INVITAE CORP, 10-Q filed on 11/9/2017
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2017
Oct. 27, 2017
Document And Entity Information [Abstract]
 
 
Entity Registrant Name
Invitae Corp 
 
Entity Central Index Key
0001501134 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2017 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Accelerated Filer 
 
Trading Symbol
NVTA 
 
Entity Common Stock, Shares Outstanding
 
50,218,987 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 33,858 
$ 66,825 
Marketable securities
43,049 
25,798 
Accounts receivable
6,142 
1,153 
Prepaid expenses and other current assets
7,898 
8,024 
Total current assets
90,947 
101,800 
Property and equipment, net
29,308 
23,793 
Restricted cash
5,405 
4,697 
Marketable securities, non-current
24,229 
 
Intangible assets, net
20,100 
 
Goodwill
42,843 
 
Other assets
406 
361 
Total assets
213,238 
130,651 
Current liabilities:
 
 
Accounts payable
10,683 
3,352 
Accrued liabilities
22,267 
6,711 
Capital lease obligation, current portion
1,851 
1,309 
Debt, current portion
 
3,381 
Total current liabilities
34,801 
14,753 
Capital lease obligation, net of current portion
2,420 
266 
Debt, net of current portion
39,030 
8,721 
Other long-term liabilities
11,593 
7,837 
Total liabilities
87,844 
31,577 
Commitments and contingencies (Note 7)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0001 par value: Authorized: 20,000,000 shares; Issued and outstanding: 3,458,823 and 0 shares as of September 30, 2017 and December 31, 2016, respectively
   
   
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 50,207,961 and 41,143,513 shares as of September 30, 2017 and December 31, 2016, respectively
Accumulated other comprehensive loss
(57)
 
Additional paid-in capital
483,551 
374,288 
Accumulated deficit
(358,105)
(275,218)
Total stockholders’ equity
125,394 
99,074 
Total liabilities and stockholders’ equity
$ 213,238 
$ 130,651 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2017
Dec. 31, 2016
Statement Of Financial Position [Abstract]
 
 
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, authorized shares
20,000,000 
20,000,000 
Preferred stock, issued shares
3,458,823 
Preferred stock, outstanding shares
3,458,823 
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
400,000,000 
400,000,000 
Common stock, shares issued
50,207,961 
41,143,513 
Common stock, shares outstanding
50,207,961 
41,143,513 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Revenue:
 
 
 
 
Test revenue
$ 17,310 
$ 6,259 
$ 40,597 
$ 15,747 
Other revenue
838 
17 
2,225 
65 
Total revenue
18,148 
6,276 
42,822 
15,812 
Costs and operating expenses:
 
 
 
 
Cost of test revenue
13,274 
7,242 
33,093 
19,705 
Research and development
11,502 
11,482 
32,864 
32,855 
Selling and marketing
13,246 
6,803 
37,338 
20,689 
General and administrative
11,102 
5,655 
25,915 
17,794 
Total costs and operating expenses
49,124 
31,182 
129,210 
91,043 
Loss from operations
(30,976)
(24,906)
(86,388)
(75,231)
Other income (expense), net
(56)
50 
(596)
122 
Interest expense
(1,128)
(115)
(2,517)
(299)
Net loss before taxes
(32,160)
(24,971)
(89,501)
(75,408)
Income tax benefit
(4,758)
 
(6,614)
 
Net loss
$ (27,402)
$ (24,971)
$ (82,887)
$ (75,408)
Net loss per share, basic and diluted
$ (0.57)
$ (0.77)
$ (1.86)
$ (2.35)
Shares used in computing net loss per share, basic and diluted
48,221,896 
32,315,038 
44,639,416 
32,145,806 
Condensed Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Sep. 30, 2017
Sep. 30, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (27,402)
$ (24,971)
$ (82,887)
$ (75,408)
Other comprehensive income (loss):
 
 
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
(19)
(14)
(57)
33 
Comprehensive loss
$ (27,421)
$ (24,985)
$ (82,944)
$ (75,375)
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2017
Sep. 30, 2016
Cash flows from operating activities:
 
 
Net loss
$ (82,887)
$ (75,408)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
5,985 
4,934 
Stock-based compensation
14,387 
6,350 
Amortization of premium on marketable securities
108 
253 
Loss on disposal of assets
268 
933 
Remeasurements of liabilities associated with business combinations
556 
 
Benefit from income taxes
(6,614)
 
Changes in operating assets and liabilities net of effects of business combination:
 
 
Accounts receivable
(1,801)
(405)
Prepaid expenses and other current assets
1,761 
1,073 
Other assets
(45)
1,015 
Accounts payable
1,278 
(946)
Accrued expenses and other liabilities
278 
2,929 
Net cash used in operating activities
(66,726)
(59,272)
Cash flows from investing activities:
 
 
Purchases of marketable securities
(94,563)
(78,915)
Proceeds from maturities of marketable securities
52,918 
103,472 
Acquisition of businesses, acquired cash
1,489 
 
Purchases of property and equipment
(4,115)
(7,117)
Net cash used in investing activities
(44,271)
17,440 
Cash flows from financing activities:
 
 
Proceeds from issuance of common stock
71,687 
1,489 
Proceeds from loan agreement
 
7,500 
Proceeds from loan and security agreement
39,661 
 
Loan payments
(30,457)
(1,595)
Capital lease principal payments
(2,153)
(1,189)
Net cash provided by financing activities
78,738 
6,205 
Net decrease in cash, cash equivalents and restricted cash
(32,259)
(35,627)
Cash, cash equivalents and restricted cash at beginning of period
71,522 
78,069 
Cash, cash equivalents and restricted cash at end of period
39,263 
42,442 
Supplemental cash flow information:
 
 
Interest paid
2,182 
299 
Supplemental cash flow information of non-cash investing and financing activities:
 
 
Equipment acquired through capital leases
4,849 
 
Purchases of property and equipment in accounts payable and accrued liabilities
2,022 
1,870 
Warrants issued pursuant to loan and security agreement
740 
 
Common stock issued for acquisition of businesses
22,876 
 
Consideration payable for acquisition of businesses
$ 12,436 
 
Organization and description of business
Organization and description of business

1. Organization and description of business

Invitae Corporation (the “Company”) was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. The Company utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for clinicians and their patients. The Company’s production facility and headquarters is located in San Francisco, California. The Company currently has more than 20,000 genes in production and provides a variety of diagnostic tests that can be used in multiple indications. The Company’s tests include multiple genes associated with hereditary cancer, neurological disorders, cardiovascular disorders, pediatric disorders, metabolic disorders and other hereditary conditions. In addition, and as a result of the acquisition of Good Start Genetics in August 2017, the Company’s tests also include preimplantation and carrier screening for inherited disorders. The Company operates in one segment.

The Company has incurred substantial losses since its inception and expects to continue to incur operating losses in the near-term. For the year ended December 31, 2016, the Company’s net loss was $100.3 million, and for the nine months ended September 30, 2017, the Company’s net loss was $82.9 million. At September 30, 2017, the Company’s accumulated deficit was $358.1 million. To date, the Company has generated only limited revenue, and it may never achieve revenue sufficient to offset its expenses. The Company believes its existing cash, cash equivalents and marketable securities as of September 30, 2017, revenue from the sale of its tests, and a second term loan of $20.0 million available under a loan agreement will be sufficient to meet its anticipated cash requirements for the 12-month period following the filing date of this report.

The Company may need to obtain additional funding to finance operations prior to achieving profitability. Company management regularly considers fundraising opportunities and will determine the timing, nature and amount of financings based upon various factors, including market conditions and management’s operating plans. The Company may in the future elect to finance operations by selling equity or debt securities or borrowing money. If additional funding is required, there can be no assurance that additional funds will be available to the Company on acceptable terms on a timely basis, if at all. If the Company is unable to obtain additional funding when needed, it will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on the Company’s ability to execute on its business plan, and have an adverse effect on its business, results of operations and future prospects.

The Company has implemented the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), and concluded that there are not conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that the September 30, 2017 financial statements are issued.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results expected for the full fiscal year or any other periods.

During the quarter ended September 30, 2016, the Company identified immaterial classification errors in the condensed consolidated financial statements for the quarters ended March 31, 2016 and June 30, 2016, related to the classification of asset impairment charges. Based on a quantitative and qualitative analysis of the errors as required by authoritative guidance, management concluded the errors had no material effect on any of the Company’s previously issued financial statements, were immaterial to the Company’s results for the first and second quarters of 2016, did not affect the expected full year results for 2016, and had no material effect on the trend of financial statements.

As a result of the immaterial classification errors discussed above, the unaudited condensed consolidated financial statements for the nine months ended September 30, 2016 reflect the following immaterial reclassification adjustments: reclassification for asset impairment charges from other income (expense), net to general and administrative expense of $0.2 million for the three months ended March 31, 2016; and reclassification for asset impairment charges from other income (expense), net, to general and administrative expense of $0.7 million for the three months ended June 30, 2016.

 

Summary of significant accounting policies
Summary of significant accounting policies

2. Summary of significant accounting policies

Principles of consolidation

The unaudited condensed consolidated financial statements include the accounts of the Company and its 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 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. The Company believes judgment is involved in determining revenue recognition; the acquisition-date fair value of intangible assets; the fair value of contingent consideration associated with acquisitions; the recoverability of long-lived assets; impairment of goodwill and intangible assets; stock-based compensation expense; and income tax uncertainties. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those estimates and assumptions.

Concentrations of credit risk and other risks and uncertainties

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash, cash equivalents and marketable securities. The Company’s cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits.

One customer represented 18.2% of accounts receivable in the consolidated financial statements as of September 30, 2017. One customer represented 13.7% and 8.3% of total revenue for three and nine months ended September 30, 2017, respectively. No customer represented over 10.0% of total revenue for the three and nine months ended September 30, 2016.

Cash equivalents

The Company considers 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 and U.S. government agency securities.

Marketable securities

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 less than 365 days 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 declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income (expense), net.

Accounts receivable

The Company receives payment for its tests from patients, institutional customers and third-party payers. For most payers, the Company has not been able to demonstrate a predictable pattern of collectability, and therefore recognizes revenue when payment is received. For payers who have demonstrated a consistent pattern of payment of tests billed, the Company recognizes revenue, at estimated realizable amounts, upon delivery of test results. Accounts receivable balances primarily represent patient, institutional customer and Medicare billings.

Restricted cash

Restricted cash consists of money market funds that serve as: collateral for a security deposit for the Company’s lease agreement for its production facility and headquarters entered into in September 2015; collateral for security deposits for facilities of the Company’s subsidiary Good Start Genetics, Inc.; collateral for a credit card agreement at one of the Company’s financial institutions; and for securing a letter of credit as collateral for a facility sublease agreement.  

Cash, cash equivalents and restricted cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited statements of cash flows (in thousands):

 

 

 

September 30,

2017

 

 

September 30,

2016

 

Cash and cash equivalents

 

$

33,858

 

 

$

37,745

 

Restricted cash

 

 

5,405

 

 

 

4,697

 

Total cash, cash equivalents and restricted cash

 

$

39,263

 

 

$

42,442

 

 

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. The Company bases the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by management, which consider management’s 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, 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 FASB Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records changes in the fair value as a component of operating expenses.

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 the Company’s operating results from the date of acquisition.

 

Intangible Assets

Amortizable intangible assets include trade names, non-compete agreements, developed technology and customer relationships acquired as part of business combinations. Intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from three to sixteen years and are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment.

 

Goodwill

In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company’s 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, the Company will perform its first annual impairment review of its goodwill balance as of October 1, 2017 in accordance with ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), which the Company adopted effective January 1, 2017. In testing for goodwill, the Company compares the fair value of its 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, the Company 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.

The Company acquired goodwill as part of acquisitions in January, June and August 2017, and therefore has not previously tested for nor recorded any goodwill impairment losses.

 

Leases

The Company rents its facilities under operating lease agreements and recognizes related rent expense on a straight-line basis over the term of the applicable lease agreement. Some of the lease agreements contain rent holidays, scheduled rent increases, lease incentives, and renewal options. Rent holidays and scheduled rent increases are included in the determination of rent expense to be recorded over the lease term. Lease incentives are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The Company recognizes rent expense beginning on the date it obtains the legal right to use and control the leased space.

Fair value of financial instruments

The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities, capital leases and debt. 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 the Company, the carrying value of capital leases approximates fair value.

See Note 6, “Fair value measurements” for disclosure of the fair value of debt and further information on the fair value of the Company’s financial instruments.

Revenue recognition

Test revenue is generated from the sale of tests that provide analysis and associated interpretation of the sequencing of parts of the genome. Revenue associated with subsequent re-requisition services and family variant tests was de minimis for all periods presented.

Test revenue is recognized when persuasive evidence of an arrangement exists; delivery has occurred or services have been rendered; the fee is fixed or determinable; and collectability is reasonably assured. The criterion for whether the fee is fixed or determinable and whether collectability is reasonably assured are based on management’s judgments. When evaluating collectability, in situations where contracted reimbursement coverage does not exist, the Company considers whether the Company has sufficient history to reliably estimate a payer’s individual payment patterns. The Company reviews the number of tests paid against the number of tests billed over at least six months of payment history and the payer’s outstanding balance for unpaid tests to determine whether payments are being made at a consistently high percentage of tests billed and at appropriate amounts given the amount billed. For most payers, the Company has not been able to demonstrate a predictable pattern of collectability, and therefore recognizes revenue when payment is received. For payers who have demonstrated a consistent pattern of payment of tests billed at appropriate amounts, the Company recognizes revenue, at estimated realizable amounts, upon delivery of test results.

Other revenue consists primarily of revenue from genome network subscription services which is recognized on a straight-line basis over the subscription term, and revenue from collaboration agreements.

Cost of test revenue

Cost of revenue reflects the aggregate costs incurred in delivering the genetic testing results to clinicians and includes expenses for personnel costs including stock-based compensation, materials and supplies, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation and utilities. Costs associated with performing the Company’s test are recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test.

Income taxes

The Company uses 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.

Stock-based compensation

The Company measures its stock-based payment awards made to employees and directors based on the estimated fair values of the awards and recognizes the compensation expense over the requisite service period. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its 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. The Company grants 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 the Company. The probability of vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. The Company recognizes 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, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company accounts for compensation expense related to stock options granted to non-employees based on fair values estimated using the Black-Scholes option-pricing model. Stock options granted to non-employees are re-measured at each reporting date until the award is vested.

The Company accounts for stock issued as compensation in connection with business combinations based on the fair value of the Company’s common stock on the date of issuance.

Net loss per common share

Basic net loss per common 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 options to purchase common stock, common stock warrants, 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.

Recent accounting pronouncements

Recently issued accounting pronouncements not yet adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU 2016-13 is effective for annual and interim periods beginning on or after December 15, 2019 and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. Lessor accounting under ASU 2016-02 is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company has not yet selected an implementation date for ASU 2016-02.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). ASU 2015-14 defers the effective date of ASU 2014-09 for public business entities by one year to annual reporting periods beginning after December 15, 2017. Therefore, the new standard will become effective for the Company on January 1, 2018. The new standard permits the use of two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company plans to implement ASU 2014-09 effective January 1, 2018 using the modified retrospective method. While the Company continues to evaluate the effect that ASU 2014-09 will have on its consolidated financial statements, related disclosures and ongoing financial reporting, it anticipates the adoption of ASC 2014-09 will result in changes in the timing of revenue recognition. The Company currently recognizes revenue for the majority of third-party payers on a cash basis. Under ASC 606 the Company expects to recognize test revenue, on an accrual basis, at the time of delivery of genetic test results to its customers. This will result in earlier revenue recognition under ASC 606 relative to the cash-basis revenue recognition policy currently utilized by the Company for many of its customers.

Recently adopted accounting pronouncements

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this ASU should be applied on a prospective basis. The Company early adopted ASU 2017-04 effective January 1, 2017 and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company early adopted ASU 2017-01 effective January 1, 2017, and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In December 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. The Company early adopted ASU 2016-18 effective January 1, 2017, and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. The ASU is intended to improve financial reporting by reducing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning on or after December 15, 2016. The Company adopted ASU 2016-15 effective January 1, 2017, and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies accounting for share-based payment award transactions. ASU 2016-09 is effective for annual and interim periods beginning on or after December 15, 2016. The Company adopted ASU 2016-09 effective January 1, 2017, and, upon adoption of this standard, recorded a deferred tax asset for unrecorded excess tax benefits of approximately $0.4 million related to share-based payments through a cumulative effect adjustment to retained earnings, and a corresponding offset of the deferred tax asset with a 100% valuation allowance. In addition, under ASU 2016-09 the Company can elect a policy to account for forfeitures as they occur rather than on an estimated basis. The Company elected to continue its current policy of estimating forfeitures. The adoption of ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

The Company has determined there are no other recently adopted or issued accounting standards that had, or will have, a material impact on its Condensed Consolidated Financial Statements.

Prior Period Reclassifications

Revenue amounts in prior periods have been reclassified to conform with current period presentation, which separates test revenue from other revenue, which consists principally of revenue from genome network subscription services and collaboration arrangements.

Business combinations
Business combinations

3. Business combinations

AltaVoice

 

In January 2017, the Company acquired AltaVoice (formerly Patient Crossroads, Inc.), a privately-owned patient-centered data company with a global platform for collecting, curating, coordinating, and delivering safeguarded data from patients and clinicians. The acquisition, complemented by several other strategic partnerships, will expand the Company's genome network, designed to connect patients, clinicians, advocacy organizations, researchers and therapeutic developers to accelerate the understanding, diagnosis, and treatment of hereditary disease. Pursuant to the terms of the Stock Purchase Agreement entered into on January 6, 2017, the Company acquired all of the outstanding shares of AltaVoice for total purchase consideration of $12.4 million, payable in the Company’s common stock, as follows:

 

 

(a)

payment of $5.5 million through the issuance of 641,126 shares of the Company’s common stock;

 

(b)

payment of $5.0 million in the Company’s common stock, payable on March 31, 2018, with the common shares deliverable equal to $5.0 million divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2018;

 

(c)

payment of $5.0 million in the Company’s common stock, contingently payable on March 31, 2018 if a milestone based on a certain threshold of revenue is achieved during 2017, with the shares deliverable equal to $5.0 million divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2018; or should the foregoing milestone not be achieved, then there is a new contingent milestone based on achieving a revenue target during 2017 and 2018. Should the new milestone revenue target be achieved, then on March 31, 2019, a payment of up to $5.0 million in the Company’s common stock would be payable. The actual payout is dependent upon the 2017 and 2018 revenue target (capped at $14.0 million) times 75% less $5.5 million. This formula in effect caps the possible payout amount at $5.0 million in the Company’s common shares. The number of shares to be issued will be equal to the payout amount divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2019.

The first payment of $5.5 million was classified as equity. The second payment was discounted to $4.7 million and recorded as a liability, and will be accreted to fair value at each reporting date until the extinguishment of the liability on March 31, 2018. The third payment, representing contingent consideration, was determined to have a fair value of $2.2 million and was recorded as a liability. In accordance with ASC Topic 805, Business Combinations, the contingent consideration of $2.2 million will be remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings.

For the second payment, whose acquisition-date fair value was $4.7 million, the Company recorded accretion losses of $60,000 and $171,000 in other income (expense), net, for the three and nine months ended September 30, 2017, respectively. These accretion losses resulted from adjustments to the discounted value of the second payment, reflecting the passage of time. For the third payment, whose contingent acquisition-date fair value was $2.2 million, the Company recorded remeasurement losses of $114,000 and $385,000 in operating expense for the three and nine months ended September 30, 2017. These remeasurement losses reflected an updated estimation of fair value of the third payment. The principal input affecting that estimation was the passage of time.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash

 

$

54

 

Accounts receivable

 

 

274

 

Prepaid expense and other assets

 

 

52

 

Non-compete agreement

 

 

286

 

Developed technology

 

 

570

 

Customer relationships

 

 

3,389

 

Total identifiable assets acquired

 

 

4,625

 

Accounts payable

 

 

(28

)

Deferred revenue

 

 

(202

)

Accrued expenses

 

 

(21

)

Deferred tax liability

 

 

(1,422

)

Total liabilities assumed

 

 

(1,673

)

Net identifiable assets acquired

 

 

2,952

 

Goodwill

 

 

9,432

 

Net assets acquired

 

$

12,384

 

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Non-compete agreement

 

$

286

 

 

 

5

 

Developed technology

 

 

570

 

 

 

6

 

Customer relationships

 

 

3,389

 

 

 

10

 

 

 

$

4,245

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of AltaVoice resulted in $9.4 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by combining capabilities, technology and data to accelerate the use of genetic information for the diagnosis and treatment of hereditary diseases. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $1.4 million relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles, with an equal offset to deferred tax liability.

The results of operations of AltaVoice for the period from the acquisition date through September 30, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately $159,000 in acquisition and transitional costs associated with the acquisition of AltaVoice during the year ended December 31, 2016 and the three months ended March 31, 2017, which were primarily general and administrative related.

 

Ommdom

In June 2017, the Company acquired Ommdom, Inc. (“Ommdom”), a privately-held company that develops, commercializes and sells hereditary risk assessment and management software, including CancerGene Connect, a cancer genetic counseling platform. The acquisition expands Invitae’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. CancerGene Connect is a platform for collecting and managing genetic family histories. The platform uses a cloud-based, mobile friendly patient interface to gather family history information from patients prior to a clinician appointment. Then, analysis tools analyze patients’ predisposition to disease and provide actionable analysis to inform therapeutic decisions, such as genetic testing or treatment approaches. In addition, the platform provides clinicians with the ability to look beyond the individual to understand trends across all of their patients.

Pursuant to the terms of the Stock Exchange Agreement entered into on June 11, 2017, the Company acquired all of the outstanding shares of Ommdom for consideration of $6.1 million, payable entirely in the Company’s common stock. There was no cash consideration nor any contingent payments associated with the acquisition, other than a hold-back amount of $613,000. Per the terms of the agreement, the Company will issue shares of its common stock as follows:

 

(a)

payment of $5.5 million through the issuance of 600,108 shares of the Company’s common stock; and

 

(b)

payment of $0.6 through the issuance of 66,582 shares of the Company’s common stock, representing a hold-back amount, and payable on the twelve-month anniversary of the acquisition date.

The first payment of $5.5 million was classified as equity. The second payment of $613,000 was recorded as a stock payable liability and will be reclassified to equity upon the issuance of the Company’s common stock on the twelve-month anniversary of the acquisition date.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash

 

$

53

 

Accounts receivable

 

 

10

 

Prepaid expense and other assets

 

 

4

 

Trade name

 

 

13

 

Developed technology

 

 

2,335

 

Customer relationships

 

 

147

 

Total identifiable assets acquired

 

 

2,562

 

Accounts payable

 

 

(16

)

Accrued expenses

 

 

(17

)

Deferred tax liability

 

 

(434

)

Total liabilities assumed

 

 

(467

)

Net identifiable assets acquired

 

 

2,095

 

Goodwill

 

 

4,045

 

Net assets acquired

 

$

6,140

 

 

Finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Trade name

 

$

13

 

 

 

5

 

Developed technology

 

 

2,335

 

 

 

5

 

Customer relationships

 

 

147

 

 

 

5

 

 

 

$

2,495

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Ommdom resulted in the recognition of $4.0 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suites of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $434,000 relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles, with an equal offset to deferred tax liability.

The results of operations of Ommdom for the period from the acquisition date through September 30, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, during the three and nine months ended September 30, 2017, the Company incurred and expensed approximately $0 and $164,000, respectively, in acquisition and transitional costs associated with the acquisition of Ommdom, which were primarily general and administrative related.

Good Start Genetics

In August, 2017 the Company acquired 100% of the fully diluted equity of Good Start Genetics, Inc. (“Good Start”), a privately-held molecular diagnostics company focused on preimplantation and carrier screening for inherited disorders. The acquisition of Good Start is intended to further Invitae’s intention to create a comprehensive genetic information platform providing high-quality, affordable genetic information coupled with world-class clinical expertise to inform healthcare decisions throughout every stage of an individual’s life. The purchase consideration for the Good Start acquisition consisted of the assumption of the net liabilities of Good Start of $33.7 million at the acquisition date, August 4, 2017.

Immediately subsequent to the acquisition of Good Start, the Company paid $18.4 million in cash to settle the outstanding notes payable, accrued interest and related costs. In addition, and immediately subsequent to the acquisition, the Company settled the outstanding convertible promissory notes payable through:

 

(a)

payment of $11.9 million through the issuance of 1,148,283 shares of the Company’s common stock; and

 

(b)

payment of $3.9 million through the issuance of 380,116 shares of the Company’s common stock, representing a hold-back amount payable on the one-year anniversary of the acquisition date.

Also in connection with the acquisition of Good Start and immediately subsequent to the acquisition, the Company paid bonuses to certain members of Good Start’s management team through:

 

(a)

payment of $0.9 million through the issuance of 83,025 shares of the Company’s common stock; and

 

(b)

payment of $0.4 million through the issuance of 41,333 shares of the Company’s common stock, representing a hold-back amount payable on the one-year anniversary of the acquisition date.

These bonus payments were recorded as general and administrative expense.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The amount recorded as accounts receivable is provisional as the Company expects to receive future cash collections pertaining to Good Start revenue activities completed but not recognized at the acquisition date. The amount recorded as deferred tax liability is provisional because certain information and analysis related to Good Start’s historical net operating losses that may affect the Company’s initial valuation is still being obtained or reviewed. Thus, the provisional measurements of fair value discussed above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and restricted cash

 

$

1,381

 

Accounts receivable

 

 

2,904

 

Prepaid expense and other assets

 

 

1,579

 

Property and equipment

 

 

1,491

 

Trade name

 

 

460

 

Developed technology

 

 

5,896

 

Customer relationships

 

 

7,830

 

Total identifiable assets acquired

 

 

21,541

 

Accounts payable

 

 

(5,418

)

Accrued expenses

 

 

(6,802

)

Deferred tax liability

 

 

(4,757

)

Notes payable

 

 

(17,904

)

Convertible promissory notes payable

 

 

(15,804

)

Other liabilities

 

 

(222

)

Total liabilities assumed

 

 

(50,907

)

Net identifiable assets acquired

 

 

(29,366

)

Goodwill

 

 

29,366

 

Net assets acquired

 

$

 

 

Finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Trade name

 

$

460

 

 

 

3

 

Developed technology

 

 

5,896

 

 

 

5

 

Customer relationships

 

 

7,830

 

 

 

16

 

 

 

$

14,186

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Good Start resulted in the recognition of $29.4 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $4.8 million relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles, with an equal offset to deferred tax liability.

The results of operations of Good Start for the period from the acquisition date through September 30, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately $1.7 million in acquisition and transitional costs associated with the acquisition of Good Start during the three and nine months ended September 30, 2017, which were recorded as general and administrative expense. Of this total, approximately $1.2 million was incurred and expensed by Good Start and $0.5 million was incurred and expensed by Invitae.

CombiMatrix

In July 2017, the Company, Coronado Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (“Merger Sub), and CombiMatrix Corporation, a Delaware corporation (“CombiMatrix”), entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), pursuant to which CombiMatrix will merge with and into Merger Sub with CombiMatrix surviving as a wholly-owned subsidiary of the Company (the “CombiMatrix Merger”). The CombiMatrix Merger is subject to certain closing conditions, including approval by the stockholders of CombiMatrix. The CombiMatrix Board of Directors has set the date for the special meeting of CombiMatrix stockholders to vote on the CombiMatrix Merger proposal and related proposals for November 10, 2017. If approved, the CombiMatrix Merger is expected to close in the fourth quarter of 2017.  

In connection with the CombiMatrix Merger, the Company commenced an offer to exchange (the “Warrant Exchange Offer”) each outstanding Series F warrant to acquire one share of common stock of CombiMatrix, validly tendered and not withdrawn in the offer, for 0.3056 of a share of the Company’s common stock. For purposes of calculating and satisfying the condition in the Merger Agreement that at least 90% of the CombiMatrix Series F warrants outstanding immediately prior to the date of the Merger Agreement shall have been validly tendered and not withdrawn prior to the expiration of the Warrant Exchange Offer, which is a condition to the Company’s obligation to consummate the CombiMatrix Merger, the Company will count towards such 90% requirement any and all CombiMatrix Series F warrants that are validly exercised prior to the expiration of the Warrant Exchange Offer (including, for this purpose, such exercises as are made contingent solely upon a closing of the CombiMatrix Merger).

At the effective time of the CombiMatrix Merger, each share of CombiMatrix common stock will be converted into the right to receive a fraction of a share of the Company’s common stock (the “Exchange Ratio”). It is currently anticipated that, at the closing of the CombiMatrix Merger, the Exchange Ratio would be between approximately 0.925 and 0.855 shares of the Company’s common stock. The Exchange Ratio is determined pursuant to a formula in the Merger Agreement, and the estimate of the Exchange Ratio is subject to adjustment.

In connection with the CombiMatrix Merger and the Warrant Exchange Offer, the Company expects to issue up to a maximum of 4,058,275 shares of common stock, including common stock underlying warrants and RSUs, to CombiMatrix securityholders who, immediately after the CombiMatrix Merger, are expected to own approximately 7% of the fully-diluted common stock of the combined company, with the Company’s securityholders, whose shares of the Company’s capital stock will remain outstanding after the CombiMatrix Merger, owning approximately 93% of the fully-diluted common stock of the combined company. These estimates are based on the assumption that 100% of the CombiMatrix Series F warrants are exchanged in the Warrant Exchange Offer and subject to adjustment. If, however, all of the CombiMatrix Series F warrants are exercised prior to expiration of the Warrant Exchange Offer, the maximum amount of the Company’s shares expected by the Company to be issued would increase to 5,100,457, with CombiMatrix securityholders owning 8.7% of the fully-diluted common stock of the combined company and the Company’s securityholders owning 91.3% of the fully-diluted common stock of the combined company.

 

Pro-forma Financial Information  

 

The unaudited financial information in the table below summarizes the combined results of operations of the Company, AltaVoice, Ommdom and Good Start on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information has been calculated after adjusting the results of Invitae, AltaVoice, Ommdom and Good Start to reflect the business combination accounting effects resulting from the acquisitions. These accounting effects consist of income tax benefits relating to the tax consequences of recognizing fair value of acquired intangible assets, amortization expense from acquired intangible assets and stock-based compensation expense relating to acquisitions

The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each of the periods presented. The unaudited pro forma financial information for the three and nine months ended September 30, 2017 combines the adjusted results of the Company for the three and nine months ended September 30, 2017, which include the results of AltaVoice subsequent to January 6, 2017, the adjusted results of Ommdom subsequent to June 11, 2017 and the adjusted results of Good Start subsequent to August 4, 2017 (the acquisition dates for AltaVoice, Ommdom and Good Start, respectively), with the adjusted historical results for AltaVoice for the period from January 1, 2017 to January 6, 2017, the adjusted historical results for Ommdom for the period from January 1, 2017 to June 11, 2017, and the adjusted historical results of Good Start for the period from January 1, 2017 to August 4, 2017. The unaudited pro forma financial information for the three and nine months ended September 30, 2016 combines the adjusted historical results for the Company for those periods, with the adjusted historical results for AltaVoice, Ommdom and Good Start for the same periods.

The following table summarizes the pro forma financial information for the three and nine months ended September 30, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Total revenue

 

$

19,925

 

 

$

13,121

 

 

$

54,924

 

 

$

34,738

 

Net loss

 

$

(37,170

)

 

$

(30,355

)

 

$

(106,896

)

 

$

(86,875

)

 

Revenue attributable to Good Start since the acquisition date and recognized in the three months ended September 30, 2017 was $2.2 million. As the Company combined operations with Good Start at the acquisition date, net loss attributable to Good Start since the acquisition date cannot be practically calculated.

Goodwill and intangible assets
Goodwill and intangible assets

4. Goodwill and intangible assets

Goodwill

Details of the Company’s goodwill for the nine months ended September 30, 2017 are as follows (in thousands):

 

 

 

AltaVoice

 

 

Ommdom

 

 

Good Start

 

 

Total

 

Balance as of December 31, 2016

 

$

 

 

$

 

 

$

 

 

$

 

Goodwill acquired

 

 

9,432

 

 

 

 

 

 

 

 

 

9,432

 

Balance as of March 31, 2017

 

 

9,432

 

 

 

 

 

 

 

 

 

9,432

 

Goodwill acquired

 

 

 

 

 

4,045

 

 

 

 

 

 

4,045

 

Balance as of June 30, 2017

 

 

9,432

 

 

 

4,045

 

 

 

 

 

 

13,477

 

Goodwill acquired

 

 

 

 

 

 

 

 

 

 

29,366

 

 

 

29,366

 

Balance as of September 30, 2017

 

$

9,432

 

 

$

4,045

 

 

$

29,366

 

 

$

42,843

 

 

Intangible Assets

The following table presents details of the Company’s finite-lived intangible assets as of September 30, 2017 (in thousands):

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Estimated

Remaining

Useful

Life

(in Years)

 

Customer relationships

 

$

11,366

 

 

$

(345

)

 

$

11,021

 

 

 

13.7

 

Developed technology

 

 

8,801

 

 

 

(412

)

 

 

8,389

 

 

 

4.8

 

Non-compete agreement

 

 

286

 

 

 

(43

)

 

 

243

 

 

 

4.3

 

Trade name

 

 

474

 

 

 

(27

)

 

 

447

 

 

 

2.9

 

 

 

$

20,927

 

 

$

(827

)

 

$

20,100

 

 

 

 

 

 

Acquisition-related intangibles included in the above table are finite-lived and are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are realized. Amortization expense was $0.6 million and $0.8 million for the three and nine months ended September 30, 2017, respectively. As all acquisition-related intangible assets were acquired in 2017, no amortization was recorded for the three and nine months ended September 30, 2016. Intangible assets are carried at cost less accumulated amortization. Amortization expense is recorded to research and development, sales and marketing and general and administrative expense.

The following table summarizes the Company’s estimated future amortization expense of intangible assets with finite lives as of September 30, 2017 (in thousands):

 

 

 

Amount

 

Remainder of 2017

 

$

703

 

2018

 

 

2,812

 

2019

 

 

2,812

 

2020

 

 

2,748

 

2021

 

 

2,658

 

Thereafter

 

 

8,367

 

 

 

$

20,100

 

 

Balance sheet components
Balance sheet components

5. Balance sheet components

Cash equivalents and marketable securities

The following is a summary of cash equivalents and marketable securities (in thousands):

 

 

September 30, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

30,855

 

 

$

 

 

$

 

 

$

30,855

 

U.S. treasury notes

 

 

8,764

 

 

 

 

 

 

(3

)

 

 

8,761

 

U.S. government agency securities

 

 

58,571

 

 

 

 

 

 

(54

)

 

 

58,517

 

 

 

$

98,190

 

 

$

 

 

$

(57

)

 

$

98,133

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

25,450

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,405

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67,278

 

Total cash equivalents, restricted cash and

   marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

98,133

 

 

 

 

December 31, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

19,457

 

 

$

 

 

$

 

 

$

19,457

 

U.S. treasury notes

 

 

11,515

 

 

 

2

 

 

 

 

 

 

11,517

 

U.S. government agency securities

 

 

14,283

 

 

 

 

 

 

(2

)

 

 

14,281

 

 

 

$

45,255

 

 

$

2

 

 

$

(2

)

 

$

45,255

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14,760

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,697

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25,798

 

Total cash equivalents, restricted cash and

   marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

45,255

 

 

The total amount of unrealized losses at September 30, 2017 was $57,000. The total fair value of investments with unrealized losses at September 30, 2017 was $67.3 million. None of the available-for-sale securities held as of September 30, 2017 has been in a continuous unrealized loss position for more than one year. At September 30, 2017, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. The Company believes it is more likely than not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

 

At September 30, 2017, the remaining contractual maturities of available-for-sale securities ranged from two to 16 months. For the nine months ended September 30, 2017, there were no realized gains or losses on available-for-sale securities.

 

Property and equipment, net

Property and equipment consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Leasehold improvements

 

$

12,442

 

 

$

1,256

 

Laboratory equipment

 

 

16,661

 

 

 

13,644

 

Equipment under capital lease

 

 

8,367

 

 

 

5,871

 

Computer equipment

 

 

2,947

 

 

 

2,514

 

Software

 

 

2,515

 

 

 

2,489

 

Furniture and fixtures

 

 

542

 

 

 

238

 

Automobiles

 

 

20

 

 

 

20

 

Construction-in-progress

 

 

2,507

 

 

 

12,229

 

Total property and equipment, gross

 

 

46,001

 

 

 

38,261

 

Accumulated depreciation and amortization

 

 

(16,693

)

 

 

(14,468

)

Total property and equipment, net

 

$

29,308

 

 

$

23,793

 

 

Depreciation expense was $1.8 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively, and $5.1 million and $4.9 million for the nine months ended September 30, 2017 and 2016, respectively.

 

 

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Accrued compensation and related expenses

 

$

5,315

 

 

$

3,072

 

Accrued laboratory materials purchases

 

 

1,835

 

 

 

338

 

Accrued outsourced services

 

 

803

 

 

 

 

Accrued professional services

 

 

914

 

 

 

446

 

Accrued construction in progress

 

 

25

 

 

 

1,215

 

Lease incentive obligation, current

 

 

485

 

 

 

468

 

Liabilities associated with business combinations

 

 

9,851

 

 

 

 

Other

 

 

3,039

 

 

 

1,172

 

Total accrued liabilities

 

$

22,267

 

 

$

6,711

 

 

 

Other long-term liabilities

Other long-term liabilities consisted of the following (in thousands):

 

 

 

September 30,

2017

 

 

December 31,

2016

 

Lease incentive obligation, non-current

 

$

3,891

 

 

$

4,243

 

Deferred rent, non-current

 

 

4,746

 

 

 

3,419

 

Liabilities associated with business combination

 

 

2,585

 

 

 

 

Other non-current liabilities

 

 

371

 

 

 

175

 

Total other long-term liabilities

 

$

11,593

 

 

$

7,837

 

 

Fair value measurements
Fair value measurements

6. Fair value measurements

 

Financial assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The authoritative guidance establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.

The three-level hierarchy for the inputs to valuation techniques is summarized as follows:

Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.

Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable.

Level 3—Unobservable inputs that reflect the reporting entity’s own assumptions.

The following tables set forth the fair value of the Company’s consolidated financial instruments that were measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (in thousands):

 

 

 

September 30, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

30,855

 

 

$

 

 

$

 

 

$

30,855

 

U.S. treasury notes

 

 

8,761

 

 

 

 

 

 

 

 

 

8,761

 

U.S. government agency securities

 

 

 

 

 

58,517

 

 

 

 

 

 

58,517

 

Total financial assets

 

$

39,616

 

 

$

58,517

 

 

$

 

 

$

98,133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

$

 

 

$

2,585

 

 

$

2,585

 

Total financial liabilities

 

$

 

 

$

 

 

$

2,585

 

 

$

2,585

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

19,457

 

 

$

 

 

$

 

 

$

19,457

 

U.S. treasury notes

 

 

11,517

 

 

 

 

 

 

 

 

 

11,517

 

U.S. government agency securities

 

 

 

 

 

14,281

 

 

 

 

 

 

14,281

 

Total financial assets

 

$

30,974

 

 

$

14,281

 

 

$

 

 

$

45,255

 

There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.

 

The following table presents the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis (in thousands):

 

 

 

Level 3

 

 

 

Contingent

Consideration

Liability

 

Balance as of December 31, 2016

 

$

 

Contingent consideration

 

 

2,200

 

Change in estimate of fair value

 

 

385

 

Balance as of September 30, 2017

 

$

2,585

 

 

The Company’s debt securities of U.S. government agency entities are classified as Level 2 as they are valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third party data providers, including but not limited to benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data.

As of September 30, 2017, the Company had a contingent obligation up to $5.0 million payable in the Company’s common stock to the former owners of AltaVoice in conjunction with the Company’s acquisition of AltaVoice in January 2017. The contingency is dependent upon future revenues attributable to AltaVoice. If such revenues are least $10 million in 2017, the Company will make a payment of $5.0 million in the Company’s common stock on March 31, 2018. If revenue attributable to AltaVoice is less than $10 million in 2017, but the combined revenue attributable to AltaVoice for the combined period of 2017 and 2018 is at least $10 million, the Company will make a payment of up to $5.0 million in the Company’s common stock on March 31, 2019. The Company estimated the fair value of the contingent consideration at $2.2 million at the acquisition date of January 6, 2017, based on a Monte Carlo simulation, as well as estimates of the 30-day trailing price of its stock at certain dates, its volatility assumptions and its revenue forecasts, all of which were significant inputs in the Level 3 measurement not supported by market activity. The value of the liability will be subsequently remeasured to fair value at each reporting date. Changes to revenue forecasts can significantly affect the estimated fair value of the contingent consideration. Changes in estimated fair value will be recorded as a component of operating expenses until the contingency is paid or expires. The change in the fair value of the contingent consideration between the acquisition date and September 30, 2017 was an increase of $385,000.

The fair value of the Company’s outstanding debt is estimated using the net present value of future debt payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding debt at September 30, 2017 and December 31, 2016, are as follows (in thousands):

 

 

 

September 30, 2017

 

 

December 31, 2016

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Debt

 

$

39,030

 

 

$

40,184

 

 

$

12,102

 

 

$

11,905

 

 

Commitments and contingencies
Commitments and contingencies

7. Commitments and contingencies

Operating leases

In September 2015, the Company entered into a lease agreement for a headquarters and production facility in San Francisco, California. This lease expires in July 2026 and the Company may renew the lease for an additional ten years. The Company has determined the lease term to be a ten-year period expiring in 2026. The lease term commenced when the Company took occupancy of the facility in February 2016. In connection with the execution of the lease, the Company provided a security deposit of approximately $4.6 million which is included in restricted cash in the Company’s consolidated balance sheets. Minimum annual rent under the lease is subject to increases based on stated rental adjustment terms. In addition, per the terms of the lease, the Company will receive a $5.2 million lease incentive in the form of reimbursement from the landlord for a portion of the costs of leasehold improvements the Company has made to the facility. The assets purchased with the lease incentive are included in property and equipment, net, in the Company’s consolidated balance sheets and the lease incentive is recognized as a reduction of rental expense on a straight-line basis over the term of the lease. At September 30, 2017, all of the lease incentive had been utilized by the Company and reimbursements totaling $4.4 million had been received from the landlord. Aggregate future minimum lease payments for the new facility at September 30, 2017 were approximately $65.8 million.

In addition to the security deposit of approximately $4.6 million for the headquarters and production facility, the Company has provided, as collateral for other leases, security deposits of $0.4 million and $0.8 million at September 30, 2017 and December 31, 2016, respectively, which are included in other assets in the Company’s consolidated balance sheets. Security deposits relating to Good Start facilities were $0.4 million at September 30, 2017 and are included in restricted cash in the Company’s consolidated balance sheet as of that date.

Future minimum payments under non-cancelable operating leases as of September 30, 2017 are as follows (in thousands):

 

 

 

Amounts

 

2017 (remainder of year)

 

$

2,268

 

2018

 

 

9,499

 

2019

 

 

9,459

 

2020

 

 

9,497

 

2021

 

 

9,727

 

Thereafter

 

 

39,523

 

Total minimum lease payments

 

$

79,973

 

 

Rent expense was $2.1 million and $2.2 million for the three months ended September 30, 2017 and 2016 respectively and $6.1 million and $6.3 million for the nine months ended September 30, 2017 and 2016, respectively.

Debt financing

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank under which term loans were available for purchases of equipment up to an aggregate of $15.0 million. As of December 31, 2016, obligations under the Loan Agreement were $12.1 million.

On March 15, 2017, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with a lender pursuant to which the Company borrowed an initial term loan of $40.0 million, and received net proceeds of approximately $39.7 million. Subject to certain conditions, the Company will also be eligible to borrow a second term loan of $20.0 million in the first quarter of 2018. In connection with entering into the Loan and Security Agreement, the Company terminated the Loan Agreement and repaid in full the balance of its obligations under such agreement, approximately $12.1 million. The payment to the lender under the Loan Agreement included a prepayment premium of $670,000, which was classified as extinguishment of debt and included in other income (expense), net.

Term loans under the Loan and Security Agreement bear interest at a floating rate equal to an index rate plus 7.73%, where the index rate is the greater of 0.77% or the 30-day U.S. Dollar London Interbank Offered Rate “LIBOR” as reported in The Wall Street Journal, with the floating rate resetting monthly subject to a floor of 8.5%. The Company can make monthly interest-only payments until May 1, 2019 (or, subject to certain conditions, May 1, 2020), and thereafter monthly payments of principal and interest are required to fully amortize the borrowed amount by a final maturity date of March 1, 2022. A fee of 5% of each funded draw is due at the earlier of prepayment or loan maturity, a facility fee of 0.5% is due upon funding for each draw, and a prepayment fee of between 1% and 3% of the outstanding balance will apply in the event of a prepayment. Concurrent with each term loan, the Company will grant to the lender a warrant to acquire shares of the Company’s common stock equal to the quotient of 3% of the funded amount divided by a per share exercise price equal to the lower of the average closing price for the previous ten days of trading (calculated on the day prior to funding) or the closing price on the day prior to funding. In connection with the initial term loan, the Company granted the lender a warrant to purchase 116,845 shares of common stock at an exercise price of $10.27 per share. The Company classified the warrant as equity and determined the fair value of the warrant to be $740,000. The warrant has a term of ten years from the date of issuance and includes a cashless exercise provision.

The Company’s obligations under the Loan and Security Agreement are subject to quarterly covenants to achieve certain revenue levels as well as additional covenants, including limits on the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of its capital stock, repurchase stock and make investments, in each case subject to certain exceptions. The Company’s obligations under the Loan and Security Agreement are secured by a security interest on substantially all the Company’s assets, excluding its intellectual property.

At September 30, 2017, obligations under the Loan and Security Agreement were $40.0 million. Debt issuance costs related to the Loan and Security Agreement of $339,000 and the warrant fair value of $740,000 were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the Loan and Security Agreement. Future payments under the Loan and Security Agreement as of September 30, 2017 are as follows (in thousands):

 

 

 

Amounts

 

2017 (remainder of year)

 

$

906

 

2018

 

 

3,634

 

2019

 

 

12,534

 

2020

 

 

15,953

 

2021

 

 

14,701

 

Thereafter

 

 

5,481

 

Total remaining debt payments

 

 

53,209

 

Less: amount representing debt discount

 

 

(970

)

Less: amount representing interest

 

 

(13,209

)

Present value of remaining debt payments

 

 

39,030

 

Less: current portion

 

 

 

Total non-current debt obligation

 

$

39,030

 

 

Interest expense related to the Loan and Security Agreement and the Loan Agreement was $1.3 million and $124,000 for the nine months ended September 30, 2017 and 2016, respectively.

Capital leases

The Company has entered into various capital lease agreements to obtain laboratory equipment. The terms of the capital leases are typically three years with interest rates ranging from 4.3% to 6.3%. The leases are secured by the underlying equipment. The portion of the future payments designated as principal repayment was classified as a capital lease obligation on the consolidated balance sheets.

Future payments under capital leases at September 30, 2017 are as follows (in thousands):

 

 

 

Amounts

 

2017 (remainder of year)

 

$

669

 

2018

 

 

1,743

 

2019

 

 

1,450

 

2020

 

 

746

 

Total capital lease obligations

 

 

4,608

 

Less: amount representing interest

 

 

(337

)

Present value of net minimum capital lease

   payments

 

 

4,271

 

Less: current portion

 

 

(1,851

)

Total non-current capital lease obligations

 

$

2,420

 

 

Interest expense related to capital leases was $45,000 and $60,000 for the nine months ended September 30, 2017 and 2016, respectively.

Property and equipment under capital leases was $8.4 million and $5.9 million as of September 30, 2017 and December 31, 2016, respectively. Accumulated depreciation and amortization, collectively, on these assets was $2.5 million and $3.4 million at September 30, 2017 and December 31, 2016, respectively.

Guarantees and indemnifications

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company indemnifies its directors and officers for certain events or occurrences while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company maintains director and officer liability insurance. This insurance allows the transfer of the risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company did not record any liabilities associated with these indemnification agreements at September 30, 2017 or December 31, 2016.

Contingencies

The Company was not a party to any material legal proceedings at September 30, 2017, or at the date of this report. The Company may from time to time become involved in various legal proceedings arising in the ordinary course of business, and the resolution of any such claims could be material.

Stockholders' Equity
Stockholders’ Equity

8. Stockholders’ Equity

Private placement

On August 3, 2017, in a private placement to certain accredited investors, the Company sold 5,188,235 shares of its common stock at a price of $8.50 per share, and 3,458,823 shares of its Series A convertible preferred stock at a price of $8.50 per share, for gross proceeds of approximately $73.5 million and net proceeds of $68.9 million. The Series A preferred stock is a non-voting common stock equivalent and conversion of the Series A preferred stock is prohibited if the holder exceeds a specified threshold of voting security ownership. The Series A preferred stock is convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like.

Stock incentive plans
Stock incentive plans

9. Stock incentive plans

Stock incentive plans

In 2010, the Company adopted the 2010 Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the granting of stock-based awards to employees, directors, and consultants under terms and provisions established by the Board of Directors. Under the terms of the 2010 Plan, options may be granted at an exercise price not less than fair market value. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and nonstatutory stock options must be at least 110% of fair market of the common stock on the grant date, as determined by the Board of Directors. The terms of options granted under the 2010 Plan may not exceed ten years.

In January 2015, the Company adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which became effective upon the closing of the Company’s initial public offering (“IPO”). The 2015 Plan had 4,370,452 shares of common stock reserved for future issuance at the time of its effectiveness, which included 120,452 shares under the 2010 Plan which were transferred to the 2015 Plan upon effectiveness of the 2015 Plan. The 2015 Plan provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 through January 1, 2025. In addition, shares subject to awards under the 2010 Plan that are forfeited or terminated will be added to the 2015 Plan. The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, stock units, stock appreciation rights and other forms of equity compensation, all of which may be granted to employees, including officers, non-employee directors and consultants. Additionally, the 2015 Plan provides for the grant of cash-based awards.

Options granted generally vest over a period of four years. Typically, the vesting schedule for options granted to newly hired employees provides that 1/4 of the award vests upon the first anniversary of the employee’s date of hire, with the remainder of the award vesting monthly thereafter at a rate of 1/48 of the total shares subject to the option. All other options typically vest in equal monthly installments over the four-year vesting schedule.

RSUs generally vest over a period of three years. Typically, the vesting schedule for RSUs provides that one third of the award vests upon each anniversary of the grant date.

In February 2016, the Company granted PRSUs under the 2015 Plan, which PRSUs could be earned based on the achievement of specified performance conditions measured over a period of approximately 12 months. In February 2017, upon the Audit Committee’s determination of the level of achievement, 352,045 fully vested stock units were awarded to holders of PRSUs.

Based on its evaluations of the probability of achieving performance conditions, the Company recorded stock-based compensation expense of zero for the three months ended September 30, 2017 and 2016, and $0.4 million and zero for the nine months ended September 30, 2017 and 2016, respectively, related to the PRSUs.

Activity under the 2010 Plan and the 2015 Plan is set forth below (in thousands, except share and per share amounts and years):

 

 

 

Shares

Available

For Grant

 

 

Stock

Options

Outstanding

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Life (years)

 

 

Aggregate

Intrinsic

Value (000's)

 

Balances at December 31, 2016

 

 

1,375,766

 

 

 

4,490,662

 

 

$

8.21

 

 

 

8.11

 

 

$

5,312

 

Additional shares reserved

 

 

2,923,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(607,398

)

 

 

607,398

 

 

$

9.20

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

499,917

 

 

 

(499,917

)

 

$

9.58

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

(333,921

)

 

$

4.40