Notes to Condensed Consolidated Financial Statements
1. Organization and description of business
Invitae Corporation ("Invitae," “the Company," "we," "us," and "our") was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. We utilize 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 patients. Our headquarters and main production facility is located in San Francisco, California. We currently have more than 20,000 genes in production and provide a variety of diagnostic tests that can be used in multiple indications. Our tests include genes associated with hereditary cancer, neurological disorders, cardiovascular disorders, pediatric disorders, metabolic disorders and other hereditary conditions. In addition, and as a result of the acquisitions of Good Start Genetics (“Good Start”) and CombiMatrix Corporation (“CombiMatrix”) in 2017, our services also include screening and testing in reproductive health, including preimplantation and carrier screening for inherited disorders, prenatal diagnosis, miscarriage analysis and pediatric developmental disorders. To complement these, in the first quarter of 2019, we introduced our Non-invasive Prenatal Screen ("NIPS") and to advance this offering, in June 2019, we acquired Singular Bio, Inc. ("Singular Bio") to lower costs associated with NIPS. In July 2019, we acquired Jungla Inc. ("Jungla") to further enhance our genetic variant interpretation. Invitae operates in one segment.
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 our Annual Report on Form 10-K for the year ended December 31, 2018. The results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other periods.
2. Summary of significant accounting policies
Principles of consolidation
Our unaudited condensed consolidated financial statements include our accounts and the accounts of our 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. We base these estimates on historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those estimates and assumptions.
Significant estimates and assumptions made by management include the determination of:
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•
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revenue recognition (See Note 3, “Revenue, accounts receivable and deferred revenue” for further information);
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•
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the fair value of assets acquired and liabilities assumed for business combinations;
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•
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the fair value of goodwill and intangible assets;
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•
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valuation of the liability and equity components of our convertible notes issued in September 2019 ("Convertible Senior Notes");
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•
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the recoverability of long-lived assets;
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•
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our incremental borrowing rates used to calculate our lease obligations;
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•
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stock-based compensation expense and the fair value of awards issued; and
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•
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income tax uncertainties.
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Concentrations of credit risk and other risks and uncertainties
Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits.
Significant customers are those that represent 10% or more of our total revenue presented on the consolidated statements of operations. Our revenue for significant customers as a percentage of our total revenue were as follows:
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Medicare
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27
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%
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25
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%
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23
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%
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20
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%
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United Healthcare
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*
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10
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%
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*
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*
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* Balance represents less than 10% of total revenue
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Accounts receivable for customers that represent 10% or more of our total accounts receivable presented on the consolidated balance sheets were as follows:
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September 30, 2019
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December 31, 2018
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Medicare
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12
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%
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21
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%
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Cash, cash equivalents and restricted cash
We consider 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.
Restricted cash consists primarily of money market funds held in irrevocable standby letters of credit that serve as collateral for security deposits for our facility leases.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows (in thousands):
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September 30,
2019
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December 31,
2018
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Cash and cash equivalents
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$
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467,012
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$
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112,158
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Restricted cash
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6,183
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6,006
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Total cash, cash equivalents and restricted cash
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$
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473,195
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$
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118,164
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Accounts receivable
We receive payment for our tests from partners, patients, institutional customers and third-party payers. See Note 3, “Revenue, accounts receivable and deferred revenue” for further information.
Inventory
We maintain test reagents and other consumables primarily used in sample collection kits which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. Our inventory was $6.0 million and $8.3 million as of September 30, 2019 and December 31, 2018, respectively, and was recorded in prepaid expenses and other current assets on our consolidated balance sheets.
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. We base the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by our management, which consider our 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 Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We remeasure this liability each reporting period and record 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 our operating results from the date of acquisition.
Goodwill
In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), our 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, we perform annual impairment reviews of our goodwill balance during the fourth fiscal quarter. In testing for impairment, we compare the fair value of our consolidated single reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to the reporting unit.
We have not incurred any goodwill impairment losses in any of the periods presented.
Indefinite-lived intangible assets
ASC 350 requires companies to test indefinite-lived intangible assets for impairment annually, and more frequently if indicators of impairment exist. ASC 350 includes an optional qualitative assessment for testing indefinite-lived intangible assets for impairment that permits companies to assess whether it is more likely than not (i.e., a likelihood of greater than 50%) that an indefinite-lived intangible asset is impaired. If a company concludes based on the qualitative assessment that it is not more likely than not that the fair value of an indefinite-lived intangible asset or, in the case of goodwill, that the fair value of the related reporting unit, is less than carrying value, it would not have to determine the asset’s or reporting unit’s fair value, as applicable.
In-process research and development
Intangible assets related to in-process research and development costs (“IPR&D”) are considered to be indefinite-lived until the completion or abandonment of the associated research and development efforts. If and when development is complete, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time. Prior to completion of the research and development efforts, the assets are considered indefinite-lived. During this period, the assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if we become aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts.
During the fourth quarter and if business factors indicate more frequently, we perform an assessment of the qualitative factors affecting the fair value of our IPR&D. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of an asset to its carrying value, without consideration of any recoverability test. We have not identified any such impairment losses to date.
Fair value of financial instruments
Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities, finance leases and contingent consideration. 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 us, the carrying value of our finance leases and Convertible Senior Notes approximate their fair values.
Revenue recognition
We recognize revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. All revenues are generated from contracts with customers.
Test revenue is generated primarily from the sale of tests that provide analysis and associated interpretation of the sequencing of parts of the genome.
Other revenue consists primarily of revenue from genome network subscription services which is recognized on a straight-line basis over the subscription term, and revenue from collaboration agreements.
Cost of revenue
Cost of revenue reflects the aggregate costs incurred in delivering the genetic testing results to clinicians and patients and includes expenses for personnel-related costs including stock-based compensation, materials and supplies, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation, amortization of acquired intangibles and utilities.
Stock-based compensation
We measure stock-based payment awards made to employees and directors based on the estimated fair values of the awards and recognize the compensation expense over the requisite service period. We use the Black-Scholes option-pricing model to estimate the fair value of 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. We grant 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 us. The probability of vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. We recognize 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, our stock-based compensation is reduced for estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
We account for stock issued in connection with business combinations based on the fair value of our common stock on the date of issuance.
Net loss per share
Basic net loss per 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 convertible preferred stock, options to purchase common stock, common stock warrants, Convertible Senior Notes, 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.
Prior period reclassifications
Statement of cash flow amounts in prior periods have been reclassified to conform with current period presentation, which includes $0.6 million of remeasurement of liabilities associated with business combinations in other adjustments to reconcile net loss to cash used in operating activities during the nine months ended September 30, 2018.
Recent accounting pronouncements
We evaluate all Accounting Standards Updates (“ASUs”) issued by the FASB for consideration of their applicability. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.
Recently issued accounting pronouncements not yet adopted
In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. We are currently evaluating the effect that adoption of this ASU will have on our consolidated financial statements.
Recently adopted accounting pronouncements – Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and in July 2018 issued ASU 2018-10, Codification Improvements to Topic 842, Leases,l and ASU 2018-11, Leases (Topic 842): Targeted Improvements (the foregoing ASUs collectively referred to as “Topic 842”). Under this guidance, lessees are required to recognize a lease liability and a right-of-use asset for all leases at the commencement date and also make expanded disclosures about leasing arrangements.
On January 1, 2019, we adopted Topic 842 using the modified retrospective approach in accordance with Topic 842. Adoption of Topic 842 had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated statements of operations. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840: Leases. We elected the package of practical expedients permitted under the transition guidance which, among other things, allowed us to carry forward the historical classification of leases in place as of January 1, 2019.
The effect of the adoption of Topic 842 on our consolidated balance sheet as of January 1, 2019 was as follows (in thousands):
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December 31, 2018
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Adjustments Due to the Adoption of Topic 842
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January 1, 2019
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Property and equipment, net
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$
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27,886
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$
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(5,159
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)
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$
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22,727
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Operating lease assets
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$
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—
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|
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$
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36,711
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$
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36,711
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Other assets
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$
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3,064
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$
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5,159
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$
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8,223
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Accrued liabilities
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$
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26,563
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$
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(490
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)
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$
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26,073
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Operating lease obligations
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$
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—
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$
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4,697
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$
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4,697
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Operating lease obligations, net of current portion
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$
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—
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$
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41,279
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$
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41,279
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Other long-term liabilities
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$
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8,956
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$
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(8,775
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)
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$
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181
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The adjustments due to the adoption of Topic 842 primarily relate to the recognition of operating and finance lease right-of-use assets and operating lease liabilities. Finance lease assets are recorded within other assets on our consolidated balance sheet and were $5.2 million as of implementation of Topic 842 on January 1, 2019 and $4.0 million as of September 30, 2019.
Under Topic 842, we determine if an arrangement is a lease at inception primarily based on the determination of the party responsible for directing the use of an underlying asset within a contract. Operating leases are included in operating lease assets and operating lease obligations in our consolidated balance sheets. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information
available at the lease commencement date which includes significant assumptions made by us including our estimated credit rating. Operating lease right-of-use assets also include any lease payments made prior to the lease commencement date and exclude any lease incentives paid or payable at the lease commencement date. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term.
As allowed under Topic 842, we elected to not apply the recognition requirements of Topic 842 to short-term leases, that is, leases with terms of 12 months or less which do not include an option to purchase the underlying asset that we are reasonably certain to exercise. For short-term leases, we recognize lease payments as operating expenses on a straight-line basis over the lease term.
As a result of our election of the package of practical expedients permitted under the Topic 842 transition guidance, for assets related to facilities leases we elected to account for lease and non-lease components, such as common area maintenance charges, as a single lease component.
We did not identify any material embedded leases with the adoption of Topic 842 and therefore the implementation of Topic 842 primarily focused on the treatment of our previously identified leases.
3. Revenue, accounts receivable and deferred revenue
Test revenue is generated from sales of diagnostic tests to three groups of customers: institutions, such as hospitals, clinics and partners; patients who pay directly; and patients’ insurance carriers. Amounts billed and collected, and the timing of collections, vary based on whether the payer is an institution, an insurance carrier or a patient. Other revenue consists principally of revenue recognized under collaboration and genome network agreements.
The following table includes our revenues as disaggregated by payer category (in thousands):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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|
Test revenue:
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Institutions
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$
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10,407
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$
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8,958
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|
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$
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28,375
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$
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24,761
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|
Patient - direct
|
4,567
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|
|
3,280
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|
|
12,364
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|
9,705
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Patient - insurance
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40,528
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|
|
24,373
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|
|
106,684
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|
|
65,548
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Total test revenue
|
55,502
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|
|
36,611
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|
|
147,423
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|
|
100,014
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Other revenue
|
1,009
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|
|
755
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|
|
3,116
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|
|
2,329
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|
Total revenue
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$
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56,511
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|
$
|
37,366
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$
|
150,539
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|
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$
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102,343
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|
We recognize revenue related to billings based on estimates of the amount that will ultimately be realized. The estimate of the transaction price of test revenue is based on many factors such as length of payer relationship, historical payment patterns, and changes in contract provisions and insurance reimbursement policies. Cash collections for certain diagnostic tests delivered may differ from rates originally estimated. As a result of new information, we updated our estimate of the amounts to be recognized for previously delivered tests which resulted in the following increases to revenue and decreases to our loss from operations and basic and diluted net loss per share (in millions, except per share amounts):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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|
2019
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2018
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|
Revenue
|
$
|
1.2
|
|
|
$
|
1.5
|
|
|
$
|
4.0
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|
$
|
3.8
|
|
|
Loss from operations
|
$
|
(1.2
|
)
|
|
$
|
(1.5
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)
|
|
$
|
(4.0
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)
|
|
$
|
(3.8
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)
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|
Net loss per share, basic and diluted
|
$
|
(0.01
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)
|
|
$
|
(0.02
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)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.06
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)
|
The changes in estimates in revenue recognized during the three and nine months ended September 30, 2019 were primarily related to adjustments to revenue recognized in 2018 from businesses acquired in 2017. We recorded revenue of $3.8 million in the nine months ended September 30, 2018 which includes the impact of a change in estimate related to deletion/duplication analysis for hereditary breast and ovarian cancer using Current Procedure Terminology (CPT) code 81433 in conjunction with CPT code 81432, for tests completed during the second half of 2017.
Accounts receivable
The majority of our accounts receivable represents amounts billed to institutions (e.g., hospitals, clinics, partners) and estimated amounts to be collected from third-party insurance payers for diagnostic test revenue recognized. Also included are amounts due under the terms of collaboration and genome network agreements for diagnostic testing and data aggregation reporting services provided and proprietary platform access rights transferred.
Deferred revenue
We record deferred revenue when cash payments are received or due in advance of our performance related to one or more performance obligations. The amounts deferred to date primarily consist of prepayments related to our consumer direct channel as well as consideration received pertaining to the estimated exercise of certain re-requisition rights. In order to comply with loss contract rules, our re-requisition rights revenue deferral is no less than the estimated cost of fulfilling related obligations. We recognize revenue related to re-requisition rights as the rights are exercised or expire unexercised, which is generally within 90 days of initial deferral.
4. Business combinations
Singular Bio
In June 2019, we acquired 100% of the fully diluted equity of Singular Bio, a privately held company developing single molecule detection technology, for approximately $57.3 million, comprised of $53.9 million in the form of 2.5 million shares of our common stock and the remainder in cash. As of September 30, 2019, we had hold-back amounts payable within 12 months of the acquisition date of $1.8 million.
Prior to the acquisition, we entered into a co-development agreement with Singular Bio whereby we paid Singular Bio $3.0 million for a 12-month right of first refusal and an opportunity to conduct due diligence on its business. As of January 2019, we made all required payments under the terms of this agreement.
In connection with the acquisition, all of Singular Bio's equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required us to allocate the fair value of the equity attributable to pre-combination service to the purchase price and the remainder was considered our post-combination expense. We recognized post-combination expense related to the acceleration of unvested equity of $3.2 million and we also incurred transaction costs of $1.3 million related to the acquisition of Singular Bio; both of these charges were recorded as general and administrative expense during the nine months ended September 30, 2019. We included the financial results of Singular Bio in our consolidated financial statements from the acquisition date, which were not material for the three or nine months ended September 30, 2019.
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by us. While we believe that our 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):
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Cash
|
$
|
4,988
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|
|
Property and equipment
|
303
|
|
|
In-process research and development
|
29,988
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|
|
Total identifiable assets acquired
|
35,279
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|
Current liabilities assumed
|
(479
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)
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|
Deferred tax liability
|
(3,950
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)
|
|
Net identifiable assets acquired
|
30,850
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|
|
Goodwill
|
26,461
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|
|
Total purchase price
|
$
|
57,311
|
|
Based on the guidance provided in ASC 805, we accounted for the acquisition of Singular Bio as a business combination in which we determined that 1) Singular Bio was a business which combines inputs and processes to create outputs, and 2) substantially all of the fair value of gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.
Our purchase price allocation for our acquisition of Singular Bio is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information that existed as of the acquisition date but at the time was unknown to us may become known to us during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Singular Bio resulted in the recognition of $26.5 million of goodwill which we believe consists primarily of technological expertise and capabilities within nucleic acid analysis and the ability to utilize the technology outside NIPS. Goodwill created as a result of the acquisition of Singular Bio is not deductible for tax purposes.
We recorded an income tax benefit of $4.0 million in June 2019 due to net deferred tax liabilities assumed in connection with our acquisition of Singular Bio which provided a future source of income to support the realization of our deferred tax assets and resulted in a partial release of our valuation allowance.
We granted approximately $90.0 million of RSUs under our 2015 Stock Incentive Plan as inducement awards to new employees who joined Invitae in connection with our acquisition of Singular Bio. $45.0 million of the RSUs are time-based and vest in three equal installments in December 2019, June 2020, and December 2020, subject to the employee's continued service with us ("Time-based RSUs") and $45.0 million of the RSUs are performance-based RSUs ("PRSUs") that vest upon the achievement of certain performance conditions over a period of approximately 12 months, subject to the employee's continued service with us. Since the number of awards granted is based on a 30-day volume weighted-average share price with a fixed dollar value, these Time-based RSUs and PRSUs are liability-classified and the fair value will be estimated at each reporting period based on the number of shares that are expected to be issued at each reporting date and our closing stock price, which combined are categorized as Level 3 inputs. Therefore, fair value of the RSUs and PRSUs and the number of shares to be issued will not be fixed until the RSUs vest.
During the three and nine months ended September 30, 2019, we recorded research and development stock-based compensation expense of $6.7 million and $7.6 million, respectively, related to the Time-based RSUs and $11.9 million and $13.6 million, respectively, related to the PRSUs based on our evaluations of the probability of achieving performance conditions. As of September 30, 2019, the Time-based RSUs and PRSUs had a total fair value of $41.2 million and $36.7 million, respectively, based on a total estimated issuance of 4.0 million shares and expectation of the achievement of the performance conditions. As of September 30, 2019, none of the Time-based RSUs or PRSUs granted to these employees had vested.
Jungla
In July 2019, we acquired 100% of the equity interest of Jungla, a privately held company developing a platform for molecular evidence testing in genes, for approximately $59.0 million, comprised of $44.9 million in the form of shares of our common stock and the remainder in cash. We agreed to pay a portion of the cash and issue approximately 0.2 million shares of our common stock after a 12-month period, subject to a hold back to satisfy indemnification obligations that may arise. We incurred $0.6 million of transaction costs related to the acquisition of Jungla which were recorded as general and administrative expense during the three months ended September 30, 2019.
We may be required to pay contingent consideration based on achievement of post-closing development milestones. As of the acquisition date, the fair value of this contingent consideration was $10.7 million, $9.6 million of which would be in the form of shares of our common stock and the remainder in cash. The milestones are expected to be completed within two years. The material factors that may impact the fair value of the contingent consideration, and therefore, this liability, are the probabilities and timing of achieving the related milestones and the discount rate we used to estimate the fair value. Significant changes in any of the probabilities of success would result in a significant change in the fair value, which will be estimated at each reporting date with changes reflected as a general and administrative expense. As of September 30, 2019, the fair value of the contingent consideration was $11.0 million.
In connection with the acquisition, a portion of Jungla's equity awards that were outstanding and unvested prior to the acquisition became fully vested per the terms of the merger agreement. The acceleration of vesting required us to allocate the fair value of the equity attributable to pre-combination service to the purchase price and the remaining amount was considered our post-combination expense. In July 2019, we recognized post-combination expense related to the acceleration of unvested equity of $2.9 million, which was recorded as general and administrative expense. We included the financial results of Jungla in our consolidated financial statements from the acquisition date, which were not material for the three or nine months ended September 30, 2019.
The following table summarizes the purchase price and post-combination expense recorded as a part of the acquisition of Jungla in July 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price
|
|
Post-combination Expense
|
|
Cash transferred
|
$
|
13,261
|
|
|
$
|
2,151
|
|
|
Hold-back consideration - cash
|
270
|
|
|
253
|
|
|
Hold-back consideration - common stock
|
4,574
|
|
|
—
|
|
|
Contingent consideration
|
10,158
|
|
|
542
|
|
|
Common stock transferred
|
30,753
|
|
|
—
|
|
|
Total
|
$
|
59,016
|
|
|
$
|
2,946
|
|
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by us. While we believe that our 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
|
$
|
289
|
|
|
Developed technology
|
44,140
|
|
|
Total identifiable assets acquired
|
44,429
|
|
|
Accounts payable
|
(8
|
)
|
|
Deferred tax liability
|
(8,700
|
)
|
|
Net identifiable assets acquired
|
35,721
|
|
|
Goodwill
|
23,295
|
|
|
Total purchase price
|
$
|
59,016
|
|
Based on the guidance provided in ASC 805, we accounted for the acquisition of Jungla as a business combination in which we determined that 1) Jungla was a business which combines inputs and processes to create outputs, and 2) substantially all of the fair value of gross assets acquired was not concentrated in a single identifiable asset or group of similar identifiable assets.
Our purchase price allocation for our acquisition of Jungla is preliminary and subject to revision as additional information about fair value of assets and liabilities becomes available. Additional information that existed as of the acquisition date but at the time was unknown to us may become known to us during the remainder of the measurement period, a period not to exceed 12 months from the acquisition date.
We measured the identifiable assets and liabilities assumed at their acquisition date fair values separately from goodwill. The intangible asset acquired is developed technology related to Jungla's functional molecular platform. The fair value of the developed technology was estimated using an income approach for $44.1 million with an estimated useful life of ten years.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Jungla resulted in the recognition of $23.3 million of goodwill which we believe consists primarily of technological expertise related to large-scale molecular and genomic technologies and the ability to expand the use of these into other areas of our business. Goodwill created as a result of the acquisition of Jungla is not deductible for tax purposes.
We recorded an income tax benefit of $8.7 million in July 2019 due to net deferred tax liabilities assumed in connection with our acquisition of Jungla which provided a future source of income to support the realization of our deferred tax assets and resulted in a partial release of our valuation allowance.
Pro forma financial information (unaudited)
The unaudited pro forma financial information in the table below summarizes the combined results of operations for Invitae, Singular Bio and Jungla as though the companies had been combined as of January 1, 2018. The pro forma amounts have been adjusted for:
|
|
|
|
•
|
transaction expenses incurred by Singular Bio, Jungla and us,
|
|
|
|
|
•
|
the impacts of the co-development agreement between Singular Bio and us,
|
|
|
|
|
•
|
the historical interest expense incurred by Singular Bio on its debt and debt-like items,
|
|
|
|
|
•
|
compensation expense recognized in relation to the equity awards granted in connection with the acquisition of Singular Bio,
|
|
|
|
|
•
|
amortization expense resulting from the developed technology acquired through the acquisition of Jungla,
|
|
|
|
|
•
|
post-combination expense,
|
|
|
|
|
•
|
income tax benefits resulting from the deferred tax liabilities acquired, and
|
|
|
|
|
•
|
the 2.5 million and 1.4 million shares of our common stock issued upon the closing of the Singular Bio and Jungla transactions, respectively.
|
The following unaudited pro forma financial information is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved as if the acquisitions had taken place as of January 1, 2018 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
|
Invitae
|
|
Singular Bio
|
|
Jungla
|
|
Total
|
|
Invitae
|
|
Singular Bio
|
|
Jungla
|
|
Total
|
|
Revenue
|
$
|
56,511
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
56,511
|
|
|
$
|
37,366
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
37,366
|
|
|
Net loss
|
$
|
(78,707
|
)
|
|
$
|
18,613
|
|
|
$
|
(5,831
|
)
|
|
$
|
(65,925
|
)
|
|
$
|
(31,723
|
)
|
|
$
|
(139
|
)
|
|
$
|
(1,254
|
)
|
|
$
|
(33,116
|
)
|
|
Shares
|
95,577
|
|
|
—
|
|
|
225
|
|
|
95,802
|
|
|
70,153
|
|
|
2,499
|
|
|
1,366
|
|
|
74,018
|
|
|
Basic and diluted net loss per share
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
$
|
(0.69
|
)
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
$
|
(0.45
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
|
Invitae
|
|
Singular Bio
|
|
Jungla
|
|
Total
|
|
Invitae
|
|
Singular Bio
|
|
Jungla
|
|
Total
|
|
Revenue
|
$
|
150,539
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
150,539
|
|
|
$
|
102,343
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
102,343
|
|
|
Net loss
|
$
|
(165,060
|
)
|
|
$
|
21,844
|
|
|
$
|
(8,381
|
)
|
|
$
|
(151,597
|
)
|
|
$
|
(99,514
|
)
|
|
$
|
(1,071
|
)
|
|
$
|
(3,762
|
)
|
|
$
|
(104,347
|
)
|
|
Shares
|
88,663
|
|
|
1,553
|
|
|
984
|
|
|
91,200
|
|
|
63,935
|
|
|
2,499
|
|
|
1,366
|
|
|
67,800
|
|
|
Basic and diluted net loss per share
|
$
|
(1.86
|
)
|
|
|
|
|
|
|
|
$
|
(1.66
|
)
|
|
$
|
(1.56
|
)
|
|
|
|
|
|
|
|
$
|
(1.54
|
)
|
5. Goodwill and intangible assets
Goodwill
The changes in the carrying amounts of goodwill were as follows (in thousands):
|
|
|
|
|
|
|
|
Balance as of December 31, 2018
|
$
|
50,095
|
|
|
Goodwill acquired - Singular Bio
|
26,461
|
|
|
Goodwill acquired - Jungla
|
23,295
|
|
|
Balance as of September 30, 2019
|
$
|
99,851
|
|
Intangible assets
The following table presents details of our intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Useful Life
(in Years)
|
|
Cost
|
|
Accumulated
Amortization
|
|
Net
|
|
Weighted-Average
Useful Life
(in Years)
|
|
Customer relationships
|
$
|
23,763
|
|
|
$
|
(4,550
|
)
|
|
$
|
19,213
|
|
|
10.0
|
|
$
|
23,763
|
|
|
$
|
(2,783
|
)
|
|
$
|
20,980
|
|
|
10.0
|
|
Developed technology
|
56,103
|
|
|
(6,298
|
)
|
|
49,805
|
|
|
8.9
|
|
11,963
|
|
|
(3,482
|
)
|
|
8,481
|
|
|
4.8
|
|
Non-compete agreement
|
286
|
|
|
(157
|
)
|
|
129
|
|
|
5.0
|
|
286
|
|
|
(114
|
)
|
|
172
|
|
|
5.0
|
|
Trade name
|
576
|
|
|
(441
|
)
|
|
135
|
|
|
2.7
|
|
576
|
|
|
(329
|
)
|
|
247
|
|
|
2.7
|
|
Patent licensing agreement
|
496
|
|
|
(64
|
)
|
|
432
|
|
|
15.0
|
|
496
|
|
|
(37
|
)
|
|
459
|
|
|
15.0
|
|
Favorable leases
|
247
|
|
|
(209
|
)
|
|
38
|
|
|
2.2
|
|
247
|
|
|
(117
|
)
|
|
130
|
|
|
2.2
|
|
In-process research and development
|
29,988
|
|
|
—
|
|
|
29,988
|
|
|
n/a
|
|
—
|
|
|
—
|
|
|
—
|
|
|
n/a
|
|
|
$
|
111,459
|
|
|
$
|
(11,719
|
)
|
|
$
|
99,740
|
|
|
6.7
|
|
$
|
37,331
|
|
|
$
|
(6,862
|
)
|
|
$
|
30,469
|
|
|
8.2
|
Acquisition-related intangibles included in the above table are finite-lived, other than in-process research and development which has an indefinite life, and are carried at cost less accumulated amortization. Customer relationships are being amortized on an accelerated basis, in proportion to estimated cash flows. All other finite-lived acquisition-related intangibles are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are realized. Amortization expense was $2.2 million and $1.3 million for the three months ended September 30, 2019 and 2018, respectively, and $4.9 million and $3.8 million for the nine months ended September 30, 2019 and 2018, respectively. Amortization expense is recorded to cost of revenue, research and development, sales and marketing and general and administrative expense.
The following table summarizes our estimated future amortization expense of intangible assets with finite lives as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
2019 (remainder of year)
|
$
|
2,416
|
|
|
2020
|
9,939
|
|
|
2021
|
10,243
|
|
|
2022
|
8,538
|
|
|
2023
|
7,525
|
|
|
Thereafter
|
31,091
|
|
|
Total estimated future amortization expense
|
$
|
69,752
|
|
6. Balance sheet components
Property and equipment, net
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Leasehold improvements
|
$
|
14,049
|
|
|
$
|
13,034
|
|
|
Laboratory equipment
|
26,136
|
|
|
22,149
|
|
|
Equipment under capital lease
|
—
|
|
|
7,129
|
|
|
Computer equipment
|
5,454
|
|
|
4,723
|
|
|
Software
|
2,659
|
|
|
2,594
|
|
|
Furniture and fixtures
|
941
|
|
|
784
|
|
|
Automobiles
|
58
|
|
|
20
|
|
|
Construction-in-progress
|
10,585
|
|
|
1,962
|
|
|
Total property and equipment, gross
|
59,882
|
|
|
52,395
|
|
|
Accumulated depreciation and amortization
|
(27,705
|
)
|
|
(24,509
|
)
|
|
Total property and equipment, net
|
$
|
32,177
|
|
|
$
|
27,886
|
|
Depreciation expense was $1.8 million and $2.1 million for the three months ended September 30, 2019 and 2018, respectively, and $5.2 million and $6.5 million for the nine months ended September 30, 2019 and 2018, respectively.
Accrued liabilities
Accrued liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Accrued compensation and related expenses
|
$
|
12,684
|
|
|
$
|
7,917
|
|
|
Liabilities associated with business combinations
|
26,771
|
|
|
6,460
|
|
|
Liability associated with co-development agreement
|
—
|
|
|
2,000
|
|
|
Deferred revenue
|
1,151
|
|
|
761
|
|
|
Other
|
12,645
|
|
|
9,425
|
|
|
Total accrued liabilities
|
$
|
53,251
|
|
|
$
|
26,563
|
|
Other long-term liabilities
Other long-term liabilities consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Lease incentive obligation, non-current
|
$
|
—
|
|
|
$
|
3,280
|
|
|
Deferred rent, non-current
|
—
|
|
|
5,495
|
|
|
Liabilities associated with business combinations, non-current
|
7,800
|
|
|
—
|
|
|
Other non-current liabilities
|
—
|
|
|
181
|
|
|
Total other long-term liabilities
|
$
|
7,800
|
|
|
$
|
8,956
|
|
7. 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 our consolidated financial instruments that were measured at fair value on a recurring basis (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Amortized
Cost
|
|
Unrealized
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
Gains
|
|
Losses
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
452,306
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
452,306
|
|
|
$
|
452,306
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Certificates of deposit
|
300
|
|
|
—
|
|
|
—
|
|
|
300
|
|
|
—
|
|
|
300
|
|
|
—
|
|
|
Total financial assets
|
$
|
452,606
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
452,606
|
|
|
$
|
452,306
|
|
|
$
|
300
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
|
|
|
|
$
|
11,000
|
|
|
—
|
|
|
—
|
|
|
$
|
11,000
|
|
|
Total financial liabilities
|
|
|
|
|
|
|
$
|
11,000
|
|
|
—
|
|
|
—
|
|
|
$
|
11,000
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Reported as:
|
|
|
|
Cash equivalents
|
$
|
446,123
|
|
|
Restricted cash
|
6,183
|
|
|
Marketable securities
|
300
|
|
|
Total cash equivalents, restricted cash, and marketable securities
|
$
|
452,606
|
|
|
|
|
|
Accrued liabilities
|
$
|
3,200
|
|
|
Other long-term liabilities
|
$
|
7,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Amortized
Cost
|
|
Unrealized
|
|
Estimated
Fair Value
|
|
|
|
|
|
|
|
|
|
Gains
|
|
Losses
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
93,934
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,934
|
|
|
$
|
93,934
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Certificates of deposit
|
300
|
|
|
—
|
|
|
—
|
|
|
300
|
|
|
—
|
|
|
300
|
|
|
—
|
|
|
Commercial paper
|
10,908
|
|
|
—
|
|
|
(1
|
)
|
|
10,907
|
|
|
—
|
|
|
10,907
|
|
|
—
|
|
|
U.S. treasury notes
|
9,990
|
|
|
—
|
|
|
—
|
|
|
9,990
|
|
|
9,990
|
|
|
—
|
|
|
—
|
|
|
U.S. government agency securities
|
6,001
|
|
|
—
|
|
|
(4
|
)
|
|
5,997
|
|
|
—
|
|
|
5,997
|
|
|
—
|
|
|
Total financial assets
|
$
|
121,133
|
|
|
$
|
—
|
|
|
$
|
(5
|
)
|
|
$
|
121,128
|
|
|
$
|
103,924
|
|
|
$
|
17,204
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
|
|
|
|
|
$
|
4,998
|
|
|
—
|
|
|
—
|
|
|
$
|
4,998
|
|
|
Total financial liabilities
|
|
|
|
|
|
|
$
|
4,998
|
|
|
—
|
|
|
—
|
|
|
$
|
4,998
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Reported as:
|
|
|
|
Cash equivalents
|
$
|
101,395
|
|
|
Restricted cash
|
6,006
|
|
|
Marketable securities
|
13,727
|
|
|
Total cash equivalents, restricted cash, and marketable securities
|
$
|
121,128
|
|
|
|
|
|
Accrued liabilities
|
$
|
4,998
|
|
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented. The total fair value of investments with unrealized losses at September 30, 2019 was nil. None of the available-for-sale securities held as of September 30, 2019 has been in a continuous unrealized loss position for more than one year. We have not identified any other-than-temporary declines in market value and thus have not recorded any impairment charges on our financial assets during the nine months ended September 30, 2019.
Our certificates of deposit, commercial paper, and debt securities of U.S. government agency entities are classified as Level 2 as they are valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including but not limited to benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data.
As of September 30, 2019, we had contingent obligations of $11.0 million of our common stock to the former owners of Jungla in conjunction with our acquisition of Jungla in July 2019. The amount of the contingent obligation is dependent upon achievement of certain post-close development milestones. We estimated the fair value of the contingent consideration as $10.7 million at the acquisition date in July 2019 using a discounted cash flow technique based on estimated achievement of the post-close milestones and discount rates which were Level 3 inputs not supported by market activity. These inputs can significantly affect the estimated fair value of the contingent consideration. The value of the liability is subsequently remeasured to fair value at each reporting date with changes recorded as general and administrative expense.
As of December 31, 2018, we had a contingent obligation of $5.0 million of our common stock calculated using a 30-day trailing average share price to the former owners of AltaVoice in conjunction with our acquisition of AltaVoice in January 2017. The amount of the contingent obligation was dependent upon 2017 and 2018 revenue attributable to AltaVoice. Since revenue attributable to AltaVoice for the combined period of 2017 and 2018 was greater than the $10.0 million contingent milestone, in April 2019 we issued 0.2 million shares of our common stock to the former owners of AltaVoice which had a fair value on the date of issuance of $5.2 million to settle this contingent obligation.
8. Commitments and contingencies
Leases
Operating leases
In 2015, we entered into a lease agreement for our headquarters and main production facility in San Francisco, California which commenced in 2016. This lease expires in July 2026 and we may renew the lease for an additional ten years. This optional period was not considered reasonably certain to be exercised and therefore we determined the lease term to be a ten-year period expiring in 2026. In connection with the execution of the lease, we provided a security deposit of approximately $4.6 million which is included in restricted cash in our consolidated balance sheets. We also have other operating leases for office and laboratory space in California and Massachusetts. We expect to enter into new leases and modifying existing leases as we support continued growth of our operations.
As of September 30, 2019, the weighted-average remaining lease term for our operating leases was 6.1 years and the weighted-average discount rate used to determine our operating lease liability was 11.5%. Cash payments included in the measurement of our operating lease liabilities were $2.7 million for the three months ended September 30, 2019 and $7.6 million for the nine months ended September 30, 2019.
The components of lease costs, which were included in cost of revenue, research and development, selling and marketing and general and administrative expenses on our consolidated statements of operations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Operating lease costs
|
$
|
2,666
|
|
|
$
|
2,416
|
|
|
$
|
7,747
|
|
|
$
|
7,248
|
|
|
Sublease income
|
(43
|
)
|
|
(39
|
)
|
|
(129
|
)
|
|
(117
|
)
|
|
Total operating lease costs
|
2,623
|
|
|
2,377
|
|
|
7,618
|
|
|
7,131
|
|
|
Finance lease costs
|
386
|
|
|
410
|
|
|
1,197
|
|
|
1,365
|
|
|
Total lease costs
|
$
|
3,009
|
|
|
$
|
2,787
|
|
|
$
|
8,815
|
|
|
$
|
8,496
|
|
Future minimum payments under non-cancelable operating leases as of September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
2019 (remainder of year)
|
$
|
2,768
|
|
|
2020
|
10,637
|
|
|
2021
|
10,676
|
|
|
2022
|
10,636
|
|
|
2023
|
9,912
|
|
|
Thereafter
|
28,273
|
|
|
Future non-cancelable minimum operating lease payments
|
72,902
|
|
|
Less: minimum payments to be received from non-cancelable subleases
|
(44
|
)
|
|
Total future non-cancelable minimum operating lease payments, net
|
72,858
|
|
|
Less: imputed interest
|
(23,264
|
)
|
|
Total operating lease liabilities
|
49,594
|
|
|
Less: current portion
|
(5,186
|
)
|
|
Operating lease obligations, net of current portion
|
$
|
44,408
|
|
Finance leases
We have entered into various finance lease agreements to obtain laboratory equipment. The terms of our finance leases are generally three years with a weighted-average remaining lease term of 0.9 years as of September 30, 2019 and are typically secured by the underlying equipment. The weighted-average discount rate used to determine our finance lease liability was 6.2%. The portion of the future payments designated as principal repayment was classified as a finance lease obligation on our consolidated balance sheets. Cash payments
included in the measurement of our finance lease liabilities were $0.5 million for the three months ended September 30, 2019 and $1.6 million for the nine months ended September 30, 2019.
Future payments under finance leases at September 30, 2019 are as follows (in thousands):
|
|
|
|
|
|
|
|
2019 (remainder of year)
|
$
|
509
|
|
|
2020
|
1,355
|
|
|
Total finance lease obligations
|
1,864
|
|
|
Less: interest
|
(60
|
)
|
|
Present value of net minimum finance lease payments
|
1,804
|
|
|
Less: current portion
|
(1,636
|
)
|
|
Finance lease obligations, net of current portion
|
$
|
168
|
|
Debt financing
In November 2018, we entered into a Note Purchase Agreement (the "2018 Note Purchase Agreement") pursuant to which we were eligible to borrow an aggregate principal amount up to $200.0 million over a seven year maturity term which included an initial borrowing of $75.0 million in November 2018. We received net proceeds of $10.3 million after terminating and repaying the balance of our obligations of approximately $64.7 million with our previous lender.
During September 2019, we settled our obligations under the 2018 Note Purchase Agreement in full for $85.7 million, which included repayment of principal of $75.0 million, accrued interest of $2.4 million, and prepayment fees of $8.9 million which were recorded as debt extinguishment costs in other income (expense) in our statement of operations during the three months ended September 30, 2019.
Interest expense related to our debt financings, excluding the impact of our Convertible Senior Notes, was $1.6 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively, and $5.5 million and $4.7 million for the nine months ended September 30, 2019 and 2018, respectively.
Convertible Senior Notes
In September 2019, we issued, at par value, $350.0 million aggregate principal amount of 2.0% Convertible Senior Notes due 2024 in a private offering. The Convertible Senior Notes are our senior unsecured obligations and will mature on September 1, 2024, unless earlier converted, redeemed or repurchased. The Convertible Senior Notes bear cash interest at a rate of 2.0% per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020.
In accounting for the issuance of the Convertible Senior Notes, we separated the notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature using the effective interest method. The excess of the principal amount of the liability component over its carrying amount, referred to as the debt discount, is amortized to interest expense over the five-year term of the Convertible Senior Notes. The equity component of $75.5 million, net of issuance costs, was recorded in additional paid-in capital on our consolidated balance sheet and will not be re-measured as long as it continues to meet the conditions for equity classification.
We received net proceeds of $339.9 million from the sale of the Convertible Senior Notes after deducting commissions and offering expenses. These transaction costs were allocated to the liability and equity components based on their relative fair values. The transaction costs attributable to the liability component are amortized to interest expense over the term of the Convertible Senior Notes under the effective interest method, and the transaction costs attributable to the equity component were netted with the equity component in stockholder's equity.
Upon conversion, the Convertible Senior Notes will be convertible into cash, common shares of our common stock or a combination of cash and shares of our common stock, at our election. Our current intent is to settle the principal amount of the Convertible Senior Notes in cash upon conversion, with any remaining conversion value being delivered in shares of our common stock.
The initial conversion rate for the Convertible Senior Notes is 33.6293 shares of our common stock per $1,000 principal amount of the Convertible Senior Notes (equivalent to an initial conversion price of approximately $29.74 per share of common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events but will not be adjusted for any accrued and unpaid interest. In addition, upon the occurrence of
certain corporate events that occur prior to the maturity date or if we deliver a notice of redemption, we will, in certain circumstances, increase the conversion rate for a holder that elects to convert its Convertible Senior Notes in connection with such a corporate event or notice of redemption.
If we undergo a fundamental change (as defined in the indenture governing the notes), the holders of the Convertible Senior Notes may require us to repurchase all or any portion of their Convertible Senior Notes for cash at a repurchase equal to 100% of the principal amount of the Convertible Senior Notes to be repurchased plus accrued and unpaid interest to, but excluding, the redemption date.
The Convertible Senior Notes will be convertible at the option of the noteholders at any time prior to the close of business on the business day immediately preceding March 1, 2024, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price for the Convertible Senior Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Convertible Senior Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the Convertible Senior Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after March 1, 2024 until the close of business on the business day immediately preceding the maturity date, holders may convert their Convertible Senior Notes at any time, regardless of the foregoing circumstances. As of September 30, 2019, none of the above circumstances had occurred and therefore the Convertible Senior Notes could not have been converted.
We may not redeem the Convertible Senior Notes prior to September 6, 2022. We may redeem for cash all or any portion of the Convertible Senior Notes, at our option, on or after September 6, 2022 and on or before the 30th scheduled trading day immediately before the maturity date if the last reported sale price of the Common Stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
The Convertible Senior Notes as of September 30, 2019 consisted of the following (in thousands):
|
|
|
|
|
|
|
|
Outstanding principal
|
$
|
350,000
|
|
|
Unamortized debt discount and issuance costs
|
(84,806
|
)
|
|
Net carrying amount, liability component
|
$
|
265,194
|
|
We recorded $1.1 million of interest expense related to the Convertible Senior Notes during the three and nine months ended September 30, 2019.
Other commitments
In the normal course of business, we enter into various purchase commitments primarily related to service agreements and laboratory supplies. At September 30, 2019, our total future payments under noncancelable unconditional purchase commitments having a remaining term of over one year were $4.7 million.
Guarantees and indemnifications
As permitted under Delaware law and in accordance with our bylaws, we indemnify our directors and officers for certain events or occurrences while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification is unlimited; however, we maintain director and officer liability insurance. This insurance allows the transfer of the risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of these indemnification agreements is minimal. Accordingly, we did not record any liabilities associated with these indemnification agreements at September 30, 2019 or December 31, 2018.
Contingencies
We were not a party to any material legal proceedings at September 30, 2019, or at the date of this report. We may from time to time become involved in various legal proceedings and claims arising in the ordinary course of business, and the resolution of any such claims could be material.
9. Stockholders’ equity
Shares outstanding
Shares of convertible preferred and common stock were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Convertible preferred stock:
|
|
|
|
|
|
|
|
|
Shares outstanding, beginning of period
|
125
|
|
|
3,459
|
|
|
3,459
|
|
|
3,459
|
|
|
Conversion into common stock
|
—
|
|
|
—
|
|
|
(3,334
|
)
|
|
—
|
|
|
Shares outstanding, end of period
|
125
|
|
|
3,459
|
|
|
125
|
|
|
3,459
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
Shares outstanding, beginning of period
|
93,763
|
|
|
68,976
|
|
|
75,481
|
|
|
53,597
|
|
|
Common stock issued in connection with public offering
|
786
|
|
|
4,325
|
|
|
11,136
|
|
|
17,103
|
|
|
Common stock issued on exercise of stock options, net
|
71
|
|
|
306
|
|
|
411
|
|
|
326
|
|
|
Common stock issued pursuant to vesting of RSUs
|
476
|
|
|
213
|
|
|
1,721
|
|
|
1,181
|
|
|
Common stock issued pursuant to exercises of warrants
|
10
|
|
|
552
|
|
|
29
|
|
|
1,098
|
|
|
Common stock issued pursuant to employee stock purchase plan
|
—
|
|
|
—
|
|
|
235
|
|
|
276
|
|
|
Common stock issued pursuant to business combinations
|
1,409
|
|
|
240
|
|
|
4,168
|
|
|
1,023
|
|
|
Common stock issued upon conversion of preferred stock
|
—
|
|
|
—
|
|
|
3,334
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Shares outstanding, end of period
|
96,515
|
|
|
74,612
|
|
|
96,515
|
|
|
74,612
|
|
2018 Sales Agreement
In August 2018, we entered into a Common Stock Sales Agreement (the “2018 Sales Agreement”) with Cowen and Company, LLC (“Cowen”), under which we may offer and sell from time to time at our sole discretion shares of our common stock through Cowen as our sales agent, in an aggregate amount not to exceed $75.0 million. Cowen may sell the shares by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, including without limitation sales made directly on The New York Stock Exchange, and also may sell the shares in privately negotiated transactions, subject to our prior approval. Per the terms of the agreement, Cowen receives a commission equal to 3% of the gross proceeds of the sales price of all shares sold through it as sales agent under the 2018 Sales Agreement. In March 2019, we amended the 2018 Sales Agreement to increase the aggregate amount of our common stock to be sold under this agreement not to exceed $175.0 million. During 2018, we sold a total of 4.3 million shares of common stock under the 2018 Sales Agreement for aggregate gross proceeds of $61.1 million and net proceeds of $58.9 million. During the three and nine months ended September 30, 2019, we sold a total of 0.8 million shares of common stock under the 2018 Sales Agreement at an average price of $25.71 per share, for gross proceeds of $20.2 million and net proceeds of $19.5 million.
Public offerings
In March 2019, we sold, in an underwritten public offering, an aggregate of 10.4 million shares of our common stock at a price of $19.00 per share, for gross proceeds of $196.7 million and net proceeds of $184.5 million.
In April 2018, we sold, in an underwritten public offering, an aggregate of 12.8 million shares of our common stock at a price of $4.50 per share, for gross proceeds of $57.5 million and net proceeds of $53.5 million.
Private placement
In August 2017, in a private placement to certain accredited investors, we issued 5.2 million shares of common stock at a price of $8.50 per share, and 3.5 million shares of our Series A convertible preferred stock at a price of $8.50 per share, for gross proceeds of approximately $73.5 million and net proceeds of $68.9 million. The Series A preferred stock is convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like. During the nine months ended September 30, 2019, 3.3 million shares of Series A convertible preferred stock were converted to 3.3 million shares of common stock.
10. Stock incentive plans
Stock incentive plans
In 2010, we 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 our 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 our Board of Directors. The terms of options granted under the 2010 Plan may not exceed ten years.
In January 2015, we adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which became effective upon the closing of our initial public offering (“IPO”). Shares outstanding under the 2010 Plan 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. In June 2019, we amended and restated the 2015 Plan to create a pool of shares to be awarded solely as a material inducement to employees.
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 1/3 of the award vests upon each anniversary of the grant date. In June 2019, we granted Time-based RSUs in connection with the acquisition of Singular Bio which vest in three equal installments over a period of 18 months and PRSUs that vest based on the achievement of performance conditions; see further details in Note 4, "Business combinations."
Under our management incentive compensation plan, in July 2019 we granted PRSUs to our executive officers as well as other specified senior level employees based on the level of achievement of a specified 2019 revenue goal. These PRSUs will vest beginning in 2020 over a period of two years and may range from 0% to 115% of the target amount of 1.0 million shares. As of September 30, 2019, these PRSUs had a fair value of $18.3 million based on an estimated issuance of 0.8 million shares and expectation of achievement of the performance conditions.
Activity under the 2010 Plan and the 2015 Plan is set forth below (in thousands, except per share amounts and years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Available For Grant
|
|
Stock Options Outstanding
|
|
Weighted-Average Exercise Price Per Share
|
|
Weighted-Average Remaining Contractual Life (Years)
|
|
Aggregate Intrinsic Value
|
|
Balances at December 31, 2018
|
118
|
|
|
3,855
|
|
|
$
|
8.54
|
|
|
6.8
|
|
$
|
9,927
|
|
|
Additional shares reserved
|
13,019
|
|
|
—
|
|
|
|
|
|
|
|
|
Options granted
|
(193
|
)
|
|
193
|
|
|
24.16
|
|
|
|
|
|
|
Options cancelled
|
33
|
|
|
(33
|
)
|
|
12.65
|
|
|
|
|
|
|
Options exercised
|
—
|
|
|
(411
|
)
|
|
7.25
|
|
|
|
|
|
|
RSUs and PRSUs granted(1)
|
(6,671
|
)
|
|
—
|
|
|
|
|
|
|
|
|
RSUs and PRSUs cancelled
|
190
|
|
|
—
|
|
|
|
|
|
|
|
|
Balances at September 30, 2019
|
6,496
|
|
|
3,604
|
|
|
$
|
9.49
|
|
|
6.3
|
|
$
|
36,158
|
|
|
Options exercisable at September 30, 2019
|
|
|
2,948
|
|
|
$
|
8.71
|
|
|
5.9
|
|
$
|
31,207
|
|
|
Options vested and expected to vest at September 30, 2019
|
|
|
3,516
|
|
|
$
|
9.35
|
|
|
6.3
|
|
$
|
35,603
|
|
|
|
|
|
(1)
|
Includes the Time-based RSUs and PRSUs granted as a part of the Singular Bio acquisition which are based on a fixed dollar value. The number of shares issued will be variable until the awards vest. See further details in Note 4, "Business combinations."
|
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of our common stock for stock options that were in-the-money.
The weighted-average fair value of options to purchase common stock granted was $14.52 and $4.87 in the nine months ended September 30, 2019 and 2018, respectively. The total grant-date fair value of options to purchase common stock vested was $3.6 million and $15.9 million in the nine months ended September 30, 2019 and 2018, respectively. The intrinsic value of options to purchase common stock exercised was $5.8 million and $1.5 million in the nine months ended September 30, 2019 and 2018, respectively.
The following table summarizes RSU activity, which includes the Time-based RSUs and PRSUs granted in connection with our acquisition of Singular Bio and PRSUs granted related to our management incentive compensation plan (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares
|
|
Weighted- Average Grant Date Fair Value Per Share
|
|
Balance at December 31, 2018
|
4,031
|
|
|
$
|
8.35
|
|
|
RSUs granted
|
1,436
|
|
|
$
|
21.40
|
|
|
Time-based RSUs and PRSUs granted - Singular Bio (1)
|
4,280
|
|
|
$
|
19.27
|
|
|
PRSUs granted
|
955
|
|
|
$
|
22.62
|
|
|
RSUs vested
|
(1,721
|
)
|
|
$
|
10.53
|
|
|
RSUs cancelled
|
(190
|
)
|
|
$
|
11.17
|
|
|
Balance at September 30, 2019
|
8,791
|
|
|
$
|
16.86
|
|
|
|
|
|
(1)
|
The Time-based RSUs and PRSUs granted as a part of the Singular Bio acquisition in June 2019 are based on a fixed dollar value. The number of shares issued and weighted-average grant date fair value per share will be variable until the awards vest. See further details in Note 4, "Business combinations."
|
2015 employee stock purchase plan
In January 2015, we 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 September 30, 2019, cash received from payroll deductions pursuant to the ESPP was $2.8 million. At September 30, 2019, a total of 0.8 million shares of common stock were reserved for issuance under the ESPP.
Stock-based compensation
We use the grant date fair value of our common stock to value options when granted. 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 model which requires input of various assumptions. Changes in assumptions can materially affect the fair value and ultimately how much stock-based compensation is recognized. The assumptions used to estimate the fair value of stock options granted are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Expected term (in years)
|
—
|
|
6.0
|
|
6.0
|
|
6.0
|
|
Expected volatility
|
—%
|
|
59.63%
|
|
64.20%
|
|
59.58%
|
|
Risk-free interest rate
|
—%
|
|
2.82%
|
|
2.58%
|
|
2.80%
|
The following table summarizes stock-based compensation expense included in the consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Cost of revenue
|
$
|
822
|
|
|
$
|
747
|
|
|
$
|
3,678
|
|
|
$
|
2,320
|
|
|
Research and development
|
22,181
|
|
|
1,722
|
|
|
30,753
|
|
|
5,237
|
|
|
Selling and marketing
|
1,752
|
|
|
1,172
|
|
|
5,909
|
|
|
3,690
|
|
|
General and administrative
|
3,531
|
|
|
1,565
|
|
|
7,486
|
|
|
4,464
|
|
|
Total stock-based compensation expense
|
$
|
28,286
|
|
|
$
|
5,206
|
|
|
$
|
47,826
|
|
|
$
|
15,711
|
|
11. Net loss per share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Net loss
|
$
|
(78,707
|
)
|
|
$
|
(31,723
|
)
|
|
$
|
(165,060
|
)
|
|
$
|
(99,514
|
)
|
|
Shares used in computing net loss per share, basic and diluted
|
95,577
|
|
|
70,153
|
|
|
88,663
|
|
|
63,935
|
|
|
Net loss per share, basic and diluted
|
$
|
(0.82
|
)
|
|
$
|
(0.45
|
)
|
|
$
|
(1.86
|
)
|
|
$
|
(1.56
|
)
|
The following common stock equivalents have been excluded from diluted net loss per share because their inclusion would be anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Shares of common stock subject to outstanding options
|
3,647
|
|
|
4,085
|
|
|
3,691
|
|
|
4,081
|
|
|
Shares of common stock subject to outstanding warrants
|
586
|
|
|
1,354
|
|
|
596
|
|
|
1,718
|
|
|
Shares of common stock subject to outstanding RSUs
|
5,915
|
|
|
4,061
|
|
|
4,878
|
|
|
3,289
|
|
|
Shares of common stock subject to outstanding PRSUs
|
2,722
|
|
|
—
|
|
|
994
|
|
|
—
|
|
|
Shares of common stock pursuant to ESPP
|
229
|
|
|
313
|
|
|
219
|
|
|
300
|
|
|
Shares of common stock underlying Series A convertible preferred stock
|
125
|
|
|
3,459
|
|
|
896
|
|
|
3,459
|
|
|
Shares of common stock subject to convertible senior notes exercise
|
2,616
|
|
|
—
|
|
|
872
|
|
|
—
|
|
|
Total shares of common stock equivalents
|
15,840
|
|
|
13,272
|
|
|
12,146
|
|
|
12,847
|
|
12. Geographic information
Revenue by country is determined based on the billing address of the customer. The following presents revenue by country (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
United States
|
$
|
52,687
|
|
|
$
|
34,906
|
|
|
$
|
140,700
|
|
|
$
|
95,712
|
|
|
Canada
|
1,158
|
|
|
1,052
|
|
|
3,005
|
|
|
3,156
|
|
|
Rest of world
|
2,666
|
|
|
1,408
|
|
|
6,834
|
|
|
3,475
|
|
|
Total revenue
|
$
|
56,511
|
|
|
$
|
37,366
|
|
|
$
|
150,539
|
|
|
$
|
102,343
|
|
All long-lived assets at September 30, 2019 and December 31, 2018, were located in the United States.
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this report, and together with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2018. Historic results are not necessarily indicative of future results.
This report contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this report other than statements of historical fact, including statements identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, are forward‑looking statements. Forward‑looking statements include, but are not limited to, statements about:
|
|
|
|
•
|
our views regarding the future of genetic testing and its role in mainstream medical practice;
|
|
|
|
|
•
|
our mission and strategy for our business, products and technology, including our ability to expand our content and develop new content while maintaining attractive pricing, further enhance our genetic testing service and the related user experience, build interest in and demand for our tests and attract potential partners;
|
|
|
|
|
•
|
the implementation of our business model;
|
|
|
|
|
•
|
the expected benefits from and our ability to integrate our acquisitions;
|
|
|
|
|
•
|
the rate and degree of market acceptance of our tests and genetic testing generally;
|
|
|
|
|
•
|
our ability to scale our infrastructure and operations in a cost‑effective manner;
|
|
|
|
|
•
|
the timing of and our ability to introduce improvements to our genetic testing platform and to expand our assays to include additional genes;
|
|
|
|
|
•
|
our expectations with respect to future hiring;
|
|
|
|
|
•
|
the timing and results of studies with respect to our tests;
|
|
|
|
|
•
|
developments and projections relating to our competitors and our industry;
|
|
|
|
|
•
|
our competitive strengths;
|
|
|
|
|
•
|
the degree to which individuals will share genetic information generally, as well as share any related potential economic opportunities with us;
|
|
|
|
|
•
|
our commercial plans, including our sales and marketing expectations;
|
|
|
|
|
•
|
our ability to obtain and maintain adequate reimbursement for our tests;
|
|
|
|
|
•
|
regulatory developments in the United States and foreign countries;
|
|
|
|
|
•
|
our ability to attract and retain key scientific or management personnel;
|
|
|
|
|
•
|
our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;
|
|
|
|
|
•
|
our ability to obtain funding for our operations and the growth of our business, including potential acquisitions;
|
|
|
|
|
•
|
our financial performance;
|
|
|
|
|
•
|
the impact of accounting pronouncements and our critical accounting policies, judgments, estimates and assumptions on our financial results;
|
|
|
|
|
•
|
our expectations regarding our future revenue, cost of revenue, operating expenses and capital expenditures, and our future capital requirements; and
|
|
|
|
|
•
|
the impact of tax laws on our business.
|
Forward‑looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed in Item 1A of Part II of this report. Although we believe that the expectations and assumptions reflected in the forward‑looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward‑looking statements. Any forward‑looking statements in this report speak only as of the date of this report. We expressly disclaim any obligation or undertaking to update any forward‑looking statements.
This report contains statistical data and estimates that we obtained from industry publications and reports. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Some data contained in this report is also based on our internal estimates. Although we have not independently verified the third‑party data, we believe it to be reasonable.
In this report, all references to “Invitae,” “we,” “us,” “our,” or “the Company” mean Invitae Corporation.
Invitae and the Invitae logo are trademarks of Invitae Corporation. We also refer to trademarks of other companies and organizations in this report.
Mission and strategy
Our mission is to bring comprehensive genetic information into mainstream medical practice, improving the quality of healthcare for billions of people. Our business model is to aggregate the world’s genetic tests into a single platform, consolidate and grow the genetic testing market, and on that foundation, build a new industry in which a network of customers and partners can work together to continue improving healthcare for every individual in the modernized healthcare system around the world.
Our strategy for long-term growth centers on five key drivers of our business, which we believe work in conjunction to create a flywheel effect extending our leadership position in the new market we are building:
|
|
|
|
•
|
Expanding our content offering. We intend to continue steadily adding additional content to the Invitae platform, ultimately leading to affordable access to the personal molecular information relevant in enabling personalized medicine. The breadth and depth of our offering is a core and central contribution to an improved user experience.
|
|
|
|
|
•
|
Creating a unique user experience. A state-of-the-art interactive platform will enhance our service offering, leverage the uniquely empowering characteristics of online sharing of genetic information and, we believe, enable a superior economic offering to clients. We intend to continue to expend
|
substantial efforts developing, acquiring and implementing technology-driven improvements to our customers’ experience. We believe that an enhanced user experience and the resulting benefits to our brand and reputation will help draw customers to us over and above our direct efforts to do so.
|
|
|
|
•
|
Driving volume. We intend to increase our brand equity and visibility through excellent service and a variety of marketing and promotional techniques, including scientific publications and presentations, sales, marketing, public relations, social media and web technology vehicles. We believe that rapidly increasing the volume of customers using our platform helps us to attract partners.
|
|
|
|
|
•
|
Attracting partners. As we add more customers to our platform, we believe our business becomes particularly attractive to potential partners that can help the patients in our network further benefit from their genetic information or that provide us access to new customers who may wish to join our network. We believe the cumulative effect of the increased volume brought by these strategic components will allow us to lower the cost of our service.
|
|
|
|
|
•
|
Lowering the costs and price of genetic information. Our goal is to provide customers with a broad menu of genetic content at a reasonable price and rapid turn-around time in order to grow volume and further achieve economies of scale. As we do so and experience further cost savings, we expect that those cost savings will allow us to deliver still more comprehensive information at decreasing prices and further improve the customer experience, allowing us to experience cumulative benefits from all of the efforts outlined above.
|
We seek to differentiate our service in the market by establishing an exceptional customer experience. To that end, we believe that elevating the needs of the customer over those of our other stakeholders is essential to our success. Thus, in our decision-making processes, we will strive to prioritize, in order:
|
|
|
|
1)
|
the needs of our customers;
|
|
|
|
|
2)
|
motivating our employees to serve the needs of our customers; and
|
|
|
|
|
3)
|
our long-term stockholder value.
|
We are certain that focusing on customers as our top priority rather than short-term financial goals is the best way to build and operate an organization for maximum long-term value creation.
Business overview
We offer high quality, comprehensive, affordable genetic testing across multiple clinical areas, including hereditary cancer, cardiology, neurology, pediatrics, metabolic conditions and rare diseases. To augment our offering and realize our mission, we have acquired multiple assets including four businesses in 2017, which expanded our suite of genome management offerings and completed our entry into prenatal and perinatal genetic testing. In the first quarter of 2019, we expanded our reproductive offering by introducing our Non-invasive Prenatal Screen ("NIPS") and in the second quarter of 2019, we acquired Singular Bio, Inc. ("Singular Bio") to assist in lowering the costs of this offering. Also in June 2019, we launched a direct channel to consumers to increase accessibility to our testing platform. In July 2019, we acquired Jungla Inc. ("Jungla") to further enhance our genetic variant interpretation and the quality of results we deliver.
We have experienced rapid growth. For the years ended December 31, 2018, 2017 and 2016, our revenue was $147.7 million, $68.2 million and $25.0 million, respectively, and we incurred net losses of $129.4 million, $123.4 million and $100.3 million, respectively. For the nine months ended September 30, 2019 and 2018, our revenue was $150.5 million and $102.3 million, respectively, and we incurred net losses of $165.1 million and $99.5 million, respectively. At September 30, 2019, our accumulated deficit was $681.8 million. To meet the demands of scaling our business, we increased our number of employees to approximately 1,100 at September 30, 2019 from approximately 700 on September 30, 2018. Our sales force grew to approximately 190 at September 30, 2019 from approximately 110 at September 30, 2018. We expect headcount will continue to increase in 2019 as we add to the team to support anticipated growth.
Sales of our tests have grown significantly. In 2018, 2017 and 2016, we generated approximately 292,000, 145,000 and 57,000 billable tests, respectively. In the nine months ended September 30, 2019, we generated approximately 322,000 billable tests compared to approximately 206,000 billable tests in the same period in 2018. Approximately 33% of the billable tests we performed in the first nine months of 2019 were billable to institutions and patients, and the remainder were billable to third-party payers. Many of the gene tests on our assays are tests for which insurers reimburse. However, when we do not have reimbursement policies or contracts with private insurers, our claims for reimbursement may be denied upon submission, and we must appeal the claims. The
appeals process is time consuming and expensive, and may not result in payment. Even if we are successful in achieving reimbursement, we may be paid at lower rates than if we were under contract with the third-party payer. When there is not a contracted rate for reimbursement, there is typically a greater coinsurance or copayment requirement from the patient which may result in further delay or decreased likelihood of collection.
We expect to incur operating losses for the near-term future and may need to raise additional capital in order to fund our operations. If we are unable to achieve our revenue growth objectives and successfully manage our costs, we may not be able to achieve profitability.
We believe that the keys to our future growth will be to increase billable test volumes, achieve broad reimbursement coverage for our tests from third-party payers, drive down the price for genetic analysis and interpretation, steadily increase the amount of genetic content we offer, consistently improve the client experience, drive physician and patient utilization of our website for ordering and delivery of results and increase the number of strategic partners working with us to add value for our clients.
Factors affecting our performance
Number of billable tests
The growth in our test revenue is tied to the number of tests for which we bill third-party payers, institutions, partners or patients, which we refer to as billable tests. We typically bill for our services following delivery of the billable test report derived from testing samples and interpreting the results. We incur the expenses associated with a test in the period in which the test is processed regardless of when payment is received with respect to that test. We believe the number of billable tests in any period is the most important indicator of the growth in our test revenue, and with time, this will translate into the number of customers we add to our platform.
Success obtaining and maintaining reimbursement
Our ability to increase the number of billable tests and our revenue will depend in part on our success achieving broad reimbursement coverage and laboratory service contracts for our tests from third-party payers and agreements with institutions and partners. Reimbursement may depend on a number of factors, including a payer’s determination that a test is appropriate, medically necessary and cost-effective, as well as whether we are in contract, where we get paid more consistently and at higher rates. Because each payer makes its own decision as to whether to establish a policy or enter into a contract to reimburse for our testing services, seeking these approvals is a time-consuming and costly process. In addition, clinicians and patients may decide not to order our tests if the cost of the test is not covered by insurance. Because we require an ordering physician to requisition a test, our revenue growth also depends on our ability to successfully promote the adoption of our testing services and expand our base of ordering clinicians. We believe that establishing coverage and obtaining contracts from third-party payers is an important factor in gaining adoption by ordering clinicians. Our arrangements for laboratory services with payers cover approximately 295 million lives, comprised of Medicare, all national commercial health plans, and Medicaid in 47 states, including California (Medi-Cal), our home state.
In cases where we have established reimbursement rates with third-party payers, we face additional challenges in complying with their procedural requirements for reimbursement. These requirements may vary from payer to payer, and it may be time-consuming and require substantial resources to meet these requirements. We may also experience delays in or denials of coverage if we do not adequately comply with these requirements. In addition, we have experienced, and may continue to experience, delays in reimbursement when we transition to being an in-network provider with a payer.
We expect to continue to focus our resources on increasing adoption of, and expanding coverage and reimbursement for, our current tests, tests provided by companies we acquire and any future tests we may develop. However, if we are not able to continue to obtain and maintain adequate reimbursement from third-party payers and institutions and partners for our testing services and expand the base of clinicians and patients ordering our tests, we may not be able to effectively increase the number of billable tests or our revenue.
Ability to lower the costs associated with performing our tests
Reducing the costs associated with performing our genetic tests is both a focus and a strategic objective of ours. Over the long term, we will need to reduce the cost of raw materials by improving the output efficiency of our assays and laboratory processes, modifying our platform-agnostic assays and laboratory processes to use materials and technologies that provide equal or greater quality at lower cost, improving how we manage our materials, porting some tests onto a next generation sequencing platform and negotiating favorable terms for our
materials purchases. Our acquisition of Singular Bio is a component of this objective and we expect the technology acquired in this transaction, once developed, to help decrease the costs associated with our NIPS offering. We also intend to continue to design and implement hardware and software tools that will reduce personnel-related costs for both laboratory and clinical operations/medical interpretation by increasing personnel efficiency and thus lowering labor costs per test.
Ability to expand our genetic content
Our focus on reducing the average cost per test will have a countervailing force — increasing the number of tests we offer and the content of each test. We intend to continue to expand our test menus by steadily releasing additional genetic content for the same or lower prices per test, ultimately leading to affordable whole genome services. The breadth and flexibility of our offering will be a critical factor in our ability to address new markets for genetic testing services. Both of these, in conjunction with our continued focus on strategic partnerships, will be important to our ability to continue to grow the volume of billable tests we deliver.
Investment in our business and timing of expenses
We plan to continue to invest in our genetic testing and information management business. We deploy state-of-the-art and costly technologies in our genetic testing services, and we intend to continue to scale our infrastructure, including our testing capacity and information systems. We also expect to incur software development costs as we seek to further automate our laboratory processes and our genetic interpretation and report sign-out procedures, scale our customer service capabilities to improve our customer's experience, and expand the functionality of our website. We will incur costs related to marketing and branding as we expand our initiatives and focus on providing access to customers through our website. We plan to hire additional personnel as necessary to support anticipated growth, including software engineers, sales and marketing personnel, billing personnel, research and development personnel, medical specialists, biostatisticians and geneticists. We will also incur additional costs related to the expansion of our production facilities in San Francisco and Irvine to accommodate growth. In addition, we expect to incur ongoing expenses as a result of operating as a public company. The expenses we incur may vary significantly by quarter as we focus on building out different aspects of our business.
How we recognize revenue
We generally recognize revenue on an accrual basis, which is when a customer obtains control of the promised goods or services, typically a test report. Accrual amounts recognized are based on estimates of the consideration that we expect to receive and such estimates are adjusted and subsequently recorded until fully settled. Changes to such estimates may increase or decrease revenue recognized in future periods. Revenue from our tests may not be equal to billed amounts due to a number of factors, including differences in reimbursement rates, the amounts of patient copayments, the existence of secondary payers and claims denials.
Financial overview
Revenue
We primarily generate revenue from the sale of our tests, which provide the analysis and associated interpretation of the sequencing of parts of the genome. Clients are billed upon delivery of test results. Our ability to increase our revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payers, sign contracts with institutions and partners, and increase the rate at which we are paid for tests performed.
Cost of revenue
Cost of revenue reflects the aggregate costs incurred in delivering test results to clinicians and patients and includes expenses for materials and supplies, personnel-related costs, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation, amortization of acquired intangibles and utilities. Costs associated with performing our tests are recorded as the patient’s sample is processed. We expect cost of revenue to generally increase in line with the increase in the number of tests we perform. However, we expect that the cost per test will decrease over time due to the efficiencies we expect to gain as test volume increases and from automation and other cost reductions, although the cost per test may fluctuate from quarter to quarter.
Operating expenses
Our operating expenses are classified into three categories: research and development, selling and marketing, and general and administrative. For each category, the largest component is personnel-related costs, which include salaries, employee benefit costs, bonuses, commissions, as applicable, and stock-based compensation expense.
Research and development
Research and development expenses represent costs incurred to develop our technology and future tests. These costs are principally for process development associated with our efforts to expand the number of genes we can evaluate in our tests and with our efforts to lower the cost of performing our tests. In addition, we incur process development costs to further develop the software we use to operate our laboratory, analyze the data it generates, process customer orders, enable ease of customer ordering, deliver reports and automate our business processes. These costs consist of personnel-related costs, laboratory supplies and equipment expenses, consulting costs and allocated overhead including rent, information technology, equipment depreciation, amortization of intangible assets and utilities.
We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses to increase as we continue our efforts to develop additional tests, make investments to reduce testing costs, streamline our technology to provide patients access to testing and work on scaling the business and acquire and integrate new technologies. Specifically, we expect stock-based compensation to significantly increase in future periods related to businesses acquired in 2019.
Selling and marketing
Selling and marketing expenses consist of personnel-related costs, client service expenses, advertising and marketing expenses, educational and promotional expenses, market research and analysis, and allocated overhead including rent, information technology, equipment depreciation, amortization of acquired intangibles, and utilities. We expect our selling and marketing expenses to significantly increase as we expand our salesforce and increase our marketing and advertising.
General and administrative
General and administrative expenses include executive, finance and accounting, billing and collections, legal and human resources functions as well as other administrative costs. These expenses include personnel-related costs; audit, accounting and legal expenses; consulting costs; allocated overhead including rent, information technology, equipment depreciation, and utilities; costs incurred in relation to our collaboration and co-development agreements; and post-combination expenses incurred in relation to companies we acquire. We expect our general and administrative expenses to increase as we support continued growth of operations.
Other income (expense), net
Other income (expense), net, primarily consists of income generated from our marketable securities, adjustments to fair value of acquisition liabilities, and extinguishment costs incurred in settling our debt facilities.
Interest expense
Interest expense is attributable to debt financing, including convertible senior notes issued in September 2019 ("Convertible Senior Notes"), and finance leases. See Note 8, “Commitments and contingencies” in the Notes to Condensed Consolidated Financial Statements included elsewhere in this report.
Income tax benefit
The income tax benefit is comprised of changes in our deferred income taxes and associated valuation allowances resulting from business combinations.
Critical accounting policies and estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
Revenue recognition
We generate test revenue primarily from delivery of test reports generated from our assays. Other revenue consists primarily of revenue from genome network subscription services which we recognize on a straight-line basis over the subscription term, and from revenue from collaboration agreements.
Under ASC 606, Revenue from Contracts with Customers, or ASC 606, we generally recognize revenue on an accrual basis, that is when a customer obtains control of the promised goods or services which for us is delivery of a test report. Accrual amounts are based on an estimate of the consideration that we expect to receive, and such estimates will be adjusted and subsequently recorded until fully settled. The estimate of the transaction price of test revenue is based on many factors such as length of payer relationship, historical payment patterns, and changes in contract provisions and insurance reimbursement policies. These estimates require significant judgment by management and any adjustments may be material.
Business combinations — purchase accounting
We apply ASC 805, Business Combinations, or ASC 805, which is the accounting guidance related to business combinations. The standard requires recognition of assets acquired, liabilities assumed, and contingent consideration at their fair value on the acquisition date with subsequent changes recognized in earnings; requires acquisition-related expenses and restructuring costs to be recognized separately from the business combination and expensed as incurred; requires in-process research and development to be capitalized at fair value as an indefinite-lived intangible asset until completion or abandonment; and requires that changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes.
We account for acquisitions of entities that include inputs and processes and have the ability to create outputs as business combinations. The purchase prices of acquisitions are allocated to tangible assets, liabilities and identifiable intangible assets acquired based on their estimated fair values. The excess of purchase prices over those fair values is recorded as goodwill. Acquisition-related expenses are expensed as incurred. While we use our best estimates and assumptions as a part of the process to accurately value assets acquired and liabilities assumed at the business combination date, these estimates and assumptions are inherently uncertain and subject to refinement. Our key assumptions and estimates used have included projected revenue and achievement of certain performance milestones, the impact to cost of revenues and operating expenses from our acquired entities, discount rates, growth rates, as well as the tax impacts of the acquisitions. As a result, during the measurement period, which may be up to one year from the business combination date, we may record adjustments to the assets acquired and liabilities assumed, with the corresponding offset to goodwill. After the measurement period, we record adjustments to assets acquired or liabilities assumed subsequent to the measurement period in our operating results in the period in which the adjustments are determined.
Goodwill
In accordance with ASC 350, Intangibles – Goodwill and Other, or ASC 350, we do not amortize goodwill or other intangible assets with indefinite lives but rather test them for impairment. ASC 350 requires us to perform an impairment review of our goodwill balance at least annually, which we do in the fourth fiscal quarter each year and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable.
Leases
We determine if an arrangement is a lease at inception primarily based on the determination of the party responsible for directing the use of an underlying asset within a contract. Operating leases are included in operating lease assets and operating lease obligations in our consolidated balance sheets. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments
arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date which includes significant assumptions made by us including our estimated credit rating. Operating lease right-of-use assets also include any lease payments made prior to the lease commencement date and exclude any lease incentives paid or payable at the lease commencement date. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term.
Stock-based compensation
We measure stock-based payment awards made to employees and directors based on the estimated fair values of the awards and recognize the compensation expense over the requisite service period. We use the Black-Scholes option-pricing model to estimate the fair value of 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. We grant 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 us. The probability of vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. We recognize 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, our stock-based compensation is reduced for estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Results of operations
Three Months Ended September 30, 2019 and 2018
The following sets forth our consolidated statements of operations data for each of the periods indicated (in thousands, except percentage changes). Our historical results are not necessarily indicative of our results of operations to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Dollar
Change
|
|
%
Change
|
|
|
2019
|
|
2018
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Test revenue
|
$
|
55,502
|
|
|
$
|
36,611
|
|
|
$
|
18,891
|
|
|
52%
|
|
Other revenue
|
1,009
|
|
|
755
|
|
|
254
|
|
|
34%
|
|
Total revenue
|
56,511
|
|
|
37,366
|
|
|
19,145
|
|
|
51%
|
|
Cost of revenue
|
32,120
|
|
|
20,441
|
|
|
11,679
|
|
|
57%
|
|
Research and development
|
46,951
|
|
|
15,776
|
|
|
31,175
|
|
|
198%
|
|
Selling and marketing
|
32,690
|
|
|
17,591
|
|
|
15,099
|
|
|
86%
|
|
General and administrative
|
21,733
|
|
|
13,668
|
|
|
8,065
|
|
|
59%
|
|
Loss from operations
|
(76,983
|
)
|
|
(30,110
|
)
|
|
(46,873
|
)
|
|
156%
|
|
Other income (expense), net
|
(7,591
|
)
|
|
231
|
|
|
(7,822
|
)
|
|
N/M
|
|
Interest expense
|
(2,833
|
)
|
|
(1,844
|
)
|
|
(989
|
)
|
|
54%
|
|
Net loss before taxes
|
(87,407
|
)
|
|
(31,723
|
)
|
|
(55,684
|
)
|
|
176%
|
|
Income tax benefit
|
(8,700
|
)
|
|
—
|
|
|
(8,700
|
)
|
|
(100)%
|
|
Net loss
|
$
|
(78,707
|
)
|
|
$
|
(31,723
|
)
|
|
$
|
(46,984
|
)
|
|
148%
|
Revenue
The increase in total revenue of $19.1 million for the three months ended September 30, 2019 compared to the same period in 2018 was due primarily to increased test volume. Billable test volumes increased to approximately 124,000 in the three months ended September 30, 2019 compared to 75,000 in the same period of 2018. Average revenue per test decreased to $448 per test in the three months ended September 30, 2019 compared to $490 per test in the comparable prior period due to changes in payer mix as well as reductions in pricing for some payers as we focus on providing genetic content at a reasonable price.
Cost of revenue
The increase in the cost of revenue of $11.7 million for the three months ended September 30, 2019 compared to the same period in 2018 was primarily due to costs associated with increased test volume, partially offset by the effect of cost efficiencies. For the three months ended September 30, 2019, the number of samples accessioned increased to approximately 129,000 from approximately 78,000 for the same period in 2018. Cost per sample accessioned was $249 in the three months ended September 30, 2019 compared to $262 for the same period in 2018. The lower cost per sample accessioned in the current period was primarily attributable to increased volume, which together with automation efficiencies, resulted in lower per-sample costs for laboratory materials; labor, including the impact of efficiencies in our medical interpretation costs; and equipment depreciation partially offset by increases in amortization costs related to our inquired intangible assets.
Research and development
The increase in research and development expense of $31.2 million for the three months ended September 30, 2019 compared to the same period in 2018 was due to the growth of the business as well as for costs related to our acquisitions of Singular Bio in June 2019 and Jungla in July 2019. The increase primarily consisted of the following elements as we invest in research and development initiatives as we grow: personnel-related costs increased by $29.4 million, principally reflecting increased headcount as well as $18.6 million of stock-based compensation related to equity awards granted to new employees who joined Invitae in connection with our acquisition of Singular Bio, and an increase in technology costs by $0.9 million.
Selling and marketing
The increase in selling and marketing expense of $15.1 million for the three months ended September 30, 2019 compared to the same period in 2018 was due primarily to the growth of the business and increased spending on marketing initiatives and principally consisted of the following elements: personnel-related costs increased by $8.0 million primarily reflecting increased headcount and includes an increase in sales commissions of $2.0 million; $4.5 million due to increases in marketing costs principally for branding initiatives and advertising; travel-related costs increased by $1.0 million; and information technology costs increased by $0.5 million.
General and administrative
The increase in general and administrative expense of $8.1 million for the three months ended September 30, 2019 compared to the same period in 2018 was due primarily to the growth of the business and the effect of our acquisitions of Singular Bio in June 2019 and Jungla in July 2019 and principally consisted of the following elements: personnel-related costs increased by $4.0 million; $2.9 million of post-combination expense relate to the acceleration of unvested equity in our acquisition of Jungla; professional fees increased by $1.7 million due to increases in costs related to outside consultants; legal and accounting services increased by $1.6 million which includes acquisition-related costs of $0.6 million related to Jungla; information technology costs increased by $1.1 million due to computer equipment and software purchases to support headcount growth; occupancy costs increased by $1.0 million; and travel-related costs increased by $0.7 million.
These cost increases were partially offset by decreases in expenses incurred related to collaboration and co-development agreements of $2.8 million and increases of $2.4 million in allocations of technology and facilities-related expenses to other functional areas.
Other income (expense), net
The decrease in other income (expense), net of $7.8 million for the three months ended September 30, 2019 compared to the same period in 2018 was due principally to $8.9 million of debt extinguishment costs related to the settlement of our 2018 Note Purchase Agreement in September 2019 offset by increases in interest income generated on our cash equivalents and marketable securities.
Interest expense
The increase in interest expense of $1.0 million for the three months ended September 30, 2019 compared to the same period in 2018 was due to increased borrowings under our debt facilities as compared to the prior year period.
Income tax benefit
The income tax benefit of $8.7 million recorded in the three months ended September 30, 2019, was due to net deferred tax liabilities assumed in connection with our acquisition of Jungla which provided a future source of income to support the realization of our deferred tax assets and resulted in a partial release of our valuation allowance.
Nine Months Ended September 30, 2019 and 2018
The following sets forth our consolidated statements of operations data for each of the periods indicated (in thousands, except percentage changes). Our historical results are not necessarily indicative of our results of operations to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
Dollar
Change
|
|
%
Change
|
|
|
2019
|
|
2018
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Test revenue
|
$
|
147,423
|
|
|
$
|
100,014
|
|
|
$
|
47,409
|
|
|
47%
|
|
Other revenue
|
3,116
|
|
|
2,329
|
|
|
787
|
|
|
34%
|
|
Total revenue
|
150,539
|
|
|
102,343
|
|
|
48,196
|
|
|
47%
|
|
Cost of revenue
|
81,380
|
|
|
58,964
|
|
|
22,416
|
|
|
38%
|
|
Research and development
|
90,247
|
|
|
46,926
|
|
|
43,321
|
|
|
92%
|
|
Selling and marketing
|
87,662
|
|
|
55,222
|
|
|
32,440
|
|
|
59%
|
|
General and administrative
|
56,326
|
|
|
37,884
|
|
|
18,442
|
|
|
49%
|
|
Loss from operations
|
(165,076
|
)
|
|
(96,653
|
)
|
|
(68,423
|
)
|
|
71%
|
|
Other income (expense), net
|
(5,572
|
)
|
|
2,066
|
|
|
(7,638
|
)
|
|
(370)%
|
|
Interest expense
|
(7,062
|
)
|
|
(4,927
|
)
|
|
(2,135
|
)
|
|
43%
|
|
Net loss before taxes
|
(177,710
|
)
|
|
(99,514
|
)
|
|
(78,196
|
)
|
|
79%
|
|
Income tax benefit
|
(12,650
|
)
|
|
—
|
|
|
(12,650
|
)
|
|
(100)%
|
|
Net loss
|
$
|
(165,060
|
)
|
|
$
|
(99,514
|
)
|
|
$
|
(65,546
|
)
|
|
66%
|
Revenue
The increase in total revenue of $48.2 million for the nine months ended September 30, 2019 compared to the same period in 2018 was due primarily to increased test volume. Billable test volumes increased to approximately 322,000 in the nine months ended September 30, 2019 compared to 206,000 in the same period of 2018. Average revenue per test decreased to $458 per test in the nine months ended September 30, 2019 compared to $485 per test in the comparable prior period due to changes in payer mix as well as reductions in pricing for some payers as we focus on providing genetic content at a reasonable price.
Cost of revenue
The increase in the cost of revenue of $22.4 million for the nine months ended September 30, 2019 compared to the same period in 2018 was primarily due to costs associated with increased test volume, partially offset by the effect of cost efficiencies. For the nine months ended September 30, 2019, the number of samples accessioned increased to approximately 334,000 from approximately 216,000 for the same period in 2018. Cost per sample accessioned was $244 in the nine months ended September 30, 2019 compared to $273 for the same period in 2018. The lower cost per sample accessioned in the nine months ended September 30, 2019 was primarily attributable to increased volume, which together with automation efficiencies, resulted in lower per-sample costs for laboratory materials; labor, including the impact of efficiencies in our medical interpretation costs; and equipment depreciation partially offset by increases in amortization costs related to our inquired intangible assets.
Research and development
The increase in research and development expense of $43.3 million for the nine months ended September 30, 2019 compared to the same period in 2018 was due to the growth of the business as well as to costs related to our acquisitions of Singular Bio in June 2019 and Jungla in July 2019. The increase principally consisted of the following elements as we invest in research and development initiatives as we grow: personnel-related costs increased by $45.4 million, primarily reflecting increased headcount as well as $21.2 million of stock-based compensation related to equity awards granted to new employees who joined Invitae in connection with our acquisition of Singular Bio; technology expense increased by $2.0 million primarily reflecting increased headcount; and travel-related costs increased by $0.7 million.
These cost increases were partially offset by allocations of resources from research and development to cost of revenue, resulting from increased test volumes, and allocations from other functional areas which reduced research and development expense by $2.4 million, as well as a decrease in depreciation and amortization costs by $2.2 million.
Selling and marketing
The increase in selling and marketing expense of $32.4 million for the nine months ended September 30, 2019 compared to the same period in 2018 was due primarily to the growth of the business and our increased spending on marketing initiatives and principally consisted of the following elements: personnel-related costs increased by $20.1 million reflecting increased headcount and included an increase in sales commissions of $5.9 million; a $6.1 million increase in marketing costs principally for branding initiatives and advertising; travel-related costs increased by $2.3 million; allocated technology and facilities-related expenses increased by $2.0 million; and information technology costs, including software licenses and related expenses, increased by $1.6 million.
General and administrative
The increase in general and administrative expense of $18.4 million for the nine months ended September 30, 2019 compared to the same period in 2018 was due primarily to the growth of the business and the effect of our acquisitions of Singular Bio in June 2019 and Jungla in July 2019 and principally consisted of the following elements: personnel-related costs increased by $6.4 million principally due to increased headcount; legal and accounting services increased by $4.2 million which included acquisition-related transaction costs of $2.0 million related to Singular Bio and Jungla; post-combination expense of $3.2 million and $2.9 million related to the acceleration of unvested equity in our acquisitions of Singular Bio and Jungla, respectively; professional fees increased by $2.7 million; occupancy costs increased by $2.1 million; information technology costs increased by $1.9 million due to computer equipment and software purchases to support headcount growth; and travel-related costs increased by $1.4 million.
These cost increases were partially offset by an increase of $5.1 million in allocations of technology and facilities-related expenses to other functional areas and decreases in expenses relating to collaboration and co-development agreements by $1.7 million.
Other income (expense), net
The increase in other expense, net of $7.6 million for the nine months ended September 30, 2019 compared to other income, net in the same period in 2018 was due principally to $8.9 million of debt extinguishment costs related to the settlement of our 2018 Note Purchase Agreement in September 2019 and decreases in gains on remeasurement of acquisition-related liabilities of $1.6 million offset by increases in income generated on our cash equivalents and marketable securities.
Interest expense
The increase in interest expense of $2.1 million for the nine months ended September 30, 2019 compared to the same period in 2018 was to due principally to increased borrowings under our debt facilities as compared to the prior year period, as well as $1.1 million of interest expense related to our Convertible Senior Notes.
Income tax benefit
The income tax benefit of $12.7 million recorded in the nine months ended September 30, 2019, was due to net deferred tax liabilities assumed in connection with our acquisition of Singular Bio and Jungla which provided a future source of income to support the realization of our deferred tax assets and resulted in a partial release of our valuation allowance.
Liquidity and capital resources
Liquidity and capital expenditures
We have incurred net losses since our inception. For the nine months ended September 30, 2019 and 2018, we had net losses of $165.1 million and $99.5 million, respectively, and we expect to incur additional losses in the near-term future. At September 30, 2019, we had an accumulated deficit of $681.8 million. While our revenue has increased over time, we may never achieve revenue sufficient to offset our expenses.
Since inception, our operations have been financed primarily by net proceeds from sales of our capital stock, fees collected from our customers as well as borrowing from debt facilities and the issuance of Convertible Senior Notes.
In March 2019, we sold, in an underwritten public offering, an aggregate of 10.4 million shares of our common stock at a price of $19.00 per share, for gross proceeds of $196.7 million and net proceeds of $184.5 million. During the three months ended September 30, 2019, we sold 0.8 million shares of common stock under our 2018 Sales Agreement in an "at the market" offering for aggregate proceeds of $20.2 million and net proceeds of $19.5 million.
In September 2019, we settled our Note Purchase Agreement we entered into in November 2018 pursuant to which we were eligible to borrow an aggregate principal amount up to $200.0 million over its maturity term of seven years which included an initial borrowing of $75.0 million in 2018. Also in September 2019, we issued $350.0 of aggregate principal amount of Convertible Senior Notes which bear cash interest at a rate of 2.0% per year.
At September 30, 2019 and December 31, 2018, we had $473.5 million and $131.9 million, respectively, of cash, cash equivalents, restricted cash and marketable securities.
Our primary uses of cash are to fund our operations as we continue to grow our business, enter into partnerships and potentially to acquire businesses and technologies. Cash used to fund operating expenses is affected by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.
We have incurred substantial losses since our inception, and we expect to continue to incur losses in the near term. We believe our existing cash, cash equivalents and marketable securities as of September 30, 2019 and fees collected from the sale of our tests will be sufficient to meet our anticipated cash requirements for the foreseeable future.
We may need additional funding to finance operations prior to achieving profitability or should we make additional acquisitions. We regularly consider fundraising opportunities and will determine the timing, nature and size of future financings based upon various factors, including market conditions and our operating plans. We may in the future elect to finance operations by selling equity or debt securities or borrowing money. We also may elect to finance future acquisitions. If we issue equity securities, dilution to stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing additional debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock. In addition, the terms of additional debt securities or borrowings could impose significant restrictions on our operations. If additional funding is required, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all. If we are unable to obtain additional funding when needed, we will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on our ability to execute on our business plan and have an adverse effect on our business, results of operations and future prospects.
The following table summarizes our cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
Cash used in operating activities
|
$
|
(97,787
|
)
|
|
$
|
(76,747
|
)
|
|
Cash provided by (used in) investing activities
|
(9,612
|
)
|
|
24,589
|
|
|
Cash provided by financing activities
|
462,430
|
|
|
141,124
|
|
|
Net increase in cash, cash equivalents and restricted cash
|
$
|
355,031
|
|
|
$
|
88,966
|
|
Cash flows from operating activities
For the nine months ended September 30, 2019, cash used in operating activities of $97.8 million principally resulted from our net loss of $165.1 million, partially offset by non-cash charges of $47.8 million for stock-based compensation, $12.7 million related to our income tax benefit generated from business combinations, $11.1 million for depreciation and amortization, and $8.9 million for debt extinguishment costs related to the settlement of our 2018 Note Purchase Agreement. The net effect on cash of changes in net operating assets was an increase of cash of $10.3 million.
For the nine months ended September 30, 2018, cash used in operating activities of $76.7 million principally resulted from our net loss of $99.5 million, partially offset by non-cash charges of $15.7 million for stock-based compensation, $10.3 million for depreciation and amortization, and $1.9 million of impairment losses related to our collaboration agreement with KEW Inc. The net effect on cash of changes in net operating assets was a use of cash of $6.4 million.
Cash flows from investing activities
For the nine months ended September 30, 2019, cash used in investing activities of $9.6 million was due to net maturities of marketable securities of $13.7 million partially offset by cash used for purchases of property and equipment of $13.5 million and net cash used to acquire Singular Bio and Jungla of $9.8 million.
For the nine months ended September 30, 2018, cash provided by investing activities of $24.6 million was due to proceeds from maturities and sales of marketable securities of $30.9 million offset by cash used for purchases of property and equipment of $4.3 million, and purchases of convertible notes related to KEW Inc. totaling $1.6 million.
Cash flows from financing activities
For the nine months ended September 30, 2019, cash provided by financing activities of $462.4 million consisted of net proceeds from the issuance of Convertible Senior Notes of $339.9 million million, net proceeds from the public offering of common stock of $204.0 million and cash received from issuances of common stock totaling $5.7 million, including cash received from exercises of stock options of $3.0 million and employee stock purchase plan purchases of $2.6 million. These cash inflows were partially offset by payments related to the settlement of our Note Purchase Agreement through repayment of loan obligations of $75.0 million and payment of debt extinguishment costs of $10.6 million, as well as finance lease payments of $1.6 million.
For the nine months ended September 30, 2018, cash provided by financing activities of $141.1 million consisted of net proceeds from the public offerings of common stock of $112.5 million, net proceeds of $19.5 million from the second term loan under the Amended 2017 Loan Agreement and cash received from issuances of common stock totaling $10.7 million, including $6.5 million received from exercises of warrants issued pursuant to the acquisition of CombiMatrix Corporation in 2017, stock option exercises of $2.6 million, and employee stock purchase plan purchases of $1.6 million. These cash inflows were partially offset by capital lease obligations payments of $1.6 million.
Contractual obligations
The following table summarizes our contractual obligations, including interest, as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations:
|
|
Remainder of 2019
|
|
2020 and 2021
|
|
2022 and 2023
|
|
2024 and beyond
|
|
Total
|
|
Operating leases
|
|
$
|
2,768
|
|
|
$
|
21,313
|
|
|
$
|
20,548
|
|
|
$
|
28,273
|
|
|
$
|
72,902
|
|
|
Finance leases
|
|
509
|
|
|
1,355
|
|
|
—
|
|
|
—
|
|
|
1,864
|
|
|
Convertible Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
350,000
|
|
|
350,000
|
|
|
Purchase commitments
|
|
417
|
|
|
4,218
|
|
|
52
|
|
|
—
|
|
|
4,687
|
|
|
Total
|
|
$
|
3,694
|
|
|
$
|
26,886
|
|
|
$
|
20,600
|
|
|
$
|
378,273
|
|
|
$
|
429,453
|
|
See Note 8, "Commitments and contingencies" in the Notes to Condensed Consolidated Financial Statements for additional details regarding our leases, debt, Convertible Senior Notes and purchase commitments.
Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements.
Recent accounting pronouncements
See “Recent accounting pronouncements” in Note 2, “Summary of significant accounting policies” in the Notes to Condensed Consolidated Financial Statements included elsewhere in this report for a discussion of recently adopted accounting pronouncements and accounting pronouncements not yet adopted, and their expected effect on our financial position and results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. Our cash, cash equivalents, restricted cash and marketable securities totaled $473.5 million at September 30, 2019, and consisted of bank deposits and money market funds. Such interest-bearing instruments carry a degree of risk; however, because our investments are primarily short-term in duration, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. At September 30, 2019, a hypothetical 1% (100 basis points) increase or decrease in interest rates would not have resulted in a material change in the fair value of our cash equivalents and portfolio of marketable securities. Fluctuations in the value of our cash equivalents and portfolio of marketable securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive gain (loss) and are realized only if we sell the underlying securities prior to maturity or declines in fair value are determined to be other-than-temporary.
ITEM 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial and accounting officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting
During the quarterly period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.