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, 2020 and in Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q. Overview We are a leading precision oncology company focused on helping conquer cancer globally through use of our proprietary 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 liquid and tissue biopsy. 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. In pursuit of our goal to manage cancer across all stages of the disease, we provide our Guardant360, Guardant360 LDT, Guardant360 CDx, and GuardantOMNI liquid biopsy-based tests for advanced stage cancer. 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 with solid tumors and to be used as a companion diagnostic in connection with non-small cell lung cancer, or NSCLC patients who may benefit from treatment with osimertinib (EGFR exon 19 deletions, exon 20 T790M or exon 21 L858R mutations), amivantamab-vmjw (EGFR exon 20 insertion mutations), and sotorasib (KRAS G12C mutations), which have been developed by our biopharmaceutical customers AstraZeneca,Janssen Biotech and Amgen respectively. InFebruary 2021 , we launched our Guardant Reveal liquid biopsy-based tests for residual and recurring cancer to first address the need in Stage II-III colorectal cancer. InJune 2021 , we launched Guardant360 TissueNext, our first tissue-based test which will be used to identify patients with advanced cancer who may benefit from biomarker-informed treatment, and Guardant360 Response which will be used to measure early indications to patients' response to treatment up to eight weeks earlier than response evaluation criteria in solid tumors. We are developing tests under our LUNAR program which aims to address the needs of early stage cancer patients with neoadjuvant and adjuvant treatment selection, cancer survivors with surveillance, asymptomatic individuals eligible for cancer screening, and individuals at a higher risk for developing cancer with early detection. 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 unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers. We perform our tests in our clinical laboratory located inRedwood City, California . Our laboratory is certified pursuant to theClinical 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. We generated total revenue of$92.1 million and$66.3 million for the three months endedJune 30, 2021 and 2020, respectively, and$170.8 million and$133.8 million for the six months endedJune 30, 2021 and 2020, respectively. We also incurred net losses of$97.6 million and$49.7 million for the three months endedJune 30, 2021 and 2020, respectively, and$204.9 million and$81.6 million for the six months endedJune 30, 2021 and 2020, respectively. We have funded our operations to date principally from the sale of our stock, convertible senior notes, and revenue from our precision oncology testing and development services and other. As ofJune 30, 2021 , we had cash, cash equivalents and marketable securities of$1.8 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 40 -------------------------------------------------------------------------------- Table of Contents our results of operations, as the average selling price for biopharmaceutical sample testing is currently higher than our average reimbursement 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. Revenue from clinical tests for patients covered by Medicare represented approximately 44% and 38% of our precision oncology revenue from clinical customers during the three months endedJune 30, 2021 , and 2020, respectively, and approximately 42% and 36% of our precision oncology revenue from clinical customers during the six months endedJune 30, 2021 , and 2020, respectively. •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 tests 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. 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. 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 . Following the FDA approval of our Guardant360 CDx test, a new Z-Code Identifier was issued inAugust 2020 . InJanuary 2021 , a proprietary laboratory analyses, or PLA code was issued for our Guardant360 CDx with an effective date inApril 2021 . Additionally, based on this new PLA code, we applied to theCenters for Medicare and Medicaid Services or CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT. InMarch 2021 , CMS approved ADLT status to the Guardant360 CDx test, which would allow us to bill Medicare at the lowest available commercial rate for the first three quarters fromApril 1, 2021 . After the initial three quarters, we can bill Medicare for Guardant360 CDx services at the median rate of claims paid by commercial payers. We are in the process of negotiating reimbursement for our Guardant Reveal, Guardant Response and Guardant360 TissueNext tests from commercial and governmental payers. 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. Additionally, if coding changes were to occur, payments for certain uses of our tests could be reduced, put on hold, or eliminated. 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 41 -------------------------------------------------------------------------------- Table of Contents 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 tests are being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen, Daiichi Sankyo,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. 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 13,000 patients and evaluate the performance of our LUNAR-2 assay in detecting colorectal cancer in average-risk adults. In addition, we are investing very heavily in establishing clinical utility of our Guardant Reveal test in adjuvant treatment settings. In 2020, we launched three trials in collaboration with key cancer researchers: COBRA, a randomized controlled study, comprising over 1,400 low-risk stage-II colon cancer patients, ACT-3, comprising over 500 stage-III colorectal cancer patients, and PEGASUS for the de-escalation of therapy, encompassing over 140 high-risk stage-II and stage-III colon cancer patients. 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 or partnerships with research organizations. 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 . •Sales and marketing expense. Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our sales and marketing expense, increase in headcount, and in particular, our various marketing programs around existing and new product introductions. •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 and performance-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 all of our employees, contractors and their dependents, implemented social distance and building entry policies at work, and followedCalifornia's public health orders and the guidance from theCenters for Disease Control and Prevention . The COVID-19 global pandemic has negatively affected, 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. The severity of the impact on our business for the remainder of calendar year 2021 and beyond will depend on a number of factors, including the duration and severity of the pandemic and the impact of any variants of the virus. InAugust 2020 , we launched our Guardant-19 test and received theFDA's emergency use authorization for use in the detection of the novel coronavirus. The test was being offered to our employees and to select partner organizations via our CLIA-certified clinical laboratory. We do not expect out Guardant-19 test to be used extensively by third parties followingJune 30, 2021 , due to our decision to discontinue offering the test to third parties. 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, 2020 , and Part II, Item 1A, "Risk Factors" of this Quarterly Report on Form 10-Q, for more information. 42 -------------------------------------------------------------------------------- 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 tests to clinical and biopharmaceutical customers. Inthe United States , throughJune 30, 2021 , 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 and for Guardant360 CDx clinical testing performed for qualifying patients diagnosed with solid tumor cancers who meet the criteria of Medicare's National Coverage Determination for Next Generation Sequencing established inMarch 2018 . Revenue from clinical tests for patients covered by Medicare represented approximately 44% and 38% of our precision oncology revenue from clinical customers during the three months endedJune 30, 2021 , and 2020, respectively, and 42% and 36% of our precision oncology revenue from clinical customers during the six months endedJune 30, 2021 , and 2020, respectively. 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, liquid biopsy testing development and support, as well as GuardantConnect, GuardantINFORM, Guardant-19, and kits fulfillment related revenues. 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, inventory write-downs, direct labor, including employee benefits, bonus, and stock-based compensation; equipment and infrastructure expenses associated with processing liquid biopsy test samples such as 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, depreciation 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 comprising of direct labor and material costs including any inventory write-downs. 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. 43 -------------------------------------------------------------------------------- Table of Contents 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 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. 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, sales incentives, 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 tests. General and administrative expense. Our general and administrative expenses include costs for our executive, accounting and finance, information technology, 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 . 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 charges relating to amortization of debt issuance costs. Other income (expense), net Other income (expense), net consists of foreign currency exchange gains and losses, payments due and received 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. 44 -------------------------------------------------------------------------------- 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, 2021 2020 2021 2020 (unaudited) (in thousands) Revenue: Precision oncology testing$ 72,604 $ 50,991 $ 136,333 $ 111,237 Development services and other 19,497 15,344
34,433 22,608
Total revenue 92,101 66,335
170,766 133,845
Costs and operating expenses:
Cost of precision oncology testing(1) 24,887 17,809
48,477 36,000
Cost of development services and other 5,040 4,626
10,197 6,941
Research and development expense(1) 63,724 36,319
119,232 73,335
Sales and marketing expense(1) 47,716 25,015
82,054 50,130
General and administrative expense(1) 48,376 37,186
116,311 56,971
Total costs and operating expenses 189,743 120,955 376,271 223,377 Loss from operations (97,642) (54,620) (205,505) (89,532) Interest income 1,037 2,640 2,588 5,958 Interest expense (644) (10) (1,290) (22) Other income (expense), net (243) 2,285 (533) 2,076
Loss before provision for income taxes (97,492) (49,705)
(204,740) (81,520) Provision for income taxes 83 34 193 48 Net loss$ (97,575) $ (49,739) $ (204,933) $ (81,568)
(1)Amounts include stock-based compensation expense as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(unaudited)
(in thousands)
Cost of precision oncology testing $ 873 $ 407 $ 1,640 $ 710
Research and development expense 4,564 2,622 8,864 4,986
Sales and marketing expense 3,438 2,167 6,318 3,965
General and administrative expense 25,632 20,619 72,754 22,492
Total stock-based compensation expense $ 34,507 $ 25,815 $ 89,576 $ 32,153
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Table of Contents Comparison of the Three Months EndedJune 30, 2021 and 2020 Revenue Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Precision oncology testing$ 72,604 $ 50,991 $ 21,613 42 % Development services and other 19,497 15,344 4,153 27 % Total revenue$ 92,101 $ 66,335 $ 25,766 39 % Total revenue was$92.1 million for the three months endedJune 30, 2021 compared to$66.3 million for the three months endedJune 30, 2020 , an increase of$25.8 million , or 39%. Precision oncology testing revenue increased to$72.6 million for the three months endedJune 30, 2021 from$51.0 million for the three months endedJune 30, 2020 , an increase of$21.6 million , or 42%. This increase in precision oncology testing revenue was primarily due to an increase in sample volume. Precision oncology revenue from tests for clinical customers was$61.1 million in the three months endedJune 30, 2021 , and$39.6 million in the three months endedJune 30, 2020 , respectively. Tests for clinical customers increased to 20,830 for the three months endedJune 30, 2021 from 13,694 for the three months endedJune 30, 2020 mainly due to an increase in the number of physicians ordering Guardant360 tests. Precision oncology revenue from tests for biopharmaceutical customers was$11.6 million in the three months endedJune 30, 2021 , and$11.4 million in the three months endedJune 30, 2020 , respectively. Tests for biopharmaceutical customers increased to 3,653 for the three months endedJune 30, 2021 , from 2,805 for the three months endedJune 30, 2020 , primarily due to an increase in the number of biopharmaceutical customers and their contracted projects. 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$19.5 million for the three months endedJune 30, 2021 from$15.3 million for the three months endedJune 30, 2020 , an increase of$4.2 million , or 27%. This increase in development services and other revenue was primarily due to new collaboration projects from biopharmaceutical customers for companion diagnostic development services and receipt of regulatory approval for two of our companion diagnostic programs during the three months endedJune 30, 2021 . Our development services arrangements with biopharmaceutical customers and development services revenue may be adversely impacted by the COVID-19 pandemic in future periods. Costs and operating expenses Cost of revenue Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Cost of revenue$ 29,927 $ 22,435 $ 7,492 33 % Gross profit$ 62,174 $ 43,900 Gross margin 68 % 66 % Cost of revenue was$29.9 million for the three months endedJune 30, 2021 , compared to$22.4 million for the three months endedJune 30, 2020 , an increase of$7.5 million , or 33%. Cost of precision oncology testing revenue was$24.9 million for the three months endedJune 30, 2021 , compared to$17.8 million for the three months endedJune 30, 2020 , an increase of$7.1 million , or 40%. This increase in cost of precision oncology testing was primarily due to a$5.3 million increase in material costs,$1.4 million increase in 46 -------------------------------------------------------------------------------- Table of Contents labor and manufacturing overhead costs, a$0.7 million increase in other costs including costs related to freight and curation of test results for physicians, partially offset by a$0.3 million decrease in royalties. Cost of development services and other was$5.0 million for the three months endedJune 30, 2021 , compared to$4.6 million for the three months endedJune 30, 2020 , an increase of$0.4 million , or 9%. 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 endedJune 30, 2021 , was 68% compared to 66% for the three months endedJune 30, 2020 . Gross margin improvement primarily relates to higher revenues from our biopharmaceutical customers due to the receipt of regulatory approval for two of our companion diagnostic programs. Our gross margin may be adversely impacted by the COVID-19 pandemic for the affected periods. Research and development expense Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Research and development$ 63,724 $ 36,319 $ 27,405 75 % Research and development expenses were$63.7 million for the three months endedJune 30, 2021 compared to$36.3 million for the three months endedJune 30, 2020 , an increase of$27.4 million , or 75%. This increase in research and development expense was primarily due to an increase of$11.8 million in personnel-related costs for employees in our research and development group, including a$1.9 million increase in stock-based compensation, as we increased our headcount to support continued investment in our technology and clinical studies. The increase is also attributable to an increase of$6.6 million in outside service costs, an increase of$5.1 million in material costs, and an increase of$2.3 million related to allocated facilities and information technology infrastructure costs. Our research and development expenses are expected to increase in absolute dollars in coming years as the Company continues to innovate and invest in new product initiatives with a particular focus on LUNAR program. Sales and marketing expense Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Sales and marketing$ 47,716 $ 25,015 $ 22,701 91 % Selling and marketing expenses were$47.7 million for the three months endedJune 30, 2021 compared to$25.0 million for the three months endedJune 30, 2020 , an increase of$22.7 million , or 91%. This increase was primarily due to an increase of$15.5 million in personnel-related costs, including a$1.3 million increase in stock-based compensation, associated with the expansion of our commercial organization. The increase is also attributable to an increase of$3.4 million related to allocated facilities and information technology infrastructure costs, and an increase of$2.6 million related to marketing activities. 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 tests. General and administrative expense Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) General and administrative$ 48,376 $ 37,186 $ 11,190 30 % General and administrative expenses were$48.4 million for the three months endedJune 30, 2021 compared to$37.2 million for the three months endedJune 30, 2020 , an increase of$11.2 million , or 30%. This increase was primarily due to an increase of$7.2 million in personnel-related costs, including a$5.0 million increase in stock-based compensation primarily in connection with the issuance of market-based restricted stock units to our Chief 47 -------------------------------------------------------------------------------- Table of Contents Executive Officer and our President and Chief Operating Officer as well as an increase in our headcount, an increase of$1.4 million in professional service expenses related to outside legal, accounting, consulting and IT services, an increase of$2.0 million related to allocated facilities and information technology infrastructure cost, and an increase of$0.3 million in office administrative costs. 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 June 30, Change 2021 2020 $ % (unaudited) (in thousands) Interest income$ 1,037 $ 2,640 $ (1,603) (61) % Interest income was$1.0 million for the three months endedJune 30, 2021 compared to$2.6 million for the three months endedJune 30, 2020 , a decrease of$1.6 million , or 61%. This decrease was primarily due to a significant decrease in interest rate as theU.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 inJune 2020 and borrowings on our convertible senior notes issued inNovember 2020 . Interest expense Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Interest expense $ (644)$ (10) $ (634) 6,340 % Interest expense was$0.6 million for the three months endedJune 30, 2021 , primarily due to the amortization of debt issuance costs. Interest expense was immaterial for the three months endedJune 30, 2020 . Other income (expense), net Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Other income (expense), net $ (243)$ 2,285 $ (2,528) * Other income (expense), net included foreign currency exchange losses of$0.1 million for the three months endedJune 30, 2021 . For the three months endedJune 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 . Provision for income taxes Three Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Provision for income taxes $ 83$ 34 $ 49 * * Not meaningful Provision for income taxes was immaterial for the three months endedJune 30, 2021 and 2020. 48
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Table of Contents Comparison of the Six Months EndedJune 30, 2021 and 2020 Revenue Six Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Precision oncology testing$ 136,333 $ 111,237 $ 25,096 23 % Development services and other 34,433 22,608 11,825 52 % Total revenue$ 170,766 $ 133,845 $ 36,921 28 % Total revenue was$170.8 million for the six months endedJune 30, 2021 compared to$133.8 million for the six months endedJune 30, 2020 , an increase of$36.9 million , or 28%. Precision oncology testing revenue increased to$136.3 million for the six months endedJune 30, 2021 from$111.2 million for the six months endedJune 30, 2020 , an increase of$25.1 million , or 23%. This increase in precision oncology testing revenue was primarily due to an increase in tests performed. Precision oncology revenue from tests for clinical customers was$110.9 million in the six months endedJune 30, 2021 and$77.6 million in the six months endedJune 30, 2020 , respectively. Tests for clinical customers increased to 39,220 for the six months endedJune 30, 2021 from 28,951 for the six months endedJune 30, 2020 mainly due to an increase in the number of physicians ordering Guardant360 tests. Precision oncology revenue from tests for biopharmaceutical customers was$25.4 million in the six months endedJune 30, 2021 and$33.6 million in the six months endedJune 30, 2020 , respectively. Tests for biopharmaceutical customers decreased to 7,175 for the six months endedJune 30, 2021 from 8,071 for the six months endedJune 30, 2020 , primarily due to the timing and progression of clinical trials and studies which resulted in fluctuation in the number of samples received for testing. 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 for the affected periods. Development services and other revenue increased to$34.4 million for the six months endedJune 30, 2021 from$22.6 million for the six months endedJune 30, 2020 , an increase of$11.8 million , or 52%. This increase in development services and other revenue was primarily due to progression of collaboration projects from biopharmaceutical customers for companion diagnostic development services and receipt of regulatory approval of two of our companion diagnostic programs during the six months endedJune 30, 2021 . 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
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(dollars in thousands)
Cost of revenue $ 58,674 $ 42,941 $ 15,733 37 %
Gross profit $ 112,092 $ 90,904
Gross margin 66 % 68 %
Cost of revenue was $58.7 million for the six months ended June 30, 2021
compared to $42.9 million for the six months ended June 30, 2020 , an increase of
$15.7 million , or 37%.
Cost of precision oncology testing revenue was $48.5 million for the six months
ended June 30, 2021 compared to $36.0 million for the six months ended June 30,
2020 , an increase of $12.5 million , or 35%. This increase in cost of precision
oncology testing was attributable to an increase in sample volumes and was
primarily due to a $8.1 million increase in material costs, a $3.2 million
increase in production labor and overhead costs, and a $1.7 million increase
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in other costs including costs related to freight and curation of test results
for physicians, offset by a $0.5 million decrease in royalties.
Cost of development services and other was $10.2 million for the six months
ended June 30, 2021 compared to $6.9 million for the six months ended June 30,
2020 , an increase of $3.3 million , or 47%. 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 six months ended June 30, 2021 was 66% compared to 68% for
the six months ended June 30, 2020 . The decrease in gross margin is primarily
due to higher average cost per test resulting from varied product mix. 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.
Operating Expenses
Research and development expense
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(in thousands)
Research and development $ 119,232 $ 73,335 $ 45,897 63 %
Research and development expenses were $119.2 million for the six months ended
June 30, 2021 compared to $73.3 million for the six months ended June 30, 2020 ,
an increase of $45.9 million , or 63%. This increase in research and development
expense was primarily due to an increase of $23.8 million in personnel-related
costs for employees in our research and development group, including a $3.9
million increase in stock-based compensation, as we increased our headcount to
support continued investment in our technology and clinical studies, an increase
of $13.7 million in material costs related to various programs, an increase of
$7.9 million in outside service costs, and an increase of $6.5 million related
to allocated facility and information technology infrastructure costs offset by
a decrease of $8.5 million relating to in-process research and development
(IPR&D) technology expensed in connection with a patent license acquisition that
occurred in March 2020 .
Sales and marketing expense
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(in thousands)
Sales and marketing $ 82,054 $ 50,130 $ 31,924 64 %
Selling and marketing expenses were $82.1 million for the six months ended June
30, 2021 compared to $50.1 million for the six months ended June 30, 2020 , an
increase of $31.9 million , or 64%. This increase was primarily due to an
increase of $20.0 million in personnel-related costs, including a $2.4 million
increase in stock-based compensation, associated with the expansion of our
commercial organization, an increase of $5.6 million related to allocated
facility and information technology infrastructure costs and an increase of $5.1
million related to marketing activities.
General and administrative expense
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(in thousands)
General and administrative $ 116,311 $ 56,971 $ 59,340 104 %
General and administrative expenses were $116.3 million for the six months ended
June 30, 2021 compared to $57.0 million for the six months ended June 30, 2020 ,
an increase of $59.3 million , or 104%. This increase was primarily due to an
increase of $55.4 million in personnel-related costs, including a $50.3 million
increase in stock-based compensation primarily in connection with the issuance
of market-based restricted stock units to our Chief
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Executive Officer and our President and Chief Operating Officer as well as an
increase in our headcount, an increase of $2.3 million related to allocated
facilities and information technology infrastructure costs, and an increase of
$2.2 million in professional service expenses related to outside legal,
accounting, consulting and IT services, offset by a decrease of $1.2 million
related to settlement costs in connection with a patent license acquisition that
occurred in March 2020 . 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
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(in thousands)
Interest income $ 2,588 $ 5,958 $ (3,370) (57) %
Interest income was $2.6 million for the six months ended June 30, 2021 compared
to $6.0 million for the six months ended June 30, 2020 , a decrease of $3.4
million , or (57)%. 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 and borrowings on our convertible senior
notes issued in November 2020 .
Interest expense
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(in thousands)
Interest expense $ (1,290) $ (22) $ (1,268) 5,764 %
Interest expense was
Six Months Ended June 30, Change
2021 2020 $ %
(unaudited)
(in thousands)
Other income (expense), net $ (533) $ 2,076 $ (2,609) *
Other income (expense), net included foreign currency exchange losses of$0.1 million for the six months endedJune 30, 2021 . For the six months endedJune 30, 2020 , other income (expense), net included receipt of$1.8 million received from HHS's relief fund under the CARES Act. Provision for income taxes Six Months Ended June 30, Change 2021 2020 $ % (unaudited) (in thousands) Provision for income taxes $ 193$ 48
* Not meaningful Provision for income taxes was immaterial for the six months endedJune 30, 2021 and 2020. 51 -------------------------------------------------------------------------------- Table of Contents Liquidity and capital resources We have incurred losses and negative cash flows from operations since our inception, and as ofJune 30, 2021 , we had an accumulated deficit of$809.4 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 products, expand our sales organization, and increase our marketing efforts to drive market adoption of our tests. As demand for our tests are expected to continue to increase from physicians and biopharmaceutical companies, we anticipate that our capital expenditure requirements could also increase if we require additional laboratory capacity. We have funded our operations to date principally from the sale of stock, convertible debt and through revenue from precision oncology testing and development services and other. As ofJune 30, 2021 , we had cash and cash equivalents of$938.6 million and marketable securities of$908.4 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 investments are held in marketable securities consisting ofUnited States treasury securities and non-marketable securities in the form of private equity investments. 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 and other 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 endedDecember 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, 2021 2020 (unaudited) (in thousands) Net cash used in operating activities$ (78,884) $ (36,647) Net cash provided by (used in) investing activities$ 250,936 $ (304,745) Net cash (used in) provided by financing activities$ (65,044) $ 362,786 Operating activities Cash used in operating activities during the six months endedJune 30, 2021 was$78.9 million , which resulted from a net loss of$204.9 million , partially offset by non-cash charges of$119.7 million and net change in our operating assets and liabilities of$6.3 million . Non-cash charges primarily consisted of$89.6 million of stock-based compensation,$10.6 million of depreciation and amortization,$10.8 million of non-cash operating lease costs,$6.5 million of amortization of premium on investment, and$1.3 million of amortization of debt issuance costs. The net change in our operating assets and liabilities was primarily the result of a$7.1 million increase in accounts payable, a$6.5 million increase in accrued compensation due to increased personnel and a$7.3 million increase in accrued expenses and other liabilities, partially offset by a$4.3 million increase in other assets, net, a$3.8 million increase in 52 -------------------------------------------------------------------------------- Table of Contents inventory due to higher testing volumes and a$3.0 million payment of operating lease liabilities net of receipt of tenant improvement allowance. 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 non-cash operating lease costs, 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 due to higher testing volumes, a$3.9 million payment of operating lease liabilities, a$2.5 million decrease in accounts payable, a$1.8 million decrease in accrued expenses and other liabilities, and a$0.8 million decrease in deferred revenue, partially offset by a$6.9 million decrease in accounts receivables. Investing activities Cash provided by investing activities during the six months endedJune 30, 2021 was$250.9 million , which resulted primarily from maturities of marketable securities of$418.1 million , partially offset by purchases of marketable securities of$126.2 million , purchases of property and equipment of$28.3 million and purchase of non-marketable equity and other related investments of$12.8 million . 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 . Financing activities Cash used in financing activities during the six months endedJune 30, 2021 was$65.0 million , which was primarily due to taxes paid related to net share settlement of restricted stock units of$75.0 million , partially offset by proceeds from issuances of common stock under employee stock purchase plan of$5.4 million and proceeds from exercise of stock options of$5.4 million . 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 . Contractual obligations and commitments Except as set forth in Note 10, 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, 2020 . 53 -------------------------------------------------------------------------------- Off-balance sheet arrangements As ofJune 30, 2021 , 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 consolidated financial statements in accordance with accounting principles generally accepted inthe United States of America ("GAAP"). Our preparation of these consolidated 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 consolidated 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. 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 and in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 . During the three and six months endedJune 30, 2021 , there were no material changes to our critical accounting policies from those discussed previously. 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, marketable securities and our indebtedness. As ofJune 30, 2021 , we had cash and cash equivalents of$938.6 million held primarily in cash deposits and money market funds. Our marketable securities are held inU.S. government debt securities. As ofJune 30, 2021 , we had short-term marketable securities of$853.1 million and long-term marketable securities of$55.4 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, 2021 , a hypothetical 100 basis point increase in interest rates would have resulted in an approximate$4.5 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$0.5 million increase of the fair value of our 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, 2021 , 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, 2021 , 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. 54
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