INVITAE CORP, 10-K filed on 3/16/2017
Annual Report
Document and Entity Information (USD $)
In Millions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Feb. 28, 2017
Jun. 30, 2016
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, 2016 
 
 
Amendment Flag
false 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Accelerated Filer 
 
 
Trading Symbol
NVTA 
 
 
Entity Voluntary Filers
No 
 
 
Entity Well-known Seasoned Issuer
No 
 
 
Entity Common Stock, Shares Outstanding
 
42,248,590 
 
Entity Public Float
 
 
$ 135.1 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 66,825 
$ 73,238 
Marketable securities
25,798 
53,780 
Prepaid expenses and other current assets
9,177 
4,292 
Total current assets
101,800 
131,310 
Property and equipment, net
23,793 
18,709 
Restricted cash
4,697 
4,831 
Other assets
361 
1,826 
Total assets
130,651 
156,676 
Current liabilities:
 
 
Accounts payable
3,352 
3,500 
Accrued liabilities
6,711 
4,253 
Capital lease obligation, current portion
1,309 
1,588 
Debt, current portion
3,381 
1,536 
Total current liabilities
14,753 
10,877 
Capital lease obligation, net of current portion
266 
1,576 
Debt, net of current portion
8,721 
5,504 
Other long-term liabilities
7,837 
343 
Total liabilities
31,577 
18,300 
Commitments and contingencies (Note 5)
   
   
Stockholders’ equity:
 
 
Preferred stock, $0.0001 par value: Authorized: 20,000,000 shares; Issued and outstanding: no shares as of December 31, 2016 and 2015
   
   
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 41,143,513 and 31,935,121 shares as of December 31, 2016 and December 31, 2015, respectively
Accumulated other comprehensive income (loss)
 
(15)
Additional paid-in capital
374,288 
313,349 
Accumulated deficit
(275,218)
(174,962)
Total stockholders’ equity
99,074 
138,376 
Total liabilities and stockholders’ equity
$ 130,651 
$ 156,676 
Consolidated Balance Sheets (Parenthetical) (USD $)
Dec. 31, 2016
Dec. 31, 2015
Statement Of Financial Position [Abstract]
 
 
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, authorized shares
20,000,000 
20,000,000 
Preferred stock, issued shares
Preferred stock, outstanding shares
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
400,000,000 
400,000,000 
Common stock, shares issued
41,143,513 
31,935,121 
Common stock, shares outstanding
41,143,513 
31,935,121 
Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Income Statement [Abstract]
 
 
 
Revenue
$ 25,048 
$ 8,378 
$ 1,604 
Costs and operating expenses:
 
 
 
Cost of revenue
27,878 
16,523 
5,624 
Research and development
44,630 
42,806 
22,063 
Selling and marketing
28,638 
22,479 
8,669 
General and administrative
24,085 
16,047 
12,600 
Total costs and operating expenses
125,231 
97,855 
48,956 
Loss from operations
(100,183)
(89,477)
(47,352)
Other income (expense), net
348 
(94)
(79)
Interest expense
(421)
(211)
(61)
Net loss
$ (100,256)
$ (89,782)
$ (47,492)
Net loss per share, basic and diluted
$ (3.02)
$ (3.18)
$ (56.14)
Shares used in computing net loss per share, basic and diluted
33,176,305 
28,213,324 
846,027 
Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement Of Income And Comprehensive Income [Abstract]
 
 
 
Net loss
$ (100,256)
$ (89,782)
$ (47,492)
Other comprehensive income (loss):
 
 
 
Unrealized income (loss) on available-for-sale marketable securities, net of tax
15 
(15)
 
Comprehensive loss
$ (100,241)
$ (89,797)
$ (47,492)
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, 2013
$ (37,280)
 
$ 408 
 
$ (37,688)
Balance at the beginning of the period (in shares) at Dec. 31, 2013
 
732,670 
 
 
 
Increase (Decrease) in Stockholders' Deficit
 
 
 
 
 
Common stock issued on exercise of stock options
209 
 
209 
 
 
Common stock issued on exercise of stock options (in shares)
 
168,867 
 
 
 
Vesting of common stock related to early exercise of options
16 
 
16 
 
 
Vesting of common stock related to early exercise of options (in shares)
 
43,044 
 
 
 
Stock-based compensation expense
971 
 
971 
 
 
Net loss
(47,492)
 
 
 
(47,492)
Balance at the end of the period at Dec. 31, 2014
(83,576)
 
1,604 
 
(85,180)
Balance at the end 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 costs
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
 
 
 
 
 
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 
 
 
 
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 
 
 
 
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 
$ 4 
$ 374,288 
 
$ (275,218)
Balance at the end of the period (in shares) at Dec. 31, 2016
 
41,143,513 
 
 
 
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity 2 (Deficit) (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Convertible preferred stock
Series F convertible preferred stock
Balance at the beginning of the period at Dec. 31, 2013
 
$ 86,574 
 
Balance at the beginning of the period (in shares) at Dec. 31, 2013
 
81,131,524 
 
Increase (Decrease) in Convertible Preferred Stock
 
 
 
Issuance of convertible preferred stock, net of issuance costs
 
 
115,731 
Issuance of convertible preferred stock, net of issuance costs (in shares)
 
 
60,000,000 
Balance at the end of the period (in shares) at Dec. 31, 2014
141,131,524 
141,131,524 
60,000,000 
Balance at the beginning of the period at Dec. 31, 2014
 
202,305 
 
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
 
$ 0 
 
Balance at the end of the period (in shares) at Dec. 31, 2015
 
 
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity (Deficit) (Parenthetical) (Series F convertible preferred stock, USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2014
Series F convertible preferred stock
 
Sale price on common stock (in dollars per share)
$ 2.00 
Issuance costs
$ 4,268 
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Cash flows from operating activities:
 
 
 
Net loss
$ (100,256,000)
$ (89,782,000)
$ (47,492,000)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
6,553,000 
5,321,000 
2,315,000 
Stock-based compensation
10,699,000 
3,477,000 
971,000 
Amortization of premium on marketable securities
311,000 
632,000 
 
Loss on disposal of assets
1,030,000 
23,000 
37,000 
Changes in operating assets and liabilities:
 
 
 
Prepaid expenses and other current assets
(1,992,000)
(1,676,000)
(1,880,000)
Other assets
1,465,000 
36,000 
(849,000)
Accounts payable
(111,000)
508,000 
2,072,000 
Accrued expenses and other liabilities
5,984,000 
806,000 
2,386,000 
Net cash used in operating activities
(76,317,000)
(80,655,000)
(42,440,000)
Cash flows from investing activities:
 
 
 
Purchases of marketable securities
(90,236,000)
(216,994,000)
 
Proceeds from sales of marketable securities
 
15,891,000 
 
Proceeds from maturities of marketable securities
117,922,000 
146,676,000 
 
Purchases of property and equipment
(11,625,000)
(6,464,000)
(6,686,000)
Change in restricted cash
134,000 
(4,681,000)
(30,000)
Net cash provided by (used in) investing activities
16,195,000 
(65,572,000)
(6,716,000)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible preferred stock, net of issuance costs
 
 
202,305,000 
Proceeds from issuance of common stock upon initial public offering, net of issuance costs
 
107,120,000 
 
Proceeds from underwritten public offering of common stock, net of issuance costs
47,102,000 
 
 
Proceeds from exercise of stock options
3,134,000 
288,000 
209,000 
Proceeds from loan agreement
7,500,000 
7,500,000 
 
Loan payments
(2,438,000)
(413,000)
 
Capital lease principal payments
(1,589,000)
(2,010,000)
(1,376,000)
Payments for deferred offering costs
 
 
(1,451,000)
Loan agreement financing costs
 
(47,000)
 
Net cash provided by financing activities
53,709,000 
112,438,000 
113,113,000 
Net increase (decrease) in cash and cash equivalents
(6,413,000)
(33,789,000)
63,957,000 
Cash and cash equivalents at beginning of period
73,238,000 
107,027,000 
43,070,000 
Cash and cash equivalents at end of period
66,825,000 
73,238,000 
107,027,000 
Supplemental cash flow information:
 
 
 
Interest paid
421,000 
211,000 
61,000 
Supplemental cash flow information of non-cash investing and financing activities:
 
 
 
Equipment acquired through capital leases
 
1,639,000 
2,850,000 
Conversion of convertible preferred stock to common stock
 
202,305,000 
 
Purchases of property and equipment in accounts payable and accrued liabilities
1,644,000 
603,000 
325,000 
Deferred offering costs included in accounts payable and accrued liabilities
 
 
450,000 
Series F convertible preferred stock
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of convertible preferred stock, net of issuance costs
 
 
$ 115,731,000 
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 1,100 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 years ended December 31, 2016 and 2015, the Company had net losses of $100.3 million and $89.8 million, respectively. At December 31, 2016, the Company’s accumulated deficit was $275.2 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 December 31, 2016, revenue from the sale of its tests and the net proceeds of the first term loan, which closed in March 2017, will be sufficient to meet its anticipated cash requirements for the 12-month period following the filing date of this report. 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 successfully raise 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 had $92.6 million of cash, cash equivalents and investments as of December 31, 2016 and borrowed $40.0 million in March 2017 through a debt arrangement, as more fully discussed in Note 13.  The Company has implemented the guidance in Financial Accounting Standards Board 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 December 31, 2016 financial statements are issued.

Initial Public Offering

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

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 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. The Company is also subject to credit risk from its accounts receivable related to its product sales. The Company does not perform evaluations of customers’ financial condition and does not require collateral.

As of December 31, 2016, substantially all of the Company’s revenue has been derived from sales of its assays. The majority of the Company’s accounts receivable arises from product sales in the United States. The majority of the Company’s tests to date have been delivered to physicians in the United States.

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 are as follows:

 

 

December 31,

 

Customers

2016

 

 

2015

 

 

2014

 

Customer A

*

 

 

*

 

 

 

15

%

Customer B

*

 

 

 

13

%

 

*

 

Customer C

 

11

%

 

*

 

 

*

 

 

 

*

Less than 10% of total revenue

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

Restricted cash

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

Internal-use software

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

During the years ended December 31, 2016, 2015 and 2014, the Company capitalized $0, $1.5 million and $550,000, respectively, of internal‑use software development costs. Internal‑use software amortization was $1.3 million, $718,000, and $152,000, in 2016, 2015 and 2014, respectively. The carrying value of capitalized internal-use software was $110,000 and $1.4 million at December 31, 2016 and 2015, respectively. The weighted average remaining useful life of capitalized internal-use software at December 31, 2016 was 1 month.

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

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

Revenue recognition

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

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

Collaboration revenue related to achievement of specified milestones is recognized in accordance with ASC Topic 605-28, Revenue Recognition — Milestone Method. Under the milestone method, a payment that is contingent upon the achievement of a substantive milestone is recognized in its entirety in the period in which the milestone is achieved. A milestone is an event (i) that can be achieved based in whole or in part on either the Company’s performance or on the occurrence of a specific outcome resulting from the Company’s performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved, and (iii) that would result in additional payments being due to the Company. The determination that a milestone is substantive is judgmental and is made at the inception of the arrangement. Milestones are considered substantive when the consideration earned from the achievement of the milestone is (i) commensurate with either the Company’s performance to achieve the milestone or the enhancement of value of the item delivered as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) relates solely to past performance and (iii) is reasonable relative to all deliverables and payment terms in the arrangement.

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, shipping and handling costs 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 a straight-line basis.

Stock-based compensation expense for awards without a performance condition is recognized using the straight-line method. Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

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

Advertising

Advertising expenses are expensed as incurred. The Company recorded advertising expenses of $0.5 million, $0.4 million and $11,000 in 2016, 2015 and 2014, 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 gains and losses on investments in available‑for‑sale securities.

Net loss per share attributable to common stockholders

Basic net loss per share attributable to common stockholders is calculated by dividing net loss attributable to common stockholders by the weighted‑average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share attributable to common stockholders is computed by dividing net loss attributable to common stockholders by the weighted‑average number of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities consisting of convertible preferred stock, options to purchase common stock and restricted stock awards are considered to be common stock equivalents but were excluded from the calculation of diluted net loss per share attributable to common stockholders because their effect would be antidilutive for all periods presented. Common shares subject to repurchase are excluded from weighted‑average shares. For the years ended December 31, 2016, 2015 and 2014; zero, 4,659 and 23,903 shares subject to repurchase, respectively, are excluded from the basic loss per share calculation.

Recent accounting pronouncements

In December 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 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 has elected to early adopt ASU 2016-18 effective January 1, 2017 and the adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In 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 has elected to early adopt ASU 2016-15 effective January 1, 2017 and the adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

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

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies accounting for share-based payment award transactions. ASU-2016-09 is effective for annual and interim periods beginning on or after December 15, 2016 and early adoption is permitted. The Company will adopt ASU 2016-09 in the first quarter of 2017 and the adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. Lessor accounting under ASU 2016-02 is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company has not yet selected an implementation date for ASU 2016-02.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). ASU 2015-14 defers the effective date of ASU 2014-09 for public business entities by one year to annual reporting periods beginning after December 15, 2017. Therefore, the new standard will become effective for the Company on January 1, 2018 and early application is permitted for periods beginning on or after January 1, 2017. The 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.

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

Balance sheet components
Balance sheet components

3. Balance sheet components

Cash equivalents and marketable securities

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

 

 

 

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

 

 

 

 

December 31, 2015

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Estimated

Fair Value

 

Money market funds

 

$

39,998

 

 

$

 

 

$

 

 

$

39,998

 

U.S. treasury notes

 

 

4,006

 

 

 

 

 

 

 

 

 

4,006

 

U.S. government agency securities

 

 

65,586

 

 

 

1

 

 

 

(16

)

 

 

65,571

 

 

 

$

109,590

 

 

$

1

 

 

$

(16

)

 

$

109,575

 

Reported as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

$

50,964

 

Restricted cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,831

 

Marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53,780

 

Total cash equivalents, restricted cash and

   marketable securities

 

 

 

 

 

 

 

 

 

 

 

 

 

$

109,575

 

 

At December 31, 2016, the remaining contractual maturities of available‑for‑sale securities were less than one year. For the years ended December 31, 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,

2016

 

 

December 31,

2015

 

Leasehold improvements

 

$

1,256

 

 

$

2,548

 

Laboratory equipment

 

 

13,644

 

 

 

10,461

 

Equipment under capital lease

 

 

5,871

 

 

 

8,224

 

Computer equipment

 

 

2,514

 

 

 

2,397

 

Software

 

 

2,489

 

 

 

2,368

 

Furniture and fixtures

 

 

238

 

 

 

210

 

Automobiles

 

 

20

 

 

 

20

 

Construction-in-progress

 

 

12,229

 

 

 

1,202

 

Total property and equipment, gross

 

 

38,261

 

 

 

27,430

 

Accumulated depreciation and amortization

 

 

(14,468

)

 

 

(8,721

)

Total property and equipment, net

 

$

23,793

 

 

$

18,709

 

 

Depreciation and amortization expense was $6.6 million, $5.3 million and $2.3 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

 

 

 

December 31,

2016

 

 

December 31,

2015

 

Accrued compensation and related expenses

 

$

3,072

 

 

$

2,307

 

Accrued laboratory materials purchases

 

 

338

 

 

 

426

 

Accrued professional services

 

 

446

 

 

 

272

 

Accrued construction in progress

 

 

1,215

 

 

 

 

Lease incentive obligation, current

 

 

468

 

 

 

 

Other

 

 

1,172

 

 

 

1,248

 

Total accrued liabilities

 

$

6,711

 

 

$

4,253

 

 

Other long-term liabilities

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

 

 

 

December 31,

2016

 

 

December 31,

2015

 

Lease incentive obligation, non-current

 

$

4,243

 

 

$

107

 

Deferred rent, non-current

 

 

3,419

 

 

 

98

 

Other non-current liabilities

 

 

175

 

 

 

138

 

Total other long-term liabilities

 

$

7,837

 

 

$

343

 

 

Fair value measurements
Fair value measurements

4. Fair value measurements

Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash equivalents, and accounts payable, are valued at cost, which approximates fair value due to their short maturities. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The authoritative guidance establishes a three‑level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.

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

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

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

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

The following tables set forth the fair value of the Company’s consolidated financial instruments that were measured at fair value on a recurring basis as of December 31, 2016 and 2015 (in thousands):

 

 

 

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

 

 

 

 

December 31, 2015

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

39,998

 

 

$

 

 

$

 

 

$

39,998

 

U.S. treasury notes

 

 

4,006

 

 

 

 

 

 

 

 

 

4,006

 

U.S. government agency securities

 

 

 

 

 

65,571

 

 

 

 

 

 

65,571

 

Total financial assets

 

$

44,004

 

 

$

65,571

 

 

$

 

 

$

109,575

 

 

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

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

The fair value of the Company’s outstanding debt is estimated using the net present value of the 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 December 31, 2016, and 2015, are as follows (in thousands):

 

 

 

December 31, 2016

 

 

December 31, 2015

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

Debt

 

$

12,102

 

 

$

11,905

 

 

$

7,040

 

 

$

6,952

 

 

Commitments and contingencies
Commitments and contingencies

5. Commitments and contingencies

Operating Leases

As of December 31, 2016, the Company leases office and laboratory facilities in California and Massachusetts under non-cancelable operating lease agreements with lease periods expiring between 2017 and 2026. All of the Company’s lease agreements include scheduled rent increases over the terms of the leases. Rent increases, including the impact of rent holidays, are recognized as deferred rent and are amortized on a straight-line basis over the term of the original lease. Leasehold improvement allowances from landlords are recognized as lease incentive obligations and are amortized on a straight-line basis over the term of the original lease.

The Company has subleased office facilities in Palo Alto, California and Cambridge Massachusetts. Future minimum rental receipts under these subleases totaled $0.8 million at December 31, 2016.

In September 2015, the Company entered into a lease agreement for a production facility and headquarters in San Francisco, California. This lease expires in July 2026 and the Company may renew the lease for an additional ten years. The Company has determined the lease term to be a ten-year period expiring in 2026. The lease term commenced when the Company took occupancy of the facility in February 2016. In connection with the execution of the lease, the Company provided a security deposit of approximately $4.6 million, which is included in restricted cash in the Company’s consolidated balance sheets. Minimum annual rent under the lease is subject to increases based on stated rental adjustment terms. In addition, per the terms of the lease, the Company will receive a $5.2 million lease incentive in the form of reimbursement from the landlord for a portion of the costs of leasehold improvements the Company has made to the facility. The assets purchased with the lease incentive are included in property and equipment, net, in the Company’s consolidated balance sheets and the lease incentive is recognized as a reduction of rental expense on a straight-line basis over the term of the lease. At December 31, 2016, all of the incentive had been utilized by the Company. Aggregate future minimum lease payments for the new facility at December 31, 2016 were approximately $69.7 million.

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

Future minimum payments under non‑cancelable operating leases as of December 31, 2016 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2017

 

$

7,043

 

2018

 

 

6,898

 

2019

 

 

6,946

 

2020

 

 

6,917

 

2021

 

 

7,079

 

Thereafter

 

 

37,137

 

Total minimum lease payments

 

$

72,020

 

 

Rent expense was $8.6 million, $3.7 million and $1.4 million for the years ended December 31, 2016, 2015 and 2014, respectively.

Equipment Financing

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank under which term loans for purchases of equipment up to an aggregate of $15.0 million were available in tranches not to exceed $2.5 million. At December 31, 2016, the Company had borrowed the full $15.0 million available under the Loan Agreement. The term loans under the Loan Agreement bear interest at a floating rate equal to 0.25% below the prime rate as published in the Wall Street Journal effective on the date the change in the prime rate becomes effective. At December 31, 2016, the interest rate on borrowings under the Loan Agreement was 3.5%. The Company is required to repay the outstanding principal and accrued but unpaid interest on each tranche in equal monthly installments beginning one month after each advance and ending on July 17, 2020 (the “Term Date”). The Company may, at its option, prepay the borrowings by paying the lender a prepayment premium.

The Company’s obligations under the Loan Agreement are subject to covenants, including covenants to maintain a minimum liquidity level with the bank, and additional covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of its capital stock, repurchase stock and make investments, in each case subject to certain exceptions. At December 31, 2016, the Company was in compliance with all covenants under the Loan Agreement. The Company’s obligations under the Loan Agreement are secured by a security interest on substantially all of its assets, excluding its intellectual property and certain other assets.

At December 31, 2016, obligations under the Loan Agreement were $12.1 million. Debt issuance costs related to the Loan Agreement of $47,000 were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the Loan Agreement. Future payments under the Loan Agreement as of December 31, 2016 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2017

 

$

3,728

 

2018

 

 

3,619

 

2019

 

 

3,509

 

2020

 

 

1,997

 

Total remaining debt payments

 

 

12,853

 

Less: amount representing debt discount

 

 

(34

)

Less: amount representing interest

 

 

(717

)

Present value of remaining debt payments

 

 

12,102

 

Less: current portion

 

 

(3,381

)

Total non-current debt obligation

 

$

8,721

 

 

 

Capital leases

The Company has entered into various capital lease agreements to obtain lab equipment. The term of the capital leases is typically three years with interest rates ranging from 3.8% to 4.3%. The leases are secured by the underlying equipment. The portion of the future payments designated as principal repayment was classified as a capital lease obligation on the consolidated balance sheets. Future payments under the capital leases as of December 31, 2016 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2017

 

$

1,350

 

2018

 

 

269

 

Total capital lease obligations

 

 

1,619

 

Less: amount representing interest

 

 

(44

)

Present value of net minimum capital lease

   payments

 

 

1,575

 

Less: current portion

 

 

(1,309

)

Total non-current capital lease obligations

 

$

266

 

 

Interest expense related to capital leases was $103,000, $141,000 and $61,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

Property and equipment under capital leases was $5.9 million and $8.2 million as of December 31, 2016 and 2015, respectively. Accumulated depreciation and amortization, collectively, on these assets was $2.4 million and $2.8 million as of December 31, 2016 and 2015, respectively.

Guarantees and indemnifications

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company currently holds 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 has not recorded any liabilities associated with these indemnification agreements as of December 31, 2016 or 2015.

Contingencies

The Company was not a party to any other material legal proceedings at December 31, 2016, or at the date of this report. The Company may from time to time become involved in various legal proceedings arising in the ordinary course of business, and the resolution of any such claims could be material.

 

Convertible preferred stock
Convertible preferred stock

6. Convertible preferred stock

Convertible preferred stock as of December 31, 2014 consisted of the following (in thousands, except share and per share data):

 

 

 

Shares

Authorized

 

 

Original

issue price

 

 

Shares

issued and

outstanding

 

 

Proceeds,

net of

issuance

costs

 

Series A

 

 

11,693,179

 

 

$

0.44

 

 

 

11,693,179

 

 

$

5,109

 

Series B

 

 

4,181,818

 

 

 

0.55

 

 

 

4,181,818

 

 

 

2,253

 

Series C

 

 

31,112,750

 

 

 

0.95

 

 

 

31,112,750

 

 

 

29,393

 

Series D

 

 

8,000,000

 

 

 

1.25

 

 

 

8,000,000

 

 

 

9,933

 

Series E

 

 

26,143,777

 

 

 

1.53

 

 

 

26,143,777

 

 

 

39,886

 

Series F

 

 

60,000,000

 

 

 

2.00

 

 

 

60,000,000

 

 

 

115,731

 

Balance at December 31, 2014

 

 

141,131,524

 

 

 

 

 

 

 

141,131,524

 

 

$

202,305

 

 

Upon the closing of the IPO in February 2015, the 141,131,524 shares of convertible preferred stock then outstanding converted into 23,521,889 shares of common stock.

Stockholders' equity (deficit)
Stockholders' equity (deficit)

7. Stockholders’ equity (deficit)

Common stock

The holders of each share of common stock have one vote for each share of stock. The common stockholders are also entitled to receive dividends whenever funds and assets are legally available and when declared by the Board of Directors.

In November 2016, the Company completed an underwritten public offering of 8,433,332 shares of its common stock at an offering price of $6.00 per share for gross proceeds of $50.6 million. The Company received net proceeds from the offering of approximately $47.1 million, after deducting the underwriters’ discounts and commissions and offering expenses.

As of December 31, 2016 and 2015, the Company had reserved shares of common stock, on an as‑if converted basis, for issuance as follows:

 

 

 

As of December 31,

 

 

 

2016

 

 

2015

 

Options issued and outstanding

 

 

4,490,662

 

 

 

3,659,713

 

RSU awards issued and outstanding

 

 

1,421,757

 

 

 

 

Shares available for grant under stock option plan

 

 

1,375,766

 

 

 

2,268,938

 

Shares reserved for issuance under the 2015

   Employee Stock Purchase Plan

 

 

274,686

 

 

 

325,000

 

Total

 

 

7,562,871

 

 

 

6,253,651

 

 

Stock plans
Stock plans

8. Stock plans

Stock incentive plans

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

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

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

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

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

At December 31, 2016, 530,005 PRSUs were outstanding, with a total grant date fair value of $3.5 million. Based on its evaluation of the probability of achieving performance conditions at December 31, 2016, the Company recorded stock-based compensation expense of $1.9 million for the year ended December 31, 2016 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, 2015

 

 

2,268,938

 

 

 

3,659,713

 

 

$

7.38

 

 

 

8.89

 

 

$

7,099

 

Additional shares reserved

 

 

1,277,442

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options granted

 

 

(1,501,461

)

 

 

1,501,461

 

 

$

9.73

 

 

 

 

 

 

 

 

 

Options cancelled

 

 

426,596

 

 

 

(426,596

)

 

$

9.36

 

 

 

 

 

 

 

 

 

Options exercised

 

 

 

 

 

 

(243,916

)

 

$

3.03

 

 

 

 

 

 

 

 

 

RSUs granted

 

 

(677,267

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRSUs granted

 

 

(575,064

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RSUs cancelled

 

 

111,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PRSUs cancelled

 

 

45,059

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at December 31, 2016

 

 

1,375,766

 

 

 

4,490,662

 

 

$

8.21

 

 

 

8.11

 

 

$

5,312

 

Options exercisable at December 31, 2016

 

 

 

 

 

 

1,611,780

 

 

$

6.42

 

 

 

6.81

 

 

$

4,096

 

Options vested and expected to vest at

   December 31, 2016

 

 

 

 

 

 

4,008,578

 

 

$

8.07

 

 

 

8.01

 

 

$

5,170

 

 

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

The weighted‑average fair value of options to purchase common stock granted was $6.18, $6.26 and $4.68 per share in the years ended December 31, 2016, 2015 and 2014, respectively. The weighted‑average fair value of RSUs granted was $9.80 and $10.72, in the years ended December 31, 2016 and 2015, respectively. No RSUs were granted in 2014.

The total grant date fair value of stock options vested was $5.6 million, $2.1 million and $494,000 in the years ended December 31, 2016, 2015 and 2014, respectively.

The intrinsic value of options to purchase common stock exercised was $1.4 million, $1.2 million and $644,000 in the years ended December 31, 2016, 2015 and 2014, respectively.

 

The following table summarizes RSU activity for the year ended December 31, 2016:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Grant Date

Fair Value

 

Balance at December 31, 2015

 

 

482,818

 

 

$

10.71

 

RSUs granted

 

 

677,267

 

 

$

9.80

 

PRSUs granted

 

 

575,064

 

 

$

6.52

 

RSUs vested

 

 

(156,810

)

 

$

10.55

 

RSUs cancelled

 

 

(111,523

)

 

$

10.31

 

PRSUs cancelled

 

 

(45,059

)

 

$

6.40

 

Balance at December 31, 2016

 

 

1,421,757

 

 

$

8.77

 

 

2015 employee stock purchase plan

In January 2015, the Company adopted the 2015 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the closing of the IPO. Employees participating in the ESPP may purchase common stock at 85% of the lesser of the fair market value of common stock on the purchase date or last trading day preceding the offering date. The initial ESPP purchase period commenced in November 2015, and in 2016, 369,674 shares of common stock were purchased pursuant to the ESPP. At December 31, 2016, cash received from payroll deductions pursuant to the ESPP was $326,000.

The ESPP provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 and continuing through January 1, 2025. At December 31, 2016, a total of 274,686 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.

In 2016, the Company modified certain stock options and RSU awards. The terms of the stock option modifications included acceleration of vesting and extensions of post-termination exercise periods. The terms of the RSU award modifications included acceleration of vesting.  A total of 14 employees were affected by the stock option and RSU modifications and the total incremental compensation cost relating to these modifications was $323,000.

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 and did not have any trading history for its common stock, 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:

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Expected term (in years)

 

6.03

 

 

6.03

 

 

6.03

 

Expected volatility

 

 

71.42%

 

 

 

68.2 – 79.7

%

 

 

83.8 – 86.6

%

Risk-free interest rate

 

 

1.37%

 

 

 

1.28 – 1.86

%

 

 

1.53 – 1.91

%

Dividend yield

 

 

 

 

 

 

 

 

 

 

Stock‑based compensation related to stock options granted to non‑employees is recognized as the stock options are earned. 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:

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Expected term (in years)

 

 

6.25 – 10.00

 

 

 

7.25 – 9.82

 

 

 

9.37 – 9.40

 

Expected volatility

 

 

76.92%

 

 

 

69.9 – 78.70%

 

 

 

83.80%

 

Risk-free interest rate

 

 

1.55 – 2.37%

 

 

 

1.86 – 2.25%

 

 

 

1.99 – 2.41%

 

Dividend yield

 

 

 

 

 

 

 

 

 

 

The fair value of shares purchases pursuant to the ESPP is estimated using the Black‑Scholes option pricing model. For the years ended December 31, 2016 and 2015, the weighted average grant date fair value per share for the ESPP was $2.66 and $2.17, respectively and stock‑based compensation expense for the ESPP was $0.9 million and $102,000, respectively.

The fair value of the shares purchased pursuant to the ESPP was estimated using the following assumptions:

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

Expected term (in years)

 

 

0.50

 

 

 

0.50

 

Expected volatility

 

 

66.31

%

 

 

74.13

%

Risk-free interest rate

 

 

0.50

%

 

 

0.33

%

Dividend yield

 

 

 

 

 

The following table summarizes stock‑based compensation expense for the years ended December 31, 2016, 2015 and 2014 included in the statements of operations as follows (in thousands):

 

 

 

Year Ended December 31,

 

 

 

2016

 

 

2015

 

 

2014

 

Cost of revenue

 

$

1,353

 

 

$

368

 

 

$

102

 

Research and development

 

 

4,976

 

 

 

1,545

 

 

 

382

 

Selling and marketing

 

 

1,709

 

 

 

688

 

 

 

216

 

General and administrative

 

 

2,661

 

 

 

876

 

 

 

271

 

Total stock-based compensation expense