CareDx, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CareDx, Inc. Index to Consolidated Financial Statements Page No. Reports of Independent Registered Public Accounting Firms 78 Consolidated Balance Sheets 81 Consolidated Statements of Operations 82 Consolidated Statements of Comprehensive Loss 83 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity 84 Consolidated Statements of Cash Flows 85 Notes to Consolidated Financial Statements 86 77 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of CareDx, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CareDx, Inc. and subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders’ 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 as of 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 accounting principles generally accepted in the United States of America. We have also 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 (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 24, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principles As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases in fiscal year 2019 due to the adoption of Accounting Standards Codification Topic 842, Leases. 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 Matter 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 critical audit matters 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 accounts or disclosures to which it relates. Revenue Recognition – Testing Services Revenue – Refer to Note 2 to the consolidated financial statements Critical Audit Matter Description During the year ended December 31, 2020, the Company’s revenue from testing services was $163.6 million. As discussed in Note 2, the Company’s testing services revenue is recognized upon the delivery of test results to the prescribing physician, at which time the Company bills for its services. The Company recognizes revenue related to billings based on transaction prices estimated as the amount that will ultimately be realized. The transaction price estimate represents differences between amounts billed and the estimated consideration the Company expects to receive based on historical collection experience and other anticipated adjustments, including anticipated payer denials. In determining the amount to recognize for a delivered test, the Company considers factors such as payment history, amount collected per test, payer coverage, and whether there is a reimbursement contract between the payer and the Company. The Company also considers whether historical collections per test are indicative of future collections or if there are any current or expected developments or changes that could affect reimbursement rates, which is an estimate that requires significant judgment by the Company. 78 Table of Contents We identified management’s estimation of the transaction price for revenue recorded as a critical audit matter due to the significant judgments required by management to estimate payer behavior. This required a high degree of auditor judgment and an increased extent of effort, including the involvement of more experienced engagement team members, when performing audit procedures to evaluate the estimated transaction prices. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to management judgments in the estimate of transaction prices for testing services revenue, included the following, among others: • We understood and tested the design, implementation, and operating effectiveness of controls over management’s determination of the assumptions used and the related review and approval of the transaction price estimate. • We tested the methodology used by the Company to estimate transaction prices. • We tested the assumptions used by management to calculate transaction prices by: • Testing the mathematical accuracy of management’s calculation. • Testing the historical cash receipts from payers used in the estimate of transaction prices, by making selections and agreeing the selected information to source documents. • Testing management’s ability to estimate transaction prices accurately by comparing recorded revenue to cash receipts received through December 2020. • Evaluating trends in revenue and accounts receivable compared to previous periods to identify any evidence that may contradict management’s assertion regarding estimated transaction price. /s/ Deloitte & Touche LLP San Jose, California February 24, 2021 We have served as the Company's auditor since 2018. 79 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of CareDx, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of CareDx, Inc. and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2020, of the Company and our report dated February 24, 2021, expressed an unqualified opinion on those financial statements and included an explanatory paragraph related to the Company’s change in method of accounting for leases in fiscal year 2019 due to the adoption of Accounting Standards Codification (ASC) Topic 842, Leases . Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. 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 audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Deloitte & Touche LLP San Jose, California February 24, 2021 80 Table of Contents CareDx, Inc. Consolidated Balance Sheets (In thousands, except share data) As of December 31, 2020 2019 Assets Current assets: Cash and cash equivalents $ 134,669 $ 38,223 Marketable securities 90,034 — Accounts receivable 34,624 24,057 Inventory 10,012 6,014 Prepaid and other current assets 3,758 3,628 Total current assets 273,097 71,922 Property and equipment, net 10,704 4,430 Operating leases right-of-use assets 15,228 4,730 Intangible assets, net 44,355 45,541 Goodwill 23,857 23,857 Restricted cash 270 256 Other assets 1,000 1,000 Total assets $ 368,511 $ 151,736 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 9,653 $ 5,506 Accrued compensation 18,466 12,484 Accrued and other liabilities 20,602 16,838 Refund liability - CMS advance payment (Note 1) 20,496 — Total current liabilities 69,217 34,828 Deferred tax liability 1,299 1,973 Common stock warrant liability 447 6,607 Deferred payments for intangible assets 3,560 5,207 Operating lease liability, less current portion 16,069 2,370 Other liabilities 240 1,751 Total liabilities 90,832 52,736 Commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock: $ 0.001 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: $ 0.001 par value; 100,000,000 shares authorized at December 31, 2020 and 2019; 49,441,166 and 42,498,430 shares issued and outstanding at December 31, 2020 and 2019, respectively 49 42 Additional paid-in capital 632,253 437,976 Accumulated other comprehensive loss ( 2,096 ) ( 5,205 ) Accumulated deficit ( 352,527 ) ( 333,813 ) Total stockholders’ equity 277,679 99,000 Total liabilities and stockholders’ equity $ 368,511 $ 151,736 The accompanying notes are an integral part of these consolidated financial statements. 81 Table of Contents CareDx, Inc. Consolidated Statements of Operations (In thousands, except share and per share data) Year Ended December 31, 2020 2019 2018 Revenue: Testing services revenue $ 163,610 $ 104,550 $ 60,300 Product revenue 19,302 18,279 15,674 Digital and other revenue 9,282 4,239 595 Total revenue 192,194 127,068 76,569 Operating expenses: Cost of testing services 43,932 29,622 21,456 Cost of product 13,847 12,919 11,531 Cost of digital and other 5,338 2,914 — Research and development 48,941 30,711 14,514 Sales and marketing 53,858 38,894 21,670 General and administrative 48,806 36,540 22,976 Total operating expenses 214,722 151,600 92,147 Loss from operations ( 22,528 ) ( 24,532 ) ( 15,578 ) Other income (expense): Interest income (expense), net 271 985 ( 3,701 ) Debt extinguishment expenses — — ( 5,780 ) Change in estimated fair value of common stock warrant and derivative liabilities ( 1,495 ) 319 ( 22,978 ) CARES Act Provider Relief Fund 4,813 — — Other expense, net ( 811 ) ( 719 ) ( 178 ) Total other income (expense) 2,778 585 ( 32,637 ) Loss before income taxes ( 19,750 ) ( 23,947 ) ( 48,215 ) Income tax benefit 1,036 1,979 1,434 Net loss ( 18,714 ) ( 21,968 ) ( 46,781 ) Net loss attributable to noncontrolling interest — — ( 25 ) Net loss attributable to CareDx, Inc. $ ( 18,714 ) $ ( 21,968 ) $ ( 46,756 ) Net loss per share attributable to CareDx, Inc. (Note 3): Basic $ ( 0.40 ) $ ( 0.52 ) $ ( 1.31 ) Diluted $ ( 0.40 ) $ ( 0.52 ) $ ( 1.31 ) Weighted-average shares used to compute net loss per share attributable to CareDx, Inc.: Basic 46,481,772 42,151,617 35,638,956 Diluted 46,481,772 42,151,617 35,638,956 The accompanying notes are an integral part of these consolidated financial statements. 82 Table of Contents CareDx, Inc. Consolidated Statements of Comprehensive Loss (In thousands) Year ended December 31, 2020 2019 2018 Net loss $ ( 18,714 ) $ ( 21,968 ) $ ( 46,781 ) Other comprehensive loss: Foreign currency translation adjustments, net of tax 3,109 ( 927 ) ( 1,933 ) Net comprehensive loss ( 15,605 ) ( 22,895 ) ( 48,714 ) Comprehensive loss attributable to noncontrolling interest, net of tax — — ( 25 ) Comprehensive loss attributable to CareDx, Inc. $ ( 15,605 ) $ ( 22,895 ) $ ( 48,689 ) The accompanying notes are an integral part of these consolidated financial statements. 83 Table of Contents CareDx, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (In thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Noncontrolling Interest Total Stockholders’ Equity Shares Amount Balance at December 31, 2017 28,825,019 $ 29 $ 264,204 $ ( 2,345 ) $ ( 268,022 ) $ 180 $ ( 5,954 ) Adoption of ASC 606 — — — — 2,933 — 2,933 Reclassification of warrants from liability to equity — — 6,550 — — — 6,550 Issuance of common stock in connection with public offering, net of offering costs of $ 3,800 2,300,000 2 52,547 — — — 52,549 Conversion of convertible debt 6,161,331 6 38,846 — — — 38,852 Issuance of common stock under ESPP 76,710 — 287 — — — 287 RSU settlements, net of shares withheld 178,150 — ( 698 ) — — — ( 698 ) Issuance of common stock for services 50,509 — 273 — — — 273 Issuance of common stock for cash upon exercise of stock options 473,812 1 1,479 — — — 1,480 Issuance of common stock for cash upon exercise of warrants 3,091,581 3 38,709 — — — 38,712 Employee stock-based compensation expense — — 5,868 — — — 5,868 Non-employee stock-based compensation expense — — 1,009 — — — 1,009 Noncontrolling interests upon acquisition — — ( 537 ) — — ( 155 ) ( 692 ) Issuance of common stock for contingent consideration 227,848 — 2,689 — — — 2,689 Issuance of warrants in connection with debt — — 784 — — — 784 Foreign currency translation adjustment — — — ( 1,933 ) — — ( 1,933 ) Net loss — — — — ( 46,756 ) ( 25 ) ( 46,781 ) Balance at December 31, 2018 41,384,960 $ 41 $ 412,010 $ ( 4,278 ) $ ( 311,845 ) $ — $ 95,928 Contingent consideration classified as equity — — 222 — — — 222 Issuance of common stock under ESPP 51,712 — 759 — — — 759 RSU settlements, net of shares withheld 285,963 — ( 4,152 ) — — — ( 4,152 ) Issuance of common stock for services 7,569 — 209 — — — 209 Issuance of common stock for cash upon exercise of stock options 625,685 1 3,552 — — — 3,553 Issuance of common stock upon exercise of warrants 142,541 — 3,181 — — — 3,181 Employee stock-based compensation expense — — 22,195 — — — 22,195 Foreign currency translation adjustment — — — ( 927 ) — — ( 927 ) Net loss — — — — ( 21,968 ) — ( 21,968 ) Balance at December 31, 2019 42,498,430 $ 42 $ 437,976 $ ( 5,205 ) $ ( 333,813 ) $ — $ 99,000 Issuance of common shares through public equity offering, net of commissions and offering costs of $ 9,166 4,492,187 4 134,580 — — — 134,584 Issuance of common shares in connection with "at-the-market" equity offering, net of commissions and offering costs of $ 785 1,000,000 1 23,450 — — — 23,451 Issuance of common stock under ESPP 76,723 — 1,393 — — — 1,393 RSU settlements, net of shares withheld 333,178 — ( 4,529 ) — — — ( 4,529 ) Issuance of common stock for services 11,116 — 315 — — — 315 Issuance of common stock for cash upon exercise of stock options 691,318 1 8,006 — — — 8,007 Issuance of common stock upon exercise of warrants 338,214 1 8,007 — — — 8,008 Employee stock-based compensation expense — — 23,055 — — — 23,055 Foreign currency translation adjustment — — — 3,109 — — 3,109 Net loss — — — — ( 18,714 ) — ( 18,714 ) Balance at December 31, 2020 49,441,166 $ 49 $ 632,253 $ ( 2,096 ) $ ( 352,527 ) $ — $ 277,679 The accompanying notes are an integral part of these consolidated financial statements. 84 Table of Contents CareDx, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2020 2019 2018 Operating activities: Net loss $ ( 18,714 ) $ ( 21,968 ) $ ( 46,781 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Stock-based compensation 23,401 22,417 7,138 Amortization of inventory fair market value adjustment — — 234 Loss on disposal of property and equipment — 160 — Depreciation and amortization 7,006 5,523 4,215 Amortization of right-of-use assets 2,538 1,621 — Revaluation of warrants and derivative liabilities to estimated fair value 1,495 ( 319 ) 22,978 Revaluation of contingent consideration to estimated fair value 309 210 1,017 Amortization of debt discount and noncash interest expense — — 2,232 Debt extinguishment expenses — — 5,831 Changes in operating assets and liabilities: Accounts receivable ( 10,402 ) ( 12,675 ) ( 3,967 ) Inventory ( 3,196 ) ( 1,270 ) 363 Prepaid and other assets ( 41 ) ( 829 ) ( 502 ) Accounts payable 4,389 1,351 ( 168 ) Accrued compensation 5,737 3,115 4,291 Accrued and other liabilities 2,911 3,029 719 Operating lease liabilities, net ( 1,475 ) ( 1,854 ) — Refund liability - CMS advance payment 20,496 — — Change in deferred taxes ( 1,023 ) ( 1,280 ) ( 1,607 ) Net cash provided by (used in) operating activities 33,431 ( 2,769 ) ( 4,007 ) Investing activities: Purchases of marketable securities ( 90,034 ) — — Additions of capital expenditures, net ( 7,110 ) ( 2,201 ) ( 2,035 ) Acquisition of intangible assets ( 3,250 ) ( 1,148 ) ( 5,202 ) Acquisition of business — ( 18,230 ) ( 692 ) Investment in equity securities — ( 1,000 ) — Net cash used in investing activities ( 100,394 ) ( 22,579 ) ( 7,929 ) Financing activities: Proceeds from issuance of common shares in public equity offering, net of issuance costs paid 134,684 — 52,910 Proceeds from issuance of common shares in "at-the-market" equity offering, net of issuance costs paid 23,451 — — Proceeds from debt, net of issuance costs — — 14,282 Principal payments on debt and finance lease obligations ( 183 ) ( 172 ) ( 28,089 ) Contingent payments related to acquisition of Conexio Genomics Pty Ltd. — ( 225 ) ( 225 ) Change in short-term credit facility — — ( 677 ) Proceeds from exercise of warrants 352 105 10,998 Proceeds from exercise of stock options 8,006 3,553 1,480 Proceeds from issuance of common stock under employee stock purchase plan 1,368 760 287 Taxes paid related to net share settlement of restricted stock units ( 4,529 ) ( 4,153 ) ( 698 ) Net cash provided by (used in) financing activities 163,149 ( 132 ) 50,268 Effect of exchange rate changes on cash and cash equivalents 274 ( 849 ) 2 Net increase (decrease) in cash, cash equivalents and restricted cash 96,460 ( 26,329 ) 38,334 Cash, cash equivalents, and restricted cash at beginning of period 38,479 64,808 26,474 Cash, cash equivalents, and restricted cash at end of period $ 134,939 $ 38,479 $ 64,808 Supplemental disclosures of cash information Cash paid for interest $ 10 $ 22 $ 1,774 Cash paid for income taxes $ 80 $ — $ — Supplemental disclosures of cash flow information Shares issued in lieu of payment $ 315 $ 209 $ — Deferred payments for intangible assets $ — $ 7,207 $ — Operating lease right-of-use assets $ 55 $ 6,138 $ — Purchases of capital expenditures in accounts payable and accrued liabilities $ 274 $ 576 $ — Issuance of common stock upon conversion of convertible debt $ — $ — $ 38,852 Offering costs included in accounts payable $ — $ — $ 361 ESPP shares included in accrued compensation $ 800 $ 703 $ 341 Common stock warrants issued upon debt financing $ — $ — $ 784 Contingent consideration $ — $ 1,442 $ 2,689 The accompanying notes are an integral part of these consolidated financial statements. 85 Table of Contents CareDx, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF BUSINESS CareDx, Inc. (“CareDx” or the “Company”) together with its subsidiaries, is a leading precision medicine company focused on the discovery, development and commercialization of clinically differentiated, high-value healthcare diagnostic solutions for transplant patients and caregivers. The Company’s headquarters are in South San Francisco, California. The primary operations are in Brisbane, California; Omaha, Nebraska; Fremantle, Australia and Stockholm, Sweden. The Company’s commercially available testing services consist of AlloSure ® Kidney, which is a donor-derived cell-free DNA (“dd-cfDNA”) solution for kidney transplant patients, AlloMap ® Heart, which is a gene expression solution for heart transplant patients, and AlloSure ® Heart, a dd-cfDNA test which can identify underlying cell injury leading to organ rejection. The Company has initiated several clinical studies to generate data on its existing and planned future testing services. In April 2020, the Company announced its first biopharma 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. The Company also offers high quality products that increase the chance of successful transplants by facilitating a better match between a donor and a recipient of stem cells and organs. In 2019, the Company began providing digital solutions to transplant centers following the acquisitions of Ottr Complete Transplant Management (“Ottr, Inc.”) and XynManagement, Inc. (“XynManagement”). Testing Services AlloSure Kidney has been a covered service for Medicare beneficiaries since October 2017. The Medicare reimbursement rate for AlloSure Kidney is currently $ 2,841 . AlloSure Kidney has received positive coverage decisions from Blue Cross Blue Shield (“BCBS”) of South Carolina, BCB S of Kansas City and Capital Health, and is reimbursed by other private payers on a case-by-case basis . AlloMap Heart has been a covered service for Medicare beneficiaries since January 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, Cigna, Health Care Services Corporation, Humana, Kaiser Foundation Health Plan, Inc. and UnitedHealthcare . In October 2020, AlloSure Heart received a final Palmetto MolDx Medicare coverage decision for AlloSure Heart. In November 2020, Noridian Healthcare Solutions, the Company's 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 . Clinical Studies In January 2018, the Company initiated the Kidney Allograft Outcomes AlloSure Kidney Registry study ( “K-OAR” ), to develop additional data on the clinical utility of AlloSure Kidney for surveillance of kidney transplant recipients. K-OAR is a multicenter, non-blinded, prospective observational cohort study which has enrolled more than 1,700 renal transplant patients who will receive AlloSure Kidney long-term surveillance. In September 2018, the Company initiated the Surveillance HeartCare ™ Outcomes Registry (“SHORE”). SHORE is a prospective, multi-center, observational registry of patients receiving HeartCare for surveillance. HeartCare combines the gene expression profiling technology of AlloMap Heart with the dd-cfDNA analysis of AlloSure ® Heart in one surveillance solution. In February 2019, AlloSure ® Lung became available for lung transplant patients through a compassionate use program while the test is undergoing further studies. In June 2020, the Company submitted an AlloSure Lung application to the Palmetto MolDx Technical Assessment program seeking coverage and reimbursement for Medicare beneficiaries. In September 2019, the Company announced the commencement of the Outcomes of KidneyCare on Renal Allografts (“OKRA”) study, which is an extension of K-OAR. OKRA is a prospective, multi-center, observational, registry of patients receiving KidneyCare for surveillance. 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 developing a multimodality surveillance solution. The Company has not yet made any applications to private payers for reimbursement coverage of AlloMap Kidney or KidneyCare iBox. Enrollment for OKRA was negatively affected by the COVID-19 restrictions during the year 2020, and the study has been delayed by six months; however, the collection of samples are at normal levels as a result of the introduction of RemoTraC. 86 Table of Contents Products The Company’s suite of AlloSeq products are commercial next generation sequencing (“NGS”)-based kitted solutions that the Company has developed as a result of its license agreement with Illumina, Inc. (“Illumina”) . These products include: AlloSeq ™ Tx, a high-resolution Human Leukocyte Antigen (“HLA”) typing solution, AlloSeq ™ cfDNA, a surveillance solution designed to measure dd-cfDNA in blood to detect active rejection in transplant recipients, and AlloSeq ™ HCT, a solution for chimerism testing for stem cell transplant recipients. The Company's other HLA typing products include: TruSight HLA, a NGS-based high resolution typing solution; Olerup SSP ® , based on the sequence specific primer (“SSP”) technology; and QTYPE ® , which uses real-time polymerase chain reaction (“PCR”) methodology, to perform HLA typing at a low to intermediate resolution for samples that require a fast turnaround time . Digital and Other Following the acquisitions of both Ottr, Inc. and XynManagement, the Company is a leading provider of transplant patient tracking software (“Ottr software”), as well as of transplant quality tracking and waitlist management solutions. Ottr software provides comprehensive solutions for transplant patient management and enables integration with electronic medical record ("EMR") systems providing patient surveillance management tools and outcomes data to transplant centers. XynManagement provides two unique solutions, XynQAPI software (“XynQAPI”) and XynCare. XynQAPI simplifies transplant quality tracking and Scientific Registry of Transplant Recipients (“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, the Company 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. COVID-19 Pandemic On January 30, 2020, the World Health Organization (the “WHO”) announced a global health emergency because of a new strain of coronavirus ( “COVID-19”) originating in Wuhan, China and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally. The full impact of the COVID-19 pandemic, including the impact associated with preventative and precautionary measures that the Company, other businesses and governments are taking, continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company, but the pandemic may materially affect the Company's financial condition, liquidity and future results of operations. 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, the Company 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, the Company 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, the Company has 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, the Company’s testing services volumes returned to levels consistent with those experienced immediately prior to the COVID-19 pandemic, and through December 31, 2020, 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, the Company did not experience a decrease in testing services volumes. The Company’s product business experienced a reduction in forecasted sales volume throughout the second and third quarters of 2020, as it was unable to undertake onsite discussions and demonstrations of its recently launched NGS products, including AlloSeq Tx 17, which was awarded CE mark authorization in May 2020. The Company's product business maintained normal sales volumes during the fourth quarter of 2020. 87 Table of Contents The Company is maintaining its testing, manufacturing, and distribution facilities while implementing specific protocols to reduce contact among employees. In areas where COVID-19 impacts healthcare operations, the Company’s 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 the Company's 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, the Company has 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 its offices for employees that do not work from home. Liquidity and Capital Resources The Company has incurred significant losses and negative cash flows from operations since its inception and had an accumulated deficit of $ 352.5 million at December 31, 2020. As of December 31, 2020, the Company had cash, cash equivalents and marketable securities of $ 224.7 million. On March 27, 2020 the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act ( the “ CARES Act”). Pursuant to the CARES Act, the Centers for Medicare & Medicaid Services ( “ 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 is 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, the Company received an advance payment from CMS of approximately $ 20.5 million, and recorded the payment as Deferred revenue - CMS advance payment on the Company's consolidated balance sheet. During December 2020, the Company reassessed the Deferred revenue - CMS advance payment and determined to repay the entire amount in January 2021. The Company recorded the amount as Refund liability - CMS advance payment on the consolidated balance sheet as of December 31, 2020. Refer to Note 8, Balance Sheet Components, for further explanation. At-the-Market Equity Offering On August 31, 2018, the Company entered into a sales agreement (the “Sales Agreement”) with Jefferies, LLC, as sales agent (“Jefferies”), pursuant to which the Company may offer and sell, from time to time, through Jefferies, up to $ 50.0 million in shares of its 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, the Company issued and sold 1,000,000 shares of its common stock under the Sales Agreement. The shares were sold at an average price of $ 24.24 per share for aggregate net proceeds to the Company of approximately $ 23.5 million, after deducting sales commissions and offering costs payable by the Company. CARES Act Provider Relief Fund for Medicare Providers Pursuant to the CARES Act, the U.S. Department of Health & Human Services ( “HHS ”) distributed an initial tranche of $ 30.0 billion in funds to healthcare providers that received Medicare fee-for-service (“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 the Company continues to assess the impact on its 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, the Company received a payment of approximately $ 4.8 million, representing its 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, the Company 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. 88 Table of Contents 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the accounts of the Company and its subsidiaries. Intercompany transactions have been eliminated. Correction to Presentation The presentation of certain prior period amounts within the accompanying consolidated statements of operations have been corrected, including creating separate line items for the presentation of cost of testing services, cost of product and cost of digital and other, which were previously reported, in aggregate, in total cost of revenue of $ 45.5 million and $ 33.0 million for the years ended December 31, 2019 and 2018, respectively. These corrections had no effect on loss from operations, loss before taxes, or net loss. The Company evaluated these corrections, considering both qualitative and quantitative factors, and concluded they are immaterial to previously issued financial statements. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to transaction price estimates used for testing revenue; standalone fair value of digital revenue performance obligations; accrued expenses for clinical studies; inventory valuation; the fair value of issued common stock warrants and embedded derivatives; the fair value of assets and liabilities acquired in a business combination or an assets acquisition (including identifiable intangible assets acquired); the fair value of contingent consideration recorded in connection with a business combination; the grant date fair value assumptions used to estimate stock-based compensation expense; income taxes; impairment of long-lived assets and indefinite-lived assets (including goodwill); and legal contingencies. Actual results could differ from those estimates. Concentrations of Credit Risk and Other Risks and Uncertainties Financial instruments that potentially subject the Company to credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. The Company’s policy is to invest its cash and cash equivalents in money market funds, obligations of U.S. government agencies and government-sponsored entities, commercial paper, corporate debt securities and various bank deposit accounts. These financial instruments are held in Company accounts at nineteen financial institutions. The counterparties to the agreements relating to the Company’s investments consist of financial institutions of high credit standing. The Company is exposed to credit risk in the event of default by the financial institutions to the extent of amounts recorded on the balance sheets that may be in excess of insured limits. The Company is also subject to credit risk from its accounts receivable, which are derived from revenue earned from AlloSure Kidney and AlloMap Heart tests provided for patients located in the U.S. and billed to various third-party payers, from sales of products to distributors, strategic partners and transplant laboratories in Europe, Asia, the Middle East, Africa, the U.S., Latin America and other geographic regions, and from sales of digital solutions software. The Company has not experienced any significant credit losses and does not require collateral on receivables. For the years ended December 31, 2020, 2019 and 2018, approximately 57 %, 55 % and 48 %, respectively, of total revenue was billed to Medicare. No other payers represented more than 10% of total revenue for the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020 and 2019, approximately 28 % and 36 %, respectively, of accounts receivable was due from Medicare. No other payer represented more than 10% of accounts receivable at either December 31, 2020 or 2019. Cash and Cash Equivalents Cash equivalents consist of short-term, highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents consist primarily of amounts invested in money market funds. Restricted Cash As a condition of the lease agreements for certain facilities and an agreement with the State of Florida Medicaid, the Company must maintain letters of credit, minimum collateral requirements and a surety bond. These agreements are collateralized by cash. The cash used to support these arrangements of $ 0.3 million is classified as long-term restricted cash on the accompanying consolidated balance sheets. 89 Table of Contents Marketable Securities The Company considers all highly liquid investments in securities with a maturity of greater than three months at the time of purchase to be marketable securities. As of December 31, 2020, the Company’s marketable securities consisted of corporate debt securities with maturities of greater than three months but less than twelve months at the time of purchase. These marketable securities are classified as current assets on the consolidated balance sheet. The Company classifies its marketable securities as held-to-maturity at the time of purchase and reevaluates such designation at each balance sheet date. The Company has the positive intent and ability to hold these marketable securities to maturity. Marketable securities are carried at amortized cost and are adjusted for amortization of premiums and accretion of discounts to maturity, which is included in interest income (expense), net on the consolidated statements of operations. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on marketable securities are included in interest income (expense), net. The cost of securities sold will be determined using specific identification. Inventory Inventory is finished goods, work in progress, and raw materials and consists of reagent plates, laboratory supplies, reagents and finished goods kits. Inventories are used in connection with tests performed, and kits produced and may also be used for research and product development efforts. Laboratory supplies subsequently designated for research and product development use are expensed. Obsolete or damaged inventories are written off and excluded from the physical inventory. Certain inventories are stated at the lower of purchased cost, determined on an average cost basis, or net realizable value. Other inventories are stated at the lower of actual purchased cost, determined on a first-in, first-out basis, or net realizable value. Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. The estimated useful life is generally five years for machinery, computer and office equipment, and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of their estimated useful lives or the remaining lease term. The Company capitalizes certain costs incurred for software developed or obtained for internal use (including hosting arrangements). These costs include software licenses and consulting services, as well as employee payroll and payroll-related costs. Capitalized internal-use software costs are usually amortized over a period of three to five years . Business Combinations The Company determines and allocates 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. The Company bases 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. The Company allocates 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 Accounting Standard Codification (“ASC”), Topic 480, Distinguishing Liabilities from Equity , the Company recognizes a liability equal to the fair value of the contingent payments that the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value as a component of operating expenses. In circumstances where the contingent consideration is classified as equity, the Company recognizes 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 the Company’s operating results from the date of acquisition. 90 Table of Contents Acquired Intangible Assets Amortizable intangible assets include customer relationships, developed technology, trademarks, contracts and assets acquired as part of a business combination or asset acquisition. 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. The Company’s 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 the Company decides to bypass this option, it proceeds to the quantitative assessment. The quantitative assessment consists of a comparison between the estimated fair value of the Company’s reporting unit and its respective carrying amount including goodwill. Where the carrying value of the reporting unit exceeds its estimated fair value, the Company 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, the Company uses 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. The Company also considers its market capitalization on the date of the analysis to ensure the reasonableness of the reporting unit’s fair value. In connection with the Company’s annual goodwill assessment on December 1, 2020, the Company 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, the Company 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 The Company evaluates 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 the Company becomes aware of any events occurring or changes in circumstances that would indicate that the fair value 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 The Company evaluates its finite-lived intangible assets and its 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. The Company then compares the carrying amounts of the assets with the future net undiscounted cash flows expected to be generated by such asset. If an impairment exists, the Company measures 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. The Company has not identified any such impairment losses to date. 91 Table of Contents Fair Value of Financial Instruments Fair value is defined as the price that would be received from selling an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which the Company would transact, and it takes into consideration the assumptions that market participants would use when pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement of an asset or liability requires management to make judgments and to consider specific characteristics of that asset or liability. The carrying amounts of certain financial instruments of the Company, including cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximate fair value due to their short maturities. The carrying amount of the contingent consideration liability also represents its fair value. 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. The Company utilizes 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 the Company's stock price, expected life of the warrants, stock price volatility determined from the Company's 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. Leases Effective January 1, 2019, the Company adopted ASC Topic 842, Leases (“ASC 842”). The Company determines if an arrangement is or contains a lease at contract inception. The Company leases office space and equipment primarily through operating leases with a limited number of finance leases. A right-of-use (“ROU”) asset, representing the underlying asset during the lease term, and a lease liability, representing the payment obligation arising from the lease, are recognized on the consolidated balance sheet at lease commencement based on the present value of the payment obligation. For operating leases, expense is recognized on a straight-line basis over the lease term. For finance leases, interest expense on the lease liability is recognized using the effective interest method and amortization of the ROU asset is recognized on a straight-line basis over the shorter of the estimated useful life of the asset or the lease term. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet. The present value of lease payments is determined by using the interest rate implicit in the lease, if that rate is readily determinable; otherwise, the Company uses its incremental borrowing rate. The incremental borrowing rate is determined by using the rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments for a similar term and in a similar economic environment. As of December 31, 2020, the Company’s leases have remaining terms of 0.01 years to 8.17 years, some of which include options to extend the lease term. The Company’s lease terms may include renewal options that are reasonably certain to be exercised and termination options that are reasonably certain not to be exercised. Certain finance leases also include bargain purchase options of the leased equipment. Revenue The Company recognizes revenue from testing services, product sales, and digital and other revenue in the amount that reflects the consideration that 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. 92 Table of Contents Testing Services Revenue AlloSure Kidney, AlloMap Heart and AlloSure Heart patient tests are ordered by healthcare providers. The Company receives a test requisition form with payer information along with a collected patient blood sample. The Company considers the patient to be its customer and the test requisition form to be the contract. Testing services are performed in the Company’s 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 the Company provides testing services are generally not responsible for the payment of these services. The first and second revenue recognition criteria are satisfied when the Company receives a test requisition form with payer information from the healthcare provider. Generally, the Company bills 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. The Company has used the portfolio approach, a practical expedient under 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. The Company estimates 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. The Company monitors 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. The Company generally has 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 the Company's perpetual software license agreement are the following: (i) implementation services and delivery of the perpetual software license are considered a single performance obligation, and (ii) post contract support ("PCS"). The Company allocates 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 the Company’s 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. The Company records deferred revenue in relation to these agreements when cash payments are received, or invoices are issued in advance of the Company’s performance, and generally recognizes revenue over the contractual term, as performance obligations are fulfilled. In addition, the Company derives digital revenue from software subscriptions. The Company generally bills software subscription fees in advance. Revenue from software subscriptions is deferred and recognized ratably over the subscription term. Cost of Testing Services Cost of testing services reflects the aggregate costs incurred in delivering the Company’s testing services. The components of cost of testing services are materials and service costs, direct labor costs, stock-based compensation, equipment and infrastructure expenses associated with testing samples, shipping, logistics and specimen processing charges to collect and transport samples, and allocated overhead including rent, information technology, equipment depreciation, utilities and royalties. Royalties for licensed technology, calculated as a percentage of testing services revenues, are recorded as license fees in cost of testing services at the time the testing services revenues are recognized. Cost of Product Cost of product reflects the aggregate costs incurred in delivering the Company’s products to customers. The components of cost of product are materials costs, manufacturing and kit assembly costs, direct labor costs, equipment and infrastructure expenses associated with preparing kitted products for shipment, shipping, and allocated overhead including rent, information technology, equipment depreciation and utilities. Cost of product also includes amortization of acquired developed technology and adjustments to inventory values, including write-downs of impaired, slow moving or obsolete inventory. 93 Table of Contents Cost of Digital and Other Cost of digital and other primarily consists of personnel-related costs associated with developing, installing and maintaining software, depreciation of servers and equipment, amortization of acquired intangible assets, support of the functionality of the software's platforms, including stock-based compensation expenses, and allocated costs of facilities and information technology. Research and Development Expenses Research and development expenses, including clinical operations, represent costs incurred to develop diagnostic products and services, high quality evidence to support use of the Company’s tests, as well as continued efforts related to improving the Company’s existing products and digital solutions service lines. These expenses include payroll and related expenses, consulting expenses, laboratory supplies, clinical studies and certain allocated expenses as well as amounts incurred under certain collaborative agreements. Research and development costs are expensed as incurred. The Company records accruals for estimated study costs comprised of work performed by contract research organizations under contract terms. Stock-based Compensation The Company uses the Black-Scholes Model, which requires the use of estimates such as stock price volatility and expected option lives, to value employee stock options. The Company estimates the expected option lives using historical data, volatility using its own historical stock prices and stock prices of peer companies in the diagnostics industry, risk-free rates using the implied yield currently available in the U.S. Treasury zero-coupon issues with a remaining term equal to the expected option lives, and dividend yield using the Company’s expectations and historical data. The fair value of each restricted stock unit is calculated based upon the closing price of the Company’s common stock on the date of the grant. The Company uses the straight-line attribution method for recognizing compensation expense. Compensation expense is recognized on awards ultimately expected to vest and reduced for forfeitures that are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on the Company’s historical experience. Compensation expense for stock options issued to nonemployees is calculated using the Black-Scholes Model and is recorded over the service performance period using the straight-line attribution method. Options subject to vesting are required to be periodically remeasured over their service performance period, which is generally the same as the vesting period. Income Taxes The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. The Company assesses all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. The Company’s assessment of an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and the Company will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit may change as new information becomes available. Foreign Currency Translation The functional currency of the Company’s foreign subsidiaries is the local currency for each entity, including the Swedish Krona, Australian dollar and the Euro. The revenue and expenses of such subsidiaries have been translated into U.S. dollars at average exchange rates prevailing during the period. Assets and liabilities have been translated at the rates of exchange on the balance sheet date. The resulting cumulative translation adjustments are reported in other comprehensive loss. Foreign currency translation gains and losses on revenue and expenses are recognized in the consolidated statements of operations. Comprehensive Loss Comprehensive loss consists of net loss and other losses affecting stockholders’ equity that, under U.S. GAAP, are excluded from net income or loss. For the Company, such items consist of foreign currency losses on the translation of foreign assets and liabilities. 94 Table of Contents Recent Accounting Pronouncements In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-10, Codification Improvements, which contains amendments that improve the consistency of the ASC by including all disclosure guidance in the appropriate Disclosure Section (Section 50). The FASB provided transition guidance for all the amendments in this ASU. The amendments in Sections B and C (Section A has been removed) of this ASU are effective for annual periods beginning after December 15, 2020 for public business entities. Early application of the amendments in this ASU is permitted for public business entities for any annual or interim period for which financial statements have not been issued. The amendments in this ASU should be applied retrospectively. The Company plans to adopt this new standard on January 1, 2021. The Company is in the process of assessing the impact that this new standard will have in its consolidated financial statements and disclosures. In November 2018, the FASB issued ASU No. 2018-18 Collaborative Arrangements - Clarifying the Interaction between Topic 808 (Collaborative Arrangements) and Topic 606 (Revenue from Contracts with Customers) (“ASU 2018-18”), which clarifies the interaction between ASC 808, Collaborative Arrangements and ASC 606, Revenue from Contracts with Customers (“ASC 606”). The ASU clarifies that certain transactions between participants in a collaborative arrangement should be accounted for under ASC 606 when the counterparty is a customer. In addition, the ASU precludes an entity from presenting consideration from a transaction in a collaborative arrangement as revenue if the counterparty is not a customer for that transaction. The Company adopted the standard on January 1, 2020. The adoption of the new standard did not have a significant impact on the Company’s consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles – Goodwill and Other – Internal – Use Software (ASC Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). ASU 2018-15 became effective for fiscal years beginning after December 15, 2019 and interim periods therein. Early adoption of ASU 2018-15 is permitted, including adoption in any interim period. The Company adopted the standard on January 1, 2020. The adoption of the new standard did not have a significant impact on the Company's consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC Topic 820) (“ASU 2018-13”), which modifies, removes and adds certain disclosure requirements on fair value measurements based on the FASB Concepts Statement, Conceptual Framework for Financial Reporting—Chapter 8: Notes to Financial Statements. ASU 2018-13 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting period thereafter. The amendments on changes in unrealized gains and losses, the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company adopted the standard on January 1, 2020. The adoption of the new standard did not have a significant impact on the Company's consolidated financial statements. In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (ASC Topic 326) (“ASU 2016-13”), which amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model known as the current expected credit loss (“CECL”) model, which is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected credit losses, which the FASB believes will result in more timely recognition of such losses. The new CECL standard is effective for public companies for annual reporting periods beginning after December 15, 2019, and interim periods therein. ASU 2016-13 has a greater impact on banks. However, nonbank entities that have financial instruments or other assets such as trade receivables, contract assets, lease receivables, financial guarantees, loans and loan commitments, and held-to-maturity debt securities are subject to the CECL model. The Company adopted the standard on January 1, 2020. The adoption of the new standard did not have an impact on the Company’s consolidated financial statements. 95 Table of Contents 3. NET LOSS PER SHARE ATTRIBUTABLE TO CAREDX, INC. Basic and diluted net loss per share attributable to CareDx, Inc. have been computed by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common share equivalents as their effect would have been antidilutive. For the years ended December 31, 2020, 2019 and 2018, all common share equivalents have been excluded from the calculation of diluted net loss per share, as their effect would be antidilutive. The following tables set forth the computation of the Company’s basic and diluted net loss per share (in thousands, except shares and per share data): Year Ended December 31, 2020 2019 2018 Numerator: Net loss attributable to CareDx, Inc. used to compute basic net loss per share $ ( 18,714 ) $ ( 21,968 ) $ ( 46,756 ) Net loss attributable to CareDx, Inc. used to compute diluted net loss per share $ ( 18,714 ) $ ( 21,968 ) $ ( 46,756 ) Denominator: Weighted-average shares used to compute basic net loss per share attributable to CareDx, Inc. 46,481,772 42,151,617 35,638,956 Weighted-average shares used to compute diluted net loss per share attributable to CareDx, Inc. 46,481,772 42,151,617 35,638,956 Net loss per share attributable to CareDx, Inc.: Basic $ ( 0.40 ) $ ( 0.52 ) $ ( 1.31 ) Diluted $ ( 0.40 ) $ ( 0.52 ) $ ( 1.31 ) The following potentially dilutive securities have been excluded from diluted net loss per share because their effect would be antidilutive: Year Ended December 31, 2020 2019 2018 Shares of common stock subject to outstanding options 2,670,398 2,609,848 2,501,057 Shares of common stock subject to outstanding common stock warrants 6,264 355,240 656,289 Shares of common stock subject to contingent consideration — 10 — Restricted stock units 1,878,866 1,516,285 968,364 Total common stock equivalents 4,555,528 4,481,383 4,125,710 During 2017 and the three months ended March 31, 2018, 6,415,039 shares of common stock were issued due to the conversion of the JGB Debt (as defined below). In the three months ended June 30, 2018, the Company achieved the milestone of performing 2,500 commercial AlloSure Kidney tests resulting in the issuance of 227,848 shares of common stock to the former owners of ImmuMetrix, Inc. (“IMX”) that was accounted for as contingent consideration. On November 13, 2018, the Company completed an underwritten public offering (the “2018 Public Offering”) pursuant to which the Company issued and sold an aggregate of 2,300,000 shares. During April 2020, the Company issued and sold 1,000,000 shares of its common stock under the Sales Agreement pursuant to an “at-the-market” equity offering. On June 15, 2020, the Company completed an underwritten public offering (the “2020 Public Offering”) pursuant to which the Company sold 4,492,187 shares of common stock. 96 Table of Contents 4. FAIR VALUE MEASUREMENTS The Company records its financial assets and liabilities at fair value. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: • Level 1: Inputs that include quoted prices in active markets for identical assets and liabilities. • Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, 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. The following table sets forth the Company’s financial assets and liabilities, measured at fair value on a recurring basis, as of December 31, 2020 and 2019 (in thousands): December 31, 2020 Fair Value Measured Using (Level 1) (Level 2) (Level 3) Total Balance Assets Cash equivalents: Money market funds $ 85,797 $ — $ — $ 85,797 Liabilities Common stock warrant liability $ — $ — $ 447 $ 447 December 31, 2019 Fair Value Measured Using (Level 1) (Level 2) (Level 3) Total Balance Assets Cash equivalents: Money market funds $ 29,177 $ — $ — $ 29,177 Liabilities Common stock warrant liability $ — $ — $ 6,607 $ 6,607 The following table presents the issuances, exercises, changes in fair value and reclassifications of the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis (in thousands): Common Stock Warrant Liability (Level 3) Balance as December 31, 2018 $ 10,003 Exercise of warrants ( 3,077 ) Change in estimated fair value ( 319 ) Balance as December 31, 2019 $ 6,607 Exercise of warrants ( 7,655 ) Change in estimated fair value 1,495 Balance as December 31, 2020 $ 447 97 Table of Contents As of December 31, 2020, the Company had one investment in convertible preferred shares carried at cost. See Note 7, "Goodwill and Intangible Assets”. In the event the Company had to calculate the fair value of this investment, it would be based on Level 3 inputs. This investment is not considered material to the Company's consolidated financial statements. In determining fair value, the Company uses various valuation approaches within the fair value measurement framework. The valuation methodologies used for the Company’s instruments measured at fair value and their classification in the valuation hierarchy are summarized below: • Money market funds —Investments in money market funds are classified within Level 1. Money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange. At December 31, 2020 and 2019, money market funds were included as cash and cash equivalents in the consolidated balance sheets. • Marketable securities —Investments in marketable securities are classified within Level 2. The securities are valued using third-party pricing sources. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly. • Common stock warrant liability —The Company utilizes a binomial-lattice pricing model (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 the Company’s stock price, expected life of the warrants, stock price volatility determined from the Company’s 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 the assumptions discussed above result in a directionally similar impact to the fair value of the common stock warrant liability. Common Stock Warrant Liability Valuation Assumptions: December 31, 2020 2019 Private Placement Common Stock Warrant Liability Stock Price $ 72.45 $ 21.57 Exercise Price $ 1.12 $ 1.12 Remaining term (in years) 2.28 3.29 Volatility 73.00 % 81.00 % Risk-free interest rate 0.14 % 1.62 % Warrants liabilities exercised during 2020 and 2019 were remeasured at the exercise date. Their fair value approximates their intrinsic value, which was recorded to additional paid in capital in the consolidated statements of stockholders’ equity. The Company’s liabilities classified as Level 3 were valued based on unobservable inputs and management’s judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of the financial instruments. 98 Table of Contents 5. CASH AND MARKETABLE SECURITIES Cash, Cash Equivalents and Restricted Cash A reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount reported within the consolidated statements of cash flows is shown in the table below (in thousands): December 31, 2020 December 31, 2019 December 31, 2018 Cash and cash equivalents $ 134,669 $ 38,223 $ 64,616 Restricted cash 270 256 192 Total cash, cash equivalents, and restricted cash at the end of the period $ 134,939 $ 38,479 $ 64,808 Marketable Securities All marketable securities were considered held-to-maturity at December 31, 2020. There were no marketable securities at December 31, 2019. As of December 31, 2020 some of the Company’s marketable securities were in an unrealized loss position. The Company determined that it had the positive intent and ability to hold until maturity all marketable securities that have been in a continuous loss position, thus there was no recognition of any other-than-temporary impairment as of December 31, 2020. All marketable securities with unrealized losses as of each balance sheet date have been in a loss position for less than twelve months. The amortized cost, gross unrealized holding losses, and fair value of the Company’s marketable securities by major security type at each balance sheet date are summarized in the table below (in thousands): December 31, 2020 Amortized Cost Unrealized Holding Losses Fair Value Short-term marketable securities: Corporate debt securities $ 90,034 $ ( 136 ) $ 89,898 Total short-term marketable securities $ 90,034 $ ( 136 ) $ 89,898 Contractual maturities of the short-term marketable securities as of December 31, 2020 are as follows (in thousands): Within one year $ 90,034 After one year through five years — After five years through ten years — After ten years — Total $ 90,034 Table of Contents 6. BUSINESS COMBINATIONS Ottr, Inc. On May 7, 2019, the Company acquired 100 % of the outstanding common stock of Ottr, Inc. for total consideration of $ 16.1 million. Ottr, Inc. was formed in 1993 and is a leading provider of organ transplant patient tracking software. The Ottr software provides comprehensive solutions for transplant patient management and enables integration with EMR systems providing patient surveillance management tools and outcomes data to transplant centers. The Company accounted for the transaction as a business combination using the acquisition method of accounting. Results of operations of Ottr, Inc. have been included with the Company’s results since the date of the acquisition. Acquisition-related costs of $ 0.6 million associated with the acquisition were expensed as incurred, and classified as part of general and administrative expenses in the consolidated statement of operations. Goodwill of $ 10.2 million arising from the acquisition primarily consists of synergies from integrating the Ottr software with transplant center EMR systems and the current testing solutions offered by the Company. Goodwill synergies also arise from acquired workforce know-how of transplant centers workflow. None of the goodwill is expected to be deductible for income tax purposes. All of the goodwill has been assigned to the Company’s existing operating segment. The following table summarizes the consideration paid for Ottr, Inc. and the provisional amounts of the assets acquired and liabilities assumed recognized at their estimated fair value at the acquisition date (in thousands): Total Consideration Cash $ 16,037 Accrued purchase consideration 111 Total consideration $ 16,148 Recognized amounts of identifiable assets acquired and liabilities assumed Current assets $ 1,525 Fixed assets 35 Identifiable intangible assets 6,600 Current liabilities ( 2,210 ) Total identifiable net assets acquired 5,950 Goodwill 10,198 Total consideration $ 16,148 The allocation of the purchase price to assets acquired and liabilities assumed was based on the Company’s best estimate of the fair value of such assets and liabilities as of the acquisition date. The fair value of the acquired current liabilities as of June 30, 2019 included a preliminary deferred revenue balance of $ 2.3 million. During the three months ended September 30, 2019, the Company recorded an adjustment of $ 0.5 million to the initial valuation amount of deferred revenue, decreasing its balance to $ 1.8 million as of the acquisition date. This change is a result of updated assumptions and methodologies for acquired software maintenance contracts. As part of this adjustment, goodwill decreased by approximately $ 0.5 million. At the acquisition date, the Company estimated net deferred tax assets of approximately $ 0.2 million arising from temporary differences related to assets acquired and liabilities assumed. The Company estimated that Ottr, Inc. had net operating losses (“NOLs”) carryforward of approximately $ 6.9 million, $ 4.3 million of which will begin to expire in 2033, and the remaining $ 2.6 million will be carried forward indefinitely. A full valuation allowance of $ 0.2 million was recognized as of the acquisition date resulting in no impact from deferred taxes to Ottr, Inc.’s opening balance. An Internal Revenue Code Section 382 study for NOLs was finalized during the third quarter of 2019 and deferred taxes acquired were finalized as of December 31, 2019. 100 Table of Contents The following table summarizes the fair values of the intangible assets acquired as of the acquisition date ($ in thousands): Estimated Fair Value Estimated Useful Lives (Years) Customer relationships $ 4,200 15 Developed technology 2,300 10 Trademark 100 2 Total $ 6,600 Customer relationships acquired by the Company represent the fair value of future projected revenue that is expected to be derived from sales of Ottr, Inc.’s products to existing customers. The customer relationships’ fair value has been estimated utilizing a multi-period excess earnings method under the income approach, which reflects the present value of the projected cash flows that are expected to be generated by the customer relationships, less charges representing the contribution of other assets to those cash flows that use projected cash flows with and without the intangible asset in place. The economic useful life was determined based on the distribution of the present value of the cash flows attributable to the intangible asset. The acquired developed technology represents the fair value of Ottr, Inc.’s proprietary software. The trademark acquired consists primarily of the Ottr, Inc. brand and markings. The fair value of both the developed technology and the trademark were determined using the relief-from-royalty method under the income approach. This method considers the value of the asset to be the value of the royalty payments from which the Company is relieved due to its ownership of the asset. The royalty rates of 15.0 % and 1.0 % were used to estimate the fair value of the developed technology and the trademark, respectively. The Company utilized a discount rate of 14.5 % in estimating the fair value of these three intangible assets. Unaudited supplemental pro forma information is not disclosed because it is considered immaterial. XynManagement On August 26, 2019, the Company acquired 100 % of the outstanding common stock of XynManagement for total cash consideration of $ 2.0 million. As a result of the acquisition, the Company recognized contingent consideration of $ 1.4 million, including liability and equity components, goodwill of $ 1.7 million and intangible assets of $ 2.1 million. Goodwill synergies arise from acquired workforce know-how of transplant centers workflow. The goodwill for this acquisition is not deductible for income tax purposes. The contingent consideration relates to potential future cash payments upon reaching specified revenue and non-financial targets. 101 Table of Contents 7. GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired. Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. There were no indicators of impairment in the year ended December 31, 2020. The following table presents details of the Company’s goodwill as of December 31, 2020 and 2019 ($ in thousands): 2020 2019 Balance as of January 1, $ 23,857 $ 12,005 Goodwill acquired — 11,852 Balance as of December 31, $ 23,857 $ 23,857 On December 1, 2020, the Company performed a qualitative assessment of its reporting unit taking into consideration past, current and projected future earnings, recent trends and market conditions, and its market capitalization. Based on this analysis, the Company 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 this time. As of December 31, 2020, no impairment of goodwill has been identified. Intangible Assets The following tables present details of the Company’s intangible assets as of December 31, 2020 (dollar amounts in thousands): December 31, 2020 Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Carrying Amount Weighted Average Remaining Useful Life (In Years) Intangible assets with finite lives: Acquired and developed technology $ 31,209 $ ( 8,991 ) $ ( 725 ) $ 21,493 9.1 Customer relationships 18,168 ( 4,684 ) ( 449 ) 13,035 10.9 Commercialization rights 8,079 ( 1,039 ) — 7,040 8.7 Trademarks and tradenames 2,360 ( 804 ) ( 19 ) 1,537 9.9 Total intangible assets with finite lives 59,816 ( 15,518 ) ( 1,193 ) 43,105 Acquired in-process technology 1,250 — — 1,250 Total intangible assets $ 61,066 $ ( 15,518 ) $ ( 1,193 ) $ 44,355 The following tables present details of the Company’s intangible assets as of December 31, 2019 (dollar amounts in thousands): December 31, 2019 Gross Carrying Amount Accumulated Amortization Foreign Currency Translation Net Carrying Amount Weighted Average Remaining Useful Life (In Years) Intangible assets with finite lives: Acquired and developed technology $ 29,106 $ ( 6,473 ) $ ( 1,852 ) $ 20,781 8.2 Customer relationships 18,168 ( 3,397 ) ( 1,498 ) 13,273 10.1 Commercialization rights 8,079 ( 231 ) — 7,848 9.7 Trademarks and tradenames 2,360 ( 618 ) ( 206 ) 1,536 9.1 Total intangible assets with finite lives 57,713 ( 10,719 ) ( 3,556 ) 43,438 Acquired in-process technology 2,103 — — 2,103 Total intangible assets $ 59,816 $ ( 10,719 ) $ ( 3,556 ) $ 45,541 102 Table of Contents Acquisition of intangible assets In June 2020, the Company 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. AlloSeq HCT, previously included in Acquired in-process technology as of December 31, 2019, is included in Acquired and developed technology as of December 31, 2020. Illumina License and Commercialization Agreement On May 4, 2018, the Company entered into a license agreement with Illumina, which provides the Company with certain worldwide distribution, development and commercialization rights to Illumina’s NGS product line for use in the field of bone marrow and solid organ transplantation diagnostic testing (the “Field”). As a result, from June 1, 2018, the Company is the exclusive worldwide distributor of Illumina’s TruSight HLA product line. In addition, the Company was also granted the exclusive right to develop and commercialize other NGS product lines for use in the Field. The License Agreement required the Company to make a $ 5.0 million initial cash payment to Illumina and further requires the Company to pay royalties in the mid-single to low-double digits on sales of future commercialized products. Pursuant to the License Agreement, the Company is obligated to complete timely development and commercialization of other NGS product lines for use in the Field, and has agreed to minimum purchase commitments of finished products and raw materials from Illumina through 2023. As the License Agreement did not meet the definition of a business combination under ASC Topic 805, Business Combinations, the Company accounted for the transaction as an asset acquisition. In an asset acquisition goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable assets acquired. Costs relating to the assets acquired were $ 5.2 million, comprising of the cash consideration of $ 5.0 million and associated transaction costs of $ 0.2 million. A deferred tax balance was not required to be established on the License Agreement date as the book and tax basis of the intangible assets was equivalent to the amount paid. The allocation of the purchase price to identified intangible assets acquired was based on the Company’s best estimate of the fair value of such assets as of the acquisition date. Significant assumptions utilized in the valuation of identified intangible assets were based on company-specific information and projections, which are not observable in the market and are thus considered Level 3 measurements as defined by U.S. GAAP. The Company determined the estimated fair values using Level 3 inputs after review and consideration of relevant information, including discounted cash flows, quoted market prices and estimates made by management. Customer relationships represent the fair value of future projected revenue that is expected to be derived from sales of TruSight HLA products to existing customers of Illumina. The customer contracts and related relationships value has been estimated utilizing a multi-period excess earnings method under income approach, which reflects the present value of the projected cash flows that are expected to be generated by the customer relationships less charges representing the contribution of other assets to those cash flows that use projected cash flows with and without the intangible asset in place. The economic useful life was determined based on the life of the products, assuming that the existing customers will remain with the Company until the products become obsolete. The Company utilized a discount rate of 18 % in estimating the fair value of the customer relationships. The acquired in-process technology represents the fair value of products in development that have not reached commercial production at the date of acquisition. The fair value of the products was also determined using the multi-period excess earnings method under income approach. A discount rate of 40 % for the AlloSeq HCT acquired in-process technology was utilized to discount the cash flows to the present value. In November 2019, the acquired in-process technology intangible for AlloSeq Tx commenced commercial production. As of December 31, 2019; such acquired in-process technology has been classified as an intangible assets with finite live, and is being amortized over a useful life of 14 years. The following table summarizes the fair values of the intangible assets acquired as of the closing date ($ in thousands): Estimated Fair Value Estimated Useful Life (Years) Customer relationships: TruSight HLA $ 380 2.6 Acquired in-process technology: AlloSeq HCT 2,103 — Total $ 2,483 103 Table of Contents Cibiltech License and Commercialization Agreement Effective April 30, 2019, the Company entered into a license and commercialization agreement (the “Cibiltech Agreement”) with Cibiltech SAS (“Cibiltech”). Cibiltech is a French company engaged in the development and support of predictive medicine and artificial intelligence software, services and technology, with an emphasis on personalized patient care and clinical research, including its proprietary software and service offering known in the U.S. as KidneyCare iBox for the predictive analysis of post-transplantation kidney allograft loss. The Cibiltech Agreement provides the Company with an irrevocable, non-transferable right to commercialize Cibiltech’s proprietary software in the field of transplantation in the U.S. for a period of ten years . The Company estimated the fair value of the acquired commercialization rights intangible asset based on expected contractual payments discounted to present value using a discount rate of 6 %. In September 2019, the Company initiated the OKRA clinical study, which incorporates KidneyCare iBox. On such date, the Company commenced amortization of the acquired commercialization intangible asset. On July 26, 2019, pursuant to the Cibiltech Agreement, the Company purchased $ 1.0 million of convertible preferred shares of Cibiltech, which is recorded in other assets. The Company does not have a significant influence on Cibiltech’s operations. The net carrying amount of intangible assets and the related amortization expense of intangible assets may change due to the effects of foreign currency fluctuations as a result of acquiring an entity with a functional currency other than the U.S. dollar. Amortization of Intangible Assets Amortization expense was $ 4.8 million, $ 3.6 million and $ 2.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. For the year ended December 31, 2020, $ 1.3 million, $ 1.7 million, $ 0.3 million and $ 1.5 million were amortized to cost of testing services, cost of product, cost of digital and other and sales and marketing, respectively. For the year ended December 31, 2019, $ 0.7 million, $ 1.4 million, $ 0.2 million and $ 1.3 million were amortized to cost of testing services, cost of product, cost of digital and other and sales and marketing, respectively. For the year ended December 31, 2018, $ 0.5 million, $ 1.5 million, $ 0.0 million and $ 1.0 million were amortized to cost of testing services, cost of product, cost of digital and other and sales and marketing, respectively. Intangible assets are carried at cost less accumulated amortization. Amortization expenses are recorded to cost of testing services, cost of product, cost of digital and other and sales and marketing expenses in the consolidated statements of operations. The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of December 31, 2020 (in thousands): Years Ending December 31, Cost of Testing Services Cost of Product Cost of Digital and Other Sales and Marketing Total 2021 $ 1,316 $ 1,847 $ 345 $ 1,392 $ 4,900 2022 1,316 1,847 345 1,374 4,882 2023 1,316 1,847 345 1,374 4,882 2024 1,316 1,847 345 1,374 4,882 2025 1,316 1,847 345 1,374 4,882 Thereafter 5,457 4,340 1,192 7,688 18,677 Total future amortization expense $ 12,037 $ 13,575 $ 2,917 $ 14,576 $ 43,105 104 Table of Contents 8. BALANCE SHEET COMPONENTS Inventory Inventory consisted of the following (in thousands): December 31, 2020 2019 Finished goods $ 1,702 $ 1,236 Work in progress 2,936 1,189 Raw materials 5,374 3,589 Total inventory $ 10,012 $ 6,014 Property and Equipment, Net Property and equipment consisted of the following (in thousands): December 31, 2020 2019 Machinery and equipment $ 9,325 $ 7,546 Leasehold improvements 8,096 5,458 Computer and office equipment 5,414 4,996 Internally developed software 2,312 — Furniture and fixtures 683 683 Construction in progress 1,873 840 Property and equipment $ 27,703 $ 19,523 Less: Accumulated depreciation and amortization ( 16,999 ) ( 15,093 ) Property and equipment, net $ 10,704 $ 4,430 Depreciation expense was $ 1.9 million, $ 1.6 million and $ 1.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Assets purchased under finance leases, included above in machinery and equipment, and computer and office equipment, were $ 0.6 million at each of December 31, 2020 and 2019. Accumulated depreciation was $ 0.4 million at each of December 31, 2020 and 2019. Related amortization expense, included in depreciation and amortization expense, was $ 0.1 million, $ 0.2 million and $ 0.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Accrued and Other Liabilities Accrued and other liabilities consisted of the following (in thousands): December 31, 2020 2019 Clinical studies $ 6,733 $ 3,068 Deferred revenue 3,530 3,686 Short-term lease liability 2,033 3,017 Deferred payments for intangible assets 2,000 2,098 Professional fees 1,529 766 Accrued royalty 1,072 547 Contingent consideration 738 810 Test sample processing fees 416 835 Other accrued expenses 2,551 2,011 Total accrued and other liabilities $ 20,602 $ 16,838 105 Table of Contents 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, the Company received an advance payment from CMS of approximately $ 20.5 million and recorded the payment as Deferred revenue - CMS advance payment on the Company's consolidated balance sheet. During December 2020, the Company reassessed the Deferred revenue - CMS advance payment and determined to repay the entire amount in January 2021. The Company recorded the amount as Refund liability - CMS advance payment on the consolidated balance sheet as of December 31, 2020. 9. COMMITMENTS AND CONTINGENCIES Leases The Company leases its operating and office facilities for various terms under long-term, non-cancelable operating lease agreements in South San Francisco, California; Brisbane, California; West Chester, Pennsylvania; Fremantle, Australia; and Stockholm, Sweden; and Vienna, Austria. The Company also leases equipment under finance lease agreements. On January 2, 2020, the Company executed the second amendment to the operating lease agreement for the building located at Brisbane, California. The building is mainly utilized for laboratory operations and research and development. The lease will be extended for a period of eight years and two months starting on January 1, 2021. The Company has determined that the amendment constitutes a lease modification effective January 1, 2020. At the inception of the lease modification, the ROU asset increased by $ 13.0 million. The Company's facility leases expire at various dates through 2029. I n the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties . As of December 31, 2020, the carrying value of the ROU asset was $ 15.2 million. The related current and non-current liabilities as of December 31, 2020 were $ 2.0 million and $ 16.1 million, respectively. The current and non-current lease liabilities are included in accrued and other current liabilities and operating lease liability, less current portion, respectively, in the consolidated balance sheets. The following table summarizes the lease cost for the year ended December 31, 2020 (in thousands): Operating lease cost $ 4,441 Finance lease cost 205 Total lease cost $ 4,646 Finance lease cost includes interest from the lease liability and amortization of the ROU asset. Other information: Weighted-average remaining lease term - Operating leases (in years) 7.30 Weighted-average remaining lease term - Finance leases (in years) 0.42 Weighted-average discount rate - Operating leases (%) 10.5 % Weighted-average discount rate - Finance leases (%) 5.4 % Rent expense under the non-cancelable operating leases was $ 4.9 million, $ 2.3 million and $ 2.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. 106 Table of Contents Future minimum lease commitments under these operating and finance leases on December 31, 2020, are as follows (in thousands): Years ending December 31, Finance Leases Operating Leases 2021 $ 71 $ 4,562 2022 — 5,014 2023 — 3,769 2024 — 3,892 2025 — 4,037 Thereafter — 10,256 Total minimum lease payments $ 71 $ 31,530 The current portion of obligations under finance leases is included in accrued and other liabilities, and the long-term portion of finance leases are included in other liabilities within the consolidated balance sheets. Royalty Commitments The Board of Trustees of the Leland Stanford Junior University (“Stanford”) In June 2014, the Company entered into a license agreement with Stanford (the “Stanford License”), which granted the Company an exclusive license to a patent relating to the diagnosis of rejection in organ transplant recipients using dd-cfDNA. Under the terms of the Stanford License, the Company is required to pay an annual license maintenance fee, six milestone payments and royalties in the low single digits of net sales of products incorporating the licensed technology. Illumina On May 4, 2018, the Company entered into the License Agreement with Illumina (the “Illumina Agreement”). The Illumina Agreement requires the Company to pay royalties in the mid-single to low-double digits on sales of products covered by the Illumina Agreement. Cibiltech Commitments Pursuant to the Cibiltech Agreement, the Company will share an agreed-upon percentage of revenue with Cibiltech, if and when revenues are generated from KidneyCare iBox. Tax Commitments As of December 31, 2020, the Company had gross unrecognized tax benefits of $ 4.4 million, which include penalties and interest of $ 0.2 million. Approximately $ 0.2 million has been recorded as a noncurrent liability. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities. Other Commitments Pursuant to the Illumina Agreement, the Company has agreed to minimum purchase commitments of finished products and raw materials from Illumina through 2023. The Company has also committed to make potential future payments to third parties as part of its collaboration and licensing agreements. Payments under these agreements generally become due and payable only upon achievement of specific project milestones. Litigation and Indemnification Obligations In response to the Company's false advertising suit filed against Natera Inc. (“Natera”), on April 10, 2019, Natera filed a counterclaim against the Company on February 18, 2020, in the U.S. District Court for the District of Delaware (the “Court”) alleging the Company made false and misleading claims about the performance capabilities of AlloSure. The suit seeks injunctive relief and unspecified monetary relief. On September 30, 2020, Natera requested leave of Court to amend its counterclaims to include additional allegations regarding purportedly false claims the Company made with respect to AlloSure; the Court granted Natera’s request. Trial is currently scheduled to begin on July 26, 2021. 107 Table of Contents In addition, in response to the Company's patent infringement suit filed against Natera on March 26, 2019, Natera filed suit against the Company on January 13, 2020, in the Court alleging, among other things, that AlloSure infringes Natera’s U.S. Patent 10,526,658. On March 25, 2020, Natera filed an amendment to the suit alleging, among other things, that AlloSure also infringes Natera’s U.S. Patent 10,597,724. The suit seeks a judgment that the Company has infringed Natera’s patents, an order preliminarily and permanently enjoining the Company from any further infringement of such patents and unspecified damages. The Company intends to defend both of these matters vigorously, and believes that the Company has good and substantial defenses to the claims alleged in the suits, but there is no guarantee that the Company will prevail. The Company has not recorded any liabilities for these suits. From time to time, the Company may become involved in litigation and other legal actions. The Company estimates the range of liability related to any pending litigation where the amount and range of loss can be estimated. The Company records its best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, the Company records a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (ii) the range of loss can be reasonably estimated. 10. DEBT The Company did no t have any outstanding debt as of December 31, 2020. Perceptive Credit Agreement On April 17, 2018, the Company entered into a credit agreement with Perceptive Credit Holdings II, LP (the “Perceptive Credit Agreement”) for an initial term loan of $ 15.0 million. On November 20, 2018, the Company paid off all obligations owing under, and terminated, the Perceptive Credit Agreement. The Perceptive Credit Agreement debt extinguishment resulted in a $ 3.0 million loss that was included in debt extinguishment expenses, in the consolidated statements of operations. JGB Debt In February and March 31, 2018, JGB Collateral LLC and certain of its affiliates (“JGB”) converted the remaining $ 26.7 million of principal and accrued interest of the Company’s convertible debt (the “JGB Debt”) into an aggregate of 6,161,331 shares of the Company’s common stock. In connection with these conversions, the Company recognized $ 6,000 to common stock and $ 38.8 million to additional paid in capital; the unamortized debt discount of $ 2.7 million was extinguished; and the compound derivative liability of $ 12.1 million was also extinguished. The JGB Debt conversion resulted in a $ 2.8 million loss on debt extinguishment that was included in debt extinguishment expenses in the consolidated statements of operations for the year ended December 31, 2018. 11. STOCKHOLDERS’ EQUITY JGB Debt On October 5, 2017, JGB converted $ 1.3 million of outstanding principal under certain debentures into shares of common stock. Accordingly, the Company issued 288,022 shares of common stock to JGB at a price per share of $ 4.34 . In 2018, JGB converted the remaining $ 26.7 million of outstanding principal and accrued interest for a total issuance of 6,161,331 shares of the Company’s common stock at a price per share of $ 4.33 . Contingent Consideration Liability The Company had a contingent obligation to issue 227,845 shares of the Company’s common stock to the former owners of IMX, in conjunction with its acquisition of IMX in June 2014. The shares were issuable upon the Company completing 2,500 commercial tests involving the measurement of dd-cfDNA in organ transplant recipients in the United States by June 10, 2020. The Company achieved the contingent consideration milestone of 2,500 commercial tests and issued the 227,848 shares in May 2018. 2018 Public Offering On November 16, 2018, the Company sold in the 2018 Public Offering an aggregate of 2,300,000 shares of its common stock, including 300,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares at a public offering price of $ 24.50 per share. Total net proceeds received were $ 52.9 million net of underwriter’s fees and issuance costs. 108 Table of Contents At-the-Market Equity Offering On August 31, 2018, the Company entered into the Sales Agreement with Jefferies, as sales agent, pursuant to which the Company may offer and sell, from time to time, through Jefferies, up to $ 50.0 million in shares of its 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, the Company issued and sold 1,000,000 shares of its common stock under the Sales Agreement. The shares were sold at an average price of $ 24.24 per share for aggregate net proceeds to the Company of approximately $ 23.5 million, after deducting sales commissions and offering costs payable by the Company. Underwritten Public Offering of Common Stock On June 15, 2020, the Company sold in the 2020 Public Offering an aggregate of 4,492,187 shares of its common stock, including 585,937 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares at a public offering price of $ 32.00 per share. Total net proceeds received were $ 134.6 million net of underwriter's fees and issuance costs. The Company did no t issue preferred stock during the years ended December 31, 2020, 2019 and 2018. 12. 401(K) PLAN The Company sponsors a 401(k) defined contribution plan covering all U.S. employees under the Internal Revenue Code of 1986, as amended. Employee contributions are voluntary and are determined on an individual basis subject to the maximum allowable under federal tax regulations. On January 1, 2018, the Company began to make contributions to the employee plan. The Company incurred expenses related to contributions to the plan of $ 0.7 million, $ 0.6 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. 13. WARRANTS The Company issues common stock warrants in connection with debt or equity financings to lenders, placement agents and investors. Issued warrants are considered standalone financial instruments and the terms of each warrant are analyzed for equity or liability classification in accordance with U.S. GAAP. Warrants that are classified as liabilities usually have various features that would require net-cash settlement by the Company. Warrants that are not liabilities, derivatives and/or meet the exception criteria are classified as equity. Warrants liabilities are remeasured at fair value at each period end with changes in fair value recorded in the consolidated statements of operations until expired or exercised. Warrants that are classified as equity are valued at their relative fair value on the date of issuance, recorded in additional paid in capital and not remeasured. During the year ended December 31, 2020, warrants to purchase approximately 314,000 shares of common stock were exercised for cash proceeds of $ 0.4 million. During the year ended December 31, 2020, a warrant to purchase approximately 34,000 shares of common stock was exercised on a cashless basis and approximately 24,000 shares were issued pursuant to the exercise. During the year ended December 31, 2019, warrants to purchase approximately 94,000 shares of common stock were exercised for cash proceeds of $ 0.1 million. During the year ended December 31, 2019, approximately 207,400 warrants were exercised on a cashless basis and approximately 49,000 shares were issued pursuant to the exercises. As of December 31, 2020, outstanding warrants to purchase common stock were: Classified as Original Term Exercise Price Number of Shares Underlying Warrants Original issue date: April 2016 Liability 7 years $ 1.12 6,264 6,264 109 Table of Contents 14. STOCK INCENTIVE PLANS 2014 Equity Incentive Plan The Company grants stock based awards under 2014 Equity Inceptive Plan (the “2014 Plan”) that allows for issuance of stock options, restricted stock units (“RSUs”) and other stock awards to the Company’s employees, directors, and consultants. Stock options granted under the 2014 Plan may be exercised when vested and generally expire ten years from the date of the grant or three months from the date of termination of employment. Vesting periods vary based on awards granted, however, certain stock-based awards may vest immediately or may accelerate based on performance-driven measures. Stock option awards generally vest over four years with first year annual cliff vesting. The RSUs generally vest annually over four years in equal increments. There were 513,437 shares of common stock reserved for future issuance under the 2014 Plan as of December 31, 2020. 2016 Inducement Plan On April 21, 2016, the Company adopted the 2016 Inducement Equity Incentive Plan (the “2016 Plan”), pursuant to which the Company may grant stock awards of up to a total of 155,500 shares of common stock to new employees of the Company. The 2016 Plan was adopted to accommodate a reserve of additional shares of common stock for issuance to new employees hired by the Company from Allenex AB. The terms in the 2016 Plan are substantially similar to the 2014 Plan. There were 62,752 shares of common stock reserved for future issuance under the 2016 Plan as of December 31, 2020. The 2016 Plan allows RSUs to be granted in addition to stock options. The RSUs vest annually over four years in equal increments. The Company began granting RSUs pursuant to the 2016 Plan starting June 2016. 2019 Inducement Equity Incentive Plan The Company grants stock based awards under 2019 Inducement Equity Incentive Plan (the “2019 Plan”) that allows for issuance of stock options, RSUs and other stock awards to new employees of the Company. Stock options granted under the 2019 Plan may be exercised when vested and generally expire ten years from the date of the grant or three months from the date of termination of employment. Vesting periods vary based on awards granted, however, certain stock-based awards may vest immediately or may accelerate based on performance-driven measures. Stock option awards generally vest over four years with first year annual cliff vesting. The RSUs generally vest annually over four years in equal increments. The terms in the 2019 Plan are substantially similar to the 2014 Plan. There were 96,779 shares of common stock reserved for future issuance under the 2019 Plan as of December 31, 2020. Stock Options and RSUs The following table summarizes option and RSUs activity under the Company’s 2014 Plan, 2016 Plan and 2019 Plan, and related information: Shares Available for Grant Stock Options Outstanding Weighted- Average Exercise Price Number of RSU Shares Weighted- Average Grant Date Fair Value Balance—December 31, 2019 504,775 2,609,848 $ 16.47 1,516,285 $ 22.51 Additional options authorized 1,699,549 — — — — Common stock awards for services ( 11,116 ) — — — — RSUs granted ( 1,287,234 ) — — 1,287,234 31.71 RSUs vested — — — ( 577,997 ) 22.28 Options granted ( 1,082,339 ) 1,082,339 29.11 — — Options exercised — ( 688,818 ) 11.58 — — Repurchases of common stock under employee incentive plans 169,706 — — — — RSUs forfeited 346,656 — — ( 346,656 ) 25.06 Options forfeited 306,075 ( 306,075 ) 24.46 — — Options expired 26,896 ( 26,896 ) 19.18 — — Balance—December 31, 2020 672,968 2,670,398 $ 21.92 1,878,866 $ 28.42 110 Table of Contents The total intrinsic value of options exercised was $ 19.2 million, $ 15.1 million and $ 6.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. The total fair value of RSUs vested during 2020 was $ 15.7 million. As of December 31, 2020, the total intrinsic value of outstanding RSUs was approximately $ 136.0 million and there were $ 39.8 million of unrecognized compensation costs related to RSUs, which are expected to be recognized over a weighted-average period of 3.00 years. Options outstanding that have vested and are expected to vest at December 31, 2020 are as follows: Number of Shares Issued (In thousands) Weighted Average Exercise Price Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (In thousands) Vested 987,653 $ 14.64 6.47 $ 57,101 Expected to Vest 1,553,039 26.16 8.76 71,883 Total 2,540,692 $ 128,984 The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock at December 31, 2020 for stock options that were in-the-money. The weighted-average grant-date fair value of options to purchase common stock granted for the years ended December 31, 2020, 2019 and 2018 using the Black-Scholes Model was $ 18.97 , $ 17.74 and $ 9.05 , respectively. The total fair value of options that vested during 2020 was $ 9.0 million. As of December 31, 2020, there were approximately $ 23.9 million of unrecognized compensation costs related to stock options, which are expected to be recognized over a weighted-average period of 2.85 years. 2014 Employee Stock Purchase Plan The Company has an Employee Stock Purchase Plan (the “ESPP”), under which employees can purchase shares of its common stock based on a percentage of their compensation, but not greater than 15 % of their earnings; provided, however, an eligible employee’s right to purchase shares of the Company’s common stock may not accrue at a rate which exceeds $ 25,000 of the fair market value of such shares for each calendar year in which such rights are outstanding. The ESPP has consecutive offering periods of approximately six months in length. The purchase price per share must be equal to the lower of 85 % of the fair value of the common stock on the first day of the offering period or on the exercise date. During the offering period in 2020 that ended on June 30, 2020, 38,576 shares were purchased for aggregate proceeds of $ 0.7 million from the issuance of shares, which occurred on July 1, 2020. The Company issued 76,723 shares and 51,712 shares of common stock during the years ended December 31, 2020 and December 31, 2019, respectively, pursuant to the ESPP. The Company received proceeds of $ 1.4 million and $ 0.8 million from the purchases of shares during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company had 511,933 shares available for issuance under the ESPP. Board of Directors Stock Awards Granted for Services For the years ended December 31, 2020, 2019 and 2018, the Company paid a portion of its directors’ compensation through the award of fully vested common shares. The stock awards are classified as equity, and compensation expense was recognized upon the issuance of the shares at the grant date price per share, which is the fair value. As of December 31, 2020, there were a total of 265,083 shares issued to the Company’s directors, for a total fair value of $ 1.7 million. Stock-based compensation expense associated with the awards was $ 0.3 million, $ 0.2 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively, which was included in general and administrative expense in the consolidated statements of operations. 111 Table of Contents Valuation Assumptions The estimated fair values of employee stock options and ESPP shares were estimated using the Black-Scholes option pricing model based on the following weighted average assumptions: Year Ended December 31, 2020 2019 2018 Employee stock options Expected term (in years) 5.98 5.97 5.90 Expected volatility 75.56 % 70.78 % 69.69 % Risk-free interest rate 0.69 % 2.32 % 2.77 % Expected dividend yield — % — % — % Employee stock purchase plan Expected term (in years) 0.5 0.5 0.5 Expected volatility 62.56 % – 93.17 % 70.80 % – 76.66 % 59.94 % – 105.32 % Risk-free interest rate 0.17 % – 1.57 % 2.10 % – 2.51 % 1.61 % – 2.14 % Expected dividend yield — % — % — % Risk-free Interest Rate: The Company based the risk-free interest rate over the expected term of the award based on the constant maturity rate of U.S. Treasury securities with similar maturities as of the date of grant. Volatility : The Company used an average historical stock price volatility of its own stock and those comparable public companies that were deemed to be representative of future stock price trends. Expected Term: The expected term represents the period for which the Company’s stock-based compensation awards are expected to be outstanding and is based on analyzing the vesting and contractual terms of the awards and the holders’ historical exercise patterns and termination behavior. Expected Dividends : The Company has not paid and does not anticipate paying any dividends in the near future. Stock-Based Compensation Expense The following table summarizes stock-based compensation expense relating to employee and nonemployee stock-based awards for the years ended December 31, 2020, 2019 and 2018, included in the consolidated statements of operations as follows (in thousands): Year Ended December 31, 2020 2019 2018 Cost of testing services $ 1,493 $ 1,751 $ 761 Cost of product 391 280 60 Cost of digital and other 449 152 — Research and development 4,676 4,422 1,631 Sales and marketing 5,795 4,008 986 General and administrative 10,597 11,804 3,700 Total $ 23,401 $ 22,417 $ 7,138 No tax benefit was recognized related to stock-based compensation expense since the Company has never reported taxable income and has established a full valuation allowance to offset all of the potential tax benefits associated with its deferred tax assets. In addition, no amounts of stock-based compensation costs were capitalized for the periods presented. 112 Table of Contents 15. INCOME TAXES Loss before income taxes for the years ended December 31, 2020, 2019 and 2018 is summarized as follows (in thousands): As of December 31, 2020 2019 2018 United States $ ( 14,233 ) $ ( 19,386 ) $ ( 41,109 ) Foreign ( 5,517 ) ( 4,561 ) ( 7,106 ) Total loss before income taxes $ ( 19,750 ) $ ( 23,947 ) $ ( 48,215 ) The components of the provision for (benefit from) income taxes are summarized as follows (in thousands): As of December 31, 2020 2019 2018 Current Federal $ ( 58 ) $ ( 571 ) $ 24 State 1 1 — Foreign 160 83 139 Total current income tax expense (income tax benefit) 103 ( 487 ) 163 Deferred Federal 91 ( 558 ) 13 State ( 52 ) ( 47 ) 4 Foreign ( 1,178 ) ( 887 ) ( 1,614 ) Total deferred income tax benefit ( 1,139 ) ( 1,492 ) ( 1,597 ) Income tax benefit $ ( 1,036 ) $ ( 1,979 ) $ ( 1,434 ) The Company's actual provision for tax differed from the amounts computed by applying the U.S. federal income tax rates of 21% in each of the years ended 2020, 2019 and 2018, to loss before income taxes as a result of the following: Year Ended December 31, 2020 2019 2018 Federal tax statutory rate 21.0 % 21.0 % 21.0 % Stock-based compensation 13.5 % 9.9 % 1.3 % Change in valuation allowance ( 34.4 ) % ( 16.6 ) % ( 9.4 ) % Foreign rate differential 1.8 % 0.3 % 2.4 % Warrant revaluation ( 1.7 ) % 0.3 % ( 10.0 ) % Interest expense ( 0.3 ) % ( 0.2 ) % ( 1.7 ) % Non-deductible executive compensation ( 6.8 ) % ( 7.6 ) % ( 0.7 ) % Research credits 3.9 % 2.6 % 0.4 % Changes in net operating loss carryforwards, including expirations 6.9 % ( 1.5 ) % — % Other 1.2 % 0.1 % ( 0.3 ) % Effective income tax rate 5.2 % 8.3 % 3.0 % 113 Table of Contents Deferred income tax assets and liabilities consist of the following: (in thousands): As of December 31, 2020 2020 2019 Deferred tax assets: Net operating loss carryforwards $ 60,578 $ 56,735 Tax credit carryforwards 8,507 7,239 Accruals 4,598 2,649 Property and equipment 1,047 1,078 Lease liability 4,408 1,015 Other 4,302 2,224 Gross deferred tax assets 83,440 70,940 Valuation allowance ( 72,860 ) ( 64,412 ) Total deferred tax assets 10,580 6,528 Deferred tax liabilities: Purchased intangibles ( 7,683 ) ( 7,589 ) Operating leases right-of-use assets ( 3,708 ) ( 878 ) Other ( 488 ) ( 34 ) Total deferred tax liabilities ( 11,879 ) ( 8,501 ) Net deferred tax liabilities $ ( 1,299 ) $ ( 1,973 ) The Company assesses the realizability of its net deferred tax assets by evaluating all available evidence, both positive and negative, including (i) cumulative results of operations in recent years, (ii) sources of recent losses, (iii) estimates of future taxable income and (iv) the length of net operating loss carryforward periods. The Company believes that based on the history of its U.S. losses and other factors, the weight of available evidence indicates that it is more likely than not that it will not be able to realize its U.S. net deferred tax assets. The Company has also placed a valuation allowance on the net deferred tax assets of its Australian operations. Accordingly, the U.S. and Australia net deferred tax assets have been offset by a full valuation allowance. The valuation allowance increased by $ 8.4 million and $ 4.1 million during the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, the Company had domestic federal net operating loss carryforwards of $ 239.0 million, domestic state net operating loss carryforwards of $ 93.9 million, and foreign net operating loss carryforwards of $ 15.3 million that can reduce future taxable income. Of the $ 239.0 million of federal net operating losses, $ 32.6 million is carried forward indefinitely. The remaining domestic federal and state net operating loss carryforwards will begin to expire in 2021 and 2029, respectively. The foreign net operating loss carryforwards can be carried forward indefinitely. As of December 31, 2020, the Company had credit carryforwards of approximately $ 6.9 million and $ 7.6 million available to reduce future taxable income, if any, for domestic federal and California state income tax purposes, respectively. The domestic federal credit carryforwards begin to expire in 2021. California credits have no expiration date. Utilization of the Company's net operating loss and credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended and similar state provisions. Based on a preliminary review of the Company's equity transactions since inception, the Company believes a portion of its net operating loss carryforwards and credit carryforwards may be limited due to equity financings which occurred in 2000, 2004, 2007, 2014 and through the current period. A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2020 2019 2018 Balance at the beginning of the year $ 3,650 $ 3,449 $ 3,164 Additions based on tax positions related to the current year 824 667 285 Decreases based on tax positions related to prior years ( 58 ) ( 466 ) — Balance at the end of the year $ 4,416 $ 3,650 $ 3,449 114 Table of Contents None of the $ 4.4 million net unrecognized tax benefit as of December 31, 2020, if recognized, would impact the Company's effective tax rate. During the year ended December 31, 2020, given the Company's valuation allowance, the uncertain tax benefits would not have impacted the effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of December 31, 2020 and December 31, 2019, the Company had in each year $ 0.2 million of cumulative interest and penalties related to unrecognized tax benefits. The Company does not anticipate a significant change in the unrecognized tax benefits over the next twelve months. The Company files U.S., state and foreign income tax returns in jurisdictions with varying statutes of limitations. Due to net operating loss and credit carryovers, the domestic federal and state income tax returns are subject to tax authority examination from inception. In foreign jurisdictions where the Company files income tax returns, the statutes of limitations with respect to these jurisdictions vary from jurisdiction to jurisdiction and range from 3 to 6 years. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), was signed into law making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning after December 31, 2017. The Company calculated the impact of the Tax Act in its year end income tax provision in accordance with its understanding of the Tax Act and guidance available as of the date of the filing of the Company's Annual Report on Form 10-K for the year ended December 31, 2017, which did not result in any additional income tax expense in the fourth quarter of 2017. The enactment of the Tax Act also requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. Consequently, the Company accounted for a provisional estimated reduction of the U.S. deferred tax assets from $ 72.5 million to approximately $ 45.9 million with a corresponding decrease of $ 27.0 million to the Company’s valuation allowance in 2018. The Company completed its analysis of the impacts of the 2017 Tax Act in the fourth quarter of 2018 with no net change to its provisional estimates. Starting in 2018, companies may be subject to global intangible low tax income (“GILTI”), which is a tax on foreign income in excess of a deemed return on tangible assets of foreign corporations as well as the new base erosion anti-abuse tax (“BEAT”) under the Tax Act. GILTI will be effectively taxed at a tax rate of 10.5%. Due to the complexity of the GILTI tax rules, companies are allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred or (2) factoring such amounts into a company’s measurement of its deferred taxes. The Company has not made an election with respect to GILTI and does not believe that GILTI will have a material impact on the Company’s 2020 taxes. The Company will continue to review the GILTI and BEAT rules to determine their applicability to the Company and the impact that the rules may have on the Company's results of operations and financial condition. 115 Table of Contents 16. SEGMENT REPORTING Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the Company's Chief Operating Decision Maker (“CODM”), or decision making group, whose function is to allocate resources to and assess the performance of the operating segments. The Company has identified its Chief Executive Officer as the CODM. In determining its reportable segments, the Company considered the markets and types of customers served and the products or services provided in those markets. The Company operates in a single reportable segment. Revenues by geographic regions are based upon the customers’ ship-to address for product revenue and the region of testing for testing services revenue. The following table summarizes reportable revenues by geographic regions (in thousands): Year Ended December 31, 2020 2019 2018 Testing services revenue United States $ 163,221 $ 104,056 $ 59,683 Rest of World 389 494 617 $ 163,610 $ 104,550 $ 60,300 Product revenue United States $ 9,219 $ 8,078 $ 5,881 Europe 7,475 7,690 7,506 Rest of World 2,608 2,511 2,287 $ 19,302 $ 18,279 $ 15,674 Digital and other revenue United States $ 9,063 $ 4,062 $ 499 Europe 87 100 96 Rest of World 132 77 — $ 9,282 $ 4,239 $ 595 Total United States $ 181,503 $ 116,196 $ 66,063 Total Europe $ 7,562 $ 7,790 $ 7,602 Total Rest of World $ 3,129 $ 3,082 $ 2,904 Total $ 192,194 $ 127,068 $ 76,569 The following table summarizes long-lived assets, consisting of property and equipment, net, by geographic regions (in thousands): December 31, 2020 December 31, 2019 Long-lived assets: United States $ 9,888 $ 3,346 Europe 351 509 Rest of World 465 575 Total $ 10,704 $ 4,430 116 Table of Contents 17. SUBSEQUENT EVENTS CMS Accelerated and Advance Payment Program for Medicare Providers As discussed in Note 8, on January 19, 2021, the Company repaid the $ 20.5 million Refund liability - CMS advance payment. After repayment, the remaining balance was $ 0.0 million . Underwritten Public Offering of Common Stock On January 25, 2021, the Company sold 1,923,077 shares of its common stock through an underwritten public offering at a public offering price of $ 91.00 per share. The net proceeds to the Company from the offering were approximately $ 164.0 million, after deducting underwriting discounts and commissions and estimated offering expenses. On February 11, 2021, the Company sold 288,461 shares of its 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 the Company from the full exercise of the underwriters' overallotment option were approximately $ 24.7 million. The aggregate net proceeds to the Company, including the 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. TransChart LLC In January 2021, the Company acquired TransChart LLC (“TransChart”) for cash. TransChart provides EMR software to hospitals throughout the U.S. to care for patients who have or may need an organ transplant. TransChart builds on the Company's digital offerings, which include Ottr, Inc. transplant electronic medical record software and XynQAPI transplant quality management solutions. Given the timing of the closing of this transaction, the Company is currently in the process of valuing the assets acquired and liabilities assumed in the business combination. As a result, the Company is not yet able to provide the amounts to be recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed and other related disclosures. The Company will disclose this and other related information in the Company's Form 10-Q for the quarter ended March 31, 2021. Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.