Guardant Health, Inc. 10-K

Item 8. Financial Statements and Supplementary Data Guardant Health, Inc. Index to Consolidated Financial Statements As of December 31, 2020 and 2019, and For the Years Ended December 31, 2020, 2019 and 2018 Page Report of Independent Registered Public Accounting Firm 95 Consolidated Balance Sheets 98 Consolidated Statements of Operations 100 Consolidated Statements of Comprehensive Loss 101 Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders' Equity 102 Consolidated Statements of Cash Flows 103 Notes to Consolidated Financial Statements 105 The supplementary financial information required by this Item 8 is included in Part II, Item 7 under the caption “ Quarterly Results of Operations ”, which is incorporated herein by reference. 94 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Guardant Health, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Guardant Health, Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive loss, redeemable noncontrolling interest and stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit 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 consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 95 Precision Oncology Revenue (testing services provided to ordering physicians) Description of the Matter For the year ended December 31, 2020, revenue recognized from Precision Oncology was $236.3 million. As described in Note 2 to the consolidated financial statements, the Company recognizes revenue from the performance of precision oncology tests for clinical customers upon delivery of test results to the ordering physician. As most precision oncology tests requested by customers are sold based on a physician requisition form without further written terms and conditions, the Company determined an implied contract exists with its patients and estimates variable consideration to be received for these services. Management estimates variable consideration based on historical payment data from third-party payers and patients adjusted for known and forecasted changes in payment patterns and subject to a constraint such that revenue recognized is not expected to be reversed. Auditing the Company’s estimate of total consideration expected to be received for the precision oncology tests is complex and requires significant judgement to evaluate management’s estimate of payments to be received for the tests. This estimate is affected by assumptions on coverage of the tests for the patient and experience with collection from third-party payors. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls that address the risks of material misstatement relating to the measurement of precision oncology revenues based upon estimating variable consideration. This included testing controls relating to management’s review of the significant assumptions described above and inputs used in the determination of the estimated amount that would be collected for tests performed during the period. We also tested controls over the current and historical data used by management in determining this estimate of variable consideration, subject to a constraint, including the completeness and accuracy of the data. Our audit procedures over the Company’s precision oncology revenue included, among others, assessing assumptions and inputs described above, testing the completeness and accuracy of the underlying data used by the Company in its analysis, including the constraint applied. We agreed the terms and conditions of the type of test (i.e. lung, non-lung, etc.) to be performed to the requisition forms submitted by the physician. We compared the significant assumptions and inputs used by management to the Company’s third-party payor collection trends and other relevant factors. This included testing inputs to the calculation by comparing historical information to source documents and evaluating the historical accuracy of management's estimates by comparing such estimates to actual results. 96 Valuation of Redeemable Non-Controlling Interest Description of the Matter As described in Note 3 to the consolidated financial statements, in May 2018, the Company entered into an agreement with an entity affiliated with SoftBank, a related party, to establish a Joint Venture to distribute the Company’s tests in certain markets outside the United States. The Company is consolidating the Joint Venture and as part of the accounting for the redeemable noncontrolling interest (“NCI”) held by Softbank, the Company is carrying the NCI at its fair value as the agreement has a put feature which contractually allows Softbank to return the NCI interest back to the Company. The fair value of the NCI was determined using two valuation models, the income approach and the market approach. Determining the fair value of the NCI requires judgment and the use of significant estimates and assumptions, such as, a discount rate and an exit multiple rate. The discount rate is applied to calculate the present value the expected future cash flows of the Joint Venture. The selection of exit multiple rate is used in establishing the value of an exit event (i.e. sale or initial public offering) of the Joint Venture. These significant estimates and assumptions are forward looking and could be affected by future economic and market conditions. At December 31, 2020, the Company’s non-controlling interest was $57.1 million. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of the Company’s controls over the fair value estimation of the NCI. We tested controls over the selection and application of the valuation models and the underlying significant estimates and assumptions noted above. To test the estimated fair value of the NCI, our audit procedures included, among others, involvement of our valuation specialist to assist us in the evaluation of the Company’s valuation methodology and testing of the significant estimates and assumptions. For example, we compared the discount rate to industry trends and market conditions and the exit multiple rate to the comparable public companies. We also compared the revenue forecast to evidence of approval by the Joint Venture board of directors. /s/ Ernst & Young LLP We have served as the Company’s auditor since 2015. Redwood City, California February 25, 2021 97 Guardant Health, Inc. Consolidated Balance Sheets (in thousands, except share and per share data) As of December 31, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 832,977 $ 143,228 Short-term marketable securities 961,903 379,574 Accounts receivable, net 53,299 47,986 Inventory 22,716 15,181 Prepaid expenses and other current assets, net 17,466 11,389 Total current assets 1,888,361 597,358 Long-term marketable securities 246,597 268,783 Property and equipment, net 62,782 43,668 Right-of-use assets 37,343 29,140 Intangible assets, net 16,155 8,524 Goodwill 3,290 3,290 Capitalized license fees 45 6,890 Other assets, net 17,208 4,882 Total Assets (1) $ 2,271,781 $ 962,535 LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,340 $ 16,197 Accrued compensation 28,280 18,557 Accrued expenses 22,639 25,703 Deferred revenue 8,550 12,277 Total current liabilities 66,809 72,734 Convertible senior notes, net 806,292 — Long-term operating lease liabilities 41,565 33,256 Obligation related to royalty — 6,880 Other long-term liabilities 1,520 1,672 Total Liabilities (1) 916,186 114,542 Commitments and contingencies (Note 10) 98 As of December 31, 2020 2019 Redeemable noncontrolling interest 57,100 49,600 Stockholders’ equity: Preferred stock, par value of $ 0.00001 per share; 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2020 and 2019 — — Common stock, par value of $ 0.00001 per share; 350,000,000 shares authorized as of December 31, 2020 and 2019; 100,213,985 and 94,261,414 shares issued and outstanding as of December 31, 2020 and 2019, respectively 1 1 Additional paid-in capital 1,902,389 1,150,090 Accumulated other comprehensive income 2,697 1,111 Accumulated deficit ( 606,592 ) ( 352,809 ) Total Stockholders’ Equity 1,298,495 798,393 Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity $ 2,271,781 $ 962,535 (1) As of December 31, 2020 and 2019, this balance includes $ 35.0 million and $ 45.1 million of assets, respectively, that can be used only to settle obligations of the consolidated variable interest entity (“VIE”) and VIE’s subsidiaries, and $ 4.9 million and $ 5.7 million of liabilities of the consolidated VIE and VIE’s subsidiaries, respectively, for which their creditors do not have recourse to the general credit of the Company. See Note 3, Investment in Joint Venture. The accompanying notes are an integral part of these consolidated financial statements. 99 Table of Contents Guardant Health, Inc. Consolidated Statements of Operations (in thousands, except per share data) Year Ended December 31, 2020 2019 2018 Revenue: Precision oncology testing (1) $ 236,324 $ 180,462 $ 78,407 Development services and other (1) 50,406 33,913 12,232 Total revenue 286,730 214,375 90,639 Costs and operating expenses: Cost of precision oncology testing 74,769 62,255 39,846 Cost of development services and other 17,766 8,465 3,364 Research and development expense 149,862 86,292 50,714 Sales and marketing expense 106,513 78,335 53,465 General and administrative expense 192,770 61,399 36,192 Total costs and operating expenses 541,680 296,746 183,581 Loss from operations ( 254,950 ) ( 82,371 ) ( 92,942 ) Interest income 10,171 13,741 5,266 Interest expense ( 4,766 ) ( 1,181 ) ( 1,251 ) Other income 3,641 88 4,702 Loss before provision for income taxes ( 245,904 ) ( 69,723 ) ( 84,225 ) Provision for (benefit from) income taxes 379 ( 1,872 ) 38 Net loss ( 246,283 ) ( 67,851 ) ( 84,263 ) Adjustment of redeemable noncontrolling interest ( 7,500 ) ( 7,800 ) ( 800 ) Net loss attributable to Guardant Health, Inc. common stockholders $ ( 253,783 ) $ ( 75,651 ) $ ( 85,063 ) Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted $ ( 2.60 ) $ ( 0.84 ) $ ( 2.80 ) Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted 97,504 90,597 30,403 (1) Fiscal year 2018 results do not reflect the impact of the adoption of the new revenue accounting standard in fiscal year 2019. The accompanying notes are an integral part of these consolidated financial statements. 100 Table of Contents Guardant Health, Inc. Consolidated Statements of Comprehensive Loss (in thousands) Year Ended December 31, 2020 2019 2018 Net loss $ ( 246,283 ) $ ( 67,851 ) $ ( 84,263 ) Other comprehensive income (loss), net of tax impact: Unrealized gain on available-for-sale securities 1,131 1,110 449 Foreign currency translation adjustments 455 84 — Other comprehensive income 1,586 1194 449 Comprehensive loss $ ( 244,697 ) $ ( 66,657 ) $ ( 83,814 ) Comprehensive loss attributable to redeemable noncontrolling interest ( 7,500 ) ( 7,800 ) ( 800 ) Comprehensive loss attributable to Guardant Health, Inc. $ ( 252,197 ) $ ( 74,457 ) $ ( 84,614 ) The accompanying notes are an integral part of these consolidated financial statements. 101 Guardant Health, Inc. Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (in thousands, except share data) Redeemable Noncontrolling Interest Convertible Preferred Stock Common Stock Additional Paid-in Capital Accumulated Other Comprehensive Gain (Loss) Accumulated Deficit Total Stockholders’ Equity Shares Amount Shares Amount Balance as of January 1, 2018 $ — 78,627,369 $ 499,974 11,896,882 $ — $ 4,900 $ ( 532 ) $ ( 195,736 ) $ 308,606 Conversion of convertible preferred stock to common stock upon initial public offering — ( 78,627,369 ) ( 499,974 ) 58,264,577 1 499,973 — — — Issuance of common stock upon initial public offering, net of offering costs of $ 4,475 — — — 14,375,000 — 249,531 — — 249,531 Issuance of common stock upon exercise of stock options — — — 963,119 — 2,905 — — 2,905 Issuance of common stock upon early exercise of stock options — — — 44,268 — — — — — Issuance of common stock upon exercise of warrants — — — 320,289 — 45 — — 45 Repurchase of common stock — — — ( 31,681 ) — ( 172 ) — — ( 172 ) Stock-based compensation — — — — — 6,851 — — 6,851 Issuance of equity interests in redeemable noncontrolling interest 41,000 — — — — — — — — Adjustment of redeemable noncontrolling interest 800 — — — — — — ( 800 ) ( 800 ) Other comprehensive gain, net of tax impact — — — — — — 449 — 449 Net loss — — — — — — — ( 84,263 ) ( 84,263 ) Balance as of December 31, 2018 41,800 — — 85,832,454 1 764,033 ( 83 ) ( 280,799 ) 483,152 Cumulative effect adjustment for Topic 606 adoption — — — — — — — 4,907 4,907 Cumulative effect adjustment for ASU 2018-07 adoption — — — — — 1,266 — ( 1,266 ) — Issuance of common stock upon follow-on offering, net of offering costs of $ 723 — — — 5,175,000 — 349,709 — — 349,709 Issuance of common stock upon exercise of stock options — — — 2,999,419 — 11,638 — — 11,638 Vesting of restricted stock units — — — 22,208 — — — — — Vesting of common stock exercised early — — — — — 95 — — 95 Common stock issued under employee stock purchase plan — — — 232,333 — 6,395 — — 6,395 Stock-based compensation — — — — — 16,954 — — 16,954 Adjustment of redeemable noncontrolling interest 7,800 — — — — — — ( 7,800 ) ( 7,800 ) Other comprehensive gain, net of tax impact — — — — — — 1,194 — 1,194 Net loss — — — — — — — ( 67,851 ) ( 67,851 ) Balance as of December 31, 2019 49,600 — — 94,261,414 1 1,150,090 1,111 ( 352,809 ) 798,393 Issuance of common stock upon follow-on offering, net of offering costs of $ 1,130 — — — 4,312,500 — 354,600 — — 354,600 Equity component of convertible senior notes, net — — — — — 330,403 — — 330,403 Purchase of convertible senior note hedges — — — — — ( 90,045 ) — — ( 90,045 ) Issuance of common stock upon exercise of stock options — — — 1,446,843 — 9,528 — — 9,528 Vesting of restricted stock units — — — 97,188 — — — — — Vesting of common stock exercised early — — — — — 52 — — 52 Common stock issued under employee stock purchase plan — — — 96,040 — 7,095 — — 7,095 Taxes paid related to net share settlement of restricted stock units — — — — — ( 3,447 ) — — ( 3,447 ) Stock-based compensation — — — — — 144,113 — — 144,113 Adjustment of redeemable noncontrolling interest 7,500 — — — — — — ( 7,500 ) ( 7,500 ) Other comprehensive gain, net of tax impact — — — — — — 1,586 — 1,586 Net loss — — — — — — — ( 246,283 ) ( 246,283 ) Balance as of December 31, 2020 $ 57,100 — $ — 100,213,985 $ 1 $ 1,902,389 $ 2,697 $ ( 606,592 ) $ 1,298,495 The accompanying notes are an integral part of these consolidated financial statements. 102 Table of Contents Guardant Health, Inc. Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2020 2019 2018 OPERATING ACTIVITIES: Net loss $ ( 246,283 ) $ ( 67,851 ) $ ( 84,263 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 16,065 11,411 7,136 Non-cash operating lease costs 5,567 4,409 — Charge of in-process research and development costs with no alternative future use 8,500 — — Unrealized translation gains on obligation related to royalty — ( 147 ) ( 357 ) Re-valuation of contingent consideration ( 120 ) 300 — Non-cash stock-based compensation 144,113 16,954 6,851 Amortization of debt discount and debt issuance costs 4,729 — — Amortization of premium (discount) on marketable securities 4,016 ( 2,310 ) ( 412 ) Benefit from income tax differences — ( 1,597 ) — Credit loss adjustment and others 7,151 — ( 13 ) Changes in operating assets and liabilities, net of effect of acquisition: Accounts receivable ( 5,463 ) ( 7,389 ) ( 22,903 ) Inventory ( 7,535 ) ( 6,045 ) ( 1,849 ) Prepaid expenses and other current assets ( 6,077 ) ( 6,185 ) ( 3,663 ) Other assets ( 19,326 ) ( 2,852 ) ( 451 ) Accounts payable ( 7,859 ) 4,341 5,046 Accrued compensation 9,723 5,571 8,075 Accrued expenses and other current liabilities ( 1,359 ) 9,289 286 Operating lease liabilities ( 6,042 ) ( 1,172 ) — Deferred rent — — 1,307 Deferred revenue ( 3,727 ) ( 3,861 ) 13,025 Net cash used in operating activities ( 103,927 ) ( 47,134 ) ( 72,185 ) INVESTING ACTIVITIES: Purchase of marketable securities ( 1,125,575 ) ( 614,290 ) ( 287,450 ) Maturity of marketable securities 562,548 325,333 154,625 Business acquisition, net of cash acquired — ( 7,328 ) — Purchase of property and equipment ( 36,173 ) ( 18,717 ) ( 20,203 ) Purchase of intangible assets and capitalized license obligations ( 17,886 ) ( 2,500 ) — Payment in connection with a license agreement — ( 68 ) — Net cash used in investing activities ( 617,086 ) ( 317,570 ) ( 153,028 ) FINANCING ACTIVITIES: Payments made on royalty obligations — ( 311 ) — Payments made on finance lease obligations ( 174 ) ( 127 ) ( 443 ) Proceeds from issuance of common stock under employee stock purchase plan 7,095 6,395 — Proceeds from issuance of common stock upon exercise of stock options 9,528 11,638 3,111 Proceeds from issuance of common stock upon the exercise of warrants — — 45 Taxes paid related to net share settlement of restricted stock units ( 3,447 ) — — 103 Table of Contents Year Ended December 31, 2020 2019 2018 Repurchase of common stock — — ( 172 ) Proceeds from public offerings of common stock 355,730 350,432 254,006 Payment of offering costs related to public offerings of common stock ( 1,130 ) ( 723 ) ( 4,386 ) Proceeds from borrowings on convertible senior notes, net 1,132,750 — — Purchase of convertible note hedges ( 90,045 ) — — Net proceeds from issuance of equity interests in redeemable noncontrolling interest — — 41,000 Net cash provided by financing activities 1,410,307 367,304 293,161 Net effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash 455 84 — Net increase in cash, cash equivalents and restricted cash 689,749 2,684 67,948 Cash, cash equivalents and restricted cash – Beginning of period 143,228 140,544 72,596 Cash and cash equivalents – End of period $ 832,977 $ 143,228 $ 140,544 Supplemental Disclosures of Cash Flow Information: Operating lease liabilities arising from obtaining right-of-use assets $ 13,123 $ 16,714 $ — Cash paid for interest $ — $ 1,181 $ 1,251 Cash paid for income taxes $ 331 $ 298 $ 102 Supplemental Disclosures of Noncash Investing and Financing Activities: Purchases of property and equipment included in accounts payable and accrued expenses $ 1,986 $ 4,818 $ 1,522 Vesting of common stock exercised early $ 52 $ 95 $ — Initial fair value of contingent consideration at acquisition date $ — $ 1,065 $ — Deferred offering costs included in accounts payable and accrued expenses $ — $ — $ 89 Debt issuance costs included in accounts payable and accrued expenses $ 784 $ — $ — Conversion of convertible preferred stock to common stock upon initial public offering $ — $ — $ 499,974 The accompanying notes are an integral part of these consolidated financial statements. 104 Table of Contents Guardant Health, Inc. Notes to Consolidated Financial Statements 1. Description of Business Guardant Health, Inc. (the “Company”) is a leading precision oncology company focused on helping conquer cancer globally through use of its proprietary blood tests, vast data sets and advanced analytics. The key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which the Company enables by a routine blood draw, or liquid biopsy. The Guardant Health Oncology Platform is designed to leverage the Company’s capabilities in technology, clinical development, regulatory and reimbursement to drive commercial adoption, accelerate drug development, improve patient clinical outcomes and lower healthcare costs. In pursuit of its goal to manage cancer across all stages of the disease, the Company has launched its Guardant360, Guardant 360 CDx, and GuardantOMNI liquid biopsy-based tests for advanced stage cancer and in February 2021, launched its Guardant Reveal liquid biopsy-based tests for residual and recurring cancer to first address the need in Stage II-III colorectal cancer, and is developing tests from its Guardant360 tissue program which aims to address challenges with tissue genotyping products currently available in the market and its LUNAR program which aim to address the needs of early stage cancer patients with neoadjuvant and adjuvant treatment selection, cancer survivors with surveillance, and asymptomatic individuals eligible for cancer screening and individuals at a higher risk for developing cancer with early detection. Using data collected from the Company's tests, the Company has also developed GuardantINFORM platform to further accelerate precision oncology drug development by biopharmaceutical companies by offering them an in-silico research platform to further unlock insights into tumor evolution and treatment resistance across various biomarker-driven cancers. The Company was incorporated in Delaware in December 2011 and is headquartered in Redwood City, California. In May 2018, the Company formed and capitalized Guardant Health AMEA, Inc. (the “Joint Venture”) in the United States with an affiliate of SoftBank Vision Fund (AIV M1) L.P. (“SoftBank”). Under the terms of the joint venture agreement, the Company held a 50 % ownership interest in the Joint Venture. As of December 31, 2020, the Joint Venture has subsidiaries in Singapore and Japan (see Note 3, Investment in Joint Venture) and the Company has a subsidiary in Switzerland which was incorporated in 2019. Approval of Amended and Restated Certificate of Incorporation In September 2018, the Company’s Board of Directors and stockholders approved an amended and restated certificate of incorporation, which authorized 350,000,000 shares of common stock and 10,000,000 shares of preferred stock. The amended and restated certificate of incorporation became effective on October 9, 2018. 2. Summary of Significant Accounting Policies Basis of Presentation The Company’s consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying consolidated financial statements include the accounts of Guardant Health, Inc. and its consolidated Joint Venture. Other stockholders’ interests in the Joint Venture are shown in the consolidated financial statements as redeemable noncontrolling interest. All significant intercompany balances and transactions have been eliminated in consolidation. The Company believes that its existing cash and cash equivalents and marketable securities as of December 31, 2020 will be sufficient to allow the Company to fund its current operating plan through at least a period of one year after the date the accompanying consolidated financial statements are issued. As the Company continues to incur losses, its transition to profitability is dependent upon a level of revenues adequate to support the Company’s cost structure. If the Company’s transition to profitability is not consistent with its current operating plan, the Company may have to seek additional capital. Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Estimates are used in several areas including, but not limited to, estimation of variable consideration, estimation of credit losses, standalone selling price allocation included in contracts with multiple performance obligations, the fair value of 105 Table of Contents assets acquired and liabilities assumed for business combinations, goodwill and identifiable intangible assets, stock-based compensation, contingencies, certain inputs into the provision for (benefit from) income taxes, including related reserves, valuation of redeemable noncontrolling interest, among others. These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates. The extent to which the coronavirus 2019, or COVID-19 pandemic will ultimately impact the Company’s business, results of operations, financial conditions, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside the Company’s control, such as the duration, scope and severity of the pandemic, steps required or mandated by governments to mitigate the impact of the pandemic, and whether COVID-19 can be effectively prevented, detected, contained and treated, particularly in the markets where the Company operates. JOBS Act Accounting Election Effective December 31, 2019, the Company is no longer an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). Foreign Currency Translation The functional currency of the subsidiaries of the consolidated Joint Venture is the local currency. The assets and liabilities of the subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date, with the resulting translation adjustments recorded to a separate component of accumulated other comprehensive loss within stockholders’ equity. Income and expense accounts are translated at average exchange rates during the period. Foreign currency transaction gains and losses resulting from transactions denominated in a currency other than the functional currency are recognized in the consolidated statements of operations. For the year ended December 31, 2020, 2019 and 2018, foreign currency translation adjustment was immaterial. Segment Information The Company operates as one operating and reportable segment. The Company’s chief operating decision makers, the Chief Executive Officer, and the President and Chief Operating Officer, manage the Company’s operations on an aggregate basis for purposes of allocating resources. Cash and Cash Equivalents and Restricted Cash Cash equivalents consist of highly liquid investments with original maturities at the time of purchase of three months or less. Cash equivalents include bank demand deposits and money market accounts that invest primarily in U.S. government-backed securities and treasuries. Cash equivalents are carried at cost, which approximates their fair value. The Company did no t have any restricted cash as of December 31, 2020 and 2019. Marketable Securities Marketable securities consist primarily of high-grade U.S. government and agency securities and corporate bonds. Marketable securities with original maturities at the time of purchase between three and twelve months from balance sheet dates are classified as short-term marketable securities and those with maturities over twelve months from balance sheet dates are classified as long-term marketable securities. The Company classifies all marketable securities as available-for-sale, which are recorded at fair value. Unrealized gains and losses are included in accumulated other comprehensive gain (loss) in stockholders’ equity. Any premium or discount arising at purchase is amortized or accreted to interest income or expense. The Company periodically evaluates its available-for-sale marketable securities for impairment. Prior to the adoption of Accounting Standards Update ("ASU") 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments , the Company assesses whether declines in fair values of its marketable securities below their book value are other-than-temporary. This evaluation consists of several qualitative and quantitative factors regarding the severity and duration of the unrealized loss as well as the Company’s ability and intent to hold the marketable security until a forecasted recovery occurs. Additionally, the Company assesses whether it has plans to sell the security or it is more likely than not that it will be required to sell any marketable securities before recovery of its amortized cost basis. Factors considered include quoted market prices, recent financial results and operating trends, implied values from any recent transactions or offers of investee securities, credit quality of debt instrument issuers, other publicly available information that may affect the value of the marketable security, duration and severity of the decline in value, and management’s strategy and intentions for 106 Table of Contents holding the marketable security. Realized gains and losses and declines in value, if any, judged to be other than temporary on available‑for‑sale securities are reported in other income (expense), net on the consolidated statements of operations. When securities are sold, any associated unrealized gain or loss initially recorded as a separate component of stockholders’ equity is reclassified out of stockholders’ equity on a specific‑identification basis and recorded in earnings for the period. Starting January 1, 2020, upon adoption of ASU 2016-13, when the fair value of a marketable security is below its amortized cost, the amortized cost is reduced to its fair value if it is more likely than not that the Company is required to sell the impaired security before recovery of its amortized cost basis, or the Company has the intention to sell the security. If neither of these conditions are met, the Company determines whether the impairment is due to credit losses by comparing the present value of the expected cash flows of the security with its amortized cost basis. The amount of impairment recognized is limited to the excess of the amortized cost over the fair value of the security. An allowance for credit losses for the excess of amortized cost over the expected cash flows is recorded in other income (expense), net on the consolidated statements of operations. Impairment losses that are not credit-related are included in accumulated other comprehensive gain (loss) in stockholders’ equity. Concentration of Risk The Company is subject to credit risk from its portfolio of cash equivalents held at one commercial bank and investments in marketable securities. The Company limits its exposure to credit losses by investing in money market funds through a U.S. bank with high credit ratings. The Company’s cash may consist of deposits held with banks that may at times exceed federally insured limits, however, its exposure to credit risk in the event of default by the financial institution is limited to the extent of amounts recorded on the consolidated balance sheets. The Company performs evaluations of the relative credit standing of these financial institutions to limit the amount of credit exposure. The Company also invests in investment‑grade debt instruments and has policy limits for the amount it can invest in any one type of security, except for securities issued or guaranteed by the U.S. government. The goals of the Company’s investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after‑tax rate of return. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, investment type and issuer, as a result, the Company is not exposed to any significant concentrations of credit risk from these financial instruments. The Company is subject to credit risk from its accounts receivable. The majority of the Company’s accounts receivable arises from the provision of precision oncology services and development services in the United States and are primarily with biopharmaceutical companies with high credit ratings. The Company has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Accounts receivable are recorded at net amounts. A significant customer is a biopharmaceutical customer or a clinical testing payer that represents 10% or more of the Company’s total revenue or accounts receivable balance. Revenue attributable to each significant customer, including its affiliated entities, as a percentage of the Company’s total revenue, for the respective period, and accounts receivable balance attributable to each significant customers, including its affiliated entities, as a percentage of the Company’s total accounts receivable balance, at the respective consolidated balance sheet date, are as follows: Revenue Accounts Receivable Year Ended December 31, As of December 31, 2020 2019 2018 2020 2019 Customer A 10 % 26 % 18 % 11 % 40 % Customer B 25 % 14 % * 13 % * Customer C * * * * 10 % Customer D * * * 12 % * Customer E * * * 11 % * * less than 10% 107 Table of Contents The Company is also subject to credit risk from its other receivables and other assets. The Company's other receivables and other assets include payments due from a third-party in relation to the settlement of a patent dispute reached in August 2020 for $ 8.0 million payable over a period of 6 years. In December 2020, the Company received the first installment payment of $ 1.0 million and recorded a gain in other income (expense), net on the consolidated statements of operations. The Company has evaluated and recorded a credit loss for the remaining $ 7.0 million considering the third-party's credit worthiness and lack of collection history. The following table presents the receivable and the related credit loss amounts: Gross Amount Allowance for Credit Losses Net Amount December 31, 2020 December 31, 2019 Year Ended December 31, 2020 December 31, 2020 December 31, 2019 Beginning Balance Charged to (Reversed from) Other Income (Expense), Net Ending Balance (in thousand) Prepaid expenses and other current assets $ — $ — $ — $ — $ — $ — $ — Other assets 7,000 — — ( 7,000 ) ( 7,000 ) — — Accounts Receivable, Net Accounts receivable represent valid claims against biopharmaceutical companies, research institutes and international distributors. The Company evaluates the collectability of its accounts receivable based on historical collection trends, the financial condition of payment partners, and external market factors and provides for an allowance for potential credit losses based on management’s best estimate of the amount of probable credit losses. As of December 31, 2020 and 2019, the Company had immaterial allowance for credit losses related to its accounts receivable. Inventory Inventories are stated at the lower of cost or net realizable value on a first-in, first-out basis. Inventory consisted entirely of supplies, which are consumed when providing liquid biopsy tests, and therefore the Company does not maintain any finished goods inventory. In order to assess the ultimate realization of inventories, the Company is required to make judgments as to future demand requirements compared to current or committed inventory levels. The Company periodically reviews its inventories for excess or obsolescence and writes-down obsolete or otherwise unmarketable inventory to its estimated net realizable value. If the actual net realizable value is less than that estimated by the Company, or if it is determined that inventory utilization will further diminish based on estimates of demand, additional inventory write-downs may be required. Amounts written-down due to unmarketable inventory are recorded in cost of precision oncology testing and cost of development services and other, as appropriate. Property and Equipment, Net Property and equipment are recorded at cost. Depreciation is computed over estimated useful lives of the related assets using the straight-line method. Leasehold improvements are amortized using the straight-line method over the estimated useful lives of the assets or the remaining term of the lease, whichever is shorter. The Company periodically reviews the depreciable lives assigned to property and equipment placed in service and changes the estimates of useful lives, if necessary. Maintenance and repairs that do not improve or extend the lives of the respective assets are expensed as incurred. Estimated useful lives for property and equipment are as follows: Property and Equipment Estimated Useful Life Machinery and equipment 3 – 5 years Furniture and fixtures 7 years Computer hardware and computer software 3 years Leasehold improvements Lesser of estimated useful life or remaining lease term 108 Table of Contents Business Combinations The Company includes the results of operations of the businesses that are acquired as of the acquisition date. The Company allocates the purchase price of acquisitions to the assets acquired and liabilities assumed based on the estimated fair values. The excess of the purchase price over the fair values of the identifiable assets and liabilities is recorded as goodwill. Acquisition related costs are recognized separately from the business combination and are expensed as incurred. Asset Acquisition If an acquisition of an asset or group of assets does not meet the definition of a business, the transaction is accounted for as an asset acquisition rather than a business combination. An asset acquisition does not result in the recognition of goodwill and transaction costs are capitalized as part of the cost of the asset or group of assets acquired. Transaction costs allocated to in-process research and development technology with no future alternate use is expensed as incurred. The total consideration is allocated to the various intangible assets acquired on a relative fair value basis. Cash paid in connection of purchase of in-process research and development technology in an asset acquisition is presented within the investing activities of the consolidated statement of cash flows. Goodwill and Intangible Assets, net Intangible assets related to in-process research and development costs (“IPR&D”) are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, 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. Prior to completion of the research and development efforts, the assets are considered indefinite-lived. During this period, the assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts. Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill and IPR&D are not amortized but are tested for impairment at least annually during the fourth fiscal quarter, or if circumstances indicate their value may no longer be recoverable. The Company continues to operate in one segment, which is considered to be the sole reporting unit and, therefore, goodwill was tested for impairment at the enterprise level. As of December 31, 2020, there has been no impairment of goodwill. Intangible assets are carried at cost, net of accumulated amortization. The Company does not have intangible assets with indefinite useful lives other than goodwill and the acquired IPR&D. Amortization is recorded on a straight-line basis over the intangible asset's useful life, which is approximately 6 — 12 years. Obligation Related to Royalty Certain of the Company’s asset acquisitions involve the potential for future payment of consideration that is contingent upon the royalty payments due on future product net sales, subject to annual minimums. The fair value of such liabilities is determined at the acquisition date using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. In March 2020, after the settlement of an arbitration and patent license acquisition as discussed in Note 6, Acquisitions , the Company no longer has such royalty obligations. Impairment for Long-Lived Assets The Company evaluates long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. Leases The Company determines if an arrangement contains a lease at inception. Operating lease right-of-use (“ROU”) assets and operating leases liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received or receivable. The Company uses its incremental borrowing rate based on the information available at the commencement date in 109 Table of Contents determining the lease liabilities, as the Company's leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain the option will be exercised. Lease expense is recognized on a straight-line basis over 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 terms of 12 months or less. Convertible Senior Notes In accounting for the issuance of the convertible senior notes, the Company separates the notes into liability and equity components. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated convertible feature, using a discounted cash flow model with a risk adjusted yield. The carrying amount of the equity component representing the conversion option is determined by deducting the fair value of the liability component from the par value of the notes as a whole. This difference represents a debt discount that is amortized to interest expense using the effective interest method over the term of the notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the transaction costs related to the issuance of the notes, the Company allocated the total amount incurred to the liability and equity components based on their relative fair values. Transaction costs attributable to the liability component are netted with the liability component and amortized to interest expense using the effective interest method over the term of the notes. Transaction costs attributable to the equity component are netted with the equity component of the notes in additional paid-in capital in the consolidated balance sheets. Revenue Recognition under ASC 606 The Company derives revenue from the provision of precision oncology testing services provided to its ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to its biopharmaceutical customers. Precision oncology testing services include genomic profiling and the delivery of other genomic information derived from the Company’s platform. Development services and other include companion diagnostic development, clinical trial setup, monitoring and maintenance, information solutions and laboratory services, and other miscellaneous revenue streams. The Company currently receives payments from third-party commercial and governmental payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies and research institutes. Effective January 1, 2019, the Company adopted the new revenue recognition standard Financial Accounting Standards Board (“FASB") ASC Topic 606, Revenue from Contracts with Customers, or ASC 606 . Revenues are recognized when control of services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. ASC 606 provides for a five-step 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. Precision oncology testing The Company recognizes revenue from the sale of its precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians. Most precision oncology tests requested by clinical customers are sold without a written agreement; however, the Company determines an implied contract exists with its clinical customers. The Company identifies each sale of its liquid biopsy test to clinical customer as a single performance obligation. With the exception of certain limited contracted arrangements with insurance carriers and other institutions where the transaction price is fixed, a stated contract price does not exist and the transaction price for each implied contract with clinical customers represents variable consideration. The Company estimates the variable consideration under the portfolio approach and considers the historical reimbursement data from third-party commercial and governmental payers and patients, as well as known or anticipated reimbursement trends not reflected in the historical data. The Company monitors the estimated amount to be collected in the portfolio at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the estimate and any subsequent revision contain uncertainty and require the use of significant judgment in the estimation of the variable consideration and application of the constraint for such variable consideration. The Company analyzes its actual cash collections over the expected reimbursement period and compares it with the estimated variable consideration for each portfolio and any difference is recognized as an adjustment to estimated revenue after the expected reimbursement period, subject to assessment of the risk of future revenue reversal. For the year ended December 31, 2020 and 2019, the Company recorded $ 26.0 million and $ 16.8 million as revenue, respectively, resulting from cash 110 Table of Contents collections over the expected reimbursement period exceeding the estimated variable consideration related to samples processed in the previous years, including revenue received from successful appeals of reimbursement denials. Revenue from sales of precision oncology tests to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume over a defined period. The Company identifies its promise to transfer a series of distinct liquid biopsy tests to biopharmaceutical customers as a single performance obligation. Precision oncology tests to biopharmaceutical customers are generally billed at a fixed price for each test performed. For agreements involving testing volume to be satisfied over a defined period, revenue is recognized over time based on the number of tests performed as the performance obligation is satisfied over time. Results of the Company’s precision oncology services are delivered electronically, and as such there are no shipping or handling fees incurred by the Company or billed to customers. Development services and other The Company performs development services for its biopharmaceutical customers utilizing its precision oncology information platform. Development services typically represent a single performance obligation as the Company performs a significant integration service, such as analytical validation and regulatory submissions. The individual promises are not separately identifiable from other promises in the contracts and, therefore, are not distinct. However, under certain contracts, a biopharmaceutical customer may engage the Company for multiple distinct development services which are both capable of being distinct and separately identifiable from other promises in the contracts and, therefore, distinct performance obligations. The Company collaborates with pharmaceutical companies in the development of new drugs. As part of these collaborations, the Company provides services related to regulatory filings to support companion diagnostic device submissions for the Company’s liquid biopsy panels. Under these collaborations, the Company generates revenue from achievement of milestones, as well as provision of on-going support. For development services performed, the Company is compensated through a combination of an upfront fee and performance-based, non-refundable regulatory and other developmental milestone payments. The transaction price of the Company's development services contracts typically represents variable consideration. Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be managed to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone. In making this assessment, the Company considers its historical experience with similar milestones, the degree of complexity and uncertainty associated with each milestone, and whether achievement of the milestone is dependent on parties other than the Company. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is assessed and updated at each reporting period as a revision to the estimated transaction price. The Company recognizes development services over the period in which biopharmaceutical research and development services are provided. Specifically, the Company recognizes revenue using an input method to measure progress, utilizing costs incurred to-date relative to total expected costs as its measure of progress. The Company assesses the changes to the total expected cost estimates as well as any incremental fees negotiated resulting from changes to the scope of the original contract in determining the revenue recognition at each reporting period. The Company revised and increased its total estimated costs relating to one of the development services contracts during the year ended December 31, 2020. Had the Company included such additional costs in the original estimated costs, revenues for the year ended December 31, 2019 would have been lower by $ 1.8 million. For development of new products or services under these arrangements, costs incurred before technological feasibility is reached are included as research and development expenses in the Company’s consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services and other. The Company also has other miscellaneous revenue streams that are recognized in addition to development services noted above such as clinical trial setup, monitoring and maintenance, referral fees, liquid biopsy testing development and support, GuardantConnect, GuardantINFORM and Guardant-19, and kits fulfillment related revenues. Revenues related to clinical trial setup, monitoring and maintenance, referral fees, liquid biopsy testing development and support, GuardantConnect, GuardantINFORM are generally recognized overtime based on an input method to measure progress in the period when the associated services have been performed. Guardant-19 and kits fulfillment related revenues are recognized when such products are delivered. 111 Table of Contents Contracts with multiple performance obligations Contracts with biopharmaceutical customers may include multiple distinct performance obligations, such as provision of precision oncology testing, biopharmaceutical research and development services, and clinical trial enrollment assistance, among others. The Company evaluates the terms and conditions included within its contracts with biopharmaceutical customers to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together. The Company first identifies material promises, in contrast to immaterial promises or administrative tasks, under the contract, and then evaluates whether these promises are both capable of being distinct and distinct within the context of the contract. In assessing whether a promised service is capable of being distinct, the Company considers whether the customer could benefit from the service either on its own or together with other resources that are readily available to the customer, including factors such as the research, development, and commercialization capabilities of a third party as well as the availability of the associated expertise in the general marketplace. In assessing whether a promised service is distinct within the context of the contract, the Company considers whether it provides a significant integration of the services, whether the services significantly modify or customize one another, or whether the services are highly interdependent or interrelated. For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin. Contract assets Contract assets consists primarily of: i) precision oncology testing revenues to clinical customers that are recognized upon delivery of the test results prior to cash collection; and ii) development services and other revenues to biopharmaceutical customers that are recognized upon the achievement of performance-based milestones but prior to the establishment of billing rights. Contract assets are relieved when the Company receives payments from clinical customers, or when it invoices the biopharmaceutical customers when milestones are achieved, thereby reclassifying the balances from contract assets to accounts receivable. Contract assets are presented under accounts receivable, net and other assets, net on the Company’s consolidated balance sheets. As of December 31, 2020, the Company had contract assets of $ 15.6 million which was recorded in accounts receivable, net, which included $ 8.4 million of unbilled receivable relating to Guardant360 CDx. As of December 31, 2019, the Company had contract assets of $ 6.2 million of which $ 1.0 million was recorded in other assets, net. Deferred revenue Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from contracts with customers. For example, development services and other contracts with biopharmaceutical customers often contain upfront payments which results in the recording of deferred revenue to the extent cash is received prior to the Company’s performance of the related services. Contract liabilities are relieved as the Company performs its obligations under the contract and revenue is consequently recognized. As of December 31, 2020 and 2019, the deferred revenue balance was $ 8.6 million and $ 12.3 million, respectively, which included $ 3.0 million and $ 4.8 million, respectively, related to collaboration development efforts with pharmaceutical companies to be recognized as the Company performs research and development services in the future periods. Revenue recognized in the year ended December 31, 2020 that was included in the deferred revenue balance as of December 31, 2019 was $ 10.2 million, of which $ 4.8 million represented revenue from provision of development services under the collaboration agreements with biopharmaceutical customers. Revenue recognized in the year ended December 31, 2019 that was included in the deferred revenue balance as of January 1, 2019 was $ 15.2 million, which primarily represented revenue from provision of development services under the collaboration agreements with biopharmaceutical customers. Transaction price allocated to the remaining performance obligations Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as 112 Table of Contents revenues in future periods. The Company expects to recognize substantially all of the remaining transaction price in the next 12 months. Revenue Recognition under ASC 605 The Company derives revenue from the provision of precision oncology testing services provided to its ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to its biopharmaceutical customers. Precision oncology services include genomic profiling and the delivery of other genomic information derived from the Company’s platform. Development services include the development of new platforms and information solutions, including companion diagnostic development and laboratory services. The Company currently receives payments from commercial third-party payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies and research institutes. The Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Criterion (i) is satisfied when the Company has an arrangement or contract in place. Criterion (ii) is satisfied when the Company delivers a test report corresponding to each sample, without further commercial obligations. Determination of criteria (iii) and (iv) are based on management’s judgments regarding whether the fee is fixed or determinable, and whether the collectability of the fee is reasonably assured. The Company recognizes revenue from the sale of its precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians, if criteria (i) through (iv) above are met. The Company recognizes revenue on a cash basis when it cannot conclude that criteria (iii) and (iv) have been met. Most of precision oncology tests requested by clinical customers are sold without a contracted engagement with a third-party payer; therefore, the Company experiences significant variability in collections and does not have sufficient history to establish a predictable pattern of payment. Because the price is not fixed or determinable and collectability is not reasonably assured, the Company recognizes revenue on a cash basis for sales of its liquid biopsy tests to clinical customers where collection depends on a third-party payer or the individual patient. The Company uses judgment in its assessment of whether the fee is fixed or determinable and whether collectability is reasonably assured in determining when to recognize revenue. Accordingly, the Company expects to recognize revenue on a cash basis for these clinical customers until it has sufficient history to reliably estimate payment patterns. The Company’s precision oncology information services are delivered electronically, and as such there are no shipping or handling fees incurred by the Company or billed to customers. Revenue from sales of the Company’s tests to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume, data access or biopharmaceutical research and development services over a defined period. The Company recognizes revenue upon delivery of the test results, or over the period in which biopharmaceutical research and development services are provided, as appropriate. Multiple-element arrangements The Company performs development services for its biopharmaceutical customers utilizing its precision oncology information platform. Contracts with biopharmaceutical customers are primarily analyzed as multiple-element arrangements given the nature of the service deliverables. For development services performed, the Company is compensated in various ways, including (i) through non-refundable regulatory and other developmental milestone payments; and (ii) through royalty and sales milestone payments. The Company performs development services as part of its normal activities. The Company records these payments as development services revenue in the consolidated statements of operations using a proportional performance model over the period which the unit of accounting is delivered or based on the level of effort expended to date over the total expected effort, whichever is considered the most appropriate measure of performance. For development of new products or services under these arrangements, costs incurred before technological feasibility is assured are included as research and development expenses in the Company’s consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services. The Company collaborates with pharmaceutical companies in the development and clinical trials of new drugs. As part of these collaborations, the Company provides services related to regulatory filings with the FDA to support companion diagnostic device submissions for the Company’s liquid biopsy panels. Under these collaborations the Company generates revenue from achievement of milestones, as well as provision of on-going support. These collaboration arrangements include no royalty obligations. For revenue arrangements with multiple deliverables, the Company evaluates each deliverable to determine whether it qualifies as a separate unit of accounting. This determination is based on whether the deliverable has stand-alone value to the customer and whether a general right of return exists. In assessing whether an item has standalone value, the Company considers factors such as the research, development and commercialization capabilities of a third party and the availability of the associated expertise in the general marketplace. In addition, the Company considers 113 Table of Contents whether the other party in the arrangement can use the other deliverables for their intended purpose without the receipt of the remaining elements, whether the value of the deliverable is dependent on the undelivered items and whether there are other vendors that can provide the undelivered elements. The consideration that is fixed or determinable is then allocated to each separate unit of accounting based on the relative selling price of each deliverable. The Company allocates the arrangement consideration following a hierarchy to determine the relative selling price to be used for allocating revenue to deliverables: (i) vendor-specific objective evidence of fair value (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“BESP”) if neither VSOE nor TPE is available. The Company typically uses BESP to estimate the selling price, since it generally does not have VSOE or TPE of selling price for its units of accounting under multiple-element arrangements. In developing the BESP for a unit of accounting, the Company considers applicable market conditions and estimated costs. The Company validates the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multiple units of accounting. The consideration allocated to each unit of accounting is recognized as the related goods or services are delivered, limited to the consideration that is not contingent upon future deliverables. The Company uses judgment in identifying the deliverables in its arrangements, assessing whether each deliverable is a separate unit of accounting and in determining the best estimate of selling price for certain deliverables. The Company also uses judgment in determining the period over which the deliverables are recognized in certain of its arrangements. Any amounts received that do not meet the criteria for revenue recognition are recorded as deferred revenue until such criteria are met. The Company performed laboratory installation and maintenance services for one of its customers as part of a multiple-element arrangement entered into in 2017. The Company recognized certain revenue from its construction service deliverables in a multiple-element collaboration arrangement based on the completed-contract method. This method was used as the Company determined that it did not have the basis for estimating performance under the contract. Other construction service deliverables under that contract were recognized under the percentage-of-completion method due to the Company’s ability to make reasonably dependable estimates of the extent of progress toward contract completion. All construction services under this arrangement were completed in March 2018. Milestones The Company recognizes payments that are contingent upon achievement of a substantive milestone in their entirety in the period in which the milestone is achieved. Milestones are defined as events that can only be achieved based on the Company’s performance and there is substantive uncertainty about whether the event will be achieved at the inception of the arrangement. Events that are contingent only on the passage of time or only on counterparty performance are not considered substantive milestones. Further, the amounts received must relate solely to prior performance, be reasonable relative to all of the deliverables and payment terms within the agreement and commensurate with the Company’s performance to achieve the milestone after commencement of the agreement. Any contingent payment that becomes payable upon achievement of events that are not considered substantive milestones are allocated to the units of accounting previously identified at the inception of an arrangement when the contingent payment is received and revenue is recognized based on the revenue recognition criteria for each unit of accounting. Revenue from commercial milestone payments are recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met. Costs of Precision Oncology Testing Cost of precision oncology testing generally consists of cost of materials, direct labor including bonus, benefit and stock-based compensation, equipment and infrastructure expenses associated with processing liquid biopsy test samples (including sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples), freight, curation of test results for physicians and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Costs associated with performing the Company’s tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to that test. Royalties for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expense at the time the related revenues are recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the applicable patent rights. Cost of Development Services and Other Cost of development service and other primarily includes costs incurred for the performance of development services requested by the Company’s biopharmaceutical customers and other revenues included as noted above. For development of new products, costs incurred before technological feasibility has been achieved are reported as 114 Table of Contents research and development expenses, while costs incurred thereafter are reported as cost of development services and other. Research and Development Expenses Research and development expenses are comprised of costs incurred to develop technology and include compensation and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services and other outside costs. Research and development expenses also include costs related to activities performed under contracts with biopharmaceutical companies. Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop the Company’s technology capabilities are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs. Advertising The Company expenses advertising costs as incurred. The Company incurred advertising costs of $ 1.2 million, $ 1.3 million and $ 0.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Deferred Offering Costs Deferred offering costs consist of fees and expenses incurred in connection with the anticipated sale of the Company’s common stock in the IPO, including the legal, accounting, printing and other IPO-related costs. In October 2018, upon completion of the IPO, the Company reclassified deferred offering costs of $ 4.5 million into additional paid-in capital as a reduction of the net proceeds received from the IPO. There were no deferred offering costs as of December 31, 2020 and 2019. Stock‑Based Compensation Stock‑based compensation related to stock options granted to the Company’s and the Joint Venture's employees, directors and nonemployees is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards. Compensation expense for stock options with performance metrics is calculated based upon expected achievement of the metrics specified in the grant. In 2018, the Company accounted for stock options issued to nonemployees consultants based on the estimated fair value at the grant date and re-measured at each reporting period. Starting January 1, 2019, upon adoption of ASU 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting , the fair value of stock options issued to nonemployee consultants is determined as of the grant date, and compensation expense is being recognized over the period that the related services are rendered. The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of stock options granted under the 2012 Stock Plan, the 2018 Incentive Award Plan, and the Joint Venture's 2020 Equity Incentive Plan, and stock purchase rights granted under the 2018 Employee Stock Purchase Plan. The Black-Scholes option-pricing model requires assumptions to be made related to the expected term of an award, expected volatility, risk-free rate and expected dividend yield. The board of directors of the Joint Venture has determined the fair value of common stock of the Joint Venture. Forfeitures are accounted for as they occur. For market-based restricted stock units, the Company derives the requisite service period using the Monte Carlo simulation model and the related compensation expense is recognized over the derived service period using an accelerated attribution model commencing on the grant date. Stock-based compensation expense will be recorded regardless of whether the market conditions are achieved or not. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met. The Company measures the grant date fair value of its service-based and performance-based restricted stock units issued to employees based on the closing market price of the common stock on the date of grant. The expense is recognized in the Company’s consolidated statement of operations on a straight-line basis over the requisite service period. Compensation expense for restricted stock units with performance metrics is calculated based upon expected achievement of the metrics specified in the grant. 115 Table of Contents Income Taxes Income taxes are recorded using an asset and liability approach. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to affect taxable income. Tax benefits are recognized when it is more likely than not that a tax position will be sustained during an audit. Deferred tax assets are reduced by a valuation allowance if current evidence indicates that it is considered more likely than not that these benefits will not be realized. The Company’s tax positions are subject to income tax audits. The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the position is sustainable upon examination by the taxing authority, based on the technical merits. The tax benefit recognized is measured as the largest amount of benefit which is more likely than not to be realized upon settlement with the taxing authority. The Company recognizes interest accrued and penalties related to unrecognized tax benefits in its tax provision. The Company evaluates uncertain tax positions on a regular basis. The evaluations are based on a number of factors, including changes in facts and circumstances, changes in tax law, correspondence with tax authorities during the course of the audit, and effective settlement of audit issues. The provision for income taxes includes the effects of any accruals that the Company believes are appropriate, as well as the related net interest and penalties. Net Loss Per Share Attributable to Common Stockholders The Company calculates basic net loss per share attributable to common stockholders by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method or the as-if converted method, as appropriate. For purposes of this calculation, convertible preferred stock, common stock warrants, stock options, restricted stock units, shares issuable pursuant to the employee stock purchase plan, shares subject to repurchase from early exercised options and contingently issuable shares under our convertible senior notes are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive. Prior to the closing of the Company’s IPO in October 2018 and the conversion of its convertible preferred stock into common stock, the Company calculated its basic and diluted net loss per share attributable to common stockholders of the Company in conformity with the two-class method required for companies with participating securities. The Company considered its convertible preferred stock to be participating securities. In the event a dividend had been declared or paid on the Company’s common stock, holders of convertible preferred stock were entitled to a share of such dividend in proportion to the holders of common stock on an as-if converted basis. Under the two-class method, net loss attributable to common stockholders is determined by allocating undistributed earnings between common and preferred stockholders. The net loss attributable to common stockholders was not allocated to the convertible preferred stock under the two-class method as the convertible preferred stock did not have a contractual obligation to share in the Company’s losses. Accounting Pronouncements Adopted Financial Instruments In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) , in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes result in earlier recognition of credit losses. The Company adopted ASU 2016-13 using the modified retrospective approach as of January 1, 2020. The cumulative effect upon adoption was not material to the Company’s consolidated financial statements. 116 Table of Contents Goodwill In January 2017, the FASB issued ASU 2017-04 , Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which eliminates Step 2 from the goodwill impairment test and instead requires entities to perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount . The Company adopted this new standard on January 1, 2020. The adoption of this standard did not have a significant impact to the Company’s consolidated financial statements. Fair Value Measurements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project. The Company adopted this new guidance on January 1, 2020. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements. Cloud Computing Arrangements In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal—Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract , which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Topic 350, Intangibles—Goodwill and Other , to determine which implementation costs to capitalize as assets or expense as incurred. The Company adopted this new standard on January 1, 2020 on a prospective basis. The adoption of this standard did not have a significant impact on the Company’s consolidated financial statements. Collaborative Arrangements In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (ASC 808) to clarify that certain transactions between participants in a collaborative arrangement should be accounted for under R evenue from contracts with customers (Topic ASC 606) when the counterparty is a customer. The Company adopted this new standard on January 1, 2020. The adoption of this standard did not have a significant impact to the Company’s consolidated financial statements. Income Taxes In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The Company early adopted this new standard on January 1, 2020. The adoption of this standard did not have a significant impact to the Company’s consolidated financial statements. Under prior GAAP, the Company historically allocated income tax benefit to continuing operations and an offsetting income tax expense to other comprehensive income under the applicable exception to ASC Topic 740. The new standard eliminates this exception and the Company will now determine the tax effect of pre-tax income or loss from continuing operations without regard to the tax effect of other items. The Company applied the new intraperiod tax allocation guidance prospectively in the period of adoption. Accounting Pronouncements Not Yet Adopted In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06) , which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Among other changes, ASU 2020-06 removes the liability and equity separation model for convertible instruments with a cash conversion feature, and as a result, after adoption, entities will no longer separately present in equity an embedded conversion feature for such debt. Similarly, the embedded conversion feature will no longer be amortized into income as interest expense over the life of the instrument. Instead, entities will account for a convertible debt instrument wholly as debt unless (1) a convertible instrument contains features that require bifurcation as a derivative under ASC Topic 815, Derivatives and Hedging, or (2) a convertible debt instrument was issued at a substantial premium. Among other potential impacts, this change is expected to reduce reported interest expense, increase reported net income, and result in a reclassification of certain conversion feature balance sheet amounts from stockholders’ equity to liabilities as it relates to the Company’s convertible senior notes. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, with early 117 Table of Contents adoption permitted for fiscal years beginning after December 15, 2020, and can be adopted on either a fully retrospective or modified retrospective basis. The Company is currently planning on early adopting ASU 2020-06 in the first quarter of fiscal 2021 using the modified retrospective approach which will result in the re-classification of the carrying amount of the equity component of the cash conversion feature as of December 31, 2020 from additional paid-in capital to long-term liabilities. 3. Investment in Joint Venture Variable Interest Entity (“VIE”) In May 2018, the Company and an affiliate of SoftBank formed and capitalized the Joint Venture for the sale, marketing and distribution of the Company’s tests in all areas worldwide, outside of North America, Central America, South America, the United Kingdom, all other member states of the European Union as of May 9, 2017, Iceland, Norway, Switzerland and Turkey. The Company expects to rely on the Joint Venture to accelerate commercialization of its products in Asia, the Middle East and Africa. Under the terms of the joint venture agreement, the Company paid $ 9.0 million for 40,000 shares of common stock, or 50 % ownership interest, of the Joint Venture, and the affiliate of SoftBank contributed $ 41.0 million for 40,000 shares of common stock, or the other 50 % ownership interest, of the Joint Venture. Neither party has the obligation to provide additional financial support to the Joint Venture. Each party holds two seats on the board of the Joint Venture and has to cast through its representatives on the board at least one vote for any board resolution of the Joint Venture to pass. The representatives of the Company on the Joint Venture’s board of directors have the right to appoint and remove a chief executive officer and a legal representative for the Joint Venture, in each case, subject to the approval of the full Joint Venture board of directors. The Joint Venture’s board of directors has the right to appoint and remove all other members of the Joint Venture’s senior management reporting to its chief executive officer and to approve the compensation of all foregoing individuals, including the compensation of the chief executive officer and legal representative. In June 2020, an amended and restated certificate of incorporation of the Joint Venture, as approved by the board of directors of the Joint Venture, was filed with the Secretary of State of the State of Delaware. The amended and restated certificate of incorporation, among other things, increased the number of authorized shares of common stock to 89,000,000 shares consisting of 80,000,000 shares of Class A common stock and 9,000,000 shares of Class B (non-voting) common stock; and authorized 80,000,000 shares of Series A preferred stock. Pursuant to the amended and restated certificate of incorporation, each share of common stock held by the Company and the affiliate of SoftBank was reclassified and exchanged for 1,000 shares of Series A preferred stock. As a result, each of the Company and the affiliate of SoftBank held 40,000,000 shares of Series A preferred stock. The holders of Series A preferred stock are entitled to receive dividends at the rate of $ 0.05 per share if and when declared by the board of directors of the Joint Venture. In June 2020, the board of directors of the Joint Venture authorized the adoption of the Joint Venture’s 2020 Equity Incentive Plan pursuant to which 4,595,555 shares of Class B common stock have been reserved for issuance. As of December 31, 2020, no shares of Class A and Class B common stock have been issued and outstanding and 80,000,000 shares of Series A preferred stock have been issued and outstanding. At the inception of the arrangement and at the end of each reporting period, the Company assesses whether the Joint Venture is a variable interest entity (“VIE”), and if so, who is the primary beneficiary of the VIE. As of December 31, 2020, the Company and SoftBank had equal ownership interests and equal voting rights in the Joint Venture, and the Joint Venture’s board consisted of an equal number of directors representing the interest of the Company and SoftBank, respectively. As of December 31, 2020, the Joint Venture’s board had the right to vote on all critical matters that most significantly impact the Joint Venture’s economic performance, except that the Company had the unilateral right to make pricing decisions. As of December 31, 2020, the Company had responsibility for the Joint Venture’s daily operations, while SoftBank served as a financing partner. The Company also entered into various ancillary agreements with the Joint Venture necessary to operate its business. The Joint Venture is deemed to be a VIE, and considering the power and benefits criterion, the Company and SoftBank, collectively as a related party group, has the characteristics of the primary beneficiary of the Joint Venture, as the related party group has the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and has the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. Because the Company is most closely associated with the Joint Venture within the related party group, it has been identified as the VIE’s primary beneficiary. As the primary beneficiary, the Company has consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances have been eliminated in consolidation. The Company concluded the Joint Venture did not meet the definition of a business upon consolidation as it lacked the processes required to generate outputs. Upon consolidation no liabilities were assumed and other than cash, and any identifiable assets 118 Table of Contents were related to intellectual property rights that the Company transferred to the Joint Venture shortly before it became its primary beneficiary and therefore such transfer was treated as a common control transaction. Upon initial consolidation, the non-controlling interest of the affiliate of SoftBank was recorded at its estimated fair value of $ 41.0 million, which is equal to the original investment made by the affiliate of SoftBank. As of December 31, 2020 and 2019, the Joint Venture had total assets of approximately $ 35.0 million and $ 45.1 million, respectively, which were primarily comprised of cash, property and equipment, right-of-use assets and security deposits. Although the Company consolidates the Joint Venture, the legal structure of the Joint Venture limits the recourse that its creditors will have over the Company’s general credit or assets. Similarly, the assets held in the Joint Venture can be used only to settle obligations of the Joint Venture. As of December 31, 2020 and 2019, the Company has not provided financial or other support to the Joint Venture that was not previously contracted or required. Put-call arrangements The joint venture agreement includes a put-call arrangement with respect to the shares of the Joint Venture held by SoftBank and its affiliates. Under certain specified circumstances and on terms specified in the joint venture agreement, including timely written notice, SoftBank has the right to cause the Company to purchase all shares of the Joint Venture held by SoftBank and its affiliates (the “put right”), and the Company has a right to purchase all such shares (the “call right”). If the Company’s business model were to change such that the sale, marketing and distribution of its tests in the territory covered by the joint venture agreement was no longer economical, SoftBank would have the right to cause the Company to purchase, or the Company would have the right to purchase, all of the shares of the Joint Venture held by SoftBank and its affiliates. In this instance, the Company would be required to repurchase the shares at an aggregate purchase price of $ 41.0 million, the original purchase price paid by SoftBank to the Joint Venture for the shares. Additionally, each of the Company and SoftBank may exercise its respective put-call rights for the Company to purchase all shares of the Joint Venture held by SoftBank in the event of (i) certain material disagreements relating to the Joint Venture or its business that may seriously affect the ability of the Joint Venture to perform its obligations under the joint venture agreement or may otherwise seriously impair the ability of the Joint Venture to conduct its business in an effective matter, other than one relating to the Joint Venture’s business plan or to factual matters that may be capable of expert determination; (ii) the effectiveness of the Company’s initial public offering, a change in control of the Company, the seventh anniversary of the formation of the Joint Venture, or each subsequent anniversary of each of the foregoing events; or (iii) a material breach of the joint venture agreement by the other party that goes unremedied within 20 business days. Unless the shares of the Joint Venture are publicly traded and listed on a nationally recognized stock exchange, the purchase price per share of the Joint Venture in these situations will be determined by a third-party valuation firm on the assumption that the sale is on an arm’s-length basis on the date of the put or call notice. The third-party valuation firm may evaluate a range of factors and employ assumptions that are subjective in nature, which could result in the fair value of SoftBank’s interests in the Joint Venture being determined to be materially different from what has been recorded in the Company’s consolidated financial statements including those included elsewhere in this Annual Report on Form 10-K. As a result of the IPO, the put-call rights for the Company to purchase all shares of the Joint Venture held by SoftBank are exercisable on each subsequent anniversary of the IPO by the Company or SoftBank. In the event the Company exercises its call right, the fair value of the Joint Venture will be deemed to be no less than an amount that yields a 20 % internal rate of return on each tranche of capital invested by SoftBank and its affiliates in the Joint Venture, taking into account all proceeds received by SoftBank and its affiliates arising from their shares through such date. In the event SoftBank exercises its put right and the fair value of the Joint Venture is determined to be greater than 40 % of the fair value of the Company, the Company will only be required to purchase the number of shares of the Joint Venture held by SoftBank and its affiliates having an aggregate value equal to the product of 40 % of the Company’s fair value and the pro rata portion of the outstanding shares of the Joint Venture held by SoftBank and its affiliates. The Company may pay the purchase price for the shares of the Joint Venture in cash, in shares of its capital stock (which may be a non-voting security with senior preferences to all other classes of its equity or, if its common stock is publicly traded on a national exchange, its common stock), or in a combination thereof. In the event the Company exercises the call right, SoftBank will choose the form of consideration. In the event SoftBank exercises the put right, the Company will choose the form of consideration. 119 Table of Contents The noncontrolling interest held by SoftBank contains embedded put-call redemption features that are not solely within the Company’s control and has been classified outside of permanent equity in the consolidated balance sheets. The put-call feature embedded in the redeemable noncontrolling interest do not currently require bifurcation as it does not meet the definition of a derivative and is considered to be clearly and closely related to the redeemable noncontrolling interest. The noncontrolling interest is considered probable of becoming redeemable as SoftBank has the option to exercise its put right to sell its equity ownership in the Joint Venture to the Company on or after the seventh anniversary of the formation of the Joint Venture, on each subsequent anniversary of the IPO and under certain other circumstances. The Company elected to recognize the change in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period. The carrying value of the redeemable noncontrolling interest is first adjusted for the earnings or losses attributable to the redeemable noncontrolling interest based on the percentage of the economic or ownership interest retained in the consolidated VIE by the noncontrolling parties, and then adjusted to equal to its redemption amount, or the fair value of the noncontrolling interest held by SoftBank, as if the redemption were to occur at the end of the reporting date. As of December 31, 2020 and 2019, the fair value of the redeemable noncontrolling interest held by SoftBank was determined using the combination of the income approach and the market approach. Determining the fair value of the redeemable noncontrolling interest requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include future revenue growth rates, gross profit margins, EBITDA margins, future capital expenditures, weighted average costs of capital and future market conditions, among others. The fair value measurement of the redeemable noncontrolling interest is classified within Level 3 of the fair value hierarchy (see Note 5, Fair Value Measurements, Cash Equivalents and Marketable Securities ). 4. Consolidated Balance Sheet Components Property and Equipment, Net Property and equipment, net consist of the following: As of December 31, 2020 2019 (in thousands) Machinery and equipment $ 40,216 $ 29,119 Leasehold improvements 34,037 21,031 Computer hardware 10,862 6,296 Construction in progress 7,833 6,354 Furniture and fixtures 3,043 1,962 Computer software 1,136 829 Property and equipment, gross $ 97,127 $ 65,591 Less: accumulated depreciation and amortization ( 34,345 ) ( 21,923 ) Property and equipment, net $ 62,782 $ 43,668 Depreciation and amortization expense related to property and equipment was $ 14.1 million, $ 9.3 million and $ 6.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. 120 Table of Contents Accrued Expenses Accrued expenses consist of the following: As of December 31, 2020 2019 (in thousands) Operating lease liabilities $ 6,632 $ 7,140 Accrued tax liabilities 4,634 3,050 Accrued professional services 3,397 3,464 Accrued clinical trials and studies 1,264 2,029 Accrued legal expenses 2,875 1,046 Purchases of property and equipment included in accrued expenses 1,156 2,424 Accrued royalty obligations 146 1,564 Others 2,535 4,986 Total accrued expenses $ 22,639 $ 25,703 5. Fair Value Measurements, Cash Equivalents and Marketable Securities Financial instruments consist of cash equivalents, marketable securities, accounts receivable, net, prepaid expenses and other current assets, net, accounts payable and accrued expenses. Cash equivalents and marketable securities are stated at fair value. Prepaid expenses and other current assets, net, accounts payable and accrued expenses are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date. Fair value is defined as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows: Level 1 - Quoted prices in active markets for identical assets or 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. 121 Table of Contents The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows: December 31, 2020 Fair Value Level 1 Level 2 Level 3 (in thousands) Financial Assets: Money market funds $ 620,630 $ 620,630 $ — $ — Total cash equivalents $ 620,630 $ 620,630 $ — $ — U.S. government debt securities $ 961,902 $ — $ 961,902 $ — Total short-term marketable securities $ 961,902 $ — $ 961,902 $ — U.S. government debt securities $ 246,597 $ — $ 246,597 $ — Total long-term marketable securities $ 246,597 $ — $ 246,597 $ — Total $ 1,829,129 $ 620,630 $ 1,208,499 $ — Financial Liabilities: Contingent consideration $ 1,245 $ — $ — $ 1,245 Total $ 1,245 $ — $ — $ 1,245 December 31, 2019 Fair Value Level 1 Level 2 Level 3 (in thousands) Financial Assets: Money market funds $ 10,734 $ 10,734 $ — $ — Total cash equivalents $ 10,734 $ 10,734 $ — $ — Corporate bonds $ 16,690 $ — $ 16,690 $ — U.S. government debt securities 362,884 — 362,884 — Total short-term marketable securities $ 379,574 $ — $ 379,574 $ — U.S. government debt securities $ 268,783 $ — $ 268,783 $ — Total long-term marketable securities $ 268,783 $ — $ 268,783 $ — Total $ 659,091 $ 10,734 $ 648,357 $ — Financial Liabilities: Contingent consideration $ 1,365 $ — $ — $ 1,365 Total $ 1,365 $ — $ — $ 1,365 The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Corporate bonds, U.S. government debt securities and U.S. government agency bonds are valued taking into consideration valuations obtained from third-party pricing services. 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, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs. There were no transfers between Level 1, Level 2 and Level 3 during the periods presented. 122 Table of Contents The following table summarizes the activities for the Level 3 financial instruments for the years ended December 31, 2020, 2019 and 2018: Redeemable Noncontrolling Interest Contingent Consideration Year Ended December 31, Year Ended December 31, 2020 2019 2018 2020 2019 2018 (in thousands) Fair value — beginning of period $ 49,600 $ 41,800 $ — $ 1,365 $ — $ — Initial valuation on the date of acquisition — — 41,000 — 1,065 — Increase (decrease) in fair value 12,934 11,659 1,730 ( 120 ) 300 — Net loss for the period ( 5,434 ) ( 3,859 ) ( 930 ) — — — Fair value — end of period $ 57,100 $ 49,600 $ 41,800 $ 1,245 $ 1,365 $ — The Company considers the fair value of the Convertible Notes as of December 31, 2020 to be a Level 2 measurement. The fair value of the Convertible Notes is primarily affected by the trading price of the Company's common stock and market interest rates. As such, the carrying value of the Convertible Notes does not reflect the market rate. See Note 8, Debt , for additional information related to the fair value of the Convertible Notes. Cash Equivalents and Marketable Securities The following tables summarizes the Company’s cash equivalents and marketable securities’ amortized costs, gross unrealized gains, gross unrealized losses and estimated fair values by significant investment category: December 31, 2020 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value (in thousands) Money market fund $ 620,630 $ — $ — $ 620,630 U.S. government debt securities 1,206,195 2,339 ( 35 ) 1,208,499 Total $ 1,826,825 $ 2,339 $ ( 35 ) $ 1,829,129 December 31, 2019 Amortized Cost Gross Unrealized Gain Gross Unrealized Loss Estimated Fair Value (in thousands) Money market fund $ 10,734 $ — $ — $ 10,734 Corporate bond 16,679 11 — 16,690 U.S. government debt securities 630,283 1,423 ( 39 ) 631,667 Total $ 657,696 $ 1,434 $ ( 39 ) $ 659,091 There have been no material realized gains or losses on marketable securities for the periods presented. None of the Company’s investments in marketable securities has been in an unrealized loss position for more than one year. The Company determined that it did have the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of credit losses in the years ended December 31, 2020, 2019 and 2018, respectively. The maturities of the Company’s long-term marketable securities range from 1.0 to 1.3 years as of December 31, 2020. 6. Acquisitions Patent License Acquisition In January 2017, the Company entered into a license agreement with a biotechnology company, KeyGene N.V. (“KeyGene”), for an exclusive, non-transferable right to use proprietary technology related to high-throughput screening and identification of mutations in targeted gene sequences. The payment terms of the license agreement included (i) a one-time upfront payment of € 1.0 million; (ii) issuance of 141,774 shares of the Company’s Series D 123 Table of Contents convertible preferred stock; (iii) a milestone payment of € 1.0 million associated with the achievement of a specified milestone event; and (iv) future royalty payments at the minimum of € 13.4 million in the aggregate based on annual net sales in which the licensed technology are used. The Company made a one-time upfront payment of $ 1.1 million in January 2017 and a milestone payment of $ 1.2 million in August 2017 upon achievement of the specified milestone event. The Series D convertible preferred stock issued under the license agreement had a fair value of $ 1.1 million on the date of issuance. The transaction was treated as an acquisition of an asset and the Company capitalized the upfront payment, milestone payments and fair value of Series D convertible preferred stock in addition to license fees of $ 6.3 million related to the future minimum royalty payments discounted to the present value. The Company recorded the obligation at the estimated present value of the future payments using a discount rate of 15 %, the Company’s estimate of its effective borrowing rate for similar obligations. In March 2020, the Company and KeyGene entered into a settlement and patent license agreement (the “SPLA”) to resolve the dispute and to acquire an extended worldwide non-exclusive license to certain patent rights with respect to KeyGene’s Next Generation Sequencing technologies along with certain covenant rights and research and development technology for a one-time payment of $ 18.5 million, ending all future royalty obligations to KeyGene. This transaction was accounted for as an asset acquisition as the purchase did not meet the definition of a business. The total consideration, including $ 0.6 million of certain capitalizable transaction costs, was allocated to various components of the SPLA. The Company allocated $ 9.4 million to the patent and covenant rights granted under the SPLA, which have useful lives in the range of 6 - 12 years. The Company allocated $ 8.5 million to IPR&D technology, which have no alternative future use and was included in research and development expenses for the year ended December 31, 2020. The remaining $ 1.2 million was allocated to the settlement of the prior dispute between the parties and was included in general and administrative expenses for the year ended December 31, 2020. Amortization of capitalized license fees relating to the January 2017 license agreement was immaterial, $ 1.0 million and $ 0.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Acquisition of Bellwether Bio In April 2019, the Company purchased of all of the outstanding shares of Bellwether Bio, Inc. (“Bellwether Bio”), a privately-held company developing a method for early blood-based cancer detection. The Company accounted for the acquisition as a business combination. The total purchase consideration was $ 8.7 million, which consisted of i) $ 7.6 million in cash paid upon closing; and ii) future contingent consideration liability with a fair value of $ 1.1 million on the acquisition date. The contingent consideration is subject to the achievement of certain commercialization milestones with a maximum payout amount of $ 10.0 million. The Company will also pay additional earn-out consideration of up to $ 10.0 million subject to the achievement of certain commercialization milestones and the continued provision of services to the Company by certain former employees and consultants of Bellwether Bio. The contingent consideration and earn-out consideration may be paid, at the Company’s election, in cash or in the Company’s common stock. As of December 31, 2020, the Company did not believe the earn-out consideration is probable to be achieved, and therefore, did not record any compensation expense. The excess purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is attributable to future revenue opportunities that we expect to achieve from leveraging Bellwether Bio’s existing license and IPR&D, as well as the assembled workforce. The valuation of the intangible assets acquired was determined using currently available information and reasonable assumptions. The following table summarizes the allocation of the total consideration to the estimated fair values of assets acquired and liabilities assumed: Amount (in thousands) Cash $ 521 Identified intangible assets 6,700 Goodwill 3,289 Net liabilities assumed ( 1,802 ) Total $ 8,708 124 Table of Contents The following table presents details of the identified intangible assets acquired from the Bellwether Bio acquisition: Fair Value Estimated Useful Life (in thousands) Acquired license $ 5,100 10 years IPR&D 1,600 * Total $ 6,700 * IPR&D assets are not subject to amortization. In connection with the acquisition of Bellwether Bio, the Company also entered into non-compete agreements with certain key individuals based on their experience and importance to the operation of Bellwether Bio. The Company accounted for the covenants not to compete as purchases of intangible assets separate from the business combination as these non-compete agreements were initiated by the Company to protect its interests. The fair value of acquired covenants not to compete was estimated to be $ 2.5 million, which is recorded within intangible assets on the consolidated balance sheet and will be amortized over an estimated useful life of 6 years using the straight-line method. Acquisition-related contingent consideration is measured at fair value on a quarterly basis based on additional information as it becomes available and change in estimated contingent consideration to be paid will be included in operating expenses in the consolidated statements of operations. The fair value of acquisition-related contingent consideration is estimated using a multiple-outcome discounted cash flow valuation technique. Contingent consideration is classified within Level 3 of the fair value hierarchy (see Note 5, Fair Value Measurements, Cash Equivalents and Marketable Securities ), as it is based on a probability that includes significant unobservable inputs. The significant unobservable inputs include a probability-weighted estimate of achievement of certain commercialization milestones, continued services from certain former employees and consultants, resulting contingent payments, and discount rate to present value the expected payments. A significant change in any of these input factors in isolation could have a material impact to fair value measurement. As of December 31, 2020 and 2019, contingent consideration liability of $ 1.2 million and $ 1.4 million, respectively, was recorded within other long-term liabilities on the consolidated balance sheets. For the year ended December 31, 2019, the Company incurred acquisition-related transaction costs of $ 0.4 million which are included in general and administrative expenses in the consolidated statements of operations. 7. Intangible Assets, Net and Goodwill The following table presents details of purchased intangible assets as of December 31, 2020 and 2019: December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life (in thousands) (in years) Intangible assets subject to amortization: Acquired license $ 11,886 $ ( 1,367 ) $ 10,519 9.8 Non-compete agreements and other covenant rights 5,100 ( 1,064 ) 4,036 4.9 Total intangible assets subject to amortization 16,986 ( 2,431 ) 14,555 Intangible assets not subject to amortization: IPR&D 1,600 — 1,600 Goodwill 3,290 — 3,290 Total purchased intangible assets $ 21,876 $ ( 2,431 ) $ 19,445 125 Table of Contents December 31, 2019 Gross Carrying Amount Accumulated Amortization Net Carrying Amount Remaining Weighted Average Useful Life (in thousands) (in years) Intangible assets subject to amortization: Acquired license $ 5,100 $ ( 373 ) $ 4,727 9.5 Non-compete agreements 2,500 ( 303 ) 2,197 5.5 Total intangible assets subject to amortization 7,600 ( 676 ) 6,924 Intangible assets not subject to amortization: IPR&D 1,600 — 1,600 Goodwill 3,290 — 3,290 Total purchased intangible assets $ 12,490 $ ( 676 ) $ 11,814 Amortization of finite-lived intangible assets was $ 1.8 million and $ 0.7 million for the year ended December 31, 2020 and 2019, respectively. There were no intangible assets as of December 31, 2018. The following table summarizes estimated future amortization expense of finite-lived intangible assets—net: Year Ending December 31, (in thousands) 2021 $ 1,947 2022 1,947 2023 1,947 2024 1,953 2025 1,705 2026 and thereafter 5,056 Total $ 14,555 8. Debt Convertible Senior Notes In November 2020, the Company issued $ 1.15 billion principal amount of its 0 % Convertible Senior Notes due 2027 (the “2027 Notes”). The 2027 Notes do not bear interest, and the principal amount of the Notes will not accrete. However, special interest and additional interest may accrue on the 2027 Notes at a rate per annum not exceeding 0.50 % (subject to certain exceptions) upon the occurrence of certain events such as the failure to file certain reports to the Securities and Exchange Commission, or to remove certain restrictive legends from the Notes. The Notes will mature on November 15, 2027, unless repurchased, redeemed or converted earlier. Before August 15, 2027, holders of the 2027 Notes will have the right to convert their 2027 Notes only under the following circumstances: • during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on March 31, 2021, if the last reported sale price of the Company's common stock exceeds 130 % of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter (the “sale price condition”); • during the five consecutive business days immediately after any ten consecutive trading day period (the “measurement period”) if the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period is less than 98 % of the product of the last reported sale price of the Company's common stock on such trading day and the conversion rate on such trading day; or • upon the occurrence of specified corporate events From and after August 15, 2027, holders of the 2027 Notes may convert their 2027 Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. 126 The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election. The initial conversion rate is 7.1523 shares of common stock per $1,000 principal amount of 2027 Notes, which represents an initial conversion price of approximately $ 139.82 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time. The Company may not redeem the 2027 Notes at its option at any time before November 20, 2024. The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after November 20, 2024 and on or before the 25th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid special interest and additional interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130 % of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption. If certain corporate events that constitute a “Fundamental Change” occur, then, subject to a limited exception for certain cash mergers, holders of Notes may require the Company to repurchase their 2027 Notes at a cash repurchase price equal to the principal amount of the 2027 Notes to be repurchased, plus accrued and unpaid special interest and additional interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock. In accounting for the 2027 Notes, the Company separated the 2027 Notes into liability and equity components. The carrying amount of the liability component was calculated using a black scholes model by measuring the fair value of a similar instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2027 Notes as a whole. This difference represents a debt discount that is amortized as interest expense using an effective interest over the term of the 2027 Notes. Since the 2027 Notes were not convertible as of December 31, 2020, the net carrying amount of the 2027 Notes was classified as a long-term liability and the equity component was included in additional paid-in capital in the consolidated balance sheet as of December 31, 2020. The following table sets forth the components of the 2027 Notes as of December 31, 2020: (in thousands) Liability component: Principal $ 1,150,000 Less: debt discount, net of amortization ( 331,074 ) Less: debt issuance costs, net of amortization ( 12,634 ) Net carrying amount $ 806,292 Equity component recorded at issuance: 2027 Notes $ 335,667 Less: issuance costs ( 5,264 ) Net amount recorded in equity $ 330,403 The total estimated fair value of the 2027 Notes was $ 1.3 billion as of December 31, 2020. The fair value was determined based on the closing trading price per $100 of the 2027 Notes as of the last day of trading for the period. We consider the fair value of the Notes as of December 31, 2020 to be a Level 2 measurement. The fair value of the 2027 Notes is primarily affected by the trading price of the Company's common stock and market interest rates. 127 The following table sets forth interest expense recognized related to the Notes for the year ended December 31, 2020: (in thousands) Amortization of debt discount $ 4,593 Amortization of debt issuance costs 136 Total interest expense recognized $ 4,729 Effective interest rate of the liability component 5.2 % Note Hedges To minimize the impact of potential economic dilution upon conversion of the 2027 Notes, the Company entered into convertible note hedge transactions (the "2027 Note Hedges") with respect to its common stock concurrent with the issuance of the Notes. The 2027 Note Hedges cover, subject to customary adjustments, the number of shares of common stock initially underlying the Notes. The strike price of the 2027 Note Hedges will initially be approximately $ 182.60 per share, which represents a premium of 75 % over the last reported sale price of the Company’s common stock of $ 104.34 per share on November 16, 2020, and is subject to certain adjustments under the terms of the 2027 Note Hedges. The 2027 Note Hedges will expire upon maturity of the 2027 Notes. The 2027 Note Hedges are separate transactions and are not part of the terms of the 2027 Notes. Holders of the 2027 Notes will not have any rights with respect to the 2027 Note Hedges. The shares receivable related to the 2027 Note Hedges are excluded from the calculation of diluted earnings per share as they are anti-dilutive. As these transactions meet certain accounting criteria, the 2027 Note Hedges are recorded in stockholders’ equity and are not accounted for as derivatives. The Company paid an aggregate amount of $ 90.0 million for the 2027 Note Hedges, which has been recorded as a reduction to additional paid-in capital and will not be remeasured. 9. Leases The Company has entered into various operating lease agreements for office space, data center, lab and warehouse use, with remaining terms ranging from 1 year to 12 years some of which include one or more options to renew. As leases approach maturity, the Company considers various factors such as market conditions and the terms of any renewal options that may exist to determine whether it will renew the lease, as such, the Company does not include renewal options in its lease terms for calculating its lease liability, as the renewal options allow it to maintain operational flexibility and the Company is not reasonably certain it will exercise these renewal options at the time of the lease commencement. Operating lease expense for the year ended December 31, 2020 and 2019 was $ 5.6 million and $ 4.4 million which includes both lease and non-lease components (primarily common area maintenance charges and property taxes). Rent expense for the facility leases was $ 4.6 million for the year ended December 31, 2018. As of December 31, 2020 2019 Weighted-average remaining lease term (in years) 5.5 6.4 Weighted-average discount rate 8.07 % 7.77 % 128 The following table summarizes our future principal contractual obligations for operating lease commitments as of December 31, 2020: Year Ending December 31, (in thousands) 2021 $ 9,129 2022 10,788 2023 11,415 2024 10,849 2025 10,783 2026 and thereafter 7,643 Total operating lease payments $ 60,607 Less: Imputed Interest ( 12,410 ) Total operating lease liabilities $ 48,197 In July 2020, the Company entered into two facility lease agreements for terms ranging from 8 - 12 years. One of the lease agreements provides an option to renew the lease term for an additional ten years . As of December 31, 2020, the Company has additional future minimum lease payments relating to these two facility lease agreements that have not yet commenced amounting to $ 239.5 million. The Company anticipates to take possession of these facilities within the second fiscal quarter of 2021. Finance leases are not material to the Company's consolidated financial statements. 10. Commitments and Contingencies License Agreements The Company has patent license agreements with four different parties. Under these agreements, the Company has made one-time upfront and milestone payments, which it has capitalized and is amortizing to expense ratably over the useful life of the underlying patent right(s). Under some of these agreements, the Company is obligated to pay low single-digit percentage running royalties on net sales where the licensed patent right(s) are used in the product or service sold, subject to minimum annual royalties or fees in certain agreements. Royalty expenses were included in cost of precision oncology testing on the accompanying consolidated statements of operations. The Company recognized royalty expenses of $ 1.1 million, $ 4.4 million and $ 1.4 million, or 0.4 %, 2 % and 2 % of precision oncology testing revenue in each period, for the years ended December 31, 2020, 2019 and 2018, respectively. Indemnification Agreements The Company has entered into indemnification agreements with certain directors and officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no such matters have arisen and the Company does not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on its financial positions, results of operations or cash flows. Accordingly, the Company has not recorded a liability related to such indemnifications as of December 31, 2020. Legal Proceedings In addition to commitments and obligations incurred in the ordinary course of business, from time to time the Company may be subject to a variety of claims and legal proceedings, including claims from customers and vendors, pending and potential legal actions for damages, governmental investigations and other matters. For example, the Company has received, and may in the future continue to receive letters, claims or complaints from others alleging false advertising, patent infringement, violation of employment practices and trademark infringement. The Company has also instituted, and may in the future institute, additional legal proceedings to enforce its rights and seek remedies, such as monetary damages, injunctive relief and declaratory relief. The Company cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact because of diversion of management time and attention as well as the financial costs related to resolving such disputes. 129 Table of Contents The Company and its affiliates are parties to the legal claims and proceedings described below. The Company is vigorously defending itself against those claims and in those proceedings. Significant developments in those matters are described below. If the Company is unsuccessful in defending, or if it determines to settle, any of these matters, it may be required to pay substantial sums, be subject to injunction and/or be forced to change how it operates its business, which could have a material adverse impact on its financial position or results of operations. Unless otherwise stated, the Company is unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for the Company to determine that a loss is probable for a claim, or to reasonably estimate the amount of loss or a range of loss, because of the limited information available and the potential effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the claim. Many of the matters described are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for claims to be resolved over a number of years. The Company reviews loss contingencies at least quarterly to determine whether the loss probability has changed and whether it can make a reasonable estimate of the possible loss or range of loss. When the Company determines that a loss from a claim is probable and reasonably estimable, it records a liability in the amount of its estimate for the ultimate loss. The Company also provides disclosure when it is reasonably possible that a loss may be incurred or when it is reasonably possible that the amount of a loss will exceed its recorded liability. Patent Disputes In November 2017, the Company filed a lawsuit against Foundation Medicine, Inc. (“Foundation Medicine”) in the United States District Court for the District of Delaware. The Company has alleged that Foundation Medicine has infringed four of the Company’s digital sequencing technology patents. Foundation Medicine has asserted counterclaims of patent invalidity, unenforceability under the doctrine of inequitable conduct, and non-infringement. The parties are seeking damages, injunctive relief and attorneys’ fees. Discovery in the lawsuit has closed, and a number of pre-trial motions were filed in September and October 2020. The trial is presently continued pending resolution by the District Court of the pre-trial motions. Foundation Medicine also filed six petitions for inter partes review with the PTAB, challenging the patentability of all four of the patents asserted by the Company. The PTAB denied institution of inter partes review for four of the six petitions filed by Foundation Medicine and instituted inter partes review for the remaining two petitions. The Company plans to vigorously defend its patent rights during such PTAB actions. At this time, the Company cannot reasonably ascertain the likelihood that any of the remaining challenged patents will be found to be invalid or unenforceable. On August 31, 2020, the Company and Personal Genome Diagnostics, Inc. settled the patent infringement lawsuit brought by the Company. Under the terms of the confidential settlement, the lawsuit and counterclaims, as well as other challenges to the Company’s patents, have been dismissed. Other Disputes In the first quarter of 2018, the Company settled a commercial dispute. In connection with the settlement, the Company received a payment of $ 4.25 million, which was reported as other income in the consolidated statements of operations for the year ended December 31, 2018. 11. Common Stock The Company’s common stockholders are entitled to dividends if and when declared by the Company’s Board of Directors (the “Board of Directors”). As of December 31, 2020 and 2019, no dividends on the Company’s common stock had been declared by the Board of Directors. 130 Table of Contents The Company’s common stock has been reserved for the following potential future issuances: As of December 31, 2020 2019 Shares underlying outstanding stock options 3,101,181 4,494,889 Shares underlying unvested restricted stock units 1,118,655 496,131 Market-based restricted stock units 3,391,148 — Performance-based restricted stock units 377,922 — Shares available for issuance under the 2018 Incentive Award Plan 1,819,223 2,726,225 Shares available for issuance under the 2018 Employee Stock Purchase Plan 1,536,491 689,917 Total 11,344,620 8,407,162 Reverse Stock Split In September 2018, the Board of Directors and its stockholders approved a 0.7378 -for-one reverse stock split of the Company’s common stock. The reverse stock split became effective on September 19, 2018. The par value of the common stock was not adjusted as a result of the reverse stock split. Adjustments corresponding to the reverse stock split were made to the ratio at which the convertible preferred stock was convertible into common stock immediately prior to the closing of the IPO. Initial Public Offering In October 2018, the Company completed the IPO, in which it issued and sold 14,375,000 shares of its common stock at a price of $ 19.00 per share. The Company received net proceeds of $ 249.5 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. All then-outstanding warrants to purchase the Company’s common stock were exercised prior to the completion of the IPO. In addition, in connection with the IPO, all shares of the Company’s then-outstanding convertible preferred stock were automatically converted into 58,264,577 shares of its common stock, and all then-outstanding warrants to purchase the Company’s convertible preferred stock were automatically converted into warrants to purchase 7,636 shares of the Company’s common stock. Follow-on Offering In May 2019, the Company completed an underwritten public offering, in which it issued and sold 5,175,000 shares of its common stock at a price of $ 71.00 per share. The Company received net proceeds of $ 349.7 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. In June 2020, the Company completed an underwritten public offering, in which it issued and sold 4,312,500 shares of its common stock at a price of $ 84.00 per share. The Company received net proceeds of $ 354.6 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. 12. Warrants In connection with a bank loan agreement with a financial institution in September 2013, the Company issued warrants to purchase 5,386 shares of Series A convertible preferred stock at an exercise price of $ 0.93 per share. In October 2014, the Company issued additional warrants to the same financial institution to purchase 4,965 shares of Series B convertible preferred stock at an exercise price of $ 3.16 per share. These preferred stock warrants were converted to warrants to purchase common stock upon the consummation of the IPO and were net exercised into 6,548 shares of common stock in October 2018. In 2012, the Company issued to certain investors warrants to purchase 495,775 shares of common stock. The exercise price of the warrants is $ 0.14 per share and the warrants have a contractual term through September 2023. For the year ended December 31, 2018, 313,741 shares were issued upon the exercise of these warrants, and these warrants were fully exercised prior to the consummation of the IPO in October 2018. No warrants remained outstanding as of December 31, 2020 and 2019. 13. Convertible Preferred Stock The Company previously issued convertible preferred stock in one or more series, each with such designations, rights, qualifications, limitations, and restrictions as set forth in the Company’s certificate of incorporation, as in effect prior to the IPO. Immediately prior to the completion of the IPO, as described in Note 1, Description of 131 Table of Contents Business , all shares of convertible preferred stock then outstanding were automatically converted to 58,264,577 shares of common stock at the respective conversion ratios in October 2018. 14. Stock-Based Compensation 2012 Stock Plan and 2018 Incentive Award Plan In June 2012 and September 2018, the Company’s Board of Directors adopted and its stockholders approved the Company’s 2012 Stock Plan (as amended and restated, the “2012 Plan”) and the Company’s 2018 Incentive Award Plan (the “2018 Plan”), respectively, under which the Company may grant cash and equity incentive awards such as stock options, restricted shares, stock units and stock appreciation rights to its employees and non-employees. Stock options granted may be either incentive stock options or nonstatutory stock options. Shares issued under the 2018 Plan may be authorized but unissued shares, or shares purchased in the open market or treasury shares. Upon effectiveness of the 2018 Plan in connection with the IPO in October 2018, the 2012 Plan was terminated and 508,847 shares reserved under the 2012 Plan were forfeited. Any outstanding awards granted under the 2012 Plan remain outstanding, subject to the terms of the 2012 Plan and applicable award agreement, and further cancellation of awards granted under the 2012 Plan are not available for grant in the future. No further grants will be made under the 2012 Plan. 132 Table of Contents Stock Option Activity A summary of the Company’s stock option activity under the 2012 Plan and the 2018 Plan and related information is as follows: Options Outstanding Shares Available for Grant Shares Subject to Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Balance as of January 1, 2018 1,698,790 7,391,052 $ 3.63 8.6 $ 3,325 Shares authorized in 2018 Plan 3,658,602 — Shares forfeited ( 508,847 ) — Granted ( 2,088,639 ) 2,088,639 7.19 Exercised — ( 1,007,387 ) 3.09 Canceled 795,371 ( 883,899 ) 4.57 Repurchase of early exercised shares 1,230 — Balance as of December 31, 2018 3,556,507 7,588,405 4.58 8.3 250,495 Granted ( 324,579 ) 324,579 88.18 Exercised — ( 2,999,419 ) 3.87 Canceled 12,636 ( 418,676 ) 6.64 Restricted stock units granted ( 567,425 ) — Restricted stock units canceled 49,086 — Balance as of December 31, 2019 2,726,225 4,494,889 10.90 7.7 306,392 2018 Plan annual increase (1) 3,689,000 — Granted ( 127,590 ) 127,590 81.78 Exercised — ( 1,446,843 ) 6.59 Canceled 20,370 ( 74,455 ) 12.13 Restricted stock units granted ( 823,454 ) — Restricted stock units canceled 103,742 — Market-based restricted stock units granted ( 3,391,148 ) — Performance-based restricted stock units granted ( 377,922 ) — Balance as of December 31, 2020 1,819,223 3,101,181 $ 15.80 6.9 $ 350,670 Vested and Exercisable as of December 31, 2020 1,920,724 $ 8.04 6.5 $ 232,094 (1) Effective as of January 1, 2020, an additional 3,689,000 shares of common stock became available for issuance under the 2018 Plan, as a result of the operation of an automatic annual increase provision therein. Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value of the options exercised was $ 120.0 million, $ 218.2 million and $ 8.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. The weighted-average grant date fair value of options granted was $ 48.99 , $ 52.37 and $ 5.17 per share for the years ended December 31, 2020, 2019 and 2018, respectively. Future stock-based compensation for unvested options as of December 31, 2020 was $ 20.9 million, which is expected to be recognized over a weighted-average period of 2.7 years. In December 31, 2020 and 2019, the Company modified one of the performance based awards issued to a nonemployee which resulted in reversal of expense of $ 0.7 million and $ 1.0 million, respectively, due to options not vested. 133 Table of Contents Restricted Stock Units A summary of the Company’s restricted stock unit activity excluding the performance-based and market-based restricted stock units under the 2012 Plan and the 2018 Plan and related information is as follows: Restricted Stock Units Outstanding Weighted-Average Grant Date Fair Value Balance as of December 31, 2018 — $ — Granted 567,425 78.61 Vested and released ( 22,208 ) 47.78 Canceled ( 49,086 ) 57.51 Balance as of December 31, 2019 496,131 82.08 Granted 823,454 96.39 Vested and released ( 97,188 ) 81.43 Canceled ( 103,742 ) 79.72 Balance as of December 31, 2020 1,118,655 $ 92.89 Future stock-based compensation for unvested restricted stock units as of December 31, 2020 was $ 93.4 million, which is expected to be recognized over a weighted-average period of 3.4 years. Performance-based Restricted Stock Units In November 2020, the Compensation Committee of the Board of Directors approved a total of 377,922 performance-based restricted stock units (“PSUs”) which have a grant date fair value of approximately $ 42.9 million. The PSUs consist of financial and operational metrics to be met over a performance period of 4 years and an additional service period requirement of six months after the performance metrics are met. These equity awards are expected to be expensed over a period of approximately 4.5 years subject to meeting the performance metrics and service requirements. As of December 31, 2020, a significant portion of these PSUs are not expected to achieve the related performance metrics, and therefore, no stock-based compensation expense was recorded for the PSUs that were not probable to vest. Stock-based compensation recorded for the PSUs for the year ended December 31, 2020 was $ 0.1 million. Future stock-based compensation for unvested PSUs that are probable to vest as of December 31, 2020 was $ 2.1 million, which is expected to be recognized over a weighted-average period of 4.3 years. Market-based Restricted Stock Units In May 2020, the Board of Directors approved and granted 1,695,574 market-based restricted stock units (“MSUs”) under the 2018 Plan to each of the Company's Chief Executive Officer and the Company's President and Chief Operating Officer, which is subject to the achievement of market-based share price goals established by the Board of Directors. The MSUs consist of three separate tranches and the vesting of each tranche is subject to the Company's common stock closing price being maintained at or above a predetermined share price goal for a period of 30 consecutive calendar days. The share price goal can be met any time during the seven-year performance period from the date of grant. Upon vesting, the MSUs must be held for a period of six to twelve months depending on the time of vesting within the seven-year performance period. The vesting of the MSUs can also be triggered upon a change in control event and achievement of a certain change in control price goal, or when there is a qualifying termination or in the event of death or disability. The following table presents additional information relating to each MSU award: Tranche Price Goal Number of RSUs Tranche 1 $120 per share 565,192 Tranche 2 $150 per share 565,191 Tranche 3 $200 per share 565,191 The grant date fair values of the MSUs were determined using a Monte Carlo valuation model for each tranche. The related stock-based compensation expense for each tranche is recognized based on an accelerated attribution method 134 Table of Contents over the estimated derived service period. If the related share price goal is achieved earlier than its expected derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal. The derived service period is the median duration of the successful stock price paths to meet the price goal for each tranche as simulated in the Monte Carlo valuation model. The Monte Carlo valuation model uses assumptions such as volatility, risk-free interest rate, cost of equity and dividend estimated for the performance period of the MSU. The weighted average grant date fair value of the MSUs was $ 67.00 and the weighted average derived service period was estimated to be in the range of 0.83 – 2.07 years. Stock-based compensation recorded for the MSUs for the year ended December 31, 2020 was $ 111.9 million and is recorded in general and administrative expenses in our consolidated statement of operations. Future stock-based compensation for unvested MSUs as of December 31, 2020 was $ 115.3 million, which is expected to be recognized over a weighted-average period of 1.0 years. In the event of a change in control, a qualifying termination, death, disability or the share price goal occurring earlier than the estimated derived service period, the stock-based compensation relating to these MSUs could be accelerated. On January 1, 2021, Tranche 1 of the MSUs became vested because it has met both service requirement and market-based performance metrics as the predetermined share price goal of $120 per share was achieved for a period of 30 consecutive calendar days. Any MSUs that remain unvested at the end of the 7-year performance period will automatically be forfeited and terminated without further consideration. AMEA 2020 Equity Incentive Plan In August 2020, the board of directors of the Joint Venture approved its 2020 Equity Incentive Plan (the “AMEA 2020 Plan”), under which the Joint Venture may grant equity incentive awards such as stock options, restricted stock, restricted stock units, stock appreciation rights and cash-based awards to its employees and non-employees. Stock options granted may be either incentive stock options or nonstatutory stock options. Incentive stock options may be granted only to employees of the Joint Venture or its affiliates. Nonstatutory stock options may be granted to employees, directors and non-employee consultants. Stock options may be granted at an exercise price of not less than the fair market value of the Joint Venture's common stock on the date of grant, determined by the board of directors of the Joint Venture. Options generally vest over 4 years and expire as determined by the board of directors of the Joint Venture, provided that the term of options may not exceed 10 years from the date of grant. For individuals holding more than 10 % of the total combined voting power of all classes of stock of the Joint Venture, the exercise price of an option will not be less than 110 % of the fair market value of the Joint Venture's common stock on the date of grant, and the term of the option will not exceed 5 years. A total of 4,595,555 shares of the Joint Venture's Class B common stock are initially reserved for issuance under the AMEA 2020 Plan, and the number of shares may be increased in accordance with the terms of the AMEA 2020 Plan. A summary of the Joint Venture's stock option activity under the AMEA 2020 Plan and related information is as follows: Options Outstanding Shares Available for Grant Shares Subject to Options Outstanding Weighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years) Aggregate Intrinsic Value (in thousands) Balance as of December 31, 2019 — — $ — 0.0 $ — Shares authorized 4,595,555 — — Granted ( 4,062,224 ) 4,062,224 0.58 Canceled 8,889 ( 8,889 ) — Balance as of December 31, 2020 542,220 4,053,335 $ 0.58 9.6 $ — Vested and Exercisable as of December 31, 2020 1,980,707 $ 0.58 9.6 $ — The weighted-average grant date fair value of options granted was $ 0.33 per share for the year ended December 31, 2020. Future stock-based compensation for unvested options as of December 31, 2020 was $ 0.7 million, which is expected to be recognized over a weighted-average period of 2.2 years. 135 Table of Contents Stock‑Based Compensation Expense The following table presents the effect of employee and non‑employee related stock‑based compensation expense including the Joint Venture: Year Ended December 31, 2020 2019 2018 (in thousands) Cost of precision oncology testing $ 1,839 $ 863 $ 512 Research and development expense 10,024 5,907 1,684 Sales and marketing expense 9,279 4,716 1,727 General and administrative expense 122,971 5,468 2,928 Total stock-based compensation expense $ 144,113 $ 16,954 $ 6,851 Valuation of Stock Options Starting January 1, 2019, the Company adopted ASU 2018-07 which aligns the accounting treatment of nonemployee awards with employee awards, and the fair value of stock options issued to employees and nonemployee consultants are both determined as of the grant date. The grant date fair value of employee and nonemployee stock options was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions including the Joint Venture: Year Ended December 31, 2020 2019 2018 Expected term (in years) 5.50 – 6.10 5.50 – 6.22 5.01 – 6.51 Expected volatility 63.6 % – 73.3 % 63.2 % – 68.7 % 68.7 % – 78.8 % Risk-free interest rate 0.3 % – 1.6 % 1.6 % – 2.7 % 2.5 % – 3.0 % Expected dividend yield — % — % — % The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of common stock of the Company and the Joint Venture, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The valuation assumptions were determined as follows: Fair Value of Common Stock Prior to the IPO, the grant date fair value of the Company’s common stock was determined by the Board of Directors with the assistance of management and an independent third-party valuation specialist. Subsequent to the IPO, the fair value of the Company’s common stock is determined by the closing price, on the date of grant, of its common stock, which is traded on the Nasdaq Global Select Market. The grant date fair value of the Joint Venture's common stock has been determined by the board of directors of the Joint Venture. The grant date fair value of the Joint Venture’s common stock was determined using valuation methodologies which utilize certain assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability. In determining the fair value of the Joint Venture’s common stock, the methodologies used to estimate the enterprise value of the Joint Venture were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . Expected Term The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term. 136 Table of Contents Expected Volatility Prior to the commencement of trading of the Company’s common stock on the Nasdaq Global Select Market on October 4, 2018 in connection with the IPO, there was no active trading market for the Company’s common stock. Due to limited historical data for the trading of the Company’s common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies in the same industry plus the Company's expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty. The Joint Venture derived the expected volatility from the average historical volatility over a period approximately equal to the expected term of comparable publicly traded companies within its peer group that were deemed to be representative of future stock price trends as the Joint Venture does not have any trading history for its common stock. The Joint Venture will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. Risk-Free Interest Rate The risk-free interest rate is based on the U.S. Treasury rate, with maturities similar to the expected term of the stock options. Expected Dividend Yield The Company and the Joint Venture does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero . Valuation of MSUs The estimated fair value of the MSUs was determined using a Monte Carlo simulation model. The valuation assumptions used were substantially consistent with the assumption used to value stock options with the exception of the following: Expected Volatility Due to limited historical data for the trading of the Company’s common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies and implied volatility of publicly traded options in the same industry plus the Company's expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty. Expected Term The expected term represents the derived service period for the respective tranches which has been estimated using the Monte Carlo simulation model. Risky Rate The risky rate represents the Company's cost of equity. Discount for Lack of Marketability The discount for lack of marketability represents the discount applied for post vest term restrictions and has been derived using the Monte Carlo simulation model. The following assumptions were used to calculate the stock-based compensation for MSUs: a weighted-average expected term of 0.83 – 2.07 years; expected volatility of 65.5 %; a risk-free interest rate of 0.53 %; a zero dividend yield; a risky rate (cost of equity) of 16 %; and a discount for post-vesting restrictions of 10.4 % – 14.5 %. 2018 Employee Stock Purchase Plan In September 2018, the Company’s Board of Directors adopted and its stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”). A total of 922,250 shares of common stock were initially reserved for issuance under the ESPP. Effective as of January 1, 2020, an additional 942,614 shares of common stock became available for issuance under the ESPP, as a result of the operation of an automatic annual increase provision therein. Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 10 % of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85 % of the fair market value of the 137 Table of Contents Company’s common stock on the first or last day of the offering period, whichever is lower. The initial offering period ran from October 2, 2018 to January 31, 2019, the second offering period ran from February 1, 2019 to July 31, 2019, and the third offering period began on August 1, 2019 and ran to November 14, 2019. For subsequent years starting with 2020, the ESPP provides for separate six-month offering periods beginning on May 15 and November 15 of each year. Shares of common stock purchased under the ESPP were 96,040 and 232,333 for the years ended December 31, 2020 and 2019, respectively. No shares were purchased under the ESPP for the year ended December 31, 2018. The total compensation expense related to the ESPP was $ 3.0 million, $ 2.3 million and $ 0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. The fair value of the stock purchase right granted under the ESPP was estimated on the first day of each offering period using the Black-Scholes option pricing model. The valuation assumptions used were substantially consistent with the assumption used to value stock options with the exception of the expected term which was based on the term of each purchase period. The grant date fair value of the stock purchase right granted under the ESPP was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions: Year Ended December 31, 2020 2019 2018 Expected term (in years) 0.50 0.29 – 0.50 0.33 Expected volatility 45.7 % – 73.2 % 58.8 % – 60.3 % 43.6 % Risk-free interest rate 0.1 % – 0.2 % 1.6 % – 2.5 % 2.4 % Expected dividend yield — % — % — % As of December 31, 2020, the unrecognized stock-based compensation expense related to the ESPP was $ 1.2 million , which is expected to be recognized over the remaining term of the offering period of 0.4 years. Liabilities for Early Exercise of Employee Options The Company allowed certain stock option holders to exercise unvested options to purchase shares of the Company’s common stock. Shares received from such early exercises are subject to repurchase in the event of the optionee’s employment termination, at the original issuance price, until the options are fully vested. As of December 31, 2020 and 2019, 12,914 shares and 23,981 shares of common stock were subject to repurchase at weighted-average price of $ 4.66 per share, respectively. As of December 31, 2020 and 2019, the cash proceeds received for unvested shares of common stock of $ 0.1 million and $ 0.1 million was recorded within other long-term liabilities on the consolidated balance sheet, respectively. The shares issued pursuant to unvested options have been included in shares issued and outstanding on the consolidated balance sheet and consolidated statement of redeemable noncontrolling interest and stockholders’ equity as such shares are considered legally outstanding. 15. Net Loss Per Share Attributable to Guardant Health, Inc. Common Stockholders The following table sets forth the computation of the basic and diluted net loss per share attributable to Guardant Health, Inc. common stockholders: Year Ended December 31, 2020 2019 2018 (in thousands, except per share data) Net loss $ ( 246,283 ) $ ( 67,851 ) $ ( 84,263 ) Adjustment of redeemable noncontrolling interest ( 7,500 ) ( 7,800 ) ( 800 ) Net loss attributable to Guardant Health, Inc. common stockholders, basic and diluted $ ( 253,783 ) $ ( 75,651 ) $ ( 85,063 ) Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted $ ( 2.60 ) $ ( 0.84 ) $ ( 2.80 ) Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted 97,504 90,597 30,403 138 Table of Contents Since the Company was in a loss position for all periods presented, basic net loss per share attributable to Guardant Health, Inc. common stockholders is the same as diluted net loss per share attributable to Guardant Health, Inc. common stockholders, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share attributable to Guardant Health, Inc. common stockholders for the periods presented as they had an anti-dilutive effect: Year Ended December 31, 2020 2019 2018 (in thousands) Convertible preferred stock (on an as if converted basis) — — 43,898 Preferred stock warrants (on an as if converted basis) — — 6 Common stock warrants — — 208 Stock options issued and outstanding (1) 3,830 5,976 7,527 Restricted stock units 687 252 — MSUs 2,031 — — PSUs 60 — — ESPP obligation 37 52 22 Common stock subject to repurchase 18 31 46 Convertible senior notes 961 — — Total 7,624 6,311 51,707 (1) Excludes stock options of 4,053,335 shares of the Joint Venture's Class B common stock granted under the AMEA 2020 Plan as of December 31, 2020. 16. Income Taxes The components of loss before provision for income taxes were as follows (in thousands): Year Ended December 31, 2020 2019 2018 (in thousands) United States $ ( 246,463 ) $ ( 69,930 ) $ ( 84,313 ) Foreign 559 207 88 Total ( 245,904 ) ( 69,723 ) ( 84,225 ) The components of the provision for income taxes are as follows: Year Ended December 31, 2020 2019 2018 (in thousands) Current: State $ 5 $ 3 $ 4 Foreign 242 266 34 Total current tax expense $ 247 $ 269 $ 38 Deferred: Federal $ 184 $ ( 1,652 ) $ — State 34 ( 311 ) — Foreign ( 86 ) ( 178 ) — Total deferred tax expense $ 132 $ ( 2,141 ) $ — Total provision for income taxes $ 379 $ ( 1,872 ) $ 38 139 Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows: As of December 31, 2020 2019 (in thousands) Deferred tax assets: Net operating losses carryforwards $ 133,015 $ 90,534 Intangible assets 14,198 14,165 Accruals and reserves 10,117 4,936 Research and development credits 19,022 11,031 Stock-based compensation 28,745 3,143 Lease liabilities 12,092 10,195 Other 65 160 Total deferred tax asset $ 217,254 $ 134,164 Deferred tax liabilities: Property and equipment $ — $ ( 119 ) Section 481 (a) adjustment ( 607 ) ( 914 ) Right-of-use asset ( 9,383 ) ( 7,363 ) Unrealized gain/loss on investments ( 571 ) ( 346 ) Debt discount ( 81,964 ) — Total deferred tax liabilities ( 92,525 ) ( 8,742 ) Less: valuation allowance ( 124,433 ) ( 125,245 ) Net deferred tax assets $ 296 $ 177 The following table presents a reconciliation of the income tax expense computed at the statutory federal rate and the Company’s income tax expense for the periods presented: Year Ended December 31, 2020 2019 2018 (in thousands) Tax at the statutory federal rate $ ( 51,639 ) $ ( 14,642 ) $ ( 17,690 ) Other nondeductible items 786 887 329 Stock-based compensation ( 13,382 ) ( 33,042 ) 497 Research and development credits ( 7,890 ) ( 5,266 ) ( 1,726 ) Change in valuation allowance 81,395 59,049 22,516 State taxes, net of federal benefits ( 11,119 ) ( 8,253 ) ( 4,231 ) Change in tax rate due to Tax Act — — — Other 2,228 ( 605 ) 343 Total provision for (benefit from) income taxes $ 379 $ ( 1,872 ) $ 38 The Company’s actual tax expense differed from the statutory federal income tax expense using a tax rate of 21% for the year ended December 31, 2020, 2019 and 2018 primarily due to state and foreign income taxes, nondeductible expenses, research and development tax credits, the acquisition of Bellwether Bio, and the change in valuation allowance. The benefit from income taxes for the year ended December 31, 2019 included a release of a valuation allowance of $ 1.6 million associated with nondeductible intangible assets recorded as a result of the acquisition of Bellwether Bio. In connection with the acquisition of Bellwether Bio, a deferred tax liability was established for the book-tax basis differences related to the non-goodwill intangible assets. The net deferred tax liability from this acquisition creates an additional source of income to offset the Company’s deferred tax assets. The benefit from income taxes for the year ended December 31, 2019 also included a benefit of $ 0.4 million associated 140 with the utilization of tax losses from continuing operations against other comprehensive income gains in accordance with intra-period tax allocation under ASC Topic 740. As of December 31, 2020 and 2019, the Company had a net operating loss carryforwards of $ 547.3 million and $ 365.3 million for federal purposes, $ 306.7 million and $ 223.2 million for state and local purposes, respectively, which may be subject to limitations as described below. If not utilized, these carryforwards will begin to expire in 2031 for federal, and 2021 for state and local purposes. Federal net operating losses incurred in 2018 and in future years may be carried forward indefinitely, but the deductibility of such federal net operating losses is limited. Some but not all states conform to the federal treatment of net operating losses. As of December 31, 2020 and 2019, the Company had research and development tax credit carryforwards for federal tax purposes of $ 11.9 million and $ 6.8 million, and state research and development tax credit carryforwards of $ 9.1 million and $ 5.3 million, respectively. The federal research and development tax credit carryforwards will expire at various dates beginning in the year 2032. The Company’s state research and development tax credit carryforwards do not expire. Utilization of the net operating loss (“NOL”) carryforwards and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation may result in the expiration of NOL carryforwards and credits before utilization. Current laws impose substantial restrictions on the utilization of NOL carryforwards and credits in the event of an “ownership change” within a three-year period as defined by the Internal Revenue Code Section 382 (“Section 382”). If there should be an ownership change, the Company’s ability to utilize its NOL carryforwards and credits could be limited. The Company has not performed a Section 382 analysis. Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Due to the Company’s history of U.S. operating losses, the Company believes that the recognition of the deferred tax assets arising from the above-mentioned future tax benefits is currently not more likely than not to be realized and, accordingly, have provided a full valuation allowance against net U.S. deferred tax assets. The net change in total valuation allowance was a decrease of $ 0.8 million, and an increase of $ 59.0 million and $ 22.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The Company has not recorded a provision for deferred U.S. tax expense that could result from the remittance of foreign undistributed earnings since the Company intends to reinvest the earnings in its foreign subsidiaries indefinitely. The Company has made an accounting policy election to treat Global Intangible Low-Taxed Income ("GILTI") taxes as a current period expense rather than including these amounts in the measurement of deferred taxes. Uncertain Tax Positions The Company records unrecognized tax benefits, where appropriate, for all uncertain income tax positions. The Company recorded unrecognized tax benefits for uncertain tax positions of $ 11.3 million and $ 6.5 million as of December 31, 2020 and 2019, respectively, none of which would impact the Company’s effective tax rate if recognized, because the benefit would be offset by an increase in the valuation allowance. A reconciliation of the beginning and ending balance of total unrecognized tax benefits is as follows: Year Ended December 31, 2020 2019 2018 (in thousands) Unrecognized tax benefits - Beginning of period $ 6,543 $ 3,427 $ 1,712 Increases related to current year’s tax positions 4,666 3,116 1,635 Increases related to prior years’ tax positions 60 — 80 Unrecognized tax benefits - End of period $ 11,269 $ 6,543 $ 3,427 The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. During the years ended December 31, 2020, 2019 and 2018, the Company recognized no interest and penalties associated with unrecognized tax benefits. There are no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date. 141 Due to the net operating loss carryforwards, all years remain open for income tax examination by tax authorities in the United States, various states and foreign tax jurisdictions in which the Company files tax returns. 17. Employee Benefit Plan The Company sponsors a 401(k) plan, and pursuant to its terms, eligible employees can elect to contribute to the 401(k) plan, subject to certain limitations, up to the lesser of the statutory maximum or 100 % of eligible compensation on a pre-tax basis. For the years ended December 31, 2020 and 2019, the Company contributed $ 2.8 million and $ 0.3 million, respectively, to match employee contributions as permitted by the plan. For the year ended December 31, 2018, the Company did not elect to match employee contributions as permitted by the plan. The Company pays the administrative costs for the plan. 18. Segment and Geographic Information The following table sets forth the Company’s revenue by geographic areas based on the customers’ locations: Year Ended December 31, 2020 2019 2018 (in thousands) United States (2) $ 264,657 $ 194,312 $ 77,916 International (1) (2) 22,073 20,063 12,723 Total revenue $ 286,730 $ 214,375 $ 90,639 (1) No single country outside of the United States accounted for more than 10% of total revenue during each of the years ended December 31, 2020, 2019 and 2018. (2) Fiscal years 2018 results do not reflect the impact of the adoption of the new revenue accounting standard in fiscal year 2019. As of December 31, 2020 and 2019, 94 % and 97 %, respectively, of the Company’s long-lived assets and right-of-use assets are located in the United States. 19. Related Party Transactions As discussed in Note 3, Investment in Joint Venture , the Company and an affiliate of SoftBank formed and capitalized the Joint Venture to accelerate commercialization of its products in Asia, the Middle East and Africa. The Company has consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances have been eliminated in consolidation. The Company and its subsidiaries may, in the ordinary course of business, have transactions with unaffiliated companies of which certain of the Company’s directors are directors and/or executive officers. The Company believes that such transactions are on the same terms generally offered by such other companies to other entities in comparable transactions. The Company does not consider the amounts involved in such transactions to be material in relation to its businesses, the businesses of such other companies or the interests of the directors involved. Revenue from an entity affiliated with a member of the Company's Board of Directors was $ 2.4 million and $ 2.6 million for the years ended December 31, 2020 and 2019. There was no revenue recognized by the Company from this entity for the year ended December 31, 2018. As of December 31, 2020 and 2019, the Company has accounts receivable from this entity of $ 1.8 million and $ 1.4 million, respectively. In October 2020, SoftBank entered into an underwriting agreement with an independent third party and sold 7,700,000 shares of the Company's common stock. The Company did not sell any shares of its common stock in this transaction. 142 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.