Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the Section entitled “Risk Factors” in Item 1A, and other documents we file with the Securities and Exchange Commission. Historical results are not necessarily indicative of future results.
Overview and Recent Highlights
We are a leading precision medicine company focused on the discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for transplant patients and caregivers. We offer testing services, products, and digital healthcare solutions along the pre- and post-transplant patient journey, and we are a leading provider of genomics-based information for transplant patients.
Testing Services
Kidney
AlloSure Kidney, our transplant surveillance solution, was commercially launched in October 2017 and is our dd-cfDNA offering built on a NGS platform. In transplantation, 109 papers from 55 studies globally have shown the value of dd-cfDNA in the management of solid organ transplantation. AlloSure Kidney is able to discriminate dd-cfDNA from recipient-cell-free DNA, targeting polymorphisms between donor and recipient. This SNP approach across all the somatic chromosomes is specifically designed for transplantation, allowing a scalable, high-quality test to differentiate dd-cfDNA.
AlloSure Kidney has received positive coverage decisions for reimbursement from Medicare. The Medicare reimbursement rate for AlloSure Kidney is $2,841. AlloSure Kidney has received positive coverage decisions from BCBS of South Carolina, BCBS of Kansas City and Capital Health, and is reimbursed by other private payers on a case-by-case basis.
Multiple studies have demonstrated that significant allograft injury can occur in the absence of changes in serum creatinine. Thus, clinicians have limited ability to detect injury early and intervene to prevent long-term damage using this marker. While histologic analysis of the allograft biopsy specimen remains the standard method used to assess injury and differentiate rejection from other injury in kidney transplants, as an invasive test with complications, repetitive biopsies are not well tolerated. AlloSure Kidney provides a non-invasive test, assessing allograft injury that enables more frequent, quantitative and safer assessment of allograft rejection and injury status. Beyond allograft rejection, the assessment of molecular inflammation has shown further utility in the assessment of proteinuria, the formation of DSAs, and as a surrogate predictive measure of eGFR decline. Monitoring of graft injury through AlloSure Kidney allows clinicians to optimize allograft biopsies, identify allograft injury and guide immunosuppression management more accurately.
Since the analytical validation paper in the Journal of Molecular Diagnostics in 2016 before the commercial launch of AlloSure Kidney, there has been an increasing body of evidence supports the use of AlloSure Kidney dd-cfDNA in the assessment and surveillance of kidney transplants. Bloom et al evaluated 102 kidney recipients and demonstrated that dd-cfDNA levels could discriminate accurately and non-invasively distinguish rejection from other types of graft injury. In contrast, serum creatinine has AUC of 50%, showing no significant difference between patients with and without rejection. Multiple publications and abstracts have shown AlloSure Kidney’s value in the management of BK viremia, as well as numerous pathologies that cause molecular inflammation and injury such as DSAs and eGFR decline. Most recently its utility in the assessment of T-cell mediated rejection (TCMR) 1A and borderline rejection has also been published in the AJT.
The prospective multicenter trial, the K-OAR study, has enrolled over 1,700 patients, with plans to survey patients with AlloSure Kidney for 3 years and provide further clinical utility of AlloSure Kidney in the surveillance of kidney transplant recipients.
KidneyCare
KidneyCare combines the dd-cfDNA analysis of AlloSure Kidney with the gene expression profiling technology of AlloMap Kidney and the predictive artificial intelligence technology of KidneyCare iBox in one surveillance solution. We have not yet made any applications to private payers for reimbursement coverage of AlloMap Kidney or KidneyCare iBox.
In September 2019, we announced the enrollment of the first patient in the OKRA study, which is an extension of the K-OAR study. OKRA is a prospective, multi-center, observational registry of patients receiving KidneyCare for surveillance. Combined with K-OAR, 4,000 patients will be enrolled into the study.
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Heart
AlloMap Heart is a gene expression test that helps clinicians monitor and identify heart transplant recipients with stable graft function who have a low probability of moderate-to-severe acute cellular rejection. Since 2008, we have sought to expand the adoption and utilization of our AlloMap Heart solution through ongoing studies to substantiate the clinical utility and actionability of AlloMap Heart, secure positive reimbursement decisions from large private and public payers, develop and enhance our relationships with key members of the transplant community, including opinion leaders at major transplant centers, and explore opportunities and technologies for the development of additional solutions for post-transplant surveillance.
We believe the use of AlloMap Heart, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a heart transplant, can improve patient care by helping healthcare providers avoid the use of unnecessary, invasive surveillance biopsies and may help to determine the appropriate dosage levels of immunosuppressants. In 2008, AlloMap Heart received 510(k) clearance from the FDA for marketing and sale as a test to aid in the identification of heart transplant recipients, who have a low probability of moderate/severe acute cellular rejection at the time of testing, in conjunction with standard clinical assessment.
AlloMap Heart has been a covered service for Medicare beneficiaries since January 1, 2006. The Medicare reimbursement rate for AlloMap Heart is currently $3,240. AlloMap Heart has also received positive coverage decisions for reimbursement from many of the largest U.S. private payers, including Aetna, Anthem, Cigna, HCSC, Humana, Kaiser, several BCBS plans and UnitedHealthcare.
In October 2020, AlloSure Heart received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart. In November 2020, Noridian Healthcare Solutions, our Medicare Administrative contractor, issued a parallel coverage policy granting coverage when used in conjunction with AlloMap Heart, which became effective in December 2020. The Medicare reimbursement rate for AlloSure Heart is currently $2,753.
We have also successfully completed several landmark clinical trials in the transplant field demonstrating the clinical utility of AlloMap Heart for surveillance of heart transplant recipients. We initially established the analytical and clinical validity of AlloMap Heart based on our CARGO study, which was published in the AJT. A subsequent clinical utility trial, IMAGE, published in The New England Journal of Medicine, demonstrated that clinical outcomes in recipients managed with AlloMap Heart surveillance were equivalent (non-inferior) to outcomes in recipients managed with biopsies. The results of our clinical trials have also been presented at major medical society congresses. AlloMap Heart is now recommended as part of the ISHLT guidelines.
HeartCare
HeartCare includes the gene expression profiling technology of AlloMap Heart with the dd-cfDNA analysis of AlloSure Heart in one surveillance solution. An approach to surveillance using HeartCare provides information from two complementary measures: (i) AlloMap Heart – a measure of immune activation, and (ii) AlloSure Heart – a measure of graft injury.
Clinical validation data from the D-OAR was published in AJT in 2019. D-OAR was an observational, prospective, multicenter study to characterize the AlloSure Heart dd-cfDNA in a routine, clinical surveillance setting with heart transplant recipients. The D-OAR study was designed to validate that plasma levels of AlloSure Heart dd-cfDNA can discriminate acute rejection from no rejection, as determined by endomyocardial biopsy criteria.
HeartCare provides robust information about distinct biological processes, such as immune quiescence, active injury, ACR and AMR. In September 2018, we initiated the SHORE study. SHORE is a prospective, multi-center, observational, registry of patients receiving HeartCare for surveillance. Patients enrolled in SHORE will be followed for 5 years with collection of clinical data and assessment of 5-year outcomes.
Lung
In February 2019, AlloSure Lung became available for lung transplant patients through a compassionate use program while the test is undergoing further studies. One of these studies, launched in April 2020, is the ALARM study, or AlloSure Lung Allograft Remote Monitoring, with Johns Hopkins University, where the impact of AlloSure Lung combined with RemoTraC will be measured. AlloSure Lung applies proprietary NGS technology to measure dd-cfDNA from the donor lung in the recipient bloodstream to monitor graft injury. In June 2020, we submitted an application to the Palmetto MolDx Technology Assessment program seeking coverage and reimbursement for AlloSure Lung.
Cellular Therapy
In April 2020, we initiated a research partnership for AlloCell, a surveillance solution that monitors the level of engraftment and persistence of allogeneic cells for patients who have received cell therapy transplants. AlloCell will initially be commercialized through collaborative research agreements with biopharma companies developing cell therapies.
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Products
We develop, manufacture, market and sell products that increase the chance of successful transplants by facilitating a better match between a solid organ or stem cell donor and a recipient, and help to provide post-transplant surveillance of these recipients.
QTYPE enables HLA typing at a low to intermediate resolution for samples that require a fast turn-around-time and uses real-time PCR methodology. Olerup SSP is used to type HLA alleles based on the SSP technology. Olerup SBT is a complete product range for sequence-based typing of HLA alleles.
On May 4, 2018, we entered into the Illumina Agreement, which provides us with worldwide distribution, development and commercialization rights to Illumina’s NGS products and technologies for use in transplantation diagnostic testing.
On June 1, 2018, we became the exclusive worldwide distributor of Illumina’s TruSight HLA product line. TruSight HLA is a high-resolution solution that uses NGS methodology. In addition, we were granted the exclusive right to develop and commercialize other NGS product lines in the field of bone marrow and solid organ transplantation on diagnostic testing. These NGS products include: AlloSeq Tx, a high-resolution HLA typing solution, AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients.
In September 2019, we commercially launched AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and we received CE mark authorization on January 10, 2020. Our ability to increase the clinical uptake for AlloSeq cfDNA will be a result of multiple factors, including local clinical education, customer lab technical proficiency and levels of country-specific reimbursement.
Also in September 2019, we commercially launched AlloSeq Tx, the first of its kind NGS high-resolution HLA typing solution utilizing hybrid capture technology. This technology enables the most comprehensive sequencing, covering more of the HLA genes than other solutions on the market and adding coverage of non-HLA genes that may impact transplant patient matching and management. AlloSeq Tx has simple NGS workflow, with a single tube for processing and steps to reduce errors. AlloSeq Tx 17 received CE mark authorization on May 15, 2020.
In June 2020, we commercially launched AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients. This technology has the potential to provide better sensitivity and data analysis compared to current solutions on the market.
Digital
In 2019, we began providing digital solutions to transplant centers following the acquisitions of Ottr, Inc. and XynManagement.
On May 7, 2019, we acquired 100% of the outstanding common stock of Ottr, Inc. Ottr, Inc. was formed in 1993 and is a leading provider of the Ottr software, which provides comprehensive solutions for transplant patient management. The Ottr software enables integration with EMR systems, including Cerner and Epic, providing patient surveillance management tools and outcomes data to transplant centers.
On August 26, 2019, we acquired 100% of the outstanding common stock of XynManagement. XynManagement provides two unique solutions, XynQAPI and XynCare. XynQAPI simplifies transplant quality tracking and SRTR reporting. XynCare includes a team of transplant assistants who maintain regular contact with patients on the waitlist to help prepare for their transplant and maintain eligibility.
In September 2020 we launched AlloCare, a mobile app that provides a patient-centric resource for transplant recipients to manage medication adherence, coordinate with Patient Care Managers for AlloSure scheduling and measure health metrics.
In January 2021, we acquired TransChart for cash. TransChart provides EMR software to hospitals throughout the United States to care for patients who have or may need an organ transplant. TransChart builds on our digital offerings, which include Ottr transplant electronic medical record software and XynQAPI transplant quality management solutions.
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COVID-19 Impact
In the final weeks of March and during April 2020, with hospitals increasingly caring for COVID-19 patients, hospital administrators chose to limit or even defer, non-emergency procedures. Immunosuppressed transplant patients either self-prescribed or were asked to avoid transplant centers and caregiver visits to reduce the risk of contracting COVID-19. As a result, with transplant surveillance visits down, we experienced a slowdown in testing services volumes in the final weeks of March and during April 2020. As a response to the COVID-19 pandemic, and to enable immune-compromised transplant patients to continue to have their blood drawn, in late March 2020, we launched RemoTraC, a remote home-based blood draw solution using mobile phlebotomy for AlloSure and AlloMap surveillance tests, as well as for other standard monitoring tests. To date, more than 150 transplant centers can offer RemoTraC to their patients and over 6,000 kidney, heart and lung transplant patients have enrolled. Based on existing and new relationships with partners, we have established a nationwide network of more than 10,000 mobile phlebotomists. Following the introduction of RemoTraC and with the easing of stay-at-home restrictions and the opening up of many hospitals to non-COVID-19 patients, our testing services volumes returned to levels consistent with those experienced immediately prior to the COVID-19 pandemic, and volumes continued to be at or above those levels since May 2020. In spite of the resurgence of COVID-19 infection rates, which resulted in increased stay-at-home and renewed travel restrictions, we did not experience a decrease in testing services volumes. Our product business experienced a reduction in forecasted sales volume throughout the second and third quarters of 2020, as we were unable to undertake onsite discussions and demonstrations of our recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark authorization in May 2020. Our product business maintained normal sales volumes during the fourth quarter of 2020.
We are maintaining our testing, manufacturing, and distribution facilities while implementing specific protocols to reduce contact among our employees. In areas where COVID-19 impacts healthcare operations, our field-based sales and clinical support teams are supporting providers through telephone and online platforms. In August 2020, the state of California released revised criteria for loosening and tightening restrictions on certain activities on generally a county-by-county basis. Under the updated executive orders, San Mateo County, where our laboratory and headquarters are located, continues to be subject to certain restrictions. These orders and others may be further modified, amended and adopted depending upon the COVID-19 transmission rates in our county and state, as well as other factors. In addition, we have created a COVID-19 task force that is responsible for crisis decision making, employee communications, enforcing pre-arrival temperature checking, daily health check-ins and enhanced safety training/protocols in our offices for employees that do not work from home.
Due to COVID-19, quarantines, shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct of business operations could occur or could impact personnel at third-party suppliers in the United States and other countries, or the availability or cost of materials, there may be disruptions in our supply chain. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities.
In addition, our clinical studies may be affected by the COVID-19 pandemic. Clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients may not be able to comply with clinical study protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact our clinical trial operations.
Financial Operations Overview
Revenue
We derive our revenue from testing services, products sales and digital and other revenues. Revenue is recorded considering a five-step revenue recognition model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations and recognizing revenue when, or as, an entity satisfies a performance obligation.
Testing Services Revenue
Our testing services revenue is derived from AlloSure Kidney, AlloMap Heart and AlloSure Heart tests, which represented 85%, 82% and 79% of our total revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Our testing services revenue depends on a number of factors, including (i) the number of tests performed; (ii) establishment of coverage policies by third-party insurers and government payers; (iii) our ability to collect from payers with whom we do not have positive coverage determination, which often requires that we pursue a case-by-case appeals process; (iv) our ability to recognize revenues on tests billed prior to the establishment of reimbursement policies, contracts or payment histories; and (v) how quickly we can successfully commercialize new product offerings.
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We currently market testing services to healthcare providers through our direct sales force that targets transplant centers and their physicians, coordinators and nurse practitioners. The healthcare providers that order the tests and on whose behalf we provide our testing services are generally not responsible for the payment of these services. Amounts received by us vary from payer to payer based on each payer’s internal coverage practices and policies. We generally bill third-party payers upon delivery of a test result report to the ordering physician. As such, we take the assignment of benefits and the risk of collection from the third-party payer and individual patients.
Product Revenue
Our product revenue is derived primarily from sales of AlloSeq Tx, Olerup SSP, QTYPE and TruSight products. Product revenue represented 10%, 15% and 20% of total revenue for the years ended December 31, 2020, 2019 and 2018, respectively. We recognize product revenue from the sale of products to end-users, distributors and strategic partners when all revenue recognition criteria are satisfied. We generally have a contract or a purchase order from a customer with the specified required terms of order, including the number of products ordered. Transaction prices are determinable and products are delivered and risk of loss passed to the customer upon either shipping or delivery, as per the terms of the agreement. There are no further performance obligations related to a contract and revenue is recognized at the point of delivery consistent with the terms of the contract or purchase order.
Digital and Other Revenue
Our digital and other revenue is mainly derived from sales of our Ottr software and XynQAPI licenses and services and other licensing agreements. Digital and other revenue represented 5%, 3% and 1% of total revenue for the years ended December 31, 2020, 2019 and 2018, respectively.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 2 of the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional information. Some of these accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We believe that the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements.
Revenue Recognition
We recognize revenue from testing services, product sales and digital and other revenue in the amount that reflects the consideration which it expects to be entitled in exchange for goods or services as it transfers control to its customers. Revenue is recorded considering a five-step revenue recognition model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.
Testing Services Revenue
AlloSure Kidney, AlloMap Heart, and AlloSure Heart patient tests are ordered by healthcare providers. We receive a test requisition form with payer information along with a collected patient blood sample. We consider the patient to be our customer and the test requisition form to be the contract. Testing services are performed in our laboratory. Testing services represent one performance obligation in a contract and are performed when results of the test are provided to the healthcare provider, at a point in time.
The healthcare providers that order the tests and on whose behalf we provide testing services are generally not responsible for the payment of these services. The first and second revenue recognition criteria are satisfied when we receive a test requisition form with payer information from the healthcare provider. Generally, we bill third-party payers upon delivery of an AlloSure Kidney, AlloMap Heart or AlloSure Heart test result to the healthcare provider. Amounts received may vary amongst payers based on coverage practices and policies of the payer.
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We have used the portfolio approach, a practical expedient under Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers , to identify financial classes of payers. Revenue recognized for Medicare and other contracted payers is based on the agreed current reimbursement rate per test, adjusted for historical collection trends where applicable. We estimate revenue for non-contracted payers and self-payers using transaction prices determined for each financial class of payers using history of reimbursements. This includes analysis of an average reimbursement per test and a percentage of tests reimbursed. This estimate requires significant judgment.
We monitor revenue estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Changes in transaction price estimates are updated quarterly based on actual cash collected or changes made to contracted rates.
Product Revenue
Product revenue is recognized from the sale of products to end-users, distributors and strategic partners when all revenue recognition criteria are satisfied. We generally have a contract or a purchase order from a customer with the specified required terms of order, including the number of products ordered. Transaction prices are determinable and products are delivered and risk of loss passed to the customer upon either shipping or delivery, as per the terms of the agreement.
Digital and Other Revenue
Digital revenue is mainly derived from perpetual software license agreements entered into with various transplant centers (customers). The main performance obligations in connection with our perpetual software license agreement are the following: (i) implementation services and delivery of the perpetual software license are considered a single performance obligation, (ii) post contract support ("PCS"). We allocate the transaction price to each performance obligation based on relative stand-alone selling prices of each distinct performance obligation. Digital revenue in connection with perpetual software license agreements is recognized over time based on our satisfaction of each distinct performance obligation in each agreement.
Perpetual software license agreements typically require advance payments from customers upon the achievement of certain milestones. We record deferred revenue in relation to these agreements when cash payments are received, or invoices are issued in advance of our performance, and generally recognize revenue over the contractual term, as performance obligations are fulfilled.
In addition, we derive digital revenue from software subscriptions. We generally bill software subscription fees in advance. Revenue from software subscriptions is deferred and recognized ratably over the subscription term.
Business Combinations
We determine and allocate the purchase price of an acquired business to the assets acquired and liabilities assumed based on their estimated fair values as of the business combination date, including separately identifiable intangible assets, which are separable from goodwill. We base the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by management, which consider management’s best estimates of inputs and assumptions that a market participant would use. We allocate any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, royalty rates, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones, could result in different purchase price allocations and amortization expense in current and future periods.
In those circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under ASC Topic 480, Distinguishing Liabilities from Equity , we recognize a liability equal to the fair value of the contingent payments that we expect to make as of the acquisition date. We remeasure this liability each reporting period and record changes in the fair value as a component of operating expenses. In circumstances where the contingent consideration is classified as equity, we recognize it at fair value at the acquisition date. Contingent consideration classified as equity is not subsequently remeasured.
Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition.
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Acquired Intangible Assets
Amortizable intangible assets include customer relationships, developed technology, trademarks, contracts and acquired in-process technology assets acquired as part of a business combination. Intangible assets subject to amortization are amortized over their estimated useful lives. Acquired in-process technology assets are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.
Impairment of Goodwill, Intangible Assets and Long-lived Assets
Goodwill
Goodwill recorded in a business combination is not subject to amortization. Instead, it is tested for impairment on an annual basis and whenever events or changes in circumstances indicate its carrying amount may not be recoverable.
Our annual impairment test date is December 1 st . A qualitative assessment is initially made to determine whether it is necessary to perform a quantitative assessment. A qualitative assessment includes, among others, consideration of: (i) past, current and projected future earnings; (ii) recent trends and market conditions; and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available. If this qualitative assessment indicates that it is more likely than not that an impairment exists, or if we decide to bypass this option, we proceed to perform the quantitative assessment. The quantitative assessment consists of a comparison between the estimated fair value of our reporting unit and its respective carrying amount including goodwill. Where the carrying value of the reporting unit exceeds its estimated fair value, we will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.
When necessary, to determine the reporting unit’s fair value under the quantitative approach, we use a combination of income and market approaches, such as estimated discounted future cash flows of that reporting unit, multiples of earnings or revenues, and analysis of recent sales or offerings of comparable entities. We also consider our market capitalization on the date of the analysis to ensure the reasonableness of the reporting unit’s fair value.
In connection with our annual goodwill assessment on December 1, 2020, we performed a qualitative assessment taking into consideration past, current and projected future earnings, recent trends and market conditions; and its market capitalization. Based on this analysis, we concluded that it was more likely than not that the fair value of the reporting unit exceeded its carrying amount. As such, it was not necessary to perform the quantitative goodwill impairment assessment at that time. As of December 31, 2020, no impairment of goodwill has been identified.
Intangible assets not subject to amortization
We evaluate the carrying value of intangible assets not subject to amortization, related to acquired in-process technology assets, which are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. Accordingly, amortization of the acquired in-process technology assets will not occur until the products reach commercialization.
During the period the assets are considered indefinite-lived, they are tested for impairment on an annual basis, as well as between annual tests if we become aware of any events occurring or changes in circumstances that would indicate that the fair values of the acquired in-process technology assets are less than their carrying amounts. An impairment loss would be recorded when the fair value of an acquired in-process technology asset is less than its carrying value. If and when development is complete, which generally occurs when the products are made commercially available, the associated acquired in-process technology asset will be deemed finite-lived and will then be amortized based on its estimated useful life. As of December 31, 2020, no impairment of acquired in-process technology assets has been identified.
Intangible assets and long-lived assets subject to amortization
We evaluate our finite-lived intangible assets and our long-lived assets for indicators of possible impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We then compare the carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset. If an impairment exists, we measure the impairment based on the excess carrying value of the asset over the asset’s fair value determined using discounted estimates of future cash flows. We have not identified any such impairment losses to date.
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Common Stock Warrants
Common stock warrants issued with debt, equity or as standalone financing instruments are recorded as either liabilities or equity in accordance with the respective accounting guidance. Warrants recorded as equity are recorded at their relative fair value determined at the issuance date and are not remeasured after that. Warrants recorded as liabilities are recorded at their fair value and remeasured on each reporting date with changes recorded in change in estimated fair value of common stock warrant liability and derivative liability in the consolidated statements of operations.
We utilize a binomial-lattice pricing model, or the Monte Carlo Simulation Model, that involves a market condition simulation to estimate the fair value of the warrants. The application of the Monte Carlo Simulation Model requires the use of a number of complex assumptions including our stock price, expected life of the warrants, stock price volatility determined from our historical stock prices and stock prices of peer companies in the diagnostics industry, and risk-free rates based on the implied yield currently available in the U.S. Treasury zero-coupon issues with a remaining term equal to the expected life of the warrants. Increases (decreases) in these assumptions result in a directionally similar impact to the fair value of the common stock warrant liability.
Recently Issued Accounting Standards
Refer to Note 2, Summary of Significant Accounting Policies - Recent Accounting Pronouncements, to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position and cash flows.
Factors Affecting Our Performance
COVID-19 Pandemic
COVID-19 may impact personnel at third-party suppliers in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Any manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing activities. Clinical trials, clinical site initiation and patient enrollment may be delayed due to prioritization of hospital resources toward the COVID-19 pandemic. Some patients may not be able to comply with clinical trial protocols if quarantines impede patient movement or interrupt healthcare services. Similarly, the ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to COVID-19, may adversely impact our clinical trial operations.
The Number of AlloMap Heart, AlloSure Kidney and AlloSure Heart Tests We Receive and Report
The growth of our testing services business is tied to the number of AlloSure Kidney, AlloMap Heart and AlloSure Heart patient samples we receive and patient results we report. We incur costs in connection with collecting and shipping all samples and a portion of the costs when we cannot ultimately issue a report. As a result, the number of patient samples received largely correlates directly to the number of patient results reported.
Reimbursement for AlloMap Heart
AlloMap Heart test volume and the corresponding reimbursement revenue has generally increased over time since the launch of AlloMap Heart, as the ISHLT included AlloMap in guidelines, payers adopted coverage policies and many payers no longer consider AlloMap Heart to be experimental and investigational. The rate at which our tests are covered and reimbursed has, and is expected to continue to vary by payer. Revenue growth depends on our ability to maintain Medicare and third party payer reimbursement, and to expand utilization by healthcare providers.
PAMA included a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA, laboratories that receive the majority of their Medicare revenues from payments made under the CLFS would report initially and then on a subsequent three-year basis thereafter (or annually for ADLTs), private payer payment rates and volumes for their tests. The final PAMA ruling was issued June 17, 2016 indicating that data for reporting for the new PAMA process would begin in 2017 and the new market based rates took effect on January 1, 2018. Effective January 1, 2018, Medicare reimburses us $3,240 for AlloMap Heart testing of Medicare beneficiaries, an increase from the 2017 reimbursement rate of $2,841. The CARES Act freezes current (2020) CMS CLFS rates through 2021. Further, the CARES Act delays the reporting cycle under PAMA to January 1 and March 31, 2025, and the preceding data collection period will become January 1 through June 30, 2024.
AlloMap Heart has also received positive coverage decisions for reimbursement from many of the largest U.S. private payers, including Aetna, Anthem, Cigna, HCSC, Humana, Kaiser Foundation Health Plan, Inc., several BCBS plans and UnitedHealthcare.
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Reimbursement for AlloSure Kidney
On September 26, 2017, we received notice that the MolDX Program developed by Palmetto GBA had set AlloSure Kidney reimbursement at $2,841. Effective October 9, 2017, AlloSure Kidney was made available for commercial testing with Medicare coverage and reimbursement. We believe the use of AlloSure Kidney, in conjunction with other clinical indicators, can help healthcare providers and their patients better manage long-term care following a kidney transplant. In particular, we believe AlloSure Kidney can improve patient care by helping healthcare providers to reduce the use of invasive biopsies and determine the appropriate dosage levels of immunosuppressants.
Reimbursement for AlloSure Heart
In October 2020, AlloSure Heart received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart. In November 2020, Noridian Healthcare Solutions, our Medicare Administrative contractor, issued a parallel coverage policy granting coverage when used in conjunction with AlloMap Heart, which became effective in December 2020. The Medicare reimbursement rate for AlloSure Heart is currently $2,753.
Continued Growth of Product Sales
We develop, manufacture, market and sell products that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and solid organs.
QTYPE enables speed and precision in HLA typing at a low to intermediate resolution for samples that require a fast turn-around-time and uses real-time polymerase chain reaction, or PCR, methodology. QTYPE received CE mark certification on April 10, 2018. Olerup SSP is used to type HLA alleles based on the SSP technology. Olerup SBT is a complete product range for sequence-based typing of HLA alleles.
On May 4, 2018, we entered into the Illumina Agreement, which provides us with worldwide distribution, development and commercialization rights to Illumina’s NGS product line for use in transplantation diagnostic testing. As a result, on June 1, 2018, we became the exclusive worldwide distributor of Illumina’s TruSight HLA product line. TruSight HLA is a high-resolution solution that uses NGS methodology. In addition, we were granted the exclusive right to develop and commercialize other NGS product lines for use in the field of bone marrow and solid organ transplantation diagnostic testing. These NGS products include: AlloSeq Tx, a high-resolution HLA typing solution, AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients.
In September 2019, we commercially launched AlloSeq cfDNA, our surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and we received CE mark authorization on January 20, 2020. Our ability to increase the clinical uptake for AlloSeq cfDNA will be a result of multiple factors, including local clinical education, customer lab technical proficiency and levels of country-specific reimbursement.
Also in September 2019, we commercially launched AlloSeq Tx, the first of its kind NGS high-resolution HLA typing solution utilizing hybrid capture technology. This technology enables the most comprehensive sequencing, covering more of the HLA genes than current solutions and adding coverage of non-HLA genes that may impact transplant patient matching and management. AlloSeq Tx has a simple NGS workflow that reduces complexity and can reduce errors. AlloSeq Tx 17 received CE mark authorization on May 15, 2020.
In June 2020, we commercially launched AlloSeq HCT, a NGS solution for chimerism testing for stem cell transplant recipients. This technology can provide better sensitivity and data analysis compared to current solutions on the market.
Continued Growth of Digital Sales
The growth of our digital revenues is tied to the continued successful implementation of our Ottr and XynQAPI software businesses, as well as continued support and maintenance of existing Ottr, Inc. and XynManagement customers. The Ottr software and XynQAPI are currently implemented in multiple locations in the U.S. The Ottr software implementation and XynQAPI implementation and support teams are based in Omaha, Nebraska.
Development of Additional Services and Products
Our development pipeline includes other transplant diagnostic solutions to help clinicians and transplant centers make personalized treatment decisions throughout a transplant patient’s lifetime. We expect to invest in research and development in order to develop additional products. Our success in developing new products and services will be important in our efforts to grow our business by expanding the potential market for our services and products and diversifying our sources of revenue.
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Timing of Research and Development Expenses
Our spending on research and development may vary substantially from quarter to quarter. We conduct clinical studies to validate our new products, as well as on-going clinical and outcome studies to further the published evidence to support our commercialized tests. Spending on research and development for both experiments and studies may vary significantly by quarter depending on the timing of these various expenses.
Results of Operations
Comparison of the Years Ended December 31, 2020 and 2019
(In thousands)
Year Ended December 31,
2020 2019 Change
Revenue:
Testing services revenue $ 163,610 $ 104,550 $ 59,060
Product revenue 19,302 18,279 1,023
Digital and other revenue 9,282 4,239 5,043
Total revenue 192,194 127,068 65,126
Operating expenses:
Cost of testing services 43,932 29,622 14,310
Cost of product 13,847 12,919 928
Cost of digital and other 5,338 2,914 2,424
Research and development 48,941 30,711 18,230
Sales and marketing 53,858 38,894 14,964
General and administrative 48,806 36,540 12,266
Total operating expenses 214,722 151,600 63,122
Loss from operations (22,528) (24,532) 2,004
Other income (expense):
Interest income (expense), net 271 985 (714)
Change in estimated fair value of common stock
warrant liabilities (1,495) 319 (1,814)
CARES Act Provider Relief Fund 4,813 — 4,813
Other expense, net (811) (719) (92)
Total other income 2,778 585 2,193
Loss before income taxes (19,750) (23,947) 4,197
Income tax benefit 1,036 1,979 (943)
Net loss $ (18,714) $ (21,968) $ 3,254
Testing Services Revenue
Testing services revenue increased by $59.1 million, or 56%, for the year ended December 31, 2020, compared to the same period in 2019. This increase is primarily due to an increase of more than 29,000 AlloSure Kidney, AlloMap Heart and AlloSure Heart patient results provided during the year ended December 31, 2020, compared to the year ended December 31, 2019.
Product Revenue
Product revenue increased by $1.0 million, or 6%, for the year ended December 31, 2020, compared to the same period in 2019. Our product business was impacted by a reduction in forecasted sales volume throughout the second and third quarters of 2020 due to COVID-19, as there were delays in onsite discussions and demonstrations of recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark authorization in May 2020. Sales volumes began to recover in the fourth quarter of 2020.
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Digital and Other Revenue
Digital and other revenue increased by $5.0 million, or 119%, during the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the new Ottr software implementations and our acquisitions of Ottr, Inc. in May 2019 and XynManagement in August 2019.
Cost of Testing Services
Cost of testing services increased by $14.3 million, or 48%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in testing volume, the cost of providing RemoTraC and increased utilization of mobile phlebotomy.
Cost of Product
Cost of product increased by $0.9 million , or 7%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. The increase is primarily due to increased sales and amortization of intangibles.
Cost of Digital and Other
Cost of digital and other increased by $2.4 million, or 83%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the acquisitions of Ottr, Inc. in Ma y 2019 and XynManagement in August 2019.
Research and Development
Research and development expenses increased by $18.2 million, or 59%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in personnel-related costs of $7.8 million, an increase of $4.8 million in clinical studies, an increase in consulting and outside service fees of $2.7 million, an increase in reagents and consumables of $2.4 million and an increase in license and collaboration fees of $1.1 million, partially offset by lower travel costs of $0.4 million.
Sales and Marketing
Sales and marketing expenses increased by approximately $15.0 million, or 38%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to an increase in personnel-related costs of $9.9 million, stock-based compensation expense of $1.8 million, $1.8 million of speaker programs and sponsorships and consulting and outside service fees of $1.1 million.
General and Administrative
General and administrative expenses increased by $12.3 million, or 34%, for the year ended December 31, 2020, compared to the year ended December 31, 2019. This increase was primarily due to legal fees of $6.0 million related to litigation and general legal expenses, an increase of $4.5 million in personnel-related costs, an increase of $2.1 million of consulting and outside service fees and $0.5 million of software expense, partially offset by lower stock-based compensation expense of $1.2 million.
Change in Estimated Fair Value of Common Stock Warrant Liability
The change in estimated fair value of common stock warrant liability decreased from income of $0.3 million for the year ended December 31, 2019 to an expense of $1.5 million for the year ended December 31, 2020, resulting in a net change of $1.8 million.
The $1.5 million expense in the year ended December 31, 2020 reflects a remeasurement gain of $6.2 million for the change in the fair value of our common stock warrant liability and a remeasurement charge of $7.7 million for warrants exercised during the year. In the year ended December 31, 2020, warrants to purchase approximately 314,000 shares of common stock with an average exercise price of $1.12 per share were exercised.
The expense for the change in estimated fair value of common stock warrants decreased by $23.3 million, or 101%, for the year ended December 31, 2019, compared to the same period in 2018. The income in 2019 was $0.3 million, comprised of a $3.4 million remeasurement gain related to the change in fair value of our common stock warrant liability, partially offset by a $3.1 million remeasurement charge for warrants exercised during the period.
CARES Act Provider Relief Fund
The CARES Act Provider Relief Fund increased by $4.8 million, or 100%, for the year ended December 31, 2020, compared to the year ended December 31, 2019, primarily due to the CARES Act payment we received in April 2020.
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Income Tax Benefit
For the year ended December 31, 2020, we recorded an income tax benefit of $1.0 million on a loss before income taxes of $19.8 million primarily attributable to the recognition of deferred tax assets from foreign losses and recognition of previous unrecognized tax benefits. The effective tax rate for the year ended December 31, 2020 differs from the federal statutory tax rate as a result of the income tax expense related to non-deductible executive compensation and the increase in valuation allowance.
For the year ended December 31, 2019, we recorded an income tax benefit of $2.0 million on a loss before income taxes of $23.9 million primarily attributable to the recognition of deferred tax assets from foreign losses and recognition of previous unrecognized tax benefits. The effective tax rate for the year ended December 31, 2019 differs from the federal statutory tax rate as a result of the income tax expense related to non-deductible executive compensation and the increase in valuation allowance.
Comparison of the Years Ended December 31, 2019 and 2018
For a discussion regarding our financial condition and results of operations for the year ended December 31, 2019 as compared to the year ended December 31, 2018, please refer to the discussion under the heading “Results of Operations—Comparison of the Ended December 31, 2019 and 2018” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 28, 2020.
Liquidity and Capital Resources
We have incurred significant losses and negative cash flows from operations since our inception and had an accumulated deficit of $352.5 million at December 31, 2020. As of December 31, 2020, we had cash, cash equivalents and marketable securities of $224.7 million, and no debt outstanding.
The spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity.
Since March 31, 2020, and in response to the outbreak of the COVID-19 pandemic, we have increased our cash and cash equivalents. With our continuing growth, we may require additional financing in the future to fund working capital and our future products developments. Additional financing might include issuance of equity securities, including through underwritten public offerings or “at-the-market” offerings, debt offerings or financings or a combination of these financings. There can be no assurance that we will be successful in acquiring additional funding at levels sufficient to fund our operations or on terms favorable to us. We believe our existing cash balance and expected cash from existing operations, including cash from current license agreements and future license and collaboration agreements, or a combination of these, will be sufficient to meet our anticipated cash requirements for the next 12 months, as well as beyond the next 12 months.
CMS Accelerated and Advance Payment Program for Medicare Providers
On March 27, 2020, the U.S. government enacted the CARES Act. Pursuant to the CARES Act, CMS expanded its current Accelerated and Advance Payment Program in order to increase cash flow to providers of services and suppliers impacted by the COVID-19 pandemic. CMS was authorized to provide accelerated or advance payments during the period of the public health emergency to any Medicare provider who submits a request to the appropriate Medicare Administrative Contractor and meets the required qualifications. During April 2020, we received an advance payment from CMS of approximately $20.5 million and recorded the payment as Deferred revenue - CMS advance payment on our consolidated balance sheet.
During December 2020, we reassessed the Deferred revenue - CMS advance payment and determined to repay the entire amount in January 2021. We recorded the amount as Refund liability - CMS advance payment on the consolidated balance sheet as of December 31, 2020. On January 19, 2021, we repaid the CMS advance payment of approximately $20.5 million to CMS in full.
At-the-Market Equity Offering
On August 31, 2018, we entered into a sales agreement, or the Sales Agreement, with Jefferies, LLC, or Jefferies, as sales agent, pursuant to which we may offer and sell, from time to time, through Jefferies, up to $50.0 million in shares of our common stock, by any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 promulgated under the Securities Act of 1933, as amended. During April 2020, we issued and sold 1,000,000 shares of our common stock under the Sales Agreement. The shares were sold at an average price of $24.24 per share for aggregate net proceeds to us of approximately $23.5 million, after deducting sales commissions and offering costs payable by us.
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CARES Act Provider Relief Fund for Medicare Providers
Pursuant to the CARES Act, the U.S. Department of Health & Human Services, or HHS, distributed an initial tranche of $30.0 billion in funds to healthcare providers that received Medicare fee-for-service, or FFS, reimbursements in 2019. These payments to healthcare providers are not loans and will not be required to be repaid. As a condition to receiving these payments, providers must agree to certain terms and conditions and submit sufficient documentation demonstrating that the funds are being used for healthcare-related expenses or lost revenue attributable to the COVID-19 pandemic. Due to the recent enactment of legislation and absence of definitive guidance, there is a high degree of uncertainty around the CARES Act’s implementation and we continue to assess the impact on our business. Furthermore, HHS has indicated that it, along with the Office of Inspector General, will be closely monitoring and auditing providers to ensure that recipients comply with the terms and conditions of relief programs and to prevent fraud and abuse. All providers will be subject to civil and criminal penalties for any deliberate omissions, misrepresentations or falsifications of any information given to HHS. Providers will be distributed a portion of the initial $30.0 billion of funds based on their share of total Medicare FFS reimbursements made by the U.S. in 2019. During April 2020, we received a payment of approximately $4.8 million, representing our portion of the initial tranche of funds, recorded in other income (expense), net on the consolidated statement of operations.
Underwritten Public Offering of Common Stock
On June 15, 2020, we sold 4,492,187 shares of common stock (which included shares sold pursuant to the underwriters’ full exercise of an overallotment option granted to the underwriters in connection with the offering) through an underwritten public offering at a price of $32.00 per share for aggregate net proceeds of $134.6 million.
Public Offering of Common Stock
On January 25, 2021, we sold 1,923,077 shares of our common stock through an underwritten public offering at a public offering price of $91.00 per share. The net proceeds to us from the offering were approximately $164.0 million, after deducting underwriting discounts and commissions and estimated offering expenses.
On February 11, 2021, we sold 288,461 shares of our common stock pursuant to the underwriters' full exercise of an overallotment option granted to the underwriters in connection with the offering. The net proceeds to us from the full exercise of the underwriters' overallotment option were approximately $24.7 million. The aggregate net proceeds to us, including shares sold pursuant to the underwriters' full exercise of the overallotment option, were approximately $188.7 million, after deducting underwriting discounts and commissions and estimated offering expenses.
Cash Flows
The following table summarizes our cash flows for the years ended December 31, 2020, 2019 and 2018:
Year Ended December 31,
2020 2019 2018
(in thousands)
Net cash provided by (used in):
Operating activities $ 33,431 $ (2,769) $ (4,007)
Investing activities (100,394) (22,579) (7,929)
Financing activities 163,149 (132) 50,268
Effect of exchange rate changes on cash, cash equivalents and restricted cash 274 (849) 2
Net increase (decrease) in cash, cash equivalents and restricted cash $ 96,460 $ (26,329) $ 38,334
Cash Flows from Operating Activities
Net cash provided by (used in) operating activities consists of net loss, adjusted for certain noncash items in the consolidated statements of operations and changes in operating assets and liabilities.
Net cash provided by operating activities for the year ended December 31, 2020 was $33.4 million. Our net loss of $18.7 million was our primary use of cash in operating activities and included $4.8 million of cash provided by the CARES Act Provider Relief Fund. Our net loss also included the following noncash items: $23.4 million in stock-based compensation expense, $7.0 million of depreciation and amortization expense, amortization of right-of-use assets of $2.5 million and a $1.5 million loss on the revaluation of common stock warrant liability to estimated fair value. Net operating assets decreased by $3.1 million, offset by an increase in Refund liability - CMS advance payment of $20.5 million.
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Net cash used in operating activities for the year ended December 31, 2019 was $2.8 million. Our net loss of $22.0 million was our primary use of cash in operating activities and included the following noncash items: $22.4 million stock-based compensation expense, $5.5 million of depreciation and amortization expense, $1.6 million non-cash lease expense and other miscellaneous items totaling $0.1 million. Net operating assets and liabilities decreased by $10.4 million.
Cash Flows from Investing Activities
For the year ended December 31, 2020, net cash used in investing activities was $100.4 million and consisted of $90.0 million related to the purchase of marketable securities, $7.1 million related to additions of capital expenditures, net, $2.0 million related to payments for the license and commercialization agreement with Cibiltech and $1.3 million related to payments for acquired intangibles.
For the year ended December 31, 2019, net cash used in investing activities was $22.6 million and consisted of $18.2 million for the acquisition of Ottr, Inc. and XynManagement, $2.2 million related to additions of capital expenditures, $1.2 million related to the acquisition of intangible assets, and $1.0 million related to our investment in equity securities.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31, 2020 was $163.1 million and primarily related to $134.7 million of proceeds from the issuance of shares of common stock in an underwritten offering, net of issuance costs, $23.5 million of proceeds from the issuance of shares of common stock in an “at-the-market” equity offering, net of issuance costs, proceeds from exercises of stock options of $8.0 million, proceeds from issuances of shares of common stock under our employee stock purchase plan of $1.4 million and proceeds from exercises of warrants of $0.4 million. These proceeds were partially offset by taxes paid related to net share settlements of restricted stock units of $4.5 million.
Net cash used by financing activities for the year ended December 31, 2019 was $0.1 million and primarily related to $4.2 million of taxes paid related to the net share settlement of restricted stock units and other miscellaneous payments totaling $0.3 million, offset by $3.6 million cash proceeds from the exercise of stock options, and $0.8 million cash proceeds from issuance of common stock under employee stock purchase plan.
For a discussion regarding our cash flows for the year ended December 31, 2018, please refer to the discussion under the heading “Results of Operations—Liquidity and Capital Resources” in Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, filed with the SEC on February 28, 2020.
Contractual Obligations
For a discussion regarding our significant contractual obligations as of December 31, 2020 and the effect those obligations are expected to have on our liquidity and cash flows in future periods, please refer to Note 9 of the consolidated financial statements, and “Results of Operations—Liquidity and Capital Resources”, respectively, included elsewhere in this Annual Report on Form 10-K.
Off-Balance Sheet Arrangements
Not required.
Foreign Operations
The accompanying consolidated balance sheets contain certain recorded assets in foreign countries, namely Sweden, Austria and Australia. Although these countries are considered economically stable and we have experienced no notable burden from foreign exchange transactions, export duties or government regulations, unanticipated events in foreign countries could have a material adverse effect on our operations.
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