Item 8. Financial Statements and Supplementary Data
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CareDx, Inc.
Index to Consolidated Financial Statements
Page No.
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34 )
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Consolidated Balance Sheets
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Consolidated Statements of Operations
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Consolidated Statements of Comprehensive Loss
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Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity
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Consolidated Statements of Cash Flows
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Notes to Consolidated Financial Statements
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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, 2021 and 2020, 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, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
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, 2021, the Company’s revenue from testing services was $259.3 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.
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
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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 by independently recalculating the estimated 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 2021.
• 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, 2022
We have served as the Company's auditor since 2018.
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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, 2021, 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, 2021, 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, 2021, of the Company and our report dated February 24, 2022, expressed an unqualified opinion on those financial statements.
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, 2022
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CareDx, Inc.
Consolidated Balance Sheets
(In thousands, except share data)
As of December 31,
2021 2020
Assets
Current assets:
Cash and cash equivalents $ 348,485 $ 134,669
Marketable securities — 90,034
Accounts receivable 59,761 34,624
Inventory 17,186 10,012
Prepaid and other current assets 7,928 3,758
Total current assets 433,360 273,097
Property and equipment, net 22,044 10,704
Operating leases right-of-use assets 17,993 15,228
Intangible assets, net 50,195 44,355
Goodwill 36,983 23,857
Restricted cash 211 270
Other assets 5,835 1,000
Total assets $ 566,621 $ 368,511
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable $ 13,337 $ 9,653
Accrued compensation 26,042 18,466
Accrued and other liabilities 37,922 20,602
Refund liability - CMS advance payment (Note 1) — 20,496
Total current liabilities 77,301 69,217
Deferred tax liability 415 1,299
Common stock warrant liability 139 447
Deferred payments for intangible assets 5,041 3,560
Operating lease liability, less current portion 17,394 16,069
Other liabilities 455 240
Total liabilities 100,745 90,832
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock: $ 0.001 par value; 10,000,000 shares authorized at December 31, 2021 and 2020; no shares issued and outstanding at December 31, 2021 and 2020
— —
Common stock: $ 0.001 par value; 100,000,000 shares authorized at December 31, 2021 and 2020; 52,923,360 and 49,441,166 shares issued and outstanding at December 31, 2021 and 2020, respectively
52 49
Additional paid-in capital 853,683 632,253
Accumulated other comprehensive loss ( 4,670 ) ( 2,096 )
Accumulated deficit ( 383,189 ) ( 352,527 )
Total stockholders’ equity 465,876 277,679
Total liabilities and stockholders’ equity $ 566,621 $ 368,511
The accompanying notes are an integral part of these consolidated financial statements.
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CareDx, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share data)
Year Ended December 31,
2021 2020 2019
Revenue:
Testing services revenue $ 259,285 $ 163,610 $ 104,550
Product revenue 26,832 19,302 18,279
Patient and digital solutions 10,280 9,282 4,239
Total revenue 296,397 192,194 127,068
Operating expenses:
Cost of testing services 71,251 43,932 29,622
Cost of product 18,930 13,847 12,919
Cost of patient and digital solutions 7,208 5,338 2,914
Research and development 76,525 48,941 30,711
Sales and marketing 77,245 53,858 38,894
General and administrative 74,964 48,806 36,540
Total operating expenses 326,123 214,722 151,600
Loss from operations ( 29,726 ) ( 22,528 ) ( 24,532 )
Other income (expense):
Interest income, net 160 271 985
Change in estimated fair value of common stock warrant liability
106 ( 1,495 ) 319
CARES Act Provider Relief Fund — 4,813 —
Other expense, net ( 2,628 ) ( 811 ) ( 719 )
Total other (expense) income ( 2,362 ) 2,778 585
Loss before income taxes ( 32,088 ) ( 19,750 ) ( 23,947 )
Income tax benefit 1,426 1,036 1,979
Net loss $ ( 30,662 ) $ ( 18,714 ) $ ( 21,968 )
Net loss per share (Note 3):
Basic $ ( 0.59 ) $ ( 0.40 ) $ ( 0.52 )
Diluted $ ( 0.59 ) $ ( 0.40 ) $ ( 0.52 )
Weighted-average shares used to compute net loss per share:
Basic 52,241,076 46,481,772 42,151,617
Diluted 52,241,076 46,481,772 42,151,617
The accompanying notes are an integral part of these consolidated financial statements.
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CareDx, Inc.
Consolidated Statements of Comprehensive Loss
(In thousands)
Year ended December 31,
2021 2020 2019
Net loss $ ( 30,662 ) $ ( 18,714 ) $ ( 21,968 )
Other comprehensive loss:
Foreign currency translation adjustments, net of tax ( 2,574 ) 3,109 ( 927 )
Net comprehensive loss $ ( 33,236 ) $ ( 15,605 ) $ ( 22,895 )
The accompanying notes are an integral part of these consolidated financial statements.
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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 Total Stockholders’ Equity
Shares Amount
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 for cash 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
Issuance of common shares through public equity offering, net of commissions and offering costs of $ 12,495
2,211,538 2 188,853 — — 188,855
Contingent consideration classified as equity — — ( 222 ) — — ( 222 )
Issuance of common stock under ESPP 45,464 — 2,139 — — 2,139
RSU settlements, net of shares withheld 464,693 — ( 18,441 ) — — ( 18,441 )
Issuance of common stock for services 3,984 — 296 — — 296
Issuance of common stock for cash upon exercise of stock options 753,383 1 12,775 — — 12,776
Issuance of common stock upon exercise of warrants 3,132 — 205 — — 205
Employee stock-based compensation expense — — 35,825 — — 35,825
Foreign currency translation adjustment — — — ( 2,574 ) — ( 2,574 )
Net loss — — — — ( 30,662 ) ( 30,662 )
Balance at December 31, 2021 52,923,360 $ 52 $ 853,683 $ ( 4,670 ) $ ( 383,189 ) $ 465,876
The accompanying notes are an integral part of these consolidated financial statements.
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CareDx, Inc.
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31,
2021 2020 2019
Operating activities:
Net loss $ ( 30,662 ) $ ( 18,714 ) $ ( 21,968 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock-based compensation 36,081 23,401 22,417
Asset impairments and write-downs 2,437 — 160
Depreciation and amortization 8,797 7,006 5,523
Amortization of right-of-use assets 3,088 2,538 1,621
Unrealized loss on long-term marketable equity securities 1,743 — —
Revaluation of common stock warrant liability to estimated fair value ( 106 ) 1,495 ( 319 )
Revaluation of contingent consideration to estimated fair value ( 609 ) 309 210
Amortization of premium on short-term marketable securities, net 1,129 — —
Other non-cash items ( 222 ) — —
Changes in operating assets and liabilities:
Accounts receivable ( 24,416 ) ( 10,402 ) ( 12,675 )
Inventory ( 6,927 ) ( 3,196 ) ( 1,270 )
Prepaid and other assets ( 5,144 ) ( 41 ) ( 829 )
Accounts payable 1,789 4,389 1,351
Accrued compensation 7,516 5,737 3,115
Accrued and other liabilities 10,690 2,911 3,029
Operating lease liabilities, net ( 2,603 ) ( 1,475 ) ( 1,854 )
Refund liability - CMS advance payment ( 20,496 ) 20,496 —
Change in deferred taxes ( 1,379 ) ( 1,023 ) ( 1,280 )
Net cash (used in) provided by operating activities ( 19,294 ) 33,431 ( 2,769 )
Investing activities:
Maturities of short-term marketable securities 88,905 — —
Purchases of long-term marketable securities ( 5,500 ) ( 90,034 ) —
Additions of capital expenditures ( 13,559 ) ( 7,110 ) ( 2,201 )
Acquisition of intangible assets ( 6,700 ) ( 3,250 ) ( 1,148 )
Acquisition of business, net of cash acquired ( 15,434 ) — ( 18,230 )
Investment in equity securities — — ( 1,000 )
Net cash provided by (used in) investing activities 47,712 ( 100,394 ) ( 22,579 )
Financing activities:
Proceeds from issuance of common shares in public equity offering, net of issuance costs paid 188,855 134,684 —
Proceeds from issuance of common shares in "at-the-market" equity offering, net of issuance costs paid — 23,451 —
Principal payments on finance lease obligations ( 66 ) ( 183 ) ( 172 )
Contingent payments related to acquisition of Conexio Genomics Pty Ltd. — — ( 225 )
Proceeds from exercise of warrants 4 352 105
Proceeds from exercise of stock options 12,775 8,006 3,553
Proceeds from issuance of common stock under employee stock purchase plan 2,139 1,368 760
Taxes paid related to net share settlement of restricted stock units ( 18,065 ) ( 4,529 ) ( 4,153 )
Net cash provided by (used in) financing activities 185,642 163,149 ( 132 )
Effect of exchange rate changes on cash and cash equivalents ( 303 ) 274 ( 849 )
Net increase (decrease) in cash, cash equivalents and restricted cash 213,757 96,460 ( 26,329 )
Cash, cash equivalents, and restricted cash at beginning of period 134,939 38,479 64,808
Cash, cash equivalents, and restricted cash at end of period $ 348,696 $ 134,939 $ 38,479
Supplemental disclosures of cash information
Cash paid for interest $ 1 $ 10 $ 22
Cash paid for income taxes $ 14 $ 80 $ —
Supplemental disclosures of cash flow information
Shares issued in lieu of payment $ 296 $ 315 $ 209
Deferred payments for intangible assets $ — $ — $ 7,207
Operating lease right-of-use assets $ 6,079 $ 55 $ 6,138
Purchases of capital expenditures in accounts payable and accrued liabilities $ 3,953 $ 274 $ 576
ESPP shares included in accrued compensation $ 1,521 $ 800 $ 703
Contingent consideration $ 5,341 $ — $ 1,442
The accompanying notes are an integral part of these consolidated financial statements.
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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 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, a donor-derived cell-free DNA (“dd-cfDNA”) solution for kidney transplant patients, AlloMap® Heart, a gene expression solution for heart transplant patients, AlloSure® Heart, a dd-cfDNA solution for heart transplant patients, and AlloSure® Lung, a dd-cfDNA solution for lung transplant patients. 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”), as well as the acquisitions of TransChart LLC (“TransChart”), MedActionPlan.com, LLC (“MedActionPlan”) and Transplant Pharmacy (“TTP”) in 2021 .
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 several commercial payers , 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.
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 .
In May 2021, the Company purchased a minority investment of common stock in the biotechnology company Miromatrix Medical, Inc. (“Miromatrix”), for $ 5.0 million, and the investment is marked to market. Miromatrix works to eliminate the need for an organ transplant waiting list through the development of implantable engineered biological organs.
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 iBox for a multimodality surveillance solution. The Company has not yet made any applications to private payers for reimbursement coverage of AlloMap Kidney or KidneyCare.
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Products
The Company’s suite of AlloSeq products are commercial next generation sequencing (“NGS”)-based kitted solutions. 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 .
In March 2021, the Company acquired certain assets of BFS Molecular S.R.L. (“BFS Molecular”), a software company focused on NGS-based patient testing solutions. BFS Molecular brings extensive software and algorithm development capabilities for NGS transplant surveillance products.
Patient and Digital Solutions
Following the acquisitions of both Ottr, Inc. and XynManagement, the Company is a leading provider of transplant patient management 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.
In January 2021, the Company acquired TransChart. TransChart provides EMR software to hospitals throughout the U.S. to care for patients who have or may need an organ transplant. As part of the Company's acquisition of TransChart in January 2021, the Company acquired Tx Access, a cloud-based service that allows nephrologists and dialysis centers to electronically submit referrals to transplant programs, closely follow and assist patients through the transplant waitlist process, and ultimately, through transplantation.
In June 2021, the Company acquired the Transplant Hero patient application. The application helps patients manage their medications through alarms and interactive logging of medication events.
Also in June 2021, the Company entered into a strategic agreement with OrganX to develop clinical decision support tools across the transplant patient journey. Together, the Company and OrganX will develop advanced analytics that integrate AlloSure, the first transplant specific dd-cfDNA assay, with large transplant databases to provide clinical data solutions. This partnership delivers the next level of innovation beyond multi-modality by incorporating a variety of clinical inputs to create a universal composite scoring system. The Company has agreed to potential future milestone payments.
In November 2021, the Company acquired MedActionPlan, a New Jersey-based provider of medication safety, medication adherence and patient education. MedActionPlan is a leader in patient medication management for transplant patients and beyond.
In December 2021, the Company acquired TTP, a transplant focused pharmacy located in Mississippi. TTP provides individualized transplant pharmacy services for patients at multiple transplant centers located throughout the U.S.
COVID-19 Pandemic
The full impact of the continued COVID-19 pandemic, including the impact associated with preventative and precautionary measures that the Company, other businesses and governments have taken and continue to take, 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
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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 200 transplant and nephrology centers can offer RemoTraC to their patients and over 11,000 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.
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 regained normalized sales volumes during the fourth quarter of 2020.
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 virtual platforms. Although the executive orders that placed certain restrictions on operations in San Mateo County and the State of California, where the Company's laboratory and headquarters are located, were lifted effective June 15, 2021, new orders or restrictions may be adopted in the future depending upon the COVID-19 transmission rates in the Company's 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 $ 383.2 million at December 31, 2021. As of December 31, 2021, the Company had cash and cash equivalents of $ 348.5 million.
CMS Accelerated and Advance Payment Program for Medicare Providers
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 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 submitted a request to the appropriate Medicare Administrative Contractor and met 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 repaid 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, 2021. 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 could 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
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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 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 statements of operations.
The Company is complying with the key terms and provisions of the CARES Act Provider Relief Fund, which includes, among other things, the requirement that the Company maintain appropriate records and cost documentation. During the quarter ended September 30, 2021, the Company was notified by HHS that the Provider Relief Fund Reporting Portal was open for reporting on the use of Provider Relief Fund payments, and the Company completed and submitted a report indicating the use of the funds the Company received pursuant to the CARES Act.
June 2020 Underwritten Public Offering of Common Stock
On June 15, 2020, the Company sold 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.
January 2021 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 offering expenses.
On February 11, 2021, the Company sold 288,461 shares of its common stock pursuant to the full exercise of the overallotment option granted to the underwriters in connection with the January 2021 offering. The net proceeds to the Company from the full exercise of the underwriters' overallotment option were approximately $ 24.7 million.
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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.
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 patient and digital solutions 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 or an asset acquisition; 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. 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, AlloSure Heart and AlloMap Heart tests provided for patients located in the U.S. and Canada, 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, from sales of patient and 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, 2021, 2020 and 2019, approximately 59 %, 57 % and 55 %, respectively, of total revenue was billed to Medicare. No other payers represented more than 10% of total revenue for the years ended December 31, 2021, 2020 and 2019.
As of December 31, 2021 and 2020, approximately 27 % and 28 %, respectively, of accounts receivable was due from Medicare. No other payer represented more than 10% of accounts receivable at either December 31, 2021 or 2020.
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 the Company must maintain letters of credit and certain minimum collateral requirements. The cash used to support these arrangements of $ 0.2 million is classified as long-term restricted cash on the accompanying consolidated balance sheets.
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, 2021, the Company had no short-term marketable securities. At December 31, 2020, the Company’s short-term marketable securities consisted of corporate debt securities with maturities of greater than three months but less than twelve months at the time of purchase, which were classified as current assets on the consolidated balance sheet.
The Company classifies its short-term 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. Short-term 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
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operations. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on short-term marketable securities are included in interest income (expense), net. The cost of securities sold will be determined using specific identification.
The Company considers investments in securities with remaining maturities of over one year as long-term investments. As of December 31, 2021, the Company's long-term marketable securities consisted of corporate equity securities and corporate debt securities. These long-term marketable securities are classified as other assets on the consolidated balance sheet.
The Company classifies its long-term marketable debt securities as available-for-sale and reevaluates such designation at each balance sheet date. The Company records its long-term marketable equity securities at fair market value. Unrealized gains and losses from the remeasurement of the long-term marketable equity securities to fair value are included in other expense, net, in the consolidated statements of operations. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on long-term marketable securities are included in interest income, net.
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, kits produced and prescription drugs, 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. 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 three to five years for computer, office and laboratory 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 ten 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.
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Acquired Intangible Assets
Amortizable intangible assets include customer relationships, developed technology, commercialization rights, trademarks and in-process technology 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, 2021, the Company performed a qualitative assessment taking into consideration past, current and projected future earnings, recent trends and market conditions; and the Company's 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, 2021, 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, 2021, 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.
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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.
Leases
The Company adopted ASC Topic 842, Leases (“ASC 842”) and determines if an arrangement is or contains a lease at contract inception. 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, 2021, the Company’s leases had remaining terms of 0.41 years to 7.17 years, some of which include options to extend the lease term.
Revenue
The Company recognizes revenue from testing services, product sales, and patient and digital solutions 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.
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 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
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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.
Patient and Digital Solutions Revenue
Patient and digital solutions revenue is mainly derived from a combination of SaaS and perpetual software license agreements entered into with various transplant centers, which are the Company's customers for this class of revenue. The main performance obligations in connection with the Company's SaaS and 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. 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 patient and digital solutions revenue from software subscriptions and medication sales. The Company generally bills software subscription fees in advance. Revenue from software subscriptions is deferred and recognized ratably over the subscription term. The medication sales revenue is recognized based on the negotiated contract price with the governmental, commercial and non-commercial payers with any applicable patient co-pay.
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.
Cost of Patient and Digital Solutions
Cost of patient and digital solutions 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, cost of prescription drugs 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 patient 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, estimates volatility using its own historical stock prices, estimates 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 estimates dividend yield using the
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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.
Recent Accounting Pronouncements
In November 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance , which contains amendments that require annual disclosures about transactions with a government that are accounted for by applying a grant or contribution accounting model. The disclosures include (1) the types of assistance, (2) an entity’s accounting for the assistance, and (3) the effect of the assistance on an entity’s financial statements. The amendments set forth in this ASU are effective for all entities for annual periods beginning after December 15, 2021. Early application of the amendments in this ASU is permitted. The amendments in this ASU should be applied either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions. The Company plans to adopt the standard prospectively on January 1, 2022. The adoption of this new standard had no impact on the Company's consolidated financial statements and disclosures.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , which requires that an entity recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. The amendments set forth in this ASU are effective for fiscal years beginning after December 15, 2022. Early adoption of the amendments is permitted. The amendments in this ASU should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company plans
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to early adopt the standard prospectively on January 1, 2022. The adoption of this new standard had no impact on the Company's consolidated financial statements and disclosures.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task Force) , which contains amendments that clarify and reduce diversity in an issuer's accounting for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after modification or exchange. The amendments set forth in this ASU are effective for all entities for annual periods beginning after December 15, 2021. Early application of the amendments in this ASU is permitted for all entities. The amendments in this ASU should be applied prospectively. The Company plans to adopt the standard prospectively on January 1, 2022. The adoption of this new standard had no impact on the Company's consolidated financial statements and disclosures.
In October 2020, the FASB issued 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 adopted the standard on January 1, 2021. The adoption of the new standard did not have an impact on the Company's 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) , which clarifies the interaction between ASC 808, Collaborative Arrangements and 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.
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3. NET LOSS PER SHARE
Basic and diluted net loss per share 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, 2021, 2020 and 2019, 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,
2021 2020 2019
Numerator:
Net loss used to compute basic net loss per share
$ ( 30,662 ) $ ( 18,714 ) $ ( 21,968 )
Net loss used to compute diluted net loss per share
$ ( 30,662 ) $ ( 18,714 ) $ ( 21,968 )
Denominator:
Weighted-average shares used to compute basic net loss per share
52,241,076 46,481,772 42,151,617
Weighted-average shares used to compute diluted net loss per share
52,241,076 46,481,772 42,151,617
Net loss per share:
Basic $ ( 0.59 ) $ ( 0.40 ) $ ( 0.52 )
Diluted $ ( 0.59 ) $ ( 0.40 ) $ ( 0.52 )
The following potentially dilutive securities have been excluded from diluted net loss per share because their effect would be antidilutive:
Year Ended December 31,
2021 2020 2019
Shares of common stock subject to outstanding options
1,863,633 2,670,398 2,609,848
Shares of common stock subject to outstanding common stock warrants
3,132 6,264 355,240
Shares of common stock subject to contingent consideration
— — 10
Restricted stock units 2,047,657 1,878,866 1,516,285
Total common stock equivalents 3,914,422 4,555,528 4,481,383
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 pursuant to which the Company sold 4,492,187 shares of common stock.
On January 25, 2021 and February 11, 2021, the Company completed an underwritten public offering, including the sale of shares pursuant to the exercise of the underwriters' over-allotment option, pursuant to which the Company sold 1,923,077 and 288,461 shares of common stock, respectively.
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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, 2021 and 2020 (in thousands):
December 31, 2021
Fair Value Measured Using
(Level 1) (Level 2) (Level 3) Total
Balance
Assets
Cash equivalents:
Money market funds $ 335,107 $ — $ — $ 335,107
Long-term marketable securities:
Corporate equity securities 3,257 — — 3,257
Corporate debt securities — 500 — 500
Total $ 338,364 $ 500 $ — $ 338,864
Liabilities
Short-term liabilities:
Contingent consideration $ — $ — $ 2,114 $ 2,114
Long-term liabilities:
Contingent consideration — — 3,227 3,227
Common stock warrant liability — — 139 139
Total $ — $ — $ 5,480 $ 5,480
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
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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 and Contingent Consideration (Level 3)
Balance at December 31, 2019 $ 6,607
Exercise of warrants ( 7,655 )
Change in estimated fair value of common stock warrant liability 1,495
Balance at December 31, 2020 $ 447
Exercise of warrants ( 202 )
Change in estimated fair value of common stock warrant liability ( 106 )
Additions to contingent consideration 5,341
Balance at December 31, 2021 $ 5,480
As of December 31, 2021, the Company had one investment in convertible preferred shares carried at cost. 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, 2021 and 2020, money market funds were included as cash and cash equivalents in the consolidated balance sheets.
• Short-term marketable securities —Investments in short-term 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.
• Long-term marketable equity and debt securities —Investments in long-term marketable equity securities are classified within Level 1. The securities are recorded at fair value based on readily available quoted market prices in active markets. Investments in long-term marketable debt securities are classified within Level 2. The securities are recorded at fair value based on observable inputs for quoted prices for identical or similar assets in markets that are not active. Long-term marketable securities are located within other assets on the consolidated balance sheets.
• Contingent consideration —Contingent consideration is classified within Level 3. Contingent consideration relates to asset acquisitions and business combinations. The Company recorded the estimate of the fair value of the contingent consideration based on its evaluation of the probability of the achievement of the contractual conditions that would result in the payment of the contingent consideration. Contingent consideration was estimated using the fair value of the milestones to be paid if the contingency is met multiplied by management’s estimate of the probability of success at a discounted rate of 12 % at December 31, 2021. The significant input in the Level 3 measurement that is not supported by market activity is the Company’s probability assessment of the achievement of the milestones. The value of the liability is subsequently remeasured to fair value at each reporting date, and the change in estimated fair value is recorded as a component of operating expenses until the milestones are paid, expire or are no longer achievable. Increases or decreases in the estimation of the probability percentage result in a directionally similar impact to the fair value measurement of the contingent consideration liability. The carrying amount of the contingent consideration liability represents its fair value. For the year ended December 31, 2021, there was no fair value adjustment to the contingent consideration for MedActionPlan and TTP as these were acquired during the fourth quarter and no changes to the probabilities have occurred post acquisition.
• Common stock warrant liability —Common stock warrant liability is classified within Level 3. 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
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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,
2021 2020
Private Placement Common Stock Warrant Liability
Stock Price $ 45.48 $ 72.45
Exercise Price $ 1.12 $ 1.12
Remaining term (in years) 1.28 2.28
Volatility 66.00 % 73.00 %
Risk-free interest rate 0.49 % 0.14 %
Warrants liabilities exercised during 2021 and 2020 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.
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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, 2021 December 31, 2020 December 31, 2019
Cash and cash equivalents $ 348,485 $ 134,669 $ 38,223
Restricted cash 211 270 256
Total cash, cash equivalents, and restricted cash at the end of the period $ 348,696 $ 134,939 $ 38,479
Marketable Securities
The long-term marketable equity securities were recorded at fair market value at December 31, 2021. The long-term marketable debt securities were considered available-for-sale at December 31, 2021. The contractual maturity of the long-term marketable debt securities are less than three years.
All short-term marketable securities were considered held-to-maturity at December 31, 2020. At December 31, 2020, some of the Company’s short-term marketable securities were in an unrealized loss position. The Company determined that it had the positive intent and ability to hold until maturity all short-term marketable securities that have been in a continuous loss position, thus there was no recognition of any other-than-temporary impairment at December 31, 2020. All short-term marketable securities with unrealized losses as of the balance sheet date have been in a loss position for less than twelve months. Contractual maturities of the short-term marketable securities were within one year or less at December 31, 2020.
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, 2021
Amortized Cost Unrealized Holding Losses Fair Value
Long-term marketable securities:
Corporate equity securities $ 5,000 $ ( 1,743 ) $ 3,257
Corporate debt securities 500 — 500
Total long-term marketable securities $ 5,500 $ ( 1,743 ) $ 3,757
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 marketable securities at each balance sheet date are as follows (in thousands):
December 31, 2021
Within one year $ —
After one year through five years 500
Total $ 500
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6. BUSINESS COMBINATIONS
The Transplant Pharmacy
In December 2021, the Company acquired TTP, a transplant focused pharmacy located in Mississippi. The Company acquired TTP with a combination of cash consideration paid upfront and contingent consideration with a fair value of $ 1.3 million. TTP provides individualized transplant pharmacy services for patients at multiple transplant centers located throughout the U.S.
The Company accounted for the transaction as a business combination using the acquisition method of accounting. Acquisition-related costs of $ 0.3 million were expensed as incurred, and classified as part of general and administrative expenses in the consolidated statements of operations.
Goodwill of $ 5.5 million arising from the acquisition primarily consists of additional growth opportunities within the pharmacy sector. The integration of TTP into the Company’s portfolio is expected to continue to increase the transplant ecosystem for patients and make medication more accessible. The Company estimated net deferred tax liabilities of approximately $ 0.6 million arising from temporary differences related to the assets acquired and liabilities assumed. 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 fair value of the intangible asset acquired as of the acquisition date ($ in thousands):
Estimated Fair Value
Estimated Useful Life (Years)
Trademark
$ 2,080 10
The trademark acquired consists primarily of the TTP brand and markings. The fair value of the trademark was 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 rate of 2 % was used to estimate the fair value of the trademark.
A discount rate of 13.5 % was utilized in estimating the fair value of the trademark.
The pro forma impact of the TTP acquisition is not material, and the results of operations of the acquisition have been included in the Company's consolidated statements of operations from the respective acquisition date.
MedActionPlan
In November 2021, the Company acquired MedActionPlan, a New Jersey-based provider of medication safety, medication adherence and patient education. The Company acquired MedActionPlan with a combination of cash consideration paid upfront and contingent consideration with a fair value of $ 3.5 million. MedActionPlan is a leader in patient medication management for transplant patients and beyond.
The Company accounted for the transaction as a business combination using the acquisition method of accounting. 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 $ 4.9 million arising from the acquisition primarily consists of synergies from integrating the MedActionPlan technology with the current testing and digital solutions offered by the Company. The integration of MedActionPlan into centers with the Company's other software platforms will continue to increase the standard of care for transplant patient safety, increase efficiency and facilitate medication compliance. 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 fair values of the intangible assets acquired as of the acquisition date ($ in thousands):
Estimated Fair Value
Estimated Useful Lives (Years)
Customer relationships $ 2,590 10
Developed technology 1,090 10
Trademarks 80 5
Total $ 3,760
Customer relationships acquired by the Company represent the fair value of future projected revenue that is expected to be derived from sales of MedActionPlan’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
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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 MedActionPlan’s proprietary software. The trademark acquired consists primarily of the MedActionPlan 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 % and 1 % were used to estimate the fair value of the developed technology and the trademark, respectively.
A discount rate of 40.0 % was utilized in estimating the fair value of these three intangible assets.
The pro forma impact of the MedActionPlan acquisition is not material, and the results of operations of the acquisition have been included in the Company's consolidated statements of operations from the respective acquisition date.
TransChart LLC
In January 2021, the Company acquired TransChart. TransChart provides EMR software to hospitals throughout the U.S. to care for patients who have or may need an organ transplant. As a result of the acquisition, the Company recognized goodwill of $ 2.2 million and intangible assets of $ 2.0 million.
The pro forma impact of the TransChart acquisition is not material, and the results of operations of the acquisition have been included in the Company's consolidated statements of operations from the respective acquisition date.
Combined Consideration Paid
The following table summarizes the consideration paid for TransChart, TTP and MedActionPlan, 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 $ 17,166
Total consideration
$ 17,166
Recognized amounts of identifiable assets acquired and liabilities assumed
Current assets $ 3,444
Fixed assets 23
Identifiable intangible assets 7,860
Other assets 2
Current liabilities ( 3,915 )
Noncurrent liabilities ( 2,883 )
Total identifiable net assets acquired 4,531
Goodwill 12,635
Total consideration $ 17,166
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.
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, 2021.
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The following table presents details of the Company’s goodwill as of December 31, 2021 and 2020 ($ in thousands):
2021 2020
Balance as of January 1, $ 23,857 $ 23,857
Goodwill acquired 13,126 —
Balance as of December 31, $ 36,983 $ 23,857
On December 1, 2021, 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, 2021, no impairment of goodwill has been identified.
Intangible Assets
The following table presents details of the Company’s intangible assets as of December 31, 2021 ($ in thousands):
December 31, 2021
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 $ 35,874 $ ( 12,088 ) $ ( 1,513 ) $ 22,273 8.1
Customer relationships 21,898 ( 6,024 ) ( 1,210 ) 14,664 9.9
Commercialization rights 10,579 ( 2,030 ) — 8,549 7.6
Trademarks and tradenames 4,540 ( 988 ) ( 155 ) 3,397 9.5
Other 250 ( 188 ) — 62 0.2
Total intangible assets with finite lives 73,141 ( 21,318 ) ( 2,878 ) 48,945
Acquired in-process technology 1,250 — — 1,250
Total intangible assets $ 74,391 $ ( 21,318 ) $ ( 2,878 ) $ 50,195
The following table presents details of the Company’s intangible assets as of December 31, 2020 ($ 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
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 has the potential to 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, 2021.
In June 2021, the Company acquired commercialization rights in an exclusive partnership for comprehensive data analytics in relation to NGS-based metagenomics testing for infectious diseases. This is included within Commercialization rights as of December 31, 2021.
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In June 2021, the Company acquired the Transplant Hero patient application. The patient application is included in Acquired and developed technology as of December 31, 2021.
As of December 31, 2021, acquisition of intangible assets increased $ 13.4 million primarily from business combinations. These acquisitions included $ 4.7 million of Acquired and developed technology, $ 2.5 million of Commercialization rights, $ 3.7 million of Customer relationships, $ 2.2 million of Trademarks and tradenames and $ 0.3 million of Other intangible assets.
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 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 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 $ 5.8 million, $ 4.8 million and $ 3.6 million for the years ended December 31, 2021, 2020 and 2019, respectively. For the year ended December 31, 2021, $ 1.3 million, $ 1.9 million, $ 0.7 million and $ 1.9 million were amortized to cost of testing services, cost of product, cost of patient and digital solutions, and sales and marketing, 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 patient and digital solutions, 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 patient and digital solutions 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 patient and digital solutions, 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, 2021 (in thousands):
Years Ending December 31, Cost of Testing Services Cost of
Product
Cost of Patient and Digital Solutions Sales and
Marketing
Total
2022 $ 1,316 $ 1,855 $ 945 $ 2,261 $ 6,377
2023 1,316 1,855 945 2,188 6,304
2024 1,316 1,855 709 2,188 6,068
2025 1,316 1,855 540 2,187 5,898
2026 1,316 780 540 2,186 4,822
Thereafter 4,141 4,186 1,720 9,429 19,476
Total future amortization expense $ 10,721 $ 12,386 $ 5,399 $ 20,439 $ 48,945
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8. BALANCE SHEET COMPONENTS
Inventory
Inventory consisted of the following (in thousands):
December 31,
2021 2020
Finished goods $ 3,911 $ 1,702
Work in progress 2,828 2,936
Raw materials 10,447 5,374
Total inventory $ 17,186 $ 10,012
Property and Equipment, Net
Property and equipment consisted of the following (in thousands):
December 31,
2021 2020
Machinery and equipment $ 12,091 $ 9,325
Construction in progress 10,925 1,873
Leasehold improvements 8,466 8,096
Computer and office equipment 5,454 5,414
Internally developed software 3,746 2,312
Furniture and fixtures 943 683
Property and equipment 41,625 27,703
Less: Accumulated depreciation and amortization ( 19,581 ) ( 16,999 )
Property and equipment, net $ 22,044 $ 10,704
Depreciation expense was $ 2.7 million, $ 1.9 million and $ 1.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
There were no assets purchased under finance leases during 2021. Assets purchased under finance leases, included above in machinery and equipment, and computer and office equipment, were $ 0.6 million at December 31, 2020. Accumulated depreciation was $ 0.5 million and $ 0.4 million at December 31, 2021 and 2020, respectively. Related amortization expense, included in depreciation and amortization expense, was $ 0.1 million, $ 0.1 million and $ 0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Accrued and Other Liabilities
Accrued and other liabilities consisted of the following (in thousands):
December 31,
2021 2020
Clinical studies $ 10,653 $ 6,733
Professional fees 5,780 1,529
Deferred revenue 4,208 3,530
Short-term lease liability 3,958 2,033
Capital expenditures 2,612 —
Contingent consideration 2,114 738
Deferred payments for intangible assets 2,000 2,000
Accrued royalty 1,664 1,072
Test sample processing fees 1,197 416
Other accrued expenses 3,736 2,551
Total accrued and other liabilities $ 37,922 $ 20,602
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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 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 submitted a request to the appropriate Medicare Administrative Contractor and met 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 repaid 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; Columbus, Ohio; West Chester, Pennsylvania; Flowood, Mississippi; Fremantle, Australia; and Stockholm, Sweden.
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 was extended for a period of eight years and two months starting on January 1, 2021. The Company has determined that the amendment constituted 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, 2021, the carrying value of the ROU asset was $ 18.0 million. The related current and non-current liabilities as of December 31, 2021 were $ 4.0 million and $ 17.4 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 years ended December 31, (in thousands):
2021 2020 2019
Operating lease cost $ 5,134 $ 4,441 $ 1,993
Finance lease cost 53 205 218
Total lease cost $ 5,187 $ 4,646 $ 2,211
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) 5.99
Weighted-average remaining lease term - Finance leases (in years) 0.00
Weighted-average discount rate - Operating leases (%) 10.0 %
Weighted-average discount rate - Finance leases (%) — %
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Maturities of operating lease liabilities as of December 31, 2021, are as follows (in thousands):
Years ending December 31, Operating Leases
2022 $ 5,662
2023 4,332
2024 4,340
2025 4,067
2026 3,196
Thereafter 7,140
Total lease payments 28,737
Less imputed interest 7,385
Present value of future minimum lease payments 21,352
Less operating lease liability, current portion 3,958
Operating lease liability, long-term portion $ 17,394
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 that certain license and commercialization agreement that the Company entered into with Cibiltech SAS (“Cibiltech”) effective April 30, 2019, the Company will share an agreed-upon percentage of revenue with Cibiltech, if and when revenues are generated from iBox.
Tax Commitments
As of December 31, 2021, the Company had gross unrecognized tax benefits of $ 4.2 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.
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, and the Court granted Natera’s request. The trial date is currently set to start March 7, 2022.
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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. Trial is currently scheduled for July 24, 2023. 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.
United States Department of Justice and United States Securities and Exchange Commission Investigations
As previously disclosed, in 2021, the Company received a civil investigative demand (“CID”) from the United States Department of Justice (DOJ) requesting that the Company produce certain documents in connection with a False Claims Act investigation being conducted by the DOJ regarding certain business practices related to the Company's kidney testing and phlebotomy services, and a subpoena from the United States Securities and Exchange Commission (“SEC”) in relation to an investigation by the SEC in respect of matters similar to those identified in the CID, as well as certain of the Company's accounting and public reporting practices. The Company also received an information request from a state regulatory agency and may receive additional requests for information from the DOJ, SEC, or other regulatory and governmental agencies regarding similar or related subject matters. The Company does not believe that the CID, the SEC subpoena or the state regulatory agency information request raise any issues regarding the safety or efficacy of any of the Company's products or services and are cooperating fully with the investigations. Although the Company remains committed to compliance with all applicable laws and regulations, it cannot predict the outcome of the DOJ or SEC investigations, the state regulatory agency information request, or any other requests or investigations that may arise in the future regarding these or other subject matters.
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. STOCKHOLDERS’ EQUITY
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 could 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.
June 2020 Underwritten Public Offering of Common Stock
On June 15, 2020, the Company sold 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.
January 2021 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 offering expenses.
On February 11, 2021, the Company sold 288,461 shares of its common stock pursuant to the full exercise of the overallotment option granted to the underwriters in connection with the January 2021 offering. The net proceeds to the Company from the full exercise of the underwriters' overallotment option were approximately $ 24.7 million.
The Company did no t issue preferred stock during the years ended December 31, 2021, 2020 and 2019.
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11. 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 (the “Internal Revenue Code”). 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 $ 1.4 million, $ 0.7 million and $ 0.6 million for the years ended December 31, 2021, 2020 and 2019, respectively.
12. 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, 2021, warrants to purchase approximately 3,000 shares of common stock were exercised for cash proceeds of $ 4 thousand.
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.
As of December 31, 2021, 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 3,132
3,132
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13. 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 1,879,913 shares of common stock reserved for future issuance under the 2014 Plan as of December 31, 2021.
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, 2021.
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 123,864 shares of common stock reserved for future issuance under the 2019 Plan as of December 31, 2021.
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, 2020 672,968 2,670,398 $ 21.92 1,878,866 $ 28.42
Additional options authorized 1,977,647 — — — —
Common stock awards for services ( 3,984 ) — — — —
RSUs granted ( 1,159,947 ) — — 1,159,947 69.49
RSUs vested — — — ( 702,467 ) 26.70
Options granted ( 202,514 ) 202,514 79.35 — —
Options exercised — ( 753,383 ) 17.10 — —
Repurchases of common stock under employee incentive plans 237,774 — — — —
RSUs forfeited 288,689 — — ( 288,689 ) 43.81
Options forfeited 245,253 ( 245,253 ) 27.93 — —
Options expired 10,643 ( 10,643 ) 25.71 — —
Balance—December 31, 2021 2,066,529 1,863,633 $ 29.33 2,047,657 $ 50.21
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The total intrinsic value of options exercised was $ 42.9 million, $ 19.2 million and $ 15.1 million for the years ended December 31, 2021, 2020 and 2019, respectively.
The total fair value of RSUs vested during 2021 was $ 53.0 million. As of December 31, 2021, the total intrinsic value of outstanding RSUs was approximately $ 93.1 million and there were $ 81.5 million of unrecognized compensation costs related to RSUs, which are expected to be recognized over a weighted-average period of 3.05 years.
Options outstanding that have vested and are expected to vest at December 31, 2021 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 956,596 $ 20.30 6.60 $ 24,396
Expected to Vest 830,469 38.97 8.19 11,545
Total 1,787,065 $ 35,941
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, 2021 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, 2021, 2020 and 2019 using the Black-Scholes Model was $ 52.65 , $ 18.97 and $ 17.74 , respectively.
The total fair value of options that vested during 2021 was $ 11.7 million. As of December 31, 2021, there were approximately $ 19.5 million of unrecognized compensation costs related to stock options, which are expected to be recognized over a weighted-average period of 2.45 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 2021 that ended on June 30, 2021, 21,412 shares were purchased for aggregate proceeds of $ 1.3 million from the issuance of shares, which occurred on July 2, 2021. During the offering period in 2021 that ended on December 31, 2021, 25,852 shares were purchased for aggregate proceeds of $ 1.0 million from the issuance of shares, which occurred on January 6, 2022. The Company issued 45,464 shares and 76,723 shares of common stock during the years ended December 31, 2021 and December 31, 2020, respectively, pursuant to the ESPP. The Company received proceeds of $ 2.1 million and $ 1.4 million from the purchases of shares during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, the Company had 600,369 shares available for issuance under the ESPP.
Board of Directors Stock Awards Granted for Services
For the years ended December 31, 2021, 2020 and 2019, 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, 2021, there were a total of 269,067 shares issued to the Company’s directors, for a total fair value of $ 2.0 million. Stock-based compensation expense associated with the awards was $ 0.3 million, $ 0.3 million and $ 0.2 million for the years ended December 31, 2021, 2020 and 2019, respectively, which was included in general and administrative expense in the consolidated statements of operations.
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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,
2021 2020 2019
Employee stock options
Expected term (in years) 5.94 5.98 5.97
Expected volatility 77.70 % 75.56 % 70.78 %
Risk-free interest rate 0.80 % 0.69 % 2.32 %
Expected dividend yield — % — % — %
Employee stock purchase plan
Expected term (in years) 0.5 0.5 0.5
Expected volatility 53.10 % – 67.79 %
62.56 % – 93.17 %
70.80 % – 76.66 %
Risk-free interest rate 0.09 % – 0.19 %
0.17 % – 1.57 %
2.10 % – 2.51 %
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.
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, 2021, 2020 and 2019, included in the consolidated statements of operations as follows (in thousands):
Year Ended December 31,
2021 2020 2019
Cost of testing services $ 2,358 $ 1,493 $ 1,751
Cost of product 579 391 280
Cost of patient and digital solutions 728 449 152
Research and development 7,126 4,676 4,422
Sales and marketing 10,887 5,795 4,008
General and administrative 14,403 10,597 11,804
Total $ 36,081 $ 23,401 $ 22,417
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.
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14. INCOME TAXES
Loss before income taxes for the years ended December 31, 2021, 2020 and 2019 is summarized as follows (in thousands):
As of December 31,
2021 2020 2019
United States $ ( 27,921 ) $ ( 14,233 ) $ ( 19,386 )
Foreign ( 4,167 ) ( 5,517 ) ( 4,561 )
Total loss before income taxes $ ( 32,088 ) $ ( 19,750 ) $ ( 23,947 )
The components of the provision for (benefit from) income taxes are summarized as follows (in thousands):
As of December 31,
2021 2020 2019
Current
Federal $ 89 $ ( 58 ) $ ( 571 )
State 2 1 1
Foreign ( 139 ) 160 83
Total current income tax expense (benefit) ( 48 ) 103 ( 487 )
Deferred
Federal ( 409 ) 91 ( 558 )
State ( 127 ) ( 52 ) ( 47 )
Foreign ( 842 ) ( 1,178 ) ( 887 )
Total deferred income tax benefit ( 1,378 ) ( 1,139 ) ( 1,492 )
Income tax benefit $ ( 1,426 ) $ ( 1,036 ) $ ( 1,979 )
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 2021, 2020 and 2019, to loss before income taxes as a result of the following:
Year Ended December 31,
2021 2020 2019
Federal tax statutory rate 21.0 % 21.0 % 21.0 %
Stock-based compensation 38.8 % 13.5 % 9.9 %
Change in valuation allowance 86.4 % ( 34.4 ) % ( 16.6 ) %
Foreign rate differential 0.7 % 1.8 % 0.3 %
Warrant revaluation — % ( 1.7 ) % 0.3 %
Interest expense — % ( 0.3 ) % ( 0.2 ) %
Non-deductible executive compensation ( 23.4 ) % ( 6.8 ) % ( 7.6 ) %
Research credits 6.9 % 3.9 % 2.6 %
Changes in net operating loss carryforwards, including expirations ( 125.1 ) % 6.9 % ( 1.5 ) %
Other ( 0.9 ) % 1.2 % 0.1 %
Effective income tax rate 4.4 % 5.2 % 8.3 %
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Deferred income tax assets and liabilities consist of the following (in thousands):
As of December 31, 2021
2021 2020
Deferred tax assets:
Net operating loss carryforwards $ 30,234 $ 60,578
Tax credit carryforwards 7,185 8,507
Accruals 6,054 4,598
Property and equipment 1,043 1,047
Lease liability 4,639 4,408
Other 7,988 4,302
Gross deferred tax assets 57,143 83,440
Valuation allowance ( 45,635 ) ( 72,860 )
Total deferred tax assets 11,508 10,580
Deferred tax liabilities:
Purchased intangibles ( 7,439 ) ( 7,683 )
Operating leases right-of-use assets ( 3,828 ) ( 3,708 )
Other ( 656 ) ( 488 )
Total deferred tax liabilities ( 11,923 ) ( 11,879 )
Net deferred tax liabilities $ ( 415 ) $ ( 1,299 )
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 decreased by $ 27.2 million and increased by $ 8.4 million during the years ended December 31, 2021 and 2020, respectively.
As of December 31, 2021, the Company had domestic federal net operating loss carryforwards of $ 108.1 million, domestic state net operating loss carryforwards of $ 53.6 million, and foreign net operating loss carryforwards of $ 15.9 million that can reduce future taxable income. The domestic federal and state net operating loss carryforwards will begin to expire in 2033 and 2030, respectively. The foreign net operating loss carryforwards can be carried forward indefinitely.
As of December 31, 2021, the Company had credit carryforwards of approximately $ 4.3 million and $ 8.9 million available to reduce future taxable income, if any, for domestic federal and California state income tax purposes, respectively. The domestic federal credit carryforwards will begin to expire in 2033. California credits have no expiration date.
The Company has recorded a valuation allowance against its deferred tax assets at December 31, 2021 and 2020 because the Company's management believes that it is more likely than not that these assets will not be fully realized. The decrease in the valuation allowance of approximately $ 27.2 million in the year ended December 31, 2021 primarily relates to the loss of net operating loss carryforwards and research and development (“R&D”) credits due to Section 382 of the Internal Revenue Code and similar provisions under state law. Section 382 of the Internal Revenue Code and similar provisions under state law limit the utilization of U.S. and state net operating loss carryforwards following certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%. Based on the Company's analysis under Section 382, the Company believes that $ 158.4 million of its federal net operating loss carryforwards and $ 50.5 million of its state net operating loss carryforwards are limited by Section 382 and similar provisions under state law as of December 31, 2021 and have been written off in the year ended December 31, 2021. Due to limitations under Section 382, the Company believes that $ 3.9 million of its R&D credits will be limited as of December 31, 2021. The portion of R&D credits that were determined to be limited by Section 382 have been written off as of December 31, 2021. The remaining unused carryforwards and credits remain available for future periods. Due to the Company's full valuation allowance, the write off of net operating loss carryforwards and R&D credits did not have any impact to the statements of operations and comprehensive loss.
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A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands):
Year Ended December 31,
2021 2020 2019
Balance at the beginning of the year $ 4,416 $ 3,650 $ 3,449
Additions based on tax positions related to the current year 805 824 667
Additions based on tax positions related to prior years 130 — —
Decreases based on tax positions related to prior years ( 1,195 ) ( 58 ) ( 466 )
Balance at the end of the year $ 4,156 $ 4,416 $ 3,650
None of the $ 4.2 million of net unrecognized tax benefit as of December 31, 2021, if recognized, would impact the Company's effective tax rate. During the year ended December 31, 2021, 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, 2021 and December 31, 2020, 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 the 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.
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15. 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,
2021 2020 2019
Testing services revenue
United States $ 258,412 $ 163,221 $ 104,056
Rest of World 873 389 494
$ 259,285 $ 163,610 $ 104,550
Product revenue
United States $ 13,512 $ 9,219 $ 8,078
Europe 9,740 7,475 7,690
Rest of World 3,580 2,608 2,511
$ 26,832 $ 19,302 $ 18,279
Patient and digital solutions revenue
United States $ 10,085 $ 9,063 $ 4,062
Europe 82 87 100
Rest of World 113 132 77
$ 10,280 $ 9,282 $ 4,239
Total United States $ 282,009 $ 181,503 $ 116,196
Total Europe $ 9,822 $ 7,562 $ 7,790
Total Rest of World $ 4,566 $ 3,129 $ 3,082
Total $ 296,397 $ 192,194 $ 127,068
The following table summarizes long-lived assets, consisting of property and equipment, net, by geographic regions (in thousands):
December 31, 2021 December 31, 2020
Long-lived assets:
United States $ 21,444 $ 9,888
Europe 403 351
Rest of World 197 465
Total $ 22,044 $ 10,704
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.