INVITAE CORP, 10-K filed on 3/6/2018
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Mar. 2, 2018
Jun. 30, 2017
Document And Entity Information [Abstract]
 
 
 
Entity Registrant Name
Invitae Corp 
 
 
Entity Central Index Key
0001501134 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 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 Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Common Stock, Shares Outstanding
 
53,705,786 
 
Entity Public Float
 
 
$ 252.0 
Document Fiscal Year Focus
2017 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 12,053 
$ 66,825 
Marketable securities
52,607 
25,798 
Accounts receivable
10,422 
1,153 
Prepaid expenses and other current assets
11,599 
8,024 
Total current assets
86,681 
101,800 
Property and equipment, net
30,341 
23,793 
Restricted cash
5,406 
4,697 
Marketable securities, non-current
5,983 
 
Intangible assets, net
35,516 
 
Goodwill
46,575 
 
Other assets
576 
361 
Total assets
211,078 
130,651 
Current liabilities:
 
 
Accounts payable
8,606 
3,352 
Accrued liabilities
22,742 
6,711 
Capital lease obligation, current portion
2,039 
1,309 
Debt, current portion
 
3,381 
Total current liabilities
33,387 
14,753 
Capital lease obligation, net of current portion
3,373 
266 
Debt, net of current portion
39,084 
8,721 
Other long-term liabilities
13,440 
7,837 
Total liabilities
89,284 
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 December 31, 2017 and December 31, 2016, respectively
   
   
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 53,595,914 and 41,143,513 shares as of December 31, 2017 and December 31, 2016, respectively
Accumulated other comprehensive loss
(171)
 
Additional paid-in capital
520,558 
374,288 
Accumulated deficit
(398,598)
(275,218)
Total stockholders’ equity
121,794 
99,074 
Total liabilities and stockholders’ equity
$ 211,078 
$ 130,651 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 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
53,595,914 
41,143,513 
Common stock, shares outstanding
53,595,914 
41,143,513 
Consolidated Statements of Operations (USD $)
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Revenue:
 
 
 
Test revenue
$ 65,169,000 
$ 24,840,000 
$ 8,378,000 
Other revenue
3,052,000 
208,000 
 
Total revenue
68,221,000 
25,048,000 
8,378,000 
Costs and operating expenses:
 
 
 
Cost of test revenue
50,142,000 
27,878,000 
16,523,000 
Research and development
46,469,000 
44,630,000 
42,806,000 
Selling and marketing
53,417,000 
28,638,000 
22,479,000 
General and administrative
39,472,000 
24,085,000 
16,047,000 
Total costs and operating expenses
189,500,000 
125,231,000 
97,855,000 
Loss from operations
(121,279,000)
(100,183,000)
(89,477,000)
Other income (expense), net
(303,000)
348,000 
(94,000)
Interest expense
(3,654,000)
(421,000)
(211,000)
Net loss before taxes
(125,236,000)
(100,256,000)
(89,782,000)
Income tax benefit
(1,856,000)
Net loss
$ (123,380,000)
$ (100,256,000)
$ (89,782,000)
Net loss per share, basic and diluted
$ (2.65)
$ (3.02)
$ (3.18)
Shares used in computing net loss per share, basic and diluted
46,511,739 
33,176,305 
28,213,324 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net loss
$ (123,380)
$ (100,256)
$ (89,782)
Other comprehensive income (loss):
 
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
(171)
15 
(15)
Comprehensive loss
$ (123,551)
$ (100,241)
$ (89,797)
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Additional Paid-In Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Balance at the beginning of the period at Dec. 31, 2014
$ (83,576)
 
$ 1,604 
 
$ (85,180)
Balance at the beginning of the period (in shares) at Dec. 31, 2014
 
944,581 
 
 
 
Increase (Decrease) in Stockholders' Deficit
 
 
 
 
 
Conversion of preferred stock into common stock upon initial public offering
202,305 
202,302 
 
 
Conversion of preferred stock into common stock upon initial public offering costs (in shares)
 
23,521,889 
 
 
 
Issuance of common stock in connection with initial public offering, net of offering costs
105,668 
105,667 
 
 
Issuance of common stock in connection with initial public offering, net of offering costs (in shares)
 
7,302,500 
 
 
 
Common stock issued on exercise of stock options
288 
 
288 
 
 
Common stock issued on exercise of stock options (in shares)
 
148,870 
 
 
 
Vesting of common stock related to early exercise of options
11 
 
11 
 
 
Vesting of common stock related to early exercise of options (in shares)
 
17,281 
 
 
 
Stock-based compensation expense
3,477 
 
3,477 
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
(15)
 
 
(15)
 
Net loss
(89,782)
 
 
 
(89,782)
Balance at the end of the period at Dec. 31, 2015
138,376 
313,349 
(15)
(174,962)
Balance at the end of the period (in shares) at Dec. 31, 2015
 
31,935,121 
 
 
 
Increase (Decrease) in Stockholders' Deficit
 
 
 
 
 
Common stock issued pursuant to vesting of restricted stock units
(1)
(1)
 
 
 
Common stock issued pursuant to vesting of restricted stock units (in shares)
 
156,810 
 
 
 
Common stock issued pursuant to employee stock purchase plan
2,391 
 
2,391 
 
 
Common stock issued pursuant to employee stock purchase plan (in shares)
 
369,674 
 
 
 
Issuance of common stock in connection with initial public offering, net of offering costs
47,102 
47,101 
 
 
Issuance of common stock in connection with initial public offering, net of offering costs (in shares)
 
8,433,332 
 
 
 
Common stock issued on exercise of stock options
744 
 
744 
 
 
Common stock issued on exercise of stock options (in shares)
 
243,916 
 
 
 
Vesting of common stock related to early exercise of options
 
 
 
Vesting of common stock related to early exercise of options (in shares)
 
4,660 
 
 
 
Stock-based compensation expense
10,699 
 
10,699 
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
15 
 
 
15 
 
Net loss
(100,256)
 
 
 
(100,256)
Balance at the end of the period at Dec. 31, 2016
99,074 
374,288 
 
(275,218)
Balance at the end of the period (in shares) at Dec. 31, 2016
 
41,143,513 
 
 
 
Increase (Decrease) in Stockholders' Deficit
 
 
 
 
 
Common stock and convertible preferred stock issued in connection with private placement, net of offering costs
68,897 
68,896 
 
 
Common stock and convertible preferred stock issued in connectionwith private placement, net of offering costs (in shares)
 
5,188,235 
 
 
 
Common stock issued pursuant to vesting of restricted stock units (in shares)
 
924,591 
 
 
 
Common stock issued pursuant to acquisition-related transaction bonus (in shares)
 
4,284 
 
 
 
Common stock issued pursuant to exercises of warrants
1,381 
 
1,381 
 
 
Common stock issued pursuant to exercises of warrants (in shares)
 
232,038 
 
 
 
Common stock issued pursuant to employee stock purchase plan
2,635 
 
2,635 
 
 
Common stock issued pursuant to employee stock purchase plan (in shares)
 
378,583 
 
 
 
Common stock issued on exercise of stock options, net
1,706 
 
1,706 
 
 
Common stock issued on exercise of stock options (in shares)
 
386,868 
 
 
 
Common stock issued pursuant to business combinations
50,808 
 
50,808 
 
 
Common stock issued pursuant to business combinations (in shares)
 
5,175,931 
 
 
 
Common stock issued to settle assumed liabilities
1,272 
 
1,272 
 
 
Common stock issued to settle assumed liabilities (in shares)
 
161,871 
 
 
 
Warrants issued pursuant to Loan and Security Agreement
740 
 
740 
 
 
Stock-based compensation expense
18,832 
 
18,832 
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
(171)
 
 
(171)
 
Net loss
(123,380)
 
 
 
(123,380)
Balance at the end of the period at Dec. 31, 2017
$ 121,794 
$ 5 
$ 520,558 
$ (171)
$ (398,598)
Balance at the end of the period (in shares) at Dec. 31, 2017
 
53,595,914 
 
 
 
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity 2 (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Convertible Preferred stock
Balance at the beginning of the period at Dec. 31, 2014
 
$ 202,305 
Balance at the beginning of the period (in shares) at Dec. 31, 2014
 
141,131,524 
Increase (Decrease) in Convertible Preferred Stock
 
 
Conversion of preferred stock into common stock upon initial public offering costs
(202,305)
(202,305)
Conversion of preferred stock into common stock upon initial public offering costs (in shares)
 
(141,131,524)
Balance at the end of the period at Dec. 31, 2015
 
Balance at the end of the period (in shares) at Dec. 31, 2015
 
Balance at the beginning of the period at Dec. 31, 2016
 
$ 0 
Balance at the beginning of the period (in shares) at Dec. 31, 2016
 
Increase (Decrease) in Convertible Preferred Stock
 
 
Common stock and convertible preferred stock issued in connection with private placement, net of offering costs (in shares)
 
3,458,823 
Balance at the end of the period (in shares) at Dec. 31, 2017
 
3,458,823 
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Statement Of Stockholders Equity [Abstract]
 
 
 
Offering costs
$ 4,599 
$ 3,498 
$ 2,961 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2017
Dec. 31, 2016
Dec. 31, 2015
Cash flows from operating activities:
 
 
 
Net loss
$ (123,380)
$ (100,256)
$ (89,782)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
9,181 
6,553 
5,321 
Stock-based compensation
19,221 
10,699 
3,477 
Amortization of premium on marketable securities
136 
311 
632 
Loss on disposal of assets
268 
1,030 
23 
Remeasurements of liabilities associated with business combinations
1,810 
 
 
Benefit from income taxes
(1,856)
 
 
Changes in operating assets and liabilities net of effects of business combination:
 
 
 
Accounts receivable
(1,963)
(843)
(309)
Prepaid expenses and other current assets
(641)
(1,149)
(1,367)
Other assets
(185)
1,465 
36 
Accounts payable
(535)
(111)
508 
Accrued expenses and other liabilities
(37)
5,984 
806 
Net cash used in operating activities
(97,981)
(76,317)
(80,655)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(101,867)
(90,236)
(216,994)
Proceeds from sales of marketable securities
 
 
15,891 
Proceeds from maturities of marketable securities
68,768 
117,922 
146,676 
Acquisition of businesses, acquired cash
2,821 
 
 
Purchases of property and equipment
(6,675)
(11,625)
(6,464)
Net cash provided by (used in) investing activities
(36,953)
16,061 
(60,891)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock upon initial public offering, net of issuance costs
 
 
107,120 
Proceeds from underwritten public offering of common stock, net of issuance costs
 
47,102 
 
Proceeds from issuance of common stock
74,619 
3,134 
288 
Proceeds from loan agreement
 
7,500 
7,500 
Proceeds from loan and security agreement
39,661 
 
 
Loan payments
(30,457)
(2,438)
(413)
Capital lease principal payments
(2,952)
(1,589)
(2,010)
Loan agreement financing costs
 
 
(47)
Net cash provided by financing activities
80,871 
53,709 
112,438 
Net decrease in cash, cash equivalents and restricted cash
(54,063)
(6,547)
(29,108)
Cash, cash equivalents and restricted cash at beginning of period
71,522 
78,069 
107,177 
Cash, cash equivalents and restricted cash at end of period
17,459 
71,522 
78,069 
Supplemental cash flow information:
 
 
 
Interest paid
2,852 
421 
211 
Supplemental cash flow information of non-cash investing and financing activities:
 
 
 
Equipment acquired through capital leases
6,789 
 
1,639 
Conversion of convertible preferred stock to common stock
 
 
202,305 
Purchases of property and equipment in accounts payable and accrued liabilities
200 
1,644 
603 
Warrants issued pursuant to loan and security agreement
740 
 
 
Common stock issued for acquisition of businesses
50,808 
 
 
Consideration payable for acquisition of businesses
13,276 
 
 
Common stock issued to settle assumed liabilities
$ 1,272 
 
 
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 acquisitions of Good Start Genetics in August 2017 and CombiMatrix Corporation in November 2017, the Company’s tests also include preimplantation and carrier screening for inherited disorders, prenatal diagnosis, miscarriage analysis and pediatric developmental 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, 2017, the Company’s net loss was $123.4 million. At December 31, 2017, the Company’s accumulated deficit was $398.6 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 December 31, 2017, revenue from the sale of its tests, and amounts available under a loan agreement will be sufficient to meet its anticipated cash requirements for its currently-planned operations 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 size of future 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 December 31, 2017 financial statements are issued.

Summary of significant accounting policies
Summary of significant accounting policies

2. Summary of significant accounting policies

Principles of consolidation

The 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, marketable securities and accounts receivable. The Company’s cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits. The Company does not perform evaluations of customers’ financial condition and does not require collateral.

Significant customers are those that represent 10% or more of the Company’s total revenue for each year presented on the statements of operations. For each significant customer, revenue as a percentage of total revenue is as follows:

 

 

 

December 31,

 

Customers

 

2017

 

 

2016

 

 

2015

 

Customer A

 

 

13

%

 

 

11

%

 

*

 

Customer B

 

*

 

 

*

 

 

 

13

%

*    Less than 10% of total revenue

 

 

 

 

 

 

 

 

 

 

 

 

Customer A represented 13% of accounts receivable in the consolidated financial statements as of December 31, 2017. No single customer represented 10% or more of accounts receivable in the consolidated financial statements as of December 31, 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 partners, 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 partner, 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; collateral for security deposits for facilities of the Company’s subsidiary Good Start; 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 consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows (in thousands):

 

 

 

December 31, 2017

 

 

December 31, 2016

 

Cash and cash equivalents

 

$

12,053

 

 

$

66,825

 

Restricted cash

 

 

5,406

 

 

 

4,697

 

Total cash, cash equivalents and restricted cash

 

$

17,459

 

 

$

71,522

 

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. Customer relationships are amortized on an accelerated basis, utilizing free cash flows, over periods ranging from five years to eleven years. All other intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from two to 15 years. All intangible assets subject to amortization 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 performs annual impairment reviews of its goodwill balance during the fourth fiscal quarter. In testing for impairment, 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 performed its first annual impairment review of its goodwill balance as of October 1, 2017. The Company determined, after performing a quantitative review, that it is more likely than not that the fair value of its reporting unit is substantially in excess of its carrying amount. Accordingly, there was no impairment. The Company did not incur any goodwill impairment losses in any of the periods presented.

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.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight‑line method over the estimated useful lives of the assets, generally between three and seven years. Leasehold improvements are amortized using the straight‑line method over the shorter of the estimated useful life of the asset or the term of the lease. Amortization expense of assets acquired through capital leases is included in depreciation and amortization expense in the consolidated statements of operations. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the statements of operations in the period realized.

The useful lives of the property and equipment are as follows:

 

Furniture and fixtures

 

7 years

Automobiles

 

7 years

Laboratory equipment

 

5 years

Computer equipment

 

3 years

Software

 

3 years

Leasehold improvements

 

Shorter of lease term or estimated useful life

 

Long‑lived assets

The Company reviews long‑lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value. The Company recorded asset impairment losses of $1.0 million in 2016 relating to leasehold improvements and to the shutdown of the Company’s Chilean operations. All impairment losses were charged to general and administrative expense. There were no impairment losses recorded for any other period presented.

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 primarily 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 test 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.

Advertising

Advertising expenses are expensed as incurred. The Company recorded advertising expenses of $0.6 million, $0.5 million and $0.4 million in 2017, 2016 and 2015, respectively.

Comprehensive loss

Comprehensive loss is composed of two components: net loss and other comprehensive loss. Other comprehensive loss refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity (deficit), but are excluded from net loss. The Company’s other comprehensive loss consists of unrealized losses on investments in available-for-sale securities.

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 preferred stock, 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 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 (“Topic 606”), which requires an entity to recognize the amount of revenue to which it expects to be entitled upon the transfer of control of the promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.

Topic 606 provides for the use of either 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 implemented Topic 606 effective January 1, 2018 using the modified retrospective method.

Based upon its work performed to date, the Company expects the implementation of Topic 606 will have a significant impact on its accounts receivable at January 1, 2018, and the timing of revenue recognition for its diagnostic test revenue thereafter. Under current GAAP, the Company recognizes test revenue generated from the majority of third-party payers on a cash basis, while under Topic 606, the Company will recognize the vast majority of test revenue on an accrual basis at the time of delivery of genetic test results to its customers. The accrual amounts to be recognized under Topic 606 in periods subsequent to the date of transition will be based on an estimate of the consideration that the Company expects to receive, and such estimates will be updated and subsequently adjusted as necessary until fully settled. This policy change will result in earlier revenue recognition under ASC 606 relative to the cash-basis revenue recognition policy utilized by the Company through December 31, 2017 for many of its payers.

The Company has not completed the work required to implement Topic 606 as of January 1, 2018. The work required to complete the implementation primarily relates to the determination of estimated variable consideration, including such consideration arising from recently acquired businesses, as of the date of transition.

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 quantitative assessment. 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 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

 

On January 6, 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. The Company’s calculation of this fair value was based on a Monte Carlo simulation, as well as estimates of the 30-day trailing price of the Company’s stock at certain dates, its volatility assumptions and its revenue forecast. 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 an accretion loss of $0.2 million in other income (expense), net, for the year ended December 31, 2017. This accretion loss 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 $1.6 million in operating expense for the year ended December 31, 2017. This remeasurement loss reflects an updated estimation of fair value of the third payment, based upon achieving a revenue target during 2017 and 2018, as the milestone based on a certain threshold of revenue to be achieved during 2017 was not met. The principal inputs affecting that estimation were updates to the Company’s revenue forecasts and 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. Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of ten years. All other acquisition-related intangibles 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 December 31, 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

On June 11, 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 million 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 $0.6 million 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 December 31, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, during the year ended December 31, 2017, the Company incurred and expensed approximately $164,000 in acquisition and transitional costs associated with the acquisition of Ommdom, which were primarily general and administrative related.

Good Start Genetics

On August 4, 2017, the Company acquired 100% of the fully diluted equity of 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 $24.4 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 $3.6 million through the issuance of 343,986 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 37,406 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, zero as of December 31, 2017, is provisional because certain information and analysis related to Good Start’s historical net operating losses that may affect the Company’s valuation is still being obtained or reviewed. Thus, the provisional measurement of fair value discussed above is 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.

At acquisition date, the Company also recorded $4.8 million as a provisional amount for a deferred tax liability because certain information and analysis related to Good Start’s historical net operating losses that may affect the Company’s initial valuation was still being obtained or reviewed at that time. This provisional amount for the deferred tax liability was subsequently reversed during the fourth quarter of 2017 based on the results of further analysis of Good Start’s historical net operating losses.

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

 

 

1,320

 

Trade name

 

 

460

 

Developed technology

 

 

5,896

 

Customer relationships

 

 

7,830

 

Total identifiable assets acquired

 

 

21,370

 

Accounts payable

 

 

(5,418

)

Accrued expenses

 

 

(6,802

)

Notes payable

 

 

(17,904

)

Convertible promissory notes payable

 

 

(15,430

)

Other liabilities

 

 

(222

)

Total liabilities assumed

 

 

(45,776

)

Net identifiable assets acquired

 

 

(24,406

)

Goodwill

 

 

24,406

 

Net assets acquired

 

$

 

 

Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of eight years. All other 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

 

 

 

8

 

 

 

$

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 $24.4 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.

The results of operations of Good Start for the period from the acquisition date through December 31, 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 year ended December 31, 2017, which were recorded as general and administrative expense.

CombiMatrix

On November 14, 2017, the Company completed its acquisition of CombiMatrix in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of July 31, 2017 (the “Merger Agreement”), by and among the Company, Coronado Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and CombiMatrix, pursuant to which Merger Sub merged with and into CombiMatrix, with CombiMatrix surviving as a wholly owned subsidiary of the Company (the “Merger”).

At the closing of the Merger, the Company issued shares of its common stock to (i) CombiMatrix’s common stockholders, at an exchange ratio of 0.8692 of a share of the Company’s common stock (the “Merger Exchange Ratio”) for each share of CombiMatrix common stock outstanding immediately prior to the Merger, (ii) CombiMatrix’s Series F preferred stockholders, at the Merger Exchange Ratio for each share of CombiMatrix common stock underlying Series F preferred stock outstanding immediately prior to the Merger, (iii) holders of outstanding and unexercised in-the-money CombiMatrix stock options, which were fully accelerated to the extent of any applicable vesting period and converted into the right to receive the number of shares of the Company’s common stock equal to the Merger Exchange Ratio multiplied by the number of shares of CombiMatrix common stock issuable upon exercise of such option, minus the number of shares of the Company’s common stock determined by dividing the aggregate exercise price for such option by $9.491 (the “Invitae Trailing Average Share Value”), and (iv) holders of outstanding and unsettled CombiMatrix restricted stock units, which were fully accelerated to the extent of any applicable vesting period and converted into the right to receive a number of shares of the Company’s common stock determined by multiplying the number of shares of CombiMatrix common stock that were subject to such restricted stock unit by the Merger Exchange Ratio.

In addition, at the closing of the Merger, (a) all outstanding and unexercised out-of-the money CombiMatrix stock options were cancelled and terminated without the right to receive any consideration, (b) all CombiMatrix Series D Warrants and Series F Warrants outstanding and unexercised immediately prior to the closing of the Merger were assumed by the Company and converted into warrants to purchase the number of shares of the Company’s common stock determined by multiplying the number of shares of CombiMatrix common stock subject to such warrants by the Merger Exchange Ratio, and with the exercise price adjusted by dividing the per share exercise price of the CombiMatrix common stock subject to such warrants by the Merger Exchange Ratio, and (c) certain entitlements under CombiMatrix’s executive compensation transaction bonus plan (the “Transaction Bonus Plan”) were paid in shares of the Company’s common stock or RSUs to be settled in shares of the Company’s common stock. All outstanding and unexercised CombiMatrix Series A, Series B, Series C, Series E, and PIPE warrants were repurchased by CombiMatrix prior to closing pursuant to that certain CombiMatrix Common Stock Purchase Warrants Repurchase Agreement dated July 11, 2016.

Pursuant to the Merger Agreement, the Company issued an aggregate of 2,703,389 shares of its common stock as follows:

 

(a)

payment of $20.5 million through the issuance of 2,611,703 shares of the Company’s common stock to holders of CombiMatrix common stock outstanding;

 

(b)

payment of $0.7 million through the issuance of 85,219 shares of the Company’s RSUs to holders of outstanding and unsettled CombiMatrix restricted stock units.

 

(c)

payment of $26,000 through the issuance of 3,323 shares of the Company’s common stock to holders of outstanding and unexercised in-the-money CombiMatrix stock options; and

 

(d)

payment of $25,000 through the issuance of 3,144 shares of the Company’s common stock to holders of CombiMatrix Series F preferred stock.

In addition, and pursuant to the Merger Agreement, the Company issued warrants to purchase an aggregate of 2,077,273 shares of its common stock as follows:

 

(a)

payment of $7.4 million through the issuance of warrants to purchase a total of 1,739,689 shares of the Company’s common stock in exchange for all outstanding CombiMatrix Series F warrants; and

 

(b)

payment of $1,000 through the issuance of warrants to purchase a total of 337,584 shares of the Company’s common stock in exchange for all outstanding CombiMatrix Series D warrants.

In connection with the acquisition of CombiMatrix, the Company paid bonuses to certain members of CombiMatrix’s management team through:

 

(a)

payment of $1.7 million through the issuance of common stock and RSUs totaling 214,976 shares of the Company’s common stock to settle payments pursuant to CombiMatrix’s executive compensation transaction bonus plan (the “Transaction Bonus Plan”), recorded as post-combination compensation expense and included in general and administrative expense; and

 

(b)

payment of $0.2 million through the issuance of 22,966 shares of the Company’s common stock to settle payments pursuant to the Transaction Bonus Plan, recorded as an assumed liability at 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. The amount recorded as deferred tax liability, zero at December 31, 2017, is provisional because certain information and analysis related to CombiMatrix’s tax attributes and ownership change history that may affect the Company’s valuation is still being obtained or reviewed. Thus, the provisional measurement of fair value discussed above is 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

 

$

1,333

 

Accounts receivable

 

 

4,118

 

Prepaid expense and other assets

 

 

1,299

 

Property and equipment

 

 

437

 

Other assets - non current

 

 

30

 

Favorable leases

 

 

247

 

Trade name

 

 

103

 

Patent licensing agreement

 

 

496

 

Developed technology

 

 

3,162

 

Customer relationships

 

 

12,397

 

Total identifiable assets acquired

 

 

23,622

 

Accounts payable

 

 

(276

)

Accrued expenses

 

 

(3,925

)

Other liabilities

 

 

(180

)

Total liabilities assumed

 

 

(4,381

)

Net identifiable assets acquired

 

 

19,241

 

Goodwill

 

 

8,692

 

Net assets acquired

 

$

27,933

 

 

Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of eleven years. All other 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)

 

Favorable leases

 

$

247

 

 

 

2

 

Trade name

 

 

103

 

 

 

1

 

Patent licensing agreement

 

 

496

 

 

 

15

 

Developed technology

 

 

3,162

 

 

 

4

 

Customer relationships

 

 

12,397

 

 

 

11

 

 

 

$

16,405

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of CombiMatrix resulted in the recognition of $8.7 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.

The results of operations of CombiMatrix for the period from the acquisition date through December 31, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately $1.8 million in acquisition and transitional costs associated with the acquisition of CombiMatrix during the year ended December 31, 2017, which were recorded as general and administrative expense.

Pro Forma Financial Information  

 

The financial information in the table below summarizes the combined results of operations of the Company, AltaVoice, Ommdom, Good Start and CombiMatrix on an unaudited pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The unaudited pro forma financial information has been calculated after adjusting the results of the Company, AltaVoice, Ommdom, Good Start and CombiMatrix 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 pro forma financial information for the year ended December 31, 2017 combines the adjusted results of the Company for the year ended December 31, 2017, which include the adjusted results of AltaVoice subsequent to January 6, 2017, the adjusted results of Ommdom subsequent to June 11, 2017, the adjusted results of Good Start subsequent to August 4, 2017 and the adjusted results of CombiMatrix for the period subsequent to November 14, 2017 (the acquisition dates for AltaVoice, Ommdom, Good Start and CombiMatrix, 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, the adjusted historical results of Good Start for the period from January 1, 2017 to August 4, 2017, and the adjusted historical results of CombiMatrix for the period from January 1, 2017 to November 14, 2017. The pro forma financial information for the year ended December 31, 2016 combines the adjusted historical results for the Company for those periods, with the adjusted historical results for AltaVoice, Ommdom, Good Start and CombiMatrix for the same periods.

The following table summarizes the pro forma financial information for the years ended December 31, 2017 and 2016 (in thousands):

 

 

 

Year Ended

December 31,

 

 

 

2017

 

 

2016

 

Total revenue

 

$

94,001

 

 

$

62,991

 

Net loss

 

$

(149,596

)

 

$

(123,148

)

 

Revenue attributable to AltaVoice, Good Start and CombiMatrix since their acquisition dates and recognized in the year ended December 31, 2017 was $2.7 million, $6.2 million and $2.0 million, respectively. As the Company combined operations with AltaVoice, Ommdom, Good Start and CombiMatrix at the acquisition dates, net loss attributable to AltaVoice, Ommdom, Good Start and CombiMatrix since their acquisition dates 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 year ended December 31, 2017 are as follows (in thousands):

 

 

 

AltaVoice

 

 

Ommdom

 

 

Good Start

 

 

CombiMatrix

 

 

Total

 

Balance as of December 31, 2016

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

Goodwill acquired

 

 

9,432

 

 

 

4,045

 

 

 

29,366

 

 

 

8,692

 

 

 

51,535

 

Goodwill adjustment

 

 

 

 

 

 

 

 

(4,960

)

 

 

 

 

 

(4,960

)

Balance as of December 31, 2017

 

$

9,432

 

 

$

4,045

 

 

$

24,406

 

 

$

8,692

 

 

$

46,575

 

The goodwill adjustment was principally due to the reversal, in the fourth quarter of 2017, of a provisional deferred tax liability of $4.8 million recorded in August 2017. The reversal of this deferred tax liability resulted from the completion of the Company’s analysis of Good Start’s historical net operating losses.

Intangible assets

The following table presents details of the Company’s finite-lived intangible assets as of December 31, 2017 (in thousands):

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Weighted Average

Useful Life

(in Years)

 

 

Weighted Average

Estimated Remaining

Useful Life

(in Years)

 

Customer relationships

 

$

23,763

 

 

$

(717

)

 

$

23,046

 

 

 

10.0

 

 

 

9.6

 

Developed technology

 

 

11,963

 

 

 

(949

)

 

 

11,014

 

 

 

4.8

 

 

 

4.4

 

Non-compete agreement

 

 

286

 

 

 

(57

)

 

 

229

 

 

 

5.0

 

 

 

4.0

 

Trade name

 

 

576

 

 

 

(78

)

 

 

498

 

 

 

2.7

 

 

 

2.3

 

Patent licensing agreement

 

 

496

 

 

 

(4

)

 

 

492

 

 

 

15.0

 

 

 

14.9

 

Favorable leases

 

 

247

 

 

 

(10

)

 

 

237

 

 

 

2.2

 

 

 

2.1

 

 

 

$

37,331

 

 

$

(1,815

)

 

$

35,516

 

 

 

8.2

 

 

 

7.8

 

 

Acquisition-related intangibles included in the above table are finite-lived. Customer relationships are being amortized on an accelerated basis, in proportion to estimated cash flows, over periods ranging from five to eleven years. All other acquisition-related intangibles 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 $1.8 million for the year ended December 31, 2017. As all acquisition-related intangible assets were acquired in 2017, no amortization was recorded for year ended December 31, 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 December 31, 2017 (in thousands):

 

 

 

Amount

 

2018

 

$

5,059

 

2019

 

 

5,250

 

2020

 

 

5,525

 

2021

 

 

5,829

 

2022

 

 

4,123

 

Thereafter

 

 

9,730

 

 

 

$

35,516

 

 

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):

 

 

 

December 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

5,998

 

 

$

 

 

$

 

 

$

5,998

 

Certificates of deposit

 

 

300

 

 

 

 

 

 

 

 

 

300

 

U.S. treasury notes

 

 

12,010

 

 

 

 

 

 

(19

)

 

 

11,991

 

U.S. government agency securities

 

 

46,451

 

 

 

 

 

 

(152

)

 

 

46,299

 

 

 

$

64,759

 

 

$

 

 

$

(171

)

 

$

64,588

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

592

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,406

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58,590

 

Total cash equivalents, restricted cash and

   marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

64,588

 

 

 

 

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 December 31, 2017 was $171,000. The total fair value of investments with unrealized losses at December 31, 2017 was $58.3 million. None of the available-for-sale securities held as of December 31, 2017 has been in a continuous unrealized loss position for more than one year. At December 31, 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 December 31, 2017, the remaining contractual maturities of available-for-sale securities ranged from less than one to 13 months. For the years ended December 31, 2017, 2016 and 2015, 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):

 

 

 

December 31,

2017

 

 

December 31,

2016

 

Leasehold improvements

 

$

12,623

 

 

$

1,256

 

Laboratory equipment

 

 

17,705

 

 

 

13,644

 

Equipment under capital lease

 

 

11,446

 

 

 

5,871

 

Computer equipment

 

 

4,023

 

 

 

2,514

 

Software

 

 

2,520

 

 

 

2,489

 

Furniture and fixtures

 

 

569

 

 

 

238

 

Automobiles

 

 

20

 

 

 

20

 

Construction-in-progress

 

 

965

 

 

 

12,229

 

Total property and equipment, gross

 

 

49,871

 

 

 

38,261

 

Accumulated depreciation and amortization

 

 

(19,530

)

 

 

(14,468

)

Total property and equipment, net

 

$

30,341

 

 

$

23,793

 

 

Depreciation expense was $7.2 million, $6.6 million and $5.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.

 

 

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

December 31,

2017

 

 

December 31,

2016

 

Accrued compensation and related expenses

 

$

7,406

 

 

$

3,072

 

Accrued laboratory materials purchases

 

 

1,242

 

 

 

338

 

Accrued outsourced services

 

 

142

 

 

 

 

Accrued professional services

 

 

1,077

 

 

 

446

 

Accrued construction in progress

 

 

 

 

 

1,215

 

Lease incentive obligation, current

 

 

489

 

 

 

468

 

Liabilities associated with business combinations

 

 

9,497

 

 

 

 

Other

 

 

2,889

 

 

 

1,172

 

Total accrued liabilities

 

$

22,742

 

 

$

6,711

 

 

 

Other long-term liabilities

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

 

 

 

December 31,

2017

 

 

December 31,

2016

 

Lease incentive obligation, non-current

 

$

3,831

 

 

$

4,243

 

Deferred rent, non-current

 

 

5,153

 

 

 

3,419

 

Liabilities associated with business combination

 

 

3,779

 

 

 

 

Other non-current liabilities

 

 

677

 

 

 

175

 

Total other long-term liabilities

 

$

13,440

 

 

$

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 December 31, 2017 and December 31, 2016 (in thousands):

 

 

 

December 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

5,998

 

 

$

 

 

$

 

 

$

5,998

 

Certificates of deposit

 

 

300