569$ 60,848 $ 13,721 23 % Total revenue was$74.6 million for the three months endedSeptember 30, 2020 compared to$60.8 million for the three months endedSeptember 30, 2019 , an increase of$13.7 million , or 23%. Precision oncology testing revenue increased to$60.4 million for the three months endedSeptember 30, 2020 from$52.1 million for the three months endedSeptember 30, 2019 , an increase of$8.2 million , or 16%. This increase in precision oncology testing revenue was due to an increase in sample volume as well as an increase in average selling price per test as a result of expanded coverage of our tests for clinical customers, plus$4.3 million in revenue received during the three months endedSeptember 30, 2020 from Medicare for samples processed in 2019 compared to$5.5 million in revenue received during the three months endedSeptember 30, 2019 from Medicare for samples processed in 2018. Precision oncology revenue from tests for clinical customers was$48.3 million in the three months endedSeptember 30, 2020 and$30.8 million in the three months endedSeptember 30, 2019 , respectively. Tests for clinical customers increased to 16,950 for the three months endedSeptember 30, 2020 from 13,259 for the three months endedSeptember 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$12.0 million in the three months endedSeptember 30, 2020 and$21.4 million in the three months endedSeptember 30, 2019 , respectively. Tests for biopharmaceutical customers decreased to 3,071 for the three months endedSeptember 30, 2020 from 5,280 for the three months endedSeptember 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$3,919 for the three months endedSeptember 30, 2020 , compared to$4,052 for the three months endedSeptember 30, 2019 . 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 and other revenue increased to$14.2 million for the three months endedSeptember 30, 2020 from$8.7 million for the three months endedSeptember 30, 2019 , an increase of$5.5 million , or 63%. This increase in development services and other revenue was primarily due to new collaboration projects from biopharmaceutical customers for companion diagnostic development and regulatory approval services during the three months endedSeptember 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 September 30, Change 2020 2019 $ % (unaudited) (in thousands) Cost of revenue$ 21,187 $ 18,514 $ 2,673 14 % Gross profit$ 53,382 $ 42,334 Gross margin 72 % 70 % Cost of revenue was$21.2 million for the three months endedSeptember 30, 2020 compared to$18.5 million for the three months endedSeptember 30, 2019 , an increase of$2.7 million , or 14%. Cost of precision oncology testing revenue was$16.7 million for the three months endedSeptember 30, 2020 compared to$16.6 million for the three months endedSeptember 30, 2019 , an increase of$0.1 million , or 1%. This increase in cost of precision oncology testing was primarily due to a$2.1 million increase in labor and manufacturing overhead costs, a$0.2 million increase in other costs including costs related to freight and curation of test results for physicians, partially offset by a$1.2 million decrease in material costs, and a$1.1 million decrease in royalties. Cost of development services and other was$4.5 million for the three months endedSeptember 30, 2020 compared to$1.9 million for the three months endedSeptember 30, 2019 , an increase of$2.6 million , or 132%. This increase in cost of development services and other 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 endedSeptember 30, 2020 was 72% compared to 70% for the three months endedSeptember 30, 2019 . Gross margin improvement primarily reflects the impact of higher sample volumes from clinical customers, increased average selling price per test including the impact of revenue from samples processed in prior periods resulting from successful appeals, and cost efficiencies. Our gross margin may be adversely impacted by the COVID-19 pandemic for the affected periods. Research and development expense Three Months Ended September 30, Change 2020 2019 $ % (unaudited) (in thousands) Research and development $ 36,245$ 24,569 $ 11,676 48 % Research and development expenses were$36.2 million for the three months endedSeptember 30, 2020 compared to$24.6 million for the three months endedSeptember 30, 2019 , an increase of$11.7 million , or 48%. This increase in research and development expense was primarily due to an increase of$4.8 million in personnel-related costs for employees in our research and development group, including a$0.3 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$3.3 million in development consulting fees, an increase of$2.3 million in material costs, and an increase of$1.0 million related to allocated facilities and information technology infrastructure costs. Sales and marketing expense Three Months Ended September 30, Change 2020 2019 $ % (unaudited) (in thousands) Sales and marketing $ 25,095$ 18,802 $ 6,293 33 %
Selling and marketing expenses were
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stock-based compensation, associated with the expansion of our commercial
organization. The increase is also attributable to an increase of $1.3 million
related to allocated facilities and information technology infrastructure costs,
and an increase of $0.8 million in professional service expenses related to
marketing activities.
General and administrative expense
Three Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
General and administrative $ 66,294 $ 16,440 $ 49,854 303 %
General and administrative expenses were $66.3 million for the three months
ended September 30, 2020 compared to $16.4 million for the three months ended
September 30, 2019 , an increase of $49.9 million , or 303%. This increase was
primarily due to an increase of $49.2 million in personnel-related costs,
including a $48.4 million increase in stock-based compensation primarily in
connection with the issuance of market-based restricted stock units to our Chief
Executive Officer and our President and Chief Operating Officer as well as an
increase in our headcount, an increase of $1.1 million related to allocated
facilities and information technology infrastructure cost, and an increase of
$0.4 million in office administrative costs, offset by a decrease of $1.1
million in professional service expenses related to outside legal, accounting,
consulting and IT services. Our general and administrative expenses may increase
in the near term due to increase in stock-based compensation expense associated
with increase headcount as well as expense recognition associated with the
market-based restricted stock units.
Interest income
Three Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Interest income $ 2,313 $ 4,286 $ (1,973) (46) %
Interest income was $2.3 million for the three months ended September 30, 2020
compared to $4.3 million for the three months ended September 30, 2019 , a
decrease of $2.0 million , or 46%. This decrease was primarily due to a
significant decrease in interest rate as the U.S. Federal Reserve 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 ended
September 30, 2020 primarily as a result of cash proceeds from our follow-on
public offering completed in June 2020 .
Interest expense
Three Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Interest expense $ (8) $ (280) $ 272 (97) %
Interest expense was immaterial for the three months ended
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Other income (expense), net
Three Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Other income (expense), net $ 345 $ 179 $ 166 *
Other income (expense), net included foreign currency exchange gains of $0.3
million and $0.2 million for the three months ended September 30, 2020 and 2019.
Provision for (benefit from) income taxes
Three Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Provision for (benefit from) income
taxes $ 68 $ (202) $ 270 *
* Not meaningful
Provision for income taxes was immaterial for the three months ended September
30, 2020 . Benefit from income taxes for the three months ended September 30,
2019 relates primarily to the utilization of tax losses from continuing
operations against other comprehensive income gains resulting in a tax benefit
of $0.2 million in accordance with intra-period tax allocation under ASC 740,
partially offset by state minimum income tax and income tax on our earnings in
foreign jurisdictions.
Comparison of the Nine Months Ended September 30, 2020 and 2019
Revenue
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Precision oncology testing $ 171,621 $ 123,048 $ 48,573 39 %
Development services and other 36,793 28,430 8,363 29 %
Total revenue $ 208,414 $ 151,478 $ 56,936 38 %
Total revenue was $208.4 million for the nine months ended September 30, 2020
compared to $151.5 million for the nine months ended September 30, 2019 , an
increase of $56.9 million , or 38%.
Precision oncology testing revenue increased to $171.6 million for the nine
months ended September 30, 2020 from $123.0 million for the nine months ended
September 30, 2019 , an increase of $48.6 million , or 39%. 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 $8.1 million in revenue received from Medicare for samples
processed in 2019 up from $5.5 million in revenue received during the nine
months ended September 30, 2019 from Medicare for samples processed in 2018.
Precision oncology revenue from tests for clinical customers was $125.9 million
in the nine months ended September 30, 2020 and $69.7 million in the nine months
ended September 30, 2019 , respectively. Tests for clinical customers increased
to 45,901 for the nine months ended September 30, 2020 from 34,655 for the nine
months ended September 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
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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 in March 2018 .
Precision oncology revenue from tests for biopharmaceutical customers was $45.7
million in the nine months ended September 30, 2020 and $53.3 million in the
nine months ended September 30, 2019 , respectively. Tests for biopharmaceutical
customers decreased to 11,142 for the nine months ended September 30, 2020 from
14,326 for the nine months ended September 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 $4,100 for the nine months ended September 30, 2020 ,
up from $3,722 for the nine months ended September 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 and other revenue increased to $36.8 million for the nine
months ended September 30, 2020 from $28.4 million for the nine months ended
September 30, 2019 , an increase of $8.4 million , or 29%. This increase in
development services and other revenue was primarily due to progression of
collaboration projects from biopharmaceutical customers for companion diagnostic
development and regulatory approval services completed during the nine months
ended September 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.
Cost of Revenue and Gross Margin
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(dollars in thousands)
Cost of revenue $ 64,128 $ 48,882 $ 15,246 31 %
Gross profit $ 144,286 $ 102,596
Gross margin 69 % 68 %
Cost of revenue was $64.1 million for the nine months ended September 30, 2020
compared to $48.9 million for the nine months ended September 30, 2019 , an
increase of $15.2 million , or 31%.
Cost of precision oncology testing revenue was $52.7 million for the nine months
ended September 30, 2020 compared to $42.3 million for the nine months ended
September 30, 2019 , an increase of $10.4 million , or 25%. This increase in cost
of precision oncology testing was attributable to an increase in sample volumes
and was primarily due to a $9.1 million increase in production labor and
overhead costs, a $2.2 million increase in material costs, and a $1.1 million
increase in other costs including costs related to freight and curation of test
results for physicians, offset by a $1.9 million decrease in royalties.
Cost of development services and other was $11.4 million for the nine months
ended September 30, 2020 compared to $6.6 million for the nine months ended
September 30, 2019 , an increase of $4.8 million , or 72%. This increase in cost
of development services and other was primarily due to an increase in labor
costs related to companion diagnostic development and regulatory approval
service contracts.
Gross margin for the nine months ended September 30, 2020 was 69% compared to
68% for the nine months ended September 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
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Research and development $ 109,580 $ 60,417 $ 49,163 81 %
Research and development expenses were $109.6 million for the nine months ended
September 30, 2020 compared to $60.4 million for the nine months ended September
30, 2019 , an increase of $49.2 million , or 81%. This increase in research and
development expense was primarily due to an increase of $16.7 million in
personnel-related costs for employees in our research and development group,
including a $2.7 million increase in stock-based compensation, as we increased
our headcount to support continued investment in our technology, an increase of
$9.5 million in material costs related to various programs, an increase of $9.5
million in development consulting fees, 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 $3.2 million related to allocated
facility and information technology infrastructure costs and an increase of $0.6
million in office administrative costs as we increased our headcount to support
continued investment in our technology.
Sales and marketing expense
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Sales and marketing $ 75,225 $ 56,048 $ 19,177 34 %
Selling and marketing expenses were $75.2 million for the nine months ended
September 30, 2020 compared to $56.0 million for the nine months ended September
30, 2019 , an increase of $19.2 million , or 34%. This increase was primarily due
to an increase of $13.2 million in personnel-related costs, including a $3.4
million increase in stock-based compensation, associated with the expansion of
our commercial organization, an increase of $3.3 million related to allocated
facility and information technology infrastructure costs and an increase of $2.9
million in professional service expenses related to marketing activities, 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
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
General and administrative $ 123,265 $ 42,540 $ 80,725 190 %
General and administrative expenses were $123.3 million for the nine months
ended September 30, 2020 compared to $42.5 million for the nine months ended
September 30, 2019 , an increase of $80.7 million , or 190%. This increase was
primarily due to an increase of $73.0 million in personnel-related costs,
including a $68.9 million increase in stock-based compensation primarily in
connection with the issuance of market-based restricted stock units to our Chief
Executive Officer and our President and Chief Operating Officer as well as an
increase in our headcount, an increase of $3.5 million related to allocated
facilities and information technology infrastructure costs, an increase of $1.3
million in office administrative 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 $1.1 million in professional service expenses
related to outside legal, accounting, consulting and IT services. Our general
and administrative expenses may increase in the near term due to increase in
stock-based compensation expense associated with increase headcount as well as
expense recognition associated with the market-based restricted stock units..
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Interest income
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Interest income $ 8,271 $ 9,870 $ (1,599) (16) %
Interest income was $8.3 million for the nine months ended September 30, 2020
compared to $9.9 million for the nine months ended September 30, 2019 , a
decrease of $1.6 million , or (16)%. This decrease was primarily due to a
significant decrease in interest rate as the U.S. Federal Reserve lowered the
risk-free interest rate to nearly zero, offset by 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 .
Interest expense
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Interest expense $ (30) $ (860) $ 830 (97) %
Interest expense was immaterial for the nine months ended September 30, 2020
compared to $0.9 million for the nine months ended September 30, 2019 , a
decrease of $0.8 million , or 97%. 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
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Other income (expense), net $ 2,421 $ 275 $ 2,146 *
For the nine months ended September 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 $0.3 million . Other income
(expense), net included foreign currency exchange gains of $0.2 million for the
nine months ended September 30, 2019 .
Provision for (benefit from) income taxes
Nine Months Ended September 30, Change
2020 2019 $ %
(unaudited)
(in thousands)
Provision for (benefit from) income
taxes $ 116 $ (1,383) $ 1,499 *
* Not meaningful
Provision for income taxes was immaterial for the nine months ended September
30, 2020 . Benefit from income taxes for the nine months ended September 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. and the utilization of tax losses from
continuing operations against other comprehensive income gains resulting in a
tax benefit of $0.2 million in accordance with intra-period tax allocation under
ASC 740, 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 September 30, 2020 , we had an accumulated deficit of $512.8
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
September 30, 2020 , we had cash and cash equivalents of $142.9 million and
marketable securities of $921.9 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 for
more than 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:
Nine Months Ended September 30,
2020 2019
(unaudited)
(in thousands)
Net cash used in operating activities $ (44,704) $ (16,792)
Net cash used in investing activities $ (319,401) $ (340,928)
Net cash provided by financing activities $ 363,583 Operating activities Cash used in operating activities during the nine months endedSeptember 30, 2020 was$44.7 million , which resulted from a net loss of$153.2 million and net change in our operating assets and liabilities of$11.7 million , partially offset by non-cash charges of$120.2 million . Non-cash charges primarily consisted of$87.4 million of stock-based compensation,$11.5 million of depreciation and amortization,$8.5 million of charge of in-process research and development costs with no alternative future use,$8.1 million of credit loss adjustment and others,$3.3 million of non-cash operating lease costs, and$1.6 million of amortization of premium on investment. The net change in our operating assets and liabilities was primarily the result of a$12.6 million increase in inventory due to higher testing volumes, a$7.6 million increase in other assets for long-term portion of payments due from a third-party in relation to the settlement of a patent dispute reached in the three months endedSeptember 30, 2020 , a$4.9 million decrease in deferred revenue, and a$3.5 million payment of operating lease liabilities net of receipt of tenant 52 -------------------------------------------------------------------------------- Table of Contents improvement allowance, partially offset by a$11.6 million decrease in accounts receivables, and a$5.5 million increase in accrued compensation due to increased personnel. Cash used in operating activities during the nine months endedSeptember 30, 2019 was$16.8 million , which resulted from a net loss of$45.7 million , partially offset by non-cash charges of$19.2 million and net change in our operating assets and liabilities of$9.8 million . Non-cash charges primarily consisted of$11.9 million of stock-based compensation,$8.0 million of depreciation and amortization, and$2.9 million of non-cash operating lease costs, partially offset by$2.0 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$11.6 million increase in accrued compensation due to increased personnel, a$6.4 million increase in accrued expenses and other liabilities, a$0.9 million decrease in accounts receivable, and a$0.6 million receipt of tenant improvement allowance net of payment of operating lease liabilities, partially offset by a$5.6 million increase in inventory due to higher testing volumes, a$3.0 million decrease in deferred revenue, and a$1.0 million increase in other assets. Investing activities Cash used in investing activities during the nine months endedSeptember 30, 2020 was$319.4 million , which resulted primarily from purchases of marketable securities of$580.2 million , purchases of property and equipment of$28.9 million and purchases of intangible assets and capitalized license obligations of$17.9 million , partially offset by maturities of marketable securities of$307.5 million . Cash used in investing activities during the nine months endedSeptember 30, 2019 was$340.9 million , which resulted primarily from purchases of marketable securities of$542.5 million , business acquisition, net of cash acquired, of$7.3 million , purchases of property and equipment of$11.6 million , purchases of intangible assets (non-compete agreements) and capitalized license obligations (under a biological materials license) of$2.6 million , offset by maturities of marketable securities of$223.1 million . Financing activities Cash provided by financing activities during the nine months endedSeptember 30, 2020 was$363.6 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 exercise of stock options of$7.4 million , and proceeds from issuances of common stock under employee stock purchase plan of$4.0 million , partially offset by taxes paid related to net share settlement of restricted stock units of$2.2 million . Cash provided by financing activities during the nine months endedSeptember 30, 2019 was$364.2 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$9.8 million , and proceeds from issuances of common stock under employee stock purchase plan of$5.1 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 ofSeptember 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 in
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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 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,
clinical trial set up, monitoring and maintenance, information solutions and
laboratory services, and other miscellaneous revenue streams. We currently
receive payments from commercial third-party payers, certain hospitals and
oncology centers and individual patients, as well as biopharmaceutical companies
and research institutes.
Effective January 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 and other
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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.
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 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.
We also have other miscellaneous revenue streams such as Guardant-19 screening
in connection with the outbreak of COVID-19, referral fees, maintenance and kits
fulfillment related revenues.
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.
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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 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.
In May 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 in Asia , the Middle East and Africa , with an
initial focus on Japan . 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
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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 on January 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.
We estimate the fair value of stock options and stock purchase rights granted
under our 2018 Employee Stock Purchase Plan and under the Guardant Health AMEA,
Inc.'s 2020 Equity Incentive Plan for the Joint Venture 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:
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. The grant date fair value of the Joint Venture's common stock has been
determined by the board of directors of the Joint Venture with the assistance of
management and an independent third-party valuation specialist. The grant date
fair value of the Joint Venture's common stock was determined using valuation
methodologies which utilizes certain assumptions including probability weighting
of events, volatility, time to liquidation, a risk-free interest rate and an
assumption for a discount for lack of marketability. In determining the fair
value of the Joint Venture's common stock, the methodologies used to estimate
the enterprise value of the Joint Venture were performed using methodologies,
approaches, and assumptions consistent with the American Institute of Certified
Public Accountants Accounting and Valuation Guide , Valuation of
Privately-Held-Company Equity Securities Issued as Compensation.
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 on January 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 on October 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.
The Joint Venture derived the expected volatility from the average historical
volatility over a period approximately equal to the expected term of comparable
publicly traded companies within its peer group that were deemed to be
representative of future stock price trends as the Joint Venture does not have
any trading history for its common stock. The Joint Venture will continue to
apply this process until a sufficient amount of historical information regarding
the volatility of its own stock price becomes available.
Risk-free interest rate
The risk-free interest rate is based on the U.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.
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Black-Scholes assumptions
The weighted-average assumptions used in our and the Joint Venture's
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 Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
(unaudited)Expected term (in years) 5.95 - 6.04 6.03 - 6.08 5.50 - 6.10 5.50 - 6.22 Expected volatility 63.6% - 68.4% 63.2% - 64.6% 63.6% - 73.3% 63.2% - 68.3% Risk-free interest rate 0.3% - 0.4% 1.6% - 1.9% 0.3% - 1.6% 1.6% - 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. Expected Volatility 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 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 0.53%; a zero dividend yield; a risky rate (cost of equity) of 16%; and a discount for post-vesting restrictions of 10.4% - 14.5%. 58
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Table of Contents 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.
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