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Item 7. Management’s Discussion and Analysis

2024-02-22 compared with 2023-02-23 · 119 added, 197 removed, 353 unchanged (47% of the section changed)

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A detailed discussion comparing our results of operations for the years ended December 31, 2022 and 2021 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, 2022.

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

We believe our tests can transform cancer care by unlocking insights that will help patients at all stages of the disease, including at its earliest stages, when it’s most treatable.

For patients with advanced-stage cancer, we have commercially launched Guardant360 LDT and Guardant360 CDx, the first comprehensive liquid biopsy test approved by the U.S.

We are a leading precision oncology company focused on guarding wellness and giving every person more time free from cancer.

We are transforming patient care by providing critical insights into what drives disease through our advanced blood and tissue tests, and real-world data.

Our tests help improve outcomes across all stages of care, including screening to find cancer early, monitoring for recurrence in early-stage cancer, and helping doctors select the best treatment for patients with advanced cancer.

For patients with advanced-stage cancer, we have commercially launched Guardant360 laboratory developed test, or LDT, and Guardant360 CDx, 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, and breast cancer.

We have also launched the Guardant360 TissueNext tissue test for advanced-stage cancer, Guardant Reveal blood test to detect residual and recurring disease in early-stage colorectal, breast and lung cancer patients, and Guardant360 Response blood test to predict patient response to immunotherapy or targeted therapy eight weeks earlier than current standard-of-care imaging.

We also collaborate with biopharmaceutical companies in clinical studies by providing the above-mentioned tests, as well as the GuardantOMNI blood test for advanced-stage cancer, and the GuardantINFINITY blood test, launched in September 2022, which is a next-generation smart liquid biopsy that provides new, multi-dimensional insights into the complexities of tumor molecular profiles and immune response to advance cancer research and therapy development.

We also collaborate with biopharmaceutical companies in clinical studies by providing the above-mentioned tests, as well as the GuardantOMNI blood test for advanced-stage cancer, and the GuardantINFINITY blood test, a next-generation smart liquid biopsy that provides new, multi-dimensional insights into the complexities of tumor molecular profiles and immune response to advance cancer research and therapy development.

Using data collected from our tests, we have also developed our GuardantINFORM platform to help biopharmaceutical companies accelerate precision oncology drug development through the use of this in-silico research platform to unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers.

In May 2022, we launched the Shield LDT test to address the needs of individuals eligible for colorectal cancer screening.

For early cancer detection, in May 2022, we launched the Shield LDT test to address the needs of individuals eligible for colorectal cancer screening.

From a simple blood draw, Shield uses a novel multimodal approach to detect colorectal cancer signals in the bloodstream, including DNA that is shed by tumors.

In addition, in December 2022, we announced positive results from ECLIPSE, an over 20,000 patient registrational study evaluating the performance of our Shield blood test for detecting colorectal cancer in average-risk adults.

In December 2022, we announced that the ECLIPSE study, a registrational study evaluating the performance of our Shield blood test for detecting colorectal cancer in average-risk adults, met co-primary endpoints.

In addition, in March 2023, we submitted a premarket approval application, or PMA, for our Shield blood test to the FDA.

The FDA’s Molecular and Clinical Genetics Panel of the Medical Devices Advisory Committee intends to review the PMA.

We also expect to expand into lung and multi-cancer screening with our investigational, next-generation Shield assay.

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Our Redwood City 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.

Our San Diego laboratory is CAP-accredited and CLIA-certified.

Our San Diego laboratory is CAP-accredited, CLIA-certified, and licensed in California.

In addition, our Palo Alto, California laboratory is currently operated as a center for our research and technology development.

In February 2022, we received CAP accreditation for our laboratory in Japan where we expect to commence processing samples following receipt of additional certification for processing In Vitro Diagnostic, or IVD, samples and reimbursement approval.

We have also received CAP accreditation and In Vitro Diagnostic, or IVD, sample processing approval from Japan's Ministry of Health, Labour and Welfare, or the MHLW, for our laboratory in Japan.

We generated total revenue of $563.9 million, $449.5 million and $373.7 million for the years ended December 31, 2023, 2022 and 2021, respectively.

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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 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 May 2023, we completed a follow-on underwritten public offering, in which we issued and sold 14,375,000 shares of our common stock at a price of $28.00 per share, and received net proceeds of $381.4 million after deducting underwriting discounts and commissions and other offering costs of $21.1 million.

In December 2023, we completed a registered direct offering with an investment management firm, in which we issued and sold 3,387,446 shares of our common stock at a price of $26.77 per share, and received net proceeds of $90.6 million.

As of December 31, 2023, we had cash, cash equivalents and marketable debt securities of approximately $1.2 billion.

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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 CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT.

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.

Effective January 1, 2022, Medicare has started to reimburse Guardant360 CDx services at the median rate of claims paid by commercial payers and this rate will apply until December 2023.

Effective January 1, 2022, Medicare started to reimburse Guardant360 CDx services at the median rate of claims paid by commercial payers and this rate will apply until December 2023.

In March 2022, Palmetto GBA, the Medicare administrative contractor for MolDX, has conveyed coverage for our Guardant360 TissueNext test under the existing local coverage determination.

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In July 2022, Palmetto GBA conveyed coverage for our Guardant Reveal test for fee-for-service Medicare patients in the United States with stage II or III colorectal cancer whose testing is initiated within three months following curative intent therapy, with an effective date of December 2021.

In April 2023, Palmetto GBA conveyed coverage for our Guardant360 Response test for fee-for-service Medicare patients in the U.S.

with metastatic or inoperable solid tumors who are on an immune checkpoint inhibitor therapy, tested four to ten weeks from therapy initiation.

Effective January 1, 2024, Medicare has increased the reimbursement rate for our Guardant360 LDT test to the same rate as our Guardant360 CDx test.

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 differs from the revenue recorded.

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Komen®, the world’s leading breast cancer organization, to bring the patient perspective to the development of clinical studies that help identify early-stage breast cancer patients who are at high risk of disease recurrence and may benefit from additional monitoring or therapy.

With respect to Shield, in December 2022, we announced positive results from ECLIPSE, an over 20,000 patient registrational study evaluating the performance of our Shield blood test for detecting colorectal cancer in average-risk adults.

With respect to Shield, in December 2022, we announced that the ECLIPSE study, a registrational study evaluating the performance of our Shield blood test for detecting colorectal cancer in average-risk adults, met co-primary endpoints.

The test demonstrated 83% sensitivity in detecting individuals with colorectal cancer.

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This test also demonstrated 13% sensitivity in detecting advanced adenomas.

Based on these study results, we plan to complete our premarket approval submission to the FDA in the first quarter of 2023.

Based on these study results, in March 2023, we submitted a PMA to the FDA for our Shield blood test.

The FDA’s Molecular and Clinical Genetics Panel of the Medical Devices Advisory Committee intends to review the PMA.

In addition, to evaluate the performance of our investigational, next-generation Shield assay in detecting lung cancer in high-risk individuals ages 50-80, in January 2022, we enrolled the first patient in a nearly 10,000-patient prospective, registrational study, which we refer to as the SHIELD LUNG study.

The study is anticipated to run in approximately 100 centers in the United States and Europe.

We are continuing to enroll more patients for these on-going studies, and 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.

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.

• International expansion.

A component of our long-term growth strategy is to expand our commercial footprint internationally, and we expect to increase our sales and marketing expense to execute on this strategy.

We currently offer our tests in countries outside the United States primarily through distributor relationships, direct contracts with hospitals or partnerships with research organizations.

In May 2018, we formed and capitalized a joint venture, Guardant Health AMEA, Inc., with SoftBank, which we refer to as the Joint Venture or Guardant AMEA, relating to the sale, marketing and distribution of our tests generally outside the Americas and Europe, and 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.

Upon our exercise of the call right in November 2021, SoftBank no longer had the option to exercise its put right.

In June 2022, we purchased all of the shares held by SoftBank and its affiliates in consideration for a cash payment of the aggregate purchase price of $177.8 million, as determined by an independent valuation firm, which resulted in $99.8 million of fair value adjustments to the noncontrolling interest liability for the year ended December 31, 2022.

Upon completion of the transaction, we obtained full control over operations throughout the Asia, Middle East and Africa region.

In December 2020, we signed our first public private partnership agreement with Vall D'Hebron Institute of Oncology, or VHIO, one of Europe’s leading cancer research institutions, and in May 2022, the first blood-based cancer testing services in Europe based on our industry-leading digital sequencing platform became available at the VHIO testing facility in Spain.

In October 2021, we signed a partnership agreement with The Royal Marsden NHS Foundation Trust, a premier cancer center within the United Kingdom for patient care, research and teaching of all types of cancer.

We expect these partnerships will lead to the establishment of our testing services at the partner laboratories, using our digital sequencing technology, as well as generation of clinical and economic evidence to support commissioning in other areas of Europe.

In June 2022, we signed a strategic partnership agreement with Adicon Holdings Limited, a leading independent clinical laboratory company based in China, to offer our industry-leading comprehensive genomic profiling tests to biopharmaceutical companies conducting clinical studies in China.

We expect the partnership to help biopharmaceutical companies bring the next generation of cancer therapies to patients in the region.

We currently offer our tests in countries outside the United States primarily through distributor relationships, direct contracts with hospitals, and partnerships with local research organizations and laboratory companies.

In May 2018, we formed and capitalized Guardant Health AMEA, Inc., with SoftBank, relating to the sale, marketing and distribution of our tests generally outside the Americas and Europe, and to accelerate commercialization of our products in Asia, the Middle East and Africa.

In June 2022, we purchased all of the shares held by SoftBank and its affiliates, and upon completion of the transaction, we obtained full control over operations of Guardant Health AMEA, Inc.

throughout the Asia, Middle East and Africa region.

In February 2022, we received CAP accreditation, and in October 2022, we received IVD sample processing approval from the MHLW for our laboratory in Japan.

In addition, in July 2023, the MHLW granted national reimbursement approval for our Guardant360 CDx test for patients with advanced or metastatic solid tumor cancers in Japan.

In December 2020, we signed our first public private partnership agreement with Vall D'Hebron Institute of Oncology, or VHIO, one of Europe’s leading cancer research institutions, and in May 2022, the first blood-based cancer testing services in Europe based on our digital sequencing platform became available at the VHIO testing facility in Spain.

In October 2021, we signed a partnership agreement with The Royal Marsden NHS Foundation Trust, or Royal Marsden, a premier cancer center within the United Kingdom, or the UK, for patient care, research and teaching of all types of cancer, and in April 2023, the blood-based cancer testing services based on our digital sequencing platform became available at Royal Marsden testing facility in the UK.

In June 2022, we signed a strategic partnership agreement with Adicon Holdings Limited, or Adicon, a leading independent clinical laboratory company based in China, and in December 2023, the blood-based cancer testing services based on our digital sequencing platform became available at Adicon's testing facility, which offers our industry-leading comprehensive genomic profiling tests to biopharmaceutical companies to advance clinical research and the development of new cancer therapies in China.

The success of our international expansion strategy depends on a number of factors, including the internal and external constraints placed on our international laboratory partners and biopharmaceutical companies in the context of broader global, regional and U.S.

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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 coronavirus 2019, or COVID-19, 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.

• Other operating expense .

Our financial results might fluctuate significantly based upon the impact of our other operating expense, and in particular, our legal settlement costs, which could potentially decrease or increase significantly.

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

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Precision oncology testing.

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

Precision oncology testing revenue is generated from sales of our tests to clinical and biopharmaceutical customers, including those tests delivered by labs operated by our strategic partners.

In the United States, through December 31, 2023, we generally performed tests as an out-of-network service provider without contracts with health insurance companies.

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private payers.

We also submit claims to Medicare for reimbursement for our Guardant360 CDx, Guardant360 LDT, Guardant360 TissueNext and Guardant Reveal clinical testing performed for qualifying patients.

We also submit claims to Medicare for reimbursement for our Guardant360 CDx, Guardant360 LDT, Guardant360 TissueNext, Guardant Reveal and Guardant360 Response clinical testing performed for qualifying patients.

Revenue from clinical tests for patients covered by Medicare represented approximately 43%, 45% and 45% of our precision oncology revenue from clinical customers for the years ended December 31, 2023, 2022 and 2021, respectively.

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Cost of development services and other .

Cost of development services and other primarily includes costs incurred for the performance of development services and other requested by our customers comprising of labor and material costs including any inventory write-downs.

Cost of development services and other primarily includes costs incurred for the performance of development services requested by our biopharmaceutical customers, and costs associated with our partnership agreements and delivery of screening tests, which comprise of labor and material costs including any inventory write-downs.

For development of new products, costs incurred before technological feasibility has been achieved are reported as research and development expenses, while costs incurred thereafter are reported as cost of revenue.

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Research and development expense .

Research and development expenses consist of costs incurred to develop technology and include salaries and benefits including stock-based compensation, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services, other outside costs and costs to develop our technology capabilities.

Research and development expenses consist of costs incurred to develop technology and include salaries and benefits including stock-based compensation, reagents and supplies used in research and development laboratory work, infrastructure expenses, including facility occupancy and information technology costs, contract services, other outside costs and costs to develop our technology capabilities.

Research and development expenses also include costs related to activities performed under contracts with biopharmaceutical companies before technological feasibility has been achieved.

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Our sales and marketing expenses are expensed as incurred and include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing and reimbursement, medical affairs, as well as business development personnel who are focused on our biopharmaceutical customers.

These expenses consist primarily of salaries, commissions, bonuses, employee benefits, travel expenses and stock-based compensation, as well as marketing, sales incentives, and educational activities and allocated overhead expenses.

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.

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Our general and administrative expenses include costs for our executive, accounting and finance, information technology, legal and human resources functions.

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.

In addition, our general and administrative expenses also include severance costs related to workforce reduction.

We expect that our general and administrative expenses will continue to increase as we incur additional costs to support the growth of our business.

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Other income (expense), net

Other income (expense), net consists of foreign currency exchange gains and losses, fair value adjustments of marketable equity securities, impairment of other assets, 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.

Other income (expense), net consists of foreign currency exchange gains and losses, fair value adjustments of marketable equity securities, and impairment of non-marketable equity securities and other related assets.

We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.

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155,800 163,956

Other operating expense 83,400 —

Total costs and operating expenses

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Cost of precision oncology testing $ 4,614 $ 5,498

Cost of development services and other 1,851 —

Research and development expense 34,682 26,630

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$ 90,759 $ 94,685

In November 2020, we granted restricted stock units with certain performance metrics, or PSUs, consisting of a performance period of 4 years combined with an additional service period requirement of six months should the vesting criteria be met.

As of December 31, 2023, these PSUs had a grant-date fair value of approximately $25.7 million, net of forfeitures, however no compensation expense for these PSUs has been recorded to-date since the achievement of the performance metrics did not meet the criteria for accrual as of December 31, 2023.

At each reporting date, we will continue to assess the likelihood of the performance criteria being met and will record a cumulative catch-up adjustment should the achievement of the performance metrics be determined to be probable.

For example, had the achievement of the performance metrics been determined to be probable as of December 31, 2023, we would have recorded a total charge of $18.1 million, of which $1.7 million would have been recorded to cost of development services and other, and $6.8 million, $5.8 million and $3.8 million would have been recorded as components of research and development expense, sales and marketing expense, and general and administrative expense, respectively, in the consolidated statements of operations for the year ended December 31, 2023.

In addition, any of these PSUs that remain unvested at the end of the performance period will be forfeited.

Comparison of the Years Ended December 31, 2023 and 2022

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Precision oncology revenue from tests for clinical customers was $403.9 million for the year ended December 31, 2023, up 35% from $298.1 million for the year ended December 31, 2022.

This increase in clinical testing revenue was driven primarily by an increase in sample volume related to our Guardant360 CDx and Guardant360 LDT tests, and revenue from products launched in 2021, including Guardant Reveal, Guardant360 Response and Guardant 360 TissueNext.

Total tests for clinical customers increased to approximately 124,800 for year ended December 31, 2022, from approximately 87,600 for the year ended December 31, 2021.

Precision oncology revenue from tests for biopharmaceutical customers was $94.0 million for the year ended December 31, 2022, and $67.9 million for the year ended December 31, 2021, respectively.

This increase in revenue was primarily due to an increase in sample volume, including our GuardantINFINITY test launched in 2022.

Total tests for biopharmaceutical customers increased to approximately 26,000 for the year ended December 31, 2022, from approximately 18,600 for the year ended December 31, 2021, primarily due to an increase in the number of biopharmaceutical customers and their contracted projects.

This increase in clinical testing revenue was driven primarily by an increase in sample volume.

Total tests for clinical customers increased to approximately 172,900 for the year ended December 31, 2023, from approximately 124,800 for the year ended December 31, 2022.

Precision oncology revenue from tests for biopharmaceutical customers was $110.4 million for the year ended December 31, 2023, up 17% from $94.0 million for the year ended December 31, 2022.

This increase in revenue was primarily due to an increase in sample volume.

Total tests for biopharmaceutical customers increased to approximately 29,900 for the year ended December 31, 2023, from approximately 26,000 for the year ended December 31, 2022.

Development services and other revenue decreased to $49.7 million for the year ended December 31, 2023, from $57.5 million for the year ended December 31, 2022, a decrease of $7.8 million, or 14%.

This decrease in development services and other revenue was primarily due to the change in collaboration projects with biopharmaceutical customers for companion diagnostic development and regulatory approval services, and discontinuation of our Guardant-19 tests in August 2021, partially offset by revenues earned from licensing our technologies, and providing data services during the year ended December 31, 2022.

This decrease in development services and other revenue was primarily due to revenue decrease of $6.9 million associated with our companion diagnostics collaboration projects and other service agreements with biopharmaceutical customers, and a reduction in royalty revenue of $3.8 million, partially offset by revenue increase from our data services of $2.4 million and partnership agreements of $1.4 million during the year ended December 31, 2023.

Cost of Revenue

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Cost of precision oncology testing was $205.5 million for the year ended December 31, 2023, compared to $148.2 million for the year ended December 31, 2022, an increase of $57.3 million, or 39%.

This increase in cost of precision oncology testing was primarily attributable to an increase in sample volumes, resulting in a $16.7 million increase in material costs, a $11.2 million increase in production labor and overhead costs, and a $10.0 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 $8.1 million for the year ended December 31, 2022, compared to $12.5 million for the year ended December 31, 2021, a decrease of $4.4 million, or 35%.

This decrease in cost of development services and other was primarily due to a decrease in labor and material costs, related to the discontinuation of our Guardant-19 tests in August 2021, and the change in companion diagnostic development and regulatory approval service contracts, partially offset by costs associated with providing screening testing services and licensing our technologies.

This increase in cost of precision oncology testing was primarily attributable to an increase in sample volumes, resulting in a $33.0 million increase in material costs, a $19.9 million increase in production labor and overhead costs, and a $4.0 million increase in other costs, including costs related to collection kits, freight, professional services and reporting of test results for physicians.

Cost of development services and other was $21.5 million for the year ended December 31, 2023, compared to $8.1 million for the year ended December 31, 2022, an increase of $13.4 million.

This increase in cost of development services and other was primarily due to costs associated with providing screening testing services which increased to $13.5 million for the year ended December 31, 2023, from $2.0 million for the year ended December 31, 2022, an increase of $11.5 million.

The increase was also related to cost increase of $4.5 million associated with our partnership agreements, partially offset by cost decrease of $2.7 million associated with our companion diagnostics collaboration projects with biopharmaceutical customers during the year ended December 31, 2023.

Operating Expenses

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(in thousands)

Research and development

Research and development expense

$ 367,194 $ 373,807 $ (6,613) (2) %

Research and development expenses were $373.8 million for the year ended December 31, 2022, compared to $263.2 million for the year ended December 31, 2021, an increase of $110.6 million, or 42%.

This increase in research and development expense was primarily related to continued investment in the development of our technologies and products, and our clinical studies, resulting in an increase of $48.8 million in outside service fees, an increase of $36.4 million in personnel-related costs for employees in our research and development group, including a $7.7 million increase in stock-based compensation, an increase of $25.3 million related to allocated facilities and information technology infrastructure costs, an increase of $5.2 million in post-acquisition related contingent consideration, and an increase of $4.1 million in depreciation and amortization, partially offset by a decrease of $11.5 million in material costs.

Research and development expenses were $367.2 million for the year ended December 31, 2023, compared to $373.8 million for the year ended December 31, 2022, a decrease of $6.6 million, or 2%.

This decrease was primarily due to a decrease of $11.2 million in material costs, a decrease of $5.6 million in information technology infrastructure costs, and a decrease of $3.1 million in post-acquisition contingent consideration, partially offset by an increase of $8.1 million in stock-based compensation, an increase of $3.3 million in personnel costs, and an increase of $2.7 million in depreciation and amortization.

Sales and marketing expense

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(in thousands)

Sales and marketing

Sales and marketing expense

$ 295,227 $ 299,828 $ (4,601) (2) %

Selling and marketing expenses were $299.8 million for the year ended December 31, 2022, compared to $191.9 million for the year ended December 31, 2021, an increase of $107.9 million, or 56%.

This increase was primarily related to commercial infrastructure buildout and marketing activities to support existing products and new product launch, resulting in an increase of $74.0 million in personnel-related costs, including a $10.0 million increase in stock-based compensation, an increase of $14.2 million related to marketing activities, an increase of $9.8 million in office administrative costs, and an increase of $9.4 million related to allocated facilities and information technology infrastructure costs.

Selling and marketing expenses were $295.2 million for the year ended December 31, 2023, compared to $299.8 million for the year ended December 31, 2022, a decrease of $4.6 million, or 2%.

This decrease was primarily due to a decrease of $2.1 million in personnel costs, and a decrease of $1.8 million in information technology infrastructure costs.

General and administrative expense

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(in thousands)

General and administrative

General and administrative expense

$ 155,800 $ 163,956 $ (8,156) (5) %

General and administrative expenses were $155.8 million for the year ended December 31, 2023, compared to $164.0 million for the year ended December 31, 2022, a decrease of $8.2 million, or 5%.

This decrease was primarily due to a decrease of $76.5 million in stock-based compensation, as the market-based restricted stock units issued to our Co-Chief Executive Officers were fully expensed as of June 2022, partially offset by an increase of $17.6 million in professional service expenses related to outside legal, accounting, consulting and IT services, an increase of $7.1 million in personnel costs, in line with our business expansion, and an increase of $5.5 million related to allocated facilities and information technology infrastructure costs.

This decrease was primarily due to a decrease of $12.3 million in stock-based compensation, a decrease of $4.2 million in acquisition-related contingent consideration, a decrease of $2.7 million in information technology infrastructure costs, and a decrease of $1.9 million in office and administrative costs, partially offset by an increase of $7.5 million in severance costs related to a workforce reduction incurred in the first quarter of 2023, and an increase of $5.0 million in personnel costs.

Other operating expense

Year Ended December 31, Change

(in thousands)

Other operating expense

$ 83,400 $ — $ 83,400 *

* Not applicable

Other operating expense for the year ended December 31, 2023 was related to a legal accrual in connection with a jury verdict related to TwinStrand Biosciences, Inc.

and the University of Washington entered into in November 2023.

See "Commitments and Contingencies - Legal Proceedings" in Note 9 to the consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Interest income

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$ 35,365 $ 6,069 $ 29,296 483 %

Interest income was $6.1 million for the year ended December 31, 2022, compared to $3.9 million for the year ended December 31, 2021, an increase of $2.1 million, or 54%, primarily due to higher U.S.

treasury interest rates, partially offset by a decrease in cash and cash equivalents and marketable debt securities balances.

Interest income was $35.4 million for the year ended December 31, 2023, compared to $6.1 million for the year ended December 31, 2022, an increase of $29.3 million, or 483%, primarily due to higher interest rates, and increase in cash and cash equivalents and marketable debt securities balances.

Interest expense

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* Not meaningful

For the year ended December 31, 2022, other income (expense), net was primarily related to $7.8 million of unrealized loss recorded for our marketable equity securities, and $5.3 million of impairment for the rights to purchase one of our non-marketable security investees.

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.

Other income (expense), net was a $53.2 million income for the year ended December 31, 2023, primarily attributable to $79.7 million of unrealized gains recorded for our marketable equity security investment in Lunit, Inc., partially offset by $29.1 million of impairment recorded for our non-marketable equity security investments and other related assets during the period.

Other income (expense), net was a $12.8 million expense for the year ended December 31, 2022, primarily due to $7.8 million of unrealized losses recorded for our marketable equity security investment in Lunit, Inc., and $5.3 million of impairment recorded for our non-marketable equity security investments and other related assets during the period.

Fair value adjustments of noncontrolling interest liability

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The change in the provision for income taxes between the years ended December 31, 2023 and 2022 was insignificant.

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, 2022.

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.

In the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of our results of operations.

This data should be read in conjunction with our audited financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

These quarterly operating results are not necessarily indicative of our operating results for the full year or any future period.

Three Months Ended

December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021

(in thousands)

Precision oncology testing

$ 113,797 $ 102,054 $ 92,062 $ 84,136 $ 88,707 $ 79,272 $ 72,604 $ 63,729

Development services and other 13,094 15,350 17,082 11,963 19,401 15,507 19,497 14,936

Total revenue

126,891 117,404 109,144 96,099 108,108 94,779 92,101 78,665

Costs and operating expenses:

Cost of precision oncology testing

43,706 39,434 34,375 30,684 32,254 29,665 24,887 23,590

Cost of development services and other 3,415 1,062 2,352 1,297 1,168 1,151 5,040 5,157

Research and development expense

106,578 100,017 85,455 81,757 73,021 70,968 63,724 55,508

Sales and marketing expense

81,423 80,370 73,603 64,432 59,599 50,228 47,716 34,338

General and administrative expense

37,888 41,121 43,680 41,267 40,274 50,055 48,376 67,935

Total costs and operating expenses

273,010 262,004 239,465 219,437 206,316 202,067 189,743 186,528

Loss from operations

(146,119) (144,600) (130,321) (123,338) (98,208) (107,288) (97,642) (107,863)

Interest income 2,150 1,754 1,387 778 653 689 1,037 1,551

Interest expense (644) (644) (645) (644) (643) (644) (644) (646)

Other income (expense), net 5,281 (18,389) 378 (48) 25,898 (187) (243) (290)

Fair value adjustments of noncontrolling interest liability — — (99,785) — — — — —

Loss before provision for income taxes

(139,332) (161,879) (228,986) (123,252) (72,300) (107,430) (97,492) (107,248)

Provision for (benefit from) income taxes

602 115 446 (24) 11 96 83 110

(139,934) (161,994) (229,432) (123,228) (72,311) (107,526) (97,575) (107,358)

Adjustment of redeemable noncontrolling interest

— — — — (18,600) — — (2,300)

Net loss attributable to Guardant Health, Inc.

common stockholders

$ (139,934) $ (161,994) $ (229,432) $ (123,228) $ (90,911) $ (107,526) $ (97,575) $ (109,658)

Net loss per share attributable to Guardant Health, Inc.

common stockholders, basic and diluted

$ (1.36) $ (1.58) $ (2.25) $ (1.21) $ (0.89) $ (1.06) $ (0.96) $ (1.09)

Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc.

common stockholders, basic and diluted

102,516 102,289 102,047 101,853 101,697 101,420 101,172 100,955

Liquidity and capital resources

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

As of December 31, 2022, we had cash and cash equivalents of $141.6 million and marketable debt securities of $869.6 million.

As of December 31, 2023, we had cash and cash equivalents of $1.1 billion and marketable debt securities of $35.1 million.

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.

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

Additionally, we have investments held in marketable debt securities consisting primarily 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 debt 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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Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued liabilities, which could impact our working capital balances.

If our available cash, cash equivalents and marketable debt 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.

If our available cash, cash equivalents and marketable debt securities and anticipated cash flows from operations are insufficient to satisfy our liquidity requirements 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.

The sale of equity and convertible debt securities may result in dilution to our stockholders and, in the case of preferred equity securities or convertible debt, those securities could provide for rights, preferences or privileges senior to those of our common stock.

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Net cash used in operating activities $ (324,975) $ (309,463)

Net cash provided by (used in) investing activities 149,816 (63,155)

Net cash used in financing activities (189,093) (66,824)

Net cash provided by investing activities 840,250 149,816

Net cash provided by (used in) financing activities 477,375 (189,093)

Operating activities

Cash used in operating activities during the year ended December 31, 2022 was $309.5 million, which resulted from a net loss of $654.6 million, partially offset by non-cash charges of $283.6 million and net change in our operating assets and liabilities of $61.6 million.

Non-cash charges primarily consisted of $99.8 million of fair value adjustments of noncontrolling interest liability in connection with the Joint Venture Acquisition, $94.7 million of stock-based compensation, $36.0 million of depreciation and amortization, $28.6 million of non-cash operating lease costs, $7.8 million of unrealized losses on marketable equity securities, $5.3 million of impairment on the rights to purchase one of our non-marketable security investees, $4.6 million of amortization of premium on marketable debt security investments, $4.3 million of revaluation adjustments to contingent consideration, and $2.6 million of amortization of debt issuance costs.

The net change in our operating assets and liabilities was primarily the result of a $60.3 million increase in accounts payable and accrued liabilities, primarily due to increase in purchases of goods and services, increased personnel and increase in accrued and other liabilities, a $20.4 million decrease in prepaid expenses and other current assets, primarily driven by a $25.0 million one-time payment pursuant to a settlement and license agreement entered into in December 2021, a $11.7 million decrease in other assets, and a $9.9 million increase in deferred revenue primarily due to upfront payments from international laboratory partners, partially offset by a $20.9 million increase in inventory, net due to forecasted higher testing volumes, and increased inventory level to offset potential disruption in supply chain, and a $20.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance.

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 $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, net due to higher testing volumes, and a $4.2 million increase in other assets, partially offset by a $34.8 million increase in accounts payable and accrued liabilities, primarily due to increase in purchases of goods and services, increased personnel and increase in accrued and other liabilities, a $14.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance, and a $2.8 million increase in deferred revenue.

Cash used in operating activities during the year ended December 31, 2023 was $325.0 million, which resulted from a net loss of $479.4 million, partially offset by non-cash charges of $100.6 million and cash effect of changes in our operating assets and liabilities of $53.8 million.

Non-cash charges primarily consisted of $90.8 million of stock-based compensation, $42.9 million of depreciation and amortization, $29.7 million of operating lease costs, and $29.1 million of impairment on non-marketable equity security investments and other related assets, partially offset by $79.7 million of unrealized gains on marketable equity security investment in Lunit, inc., and $13.6 million of amortization of discount on marketable debt securities.

The cash effect of changes in our operating assets and liabilities was primarily the result of a $88.6 million increase in accounts payable and accrued liabilities, primarily due to a legal accrual of $83.4 million in connection with a jury verdict entered in favor of TwinStrand Biosciences, Inc.

and the University of Washington in November 2023, and a $8.4 million decrease in accounts receivable, net, partially offset by a $31.5 million payment of operating lease liabilities net of receipt of tenant improvement allowance, a $10.4 million increase in inventory, net due to forecasted higher testing volumes, and a $4.3 million increase in prepaid expenses and other current assets, net.

Cash used in operating activities during the year ended December 31, 2022 was $309.5 million, which resulted from a net loss of $654.6 million, partially offset by non-cash charges of $283.6 million and cash effect of changes in our operating assets and liabilities of $61.6 million.

Non-cash charges primarily consisted of $99.8 million of fair value adjustments of noncontrolling interest liability in connection with the Joint Venture Acquisition, $94.7 million of stock-based compensation, $36.0 million of depreciation and amortization, $28.6 million of operating lease costs, $7.8 million of unrealized losses on marketable equity security investment in Lunit, inc., $5.3 million of impairment on non-marketable equity security investments and other related assets, $4.6 million of amortization of premium on marketable debt securities, and $4.3 million of acquisition-related contingent consideration.

The cash effect of changes in our operating assets and liabilities was primarily the result of a $60.3 million increase in accounts payable and accrued liabilities, primarily due to increase in purchases of goods and services, increased personnel and increase in accrued and other liabilities, a $20.4 million decrease in prepaid expenses and other current assets, net primarily driven by a $25.0 million one-time payment pursuant to a settlement and license agreement entered into in December 2021, a $11.7 million decrease in other assets, net and a $9.9 million increase in deferred revenue primarily due to upfront payments from international laboratory partners, partially offset by a $20.9 million increase in inventory, net due to forecasted higher testing volumes, and increased inventory level to offset potential disruption in supply chain, and a $20.2 million payment of operating lease liabilities net of receipt of tenant improvement allowance.

Investing activities

Cash provided by investing activities during the year ended December 31, 2022 was $149.8 million, which resulted primarily from maturities of marketable debt securities of $555.0 million, partially offset by purchases of marketable debt securities of $303.8 million, purchases of property and equipment of $77.5 million, and purchases of non-marketable equity and other related assets of $24.0 million.

Cash used in investing activities during the year ended December 31, 2021 was $63.2 million, which resulted primarily from purchases of marketable debt 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 maturities of marketable debt securities of $952.1 million.

Cash provided by investing activities during the year ended December 31, 2023 was $840.3 million, which resulted primarily from maturities of marketable debt securities of $1.5 billion, partially offset by purchases of marketable debt securities of $629.9 million, purchases of property and equipment of $20.5 million, and purchases of non-marketable equity security investments and other related assets of $5.6 million.

Financing activities

Cash used in financing activities during the year ended December 31, 2022 was $189.1 million, which was primarily due to consideration payment for the Joint Venture Acquisition of $177.8 million, payment for the tender offer in connection with the Joint Venture Acquisition and acquisition related costs of $14.2 million, and taxes paid related to net share settlement of restricted stock units of $7.9 million, partially offset by proceeds of $9.3 million from issuances of common stock under our employee stock purchase plan, and proceeds of $2.6 million from exercise of stock options.

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 of common stock under our 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, 2023 was $477.4 million, which was primarily attributable to proceeds of $493.1 million from equity offerings, and proceeds of $10.2 million from issuances of common stock under our employee stock purchase plan, partially offset by payment of equity offering costs of $21.1 million, and taxes paid related to net share settlement of restricted stock units of $11.2 million.

Cash used in financing activities during the year ended December 31, 2022 was $189.1 million, which was primarily attributable to consideration payment for the Joint Venture Acquisition of $177.8 million, payment for the tender offer in connection with the Joint Venture Acquisition and acquisition related costs of $14.2 million, and taxes paid related to net share settlement of restricted stock units of $7.9 million, partially offset by proceeds of $9.3 million from issuances of common stock under our employee stock purchase plan.

Critical accounting policies and estimates

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We derive revenue from the provision of precision oncology testing services, as well as from development services and other.

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

Precision oncology testing revenue includes amount derived from the delivery of our precision oncology tests, including those tests delivered by labs operated by our strategic partners.

Development services include companion diagnostic development and regulatory approval, clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect and GuardantINFORM.

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These revenues are generally recognized over time based on an input method to measure progress in the period when the associated services have been performed.

In addition, other revenue includes amounts derived from licensing our digital sequencing technologies to our domestic customers and international laboratory partners, and kit fulfillment.

In addition, we license our digital sequencing technologies to our domestic customers and international laboratory partners.

For the licensed technology, we are compensated through royalty-based payments, non-refundable upfront payments, guaranteed minimum payments, and/or sample milestone payments.

Depending on the nature of the technology licensing arrangements, and considering factors including but not limited to enforceable right to payment and payment terms, and if an asset with alternative use is created, these revenues are recognized in the period when royalty-bearing sales occur, when the technology transfer is complete, or during the technology transfer period.

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

Depending on the nature of the technology licensing arrangements, and considering factors including but not limited to enforceable right to payment and payment terms, and if an asset with alternative use is created, these technology licensing revenues are recognized in the period when royalty-bearing sales occur, when the technology transfer is complete or over the technology transfer period.

Other revenue also includes kit fulfillment which is recognized when such products are delivered.

Contracts with multiple performance obligations

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or by using the residual approach if standalone selling price is not observable, by reference to the total transaction price less the sum of the observable standalone selling prices of other performance obligations promised in the contract.

Variable interest entity

We review agreements we enter into with third party entities, pursuant to which we may have a variable interest in the entity, in order to determine if the entity is a variable interest entity, or VIE.

If the entity is a VIE, we assess whether or not we are the primary beneficiary of that entity.

In determining whether we are the primary beneficiary of an entity, we apply a qualitative approach that determines whether we have both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity.

If we determine we are the primary beneficiary of a VIE, we consolidate the statements of operations and financial condition of the VIE into our consolidated financial statements.

Accounting for the consolidation is based on our determination if the VIE meets the definition of a business or and asset.

Assets, liabilities and noncontrolling interests, excluding goodwill, of VIEs that are not determined to be businesses are recorded at fair value in our financial statements upon consolidation.

Assets and liabilities that we have transferred to a VIE, after, or shortly before the date we became the primary beneficiary are recorded at the same amount at which the assets and liabilities would have been measured if they had not been transferred.

Our determination about whether we should consolidate such VIEs is made continuously as changes to existing relationships or future transactions may result in a consolidation or deconsolidation event.

In May 2018, we and an affiliate of SoftBank formed and capitalized the Joint Venture for the sale, marketing and distribution of our tests generally outside the Americas and Europe.

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

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

Prior to November 2021, the noncontrolling interest held by SoftBank contained embedded put-call redemption features that were not solely within our control and had been classified outside of permanent equity in the consolidated balance sheets.

The noncontrolling interest was considered probable of becoming redeemable as SoftBank had the option to exercise its put right to sell its equity ownership in the Joint Venture to us 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.

We elected to recognize the changes in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period.

Upon our exercise of the call right in November 2021, SoftBank no longer had the option to exercise its put right.

In connection with exercising the call right, we reclassified $78.0 million from redeemable noncontrolling interest to noncontrolling interest liability.

In June 2022, we purchased all of the shares held by SoftBank and its affiliates in consideration for a cash payment of the aggregate purchase price of $177.8 million, which resulted in $99.8 million of fair value adjustments to the noncontrolling interest liability for the year ended December 31, 2022.

Stock-based compensation

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.

We measure the grant date fair value of our service-based and performance-based restricted stock units issued to employees and non-employees based on the closing market price of the common stock on the date of grant.

For restricted stock units with only service-based vesting conditions, compensation expense is recognized on a straight-line basis over the requisite service period.

Compensation expense for restricted stock units with performance metrics, or PSUs, is calculated based upon expected achievement of the metrics specified in the grant, and is recognized using an accelerated attribution model over the requisite service period for each separately vesting portion of the award.

No stock-based compensation expense is recorded for PSUs, unless it is determined to be probable that the related performance metrics will be met.

Any PSUs that remain unvested at the end of the performance period will be forfeited.

Forfeitures are accounted for as they occur.

We measure stock-based compensation expense for stock options granted to our employees, directors, and non-employee 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 former Guardant Health AMEA, Inc.'s 2020 Equity Incentive Plan for the Joint Venture (see Note 12, Stock-Based Compensation ), and stock purchase rights granted under our 2018 Employee Stock Purchase Plan on the grant date using the Black-Scholes option-pricing model.

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

The assumptions used to calculate the fair value of our stock options, including the Joint Venture, were:

Fair Value of Common Stock

The fair value of our 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 board of directors of the Joint Venture determined the fair value of common stock of the Joint Venture.

The grant date fair value of the Joint Venture’s common stock was determined using valuation methodologies which utilizes 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 .

The fair value of our common stock is determined by the closing price, on the date of grant, of our common stock, which is traded on the Nasdaq Global Select Market.

The grant date fair value of the Joint Venture's common stock was determined by the board of directors of the Joint Venture, 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.

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

Our expected term represents the period that our stock options are expected to be outstanding.

The expected term of stock options issued to employees, directors and nonemployee consultants is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term), as we do not have sufficient historical data to use any other method to estimate expected term.

The expected term represents the period that the stock 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 we have concluded that our stock option exercise history does not provide a reasonable basis upon which to estimate expected term.

Expected Volatility

Prior to the commencement of trading of our common stock on the Nasdaq Global Select Market on October 4, 2018 in connection with the IPO, there was no active trading market for our common stock.

Prior to the commencement of trading of our common stock on the Nasdaq Global Select Market on October 4, 2018 in connection with our initial public offering, there was no active trading market for our common stock.

Due to limited historical data for the trading of our common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies in the same industry plus our 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 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 did not have any trading history for its common stock.

Risk-Free Interest Rate

The risk-free interest rate is based on the U.S.

treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants.

Treasury rate, with maturities similar to the expected term of the stock options.

Expected Dividend Yield

We have never paid dividends on our common stock and have no plans to pay dividends on our common stock.

Therefore, we use an expected dividend yield of zero.

We do not anticipate paying any dividends in the foreseeable future and, therefore, use an expected dividend yield of zero.

The Joint Venture did not anticipate paying any dividends, therefore used an expected dividend yield of zero.

Black-Scholes Assumptions

The weighted-average assumptions used in our Black-Scholes option-pricing model, including the Joint Venture, were as follows for stock option granted to our employees, directors and nonemployees for the periods presented:

Year Ended December 31,

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Expected dividend yield

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.

If the related market condition 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 assumptions used to calculate the fair value of our market-based restricted stock units were as follows:

Fair Value of Common Stock

The fair value of our 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.

Expected Volatility

Due to limited historical data for the trading of our 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 our 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.

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 market-based restricted stock units.

The risky rate represents our cost of equity.

Expected Dividend Yield

We do not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero.

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 market-based restricted stock units:

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%.

We recognize stock-based compensation expense net of forfeitures as they occur.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis.

We will continue to use judgment in evaluating the assumptions related to our stock-based compensation on a prospective basis, including probabilities of meeting performance metrics for our PSUs.

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.

Recent accounting pronouncements

Not applicable.

See Note 2, Summary of Significant Accounting Policies , to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for more information.

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