INVITAE CORP, 10-Q filed on 5/9/2017
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2017
Apr. 28, 2017
Document And Entity Information [Abstract]
 
 
Entity Registrant Name
Invitae Corp 
 
Entity Central Index Key
0001501134 
 
Document Type
10-Q 
 
Document Period End Date
Mar. 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 Common Stock, Shares Outstanding
 
42,314,403 
Document Fiscal Year Focus
2017 
 
Document Fiscal Period Focus
Q1 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2017
Dec. 31, 2016
Current assets:
 
 
Cash and cash equivalents
$ 43,439 
$ 66,825 
Marketable securities
53,342 
25,798 
Accounts receivable
2,032 
1,153 
Prepaid expenses and other current assets
8,582 
8,024 
Total current assets
107,395 
101,800 
Property and equipment, net
26,604 
23,793 
Restricted cash
4,697 
4,697 
Intangible assets, net
4,122 
 
Goodwill
9,432 
 
Other assets
372 
361 
Total assets
152,622 
130,651 
Current liabilities:
 
 
Accounts payable
4,953 
3,352 
Accrued liabilities
13,112 
6,711 
Capital lease obligation, current portion
1,647 
1,309 
Debt, current portion
 
3,381 
Total current liabilities
19,712 
14,753 
Capital lease obligation, net of current portion
1,166 
266 
Debt, net of current portion
38,921 
8,721 
Other long-term liabilities
10,524 
7,837 
Total liabilities
70,323 
31,577 
Commitments and contingencies (Note 6)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0001 par value: Authorized: 20,000,000 shares; Issued and outstanding: no shares as of March 31, 2017 and December 31, 2016
   
   
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 42,307,799 and 41,143,513 shares as of March 31, 2017 and December 31, 2016, respectively
Accumulated other comprehensive loss
(36)
 
Additional paid-in capital
384,477 
374,288 
Accumulated deficit
(302,146)
(275,218)
Total stockholders’ equity
82,299 
99,074 
Total liabilities and stockholders’ equity
$ 152,622 
$ 130,651 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Mar. 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
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
42,307,799 
41,143,513 
Common stock, shares outstanding
42,307,799 
41,143,513 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Income Statement [Abstract]
 
 
Revenue
$ 10,338 
$ 3,955 
Costs and operating expenses:
 
 
Cost of revenue
9,329 
5,987 
Research and development
10,023 
10,660 
Selling and marketing
11,572 
7,043 
General and administrative
6,751 
5,755 
Total costs and operating expenses
37,675 
29,445 
Loss from operations
(27,337)
(25,490)
Other income (expense), net
(691)
(16)
Interest expense
(322)
(84)
Net loss before taxes
(28,350)
(25,590)
Income tax benefit
(1,422)
 
Net loss
$ (26,928)
$ (25,590)
Net loss per share, basic and diluted
$ (0.64)
$ (0.80)
Shares used in computing net loss per share, basic and diluted
42,318,136 
31,964,541 
Condensed Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Statement Of Income And Comprehensive Income [Abstract]
 
 
Net loss
$ (26,928)
$ (25,590)
Other comprehensive income (loss):
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
(36)
43 
Comprehensive loss
$ (26,964)
$ (25,547)
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2017
Mar. 31, 2016
Cash flows from operating activities:
 
 
Net loss
$ (26,928)
$ (25,590)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
1,733 
1,555 
Stock-based compensation
3,278 
1,465 
Amortization of premium on marketable securities
40 
91 
Loss on disposal of assets
268 
186 
Changes in operating assets and liabilities net of effects of business combination:
 
 
Accounts receivable
(605)
 
Prepaid expenses and other current assets
(506)
(1,969)
Other assets
(11)
162 
Accounts payable
1,858 
(394)
Accrued expenses and other liabilities
(1,157)
506 
Net cash used in operating activities
(22,030)
(23,988)
Cash flows from investing activities:
 
 
Purchases of marketable securities
(45,113)
(60,319)
Proceeds from maturities of marketable securities
17,493 
37,500 
Acquisition of business, acquired cash
54 
 
Purchases of property and equipment
(1,343)
(1,037)
Net cash used in investing activities
(28,909)
(23,856)
Cash flows from financing activities:
 
 
Proceeds from exercise of stock options
696 
210 
Proceeds from loan agreement
 
2,500 
Proceeds from loan and security agreement
39,661 
 
Loan payments
(12,102)
(386)
Capital lease principal payments
(702)
(404)
Net cash provided by financing activities
27,553 
1,920 
Net decrease in cash, cash equivalents and restricted cash
(23,386)
(45,924)
Cash, cash equivalents and restricted cash at beginning of period
71,522 
78,069 
Cash, cash equivalents and restricted cash at end of period
48,136 
32,145 
Supplemental cash flow information:
 
 
Interest paid
296 
84 
Supplemental cash flow information of non-cash investing and financing activities:
 
 
Equipment acquired through capital leases
1,940 
 
Purchases of property and equipment in accounts payable and accrued liabilities
3,050 
410 
Warrants issued pursuant to loan and security agreement
740 
 
Common stock issued for acquisition of business
5,475 
 
Consideration payable for acquisition of business
$ 6,909 
 
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. 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 future. For the year ended December 31, 2016, the Company’s net loss was $100.3 million, and for the three months ended March 31, 2017, the Company’s net loss was $26.9 million. At March 31, 2017, the Company’s accumulated deficit was $302.1 million. To date, the Company has generated only limited revenue, and it may never achieve revenue sufficient to offset its expenses. The Company believes its existing cash and cash equivalents as of March 31, 2017, and revenue from the sale of its tests will be sufficient to meet its anticipated cash requirements for the 12-month period following the filing date of this report. Beyond this 12-month period, the Company intends to generate sufficient cash from operations to fund its future operating needs, but there can be no assurance it will be able to do so.

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

The Company has implemented the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update 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 March 31, 2017 financial statements are issued.

Basis of presentation

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

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

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

 

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. 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 debt securities at the time of purchase and reevaluates such designation at each balance sheet date. Short-term marketable securities have maturities less than 365 days at the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income (expense), net.

Accounts receivable

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

Restricted cash

Restricted cash consists of money market funds that serve as: collateral for a security deposit for the Company’s lease agreement for 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.  

Cash, cash equivalents and restricted cash

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

 

 

 

March 31,

2017

 

 

March 31,

2016

 

Cash and cash equivalents

 

$

43,439

 

 

$

27,314

 

Restricted cash

 

 

4,697

 

 

 

4,831

 

Total cash, cash equivalents and restricted cash

 

$

48,136

 

 

$

32,145

 

 

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 non-compete agreements, developed technology and customer relationships acquired as part of a business combination. Intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from five to ten years and are reviewed for impairment in accordance with Accounting Standards Codification (“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 the annual impairment review of its goodwill balance as of October 1. In testing for goodwill, the Company compares the fair value of its reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the unit’s fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The Company acquired goodwill as part of a business combination in January 2017, and therefore has not previously tested for or recorded any goodwill impairment charges.

 

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. 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. The Company believes the fair value of the term debt approximates recorded amounts as of March 31, 2017 as the interest rates on the term debt are variable and are based on market interest rates after consideration of default and credit risk (using level 2 inputs).

See Note 5, “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 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, 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

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this ASU should be applied on a prospective basis. The nature of and reason for the change in accounting principle should be disclosed upon transition. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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 and early adoption is permitted. The Company early 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 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 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.

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 2014-02 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company has not yet selected an implementation date for ASU 2016-02.

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

Business Combinations
Business Combination

3. Business Combinations

 

In January 2017, the Company acquired AltaVoice (formerly Patient Crossroads), 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 $5,000,000 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 Invitae 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. 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 remeasured to fair value at each reporting date until the extinguishment of the liability on March 31, 2018. The third payment, representing contingent consideration, was determined to have a fair value of $2.2 million and was recorded as a liability. In accordance with ASC Topic 805, Business Combinations, the contingent consideration of $2.2 million will be remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings.

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

 

Cash

 

$

54

 

Accounts receivable

 

 

274

 

Prepaid expense and other assets

 

 

52

 

Non-compete agreement

 

 

286

 

Developed technology

 

 

570

 

Customer relationships

 

 

3,389

 

  Total identifiable assets acquired

 

 

4,625

 

Accounts payable

 

 

(28

)

Deferred revenue

 

 

(202

)

Accrued expenses

 

 

(21

)

Deferred tax liability

 

 

(1,422

)

   Total liabilities assumed

 

 

(1,673

)

Net identifiable assets acquired

 

 

2,952

 

Goodwill

 

 

9,432

 

Net assets acquired

 

$

12,384

 

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

 

 

 

Gross

Purchased

Intangible

Asset

 

 

Estimated

Useful

Life

(in Years)

Non-compete agreements

 

$

286

 

 

5

Developed technology

 

 

570

 

 

6

Customer relationships

 

 

3,389

 

 

10

 

 

$

4,245

 

 

 

 

The following table presents information about acquisition-related intangibles as of March 31, 2017 (in thousands):

 

 

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

 

Estimated

Remaining

Useful

Life

(in Years)

 

Non-compete agreements

 

$

286

 

 

$

(14

)

 

$

272

 

 

 

4.8

 

Developed technology

 

 

570

 

 

 

(24

)

 

 

546

 

 

 

5.8

 

Customer relationships

 

 

3,389

 

 

 

(85

)

 

 

3,304

 

 

 

9.8

 

 

 

$

4,245

 

 

$

(123

)

 

$

4,122

 

 

 

 

 

 

Estimated future amortization expense of acquisition-related intangibles as of March 31, 2017 is as follows (in thousands):

 

 

 

Amount

 

Remainder of 2017

 

$

368

 

2018

 

 

491

 

2019

 

 

491

 

2020

 

 

491

 

2021

 

 

491

 

Thereafter

 

 

1,790

 

 

 

$

4,122

 

 

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 March 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.

 

 

Pro-forma Financial Information:  

 

The unaudited financial information in the table below summarizes the combined results of operations of the Company and AltaVoice on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of each of the periods presented. The unaudited pro forma financial information for the three months ended March 31, 2017 combines the results of the Company for the three months ended March 31, 2017, which include the results of AltaVoice subsequent to January 6, 2017 (the acquisition date), with the historical results for AltaVoice for the period from January 1, 2017 to January 6, 2017. The unaudited pro forma financial information for the three months ended March 31, 2016 combines the historical results for the Company for that period, with the historical results for AltaVoice for the same period.

 

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

 

 

 

March 31,

 

 

March 31,

 

 

 

2017

 

 

2016

 

Total revenue

 

$

10,419

 

 

$

4,376

 

Net loss

 

$

(26,985

)

 

$

(25,754

)

 

Balance sheet components
Balance sheet components

4. Balance sheet components

Cash equivalents and marketable securities

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

 

 

March 31, 2017

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

6,942

 

 

$

 

 

$

 

 

$

6,942

 

U.S. treasury notes

 

 

14,015

 

 

 

 

 

 

(10

)

 

 

14,005

 

U.S. government agency securities

 

 

39,363

 

 

 

 

 

 

(26

)

 

 

39,337

 

 

 

$

60,320

 

 

$

 

 

$

(36

)

 

$

60,284

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,245

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,697

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,342

 

Total cash equivalents, restricted cash and

   marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

60,284

 

 

 

 

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 March 31, 2017 was $36,000. None of the available-for-sale securities held as of March 31, 2017 has been in a continuous unrealized loss position for more than one year. At March 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 March 31, 2017, the remaining contractual maturities of available-for-sale securities were less than one year. For the three months ended March 31, 2017, there were no realized gains or losses on available-for-sale securities.

 

Property and equipment, net

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

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Leasehold improvements

 

$

11,687

 

 

$

1,256

 

Laboratory equipment

 

 

16,573

 

 

 

13,644

 

Equipment under capital lease

 

 

4,489

 

 

 

5,871

 

Computer equipment

 

 

2,759

 

 

 

2,514

 

Software

 

 

2,489

 

 

 

2,489

 

Furniture and fixtures

 

 

523

 

 

 

238

 

Automobiles

 

 

58

 

 

 

20

 

Construction-in-progress

 

 

3,294

 

 

 

12,229

 

Total property and equipment, gross

 

 

41,872

 

 

 

38,261

 

Accumulated depreciation and amortization

 

 

(15,268

)

 

 

(14,468

)

Total property and equipment, net

 

$

26,604

 

 

$

23,793

 

 

Depreciation and amortization expense was $1.7 million and $1.6 million for the three months ended March 31, 2017 and 2016, respectively.

 

 

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Accrued compensation and related expenses

 

$

3,543

 

 

$

3,072

 

Accrued laboratory materials purchases

 

 

797

 

 

 

338

 

Accrued professional services

 

 

663

 

 

 

446

 

Accrued construction in progress

 

 

965

 

 

 

1,215

 

Lease incentive obligation, current

 

 

468

 

 

 

468

 

Liabilities associated with business combination

 

 

4,762

 

 

 

 

Other

 

 

1,914

 

 

 

1,172

 

Total accrued liabilities

 

$

13,112

 

 

$

6,711

 

 

 

Other long-term liabilities

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

 

 

 

March 31,

2017

 

 

December 31,

2016

 

Lease incentive obligation, non-current

 

$

4,126

 

 

$

4,243

 

Deferred rent, non-current

 

 

4,024

 

 

 

3,419

 

Liabilities associated with business combination

 

 

2,200

 

 

 

 

Other non-current liabilities

 

 

174

 

 

 

175

 

Total other long-term liabilities

 

$

10,524

 

 

$

7,837

 

 

Fair value measurements
Fair value measurements

5. 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 March 31, 2017 and December 31, 2016 (in thousands):

 

 

 

March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

6,942

 

 

$

 

 

$

 

 

$

6,942

 

U.S. treasury notes

 

 

14,005

 

 

 

 

 

 

 

 

 

14,005

 

U.S. government agency securities

 

 

 

 

 

39,337

 

 

 

 

 

 

39,337

 

Total financial assets

 

$

20,947

 

 

$

39,337

 

 

$

 

 

$

60,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contingent consideration

 

$

 

 

 

$

 

 

$

2,200

 

 

$

2,200

 

Total financial liabilities

 

$

 

 

$

 

 

$

2,200

 

 

$

2,200

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

19,457

 

 

$

 

 

$

 

 

$

19,457

 

U.S. treasury notes

 

 

11,517

 

 

 

 

 

 

 

 

 

11,517

 

U.S. government agency securities

 

 

 

 

 

14,281

 

 

 

 

 

 

14,281

 

Total financial assets

 

$

30,974

 

 

$

14,281

 

 

$

 

 

$

45,255

 

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

 

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

 

 

 

Level 3

 

 

 

Contingent

Consideration

Liability

 

Balance as of December 31, 2016

 

$

 

Contingent consideration

 

 

2,200

 

Balance as of March 31, 2017

 

$

2,200

 

 

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

As of March 31, 2017, the Company had a contingent obligation up to $5.0 million payable in the Company’s common stock to the former owners of AltaVoice in conjunction with the Company’s acquisition of AltaVoice in January 2017. The contingency is dependent upon future revenues attributable to AltaVoice. If such revenues are least $10 million in 2017, the Company will make a payment of $5.0 million in the Company’s common stock on March 31, 2018. If revenue attributable to AltaVoice is less than $10 million in 2017, but the combined revenue attributable to AltaVoice for the combined period of 2017 and 2018 is at least $10 million, the Company will make a payment of up to $5.0 million in the Company’s common stock on March 31, 2019. The Company estimated the fair value of the contingent consideration at $2.2 million, based on a Monte Carlo simulation, as well as estimates of the 30-day trailing price of its stock at certain dates, its volatility assumptions and its revenue forecasts, all of which were significant inputs in the Level 3 measurement not supported by market activity. The value of the liability will be subsequently remeasured to fair value at each reporting date. Changes in estimated fair value will be recorded as a component of operating expenses until the contingency is paid or expires. There was no change in the fair value of the contingent consideration between the acquisition date and March 31, 2017.

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 March 31, 2017 and December 31, 2016, are as follows (in thousands):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Debt

 

$

38,921

 

 

$

39,495

 

 

$

12,102

 

 

$

11,905

 

 

Commitments and contingencies
Commitments and contingencies

6. Commitments and contingencies

Operating Leases

In September 2015, the Company entered into a lease agreement for a headquarters and production facility in San Francisco, California. This lease expires in July 2026 and the Company may renew the lease for an additional ten years. The Company has determined the lease term to be a ten-year period expiring in 2026. The lease term commenced when the Company took occupancy of the facility in February 2016. In connection with the execution of the lease, the Company provided a security deposit of approximately $4.6 million which is included in restricted cash in the Company’s consolidated balance sheets. Minimum annual rent under the lease is subject to increases based on stated rental adjustment terms. In addition, per the terms of the lease, the Company will receive a $5.2 million lease incentive in the form of reimbursement from the landlord for a portion of the costs of leasehold improvements the Company 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 March 31, 2017, all of the lease incentive had been utilized by the Company. Aggregate future minimum lease payments for the new facility at March 31, 2017 were approximately $68.6 million.

In addition to the security deposit of approximately $4.6 million for the new facility, the Company has provided, as collateral for other leases, security deposits of $0.8 million at March 31, 2017 and at December 31, 2016, which are included in other assets in the Company’s consolidated balance sheets.

Future minimum payments under non-cancelable operating leases as of March 31, 2017 are as follows (in thousands):

 

 

 

Amounts

 

2017 (remainder of year)

 

$

5,134

 

2018

 

 

6,898

 

2019

 

 

6,946

 

2020

 

 

6,917

 

2021

 

 

7,079

 

Thereafter

 

 

37,137

 

Total minimum lease payments

 

$

70,111

 

 

Rent expense was $2.2 million and $1.6 million for the three months ended March 31, 2017 and 2016, respectively.

Debt Financing

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

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

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

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

At March 31, 2017, obligations under the Loan and Security Agreement were $40.0 million. Debt issuance costs related to the Loan and Security Agreement of $339,000 and the warrant fair value of $740,000 were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the Loan and Security Agreement. Future payments under the Loan and Security Agreement as of March 31, 2017 are as follows (in thousands):

 

 

 

Amounts

 

2017 (remainder of year)

 

$

2,310

 

2018

 

 

3,455

 

2019

 

 

12,367

 

2020

 

 

15,843

 

2021

 

 

14,651

 

Thereafter

 

 

5,479

 

Total remaining debt payments

 

 

54,105

 

Less: amount representing debt discount

 

 

(1,079

)

Less: amount representing interest

 

 

(14,105

)

Present value of remaining debt payments

 

 

38,921

 

Less: current portion

 

 

 

Total non-current debt obligation

 

$

38,921

 

 

Interest expense related to the Loan and Security Agreement and the Loan Agreement was $306,000 and $52,000 for the three months ended March 31, 2017 and 2016, respectively.

Capital leases

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

Future payments under capital leases at March 31, 2017 are as follows (in thousands):

 

 

 

Amounts

 

2017 (remainder of year)

 

$

1,377

 

2018

 

 

849

 

2019

 

 

581

 

2020

 

 

194

 

Total capital lease obligations

 

 

3,001

 

Less: amount representing interest

 

 

(188

)

Present value of net minimum capital lease

   payments

 

 

2,813

 

Less: current portion

 

 

(1,647

)

Total non-current capital lease obligations

 

$

1,166

 

 

Interest expense related to capital leases was $16,000 and $32,000 for the three months ended March 31, 2017 and 2016, respectively.

Property and equipment under capital leases was $4.5 million and $5.9 million as of March 31, 2017 and December 31, 2016, respectively. Accumulated depreciation and amortization, collectively, on these assets was $1.8 million and $2.8 million at March 31, 2017 and December 31, 2016, respectively.

Guarantees and indemnifications

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company indemnifies its 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 March 31, 2017 or December 31, 2016.

Contingencies

The Company was not a party to any material legal proceedings at March 31, 2017, or at the date of this report. The Company may from time to time become involved in various legal proceedings arising in the ordinary course of business, and the resolution of any such claims could be material.

Stock incentive plans
Stock incentive plans

7. Stock incentive plans

Stock incentive plans

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

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

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

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

In February 2016, the Company granted PRSUs under the 2015 Plan, which PRSUs could be earned based on the achievement of specified performance conditions measured over a period of approximately 12 months. Holders of PRSUs were eligible to receive 0% to 100% of the target number of PRSUs originally granted. Stock-based compensation expense associated with PRSU grants would be recorded when the performance conditions were determined to be probable and fully vested restricted stock units would be awarded upon the Audit Committee’s determination of the level of achievement. In February, 2017, upon the Audit Committee’s determination of the level of achievement, 352,045 fully vested stock units were awarded to holders of PRSUs.

Based on its evaluations of the probability of achieving performance conditions, the Company recorded stock-based compensation expense of $0.4 million and zero, for the three months ended March 31, 2017 and 2016, respectively, related to the PRSUs.

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

 

 

 

Shares

available

for grant

 

 

Stock

options

outstanding

 

 

Weighted-

average

exercise

price

 

 

Weighted-

average

remaining

contractual

life (years)

 

 

Aggregate

intrinsic

value

 

Balances at December 31, 2016

 

 

1,375,766

 

 

 

4,490,662

 

 

$

8.21

 

 

 

8.11

 

 

$

5,312

 

Additional shares reserved

 

 

2,923,183

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(443,648

)

 

 

443,648

 

 

$

8.97

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

108,418

 

 

 

(108,418

)

 

$

9.87

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

(157,799

)

 

$

4.57

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

(1,668,965

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs cancelled

 

 

27,607

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRSUs cancelled

 

 

177,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at March 31, 2017

 

 

2,500,321

 

 

 

4,668,093

 

 

$

8.37

 

 

 

8.20

 

 

$

12,846

 

Options exercisable at March 31, 2017

 

 

 

 

 

 

1,723,431

 

 

$

6.89

 

 

 

7.17

 

 

$

7,351

 

Options vested and expected to vest at

   March 31, 2017

 

 

 

 

 

 

4,212,145

 

 

$

8.27

 

 

 

8.12

 

 

$

12,036

 

 

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 $5.85 and $6.29 in the three months ended March 31, 2017 and 2016, respectively. The weighted-average fair value of RSUs granted was $10.22 and $10.00 in the three months ended March 31, 2017 and 2016. No PRSUs were granted in the three months ended March 31, 2017 and the weighted average fair value of PRSUs granted in the three months ended March 31, 2016 was $6.33.  

The total grant date fair value of options to purchase common stock vested was $1.1 million and $1.3 million in the three months ended March 31, 2017 and 2016, respectively.

The intrinsic value of options to purchase common stock exercised was $856,000 and $507,000 in the three months ended March 31, 2017 and 2016, respectively.

The following table summarizes RSU and PRSU activity for the three months ended March 31, 2017:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

 

Balance at December 31, 2016

 

 

1,421,757

 

 

$

8.77

 

RSUs granted

 

 

1,668,965

 

 

$

10.22

 

RSUs vested

 

 

(13,316

)

 

$

8.99

 

PRSUs vested

 

 

(352,045

)

 

$

6.54

 

RSUs cancelled

 

 

(27,607

)

 

$

9.98

 

PRSUs cancelled

 

 

(177,960

)

 

$

6.53

 

Balance at March 31, 2017

 

 

2,519,794

 

 

$

10.18

 

 

 

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. At March 31, 2017, 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 March 31, 2017, a total of 686,121 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,

 

 

 

 

March 31,

2017

 

 

March 31,

2016

 

 

Expected term (in years)

 

6.03

 

 

 

6.13

 

 

Expected volatility

 

 

72.94%

 

 

 

71.05%

 

 

Risk-free interest rate

 

 

2.05%

 

 

 

1.34%

 

 

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 March 31,

 

 

 

2017

 

 

2016

 

Expected term (in years)

 

6.00 – 9.00

 

 

7.00 – 9.57%

 

Expected volatility

 

72.29 – 77.36%

 

 

 

71.05%

 

Risk-free interest rate

 

2.02 – 2.31%

 

 

1.44 – 1.73%

 

Dividend yield

 

 

 

 

 

 

 

The following table summarizes stock-based compensation expense for the three months ended March 31, 2017 and 2016, included in the consolidated statements of operations (in thousands):

 

 

 

Three months ended

March 31,

 

 

 

2017

 

 

2016

 

Cost of revenue

 

$

317

 

 

$

201

 

Research and development

 

 

1,295

 

 

 

538

 

Selling and marketing

 

 

716

 

 

 

241

 

General and administrative

 

 

950

 

 

 

485

 

Total stock-based compensation expense

 

$

3,278

 

 

$

1,465

 

 

At March 31, 2017, unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $16.3 million, which the Company expects to recognize on a straight-line basis over a weighted-average period of 2.8 years. Unrecognized compensation expense related to RSUs at March 31, 2017 was $19.3 million, which the Company expects to recognize on a straight-line basis over a weighted-average period of 2.8 years. At March 31, 2017, 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

8. Net loss per common share

The following table presents the calculation of basic and diluted net loss per share for the three months ended March 31, 2017 and 2016 (in thousands, except share and per share amounts):

 

 

 

Three months ended

March 31,

 

 

 

2017

 

 

2016

 

Net loss

 

$

(26,928

)

 

$

(25,590

)

Shares used in computing net loss per share, basic and diluted

 

 

42,318,136

 

 

 

31,964,541

 

Net loss per share, basic and diluted

 

$

(0.64

)

 

$

(0.80

)

 

The following common stock equivalents have been excluded from diluted net loss per share for the three months ended March 31, 2017 and 2016 because their inclusion would be anti-dilutive:

 

 

 

Three months ended

March 31,

 

 

 

2017

 

 

2016

 

Shares of common stock subject to outstanding options

 

 

4,668,093

 

 

 

4,570,714

 

Shares of common stock subject to outstanding warrants

 

 

116,845

 

 

 

 

Shares of common stock subject to outstanding RSUs

 

 

2,519,794

 

 

 

998,837

 

Shares of common stock pursuant to ESPP

 

 

174,204

 

 

 

130,049

 

Total shares of common stock equivalents

 

 

7,478,936

 

 

 

5,699,600

 

 

Geographic information
Geographic information

9. Geographic information

Revenue by country is determined based on the billing address of the customer. The following presents revenue by country for the three months ended March 31, 2017 and 2016 (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2017

 

 

2016

 

United States

 

$

9,208

 

 

$

2,964

 

Canada

 

 

597

 

 

 

782

 

Rest of world

 

 

533

 

 

 

209

 

Total revenue

 

$

10,338

 

 

$

3,955

 

 

All long-lived assets, at March 31, 2017 and December 31, 2016, were located in the United States.

 

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. 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 debt securities at the time of purchase and reevaluates such designation at each balance sheet date. Short-term marketable securities have maturities less than 365 days at the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive loss. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income (expense), net.

Accounts receivable

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

Restricted cash

Restricted cash consists of money market funds that serve as: collateral for a security deposit for the Company’s lease agreement for 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.  

Cash, cash equivalents and restricted cash

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

 

 

 

March 31,

2017

 

 

March 31,

2016