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Item 7. Management’s Discussion and Analysis

2022-02-24 compared with 2021-02-25 · 142 added, 219 removed, 404 unchanged (47% of the section changed)

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A detailed discussion comparing our results of operations for the years ended December 31, 2020 and 2019 can be found in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2020.

We are a leading precision oncology company focused on helping conquer cancer globally through use of our proprietary blood-based tests, vast data sets and advanced analytics.

We believe that the key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which we intend to enable by a routine blood draw, or liquid biopsy.

Our Guardant Health Oncology Platform is designed to leverage our 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 our goal to manage cancer across all stages of the disease, we have launched our Guardant360, Guardant360 CDx, and GuardantOMNI liquid biopsy-based tests for advanced stage cancer and our Guardant Reveal liquid biopsy-based tests for residual and recurring cancer to first address the need in Stage II-III colorectal cancer.

We are developing tests under our Guardant360 tissue program which aims to address challenges with tissue genotyping products currently available in the market and tests from our LUNAR program which aims 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.

We are a leading precision oncology company focused on helping conquer cancer globally through use of our proprietary tests, vast data sets and advanced analytics.

Today our proprietary tests are helping to realize the full potential of precision oncology by providing patients and their doctors critical insights that can inform decisions at all stages of the disease, from screening, to monitoring cancer recurrence, to treatment decisions.

We believe that the key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which we intend to enable by our tests.

By looking at the unique dimensions of cancer found in blood, including genomic alterations, methylation, and fragmentomics, we are unlocking insights that can increasingly help patients across all stages of cancer, including at its earliest, when it’s most treatable.

To help identify cancer at the earliest stages, we are developing Guardant SHIELD, a blood test for cancer screening in average-risk adults without symptoms, that detects very early signs of cancer by interrogating genomic alterations, methylation, and fragmentomic signals from a simple blood draw.

In pursuit of our goal to manage cancer across all stages of the disease, we provide our Guardant360, Guardant360 LDT, Guardant360 CDx and GuardantOMNI liquid biopsy-based tests for advanced stage cancer.

Our Guardant360 CDx test was the first comprehensive liquid biopsy test approved by the U.S.

Food and Drug Administration, or the FDA, to provide tumor mutation profiling with solid tumors and to be used as a companion diagnostic in connection with non-small cell lung cancer, or NSCLC.

In February 2021, we launched our Guardant Reveal liquid biopsy-based tests for residual and recurring cancer to first address the need in Stage II-III colorectal cancer.

In June 2021, we launched Guardant360 TissueNext, our first tissue-based test which will be used to identify patients with advanced cancer who may benefit from biomarker-informed treatment, and Guardant360 Response which will be used to measure early indications to patients' response to treatment up to eight weeks earlier than response evaluation criteria in solid tumors.

We have also developed our GuardantINFORM platform to further accelerate precision oncology drug development by biopharmaceutical companies by offering them an in-silico research platform to unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers.

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Our laboratory is certified pursuant to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, permitted by the New York State Department of Health, or NYSDOH, and licensed in California and four other states.

In September 2020, we dual-launched our Guardant360 CDx and Guardant360 LDT tests.

Our Guardant360 CDx test was the first comprehensive liquid biopsy test approved by the U.S.

Food and Drug Administration, or the FDA, to provide tumor mutation profiling for cancer patients with solid tumors and to be used as a companion diagnostic initially in connection with one therapeutic product of a biopharmaceutical customer.

In the United States, we market our tests to clinical customers through our sales organization, which is engaged in sales efforts and promotional activities primarily targeting oncologists and cancer centers.

Outside the United States, we market our tests to clinical customers through distributors and direct contracts with healthcare institutions and partnerships with research organizations.

We also market our tests to biopharmaceutical customers globally through our business development team, which promotes the broad utility of our tests throughout drug development and commercialization.

Additionally, we have established a joint venture with SoftBank to accelerate commercialization of our products including in Asia, the Middle East and Africa.

We generated total revenue of $373.7 million, $286.7 million and $214.4 million for the years ended December 31, 2021, 2020 and 2019, respectively.

We also incurred net losses of $246.3 million, $67.9 million and $84.3 million in

the years ended December 31, 2020, 2019 and 2018, respectively.

We have funded our operations to date principally from the sale of our common stock, the issuance of convertible senior notes, and revenue from our precision oncology testing and development services and other.

In October 2018, we completed our initial public offering, or the IPO, selling 14,375,000 shares of our common stock and raising $249.5 million net of underwriting discounts and commissions and other expenses payable by us.

We also incurred net losses of $384.8 million, $246.3 million and $67.9 million in the years ended December 31, 2021, 2020 and 2019, respectively.

We have funded our operations to date principally from the sale of our stock, convertible senior notes, and revenue from our precision oncology testing and development services and other.

In May 2019, we completed an underwritten public offering of a total of 5,175,000 shares of our common stock, through which we received net proceeds of $349.7 million after deducting underwriting discounts and commissions and offering expenses payable by us.

In June 2020, we completed an underwritten public offering of a total of 4,312,500 shares of our common stock, through which we received net proceeds of $354.6 million after deducting underwriting discounts and commissions and offering expenses payable by us.

In November 2020, we issued our convertible senior notes with an aggregate principal amount of $1.15 billion.

In November 2020, we issued our convertible senior notes with an aggregate principal amount of $1.15

As of December 31, 2021, we had cash, cash equivalents and marketable securities of approximately $1.6 billion.

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Customer mix for our tests has the potential to significantly affect our results of operations, as the average selling price for biopharmaceutical sample testing is currently higher than our average reimbursement for clinical tests because we are not a contracted provider for, or our tests are not covered by clinical patients’ insurance for, the majority of the tests that we perform for patients on behalf of clinicians.

Approximately 37%, 38% and 38% of our U.S.

clinical tests for the years ended December 31, 2020, 2019 and 2018 were for Medicare beneficiaries.

Revenue from clinical tests for patients covered by Medicare represented approximately 45%, 42% and 29% of our precision oncology revenue from clinical customers for the years ended December 31, 2021, 2020 and 2019, respectively.

• Payer coverage and reimbursement .

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The variable consideration is estimated based on historical collection patterns as well as the potential for changes in future reimbursement behavior by one or more payers.

Estimation of the impact of the potential for changes in reimbursement requires significant judgment and considers payer' past patterns of changes in reimbursement as well as any stated plans to implement changes.

Estimation of the impact of the potential for changes in reimbursement requires significant judgment and considers payers' past patterns of changes in reimbursement as well as any stated plans to implement changes.

Any cash collections over the expected reimbursement period exceeding the estimated variable consideration is recorded in future periods based on actual cash received.

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When we contract with a payer to serve as a participating provider, reimbursements by the payer are generally made pursuant to a negotiated fee schedule and are limited to only covered indications or where prior approval has been obtained.

Becoming a participating provider can result in higher reimbursement amounts for covered uses of our test and, potentially, no reimbursement for non-covered uses identified under the payer’s policies or the contract.

Becoming a participating provider can result in higher reimbursement amounts for covered uses of our tests and, potentially, no reimbursement for non-covered uses identified under the payer’s policies or the contract.

As a result, the potential for more favorable reimbursement associated with becoming a participating provider may be offset by a potential loss of reimbursement for non-covered uses of our tests.

Current Procedural Terminology, or CPT, coding plays a significant role in how our Guardant360 test is reimbursed both from commercial and governmental payers.

In addition, Z-Code Identifiers are used by certain payers, including under Medicare's Molecular Diagnostic Services Program, or MolDx, to supplement CPT codes for molecular diagnostics tests such as our Guardant360 test.

Changes to the codes used to report the Guardant360 test to payers may result in significant changes in its reimbursement.

If a coding change were to occur, including as a result of the FDA approval of our Guardant360 test, payments for certain uses of the Guardant360 test could be reduced, put on hold, or eliminated by such payers.

Cigna, Priority Health, multiple Blue Cross Blue Shield plans as well as the health plans associated with eviCore adopted policies that cover our Guardant360 test for the majority of NSCLC patients we test.

Current Procedural Terminology, or CPT, coding plays a significant role in how our tests are reimbursed both from commercial and governmental payers.

In addition, Z-Code Identifiers are used by certain payers, including under Medicare's Molecular Diagnostic Services Program, or MolDx, to supplement CPT codes for our molecular diagnostics tests.

Changes to the codes used to report to payers may result in significant changes in its reimbursement.

If their policies were to change in the future to cover additional cancer indications, we anticipate that our total reimbursement would increase.

For the years ended December 31, 2020, 2019 and 2018, approximately 43%, 44% and 46% of our U.S.

clinical tests were for

patients tested for NSCLC.

In September 2018, we began to receive reimbursements from Medicare for claims submitted with respect to Guardant360 clinical tests performed for NSCLC patients.

In March 2020, we began to receive reimbursement from Medicare for claims submitted, with respect to Guardant360 clinical tests performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin other than NSCLC.

Following the FDA approval of our Guardant360 CDx test, a new Z-Code Identifier is expected to be issued, and a new pricing is expected to be established under MolDx for the Guardant360 CDx test.

While we expect to continue to submit claims to Medicare for Guardant360 LDT clinical tests performed for such qualifying patients using the existing Z-Code Identifier, Medicare has instructed us to not submit claims to Medicare for Guardant360 CDx clinical tests until the new code is issued for the Guardant360 CDx test and the corresponding pricing is established.

This new pricing for Guardant360 CDx clinical tests could be different from the current pricing for Guardant360 LDT clinical tests which could affect our future revenue.

A proprietary laboratory analyses, or PLA code was issued for our Guardant360 CDx in January 2021 with an effective date in April 2021.

Once the code is effective, all Guardant360 CDx services will be billed with this new code.

Additionally, based on this new PLA code, we applied to CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT.

If CMS grants ADLT status to the Guardant360 CDx test, for the first three quarters thereafter, we can only bill Medicare at the lowest available commercial rate at the launch of the test.

After the initial three quarters, we can bill Medicare for Guardant360 CDx services at the median rate of claims paid by commercial payers.

Changes to the codes used to bill a test to payers may result in significant changes in its reimbursement, which could negatively impact our revenue.

As a result of implementing this new coding change for our Guardant360 CDx test, payments for Guardant360 CDx services could be reduced, put on hold, or eliminated by such payers.

Due to the inherent variability and unpredictability of the reimbursement landscape, including related to the amount that payers reimburse us for any of our tests, previously recorded revenue adjustments are not indicative of future revenue adjustments from actual cash collections, which may fluctuate significantly.

In May 2020, Noridian issued a coverage article and confirmed limited Medicare coverage for our Guardant360 test for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin who meet the criteria of Medicare’s National Coverage Determination for Next Generation Sequencing established in March 2018.

Following the FDA approval of our Guardant360 CDx test, a new Z-Code Identifier was issued in August 2020.

In January 2021, a proprietary laboratory analyses, or PLA code was issued for our Guardant360 CDx with an effective date in April 2021.

Additionally, based on this new PLA code, we applied to the Centers for Medicare and Medicaid Services or CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT.

In March 2021, CMS approved ADLT status to the Guardant360 CDx test, based on which Medicare paid us at the lowest available commercial rate per test, from April 1, 2021 to December 31, 2021.

After this period, Medicare would reimburse Guardant360 CDx services at the median rate of claims paid by commercial payers.

We are in the process of negotiating reimbursement for our Guardant Reveal, Guardant Response and Guardant360 TissueNext tests from commercial and governmental payers.

Due to the inherent

variability and unpredictability of the reimbursement landscape, including related to the amount that payers reimburse us for any of our tests, we estimate the amount of revenue to be recognized at the time a test is provided and record revenue adjustments if and when the cash subsequently received for a test differs from the revenue recorded for the test.

Due to this variability and unpredictability, previously recorded revenue adjustments are not indicative of future revenue adjustments from actual cash collections, which may fluctuate significantly.

Additionally, if coding changes were to occur, payments for certain uses of our tests could be reduced, put on hold, or eliminated.

This variability and unpredictability could increase the risk of future revenue reversal and result in our failing to meet any previously publicly stated guidance we may provide.

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Our revenue also depends on our ability to attract, maintain and expand relationships with biopharmaceutical customers.

As we continue to develop these relationships, we expect to support a growing number of clinical trials globally and continue to have opportunities to offer our platform to such customers for development services, including companion diagnostic development, novel target discovery and validation, as well as clinical trial enrollment.

For example, our Guardant360, Guardant360 CDx and GuardantOMNI tests are being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen, Janssen Biotech and Radius Health.

As we continue to develop these relationships, we expect to support a growing number of clinical studies globally and continue to have opportunities to offer our platform to such customers for development services, including companion diagnostic development, novel target discovery and validation, as well as clinical study enrollment.

For example, our tests are being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen, Daiichi Sankyo, Janssen Biotech and Radius Health.

• Research and development.

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In particular, we have invested heavily in clinical studies as we believe these studies are critical to gaining physician adoption and driving favorable coverage decisions by payers.

With respect to our LUNAR program, we initiated a prospective screening study, which we refer to as the ECLIPSE trial, aiming to recruit approximately 10,000 patients and evaluate the performance of our LUNAR-2 assay in detecting colorectal cancer in average-risk adults.

In addition, we are investing very heavily in establishing clinical utility of our Guardant Reveal test in adjuvant treatment settings.

In 2020, we launched three trials in collaboration with key cancer researchers:

COBRA, a randomized controlled study, comprising over 1,400 low-risk stage-II colon cancer patients, ACT-3, comprising over 500 stage 3 colorectal cancer patients, and PEGASUS for the de-escalation of therapy, encompassing over 140 high-risk stage-II and stage-III colon cancer patients.

With respect to Guardant Reveal, in 2021, we initiated a 1,000-patient prospective, observational, multi-center study, which we refer to as the ORACLE study, designed to evaluate the performance of our Guardant Reveal liquid biopsy test to predict cancer recurrence after curative intent treatment, across 11 solid tumor types.

With respect to Guardant SHIELD, we completed enrollment toward a prospective screening study, which we refer to as the ECLIPSE study, aiming to evaluate the performance of our Guardant SHIELD assay in detecting colorectal cancer in average-risk adults.

In addition, in early 2022, we enrolled the first patient in a nearly 10,000-patient prospective, registrational study, which we refer to as the SHIELD study, to evaluate the performance of our next-generation Guardant SHIELD assay in detecting lung cancer in high-risk individuals ages 50-80 and the study is anticipated to run in approximately 100 centers in the United States and Europe.

We have expended considerable resources, and expect to increase such expenditures over the next few years, to support our research and development programs with the goal of fueling further innovation.

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We expect to rely on the Joint Venture to accelerate commercialization of our products in Asia, the Middle East and Africa.

In November 2021, we exercised our call right contained in the joint venture agreement with SoftBank to purchase all of the shares held by SoftBank and its affiliates in consideration for the payment of the aggregate purchase price to be determined based on an independent third-party valuation.

The aggregate purchase price will be no less than an amount that yields a 20% internal rate of return on the $41.0 million of capital invested by SoftBank in May 2018 as stipulated in the joint venture agreement.

SoftBank and us have initiated a process to determine the independent valuation of the Joint Venture, which includes the appointment of independent appraisers by both SoftBank and us.

We expect to complete this transaction before the end of the second quarter of 2022.

• Sales and marketing expense .

Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our sales and marketing expense, and in particular, our various marketing programs around existing and new product introductions.

Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our sales and marketing expense, increase in headcount, and in particular, our various marketing programs around existing and new product introductions.

• General and administrative expense .

Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our general and administrative expense, and in particular, our stock-based compensation expense.

Our equity awards, including market-based restricted stock units and performance-based restricted stock units, are intended to retain and incentivize employees to lead us to sustained, long-term superior financial and operational performance.

Our equity awards, including market-based and performance-based restricted stock units, are intended to retain and incentivize employees to lead us to sustained, long-term superior financial and operational performance.

• COVID-19 Global Pandemic .

The global outbreak of coronavirus 2019, or COVID-19, has disrupted, and we expect will continue to disrupt, our operations.

To protect the health and well-being of our workforce, partners, vendors and customers, we have provided free COVID-19 testing for employees working on-site, implemented social distance and building entry policies at work, restricted travel and facility visits, and followed California’s “shelter in place” public health orders and the guidance from the Centers for Disease Control and Prevention.

The COVID-19 global pandemic also has started to negatively affect, and we expect will continue to negatively affect, our revenue and our clinical studies.

For example, our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical trials to advance their pipelines, for which our tests could be utilized.

We launched our Guardant-19 test and received the FDA’s emergency use authorization for use in the detection of the novel coronavirus.

The test is being offered to our employees and select partner organizations our CLIA-certified clinical laboratory.

We cannot predict the extent to which the Guardant-19 test will be used by third parties.

To protect the health and well-being of our workforce, partners, vendors and customers, we have provided free COVID-19 testing for all of our employees, contractors and their dependents, implemented social distance and building entry policies at work, and followed California’s public health orders and the guidance from the Centers for Disease Control and Prevention.

The COVID-19 global pandemic has negatively affected, and we expect will continue to negatively affect, our revenue and our clinical studies.

For example, our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical studies to advance their pipelines, for which our tests could be utilized.

In addition, disruptions caused by the pandemic have adversely affected the quantity and quality of certain sequencers, reagents, blood tubes and other similar materials that are critical to our commercial and research and development programs.

We currently have a limited amount of stock of these components.

Failure in the future to secure sufficient supply of critical components could materially and adversely affect our ability to manufacture or supply marketed products and product candidates or complete our ongoing research and development programs on the timelines previously established, which could materially and adversely affect our business and future prospects.

The severity of the impact on our business will depend on a number of factors, including the duration and severity of the pandemic and the impact of any variants of the virus on us, our customers, and our suppliers.

In August 2020, we launched our Guardant-19 test and received the FDA’s emergency use authorization for use in the detection of the novel coronavirus.

The test was being offered to our employees and to select partner organizations via our CLIA-certified clinical laboratory.

Effective August 2021, we have discontinued offering the test to third parties.

While each of these areas presents significant opportunities for us, they also pose significant risks and challenges that we must address.

See Part I, Item 1A, “Risk Factors ” of this Annual Report on Form 10-K for more information.

Non-GAAP Financial Measure

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“Adjusted EBITDA”), a non-GAAP financial measure is a key metric to assess period-to-period comparison in evaluating the performance of our core business by removing the impact of income (expenses) attributable to material non-cash items, specifically stock-based compensation and fair value remeasurements due to the subjectivity, management judgment, and market fluctuations involved around these amounts.

We exclude certain other items because we believe that these income (expenses) do not reflect expected future operating expenses.

Additionally, certain items are inconsistent in amounts and frequency, making it difficult to perform a meaningful evaluation of our current or past operating performance.

“Adjusted EBITDA” is defined by us as net loss attributable to Guardant Health, Inc.

common stockholders before:

(i) interest income, (ii) interest expense, (iii) provision for (benefit from) income taxes, (iv) depreciation and amortization expense, (v) other (income) expense, net, (vi) stock-based compensation expense, (vii) a djustments relating to non-controlling interest and contingent consideration and, (viii) acquisition-related expenses, and other non-recurring items, if applicable in a reporting period.

Our use of Adjusted EBITDA as a non-GAAP financial measure is not intended to be considered in isolation from, as substitute for, or as superior to, the corresponding financial measure prepared in accordance with GAAP and you should not consider it in isolation or substitute for analysis of our results reported under GAAP.

There are limitations inherent in non-GAAP financial measures because they exclude charges and credits that are required to be included in a GAAP presentation, and do not present the full measure of our recorded costs against its revenue.

In addition, our definition of non-GAAP financial measures may differ from non-GAAP measures used by other companies.

The following table reconciles net loss attributable to Guardant Health, Inc.

common stockholders (which is the most directly comparable GAAP operating financial measure) to Adjusted EBITDA.

Year Ended December 31,

Net loss attributable to Guardant Health, Inc.

common stockholders

$ (253,783) $ (75,651)

Interest income (10,171) (13,741)

Interest expense 4,766 1,181

Other (income) expense, net (3,641) (88)

Provision for (benefit from) income taxes 379 (1,872)

Depreciation and amortization 16,065 11,411

Stock-based compensation expense 144,113 16,954

Adjustments relating to noncontrolling interest and contingent consideration

Acquisition related expenses (1)

Adjusted EBITDA (non-GAAP)

$ (85,185) $ (53,284)

(1) For the year ended December 31, 2020, acquisition related expenses consist of a dispute settlement expense of $1.2 million and an IPR&D technology write off of $8.5 million incurred during the three months ended March 31, 2020 in connection with a settlement and a license purchase agreement.

For the year ended December 31, 2019, acquisition related expenses of $0.4 million primarily include certain diligence, accounting, and legal expenses incurred related to our Bellwether acquisition.

Components of results of operations

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Precision oncology testing.

Precision oncology testing revenue is generated from sales of our Guardant360, Guardant360 CDx and GuardantOMNI tests to clinical and biopharmaceutical customers.

Precision oncology testing revenue is generated from sales of our tests to clinical and biopharmaceutical customers.

In the United States, through December 31, 2021, we generally performed tests as an out-of-network service provider without contracts with health insurance companies.

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private payers.

We submit claims to Medicare for reimbursement for Guardant360 clinical testing performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin who meet the criteria of Medicare's National Coverage Determination for Next Generation Sequencing first established in March 2018.

Tests for patients covered by Medicare represented approximately 37% and 38% of U.S.

tests performed during the year ended December 31, 2020 and 2019.

We also provide precision oncology testing to biopharmaceutical customers under contracts for which all recognition criteria are met, and we have recognized revenue on an accrual basis for those services.

We submit claims to Medicare for reimbursement for Guardant360 clinical testing performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin and for Guardant360 CDx clinical testing performed for qualifying patients diagnosed with solid tumor cancers who meet the criteria of Medicare’s National Coverage Determination for Next Generation Sequencing established since March 2018.

Development services and other.

Development services and other revenue primarily represents services, other than precision oncology testing, that we provide to biopharmaceutical companies and large medical institutions.

It includes companion diagnostic development and regulatory approval services, clinical trial setup, monitoring and maintenance, referrals, liquid biopsy testing development and support, as well as GuardantConnect, GuardantINFORM, Guardant-19, and kits fulfillment related revenues.

We collaborate with biopharmaceutical companies in the development and clinical trials of new drugs.

As part of these collaborations, we provide services related to regulatory filings to support companion diagnostic device submissions for our liquid biopsy panels.

We collaborate with biopharmaceutical companies in the development and clinical studies of new drugs.

As part of these collaborations, we provide services related to regulatory filings to support companion diagnostic device submissions for our test panels.

Under these arrangements, we generate revenue from progression of our collaboration efforts, as well as from provision of on-going support.

In addition to companion diagnostic development and regulatory approval services, we also provide clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, GuardantINFORM, and kits fulfillment related services for our biopharmaceutical customers.

In addition, we derive royalty revenues from licensing our technology.

Development services and other revenue can vary over time as different projects start and complete.

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Cost of precision oncology testing.

Cost of precision oncology testing generally consists of cost of materials, inventory write-downs, direct labor, including bonus, employee benefits 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;

Cost of precision oncology testing generally consists of cost of materials, inventory write-downs, direct labor, including employee benefits, bonus, and stock-based compensation;

equipment and infrastructure expenses associated with processing test samples, such as sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples;

curation of test results for physicians;

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Infrastructure expenses include depreciation of laboratory equipment, rent costs, depreciation of leasehold improvements and information technology costs.

Costs associated with performing our tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to the tests.

Costs associated with performing our tests are recorded as the tests are performed regardless of whether revenue was

recognized with respect to the tests.

Royalties for licensed technology are calculated as a percentage of revenues generated using the associated technology and recorded as expense at the time the related revenue is 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 patents.

While we do not

believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors.

We expect the cost of precision oncology testing to generally increase in line with the increase in the number of tests we perform, but the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions.

While we do not believe the technologies underlying these licenses are necessary to permit us to provide our tests, we do believe these technologies are potentially valuable and of possible strategic importance to us or our competitors.

We expect the cost of precision oncology testing to generally increase in line with the increase in the number of tests we perform, but we expect the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions.

Cost of development services and other.

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Costs to develop our technology capabilities are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs.

We expect that our research and development expenses will continue to increase in absolute dollars as we continue to innovate and develop additional products, expand our genomic and medical data management resources and conduct our ongoing and new clinical trials.

Sales and marketing expense.

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These expenses consist principally of salaries, bonuses, employee benefits, travel expenses and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses.

We expect that our general and administrative expenses will continue to increase in absolute dollars, primarily due to increased stock-based compensation expense, including resulting from the market-based restricted stock units granted to our Chief Executive Officer and our President and Chief Operating Officer in May 2020, increased headcount and increased costs associated with operating as a growing public company, including expenses related to legal, accounting, information systems, regulatory, maintaining compliance with exchange listing and requirements of the SEC, director and officer insurance premiums and investor relations.

These expenses, though expected to increase in absolute dollars, are expected to decrease modestly as a percentage of revenue in the long term, though they may fluctuate as a percentage of revenue from period to period due to the timing and extent of these expenses being incurred.

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Interest expense

Interest expense consists primarily of charges relating to amortization/accretion of debt issuance costs and debt discount, interest on finance leases or capital leases and royalty obligations.

Interest expense consists primarily of charges relating to amortization of debt issuance costs.

Other income (expense), net

Other income (expense), net consists of foreign currency exchange gains and losses, payments due and received in relation to the settlement of a patent dispute, net of credit losses, and the relief fund grant from the Department of Health and Human Services, or HHS, under the U.S.

Other income (expense), net consists of foreign currency exchange gains and losses, non-recurring payments due and received in relation to the settlement of license and patent disputes, net of credit losses, and the relief fund grant

from the Department of Health and Human Services, or HHS, under the U.S.

Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act.

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Results of operations

The following table sets forth the significant components of our results of operations for the periods presented.

The following tables set forth the significant components of our results of operations for the periods presented.

Year Ended December 31,

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(384,470) (245,904)

Provision for (benefit from) income taxes

Provision for income taxes

$ (384,770) $ (246,283)

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$ 304,312 $ 236,324 $ 67,988 29 %

Development services

Development services and other

69,341 50,406 18,935 38 %

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Precision oncology testing revenue increased to $304.3 million for the year ended December 31, 2021, from $236.3 million for the year ended December 31, 2020, an increase of $68.0 million, or 29%.

This increase in precision oncology testing revenue was primarily due to an increase in tests performed, an increase in average selling price per test as a result of expanded coverage of our tests for clinical customers.

Precision oncology revenue from tests for clinical customers was $236.4 million for the year ended December 31, 2021, up 38% from $171.8 million for the year ended December 31, 2020.

This increase in clinical testing revenue was driven primarily by increases in test volume, higher average revenue per test, plus $11.0 million in revenue received from Medicare during the year ended December 31, 2020 for samples processed in 2019 up from $9.4 million in revenue received from Medicare during the year ended December 31, 2019 for samples processed in 2018.

Tests for clinical customers increased to 63,254 for year ended December 31, 2020 from 49,926 for the year ended December 31, 2019 mainly due to an increase in the number of physicians ordering Guardant360 clinical tests.

In March 2020, we began to receive reimbursement from Medicare for claims submitted with respect to Guardant360 clinical tests performed for qualifying patients diagnosed with solid tumor cancers of non-central nervous system origin other than NSCLC.

Precision oncology revenue from tests for biopharmaceutical customers was $64.5 million for the year ended December 31, 2020 and $79.5 million for the year ended December 31, 2019.

Tests for biopharmaceutical customers decreased to 15,983 for the year ended December 31, 2020 from 20,643 for the year ended December 31, 2019 primarily due to the timing and progression of clinical trials and studies which resulted in fluctuation in the number of samples received for testing.

The average selling price of biopharmaceutical tests was $4,037 for the year ended December 31, 2020, up from $3,850 for the year ended December 31, 2019 due to a greater number of such tests being the GuardantOMNI test, which has a higher selling price than the Guardant360 test.

As a result of the COVID-19 pandemic, beginning in the latter half of March 2020, we began receiving fewer samples for testing on a daily average basis from our clinical and biopharmaceutical customers than before the outbreak of the COVID-19 pandemic.

Our future sample volumes and precision oncology revenue may be adversely impacted by the COVID-19 pandemic for the affected periods.

This increase in clinical testing revenue was driven primarily by an increase in sample volume related to our Guardant360 LDT and Guardant360 CDx tests, and an overall increase in the average selling price per Guardant360 CDx test primarily due to ADLT status being received from Medicare effective April 1, 2021.

Tests for clinical customers increased to 87,600 for year ended December 31, 2021, from 63,254 for the year ended December 31, 2020.

Precision oncology revenue from tests for biopharmaceutical customers was $67.9 million for the year ended December 31, 2021, and $64.5 million for the year ended December 31, 2020, respectively.

The increase in revenue was primarily due to an increase in tests, partially offset by a decrease in average selling price per test primarily due to a greater proportion of such tests being the Guardant360 tests, which have a lower average selling price than the GuardantOMNI tests.

Tests for biopharmaceutical customers increased to 18,600 for the year ended December 31, 2021, from 15,983 for the year ended December 31, 2020, primarily due to an increase in the number of biopharmaceutical customers and their contracted projects.

Development services and other revenue increased to $69.3 million for the year ended December 31, 2021, from $50.4 million for the year ended December 31, 2020, an increase of $18.9 million, or 38%.

This increase in development services and other revenue was primarily due to new collaboration agreements entered in the year ended December 31, 2020 as well as progression of existing collaboration projects from biopharmaceutical customers for companion diagnostic development and regulatory approval services completed during the year ended December 31, 2020.

Our development services arrangements with biopharmaceutical customers and development services revenue may continue to be adversely impacted by the COVID-19 pandemic in future periods.

This increase in development services and other revenue was primarily due to the progression of collaboration projects with biopharmaceutical customers for companion diagnostic development services, including receipt of milestone payments for regulatory approval of two of our companion diagnostic programs during the year ended December 31, 2021, and royalty revenues earned during the year ended December 31, 2021, pursuant to a settlement and license agreement entered into in December 2021.

Our revenue may be adversely impacted by the COVID-19 pandemic in future periods depending on the duration and severity of the pandemic and the impact of any variants of the virus.

Costs of Revenue and Gross Margin

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Cost of precision oncology testing revenue was $110.4 million for the year ended December 31, 2021, compared to $74.8 million for the year ended December 31, 2020, an increase of $35.6 million, or 48%.

This increase in cost of precision oncology testing was attributable to an increase in sample volumes and was primarily due to a $10.9 million increase in production labor and overhead costs, a $3.1 million increase in material costs, and a $1.9 million increase in other costs including costs related to kits, freight and curation of test results for physicians, offset by a $3.3 million decrease in royalties.

Cost of development services and other was $17.8 million for the year ended December 31, 2020 compared to $8.5 million for the year ended December 31, 2019, an increase of $9.3 million, or 110%.

This increase in cost of development services and other was primarily due to an increase in labor costs and materials related to companion diagnostic development and regulatory approval service contracts and costs associated with the development of the Guardant-19 product.

This increase in cost of precision oncology testing was primarily attributable to an increase in sample volumes, resulting in a $20.3 million increase in material costs, a $12.4 million increase in production labor and overhead costs, and a $3.3 million increase in other costs, including costs related to kits, freight and curation of test results for physicians.

Cost of development services and other was $12.5 million for the year ended December 31, 2021, compared to $17.8 million for the year ended December 31, 2020, a decrease of $5.3 million, or 30%.

This decrease in cost of development services and other was primarily due to a decrease in labor costs and materials, related to the progression of companion diagnostic development and regulatory approval service contracts.

Gross margin for the year ended December 31, 2021 was 67%, compared to 68% for the year ended December 31, 2020.

Gross margin improvement primarily reflects the impact of increased average selling price per test.

Our gross margin may continue to be adversely impacted by the COVID-19 pandemic depending on how long the pandemic lasts and the severity of the situation in the coming periods.

The decrease in gross margin was primarily due to lower average selling price and higher average cost per test resulting from the varied product mix of precision oncology testing, partially offset by gross margin improvement of development services and other.

The improvement of development services and other gross margin was primarily attributable to royalty revenues earned pursuant to a settlement and license agreement entered into in December 2021, and receipt of milestone payments for regulatory approval of two for our companion diagnostic programs in 2021.

Our gross margin may be adversely impacted by the COVID-19 pandemic depending on how long the pandemic lasts and the severity of the situation in coming quarters.

Operating Expenses

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This increase in research and development expense was primarily due to an increase of $49.7 million in personnel-related costs for employees in our research and development group, including a $8.9 million increase in stock-based compensation, as we increased our headcount to support continued investment in our technology.

The increase is also attributable to an increase of $10.7 million in development consulting fees, an increase of $10.7 million in material costs related to various programs, an increase of $8.5 million relating to in-process research and development (IPR&D) technology expensed in connection with a patent license acquisition that occurred in March 2020, an increase of $5.9 million related to allocated facility and information technology infrastructure costs and an increase of $0.9 million in allocated facilities and information technology infrastructure costs as we increased our headcount to support continued investment in our technology.

Our research and development expenses are expected to increase in absolute dollars in coming years as the Company continues to innovate and invest in new product initiatives with a particular focus on LUNAR program.

The increase was also attributable to an increase of $32.7 million in material costs related to various programs, an increase of $21.2 million in development consulting fees, an increase of $12.3 million related to allocated facility and information technology infrastructure costs, and an increase of $4.9 million in depreciation and amortization costs, partially offset by a decrease of $8.5 million relating to in-process research and development (IPR&D) technology expensed in connection with a patent license acquisition that occurred in March 2020.

Sales and marketing expense

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Selling and marketing expenses were $191.9 million for the year ended December 31, 2021, compared to $106.5 million for the year ended December 31, 2020, an increase of $85.4 million, or 80%.

This increase was primarily due to an increase of $18.7 million in personnel-related costs, including a $4.6 million increase in stock-based compensation, associated with the expansion of our commercial organization, an increase of $5.3 million related to allocated facilities and information technology infrastructure costs, and an increase of $4.3 million in professional service expenses related to marketing activities.

We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales force, increase our presence within and outside of the United States, and increase our marketing activities to drive further awareness and adoption of our tests.

This increase was primarily due to an increase of $58.9 million in personnel-related costs, including a $6.2 million increase in stock-based compensation, associated with the expansion of our commercial organization, an increase of $12.0 million related to allocated facilities and information technology infrastructure costs, an increase of $10.6 million in professional service expenses related to marketing activities, and an increase of $3.5 million in office administrative costs.

General and administrative expense

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General and administrative expenses were $206.6 million for the year ended December 31, 2021, compared to $192.8 million for the year ended December 31, 2020, an increase of $13.9 million, or 7%.

This increase was primarily due to an increase of $122.1 million in personnel-related costs, including a $117.5 million increase in stock-based compensation primarily in connection with the issuance of market-based restricted stock units to our Chief Executive Officer and our President and Chief Operating Officer as well as an increase in our headcount, an increase of $4.3 million related to allocated facilities and information technology infrastructure costs, an increase of $1.7 million in office administrative costs, an increase of $1.2 million related to settlement costs in connection with a patent license acquisition that occurred in March 2020, and an increase of $1.2 million in professional service expenses related to outside legal, accounting, consulting and IT services.

Our general and administrative expenses may increase in the near term due to increase in stock-based compensation expense associated with increase headcount as well as expense recognition associated with the market-based restricted stock units.

This increase was primarily due to an increase of $9.0 million in personnel-related costs, as we increased our headcount to support the

business growth, an increase of $7.4 million in professional service expenses related to outside legal, accounting, consulting and IT services, an increase of $5.3 million related to allocated facilities and information technology infrastructure costs, and an increase of $2.0 million in office administrative costs, partially offset by a decrease of $9.4 million in stock-based compensation, as tranche 1 of the market-based restricted stock units issued to our Co-Chief Executive Officers were fully vested as of January 1, 2021, and a decrease of $1.2 million related to settlement costs in connection with a patent license acquisition that occurred in March 2020.

Interest income

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$ (2,577) $ (4,766) $ 2,189 (46) %

Interest expense was $4.8 million for the year ended December 31, 2020 compared to $1.2 million for the year ended December 31, 2019, an increase of $3.6 million, or 304%.

This increase was primarily due to charges related to amortization of debt issuance costs and accretion of debt discount related to our convertible senior notes issued in November 2020, partially offset by the decrease in interest expense due to the settlement of all outstanding royalty obligations in March 2020 related to a patent license agreement we entered into in January 2017.

Interest expense was $2.6 million for the year ended December 31, 2021, compared to $4.8 million for the year ended December 31, 2020, a decrease of $2.2 million, or 46%.

For the year ended December 31, 2021, interest expense was primarily attributable to amortization of issuance costs, and for the year ended December 31, 2020, interest expense was primarily attributable to amortization of debt discount and debt issuance costs, related to our convertible senior notes issued in November 2020.

The decrease was due to the impact of adopting ASU 2020-06 in 2021.

Other income (expense), net

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* Not meaningful

For the year ended December 31, 2020, other income (expense), net included receipt of $1.8 million received from HHS’s relief fund under the CARES Act, and $1.0 million received in connection with settlement of a patent dispute.

There was no similar charge or gain for the year ended December 31, 2019.

Other income (expense), net also included foreign currency exchange gains of $0.5 million for the year ended December 31, 2020.

Foreign currency exchange gains/losses for the year ended December 31, 2019 was immaterial.

Provision for (benefit from) income taxes

For the year ended December 31, 2021, other income (expense), net primarily included $25.0 million related to the one-time payment pursuant to a settlement and license agreement entered into in December 2021.

For the year ended December 31, 2020 , other income (expense), net primarily included $1.8 million received from HHS’s relief fund under the CARES Act, and $1.0 million received in connection with settlement of a patent dispute.

Provision for income taxes

Year Ended December 31, Change

(in thousands)

Provision for (benefit from) income taxes

Provision for income taxes

$ 300 $ 379 $ (79) (21) %

Provision for income taxes was immaterial for the year ended December 31, 2020.

Benefit from income taxes of $1.9 million for the year ended December 31, 2019 was primarily due to the release of valuation allowance of $1.6 million associated with nondeductible intangible assets recorded as part of the Bellwether Bio acquisition.

Additionally, there was a benefit of $0.4 million for the year ended December 31, 2019 associated with the utilization of tax losses from continuing operations against other comprehensive income gains.

Provision for income taxes was immaterial for both of the years ended December 31, 2021 and 2020.

Quarterly results of operations

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters in the 24-month period ended December 31, 2020.

The following tables set forth our unaudited quarterly consolidated statements of operations data for each of the

eight quarters in the 24-month period ended December 31, 2021.

The information for each of these quarters has been prepared in accordance with generally accepted accounting principles in the United States of America and on the same basis as our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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$ 88,707 $ 79,272 $ 72,604 $ 63,729 $ 64,703 $ 60,384 $ 50,991 $ 60,246

Development services

13,613 14,185 15,344 7,264 5,483 8,701 11,911 7,818

Development services and other 19,401 15,507 19,497 14,936 13,613 14,185 15,344 7,264

Total revenue

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32,254 29,665 24,887 23,590 22,070 16,699 17,809 18,191

Cost of development services

6,337 4,488 4,626 2,315 1,834 1,936 2,183 2,512

Cost of development services and other 1,168 1,151 5,040 5,157 6,337 4,488 4,626 2,315

Research and development expense

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Liquidity and capital resources

We have incurred losses and negative cash flows from operations since our inception, and as of December 31, 2020, we had an accumulated deficit of $606.6 million.

We expect to incur additional operating losses in the near future and our operating expenses will increase as we continue to invest in clinical trials and develop new product, expand our sales organization, and increase our marketing efforts to drive market adoption of our tests.

We have incurred losses and negative cash flows from operations since our inception, and as of December 31, 2021, we had an accumulated deficit of $1.0 billion.

We expect to incur additional operating losses in the near future and our operating expenses will increase as we continue to invest in clinical studies and develop new products, expand our sales organization, and increase our marketing efforts to drive market adoption of our tests.

As demand for our tests are expected to continue to increase from physicians and biopharmaceutical companies, we anticipate that our capital expenditure requirements could also increase if we require additional laboratory capacity.

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Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to provide liquidity while ensuring capital preservation.

Currently, our funds are held in marketable securities consisting of United States treasury securities.

Additionally, we have investments held in marketable securities consisting of United States treasury securities that can be immediately liquid.

Based on our current business plan, we believe our current cash, cash equivalents and marketable securities and anticipated cash flows from operations, will be sufficient to meet our anticipated cash requirements for more than 12 months from the date of this Annual Report on Form 10-K.

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As revenue from precision oncology testing and development services and other is expected to grow long-term, we expect our accounts receivable and inventory balances to increase.

Any increase in accounts receivable and

inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.

Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.

If our available cash, cash equivalents and marketable securities and anticipated cash flows from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from our customers or other risks described in this Annual Report on Form 10-K, we may seek to sell additional common or preferred equity or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing.

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Net cash used in investing activities (63,155) (617,086)

Net cash provided by financing activities 1,410,307 367,304

Net cash (used in) provided by financing activities (66,824) 1,410,307

Operating activities

Cash used in operating activities during the year ended December 31, 2021 was $209.0 million, which resulted from a net loss of $384.8 million and net change in our operating assets and liabilities of $40.5 million, partially offset by non-cash charges of $216.2 million.

Non-cash charges primarily consisted of $144.1 million of stock-based compensation, $16.1 million of depreciation and amortization, $8.5 million of charge of in-process research and development costs with no alternative future use, $7.2 million of credit loss adjustment and others, $5.6 million of non-cash operating lease costs, and $4.0 million of amortization of premium on investment.

The net change in our operating assets and liabilities was primarily the result of a $19.3 million increase in other assets for security deposits relating to new leases we entered into in 2020, a $7.9 million decrease in accounts payable, a $7.5 million increase in inventory due to higher testing volumes, a $6.1 million increase in prepaid expenses and other current assets, a $6.0 million payment of operating lease liabilities net of receipt of tenant improvement allowance, a $5.5 million increase in accounts receivables driven by increased sales to biopharmaceutical customers and a $3.7 million decrease in deferred revenue partially offset by a $9.7 million increase in accrued compensation due to increased personnel.

Non-cash charges primarily consisted of $151.4 million of stock-based compensation, $24.7 million of non-cash operating lease costs, $22.3 million of depreciation and amortization, $12.8 million of amortization of premium on investment, $2.6 million of amortization of debt issuance costs, and $2.4 million of revaluation adjustments to contingent consideration.

The net change in our operating assets and liabilities was primarily the result of a $44.4 million increase in accounts receivables driven by increased sales to clinical and biopharmaceutical customers, and royalty revenues earned pursuant to a settlement and license agreement entered into in December 2021, a $35.8 million increase in prepaid expenses and other current assets, primarily driven by a $25.0 million one-time payment pursuant the above-mentioned settlement and license agreement, a $8.0 million increase in inventory due to higher testing volumes, and a $4.2 million increase in other assets, partially offset by a $14.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance, a $14.2 million increase in accrued compensation due to increased personnel, a $11.9 million increase in accrued expense and other liabilities, a $8.6 million increase in accounts payable, and a $2.8 million increase in deferred revenue.

Cash used in operating activities during the year ended December 31, 2020 was $103.9 million, which resulted from a net loss of $246.3 million and net change in our operating assets and liabilities of $47.7 million, partially offset by non-cash charges of $190.0 million.

Non-cash charges primarily consisted of $11.4 million of depreciation and amortization and $17.0 million of stock-based compensation, partially offset by $2.3 million of amortization of discount on investment.

The net change in our operating assets and liabilities was primarily the result of a $7.4 million increase in accounts receivable driven by increased sales to biopharmaceutical customers and adoption of ASC 606, a $6.2 million increase in prepaid expenses and other current assets, a $6.0 million increase in inventory to support testing volumes, a $2.9 million increase in other assets for security deposits relating to new leases entered into in 2019 and a $3.9 million decrease in deferred revenue partially offset by a $9.3 million increase in accrued expenses and other current liabilities, a $5.6 million increase in accrued compensation due to increased personnel, a $4.3 million increase in accounts payable and a $1.2 million increase in operating lease liabilities as a result of the adoption of ASC 842.

Non-cash charges primarily consisted of $144.1 million of stock-based compensation, $16.1 million of depreciation and amortization, $8.5 million of charge of in-process research and

development costs with no alternative future use, $7.2 million of credit loss adjustment and others, $5.6 million of non-cash operating lease costs, $4.7 million of amortization of debt discount and debt issuance costs, and $4.0 million of amortization of premium on investment.

The net change in our operating assets and liabilities was primarily the result of a $19.3 million increase in other assets for security deposits relating to new leases we entered into in 2020, a $7.9 million decrease in accounts payable, a $7.5 million increase in inventory due to higher testing volumes, a $6.1 million increase in prepaid expenses and other current assets, a $6.0 million payment of operating lease liabilities net of receipt of tenant improvement allowance, a $5.5 million increase in accounts receivables driven by increased sales to biopharmaceutical customers, and a $3.7 million decrease in deferred revenue, partially offset by a $9.7 million increase in accrued compensation due to increased personnel.

Investing activities

Cash used in investing activities during the year ended December 31, 2020 was $617.1 million, which resulted primarily from purchases of marketable securities of $1.1 billion, purchases of property and equipment of $36.2 million, and purchases of intangible assets of $17.9 million, partially offset by proceeds from the maturities of marketable securities of $562.5 million.

Cash used in investing activities during the year ended December 31, 2019 was $317.6 million, which resulted primarily from purchases of marketable securities of $614.3 million, purchases of property and equipment of $18.7 million, purchase of business of $7.3 million and purchase of intangible assets of $2.5 million, partially offset by our proceeds from the maturities of marketable securities of $325.3 million.

Cash used in investing activities during the year ended December 31, 2021 was $63.2 million, which resulted primarily from purchases of marketable securities of $900.8 million, purchases of property and equipment of $75.0 million, and purchases of non-marketable equity and other related investments of $39.4 million, partially offset by proceeds from the maturities of marketable securities of $952.1 million.

Cash used in investing activities during the year ended December 31, 2020 was $617.1 million, which resulted primarily from purchases of marketable securities of $1.1 billion, purchases of property and equipment of $36.2 million, and purchase of intangible assets of $17.9 million, partially offset by proceeds from the maturities of marketable securities of $562.5 million.

Financing activities

Cash used in financing activities during the year ended December 31, 2021 was $66.8 million, which was primarily due to taxes paid related to net share settlement of restricted stock units of $83.8 million, partially offset by proceeds of $9.8 million from issuances under employee stock purchase plan, and proceeds of $8.1 million from exercise of stock options.

Cash provided by financing activities during the year ended December 31, 2020 was $1.4 billion, which was primarily due to net proceeds of $1.1 billion from borrowings on convertible senior notes, proceeds of $354.6 million from a follow-on offering of our common stock, net of underwriting discounts and commissions and offering expenses payable by us, proceeds of $9.5 million from exercise of stock options, and proceeds of $7.1 million from issuances under employee stock purchase plan, partially offset by purchases of note hedges relating to the convertible senior notes of $90.0 million, and taxes paid related to net share settlement of restricted stock units of $3.4 million.

Cash provided by financing activities during the year ended December 31, 2019 was $367.3 million which was primarily due to proceeds of $350.4 million from the follow-on offering completed in May 2019, and receipt of proceeds of $11.6 million from issuance of common stock upon exercise of stock options and $6.4 million from issuances under our employee stock purchase plan.

Contractual obligations and commitments

Our contractual commitments will have an impact on our future liquidity.

The following table summarizes our contractually committed future obligations as of December 31, 2020:

Payments due by period

Total Less than

1 year 1-3 years 3-5 years More than 5 years

(in thousands)

Operating lease obligations (1) (2)

$ 60,607 $ 9,129 $ 22,203 $ 21,632 $ 7,643

(1) We lease our office and laboratory space in Redwood City, California, and office space in Spring City, Texas and Seattle, Washington under operating leases that expire between January 2021 and November 2027.

We also have operating leases for manufacturing and office equipment through March 2023.

(2) Excludes two facility lease agreements entered into in July 2020 that had not yet commenced as of December 31, 2020.

The lease terms of these facility leases range from 8-12 years, and 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 amounting to $239.5 million.

The Company anticipates to take possession of these facilities within the second fiscal quarter of 2021.

(3) We have patent license agreements with four parties.

Under these agreements, we have made one-time and milestone license fee payments that we have capitalized and are amortizing to expense ratably over the useful life of the applicable underlying patent rights.

Under some of these agreements, we are obligated to pay low single-digit percentage running royalties on net sales where the patent right(s) are used in the product or service sold, subject to minimum annual royalties or fees in certain agreements.

Off-balance sheet arrangements

As of December 31, 2020, we have not had any off-balance sheet arrangements as defined in the rules and regulations of the SEC.

Critical accounting policies and estimates

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP.

Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the consolidated financial statements, as well as revenue and expenses recorded during the reporting periods.

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We derive revenue from the provision of precision oncology testing services provided to our ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to our biopharmaceutical customers.

Precision oncology services include genomic profiling and the delivery of other genomic information derived from our platform.

Development services and other include companion diagnostic development, clinical trial set up, monitoring and maintenance, information solutions and laboratory services, and other miscellaneous revenue streams.

We currently receive payments from commercial third-party payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies and research institutes.

Effective January 1, 2019, we began recognizing revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers , or ASC 606.

Precision oncology testing services include genomic profiling and the delivery of other genomic information derived from our platform.

Development services and other include companion diagnostic development, clinical study setup, monitoring and maintenance, information solutions and laboratory services, and other miscellaneous revenue streams.

We currently receive payments from third-party commercial and governmental payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies, research institutes and international distributors.

Effective January 1, 2019, we adopted the new revenue recognition standard, Financial Accounting Standards Board, or 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 we expect to be entitled to in exchange for those services.

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however, we determine an implied contract exists with our clinical customers.

We identify each sale of our liquid biopsy test to clinical customer as a single performance obligation.

We identify each sale of our test to a 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 our clinical customers represents variable consideration.

We estimate the variable consideration under the portfolio approach and consider the historical reimbursement data from third-party payers and patients, as well as known current or anticipated reimbursement trends not reflected in the historical data.

We estimate the variable consideration under the portfolio approach and consider 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.

We monitor 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 judgment in the estimation of the variable consideration and application of the constraint for such variable consideration.

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.

We analyze actual cash collections over the expected reimbursement period and compare 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.

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.

We identify our promise to transfer a series of distinct liquid biopsy tests to biopharmaceutical customers as a single performance obligation.

We identify our promise to transfer a series of distinct 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.

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However, under certain contracts, a biopharmaceutical customer may engage us 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.

We collaborate with pharmaceutical companies in the development and clinical trials of new drugs.

We collaborate with pharmaceutical companies in the development of new drugs.

As part of these collaborations, we provide services related to regulatory filings to support companion diagnostic device submissions for our liquid biopsy panels.

Under these collaborations, we generate revenue from achievement of milestones, as well as provision of on-going support.

These collaboration arrangements include no royalty obligations.

For development services performed, we are compensated through a combination of an upfront fee and performance-based, non-refundable regulatory and other developmental milestone payments.

The transaction price of our

development services contracts typically represents variable consideration.

The transaction price of our development services contracts typically represents variable consideration.

Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment.

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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 updated at each reporting period as a revision to the estimated transaction price.

Application of the constraint for variable consideration is assessed and updated at each reporting period as a revision to the estimated transaction price.

We recognize development services and other revenue over the period in which biopharmaceutical research and development services are provided.

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We also assess 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.

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 our consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services.

We also have other miscellaneous revenue streams such as relating to GuardantINFORM, Guardant-19 screening in connection with the outbreak of COVID-19, referral fees, maintenance, kits fulfillment related revenues.

We also have other miscellaneous revenue streams that are recognized in addition to development services noted above such as clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, GuardantINFORM, and kits fulfillment related revenues.

In addition, we derive sales-based royalty revenues from licensing our technologies.

Revenues related to clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, GuardantINFORM are generally recognized over time based on an input method to measure progress in the period when the associated services have been performed.

Kits fulfillment related revenues are recognized when such products are delivered.

Royalty revenues are recognized when actual sales incur.

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.

We evaluate the terms and conditions included within our 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.

We first identify 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, we consider 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 and the availability of the associated expertise in the general marketplace.

In assessing whether a promised service is capable of being distinct, we consider 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, we consider whether we provide a significant integration of the services, whether the services significantly modify or customize one another, or whether the services are highly interdependent or interrelated.

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We expect to rely on the Joint Venture to accelerate commercialization of our products in Asia, the Middle East and Africa.

The Joint Venture is deemed to be a VIE and we are identified as the primary beneficiary of the VIE.

The Joint Venture is deemed to be a VIE and we are identified

as the primary beneficiary of the VIE.

Consequently, we have consolidated the financial position, results of operations and cash flows of the Joint Venture in our financial statements and all intercompany balances have been eliminated in consolidation.

The joint venture agreement also includes a put-call arrangement with respect to the shares of the Joint Venture held by SoftBank and its affiliates.

SoftBank will have a put right to cause us to purchase all shares of the Joint Venture held by SoftBank and its affiliates, and we will have a call right to purchase all such shares in the event of (i) certain material disagreement 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 our initial public offering, a change in control, 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 interest in the Joint Venture being determined to be materially different from what has been recorded in our consolidated financial statements, including those included elsewhere in this Annual Report on Form 10-K.

In the event we exercise our 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 our fair value, we 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 our fair value and the pro rata portion of the outstanding shares of the Joint Venture held by SoftBank and its affiliates.

We may pay the purchase price for the shares of the Joint Venture in cash, in shares of our common stock, or in a combination thereof.

In the event we exercise the call right, SoftBank will choose the form of consideration.

In the event SoftBank exercises the put right, we will choose the form of consideration.

The noncontrolling interest held by SoftBank contains embedded put-call redemption features that are not solely within our control and has been classified outside of permanent equity in our consolidated balance sheets.

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We 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.

As a result of exercising the call right, the noncontrolling interest has been recorded as a current liability in our consolidated balance sheet as of December 31, 2021, and future adjustments to the noncontrolling interest liability will be recorded in net loss in our consolidated statement of operations.

Stock-based compensation

After the adoption of Accounting Standards Update 2018-07, Compensation—Stock Compensation (Topic 718):

Improvements to Nonemployee Share-Based Payment Accounting on January 1, 2019, we measure stock-based compensation expense for stock options granted to our employees, directors, and nonemployee consultants on the date of grant and recognize the corresponding compensation expense of those awards over the period that the related services are rendered, which is generally the vesting period of the respective award.

Improvements to Nonemployee Share-Based Payment Accounting on January 1, 2019, we measure stock-based compensation expense for stock options granted to our employees, directors, and nonemployee consultants on the date of grant based on the fair value of the awards and recognize the corresponding compensation expense of those awards 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.

We estimate the fair value of stock options granted under the 2012 Stock Plan, the 2018 Incentive Award Plan, and under the Guardant Health AMEA, Inc.'s 2020 Equity Incentive Plan for the Joint Venture, and stock purchase rights granted under our 2018 Employee Stock Purchase Plan on the grant date using the Black-Scholes option-pricing model.

The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables

that are complex, subjective and generally require significant judgment to determine.

The Black-Scholes option-pricing model requires the use of assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine.

The assumptions used to calculate the fair value of our stock options were:

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For market-based restricted stock units, we derive the requisite service period using the Monte Carlo simulation model.

The estimated fair value of the market-based restricted stock units was determined using a Monte Carlo simulation model which requires the use of assumptions regarding a number of variables that are complex,

subjective and generally require significant judgment to determine.

Stock-based compensation expense will be recorded regardless of achieving the market conditions or not.

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As we continue to accumulate additional data related to our common stock, we may have refinements to our estimates, which could materially impact our future stock-based compensation expense.

Convertible Senior Notes

In accounting for the issuance of the convertible senior notes, we separate 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, we 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.

Recent accounting pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis