CareDx, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CareDx, Inc. Index to Consolidated Financial Statements Page No. Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 84 Consolidated Balance Sheets 88 Consolidated Statements of Operations 89 Consolidated Statements of Comprehensive Loss 90 Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity 91 Consolidated Statements of Cash Flows 92 Notes to Consolidated Financial Statements 93 83 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of CareDx, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CareDx, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 27, 2023, expressed an adverse 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 Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Revenue Recognition - Testing Services Revenue — Refer to Note 2 to the consolidated financial statements Critical Audit Matter Description During the year ended December 31, 2022, the Company’s revenue from testing services was $263.7 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 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 an increased extent of effort, including the involvement of more experienced engagement team members, when performing audit procedures to evaluate the estimated transaction prices. 84 Table of Contents 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 2022. • 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. Impact on Financial Statements of Material Weaknesses in Internal Control Over Reporting - Refer to Management’s Report on Internal Control Over Financial Reporting Critical Audit Matter Description As discussed in Management’s Annual Report on Internal Control Over Financial Reporting, the Company identified material weaknesses across multiple components of the Internal Control – Integrated Framework (2013) issued by COSO. Because these material weaknesses impact the Company’s controls over information technology (IT) systems and business processes, affect substantially all financial statement account balances and disclosures, and required us to increase the extent of our audit effort, including the need to modify the nature and extent of audit evidence obtained, we have identified the impact to our audit procedures as a result of the material weaknesses as a critical audit matter. How the Critical Audit Matter Was Addressed in the Audit As a result of the material weaknesses, in performing our audit procedures we lowered the threshold for investigating differences between recorded amounts and independent expectations developed by us that we would have otherwise used, and increased the number of selections we would have otherwise made if the Company’s controls were designed and operating effectively. In addition, we performed additional procedures to test the completeness and accuracy of the information included in all system reports or information generated by the Company’s IT systems which were utilized for audit evidence. /s/ Deloitte & Touche LLP San Jose, California February 27, 2023 We have served as the Company's auditor since 2018. 85 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of CareDx, Inc. Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of CareDx, Inc. and subsidiaries (the “Company”) as of December 31, 2022, 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, because of the effect of the material weaknesses identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2022, 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, 2022, of the Company and our report dated February 27, 2023, 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. Material Weaknesses A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: General Information Technology Controls (GITCs) The Company did not design and maintain effective general information technology controls (“GITCs”) for information systems and applications that are relevant to the preparation of the consolidated financial statements. Specifically, the Company did not design and maintain: (i) sufficient user access controls to ensure appropriate segregation of duties, logical access controls to prevent unauthorized user access and adequately restrict user and privileged access to financial applications, programs and data to appropriate Company personnel; (ii) program change management controls to ensure that information technology (“IT”) program and data changes affecting financial IT 86 Table of Contents applications and underlying accounting records are identified, tested, authorized and implemented appropriately with appropriate segregation of duties; and (iii) computer and network operations controls to ensure that batch and interface jobs are monitored and privileges are appropriately granted, authorized and monitored. As a result, business process controls (automated and manual) that are dependent on the ineffective GITCs, or that rely on data produced from systems impacted by the ineffective GITCs, are also deemed ineffective, which affects substantially all financial statement accounts and disclosures. Purchase Order Approval Workflow The Company did not design and maintain effective process-level control activities related to procurement to ensure appropriate approval of purchase orders, which could affect the amount and classification of costs capitalized or expensed. COSO Framework The Company did not fully maintain components of the COSO framework, including elements of the control environment, information and communication, control activities and monitoring activities components, relating to: (i) sufficiency of competent personnel to perform internal control activities and support the achievement of the Company’s internal control objectives (ii) enforcing accountability of personnel for the performance of their internal control responsibilities across the organization in the pursuit of objectives (iii) designing and maintaining general control activities over technology to support the achievement of the Company’s internal control objectives;(iv) performing control activities in accordance with established policies in a timely manner; and (v) performing sufficient reviews of information to assess its relevance, accuracy, and completeness in supporting the internal control components. As such, the Company’s management concluded that the Company did not have an adequate process in place to complete its assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2022, of the Company, and this report does not affect our report on such financial statements. /s/ Deloitte & Touche LLP San Jose, California February 27, 2023 87 Table of Contents CareDx, Inc. Consolidated Balance Sheets (In thousands, except share data) As of December 31, 2022 2021 Assets Current assets: Cash and cash equivalents $ 89,921 $ 348,485 Marketable securities 203,168 — Accounts receivable 66,312 59,761 Inventory 19,232 17,186 Prepaid and other current assets 9,216 7,928 Total current assets 387,849 433,360 Property and equipment, net 35,529 22,044 Operating leases right-of-use assets 34,689 17,993 Intangible assets, net 43,051 50,195 Goodwill 37,523 36,983 Restricted cash 522 211 Other assets 3,828 5,835 Total assets $ 542,991 $ 566,621 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 9,942 $ 13,337 Accrued compensation 16,902 26,042 Accrued and other liabilities 49,131 37,922 Total current liabilities 75,975 77,301 Deferred tax liability — 415 Common stock warrant liability 32 139 Deferred payments for intangible assets 2,418 5,041 Operating lease liability, less current portion 33,406 17,394 Other liabilities 249 455 Total liabilities 112,080 100,745 Commitments and contingencies (Note 9) Stockholders’ equity: Preferred stock: $ 0.001 par value; 10,000,000 shares authorized at December 31, 2022 and 2021; no shares issued and outstanding at December 31, 2022 and 2021 — — Common stock: $ 0.001 par value; 100,000,000 shares authorized at December 31, 2022 and 2021; 53,583,301 and 52,923,360 shares issued at December 31, 2022 and 2021, respectively; 53,533,250 and 52,923,360 shares outstanding at December 31, 2022 and 2021, respectively 52 52 Additional paid-in capital 898,806 853,683 Accumulated other comprehensive loss ( 7,503 ) ( 4,670 ) Accumulated deficit ( 460,444 ) ( 383,189 ) Total stockholders’ equity 430,911 465,876 Total liabilities and stockholders’ equity $ 542,991 $ 566,621 The accompanying notes are an integral part of these consolidated financial statements. 88 Table of Contents CareDx, Inc. Consolidated Statements of Operations (In thousands, except share and per share data) Year Ended December 31, 2022 2021 2020 Revenue: Testing services revenue $ 263,748 $ 259,285 $ 163,610 Product revenue 29,251 26,832 19,302 Patient and digital solutions 28,794 10,280 9,282 Total revenue 321,793 296,397 192,194 Operating expenses: Cost of testing services 72,286 71,251 43,932 Cost of product 17,639 18,930 13,847 Cost of patient and digital solutions 22,287 7,208 5,338 Research and development 90,388 76,525 48,941 Sales and marketing 96,027 77,245 53,858 General and administrative 100,397 74,964 48,806 Total operating expenses 399,024 326,123 214,722 Loss from operations ( 77,231 ) ( 29,726 ) ( 22,528 ) Other income (expense): Interest income, net 3,762 160 271 Change in estimated fair value of common stock warrant liability 107 106 ( 1,495 ) CARES Act Provider Relief Fund — — 4,813 Other expense, net ( 2,872 ) ( 2,628 ) ( 811 ) Total other income (expense) 997 ( 2,362 ) 2,778 Loss before income taxes ( 76,234 ) ( 32,088 ) ( 19,750 ) Income tax (expense) benefit ( 379 ) 1,426 1,036 Net loss $ ( 76,613 ) $ ( 30,662 ) $ ( 18,714 ) Net loss per share (Note 3): Basic $ ( 1.44 ) $ ( 0.59 ) $ ( 0.40 ) Diluted $ ( 1.44 ) $ ( 0.59 ) $ ( 0.40 ) Weighted-average shares used to compute net loss per share: Basic 53,321,625 52,241,076 46,481,772 Diluted 53,321,625 52,241,076 46,481,772 The accompanying notes are an integral part of these consolidated financial statements. 89 Table of Contents CareDx, Inc. Consolidated Statements of Comprehensive Loss (In thousands) Year ended December 31, 2022 2021 2020 Net loss $ ( 76,613 ) $ ( 30,662 ) $ ( 18,714 ) Other comprehensive loss: Foreign currency translation adjustments, net of tax ( 2,833 ) ( 2,574 ) 3,109 Net comprehensive loss $ ( 79,446 ) $ ( 33,236 ) $ ( 15,605 ) The accompanying notes are an integral part of these consolidated financial statements. 90 Table of Contents CareDx, Inc. Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity (In thousands, except share amounts) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Stockholders’ Equity Shares Amount 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 employee stock purchase plan 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 employee stock purchase plan 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 Issuance of common stock under employee stock purchase plan 93,422 — 2,230 — — 2,230 Repurchase and retirement of common stock ( 50,051 ) — — — ( 642 ) ( 642 ) RSU settlements, net of shares withheld 411,176 — ( 6,067 ) — — ( 6,067 ) Issuance of common stock for services 12,764 — 319 — — 319 Issuance of common stock for cash upon exercise of stock options 142,579 — 2,435 — — 2,435 Employee stock-based compensation expense — — 46,206 — — 46,206 Foreign currency translation adjustment — — — ( 2,833 ) — ( 2,833 ) Net loss — — — — ( 76,613 ) ( 76,613 ) Balance at December 31, 2022 53,533,250 $ 52 $ 898,806 $ ( 7,503 ) $ ( 460,444 ) $ 430,911 The accompanying notes are an integral part of these consolidated financial statements. 91 Table of Contents CareDx, Inc. Consolidated Statements of Cash Flows (In thousands) Year Ended December 31, 2022 2021 2020 Operating activities: Net loss $ ( 76,613 ) $ ( 30,662 ) $ ( 18,714 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Stock-based compensation 46,553 36,081 23,401 Asset impairments and write-downs 840 2,437 — Depreciation and amortization 11,595 8,797 7,006 Amortization of right-of-use assets 4,412 3,088 2,538 Unrealized loss on long-term marketable equity securities 1,181 1,743 — Revaluation of common stock warrant liability to estimated fair value ( 107 ) ( 106 ) 1,495 Revaluation of contingent consideration to estimated fair value 727 ( 609 ) 309 Amortization of premium on short-term marketable securities, net 390 1,129 — Other non-cash items — ( 222 ) — Changes in operating assets and liabilities: Accounts receivable ( 6,660 ) ( 24,416 ) ( 10,402 ) Inventory ( 2,859 ) ( 6,927 ) ( 3,196 ) Prepaid and other assets ( 1,049 ) ( 5,144 ) ( 41 ) Accounts payable ( 2,054 ) 1,789 4,389 Accrued compensation ( 9,251 ) 7,516 5,737 Accrued and other liabilities 11,327 10,690 2,911 Operating lease liabilities, net ( 3,456 ) ( 2,603 ) ( 1,475 ) Refund liability - CMS advance payment — ( 20,496 ) 20,496 Change in deferred taxes ( 215 ) ( 1,379 ) ( 1,023 ) Net cash (used in) provided by operating activities ( 25,239 ) ( 19,294 ) 33,431 Investing activities: Maturities of short-term marketable securities 111,587 88,905 — Purchases of short-term marketable securities ( 315,145 ) — — Purchases of long-term marketable securities — ( 5,500 ) ( 90,034 ) Additions of capital expenditures ( 21,234 ) ( 13,559 ) ( 7,110 ) Acquisition of intangible assets ( 3,100 ) ( 6,700 ) ( 3,250 ) Acquisition of business, net of cash acquired ( 610 ) ( 15,434 ) — Net cash (used in) provided by investing activities ( 228,502 ) 47,712 ( 100,394 ) 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 Payment of contingent consideration ( 2,625 ) — — Principal payments on finance lease obligations — ( 66 ) ( 183 ) Repurchase and retirement of common stock ( 642 ) — — Proceeds from exercise of warrants — 4 352 Proceeds from exercise of stock options 2,435 12,775 8,006 Proceeds from issuance of common stock under employee stock purchase plan 2,230 2,139 1,368 Taxes paid related to net share settlement of restricted stock units ( 5,933 ) ( 18,065 ) ( 4,529 ) Net cash (used in) provided by financing activities ( 4,535 ) 185,642 163,149 Effect of exchange rate changes on cash and cash equivalents 23 ( 303 ) 274 Net (decrease) increase in cash, cash equivalents and restricted cash ( 258,253 ) 213,757 96,460 Cash, cash equivalents, and restricted cash at beginning of period 348,696 134,939 38,479 Cash, cash equivalents, and restricted cash at end of period $ 90,443 $ 348,696 $ 134,939 Supplemental disclosures of cash information Cash paid for interest $ 8 $ 1 $ 10 Cash paid for income taxes $ 392 $ 14 $ 80 Supplemental disclosures of cash flow information Shares issued in lieu of payment $ 319 $ 296 $ 315 Operating lease right-of-use assets $ 22,267 $ 6,079 $ 55 Purchases of capital expenditures in accounts payable and accrued liabilities $ 1,423 $ 3,953 $ 274 Employee stock purchase plan shares included in accrued compensation $ 686 $ 1,521 $ 800 Contingent consideration $ — $ 5,341 $ — The accompanying notes are an integral part of these consolidated financial statements. 92 Table of Contents CareDx, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND DESCRIPTION OF BUSINESS CareDx, Inc. (“CareDx” or the “Company”), together with its subsidiaries, is a leading precision medicine company focused on the discovery, development and commercialization of clinically differentiated, high-value diagnostic solutions for transplant patients and caregivers. The Company’s headquarters are in Brisbane, California. The primary operations are in Brisbane, California; Omaha, Nebraska; Fremantle, Australia; and Stockholm, Sweden. See also Note 16. 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. The Company also provides digital solutions to transplant centers following the acquisitions of Ottr Complete Transplant Management (“Ottr”) and XynManagement, Inc. (“XynManagement”), as well as the acquisitions of TransChart LLC (“TransChart”), MedActionPlan.com, LLC (“MedActionPlan”) and The Transplant Pharmacy, LLC (“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, the Company 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 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. 93 Table of Contents 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: 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 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 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 may 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 home-based blood draw solution using mobile phlebotomy for AlloSure and AlloMap surveillance tests, as well as for other standard monitoring tests. 94 Table of Contents There continues to be uncertainty around the COVID-19 pandemic as the Omicron variant, including its sub-variants, has periodically caused increases in COVID-19 cases globally, which in turn impacted the availability of medical personnel in transplant centers and the volume of transplant procedures. A sustained reduction in transplant volume can negatively impact the Company's testing volumes, as the Company saw in the early part of the first quarter of 2022. The Company's product business experienced a reduction in 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 continues to impact healthcare operations, the Company's field-based sales and clinical support teams are supporting providers through virtual platforms. In addition, the Company created, and continues to have, a COVID-19 task force that is responsible for crisis decision making, employee communications, and enforcing all safety, monitoring and testing protocols in line with local regulations. 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 $ 460.4 million at December 31, 2022. As of December 31, 2022, the Company had cash and cash equivalents and marketable securities of $ 293.1 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. Refer to Note 8, Balance Sheet Components, for further explanation. 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. 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 95 Table of Contents 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, 2022, 2021 and 2020, approximately 53 %, 59 % and 57 %, respectively, of total revenue was billed to Medicare. No other payers represented more than 10% of total revenue for the years ended December 31, 2022, 2021 and 2020. As of December 31, 2022 and 2021, approximately 27 % and 27 %, respectively, of accounts receivable was due from Medicare. No other payer represented more than 10% of accounts receivable at either December 31, 2022 or 2021. 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 $ 0.5 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, 2022, 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, net on the consolidated statements of 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, 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, 2022, the Company's long-term marketable securities consisted of corporate equity securities. The 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. Unrealized gains and losses from the reevaluation of the long-term marketable debt securities, if any, are included in other comprehensive gain (loss) in the consolidated statement of comprehensive income (loss). 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. 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 income (expense), net, in the consolidated statements of operations. 96 Table of Contents 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. Inventories are stated at the lower of actual purchased cost, determined on an average cost basis, on a first-in, first-out basis, or at 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 seven 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. 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 97 Table of Contents 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, 2022, 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, 2022, 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, 2022, 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 material impairment losses to date. 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 98 Table of Contents 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. The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company's facility leases. The Company also elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with an initial term of 12 months or less. 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, 2022, the Company’s leases had remaining terms of 0.92 years to 10.09 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, AlloSure Heart and AlloSure Lung 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, AlloSure Heart or AlloSure Lung 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 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 99 Table of Contents 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. The Company recognizes revenue from medication sales when prescriptions are delivered. 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 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. 100 Table of Contents 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 adopted 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 adopted 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 adopted the standard prospectively on 101 Table of Contents 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. 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, 2022, 2021 and 2020, 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, 2022 2021 2020 Numerator: Net loss used to compute basic net loss per share $ ( 76,613 ) $ ( 30,662 ) $ ( 18,714 ) Net loss used to compute diluted net loss per share $ ( 76,613 ) $ ( 30,662 ) $ ( 18,714 ) Denominator: Weighted-average shares used to compute basic net loss per share 53,321,625 52,241,076 46,481,772 Weighted-average shares used to compute diluted net loss per share 53,321,625 52,241,076 46,481,772 Net loss per share: Basic $ ( 1.44 ) $ ( 0.59 ) $ ( 0.40 ) Diluted $ ( 1.44 ) $ ( 0.59 ) $ ( 0.40 ) The following potentially dilutive securities have been excluded from diluted net loss per share because their effect would be antidilutive: Year Ended December 31, 2022 2021 2020 Shares of common stock subject to outstanding options 2,921,925 1,863,633 2,670,398 Shares of common stock subject to outstanding common stock warrants 3,132 3,132 6,264 Restricted stock units 3,092,467 2,047,657 1,878,866 Total common stock equivalents 6,017,524 3,914,422 4,555,528 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. 102 Table of Contents 4. FAIR VALUE MEASUREMENTS The Company records its financial assets and liabilities at fair value. The carrying amounts of certain financial instruments of the Company, including cash and cash equivalents, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The accounting guidance establishes a three-tiered hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value as follows: • Level 1: Inputs that include quoted prices in active markets for identical assets and liabilities. • Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following table sets forth the Company’s financial assets and liabilities, measured at fair value on a recurring basis, as of December 31, 2022 and 2021 (in thousands): December 31, 2022 Fair Value Measured Using (Level 1) (Level 2) (Level 3) Total Balance Assets Cash equivalents: Money market funds $ 66,594 $ — $ — $ 66,594 Long-term marketable securities: Corporate equity securities 2,076 — — 2,076 Total $ 68,670 $ — $ — $ 68,670 Liabilities Short-term liabilities: Contingent consideration $ — $ — $ 1,025 $ 1,025 Long-term liabilities: Contingent consideration — — 2,418 2,418 Common stock warrant liability — — 32 32 Total $ — $ — $ 3,475 $ 3,475 103 Table of Contents 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 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 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, 2020 $ 447 Exercise of warrants ( 202 ) Change in estimated fair value of common stock warrant liability ( 106 ) Change in estimated fair value of contingent consideration 5,341 Balance at December 31, 2021 5,480 Change in estimated fair value of common stock warrant liability ( 107 ) Additions to contingent consideration 727 Payment related to contingent consideration ( 2,625 ) Balance at December 31, 2022 $ 3,475 As of December 31, 2022, 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, 2022 and 2021, 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. 104 Table of Contents • 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, 2022. 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. • Common stock warrant liability — Common stock warrant liability is classified within Level 3. The Company utilizes intrinsic value to estimate the fair value of the warrants. The intrinsic value is computed as the difference between the fair value of the Company’s common stock on the valuation date and the exercise price of the warrants. Increases (decreases) in the Company's stock price discussed above result in a directionally similar impact to the fair value of the common stock warrant liability. Prior to fiscal year 2022, the Company utilized a binomial lattice pricing model (the “Monte Carlo Simulation Model”), which involves a market condition simulation to estimate the fair value of the warrants. The application of the Monte Carlo Simulation Model requires the use of a number of complex assumptions, including the Company’s stock price, expected life of the warrants, stock price volatility determined from the Company’s historical stock prices, and 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. The change in valuation method does not have material financial impact. Common Stock Warrant Liability Valuation Assumptions: December 31, 2022 2021 Private Placement Common Stock Warrant Liability Stock Price $ 11.41 $ 45.48 Exercise Price $ 1.12 $ 1.12 Remaining term (in years) 0.28 1.28 Volatility N/A 66.00 % Risk-free interest rate N/A 0.49 % Warrant liabilities exercised during 2021 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. There were no warrant liabilities exercised during 2022. 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. 105 Table of Contents 5. CASH AND MARKETABLE SECURITIES Cash, Cash Equivalents and Restricted Cash A reconciliation of cash, cash equivalents, and restricted cash reported within the consolidated balance sheets to the amount reported within the consolidated statements of cash flows is shown in the table below (in thousands): December 31, 2022 December 31, 2021 December 31, 2020 Cash and cash equivalents $ 89,921 $ 348,485 $ 134,669 Restricted cash 522 211 270 Total cash, cash equivalents, and restricted cash at the end of the period $ 90,443 $ 348,696 $ 134,939 Marketable Securities All short-term marketable securities were considered held-to-maturity at December 31, 2022. At December 31, 2022, 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, 2022. 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, 2022. The long-term marketable equity securities were recorded in the consolidated balance sheets at fair market value with changes in the fair value recognized in earnings at December 31, 2022. The long-term marketable debt securities were considered available-for-sale. The contractual maturity of the long-term marketable debt securities are less than three years. During 2022, the Company wrote off $ 0.5 million of long-term marketable debt securities. 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, 2022 Amortized Cost Unrealized Holding Gains (Losses) Fair Value Short-term marketable securities: U.S. agency securities $ 79,347 $ 452 $ 79,799 Corporate debt securities 123,821 ( 220 ) 123,601 Total short-term marketable securities 203,168 232 203,400 Long-term marketable securities: Corporate equity securities 5,000 ( 2,924 ) 2,076 Total long-term marketable securities 5,000 ( 2,924 ) 2,076 Total $ 208,168 $ ( 2,692 ) $ 205,476 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 ) $ 3,757 106 Table of Contents Contractual maturities of the marketable securities at each balance sheet date are as follows (in thousands): December 31, 2022 Within one year $ 203,168 After one year through five years — Total $ 203,168 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. 107 Table of Contents The following table summarizes the fair values of the intangible assets acquired as of the acquisition date ($ in thousands): Estimated Fair Value Estimated Useful Lives (Years) Customer relationships $ 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 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 for cash. 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. 108 Table of Contents 7. GOODWILL AND INTANGIBLE ASSETS Goodwill Goodwill is recorded when the purchase price of an acquisition exceeds the fair value of the net tangible and identified intangible assets acquired. Goodwill is tested annually for impairment at the reporting unit level during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances. There were no indicators of impairment in the year ended December 31, 2022. The following table presents details of the Company’s goodwill as of December 31, 2022 and 2021 (in thousands): 2022 2021 Balance as of January 1, $ 36,983 $ 23,857 Goodwill acquired 540 13,126 Balance as of December 31, $ 37,523 $ 36,983 On December 1, 2022, 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, 2022, no impairment of goodwill has been identified. Intangible Assets The following table presents details of the Company’s intangible assets as of December 31, 2022 ($ in thousands): December 31, 2022 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 $ 35,747 $ ( 15,138 ) $ ( 2,369 ) $ 18,240 7.5 Customer relationships 21,898 ( 7,459 ) ( 2,104 ) 12,335 9.0 Commercialization rights 11,579 ( 3,233 ) — 8,346 6.6 Trademarks and tradenames 4,540 ( 1,345 ) ( 315 ) 2,880 8.5 Total intangible assets with finite lives 73,764 ( 27,175 ) ( 4,788 ) 41,801 Acquired in-process technology 1,250 — — 1,250 Total intangible assets $ 75,014 $ ( 27,175 ) $ ( 4,788 ) $ 43,051 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 ) $ 50,195 109 Table of Contents Acquisition of intangible assets 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. During the year ended December 31, 2022, the Company incurred additional costs related to this partnership of $ 1.0 million. These are included within commercialization rights as of December 31, 2022. 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, 2022. In the fourth quarter of 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. Amortization of Intangible Assets 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 amortization expense of intangible assets (in thousands): Year Ended December 31, 2022 2021 2020 Cost of testing services $ 1,316 $ 1,316 $ 1,316 Cost of product 1,716 1,905 1,665 Cost of patient and digital solutions 945 684 345 Sales and marketing 2,252 1,891 1,472 Total $ 6,229 $ 5,796 $ 4,798 The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of December 31, 2022 (in thousands): Years Ending December 31, Cost of Testing Services Cost of Product Cost of Patient and Digital Solutions Sales and Marketing Total 2023 $ 1,316 $ 1,675 $ 945 $ 2,211 $ 6,147 2024 1,316 1,675 709 2,211 5,911 2025 1,316 1,675 540 2,211 5,742 2026 1,316 743 540 2,209 4,808 2027 1,316 743 540 2,195 4,794 Thereafter 2,825 3,294 1,180 7,100 14,399 Total future amortization expense $ 9,405 $ 9,805 $ 4,454 $ 18,137 $ 41,801 8. BALANCE SHEET COMPONENTS Inventory Inventory consisted of the following (in thousands): December 31, 2022 2021 Finished goods $ 2,962 $ 3,911 Work in progress 4,306 2,828 Raw materials 11,964 10,447 Total inventory $ 19,232 $ 17,186 110 Table of Contents Property and Equipment, Net Property and equipment consisted of the following (in thousands): December 31, 2022 2021 Leasehold improvements $ 17,389 $ 8,466 Machinery and equipment 16,294 12,091 Internally developed software 10,893 3,746 Construction in progress 7,639 10,925 Computer and office equipment 5,570 5,454 Furniture and fixtures 2,168 943 Property and equipment 59,953 41,625 Less: Accumulated depreciation and amortization ( 24,424 ) ( 19,581 ) Property and equipment, net $ 35,529 $ 22,044 Depreciation expense was $ 5.2 million, $ 2.7 million and $ 1.9 million for the years ended December 31, 2022, 2021 and 2020, respectively. There were no assets purchased under finance leases during 2022. Accumulated depreciation was $ 0.6 million and $ 0.5 million at December 31, 2022 and 2021, respectively. Related amortization expense, included in depreciation and amortization expense, was $ 0.1 million for each of the three years ended December 31, 2022, 2021 and 2020. Accrued and Other Liabilities Accrued and other liabilities consisted of the following (in thousands): December 31, 2022 2021 Clinical studies $ 14,816 $ 10,653 Professional fees 6,115 5,780 Short-term lease liability 5,591 3,958 Deferred revenue 5,342 4,208 Accrued royalty 4,633 1,664 Laboratory processing fees and materials 2,189 1,664 Deferred payments for intangible assets 2,062 2,000 Capital expenditures 1,316 2,612 Contingent consideration 1,025 2,114 License and other collaboration fees 1,000 — Accrued shipping expenses 489 668 Other accrued expenses 4,553 2,601 Total accrued and other liabilities $ 49,131 $ 37,922 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. 111 Table of Contents 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 Brisbane, California; Columbus, Ohio; West Chester, Pennsylvania; Flowood, Mississippi; Gaithersburg, Maryland; Omaha, Nebraska; Fremantle, Australia; and Stockholm, Sweden. The Company's facility leases expire at various dates through 2033. In 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, 2022, the carrying value of the ROU asset was $ 34.7 million. The related current and non-current liabilities as of December 31, 2022 were $ 5.6 million and $ 33.4 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): 2022 2021 2020 Operating lease cost $ 6,716 $ 5,134 $ 4,441 Finance lease cost — 53 205 Total lease cost $ 6,716 $ 5,187 $ 4,646 Finance lease cost included interest from the lease liability and amortization of the ROU asset. Other information: Weighted-average remaining lease term - Operating leases (in years) 6.26 Weighted-average discount rate - Operating leases (%) 7.1 % In February and June 2022, the Company entered into various lease agreements to lease office buildings in California, Nebraska, and Australia with lease terms ranging from 2 to 10.5 years. Certain leases have options to renew the lease terms ranging from 5 to 10 years. In June 2022, the Company modified the termination date of the lease agreement for its headquarters in South San Francisco, California from December 31, 2022 to July 15, 2022. As a result, the Company remeasured its lease liability using the current incremental borrowing rate and made an adjustment by reducing the ROU asset and lease liability by $ 0.5 million. Lease liabilities for the lease agreements made in February and June 2022 are recognized at the present value of the fixed lease payments using the current incremental borrowing rate at the lease commencement date. ROU assets are recognized based on the initial present value of the fixed lease payments. As of December 31, 2022, the ROU assets and lease liabilities for lease agreements which commenced in July 2022 aggregated to $ 14.3 million and $ 15.3 million, respectively. As of December 31, 2022, the ROU assets and lease liabilities for lease agreements which commenced in August 2022, amounted to $ 5.8 million and $ 6.0 million, respectively. Supplemental cash flow information related to leases for the years ended December 31, are as follows (in thousands) : 2022 2021 2020 Cash paid for amounts included in the measurement of lease liabilities Operating cash flows used for operating leases $ 3,665 $ 2,580 $ 934 Operating cash flows used for finance leases — 63 199 Total $ 3,665 $ 2,643 $ 1,133 112 Table of Contents Maturities of operating lease liabilities as of December 31, 2022, are as follows (in thousands): Years ending December 31, Operating Leases 2023 $ 7,807 2024 7,903 2025 7,651 2026 7,019 2027 7,166 Thereafter 10,605 Total lease payments 48,151 Less imputed interest 9,154 Present value of future minimum lease payments 38,997 Less operating lease liability, current portion 5,591 Operating lease liability, long-term portion $ 33,406 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, 2022, the Company had gross unrecognized tax benefits of $ 5.4 million, which include penalties and interest of $ 0.2 million. Approximately $ 0.2 million has been recorded as a noncurrent liability. At this time, the Company is unable to make a reasonably reliable estimate of the timing of payments in individual years in connection with these tax liabilities. Other Commitments Pursuant to the Illumina Agreement, the Company has agreed to minimum purchase commitments of finished products and raw materials from Illumina through 2023. 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 commenced on March 7, 2022 and concluded on March 14, 2022, with the jury awarding the Company $ 44.9 million in damages, comprised of $ 21.2 million in compensatory damages and $ 23.7 million in punitive damages. Post-trial motion practice remains pending. The Company will not record the award until cash is received or the matter is otherwise resolved. 113 Table of Contents On July 19, 2022, the United States Court of Appeals for the Federal Circuit affirmed the Court’s judgment dismissing the Company’s patent infringement suit against Natera. 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. This case was consolidated with the Company’s patent infringement suit on February 4, 2020. 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. On May 13, 2022, Natera filed two new complaints alleging that AlloSure infringes Natera’s U.S. Patents 10,655,180 and 11,111,544. These two cases were consolidated with the patent infringement case on June 15, 2022. On May 17, 2022, Natera agreed to dismiss the case alleging infringement of Natera’s U.S. Patent 10,526,658. On July 6, 2022, the Company moved to dismiss the rest of Natera’s claims. On September 6, 2022, the Company withdrew its motion to dismiss. 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. The state regulatory agency recently advised the Company that it has completed its review of the Company’s business practices and determined that no further information or action is required. In late 2022, the Company received a request for information from a separate state regulatory agency concerning specimen collection by a vendor in the state. The Company 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 and the request for information. 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. Olymbios Matter On April 15, 2022, a complaint was filed by Michael Olymbios against the Company in the Superior Court of the State of California for the County of San Mateo (the “San Mateo County Court”). The complaint alleges that the Company failed to pay certain fees and costs required to continue an arbitration proceeding against Dr. Olymbios, and that the Company has defamed Dr. Olymbios. Dr. Olymbios also seeks to void restrictive covenants previously agreed to by him in favor of the Company and to recover damages purportedly incurred by Dr. Olymbios. The Company filed a motion to compel arbitration and dismiss the case. On April 25, 2022, the San Mateo County Court granted the Company’s ex parte application to stay the case and advance the hearing date to June 10, 2022 for the motion to compel arbitration and dismiss. At the June 10, 2022 hearing, the San Mateo County Court found that the decision should be made by the arbitrator, and stayed the case. On July 19, 2022, Olymbios filed a motion to withdraw from arbitration before JAMS, which was denied on August 18, 2022. The arbitration hearing is currently set for June 26, 2023. The Company intends to defend itself vigorously. The Company believes it has good and substantial defenses to the claims alleged in the suit, but there is no guarantee that the Company will prevail if the case continues. The Company has not recorded any liabilities for this suit. Securities Class Action On May 23, 2022, Plumbers & Pipefitters Local Union #295 Pension Fund filed a federal securities class action in the U.S. District Court for the Northern District of California against the Company, Reginald Seeto, its President, Chief Executive 114 Table of Contents Officer and member of the Company’s Board of Directors, Ankur Dhingra, its former Chief Financial Officer, Marcel Konrad, its former interim Chief Financial Officer and former Senior Vice President of Finance & Accounting, and Peter Maag, its former President, former Chief Executive Officer, former Chairman of the Board and current member of the Company’s Board of Directors. The action alleges that the Company and the individual defendants made materially false and/or misleading statements and/or omissions and that such statements violated Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. The action also alleges that the individual defendants are liable pursuant to Section 20(a) of the Exchange Act as controlling persons of the Company. The suit seeks to recover damages caused by the alleged violations of federal securities laws, along with the plaintiffs’ costs incurred in the lawsuit, including their reasonable attorneys’ and experts’ witness fees and other costs. On August 25, 2022, the court appointed an investor group led by the Oklahoma Police Pension and Retirement System as lead plaintiffs and appointed Saxena White P.A. and Robbins Geller Rudman & Dowd LLP as lead counsels. Plaintiffs filed an amended complaints on November 28, 2022. On January 27, 2023, defendants moved to dismiss all claims and to strike certain allegations in the amended complaint. Plaintiffs’ opposition to the motion to dismiss and motion to strike is due on March 13, 2023, and defendants' reply is due on April 13, 2023. The Company intends to defend itself vigorously, and believes that the Company has good and substantial defenses to the claims alleged in the suit, but there is no guarantee that the Company will prevail. The Company has not recorded any liabilities for this suit. Derivative Action On September 21, 2022, Jeffrey Edelman brought a stockholder derivative action complaint in the U.S. District Court for the Northern District of California against the Company as nominal defendant and Reginald Seeto, its President, Chief Executive Officer and member of the Company’s Board of Directors, Ankur Dhingra, its former Chief Financial Officer, Peter Maag, its former President, former Chief Executive Officer, former Chairman of the Board and current member of the Company’s Board of Directors, and other current and former members of the Company’s Board of Directors (the “ Edelman Derivative Action ” ). The plaintiff alleges that the individual defendants breached their fiduciary duties as directors and/or officers of the Company and engaged in insider trading, waste of corporate assets, unjust enrichment and violations of Sections 14(a) and 20(a) of the Exchange Act. The action alleges that the individual defendants are liable pursuant to Section 20(a) of the Exchange Act as controlling persons of the Company. The suit seeks a declaration that the individual defendants breached their fiduciary duties to the Company, violated Sections 14(a) and 20(a) of the Exchange Act and were unjustly enriched, and also seeks to recover damages sustained by the Company as a result of the alleged violations, along with the plaintiff’s costs incurred in the lawsuit, including reasonable attorneys’ and experts’ fees, costs and expenses. On December 8, 2022, the court stayed the Edelman Derivative Action until twenty (20) days after the earlier of the following events: (a) the securities class action is dismissed in its entirety with prejudice; (b) the motion to dismiss in the securities class action is denied; (c) a joint request by plaintiff and defendants to lift the stay; (d) notification that a related derivative action that has been filed is not stayed or is no longer stayed; or (e) notification that there has been a settlement reached in the securities class action or any related derivative action. The Company intends to defend itself vigorously, and believes that the Company has good and substantial defenses to the claims alleged in the suit, but there is no guarantee that the Company will prevail. 10. STOCKHOLDERS’ EQUITY Stock Repurchase Program On December 3, 2022, the Company's Board of Directors approved a Stock Repurchase Program (the "Repurchase Program"), whereby the Company may purchase up to $ 50 million in shares of its common stock over a period of up to two years , commencing on December 8, 2022. The Repurchase Program may be carried out at the discretion of a committee of the Board of Directors through open market purchases, one or more Rule 10b5-1 trading plans, block trades and in privately negotiated transactions. In 2022, the Company purchased an aggregate of 50,051 shares of its common stock under the Repurchase Program for an aggregate purchase price of $ 0.6 million. As of December 31, 2022, $ 49.4 million remained available for future share repurchase under the Repurchase Program. See also Note 16. These shares were retired upon repurchase. The Company's policy related to repurchase of its common stock is to charge the excess of cost over par value to accumulated deficit. 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. 115 Table of Contents 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, 2022, 2021 and 2020. 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. The Company incurred expenses related to contributions to the plan of $ 1.8 million, $ 1.4 million and $ 0.7 million for the years ended December 31, 2022, 2021 and 2020, 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, 2022, no warrants to purchase shares of common stock were exercised. 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. As of December 31, 2022, 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 13. STOCK INCENTIVE PLANS 2014 Equity Incentive Plan The Company grants stock based awards under 2014 Equity Incentive 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 1,297,408 shares of common stock reserved for future issuance under the 2014 Plan as of December 31, 2022. 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, 2022. 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. 116 Table of Contents 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 130,302 shares of common stock reserved for future issuance under the 2019 Plan as of December 31, 2022. 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, 2021 2,066,529 1,863,633 $ 29.33 2,047,657 $ 50.21 Additional options authorized 2,116,934 — — — — Common stock awards for services ( 12,764 ) — — — — RSUs granted ( 2,397,369 ) — — 2,397,369 27.79 RSUs vested — — — ( 643,892 ) 42.59 Options granted ( 1,864,465 ) 1,864,465 28.35 — — Options exercised — ( 142,579 ) 17.07 — — Repurchases of common stock under employee incentive plans 211,265 — — — — RSUs forfeited 706,738 — — ( 706,738 ) 43.80 Options forfeited 554,427 ( 554,427 ) 34.12 — — Options expired 109,167 ( 109,167 ) 33.96 — — Balance—December 31, 2022 1,490,462 2,921,925 $ 28.13 3,094,396 $ 37.39 The total intrinsic value of options exercised was $ 1.6 million, $ 42.9 million and $ 19.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The total fair value of RSUs vested during 2022 was $ 20.0 million. As of December 31, 2022, the total intrinsic value of outstanding RSUs was approximately $ 37.1 million and there were $ 74.7 million of unrecognized compensation costs related to RSUs, which are expected to be recognized over a weighted-average period of 2.55 years. Options outstanding that have vested and are expected to vest at December 31, 2022 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 1,186 $ 25.39 5.72 $ 1,558 Expected to Vest 1,592 30.37 8.94 — Total 2,778 $ 1,558 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, 2022 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, 2022, 2021 and 2020 using the Black-Scholes Model was $ 19.51 , $ 52.65 and $ 18.97 , respectively. The total fair value of options that vested during 2022 was $ 10.6 million. As of December 31, 2022, there were approximately $ 27.7 million of unrecognized compensation costs related to stock options, which are expected to be recognized over a weighted-average period of 2.97 years. 117 Table of Contents 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 2022 that ended on June 30, 2022, 67,570 shares were purchased for aggregate proceeds of $ 1.2 million from the issuance of shares, which occurred on July 1, 2022. During the offering period in 2022 that ended on December 31, 2022, 47,025 shares were purchased for aggregate proceeds of $ 0.5 million from the issuance of shares, which occurred on January 2, 2023. The Company issued 93,422 shares and 45,464 shares of common stock during the years ended December 31, 2022 and December 31, 2021, respectively, pursuant to the ESPP. The Company received proceeds of $ 3.0 million and $ 2.1 million from the purchases of shares during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company had 640,847 shares available for issuance under the ESPP. Board of Directors Stock Awards Granted for Services For the years ended December 31, 2022, 2021 and 2020, 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, 2022, there were a total of 289,480 shares issued to the Company’s directors, for a total fair value of $ 2.3 million. Stock-based compensation expense associated with the awards was $ 0.4 million, $ 0.3 million and $ 0.3 million for the years ended December 31, 2022, 2021 and 2020, respectively, which was included in general and administrative expense in the consolidated statements of operations. 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, 2022 2021 2020 Employee stock options Expected term (in years) 5.96 5.94 5.98 Expected volatility 77.62 % 77.70 % 75.56 % Risk-free interest rate 2.74 % 0.80 % 0.69 % Expected dividend yield — % — % — % Employee stock purchase plan Expected term (in years) 0.5 0.5 0.5 Expected volatility 67.79 % – 77.88 % 53.10 % – 67.79 % 62.56 % – 93.17 % Risk-free interest rate 2.51 % – 4.76 % 0.09 % – 0.19 % 0.17 % – 1.57 % 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, 2022, 2021 and 2020, included in the consolidated statements of operations as follows (in 118 Table of Contents thousands): Year Ended December 31, 2022 2021 2020 Cost of testing services $ 1,529 $ 2,358 $ 1,493 Cost of product 1,120 579 391 Cost of patient and digital solutions 1,331 728 449 Research and development 7,391 7,126 4,676 Sales and marketing 14,403 10,887 5,795 General and administrative 20,779 14,403 10,597 Total $ 46,553 $ 36,081 $ 23,401 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. 119 Table of Contents 14. INCOME TAXES Loss before income taxes for the years ended December 31, 2022, 2021 and 2020 is summarized as follows (in thousands): As of December 31, 2022 2021 2020 United States $ ( 73,089 ) $ ( 27,921 ) $ ( 14,233 ) Foreign ( 3,145 ) ( 4,167 ) ( 5,517 ) Total loss before income taxes $ ( 76,234 ) $ ( 32,088 ) $ ( 19,750 ) The components of the provision for (benefit from) income taxes are summarized as follows (in thousands): As of December 31, 2022 2021 2020 Current Federal $ 145 $ 89 $ ( 58 ) State 328 2 1 Foreign 184 ( 139 ) 160 Total current income tax expense (benefit) 657 ( 48 ) 103 Deferred Federal ( 130 ) ( 409 ) 91 State 75 ( 127 ) ( 52 ) Foreign ( 223 ) ( 842 ) ( 1,178 ) Total deferred income tax benefit ( 278 ) ( 1,378 ) ( 1,139 ) Income tax expense (benefit) $ 379 $ ( 1,426 ) $ ( 1,036 ) 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 2022, 2021 and 2020, to loss before income taxes as a result of the following: Year Ended December 31, 2022 2021 2020 Federal tax statutory rate 21.0 % 21.0 % 21.0 % Stock-based compensation ( 2.8 ) % 38.8 % 13.5 % Change in valuation allowance ( 16.9 ) % 86.4 % ( 34.4 ) % Foreign rate differential ( 0.2 ) % 0.7 % 1.8 % Warrant revaluation — % — % ( 1.7 ) % Interest expense — % — % ( 0.3 ) % Non-deductible executive compensation ( 2.1 ) % ( 23.4 ) % ( 6.8 ) % Research credits 1.8 % 6.9 % 3.9 % Changes in net operating loss carryforwards, including expirations ( 0.5 ) % ( 125.1 ) % 6.9 % Other ( 0.8 ) % ( 0.9 ) % 1.2 % Effective income tax rate ( 0.5 ) % 4.4 % 5.2 % 120 Table of Contents Deferred income tax assets and liabilities consist of the following (in thousands): As of December 31, 2022 2022 2021 Deferred tax assets: Net operating loss carryforwards $ 26,658 $ 30,234 Tax credit carryforwards 9,138 7,185 Accruals 2,971 6,054 Property and equipment — 1,043 Lease liability 9,250 4,639 Section 174 capitalized costs 20,602 — Stock-based compensation 7,798 7,401 Other 959 587 Gross deferred tax assets 77,376 57,143 Valuation allowance ( 59,499 ) ( 45,635 ) Total deferred tax assets 17,877 11,508 Deferred tax liabilities: Purchased intangibles ( 6,615 ) ( 7,439 ) Operating leases right-of-use assets ( 8,189 ) ( 3,828 ) Property and equipment ( 2,548 ) — Other ( 497 ) ( 656 ) Total deferred tax liabilities ( 17,849 ) ( 11,923 ) Net deferred tax assets (liabilities) $ 28 $ ( 415 ) The Company assesses the realizability of its net deferred tax assets by evaluating all available evidence, both positive and negative, including (i) cumulative results of operations in recent years, (ii) sources of recent losses, (iii) estimates of future taxable income and (iv) the length of net operating loss carryforward periods. The Company believes that based on the history of its U.S. losses and other factors, the weight of available evidence indicates that it is more likely than not that it will not be able to realize its U.S. net deferred tax assets. The Company has also placed a valuation allowance on the net deferred tax assets of its Australian operations. Accordingly, the U.S. and Australia net deferred tax assets have been offset by a full valuation allowance. The valuation allowance increased by $ 13.9 million and decreased by $ 27.2 million during the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, the Company had domestic federal net operating loss carryforwards of $ 90.5 million, domestic state net operating loss carryforwards of $ 61.9 million, and foreign net operating loss carryforwards of $ 13.6 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, 2022, the Company had credit carryforwards of approximately $ 6.5 million and $ 10.2 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, 2022 and 2021 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 as of December 31, 2022, the Company believes that there are no additional ownership changes that would result in further adjustments to the $ 158.4 million of its federal net operating loss (“NOL”) carryforwards and $ 50.5 million of its state NOL carryforwards. $ 3.9 million of its R&D credit carryforwards were determined to be limited by Section 382 and similar provisions under state law as of December 31, 2021, and these amounts were written off in the year ended December 31, 2021. The remaining unused carryforwards and credits remain available for future periods. Due to the Company's full valuation 121 Table of Contents 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. A reconciliation of the Company’s unrecognized tax benefits is as follows (in thousands): Year Ended December 31, 2022 2021 2020 Balance at the beginning of the year $ 4,156 $ 4,416 $ 3,650 Additions based on tax positions related to the current year 1,255 805 824 Additions based on tax positions related to prior years 25 130 — Decreases based on tax positions related to prior years — ( 1,195 ) ( 58 ) Balance at the end of the year $ 5,436 $ 4,156 $ 4,416 None of the $ 5.4 million of net unrecognized tax benefit as of December 31, 2022, if recognized, would impact the Company's effective tax rate. During the year ended December 31, 2022, 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, 2022 and December 31, 2021, 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. 122 Table of Contents 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, 2022 2021 2020 Testing services revenue United States $ 262,959 $ 258,412 $ 163,221 Rest of World 789 873 389 $ 263,748 $ 259,285 $ 163,610 Product revenue United States $ 16,409 $ 13,512 $ 9,219 Europe 9,081 9,740 7,475 Rest of World 3,761 3,580 2,608 $ 29,251 $ 26,832 $ 19,302 Patient and digital solutions revenue United States $ 28,175 $ 10,085 $ 9,063 Europe 468 82 87 Rest of World 151 113 132 $ 28,794 $ 10,280 $ 9,282 Total United States $ 307,543 $ 282,009 $ 181,503 Total Europe $ 9,549 $ 9,822 $ 7,562 Total Rest of World $ 4,701 $ 4,566 $ 3,129 Total $ 321,793 $ 296,397 $ 192,194 The following table summarizes long-lived assets, consisting of property and equipment, net, by geographic regions (in thousands): December 31, 2022 December 31, 2021 Long-lived assets: United States $ 35,020 $ 21,444 Europe 405 403 Rest of World 104 197 Total $ 35,529 $ 22,044 123 Table of Contents 16. SUBSEQUENT EVENTS Business Combination In January 2023, the Company acquired a software system company based in the U.S. The acquisition will be accounted for as a business combination. The purchase price will be allocated to the assets acquired and liabilities assumed based upon their estimated fair values. The purchase price allocation will be determined when additional information becomes available. Restructuring Plan In January 2023, the Company announced a restructuring plan that is intended to optimize costs and simplify its organizational and corporate structure. The restructuring plan includes the discontinuation of its operations in Fremantle, Australia, terminating its employees in that location and vacating its facilities there. The Company expects to complete the closure of its Australia location in June 2024. Derivative Action On February 7, 2023, Jaysen Stevenson brought a stockholder derivative action complaint in the U.S. District Court for the Northern District of California against the Company as nominal defendant and Reginald Seeto, Ankur Dhingra, Peter Maag, and other current and former members of the Company’s Board of Directors (the “Stevenson Derivative Action”). The claims and allegations in the Stevenson Derivative Action are substantially similar to those in the Edelman Derivative Action. The plaintiff alleges that the individual defendants breached their fiduciary duties as directors and/or officers of the Company and engaged in insider trading, waste of corporate assets, unjust enrichment and violations of Sections 14(a) and 20(a) of the Exchange Act. The suit seeks declaratory relief and to recover alleged damages sustained by the Company as a result of the alleged violations, along with the plaintiff’s costs incurred in the lawsuit, including reasonable attorneys’ and experts’ fees, costs and expenses. The Company intends to defend itself vigorously, and believes the Company has good and substantial defenses to the claims alleged in this suit, but there is no guarantee that the Company will prevail. Stock Repurchase Subsequent to December 31, 2022 and through filing of this Annual Report on Form 10-K, the Company repurchased 25,622 shares of its common stock, for an aggregate purchase price of $ 13.53 per share , under the Repurchase Program. 124 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.