Annual Statements Open main menu

Guardant Health, Inc. - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-Q
_____________________
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to                        
Commission File Number: 001-38683
_____________________
GUARDANT HEALTH, INC.
(Exact Name of Registrant as Specified in its Charter)
_____________________
Delaware
45-4139254
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
505 Penobscot Dr.
Redwood City, California, 94063
Registrant’s telephone number, including area code: (855) 698-8887
_______________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated filer
Non-accelerated filer
 (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

Securities registered pursuant to Section 12(b) of the Act:



Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.00001
GH
The Nasdaq Global Select Market

As of October 31, 2020, the registrant had 99,972,386 shares of common stock, $0.00001 par value per share, outstanding.



GUARDANT HEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
Page

FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, including the section titled “Managements Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements regarding future events and our future results that are based on our current expectations, estimates, forecasts and projections as well as the current beliefs and assumptions of our management, including about our business, our financial condition, our results of operations, our cash flows, and the industry and environment in which we operate. Statements that include words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “would,” “could,” “should,” “intend” and “expect,” variations of these words, and similar expressions, are intended to identify forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A,“Risk Factors” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2019, in Part II, Item 1A, “Risk Factors” and elsewhere in our Quarterly Report on Form 10-Q for the period ended March 31, 2020, and in other reports we file with the U.S. Securities and Exchange Commission, or the SEC. While forward-looking statements are based on the reasonable expectations of our management at the time that they are made, you should not rely on them. We undertake no obligation to revise or update publicly any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as may be required by law.
Each of the terms the “Company,” “we,” “our,” “us” and similar terms used herein refer collectively to Guardant Health, Inc., a Delaware corporation, and its consolidated subsidiaries, unless otherwise stated. 


Table of Contents
PART I—FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Guardant Health, Inc.
Condensed Consolidated Balance Sheets (unaudited)
(in thousands, except share and per share data)
September 30, 2020December 31, 2019
ASSETS
Current assets:
Cash and cash equivalents
$142,945 $143,228 
Short-term marketable securities
870,459 379,574 
Accounts receivable, net
36,255 47,986 
Inventory
27,731 15,181 
Prepaid expenses and other current assets, net
9,898 11,389 
Total current assets
1,087,288 597,358 
Long-term marketable securities
51,398 268,783 
Property and equipment, net
61,882 43,668 
Right-of-use assets
36,103 29,140 
Intangible assets, net
16,645 8,524 
Goodwill
3,290 3,290 
Capitalized license fees
50 6,890 
Other assets, net
5,453 4,882 
Total Assets(1)
$1,262,109 $962,535 
LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$18,281 $16,197 
Accrued compensation
24,037 18,557 
Accrued expenses
22,312 25,703 
Deferred revenue
7,337 12,277 
Total current liabilities
71,967 72,734 
Long-term operating lease liabilities
39,682 33,256 
Obligation related to royalty
— 6,880 
Other long-term liabilities
1,856 1,672 
Total Liabilities(1)
113,505 114,542 
Redeemable noncontrolling interest
56,400 49,600 
Stockholders’ equity:
Common stock, par value of $0.00001 per share; 350,000,000 shares authorized as of September 30, 2020 and December 31, 2019; 99,897,188 and 94,261,414 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively
Additional paid-in capital
1,601,188 1,150,090 
Accumulated other comprehensive income
3,862 1,111 
Accumulated deficit
(512,847)(352,809)
Total Stockholders’ Equity
1,092,204 798,393 
Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity
$1,262,109 $962,535 
(1) As of September 30, 2020 and December 31, 2019, this balance includes $37.7 million and $45.1 million of assets, respectively, that can be used only to settle obligations of the consolidated variable interest entity (“VIE”) and VIE’s subsidiaries, and $4.6 million and $5.7 million of liabilities of the consolidated VIE and VIE’s subsidiaries, respectively, for which their creditors do not have recourse to the general credit of the Company. See Note 3, Investment in Joint Venture.
The accompanying notes are an integral part of these condensed consolidated financial statements.


Table of Contents
Guardant Health, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Revenue:
Precision oncology testing
$60,384 $52,147 $171,621 $123,048 
Development services and other14,185 8,701 36,793 28,430 
Total revenue
74,569 60,848 208,414 151,478 
Costs and operating expenses:
Cost of precision oncology testing
16,699 16,578 52,699 42,251 
Cost of development services and other4,488 1,936 11,429 6,631 
Research and development expense
36,245 24,569 109,580 60,417 
Sales and marketing expense
25,095 18,802 75,225 56,048 
General and administrative expense
66,294 16,440 123,265 42,540 
Total costs and operating expenses
148,821 78,325 372,198 207,887 
Loss from operations
(74,252)(17,477)(163,784)(56,409)
Interest income2,313 4,286 8,271 9,870 
Interest expense(8)(280)(30)(860)
Other income (expense), net345 179 2,421 275 
Loss before provision for income taxes
(71,602)(13,292)(153,122)(47,124)
Provision for (benefit from) income taxes
68 (202)116 (1,383)
Net loss
(71,670)(13,090)(153,238)(45,741)
Adjustment of redeemable noncontrolling interest
(6,000)300 (6,800)(4,700)
Net loss attributable to Guardant Health, Inc. common stockholders
$(77,670)$(12,790)$(160,038)$(50,441)
Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
$(0.78)$(0.14)$(1.66)$(0.56)
Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
99,554 93,303 96,659 89,452 
The accompanying notes are an integral part of these condensed consolidated financial statements.



5

Table of Contents
Guardant Health, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss
$(71,670)$(13,090)$(153,238)$(45,741)
Other comprehensive income (loss), net of tax impact:
Unrealized gain (loss) on available-for-sale securities
(1,721)(282)2,512 1,055 
Foreign currency translation adjustments
191 47 239 137 
Other comprehensive income (loss)(1,530)(235)2,751 1,192 
Comprehensive loss
$(73,200)$(13,325)$(150,487)$(44,549)
Comprehensive income (loss) attributable to redeemable noncontrolling interest
(6,000)300 (6,800)(4,700)
Comprehensive loss attributable to Guardant Health, Inc.
$(79,200)$(13,025)$(157,287)$(49,249)
The accompanying notes are an integral part of these condensed consolidated financial statements.



6


Guardant Health, Inc.

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (unaudited)
(in thousands, except share data)
Three Months Ended September 30, 2020
Redeemable Noncontrolling InterestCommon Stock Additional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 2020
$50,400 99,312,237 $$1,544,373 $5,392 $(435,177)$1,114,589 
Issuance of common stock upon exercise of stock options
— 533,962 — 3,851 — — 3,851 
Vesting of restricted stock units
— 50,989 — — — — — 
Vesting of common stock exercised early
— — — 13 — — 13 
Taxes paid related to net share settlement of restricted stock units— — — (2,247)— — (2,247)
Stock-based compensation— — — 55,198 — — 55,198 
Adjustment of redeemable noncontrolling interest
6,000 — — — — (6,000)(6,000)
Other comprehensive loss— — — — (1,530)— (1,530)
Net loss— — — — — (71,670)(71,670)
Balance as of September 30, 2020
$56,400 99,897,188 $$1,601,188 $3,862 $(512,847)$1,092,204 

Three Months Ended September 30, 2019
Redeemable Noncontrolling InterestCommon StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 2019
$46,800 92,806,252 $$1,128,938 $1,344 $(314,809)$815,474 
Issuance of common stock upon exercise of stock options
— 949,496 — 4,265 — — 4,265 
Vesting of restricted stock units
— 4,439 — — — — — 
Vesting of common stock exercised early
— — — 13 — — 13 
Common stock issued under employee stock purchase plan
— 93,203 — 3,185 — — 3,185 
Stock-based compensation— — — 5,484 — — 5,484 
Adjustment of redeemable noncontrolling interest
(300)— — — — 300 300 
Other comprehensive loss— — — — (235)— (235)
Net loss— — — — — (13,090)(13,090)
Balance as of September 30, 2019
$46,500 93,853,390 $$1,141,885 $1,109 $(327,599)$815,396 
7


Nine Months Ended September 30, 2020
Redeemable Noncontrolling InterestCommon Stock Additional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of December 31, 2019
$49,600 94,261,414 $$1,150,090 $1,111 $(352,809)$798,393 
Issuance of common stock in public offering, net of offering costs of $1,130
— 4,312,500 — 354,600 — — 354,600 
Issuance of common stock upon exercise of stock options
— 1,188,519 — 7,399 — — 7,399 
Vesting of restricted stock units
— 76,591 — — — — — 
Vesting of common stock exercised early
— — — 39 — — 39 
Common stock issued under employee stock purchase plan
— 58,164 — 3,956 — — 3,956 
Taxes paid related to net share settlement of restricted stock units— — — (2,247)— — (2,247)
Stock-based compensation— — — 87,351 — — 87,351 
Adjustment of redeemable noncontrolling interest
6,800 — — — — (6,800)(6,800)
Other comprehensive loss— — — — 2,751 — 2,751 
Net loss— — — — — (153,238)(153,238)
Balance as of September 30, 2020
$56,400 99,897,188 $$1,601,188 $3,862 $(512,847)$1,092,204 

Nine Months Ended September 30, 2019
Redeemable Noncontrolling InterestCommon Stock Additional
Paid-in
Capital
Accumulated Other Comprehensive Income (Loss) 
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of December 31, 2018
$41,800 85,832,454 $$764,033 $(83)$(280,799)$483,152 
Cumulative effect adjustment for Topic 606 adoption
— — — — — 4,907 4,907 
Cumulative effect adjustment for ASU 2018-07 adoption
— — — 1,266 — (1,266)— 
Issuance of common stock in public offering, net of offering costs of $723
— 5,175,000 — 349,709 — — 349,709 
Issuance of common stock upon exercise of stock options
— 2,627,486 — 9,795 — — 9,795 
Vesting of restricted stock units
— 5,545 — — — — — 
Vesting of common stock exercised early
— — — 82 — — 82 
Common stock issued under employee stock purchase plan
— 212,905 — 5,118 — — 5,118 
Stock-based compensation— — — 11,882 — — 11,882 
Adjustment of redeemable noncontrolling interest4,700 — — — — (4,700)(4,700)
Other comprehensive gain, net of tax impact— — — — 1,192 — 1,192 
Net loss— — — — — (45,741)(45,741)
Balance as of September 30, 2019
$46,500 93,853,390 $$1,141,885 $1,109 $(327,599)$815,396 
The accompanying notes are an integral part of these condensed consolidated financial statements.
8

Table of Contents
Guardant Health, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended September 30,
20202019
OPERATING ACTIVITIES:
Net loss
$(153,238)$(45,741)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
11,462 7,963 
Non-cash operating lease costs
3,349 2,865 
Charge of in-process research and development costs with no alternative future use
8,500 — 
Unrealized translation gains (loss) on obligation related to royalty
— (330)
Re-valuation of contingent consideration
(120)— 
Non-cash stock-based compensation
87,351 11,882 
Amortization of premium (discount) on marketable securities
1,636 (1,953)
Benefit from income tax differences
— (1,235)
Credit loss adjustment and others8,056 — 
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable, net
11,581 908 
Inventory
(12,550)(5,624)
Prepaid expenses and other current assets
491 (453)
Other assets
(7,571)(1,043)
Accounts payable
846 426 
Accrued compensation
5,480 11,618 
Accrued expenses and other liabilities(1,514)6,368 
Operating lease liabilities
(3,523)600 
Deferred revenue
(4,940)(3,043)
Net cash used in operating activities(44,704)(16,792)
INVESTING ACTIVITIES:
Purchases of marketable securities
(580,172)(542,468)
Maturity of marketable securities
307,548 223,064 
Business acquisition, net of cash acquired
— (7,328)
Purchases of property and equipment
(28,891)(11,628)
Purchase of intangible assets and capitalized license obligations(17,886)(2,568)
Net cash used in investing activities(319,401)(340,928)
FINANCING ACTIVITIES:
Payments made on royalty obligations
— (228)
Payments made on finance lease obligations
(125)(79)
Proceeds from issuance of common stock upon exercise of stock options
7,399 9,795 
Proceeds from issuances of common stock under employee stock purchase plan
3,956 5,118 
Taxes paid related to net share settlement of restricted stock units(2,247)— 
Proceeds from public offering, net of underwriting discounts and commissions
355,730 350,432 
Payment of offering costs related to public offering
(1,130)(811)
Net cash provided by financing activities
363,583 364,227 
Net effect of foreign exchange rate changes on cash and cash equivalents
239 137 
9

Table of Contents
Nine Months Ended September 30,
20202019
Net increase in cash and cash equivalents
(283)6,644 
Cash and cash equivalents—Beginning of period
143,228 140,544 
Cash and cash equivalents—End of period
$142,945 $147,188 
Supplemental Disclosures of Cash Flow Information:
Operating lease liabilities arising from obtaining right-of-use assets$10,463 $9,701 
Supplemental Disclosures of Noncash Investing and Financing Activities:
Purchases of property and equipment included in accounts payable and accrued expenses
$4,301 $6,418 
Initial fair value of contingent consideration at acquisition date$— $1,065 
The accompanying notes are an integral part of these condensed consolidated financial statements.
10

Table of Contents
 Guardant Health, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1.    Description of Business
Guardant Health, Inc. (the “Company”) is a leading precision oncology company focused on helping conquer cancer globally through use of its proprietary blood tests, vast data sets and advanced analytics. The key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which the Company enables by a routine blood draw, or liquid biopsy. The Guardant Health Oncology Platform is designed to leverage the Company’s capabilities in technology, clinical development, regulatory and reimbursement to drive commercial adoption, accelerate drug development, improve patient clinical outcomes and lower healthcare costs. In pursuit of its goal to manage cancer across all stages of the disease, the Company has launched its Guardant360 and GuardantOMNI liquid biopsy-based tests for advanced stage cancer and is developing tests from its 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 and is developing tests from its 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. Using data collected from the Company's Guardant360 tests, the Company has also developed GuardantINFORM platform to further accelerate precision oncology drug development by biopharmaceutical companies by offering them an in-silico research platform to further unlock insights into tumor evolution and treatment resistance across various biomarker-driven cancers.
The Company was incorporated in Delaware in December 2011 and is headquartered in Redwood City, California. In May 2018, the Company formed and capitalized Guardant Health AMEA, Inc. (the “Joint Venture”) in the United States with an affiliate of SoftBank Vision Fund (AIV M1) L.P. (“SoftBank”). Under the terms of the joint venture agreement, the Company held a 50% ownership interest in the Joint Venture. As of September 30, 2020, the Joint Venture has subsidiaries in Singapore and Japan (see Note 3, Investment in Joint Venture) and the Company has a subsidiary in Switzerland, which was incorporated in 2019.

2.    Summary of Significant Accounting Policies
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed consolidated financial statements include the accounts of Guardant Health, Inc. and its consolidated Joint Venture. Other stockholders’ interests in the Joint Venture are shown in the condensed consolidated financial statements as redeemable noncontrolling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company believes that its existing cash and cash equivalents and marketable securities as of September 30, 2020 will be sufficient to allow the Company to fund its current operating plan through at least a period of one year after the date the accompanying condensed consolidated financial statements are issued. As the Company continues to incur losses, its transition to profitability is dependent upon a level of revenues adequate to support the Company’s cost structure. If the Company’s transition to profitability is not consistent with its current operating plan, the Company may have to seek additional capital.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and the related disclosures at the date of the condensed consolidated financial statements, as well as the reported amounts of revenues and expenses during the periods presented. The Company bases its estimates on historical experience and other market-specific or other relevant assumptions that it believes to be reasonable under the circumstances. Estimates are used in several areas including, but not limited to, estimation of variable consideration, estimation of credit losses, standalone selling price allocation included in contracts with multiple performance obligations, the fair value of assets acquired and liabilities assumed for business combinations, goodwill and identifiable intangible assets, stock-based compensation, contingencies, certain inputs into the provision for (benefit from) income taxes,
11

Table of Contents
including related reserves, valuation of redeemable noncontrolling interest, among others. These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates. The extent to which the COVID-19 pandemic will ultimately impact the Company’s business, results of operations, financial conditions, or cash flows is highly uncertain and difficult to predict because it will depend on many factors that are outside the Company’s control, such as the duration, scope and severity of the pandemic, steps required or mandated by governments to mitigate the impact of the pandemic, and whether COVID-19 can be effectively prevented, detected, contained and treated, particularly in the markets where the Company operates.
Unaudited Interim Condensed Financial Statements
The accompanying condensed consolidated balance sheet as of September 30, 2020, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended September 30, 2020 and 2019, the condensed consolidated statements of redeemable noncontrolling interest and stockholders’ equity for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019, and the related interim condensed consolidated disclosures are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. These unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring accruals that the Company believes are necessary to fairly state the financial position and the results of the Company’s operations and cash flows for interim periods in accordance with GAAP. Interim-period results are not necessarily indicative of results of operations or cash flows for a full year or any subsequent interim period.
The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.
Foreign Currency Translation
The functional currency of the subsidiaries of the consolidated Joint Venture is the local currency. The assets and liabilities of the subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date, with the resulting translation adjustments recorded to a separate component of accumulated other comprehensive loss within stockholders’ equity. Income and expense accounts are translated at average exchange rates during the period. Foreign currency transaction gains and losses resulting from transactions denominated in a currency other than the functional currency are recognized in the condensed consolidated statements of operations. For the three and nine months ended September 30, 2020 and 2019, foreign currency translation adjustment was immaterial.
Concentration of Risk
The Company is subject to credit risk from its portfolio of cash equivalents held at one commercial bank and investments in marketable securities. The Company limits its exposure to credit losses by investing in money market funds through a U.S. bank with high credit ratings. The Company’s cash may consist of deposits held with banks that may at times exceed federally insured limits, however, its exposure to credit risk in the event of default by the financial institution is limited to the extent of amounts recorded on the condensed consolidated balance sheets. The Company performs evaluations of the relative credit standing of these financial institutions to limit the amount of credit exposure.
The Company also invests in investment-grade debt instruments and has policy limits for the amount it can invest in any one type of security, except for securities issued or guaranteed by the U.S. government. The goals of the Company’s investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after-tax rate of return. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, investment type and issuer, as a result, the Company is not exposed to any significant concentrations of credit risk from these financial instruments.
12

Table of Contents
The Company is subject to credit risk from its accounts receivable. The majority of the Company’s accounts receivable arises from the provision of precision oncology services in the United States and are primarily with biopharmaceutical companies with high credit ratings. The Company has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Accounts receivable are recorded at the invoiced amount.
A significant customer is a biopharmaceutical customer or a clinical testing payer that represents 10% or more of the Company’s total revenue or accounts receivable balance. Revenue attributable to each significant customer, including its affiliated entities, as a percentage of the Company’s total revenue, for the respective period, and accounts receivable balance attributable to each significant customers, including its affiliated entities, as a percentage of the Company’s total accounts receivable balance, at the respective condensed consolidated balance sheet date, are as follows:
RevenueAccounts Receivable, Net
Three Months Ended September 30,Nine Months Ended September 30,September 30, 2020December 31, 2019
2020201920202019
(unaudited)(unaudited)
Customer A
*21 %11 %27 %11 %40 %
Customer B
28 %19 %24 %15 %**
Customer C
*****10 %
Customer D
****10 %*
Customer E
****13 %*
*    less than 10%
The Company is also subject to credit risk from its other receivables and other assets. The Company's other receivables and other assets include payments due from a third-party in relation to the settlement of a patent dispute reached during the three months ended September 30, 2020 for $8.0 million payable over a period of 6 years. The Company has evaluated and recorded a credit loss for the full amount considering the third-party's credit worthiness and lack of collection history. The following table presents the receivable and the related credit loss amounts:
Gross AmountAllowance for Credit LossesNet Amount
September 30, 2020December 31, 2019Three and Nine Months Ended September 30, 2020September 30, 2020December 31, 2019
Beginning BalanceAdditions: Charged to Other Income (Expense), NetEnding Balance
(unaudited)(unaudited)(unaudited)
(in thousand)
Prepaid expenses and other current assets
$1,000 $— $— $(1,000)$(1,000)$— $— 
Other assets
7,000 — — (7,000)(7,000)— $— 
Accounts Receivable, Net
Accounts receivable represent valid claims against biopharmaceutical companies, research institutes and international distributors. The Company evaluates the collectability of its accounts receivable based on historical collection trends, the financial condition of payment partners, and external market factors and provides for an allowance for potential credit losses based on management’s best estimate of the amount of probable credit losses. As of September 30, 2020 and December 31, 2019, the Company had no allowance for credit losses related to its accounts receivable.
Asset Acquisition
If an acquisition of an asset or group of assets does not meet the definition of a business, the transaction is accounted for as an asset acquisition rather than a business combination. An asset acquisition does not result in the recognition of goodwill and transaction costs are capitalized as part of the cost of the asset or group of assets acquired. The total
13

Table of Contents
consideration is allocated to the various intangible assets acquired on a relative fair value basis. Transaction costs associated with the asset acquisition are capitalized. Cash paid in connection of purchase of in-process research and development technology in an asset acquisition is presented within the investing section of the condensed consolidated statement of cash flows.
Goodwill and Intangible Assets, net
Intangible assets related to in-process research and development costs (“IPR&D”) are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. Prior to completion of the research and development efforts, the assets are considered indefinite-lived. During this period, the assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts.
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill and IPR&D are not amortized but are tested for impairment at least annually during the fourth fiscal quarter, or if circumstances indicate their value may no longer be recoverable. The Company continues to operate in one segment, which is considered to be the sole reporting unit and, therefore, goodwill was tested for impairment at the enterprise level. As of September 30, 2020, there has been no impairment of goodwill.
Intangible assets are carried at cost, net of accumulated amortization. The Company does not have intangible assets with indefinite useful lives other than goodwill and the acquired IPR&D. Amortization is recorded on a straight-line basis over the intangible asset's useful life, which is approximately 6-12 years.
Leases
The Company determines if an arrangement contains a lease at inception. Operating lease right-of-use (“ROU”) assets and operating leases liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date. ROU assets also include any initial direct costs incurred and any lease payments made at or before the lease commencement date, less lease incentives received or receivable. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities, as the Company's leases generally do not provide an implicit rate. Lease terms may include options to extend or terminate when the Company is reasonably certain the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. The Company also has lease arrangements with lease and non-lease components. The Company elected the practical expedient not to separate non-lease components from lease components for the Company’s facility leases. The Company also elected to apply the short-term lease measurement and recognition exemption in which ROU assets and lease liabilities are not recognized for leases with terms of 12 months or less.
Revenue Recognition
The Company derives revenue from the provision of precision oncology testing services provided to its ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to its biopharmaceutical customers. Precision oncology testing services include genomic profiling and the delivery of other genomic information derived from the Company’s platform. Development services and other include companion diagnostic development, clinical trial setup, monitoring and maintenance, information solutions and laboratory services, and other miscellaneous revenue streams. The Company currently receives payments from third-party commercial and governmental payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies and research institutes.
Revenues are recognized when control of services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.
Precision oncology testing
The Company recognizes revenue from the sale of its precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians. Most precision oncology tests requested by clinical customers are sold without a written agreement;
14

Table of Contents
however, the Company determines an implied contract exists with its clinical customers. The Company identifies each sale of its liquid biopsy test to clinical customer as a single performance obligation. With the exception of certain limited contracted arrangements with insurance carriers and other institutions where the transaction price is fixed, a stated contract price does not exist and the transaction price for each implied contract with clinical customers represents variable consideration. The Company estimates the variable consideration under the portfolio approach and considers the historical reimbursement data from third-party commercial and governmental payers and patients, as well as known or anticipated reimbursement trends not reflected in the historical data. The Company monitors the estimated amount to be collected in the portfolio at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the estimate and any subsequent revision contain uncertainty and require the use of significant judgment in the estimation of the variable consideration and application of the constraint for such variable consideration. The Company analyzes its actual cash collections over the expected reimbursement period and compares it with the estimated variable consideration for each portfolio and any difference is recognized as an adjustment to estimated revenue after the expected reimbursement period, subject to assessment of the risk of future revenue reversal. For the three months ended September 30, 2020 and 2019, the Company recorded $11.4 million and $10.9 million as revenue, respectively, resulting from cash collections over the expected reimbursement period exceeding the estimated variable consideration related to samples processed in previous periods, including revenue received from successful appeals of reimbursement denials. For the nine months ended September 30, 2020 and 2019, the Company recorded $21.9 million and $15.5 million as revenue, respectively, resulting from cash collections over the expected reimbursement period exceeding the estimated variable consideration related to samples processed in previous periods, including revenue received from successful appeals of reimbursement denials.
Revenue from sales of precision oncology tests to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume over a defined period. The Company identifies its promise to transfer a series of distinct liquid biopsy tests to biopharmaceutical customers as a single performance obligation. Precision oncology tests to biopharmaceutical customers are generally billed at a fixed price for each test performed. For agreements involving testing volume to be satisfied over a defined period, revenue is recognized over time based on the number of tests performed as the performance obligation is satisfied over time. Results of the Company’s precision oncology services are delivered electronically, and as such there are no shipping or handling fees incurred by the Company or billed to customers.
Development services and other
The Company performs development services for its biopharmaceutical customers utilizing its precision oncology information platform. Development services and other typically represent a single performance obligation as the Company performs a significant integration service, such as analytical validation and regulatory submissions. The individual promises are not separately identifiable from other promises in the contracts and, therefore, are not distinct. However, under certain contracts, a biopharmaceutical customer may engage the Company for multiple distinct development services which are both capable of being distinct and separately identifiable from other promises in the contracts and, therefore, distinct performance obligations.
The Company collaborates with pharmaceutical companies in the development of new drugs. As part of these collaborations, the Company provides services related to regulatory filings to support companion diagnostic device submissions for the Company’s liquid biopsy panels. Under these collaborations, the Company generates revenue from achievement of milestones, as well as provision of on-going support. For development services performed, the Company is compensated through a combination of an upfront fee and performance-based, non-refundable regulatory and other developmental milestone payments. The transaction price of the Company's development services contracts typically represents variable consideration. Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be managed to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone. In making this assessment, the Company considers its historical experience with similar milestones, the degree of complexity and uncertainty associated with each milestone, and whether achievement of the milestone is dependent on parties other than the Company. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is updated at each reporting period as a revision to the estimated transaction price.
15

Table of Contents
The Company recognizes development services revenue over the period in which biopharmaceutical research and development services are provided. Specifically, the Company recognizes revenue using an input method to measure progress, utilizing costs incurred to-date relative to total expected costs as its measure of progress. The Company assesses the changes to the total expected cost estimates as well as any incremental fees negotiated resulting from changes to the scope of the original contract in determining the revenue recognition at each reporting period. The Company revised and increased its total estimated costs relating to one of the development services contracts during the nine months ended September 30, 2020. Had the Company included such additional costs in the original estimated costs, revenues for the nine months ended September 30, 2019 would have been lower by $3.5 million. For development of new products or services under these arrangements, costs incurred before technological feasibility is reached are included as research and development expenses in the Company’s condensed consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services.
The Company also has other miscellaneous revenue streams such as Guardant-19 screening in connection with the outbreak of COVID-19, referral fees, maintenance and kits fulfillment related revenues.
Contracts with multiple performance obligations
Contracts with biopharmaceutical customers may include multiple distinct performance obligations, such as provision of precision oncology testing, biopharmaceutical research and development services, and clinical trial enrollment assistance, among others. The Company evaluates the terms and conditions included within its contracts with biopharmaceutical customers to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together. The Company first identifies material promises, in contrast to immaterial promises or administrative tasks, under the contract, and then evaluates whether these promises are both capable of being distinct and distinct within the context of the contract. In assessing whether a promised service is capable of being distinct, the Company considers whether the customer could benefit from the service either on its own or together with other resources that are readily available to the customer, including factors such as the research, development, and commercialization capabilities of a third- party as well as the availability of the associated expertise in the general marketplace. In assessing whether a promised service is distinct within the context of the contract, the Company considers whether it provides a significant integration of the services, whether the services significantly modify or customize one another, or whether the services are highly interdependent or interrelated.
For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin.
Contract assets
Contract assets consists primarily of: i) precision oncology testing revenues to clinical customers that are recognized upon delivery of the test results prior to cash collection; and ii) development services revenues to biopharmaceutical customers that are recognized upon the achievement of performance-based milestones but prior to the establishment of billing rights. Contract assets are relieved when the Company receives payments from clinical customers, or when it invoices the biopharmaceutical customers when milestones are achieved, thereby reclassifying the balances from contract assets to accounts receivable. Contract assets are presented under accounts receivable, net and other assets, net on the Company’s condensed consolidated balance sheets. As of September 30, 2020, the Company had contract assets of $13.4 million of which $0.2 million was recorded in other assets, net. As of December 31, 2019, the Company had contract assets of $6.2 million of which $1.0 million was recorded in other assets.
Deferred revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from contracts with customers. For example, development services contracts with biopharmaceutical customers often contain upfront payments which results in the recording of deferred revenue to the extent cash is received prior to the Company's performance of the related services. Contract liabilities are relieved as the Company performs its obligations under the contract and revenue is consequently recognized. As of September 30, 2020 and December 31, 2019, the deferred revenue balance was $7.3 million and $12.3 million, respectively, which included $2.2 million and $4.8 million, respectively, related to collaboration development efforts with pharmaceutical companies to be recognized as the Company performs research and development services in the future periods. Revenue recognized in the nine months ended September 30, 2020 that was included in the deferred revenue balance
16

Table of Contents
as of December 31, 2019 was $8.8 million, which primarily represented revenue from provision of development services under the collaboration agreements with biopharmaceutical customers. 
Transaction price allocated to the remaining performance obligations
Transaction price allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenues in future periods. The Company expects to recognize substantially all of the remaining transaction price in the next 12 months.

Costs of Precision Oncology Testing
Cost of precision oncology testing generally consists of cost of materials, direct labor including bonus, benefit and stock-based compensation, equipment and infrastructure expenses associated with processing liquid biopsy test samples (including sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples), freight, curation of test results for physicians and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Costs associated with performing the Company’s tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to that test. Royalties for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expense at the time the related revenues are recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the applicable patent rights.
Cost of Development Services and Other
Cost of development service and other primarily includes costs incurred for the performance of development services requested by the Company’s biopharmaceutical customers and other. 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 development services.
Research and Development Expenses
Research and development expenses are comprised of costs incurred to develop technology and include compensation and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services and other outside costs.
Stock-Based Compensation
Stock-based compensation related to stock options granted to the Company’s and the Joint Venture's employees, directors and nonemployees is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards. Compensation expense for stock options with performance metrics is calculated based upon expected achievement of the metrics specified in the grant.
Starting January 1, 2019, upon adoption of Accounting Standards Update (“ASU”) 2018-07, Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, the fair value of stock options issued to nonemployee consultants is determined as of the grant date, and compensation expense is being recognized over the period that the related services are rendered.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options and stock purchase rights granted under its 2018 Employee Stock Purchase Plan and under the Joint Venture's 2020 Equity Incentive Plan. The Black-Scholes option-pricing model requires assumptions to be made related to the expected term of an award, expected volatility, risk-free rate and expected dividend yield. The board of directors of the Joint Venture has determined the fair value of common stock of the Joint Venture. Forfeitures are accounted for as they occur.
For market-based restricted stock units, the Company derives the requisite service period using the Monte Carlo simulation model and the related compensation expense is recognized over the derived service period using an accelerated attribution model commencing on the grant date. Stock-based compensation expense will be recorded regardless of whether the market conditions are achieved or not. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met.
17

Table of Contents
The Company accounts for restricted stock units issued to employees based on the grant date fair value which is determined based on the closing market price of the common stock on the date of grant. The expense is recognized in the Company’s condensed consolidated statement of operations on a straight-line basis over the requisite vesting or service period.
Net Loss Per Share Attributable to Common Stockholders
The Company calculates basic net loss per share attributable to common stockholders by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, stock options, restricted stock units, shares issuable pursuant to the employee stock purchase plan, shares subject to repurchase from early exercised options and contingently issuable shares are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.
Accounting Pronouncements Adopted
Financial Instruments
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), in order to improve financial reporting of expected credit losses on financial instruments and other commitments to extend credit. ASU 2016-13 requires that an entity measure and recognize expected credit losses for financial assets held at amortized cost and replaces the incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to certain available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities.  These changes result in earlier recognition of credit losses. The Company adopted ASU 2016-13 using the modified retrospective approach as of January 1, 2020. The cumulative effect upon adoption was not material to the Company’s condensed consolidated financial statements. The Company will continue to monitor the developments pertaining to the recent coronavirus (COVID-19) pandemic and its impact on expected credit losses.
Goodwill
In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment which eliminates Step 2 from the goodwill impairment test and instead requires entities to perform its annual or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The Company adopted this new standard on January 1, 2020. The adoption of this standard did not have a significant impact to the Company’s condensed consolidated financial statements.
Fair Value Measurements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements in ASC 820, Fair Value Measurement, as part of its disclosure framework project. The Company adopted this new guidance on January 1, 2020. The adoption of this standard did not have a significant impact on the Company’s condensed consolidated financial statements.
Cloud Computing Arrangements
In August 2018, the FASB issued ASU 2018-15—Intangibles-Goodwill and Other-Internal—Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC Topic 350, Intangibles—Goodwill and Other, to determine which implementation costs to capitalize as assets or expense as incurred. The Company adopted this new standard on January 1, 2020 on a prospective basis. The adoption of this standard did not have a significant impact on the Company’s condensed consolidated financial statements.
Collaborative Arrangements
In November 2018, the FASB issued ASU 2018-18 -Collaborative Arrangements (ASC 808) to clarify that certain transactions between participants in a collaborative arrangement should be accounted for under Revenue from contracts with customers (Topic ASC 606) when the counterparty is a customer. The Company adopted this new
18

Table of Contents
standard on January 1, 2020. The adoption of this standard did not have a significant impact to the Company’s condensed consolidated financial statements.
Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740.  The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance.  The Company early adopted this new standard on January 1, 2020.The adoption of this standard did not have a significant impact to the Company’s condensed consolidated financial statements. Under prior GAAP, the Company historically allocated income tax benefit to continuing operations and an offsetting income tax expense to other comprehensive income under the applicable exception to ASC Topic 740.  The new standard eliminates this exception and the Company will now determine the tax effect of pre-tax income or loss from continuing operations without regard to the tax effect of other items.  The Company applied the new intraperiod tax allocation guidance prospectively in the period of adoption.

3.    Investment in Joint Venture
Variable Interest Entity (“VIE”)
In May 2018, the Company and an affiliate of SoftBank formed and capitalized the Joint Venture for the sale, marketing and distribution of the Company’s tests in all areas worldwide, outside of North America, Central America, South America, the United Kingdom, all other member states of the European Union as of May 9, 2017, Iceland, Norway, Switzerland and Turkey. The Company expects to rely on the Joint Venture to accelerate commercialization of its products in Asia, the Middle East and Africa, with an initial focus on Japan.
Under the terms of the joint venture agreement, the Company paid $9.0 million for 40,000 shares of common stock, or 50% ownership interest, of the Joint Venture, and the affiliate of SoftBank contributed $41.0 million for 40,000 shares of common stock, or the other 50% ownership interest, of the Joint Venture. In June 2020, an amended and restated certificate of incorporation of the Joint Venture, as approved by the board of directors of the Joint Venture, was filed with the Secretary of State of the State of Delaware. The amended and restated certificate of incorporation, among other things, increased the number of authorized shares of common stock to 89,000,000 shares consisting of 80,000,000 shares of Class A common stock and 9,000,000 shares of Class B (non-voting) common stock; and authorized 80,000,000 shares of Series A preferred stock. Pursuant to the amended and restated certificate of incorporation, each share of common stock held by the Company and the affiliate of SoftBank was reclassified and exchanged for 1,000 shares of Series A preferred stock. As a result, each of the Company and the affiliate of SoftBank held 40,000,000 shares of Series A preferred stock. The holders of Series A preferred stock are entitled to receive dividends at the rate of $0.05 per share if and when declared by the board of directors of the Joint Venture. In June 2020, the board of directors of the Joint Venture authorized the adoption of the Joint Venture’s 2020 Equity Incentive Plan pursuant to which 4,595,555 shares of Class B common stock have been reserved for issuance. As of September 30, 2020, no shares of Class A and Class B common stock have been issued and outstanding and 80,000,000 shares of Series A preferred stock have been issued and outstanding.
Under the terms of the joint venture agreement, neither party is obligated to make any further capital contribution, in cash or otherwise, to the Joint Venture. The Joint Venture is deemed to be a variable interest entity (“VIE”) and the Company has been identified as the VIE’s primary beneficiary. As the primary beneficiary, the Company has consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances have been eliminated in consolidation.
As of September 30, 2020 and December 31, 2019, the Joint Venture had total assets of approximately $37.7 million and $45.1 million, respectively, which were primarily comprised of cash, property and equipment, right-of-use assets and security deposits. Although the Company consolidates the Joint Venture, the legal structure of the Joint Venture limits the recourse that its creditors will have over the Company’s general credit or assets.  Similarly, the assets held in the Joint Venture can be used only to settle obligations of the Joint Venture. As of September 30, 2020 and December 31, 2019, the Company has not provided financial or other support to the Joint Venture that was not previously contracted or required.
Put-call arrangements
The joint venture agreement includes a put-call arrangement with respect to the shares of the Joint Venture held by SoftBank and its affiliates. Under certain specified circumstances and on terms specified in the joint venture
19

Table of Contents
agreement, including timely written notice, SoftBank has the right to cause the Company to purchase all shares of the Joint Venture held by SoftBank and its affiliates (the “put right”), and the Company has a right to purchase all such shares (the “call right”).
Each of the Company and SoftBank may exercise its respective put-call rights for the Company to purchase all shares of the Joint Venture held by SoftBank in the event of (i) certain material disagreements relating to the Joint Venture or its business that may seriously affect the ability of the Joint Venture to perform its obligations under the joint venture agreement or may otherwise seriously impair the ability of the Joint Venture to conduct its business in an effective matter, other than one relating to the Joint Venture’s business plan or to factual matters that may be capable of expert determination; (ii) the effectiveness of the Company’s initial public offering, a change in control of the Company, the seventh anniversary of the formation of the Joint Venture, or each subsequent anniversary of each of the foregoing events; or (iii) a material breach of the joint venture agreement by the other party that goes unremedied within 20 business days. Unless the shares of the Joint Venture are publicly traded and listed on a nationally recognized stock exchange, the purchase price per share of the Joint Venture in these situations will be determined by a third-party valuation firm on the assumption that the sale is on an arm’s-length basis on the date of the put or call notice. The third-party valuation firm may evaluate a range of factors and employ assumptions that are subjective in nature, which could result in the fair value of SoftBank’s interests in the Joint Venture being determined to be materially different from what has been recorded in the Company’s condensed consolidated financial statements.
In the event the Company exercises its call right, the fair value of the Joint Venture will be deemed to be no less than an amount that yields a 20% internal rate of return on each tranche of capital invested by SoftBank and its affiliates in the Joint Venture, taking into account all proceeds received by SoftBank and its affiliates arising from their shares through such date.
In the event SoftBank exercises its put right and the fair value of the Joint Venture is determined to be greater than 40% of the fair value of the Company, the Company will only be required to purchase the number of shares of the Joint Venture held by SoftBank and its affiliates having an aggregate value equal to the product of 40% of the Company's fair value and the pro rata portion of the outstanding shares of the Joint Venture held by SoftBank and its affiliates.
The Company may pay the purchase price for the shares of the Joint Venture in cash, in shares of its capital stock (which may be a non-voting security with senior preferences to all other classes of its equity or, if its common stock is publicly traded on a national exchange, its common stock), or in a combination thereof. In the event the Company exercises the call right, SoftBank will choose the form of consideration. In the event SoftBank exercises the put right, the Company will choose the form of consideration.
The noncontrolling interest held by SoftBank contains embedded put-call redemption features that are not solely within the Company’s control and has been classified outside of permanent equity in the consolidated balance sheets. The put-call feature embedded in the redeemable noncontrolling interest do not currently require bifurcation as it does not meet the definition of a derivative and is considered to be clearly and closely related to the redeemable noncontrolling interest. The noncontrolling interest is considered probable of becoming redeemable as SoftBank has the option to exercise its put right to sell its equity ownership in the Joint Venture to the Company on or after the seventh anniversary of the formation of the Joint Venture, on each subsequent anniversary of the Company’s initial public offering (the “IPO”) and under certain other circumstances. The Company elected to recognize the change in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period. The carrying value of the redeemable noncontrolling interest is first adjusted for the earnings or losses attributable to the redeemable noncontrolling interest based on the percentage of the economic or ownership interest retained in the consolidated VIE by the noncontrolling parties, and then adjusted to equal to its redemption amount, or the fair value of the noncontrolling interest held by SoftBank, as if the redemption were to occur at the end of the reporting date.

20

Table of Contents
4.     Condensed Consolidated Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consist of the following:
September 30, 2020December 31, 2019
(unaudited)
(in thousands)
Machinery and equipment
$37,954 $29,119 
Leasehold improvements
33,480 21,031 
Computer hardware
10,129 6,296 
Construction in progress
7,465 6,354 
Furniture and fixtures
3,182 1,962 
Computer software
1,027 829 
Property and equipment, gross
$93,237 $65,591 
Less: accumulated depreciation
(31,355)(21,923)
Property and equipment, net
$61,882 $43,668 
Depreciation expense related to property and equipment was $3.8 million and $2.5 million for the three months ended September 30, 2020 and 2019, respectively, and $10.0 million and $6.8 million for the nine months ended September 30, 2020 and 2019, respectively.
Accrued Expenses
Accrued expenses consist of the following:
September 30, 2020December 31, 2019
(unaudited)
(in thousands)
Operating lease liabilities
$7,438 $7,140 
Accrued tax liabilities
3,751 3,050 
Accrued professional services
2,475 3,464 
Accrued clinical trials and studies2,489 2,029 
Accrued legal expenses
1,808 1,046 
Purchases of property and equipment included in accrued expenses
668 2,424 
Accrued royalty obligations
321 1,564 
Others
3,362 4,986 
Total accrued expenses
$22,312 $25,703 
5.    Fair Value Measurements, Cash Equivalents and Marketable Securities
Financial instruments consist of cash equivalents, marketable securities, accounts receivable, net, prepaid expenses and other current assets, net, accounts payable and accrued expenses. Cash equivalents and marketable securities are stated at fair value. Prepaid expenses and other current assets, net, accounts payable and accrued expenses are stated at their carrying value, which approximates fair value due to the short time to the expected receipt or payment date.
Fair value is defined as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
21

Table of Contents
A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company’s financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements were as follows:
22

Table of Contents
September 30, 2020
Fair ValueLevel 1Level 2Level 3
(unaudited)
(in thousands)
Financial Assets:
Money market funds
$18,104 $18,104 $— $— 
Total cash equivalents
$18,104 $18,104 $— $— 
U.S. government debt securities
$870,459 $— $870,459 $— 
Total short-term marketable securities
$870,459 $— $870,459 $— 
U.S. government debt securities
$51,398 $— $51,398 $— 
Total long-term marketable securities
$51,398 $— $51,398 $— 
Total
$939,961 $18,104 $921,857 $— 
Financial Liabilities:
Contingent consideration
$1,245 $— $— $1,245 
Total
$1,245 $— $— $1,245 
December 31, 2019
Fair ValueLevel 1Level 2Level 3
(in thousands)
Financial Assets:
Money market funds
$10,734 $10,734 $— $— 
Total cash equivalents
$10,734 $10,734 $— $— 
Corporate bonds
$16,690 $— $16,690 $— 
U.S. government debt securities
362,884 — 362,884 — 
Total short-term marketable securities
$379,574 $— $379,574 $— 
U.S. government debt securities
$268,783 $— $268,783 $— 
Total long-term marketable securities
$268,783 $— $268,783 $— 
Total
$659,091 $10,734 $648,357 $— 
Financial Liabilities:
Contingent consideration
$1,365 $— $— $1,365 
Total
$1,365 $— $— $1,365 
The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Corporate bonds, U.S. government debt securities and U.S. government agency bonds are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data and other observable inputs.
23

Table of Contents
The following table summarizes the activities for the Level 3 financial instruments for the three and nine months ended September 30, 2020 and 2019:
Redeemable Noncontrolling Interest
Contingent Consideration
Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
20202019202020192020201920202019
(unaudited)
(in thousands)
Fair value — beginning of period
$50,400 $46,800 $49,600 $41,800 $1,175 $1,065 $1,365 $— 
Initial valuation on the date of acquisition
— — — — — — — 1,065 
Increase (decrease) in fair value
7,407 260 10,566 6,204 70 — (120)— 
Net loss for the period(1,407)(560)(3,766)(1,504)— — — — 
Fair value — end of period
$56,400 $46,500 $56,400 $46,500 $1,245 $1,065 $1,245 $1,065 
As of September 30, 2020 and December 31, 2019, contingent consideration liability of $1.2 million and $1.4 million, respectively, was recorded within other long-term liabilities on the condensed consolidated balance sheets.
Cash Equivalents and Marketable Securities
The following tables summarizes the Company’s cash equivalents and marketable securities’ amortized costs, gross unrealized gains, gross unrealized losses and estimated fair values by significant investment category:
September 30, 2020
Amortized CostGross Unrealized GainGross Unrealized LossEstimated Fair Value
(unaudited)
(in thousands)
Money market fund
$18,104 $— $— $18,104 
U.S. government debt securities
917,954 3,903 — 921,857 
Total
$936,058 $3,903 $— $939,961 

December 31, 2019
Amortized CostGross Unrealized GainGross Unrealized LossEstimated Fair Value
(in thousands)
Money market fund
$10,734 $— $— $10,734 
Corporate bond
16,679 11 — 16,690 
U.S. government debt securities
630,283 1,423 (39)631,667 
Total
$657,696 $1,434 $(39)$659,091 
There have been no material realized gains or losses on marketable securities for the periods presented. None of the Company’s investments in marketable securities has been in an unrealized loss position for more than one year. The Company determined that it did have the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of credit losses in the three and nine months ended September 30, 2020 and 2019, respectively. The maturities of the Company’s long-term marketable securities range from 1.0 to 1.2 years as of September 30, 2020.
24

Table of Contents

6.    Intangible Assets, Net and Goodwill
The following table presents details of purchased intangible assets as of September 30, 2020 and December 31, 2019:
September 30, 2020
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountRemaining Weighted Average Useful Life
(unaudited)
(in thousands)(in years)
Intangible assets subject to amortization:
Acquired license$11,886 $(1,088)$10,798 10.0
Non-compete agreements and other covenant rights
5,100 (853)4,247 5.2
Total intangible assets subject to amortization
16,986 (1,941)15,045 
Intangible assets not subject to amortization:
IPR&D1,600 — 1,600 
Goodwill3,290 — 3,290 
Total purchased intangible assets
$21,876 $(1,941)$19,935 
December 31, 2019
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountRemaining Weighted Average Useful Life
(in thousands)(in years)
Intangible assets subject to amortization:
Acquired license$5,100 $(373)$4,727 9.5
Non-compete agreements2,500 (303)2,197 5.5
Total intangible assets subject to amortization
7,600 (676)6,924 
Intangible assets not subject to amortization:
IPR&D1,600 — 1,600 
Goodwill3,290 — 3,290 
Total purchased intangible assets
$12,490 $(676)$11,814 
Amortization of finite-lived intangible assets was $0.5 million and $0.2 million for the three months ended September 30, 2020 and 2019, respectively, and $1.3 million and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively.
The following table summarizes estimated future amortization expense of finite-lived intangible assets:
25

Table of Contents
Year Ending December 31,
(unaudited)
(in thousands)
Remainder of 2020$491 
20211,947 
20221,947 
20231,947 
20241,953 
2025 and thereafter6,760 
Total$15,045 

7.    Acquisition
Patent License Acquisition
In January 2017, the Company entered into a license agreement with a biotechnology company, KeyGene N.V. (“KeyGene”). An arbitration was initiated between the parties in 2018. In March 2020, the Company and KeyGene entered into a settlement and patent license agreement (the “SPLA”) to resolve the dispute and to acquire an extended worldwide non-exclusive license to certain patent rights with respect to KeyGene’s Next Generation Sequencing technologies along with certain covenant rights and research and development technology for a one-time payment of $18.5 million, ending all future royalty obligations to KeyGene. This transaction was accounted for as an asset acquisition as the purchase did not meet the definition of a business. The total consideration, including $0.6 million of certain capitalizable transaction costs, was allocated to various components of the SPLA.
The Company allocated $9.4 million to the patent and covenant rights granted under the SPLA, which have useful lives in the range of 6-12 years. The Company allocated $8.5 million to IPR&D technology, which have no alternative future use and was included in research and development expenses for the nine months ended September 30, 2020. The remaining $1.2 million was allocated to the settlement of the prior dispute between the parties and was included in general and administrative expenses for the nine months ended September 30, 2020.
Amortization of capitalized license fees relating to the January 2017 license agreement was nil and immaterial for the three and nine months ended September 30, 2020, respectively. Amortization of capitalized license fees relating to the January 2017 license agreement was $0.2 million and $0.7 million for the three and nine months ended September 30, 2019, respectively.
Acquisition of Bellwether Bio
In April 2019, the Company purchased all of the outstanding shares of Bellwether Bio, Inc. (“Bellwether Bio”), a privately-held company developing a method for early blood-based cancer detection. The Company accounted for the acquisition as a business combination. The total purchase consideration was $8.7 million, which consisted of i) $7.6 million in cash paid upon closing; and ii) future contingent consideration liability with a fair value of $1.1 million on the acquisition date. The contingent consideration is subject to the achievement of certain commercialization milestones with a maximum payout amount of $10.0 million. The Company will also pay additional earn-out consideration of up to $10.0 million subject to the achievement of certain commercialization milestones and the continued provision of services to the Company by certain former employees and consultants of Bellwether Bio. The contingent consideration and earn-out consideration may be paid, at the Company’s election, in cash or in the Company’s common stock. As of September 30, 2020, the Company did not believe the earn-out consideration is probable to be achieved, and therefore, did not record any compensation expense. The following table summarizes the allocation of the total consideration to the estimated fair values of assets acquired and liabilities assumed:
26

Table of Contents
Amount
(in thousands)
Cash
$521 
Identified intangible assets
6,700 
Goodwill3,289 
Net liabilities assumed(1,802)
Total
$8,708 
The following table presents details of the identified intangible assets acquired from the Bellwether Bio acquisition:
Fair ValueEstimated Useful Life
(in thousands)
Acquired license
$5,100 10 years
IPR&D
1,600 *
Total
$6,700 
*    IPR&D assets are not subject to amortization.
In connection with the acquisition of Bellwether Bio, the Company also entered into non-compete agreements with certain key individuals based on their experience and importance to the operation of Bellwether Bio. The Company accounted for the covenants not to compete as purchases of intangible assets separate from the business combination as these non-compete agreements were initiated by the Company to protect its interests. The fair value of acquired covenants not to compete is estimated to be $2.5 million, which is recorded within intangible assets, net on the condensed consolidated balance sheet and will be amortized over an estimated useful life of 6 years using the straight-line method. Acquisition-related contingent consideration is measured at fair value on a quarterly basis and change in estimated contingent consideration to be paid are included in operating expenses in the condensed consolidated statements of operations.

8. Leases
The Company has entered into various operating lease agreements for office space, with remaining terms ranging from 1-12 years some of which include one or more options to renew. As leases approach maturity, the Company considers various factors such as market conditions and the terms of any renewal options that may exist to determine whether it will renew the lease, as such, the Company does not include renewal options in its lease terms for calculating its lease liability, as the renewal options allow it to maintain operational flexibility and the Company is not reasonably certain it will exercise these renewal options at the time of the lease commencement. Operating lease expense was immaterial for the three months ended September 30, 2020 due to a one-time non-recurring adjustment made for the accounting for leasehold improvements. Lease expense for the three months ended September 30, 2019 was $1.2 million, and $3.3 million and $2.9 million for the nine months ended September 30, 2020 and 2019, respectively, which includes both lease and non-lease components (primarily common area maintenance charges and property taxes).
September 30, 2020December 31, 2019
(unaudited)
Weighted-average remaining lease term (in years)
5.96.4
Weighted-average discount rate
8.17 %7.77 %
The following table summarizes our future principal contractual obligations for operating lease commitments as of
27

Table of Contents
September 30, 2020:
Year Ending December 31,
(unaudited)
(in thousands)
Remainder of 2020$1,049 
20219,759 
20229,886 
202310,547 
202410,792 
2025 and thereafter18,350 
Total operating lease payments$60,383 
Less: Imputed Interest(13,263)
Total operating lease liabilities$47,120 
In July 2020, the Company entered into two facility lease agreements for terms ranging from 8-12 years. One of the lease agreements provides an option to renew the lease term for an additional ten years. As of September 30, 2020, the Company has additional future minimum lease payments relating to these two lease agreements that have not yet commenced amounting to $239.5 million. The Company anticipates to take possession of these facilities in the first fiscal quarter of 2021.
Finance leases are not material to the Company's condensed consolidated financial statements.

9.    Commitments and Contingencies
Legal Proceedings
In addition to commitments and obligations incurred in the ordinary course of business, from time to time the Company may be subject to a variety of claims and legal proceedings, including claims from customers and vendors, pending and potential legal actions for damages, governmental investigations and other matters. For example, we have received, and may in the future continue to receive letters, claims or complaints from others alleging false advertising, patent infringement, violation of employment practices and trademark infringement. We have also instituted, and may in the future institute, additional legal proceedings to enforce our rights and seek remedies, such as monetary damages, injunctive relief and declaratory relief. We cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on us because of diversion of management time and attention as well as the financial costs related to resolving such disputes.
The Company and its affiliates are parties to the legal claims and proceedings described below. The Company is vigorously defending itself against those claims and in those proceedings. Significant developments in those matters are described below. If the Company is unsuccessful in defending, or if it determines to settle, any of these matters, it may be required to pay substantial sums, be subject to injunction and/or be forced to change how it operates its business, which could have a material adverse impact on its financial position or results of operations.
Unless otherwise stated, the Company is unable to reasonably estimate the loss or a range of possible loss for the matters described below. Often, it is not reasonably possible for the Company to determine that a loss is probable for a claim, or to reasonably estimate the amount of loss or a range of loss, because of the limited information available and the potential effects of future events and decisions by third parties, such as courts and regulators, that will determine the ultimate resolution of the claim. Many of the matters described are at preliminary stages, raise novel theories of liability or seek an indeterminate amount of damages. It is not uncommon for claims to be resolved over a number of years. The Company reviews loss contingencies at least quarterly to determine whether the loss probability has changed and whether it can make a reasonable estimate of the possible loss or range of loss. When the Company determines that a loss from a claim is probable and reasonably estimable, it records a liability in the amount of its estimate for the ultimate loss. The Company also provides disclosure when it is reasonably possible that a loss may be incurred or when it is reasonably possible that the amount of a loss will exceed its recorded liability.
28

Table of Contents
Patent Disputes
In November 2017, the Company filed a lawsuit against Foundation Medicine, Inc. (“Foundation Medicine”) in the United States District Court for the District of Delaware. The Company has alleged that Foundation Medicine has infringed four of the Company’s digital sequencing technology patents. Foundation Medicine has asserted counterclaims of patent invalidity, unenforceability under the doctrine of inequitable conduct, and non-infringement. The parties are seeking damages, injunctive relief and attorneys’ fees. Discovery in the lawsuit has closed, and a number of pre-trial motions were filed in September and October 2020. The trial is presently continued pending resolution by the District Court of the pre-trial motions.

Foundation Medicine also filed six petitions for inter partes review with the PTAB, challenging the patentability of all four of the patents asserted by the Company. The PTAB denied institution of inter partes review for four of the six petitions filed by Foundation Medicine and instituted inter partes review for the remaining two petitions. The Company plans to vigorously defend its patent rights during such PTAB actions. At this time, the Company cannot reasonably ascertain the likelihood that any of the remaining challenged patents will be found to be invalid or unenforceable.
On August 31, 2020, the Company and Personal Genome Diagnostics, Inc. settled the patent infringement lawsuit brought by the Company. Under the terms of the confidential settlement, the lawsuit and counterclaims, as well as other challenges to the Company’s patents, have been dismissed.

10.    Common Stock
The Company’s common stockholders are entitled to dividends if and when declared by the Company’s Board of Directors (the “Board of Directors”). As of September 30, 2020 and December 31, 2019, no dividends on common stock had been declared by the Board of Directors.
The Company’s common stock has been reserved for the following potential future issuances:
September 30, 2020December 31, 2019
(unaudited)
Shares underlying outstanding stock options
3,356,7744,494,889
Shares underlying unvested restricted stock units
949,276496,131
Shares available for issuance under the 2018 Incentive Award Plan2,397,2562,726,225
Shares available for issuance under the 2018 Employee Stock Purchase Plan1,574,367689,917
Total
8,277,6738,407,162
Follow-on Public Offering
In June 2020, the Company completed an underwritten public offering, in which it issued and sold 4,312,500 shares of its common stock at a price of $84.00 per share. The Company received net proceeds of $354.6 million after deducting underwriting discounts and commissions and offering expenses payable by the Company.
In May 2019, the Company completed an underwritten public offering, in which it issued and sold 5,175,000 shares of its common stock at a price of $71.00 per share. The Company received net proceeds of $349.7 million after deducting underwriting discounts and commissions and offering expenses payable by the Company.
29

Table of Contents

11.    Stock-Based Compensation
Stock Option Activity
A summary of the Company’s stock option activity under the 2012 Stock Plan (as amended and restated, the “2012 Plan”) and the 2018 Incentive Award Plan (the “2018 Plan”) and related information is as follows:
Options Outstanding
Shares
Available for Grant 
Shares Subject to Options OutstandingWeighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years)Aggregate Intrinsic Value
(unaudited)
(in thousands)
Balance as of December 31, 2019
2,726,2254,494,889$10.90 7.7$306,392 
2018 Plan annual increase(1)
3,689,000
Granted(114,472)114,47278.15 
Exercised(1,188,519)6.23 
Canceled17,387(64,068)9.09 
Restricted stock units granted
(601,451)— 
Restricted stock units canceled
71,715— 
Market-based restricted stock units granted
(3,391,148)— 
Balance as of September 30, 2020
2,397,2563,356,774$14.89 7.2$325,246 
Vested and Exercisable as of September 30, 2020
1,826,533$7.59 6.7$190,313 
(1)Effective as of January 1, 2020, an additional 3,689,000 shares of common stock became available for issuance under the 2018 Plan, as a result of the operation of an automatic annual increase provision therein.
Aggregate intrinsic value represents the difference between the estimated fair value of the underlying common stock and the exercise price of outstanding, in-the-money options. The total intrinsic value of the options exercised was $46.8 million and $75.3 million for the three months ended September 30, 2020 and 2019, respectively, and $97.1 million and $191.7 million for the nine months ended September 30, 2020 and 2019, respectively.
The weighted-average grant date fair value of options granted was $49.73 and $55.16 per share for the three months ended September 30, 2020 and 2019, respectively, and $46.85 and $53.02 per share for the nine months ended September 30, 2020 and 2019, respectively.
Future stock-based compensation for unvested options as of September 30, 2020 was $21.0 million, which is expected to be recognized over a weighted-average period of 2.5 years.
Restricted Stock Units
A summary of the Company’s restricted stock unit activity excluding the market-based restricted stock units under the 2012 Plan and the 2018 Plan and related information is as follows:
Restricted Stock Units OutstandingWeighted-Average Grant Date Fair Value
(unaudited)
Balance as of December 31, 2019
496,131$82.08 
Granted601,45190.11 
Vested and released(76,591)86.35 
Canceled(71,715)81.09 
Balance as of September 30, 2020
949,276$86.90 
30

Table of Contents
Future stock-based compensation for unvested restricted stock units as of September 30, 2020 was $77.1 million, which is expected to be recognized over a weighted-average period of 3.4 years.
Market-based Restricted Stock Units
On May 26, 2020, the Board of Directors approved and granted 1,695,574 market-based restricted stock units (“MSUs”) under the 2018 Plan to each of the Company's Chief Executive Officer and the Company's President and Chief Operating Officer, which is subject to the achievement of market-based share price goals established by the Board of Directors. The MSUs consist of three separate tranches and the vesting of each tranche is subject to the Company's common stock closing price being maintained at or above a predetermined share price goal for a period of 30 consecutive calendar days. The share price goal can be met any time during the seven-year performance period from the date of grant. Upon vesting, the MSUs must be held for a period of six to twelve months depending on the time of vesting within the seven-year performance period. The vesting of the MSUs can also be triggered upon a change in control event and achievement of a certain change in control price goal, or when there is a qualifying termination or in the event of death or disability. The following table presents additional information relating to each MSU award:
TranchePrice GoalNumber of RSUs
Tranche 1$120 per share565,192
Tranche 2$150 per share565,191
Tranche 3$200 per share565,191

The grant date fair values of the MSUs were determined using a Monte Carlo valuation model for each tranche. The related stock-based compensation expense for each tranche is recognized based on an accelerated attribution method over the estimated derived service period. If the related share price goal is achieved earlier than its expected derived service period, the stock-based compensation expense will be recognized as a cumulative catch-up expense from the grant date to that point in time in achieving the share price goal. The derived service period is the median duration of the successful stock price paths to meet the price goal for each tranche as simulated in the Monte Carlo valuation model. The Monte Carlo valuation model uses assumptions such as volatility, risk-free interest rate, cost of equity and dividend estimated for the performance period of the MSU. The weighted average grant date fair value of the MSUs was $67.00 and the weighted average derived service period was estimated to be in the range of 0.83 – 2.07 years.
For the three and nine months ended September 30, 2020, stock-based compensation for the MSUs was $46.8 million and $65.1 million, respectively, which was recorded in general and administrative expenses in our condensed consolidated statement of operations. Future stock-based compensation for unvested MSUs as of September 30, 2020 was $162.1 million, which is expected to be recognized over a weighted-average period of 1.1 years. In the event of a change in control, a qualifying termination, death, disability or the share price goal occurring earlier than the estimated derived service period, the stock-based compensation relating to these MSUs could be accelerated. Any MSUs that remain unvested at the end of the seven-year performance period will automatically be forfeited and terminated without further consideration.
AMEA 2020 Equity Incentive Plan
In August 2020, the board of directors of the Joint Venture approved its 2020 Equity Incentive Plan (the “AMEA 2020 Plan”), under which the Joint Venture may grant equity incentive awards such as stock options, restricted stock, restricted stock units, stock appreciation rights and cash-based awards to its employees and non-employees. Stock options granted may be either incentive stock options or nonstatutory stock options. Incentive stock options may be granted only to employees of the Joint Venture or its affiliates. Nonstatutory stock options may be granted to employees, directors and non-employee consultants. Stock options may be granted at an exercise price of not less than the fair market value of the Joint Venture's common stock on the date of grant, determined by the board of directors of the Joint Venture. Options generally vest over 4 years and expire as determined by the board of directors of the Joint Venture, provided that the term of options may not exceed 10 years from the date of grant. For individuals holding more than 10% of the total combined voting power of all classes of stock of the Joint Venture, the exercise price of an option will not be less than 110% of the fair market value of the Joint Venture's common stock on the date of grant, and the term of the option will not exceed 5 years. A total of 4,595,555 shares of the Joint Venture's Class B common stock are initially reserved for issuance under the AMEA 2020 Plan, and the number of shares may be increased in accordance with the terms of the AMEA 2020 Plan.
31

Table of Contents
A summary of the Joint Venture's stock option activity under the AMEA 2020 Plan and related information is as follows:
Options Outstanding
Shares
Available for Grant 
Shares Subject to Options OutstandingWeighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years)Aggregate Intrinsic Value
(unaudited)
(in thousands)
Balance as of December 31, 2019
$— 0.0$— 
Shares authorized4,595,555— 
Granted(3,902,224)3,902,2240.58 
Balance as of September 30, 2020
693,3313,902,224$0.58 9.9$— 
Vested and Exercisable as of September 30, 2020
1,687,382$0.58 9.9$— 

The weighted-average grant date fair value of options granted was $0.33 per share for the three and nine months ended September 30, 2020. Future stock-based compensation for unvested options as of September 30, 2020 was $0.7 million, which is expected to be recognized over a weighted-average period of 2.4 years.
Stock-Based Compensation Expense
The following table presents the effect of employee and non-employee related stock-based compensation expense including the Joint Venture:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(unaudited)
(in thousands)
Cost of precision oncology testing
$428 $266 $1,138 $562 
Research and development expense
2,369 2,066 7,355 4,704 
Sales and marketing expense
2,320 1,458 6,285 2,930 
General and administrative expense
50,081 1,694 72,573 3,686 
Total stock-based compensation expense
$55,198 $5,484 $87,351 $11,882 
Valuation of Stock Options
The grant date fair value of stock options was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions including the Joint Venture:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(unaudited)
Expected term (in years)
5.95 – 6.04
6.03 – 6.08
5.50 – 6.10
5.50 – 6.22
Expected volatility
63.6% – 68.4%
63.2% – 64.6%
63.6% – 73.3%
63.2% – 68.3%
Risk-free interest rate
0.3% – 0.4%
1.6% – 1.9%
0.3% – 1.6%
1.6% – 2.7%
Expected dividend yield
—%
—%
—%
—%
The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of common stock of the Company and the Joint Venture, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The valuation assumptions were determined as follows:
32

Table of Contents
Fair Value of Common Stock
The fair value of the Company’s common stock is determined by the closing price, on the date of grant, of its common stock, which is traded on the Nasdaq Global Select Market. The grant date fair value of the Joint Venture's common stock has been determined by the board of directors of the Joint Venture. The grant date fair value of the Joint Venture’s common stock was determined using valuation methodologies which utilize certain assumptions including probability weighting of events, volatility, time to liquidation, a risk-free interest rate and an assumption for a discount for lack of marketability. In determining the fair value of the Joint Venture’s common stock, the methodologies used to estimate the enterprise value of the Joint Venture were performed using methodologies, approaches, and assumptions consistent with the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation.
Expected Term
The expected term represents the period that the options granted are expected to be outstanding and is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term.
Expected Volatility
Prior to the commencement of trading of the Company’s common stock on the Nasdaq Global Select Market on October 4, 2018 in connection with the IPO, there was no active trading market for the Company's common stock. Due to limited historical data for the trading of the Company’s common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies in the same industry plus the Company's expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.
The Joint Venture derived the expected volatility from the average historical volatility over a period approximately equal to the expected term of comparable publicly traded companies within its peer group that were deemed to be representative of future stock price trends as the Joint Venture does not have any trading history for its common stock. The Joint Venture will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Risk-Free Interest Rate
The risk-free interest rate is based on the U.S. Treasury rate, with maturities similar to the expected term of the stock options.
Expected Dividend Yield
The Company and the Joint Venture does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero.
Valuation of MSUs
The estimated fair value of the MSUs was determined using a Monte Carlo simulation model. The valuation assumptions used were substantially consistent with the assumption used to value stock options with the exception of the following:
Expected Volatility
Due to limited historical data for the trading of the Company’s common stock, expected volatility is estimated based on the average volatility for comparable publicly traded peer group companies and implied volatility of publicly traded options in the same industry plus the Company's expected volatility for the available periods. The comparable companies are chosen based on their similar size, stage in the life cycle or area of specialty.
Expected Term
The expected term represents the derived service period for the respective tranches which has been estimated using the Monte Carlo simulation model.
Risky Rate
The risky rate represents the Company's cost of equity.
33

Table of Contents
Discount for Lack of Marketability
The discount for lack of marketability represents the discount applied for post vest term restrictions and has been derived using the Monte Carlo simulation model.
The following assumptions were used to calculate the stock-based compensation for MSUs: a weighted-average expected term of 0.83 – 2.07 years; expected volatility of 65.5%; a risk-free interest rate of 0.53%; a zero dividend yield; a risky rate (cost of equity) of 16%; and a discount for post-vesting restrictions of 10.4% – 14.5%.
2018 Employee Stock Purchase Plan
In September 2018, the Company’s Board of Directors adopted and its stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”). A total of 922,250 shares of common stock were initially reserved for issuance under the ESPP. Effective as of January 1, 2020, an additional 942,614 shares of common stock became available for issuance under the ESPP, as a result of the operation of an automatic annual increase provision therein.
Subject to any plan limitations, the ESPP allows eligible employees to contribute, normally through payroll deductions, up to 10% of their earnings for the purchase of the Company’s common stock at a discounted price per share. The price at which common stock is purchased under the ESPP is equal to 85% of the fair market value of the Company’s common stock on the first or last day of the offering period, whichever is lower. The initial offering period ran from October 2, 2018 to January 31, 2019, the second offering period ran from February 1, 2019 to July 31, 2019, and the third offering period began on August 1, 2019 and ran to November 14, 2019. For subsequent years starting with 2020, the ESPP provides for separate six-month offering periods beginning on May 15 and November 15 of each year.
Shares of common stock purchased under the ESPP were nil and 93,203 for the three months ended September 30, 2020 and 2019, respectively, and 58,164 and 212,905 for the nine months ended September 30, 2020 and 2019, respectively. The total compensation expense related to the ESPP was $0.7 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively, and $2.3 million and $1.8 million for the nine months ended September 30, 2020 and 2019, respectively.
The fair value of the stock purchase right granted under the ESPP was estimated on the first day of each offering period using the Black-Scholes option pricing model. The valuation assumptions used were substantially consistent with the assumption used to value stock options with the exception of the expected term which was based on the term of each purchase period.
No ESPP shares were granted for the three months ended September 30, 2020. The grant date fair value of the stock purchase right granted under the ESPP was estimated using a Black-Scholes option-pricing model with the following weighted-average assumptions:
Three Months Ended
September 30, 2019
Nine Months Ended
September 30,
20202019
(unaudited)
Expected term (in years) 0.30.5
0.3 – 0.5
Expected volatility 60.3%73.2%
60.2% – 60.3%
Risk-free interest rate 2.1%0.2%
2.1% – 2.5%
Expected dividend yield —%—%—%
As of September 30, 2020, the unrecognized stock-based compensation expense related to the ESPP was $0.4 million, which is expected to be recognized over the remaining term of the offering period of 0.1 years.
Liabilities for Early Exercise of Employee Options
The Company allowed certain stock option holders to exercise unvested options to purchase shares of the Company’s common stock. Shares received from such early exercises are subject to repurchase in the event of the optionee’s employment termination, at the original issuance price, until the options are fully vested. As of September 30, 2020 and December 31, 2019, 15,681 shares and 23,981 shares of common stock were subject to repurchase at weighted-average price of $4.66 per share. As of September 30, 2020 and December 31, 2019, the cash proceeds received for unvested shares of common stock of $0.1 million and $0.1 million, respectively, was recorded within other long-term liabilities on the condensed consolidated balance sheet, respectively. The shares issued pursuant to unvested options have been included in shares issued and outstanding on the condensed
34

Table of Contents
consolidated balance sheet and condensed consolidated statement of redeemable noncontrolling interest and stockholders’ equity as such shares are considered legally outstanding.

12.    Net Loss Per Share Attributable to Guardant Health, Inc. Common Stockholders
The following table sets forth the computation of the basic and diluted net loss per share attributable to Guardant Health, Inc. common stockholders:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(unaudited)
(in thousands, except per share data)
Net loss$(71,670)$(13,090)$(153,238)$(45,741)
Adjustment of redeemable noncontrolling interest
(6,000)300 (6,800)(4,700)
Net loss attributable to Guardant Health, Inc. common stockholders, basic and diluted
$(77,670)$(12,790)$(160,038)$(50,441)
Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
$(0.78)$(0.14)$(1.66)$(0.56)
Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
99,554 93,303 96,659 89,452 
Since the Company was in a loss position for all periods presented, basic net loss per share attributable to Guardant Health, Inc. common stockholders is the same as diluted net loss per share attributable to Guardant Health, Inc. common stockholders, as the inclusion of all potential shares of common stock outstanding would have been anti-dilutive. The following weighted-average common stock equivalents were excluded from the calculation of diluted net loss per share attributable to Guardant Health, Inc. common stockholders for the periods presented as they had an anti-dilutive effect:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(unaudited)
(in thousands)
Stock options issued and outstanding (1)
3,6625,3534,0216,390
Restricted stock units650338563179
MSUs3,3911,577
ESPP obligation38423962
Common stock subject to repurchase17282033
Total7,7585,7616,2206,664
(1)    Excludes stock options of 3,902,224 shares granted under the AMEA 2020 Plan as of September 30, 2020.

13.    Income Taxes
The income tax expense for the three and nine months ended September 30, 2020 was determined based upon estimates of the Company’s effective income tax rates in various jurisdictions. The difference between the Company’s effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, foreign income taxes, the effect of certain permanent differences, and full valuation allowance against net deferred tax assets.
The income tax expense for the three and nine months ended September 30, 2020 relates primarily to state minimum income tax and income tax on the Company’s earnings in foreign jurisdictions. The benefit from income taxes for
35

Table of Contents
the nine months ended September 30, 2019 relates primarily to the release of a valuation allowance of $1.2 million associated with nondeductible intangible assets recorded as part of the Bellwether Bio acquisition, partially offset by state minimum income tax and income tax on the Company's earnings in foreign jurisdictions. In connection with the acquisition of Bellwether Bio, a deferred tax liability was established for the book-tax basis differences related to the non-goodwill intangible assets. The net deferred tax liability from this acquisition creates an additional source of income to offset the Company’s deferred tax assets. As such, the impact on the acquiring Company’s deferred tax assets and liabilities caused by an acquisition are recorded in the acquiring company’s consolidated financial statements outside of acquisition accounting.

14.    Segment and Geographic Information
The following table sets forth the Company’s revenue by geographic areas based on the customers’ locations:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(unaudited)
(in thousands)
United States$65,613 $54,675 $191,648 $134,917 
International (1)
8,956 6,173 16,766 16,561 
Total revenue
$74,569 $60,848 $208,414 $151,478 
(1)    No single country outside of the United States accounted for more than 10% of total revenue during the three and nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020 and December 31, 2019, substantially all of the Company’s long-lived assets and right-of-use assets are located in the United States.

15.    Related Party Transactions
As discussed in Note 3, Investment in Joint Venture, the Company and an affiliate of SoftBank formed and capitalized the Joint Venture to accelerate commercialization of its products in Asia, the Middle East and Africa, with an initial focus on Japan. The Company has consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances have been eliminated in consolidation.
The Company and its subsidiaries may, in the ordinary course of business, have transactions with unaffiliated companies of which certain of the Company’s directors are directors and/or executive officers. The Company believes that such transactions are on the same terms generally offered by such other companies to other entities in comparable transactions. The Company does not consider the amounts involved in such transactions to be material in relation to its businesses, the businesses of such other companies or the interests of the directors involved. Revenue from an entity affiliated with a member of the Company's Board of Directors was $0.5 million and $0.8 million for the three months ended September 30, 2020 and 2019, and $2.0 million and $1.7 million for the nine months ended September 30, 2020 and 2019. As of September 30, 2020 and December 31, 2019, the Company has accounts receivable from this entity of $1.9 million and $0.9 million, respectively.
In October 2020, SoftBank entered into an underwriting agreement with an independent third party and sold 7,700,000 shares of the Company's common stock. The Company did not sell any shares of its common stock in this transaction.
36



16.     Subsequent Events
On November 4, 2020, the Compensation Committee of the Company's Board of Directors approved a total of 546,572 stock awards comprising of performance-based and time-based restricted stock units which have a grant date fair value of approximately $62.0 million. The performance-based restricted stock units consist of financial and operational metrics to be met over a performance period of 4 years and an additional service period requirement of 6 months after the performance metrics are met. The time-based restricted stock units will cliff vest after a period of 4 years. These equity awards are expected to be expensed over a period of approximately 4 years subject to meeting the performance metrics and service requirements.


37

Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of our financial condition and results of operations together with the unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, beliefs, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the period ended March 31, 2020.

Overview
We are a leading precision oncology company focused on helping conquer cancer globally through use of our proprietary blood tests, vast data sets and advanced analytics. 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. 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 further unlock insights into tumor evolution and treatment resistance across various biomarker-driven cancers. We launched our Guardant360 and GuardantOMNI liquid biopsy-based tests for advanced stage cancer. These tests fuel development of our treatment selection, cancer survivors with surveillance, asymptomatic individuals eligible for cancer screening and individuals at a higher risk for developing cancer with early detection. Our LUNAR-1 assay is intended to address identification of those who are likely to benefit from adjuvant treatment, detection of minimal residual disease in the blood of cancer patients after surgery, and surveillance of patients who have completed curative cancer treatment to potentially detect recurrence at an earlier stage. In addition, we are developing our LUNAR-2 assay to address early cancer detection in screening eligible asymptomatic individuals and higher risk individuals.
We perform our Guardant360, GuardantOMNI and other tests in our clinical laboratory located in Redwood City, California. 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.
We generated total revenue of $74.6 million and $60.8 million for the three months ended September 30, 2020 and 2019, respectively, and $208.4 million and $151.5 million for the nine months ended September 30, 2020 and 2019, respectively. We also incurred net losses of $71.7 million and $13.1 million for the three months ended September 30, 2020 and 2019, respectively, and $153.2 million and $45.7 million for the nine months ended September 30, 2020 and 2019, respectively. We have funded our operations to date principally from the sale of our stock and revenue from our precision oncology testing and development services. As of September 30, 2020, we had cash, cash equivalents and marketable securities of $1.1 billion.

Factors affecting our performance
We believe there are several important factors that have impacted and that we expect will impact our operating performance and results of operations, including:
Testing volume, pricing and customer mix. Our revenue and costs are affected by the volume of testing and mix of customers from period to period. We evaluate both the volume of tests that we perform for patients on behalf of clinicians and the number of tests we perform for biopharmaceutical companies. Our performance depends on our ability to retain and broaden adoption with existing customers, as well as attract new customers. We believe that the test volume we receive from clinicians and biopharmaceutical companies are indicators of growth in each of these customer verticals. 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 selling price for clinical tests because we are not a contracted provider for, or our tests are not
38

Table of Contents
covered by clinical patients’ insurance for, the majority of the tests that we perform for patients on behalf of clinicians. Approximately 37% and 39% of our U.S. clinical tests for the three months ended September 30, 2020 and 2019, respectively, and approximately 37% and 38% of our U.S. clinical tests for the nine months ended September 30, 2020 and 2019, respectively, were for Medicare beneficiaries.
Payer coverage and reimbursement. Our revenue depends on achieving broad coverage and reimbursement for our tests from third-party payers, including both commercial and government payers. Precision oncology revenue from tests for clinical customers is calculated based on our expected cash collections, using the estimated variable consideration. 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. Any cash collections over the expected reimbursement period exceeding the estimated variable consideration is recorded in future periods based on actual cash received. Payment from commercial payers can vary depending on whether we have entered into a contract with the payers as a “participating provider” or do not have a contract and are considered a “non-participating provider”. Payers often reimburse non-participating providers, if at all, at a lower amount than participating providers. Because we are not contracted with these payers, they determine the amount that they are willing to reimburse us for any of our tests and they can prospectively and retrospectively adjust the amount of reimbursement, adding to the complexity in estimating the variable consideration. 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. 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. If their policies were to change in the future to cover additional cancer indications, we anticipate that our total reimbursement would increase. For the three months ended September 30, 2020 and 2019, respectively, approximately 44% and 42% of our U.S. clinical tests were for patients tested for NSCLC, and for the nine months ended September 30, 2020 and 2019, respectively, approximately 43% and 45% of our U.S. clinical tests were for patients tested for NSCLC. In September 2018, we began to receive payments from Medicare for 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. 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. 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.
Biopharmaceutical customers. 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 and GuardantOMNI tests are
39

Table of Contents
both being developed as companion diagnostics under collaborations with biopharmaceutical companies, including AstraZeneca, Amgen, Janssen Biotech and Radius Health.
Research and development. A significant aspect of our business is our investment in research and development, including the development of new products, such as those being developed as part of our LUNAR program. 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, and in collaboration with a National Clinical Trials Network group, initiated a prospective multi-center randomized controlled trial, which we refer to as the COBRA study, in approximately 1,400 patients with resected stage II colon cancer to use our LUNAR-1 assay to evaluate recurrence-free survival in patients who receive ctDNA-directed therapy as compared to the current standard-of-care active surveillance. 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 or direct contracts with hospitals. In May 2018, we formed and capitalized a joint venture, Guardant Health AMEA, Inc., which we refer to as the Joint Venture, with SoftBank, relating to the sale, marketing and distribution of our tests generally outside the Americas and Europe. We expect to rely on the Joint Venture to accelerate commercialization of our products in Asia, the Middle East and Africa, with our initial focus being on Japan.
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, 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 and have not yet determined the scale and financial elements of this program.
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 our Annual Report on Form 10-K for the year ended December 31, 2019, and Part II, Item 1A, “Risk Factors” of our Quarterly Report on Form 10-Q for the period ended March 31, 2020 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
40

Table of Contents
(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) Adjustments relating to non-controlling interest and contingent consideration and, if applicable in a reporting period, and (viii) acquisition-related expenses, and other non-recurring items.
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.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
Net loss attributable to Guardant Health, Inc. common stockholders
$(77,670)$(12,790)$(160,038)$(50,441)
Adjustments:
Interest income(2,313)(4,286)(8,271)(9,870)
Interest expense280 30 860 
Other (income) expense, net(345)(179)(2,421)(275)
Provision for (benefit from) income taxes68 (202)116 (1,383)
Depreciation and amortization4,353 2,952 11,462 7,963 
Stock-based compensation expense55,198 5,484 87,351 11,882 
Adjustments relating to noncontrolling interest and contingent consideration
6,070 (300)6,680 4,700 
Acquisition related expenses (1)
— — 9,707 422 
Adjusted EBITDA (non-GAAP)
$(14,631)$(9,041)$(55,384)$(36,142)
(1) For the nine months ended September 30, 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 nine months ended September 30, 2019, acquisition related expenses of $0.4 million primarily include certain diligence, accounting, and legal expenses incurred related to our Bellwether acquisition.


41

Table of Contents
Components of results of operations
Revenue
We derive our revenue from two sources: (i) precision oncology testing and (ii) development services and other.
Precision oncology testing. Precision oncology testing revenue is generated from sales of our Guardant360 and GuardantOMNI tests to clinical and biopharmaceutical customers. In the United States, through September 30, 2020, we generally performed tests as an out-of-network service provider without contracts with health insurance companies. We submit claims for payment for tests performed for patients covered by U.S. 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 established in March 2018. Tests for patients covered by Medicare represented approximately 37% and 39% of U.S. tests performed during the three months ended September 30, 2020 and 2019, respectively, and 37% and 38% of U.S. tests performed during the nine months ended September 30, 2020 and 2019, respectively. 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.
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 and liquid biopsy testing development and support. 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. Under these arrangements, we generate revenue from progression of our collaboration efforts, as well as from provision of on-going support. Development services and other revenue can vary over time as different projects start and complete.
Costs and operating expenses
Cost of precision oncology testing. Cost of precision oncology testing generally consists of cost of materials, direct labor, including bonus, benefit and stock-based compensation; equipment and infrastructure expenses associated with processing liquid biopsy test samples, including sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples; freight; curation of test results for physicians; and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Costs associated with performing 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.
Cost of development services and other. Cost of development services and other primarily includes costs incurred for the performance of development services requested by our customers. 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. Cost of development services and other will vary depending on the nature, timing and scope of customer projects.
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 also include costs related to activities performed under contracts with biopharmaceutical companies before technological feasibility has been achieved. Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or
42

Table of Contents
services are rendered. 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 with a particular focus on our LUNAR program.
Sales and marketing expense. 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 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 Guardant360 and GuardantOMNI tests.
General and administrative expense. Our general and administrative expenses include costs for our executive, accounting and finance, 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.
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, 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.
Interest income
Interest income consists of interest earned on our cash, cash equivalents and marketable securities.
Interest expense
Interest expense consists primarily of interest from finance leases or capital leases and royalty obligations.
Other income (expense), net
Other income (expense), net consists of foreign currency exchange gains and losses, payments due 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. Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
43

Table of Contents
Results of operations
The following table set forth the significant components of our results of operations for the periods presented.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2020201920202019
(unaudited)
(in thousands)
Revenue:
Precision oncology testing$60,384 $52,147 $171,621 $123,048 
Development services and other14,185 8,701 36,793 28,430 
Total revenue
74,569 60,848 208,414 151,478 
Costs and operating expenses:
Cost of precision oncology testing(1)
16,699 16,578 52,699 42,251 
Cost of development services and other4,488 1,936 11,429 6,631 
Research and development expense(1)
36,245 24,569 109,580 60,417 
Sales and marketing expense(1)
25,095 18,802 75,225 56,048 
General and administrative expense(1)
66,294 16,440 123,265 42,540 
Total costs and operating expenses
148,821 78,325 372,198 207,887 
Loss from operations
(74,252)(17,477)(163,784)(56,409)
Interest income2,313 4,286 8,271 9,870 
Interest expense(8)(280)(30)(860)
Other income (expense), net345 179 2,421 275 
Loss before provision for income taxes
(71,602)(13,292)(153,122)(47,124)
Provision for (benefit from) income taxes
68 (202)116 (1,383)
Net loss
$(71,670)$(13,090)$(153,238)$(45,741)
(1)Amounts include stock-based compensation expense as follows:
Three Months Ended September 30,Nine Months Ended
September 30,
2020201920202019
(unaudited)
(in thousands)
Cost of precision oncology testing$428 $266 $1,138 $562 
Research and development expense2,369 2,066 7,355 4,704 
Sales and marketing expense2,320 1,458 6,285 2,930 
General and administrative expense50,081 1,694 72,573 3,686 
Total stock-based compensation expense
$55,198 $5,484 $87,351 $11,882 

44

Table of Contents
Comparison of the Three Months Ended September 30, 2020 and 2019
Revenue
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Precision oncology testing
$60,384 $52,147 $8,237 16 %
Development services and other
14,185 8,701 5,484 63 %
Total revenue
$74,569 $60,848 $13,721 23 %
Total revenue was $74.6 million for the three months ended September 30, 2020 compared to $60.8 million for the three months ended September 30, 2019, an increase of $13.7 million, or 23%.
Precision oncology testing revenue increased to $60.4 million for the three months ended September 30, 2020 from $52.1 million for the three months ended September 30, 2019, an increase of $8.2 million, or 16%. This increase in precision oncology testing revenue was due to an increase in sample volume as well as an increase in average selling price per test as a result of expanded coverage of our tests for clinical customers, plus $4.3 million in revenue received during the three months ended September 30, 2020 from Medicare for samples processed in 2019 compared to $5.5 million in revenue received during the three months ended September 30, 2019 from Medicare for samples processed in 2018. Precision oncology revenue from tests for clinical customers was $48.3 million in the three months ended September 30, 2020 and $30.8 million in the three months ended September 30, 2019, respectively. Tests for clinical customers increased to 16,950 for the three months ended September 30, 2020 from 13,259 for the three months ended September 30, 2019 mainly due to an increase in the number of physicians ordering Guardant360 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. 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.
Precision oncology revenue from tests for biopharmaceutical customers was $12.0 million in the three months ended September 30, 2020 and $21.4 million in the three months ended September 30, 2019, respectively. Tests for biopharmaceutical customers decreased to 3,071 for the three months ended September 30, 2020 from 5,280 for the three months ended September 30, 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 $3,919 for the three months ended September 30, 2020, compared to $4,052 for the three months ended September 30, 2019. 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 depending on the duration and severity of the pandemic.
Development services and other revenue increased to $14.2 million for the three months ended September 30, 2020 from $8.7 million for the three months ended September 30, 2019, an increase of $5.5 million, or 63%. This increase in development services and other revenue was primarily due to new collaboration projects from biopharmaceutical customers for companion diagnostic development and regulatory approval services during the three months ended September 30, 2020. Our development services arrangements with biopharmaceutical customers and development services revenue may be adversely impacted by the COVID-19 pandemic in future periods.
45

Table of Contents
Costs and operating expenses
Cost of revenue
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Cost of revenue$21,187 $18,514 $2,673 14 %
Gross profit
$53,382 $42,334 
Gross margin
72 %70 %

Cost of revenue was $21.2 million for the three months ended September 30, 2020 compared to $18.5 million for the three months ended September 30, 2019, an increase of $2.7 million, or 14%.
Cost of precision oncology testing revenue was $16.7 million for the three months ended September 30, 2020 compared to $16.6 million for the three months ended September 30, 2019, an increase of $0.1 million, or 1%. This increase in cost of precision oncology testing was primarily due to a $2.1 million increase in labor and manufacturing overhead costs, a $0.2 million increase in other costs including costs related to freight and curation of test results for physicians, partially offset by a $1.2 million decrease in material costs, and a $1.1 million decrease in royalties.
Cost of development services and other was $4.5 million for the three months ended September 30, 2020 compared to $1.9 million for the three months ended September 30, 2019, an increase of $2.6 million, or 132%. This increase in cost of development services and other was primarily due to an increase in material and labor costs related to companion diagnostic development and regulatory approval service contracts.
Gross margin for the three months ended September 30, 2020 was 72% compared to 70% for the three months ended September 30, 2019. Gross margin improvement primarily reflects the impact of higher sample volumes from clinical customers, increased average selling price per test including the impact of revenue from samples processed in prior periods resulting from successful appeals, and cost efficiencies. Our gross margin may be adversely impacted by the COVID-19 pandemic for the affected periods.
Research and development expense
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Research and development
$36,245 $24,569 $11,676 48 %
Research and development expenses were $36.2 million for the three months ended September 30, 2020 compared to $24.6 million for the three months ended September 30, 2019, an increase of $11.7 million, or 48%. This increase in research and development expense was primarily due to an increase of $4.8 million in personnel-related costs for employees in our research and development group, including a $0.3 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 $3.3 million in development consulting fees, an increase of $2.3 million in material costs, and an increase of $1.0 million related to allocated facilities and information technology infrastructure costs.
Sales and marketing expense
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Sales and marketing
$25,095 $18,802 $6,293 33 %
Selling and marketing expenses were $25.1 million for the three months ended September 30, 2020 compared to $18.8 million for the three months ended September 30, 2019, an increase of $6.3 million, or 33%. This increase was primarily due to an increase of $4.1 million in personnel-related costs, including a $0.9 million increase in
46

Table of Contents
stock-based compensation, associated with the expansion of our commercial organization. The increase is also attributable to an increase of $1.3 million related to allocated facilities and information technology infrastructure costs, and an increase of $0.8 million in professional service expenses related to marketing activities.
General and administrative expense
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
General and administrative
$66,294 $16,440 $49,854 303 %
General and administrative expenses were $66.3 million for the three months ended September 30, 2020 compared to $16.4 million for the three months ended September 30, 2019, an increase of $49.9 million, or 303%. This increase was primarily due to an increase of $49.2 million in personnel-related costs, including a $48.4 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 $1.1 million related to allocated facilities and information technology infrastructure cost, and an increase of $0.4 million in office administrative costs, offset by a decrease of $1.1 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.
Interest income
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Interest income
$2,313 $4,286 $(1,973)(46)%
Interest income was $2.3 million for the three months ended September 30, 2020 compared to $4.3 million for the three months ended September 30, 2019, a decrease of $2.0 million, or 46%. This decrease was primarily due to a significant decrease in interest rate as the U.S. Federal Reserve lowered the risk-free interest rate to nearly zero, partially offset by an increase in cash, cash equivalents and marketable securities during the three months ended September 30, 2020 primarily as a result of cash proceeds from our follow-on public offering completed in June 2020.
Interest expense
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Interest expense
$(8)$(280)$272 (97)%
Interest expense was immaterial for the three months ended September 30, 2020 compared to $0.3 million for the three months ended September 30, 2019, a decrease of $0.3 million, or 97%. This decrease was primarily due to the settlement of all outstanding balances in March 2020 related to the patent license agreement entered into in January 2017.
47

Table of Contents
Other income (expense), net
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Other income (expense), net
$345 $179 $166 *

Other income (expense), net included foreign currency exchange gains of $0.3 million and $0.2 million for the three months ended September 30, 2020 and 2019.
Provision for (benefit from) income taxes
Three Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Provision for (benefit from) income taxes
$68 $(202)$270 *
*    Not meaningful
Provision for income taxes was immaterial for the three months ended September 30, 2020. Benefit from income taxes for the three months ended September 30, 2019 relates primarily to the utilization of tax losses from continuing operations against other comprehensive income gains resulting in a tax benefit of $0.2 million in accordance with intra-period tax allocation under ASC 740, partially offset by state minimum income tax and income tax on our earnings in foreign jurisdictions.

Comparison of the Nine Months Ended September 30, 2020 and 2019
Revenue
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Precision oncology testing
$171,621 $123,048 $48,573 39 %
Development services and other
36,793 28,430 8,363 29 %
Total revenue
$208,414 $151,478 $56,936 38 %
Total revenue was $208.4 million for the nine months ended September 30, 2020 compared to $151.5 million for the nine months ended September 30, 2019, an increase of $56.9 million, or 38%.
Precision oncology testing revenue increased to $171.6 million for the nine months ended September 30, 2020 from $123.0 million for the nine months ended September 30, 2019, an increase of $48.6 million, or 39%. This increase in precision oncology testing revenue was primarily due to an increase in tests performed, an increase in average selling price per test for similar reasons as noted above, plus $8.1 million in revenue received from Medicare for samples processed in 2019 up from $5.5 million in revenue received during the nine months ended September 30, 2019 from Medicare for samples processed in 2018. Precision oncology revenue from tests for clinical customers was $125.9 million in the nine months ended September 30, 2020 and $69.7 million in the nine months ended September 30, 2019, respectively. Tests for clinical customers increased to 45,901 for the nine months ended September 30, 2020 from 34,655 for the nine months ended September 30, 2019 mainly due to an increase in the number of physicians ordering Guardant360 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. In May 2020, Noridian issued a coverage article and confirmed limited Medicare coverage for our Guardant360 test for qualifying patients
48

Table of Contents
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.
Precision oncology revenue from tests for biopharmaceutical customers was $45.7 million in the nine months ended September 30, 2020 and $53.3 million in the nine months ended September 30, 2019, respectively. Tests for biopharmaceutical customers decreased to 11,142 for the nine months ended September 30, 2020 from 14,326 for the nine months ended September 30, 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 $4,100 for the nine months ended September 30, 2020, up from $3,722 for the nine months ended September 30, 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.
Development services and other revenue increased to $36.8 million for the nine months ended September 30, 2020 from $28.4 million for the nine months ended September 30, 2019, an increase of $8.4 million, or 29%. This increase in development services and other revenue was primarily due to progression of collaboration projects from biopharmaceutical customers for companion diagnostic development and regulatory approval services completed during the nine months ended September 30, 2020. Our development services arrangements with biopharmaceutical customers and development services revenue may be adversely impacted by the COVID-19 pandemic in future periods.

Cost of Revenue and Gross Margin
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(dollars in thousands)
Cost of revenue
$64,128 $48,882 $15,246 31 %
Gross profit
$144,286 $102,596 
Gross margin69 %68 %
Cost of revenue was $64.1 million for the nine months ended September 30, 2020 compared to $48.9 million for the nine months ended September 30, 2019, an increase of $15.2 million, or 31%.
Cost of precision oncology testing revenue was $52.7 million for the nine months ended September 30, 2020 compared to $42.3 million for the nine months ended September 30, 2019, an increase of $10.4 million, or 25%. This increase in cost of precision oncology testing was attributable to an increase in sample volumes and was primarily due to a $9.1 million increase in production labor and overhead costs, a $2.2 million increase in material costs, and a $1.1 million increase in other costs including costs related to freight and curation of test results for physicians, offset by a $1.9 million decrease in royalties.
Cost of development services and other was $11.4 million for the nine months ended September 30, 2020 compared to $6.6 million for the nine months ended September 30, 2019, an increase of $4.8 million, or 72%. This increase in cost of development services and other was primarily due to an increase in labor costs related to companion diagnostic development and regulatory approval service contracts.
Gross margin for the nine months ended September 30, 2020 was 69% compared to 68% for the nine months ended September 30, 2019. Gross margin improvement reflects the impact of increased average selling price per test. 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.
49

Table of Contents
Operating Expenses
Research and development expense
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Research and development
$109,580 $60,417 $49,163 81 %
Research and development expenses were $109.6 million for the nine months ended September 30, 2020 compared to $60.4 million for the nine months ended September 30, 2019, an increase of $49.2 million, or 81%. This increase in research and development expense was primarily due to an increase of $16.7 million in personnel-related costs for employees in our research and development group, including a $2.7 million increase in stock-based compensation, as we increased our headcount to support continued investment in our technology, an increase of $9.5 million in material costs related to various programs, an increase of $9.5 million in development consulting fees, an increase of $8.5 million relating to IPR&D technology expensed in connection with a patent license acquisition that occurred in March 2020, an increase of $3.2 million related to allocated facility and information technology infrastructure costs and an increase of $0.6 million in office administrative costs as we increased our headcount to support continued investment in our technology.
Sales and marketing expense
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Sales and marketing
$75,225 $56,048 $19,177 34 %
Selling and marketing expenses were $75.2 million for the nine months ended September 30, 2020 compared to $56.0 million for the nine months ended September 30, 2019, an increase of $19.2 million, or 34%. This increase was primarily due to an increase of $13.2 million in personnel-related costs, including a $3.4 million increase in stock-based compensation, associated with the expansion of our commercial organization, an increase of $3.3 million related to allocated facility and information technology infrastructure costs and an increase of $2.9 million in professional service expenses related to marketing activities, offset by a decrease of $0.2 million related to office administrative costs as a result of the COVID-19 pandemic.
General and administrative expense
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
General and administrative
$123,265 $42,540 $80,725 190 %
General and administrative expenses were $123.3 million for the nine months ended September 30, 2020 compared to $42.5 million for the nine months ended September 30, 2019, an increase of $80.7 million, or 190%. This increase was primarily due to an increase of $73.0 million in personnel-related costs, including a $68.9 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 $3.5 million related to allocated facilities and information technology infrastructure costs, an increase of $1.3 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 $1.1 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..
50

Table of Contents
Interest income
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Interest income
$8,271 $9,870 $(1,599)(16)%
Interest income was $8.3 million for the nine months ended September 30, 2020 compared to $9.9 million for the nine months ended September 30, 2019, a decrease of $1.6 million, or (16)%. This decrease was primarily due to a significant decrease in interest rate as the U.S. Federal Reserve lowered the risk-free interest rate to nearly zero, offset by a significant increase in cash, cash equivalents and marketable securities related to the receipt of cash proceeds from our follow-on public offering completed in June 2020.
Interest expense
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Interest expense
$(30)$(860)$830 (97)%
Interest expense was immaterial for the nine months ended September 30, 2020 compared to $0.9 million for the nine months ended September 30, 2019, a decrease of $0.8 million, or 97%. This decrease was primarily due to the settlement of all outstanding balances in March 2020 related to the patent license agreement entered into in January 2017.
Other income (expense), net
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Other income (expense), net
$2,421 $275 $2,146 *
For the nine months ended September 30, 2020, other income (expense), net included receipt of $1.8 million received from HHS’s relief fund under the CARES Act and foreign currency exchange losses of $0.3 million. Other income (expense), net included foreign currency exchange gains of $0.2 million for the nine months ended September 30, 2019.
Provision for (benefit from) income taxes
Nine Months Ended September 30,
Change
20202019
$
%
(unaudited)
(in thousands)
Provision for (benefit from) income taxes
$116 $(1,383)$1,499 *
*    Not meaningful
Provision for income taxes was immaterial for the nine months ended September 30, 2020. Benefit from income taxes for the nine months ended September 30, 2019 relates primarily to the release of a valuation allowance of $1.2 million associated with nondeductible intangible assets recorded as part of the acquisition of Bellwether Bio, Inc. and the utilization of tax losses from continuing operations against other comprehensive income gains resulting in a tax benefit of $0.2 million in accordance with intra-period tax allocation under ASC 740, partially offset by state minimum income tax and income tax on our earnings in foreign jurisdictions.
51

Table of Contents
Liquidity and capital resources
We have incurred losses and negative cash flows from operations since our inception, and as of September 30, 2020, we had an accumulated deficit of $512.8 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 offerings from our research programs, including our LUNAR program, expand our sales organization, and increase our marketing efforts to drive market adoption of our Guardant360 and GuardantOMNI tests. Our capital expenditure requirements could also increase if we build additional laboratory capacity.
We have funded our operations to date principally from the sale of stock, and revenue from precision oncology testing and development services. As of September 30, 2020, we had cash and cash equivalents of $142.9 million and marketable securities of $921.9 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. Currently, our funds are held in marketable securities consisting of United States treasury securities and corporate bonds.
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 report. We may consider raising additional capital to expand our business, to pursue strategic investments, to take advantage of financing opportunities or for other reasons. As revenue from precision oncology testing and development services 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.
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 our Form 10-K for the year ended December 31, 2019 and our Form 10-Q for the quarter ended March 31, 2020, 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. The terms of debt securities issued or borrowings pursuant to a credit agreement could impose significant restrictions on our operations. If we raise funds through collaborations and licensing arrangements, we might be required to relinquish significant rights to our platform technologies or products or grant licenses on terms that are not favorable to us. Additional capital may not be available to us on reasonable terms, or at all.
Cash flows
The following table summarizes our cash flows for the periods presented:
Nine Months Ended September 30,
20202019
(unaudited)
(in thousands)
Net cash used in operating activities$(44,704)$(16,792)
Net cash used in investing activities$(319,401)$(340,928)
Net cash provided by financing activities$363,583 $364,227 
Operating activities
Cash used in operating activities during the nine months ended September 30, 2020 was $44.7 million, which resulted from a net loss of $153.2 million and net change in our operating assets and liabilities of $11.7 million, partially offset by non-cash charges of $120.2 million. Non-cash charges primarily consisted of $87.4 million of stock-based compensation, $11.5 million of depreciation and amortization, $8.5 million of charge of in-process research and development costs with no alternative future use, $8.1 million of credit loss adjustment and others, $3.3 million of non-cash operating lease costs, and $1.6 million of amortization of premium on investment. The net change in our operating assets and liabilities was primarily the result of a $12.6 million increase in inventory due to higher testing volumes, a $7.6 million increase in other assets for long-term portion of payments due from a third-party in relation to the settlement of a patent dispute reached in the three months ended September 30, 2020, a $4.9 million decrease in deferred revenue, and a $3.5 million payment of operating lease liabilities net of receipt of tenant
52

Table of Contents
improvement allowance, partially offset by a $11.6 million decrease in accounts receivables, and a $5.5 million increase in accrued compensation due to increased personnel.
Cash used in operating activities during the nine months ended September 30, 2019 was $16.8 million, which resulted from a net loss of $45.7 million, partially offset by non-cash charges of $19.2 million and net change in our operating assets and liabilities of $9.8 million. Non-cash charges primarily consisted of $11.9 million of stock-based compensation, $8.0 million of depreciation and amortization, and $2.9 million of non-cash operating lease costs, partially offset by $2.0 million of amortization of discount on investment and $1.2 million of benefit from income tax differences. The net change in our operating assets and liabilities was primarily the result of a $11.6 million increase in accrued compensation due to increased personnel, a $6.4 million increase in accrued expenses and other liabilities, a $0.9 million decrease in accounts receivable, and a $0.6 million receipt of tenant improvement allowance net of payment of operating lease liabilities, partially offset by a $5.6 million increase in inventory due to higher testing volumes, a $3.0 million decrease in deferred revenue, and a $1.0 million increase in other assets.
Investing activities
Cash used in investing activities during the nine months ended September 30, 2020 was $319.4 million, which resulted primarily from purchases of marketable securities of $580.2 million, purchases of property and equipment of $28.9 million and purchases of intangible assets and capitalized license obligations of $17.9 million, partially offset by maturities of marketable securities of $307.5 million.
Cash used in investing activities during the nine months ended September 30, 2019 was $340.9 million, which resulted primarily from purchases of marketable securities of $542.5 million, business acquisition, net of cash acquired, of $7.3 million, purchases of property and equipment of $11.6 million, purchases of intangible assets (non-compete agreements) and capitalized license obligations (under a biological materials license) of $2.6 million, offset by maturities of marketable securities of $223.1 million.
Financing activities
Cash provided by financing activities during the nine months ended September 30, 2020 was $363.6 million, which was primarily due to proceeds from a follow-on offering of our common stock, net of underwriting discounts and commissions and offering expenses payable by us, of $354.6 million, proceeds from exercise of stock options of $7.4 million, and proceeds from issuances of common stock under employee stock purchase plan of $4.0 million, partially offset by taxes paid related to net share settlement of restricted stock units of $2.2 million.
Cash provided by financing activities during the nine months ended September 30, 2019 was $364.2 million, which was primarily due to proceeds from a public offering of our common stock, net of underwriting discounts and commissions and offering expenses payable by us, of $349.7 million, proceeds from exercise of stock options of $9.8 million, and proceeds from issuances of common stock under employee stock purchase plan of $5.1 million.

Contractual obligations and commitments
Except as set forth in Note 9, Commitments and Contingencies, of the notes to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, there have been no material changes outside the ordinary course of business to our contractual obligations and commitments as described in “Managements Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2019.

Off-balance sheet arrangements
As of September 30, 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 financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Our preparation of these financial statements requires us to make estimates,
53

Table of Contents
assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the financial statements, as well as revenue and expenses recorded during the reporting periods. We evaluate our estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could therefore differ materially from these estimates under different assumptions or conditions.
While our significant accounting policies are described in more detail in Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, we believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our financial statements.
Revenue recognition
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 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. 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. ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.
Precision oncology testing
We recognize revenue from the sale of our precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians. Most precision oncology tests requested by clinical customers are sold without a written agreement; however, 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. 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 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. 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. Precision oncology tests to biopharmaceutical customers are generally billed at a fixed price for each test performed. For agreements involving testing volume to be satisfied over a defined period, revenue is recognized over time based on the number of tests performed as the performance obligation is satisfied over time.
Results of our precision oncology services are delivered electronically, and as such there are no shipping or handling fees incurred by us or billed to customers.
Development services and other
54

Table of Contents
We perform development services for our biopharmaceutical customers utilizing our precision oncology information platform. Development services typically represent a single performance obligation as we perform a significant integration service, such as analytical validation and regulatory submissions. The individual promises are not separately identifiable from other promises in the contracts and, therefore, are not distinct. However, under certain contracts, a biopharmaceutical customer may engage 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. 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. Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment. We evaluate factors such as the scientific, clinical, regulatory, commercial, and other risks that must be managed to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone. In making this assessment, we consider our historical experience with similar milestones, the degree of complexity and uncertainty associated with each milestone, and whether achievement of the milestone is dependent on parties other than us. 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.
We recognize development services revenue over the period in which biopharmaceutical research and development services are provided. Specifically, we recognize revenue using an input method to measure progress, utilizing costs incurred to-date relative to total expected costs as its measure of progress. 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 condensed consolidated statements of operations, while costs incurred thereafter are recorded as cost of development services.
We also have other miscellaneous revenue streams such as Guardant-19 screening in connection with the outbreak of COVID-19, referral fees, maintenance and kits fulfillment related revenues.
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 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.
For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. We determine standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin.
55

Table of Contents
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 in the JV Territory. We expect to rely on the Joint Venture to accelerate commercialization of our products in Asia, the Middle East and Africa, with an initial focus on Japan. 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 condensed consolidated financial statements, including those included elsewhere in this Quarterly Report on Form 10-Q.
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. The put-call feature embedded in the redeemable noncontrolling interest do not currently require bifurcation as it does not meet the definition of a derivative and is considered to be clearly and closely related to the redeemable noncontrolling interest. The noncontrolling interest is considered probable of becoming redeemable as SoftBank has the option to exercise its put right to sell its equity ownership in the Joint Venture to 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
56

Table of Contents
circumstances. 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.
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. 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 and stock purchase rights granted under our 2018 Employee Stock Purchase Plan and under the Guardant Health AMEA, Inc.'s 2020 Equity Incentive Plan for the Joint Venture 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:
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 grant date fair value of the Joint Venture's common stock has been determined by the board of directors of the Joint Venture with the assistance of management and an independent third-party valuation specialist. 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.
Expected term
Our expected term represents the period that our stock options are expected to be outstanding. 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, 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.
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. 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 will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Risk-free interest rate
The risk-free interest rate is based on the U.S. treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the stock option grants.
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.
57

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