Adaptive Biotechnologies Corp 10-K

Item 8. Financial Statements and Supplementary Data Adaptive Biotechnologies Corporation Index to Financial Statements As of December 31, 2020 and 2019 and For the Years Ended December 31, 2020, 2019 and 2018 Report of Independent Registered Public Accounting Firm 103 Balance Sheets 105 Statements of Operations 106 Statements of Comprehensive Loss 107 Statements of Convertible Preferred Stock and Shareholders’ (Deficit) Equity 108 Statements of Cash Flows 109 Notes to Financial Statements 110 102 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Adaptive Biotechnologies Corporation Opinion on the Financial Statements We have audited the accompanying balance sheets of Adaptive Biotechnologies Corporation (the Company) as of December 31, 2020 and 2019, the related statements of operations, comprehensive loss , convertible preferred stock and shareholders' (deficit) equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 24, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account s or disclosure s to which it relates. 103 Estimation of Total Expected Costs of Genentech Agreement Description of the Matter As more fully described in Note 3 of the financial statements, Genentech Agreement revenue is estimated to be recognized over a period of seven to eight years from the effective date. The non-refundable upfront consideration of $300.0 million is recognized using a proportional performance model through an input method based on costs incurred relative to the total estimated costs of research and development efforts. For the twelve months ended December 31, 2020, total revenue recorded totaled $52.8 million and related deferred revenue totaled $212.1 million. Auditing management’s estimate related to determining the total expected research and development costs at completion is complex and requires judgment as a result of the uncertainties of the ultimate progression of the customized product paths, timing and path of development and commercialization decisions, which are controlled by Genentech. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of controls over the Company’s process to estimate the total costs of research and development efforts for the collaboration based on evaluating the progress of the collaboration and the likely path of future development based on significant decisions made by Genentech communicated through the joint committees. To test the estimate of total expected research and development costs, we performed audit procedures that included, among others, observing the quarterly meetings with accounting and the Company collaboration managers discussing the status of the collaboration and the future development for the customized product paths, investigating any changes to the development path. We reviewed supporting documentation to corroborate progress and status of the overall timeline, including meeting minutes from the joint committees. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015 Seattle, Washington February 24, 2021 104 Adaptive Biotechnologies Corporation Balance Sheets (in thousands, except share and per share amounts) December 31, 2020 2019 Assets Current assets Cash and cash equivalents $ 123,436 $ 96,576 Short-term marketable securities (amortized cost of $ 564,036 and $ 479,791 , respectively) 564,833 480,290 Accounts receivable, net 10,047 12,676 Inventory 14,063 9,069 Prepaid expenses and other current assets 14,535 14,079 Total current assets 726,914 612,690 Long-term assets Property and equipment, net 39,692 60,355 Operating lease right-of-use assets 99,350 — Long-term marketable securities (amortized cost of $ 118,429 and $ 105,263 , respectively) 118,525 105,435 Restricted cash 2,138 2,138 Intangible assets, net 10,225 11,928 Goodwill 118,972 118,972 Other assets 598 784 Total assets $ 1,116,414 $ 912,302 Liabilities and shareholders’ equity Current liabilities Accounts payable $ 3,237 $ 4,453 Accrued liabilities 13,162 4,371 Accrued compensation and benefits 11,950 8,124 Current portion of deferred rent — 371 Current portion of operating lease liabilities 3,529 — Current portion of deferred revenue 73,319 60,994 Total current liabilities 105,197 78,313 Long-term liabilities Deferred rent liability, less current portion — 6,918 Operating lease liabilities, less current portion 104,333 — Financing obligation — 36,607 Deferred revenue, less current portion 163,618 219,332 Other long-term liabilities — 93 Total liabilities 373,148 341,263 Commitments and contingencies (Note 11) Shareholders’ equity Preferred stock: $ 0.0001 par value, 10,000,000 shares authorized at December 31, 2020 and 2019; no shares issued and outstanding at December 31, 2020 and 2019 — — Common stock: $ 0.0001 par value, 340,000,000 shares authorized at December 31, 2020 and 2019; 137,646,896 and 125,238,142 shares issued and outstanding at December 31, 2020 and 2019, respectively 14 12 Additional paid-in capital 1,253,971 935,834 Accumulated other comprehensive gain 893 671 Accumulated deficit ( 511,612 ) ( 365,478 ) Total shareholders’ equity 743,266 571,039 Total liabilities and shareholders’ equity $ 1,116,414 $ 912,302 The accompanying notes are an integral part of these financial statements. 105 Adaptive Biotechnologies Corporation Statements of Operations (in thousands, except share and per share amounts) Year Ended December 31, 2020 2019 2018 Revenue Sequencing revenue $ 41,439 $ 43,519 $ 32,978 Development revenue 56,943 41,552 22,685 Total revenue 98,382 85,071 55,663 Operating expenses Cost of revenue 22,530 22,274 19,668 Research and development 116,072 70,705 39,157 Sales and marketing 61,358 38,453 24,486 General and administrative 49,536 30,332 20,409 Amortization of intangible assets 1,703 1,698 1,699 Total operating expenses 251,199 163,462 105,419 Loss from operations ( 152,817 ) ( 78,391 ) ( 49,756 ) Interest and other income, net 6,590 9,785 3,309 Net loss ( 146,227 ) ( 68,606 ) ( 46,447 ) Fair value adjustment to Series E-1 convertible preferred stock options — ( 964 ) 102 Net loss attributable to common shareholders $ ( 146,227 ) $ ( 69,570 ) $ ( 46,345 ) Net loss per share attributable to common shareholders, basic and diluted $ ( 1.11 ) $ ( 1.01 ) $ ( 3.67 ) Weighted-average shares used in computing net loss per share attributable to common shareholders, basic and diluted 131,216,468 69,165,315 12,629,778 The accompanying notes are an integral part of these financial statements. 106 Adaptive Biotechnologies Corporation Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2020 2019 2018 Net loss $ ( 146,227 ) $ ( 68,606 ) $ ( 46,447 ) Change in unrealized gain (loss) on investments 222 778 59 Comprehensive loss $ ( 146,005 ) $ ( 67,828 ) $ ( 46,388 ) The accompanying notes are an integral part of these financial statements. 107 Adaptive Biotechnologies Corporation Statements of Convertible Preferred Stock and Shareholders’ ( Deficit) Equity (in thousands, except share amounts) Convertible Preferred Stock Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Total Shareholders’ (Deficit) Shares Amount Shares Amount Capital (Loss) Gain Deficit Equity Balance at December 31, 2017 92,656,029 $ 561,333 12,208,731 $ 1 $ 24,972 $ ( 166 ) $ ( 249,423 ) $ ( 224,616 ) Adjustments to accumulated deficit for adoption of guidance on accounting for share-based payment transactions — — — — 140 — ( 140 ) — Issuance of common stock for cash upon exercise of stock options — — 632,805 — 1,168 — — 1,168 Issuance of Series E-1 convertible preferred stock for cash upon exercise of Series E-1 convertible preferred stock options at fair value 134,065 100 — — — — — — Vested Series E-1 convertible preferred stock option forfeitures — ( 767 ) — — 476 — 291 767 Series E-1 convertible preferred stock option share-based compensation — — — — 3 — — 3 Adjustment to redemption value for vested Series E-1 convertible preferred stock options — 3 — — ( 3 ) — — ( 3 ) Change in redemption value for vested Series E-1 convertible preferred stock options — 189 — — — — ( 189 ) ( 189 ) Common stock option share-based compensation — — — — 11,146 — — 11,146 Other comprehensive income — — — — — 59 — 59 Net loss — — — — — — ( 46,447 ) ( 46,447 ) Balance at December 31, 2018 92,790,094 $ 560,858 12,841,536 $ 1 $ 37,902 $ ( 107 ) $ ( 295,908 ) $ ( 258,112 ) Proceeds from initial public offering, net of underwriters' discounts and commissions — — 17,250,000 2 320,848 — — 320,850 Initial public offering costs — — — — ( 4,986 ) — — ( 4,986 ) Conversion of convertible preferred stock to common stock ( 93,039,737 ) ( 561,931 ) 93,039,737 9 561,922 — — 561,931 Conversion of convertible preferred stock warrant to common stock warrant — — — — 2,602 — — 2,602 Issuance of common stock upon exercise of common stock warrants — — 54,792 — 9 — — 9 Issuance of common stock for cash upon exercise of stock options — — 2,043,767 — 4,413 — — 4,413 Issuance of Series E-1 convertible preferred stock for cash upon exercise of Series E-1 convertible preferred stock options at fair value 249,643 109 — — — — — — Vesting of restricted stock units — — 8,310 — — — — — Change in redemption value for vested Series E-1 convertible preferred stock options — 964 — — — — ( 964 ) ( 964 ) Common stock option and restricted stock unit share-based compensation — — — — 13,124 — — 13,124 Other comprehensive income — — — — — 778 — 778 Net loss — — — — — — ( 68,606 ) ( 68,606 ) Balance at December 31, 2019 — $ — 125,238,142 $ 12 $ 935,834 $ 671 $ ( 365,478 ) $ 571,039 Issuance of common stock upon public offering, after deducting underwriters' discounts and net offering costs paid by us — — 7,200,000 1 271,838 — — 271,839 Adjustments to accumulated deficit for adoption of guidance on accounting for leases — — — — — — 93 93 Issuance of common stock for cash upon exercise of stock options — — 5,204,254 1 21,538 — — 21,539 Vesting of restricted stock units — — 4,500 — — — — — Common stock option and restricted stock unit share-based compensation — — — — 24,761 — — 24,761 Other comprehensive income — — — — — 222 — 222 Net loss — — — — — — ( 146,227 ) ( 146,227 ) Balance at December 31, 2020 — $ — 137,646,896 $ 14 $ 1,253,971 $ 893 $ ( 511,612 ) $ 743,266 The accompanying notes are an integral part of these financial statements. 108 Adaptive Biotechnologies Corporation Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 2018 Operating activities Net loss $ ( 146,227 ) $ ( 68,606 ) $ ( 46,447 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation expense 6,769 6,093 4,301 Noncash lease expense 3,266 — — Share-based compensation expense 24,761 13,124 11,149 Intangible assets amortization 1,703 1,698 1,699 Investment amortization 773 ( 4,463 ) ( 1,214 ) Fair value adjustment of convertible preferred stock warrant — 2,266 ( 6 ) Other 71 359 ( 18 ) Changes in operating assets and liabilities: Accounts receivable, net 2,613 ( 7,817 ) 775 Inventory ( 4,994 ) ( 1,231 ) ( 3,046 ) Prepaid expenses and other current assets ( 1,362 ) ( 8,576 ) ( 318 ) Accounts payable and accrued liabilities 7,495 6,149 2,185 Deferred rent — 78 ( 488 ) Operating lease liabilities ( 886 ) — — Deferred revenue ( 43,389 ) 266,927 ( 649 ) Other ( 276 ) ( 597 ) ( 182 ) Net cash (used in) provided by operating activities ( 149,683 ) 205,404 ( 32,259 ) Investing activities Purchases of property and equipment ( 18,803 ) ( 11,200 ) ( 6,299 ) Purchases of marketable securities ( 694,965 ) ( 884,217 ) ( 146,503 ) Proceeds from sales and maturities of marketable securities 596,724 413,720 153,538 Net cash (used in) provided by investing activities ( 117,044 ) ( 481,697 ) 736 Financing activities Proceeds from exercise of stock options 21,748 4,055 1,268 Proceeds from public offering of common stock, net of underwriting discounts and commissions 272,160 320,850 — Payment of public offering costs, net ( 321 ) ( 4,986 ) — Proceeds from issuance of common stock upon the exercise of a common stock warrant — 9 — Other — ( 12 ) ( 20 ) Net cash provided by financing activities 293,587 319,916 1,248 Net increase (decrease) in cash, cash equivalents and restricted cash 26,860 43,623 ( 30,275 ) Cash, cash equivalents and restricted cash at beginning of year 98,714 55,091 85,366 Cash, cash equivalents and restricted cash at end of year $ 125,574 $ 98,714 $ 55,091 Noncash investing and financing activities Purchases of equipment included in accounts payable and accrued liabilities $ 4,679 $ 773 $ 832 Landlord-funded leasehold improvements $ — $ — $ 2,419 Noncash additions to property through lease financing arrangements $ — $ 36,607 $ — Derecognition of lease financing arrangements upon adoption of guidance on accounting for leases $ 36,607 $ — $ — Conversion of convertible preferred stock to common stock upon closing of initial public offering $ — $ 561,931 $ — Conversion of convertible preferred stock warrant to common stock warrant upon closing of initial public offering $ — $ 2,602 $ — The accompanying notes are an integral part of these financial statements. 109 Adaptive Biotechnologies Corporation Notes to Financial Statements 1. Organization and Description of Business Adaptive Biotechnologies Corporation (“we,” “us” or “our”) is a commercial-stage company advancing the field of immune medicine by harnessing the inherent biology of the adaptive immune system to transform the diagnosis and treatment of disease. We believe the adaptive immune system is nature’s most finely tuned diagnostic and therapeutic for most diseases, but the inability to decode it has prevented the medical community from fully leveraging its capabilities. Our immune medicine platform applies our proprietary technologies to read the diverse genetic code of a patient’s immune system and aims to understand precisely how the immune system detects and treats disease in that patient. We capture these insights in our dynamic clinical immunomics database, which is underpinned by computational biology and machine learning, and use them to develop and commercialize clinical products and services that we are tailoring to each individual patient. We have commercial products and services and a robust pipeline of clinical products and services that we are designing to diagnose, monitor and enable the treatment of diseases, such as cancer, autoimmune conditions and infectious diseases. We were incorporated in the State of Washington on September 8, 2009 under the name Adaptive TCR Corporation. On December 21, 2011, we changed our name to Adaptive Biotechnologies Corporation. We are headquartered in Seattle, Washington. Initial Public Offering Our registration statement on Form S-1 related to our initial public offering was declared effective on June 26, 2019 and our common stock began trading on the Nasdaq Global Select Market on June 27, 2019. On July 1, 2019, we completed our initial public offering in which we issued and sold 17,250,000 shares of common stock, including shares issued upon the exercise in full of the underwriters’ over-allotment option, at a public offering price of $ 20.00 per share. We received $ 315.9 million in net proceeds, after deducting underwriting discounts and commissions of $ 24.1 million and offering expenses of $ 5.0 million. Follow-On Offering In July 2020, we completed an underwritten public offering of our common stock in which we issued and sold 7,200,000 shares of common stock, including shares issued upon the exercise in full of the underwriters’ over-allotment option, at a public offering price of $ 40.00 per share. We received $ 271.8 million in net proceeds, after deducting underwriting discounts and net offering expenses paid by us. 2. Significant Accounting Policies Basis of Presentation and Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. We base our estimates on historical experience and other relevant assumptions that we believe to be reasonable under the circumstances. Estimates are used in several areas including, but not limited to, estimates of progress to date for certain performance obligations and the transaction price for certain contracts with customers, share-based compensation, including the fair value of stock, the provision for income taxes, including related reserves, and goodwill, among others. These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates. JOBS Act Accounting Election Effective December 31, 2020, we are no longer an “emerging growth company” within the meaning of the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”). The JOBS Act allows an emerging growth company to delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. Prior to December 31, 2020, we had elected to use this extended transition period and, as a result, our financial statements may not be comparable to companies that comply with public company effective dates. We can no longer take advantage of this extended transition period. 110 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Cash and Cash Equivalents Cash and cash equivalents are stated at fair value. Cash equivalents include only securities having an original maturity of three months or less at the time of purchase. We limit our credit risk associated with cash and cash equivalents by placing our investments with banks that we believe are highly creditworthy and with highly rated money market funds. Cash and cash equivalents primarily consist of bank deposits and investments in money market funds. Restricted Cash We are required to maintain certain balances under lease arrangements for some of our property and facility leases. We had restricted cash of $ 2.1 million as of December 31, 2020 and 2019. Investments in Marketable Securities Marketable securities are classified as available-for-sale, primarily consist of U.S. government debt securities, commercial paper and corporate bonds and are reported at fair value. Unrealized holding gains and losses are reflected as a separate component of shareholders’ (deficit) equity in accumulated other comprehensive (loss) gain until realized. Realized gains and losses on the sale of these securities are recognized in net income or loss. The cost of marketable securities sold is based on the specific identification method. Concentrations of Risk We are subject to a concentration of risk from a limited number of suppliers, or in some cases, single suppliers for some of our laboratory instruments and materials. This risk is managed by targeting a quantity of surplus stock. Cash, cash equivalents and marketable securities are financial instruments that potentially subject us to concentrations of credit risk. We invest in money market funds, U.S. government debt securities, U.S. government agency securities, commercial paper and corporate bonds with high-quality accredited financial institutions. Significant customers are those that represent more than 10% of our total revenue or accounts receivable, net balances for the periods and as of each balance sheet date presented, respectively. Revenue from these customers reflects their purchase of our products and services and our collaboration efforts with Genentech. For each significant customer, revenue as a percentage of total revenue for the periods presented and accounts receivable, net as a percentage of total accounts receivable, net as of the dates presented were as follows: Revenue Accounts Receivable, Net Year Ended December 31, December 31, 2020 2019 2018 2020 2019 Customer A *% 13.9 % 18.4 % 19.1 % 41.8 % Customer B * * 13.5 12.2 * Customer C * * 15.4 * * Genentech, Inc. and Roche Group 55.8 42.1 * * * * less than 10% Accounts Receivable Accounts receivable consists of amounts due from customers for services performed. We review our accounts receivable for credit impairment and regularly analyze the status of significant past due receivables to determine if any will potentially be uncollectible to estimate the amount of allowance necessary to reduce accounts receivable to its estimated net realizable value. Additionally, we had $ 0.9 million and $ 2.4 million of unbilled receivables as of December 31, 2020 and 2019, respectively. The unbilled receivables are amounts that will become due for which we have an unconditional right to consideration. Inventory Inventory consists of laboratory materials and supplies used in lab analysis. We capitalize inventory when purchased and record expense upon order fulfillment for servicing revenue or utilization in our research and development laboratories. Inventory is valued at the lower of cost or market on a first-in, first-out basis. We periodically perform obsolescence assessments and write off any inventory that is no longer usable. 111 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Property and Equipment Property and equipment consists of computer equipment, computer software, laboratory equipment, leasehold improvements and furniture and office equipment. Property and equipment are recorded at cost and depreciation is recognized using the straight-line method based on estimated useful life. Maintenance and repairs are charged to expense as incurred and costs of improvements are capitalized. Useful lives assigned to property and equipment are as follows: Laboratory equipment 3 years to 7 years Leasehold improvements Shorter of estimated useful life or remaining lease term Computer equipment and software 3 years Furniture and office equipment 5 years to 10 years We review long-lived assets for impairment whenever events or circumstances indicate the carrying amount of an asset group may not be recoverable. Gains and losses from asset disposals and impairment losses are classified within our statements of operations in accordance with the use of the asset. Goodwill Goodwill represents the excess of the purchase price over the net amount of identifiable assets acquired and liabilities assumed in a business combination measured at fair value. We assess goodwill for impairment annually on October 1, or more frequently if events or changes in circumstances would more likely than not reduce the fair value of our single reporting unit below its carrying value. We evaluate goodwill for impairment by first assessing qualitative factors to determine whether it is more likely than not that the fair value of our reporting unit is less than its carrying amount. If we so determine, or if we choose to bypass the qualitative assessment, we perform a quantitative goodwill impairment test. Goodwill impairment exists when the estimated fair value of our one reporting unit is less than its carrying value. If impairment exists, the carrying value of the goodwill is reduced to fair value through an impairment charge recorded in our statements of operations. To date, we have no t recognized any impairment of goodwill. Intangible Assets Intangible assets acquired in a business combination are recognized separately from goodwill and are initially recognized at their fair value at the acquisition date, which is regarded as their cost. Intangible assets may also result from the purchase of assets and intellectual property in a transaction that does not qualify as a business combination. Intangible assets are amortized over their estimated useful lives on a straight-line basis which approximates their usage pattern. Intangible assets are reviewed for impairment at least annually or if indicators of potential impairment exist. We have no t recognized any impairment losses on intangible assets. Leases We determine if an arrangement contains a lease at inception. We have operating lease agreements for the laboratory and office facilities that we occupy, as well as server space. Operating lease right-of-use (“ROU”) assets and operating lease liabilities are recognized at the date the underlying asset becomes available for our use and are based on the present value of the future minimum lease payments over the lease term. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received. As our leases generally do not provide an implicit interest rate, the present value of our future minimum lease payments is determined using our incremental borrowing rate. This rate is an estimate of the collateralized borrowing rate we would incur on our future lease payments over a similar term and is based on the information available to us at the lease commencement date, or as of January 1, 2020 for commenced leases that existed as of our adoption of the new lease standard, discussed in more detail below. Certain of our leases contain options to extend or terminate the lease; lease terms are adjusted for these options only when it is reasonably certain we will exercise these options. Our lease agreements do not contain residual value guarantees or covenants. We have made a policy election regarding our real estate leases not to separate nonlease components from lease components, to the extent they are fixed. Nonlease components that are not fixed are expensed as incurred as variable lease expense. Our leases for laboratory and office facilities typically include variable nonlease components, such as common-area maintenance costs. We have also elected not to record on the balance sheet a lease that has a lease term of twelve months or less and does not contain a purchase option that we are reasonably certain to exercise. Lease expense is recognized on a straight-line basis over the terms of the leases. Incentives granted under our facilities leases, including rent holidays, are recognized as adjustments to lease expense on a straight-line basis over the terms of the leases. 112 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Lease Financing Arrangements In 2019, due to our significant involvement during the construction process of a leased building, we qualified as the deemed owner of the building under build-to-suit lease accounting guidance. Prior to our adoption of the new lease standard, the cost of the related building was recorded in property and equipment, net and the offsetting lease financing obligation was recorded as a long-term financing obligation on our balance sheet. As of December 31, 2019, $ 36.6 million of building costs was recorded in property and equipment, net. Fair Value of Financial Instruments The Financial Accounting Standards Board (“FASB”) has defined fair value as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. The FASB established a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. The hierarchy defines three levels of inputs that may be used to measure fair value: • Level 1: Quoted prices in active markets for identical assets or liabilities. • Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities A financial instrument categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Our financial instruments consist of Level 1 and Level 2 assets and has included Level 3 liabilities in the past. In certain cases, where there is limited activity or less transparency around inputs to valuation, financial instruments are classified as Level 3 within the valuation hierarchy. The carrying amounts of certain financial instruments approximate fair value due to their short maturities. We did not have any nonfinancial assets or liabilities that were measured or disclosed at fair value on a recurring basis as of December 31, 2020 or 2019. Convertible Preferred Stock Warrant Liability We had issued a freestanding warrant to a venture capital firm to purchase 56,875 shares of Series C convertible preferred stock with an exercise price of $ 2.64 in connection with a $ 5.0 million credit facility entered into in 2014. Immediately prior to and in connection with the completion of our initial public offering, the convertible preferred stock warrant converted to a common stock warrant. Prior to the conversion, the fair value of this warrant was classified as a non-current liability in the balance sheets, since the underlying convertible preferred stock had been classified as temporary equity instead of shareholders’ deficit in accordance with authoritative guidance for the classification and measurement of potentially redeemable securities. Upon certain change in control events that were outside of our control, including liquidation, sale or transfer of control, holders of the convertible preferred stock may have caused its redemption. Prior to conversion, the warrant was subject to remeasurement at each balance sheet date, with changes in estimated fair value recognized as a component of interest and other income, net on our statements of operations. During the year ended December 31, 2019, we recognized $ 2.3 million of expense related to the revaluation of the convertible preferred stock warrant liability in the interest and other income, net line item on our statements of operations. When the convertible preferred stock warrant converted to a common stock warrant immediately prior to and in connection with the completion of the initial public offering, the $ 2.6 million financial liability was reclassified to the additional paid-in capital line item on our balance sheet, thereby concluding the need for revaluation. Revenue Recognition We recognize revenue in accordance with ASC Topic 606 (“ASC 606”), Revenue from Contracts with Customers . Under ASC 606, for all revenue-generating contracts, we perform the following steps to determine the amount of revenue to be recognized: (1) identify the contract or contracts; (2) determine whether the promised goods or services are performance obligations, including whether they are distinct in the context of the contract; (3) measure the transaction price, including the constraint on variable consideration; (4) allocate the transaction price to the performance obligations based on estimated selling prices; and (5) recognize revenue when (or as) we satisfy each performance obligation. The following is a summary of the application of the respective model to each of our revenue classifications. 113 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Overview Our revenue is generated from immunosequencing (“sequencing”) products and services (“sequencing revenue”) and from regulatory or development support services leveraging our immune medicine platform (“development revenue”). When revenue generating contracts have elements of both sequencing revenue and development revenue, we classify revenue based on the nature of the performance obligation and the allocated transaction price. Sequencing Revenue Sequencing revenue reflects the amounts generated from providing sequencing services and testing through our clonoSEQ and immunoSEQ products and services to our clinical and research customers, respectively. For clinical customers, we derive revenues from providing our clonoSEQ test report to ordering physicians, and we bill and receive payments from medical institutions and commercial and government third-party payors. In these transactions, we have identified one performance obligation: the delivery of a clonoSEQ report. As payment from the respective payors may vary based on the various reimbursement rates and patient responsibilities, we consider the transaction price to be variable and record an estimate of the transaction price, subject to the constraint for variable consideration, as revenue at the time of delivery. The estimate of transaction price is based on historical and expected reimbursement rates with the various payors, which are monitored in subsequent periods and adjusted as necessary based on actual collection experience. For our clonoSEQ coverage under Medicare, we bill an episode of treatment when we deliver the first eligible test results. This billing contemplates all necessary tests required during a patient’s treatment cycle, which is currently estimated at approximately four tests per patient, including the initial sequence identification test. Revenue recognition commences at the time the initial billable test result is delivered and is based upon cumulative tests delivered to date. We estimate the number of tests we expect to deliver over a patient’s treatment cycle based on historical testing frequencies for patients by indication. These estimates are subject to change as we develop more information about utilization over time. Any unrecognized revenue from the initial billable test is recorded as deferred revenue and is recognized as we deliver the remaining tests in a patient’s treatment cycle or when it becomes remote that a patient will receive additional testing and we have not delivered our estimate of total tests. For research customers, contracts typically include an amount billed in advance of services (“upfront”) and subsequent billings as sample results are delivered to the customer. Upfront amounts received are recorded as deferred revenue, which we recognize as revenue upon satisfaction of performance obligations. We have identified two typical performance obligations under the terms of our research service contracts: sequencing services and related data analysis. We recognize revenue for both identified performance obligations as sample results are delivered to the customer. Development Revenue We derive revenue by providing services through development agreements to biopharmaceutical customers who seek access to our immune medicine platform technologies. We generate revenues from the delivery of professional support activities pertaining to the use of immunoSEQ and our MRD product in the development of the respective customers’ initiatives. The transaction price for these contracts may consist of a combination of non-refundable upfront fees, separately priced sequencing fees, progress-based milestones and regulatory milestones. The development agreements may include single or multiple performance obligations, depending on the contract. For certain contracts, we may perform services to support the biopharmaceutical customers’ regulatory submissions as part of their registrational trials. These services include regulatory support pertaining to our technology intended to be utilized as part of the submission, development of analytical plans for our sequencing data, participation on joint research committees and assistance in completing a regulatory submission. Generally, these services are not distinct within the context of the contract and they are accounted for as a single performance obligation. When sequencing services are separately priced customer options, we assess if a material right exists and, if not, the customer option to purchase additional sequencing services is not considered part of the contract. Except for any non-refundable upfront fees, the other forms of compensation represent variable consideration. Variable consideration related to progress-based and regulatory milestones is estimated using the most likely amount method, where variable consideration is constrained until it is probable that a significant reversal of cumulative revenue recognized will not occur. Progress milestones, such as the first sample result delivered or final patient enrollment in a customer trial, are customer dependent and are included in the transaction price when the respective milestone is probable of occurring. Milestone payments that are not within our customers’ control, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. Determining whether regulatory milestone payments are probable is an area that requires significant judgment. In making this assessment, we evaluate scientific, clinical, regulatory and other risks, as well as the level of effort and investment required to achieve the respective milestone. 114 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) The primary method used to estimate standalone selling price for performance obligations is the adjusted market assessment approach. Using this approach, we evaluate the market in which we sell our services and estimate the price that a customer in that market would be willing to pay for our services. We recognize revenue using either an input or output measure of progress that faithfully depicts performance on a contract, depending on the contract. The measure used is dependent on the nature of the service to be provided in each contract. Selecting the measure of progress and estimating progress to date requires significant judgment. Contract Balances In certain circumstances, billing may occur prior to services being performed. Upfront payments are recorded as deferred revenue, contract liabilities. We classify deferred revenue as current for sequencing revenue, as we expect our performance obligations will be completed within the next twelve months; however, we do not control the timing of customer provided samples. For development services, we assess the performance obligations and recognize deferred revenue as current or non-current based upon forecasted delivery times, which are customer coordinated. In certain circumstances, the customer project may be cancelled or terminated prior to the delivery of all related services covered by a customer’s upfront payment. In these circumstances, we recognize revenue when sufficient evidence is obtained that a reversal of revenue is not probable. Share-Based Compensation Share-based compensation includes compensation expense for stock option and restricted stock unit grants to employees and non-employees. It represents the grant date fair value of the grants and is recognized over the requisite service period of the awards, usually the vesting period, on a straight-line basis, net of actual forfeitures. We estimate the grant date fair value of stock option grants using the Black-Scholes option-pricing model. Advertising Advertising costs are expensed as incurred. Advertising expenses were $ 14.5 million, $ 6.6 million and $ 3.5 million for the year ended December 31, 2020, 2019 and 2018, respectively. Cost of Revenue Cost of revenue includes the cost of materials, personnel-related expenses (comprised of salaries, benefits and share-based compensation), shipping and handling, equipment and allocated facility costs associated with processing samples and professional support for our sequencing revenue. Allocated facility costs include depreciation of laboratory equipment, allocated facility occupancy and information technology costs. Costs associated with processing samples are recorded as expense, regardless of the timing of revenue recognition. Research and Development Expenses Research and development expenses are comprised of laboratory materials costs, personnel-related expenses, equipment costs, allocated facility costs, information technology expenses and contract service expenses. We also include in research and development expenses the costs associated with software development of applications to support future commercial opportunities, as well as development activities to support laboratory scaling and workflow. Research and development costs are expensed as incurred. Upfront payments for goods or services that will be used or rendered for future research and development activities are deferred and capitalized, then are recognized as an expense as the goods are consumed or the related services are performed. Costs to support our Genentech Agreement are a component of our research and development activities. Sales and Marketing Expenses Sales and marketing expenses consist primarily of personnel-related expenses for commercial sales, account management, marketing, reimbursement, medical education and business development personnel that support commercialization of our platform products. In addition, these expenses include external costs such as advertising expenses, customer education and promotional expenses, market analysis expenses, conference fees, travel expenses and allocated facility costs. 115 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Income Taxes Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and the operating loss and tax credit carryforwards. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Deferred tax assets and liabilities are measured at the balance sheet date using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities due to a change in tax rates is recognized in the period such tax rate changes are enacted. Our net deferred tax assets are fully offset by a valuation allowance, because of our history of losses. We recognize the effect of income tax positions only if those positions are more likely than not of being sustained upon examination. Net Loss Per Share Attributable to Common Shareholders We calculate basic net loss per share attributable to common shareholders by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common shareholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, common stock warrants, stock options and nonvested restricted stock units are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common shareholders, as their effect is anti-dilutive. Prior to the closing of our initial public offering in July 2019 and the related conversion of our convertible preferred stock into common stock, we calculated our basic and diluted net loss per share attributable to common shareholders in conformity with the two-class method required for companies with participating securities. We considered our convertible preferred stock to be participating securities. In the event a dividend had been declared or paid on common stock, holders of convertible preferred stock would have been entitled to a share of such dividend in proportion to the holders of common stock on an as-if converted basis. Under the two-class method, basic net loss per share attributable to common shareholders is calculated by dividing the net loss attributable to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Net loss attributable to common shareholders is determined by allocating undistributed earnings between common and preferred shareholders. The net loss attributable to common shareholders was not allocated to the convertible preferred stock under the two-class method, as the convertible preferred stock did not have a contractual obligation to share in our losses. The diluted net loss per share attributable to common shareholders was computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock, convertible preferred stock warrants, common stock warrants and stock options were considered common stock equivalents but were excluded from the calculation of diluted net loss per share attributable to common shareholders, as their effect was anti-dilutive. Segment Information We have determined that our chief executive officer is the chief operating decision maker (“CODM”). The CODM reviews financial information presented on a regular basis at the entity level. Resource allocation decisions are made by the CODM based on the results at the entity level, which is determined to be a single reporting unit. There are no segment managers who are held accountable by the CODM for operations, operating results or planning for levels or components below the entity. As such, we have concluded that we operate as one segment. We present disaggregated revenue from contracts with customers by type of service. See Note 3, Revenue. Recently Ad opted Accounting Pronouncements In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842) (“ASC 842”), intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheets and disclosing key information about leasing arrangements. We adopted the guidance effective January 1, 2020 using the optional transition method described in ASU 2018-11 , Leases (Topic 842) Targeted Improvements . Under the optional transition method, we recognized a cumulative-effect adjustment in the period of adoption. Prior period amounts were not adjusted and continue to be reported in accordance with the previous accounting under ASC 840, Leases (“ASC 840”). 116 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) In adopting the new standard, we utilized certain practical expedients available. These practical expedients include waiving reassessment of (1) whether any expired or existing contracts are or contain leases; (2) lease classification of expired or existing leases; and (3) initial direct costs for existing leases. We also elected to use hindsight in determining the lease term and in assessing impairment of our ROU assets. Furthermore, we have made a policy decision regarding our real estate leases not to separate nonlease components from lease components, to the extent they are fixed. We have also elected not to record on the balance sheet a lease that has a lease term of twelve months or less and does not contain a purchase option that we are reasonably certain to exercise. The standard had a material impact on our balance sheet as of December 31, 2020, but did not have a material impact on our statements of operations or statements of cash flows. The most significant impact was the recognition of $ 33.0 million and $ 39.7 million of operating lease ROU assets and liabilities, respectively, and the derecognition of a $ 36.6 million asset and corresponding liability previously recorded pursuant to build-to-suit lease accounting guidance under ASC 840, which resulted in an increase to retained earnings of $ 0.1 million. The operating lease ROU assets and liabilities recorded at adoption included the derecognition of $ 7.3 million of deferred rent recognized as of December 31, 2019, as well as a $ 0.5 million reclassification of tenant incentive receivables previously recognized in the prepaid expenses and other current assets line item on our balance sheet. See Note 10, Leases, for additional information regarding leases. In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables. The expected credit losses are recorded through an allowance account that is deducted from the amortized cost basis of the financial asset, and the net carrying value of the financial asset is presented on the balance sheet. The guidance also amends the previous other-than-temporary impairment model for available-for-sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account, limited to the difference between a security’s amortized cost basis and its fair value. Furthermore, the standard update removes the distinction between whether an impairment is temporary or other-than temporary. We adopted the guidance effective January 1, 2020 . Given the short-term nature of our accounts receivable, the adoption as it relates to trade receivables did not have a significant impact on our financial statements. Furthermore, impairment of available-for-sale debt securities as of the adoption date was determined to be due to factors other than credit loss; therefore, a credit allowance was not recognized. In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other: Internal-Use Software (Subtopic 350-40) to provide additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement. We adopted this guidance effective January 1, 2020 on a prospective basis, and the adoption did not have any impact on our financial statements. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which eliminates certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. Among other things, this guidance also clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. This guidance is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted, and the guidance is to be applied prospectively, except for certain amendments. We early adopted the guidance on January 1, 2020 and the adoption did not have a material impact on our financial statements. 3. Revenue We disaggregate our revenue from contracts with customers by type of service, as we believe this best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following table presents our revenue disaggregated by type of products and services for the periods presented (in thousands): Year Ended December 31, 2020 2019 2018 Sequencing revenue $ 41,439 $ 43,519 $ 32,978 Development revenue Development support 54,443 39,552 12,685 Regulatory milestones 2,500 2,000 10,000 Total development revenue 56,943 41,552 22,685 Total revenue $ 98,382 $ 85,071 $ 55,663 117 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Translational Development Agreement In December 2015, we entered into a translational development agreement with a biopharmaceutical customer for access to certain of our oncology immunosequencing research datasets, including full-time employee support, to accelerate the customer’s preclinical, nonclinical and clinical trial testing. Under the initial terms of the agreement, we could have been entitled to up to $ 40.0 million over a period of four years , which did not include any separately negotiated research sequencing contracts. If the biopharmaceutical customer terminated the agreement prior to the end of the initial four-year research term for any reason other than a material uncured breach by us, then the biopharmaceutical partner agreed to pay us $ 0.8 million. In May 2019, the agreement was subsequently amended to reduce the services provided, which in turn reduced the fourth year of eligible payments to $ 2.3 million. We identified one performance obligation under this agreement, as the services were determined to be highly interrelated. We determined that any separately negotiated sequencing contracts are not performance obligations under the contract, as the contract did not contain any material rights related to such sequencing contracts. For the identified performance obligation, we assessed the work to be performed over the duration of the contract and determined that it was a consistent level of support throughout the period, and therefore, revenue was recognized on a straight-line basis over the contract term. Revenue recognized from this translational development agreement, excluding separately negotiated research sequencing contracts, was $ 2.3 million and $ 9.3 million during the year ended December 31, 2019 and 2018, respectively. MRD Development Agreements We have entered into agreements with biopharmaceutical customers to further develop and commercialize our MRD product and the biopharmaceutical customers’ therapeutics. Under each of the agreements, we received or will receive non-refundable upfront payments and could receive substantial additional payments upon reaching certain progress milestones or achievement of certain regulatory milestones pertaining to the customers’ therapeutics and our MRD product. Under the contracts, we identify performance obligations, which may include: (1) obligations to provide services supporting the customer’s regulatory submission activities as they relate to our MRD product; and (2) sequencing services related to customer-provided samples for their regulatory submissions. The transaction price allocated to the respective performance obligations is estimated using an adjusted market assessment approach for the regulatory support services and a standalone selling price for the estimated immunosequencing services. At contract inception, we fully constrain any consideration related to the regulatory milestones, as the achievement of such milestones is subject to third-party regulatory approval and the customers’ own submission decision-making. We recognize revenue relating to the sequencing services as sequencing revenue over time using an output method based on the proportion of sample results delivered relative to the total amount of sample results expected to be delivered and when expected to be a faithful depiction of progress. We use the same method to recognize the regulatory support services. When an output method based on the proportion of sample results delivered is not expected to be a faithful depiction of progress, we utilize an input method based on estimates of effort completed using a cost-based model. We earned $ 2.5 million, $ 2.0 million and $ 10.0 million during the year ended December 31, 2020, 2019 and 2018, respectively, upon the achievement of certain regulatory milestones by us and our respective customers’ therapeutics. All $2.5 million, $2.0 million and $10.0 million was recognized as revenue within the respective periods, as we determined these amounts were consistent with our estimated standalone selling price and the respective performance obligations were complete. We recognized $ 3.4 million, $ 3.7 million and $ 12.8 million in development revenue related to these contracts, inclusive of the milestones, during the year ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, in future periods we could receive up to an additional $ 313.5 million in milestone payments if certain regulatory approvals are obtained by our customers’ therapeutics in connection with MRD data generated from our MRD product. Genentech Collaboration Agreement In December 2018, we entered into a worldwide collaboration and license agreement with Genentech (“Genentech Agreement”) to leverage our capability to develop cellular therapies in oncology. Subsequent to receipt of regulatory approval in January 2019, we received a non-refundable, upfront payment of $ 300.0 million in February 2019 and may be eligible to receive more than $ 1.8 billion over time, including payments of up to $ 75.0 million upon the achievement of specified regulatory milestones, up to $ 300.0 million upon the achievement of specified development milestones and up to $ 1,430.0 million upon the achievement of specified commercial milestones. In addition, we are separately able to receive tiered royalties at a rate ranging from the mid-single digits to the mid-teens on aggregate worldwide net sales of products arising from the strategic collaboration, subject to certain reductions, with aggregate minimum floors. Under the agreement, we are pursuing two product development pathways for novel T cell immunotherapies in which Genentech intends to use TCRs screened by our immune medicine platform to engineer and manufacture cellular medicines: • Shared Products. The shared products will use “off-the-shelf” TCRs identified against cancer antigens shared among patients (“Shared Products”). 118 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) • Personalized Product. The personalized product will use patient-specific TCRs identified by real-time screening of TCRs against cancer antigens in each patient (“Personalized Product”). Under the terms of the agreement, we granted Genentech exclusive worldwide licenses to develop and commercialize TCR-based cellular therapies in the field of oncology, including licenses to existing shared antigen data packages. Additionally, Genentech has the right to determine which product candidates to further develop for commercialization purposes. We determined that this arrangement meets the criteria set forth in ASC Topic 808, Collaborative Arrangements (“ASC 808”), because both parties are active participants in the activity and are exposed to significant risks and rewards depending on the activity’s commercial failure or success. Because ASC 808 does not provide guidance on how to account for the activities under a collaborative arrangement, we applied the guidance in ASC 606 to account for the activities related to the Genentech Agreement. In applying ASC 606, we identified the following performance obligations at the inception of the agreement: 1. License to utilize on an exclusive basis all TCR-specific platform intellectual property to develop and commercialize any licensed products in the field of oncology. 2. License to utilize all data and information within each shared antigen data package and any other know-how disclosed by us to Genentech in oncology. 3. License to utilize all private antigen TCR product data in connection with research and development activities in the field of use. 4. License to existing shared antigen data packages. 5. Research and development services for shared product development, including expansion of shared antigen data packages. 6. Research and development services for private product development. 7. Obligations to participate on various joint research, development and project committees. We determined that none of the licenses, research and development services or obligations to participate on various committees were distinct within the context of the contract, given such rights and activities were highly interrelated and there was substantial additional research and development to further develop the licenses. We considered factors such as the stage of development of the respective existing antigen data packages, the subsequent development that would be required to both identify and submit a potential target for investigational new drug acceptance under both product pathways and the variability in research and development pathways given Genentech’s control of product commercialization. Specifically, under the agreement, Genentech is not required to pursue development or commercialization activities pertaining to both product pathways and may choose to proceed with one or the other, as opposed to both. Accordingly, we determined that all of the identified performance obligations were attributable to one general performance obligation, which is to further the development of our TCR-specific platform, including data packages, and continue to make our TCR identification process available to Genentech to pursue either product pathway. Separately, we have a responsibility to Genentech to enter into a supply and manufacturing agreement for patient-specific TCRs as it pertains to any Personalized Product therapeutic. We determined this was an option right of Genentech should they pursue commercialization of a Personalized Product therapy. Because of the uncertainty resulting from the early stage of development, the novel approach of our collaboration with Genentech and our rights to future commercial milestones and royalty payments, we determined that this option right was not a material right that should be accounted for at inception. As such, we will account for the supply and manufacturing agreement when entered into between the parties. We determined the initial transaction price shall be made up of only the $ 300.0 million upfront, non-refundable payment, as all potential regulatory and development milestone payments were probable of significant revenue reversal given their achievement was highly dependent on factors outside our control. As a result, these payments were fully constrained and were not included in the transaction price as of December 31, 2020. We excluded the commercial milestones and potential royalties from the transaction price, as those items relate predominantly to the license rights granted to Genentech and will be assessed when and if such events occur. 119 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) As there are potential substantive developments necessary, which Genentech may be able to direct, we determined that we would apply a proportional performance model to recognize revenue for our performance obligation. We measure proportional performance using an input method based on costs incurred relative to the total estimated costs of research and development efforts to pursue both the Shared Product and Personalized Product pathways. When any of the potential regulatory and development milestones are no longer fully constrained and included in the transaction price, such amounts will be recognized using the cumulative catch-up method based on proportional performance at such time. We currently expect to recognize the revenue over a period of approximately seven to eight years from the effective date. This estimate of the research and development period considers pursuit options of development activities supporting both the Shared Product and the Personalized Product, but may be reduced or increased based on the various activities as directed by the joint committees, decisions made by Genentech, regulatory feedback or other factors not currently known. We recognized revenue of $ 52.8 million and $ 35.1 million during the year ended December 31, 2020 and 2019, respectively, related to the Genentech Agreement. Costs related to the Genentech Agreement are included in research and development expenses. 4. Fair Value Measurements The following tables set forth the fair value of financial assets as of December 31, 2020 and 2019 that were measured at fair value on a recurring basis (in thousands): December 31, 2020 Level 1 Level 2 Level 3 Total Financial assets Money market funds $ 103,283 $ — $ — $ 103,283 U.S. government debt securities — 671,777 — 671,777 Corporate bonds — 11,581 — 11,581 Total financial assets $ 103,283 $ 683,358 $ — $ 786,641 December 31, 2019 Level 1 Level 2 Level 3 Total Financial assets Money market funds $ 88,683 $ — $ — $ 88,683 Commercial paper — 121,867 — 121,867 U.S. government debt securities — 377,243 — 377,243 Corporate bonds — 86,615 — 86,615 Total financial assets $ 88,683 $ 585,725 $ — $ 674,408 Level 1 securities include highly liquid money market funds, for which we measure the fair value based on quoted prices in active markets for identical assets or liabilities. Level 2 securities consist of U.S. government debt securities, commercial paper and corporate bonds, and are valued based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from or corroborated by observable market data. 120 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) 5. Investments Available-for-sale investments consisted of the following as of December 31, 2020 and 2019 (in thousands): December 31, 2020 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Short-term marketable securities U.S. government debt securities $ 552,539 $ 723 $ ( 10 ) $ 553,252 Corporate bonds 11,497 86 ( 2 ) 11,581 Total short-term marketable securities $ 564,036 $ 809 $ ( 12 ) $ 564,833 Long-term marketable securities U.S. government debt securities $ 118,429 $ 98 $ ( 2 ) $ 118,525 Total long-term marketable securities $ 118,429 $ 98 $ ( 2 ) $ 118,525 December 31, 2019 Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Short-term marketable securities Commercial paper $ 121,866 $ — $ — $ 121,866 U.S. government debt securities 285,963 394 ( 1 ) 286,356 Corporate bonds 71,962 109 ( 3 ) 72,068 Total short-term marketable securities $ 479,791 $ 503 $ ( 4 ) $ 480,290 Long-term marketable securities U.S. government debt securities $ 90,750 $ 146 $ ( 9 ) $ 90,887 Corporate bonds 14,513 35 — 14,548 Total long-term marketable securities $ 105,263 $ 181 $ ( 9 ) $ 105,435 All the commercial paper, U.S. government debt securities and corporate bonds designated as short-term marketable securities have an effective maturity date that is equal to or less than one year from the respective balance sheet date. Those that are designated as long-term marketable securities have an effective maturity date that is more than one year from the respective balance sheet date. Accrued interest receivables are excluded from the amortized cost and estimated fair value of our marketable securities. Accrued interest receivables of $ 2.5 million and $ 2.2 million were presented separately within the prepaid expenses and other current assets line item on our balance sheet as of December 31, 2020 and 2019, respectively. We have made an accounting policy election to not measure an allowance for credit losses for accrued interest receivables. The following table presents the gross unrealized holding losses and fair value for investments in an unrealized loss position and the length of time that individual securities have been in a continuous loss position as of December 31, 2020 (in thousands): Less Than 12 Months 12 Months Or Greater Fair Value Unrealized Loss Fair Value Unrealized Loss U.S. government debt securities $ 177,554 $ ( 12 ) $ — $ — Corporate bonds 1,512 ( 2 ) — — Total available-for-sale securities $ 179,066 $ ( 14 ) $ — $ — We periodically review our available-for-sale securities to assess for credit impairment. Some of the factors considered in assessing impairment include the extent to which the fair value is less than the amortized cost basis, adverse conditions related to the security, an industry or geographic area, changes to security ratings or sector credit ratings and other relevant market data. As of December 31, 2020, we did not intend, nor were we more likely than not to be required, to sell our available-for-sale investments before the recovery of their amortized cost basis, which may be maturity. Based on our assessment, we concluded all impairment as of December 31, 2020 to be due to factors other than credit loss, such as changes in interest rates. A credit allowance was not recognized and the impairment of our available-for-sale securities was recorded in other comprehensive loss. 121 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) 6. Property and Equipment, Net Property and equipment, net as of December 31, 2020 and 2019 consisted of the following (in thousands): December 31, 2020 2019 Laboratory equipment $ 27,767 $ 20,773 Computer equipment 3,600 2,450 Furniture and office equipment 2,717 1,568 Computer software 860 505 Construction in progress 7,185 1,852 Leasehold improvements 21,945 14,716 Build-to-suit asset cost — 36,607 Property and equipment, at cost 64,074 78,471 Less: accumulated depreciation ( 24,382 ) ( 18,116 ) Property and equipment, net $ 39,692 $ 60,355 Depreciation expense was $ 6.8 million, $ 6.1 million and $ 4.3 million for the year ended December 31, 2020, 2019 and 2018, respectively. 7 . Goodwill and Intangible Assets There have been no changes in the carrying amount of goodwill since its recognition in 2015. Intangible assets subject to amortization as of December 31, 2020 and 2019 consisted of the following (in thousands): December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Acquired developed technology $ 20,000 $ ( 9,972 ) $ 10,028 Purchased intellectual property 325 ( 128 ) 197 Balance at December 31, 2020 $ 20,325 $ ( 10,100 ) $ 10,225 December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Acquired developed technology $ 20,000 $ ( 8,301 ) $ 11,699 Purchased intellectual property 325 ( 96 ) 229 Balance at December 31, 2019 $ 20,325 $ ( 8,397 ) $ 11,928 The developed technology was acquired in connection with our acquisition of Sequenta in 2015. The remaining balance of the acquired technology and the purchased intellectual property is expected to be amortized over the next 6.0 years. As of December 31, 2020, expected future amortization expense for intangible assets was as follows (in thousands): 2021 $ 1,699 2022 1,699 2023 1,699 2024 1,703 2025 1,699 Thereafter 1,726 Total future amortization expense $ 10,225 122 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) 8. Accrued Liabilities Accrued liabilities as of December 31, 2020 and 2019 consisted of the following (in thousands): December 31, 2020 2019 Professional fees $ 3,219 $ 1,011 Clinical and contract research organization costs 1,781 30 Travel and entertainment 91 157 Tax liabilities 1,767 2,062 Purchases of property and equipment 4,423 555 Other 1,881 556 Total accrued liabilities $ 13,162 $ 4,371 The accrued tax liabilities balance as of December 31, 2020 includes a $ 1.4 million tax withholding liability related to unsettled option exercises as of December 31, 2020. The accrued tax liabilities balance as of December 31, 2019 includes a $ 1.9 million tax withholding liability related to unsettled option exercises as of December 31, 2019. 9 . Deferred Revenue Deferred revenue by revenue classification as of December 31, 2020 and 2019 was as follows (in thousands): December 31, 2020 2019 Current deferred revenue Sequencing $ 15,463 $ 12,482 Development 57,856 48,512 Total current deferred revenue 73,319 60,994 Non-current deferred revenue Sequencing 724 1,459 Development 162,894 217,873 Total non-current deferred revenue 163,618 219,332 Total current and non-current deferred revenue $ 236,937 $ 280,326 Deferred revenue from our Genentech Agreement represents $ 55.1 million and $ 157.0 million of the current and non-current development deferred revenue balances, respectively, as of December 31, 2020 and $ 48.1 million and $ 216.8 million of the current and non-current development deferred revenue balances, respectively, as of December 31, 2019. In general, we expect that the current amounts will be recognized as revenue within 12 months and the non-current amounts will be recognized as revenue over a period of approximately six to seven years . This period of time represents an estimate of the research and development period to develop cellular therapies in oncology, which may be reduced or increased based on the various development activities. Changes in deferred revenue during the year ended December 31, 2020 were as follows (in thousands): Deferred revenue balance at December 31, 2019 $ 280,326 Additions to deferred revenue during the period 26,434 Revenue recognized during the period ( 69,823 ) Deferred revenue balance at December 31, 2020 $ 236,937 As of December 31, 2020, $ 61.6 million was recognized as revenue that was included in the deferred revenue balance at December 31, 2019. This is inclusive of $ 1.0 million of sequencing revenue recognized as a result of cancelled biopharmaceutical customer sequencing contracts and $ 0.6 million of sequencing revenue related to Medicare that was recognized due to our determination that additional testing for specific patients was remote. 123 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) 10. Leases We have operating lease agreements for the laboratory and office facilities that we occupy in various locations, as well as server space. In July 2011, we entered into a non-cancelable lease agreement with an, at the time, minority shareholder for our current headquarters in Seattle, Washington. The lease terms were subsequently amended multiple times, most recently in August 2019, when we expanded the existing premises to approximately 65,500 square feet. Cash payment for rent of the expanded premises commenced January 2020 , four months after the landlord delivered the expanded premises to us for construction of certain tenant improvements, and the lease term for both the existing premises and the expanded premises ends October 2032, subject to our option to twice extend the lease for five years . The amended lease also requires us to pay additional amounts for operating and maintenance expenses. In August 2019, we entered into an agreement to rent approximately 100,000 square feet in a to-be-constructed building in Seattle, Washington. In connection with the lease, we entered into a $ 2.1 million letter of credit with one of our existing financial institutions. Due to our significant involvement during the construction process of the leased building, we qualified as the deemed owner of the building under build-to-suit lease accounting guidance that proceeded ASC 842. The resulting asset and long-term financing obligation recorded on our balance sheet as of December 31, 2019 for the cost of the building was derecognized upon adoption of ASC 842. The lease commenced in December 2020 , when the landlord delivered the premises to us for construction of certain tenant improvements. Cash payment for rent begins in October 2021 and the lease term ends in August 2033 , subject to our option to twice extend the lease for five years . We plan to occupy the new building in 2021, once interior construction is finished. In connection with this lease, the landlord agreed to fund $ 20.0 million in improvements, which was subsequently reduced to $ 14.8 million as a result of our change requests made during landlord construction of the building, net of an administration fee. As of December 31, 2020, w e have incurred $ 5.2 million in certain tenant improvement costs, of which $ 0.7 million has been reimbursed by the landlord. The remaining $ 4.5 million is presented as a reduction in the cash flows used to measure our ROU asset and lease liabilities on our balance sheet as of December 31, 2020 and will be reimbursed by the landlord. The lease also requires us to pay additional amounts for operating and maintenance expenses. In October 2019, we entered into an agreement to lease approximately 14,750 square feet in a separate Seattle, Washington location, pursuant to a lease expiring in October 2029, which is subject to our ability to exercise an early termination right after the third year. In connection with the lease, the landlord has agreed to provide a tenant improvement allowance in the maximum amount of $ 0.7 million. The lease also requires us to pay additional amounts for operating expenses. In April 2018, we entered into a lease agreement to lease approximately 13,400 square feet in South San Francisco, California. The lease term is through March 2026 and provides for one five-year extension option. We are responsible for our share of allocable operating expenses, tax expenses and utilities cost during the duration of the lease term. In connection with the lease, the landlord funded agreed-upon improvements. The landlord was solely responsible for the $ 2.4 million cost of such improvements. The lease agreement was amended in February 2020 to lease approximately 19,900 additional square feet and provides for a $ 0.6 million tenant improvement allowance. In December 2019, we entered into an agreement to lease approximately 3,100 square feet of office space in New York City, New York, pursuant to a lease that expires November 2025 , subject to our ability to exercise an early termination right in 2023. As of December 31, 2020, we were not party to any finance leases. Our leases have remaining terms of 1.3 years to 12.7 years and include options to extend certain of the leases up to 10.0 years and terminate certain of the leases after 3.0 years. We adjust lease terms for these options only when it is reasonably certain we will exercise these options. As of December 31, 2020, it was reasonably certain that we would exercise our option to terminate two of our leases after 3.0 years . Other information related to our operating leases as of December 31, 2020 was as follows: Weighted-average remaining lease term (in years) 11.33 Weighted-average discount rate 4.6 % 124 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) The following table reconciles our undiscounted operating lease cash flows to our operating lease liabilities as of December 31, 2020 (in thousands): 2021 $ 7,828 2022 13,554 2023 13,318 2024 13,030 2025 13,419 Thereafter 88,463 Total undiscounted lease payments 149,612 Less: Imputed interest rate ( 35,848 ) Tenant improvement receivables ( 5,902 ) Total operating lease liabilities $ 107,862 Less: current portion ( 3,529 ) Operating lease liabilities, less current portion $ 104,333 Operating lease expense was $ 5.5 million for the year ended December 31, 2020. Variable lease expense for operating leases was $ 2.6 million for the year ended December 31, 2020. Rent expense recognized under ASC 840, inclusive of operating and maintenance costs, was $ 5.3 million and $ 4.1 million for the year ended December 31, 2019 and 2018, respectively. Cash paid for amounts included in the measurement of lease liabilities for the year ended December 31, 2020 was $ 3.2 million, net of $ 2.5 million of cash received for tenant improvement allowances. For the year ended December 31, 2020, ROU assets obtained in exchange for operating lease liabilities was $ 109.1 million, inclusive of the $ 33.0 million recognized from the adoption of ASC 842. 1 1 . Commitments and Contingencies Legal Proceedings We are subject to claims and assessments from time to time in the ordinary course of business. We will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. We are not party to any material legal proceedings as of December 31, 2020. Indemnification Agreements In the ordinary course of business, we may provide indemnification of varying scope and terms to vendors, lessors, customers and other parties with respect to certain matters including, but not limited to, losses arising out of breach of our agreements with them or from intellectual property infringement claims made by third parties. In addition, we have entered into indemnification agreements with members of our board of directors and certain of our executive officers that will require us to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. The maximum potential amount of future payments that we could be required to make under these indemnification agreements is, in many cases, unlimited. We have not incurred any material costs as a result of such indemnifications and are not currently aware of any indemnification claims. 1 2 . Shareholders’ Equity Convertible Preferred Stock Immediately prior to the completion of our initial public offering on July 1, 2019, 93,039,737 shares of convertible preferred stock then outstanding converted into an equivalent number of shares of common stock. As of December 31, 2020, no shares of convertible preferred stock were outstanding. Preferred Stock We are authorized to issue 10,000,000 shares of preferred stock, par value $ 0.0001 per share. As of December 31, 2020, no shares of preferred stock were outstanding. 125 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Common Stock We are authorized to issue 340,000,000 shares of common stock. Our common stock has a par value of $ 0.0001 per share, no preferences or privileges and is not redeemable. Holders of our common stock are entitled to one vote for each share of common stock held . The holders of record of outstanding shares of common stock shall be entitled to receive, when, as and if declared, out of funds legally available, such cash and other dividends as may be declared from time to time. As of December 31, 2020, we had 137,646,896 shares of common stock outstanding. As of December 31, 2020, w e have reserved shares of common stock for the following: Shares issuable upon the exercise of outstanding common stock options and the vesting of outstanding common restricted stock units granted 14,483,560 Shares available for future grant under the 2019 Equity Incentive Plan 18,617,001 Shares available for future grant under the Employee Stock Purchase Plan 2,804,298 Shares to be issued upon exercise of a common stock warrant 56,875 Total shares of common stock reserved for future issuance 35,961,734 Our 2019 Equity Incentive Plan (“2019 Plan”) provides for annual increases in the number of shares that may be issued under the 2019 Plan on January 1, 2020 and on each subsequent January 1, thereafter, by a number of shares equal to the lesser of (a) 5 % of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by our board of directors. Furthermore, our Employee Stock Purchase Plan (“ESPP”) provides for annual increases in the number of shares available for issuance under our ESPP on January 1, 2020 and on each January 1, thereafter, by a number of shares equal to the smallest of (a) 1 % of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by our board of directors. Effective January 1, 2020, our 2019 Plan and ESPP reserves increased by 6,261,907 shares and 1,252,381 shares, respectively. Effective January 1, 2021, our 2019 Plan reserve increased by 6,882,344 shares. Common Stock Warrants In connection with two transactions in 2012 and 2013, we granted warrants to purchase up to 55,032 shares of common stock. These warrants were exercisable at any time for a period of ten years from the date of issuance at a weighted-average exercise price of $ 0.37 , except in the case of a warrant to purchase 20,000 shares of common stock at an exercise price of $ 0.45 per share that would have expired if unexercised prior to the closing of our initial public offering. On July 1, 2019, we issued 54,792 shares of common stock through both a cash and cashless exercise of the warrants. The impact of these exercises was immaterial to the financial statements. Separately, in 2014, we issued a warrant to purchase 56,875 shares of Series C convertible preferred stock at an exercise price of $ 2.64 . The warrant is exercisable for a period of seven years from the date of issuance. Immediately prior to and in connection with the completion of our initial public offering on July 1, 2019, this convertible preferred stock warrant, which was previously recorded as a financial liability, was converted to a warrant to purchase the same number of shares of common stock. Upon conversion, the financial liability was reclassified to the additional paid-in capital line item on our balance sheet. The warrant to purchase 56,875 shares of common stock remains outstanding as of December 31, 2020. 1 3 . Equity Incentive Plans Sequenta 2008 Stock Plan, as amended In connection with our acquisition of Sequenta in January 2015, we assumed Sequenta’s Equity Incentive Plan (“2008 Plan”), including all outstanding options and shares available for future issuance under the 2008 Plan, which, prior to the completion of our initial public offering, were all exercisable for Series E-1 convertible preferred stock. Upon completion of our initial public offering in July 2019, the outstanding options were exercisable for common stock. No shares are available for future issuance under this plan and no equity awards are outstanding under this plan as of December 31, 2020. 126 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Adaptive 2009 Equity Incentive Plan We adopted an equity incentive plan in 2009 (“2009 Plan”) that provided for the issuance of incentive and nonqualified common stock options and other share-based awards for employees, directors and consultants. Under the 2009 Plan, the option exercise price for incentive and nonqualified stock options were not to be less than the fair market value of our common stock at the date of grant. Options granted under this plan expire no later than ten years from the grant date and vesting was established at the time of grant. Pursuant to the terms of the 2019 Plan, any shares subject to outstanding options originally granted under the 2009 Plan that terminate, expire or lapse for any reason without the delivery of shares to the holder thereof shall become available for issuance pursuant to awards granted under the 2019 Plan. While no shares are available for future issuance under the 2009 Plan, it continues to govern outstanding equity awards granted thereunder. 2019 Equity Incentive Plan The 2019 Plan was approved by our shareholders on June 13, 2019 and, pursuant to the resolutions adopted by our board of directors, became effective immediately prior to the closing of our initial public offering. The 2019 Plan provides for the issuance of awards in the form of options and other share-based awards for employees, directors and consultants. Under the 2019 Plan, the option exercise price per share shall not be less than the fair market value of a share of stock on the grant date of the option, as defined by the 2019 Plan, unless explicitly qualified under the provisions of Section 409A or Section 424(a) of the Internal Revenue Code of 1986. Additionally, unless otherwise specified, options granted under this plan expire no later than ten years from the grant date and vesting is established at the time of grant. Except for certain option grants made to non-employee directors, stock options granted under the 2019 Plan generally vest over a four-year period, subject to continuous service through each applicable vesting date. As of December 31, 2020, we have authorized 22,109,217 shares of common stock for issuance under the 2019 Plan. Changes in shares available for grant during the year ended December 31, 2020 were as follows: Shares Available for Grant Shares available for grant at December 31, 2019 15,396,254 2019 Plan reserve increase on January 1, 2020 6,261,907 Options and restricted stock units granted ( 3,291,701 ) Options forfeited, cancelled or expired 250,541 Shares available for grant at December 31, 2020 18,617,001 Stock option activity under the 2008 Plan, 2009 Plan and 2019 Plan during the year ended December 31, 2020 was as follows: Shares Subject to Outstanding Options Weighted- Average Exercise Price per Share Aggregate Intrinsic Value (in thousands) Options outstanding at December 31, 2019 16,646,654 $ 6.14 $ 398,379 Options granted 3,241,701 33.36 Options forfeited or cancelled ( 235,541 ) 16.17 Options expired ( 15,000 ) 0.16 Options exercised ( 5,204,254 ) 4.14 Options outstanding at December 31, 2020 14,433,560 $ 12.82 $ 668,458 Options vested and exercisable at December 31, 2020 7,924,779 $ 6.41 $ 417,801 The weighted-average remaining contractual life for options outstanding as of December 31, 2020 was 7.1 years. The weighted-average remaining contractual life for vested and exercisable options outstanding as of December 31, 2020 was 5.9 years. The weighted-average grant date fair value per share of options granted was $ 21.11 , $ 6.87 and $ 4.15 during the year ended December 31, 2020, 2019 and 2018, respectively. The total intrinsic value of options exercised was $ 190.4 million, $ 39.1 million and $ 3.8 million during the year ended December 31, 2020, 2019 and 2018, respectively. As of December 31, 2020, $ 0.3 million was included in the prepaid expenses and other current assets line item on our balance sheet for unsettled cash proceeds related to options exercised during the year ended December 31, 2020. As of December 31, 2019, $ 0.5 million was included in the prepaid expenses and other current assets line item on our balance sheet for unsettled cash proceeds related to options exercised during the year ended December 31, 2019. The $ 21.7 million proceeds from exercise of stock options on our statements of cash flows for the year ended December 31, 2020 includes this $ 0.5 million, as the related proceeds settled during the year ended December 31, 2020. 127 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Restricted stock unit activity under the 2019 Plan during the year ended December 31, 2020 was as follows: Restricted Stock Units Outstanding Weighted- Average Grant Date Fair Value per Share Nonvested outstanding restricted stock units at December 31, 2019 4,500 $ 41.63 Restricted stock units granted 50,000 28.10 Restricted stock units vested ( 4,500 ) 41.63 Nonvested outstanding restricted stock units at December 31, 2020 50,000 $ 28.10 The weighted-average grant date fair value per share of restricted stock units granted during the year ended December 31, 2019 was $ 41.63 . Grant Date Fair Value of Options and Restricted Stock Units Granted The estimated grant date fair value of options granted during the year ended December 31, 2020, 2019 and 2018 was estimated using the Black-Scholes option-pricing model with the following assumptions: Year Ended December 31, 2020 2019 2018 Fair value of common stock $17.68 - $55.23 $7.80 - $47.81 $ 6.55 Expected term (in years) 5.27 - 6.08 5.27 - 6.08 6.08 - 10.00 Risk-free interest rate 0.4% - 1.7% 1.4% - 2.5% 2.6% - 3.0% Expected volatility 70.5% - 73.3% 64.3% - 72.9% 65.0% - 69.2% Expected dividend yield — — — The weighted-average volatility used in the grant date fair value calculations of options granted during the year ended December 31, 2020, 2019 and 2018 was 71.4 %, 68.1 % and 68.1 %, respectively. The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of our common stock, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The valuation assumptions were determined as follows: Fair value of common stock— Prior to the closing of our initial public offering, the fair value of our common stock was determined with input from management using valuation methodologies which utilized 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 (Level 3 inputs). In determining the fair value of our common stock, the methodologies used to estimate the enterprise value 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 . For valuations of grants made after the closing of our initial public offering, the fair value of each share of common stock is based on the closing price of our common stock on the date of grant, or other relevant determination date, as reported on The Nasdaq Global Select Market. Expected term —The expected term of options granted to employees and non-employee directors is determined using the “simplified” method, as illustrated in ASC Topic 718, Compensation—Stock Compensation , as we do not have sufficient exercise history to determine a better estimate of expected term. Under this approach, the expected term is based on the midpoint between the vesting date and the end of the contractual term of the option. Risk-free interest rate —We utilize a risk-free interest rate in the option valuation model based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected terms of the options. Expected volatility —As we do not have sufficient trading history for our common stock, the expected volatility is based on the historical volatility of our publicly traded industry peers utilizing a period of time consistent with our estimate of the expected term. Expected dividend yield —We do not anticipate paying any cash dividends in the foreseeable future and, therefore, use an expected dividend yield of zero in the option valuation model. The grant date fair value of restricted stock units granted after the closing of our initial public offering is based on the closing price of our common stock on the date of grant, or other relevant determination date, as reported on The Nasdaq Global Select Market. 128 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Share-based compensation expense of $ 24.8 million , $ 13.1 million and $ 11.1 million was recognized during the year ended December 31 , 20 20 , 201 9 and 201 8 , respectively . The compensation costs related to stock options and restricted stock units for the years ended December 31, 2020, 2019 and 2018 are included on our statements of operations as follows (in thousands): Year Ended December 31, 2020 2019 2018 Cost of revenue $ 817 $ 555 $ 398 Research and development 8,519 3,934 2,896 Sales and marketing 6,627 3,480 2,891 General and administration 8,798 5,155 4,964 Total share-based compensation expense $ 24,761 $ 13,124 $ 11,149 During the year ended December 31, 2018, there was one employee option modification to extend the option exercise period, which resulted in incremental stock compensation of $ 0.5 million. As of December 31, 2020, unrecognized share-based compensation expense related to unvested stock options was $ 74.9 million, which is expected to be recognized over a remaining weighted-average period of 3.0 years. Additionally, as of December 31, 2020, unrecognized share-based compensation expense related to nonvested restricted stock units was $ 1.1 million, which is expected to be recognized over a remaining weighted-average period of 3.3 years. 1 4 . Microsoft Collaboration Agreement Summary of Agreement In December 2017, we entered into a collaboration agreement with Microsoft (“Microsoft Agreement”) to computationally derive a comprehensive TCR antigen map for purposes of developing a universal diagnostic based on a single blood test. Contemporaneously with the Microsoft Agreement, we entered into a separate agreement to use Microsoft’s Azure cloud services at standard volume pricing with a minimum Azure consumption requirement of $ 12.0 million over the seven-year term of the Microsoft Agreement, which we expect to meet in the ordinary course of business. In addition, contemporaneously with entering into the Microsoft Agreement, Microsoft made a preferred stock investment of approximately $ 45.0 million as a part of our Series F-1 convertible preferred stock issuance. Summary of Accounting The terms of the Microsoft Agreement meet the criteria under ASC Topic 808, Collaborative Arrangements (“ASC 808”), as both parties are active participants in the activity and are exposed to significant risks and rewards dependent on the commercial success of the activity. ASC 808 does not provide guidance on how to account for the activities under the collaboration and we determined that Microsoft did not meet the definition of a customer under ASC 606. Accordingly, we looked to other guidance to determine the accounting for the respective elements. We determined that the preferred stock issuance and commitment to use Microsoft’s Azure cloud services were made at terms consistent with market rates. All consideration received as part of the Series F-1 convertible preferred stock issuance was accounted for as part of the Series F-1 preferred stock issuance. Since the commitment to use Microsoft’s Azure cloud services was at market terms and we expect to meet the commitment in the ordinary course of business during the seven-year term, we record the expenses in the period in which the services are consumed. These costs are recorded in our statements of operations based on the underlying activities for which they support. The remaining elements of the agreement were highly interrelated, so we evaluated them in the aggregate to determine the appropriate accounting application. Specifically, we determined that the transfer of license rights between the parties, our commitment to provide data and immunomics, diagnostic and bioinformatics expertise to Microsoft and Microsoft’s commitment to provide machine learning software and related development services to us were highly interrelated because they were necessary for the parties to perform the activities under the Microsoft Agreement and, therefore, should be evaluated as one unit of account. 129 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) We accounted for these collaboration activities by analogy to ASC Topic 845, Nonmonetary Transactions , and determined that major uncertainties exist about the realizability of the value that would be assigned to an asset received from or provided to Microsoft under the collaboration and, therefore, fair value could not be reliably measured. As a result, we did not recognize any non-monetary assets or corresponding non-monetary income or expenses pertaining to the rights provided to us or to be received by us under the Microsoft Agreement. 1 5 . Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities for the periods presented are as follows (in thousands): December 31, 2020 2019 Deferred tax assets Net operating losses $ 105,433 $ 79,035 Tax credit carryforward 18,981 11,152 Non qualifying stock options 12,096 9,150 Deferred rent — 11,755 Operating lease liabilities 31,052 — Deferred revenue 59,713 1,706 Other 2,983 1,892 Total deferred tax assets 230,258 114,690 Valuation allowance ( 197,527 ) ( 100,906 ) Deferred tax assets, net of valuation allowance 32,731 13,784 Deferred tax liabilities Tangible and intangible assets ( 5,760 ) ( 13,784 ) ROU assets ( 26,971 ) — Net deferred taxes $ — $ — ASC Topic 740, Income Taxes , requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Because of our history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not likely to be realized and, accordingly, has provided a valuation allowance. The valuation allowance increased by $ 96.6 million and $ 30.2 million during the year ended December 31, 2020 and 2019, respectively. In March 2020, the CARES Act was enacted and signed into law in response to COVID-19. The CARES Act, among other things, included several significant provisions that impacted corporate taxpayers' accounting for income taxes, including modification to the utilization of net operating losses and interest expense deduction limitations. However, none of these provisions have an impact on our tax provision. Federal tax laws impose substantial restrictions on the utilization of net operating loss and credit carryforwards in the event of an ownership change, as defined in Section 382 of the Internal Revenue Code. Accordingly, our ability to utilize these carryforwards may be limited due to such ownership changes. We have completed a Section 382 analysis for changes in ownership through December 31, 2018 and an analysis is ongoing for ownership changes through December 31, 2020. Based on these analyses, we do not expect to have any permanent limitations on the utilization of our federal net operating losses. Under the TCJA federal income tax law, federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. Net operating losses generated prior to 2018 are eligible to be carried forward up to 20 years. As of December 31, 2020, we had U.S. federal net operating losses of $ 192.5 million and U.S. federal tax credits of $ 18.8 million that will begin to expire in 2028 . We also have $ 211.9 million of net operating losses that do not expire. 130 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) The effective tax rate of our provision for income taxes differs from the federal statutory rate for the periods presented as follows: Year Ended December 31, 2020 2019 2018 Statutory rate 21.0 % 21.0 % 21.0 % State tax 13.8 8.1 5.5 Stock compensation 25.2 9.8 0.5 Permanent items ( 0.1 ) ( 1.0 ) 0.5 Credits 5.7 6.1 2.7 Other 0.5 0.3 0.1 Change in valuation allowance ( 66.1 ) ( 44.3 ) ( 30.3 ) Total 0.0 % 0.0 % 0.0 % We recognize, in our financial statements, the effect of a tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. We had unrecognized tax benefits of $ 3.5 million as of December 31, 2020. A reconciliation of the beginning and ending amounts of unrecognized tax benefits during the periods presented are as follows (in thousands): Balance at December 31, 2017 $ 1,031 Additions in 2018 229 Balance at December 31, 2018 1,260 Additions in 2019 792 Balance at December 31, 2019 2,052 Additions in 2020 1,437 Balance at December 31, 2020 $ 3,489 During the year ended December 31, 2020 and 2019, we recognized uncertain tax positions of $ 1.4 million and $ 0.8 million, respectively, related to a reduction of the research and development credit deferred tax asset. Unrecognized tax benefits may change during the next twelve months for items that arise in the ordinary course of business. We do not anticipate a material change to our unrecognized tax benefits over the next twelve months that would have an adverse effect on our operating results. We recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We had no accrued interest or penalties related to uncertain tax positions as of December 31, 2020 and 2019. We file federal and certain state income tax returns, which provide varying statutes of limitations on assessments. However, because of net operating loss carryforwards, substantially all tax years since inception remain open to federal and state tax examination. 1 6 . Net Loss Per Share Attributable to Common Shareholders Net Loss Per Share The following table sets forth the computation of the basic and diluted net loss per share attributable to common shareholders for the periods presented (in thousands, except share and per share amounts): Year Ended December 31, 2020 2019 2018 Net loss $ ( 146,227 ) $ ( 68,606 ) $ ( 46,447 ) Fair value adjustments to redemption value for Series E-1 convertible preferred stock options — ( 964 ) 102 Net loss attributable to common shareholders, basic and diluted $ ( 146,227 ) $ ( 69,570 ) $ ( 46,345 ) Weighted-average shares used in computing net loss per share 131,216,468 69,165,315 12,629,778 Net loss per share attributable to common shareholders, basic and diluted $ ( 1.11 ) $ ( 1.01 ) $ ( 3.67 ) 131 Adaptive Biotechnologies Corporation Notes to Financial Statements (Continued) Since we were in a loss position for all periods presented, basic net loss per share attributable to common shareholders is the same as diluted net loss per share attributable to common shareholders, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share attributable to common shareholders for the year ended December 31, 2020, 2019 and 2018, respectively, as they had an anti-dilutive effect: Year Ended December 31, 2020 2019 2018 Convertible preferred stock (on as if converted basis) — 46,104,469 92,783,867 Stock options issued and outstanding 16,125,548 17,183,546 14,701,626 Nonvested restricted stock units 38,125 4,952 — Common stock warrants 56,875 55,961 55,032 Convertible preferred stock warrants — 28,204 56,875 Total 16,220,548 63,377,132 107,597,400 1 7 . Retirement Plan We maintain a salary deferral 401(k) plan (“401(k) Plan”) covering employees who have met certain eligibility requirements. Employees may defer up to 100 % of their compensation to the 401(k) Plan, subject to federal limits. We made $ 1.6 million in discretionary contributions during the year ended December 31, 2020, which are fully vested after one year of employee service. We did no t make any discretionary contributions during the years ended December 31, 2019 and 2018. 132 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable .