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Guardant Health, Inc. - Quarter Report: 2022 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, 2022
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.)
3100 Hanover Street
Palo Alto, California, 94304
Registrant’s telephone number, including area code: (855) 698-8887
_______________

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, $0.00001 par value per share
GH
The Nasdaq Global Select Market

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
 
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  

As of October 28, 2022, the registrant had 102,436,169 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, 2021, in Part II, Item 1A, “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, 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, 2022December 31, 2021
ASSETS
Current assets:
Cash and cash equivalents
$158,310 $492,202 
Short-term marketable debt securities
799,727 440,546 
Accounts receivable, net
86,200 97,652 
Inventory, net
63,047 30,674 
Prepaid expenses and other current assets, net
23,565 53,052 
Total current assets
1,130,849 1,114,126 
Long-term marketable debt securities
156,741 698,034 
Property and equipment, net
168,007 124,461 
Right-of-use assets, net
178,747 189,443 
Intangible assets, net
12,417 14,207 
Goodwill
3,290 3,290 
Other assets, net
51,728 60,938 
Total Assets(1)
$1,701,779 $2,204,499 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
$40,911 $17,580 
Accrued compensation
57,423 42,496 
Accrued expenses
63,367 45,285 
Noncontrolling interest liability
— 78,000 
Deferred revenue
13,423 11,326 
Total current liabilities
175,124 194,687 
Convertible senior notes, net1,136,748 1,134,821 
Long-term operating lease liabilities
216,174 226,053 
Other long-term liabilities
6,988 3,933 
Total Liabilities(1)
1,535,034 1,559,494 
Stockholders’ equity:
Preferred stock, par value of $0.00001 per share; 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2022 and December 31, 2021
— — 
Common stock, par value of $0.00001 per share; 350,000,000 shares authorized as of September 30, 2022, and December 31, 2021; 102,413,638 and 101,767,446 shares issued and outstanding as of September 30, 2022, and December 31, 2021, respectively
Additional paid-in capital
1,716,075 1,657,593 
Accumulated other comprehensive loss
(26,852)(4,764)
Accumulated deficit
(1,522,479)(1,007,825)
Total Stockholders’ Equity
166,745 645,005 
Total Liabilities and Stockholders’ Equity
$1,701,779 $2,204,499 
(1) As of December 31, 2021, the Company's consolidated balance sheet included $20.4 million of assets, that can be used only to settle obligations of Guardant Health AMEA, Inc., the consolidated variable interest entity, or VIE, and VIE’s subsidiaries, and $4.3 million of liabilities of the consolidated VIE and VIE’s subsidiaries, for which their creditors do not have recourse to the general credit of the Company. Guardant Health AMEA, Inc. is no longer a VIE, after the completion of the Joint Venture Acquisition on June 10, 2022. See Note 3, 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,
2022202120222021
Revenue:
Precision oncology testing
$102,054 $79,272 $278,252 $215,605 
Development services and other15,350 15,507 44,395 49,940 
Total revenue
117,404 94,779 322,647 265,545 
Costs and operating expenses:
Cost of precision oncology testing39,434 29,665 104,493 78,142 
Cost of development services and other1,062 1,151 4,711 11,348 
Research and development expense100,017 70,968 267,229 190,200 
Sales and marketing expense80,370 50,228 218,405 132,282 
General and administrative expense41,121 50,055 126,068 166,366 
Total costs and operating expenses
262,004 202,067 720,906 578,338 
Loss from operations
(144,600)(107,288)(398,259)(312,793)
Interest income1,754 689 3,919 3,277 
Interest expense(644)(644)(1,933)(1,934)
Other income (expense), net(18,389)(187)(18,059)(720)
Fair value adjustments of noncontrolling interest liability— — (99,785)— 
Loss before provision for income taxes
(161,879)(107,430)(514,117)(312,170)
Provision for income taxes
115 96 537 289 
Net loss
(161,994)(107,526)(514,654)(312,459)
Adjustment of redeemable noncontrolling interest
— — — (2,300)
Net loss attributable to Guardant Health, Inc. common stockholders
$(161,994)$(107,526)$(514,654)$(314,759)
Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
$(1.58)$(1.06)$(5.04)$(3.11)
Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
102,289 101,420 102,065 101,184 
The accompanying notes are an integral part of these condensed consolidated financial statements.

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Guardant Health, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
Net loss
$(161,994)$(107,526)$(514,654)$(312,459)
Other comprehensive loss, net of tax impact:
Unrealized loss on available-for-sale securities
(2,062)(513)(19,348)(2,097)
Foreign currency translation adjustments(529)(113)(2,740)(1,193)
Other comprehensive loss(2,591)(626)(22,088)(3,290)
Comprehensive loss
$(164,585)$(108,152)$(536,742)$(315,749)
Comprehensive loss attributable to redeemable noncontrolling interest
— — — (2,300)
Comprehensive loss attributable to Guardant Health, Inc.
$(164,585)$(108,152)$(536,742)$(318,049)
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Guardant Health, Inc.

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (unaudited)
(in thousands, except share data)
Three Months Ended September 30, 2022
Common Stock Additional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 2022
102,186,856 $$1,703,832 $(24,261)$(1,360,485)$319,087 
Issuance of common stock upon exercise of stock options51,338 — 347 — — 347 
Vesting of restricted stock units175,444 — — — — — 
Taxes paid related to net share settlement of restricted stock units— — (4,340)— — (4,340)
Stock-based compensation— — 20,639 — — 20,639 
Tender offer issued in connection with the Joint Venture Acquisition and acquisition related costs— — (4,403)— — (4,403)
Other comprehensive loss— — — (2,591)— (2,591)
Net loss— — — — (161,994)(161,994)
Balance as of September 30, 2022
102,413,638 $$1,716,075 $(26,852)$(1,522,479)$166,745 

Three Months Ended September 30, 2021
Redeemable Noncontrolling InterestCommon StockAdditional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of June 30, 2021
$59,400 101,265,100 $$1,597,419 $33 $(809,388)$788,065 
Issuance of common stock upon exercise of stock options— 257,535 — 1,677 — — 1,677 
Vesting of restricted stock units— 100,622 — — — — — 
Vesting of common stock exercised early— — — 13 — — 13 
Taxes paid related to net share settlement of restricted stock units— — — (7,199)— — (7,199)
Stock-based compensation— — — 35,016 — — 35,016 
Other comprehensive loss, net of tax impact— — — — (626)— (626)
Net loss— — — — — (107,526)(107,526)
Balance as of September 30, 2021
$59,400 101,623,257 $$1,626,926 $(593)$(916,914)$709,420 
The accompanying notes are an integral part of these condensed consolidated financial statements.
7



Nine Months Ended September 30, 2022
Common Stock Additional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of December 31, 2021
101,767,446 $$1,657,593 $(4,764)$(1,007,825)$645,005 
Issuance of common stock upon exercise of stock options207,353 — 2,504 — — 2,504 
Vesting of restricted stock units250,729 — — — — — 
Vesting of common stock exercised early— — — — 
Common stock issued under employee stock purchase plan188,110 — 5,742 — — 5,742 
Taxes paid related to net share settlement of restricted stock units— — (6,519)— — (6,519)
Stock-based compensation— — 70,982 — — 70,982 
Tender offer issued in connection with the Joint Venture Acquisition and acquisition related costs— — (14,235)— — (14,235)
Other comprehensive loss— — — (22,088)— (22,088)
Net loss— — — — (514,654)(514,654)
Balance as of September 30, 2022
102,413,638 $$1,716,075 $(26,852)$(1,522,479)$166,745 

Nine Months Ended September 30, 2021
Redeemable Noncontrolling InterestCommon Stock Additional
Paid-in
Capital
Accumulated Other
Comprehensive Income (Loss)
 
Accumulated
Deficit
Total Stockholders’ Equity
SharesAmount
Balance as of December 31, 2020
$57,100 100,213,985 $$1,902,389 $2,697 $(606,592)$1,298,495 
Cumulative effect adjustment for ASU 2020-06 adoption— — — (330,403)— 4,437 (325,966)
Issuance of common stock upon exercise of stock options— 629,246 — 7,065 — — 7,065 
Vesting of restricted stock units— 719,128 — — — — — 
Vesting of common stock exercised early— — — 39 — — 39 
Common stock issued under employee stock purchase plan— 60,898 — 5,401 — — 5,401 
Taxes paid related to net share settlement of restricted stock units— — — (82,157)— — (82,157)
Stock-based compensation— — — 124,592 — — 124,592 
Adjustment of redeemable noncontrolling interest2,300 — — — — (2,300)(2,300)
Other comprehensive loss, net of tax impact— — — — (3,290)— (3,290)
Net loss— — — — — (312,459)(312,459)
Balance as of September 30, 2021
$59,400 101,623,257 $$1,626,926 $(593)$(916,914)$709,420 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Guardant Health, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
Nine Months Ended September 30,
20222021
OPERATING ACTIVITIES:
Net loss
$(514,654)$(312,459)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization25,793 16,181 
Non-cash operating lease costs
21,394 17,782 
Re-valuation of contingent consideration4,195 1,845 
Non-cash stock-based compensation70,982 124,592 
Amortization of debt issuance costs1,926 1,922 
Amortization of premium (discount) on marketable debt securities3,366 9,546 
Unrealized losses on marketable equity securities13,230 — 
Impairment of other assets5,261 — 
Fair value adjustments of noncontrolling interest liability99,785 — 
Other23 
Changes in operating assets and liabilities:
Accounts receivable, net11,431 (7,445)
Inventory, net(32,375)(2,023)
Prepaid expenses and other current assets, net28,387 (5,758)
Other assets, net4,770 (3,226)
Accounts payable17,752 6,939 
Accrued compensation14,927 10,558 
Accrued expenses and other liabilities14,034 10,484 
Operating lease liabilities(12,993)258 
Deferred revenue4,052 (1,233)
Net cash used in operating activities(218,714)(132,029)
INVESTING ACTIVITIES:
Purchase of marketable debt securities(238,601)(334,082)
Maturity of marketable debt securities398,000 627,110 
Purchase of non-marketable equity securities and other related investments(12,750)(39,076)
Purchase of property and equipment (67,460)(50,410)
Net cash provided by investing activities79,189 203,542 
FINANCING ACTIVITIES:
Payments made on finance lease obligations (53)(129)
Proceeds from issuance of common stock upon exercise of stock options 2,505 7,065 
Proceeds from issuances of common stock under employee stock purchase plan5,742 5,401 
Taxes paid related to net share settlement of restricted stock units(6,519)(82,157)
Joint Venture Acquisition(177,785)— 
Tender offer issued in connection with the Joint Venture Acquisition and acquisition related costs(14,236)— 
Payment of contingent consideration(1,065)— 
Payment of offering costs related to borrowings on convertible senior notes— (784)
Net cash used in financing activities(191,411)(70,604)
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Nine Months Ended September 30,
20222021
Net effect of foreign exchange rate changes on cash, cash equivalents and restricted cash
(2,740)(1,193)
Net (decrease) increase in cash, cash equivalents and restricted cash
(333,676)(284)
Cash, cash equivalents and restricted cash—Beginning of period
492,288 832,977 
Cash, cash equivalents and restricted cash—End of period
$158,612 $832,693 
Supplemental Disclosures of Cash Flow Information:
Operating lease liabilities arising from obtaining right-of-use assets
$4,073 $171,068 
Supplemental Disclosures of Noncash Investing and Financing Activities:
Purchase of property and equipment included in accounts payable and accrued expenses
$8,914 $9,589 
Issuance costs related to purchase of non-marketable equity and other related investments included in accounts payable and accrued expenses$— $346 
Property and equipment acquired under finance leases$— $238 
Reconciliation of cash, cash equivalents and restricted cash:
Cash and cash equivalents
$158,310 $832,370 
Restricted cash – included in other assets, net302 323 
Total cash, cash equivalents and restricted cash$158,612 $832,693 
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 Guardant Health, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1.    Description of Business
Guardant Health, Inc., or the Company, is a leading precision oncology company focused on helping conquer cancer globally through the use of its proprietary tests, vast data sets and advanced analytics. The Company believes its tests can transform cancer care by unlocking insights that will help patients at all stages of the disease, including at its earliest, when it’s most treatable. For patients with advanced-stage cancer, the Company has commercially launched Guardant360 LDT and Guardant360 CDx, the first comprehensive liquid biopsy test approved by the U.S. Food and Drug Administration, or the FDA, to provide tumor mutation profiling with solid tumors and to be used as a companion diagnostic in connection with non-small cell lung cancer, or NSCLC. The Company has also launched the Guardant360 TissueNext tissue test for advanced-stage cancer, Guardant Reveal blood test to detect residual and recurring disease in early-stage colorectal, breast and lung cancer patients, and Guardant360 Response blood test to predict patient response to immunotherapy or targeted therapy 8 weeks earlier than current standard-of-care imaging.
The Company also collaborates with biopharmaceutical companies in clinical studies by providing the above-mentioned tests, as well as the GuardantOMNI blood test for advanced-stage cancer, and the GuardantINFINITY blood test, launched in September 2022, which is a next-generation liquid biopsy that provides new, multi-dimensional insights into the complexities of tumor molecular profiles and immune response to advance cancer research and therapy development. Using data collected from its tests, the Company has also developed its GuardantINFORM platform to help biopharmaceutical companies accelerate precision oncology drug development through the use of this in-silico research platform to unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers.
In May 2022, the Company launched the Shield LDT test to address the needs of individuals eligible for colorectal cancer screening. From a simple blood draw, Shield uses a novel multimodal approach to detect colorectal cancer signals in the bloodstream, including DNA that is shed by tumors. In addition, with respect to Shield, the Company is working towards completing its prospective screening study, referred to as the ECLIPSE study, for the purpose of evaluating the performance of its Shield assay in detecting colorectal cancer in average-risk adults. The Company will expand into multi-cancer screening with its investigational next-generation Guardant SHIELD multi-cancer assay and presented data in April 2022 demonstrating the ability of next-generation Guardant SHIELD to accurately detect early-stage cancers and identify the tumor tissue of origin with high accuracy.
The Company was incorporated in Delaware in December 2011 and is headquartered in Palo Alto, California. In May 2018, the Company formed and capitalized Guardant Health AMEA, Inc., or the Joint Venture, in the United States with an affiliate of SoftBank Vision Fund (AIV M1) L.P., or SoftBank. Under the terms of the joint venture agreement, the Company held approximately 50% ownership and controlling interest in the Joint Venture. In June 2022, the Company completed the purchase of all of the shares of the Joint Venture, or the Joint Venture Acquisition, held by SoftBank and its affiliates, and issued a tender offer to purchase the Joint Venture's Class B common stock issued and issuable upon exercise of vested Joint Venture's stock options held by the Joint Venture's employees. Upon completion of the Joint Venture Acquisition and the tender offer, Guardant Health AMEA, Inc. became the Company's wholly owned subsidiary (see Note 3, Joint Venture and Note 11, Stock-Based Compensation).
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, or GAAP. The accompanying condensed consolidated financial statements include the accounts of Guardant Health, Inc., its consolidated Joint Venture (see Note 1, Description of Business and Note 3, Joint Venture), and its wholly owned subsidiaries. Other stockholders’ interests in the Joint Venture were shown in the condensed consolidated financial statements as noncontrolling interest liability before the Joint Venture Acquisition was completed. All significant intercompany balances and transactions have been eliminated in consolidation.
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The Company believes that its existing cash and cash equivalents and marketable debt securities as of September 30, 2022, 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, goodwill and identifiable intangible assets, stock-based compensation, incremental borrowing rate for operating leases, contingencies, certain inputs into the provision for (benefit from) income taxes, including related reserves, valuation of non-marketable securities, 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 severity of the impact on the Company's business for the remainder of calendar year 2022 and beyond will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic, and the impact of any variants of the virus, the extent and severity of the impact on the Company's customers and suppliers, the continued disruption to demand for the Company's products and services, and the impact of the global business and economic environment on liquidity and the availability of capital, all of which are uncertain and cannot be predicted.
Unaudited Interim Condensed Financial Statements
The accompanying condensed consolidated balance sheet as of September 30, 2022, the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, and 2021, the condensed consolidated statements of comprehensive loss for the three and nine months ended September 30, 2022, and 2021, the condensed consolidated statements of redeemable noncontrolling interest and stockholders’ equity for the three and nine months ended September 30, 2022, and 2021, and cash flows for the nine months ended September 30, 2022, and 2021, 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, or 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, 2021.
Foreign Currency
The functional currency of the subsidiaries 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, 2022, and 2021, foreign currency transaction gains and losses were immaterial.
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Restricted Cash
Restricted cash consists of payroll withholding related to the Company's enrollment in certain voluntary disability insurance plan. Restricted cash balance was $0.3 million and $0.1 million as of September 30, 2022, and December 31, 2021, respectively, which was included in other assets in the accompanying condensed consolidated balance sheets.
Non-Marketable Securities
The Company acquires certain equity investments in private companies to promote business and strategic objectives. The Company's investments in non-marketable equity securities do not give the Company the ability to control or exercise significant influence over the investee. The Company's non-marketable equity and other related investments totaled $20.8 million and $39.4 million as of September 30, 2022, and December 31, 2021, respectively, and are included in other assets, net on the accompanying condensed consolidated balance sheets. Non-marketable securities are subject to periodic impairment reviews and adjustments for observable price changes from orderly transactions. The Company's evaluation of impairment of such non-marketable securities is based on adverse changes in market conditions and the regulatory or economic environment, qualitative and quantitative analysis of the operating performance of the investee; changes in operating structure or management of the investee; additional funding requirements; and the investee’s ability to remain in business. Pursuant to one of the investments in non-marketable securities purchased by the Company, the Company acquired rights to purchase the investee at a pre-determined price subject to additional adjustments based on the performance of the investee, on or before December 31, 2022. In September 2022, the Company decided not to exercise such rights to purchase the investee and recorded an impairment of $5.3 million for the three and nine months ended September 30, 2022 based on an independent third-party valuation, which has been included in other income (expense) on the accompanying condensed consolidated statements of operations. No other impairment or downward adjustments to the carrying value of non-marketable securities have been previously recorded. In July 2022, one of the investees completed its initial public offering, or IPO, subsequent to which, the Company started to account for the investment in the investee at fair value on a recurring basis (see Note 5, Fair Value Measurements, Cash Equivalents and Marketable Securities).
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 debt 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.
The Company is subject to credit risk from its accounts receivable. The majority of the Company’s accounts receivable arises from the provision of precision oncology services, and development services and other, primarily with biopharmaceutical companies and international laboratory partners, all of which have high credit ratings. The Company has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Accounts receivable are recorded at net amount.
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A significant customer is any biopharmaceutical customer, clinical testing payer, or international laboratory partner 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, 2022December 31, 2021
2022202120222021
(unaudited)(unaudited)
Customer A
30 %31 %30 %28 %11 %13 %
Customer B
*****10 %
Customer C
*****13 %
Customer D
****10 %*
Customer E
****11 %*
*    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 in August 2020 for $8.0 million payable over a period of 6 years. In December 2020, the Company received the first installment payment of $1.0 million, and in December 2021, the Company received the second installment payment of $1.1 million. The Company has evaluated and recorded a credit loss for the remaining $5.9 million considering the third-party's credit worthiness and lack of financial history.
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The following table presents the receivable and the related credit loss amounts:
September 30, 2022
December 31, 2021
(unaudited)
(in thousands)
Prepaid expenses and other current assets:
Gross Amount
$1,100 $— 
Allowance for Credit Losses
(1,100)— 
Net Amount
$— $— 
Other assets:
Gross Amount
$4,800 $5,900 
Allowance for Credit Losses
(4,800)(5,900)
Net Amount
$— $— 
There were no activities for the allowance for credit losses during the three months ended September 30, 2022 and 2021. The following table summarizes the allowance for credit losses activities for the nine months ended September 30, 2022 and 2021:
Nine Months Ended September 30,
20222021
(unaudited)
(in thousands)
Prepaid expenses and other current assets:
Allowance for credit losses—Beginning of period
$— $— 
Reclassification
1,100 1,100 
Allowance for credit losses—End of period
$1,100 $1,100 
Other assets:
Allowance for credit losses—Beginning of period
$5,900 $7,000 
Reclassification
(1,100)(1,100)
Allowance for credit losses—End of period
$4,800 $5,900 
Accounts Receivable, Net
Accounts receivable represent valid claims against commercial and governmental payers, biopharmaceutical companies, research institutes, international laboratory partners and distributors, including unbilled receivables, and royalty payments due from third parties for licensing the Company’s technologies. Unbilled receivables include balances due from biopharmaceutical customers related to development services and other revenues that are recognized upon the achievement of performance-based milestones but prior to the achievement of contractual billing rights. As of September 30, 2022, and December 31, 2021, the Company had unbilled receivables of $5.1 million and $5.7 million, respectively.
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, 2022, and December 31, 2021, the Company had immaterial 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. Transaction costs allocated to in-process research and development technology with no future alternate use is expensed as incurred. The total consideration is allocated to the various intangible assets acquired on a relative fair value basis. Cash paid in connection of purchase of in-process research and development technology in an asset acquisition is presented within the investing section of the condensed consolidated statement of cash flows.
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Goodwill and Intangible Assets, net
Intangible assets related to in-process research and development costs, or IPR&D, acquired in a business combination 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 the Company becomes 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. In connection with the launch of Shield LDT in May 2022, the Company's IPR&D of $1.6 million was reclassified as an intangible asset with a useful life of 2 years.
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill is not amortized but is tested for impairment at least annually during the fourth fiscal quarter, or if circumstances indicate its 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 is tested for impairment at the enterprise level. As of September 30, 2022, 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. Amortization is recorded on a straight-line basis over the intangible asset's useful life, which is approximately 2—12 years.
Post-acquisition Contingent Consideration
Post-acquisition contingent consideration is recognized over the service period, subject to meeting the respective service requirements and performance metrics. For the three and nine months ended September 30, 2022, the Company recorded post-acquisition contingent consideration expense of $0.4 million and $2.7 million, respectively, in research and development expenses on the Company's condensed consolidated statement of operations. The Company did not record any post-acquisition contingent consideration expense for the three and nine months ended September 30, 2021.
Leases
The Company determines if an arrangement contains a lease at inception. Operating lease right-of-use, or 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.
Convertible Senior Notes
Upon early adoption of ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity on January 1, 2021, the Company reclassified the carrying amount of the equity component of the cash conversion feature including the allocated debt issuance costs from additional paid-in capital to convertible senior notes, net. Convertible senior notes are accounted for as a liability and measured at their amortized cost. Transaction costs related to the issuance of the notes are netted with the liability and are amortized to interest expense over the term of the notes, using an effective interest rate method.
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Revenue Recognition
The Company derives revenue from the provision of precision oncology testing services, as well as from development services and other. Precision oncology testing services include genomic profiling and the delivery of other genomic information derived from the Company’s platform. Development services include companion diagnostic development and regulatory approval, clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect and GuardantINFORM. Other revenue includes amounts derived from licensing the Company's technology, and kit fulfillment. 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, research institutes, international laboratory partners and distributors.
Revenues are recognized when control of services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.
Precision oncology testing
The Company recognizes revenue from the sale of its precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians. Most precision oncology tests requested by clinical customers are sold without a written agreement; however, the Company determines an implied contract exists with its clinical customers. The Company identifies each sale of its test to a clinical customer as a single performance obligation. With the exception of certain limited contracted arrangements with insurance carriers and other institutions where the transaction price is fixed, a stated contract price does not exist and the transaction price for each implied contract with 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, 2022, and 2021, the Company recorded $1.9 million and $3.2 million as revenue, respectively, resulting from cash collections exceeding the estimated variable consideration related to samples processed in previous periods, including revenue received from successful appeals of reimbursement denials, net of recoupments. For the nine months ended September 30, 2022, and 2021, the Company recorded $4.7 million and $17.8 million as revenue, respectively, resulting from cash collections exceeding the estimated variable consideration related to samples processed in previous periods, including revenue received from successful appeals of reimbursement denials, net of recoupments.
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 tests to biopharmaceutical customers as a single performance obligation. Precision oncology tests to biopharmaceutical customers are generally billed at a fixed price for each test performed. For agreements involving testing volume to be satisfied over a defined period, revenue is recognized over time based on the number of tests performed as the performance obligation is satisfied over time. Results of the Company’s precision oncology services are delivered electronically, and as such there are no shipping or handling fees incurred by the Company or billed to customers.
Development services and other
The Company performs development services for its biopharmaceutical customers utilizing its precision oncology information platform. Development services typically represent a single performance obligation as the Company performs a significant integration service, such as analytical validation and regulatory submissions. The individual promises are not separately identifiable from other promises in the contracts and, therefore, are not distinct. However, under certain contracts, a biopharmaceutical customer may engage the Company for multiple distinct development services which are both capable of being distinct and separately identifiable from other promises in the contracts and, therefore, distinct performance obligations.
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The Company collaborates with biopharmaceutical 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 testing panels. Under these collaborations, the Company generates revenue from achievement of milestones, as well as provision of on-going support. For the companion diagnostic development and regulatory approval 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 these contracts typically represents variable consideration. Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be managed to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone. In making this assessment, the Company considers its historical experience with similar milestones, the degree of complexity and uncertainty associated with each milestone, and whether achievement of the milestone is dependent on parties other than the Company. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is assessed and updated at each reporting period as a revision to the estimated transaction price.
The Company recognizes companion diagnostic development and regulatory approval 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. 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 and other.
The Company also recognizes revenue from other development services, in addition to companion diagnostic development and regulatory approval services noted above, such as clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect, and GuardantINFORM. These revenues are generally recognized over time based on an input method to measure progress in the period when the associated services have been performed.
In addition, other revenue includes amounts derived from licensing the Company's digital sequencing technology to its domestic customers and international laboratory partners, and kit fulfillment. For the licensed technology, the Company is compensated through royalty-based payments, non-refundable upfront payments, guaranteed minimum payments, and/or sample milestone payments. Depending on the nature of the technology licensing arrangements, these revenues are recognized in the period when royalty-bearing sales occur, when the technology transfer is complete, or during the technology transfer period. Kit fulfillment related revenues are recognized when such products are delivered.
Contracts with multiple performance obligations
Contracts with biopharmaceutical customers and international laboratory partners may include multiple distinct performance obligations, such as provision of precision oncology testing, the above-mentioned development services, and digital sequencing technology licensing, among others. The Company evaluates the terms and conditions included within its contracts with biopharmaceutical customers and international laboratory partners 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.
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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; or by using the residual approach if standalone selling price is not observable, by reference to the total transaction price less the sum of the observable standalone selling prices of other performance obligations promised in the contract.
Deferred revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from contracts with customers. For example, development services and other contracts with biopharmaceutical customers often contain upfront payments which results in the recording of deferred revenue to the extent cash is received prior to the Company's performance of the related services. Contract liabilities are relieved as the Company performs its obligations under the contract and revenue is consequently recognized. As of September 30, 2022, the deferred revenue balance was $15.4 million, of which $2.0 million is considered long-term and was recorded within other long-term liabilities on the accompanying condensed consolidated balance sheets. As of December 31, 2021, the deferred revenue balance was $11.3 million. Revenue recognized in the nine months ended September 30, 2022 that was included in the deferred revenue balance as of December 31, 2021 was $7.7 million, and revenue recognized in the nine months ended September 30, 2021 that was included in the deferred revenue balance as of December 31, 2020 was $8.0 million, respectively.
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 1-2 years.
Costs of Precision Oncology Testing
Cost of precision oncology testing generally consists of cost of materials, cost of labor, including bonus, benefit, and stock-based compensation, equipment and infrastructure expenses associated with processing test samples (including sample accessioning, library preparation, sequencing, and quality control analyses), freight, curation of test results for physicians, phlebotomy, and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, lease costs, amortization of leasehold improvements, and information technology costs. Costs associated with performing the Company’s tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to that test. Royalties for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expense at the time the related revenues are recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the applicable patent rights.
Cost of Development Services and Other
Cost of development service and other primarily includes costs incurred for the performance of development services requested by the Company’s biopharmaceutical customers and other revenues included as noted above. For development of new products, costs incurred before technological feasibility has been achieved are reported as research and development expenses, while costs incurred thereafter are reported as cost of development services and other.
Research and Development Expenses
Research and development expenses are comprised of costs incurred to develop technology and include compensation and benefits, reagents and supplies used in research and development laboratory work, infrastructure expenses, including allocated facility occupancy and information technology costs, contract services and other outside costs. Research and development costs are expensed as incurred. Payments made prior to the receipt of goods or services to be used in research and development are deferred and recognized as expense in the period in which the related goods are received or services are rendered. Costs to develop the Company’s technology capabilities are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs.
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Stock-Based Compensation
Stock-based compensation related to stock options granted to the Company’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.
The Company uses the Black-Scholes option-pricing model to estimate the fair value of stock options granted under the 2012 Stock Plan and the 2018 Incentive Award Plan, and stock purchase rights granted under the 2018 Employee Stock Purchase Plan. The Black-Scholes option-pricing model requires assumptions to be made related to the expected term of an award, expected volatility, risk-free rate and expected dividend yield. Forfeitures are accounted for as they occur.
For market-based restricted stock units, the Company derives the requisite service period using the Monte Carlo simulation model and the related compensation expense is recognized over the derived service period using an accelerated attribution model commencing on the grant date. Stock-based compensation expense will be recorded regardless of whether the market conditions are achieved or not. If the related market condition is achieved earlier than its estimated derived service period, the stock-based compensation expense will be accelerated, and a cumulative catch-up expense will be recorded during the period in which the market condition is met.
The Company measures the grant date fair value of its service-based and performance-based restricted stock units issued to employees based on the closing market price of the common stock on the date of grant. For restricted stock units with only service-based vesting conditions, compensation expense is recognized in the Company’s condensed consolidated statement of operations on a straight-line basis over the requisite service period. Compensation expense for restricted stock units with performance metrics is calculated based upon expected achievement of the metrics specified in the grant, and is recognized in the Company’s condensed consolidated statement of operations using an accelerated attribution model over the requisite service period for each separately vesting portion of the award.
Net Loss Per Share Attributable to Common Stockholders
The Company calculates basic net loss per share attributable to common stockholders by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method or the as-if converted method, as appropriate. For purposes of this calculation, stock options, restricted stock units, shares issuable pursuant to the employee stock purchase plan, shares subject to repurchase from early exercised options and contingently issuable shares under the convertible senior notes are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.

3.    Joint Venture
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.
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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 were 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, 2022, and December 31, 2021, 2,654,053 and 602,408 shares of Class B common stock have been issued and outstanding, respectively, and no shares of Class A common stock have been issued and outstanding. As of September 30, 2022, and December 31, 2021, 80,000,000 shares of Series A preferred stock have been issued and outstanding.
Prior to the completion of the Joint Venture Acquisition, under the terms of the joint venture agreement, neither party was obligated to make any further capital contribution, in cash or otherwise, to the Joint Venture. The Joint Venture was deemed to be a VIE, and the Company had been identified as the VIE’s primary beneficiary. As the primary beneficiary, the Company had consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances had been eliminated in consolidation.
Prior to November 2021, the noncontrolling interest held by SoftBank contained embedded put-call redemption features that were not solely within the Company’s control and had been classified outside of permanent equity in the consolidated balance sheets. The put-call feature embedded in the redeemable noncontrolling interest did not require bifurcation as it did not meet the definition of a derivative and was considered to be clearly and closely related to the redeemable noncontrolling interest. The Company elected to recognize the changes in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period. The carrying value of the redeemable noncontrolling interest was 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 occurred at the end of the reporting date. The adjustment of redeemable noncontrolling interest was recorded as an adjustment to net loss attributable to Guardant Health, Inc. common stockholders in the Company's condensed consolidated statement of operations.
In November 2021, the Company exercised its call right contained in the joint venture agreement with SoftBank to purchase all of the shares held by SoftBank and its affiliates in consideration for the payment of the aggregate purchase price to be determined based on an independent third-party valuation. Upon the Company's exercise of the call right in November 2021, SoftBank no longer had the option to exercise its put right. In connection with exercising the call right, the Company reclassified $78.0 million from redeemable noncontrolling interest to noncontrolling interest liability.
In June 2022, the Company purchased all of the shares held by SoftBank and its affiliates in consideration for a cash payment of the aggregate purchase price of $177.8 million, which resulted in $99.8 million of fair value adjustments to the noncontrolling interest liability for the nine months ended September 30, 2022.
As of December 31, 2021, the Company's consolidated balance sheet included $20.4 million of assets, that can be used only to settle obligations of the consolidated VIE and VIE’s subsidiaries, and $4.3 million of liabilities of the consolidated VIE and VIE’s subsidiaries, for which their creditors do not have recourse to the general credit of the Company. As of September 30, 2022, Guardant Health AMEA, Inc. was no longer a VIE, as the Company completed the Joint Venture Acquisition in June 2022.
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4.     Condensed Consolidated Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consist of the following:
September 30, 2022December 31, 2021
(unaudited)
(in thousands)
Machinery and equipment
$88,489 $63,022 
Leasehold improvements
99,370 38,702 
Computer hardware
28,147 16,685 
Construction in progress(1)
20,482 55,873 
Furniture and fixtures
8,358 3,683 
Computer software
1,784 1,320 
Property and equipment, gross
$246,630 $179,285 
Less: accumulated depreciation
(78,623)(54,824)
Property and equipment, net
$168,007 $124,461 
(1)    As of September 30, 2022, and December 31, 2021, $2.6 million and $45.8 million of construction in progress was related to leasehold improvements, furniture and equipment for the office in Palo Alto, California, respectively. Starting from February 2022, part of the Palo Alto office has been put in service and related construction in progress has been transferred to fixed assets.
Depreciation expense related to property and equipment was $9.1 million and $5.0 million for the three months ended September 30, 2022, and 2021, respectively, and $23.9 million and $14.6 million for the nine months ended September 30, 2022, and 2021, respectively.
Accrued Expenses
Accrued expenses consist of the following:
September 30, 2022December 31, 2021
(unaudited)
(in thousands)
Operating lease liabilities
$20,492 $12,856 
Accrued tax liabilities
3,564 4,223 
Accrued professional services
10,559 6,994 
Accrued clinical studies
7,665 3,332 
Accrued legal expenses
8,244 4,166 
Purchases of property and equipment included in accrued expenses
337 5,893 
Contingent consideration
4,152 — 
Others
8,354 7,821 
Total accrued expenses
$63,367 $45,285 
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.
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Fair value is defined as the exchange price that would be received from sale of an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The identification of market participant assumptions provides a basis for determining what inputs are to be used for pricing each asset or liability. A financial instrument’s classification within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
A fair value hierarchy has been established which gives precedence to fair value measurements calculated using observable inputs over those using unobservable inputs. This hierarchy prioritized the inputs into three broad levels as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
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:
September 30, 2022
Fair ValueLevel 1Level 2Level 3
(unaudited)
(in thousands)
Financial Assets:
Money market funds
$88,362 $88,362 $— $— 
Total cash equivalents
$88,362 $88,362 $— $— 
U.S. government debt securities
$799,727 $— $799,727 $— 
Total short-term marketable debt securities
$799,727 $— $799,727 $— 
U.S. government debt securities
$156,741 $— $156,741 $— 
Total long-term marketable debt securities
$156,741 $— $156,741 $— 
Long-term marketable equity securities
$12,855 $12,855 $— $— 
Total
$1,057,685 $101,217 $956,468 $— 
Financial Liabilities:
Contingent consideration
$6,320 $— $— $6,320 
Total
$6,320 $— $— $6,320 
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December 31, 2021
Fair ValueLevel 1Level 2Level 3
(in thousands)
Financial Assets:
Money market funds
$357,785 $357,785 $— $— 
Total cash equivalents
$357,785 $357,785 $— $— 
U.S. government debt securities
$440,546 $— $440,546 $— 
Total short-term marketable debt securities
$440,546 $— $440,546 $— 
U.S. government debt securities
$698,034 $— $698,034 $— 
Total long-term marketable debt securities
$698,034 $— $698,034 $— 
Total
$1,496,365 $357,785 $1,138,580 $— 
Financial Liabilities:
Contingent consideration
$3,625 $— $— $3,625 
Total
$3,625 $— $— $3,625 
The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. U.S. government debt securities 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.
In July 2022, one of the Company's equity investees completed its IPO, subsequent to which, the Company started to account for the investment at fair value on a recurring basis, and classified the investment within Level 1 of the fair value hierarchy as the investment is valued using the quoted market price. The Company is subject to a 2-year lock-up period since the IPO date, during which the Company shall not transfer the investee's shares between accounts, establish or cancel pledges, sell, or withdraw such shares, without approval from the local securities and exchange commission. The balance of the investment was $12.9 million as of September 30, 2022, and $26.1 million as of December 31, 2021, respectively, included in other assets, net, on the accompanying condensed consolidated balance sheets.
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.
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. The fair value of acquisition related contingent consideration is estimated using a multiple-outcome discounted cash flow valuation technique. Contingent consideration is classified within Level 3 of the fair value hierarchy, as it is based on a probability that includes significant unobservable inputs. The significant unobservable inputs include a probability-weighted estimate of achievement of certain commercialization milestones, and discount rate to present value the expected payments. A significant change in any of these input factors in isolation could have a material impact to fair value measurement. As of September 30, 2022, the Company recorded contingent consideration liability of $6.3 million, net of payment made in September 2022, of which $4.8 million is considered long-term and was recorded within other long-term liabilities on the accompanying condensed consolidated balance sheets. As of December 31, 2021, the Company recorded contingent consideration liability of $3.6 million within other long-term liabilities on the accompanying condensed consolidated balance sheets.
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As of December 31, 2021, the fair value of the noncontrolling interest liability was considered to be a Level 3 measurement and was determined based on an annual internal rate of return of 20% on the initial amount of $41.0 million invested by SoftBank in May 2018, to the date of Company's exercising the call right in November 2021. In June 2022, the Company purchased all of the shares held by SoftBank and its affiliates in consideration for the cash payment of the aggregate purchase price of $177.8 million, which was determined by an independent valuation firm using a combination of the income approach with consideration of discounted future cash flows and the market approach with consideration of comparable publicly traded companies. The noncontrolling interest liability was fully paid by June 30, 2022.
The following table summarizes the activities for the Level 3 financial instruments:
Noncontrolling Interest Liability
Redeemable Noncontrolling Interest
Contingent Consideration
Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,Three Months Ended September 30,Nine Months Ended September 30,
2022202120212022202120222021
(unaudited)
(in thousands)
Fair value — beginning of period
$78,000 $59,400 $57,100 $7,430 $2,120 $3,625 $1,245 
Increase in fair value 99,785 1,920 7,852 390 970 4,195 1,845 
Net loss for the period— (1,920)(5,552)— — — — 
Settlement(177,785)— — (1,500)— (1,500)— 
Fair value — end of period
$— $59,400 $59,400 $6,320 $3,090 $6,320 $3,090 
The Company considers the fair value of the Convertible Notes as of September 30, 2022, and December 31, 2021, to be a Level 2 measurement. The fair value of the Convertible Notes is primarily affected by the trading price of the Company's common stock and market interest rates. As such, the carrying value of the Convertible Notes does not reflect the market rate. See Note 7, Debt, for additional information related to the fair value of the Convertible Notes.
The following tables summarize the Company’s cash equivalents and marketable debt securities’ amortized costs, gross unrealized gains, gross unrealized losses and estimated fair values by significant investment category:
September 30, 2022
Amortized CostGross Unrealized GainGross Unrealized LossEstimated Fair Value
(unaudited)
(in thousands)
Money market fund
$88,362 $— $— $88,362 
U.S. government debt securities
979,407 — (22,939)956,468 
Total
$1,067,769 $— $(22,939)$1,044,830 
December 31, 2021
Amortized CostGross Unrealized GainGross Unrealized LossEstimated Fair Value
(in thousands)
Money market fund
$357,785 $— $— $357,785 
U.S. government debt securities
1,142,172 (3,594)1,138,580 
Total
$1,499,957 $$(3,594)$1,496,365 
The following tables present the estimated fair values and gross unrealized losses of the Company's marketable debt securities that have been in a continuous unrealized loss position as of September 30, 2022. None of the Company’s investments in marketable debt securities had been in an unrealized loss position for more than one year as of December 31, 2021.
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September 30, 2022
Less Than 12 Months12 Months or GreaterTotal
Estimated Fair ValueGross Unrealized LossEstimated Fair ValueGross Unrealized LossEstimated Fair ValueGross Unrealized Loss
(unaudited)
(in thousands)
U.S. government debt securities
$847,927 $(19,915)$108,541 $(3,024)$956,468 $(22,939)
Total
$847,927 $(19,915)$108,541 $(3,024)$956,468 $(22,939)
There have been no material realized gains or losses on marketable debt securities for the periods presented. The Company determined that it did have the ability and intent to hold all marketable debt securities that have been in a continuous loss position until maturity or recovery and the loss position was temporary due to market volatility, thus there has been no recognition of credit losses in the three and nine months ended September 30, 2022, and 2021, respectively. The maturities of the Company’s long-term marketable debt securities range from 1.0 to 1.3 years as of September 30, 2022. The Company recorded $13.2 million unrealized losses on marketable equity securities for the three and nine months ended September 30, 2022, included in other income (expense) on the Company's condensed consolidated statement of operations. The Company did not record any unrealized gains or losses on marketable equity securities for the three and nine months ended September 30, 2021.
6.    Intangible Assets, Net and Goodwill
The following table presents details of purchased intangible assets as of September 30, 2022, and December 31, 2021:
September 30, 2022
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountRemaining Weighted-Average Useful Life
(unaudited)
(in thousands)(in years)
Intangible assets subject to amortization:
Acquired license$11,886 $(3,301)$8,585 8.0
Non-compete agreements and other covenant rights
5,100 (2,535)2,565 3.2
Acquired technology1,600 (333)1,267 1.6
Total intangible assets subject to amortization
18,586 (6,169)12,417 
Intangible assets not subject to amortization:
Goodwill3,290 — 3,290 
Total purchased intangible assets
$21,876 $(6,169)$15,707 
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December 31, 2021
Gross Carrying AmountAccumulated AmortizationNet Carrying AmountRemaining Weighted-Average Useful Life
(in thousands)(in years)
Intangible assets subject to amortization:
Acquired license$11,886 $(2,473)$9,413 8.8
Non-compete agreements and other covenant rights
5,100 (1,906)3,194 3.9
Total intangible assets subject to amortization
16,986 (4,379)12,607 
Intangible assets not subject to amortization:
IPR&D1,600 — 1,600 
Goodwill3,290 — 3,290 
Total purchased intangible assets
$21,876 $(4,379)$17,497 
Amortization of finite-lived intangible assets was $0.7 million and $0.5 million for the three months ended September 30, 2022, and 2021, respectively, and $1.8 million and $1.5 million for the nine months ended September 30, 2022, and 2021, respectively.
The following table summarizes estimated future amortization expense of finite-lived intangible assets, net:
Year Ending December 31,
(unaudited)
(in thousands)
Remainder of 2022
$691 
20232,747 
20242,219 
20251,670 
20261,212 
2027 and thereafter
3,878 
Total$12,417 
7. Debt
Convertible Senior Notes
In November 2020, the Company issued $1.15 billion principal amount of its 0% Convertible Senior Notes due 2027, or the 2027 Notes. The 2027 Notes do not bear interest, and the principal amount of the Notes will not accrete. However, special interest and additional interest may accrue on the 2027 Notes at a rate per annum not exceeding 0.50% (subject to certain exceptions) upon the occurrence of certain events such as the failure to file certain reports to the Securities and Exchange Commission, or to remove certain restrictive legends from the Notes. The Notes will mature on November 15, 2027, unless repurchased, redeemed or converted earlier.
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Before August 15, 2027, holders of the 2027 Notes will have the right to convert their 2027 Notes only under the following circumstances:
during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on March 31, 2021, if the last reported sale price of the Company's common stock exceeds 130% of the conversion price for each of at least 20 trading days (whether or not consecutive) during the 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter, or the sale price condition;
during the five consecutive business days immediately after any ten consecutive trading day period, or the measurement period, if the trading price per $1,000 principal amount of the Notes for each trading day of the measurement period is less than 98% of the product of the last reported sale price of the Company's common stock on such trading day and the conversion rate on such trading day; or
upon the occurrence of specified corporate events
From and after August 15, 2027, holders of the 2027 Notes may convert their 2027 Notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date.
The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock or a combination of cash and shares of its common stock, at the Company’s election.
The initial conversion rate is 7.1523 shares of common stock per $1,000 principal amount of 2027 Notes, which represents an initial conversion price of approximately $139.82 per share of common stock. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. In addition, if certain corporate events that constitute a “Make-Whole Fundamental Change” occur, then the conversion rate will, in certain circumstances, be increased for a specified period of time.
The Company may not redeem the 2027 Notes at its option at any time before November 20, 2024. The Notes will be redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after November 20, 2024 and on or before the 25th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the Notes to be redeemed, plus accrued and unpaid special interest and additional interest, if any, to, but excluding, the redemption date, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price on (i) each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the trading day immediately before the date the Company sends the related redemption notice; and (ii) the trading day immediately before the date the Company sends such notice. In addition, calling any Note for redemption will constitute a Make-Whole Fundamental Change with respect to that Note, in which case the conversion rate applicable to the conversion of that Note will be increased in certain circumstances if it is converted after it is called for redemption.
If certain corporate events that constitute a “Fundamental Change” occur, then, subject to a limited exception for certain cash mergers, holders of Notes may require the Company to repurchase their 2027 Notes at a cash repurchase price equal to the principal amount of the 2027 Notes to be repurchased, plus accrued and unpaid special interest and additional interest, if any, to, but excluding, the fundamental change repurchase date. The definition of Fundamental Change includes certain business combination transactions involving the Company and certain de-listing events with respect to the Company’s common stock.
Since the 2027 Notes were not convertible as of September 30, 2022, the net carrying amount of the 2027 Notes was classified as a long-term liability.
The following table sets forth the net carrying amounts of the 2027 Notes as of September 30, 2022, and December 31, 2021:
September 30, 2022December 31, 2021
(unaudited)
(in thousands)
Liability component:
Principal$1,150,000 $1,150,000 
Less: debt issuance costs, net of amortization(13,252)(15,179)
Net carrying amount$1,136,748 $1,134,821 
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The total estimated fair value of the 2027 Notes was $0.9 billion and $1.2 billion as of September 30, 2022, and December 31, 2021, respectively. The fair value was determined based on the closing trading price per $100 of the 2027 Notes as of the last day of trading for the period.
The interest expense recognized in relation to amortization of debt issuance costs was $0.6 million and $1.9 million for the three and nine months ended September 30, 2022 and 2021, respectively, which represented an effective interest rate of 0.2% and 0.2% for the three and nine months ended September 30, 2022, and 2021, respectively.
Note Hedges
To minimize the impact of potential economic dilution upon conversion of the 2027 Notes, the Company entered into convertible note hedge transactions, or the 2027 Note Hedges, with respect to its common stock concurrent with the issuance of the Notes. The 2027 Note Hedges cover, subject to customary adjustments, the number of shares of common stock initially underlying the Notes. The strike price of the 2027 Note Hedges will initially be approximately $182.60 per share, which represents a premium of 75% over the last reported sale price of the Company’s common stock of $104.34 per share on November 16, 2020, and is subject to certain adjustments under the terms of the 2027 Note Hedges.
The 2027 Note Hedges will expire upon maturity of the 2027 Notes. The 2027 Note Hedges are separate transactions and are not part of the terms of the 2027 Notes. Holders of the 2027 Notes will not have any rights with respect to the 2027 Note Hedges. The shares receivable related to the 2027 Note Hedges are excluded from the calculation of diluted earnings per share as they are anti-dilutive.
As these transactions meet certain accounting criteria, the 2027 Note Hedges are recorded in stockholders’ equity and are not accounted for as derivatives. The Company paid an aggregate amount of $90.0 million for the 2027 Note Hedges, which has been recorded as a reduction to additional paid-in capital and will not be remeasured.
8. Leases
The Company has entered into various operating lease agreements for office space, data center, lab and warehouse use, with remaining terms ranging from 1 year to 11 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. In July 2020, the Company entered into two lease agreements for additional office space in Palo Alto, California, or the Palo Alto Lease, and in San Diego, California, or the San Diego Lease. The San Diego Lease has a term of 8 years with rent payments commencing in May 2022. The Palo Alto Lease has a term of 12 years with an option to renew the lease term for an additional 10 years which has not been considered in the determination of ROU or the lease liability as the Company does not consider it reasonably certain of exercising the renewal option. After the initial payment of $0.9 million in February 2022, the remaining rent payments for the Palo Alto Lease commenced in July 2022. Both leases consist of fixed and variable payments and are being accounting for as operating leases. The Company took possession of these facilities in March 2021. The Company estimated the incremental borrowing rate to determine the present value of lease payments for the San Diego and Palo Alto leases using trading data of the Company's convertible debt adjusted for credit rating and market yield curves.
Operating lease expense was $7.2 million and $6.9 million for the three months ended September 30, 2022, and 2021, respectively, and $21.4 million and $17.8 million for the nine months ended September 30, 2022, and 2021, respectively, which includes both lease and non-lease components (primarily common area maintenance charges and property taxes).
September 30, 2022December 31, 2021
(unaudited)
Weighted-average remaining lease term (in years)
9.310.0
Weighted-average discount rate
3.95 %4.01 %
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The following table summarizes the Company's future principal contractual obligations for operating lease commitments as of September 30, 2022:
Year Ending December 31,
(unaudited)
(in thousands)
Remainder of 2022
$7,234 
202330,306 
202432,806 
202532,175 
202627,688 
2027 and thereafter
149,636 
Total operating lease payments$279,845 
Less: imputed interest(43,179)
Total operating lease liabilities$236,666 
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, the Company has received, and may in the future continue to receive letters, claims or complaints from others alleging false advertising, patent infringement, violation of employment practices and trademark infringement. The Company has also instituted, and may in the future institute, additional legal proceedings to enforce its rights and seek remedies, such as monetary damages, injunctive relief and declaratory relief. The Company cannot predict the results of any such disputes, and despite the potential outcomes, the existence thereof may have an adverse material impact on the Company 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.
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Intellectual Property Disputes
In August 2021, TwinStrand Biosciences, Inc., or TwinStrand Biosciences, and the University of Washington filed a patent infringement suit in the United States District Court for the District of Delaware alleging that the Company infringes U.S. Patent Nos. 10,287,631; 10,689,699; 10,752,951; and 10,760,127. The Company answered the complaint in October 2021, denying TwinStrand Biosciences’ allegations and asserted counterclaims of invalidity, unenforceability due to inequitable conduct and infringement of four of the Company’s patents. Discovery in the case is ongoing and trial is scheduled to commence in November 2023.
In March 2022, Illumina Inc., or Illumina, filed suit in the United States District Court for the District of Delaware against the Company and its Co-Chief Executive Officers, Dr. Helmy Eltoukhy, or Dr. Eltoukhy, and Dr. AmirAli Talasaz, or Dr. Talasaz, or collectively the Defendants, alleging that Illumina is the owner of certain of the Company’s patents and patent applications, and that the Defendants allegedly misappropriated Illumina trade secrets. Illumina also alleges that Drs. Eltoukhy and Talasaz breached various Illumina employment contracts, company policies, and implied covenants of good faith and fair dealing as part of their former employment with Illumina prior to starting the Company. Illumina is requesting unspecified compensatory and punitive damages, attorneys’ fees, and specific performance in the form of a declaration of ownership and assignment of intellectual property filed for or obtained by the Defendants that derives from the alleged misuse of Illumina confidential information. The Defendants deny the allegations of misconduct, and have moved to dismiss the complaint. Discovery in the case is ongoing and trial is estimated to commence late 2024.
False Advertising Dispute
In May 2021, the Company also filed a lawsuit against Natera, Inc., or Natera, in the United States District Court for the Northern District of California, wherein the Company alleged that Natera is misleading healthcare providers about the performance of the Company’s new oncology test, Guardant Reveal, by suggesting the test is inaccurate and/or insensitive, and inferior to Natera’s Signatera assay. The Company is seeking an injunction to prevent Natera from continuing to make false and misleading statements and to require Natera to take corrective actions. Natera has asserted counterclaims of false and misleading statements, false advertising, unlawful trade practices and unfair competition. The Company moved to dismiss Natera’s counterclaims, and in January 2022, the court granted in part and denied in part the Company's motion to dismiss. Discovery is ongoing and trial is scheduled to commence in February 2023.
Civil Investigative Demand
In January 2022, the Company received a Civil Investigative Demand, or CID, from the United States Attorney for the Northern District of California in connection with an investigation under the False Claims Act. The CID requests information and documents regarding billing of government-funded programs for the Company’s panel of genetic tests known as Guardant360. The Company is fully cooperating with the investigation. At this time, the Company is unable to predict the outcome of this investigation.
10.    Common Stock
The Company’s common stockholders are entitled to dividends if and when declared by the Company’s Board of Directors, or the Board of Directors. As of September 30, 2022, and December 31, 2021, no dividends on the Company's 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, 2022December 31, 2021
(unaudited)
Shares underlying outstanding stock options
2,890,3422,624,974
Shares underlying unvested restricted stock units
2,794,4011,498,553
Market-based restricted stock units2,260,7642,260,764
Performance-based restricted stock units348,600374,596
Shares available for issuance under the 2018 Incentive Award Plan6,923,0885,231,624
Shares available for issuance under the 2018 Employee Stock Purchase Plan1,238,1541,426,264
Total16,455,34913,416,775
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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), or the 2012 Plan, and the 2018 Incentive Award Plan, or 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 January 1, 2022
5,231,6242,624,974$29.17 6.5$193,014 
2018 Plan annual increase(1)
3,689,000
Granted(488,174)488,17442.15 
Granted in connection with the Joint Venture Acquisition(15,128)15,1284.90 
Exercised(207,353)6.34 
Canceled26,347(30,581)87.94 
Restricted stock units granted
(1,905,716)— 
Restricted stock units canceled
359,139— 
Performance-based restricted stock units granted(26,935)— 
Performance-based restricted stock units canceled52,931— 
Balance as of September 30, 2022
6,923,0882,890,342$32.25 6.4$93,798 
Vested and Exercisable as of September 30, 2022
2,055,854$19.01 5.4$85,683 
(1)Effective as of January 1, 2022, 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 $2.3 million and $28.4 million for the three months ended September 30, 2022, and 2021, respectively, and $11.5 million and $77.8 million for the nine months ended September 30, 2022, and 2021, respectively.
The weighted-average grant date fair value of options granted was $33.66 and $65.17 per share for the three months ended September 30, 2022, and 2021, respectively, and $26.49 and $72.14 per share for the nine months ended September 30, 2022, and 2021, respectively.
Future stock-based compensation for unvested options as of September 30, 2022 was $32.9 million, which is expected to be recognized over a weighted-average period of 2.8 years.
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Restricted Stock Units
A summary of the Company’s restricted stock unit activity excluding the performance-based and market-based restricted stock units under the 2012 Plan and the 2018 Plan and related information is as follows:
Restricted Stock Units OutstandingWeighted-Average Grant Date Fair Value
(unaudited)
Balance as of January 1, 2022
1,498,553$109.72 
Granted1,812,40043.74 
Granted in connection with the Joint Venture Acquisition93,31638.24 
Vested and released(250,729)98.90 
Canceled(359,139)97.56 
Balance as of September 30, 2022
2,794,401$67.07 
Future stock-based compensation for unvested restricted stock units as of September 30, 2022 was $163.2 million, which is expected to be recognized over a weighted-average period of 2.9 years.
Performance-based Restricted Stock Units
Since November 2020, the Compensation Committee of the Board of Directors started to approve, and the Company started to grant performance-based restricted stock units, or PSUs, under the 2018 Plan. The PSUs granted to employees consist of financial and operational metrics to be met over a performance period of 1.5 years to 4 years and an additional service period requirement of six months to one year after the performance metrics are met. The PSUs granted to a consultant consistent of operational metrics to be met over a performance period of 4 years. The PSUs are expected to be expensed over a period of approximately 2.5 years to 4.5 years subject to meeting the respective performance metrics and service requirements. As of September 30, 2022, a significant portion of these PSUs are not expected to achieve the related performance metrics, and therefore, no stock-based compensation expense was recorded for the PSUs that were not probable to vest.
A summary of the Company’s performance-based restricted stock unit activity under the 2018 Plan and related information is as follows:
Performance-based Restricted Stock Units OutstandingWeighted-Average Grant Date Fair Value
(unaudited)
Balance as of January 1, 2022
374,596$116.58 
Granted26,93537.50 
Canceled(52,931)115.14 
Balance as of September 30, 2022
348,600$110.69 
Stock-based compensation recorded for the PSUs was $0.4 million and $0.3 million for the three months ended September 30, 2022, and 2021, respectively, and $1.0 million and $1.0 million for the nine months ended September 30, 2022, and 2021, respectively. Future stock-based compensation for unvested PSUs that are probable to vest as of September 30, 2022 was $3.4 million, which is expected to be recognized over a weighted-average period of 2.4 years.
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Market-based Restricted Stock Units
In May 2020, the Board of Directors approved and granted 1,695,574 market-based restricted stock units, or MSUs, under the 2018 Plan to each of the Company's Co-Chief Executive Officers, 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. Any MSUs that remain unvested at the end of the seven-year performance period will automatically be forfeited and terminated without further consideration. The following table presents additional information relating to each MSU award:
TranchePrice GoalNumber of RSUs
Tranche 1
$120 per share
565,192
Tranche 2
$150 per share
565,191
Tranche 3
$200 per share
565,191
The grant date fair values of the MSUs were determined using a Monte Carlo valuation model for each tranche. The related stock-based compensation expense for each tranche is recognized based on an accelerated attribution method 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 per share and the weighted-average derived service period was estimated to be in the range of 0.83 – 2.07 years.
On January 1, 2021, Tranche 1 of the MSUs became vested because it had met both service requirement and market-based performance metrics as the predetermined share price goal of $120 per share was achieved for a period of 30 consecutive calendar days. As of September 30, 2022 and December 31, 2021, 2,260,764 shares of market-based restricted stock units, with a weighted-average grant date fair value of $65.20 per share, were outstanding under the 2018 Plan. No MSUs were granted, vested or canceled during the nine months ended September 30, 2022.
The MSUs were fully expensed as of June 30, 2022. Stock-based compensation for the MSUs was nil and $22.6 million, for the three months ended September 30, 2022, and 2021, respectively, and $16.1 million and $88.9 million, for the nine months ended September 30, 2022, and 2021, respectively, which was recorded in general and administrative expenses on the Company's condensed consolidated statement of operations. 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, or 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 were 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.
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In June 2022, in connection with the Joint Venture Acquisition, the Company issued a tender offer to purchase the Joint Venture's Class B common stock issued and issuable upon exercise of vested Joint Venture's stock options, at a price of $4.44 per share determined pursuant to an independent valuation. In July 2022, the Company settled the tender offer with the 39 grantees for a total amount of $13.7 million. In addition, in connection with the Joint Venture Acquisition, the unvested Joint Venture's stock options were cancelled and such grantees received replacement awards covering a number of shares of the Company's common stock. The replacement awards, valued at $4.1 million, are subject to the same vesting schedule that applied to the unvested Joint Venture's stock option immediately prior to the close of the Joint Venture Acquisition transaction, to be recognized over a weighted-average period of 2.2 years. The Company accounted for this as a modification which resulted in an immaterial incremental stock-based compensation expense. After the settlement of the tender offer in July 2022, the Company cancelled the AMEA 2020 Plan.
A summary of the Joint Venture's stock option activity under the AMEA 2020 Plan and related information is as follows:
Options Outstanding
Shares
Available for Grant 
Shares Subject to Options OutstandingWeighted-Average Exercise Price Weighted-Average Remaining Contractual Life (Years)Aggregate Intrinsic Value
(unaudited)
(in thousands)
Balance as of January 1, 2022
340,9283,652,219$0.58 8.8$— 
Exercised(2,051,645)0.58 
Canceled82,407(82,407)0.58 
Canceled in connection with the Joint Venture Acquisition(423,335)(1,518,167)0.58 
Balance as of September 30, 2022
$— 0.0$— 
Vested and Exercisable as of September 30, 2022
$— 0.0$— 
No stock options were granted under the AMEA 2020 Plan for the nine months ended September 30, 2022. The weighted-average grant date fair value of options granted under the AMEA 2020 Plan was $0.33 per share for the three and nine months ended September 30, 2021.
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,
2022202120222021
(unaudited)
(in thousands)
Cost of precision oncology testing
$1,316 $676 $3,695 $2,316 
Research and development expense
7,044 4,416 18,503 13,280 
Sales and marketing expense
6,466 3,991 17,978 10,309 
General and administrative expense
5,813 25,933 30,806 98,687 
Total stock-based compensation expense
$20,639 $35,016 $70,982 $124,592 
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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,
2022202120222021
(unaudited)
Expected term (in years)
5.94 – 6.02
5.94 – 6.04
5.50 – 6.10
5.49 – 6.04
Expected volatility
66.8% – 67.3%
63.6% – 66.0%
63.3% – 67.3%
63.6% – 66.7%
Risk-free interest rate
2.9% – 2.9%
0.3% – 0.8%
1.9% – 3.4%
0.3% – 1.1%
Expected dividend yield
—%
—%
—%
—%
The determination of the fair value of stock options on the date of grant using a Black-Scholes option-pricing model is affected by the estimated fair value of common stock of the Company and the Joint Venture, as well as assumptions regarding a number of variables that are complex, subjective and generally require significant judgment to determine. The valuation assumptions were determined as follows:
Fair Value of Common Stock
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 was 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 did not have any trading history for its common stock.
Risk-Free Interest Rate
The risk-free interest rate is based on the U.S. Treasury 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.
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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, or 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.
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 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 for the three months ended September 30, 2022, and 2021, respectively, and 188,110 and 60,898 for the nine months ended September 30, 2022, and 2021, respectively. The total compensation expense related to the ESPP was $0.9 million and $0.9 million for the three months ended September 30, 2022, and 2021, respectively, and $3.2 million and $2.5 million for the nine months ended September 30, 2022, and 2021, 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 issued for the three months ended September 30, 2022, and 2021. 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 assumptions:
Nine Months Ended September 30,
20222021
(unaudited)
Expected term (in years)
0.50
0.50
Expected volatility
92.0%
50.8%
Risk-free interest rate
1.5%
—%
Expected dividend yield
—%
—%
As of September 30, 2022, the unrecognized stock-based compensation expense related to the ESPP was $0.4 million, which is expected to be recognized over the remaining term of the offering period of 0.1 years.
12.    Net Loss Per Share Attributable to Guardant Health, Inc. Common Stockholders
The following table sets forth the computation of the basic and diluted net loss per share attributable to Guardant Health, Inc. common stockholders:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
(unaudited)
(in thousands, except per share data)
Net loss$(161,994)$(107,526)$(514,654)$(312,459)
Adjustment of redeemable noncontrolling interest
— — — (2,300)
Net loss attributable to Guardant Health, Inc. common stockholders, basic and diluted
$(161,994)$(107,526)$(514,654)$(314,759)
Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
$(1.58)$(1.06)$(5.04)$(3.11)
Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
102,289 101,420 102,065 101,184 
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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,
2022202120222021
(unaudited)
(in thousands)
Stock options issued and outstanding2,8612,6282,6622,753
Restricted stock units2,7891,1852,0091,151
MSUs2,2612,2612,2612,389
PSUs363395356404
ESPP obligation1185110447
Common stock subject to repurchase69
Convertible senior notes8,2258,2258,2258,225
Total16,61714,75115,61714,978
13.    Income Taxes
The income tax expense for the three and nine months ended September 30, 2022 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, 2022, and 2021, relates primarily to state minimum income tax and income tax on the Company’s earnings in foreign jurisdictions.
14.    Segment and Geographic Information
The Company operates as one operating segment. The Company's chief operating decision makers are its Co-Chief Executive Officers, who review financial information presented on a consolidated basis for the purposes of making operating decisions, assessing financial performance and allocating resources.
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,
2022202120222021
(unaudited)
(in thousands)
United States$111,096 $90,421 $302,803 $250,589 
International (1)
6,308 4,358 19,844 14,956 
Total revenue
$117,404 $94,779 $322,647 $265,545 
(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, 2022, and 2021, respectively.
As of September 30, 2022, and December 31, 2021, 99% and 98%, respectively, of the Company’s long-lived assets and right-of-use assets are located in the United States.
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15.    Related Party Transactions
As discussed in Note 3, Joint Venture, in May 2018, 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. Prior to the completion of the Joint Venture Acquisition in June 2022, the Company had consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances had 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.


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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, 2021 and in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q.
Overview
We are a leading precision oncology company focused on helping conquer cancer globally through the use of our proprietary tests, vast data sets and advanced analytics. We believe our tests can transform cancer care by unlocking insights that will help patients at all stages of the disease, including at its earliest, when it’s most treatable. For patients with advanced-stage cancer, we have commercially launched Guardant360 LDT and Guardant360 CDx, the first comprehensive liquid biopsy test approved by the U.S. Food and Drug Administration, or the FDA, to provide tumor mutation profiling with solid tumors and to be used as a companion diagnostic in connection with non-small cell lung cancer, or NSCLC. We have also launched the Guardant360 TissueNext tissue test for advanced-stage cancer, Guardant Reveal blood test to detect residual and recurring disease in early-stage colorectal, breast and lung cancer patients, and Guardant360 Response blood test to predict patient response to immunotherapy or targeted therapy 8 weeks earlier than current standard-of-care imaging.
We also collaborate with biopharmaceutical companies in clinical studies by providing the above-mentioned tests, as well as the GuardantOMNI blood test for advanced-stage cancer, and the GuardantINFINITY blood test, launched in September 2022, which is a next-generation liquid biopsy that provides new, multi-dimensional insights into the complexities of tumor molecular profiles and immune response to advance cancer research and therapy development. Using data collected from our tests, we have also developed our GuardantINFORM platform to help biopharmaceutical companies accelerate precision oncology drug development through the use of this in-silico research platform to unlock further insights into tumor evolution and treatment resistance across various biomarker-driven cancers.
In May 2022, we launched the Shield LDT test to address the needs of individuals eligible for colorectal cancer screening. From a simple blood draw, Shield uses a novel multimodal approach to detect colorectal cancer signals in the bloodstream, including DNA that is shed by tumors. In addition, with respect to Shield, we are working towards completing our prospective screening study, referred to as the ECLIPSE study, for the purpose of evaluating the performance of our Shield assay in detecting colorectal cancer in average-risk adults. We will expand into multi-cancer screening with our investigational next-generation Guardant SHIELD multi-cancer assay and presented data in April 2022 demonstrating the ability of next-generation Guardant SHIELD to accurately detect early-stage cancers and identify the tumor tissue of origin with high accuracy.
We currently perform our tests in our laboratories located in Redwood City, California, and San Diego, California. Our Redwood City laboratory is certified pursuant to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, accredited by the College of American Pathologists, or CAP, permitted by the New York State Department of Health, or NYSDOH, and licensed in California and four other states. Our San Diego laboratory is CLIA-certified, and we are currently in the process of obtaining CAP accreditation for the San Diego laboratory. In February 2022, we received CAP accreditation for our laboratory in Japan where we expect to commence processing samples following receipt of additional certification for processing In Vitro Diagnostic, or IVD, samples and reimbursement approval.
We generated total revenue of $117.4 million and $94.8 million for the three months ended September 30, 2022, and 2021, respectively, and $322.6 million and $265.5 million for the nine months ended September 30, 2022, and 2021, respectively. We also incurred net losses of $162.0 million and $107.5 million for the three months ended September 30, 2022, and 2021, respectively, and $514.7 million and $312.5 million for the nine months ended September 30, 2022, and 2021, respectively. We have funded our operations to date principally from the sale of our stock, convertible senior notes, and revenue from our precision oncology testing and development services and other. As of September 30, 2022, we had cash, cash equivalents and marketable debt securities of approximately $1.1 billion.
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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 reimbursement for clinical tests because we are not a contracted provider for, or our tests are not covered by clinical patients’ insurance for, the majority of the tests that we perform for patients on behalf of clinicians. Revenue from clinical tests for patients covered by Medicare represented approximately 46% and 48% of our precision oncology revenue from clinical customers during the three months ended September 30, 2022, and 2021, respectively, and approximately 45% and 44% of our precision oncology revenue from clinical customers for the nine months ended September 30, 2022, and 2021, respectively.
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 payers' past patterns of changes in reimbursement as well as any stated plans to implement changes. Any cash collections over the expected reimbursement period exceeding the estimated variable consideration are 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 tests and, potentially, no reimbursement for non-covered uses identified under the payer’s policies or the contract. As a result, the potential for more favorable reimbursement associated with becoming a participating provider may be offset by a potential loss of reimbursement for non-covered uses of our tests. Current Procedural Terminology, or CPT, coding plays a significant role in how our tests are reimbursed both from commercial and governmental payers. In addition, Z-Code Identifiers are used by certain payers, including under Medicare's Molecular Diagnostic Services Program, or MolDx, to supplement CPT codes for our molecular diagnostics tests. Changes to the codes used to report to payers may result in significant changes in its reimbursement. If their policies were to change in the future to cover additional cancer indications, we anticipate that our total reimbursement would increase. In January 2021, a proprietary laboratory analyses, or PLA code was issued for our Guardant360 CDx with an effective date in April 2021. Additionally, based on this new PLA code, we applied to the Centers for Medicare and Medicaid Services or CMS for our Guardant360 CDx test to become an advanced diagnostic laboratory test, or ADLT. In March 2021, CMS approved ADLT status to the Guardant360 CDx test, based on which Medicare paid us at the lowest available commercial rate per test, from April 1, 2021 to December 31, 2021. Effective January 1, 2022, Medicare has started to reimburse Guardant360 CDx services at the median rate of claims paid by commercial payers and this rate will apply until December 2023. In March 2022, Palmetto GBA, the Medicare administrative contractor for MolDX, has conveyed coverage for our Guardant360 TissueNext test under the existing local coverage determination. The policy covers our Guardant360 TissueNext test for Medicare fee-for-service patients with advanced solid tumor cancers. In July 2022, Palmetto GBA conveyed coverage for our Guardant Reveal test for fee-for-service Medicare patients in the United States with stage II or III colorectal cancer whose testing is initiated within three months following curative intent therapy, with an effective date of December 2021. Due to the inherent variability and unpredictability of the reimbursement landscape, including related to the amount that payers reimburse us for any of our tests, we estimate the amount of revenue to be recognized at the time a test is provided and record revenue adjustments if and when the cash subsequently received differs from the revenue recorded. Due to this variability and unpredictability, previously recorded revenue adjustments are not
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indicative of future revenue adjustments from actual cash collections, which may fluctuate significantly. Additionally, if coding changes were to occur, payments for certain uses of our tests could be reduced, put on hold, or eliminated. This variability and unpredictability could increase the risk of future revenue reversal and result in our failing to meet any previously publicly stated guidance we may provide.
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 studies globally and continue to have opportunities to offer our platform to such customers for development services, including companion diagnostic development, novel target discovery and validation, as well as clinical study enrollment. For example, our tests are being developed as companion diagnostics under collaborations with biopharmaceutical companies.
Research and development. A significant aspect of our business is our investment in research and development, including the development of new products. 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 Guardant Reveal, in October 2021, we initiated a 1,000-patient prospective, observational, multi-center study, which we refer to as the ORACLE study, designed to evaluate the performance of our Guardant Reveal liquid biopsy test to predict cancer recurrence after curative intent treatment, across 11 solid tumor types. With respect to Shield, we are working towards completing our prospective screening study, which we refer to as the ECLIPSE study, for the purpose of evaluating the performance of our Shield assay in detecting colorectal cancer in average-risk adults. In addition, in January 2022, we enrolled the first patient in a nearly 10,000-patient prospective, registrational study, which we refer to as the SHIELD LUNG study, to evaluate the performance of our next-generation Guardant SHIELD assay in detecting lung cancer in high-risk individuals ages 50-80 and the study is anticipated to run in approximately 100 centers in the United States and Europe. We have expended considerable resources, and expect to increase such expenditures over the next few years, to support our research and development programs with the goal of fueling further innovation.
International expansion. A component of our long-term growth strategy is to expand our commercial footprint internationally, and we expect to increase our sales and marketing expense to execute on this strategy. We currently offer our tests in countries outside the United States primarily through distributor relationships, direct contracts with hospitals or partnerships with research organizations. In May 2018, we formed and capitalized a joint venture, Guardant Health AMEA, Inc., 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. In February 2021, an affiliate of the Joint Venture, submitted an application to Ministry of Health, Labour and Welfare, or the MHLW, for regulatory approval of Guardant360 CDx. In December 2021, MHLW granted regulatory approval of Guardant360 CDx as a companion diagnostic for identifying patients with metastatic NSCLC who may benefit from treatment with LUMAKRAS™ (sotorasib). In March 2022, MHLW granted regulatory approval of Guardant360® CDx in patients with advanced solid tumors. MHLW also approved Guardant360 CDx as a companion diagnostic to identify patients with microsatellite instability-high (MSI-High) solid tumors who may benefit from Keytruda® (pembrolizumab) and patients with MSI-High advanced colorectal cancer who may benefit from Opdivo® (nivolumab).
In November 2021, we exercised our call right contained in the joint venture agreement with SoftBank to purchase all of the shares held by SoftBank and its affiliates in consideration for the payment of the aggregate purchase price to be determined based on an independent third-party valuation. Upon our exercise of the call right in November 2021, SoftBank no longer had the option to exercise its put right. In June 2022, we purchased all of the shares held by SoftBank and its affiliates in consideration for a cash payment of the aggregate purchase price of $177.8 million, as determined by an independent valuation firm, which resulted in $99.8 million of fair value adjustments to the noncontrolling interest liability for the nine months ended September 30, 2022. Upon completion of the transaction, we obtained full control over operations throughout the Asia, Middle East and Africa region.
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In December 2020, we signed our first public private partnership agreement with Vall D'Hebron Institute of Oncology, or VHIO, one of Europe’s leading cancer research institutions, and in May 2022, the first blood-based cancer testing services in Europe based on our industry-leading digital sequencing platform became available at the VHIO testing facility in Spain. In October 2021, we signed a partnership agreement with The Royal Marsden NHS Foundation Trust, a premier cancer center within the United Kingdom for patient care, research and teaching of all types of cancer. We expect these partnerships will lead to the establishment of our testing services at the partner laboratories, using our digital sequencing technology, as well as generation of clinical and economic evidence to support commissioning in other areas of Europe.
In June 2022, we signed a strategic partnership agreement with Adicon Holdings Limited, a leading independent clinical laboratory company based in China, to offer our industry-leading comprehensive genomic profiling tests to biopharmaceutical companies conducting clinical studies in China. We expect the partnership to help biopharmaceutical companies bring the next generation of cancer therapies to patients in the region.
The success of our international expansion strategy depends on a number of factors, including the internal and external constraints placed on our international laboratory partners and biopharmaceutical companies in the context of broader global, regional and U.S. economic and geopolitical conditions. For example, deterioration in the bilateral relationship between the United States and China may impact international trade, government spending, regional stability and macroeconomic conditions. The impact of these potential developments, including any resulting sanctions, export controls or other restrictive actions that may be imposed against governmental or other entities in, for example, China, may contribute to disruption of our international partnerships and instability and volatility in the global markets, which in turn could adversely impact our operations and weaken our financial results.
Sales and marketing expense. Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our sales and marketing expense, increase in headcount, and in particular, our various marketing programs around existing and new product introductions.
General and administrative expense. Our financial results have historically, and will likely continue to, fluctuate significantly based upon the impact of our general and administrative expense, and in particular, our stock-based compensation expense. Our equity awards, including market-based and performance-based restricted stock units, are intended to retain and incentivize employees to lead us to sustained, long-term superior financial and operational performance.
COVID-19 Global Pandemic. The global coronavirus 2019, or COVID-19, pandemic has negatively affected, and we expect will continue to negatively affect, our revenue and our clinical studies. For example, our biopharmaceutical customers are facing challenges in recruiting patients and in conducting clinical studies to advance their pipelines, for which our tests could be utilized. In addition, disruptions caused by the pandemic have adversely affected the quantity and quality of certain sequencers, reagents, blood tubes and other similar materials that are critical to our commercial and research and development programs. We currently have a limited amount of stock of these components. Failure in the future to secure sufficient supply of critical components could materially and adversely affect our ability to manufacture or supply marketed products and product candidates or complete our ongoing research and development programs on the timelines previously established, which could materially and adversely affect our business and future prospects. The severity of the impact on our business will depend on a number of factors, including the duration and severity of the pandemic and the impact of any variants of the virus on us, our customers, and our suppliers.
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, 2021, and Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q, for more information.
Components of results of operations
Revenue
We derive our revenue from two sources: (i) precision oncology testing, and (ii) development services and other.
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Precision oncology testing. Precision oncology testing revenue is generated from sales of our tests to clinical and biopharmaceutical customers. In the United States, through September 30, 2022, 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 our Guardant360 CDx, Guardant360 LDT, Guardant360 TissueNext and Guardant Reveal clinical testing performed for qualifying patients. Revenue from clinical tests for patients covered by Medicare represented approximately 46% and 48% of our precision oncology revenue from clinical customers during the three months ended September 30, 2022, and 2021, respectively, and 45% and 44% of our precision oncology revenue from clinical customers during the nine months ended September 30, 2022, and 2021, respectively.
Development services and other. Development services revenue primarily represents services that we provide to biopharmaceutical companies, large medical institutions and international laboratory partners. We collaborate with biopharmaceutical companies in the development and clinical studies of new drugs. As part of these collaborations, we provide services related to regulatory filings to support companion diagnostic device submissions for our test panels. Under these arrangements, we generate revenue from progression of our collaboration efforts, as well as from provision of on-going support. In addition to companion diagnostic development and regulatory approval services, we also provide other development services, including clinical study setup, monitoring and maintenance, testing development and support, GuardantConnect and GuardantINFORM. Other revenue includes amounts derived from licensing our technologies, and kit fulfillment.
Costs and operating expenses
Cost of precision oncology testing. Cost of precision oncology testing generally consists of cost of materials, including inventory write-downs; cost of labor, including employee benefits, bonus, and stock-based compensation; equipment and infrastructure expenses associated with processing test samples, such as sample accessioning, library preparation, sequencing, and quality control analyses; freight; curation of test results for physicians; phlebotomy; and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, rent costs, depreciation of leasehold improvements and information technology costs. Costs associated with performing our tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to the tests. 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 we expect the cost per test to decrease modestly over time due to the efficiencies we may gain as test volume increases, and from automation and other cost reductions.
Cost of development services and other. Cost of development services and other primarily includes costs incurred for the performance of development services and other requested by our customers comprising of labor and material costs including any inventory write-downs. 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 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 studies.
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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, sales incentives, and educational activities and allocated overhead expenses. We expect our sales and marketing expenses to increase in absolute dollars as we expand our sales force, increase our presence within and outside of the United States, and increase our marketing activities to drive further awareness and adoption of our tests.
General and administrative expense. Our general and administrative expenses include costs for our executive, accounting and finance, information technology, legal and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, travel expenses and stock-based compensation, as well as professional services fees such as consulting, audit, tax and legal fees, and general corporate costs and allocated overhead expenses. We expect that our general and administrative expenses will continue to increase as we incur additional costs to support the growth of our business. 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 debt securities.
Interest expense
Interest expense consists primarily of charges relating to amortization of debt issuance costs.
Other income (expense), net
Other income (expense), net consists of foreign currency exchange gains and losses, fair value adjustments of marketable equity securities, impairment of other assets, and non-recurring payments due and received in relation to the settlement of license and patent disputes, net of credit losses. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates.
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Results of operations
The following tables set forth the significant components of our results of operations for the periods presented.
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
(unaudited)
(in thousands)
Revenue:
Precision oncology testing$102,054 $79,272 $278,252 $215,605 
Development services and other15,350 15,507 44,395 49,940 
Total revenue
117,404 94,779 322,647 265,545 
Costs and operating expenses:
Cost of precision oncology testing(1)
39,434 29,665 104,493 78,142 
Cost of development services and other1,062 1,151 4,711 11,348 
Research and development expense(1)
100,017 70,968 267,229 190,200 
Sales and marketing expense(1)
80,370 50,228 218,405 132,282 
General and administrative expense(1)
41,121 50,055 126,068 166,366 
Total costs and operating expenses
262,004 202,067 720,906 578,338 
Loss from operations
(144,600)(107,288)(398,259)(312,793)
Interest income1,754 689 3,919 3,277 
Interest expense(644)(644)(1,933)(1,934)
Other income (expense), net(18,389)(187)(18,059)(720)
Fair value adjustments of noncontrolling interest liability— — (99,785)— 
Loss before provision for income taxes
(161,879)(107,430)(514,117)(312,170)
Provision for income taxes
115 96 537 289 
Net loss
$(161,994)$(107,526)$(514,654)$(312,459)
(1)Amounts include stock-based compensation expense as follows:
Three Months Ended
September 30,
Nine Months Ended
September 30,
2022202120222021
(unaudited)
(in thousands)
Cost of precision oncology testing$1,316 $676 $3,695 $2,316 
Research and development expense7,044 4,416 18,503 13,280 
Sales and marketing expense6,466 3,991 17,978 10,309 
General and administrative expense5,813 25,933 30,806 98,687 
Total stock-based compensation expense
$20,639 $35,016 $70,982 $124,592 
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Comparison of the Three Months Ended September 30, 2022 and 2021
Revenue
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Precision oncology testing
$102,054 $79,272 $22,782 29 %
Development services and other
15,350 15,507 (157)(1)%
Total revenue
$117,404 $94,779 $22,625 24 %
Total revenue was $117.4 million for the three months ended September 30, 2022, compared to $94.8 million for the three months ended September 30, 2021, an increase of $22.6 million, or 24%.
Precision oncology testing revenue increased to $102.1 million for the three months ended September 30, 2022, from $79.3 million for the three months ended September 30, 2021, an increase of $22.8 million, or 29%.
Precision oncology revenue from tests for clinical customers was $77.8 million for the three months ended September 30, 2022, up 27% from $61.3 million for the three months ended September 30, 2021. This increase in clinical testing revenue was driven primarily by an increase in sample volume related to our Guardant360 CDx and Guardant360 LDT tests and revenue from products launched in 2021, including Guardant Reveal, Guardant360 Response and Guardant 360 TissueNext. Total tests for clinical customers increased to approximately 32,400 for the three months ended September 30, 2022, from 22,806 for the three months ended September 30, 2021.
Precision oncology revenue from tests for biopharmaceutical customers was $24.2 million for the three months ended September 30, 2022, and $17.9 million for the three months ended September 30, 2021, respectively. This increase in revenue was primarily due to an increase in sample volume. Total tests for biopharmaceutical customers increased to approximately 6,750 for the three months ended September 30, 2022, from 4,839 for the three months ended September 30, 2021, primarily due to an increase in the number of biopharmaceutical customers and their contracted projects.
Development services and other revenue decreased to $15.4 million for the three months ended September 30, 2022, from $15.5 million for the three months ended September 30, 2021. This decrease in development services and other revenue was primarily due to the change in collaboration projects with biopharmaceutical customers for companion diagnostic development and regulatory approval services, partially offset by revenues earned from licensing our technologies during the three months ended September 30, 2022.
Cost of Revenue
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Cost of precision oncology testing$39,434 $29,665 $9,769 33 %
Cost of development services and other1,062 1,151 (89)(8)%
Total cost of revenue $40,496 $30,816 $9,680 31 %
Total cost of revenue was $40.5 million for the three months ended September 30, 2022, compared to $30.8 million for the three months ended September 30, 2021, an increase of $9.7 million, or 31%.
Cost of precision oncology testing was $39.4 million for the three months ended September 30, 2022, compared to $29.7 million for the three months ended September 30, 2021, an increase of $9.8 million, or 33%. This increase in cost of precision oncology testing was primarily attributable to an increase in sample volumes, resulting in a $5.5 million increase in material costs, a $2.5 million increase in other costs, including costs related to kits, freight and curation of test results for physicians, and a $1.8 million increase in production labor and overhead costs.
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Cost of development services and other was $1.1 million for the three months ended September 30, 2022, compared to $1.2 million for the three months ended September 30, 2021, a decrease of $0.1 million, or 8%. This decrease in cost of development services and other was primarily due to a decrease in labor and material costs, related to companion diagnostic development and regulatory approval service contracts, partially offset by costs associated with licensing our technologies during the three months ended September 30, 2022.
Operating Expenses
Research and development expense
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Research and development
$100,017 $70,968 $29,049 41 %
Research and development expenses were $100.0 million for the three months ended September 30, 2022, compared to $71.0 million for the three months ended September 30, 2021, an increase of $29.0 million, or 41%. This increase was primarily related to continued investment in the development of our technologies and products, and our clinical studies, resulting in an increase of $13.1 million in outside service fees, an increase of $10.8 million in personnel-related costs for employees in our research and development group, including a $2.6 million increase in stock-based compensation, and an increase of $9.3 million related to allocated facility and information technology infrastructure costs, partially offset by a decrease of $5.7 million in material costs.
Sales and marketing expense
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Sales and marketing
$80,370 $50,228 $30,142 60 %
Selling and marketing expenses were $80.4 million for the three months ended September 30, 2022, compared to $50.2 million for the three months ended September 30, 2021, an increase of $30.1 million, or 60%. This increase was primarily related to commercial infrastructure buildout and marketing activities to support existing products and new product launch, resulting in an increase of $18.5 million in personnel-related costs, including a $2.5 million increase in stock-based compensation, an increase of $4.7 million related to marketing activities, an increase of $3.6 million related to allocated facilities and information technology infrastructure costs, and an increase of $3.3 million in office administrative costs.
General and administrative expense
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
General and administrative
$41,121 $50,055 $(8,934)(18)%
General and administrative expenses were $41.1 million for the three months ended September 30, 2022, compared to $50.1 million for the three months ended September 30, 2021, a decrease of $8.9 million, or 18%. This decrease was primarily due to a decrease of $20.1 million in stock-based compensation, as tranche 2 and tranche 3 of the market-based restricted stock units issued to our Co-Chief Executive Officers were fully expensed as of December 31, 2021 and June 30, 2022, respectively, partially offset by an increase of $5.5 million in professional service expenses related to outside legal, accounting, consulting and IT services, and an increase of $2.9 million in personnel cost in line with our business expansion.
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Interest income
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Interest income
$1,754 $689 $1,065 155 %
Interest income was $1.8 million for the three months ended September 30, 2022, compared to $0.7 million for the three months ended September 30, 2021, an increase of $1.1 million, or 155%. This increase was primarily due to an increase in interest rate as the U.S. Federal Reserve increased the risk-free interest rate, partially offset by a decrease in cash and cash equivalents and marketable debt securities balances.
Interest expense
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Interest expense
$(644)$(644)$— — %
Interest expense was primarily attributable to amortization of debt issuance costs related to our convertible senior notes issued in November 2020, for the three months ended September 30, 2022, and 2021.
Other income (expense), net
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Other income (expense), net
$(18,389)$(187)$(18,202)*
*    Not meaningful
Other income (expense), net was a $18.4 million expense for the three months ended September 30, 2022, compared to $0.2 million for the three months ended September 30, 2021, an increase of $18.2 million. This increase was primarily attributable to $13.2 million of unrealized loss recorded for our marketable equity securities, and $5.3 million of impairment for the rights to purchase one of our non-marketable security investees, during the three months ended September 30, 2022.
Provision for income taxes
Three Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Provision for income taxes
$115 $96 $19 20 %
Provision for income taxes was immaterial for the three months ended September 30, 2022, and 2021.
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Comparison of the Nine Months Ended September 30, 2022 and 2021
Revenue
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Precision oncology testing
$278,252 $215,605 $62,647 29 %
Development services and other
44,395 49,940 (5,545)(11)%
Total revenue
$322,647 $265,545 $57,102 22 %
Total revenue was $322.6 million for the nine months ended September 30, 2022, compared to $265.5 million for the nine months ended September 30, 2021, an increase of $57.1 million, or 22%.
Precision oncology testing revenue increased to $278.3 million for the nine months ended September 30, 2022 from $215.6 million for the nine months ended September 30, 2021, an increase of $62.6 million, or 29%. This increase in precision oncology testing revenue was primarily due to an increase in sample volume.
Precision oncology revenue from tests for clinical customers increased to $214.3 million for the nine months ended September 30, 2022, from $172.2 million for the nine months ended September 30, 2021. This increase in clinical testing revenue was driven primarily by an increase in sample volume related to our Guardant360 CDx and Guardant360 LDT tests and revenue from products launched in 2021, including Guardant Reveal, Guardant360 Response and Guardant 360 TissueNext. Tests for clinical customers increased to approximately 88,800 for the nine months ended September 30, 2022, from 62,026 for the nine months ended September 30, 2021.
Precision oncology revenue from tests for biopharmaceutical customers was $63.9 million in the nine months ended September 30, 2022, and $43.4 million in the nine months ended September 30, 2021, respectively. This increase in revenue was primarily due to an increase in sample volume. Tests for biopharmaceutical customers increased to approximately 17,850 for the nine months ended September 30, 2022, from 12,014 for the nine months ended September 30, 2021, primarily due to an increase in the number of biopharmaceutical customers and their contracted projects.
Development services and other revenue decreased to $44.4 million for the nine months ended September 30, 2022, from $49.9 million for the nine months ended September 30, 2021. This decrease in development services and other revenue was primarily due to the change in collaboration projects with biopharmaceutical customers for companion diagnostic development and regulatory approval services, and discontinuation of our Guardant-19 tests in August 2021, partially offset by revenues earned from licensing our technologies, and providing data services during the nine months ended September 30, 2022.

Cost of Revenue
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(dollars in thousands)
Cost of precision oncology testing$104,493 $78,142 $26,351 34 %
Cost of development services and other4,711 11,348 (6,637)(58)%
Total cost of revenue$109,204 $89,490 $19,714 22 %
Total cost of revenue was $109.2 million for the nine months ended September 30, 2022, compared to $89.5 million for the nine months ended September 30, 2021, an increase of $19.7 million, or 22%.
Cost of precision oncology testing was $104.5 million for the nine months ended September 30, 2022, compared to $78.1 million for the nine months ended September 30, 2021, an increase of $26.4 million, or 34%. This increase in cost of precision oncology testing was primarily attributable to an increase in sample volumes, resulting in a $11.7 million increase in material costs, a $7.9 million increase in production labor and overhead costs, and a $6.9 million increase in other costs, including costs related to kits, freight and curation of test results for physicians.
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Cost of development services and other was $4.7 million for the nine months ended September 30, 2022, compared to $11.3 million for the nine months ended September 30, 2021, a decrease of $6.6 million, or 58%. This decrease in cost of development services and other was primarily due to a decrease in labor and material costs, related to discontinuation of our Guardant-19 tests in August 2021, and the change in companion diagnostic development and regulatory approval service contracts, partially offset by costs associated with licensing our technologies during the nine months ended September 30, 2022.
Operating Expenses
Research and development expense
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Research and development
$267,229 $190,200 $77,029 40 %
Research and development expenses were $267.2 million for the nine months ended September 30, 2022, compared to $190.2 million for the nine months ended September 30, 2021, an increase of $77.0 million, or 40%. This increase was primarily related to continued investment in the development of our technologies and products, and our clinical studies, resulting in an increase of $29.8 million in personnel-related costs for employees in our research and development group, including a $5.2 million increase in stock-based compensation, an increase of $27.8 million in outside service fees, an increase of $20.2 million related to allocated facility and information technology infrastructure costs, and an increase of $2.7 million in post-acquisition related contingent consideration, partially offset by a decrease of $8.1 million in material costs.
Sales and marketing expense
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Sales and marketing
$218,405 $132,282 $86,123 65 %
Selling and marketing expenses were $218.4 million for the nine months ended September 30, 2022, compared to $132.3 million for the nine months ended September 30, 2021, an increase of $86.1 million, or 65%. This increase was primarily related to commercial infrastructure buildout and marketing activities to support existing products and new product launch, resulting in an increase of $60.0 million in personnel-related costs, including a $7.7 million increase in stock-based compensation, an increase of $8.9 million related to marketing activities, an increase of $8.5 million in office administrative costs, and an increase of $8.2 million related to allocated facility and information technology infrastructure costs.
General and administrative expense
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
General and administrative
$126,068 $166,366 $(40,298)(24)%
General and administrative expenses were $126.1 million for the nine months ended September 30, 2022, compared to $166.4 million for the nine months ended September 30, 2021, a decrease of $40.3 million, or 24%. This decrease was primarily due to a decrease of $67.9 million in stock-based compensation, as tranche 1, tranche 2 and tranche 3 of the market-based restricted stock units issued to our Co-Chief Executive Officers were fully expensed as of March 31, 2021, December 31, 2021 and June 30, 2022, respectively, partially offset by an increase of $12.8 million in professional service expenses related to outside legal, accounting, consulting and IT services, an increase of $4.8 million related to allocated facilities and information technology infrastructure costs, an increase of $4.5 million in personnel cost in line with our business expansion, an increase of $3.5 million in office administrative costs, and an increase of $2.4 million in acquisition related contingent consideration.
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Interest income
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Interest income
$3,919 $3,277 $642 20 %
Interest income was $3.9 million for the nine months ended September 30, 2022, compared to $3.3 million for the nine months ended September 30, 2021, an increase of $0.6 million, or 20%. This increase was primarily due to an increase in interest rate as the U.S. Federal Reserve increased the risk-free interest rate, partially offset by a decrease in cash and cash equivalents and marketable debt securities balances.
Interest expense
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Interest expense
$(1,933)$(1,934)$— %
Interest expense was primarily attributable to amortization of debt issuance costs related to our convertible senior notes issued in November 2020, for the nine months ended September 30, 2022 and 2021.
Other income (expense), net
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Other income (expense), net
$(18,059)$(720)$(17,339)*
*    Not meaningful
Other income (expense), net was a $18.1 million expense for the nine months ended September 30, 2022, compared to $0.7 million for the nine months ended September 30, 2021, an increase of $17.3 million. This increase was primarily attributable to $13.2 million of unrealized loss recorded for our marketable equity securities, and $5.3 million of impairment for the the rights to purchase one of our non-marketable security investees, during the nine months ended September 30, 2022.
Fair value adjustments of noncontrolling interest liability
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Fair value adjustments of noncontrolling interest liability
$(99,785)$— $(99,785)*
*    Not meaningful
Fair value adjustments of noncontrolling interest liability for the nine months ended September 30, 2022 was made as a result of the Joint Venture Acquisition completed in June 2022.
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Provision for income taxes
Nine Months Ended September 30,
Change
20222021
$
%
(unaudited)
(in thousands)
Provision for income taxes
$537 $289 $248 86 %
Provision for income taxes was immaterial for the nine months ended September 30, 2022, and 2021.
Liquidity and capital resources
We have incurred losses and negative cash flows from operations since our inception, and as of September 30, 2022, we had an accumulated deficit of $1.5 billion. We expect to incur additional operating losses in the near future and our operating expenses will increase as we continue to invest in clinical studies and develop new products, expand our sales organization, and increase our marketing efforts to drive market adoption of our tests. As demand for our tests are expected to continue to increase from physicians and biopharmaceutical companies, we anticipate that our capital expenditure requirements could also increase if we require additional laboratory capacity.
We have funded our operations to date principally from the sale of stock, convertible debt and through revenue from precision oncology testing and development services and other. As of September 30, 2022, we had cash and cash equivalents of $158.3 million and marketable debt securities of $1.0 billion. Cash in excess of immediate requirements is invested in accordance with our investment policy, primarily with a view to provide liquidity while ensuring capital preservation. Additionally, we have investments held in marketable debt securities consisting of United States treasury securities that can be immediately liquid.
Based on our current business plan, we believe our current cash, cash equivalents and marketable debt securities and anticipated cash flows from operations, will be sufficient to meet our anticipated cash requirements for more than 12 months from the date of this Quarterly Report on Form 10-Q. 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 and other is expected to grow long-term, we expect our accounts receivable and inventory balances to increase. Any increase in accounts receivable and inventory may not be completely offset by increases in accounts payable and accrued expenses, which could result in greater working capital requirements.
If our available cash, cash equivalents and marketable debt securities and anticipated cash flows from operations are insufficient to satisfy our liquidity requirements including because of lower demand for our products as a result of lower than currently expected rates of reimbursement from our customers or other risks described in this Quarterly Report on Form 10-Q and in our Form 10-K for the year ended December 31, 2021, 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,
20222021
(unaudited)
(in thousands)
Net cash used in operating activities$(218,714)$(132,029)
Net cash provided by investing activities$79,189 $203,542 
Net cash used in financing activities$(191,411)$(70,604)
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Operating activities
Cash used in operating activities during the nine months ended September 30, 2022, was $218.7 million, which resulted from a net loss of $514.7 million, partially offset by non-cash charges of $246.0 million and net change in our operating assets and liabilities of $50.0 million. Non-cash charges primarily consisted of $99.8 million of fair value adjustments of noncontrolling interest liability in connection with the Joint Venture Acquisition, $71.0 million of stock-based compensation, $25.8 million of depreciation and amortization, $21.4 million of non-cash operating lease costs, $13.2 million of unrealized losses on marketable equity securities, $5.3 million of impairment on the rights to purchase one of our non-marketable security investees, $4.2 million of revaluation adjustments to contingent consideration, and $3.4 million of amortization of premium on marketable debt investments. The net change in our operating assets and liabilities was primarily the result of a $28.4 million decrease in prepaid expenses and other current assets, net, primarily driven by a $25.0 million one-time payment pursuant to a settlement and license agreement entered into in December 2021, a $17.8 million increase in accounts payable primarily due to increase in purchases of goods and services, a $14.9 million increase in accrued compensation due to increased personnel, a $14.0 million increase in accrued expense and other liabilities, a $11.4 million decrease in accounts receivable, a $4.8 million decrease in other assets, and a $4.1 million increase in deferred revenue primarily due to upfront payments from international laboratory partners, partially offset by a $32.4 million increase in inventory, net, due to forecasted higher testing volumes, and increased inventory level to offset potential disruption in supply chain, and a $13.0 million payment of operating lease liabilities net of receipt of tenant improvement allowance.
Cash used in operating activities during the nine months ended September 30, 2021 was $132.0 million, which resulted from a net loss of $312.5 million, partially offset by non-cash charges of $171.9 million and net change in our operating assets and liabilities of $8.6 million. Non-cash charges primarily consisted of $124.6 million of stock-based compensation, $17.8 million of non-cash operating lease costs, $16.2 million of depreciation and amortization, and $9.5 million of amortization of premium on marketable debt investments. The net change in our operating assets and liabilities was primarily the result of a $10.6 million increase in accrued compensation due to increased personnel, a $10.5 million increase in accrued expenses and other liabilities, and a $6.9 million increase in accounts payable, partially offset by a $7.4 million increase in accounts receivable, net, a $5.8 million increase in prepaid expenses and other current assets, net, a $3.2 million increase in other assets, net, and a $2.0 million increase in inventory, net, due to higher testing volumes.
Investing activities
Cash provided by investing activities during the nine months ended September 30, 2022, was $79.2 million, which resulted primarily from maturities of marketable debt securities of $398.0 million, partially offset by purchases of marketable debt securities of $238.6 million, purchases of property and equipment of $67.5 million, and purchase of non-marketable equity securities and other related investments of $12.8 million.
Cash provided by investing activities during the nine months ended September 30, 2021, was $203.5 million, which resulted primarily from maturities of marketable debt securities of $627.1 million, partially offset by purchases of marketable debt securities of $334.1 million, purchases of property and equipment of $50.4 million, and purchase of non-marketable equity securities and other related investments of $39.1 million.
Financing activities
Cash used in financing activities during the nine months ended September 30, 2022, was $191.4 million, which was primarily attributable to consideration payment for the Joint Venture Acquisition of $177.8 million, payment for the tender offer in connection with the Joint Venture Acquisition and acquisition related costs of $14.2 million, and taxes paid related to net share settlement of restricted stock units of $6.5 million, partially offset by proceeds from issuances of common stock under our employee stock purchase plan of $5.7 million, and proceeds from exercise of stock options of $2.5 million.
Cash used in financing activities during the nine months ended September 30, 2021, was $70.6 million, which was primarily attributable to taxes paid related to net share settlement of restricted stock units of $82.2 million, partially offset by proceeds from proceeds from exercise of stock options of $7.1 million, and proceeds from issuances of common stock under our employee stock purchase plan of $5.4 million.
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Critical accounting policies and estimates
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP. Our preparation of these consolidated financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures at the date of the consolidated financial statements, as well as revenue and expenses recorded during the reporting periods. 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.
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 and in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. During the three and nine months ended September 30, 2022, there were no material changes to our critical accounting policies from those discussed previously.
Recent accounting pronouncements
Not applicable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates.
Interest rate risk
We are exposed to market risk for changes in interest rates related primarily to our cash and cash equivalents, marketable debt securities and our indebtedness. As of September 30, 2022, we had cash and cash equivalents of $158.3 million held primarily in cash deposits and money market funds. Our marketable debt securities are held in U.S. government debt securities. As of September 30, 2022, we had short-term marketable debt securities of $799.7 million and long-term marketable debt securities of $156.7 million. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States. As of September 30, 2022, a hypothetical 100 basis point increase in interest rates would have resulted in an approximate $6.2 million decline of the fair value of our available-for-sale securities and a hypothetical 100 basis point decrease in interest rates would have resulted in an approximate $6.2 million increase of the fair value of our available-for-sale securities. This estimate is based on a sensitivity model that measures market value changes when changes in interest rates occur.
Foreign currency risk
The majority of our revenue is generated in the United States. Through September 30, 2022, we have generated an insignificant amount of revenues denominated in foreign currencies. As we expand our presence in the international market, our results of operations and cash flows are expected to increasingly be subject to fluctuations due to changes in foreign currency exchange rates and may be adversely affected in the future due to changes in foreign exchange rates. As of September 30, 2022, the effect of a hypothetical 10% change in foreign currency exchange rates would not be material to our financial condition or results of operations. To date, we have not entered into any hedging arrangements with respect to foreign currency risk. As our international operations grow, we will continue to reassess our approach