INVITAE CORP, 10-Q filed on 11/7/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 28, 2016
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, 2016 
 
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
 
32,445,924 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 37,745 
$ 73,238 
Marketable securities
29,003 
53,780 
Prepaid expenses and other current assets
8,216 
4,292 
Total current assets
74,964 
131,310 
Property and equipment, net
21,226 
18,709 
Restricted cash
4,697 
4,831 
Other assets
811 
1,826 
Total assets
101,698 
156,676 
Current liabilities:
 
 
Accounts payable
2,204 
3,500 
Accrued liabilities
6,350 
4,253 
Capital lease obligation, current portion
1,383 
1,588 
Debt, current portion
3,377 
1,536 
Total current liabilities
13,314 
10,877 
Capital lease obligation, net of current portion
592 
1,576 
Debt, net of current portion
9,568 
5,504 
Other long-term liabilities
7,380 
343 
Total liabilities
30,854 
18,300 
Commitments and contingencies (Note 5)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0001 par value: Authorized: 20,000,000 shares; Issued and outstanding: no shares as of September 30, 2016 and December 31, 2015
   
   
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 32,445,924 and 31,935,121 shares as of September 30, 2016 and December 31, 2015, respectively
Accumulated other comprehensive income (loss)
18 
(15)
Additional paid-in capital
321,192 
313,349 
Accumulated deficit
(250,370)
(174,962)
Total stockholders’ equity
70,844 
138,376 
Total liabilities and stockholders’ equity
$ 101,698 
$ 156,676 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2016
Dec. 31, 2015
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
Preferred stock, outstanding shares
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
32,445,924 
31,935,121 
Common stock, shares outstanding
32,445,924 
31,935,121 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Income Statement [Abstract]
 
 
 
 
Revenue
$ 6,276 
$ 2,187 
$ 15,812 
$ 5,217 
Costs and operating expenses:
 
 
 
 
Cost of revenue
7,242 
3,952 
19,705 
11,017 
Research and development
11,482 
11,134 
32,855 
31,426 
Selling and marketing
6,803 
5,439 
20,689 
16,368 
General and administrative
5,655 
4,118 
17,794 
11,592 
Total costs and operating expenses
31,182 
24,643 
91,043 
70,403 
Loss from operations
(24,906)
(22,456)
(75,231)
(65,186)
Other income (expense), net
50 
(9)
122 
(111)
Interest expense
(115)
(62)
(299)
(125)
Net loss
$ (24,971)
$ (22,527)
$ (75,408)
$ (65,422)
Net loss per share attributable to common stockholders, basic and diluted
$ (0.77)
$ (0.71)
$ (2.35)
$ (2.43)
Shares used in computing net loss per share, basic and diluted
32,315,038 
31,852,796 
32,145,806 
26,962,821 
Condensed Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
 
Net loss
$ (24,971)
$ (22,527)
$ (75,408)
$ (65,422)
Other comprehensive gain (loss):
 
 
 
 
Unrealized gain (loss) on available-for-sale marketable securities, net of tax
(14)
33 
11 
Comprehensive loss
$ (24,985)
$ (22,520)
$ (75,375)
$ (65,411)
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Cash flows from operating activities:
 
 
Net loss
$ (75,408)
$ (65,422)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
4,934 
3,718 
Stock-based compensation
6,350 
1,837 
Amortization of premium on marketable securities
253 
545 
Loss on disposal of assets
933 
15 
Changes in operating assets and liabilities:
 
 
Prepaid expenses and other current assets
668 
(651)
Other assets
1,015 
208 
Accounts payable
(946)
(216)
Accrued expenses and other liabilities
2,929 
77 
Net cash used in operating activities
(59,272)
(59,889)
Cash flows from investing activities:
 
 
Purchases of marketable securities
(78,915)
(186,312)
Proceeds from sales of marketable securities
 
15,891 
Proceeds from maturities of marketable securities
103,472 
71,634 
Purchases of property and equipment
(7,117)
(5,304)
Change in restricted cash
134 
(4,697)
Net cash provided by (used in) investing activities
17,574 
(108,788)
Cash flows from financing activities:
 
 
Proceeds from issuance of common stock upon initial public offering, net of issuance costs
 
107,116 
Proceeds from exercise of stock options
1,489 
273 
Proceeds from loan agreement
7,500 
5,000 
Loan payments
(1,595)
(165)
Capital lease principal payments
(1,189)
(1,528)
Loan agreement financing costs
 
(47)
Net cash provided by financing activities
6,205 
110,649 
Net decrease in cash and cash equivalents
(35,493)
(58,028)
Cash and cash equivalents at beginning of period
73,238 
107,027 
Cash and cash equivalents at end of period
37,745 
48,999 
Supplemental cash flow information:
 
 
Interest paid
299 
125 
Supplemental cash flow information of non-cash investing and financing activities:
 
 
Equipment acquired through capital leases
 
1,639 
Conversion of convertible preferred stock to common stock
 
202,305 
Purchases of property and equipment in accounts payable and accrued liabilities
$ 1,870 
$ 94 
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 laboratory is located in San Francisco, California. The Company currently has more than 1,000 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. 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. The Company will need to raise additional capital to meet anticipated cash requirements for the 12-month period following the filing date of this report. Management regularly considers fundraising opportunities and will determine the timing, nature and amount of financings based upon various factors, including market conditions and the Company’s operating plans. However, no assurance can be given as to whether any needed financing will be available on terms acceptable to the Company, if at all. If the Company is unable to successfully raise additional capital when needed, it may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives.

Initial public offering

In February 2015, the Company completed an initial public offering (“IPO”) of its common stock. In connection with its IPO, the Company sold 7,302,500 shares of common stock at $16.00 per share for aggregate net proceeds of $105.7 million after underwriting discounts and commissions and offering expenses payable by the Company. This includes the exercise in full by the underwriters of their option to purchase up to 952,500 additional shares of common stock at the same price to cover over-allotments. Upon the closing of the IPO, all shares of convertible preferred stock then outstanding converted into 23,521,889 shares of common stock.

Upon the effectiveness of the Amended and Restated Certificate of Incorporation of the Company on February 12, 2015, the number of shares of capital stock the Company is authorized to issue was increased to 420,000,000 shares, of which 400,000,000 shares are common stock and 20,000,000 shares are preferred stock. Both the common stock and preferred stock have a par value of $0.0001 per share. There were no shares of preferred stock outstanding at September 30, 2016 or December 31, 2015.

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, 2015. The results for the three and nine months ended September 30, 2016 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, are immaterial to the Company’s results for the first and second quarters of 2016, do 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 related to prior periods: reclassification for asset impairment charges from other income (expense) to general and administrative expense of $0.2 million for the quarter ended March 31, 2016; and reclassification for asset impairment charges from other income (expense) to general and administrative expense of $0.7 million for the quarter 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 recoverability of long-lived 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 and cash equivalents. The Company’s cash and cash equivalents are held by financial institutions in the United States and Chile. Such deposits may exceed federally insured limits.

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 securities in 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 income (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.

Restricted cash

Restricted cash consists of money market funds that serve as: collateral for a security deposit for the Company’s lease agreement for a production facility entered into in September 2015; 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.

Internal-use software

The Company capitalizes third-party costs incurred in the application development stage to design and implement internal-use software. Maintenance and training costs relating to internal-use software are expensed as incurred. Capitalized internal-use software costs are recorded as property and equipment and are amortized over estimated useful lives of up to three years on a straight line basis. Amortization of capitalized internal-use software costs is recorded as sales and marketing expense.

During the nine months ended September 30, 2016 and 2015, the Company capitalized $0 and $1.5 million, respectively, of internal-use software development costs. Internal-use software amortization was $990,000 and $390,000 in the nine months ended September 30, 2016 and 2015, respectively. The carrying value of capitalized internal-use software was $440,000 and $1.4 million at September 30, 2016 and December 31, 2015, respectively. The weighted average remaining useful life of capitalized internal-use software at September 30, 2016 was 4 months.

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, capital leases and debt relating to equipment financing. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, and accounts payable, approximate fair value due to their short maturities. Based on borrowing rates available to the Company, the carrying value of capital leases approximates fair value.

See Note 4, “Fair value measurements” for further information on the fair value of the Company’s financial instruments.

Revenue recognition

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 was de minimis for all periods presented.

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 several 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.

Cost of 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 the fair values estimated using the Black-Scholes model. Stock options granted to non-employees are re-measured at each reporting date until the award is vested.

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, 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. There were no shares subject to repurchase during the nine months ended September 30, 2016. Common shares subject to repurchase in the amount of 8,080 were excluded from weighted-average shares for the three and nine months ended September 30, 2015.

Recent accounting pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU 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 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 and early adoption is permitted. The Company will adopt ASU 2016-09 in the first quarter of 2017 and 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 2014-09 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 and early application is permitted for periods beginning on or after January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company plans to implement ASU 2014-09 effective January 1, 2018 and has not yet determined a transition method.

In August 2014, the FASB issued ASU No. 2014-15 (Subtopic 205- 40), Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 will be effective in the fourth quarter of 2016. Early application is permitted. The adoption of this standard is not expected to have an effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

Balance sheet components
Balance sheet components

3. Balance sheet components

Cash equivalents and marketable securities

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

 

  

 

September 30, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

22,779

 

 

$

 

 

$

 

 

$

22,779

 

U.S. treasury notes

 

 

11,007

 

 

 

12

 

 

 

 

 

 

11,019

 

U.S. government agency securities

 

 

17,978

 

 

 

6

 

 

 

 

 

 

17,984

 

 

 

$

51,764

 

 

$

18

 

 

$

 

 

$

51,782

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,082

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,697

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,003

 

Total cash equivalents, restricted cash and marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

51,782

 

 

 

 

December 31, 2015

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

39,998

 

 

$

 

 

$

 

 

$

39,998

 

U.S. treasury notes

 

 

4,006

 

 

 

 

 

 

 

 

 

4,006

 

U.S. government agency securities

 

 

65,586

 

 

 

1

 

 

 

(16

)

 

 

65,571

 

 

 

$

109,590

 

 

$

1

 

 

$

(16

)

 

$

109,575

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

50,964

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,831

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,780

 

Total cash equivalents, restricted cash and marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

109,575

 

 

At September 30, 2016, the remaining contractual maturities of available-for-sale securities were less than one year. For the three and nine months ended September 30, 2016, 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,

2016

 

 

December 31,

2015

 

Leasehold improvements

 

$

1,259

 

 

$

2,548

 

Laboratory equipment

 

 

13,492

 

 

 

10,461

 

Equipment under capital lease

 

 

5,871

 

 

 

8,224

 

Computer equipment

 

 

2,488

 

 

 

2,397

 

Software

 

 

2,489

 

 

 

2,368

 

Furniture and fixtures

 

 

238

 

 

 

210

 

Automobiles

 

 

20

 

 

 

20

 

Construction-in-progress

 

 

8,158

 

 

 

1,202

 

Total property and equipment, gross

 

 

34,015

 

 

 

27,430

 

Accumulated depreciation and amortization

 

 

(12,789

)

 

 

(8,721

)

Total property and equipment, net

 

$

21,226

 

 

$

18,709

 

 

Depreciation and amortization expense was $4.9 million and $3.7 million for the nine months ended September 30, 2016 and 2015, respectively.

 

 

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

September 30,

2016

 

 

December 31,

2015

 

Accrued compensation and related expenses

 

$

2,377

 

 

$

2,307

 

Accrued laboratory materials purchases

 

 

137

 

 

 

426

 

Accrued professional services

 

 

618

 

 

 

272

 

Accrued construction in progress

 

 

1,508

 

 

 

 

Lease incentive obligation, current

 

 

468

 

 

 

 

Other

 

 

1,242

 

 

 

1,248

 

Total accrued liabilities

 

$

6,350

 

 

$

4,253

 

 

 

Other long-term liabilities

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

 

 

 

September 30,

2016

 

 

December 31,

2015

 

Lease incentive obligation, non-current

 

$

4,360

 

 

$

107

 

Deferred rent, non-current

 

 

2,846

 

 

 

98

 

Other non-current liabilities

 

 

174

 

 

 

138

 

Total other long-term liabilities

 

$

7,380

 

 

$

343

 

 

Fair value measurements
Fair value measurements

4. 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 briefly 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, 2016 and December 31, 2015 (in thousands):

 

 

 

September 30, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

22,779

 

 

$

 

 

$

 

 

$

22,779

 

U.S. treasury notes

 

 

11,019

 

 

 

 

 

 

 

 

 

11,019

 

U.S. government agency securities

 

 

 

 

 

17,984

 

 

 

 

 

 

17,984

 

Total financial assets

 

$

33,798

 

 

$

17,984

 

 

$

 

 

$

51,782

 

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

39,998

 

 

$

 

 

$

 

 

$

39,998

 

U.S. treasury notes

 

 

4,006

 

 

 

 

 

 

 

 

 

4,006

 

U.S. government agency securities

 

 

 

 

 

65,571

 

 

 

 

 

 

65,571

 

Total financial assets

 

$

44,004

 

 

$

65,571

 

 

$

 

 

$

109,575

 

 

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.

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

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, 2016 and December 31, 2015, are as follows (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Debt

 

$

12,946

 

 

$

12,671

 

 

$

7,040

 

 

$

6,952

 

 

Commitments and contingencies
Commitments and contingencies

5. Commitments and contingencies

Operating Leases

In September 2015, the Company entered into a lease agreement for a 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 makes 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, 2016, all of the incentive had been utilized by the Company. Aggregate future minimum lease payments for the new facility at September 30, 2016 were approximately $70.8 million.

In addition to the security deposit of approximately $4.6 million for the new production facility, the Company has provided, as collateral for other leases, security deposits of $0.8 million at September 30, 2016 and at December 31, 2015, which are included in other assets in the Company’s consolidated balance sheets.

Future minimum payments under non-cancelable operating leases as of September 30, 2016 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2016 (remainder of year)

 

$

2,041

 

2017

 

 

7,043

 

2018

 

 

6,898

 

2019

 

 

6,946

 

2020

 

 

6,917

 

Thereafter

 

 

44,216

 

Total minimum lease payments

 

$

74,061

 

 

Rent expense was $6.3 million and $2.7 million for the nine months ended September 30, 2016 and 2015, respectively.

Equipment Financing

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank under which term loans for purchases of equipment up to an aggregate of $15.0 million are available in tranches not to exceed $2.5 million. The Company may request additional tranches to finance the purchase of equipment through December 31, 2016, subject to certain restrictions. The term loans under the Loan Agreement bear interest at a floating rate equal to 0.25% below the prime rate as published in the Wall Street Journal effective on the date the change in the prime rate becomes effective. The Company is required to repay the outstanding principal and accrued but unpaid interest on each tranche in equal monthly installments beginning one month after each advance and ending on July 17, 2020 (the “Term Date”). Any then-unpaid principal and interest on advances under the Loan Agreement are payable on the Term Date. The Company may, at its option, prepay the borrowings by paying the lender a prepayment premium.

The Company’s obligations under the Loan Agreement are subject to covenants, including covenants to maintain a minimum liquidity level with the bank, and additional covenants limiting 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. At September 30, 2016, the Company was in compliance with all covenants under the Loan Agreement. The Company’s obligations under the Loan Agreement are secured by a security interest on substantially all of its assets, excluding its intellectual property and certain other assets.

At September 30, 2016, obligations under the Loan Agreement were $12.9 million. Debt issuance costs related to the Loan Agreement of $47,000 were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the Loan Agreement. Future payments under the Loan Agreement as of September 30, 2016 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2016 (remainder of year)

 

$

945

 

2017

 

 

3,728

 

2018

 

 

3,617

 

2019

 

 

3,508

 

2020

 

 

1,997

 

Total remaining debt payments

 

 

13,795

 

Less: amount representing debt discount

 

 

(36

)

Less: amount representing interest

 

 

(814

)

Present value of remaining debt payments

 

 

12,945

 

Less: current portion

 

 

(3,377

)

Total non-current debt obligation

 

$

9,568

 

 

Interest expense related to the Loan Agreement was $215,000 and $0 for the nine months ended September 30, 2016 and 2015, 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 3.8% to 4.3%. 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, 2016 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2016 (remainder of year)

 

$

419

 

2017

 

 

1,350

 

2018

 

 

269

 

Total capital lease obligations

 

 

2,038

 

Less: amount representing interest

 

 

(63

)

Present value of net minimum capital lease payments

 

 

1,975

 

Less: current portion

 

 

(1,383

)

Total non-current capital lease obligations

 

$

592

 

 

Interest expense related to capital leases was $84,000 and $105,000 for the nine months ended September 30, 2016 and 2015, respectively.

Property and equipment under capital leases was $5.9 million and $8.2 million as of September 30, 2016 and December 31, 2015, respectively. Accumulated depreciation and amortization, collectively, on these assets was $3.1 million and $2.8 million at September 30, 2016 and December 31, 2015, respectively.

Guarantees and indemnifications

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company indemnifies its officers and directors 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, 2016 or December 31, 2015.

Contingencies

On September 16, 2015, GeneDx, Inc. and Bio-Reference Laboratories, Inc. filed an action against the Company in the U.S. District Court for the District of New Jersey. The Complaint alleges that the Company wrongfully solicited and hired employees away from the plaintiffs in order to acquire access to trade secrets and other confidential business information belonging to the plaintiffs. The Complaint alleges claims for relief based on legal theories of unfair competition, tortious interference with prospective economic advantage, tortious interference with contract, and trade secret misappropriation, and seeks injunctive relief; damages, including punitive damages; and attorneys’ fees and costs. On October 22, 2015, the Company filed a motion to dismiss the action for lack of personal jurisdiction or, in the alternative, to transfer the action to the U.S. District Court for the Northern District of California. On November 13, 2015, the plaintiffs filed their First Amended Complaint. On December 14, 2015, the Company responded by again filing a motion to dismiss the action for lack of personal jurisdiction or, in the alternative, to transfer the action to the U.S. District Court for the Northern District of California. Following the filing of opposition papers by the plaintiffs and reply papers by the Company, the U.S. District Court for the District of New Jersey granted the motion to dismiss by order dated July 26, 2016. The plaintiffs did not appeal the decision and the deadline to do so has passed.  

The Company was not a party to any other material legal proceedings at September 30, 2016, 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.

Stock incentive plans
Stock incentive plans

6. 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 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 may be earned based on the achievement of specified performance conditions measured over a period of approximately 12 months. Holders of PRSUs may receive 0% to 100% of the target number of PRSUs originally granted. Stock-based compensation expense associated with PRSU grants is recorded when the performance conditions are determined to be probable. Fully vested restricted stock units will be awarded upon the Board of Directors’ determination of the level of achievement.

At September 30, 2016, 546,746 PRSUs were outstanding, with a total grant date fair value of $3.6 million.  Based on the its evaluation of the probability of achieving performance conditions at September 30, 2016, the Company has not recorded stock-based compensation expense for the three and nine months ended September 30, 2016 related to the PRSUs. The Company will continue to evaluate the probability of achieving the performance conditions for the PRSUs at each reporting period and will record compensation expense related to the PRSUs accordingly.

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

 

Balances at December 31, 2015

 

 

2,268,938

 

 

 

3,659,713

 

 

$

7.38

 

 

 

8.89

 

 

$

7,099

 

Additional shares reserved

 

 

1,277,442

 

 

 

 

 

$

 

 

 

 

 

 

 

 

 

Options granted

 

 

(1,400,461

)

 

 

1,400,461

 

 

$

9.87

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

312,258

 

 

 

(312,258

)

 

$

9.69

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

(181,893

)

 

$

2.38

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

(652,267

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRSUs granted

 

 

(567,717

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs cancelled

 

 

72,143

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRSUs cancelled

 

 

20,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2016

 

 

1,331,307

 

 

 

4,566,023

 

 

$

8.18

 

 

8.38

 

 

$

6,834

 

Options exercisable at September 30, 2016

 

 

 

 

 

 

1,362,560

 

 

$

6.13

 

 

6.88

 

 

$

4,491

 

Options vested and expected to vest at September 30, 2016

 

 

 

 

 

 

4,012,377

 

 

$

8.02

 

 

8.28

 

 

$

6,551

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of the Company’s common stock for stock options that were in-the-money.

The weighted-average fair value of options to purchase common stock granted was $6.26 and $7.02 in the nine months ended September 30, 2016 and 2015, respectively. The weighted-average fair value of RSUs granted in the nine months ended September 30, 2016 was $9.83. The weighted average fair value of PRSUs granted in the nine months ended September 30, 2016 was $6.50. No RSUs or PRSUs were granted in the nine months ended September 30, 2015.

The fair value of options to purchase common stock vested was $4.0 million and $1.1 million in the nine months ended September 30, 2016 and 2015, respectively.

The intrinsic value of options to purchase common stock exercised was $1.2 million and $1.2 million in the nine months ended September 30, 2016 and 2015, respectively.

The following table summarizes RSU and PRSU activity for the nine months ended September 30, 2016:

 

  

 

Number of

Shares

 

 

Weighted-Average

Grant Date

Fair Value

 

Balance at December 31, 2015

 

 

482,818

 

 

$

10.71

 

RSUs granted

 

 

652,267

 

 

$

9.83

 

PRSUs granted

 

 

567,717

 

 

$

6.50

 

RSUs vested

 

 

(143,710

)

 

$

10.79

 

RSUs cancelled

 

 

(72,143

)

 

$

10.51

 

PRSUs cancelled

 

 

(20,971

)

 

$

6.47

 

Balance at September 30, 2016

 

 

1,465,978

 

 

$

8.75

 

 

 

2015 employee stock purchase plan

In January 2015, the Company adopted the 2015 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the closing of the IPO. Employees participating in the ESPP may purchase common stock at 85% of the lesser of the fair market value of common stock on the purchase date or last trading day preceding the offering date. The initial ESPP purchase period commenced in November 2015 and in May 2016, 186,741 shares of common stock were purchased pursuant to the ESPP. At September 30, 2016, cash received from payroll deductions pursuant to the ESPP was $1.0 million.

The ESPP provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 and continuing through January 1, 2025. At September 30, 2016, a total of 457,889 shares of common stock are reserved for issuance under the ESPP.

 

 

Stock-based compensation

The Company uses the grant date fair value of its common stock to value both employee and non-employee options when granted. The Company revalues non-employee options each reporting period using the fair market value of the Company’s common stock as of the last day of each reporting period.

In determining the fair value of stock options and ESPP purchases, the Company uses the Black-Scholes option-pricing model and, for stock options, the assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment. The fair value of RSU and PRSU awards is based on the grant date share price. Compensation cost is recognized as expense on a straight-line basis over the vesting period for options and RSUs and on an accelerated basis for PRSUs.

Expected term—The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined using the simplified method (based on the midpoint between the vesting date and the end of the contractual term).

Expected volatility—Because the Company was privately held until February 2015 and did not have any trading history for its common stock prior to its IPO, the expected volatility was estimated based on the average volatility for comparable publicly traded biopharmaceutical companies over a period equal to the expected term of the stock option grants. When selecting comparable publicly traded companies in a similar industry on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. The historical volatility data was computed using the daily closing prices for the selected companies’ common stock during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available.

Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

Dividend yield—The Company has never paid dividends on its common stock and has no plans to pay dividends on its common stock. Therefore, the Company used an expected dividend yield of zero.

The fair value of share-based payments for options granted to employees and directors was estimated on the date of grant using the Black-Scholes option- pricing valuation model based on the following assumptions:

 

 

 

Three months ended,

 

 

Nine months ended,

 

 

 

September 30,

2016

 

 

September 30,

2015

 

 

September 30,

2016

 

 

September 30,

2015

 

Expected term (in years)

 

6.03

 

 

 

6.03

 

 

6.03

 

 

 

6.03

 

Expected volatility

 

 

73.91

%

 

 

68.9 – 69.0

%

 

 

71.09

%

 

 

68.9 –79.7

%

Risk-free interest rate

 

 

1.20

%

 

 

1.67 – 1.73

%

 

 

1.36

%

 

 

1.28 – 1.73

%

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation related to stock options granted to non-employees is recognized as the stock options vest. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option pricing model based on the following assumptions:

 

  

 

As of September 30,

 

 

 

2016

 

 

2015

 

Expected term (in years)

 

6.51 – 10.00

 

 

7.51 – 9.27

 

Expected volatility

 

 

74.39%

 

 

68.9 – 90.27%

 

Risk-free interest rate

 

1.28 – 1.55%

 

 

1.72 – 1.82%

 

Dividend yield

 

 

 

 

 

 

 

The following table summarizes stock-based compensation expense for the three and nine months ended September 30, 2016 and 2015, included in the consolidated statements of operations (in thousands):

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Cost of revenue

 

$

683

 

 

$

61

 

 

$

1,257

 

 

$

195

 

Research and development

 

 

1,124

 

 

 

373

 

 

 

2,391

 

 

 

823

 

Selling and marketing

 

 

424

 

 

 

144

 

 

 

1,000

 

 

 

403

 

General and administrative

 

 

777

 

 

 

184

 

 

 

1,702

 

 

 

416

 

Total stock-based compensation expense

 

$

3,008

 

 

$

762

 

 

$

6,350

 

 

$

1,837

 

 

At September 30, 2016, unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $14.2 million, which the Company expects to recognize on a straight-line basis over a weighted-average period of 3.0 years. Unrecognized compensation expense related to RSUs at September 30, 2016 was $6.8 million, which the Company expects to recognize on a straight-line basis over a weighted-average period of 2.4 years. At September 30, 2016, there was no unrecognized compensation expense related to PRSUs and no capitalized stock-based employee compensation.

 

Net loss per common share
Net loss per common share

7. Net loss per common share

The following table presents the calculation of basic and diluted net loss per share for the three and nine months ended September 30, 2016 and 2015 (in thousands, except share and per share amounts):

 

 

 

Three months ended

September 30,

 

 

Nine months ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net loss

 

$

(24,971

)

 

$

(22,527

)

 

$

(75,408

)

 

$

(65,422

)

Shares used in computing net loss per share, basic and

   diluted

 

 

32,315,038

 

 

 

31,852,796

 

 

 

32,145,806

 

 

 

26,962,821

 

Net loss per share, basic and diluted

 

$

(0.77

)

 

$

(0.71

)

 

$

(2.35

)

 

$

(2.43

)

 

The following common stock equivalents have been excluded from diluted net loss per share for the three and nine months ended September 30, 2016 and 2015 because their inclusion would be anti-dilutive:

 

 

 

Three and nine months ended

September 30,

 

 

 

2016

 

 

2015

 

Shares of common stock subject to outstanding options

 

 

4,566,023

 

 

 

3,072,473

 

Shares of common stock subject to outstanding RSUs

 

 

920,232

 

 

 

440,568

 

Shares of common stock subject to outstanding PRSUs

 

 

556,712

 

 

 

 

Shares of common stock pursuant to ESPP

 

 

145,780

 

 

 

 

Shares of common stock subject to unvested early exercise of

   outstanding options subject to repurchase

 

 

 

 

 

8,080

 

Total shares of common stock equivalents

 

 

6,188,747

 

 

 

3,521,121

 

 

Geographic information
Geographic information

8. Geographic information

Revenue by country is determined based on the billing address of the customer. The following presents revenue by country for the three and nine months ended September 30, 2016 and 2015 (in thousands):

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

United States

 

$

5,245

 

 

$

1,601

 

 

$

12,768

 

 

$

3,493

 

Canada

 

 

508

 

 

 

341

 

 

 

1,868

 

 

 

1,081

 

Rest of world

 

 

523

 

 

 

245

 

 

 

1,176

 

 

 

643

 

Total revenue

 

$

6,276

 

 

$

2,187

 

 

$

15,812

 

 

$

5,217

 

 

Long-lived assets, net, by location are summarized as follows (in thousands):

 

 

 

September 30,

2016

 

 

December 31,

2015

 

United States

 

$

21,226

 

 

$

17,180

 

Chile

 

 

 

 

 

1,529

 

Total long-lived assets, net

 

$

21,226

 

 

$

18,709

 

 

Summary of significant accounting policies (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 recoverability of long-lived 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 and cash equivalents. The Company’s cash and cash equivalents are held by financial institutions in the United States and Chile. Such deposits may exceed federally insured limits.

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 securities in 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 income (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.

Restricted cash

Restricted cash consists of money market funds that serve as: collateral for a security deposit for the Company’s lease agreement for a production facility entered into in September 2015; 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.

Internal-use software

The Company capitalizes third-party costs incurred in the application development stage to design and implement internal-use software. Maintenance and training costs relating to internal-use software are expensed as incurred. Capitalized internal-use software costs are recorded as property and equipment and are amortized over estimated useful lives of up to three years on a straight line basis. Amortization of capitalized internal-use software costs is recorded as sales and marketing expense.

During the nine months ended September 30, 2016 and 2015, the Company capitalized $0 and $1.5 million, respectively, of internal-use software development costs. Internal-use software amortization was $990,000 and $390,000 in the nine months ended September 30, 2016 and 2015, respectively. The carrying value of capitalized internal-use software was $440,000 and $1.4 million at September 30, 2016 and December 31, 2015, respectively. The weighted average remaining useful life of capitalized internal-use software at September 30, 2016 was 4 months.

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, capital leases and debt relating to equipment financing. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, and accounts payable, approximate fair value due to their short maturities. Based on borrowing rates available to the Company, the carrying value of capital leases approximates fair value.

See Note 4, “Fair value measurements” for further information on the fair value of the Company’s financial instruments.

Revenue recognition

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 was de minimis for all periods presented.

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 several 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.

Cost of 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 the fair values estimated using the Black-Scholes model. Stock options granted to non-employees are re-measured at each reporting date until the award is vested.

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, 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. There were no shares subject to repurchase during the nine months ended September 30, 2016. Common shares subject to repurchase in the amount of 8,080 were excluded from weighted-average shares for the three and nine months ended September 30, 2015.

Recent accounting pronouncements

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU 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 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 and early adoption is permitted. The Company will adopt ASU 2016-09 in the first quarter of 2017 and 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 2014-09 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 and early application is permitted for periods beginning on or after January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company plans to implement ASU 2014-09 effective January 1, 2018 and has not yet determined a transition method.

In August 2014, the FASB issued ASU No. 2014-15 (Subtopic 205- 40), Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 will be effective in the fourth quarter of 2016. Early application is permitted. The adoption of this standard is not expected to have an effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

Balance sheet components (Tables)

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

 

  

 

September 30, 2016

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

22,779

 

 

$

 

 

$

 

 

$

22,779

 

U.S. treasury notes

 

 

11,007

 

 

 

12

 

 

 

 

 

 

11,019

 

U.S. government agency securities

 

 

17,978

 

 

 

6

 

 

 

 

 

 

17,984

 

 

 

$

51,764

 

 

$

18

 

 

$

 

 

$

51,782

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

18,082

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,697

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29,003

 

Total cash equivalents, restricted cash and marketable

   securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

51,782

 

 

 

 

December 31, 2015

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

39,998

 

 

$

 

 

$

 

 

$

39,998

 

U.S. treasury notes

 

 

4,006