Document
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_____________________
FORM 10-Q
_____________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                        to                        
Commission File Number: 001-38683
_____________________
GUARDANT HEALTH, INC.
(Exact Name of Registrant as Specified in its Charter)
_____________________
Delaware
 
45-4139254
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
505 Penobscot Dr.
Redwood City, California
 
94063
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code: (855) 698-8887
_______________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x    No  o
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  x    No  o
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 filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
x (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
Emerging growth company
x
 
 
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

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




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

As of July 31, 2019, the registrant had 92,965,751 shares of common stock, $0.00001 par value per share, outstanding.
 




GUARDANT HEALTH, INC.
FORM 10-Q
TABLE OF CONTENTS
 
 
 
 
Page
Unaudited Condensed Consolidated Financial Statements
 
Condensed Consolidated Balance Sheets
 
Condensed Consolidated Statements of Operations
 
Condensed Consolidated Statements of Comprehensive Loss
 
Condensed Consolidated Statements of Noncontrolling Interest and Stockholders’ Equity
 
Condensed Consolidated Statements of Cash Flows
 
Notes to the Unaudited Condensed Consolidated Financial Statements
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
 
 
 
 
 
 
 
 
 

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 about our business, our results of operations, the industry in which we operate and the beliefs and assumptions of our management. 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 are only predictions 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, 2018, 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)
 
June 30, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
174,653

 
$
140,544

Short-term marketable securities
370,974

 
278,417

Accounts receivable
40,363

 
35,690

Inventory
14,176

 
9,136

Prepaid expenses and other current assets
4,082

 
5,204

Total current assets
604,248

 
468,991

Long-term marketable securities
277,301

 
77,563

Property and equipment, net
34,811

 
31,003

Intangible assets
8,987

 

Goodwill
2,935

 

Capitalized license fees
7,313

 
7,800

Deferred tax assets
1,235

 

Other assets
3,159

 
2,046

Total Assets(1)
$
939,989

 
$
587,403

LIABILITIES, REDEEMABLE NONCONTROLLING INTEREST AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
15,700

 
$
10,642

Accrued compensation
13,687

 
12,986

Accrued expenses
11,092

 
7,081

Capital lease, current
74

 
97

Deferred revenue
16,496

 
16,138

Total current liabilities
57,049

 
46,944

Capital lease, net of current portion
80

 
119

Deferred rent, net of current portion
10,912

 
7,844

Obligation related to royalty
7,136

 
7,338

Deferred tax liabilities
1,235

 

Other long-term liabilities
1,303

 
206

Total Liabilities(1)
77,715

 
62,451

Commitments and contingencies (Note 8)


 


Redeemable noncontrolling interest
46,800

 
41,800





Stockholders’ equity:
 
 
 
Common stock, par value of $0.00001 per share; 350,000,000 shares authorized as of June 30, 2019 and December 31, 2018; 92,806,252 and 85,832,454 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
1

 
1

Additional paid-in capital
1,128,938

 
764,033

Accumulated other comprehensive loss
1,344

 
(83
)
Accumulated deficit
(314,809
)
 
(280,799
)
Total Stockholders’ Equity
815,474

 
483,152

Total Liabilities, Redeemable Noncontrolling Interest and Stockholders’ Equity
$
939,989

 
$
587,403

(1) As of June 30, 2019 and December 31, 2018, includes $45.1 million and $48.3 million of assets, respectively, that can be used only to settle obligations of the consolidated variable interest entity (“VIE”) and VIE’s subsidiaries, and $984,000 and $1.2 million of liabilities of the consolidated VIE and VIE’s subsidiaries, respectively, for which their creditors do not have recourse to the general credit of the Company. See Note 3.
The accompanying notes are an integral part of these condensed consolidated financial statements.

5

Table of Contents

Guardant Health, Inc.
Condensed Consolidated Statements of Operations (unaudited)
(in thousands, except per share data)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
Precision oncology testing
 
$
42,064

 
$
17,822

 
$
70,901

 
$
32,013

Development services
 
11,911

 
1,560

 
19,729

 
4,061

Total revenue
 
53,975

 
19,382

 
90,630

 
36,074

Costs and operating expenses:
 
 
 
 
 
 
 
 
Cost of precision oncology testing
 
14,650

 
9,506

 
25,673

 
17,551

Cost of development services
 
2,183

 
453

 
4,695

 
1,661

Research and development expense
 
19,532

 
11,554

 
35,848

 
19,809

Sales and marketing expense
 
19,439

 
11,575

 
37,246

 
22,887

General and administrative expense
 
13,439

 
8,997

 
26,100

 
15,516

Total costs and operating expenses
 
69,243

 
42,085

 
129,562

 
77,424

Loss from operations
 
(15,268
)
 
(22,703
)
 
(38,932
)
 
(41,350
)
Interest income
 
3,099

 
989
 
5,584

 
1,974

Interest expense
 
(287
)
 
(317)
 
(580
)
 
(648
)
Other income (expense), net
 
(51
)
 
395
 
96

 
4,544

Loss before provision for income taxes
 
(12,507
)
 
(21,636
)
 
(33,832
)
 
(35,480
)
Provision for (benefit from) income taxes
 
(1,207
)
 
3

 
(1,181
)
 
3

Net loss
 
(11,300
)
 
(21,639
)
 
(32,651
)
 
(35,483
)
Fair value adjustment of redeemable noncontrolling interest
 
(300
)
 

 
(5,000
)
 

Net loss attributable to Guardant Health, Inc. common stockholders
 
$
(11,600
)
 
$
(21,639
)
 
$
(37,651
)
 
$
(35,483
)
Net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
 
$
(0.13
)
 
$
(1.75
)
 
$
(0.43
)
 
$
(2.92
)
Weighted-average shares used in computing net loss per share attributable to Guardant Health, Inc. common stockholders, basic and diluted
 
89,036

 
12,388

 
87,494

 
12,155

The accompanying notes are an integral part of these condensed consolidated financial statements.

6

Table of Contents

Guardant Health, Inc.
Condensed Consolidated Statements of Comprehensive Loss (unaudited)
(in thousands)
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
Net loss
 
$
(11,300
)
 
$
(21,639
)
 
$
(32,651
)
 
$
(35,483
)
Other comprehensive income (loss), net of tax impact:
 
 
 
 
 
 
 
 
Unrealized gain (loss) on available-for-sale securities
 
852

 
138

 
1,337

 
(160
)
Foreign currency translation adjustments
 
159

 

 
90

 

Other comprehensive income (loss)
 
1,011

 
138

 
1,427

 
(160
)
Comprehensive loss
 
$
(10,289
)
 
$
(21,501
)
 
$
(31,224
)
 
$
(35,643
)
Comprehensive loss attributable to redeemable noncontrolling interest
 
(300
)
 

 
(5,000
)
 

Comprehensive loss attributable to Guardant Health, Inc.
 
$
(10,589
)
 
$
(21,501
)
 
$
(36,224
)
 
$
(35,643
)
The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Guardant Health, Inc.

Condensed Consolidated Statements of Redeemable Noncontrolling Interest and Stockholders’ Equity (unaudited)
(in thousands, except share data)
 
Redeemable Noncontrolling Interest

 
Common Stock 
 
 
Additional
Paid-in
Capital

 
Accumulated
Other
Comprehensive Loss

 
 
Accumulated
Deficit

 
Total Stockholders’ Equity

 
 
Shares

 
Amount

 
Balance as of December 31, 2018
$
41,800

 
85,832,454

 
$
1

 
$
764,033

 
$
(83
)
 
$
(280,799
)
 
$
483,152

Cumulative effect adjustment for Topic 606 adoption

 

 

 

 

 
4,907

 
4,907

Cumulative effect adjustment for ASU 2018-07 adoption

 

 

 
1,266

 

 
(1,266
)
 

Issuance of common stock upon exercise of stock options

 
146,318

 

 
538

 

 

 
538

Vesting of common stock exercised early

 

 

 
56

 

 

 
56

Common stock issued under employee stock purchase plan

 
119,702

 

 
1,933

 

 

 
1,933

Stock-based compensation

 

 

 
3,183

 

 

 
3,183

Fair value adjustment of redeemable noncontrolling interest
4,700

 

 

 

 

 
(4,700
)
 
(4,700
)
Other comprehensive gain, net of tax impact

 

 

 

 
416

 

 
416

Net loss

 

 

 

 

 
(21,351
)
 
(21,351
)
Balance as of March 31, 2019
46,500

 
86,098.474

 
1

 
771,009

 
333

 
(303,209
)
 
468,134

Issuance of common stock upon follow-on offering, net of offering costs of $723

 
5,175,000

 

 
349,709

 

 

 
349,709

Issuance of common stock upon exercise of stock options

 
1,531,672

 

 
4,992

 

 

 
4,992

Vesting of restricted stock units

 
1,106

 

 

 

 

 

Vesting of common stock exercised early

 

 

 
13

 

 

 
13

Stock-based compensation

 

 

 
3,215

 

 

 
3,215

Fair value adjustment of redeemable noncontrolling interest
300

 

 

 

 

 
(300
)
 
(300
)
Other comprehensive gain, net of tax impact

 

 

 

 
1,011

 

 
1,011

Net loss

 

 

 

 

 
(11,300
)
 
(11,300
)
Balance as of June 30, 2019
$
46,800

 
92,806,252

 
$
1

 
$
1,128,938

 
$
1,344

 
$
(314,809
)
 
$
815,474

 
 
 
 
 
 
 
 
 
 
 
 
 
 


8


 
Redeemable Noncontrolling Interest

 
Convertible
Preferred Stock 
 
 
Common Stock 
 
 
Additional
Paid-in
Capital

 
Accumulated
Other
Comprehensive Loss

 
 
Accumulated
Deficit

 
Total Stockholders’ Equity

 
 
Shares

 
Amount

 
Shares

 
Amount

 
Balance as of December 31, 2017
$

 
78,627,369

 
$
499,974

 
11,896,882

 
$

 
$
4,900

 
$
(532
)
 
$
(195,736
)
 
$
308,606

Issuance of common stock upon exercise of stock options

 

 

 
421,264

 

 
1,103

 

 

 
1,103

Issuance of common stock upon early exercise of stock options

 

 

 
44,268

 

 

 

 

 

Issuance of common stock upon exercise of warrants

 

 

 
31,713

 

 
4

 

 

 
4

Stock-based compensation

 

 

 

 

 
1,277

 

 

 
1,277

Other comprehensive loss, net of tax impact

 

 

 

 

 

 
(298
)
 

 
(298
)
Net loss

 

 

 

 

 

 

 
(13,844
)
 
(13,844
)
Balance as of March 31, 2018

 
78,627,369

 
499,974

 
12,394,127

 

 
7,284

 
(830
)
 
(209,580
)
 
296,848

Issuance of common stock upon exercise of stock options

 

 

 
148,230

 

 
424

 

 

 
424

Issuance of common stock upon exercise of warrants

 

 

 
11,922

 

 
2

 

 

 
2

Repurchase of common stock

 

 

 
(31,681
)
 

 
(172
)
 

 

 
(172
)
Stock-based compensation

 

 

 

 

 
1,180

 

 

 
1,180

Issuance of equity interests in redeemable noncontrolling interest
41,000

 

 

 

 

 

 

 

 
 
Other comprehensive loss, net of tax impact

 

 

 

 

 

 
138

 

 
138

Net loss

 

 

 

 

 

 

 
(21,639
)
 
(21,639
)
Balance as of June 30, 2018
$
41,000

 
78,627,369

 
$
499,974

 
12,522,598

 
$

 
$
8,718

 
$
(692
)
 
$
(231,219
)
 
$
276,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

9

Table of Contents

Guardant Health, Inc.
Condensed Consolidated Statements of Cash Flows (unaudited)
(in thousands)
 
Six Months Ended June 30,
 
2019
 
2018
 
 
 
 
OPERATING ACTIVITIES:
 
Net loss
$
(32,651
)
 
$
(35,483
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
5,011

 
2,964

Unrealized translation gains on obligation related to royalty
(51
)
 
(205
)
Non-cash stock-based compensation
6,397

 
2,457

Non-cash interest expense

 
(7
)
Amortization of discounts on marketable securities
(1,276
)
 
150

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
234

 
2,224

Inventory
(5,040
)
 
559

Prepaid expenses and other current assets
1,122

 
(1,496
)
Deferred tax assets
(1,235
)
 

Other assets
(1,129
)
 
255

Accounts payable
3,413

 
823

Accrued compensation
701

 
51

Accrued expenses and other liabilities
2,939

 
2,482

Deferred rent
3,068

 
866

Deferred revenue
358

 
760

Net cash used in operating activities
(18,139
)
 
(23,600
)
 
 
 
 
INVESTING ACTIVITIES:
 
 
 
Purchase of marketable securities
(418,841
)
 
(44,070
)
Maturity of marketable securities
129,160

 
75,625

Business acquisitions, net of cash acquired
(9,765
)
 

Purchase of property and equipment
(5,752
)
 
(11,360
)
Net cash (used in) provided by investing activities
(305,198
)
 
20,195

 
 
 
 
FINANCING ACTIVITIES:
 
 
 
Payments made on royalty obligations
(151
)
 

Payments made on capital lease obligations
(62
)
 
(399
)
Proceeds from issuance of common stock upon exercise of stock options
5,530

 
1,734

Proceeds from issuance of common stock upon the exercise of warrants

 
6

Repurchase of common stock

 
(172
)
Proceeds from issuances of common stock under employee stock purchase plan
1,933

 

Proceeds from follow-on offering, net of underwriting discounts and commissions
350,432

 

Payment of offering costs related to initial public offering and follow-on offering
(326
)
 
(168
)
Net proceeds from issuance of equity interests in redeemable noncontrolling interest

 
41,000

Net cash provided by financing activities
357,356

 
42,001


10

Table of Contents

Net effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash
90

 

Net increase in cash, cash equivalents and restricted cash
34,109

 
38,596

Cash, cash equivalents and restricted cash - Beginning of period
140,544

 
72,596

Cash, cash equivalents and restricted cash - End of period
$
174,653

 
$
111,192

Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid for interest
$
580

 
$
51

Supplemental Disclosures of Noncash Investing and Financing Activities:
 
 
 
Purchases of property and equipment included in accounts payable and accrued expenses
$
3,874

 
$
4,986

Deferred offering costs included in accounts payable and accrued expenses
$
485

 
$
1,794

Initial fair value of contingent consideration at acquisition date
$
1,135

 
$

The accompanying notes are an integral part of these condensed consolidated financial statements.

11

Table of Contents

 Guardant Health, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements
1.
Description of Business
Guardant Health, Inc. (the “Company”) is a leading precision oncology company focused on helping conquer cancer globally through use of its proprietary blood tests, vast data sets and advanced analytics. The key to conquering cancer is unprecedented access to its molecular information throughout all stages of the disease, which it enables by a routine blood draw, or liquid biopsy. The Guardant Health Oncology Platform is designed to leverage the Company’s capabilities in technology, clinical development, regulatory, reimbursement and commercial adoption to improve patient clinical outcomes, lower healthcare costs and accelerate biopharmaceutical drug development. In pursuit of its goal to manage cancer across all stages of the disease, it has launched its Guardant360 and GuardantOMNI liquid biopsy-based tests for advanced stage cancer patients, and is developing tests from its LUNAR early detection program to address the needs of early stage cancer patients with adjuvant treatment selection, cancer survivors with surveillance and asymptomatic individuals with screening.
The Company was incorporated in Delaware in December 2011 and is headquartered in Redwood City, California. In April 2018, the Company established Guardant Health AMEA, Inc. (the “Joint Venture”) in the United States with an entity affiliated with SoftBank. Under the terms of the joint venture agreement, the Company held a 50% ownership interest in the Joint Venture. As of June 30, 2019, the Joint Venture has subsidiaries in Singapore and Japan (see Note 3).
2.
Summary of Significant Accounting Policies
Basis of Presentation
The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The accompanying condensed consolidated financial statements include the accounts of Guardant Health, Inc. and its consolidated Joint Venture. Other stockholders’ interests in the Joint Venture are shown in the condensed consolidated financial statements as redeemable noncontrolling interest. All significant intercompany balances and transactions have been eliminated in consolidation.
The Company believes that its existing cash and cash equivalents and marketable securities as of June 30, 2019 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, standalone selling price allocation included in contracts with multiple performance obligations, estimation of potential credit losses on accounts receivable, the valuation of inventory, the fair value of assets acquired and liabilities assumed for business combinations, goodwill and identifiable intangible assets, stock-based compensation, contingencies, certain inputs into the provision for income taxes, including related reserves, valuation of redeemable noncontrolling interest, among others. These estimates generally involve complex issues and require judgments, involve the analysis of historical results and prediction of future trends, can require extended periods of time to resolve and are subject to change from period to period. Actual results may differ materially from management’s estimates.
Unaudited Interim Condensed Financial Statements
The accompanying condensed consolidated balance sheet as of June 30, 2019, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018, and the related interim condensed consolidated disclosures are unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X of the Securities Act of 1933, as amended (the “Securities Act”). Accordingly, they do not include all

12

Table of Contents

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, 2018.
JOBS Act Accounting Election
The Company is an “emerging growth company” within the meaning of the Jumpstart Our Business Act of 2012 (the “JOBS Act”). Section 107(b) of the JOBS Act provides that an emerging growth company can leverage the extended transition period, provided in Section 102(b) of the JOBS Act, for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of new or revised accounting standards that have different effective dates for public and private companies until those standards apply to private companies. The Company has elected to use this extended transition period and, as a result, the consolidated financial statements may not be comparable to companies that comply with public company effective dates. The Company also intends to rely on other exemptions provided by the JOBS Act, including without limitation, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002. As the market value of the Company’s common stock that was held by non-affiliates exceeded $700 million as of June 30, 2019, the Company expects to be classified as a large accelerated filer and cease being an emerging growth company.
Foreign Currency Translation
The functional currency of the subsidiaries of the consolidated Joint Venture is the local currency. The assets and liabilities of the subsidiaries are translated into U.S. dollars at exchange rates in effect at each balance sheet date, with the resulting translation adjustments recorded to a separate component of accumulated other comprehensive loss within stockholders’ equity. Income and expense accounts are translated at average exchange rates during the period. Foreign currency transaction gains and losses resulting from transactions denominated in a currency other than the functional currency are recognized in the consolidated statements of operations. For the three and six months ended June 30, 2019, foreign currency translation adjustment was immaterial.
Cash and Cash Equivalents and Restricted Cash
Cash equivalents consist of highly liquid investments with original maturities at the time of purchase of three months or less. Cash equivalents include bank demand deposits and money market accounts that invest primarily in U.S. government-backed securities and treasuries. Cash equivalents are carried at cost, which approximates their fair value.
Restricted cash consists of deposits related to the Company’s corporate credit card. Restricted cash balance was included in other assets in the accompanying condensed consolidated balance sheet, and was immaterial as of June 30, 2019 and December 31, 2018.
Concentration of Risk
The Company is subject to credit risk from its portfolio of cash equivalents held at one commercial bank and investments in marketable securities. The Company limits its exposure to credit losses by investing in money market funds through a U.S. bank with high credit ratings. The Company’s cash may consist of deposits held with banks that may at times exceed federally insured limits, however, its exposure to credit risk in the event of default by the financial institution is limited to the extent of amounts recorded on the condensed consolidated balance sheets. The Company performs evaluations of the relative credit standing of these financial institutions to limit the amount of credit exposure.
The Company also invests in investment‑grade debt instruments and has policy limits for the amount it can invest in any one type of security, except for securities issued or guaranteed by the U.S. government. The goals of the Company’s investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after‑tax rate of return. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, investment type and issuer, as a result, the Company is not exposed to any significant concentrations of credit risk from these financial instruments.

13

Table of Contents

The Company is also subject to credit risk from its accounts receivable. The majority of the Company’s accounts receivable arises from the provision of precision oncology services in the United States and are primarily with biopharmaceutical companies with high credit ratings. The Company has not experienced any material losses related to receivables from individual customers, or groups of customers. The Company does not require collateral. Accounts receivable are recorded at the invoiced amount and do not bear interest.
Significant customers are those which represent more than 10% of the Company’s total revenue or accounts receivable balance at each respective condensed consolidated balance sheet date. For each significant customer, revenue as a percentage of revenue and accounts receivable as a percentage of accounts receivable are as follows:
 
 
Revenue
 
Accounts Receivable
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
June 30, 2019
 
December 31, 2018
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
 
(unaudited)
 
 
Customer A
 
*

 
11
%
 
*

 
11
%
 
*

 
*

Customer B
 
36
%
 
16
%
 
31
%
 
12
%
 
48
%
 
65
%
Customer C
 
12
%
 
*

 
12
%
 
*

 
*

 
*

Customer D
 
*

 
11
%
 
*

 
*

 
*

 
*

*
less than 10%
Accounts Receivable
Accounts receivable represent valid claims against biopharmaceutical companies, research institutes and international distributors. The Company evaluates the collectability of its accounts receivable and provides for an allowance for potential credit losses based on management’s best estimate of the amount of probable credit losses. Accounts receivable are written off when management determines a balance is uncollectible and no longer intends to actively pursue collection of the receivable. For the three and six months ended June 30, 2019 and 2018, the Company did not write off any material accounts receivable.
Upon the adoption of ASC 606 on January 1, 2019, contract assets are reported as part of accounts receivable on the condensed consolidated balance sheets and are discussed in “unbilled receivables” below.
Revenue Recognition
The Company derives revenue from the provision of precision oncology testing services provided to its ordering physicians and biopharmaceutical customers, as well as from biopharmaceutical research and development services provided to its biopharmaceutical customers. Precision oncology services include genomic profiling and the delivery of other genomic information derived from the Company’s platform. Development services include the development of new platforms and information solutions, including companion diagnostic development and laboratory services. The Company currently receives payments from commercial third-party payers, certain hospitals and oncology centers and individual patients, as well as biopharmaceutical companies and research institutes.
Effective January 1, 2019, the Company began recognizing revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). Revenues are recognized when control of services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services. ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.
Precision oncology testing
The Company recognizes revenue from the sale of its precision oncology tests for clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians. Most precision oncology tests requested by clinical customers are sold without a written agreement; however, the Company determines an implied contract exists with its clinical patients. The Company identifies each sale of its liquid biopsy test to clinical customer as a single performance obligation. With the exception of certain limited contracted arrangements with insurance carriers and other institutions where the transaction price is fixed, a stated contract price does not exist and the transaction price for each implied contract with clinical customers represents variable consideration. The Company estimates the variable consideration under the portfolio approach and considers the historical reimbursement data from third-party 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

14

Table of Contents

at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the estimate and any subsequent revision contain uncertainty and require the use of judgment in the estimation of the variable consideration and application of the constraint for such variable consideration.
Revenue from sales of precision oncology tests to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume over a defined period. The Company identifies its promise to transfer a series of distinct liquid biopsy tests to biopharmaceutical customers as a single performance obligation. Precision oncology tests to biopharmaceutical customers are generally billed at a fixed price for each test performed. For agreements involving testing volume to be satisfied over a defined period, revenue is recognized over time based on the number of tests performed as the performance obligation is satisfied over time.
The Company’s precision oncology information services are delivered electronically, and as such there are no shipping or handling fees incurred by the Company or billed to customers.
Development services
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, in certain contracts, a biopharmaceutical customer may engage the Company for multiple distinct development services which are both capable of being distinct and separately identifiable from other promises in the contracts and, therefore, distinct performance obligations.
The Company collaborates with pharmaceutical companies in the development and clinical trials of new drugs. As part of these collaborations, the Company provides services related to regulatory filings with the FDA to support companion diagnostic device submissions for the Company’s liquid biopsy panels. Under these collaborations, the Company generates revenue from achievement of milestones, as well as provision of on-going support. These collaboration arrangements include no royalty obligations. For development services performed, the Company is compensated through a combination of an upfront fee and performance-based, non-refundable regulatory and other developmental milestone payments. The transaction price of the Company's development services contracts typically represents variable consideration. Application of the constraint for variable consideration to milestone payments is an area that requires significant judgment. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be managed to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone. In making this assessment, the Company considers its historical experience with similar milestones, the degree of complexity and uncertainty associated with each milestone, and whether achievement of the milestone is dependent on parties other than the Company. The constraint for variable consideration is applied such that it is probable a significant reversal of revenue will not occur when the uncertainty associated with the contingency is resolved. Application of the constraint for variable consideration is updated at each reporting period as a revision to the estimated transaction price.
The Company recognizes development services revenue over the period in which biopharmaceutical research and development services are provided. Specifically, the Company recognizes revenue using an input method to measure progress, utilizing costs incurred to-date relative to total expected costs as its measure of progress. 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.
Contracts with multiple performance obligations
Contracts with biopharmaceutical customers may include multiple distinct performance obligations, such as provision of precision oncology testing, biopharmaceutical research and development services, and clinical trial enrollment assistance, among others. The Company evaluates the terms and conditions included within its contracts with biopharmaceutical customers to ensure appropriate revenue recognition, including whether services are considered distinct performance obligations that should be accounted for separately versus together. The Company first identifies material promises, in contrast to immaterial promises or administrative tasks, under the contract and then evaluates whether these promises are both capable of being distinct and distinct within the context of the contract. In assessing whether a promised service is capable of being distinct, the Company considers whether the customer could benefit from the service either on its own or together with other resources that are readily available to the customer, including factors such as the research, development, and commercialization capabilities of a third party and the availability of the associated expertise in the general marketplace. In assessing whether a promised service is distinct within the context

15

Table of Contents

of the contract, the Company considers whether it provides a significant integration of the services, whether the services significantly modify or customize one another, or whether the services are highly interdependent or interrelated.
For contracts with multiple performance obligations, the transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. The Company determines standalone selling price by considering the historical selling price of these performance obligations in similar transactions as well as other factors, including, but not limited to, the price that customers in the market would be willing to pay, competitive pricing of other vendors, industry publications and current pricing practices, and expected costs of satisfying each performance obligation plus appropriate margin.
Unbilled receivables
Unbilled receivables, which is a contract asset, consists primarily of: i) precision oncology testing revenues to clinical customers that are recognized upon delivery of the test results prior to cash collection; and ii) development services revenues to biopharmaceutical customers that are recognized upon the achievement of performance-based milestones but prior to the establishment of billing rights. Contract assets are relieved when the Company receives payments from clinical customers, or when it invoices the biopharmaceutical customers when milestones are achieved, thereby reclassifying the balances from contract assets to accounts receivable. 
Unbilled receivables are presented under accounts receivable on the Company's consolidated balance sheets. As of June 30, 2019, the Company had unbilled receivables of $5.2 million as compared to $4.9 million as of January 1, 2019. The Company did not record unbilled receivables for its contract assets prior to the adoption of ASC 606 on January 1, 2019.
Deferred revenue
Deferred revenue, which is a contract liability, consists primarily of payments received in advance of revenue recognition from contracts with customers. For example, development services contracts with biopharmaceutical customers often contain upfront payments which results in the recording of deferred revenue to the extent cash is received prior to the Company's performance of the related services. Contract liabilities are relieved as the Company performs its obligations under the contract and revenue is consequently recognized.
As of June 30, 2019 and December 31, 2018, the deferred revenue balance was $16.5 million and $16.1 million, respectively, which included $10.4 million and $10.5 million, respectively, related to collaboration development efforts with two pharmaceutical companies to be recognized as the Company performs research and development services in the future periods. Revenue recognized in the six months ended June 30, 2019 that was included in the deferred revenue balance as of January 1, 2019 was $13.6 million, which represented primarily revenue from provision of development services under the collaboration agreement with a biopharmaceutical company. 
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 applied the practical expedient in accordance with Topic 606 to forego disclosures related to the allocation of consideration to the remaining performance obligations and the timing in which revenues will be recognized from such performance obligations.
Costs of Precision Oncology Testing
Cost of precision oncology testing generally consists of cost of materials, direct labor including bonus, benefit and stock-based compensation, equipment and infrastructure expenses associated with processing liquid biopsy test samples (including sample accessioning, library preparation, sequencing, quality control analyses and shipping charges to transport blood samples), freight, curation of test results for physicians and license fees due to third parties. Infrastructure expenses include depreciation of laboratory equipment, rent costs, amortization of leasehold improvements and information technology costs. Costs associated with performing the Company’s tests are recorded as the tests are performed regardless of whether revenue was recognized with respect to that test. Royalties for licensed technology calculated as a percentage of revenues generated using the associated technology are recorded as expense at the time the related revenues are recognized. One-time royalty payments related to signing of license agreements or other milestones, such as issuance of new patents, are amortized to expense over the expected useful life of the applicable patent rights.

16

Table of Contents

Cost of Development Services
Cost of development service includes costs incurred for the performance of development services requested by the Company’s customers. For development of new products, costs incurred before technological feasibility has been achieved are reported as research and development expenses, while costs incurred thereafter are reported as cost of development services.
Intangible Assets
Purchased intangible assets with finite lives are carried at cost, less accumulated amortization. Amortization is computed over the estimated useful lives of the respective assets. Acquisition-related in-process research and development (“IPR&D”) represents the fair value of incomplete research and development projects that have not reached technological feasibility as of the date of acquisition. Initially, these assets are not subject to amortization. Assets related to projects that have been completed are transferred to developed technology, which are subject to amortization.
Impairment of Goodwill, Intangible Assets, and Other Long-Lived Assets
Goodwill is evaluated for impairment on an annual basis during the fourth quarter of the Company’s fiscal year, and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. The Company has elected to first assess qualitative factors to determine whether it is more likely than not that the fair value of single reporting unit is less than its carrying amount, including goodwill. If it is more likely than not that the fair value of single reporting unit is less than its carrying amount, then the quantitative impairment test will be performed. Under the quantitative impairment test, if the carrying amount of single reporting unit exceeds its fair value, an impairment loss will be recognized in an amount equal to that excess, but limited to the total amount of goodwill.
The Company evaluates long-lived assets, including property and equipment and purchased intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the asset may not be fully recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.
As of June 30, 2019, the Company has not recognized any impairment losses on its goodwill, intangible assets, or other long-loved assets.
Stock‑Based Compensation
Stock‑based compensation related to stock options granted to the Company’s employees and directors 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.
In 2018, the Company accounted for stock options issued to nonemployees consultants based on the estimated fair value at the grant date and re-measured at each reporting period. Starting January 1, 2019, upon adoption of Accounting Standards Update (“ASU”) 2018-07, Compensation - Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting, the fair value of stock options issued to nonemployee consultants is determined as of the grant date, and compensation expense is being recognized over the period that the related services are rendered.
The Company uses the Black‑Scholes option‑pricing model to estimate the fair value of its stock options. The Black-Scholes option-pricing model requires assumptions to be made related to expected term of an award, expected volatility, risk-free rate and expected dividend yield. Starting January 1, 2017, forfeitures are accounted for as they occur.
Net Loss Per Share Attributable to Common Stockholders
The Company calculates basic net loss per share attributable to common stockholders by dividing the net loss attributable to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The diluted net loss per share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock, common stock warrants, stock options, restricted stock units, shares issuable pursuant to the employee stock purchase plan, shares subject to repurchase from early exercised options and contingently issuable shares are considered common stock equivalents but have been excluded from the calculation of diluted net loss per share attributable to common stockholders as their effect is anti-dilutive.
Prior to the closing of the Company's initial public offering (the “IPO”) in October 2018 and the conversion of its convertible preferred stock into common stock, the Company calculated its basic and diluted net loss per share attributable to common stockholders of the Company in conformity with the two-class method required for companies

17

Table of Contents

with participating securities. The Company considered its convertible preferred stock to be participating securities. In the event a dividend had been declared or paid on the Company’s common stock, holders of convertible preferred stock were entitled to a share of such dividend in proportion to the holders of common stock on an as-if converted basis. Under the two-class method, net loss attributable to common stockholders is determined by allocating undistributed earnings between common and preferred stockholders. The net loss attributable to common stockholders was not allocated to the convertible preferred stock under the two-class method as the convertible preferred stock did not have a contractual obligation to share in the Company’s losses.
Recent Adopted Accounting Pronouncements
The Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) and all related amendments (collectively “ASC 606”) on January 1, 2019 utilizing the modified retrospective method. The cumulative effect of applying the standard to all contracts that were not completed as of the date of initial application was recognized to beginning accumulated deficit as of January 1, 2019. The Company identified certain differences in accounting for revenue recognition as a result of the adoption of ASC 606 which have impacted its financial position and results of operations. These differences are discussed below.
For precision oncology testing revenue with certain clinical customers, the Company historically deferred revenue recognition until cash receipt when the price pursuant to the underlying customer arrangement became fixed and determinable and collectability became reasonably assured. Under the new standard, this is considered variable consideration and revenue is recognized at the estimated transaction price upon delivery. This results in earlier revenue recognition under the new standard as compared to previous revenue recognition.
For development services revenue with certain biopharmaceutical customers, the Company historically limited revenue recognition based on the right to invoice the customer. Under the new standard, for these arrangements, the Company constrains revenue such that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. For arrangements with regulatory and other developmental milestone payments, this results in a change to the timing and pattern of revenue recognition under the new standard as compared to previous revenue recognition.
Effective January 1, 2019, the Company recognizes revenue in accordance with ASC 606. Comparative information from prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.
The cumulative effect of changes made to the condensed consolidated balance sheet as of January 1, 2019 related to the adoption of ASC 606 were as follows:
 
Balance as of December 31, 2018
 
Adjustments Due to ASC 606
 
Balance as of January 1, 2019
 
(in thousands)
Assets:
 
 
 
 
 
Accounts receivable
$
35,690

 
$
4,907

 
$
40,597

Equity:
 
 
 
 
 
Accumulated deficit
$
(280,799
)
 
$
4,907

 
$
(275,892
)
In accordance with ASC 606 requirements under the modified retrospective method of adoption, the disclosure of the impact of adoption on the Company's condensed consolidated statement of operations and condensed consolidated balance sheet was as follows:
 
Three Months Ended June 30, 2019
 
Six Months Ended June 30, 2019
 
As Reported Under ASC 606
 
Effect of Change
 
Balances Without Adoption of ASC606
 
As Reported Under ASC 606
 
Effect of Change
 
Balances Without Adoption of ASC606
 
(in thousands)
Revenue:
 
 
 
 
 
 
 
 
 
 
 
Precision oncology testing
$
42,064

 
$
1,023

 
$
43,087

 
$
70,901

 
$
2,017

 
$
72,918

Development services
11,911

 
(1,362
)
 
10,549

 
19,729

 
(1,362
)
 
18,367

Total revenue
53,975

 
(339
)
 
53,636

 
90,630

 
655

 
91,285


18

Table of Contents

 
June 30, 2019
 
As Reported Under ASC 606
 
Effect of Change
 
Balances Without Adoption of ASC606
 
(in thousands)
Assets:
 
 
 
 
 
Accounts receivable
$
40,363

 
$
655

 
$
41,018

Equity:
 
 
 
 
 
Accumulated deficit
$
(314,809
)
 
$
655

 
$
(314,154
)
ASC 606 did not have an aggregate impact on the Company’s net cash used in operating activities but resulted in offsetting changes in certain assets presented within net cash used in operating activities in the Company’s condensed consolidated statement of cash flows, as reflected in the above table.
In June 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees, with certain exceptions. The Company early adopted this new guidance effective January 1, 2019. In accordance with the transition guidance, the Company assessed its outstanding nonemployee awards for which a measurement date had not been established. These outstanding awards were re-measured to fair value as of the January 1, 2019 adoption date. For nonemployee awards that contain performance condition, the measurement is based on the outcome that is probable as opposed to the lowest aggregate fair value within a range of possible outcomes. The adoption of ASU 2018-07 provided administrative relief by fixing the measurement date of nonemployee awards and eliminating the requirement of quarterly re-measurement. The Company adopted this standard on a modified retrospective basis and recorded a cumulative-effect adjustment of $1.3 million as an increase to accumulated deficit and an equal increase to additional paid-in capital as of January 1, 2019.
Recent Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to recognize most leases on their balance sheets as lease liabilities with corresponding right-of-use assets and eliminates certain real estate-specific provisions. The new guidance will be effective for the Company beginning in 2020, at which time, the new guidance will be adopted on a modified retrospective transition basis for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements and anticipates the recognition of additional assets and corresponding liabilities on its condensed consolidated balance sheet related to leases. The adoption of the new standard is also expected to materially impact the Company’s condensed consolidated financial statement disclosures related to leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments, which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses on certain types of financial instruments, including trade receivables and available for sale debt securities. The new guidance is effective for the Company beginning in 2021, with early adoption permitted. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
3.
Investment in Joint Venture
Variable Interest Entity (“VIE”)
In May 2018, the Company and SoftBank formed and capitalized Guardant Health AMEA, Inc. (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 2017, Iceland, Norway, Switzerland and Turkey. The Company expects to rely on the Joint Venture to accelerate commercialization of its products in Asia, the Middle East and Africa, with an initial focus on Japan.
Under the terms of the joint venture agreement, the Company paid $9.0 million for 40,000 shares of common stock, or 50% ownership interest, of the Joint Venture, and the affiliate of SoftBank contributed $41.0 million for 40,000 shares of common stock, or the other 50% ownership interest, of the Joint Venture. Neither party has the obligation to provide additional financial support to the Joint Venture. The Joint Venture is deemed to be a variable interest entity (“VIE”) and the Company has been identified as the VIE’s primary beneficiary. As the primary beneficiary, the Company has consolidated the financial position, results of operations and cash flows of the Joint Venture in its financial statements and all intercompany balances have been eliminated in consolidation.

19

Table of Contents

As of June 30, 2019 and December 31, 2018, the Joint Venture had total assets of approximately $45.1 million and $48.3 million, respectively, which were primarily comprised of cash, property and equipment and security deposits. Although the Company consolidates the Joint Venture, the legal structure of the Joint Venture limits the recourse that its creditors will have over the Company’s general credit or assets.  Similarly, the assets held in the Joint Venture can be used only to settle obligations of the Joint Venture. As of June 30, 2019 and December 31, 2018, the Company has not provided financial or other support to the Joint Venture that was not previously contracted or required.
Put-call arrangements
The joint venture agreement includes a put-call arrangement with respect to the shares of the Joint Venture held by SoftBank and its affiliates. Under certain specified circumstances and on terms specified in the joint venture agreement, including timely written notice, SoftBank has the right to cause the Company to purchase all shares of the Joint Venture held by SoftBank and its affiliates (the “put right”), and the Company has a right to purchase all such shares (the “call right”).
Each of the Company and SoftBank may exercise its respective put-call rights for the Company to purchase all shares of the Joint Venture held by SoftBank in the event of (i) certain material disagreement relating to the Joint Venture or its business that may seriously affect the ability of the Joint Venture to perform its obligations under the joint venture agreement or may otherwise seriously impair the ability of the Joint Venture to conduct its business in an effective matter, other than one relating to the Joint Venture’s business plan or to factual matters that may be capable of expert determination; (ii) the effectiveness of the Company’s initial public offering, a change in control of the Company, the seventh anniversary of the formation of the Joint Venture, or each subsequent anniversary of each of the foregoing events; or (iii) a material breach of the joint venture agreement by the other party that goes unremedied within 20 business days. The purchase price per share of the Joint Venture in these situations will be equal to the average closing price of the shares for the 20 trading days ending on the business day immediately preceding the date of the put or call notice, if the shares of the Joint Venture are publicly traded and listed on a national exchange; or determined by a third-party valuation firm on the assumption that the sale is on an arm’s-length basis on the date of the put or call notice. As a result of the IPO, the put-call rights for the Company to purchase all shares of the Joint Venture held by SoftBank are exercisable on each subsequent anniversary of the IPO by the Company or SoftBank.
In the event the Company exercises its call right, the fair value of the Joint Venture will be deemed to be no less than an amount that yields a 20% internal rate of return on each tranche of capital invested by SoftBank and its affiliates in the Joint Venture, taking into account all proceeds received by SoftBank and its affiliates arising from their shares through such date.
In the event SoftBank exercises its put right and the fair value of the Joint Venture is determined to be greater than 40% of the fair value of the Company, the Company will only be required to purchase the number of shares of the Joint Venture held by SoftBank and its affiliates having an aggregate value equal to the product of 40% of the Company's fair value and the pro rata portion of the outstanding shares of the Joint Venture held by SoftBank and its affiliates.
The Company may pay the purchase price for the shares of the Joint Venture in cash, in shares of its common stock, or in a combination thereof. In the event the Company exercises the call right, SoftBank will choose the form of consideration. In the event SoftBank exercises the put right, the Company will choose the form of consideration.
The noncontrolling interest held by SoftBank contains embedded put-call redemption features that are not solely within the Company’s control and has been classified outside of permanent equity in the consolidated balance sheets. The put-call feature embedded in the redeemable noncontrolling interest do not currently require bifurcation as it does not meet the definition of a derivative and is considered to be clearly and closely related to the redeemable noncontrolling interest. The noncontrolling interest is considered probable of becoming redeemable as SoftBank has the option to exercise its put right to sell its equity ownership in the Joint Venture to the Company on or after the seventh anniversary of the formation of the Joint Venture, on each subsequent anniversary of the IPO and under certain other circumstances. The Company elected to recognize the change in redemption value immediately as they occur as if the put-call redemption feature were exercisable at the end of the reporting period.
As of June 30, 2019 and December 31, 2018, the fair value of the redeemable noncontrolling interest held by SoftBank approximated $46.8 million and $41.8 million, respectively. For the three and six months ended June 30, 2019, the Company recorded a fair value adjustment of $0.3 million and $5.0 million , respectively, in its condensed consolidated statements of operations.
As of June 30, 2019, the fair value of the redeemable noncontrolling interest held by SoftBank was determined using the combination of the income approach and the market approach. Determining the fair value of the redeemable noncontrolling interest requires judgment and the use of significant estimates and assumptions. Such estimates and assumptions include future revenue growth rates, gross profit margins, EBITDA margins, future capital expenditures,

20

Table of Contents

weighted average costs of capital and future market conditions, among others. The fair value measurement of the redeemable noncontrolling interest is classified within Level 3 of the fair value hierarchy.
4.
Condensed Consolidated Balance Sheet Components
Property and Equipment, Net
Property and equipment, net consisted of the following:
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
 
(in thousands)
Machinery and equipment
$
26,264

 
$
23,440

Computer hardware
5,528

 
4,949

Leasehold improvements
14,736

 
13,965

Furniture and fixtures
1,549

 
1,522

Computer software
741

 
643

Construction in progress
4,358

 
3,118

Property and equipment, gross
53,176

 
47,637

Less: accumulated depreciation and amortization
(18,365
)
 
(16,634
)
Property and equipment, net
$
34,811

 
$
31,003

Depreciation and amortization expense related to property and equipment was $2.2 million and $1.3 million for the three months ended June 30, 2019 and 2018, respectively, and $4.3 million and $2.5 million for the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019 and December 31, 2018, total property and equipment financed under capital leases was $346,000 and $504,000, net of accumulated amortization of $187,000 and $294,000, respectively. Amortization expense related to total property and equipment financed under capital leases was $21,000 and $41,000 for the three months ended June 30, 2019 and 2018, respectively, and $51,000 and $105,000 for the six months ended June 30, 2019 and 2018, respectively.
Accrued Expenses
Accrued expenses consisted of the following:
 
June 30, 2019
 
December 31, 2018
 
(unaudited)
 
 
 
(in thousands)
Accrued royalty obligations
$
1,324

 
$
707

Accrued legal expenses
1,610

 
814

Accrued tax liabilities
1,713

 
1,470

Accrued professional services
1,783

 
1,791

Purchases of property and equipment included in accrued expenses
1,417

 
343

Other
3,245

 
1,956

Total accrued expenses
$
11,092

 
$
7,081

5.
Fair Value Measurements, Cash Equivalents and Marketable Securities
Financial instruments consist of cash equivalents, marketable securities, prepaid expenses and other current assets, accounts payable, accrued expenses and other long-term liabilities. Cash equivalents and marketable securities are stated at fair value. Prepaid expenses and other current assets, 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.

21

Table of Contents

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:

22

Table of Contents

 
June 30, 2019
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands)
Financial Assets:
 
 
 
 
 
 
 
Money market funds
$
24,016

 
$
24,016

 
$

 
$

U.S. government debt securities
5,007

 

 
5,007

 

Total cash equivalents
29,023

 
24,016

 
5,007

 

 
 
 
 
 
 
 
 
Corporate bonds
32,988

 

 
32,988

 

U.S. government debt securities
332,959

 

 
332,959

 

U.S. government agency bonds
5,027

 

 
5,027

 

Total short-term marketable securities
370,974

 

 
370,974

 

 
 
 
 
 
 
 
 
U.S. government debt securities
277,301

 

 
277,301

 

Total long-term marketable securities
277,301

 

 
277,301

 

Total
$
677,298

 
$
24,016

 
$
653,282

 
$

 
 
 
 
 
 
 
 
Financial Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration
$

 
$

 
$
1,135

 
$

Total
$

 
$

 
$
1,135

 
$

 
December 31, 2018
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
 
 
 
 
 
 
 
(in thousands)
Financial Assets:
 
 
 
 
 
 
 
Money market funds
$
25,796

 
$
25,796

 
$

 
$

Total cash equivalents
25,796
 
25,796
 

 

 
 
 
 
 
 
 
 
Corporate bonds
38,397
 

 
38,397
 

U.S. government debt securities
235,016
 

 
235,016
 

U.S. government agency bonds
5,004
 

 
5,004
 

Total short-term marketable securities
278,417
 

 
278,417
 

 
 
 
 
 
 
 
 
Corporate bonds
3,805
 

 
3,805
 

U.S. government debt securities
73,758
 

 
73,758
 

Total long-term marketable securities
77,563
 

 
77,563
 

Total
$
381,776

 
$
25,796

 
$
355,980

 
$

The Company measures the fair value of money market funds based on quoted prices in active markets for identical securities. Corporate bonds, U.S. government debt securities and U.S. government agency bonds are valued taking into consideration valuations obtained from third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly, to estimate fair value. These inputs include reported trades of and broker/dealer quotes on the same or similar securities, issuer credit spreads; benchmark securities; prepayment/default projections based on historical data; and other observable inputs.

23

Table of Contents

The significant unobservable inputs used in the fair value measurement of the Company’s contingent consideration liability include the estimated amount and timing of projected cash flows, and the risk-adjusted discount rate used to present value the cash flows. The use of different inputs in the valuation of the contingent consideration liability could result in materially different fair value estimates.
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.
Cash Equivalents and Marketable Securities
The following tables summarizes the Company’s cash equivalents and marketable securities’ amortized costs, gross unrealized gains, gross unrealized losses and estimated fair values by significant investment category:
 
June 30, 2019
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
(unaudited)
 
(in thousands)
Money market fund
$
24,016

 
$

 
$

 
$
24,016

Corporate bond
32,919

 
69

 

 
32,988

U.S. government debt securities
614,082

 
1,189

 
(4
)
 
615,267

U.S. government agency bonds
5,025

 
2

 

 
$
5,027

Total
$
676,042

 
$
1,260

 
$
(4
)
 
$
677,298

 
December 31, 2018
 
Amortized Cost
 
Gross Unrealized Gain
 
Gross Unrealized Loss
 
Estimated Fair Value
 
 
 
 
 
 
 
 
 
(in thousands)
Money market fund
$
25,796

 
$

 
$

 
$
25,796

Corporate bond
42,273

 

 
(71
)
 
42,202

U.S. government debt securities
308,775

 
235

 
(236
)
 
308,774

U.S. government agency bonds
5,014

 

 
(10
)
 
5,004

Total
$
381,858

 
$
235

 
$
(317
)
 
$
381,776

There have been no material realized gains or losses on marketable securities for the periods presented. None of the Company’s investments in marketable securities has been in an unrealized loss position for more than one year. The Company determined that it did have the ability and intent to hold all marketable securities that have been in a continuous loss position until maturity or recovery, thus there has been no recognition of any other-than-temporary impairment in the three and six months ended June 30, 2019 and 2018. The maturities of the Company’s long-term marketable securities range from 1.0 year to 1.8 years as of June 30, 2019.

24

Table of Contents

6.
Acquisition of Bellwether Bio
In April 2019, the Company purchased of all of the outstanding shares of Bellwether Bio, Inc. (“Bellwether Bio”), a privately-held company developing a method for early blood-based cancer detection. The Company accounted for the acquisition as a business combination. The total consideration was $11.4 million, which consisted of i) $10.3 million in cash paid upon closing; and ii) future contingent consideration liability with a fair value of $1.1 million on the acquisition date. The contingent consideration is subject to the achievement of certain commercialization milestones with a maximum payout amount of $10.0 million. The Company will also pay additional earn-out consideration of up to $10.0 million subject to the achievement of certain commercialization milestones and the continued provision of services to the Company by certain former employees and consultants of Bellwether Bio. The contingent consideration and earn-out consideration may be paid, at the Company’s election, in cash or in the Company’s common stock. As of June 30, 2019, the Company did not believe the earn-out consideration is probable to be achieved, and therefore, did not record any compensation expense.
The excess purchase consideration over the fair value of assets acquired and liabilities assumed was recorded as goodwill. Goodwill is attributable to future revenue opportunities that we expect to achieve from leveraging Bellwether Bio’s existing license and IPR&D, as well as the assembled workforce. The valuation of the intangible assets acquired was determined using currently available information and reasonable assumptions.  The purchase price allocation is preliminary as the Company is still in the process of collecting additional information for the valuation of intangible assets, contingent consideration and unrecognized tax benefits. The following table summarizes the preliminary allocation of the total consideration to the estimated fair values of assets acquired and liabilities assumed:
 
 
Amount
 
 
(unaudited)
 
 
(in thousands)
Cash
 
$
521

Identified intangible assets
 
9,200

Goodwill
 
2,935

Net liabilities assumed
 
(1,235
)
Total
 
$
11,421

The following table presents details of the identified intangible assets acquired:
 
 
Fair Value
 
Estimated Useful Life
 
 
(in thousands)
 
 
Acquired license
 
$
5,100

 
10 years
Covenants not to compete
 
2,500

 
6 years
IPR&D
 
1,600

 
*
Total
 
$
9,200

 
 
*
IPR&D assets are not subject to amortization.
Acquisition-related contingent consideration is measured at fair value on a quarterly basis based on additional information as it becomes available, and change in estimated contingent consideration to be paid will be included in other income (expense), net in the consolidated statements of operations. The fair value of acquisition-related contingent consideration is estimated using a multiple-outcome discounted cash flow valuation technique. Contingent consideration is classified within Level 3 of the fair value hierarchy, as it is based on a probability that includes significant unobservable inputs. The significant unobservable inputs include a probability-weighted estimate of achievement of certain commercialization milestones, continued services from certain former employees and consultants, resulting contingent payments, and discount rate to present value the expected payments. A significant change in any of these input factors in isolation could have a material impact to fair value measurement. For the three months ended June 30, 2019, no change in estimated contingent consideration liability was recorded as the information available at period end is similar to those used to estimate the fair value of contingent consideration on the acquisition date. As of June 30, 2019, the acquisition-related contingent consideration liability of $1.1 million was recorded within other long-term liabilities on the condensed consolidated balance sheet.

25

Table of Contents

7.
Patent License Agreement
In January 2017, the Company entered into a license agreement with a biotechnology company for an exclusive, non-transferable right to use proprietary technology related to high-throughput screening and identification of mutations in targeted gene sequences. The transaction was treated as an acquisition of an asset and the Company capitalized a total of $9.7 million under the arrangement.
As of June 30, 2019 and December 31, 2018, unamortized capitalized license fees were $7.3 million and $7.8 million, respectively, which will be amortized over the remaining useful life of 7.5 and 8.0 years, respectively. Amortization of capitalized license fees totaled $243,000 and $239,000 for the three months ended June 30, 2019 and 2018, respectively, and $486,000 and $428,000 for the six months ended June 30, 2019 and 2018, respectively.
8.
Commitments and Contingencies
Operating Leases
As of June 30, 2019, future minimum payments under the non-cancelable operating lease were as follows:
Year Ending December 31,
 
 
(unaudited)
 
(in thousands)
Remainder of 2019
$
2,746

2020
7,280

2021
8,144

2022
8,388

2023
9,022

2024 and thereafter
26,076

Total
$
61,656

Rent expense for the facility leases was $1.6 million and $1.1 million for the three months ended June 30, 2019 and 2018, respectively, and $2.9 million and $2.2 million for the six months ended June 30, 2019 and 2018, respectively.
Capital Leases
As of June 30, 2019, future minimum capital lease payments were as follows:
Year Ending December 31,
 
 
(unaudited)
 
(in thousands)
Remainder of 2019
$
54

2020
108

2021
36

Total minimum capital lease payments
198

Less: amount representing interest
(44
)
Present value of net minimum capital lease payments
154

Less: current installments of obligations under capital lease
(74
)
Obligations under capital lease, excluding current installments
$
80

Patent License Agreements
The Company has agreements with four different parties to in-license patent rights. Under these agreements, the Company has made one-time upfront and milestone payments, which it has capitalized and is amortizing to expense ratably over the useful life of the underlying patent right(s). Under some of these agreements, the Company is obligated to pay low single-digit percentage running royalties on net sales where the licensed patent right(s) are used in the product or service sold, subject to minimum annual royalties or fees in certain agreements.

26

Table of Contents

Royalty expenses were included in cost of precision oncology testing on the accompanying condensed consolidated statements of operations. The Company recognized royalty expenses of $1.1 million and $445,000, or 3% and 2% of precision oncology testing revenue in each period, for the three months ended June 30, 2019 and 2018, respectively, and $1.7 million and $617,000, or 2% and 2% of precision oncology testing revenue in each period, for the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019, future minimum royalty payments were due as follows regardless of sales amounts:
Year Ending December 31,
 
 
(unaudited)
 
(in thousands)
Remainder of 2019
$
710

2020
1,421

2021
1,421

2022
1,705

2023
1,705

2024 and thereafter
5,683

Total future minimum royalty payments
12,645

Less: amount representing interest
(5,509
)
Present value of future minimum royalty payments
$
7,136

Indemnification Agreements
The Company has entered into indemnification agreements with certain directors and officers that require the Company, among other things, to indemnify them against certain liabilities that may arise by reason of their status or service as directors or officers. To date, no such matters have arisen and the Company does not believe that the outcome of any claims under indemnification arrangements will have a material adverse effect on its financial positions, results of operations or cash flows. Accordingly, the Company has not recorded a liability related to such indemnifications as of June 30, 2019.
Security Incidents
In July 2018, the Company experienced security incidents involving an unauthorized actor obtaining access to its email system and sending phishing messages. The Company has implemented and continues to implement additional security measures to help prevent future unauthorized access to its systems and the data it maintains, including promptly engaging an independent cybersecurity firm to support its investigation, assess its systems and bolster security thereof. The Company provided timely notices to the U.S. Department of Health and Human Services (“HHS”), certain state regulators and certain credit agencies, as applicable, as well as to the individuals affected. Following such security incidents, the Company received a request for information in January 2019 regarding the incidents from the HHS Office for Civil Rights (“OCR”).  The Company has responded to that request in a timely manner but does not know whether OCR will request additional information or pursue any further action. The Company currently cannot predict the ultimate resolution of the security incidents or the OCR inquiry and cannot estimate the amounts or ranges of potential loss that could result therefrom. The Company has insurance coverage in place for certain potential claims, liabilities and costs relating to the security incidents, but this coverage is limited in amount and may not be adequate to protect against all claims, liabilities and costs arising from such incidents, including fines and penalties.

Legal Proceedings
The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company will accrue a liability for such matters when it is probable that a liability has been incurred and the amount can be reasonably estimated. When only a range of possible loss can be established, the most probable amount in the range is accrued. If no amount within this range is a better estimate than any other amount within the range, the minimum amount in the range is accrued. The accrual for a litigation loss contingency might include, for example, estimates of potential damages, outside legal fees and other directly related costs expected to be incurred.

27

Table of Contents

Patent Disputes
In November 2017, the Company filed separate lawsuits against Foundation Medicine, Inc. (“Foundation Medicine”) and Personal Genome Diagnostics, Inc. (“Personal Genome Diagnostics”) in the United States District Court for the District of Delaware. The Company has alleged that each of the two companies has infringed four of the Company’s digital sequencing technology patents. The two companies have each asserted counterclaims of patent invalidity, unenforceabilty under the doctrine of inequitable conduct, and non-infringement. Personal Genome Diagnostics has also alleged antitrust violations related to the enforcement of the Company’s patent rights. In each lawsuit, the parties are seeking damages, injunctive relief and attorneys’ fees.

In March 2018, Personal Genome Diagnostics filed two petitions for post-grant review with the Patent Trial and Appeal Board (“PTAB”) at the United States Patent and Trademark Office, challenging the patentability of two of the patents asserted by the Company. The two post-grant review petitions were dismissed with prejudice in July 2018. Subsequently, Foundation Medicine filed six petitions for inter partes review with the PTAB, challenging the patentability of all four of the patents asserted by the Company. In June 2019, the PTAB denied institution of inter partes review for the first of the six petitions filed by Foundation Medicine. The Company plans to vigorously defend its patent rights during such PTAB actions. At this time, the Company cannot reasonably ascertain the likelihood that any of the remaining challenged patents will be found to be invalid or unenforceable.
License Dispute
In November 2018, the Company filed a request for arbitration to the International Chamber of Commerce claiming that KeyGene N.V. (“Licensor”) has breached its patent license agreement with the Company. Licensor counterclaimed that the Company has breached the agreement. The parties are seeking damages, declaratory relief and recovery of costs and fees, among other remedies. At this time, the Company cannot reasonably ascertain the likelihood that any of its claims or Licensor’s counterclaims will succeed on the merits.
Other Disputes
In the first quarter of 2018, the Company settled a commercial dispute. In connection with the settlement, the Company received a payment of $4.25 million, which was reported as other income in the condensed consolidated statements of operations for the three months ended March 31, 2018.
9.
Common Stock
Common stockholders are entitled to dividends if and when declared by the Company’s Board of Directors (the “Board of Directors”). As of June 30, 2019 and December 31, 2018, no dividends on common stock had been declared by the Board of Directors.
Common stock has been reserved for the following potential future issuances:
 
June 30, 2019
 
December 31, 2018
 
(unaudited)

 
 
Shares underlying outstanding stock options
5,677,472

 
7,588,405

Shares underlying unvested restricted stock units
142,217

 

Shares available for issuance under the 2018 Incentive Award Plan
3,358,358

 
3,556,507

Shares available for issuance under the 2018 Employee Stock Purchase Plan
802,548

 
922,250

Total
9,980,595
 
12,067,162
Reverse Stock Split
In September 2018, the Company’s Board of Directors and its stockholders approved a 0.7378-for-one reverse stock split of the Company’s common stock. The reverse stock split became effective on September 19, 2018. The par value of the common stock was not adjusted as a result of the reverse stock split. Adjustments corresponding to the reverse stock split were made to the ratio at which the convertible preferred stock was convertible into common stock immediately prior to the closing of the IPO. All share and per share amounts in the accompanying condensed consolidated financial statements have been retroactively adjusted for all periods presented to give effect to this reverse stock split.
Initial Public Offering


28

Table of Contents

On October 9, 2018, the Company completed the IPO, in which it issued and sold 14,375,000 shares of its common stock at a price of $19.00 per share. The Company received net proceeds of $249.5 million after deducting underwriting discounts and commissions and offering expenses payable by the Company. All then-outstanding warrants to purchase the Company’s common stock were exercised prior to the completion of the IPO. In addition, in connection with the IPO, all shares of the Company’s then-outstanding convertible preferred stock were automatically converted into 58,264,577 shares of its common stock, and all then-outstanding warrants to purchase the Company’s convertible preferred stock were automatically converted into warrants to purchase 7,636 shares of the Company’s common stock.

Follow-on Offering
In May 2019, the Company completed an underwritten public offering, in which it issued and sold 5,175,000 shares of its common stock (including the exercise in full of the underwriters’ over-allotment option to purchase 675,000 additional shares) at a price of $71.00 per share. The Company received net proceeds of $349.7 million after deducting underwriting discounts and commissions and offering expenses payable by the Company.
10.
Stock-Based Compensation
2012 Stock Plan and 2018 Incentive Award Plan
In June 2012 and September 2018, the Board of Directors adopted and its stockholders approved the Company’s 2012 Stock Plan (as amended and restated, the “2012 Plan”) and the Company’s 2018 Incentive Award Plan (the “2018 Plan”), respectively, under which the Company may grant cash and equity incentive awards such as stock options, restricted shares, stock units and stock appreciation rights to its employees and nonemployees. Stock options granted may be either incentive stock options or nonstatutory stock options. Shares issued under the 2018 Plan may be authorized but unissued shares, or shares purchased in the open market or treasury shares. Upon effectiveness of the 2018 Plan in connection with the IPO in October 2018, the 2012 Plan was terminated and the 508,847 shares remaining available for future grant under the 2012 Plan were not made available for grant under the 2012 Plan or the 2018 Plan. Any outstanding awards granted under the 2012 Plan remained outstanding, subject to the terms of the 2012 Plan and applicable award agreement; and if any of those awards are forfeited or cancelled without payment therefor, the shares covered by those awards will not become available for future grant or issuance under the 2012 Plan or the 2018 Plan. No further grants will be made under the 2012 Plan. As of June 30, 2019, 3,658,602 shares were approved and reserved for issuance under the 2018 Plan.
Stock Option Activity
A summary of the Company’s stock option activity under the 2012 Plan and the 2018 Plan and related information is as follows:
 
 
 
Options Outstanding
 
Shares
Available for Grant 
 
Shares Subject to Options Outstanding
 
Weighted-Average Exercise Price 
 
Weighted-Average Remaining Contractual Life (Years)
 
Aggregate Intrinsic Value
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
Balance as of December 31, 2018
3,556,507

 
7,588,405

 
$
4.58

 
8.3
 
$
250,495

Granted
(55,712
)
 
55,712

 
70.53

 
 
 
 
Exercised

 
(1,677,990
)
 
3.28

 
 
 
 
Canceled
886

 
(288,655
)
 
6.08

 
 
 
 
Restricted stock units granted
(173,733
)
 

 

 
 
 
 
Restricted stock units canceled
30,410

 

 

 
 
 
 
Balance as of June 30, 2019
3,358,358

 
5,677,472

 
$
5.54

 
8.1
 
$
458,782

Vested and Exercisable as of June 30, 2019
 
 
2,370,282

 
$
4.12

 
7.7
 
$
194,852

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

29

Table of Contents

$108.3 million and $478,000 for the three months ended June 30, 2019 and 2018, respectively, and $116.4 million and $1.8 million for the six months ended June 30, 2019 and 2018, respectively.
Starting January 1, 2019, the Company adopted ASU 2018-07 which aligns the accounting treatment of nonemployee awards with employee awards, and the fair value of stock options issued to employees and nonemployee consultants are both determined as of the grant date. The weighted-average grant date fair value of options granted was $51.94 and $4.24 per share for the three months ended June 30, 2019 and 2018, respectively, and $43.35 and $4.06 per share for the six months ended June 30, 2019 and 2018, respectively.
Future stock-based compensation for unvested options as of June 30, 2019 and December 31, 2018 was $15.3 million and $17.5 million, respectively, which is expected to be recognized over a weighted-average period of 2.3 years and 2.7 years, respectively.
Restricted Stock Units
A summary of the Company’s restricted stock unit activity under the 2012 Plan and the 2018 Plan and related information is as follows:
 
 
Restricted Stock Units Outstanding
 
Weighted-Average Grant Date Fair Value
 
 
 
 
 
Unvested balance as of December 31, 2018
 

 
$

Granted
 
173,733

 
55.25

Vested
 
(1,106
)
 
65.50

Canceled
 
(30,410
)
 
42.72

Unvested balance as of June 30, 2019
 
142,217

 
$
57.85

Future stock-based compensation for unvested restricted stock units as of June 30, 2019 was $7.4 million, which is expected to be recognized over a weighted-average period of 3.3 years.
Stock‑Based Compensation Expense
The following table presents the effect of employee and non‑employee related stock‑based compensation expense:
 
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
 
 
(in thousands)
Cost of precision oncology testing
 
$
126

 
$
79

 
$
296

 
$
142

Research and development expense
 
1,428

 
214

 
2,638

 
418

Sales and marketing expense
 
646

 
259

 
1,472

 
633

General and administrative expense
 
1,015

 
628

 
1,991

 
1,264

Total stock-based compensation expense
 
$
3,215

 
$
1,180

 
$
6,397

 
$
2,457


30

Table of Contents

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:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(unaudited)
Expected term (in years)
 
5.50 – 6.16
 
5.85 – 6.20
 
5.50 – 6.22
 
5.01 – 10.00
Expected volatility
 
66.9% – 68.3%
 
80.7% – 81.0%
 
66.7% – 68.3%
 
80.7% – 86.5%
Risk-free interest rate
 
1.9%
 
3.0%
 
1.9% – 2.7%
 
2.5% – 2.9%
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 the Company’s common stock, 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:
Expected Term
The expected term represents the period that the options granted are expected to be outstanding. After the adoption of ASU 2018-07 on January 1, 2019, the expected term of stock options issued to employees and nonemployee consultants is determined using the simplified method (based on the mid-point between the vesting date and the end of the contractual term) as the Company has concluded that its stock option exercise history does not provide a reasonable basis upon which to estimate expected term. Prior to the adoption of ASU 2018-07, the expected term of stock options issued to employees was determined using the simplified method, and the expected term of stock options issued to nonemployee consultants was based on the contractual term of the award.
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.

The Company derived the expected volatility from the average historical volatilities 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 Company has limited trading history for its common stock. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.
Risk-Free Interest Rate
The risk-free interest rate is based on the U.S. Treasury rate, with maturities similar to the expected term of the stock options.
Expected Dividend Yield
The Company does not anticipate paying any dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero.
2018 Employee Stock Purchase Plan
In September 2018, the Board of Directors adopted and its stockholders approved the 2018 Employee Stock Purchase Plan (the “ESPP”). A total of 922,250 shares of common stock were initially reserved for issuance under the ESPP. The number of shares may be increased in accordance with the terms of 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. Except for the initial offering period, the ESPP provides for separate six-month offering periods beginning on February 1 and August 1 of each year. The initial offering period ran from October 2, 2018 through January 31, 2019.

31

Table of Contents

For the three and six months ended June 30, 2019nil and 119,702 shares of common stock were purchased under the ESPP. The total compensation expense related to the ESPP for the three and six months ended June 30, 2019 was $440,000 and $1,006,000. As of June 30, 2019, the unrecognized stock-based compensation expense related to the ESPP was $151,000 which is expected to be recognized over the remaining term of the offering period of 0.1 years.
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. For the six months ended June 30, 2019, the following assumptions were used to calculate the stock-based compensation for each stock purchase right granted under the ESPP: a weighted-average expected life of 0.5 years; expected volatility of 60.2%; a risk-free interest rate of 2.5%; and a zero dividend yield.
Liabilities for Early Exercise of Employee Options
The Company allowed certain stock option holders to exercise unvested options to purchase shares of common stock. Shares received from such early exercises are subject to repurchase in the event of the optionee’s employment termination, at the original issuance price, until the options are fully vested. As of June 30, 2019 and December 31, 2018, 29,513 and 44,268 shares of common stock were subject to repurchase at weighted-average prices of $4.66 and $4.66 per share, respectively. As of June 30, 2019 and December 31, 2018, the cash proceeds received for unvested shares of common stock of $137,000 and $206,000, respectively, were recorded within other long-term liabilities on the condensed consolidated balance sheet. The shares issued pursuant to unvested options have been included in shares issued and outstanding on the condensed consolidated balance sheet and condensed consolidated statement of redeemable noncontrolling interest and stockholders’ equity as such shares are considered legally outstanding.
11.
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
June 30,
 
Six Months Ended
June 30,
 
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
 
 
 
(unaudited)