|Summary of significant accounting policies
Principles of consolidation
Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base these estimates on current facts, historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those judgments, estimates and assumptions. We evaluate our estimates on an ongoing basis.
Significant estimates and assumptions made by management include the determination of:
•the fair value of assets and liabilities associated with business combinations;
•the impairment assessment of goodwill and intangible assets;
•the valuation of our 2.00% convertible senior notes due 2024 issued in September 2019 ("Convertible Senior Notes");
•the recoverability of long-lived assets;
•our incremental borrowing rates used to calculate our lease balances;
•stock-based compensation expense and the fair value of awards and warrants issued; and
•income tax uncertainties.
Concentrations of credit risk and other risks and uncertainties
Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits.
Significant customers are those that represent 10% or more of our total revenue for each year presented on the consolidated statements of operations. Our revenue from significant customers as a percentage of our total revenue was as follows:
| ||Year Ended December 31,|
|Medicare||19 ||%||25 ||%||22 ||%|
No customers represented more than 10% of accounts receivable as of December 31, 2020 or 2019.
Cash, cash equivalents, and restricted cash
We consider all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market funds, U.S. treasury notes and government agency securities.
Restricted cash consists primarily of money market funds that secure irrevocable standby letters of credit that serve as collateral for security deposits for our facility leases.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows (in thousands):
|Cash and cash equivalents||$||124,794 ||$||151,389 |
|Restricted cash||6,686 ||6,183 |
|Total cash, cash equivalents and restricted cash||$||131,480 ||$||157,572 |
All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its marketable debt securities at the time of purchase and reevaluates such designation at each balance sheet date. Short-term marketable securities have maturities one year or less at the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive loss. Realized gains and losses and impairments, if any, on available-for-sale securities are included in other expense, net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in other income (expense), net.
For marketable securities in an unrealized loss position, we assess our intent to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria are met, the security’s amortized cost basis is written down to fair value through other income (expense), net.
We receive payment from patients, biopharmaceutical partners, third-party payers and other business-to-business customers. See Note 3, "Revenue, accounts receivable and deferred revenue" for further information.
We record a contract liability when cash payments are received or due in advance of our performance related to one or more performance obligations. See Note 3, "Revenue, accounts receivable and deferred revenue" for further information.
Our inventory consists of raw materials, work in progress, and finished goods, which are stated at the lower of cost or net realizable value on a first-in, first-out basis. We periodically analyze our inventory levels and expiration dates, and write down inventory that has become obsolete, inventory that has a cost basis in excess of its net realizable value, and inventory in excess of expected sales requirements as cost of revenue. We record an allowance for obsolete inventory using an estimate based on historical trends and evaluation of near-term expirations.
We apply Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC") 805, Business Combinations, which requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date with subsequent changes recognized in earnings; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset until completion or abandonment; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes.
We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. The tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. We base the estimated fair value of identifiable intangible assets acquired in a business combination on independent third-party valuations that use information and assumptions provided by our management, which consider our estimates of inputs and assumptions that a market participant would use. Any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed is recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, estimated cost savings, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.
In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under ASC Topic 480, Distinguishing Liabilities from Equity, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We remeasure this liability each reporting period and record changes in the fair value as general and administrative expense.
Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition.
Amortizable intangible assets include trade names, non-compete agreements, patent licensing agreements, favorable leases, developed technology, customer relationships, and rights to develop new technology acquired as part of business combinations. Customer relationships acquired through our business combinations in 2017 are amortized on an accelerated basis, utilizing free cash flows, over periods ranging from to 12 years. All other intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from to 15 years. All intangible assets subject to amortization are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment.
In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), our goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, we perform annual impairment reviews of our goodwill balance during the fourth fiscal quarter or more frequently if business factors indicate. In testing for impairment, we compare the fair value of our reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit. We did not incur any goodwill impairment losses in any of the periods presented.
In-process research and development
Intangible assets related to in-process research and development costs (“IPR&D”) are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. During this period, the assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts.
During the fourth quarter and if business factors indicate more frequently, we perform an assessment of the qualitative factors affecting the fair value of our IPR&D projects. If the fair value exceeds the carrying value, there is no impairment. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of an asset to its carrying value, without consideration of any recoverability test. We have not identified any such impairment losses to date.
Under ASC 842, Leases, we determine if an arrangement is a lease at inception. Operating leases are included in operating lease assets and operating lease obligations in our consolidated balance sheets. Finance leases are included in other assets and finance lease obligations in our consolidated balance sheets.
Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement based on the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The operating lease asset also includes any lease payments made and is adjusted for lease incentives. Our lease terms may include options to extend or terminate the lease which are recognized when it is reasonably certain that we will exercise that option. Leases with terms of 12 months or less are not recorded on our balance sheet. Lease expense is recognized on a straight-line basis over the lease terms, or in some cases, the useful life of the underlying asset. We account for the lease and non-lease components as a single lease component.
Property and equipment, net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, generally between and seven years. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations in the period realized.
The estimated useful lives of property and equipment are as follows:
|Furniture and fixtures||7 years|
|Manufacturing and Laboratory equipment||5 years|
|Computer equipment||3 years|
|Leasehold improvements||Shorter of lease term or estimated useful life|
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total estimated future undiscounted 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 assessed using discounted cash flows or other appropriate measures of fair value. There were no long-lived asset impairment losses recorded for any period presented.
Fair value of financial instruments
Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities, finance leases, and liabilities associated with business combinations. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities approximate their current fair value due to the relatively short-term nature of these accounts. Based on borrowing rates available to us, the carrying value of finance leases approximate their fair values. Liabilities associated with business combinations are recorded at their estimated fair value.
We recognize revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. All revenues are generated from contracts with customers. We utilize the following practical expedients and exemptions:
•Costs to obtain or fulfill a contract are expensed when incurred because the amortization period would have been one year or less, and
•No adjustments to promised consideration were made for financing as we expect, at contract inception, that the period between the transfer of a promised good or service and when the customer pays for that good or service will be one year or less.
Test revenue is comprised of testing services and sales of distributed precision oncology products.
The majority of our test revenue is generated from genetic testing, in addition to somatic testing for therapy selection and personalized cancer monitoring. These testing services provide analysis and associated interpretation of the sequencing of parts of the genome. Test orders are placed under signed requisitions or contractual agreements, and we often enter into contracts with biopharmaceutical partners, other business-to-business customers (e.g., hospitals, clinics, medical centers) and insurance companies that include pricing provisions under which such tests are billed. Billing terms are generally net 30 to 60 days.
While the transaction price of diagnostic tests is originally established either via contract or pursuant to our standard list price, we often provide concessions for tests billed to insurance carriers, and therefore the transaction price for patient insurance-billed tests is considered to be variable and revenue is recognized based on an estimate of the consideration to which we will be entitled at an amount for which it is probable that a reversal of cumulative consideration will not occur. Making these estimates requires significant judgments based upon such factors as length of payer relationship, historical payment patterns, changes in contract provisions and insurance reimbursement policies. These judgments are reviewed each reporting period and updated as necessary.
We look to transfer of control in assessing timing of recognition of revenue in connection with each performance obligation. In general, revenue in connection with the service portion of our diagnostic tests is recognized upon delivery of the underlying clinical report or when the report is made available on our web portal. Outstanding performance obligations pertaining to orders received but for which the underlying report has not been issued are generally satisfied within a 30-day period.
We also generate test revenue through the sale of our precision oncology products, which is comprised primarily of sales of our distributed research use only ("RUO ") and in vitro diagnostics ("IVD") products for therapy selection. We recognize revenue on these sales once shipment has occurred. Product sales are recorded net of discounts and other deductions. Billing terms are generally net 30 days.
Shipping and handling fees billed to customers are recorded as revenue on the consolidated statements of operations. The associated shipping and handling costs are recorded as cost of revenue.
Other revenue is primarily generated from pharma development services provided to biopharmaceutical companies related to companion diagnostic development as well as through collaboration agreements and genome network contracts.
Contracts for companion diagnostic development consist primarily of milestone-based payments along with annual fees and marked-up pass-through costs. The arrangements are treated as short-term contracts for revenue recognition purposes because they allow termination of the agreements by the customers with 30 to 120 days’ written notice without a termination penalty. Upon termination, customers are required to pay for the proportion of services provided under milestones that were in progress. We recognize revenue in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. We recognize revenue over time based on the progress made toward achieving the performance obligation, utilizing both input or output methods, depending on the performance obligation, including labor hours expended, tests processed, or time elapsed, that measure our progress toward the achievement of the milestone.
We also enter into collaboration and genome network contracts. Collaboration agreements provide customers with diagnostic testing and related data aggregation reporting services that are provided over the contract term. Collaboration revenue is recognized as the data and reporting services are delivered to the customer. Genome network offerings consist of subscription services related to a proprietary software platform designed to connect patients, clinicians, advocacy organizations, researchers and therapeutic developers to accelerate the understanding, diagnosis and treatment of hereditary disease. Such services are recognized on a straight-line basis over the subscription periods. Amounts due under collaboration and genome network agreements are typically billable on net 30-day terms.
Cost of revenue
Cost of revenue reflects the aggregate costs incurred in delivering our genetic offerings and includes expenses for personnel-related costs including stock-based compensation, materials and supplies, royalties, regulatory fees, commercialization fees, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation, information technology costs, amortization of acquired intangibles and utilities.
We have entered and may continue to enter into license agreements to access and utilize certain technology. We evaluate if the license agreement results in the acquisition of an asset or a business and then determine if the acquired asset has the ability to generate revenues or is subject to regulatory approval. When regulatory approval is not required, we record the license as an asset and amortize it over the estimated economic life. When regulatory approval is required, we record the amount paid as a research and development expense.
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Significant judgment is required in determining the net valuation allowance which includes our evaluation of all available evidence including past operating results, estimates on future taxable income and acquisition-related tax assets and liabilities.
We historically established a full valuation allowance against our deferred tax assets due to the uncertainty surrounding realization of such assets. In 2020, we released approximately $112.1 million of our valuation allowance to account for acquired intangibles that support the future realization of some of our deferred tax assets. Due to the overall increase of deferred tax assets, our valuation allowance has also increased from the prior year.
We measure stock-based payment awards made to employees and directors based on the estimated fair values of the awards and recognize the compensation expense over the requisite service period. We use the Black-Scholes option-pricing model to estimate the fair value of stock option awards and employee stock purchase plan (“ESPP”) purchases. The fair value of restricted stock unit (“RSU”) awards with time-based vesting terms is based on the grant date share price. We grant performance-based restricted stock unit (“PRSU”) awards to certain employees which vest upon the achievement of certain performance conditions, subject to the employees’ continued service relationship with us. The probability of vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. We recognize such compensation expense on an accelerated vesting method.
Stock-based compensation expense for awards without a performance condition is recognized using the straight-line method. Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, our stock-based compensation is reduced for estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We account for stock issued in connection with business combinations based on the fair value on the date of issuance.
Advertising expenses are expensed as incurred. We incurred advertising expenses of $11.4 million, $9.9 million and $0.6 million during the years ended December 31, 2020, 2019 and 2018, respectively.
Comprehensive loss is composed of two components: net loss and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity, but are excluded from net loss. Our other comprehensive income (loss) consists of unrealized gains or losses on investments in available-for-sale securities.
Net loss per share
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities, consisting of preferred stock, options to purchase common stock, common stock warrants, shares of common stock pursuant to ESPP, common stock issuable in connection with our Convertible Senior Notes, RSUs and PRSUs, are considered to be common stock equivalents and were excluded from the calculation of diluted net loss per share because their effect would be antidilutive for all periods presented.
Prior period reclassifications
We have reclassified certain amounts in prior periods to conform with current presentation.
Immaterial correction of an error
We determined the historical classification of certain acquisition-related obligations as equity and the subsequent measurement of such obligations was inappropriate and instead should have been classified as liabilities and subsequently measured at fair value with changes recognized in other expense, net during the year ended December 31, 2020. We determined that the impact of the error to previously issued consolidated financial statements was not material and have corrected the immaterial error in the current period financial statements. The impact of this correction was an increase to other long-term liabilities of $10.1 million, a corresponding decrease to additional paid-in capital of $10.4 million and an increase to other income, net of $0.3 million.
Recent accounting pronouncements
We evaluate all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board ("FASB") for consideration of their applicability. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements not yet adopted
In August 2020, the FASB issued ASU No. 2020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. This new standard is effective for our interim and annual periods beginning January 1, 2022, and earlier adoption is permitted. We may elect to apply the amendments on a retrospective or modified retrospective basis. We are currently evaluating the impact of the adoption of this standard on our consolidated financial statements.
Recently adopted accounting pronouncements
In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires measurement and recognition of expected credit losses for financial assets. This guidance became effective for us beginning in the first quarter of 2020 and was adopted using a modified retrospective approach, with certain exceptions. The adoption of Topic 326 did not have a material impact on our consolidated financial statements as credit losses are not expected to be significant.
As part of our adoption of Topic 326, we assess our accounts receivables for expected credit losses at each reporting period by disaggregating by payer type and further by portfolios of customers with similar characteristics, such as customer type and geographic location. We then review each portfolio for expected credit losses based on historical payment trends as well as forward looking data and current economic trends. If a credit loss is determined, we record a reduction to our accounts receivable balance with a corresponding general and administrative expense.
In accordance with Topic 326, we no longer evaluate whether our available-for-sale debt securities in an unrealized loss position are other than temporarily impaired. Instead, we assess whether such unrealized loss positions are credit-related. Our expected loss allowance methodology for these securities is developed by reviewing the extent of the unrealized loss, the issuers’ credit ratings and any changes in those ratings, as well as reviewing current and future economic market conditions and the issuers’ current status and financial condition. The credit-related portion of unrealized losses, and any subsequent improvements, are recorded in other income (expense), net. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive income (loss).
On January 1, 2019, we adopted the provisions of ASC Topic 842, Leases, using the modified retrospective approach in accordance with Topic 842. Adoption of Topic 842 had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated statements of operations. We elected the package of practical expedients permitted under the transition guidance which, among other things, allowed us to carry forward the historical classification of leases in place as of January 1, 2019. We did not identify any material embedded leases with the adoption of Topic 842 and therefore the implementation of Topic 842 primarily focused on the treatment of our previously identified leases.
Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840, Leases. Under ASC 840, we rented facilities under operating lease agreements and recognized related rent expense on a straight-line basis over the term of the applicable lease agreement. Some of the lease agreements contained rent holidays, scheduled rent increases, lease incentives, and renewal options. Rent holidays and scheduled rent increases were included in the determination of rent expense recorded over the lease term. Lease incentives were recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals were not assumed in the determination of the lease term unless they were deemed to be reasonably assured at the inception of the lease. We recognized rent expense beginning on the date we obtained the legal right to use and control the leased space.