INVITAE CORP, 10-Q filed on 11/10/2015
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2015
Oct. 30, 2015
Document and Entity Information
 
 
Entity Registrant Name
Invitae Corp 
 
Entity Central Index Key
0001501134 
 
Document Type
10-Q 
 
Document Period End Date
Sep. 30, 2015 
 
Amendment Flag
false 
 
Current Fiscal Year End Date
--12-31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Non-accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
31,926,026 
Document Fiscal Year Focus
2015 
 
Document Fiscal Period Focus
Q3 
 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2015
Dec. 31, 2014
Current assets
 
 
Cash and cash equivalents
$ 48,999 
$ 107,027 
Marketable securities
98,253 
 
Prepaid expenses and other current assets
3,267 
2,616 
Total current assets
150,519 
109,643 
Property and equipment, net
18,652 
15,672 
Restricted cash
4,847 
150 
Other assets
1,654 
3,313 
Total assets
175,672 
128,778 
Current liabilities
 
 
Accounts payable
2,420 
2,862 
Accrued liabilities
3,376 
3,237 
Capital lease obligation, current portion
1,670 
1,524 
Debt, current portion
991 
 
Total current liabilities
8,457 
7,623 
Capital lease obligation, net of current portion
1,976 
2,011 
Debt, net of current portion
3,797 
 
Other long-term liabilities
335 
401 
Liabilities related to early exercise of stock options
14 
Total liabilities
14,571 
10,049 
Commitments and contingencies (Note 5)
   
   
Convertible preferred stock, $0.0001 par value; 0 and 141,131,524 shares authorized, 0 and 141,131,524 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
 
202,305 
Stockholders' equity (deficit):
 
 
Preferred stock, $0.0001 par value; 20,000,000 and 0 shares authorized, no shares issued and outstanding as of September 30, 2015 and December 31, 2014
   
   
Common stock, $0.0001 par value; 400,000,000 and 160,131,524 shares authorized, 31,924,022 and 944,581 shares issued and outstanding as of September 30, 2015 and December 31, 2014, respectively
 
Accumulated other comprehensive gain (loss)
11 
 
Additional paid-in capital
311,688 
1,604 
Accumulated deficit
(150,602)
(85,180)
Total Stockholders' equity (deficit)
161,101 
(83,576)
Total liabilities, convertible preferred stock, and stockholders' equity (deficit)
$ 175,672 
$ 128,778 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
Sep. 30, 2015
Dec. 31, 2014
Condensed Consolidated Balance Sheets
 
 
Convertible preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Convertible preferred stock, shares authorized
141,131,524 
Convertible preferred stock, shares issued
141,131,524 
Convertible preferred stock, shares outstanding
141,131,524 
Preferred stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Preferred stock, authorized shares
20,000,000 
Preferred stock, issued shares
Preferred stock, outstanding shares
Common stock, par value (in dollars per share)
$ 0.0001 
$ 0.0001 
Common stock, shares authorized
400,000,000 
160,131,524 
Common stock, shares issued
31,924,026 
944,581 
Common stock, shares outstanding
31,924,026 
944,581 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Condensed Consolidated Statements of Operations
 
 
 
 
Revenue
$ 2,187 
$ 310 
$ 5,217 
$ 729 
Costs and operating expenses:
 
 
 
 
Cost of revenue
3,952 
1,689 
11,017 
3,263 
Research and development
11,134 
5,557 
31,426 
15,600 
Selling and marketing
5,439 
2,386 
16,368 
5,823 
General and administrative
4,118 
3,212 
11,592 
8,112 
Total costs and operating expenses
24,643 
12,844 
70,403 
32,798 
Loss from operations
(22,456)
(12,534)
(65,186)
(32,069)
Interest and other income (expense), net
(9)
(66)
(111)
(69)
Interest expense
(62)
(15)
(125)
(49)
Net loss
$ (22,527)
$ (12,615)
$ (65,422)
$ (32,187)
Net loss per share basic and diluted
$ (0.71)
$ (14.24)
$ (2.43)
$ (39.27)
Shares used in computing net loss per share, basic and diluted
31,852,796 
885,999 
26,962,821 
819,704 
Condensed Consolidated Statements of Comprehensive Loss (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Sep. 30, 2015
Sep. 30, 2014
Condensed Consolidated Statements of Comprehensive Loss
 
 
 
 
Net loss
$ (22,527)
$ (12,615)
$ (65,422)
$ (32,187)
Other comprehensive income (loss):
 
 
 
 
Unrealized gain on available-for-sale marketable securities, net of tax
 
11 
 
Comprehensive loss
$ (22,520)
$ (12,615)
$ (65,411)
$ (32,187)
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2015
Sep. 30, 2014
Cash flows from operating activities
 
 
Net loss
$ (65,422)
$ (32,187)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
3,718 
1,574 
Stock-based compensation
1,837 
538 
Amortization of premium on marketable securities
545 
 
Loss on disposal of assets
15 
33 
Changes in operating assets and liabilities
 
 
Prepaid expenses and other current assets
(651)
(657)
Other assets
208 
(658)
Accounts payable
(216)
1,454 
Accrued expenses and other liabilities
77 
1,799 
Net cash used in operating activities
(59,889)
(28,104)
Cash flows from investing activities
 
 
Purchase of marketable securities
(186,312)
 
Proceeds from sales and maturities of marketable securities
87,525 
 
Purchases of property and equipment
(5,304)
(2,655)
Change in restricted cash
(4,697)
(30)
Net cash used in investing activities
(108,788)
(2,685)
Cash flows from financing activities
 
 
Proceeds from issuance of convertible preferred stock, net of issuance costs
 
47,333 
Proceeds from issuance of common stock upon initial public offering, net of issuance costs
107,116 
 
Proceeds from exercise of stock options
273 
149 
Proceeds from Loan agreement
5,000 
 
Loan payments
(165)
 
Capital lease principal payment
(1,528)
(625)
Loan agreement financing costs
(47)
 
Net cash provided by financing activities
110,649 
46,857 
Net increase (decrease) in cash and cash equivalents
(58,028)
16,068 
Cash and cash equivalents at beginning of period
107,027 
43,070 
Cash and cash equivalents at end of period
48,999 
59,138 
Supplemental cash flow information
 
 
Interest paid
125 
49 
Supplemental cash flow information of non-cash investing and financing activities:
 
 
Equipment acquired through capital leases
1,639 
 
Conversion of convertible preferred stock to common stock
202,305 
 
Purchases of property and equipment in accounts payable and accrued liabilities
$ 94 
$ 1,583 
Organization and description of business
Organization and description of business

 

1. Organization and description of business

 

Invitae Corporation (the “Company”) was incorporated in the state of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. The Company utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for physicians and their patients. The Company’s laboratory is located in San Francisco, California. The Company’s current product is an assay of over 600 genes that can be used for multiple indications. The test includes multiple genes associated with hereditary cancer, neurological disorders, cardiovascular disorders and other hereditary conditions. The Company operates in one segment.

 

Reverse stock split

 

In January 2015, the Company’s board of directors approved an amendment to the Company’s amended and restated certificate of incorporation to effect a reverse split of the Company’s issued and outstanding common stock at a 1-for-6 ratio, which was effected on February 9, 2015. The par value and authorized shares of common stock and convertible preferred stock were not adjusted as a result of the reverse split. All issued and outstanding common stock, options to purchase common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect the reverse stock split for all periods presented. The financial statements have also been retroactively adjusted to reflect a proportional adjustment to the conversion ratio for each series of preferred stock that was effected in connection with the reverse stock split.

 

Initial public offering

 

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

 

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

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results for the three and nine months ended September 30,  2015 are not necessarily indicative of the results expected for the full fiscal year or any other periods.

Summary of significant accounting policies
Summary of significant accounting policies

 

2. Summary of significant accounting policies

 

Principles of consolidation

 

The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company believes judgment is involved in determining revenue recognition; the recoverability of long-lived assets; stock-based compensation expense; and income tax uncertainties. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those estimates and assumptions.

 

Customer concentration

 

Significant customers are those which represent 10% or more of the Company’s total revenue for each period presented in the condensed consolidated statements of operations. For each significant customer, revenue as a percentage of total revenue was as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Customers

 

2015

 

2014

 

2015

 

2014

 

Customer A

 

*

%

12.0 

%

*

%

*

%

Customer B

 

*

%

*

%

*

 

11.6 

%

 

 

*Less than 10% of total revenue

 

Cash equivalents

 

The Company considers all highly liquid marketable securities with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market funds and U.S government agency securities.

 

Marketable securities

 

All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its marketable securities in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Short-term marketable securities have maturities less than 365 days as of the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss). Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income (expense), net.

 

Restricted cash

 

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

 

Internal-use software

 

The Company capitalizes third-party costs incurred in the application development stage to design and implement the software used in its tests and in the Invitae Family History Tool mobile application. Costs incurred in the application development stage of the software and the mobile application are capitalized and are amortized over an estimated useful life of three years on a straight line basis.

 

During the nine months ended September 30,  2015 and 2014, the Company capitalized $1.5 million and $375,000, respectively, of software development costs.

 

Deferred offering costs

 

Deferred offering costs, which primarily consist of direct incremental legal, accounting and printer fees relating to the IPO, were initially capitalized. As of December 31, 2014, the Company capitalized $1.9 million of deferred offering costs in other assets on the consolidated balance sheets. The deferred offering costs were subsequently offset against IPO proceeds upon the closing of the offering in February 2015.

 

Leases

 

The Company rents its facilities under operating lease agreements and recognizes related rent expense on a straight-line basis over the term of the lease. Some of the lease agreements contain rent holidays, scheduled rent increases, lease incentives, and renewal options. Rent holidays and scheduled rent increases are included in the determination of rent expense to be recorded over the lease term. Lease incentives are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The Company recognizes rent expense beginning on the date it obtains the legal right to use and control the leased space.

 

Fair value of financial instruments

 

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

 

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

 

Revenue recognition

 

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

 

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

 

Cost of revenue

 

Cost of revenue reflects the aggregate costs incurred in delivering the genetic testing results to physicians and includes expenses for personnel costs including stock-based compensation, materials and supplies, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation and utilities. Costs associated with performing the Company’s test are recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test.

 

Foreign currency transactions

 

The Company uses the U.S. dollar as its functional currency for its subsidiary in Chile. Foreign currency assets and liabilities are remeasured into U.S. dollars using the end of period exchange rates except for nonmonetary assets and liabilities, which are remeasured using historical exchange rates. Expenses are remeasured using an average exchange rate for the respective period. No revenue has been recorded in Chile for the periods presented. Gains or losses from foreign currency transactions are included in interest income and other income (expense), net, in the condensed consolidated statements of operations. Foreign currency transaction gains and losses have not been significant to the condensed consolidated financial statements for all periods presented.

 

Net loss per common share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share in the periods presented is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive. Common shares subject to repurchase are excluded from the weighted-average shares. At September 30, 2015 and 2014, 8,080 and 30,157 shares subject to repurchase, respectively, are excluded from basic net loss per share calculation.

 

Recent accounting pronouncements

 

In April, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 simplifies the presentation of debt issuance costs and requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability instead of as an asset. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015 and early adoption is permitted. The Company early adopted ASU 2015-03 in the second quarter of 2015 and the adoption of this standard did not have an impact on the Company’s consolidated financial statements.

 

 

In May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). ASU 2015-14 defers the effective date of ASU 2014-09 for public business entities by one year to annual reporting periods beginning after December 15, 2017. Therefore, the new standard will become effective for the Company on January 1, 2018 and early application is permitted for periods beginning on or after January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected an implementation date or a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

In August 2014, the FASB issued ASU No. 2014-15 (Subtopic 205- 40), Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial statements.

Balance sheet components
Balance sheet components

 

3. Balance sheet components

 

Cash equivalents and marketable securities

 

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

 

 

 

September 30, 2015

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Money market funds

 

$

30,327

 

$

 

$

 

$

30,327

 

U.S. treasury notes

 

8,034

 

4

 

 

8,038

 

U.S. government agency securities

 

91,207

 

9

 

(2

)

91,214

 

 

 

 

 

 

 

 

 

 

 

 

 

$

129,568

 

$

13

 

$

(2

)

$

129,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

$

26,479

 

Restricted cash

 

 

 

 

 

 

 

4,847

 

Marketable securities

 

 

 

 

 

 

 

98,253

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents, restricted cash and marketable securities

 

 

 

 

 

 

 

$

129,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Money market funds

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

$

15,017 

 

Restricted cash

 

 

 

 

 

 

 

150 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and restricted cash

 

 

 

 

 

 

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the available-for-sale securities that were in an unrealized loss position as of September 30, 2015, having been in such a position for less than 12 months, and none having been deemed to be other-than-temporarily impaired (in thousands):

 

 

Gross Unrealized
Losses

 

Estimated Fair
Value

 

U.S. government agency securities

 

$

 

$

6,717 

 

 

None of the available-for-sale securities held as of September 30, 2015 has been in a continuous unrealized loss position for more than one year. As of September 30, 2015, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. The Company believes that it is more-likely-than-not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

 

 

At September 30, 2015, the remaining contractual maturities of available-for-sale securities were less than one year. For the three and nine months ended September 30, 2015, there were no realized gains or losses on the available-for-sale securities. There were no available-for-sale marketable securities held by the Company at December 31, 2014.

 

Property and equipment, net

 

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

 

 

September 30,
2015

 

December 31,
2014

 

Leasehold improvements

 

$

2,548

 

$

1,914

 

Laboratory equipment

 

9,859

 

6,528

 

Equipment under capital lease

 

8,224

 

3,735

 

Computer equipment

 

2,341

 

1,156

 

Internal-use software

 

2,301

 

800

 

Software

 

67

 

31

 

Furniture and fixtures

 

198

 

158

 

Automobiles

 

20

 

 

Construction-in-progress

 

236

 

4,853

 

 

 

 

 

 

 

Total property and equipment, gross

 

25,794

 

19,175

 

Accumulated depreciation and amortization

 

(7,142

)

(3,503

)

 

 

 

 

 

 

Total property and equipment, net

 

$

18,652

 

$

15,672

 

 

 

 

 

 

 

 

 

 

 

Included in the construction-in-progress balance as of December 31, 2014 was $2.9 million of capital lease equipment that had not been placed in service. This capital lease equipment was placed in service in the first quarter of 2015.

 

Accrued liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,
2015

 

December 31,
2014

 

Accrued compensation and related expenses

 

$

1,639 

 

$

1,439 

 

Accrued professional services

 

262 

 

1,030 

 

Accrued costs for construction-in-progress

 

29 

 

32 

 

Other

 

1,446 

 

736 

 

 

 

 

 

 

 

Total accrued liabilities

 

$

3,376 

 

$

3,237 

 

 

 

 

 

 

 

 

 

 

Fair value measurements
Fair value measurements

 

4. Fair value measurements

 

Financial assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The authoritative guidance establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.

 

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

 

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

 

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

 

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

 

The following tables set forth the fair value of the Company’s consolidated financial instruments that were measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

September 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

30,327 

 

$

 

$

 

$

30,327 

 

U.S. treasury notes

 

8,038 

 

 

 

8,038 

 

U.S. government agency securities

 

 

91,214 

 

 

91,214 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

38,365 

 

$

91,214 

 

$

 

$

129,579 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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

 

The fair value of the Company’s outstanding debt is estimated using the net present value of the payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding debt at September 30, 2015, and December 31, 2014, are as follows (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

Debt

 

$

4,788 

 

$

4,747 

 

$

 

$

 

 

Commitments and contingencies
Commitments and contingencies

 

5. Commitments and contingencies

 

Leases

 

In September 2015, the Company entered into a lease agreement for a laboratory and headquarters in San Francisco, California. This lease expires in July 2026 and the Company may renew the lease for an additional ten years. The Company has determined the lease term to be a ten-year period expiring in 2026. The lease term will commence when the Company takes occupancy of the facility, which is expected to occur in the fourth quarter of 2015. In connection with the execution of the lease, the Company provided a security deposit of approximately $4.6 million which is included in restricted cash in the Company’s consolidated balance sheets. Minimum annual rent under the lease is subject to increases based on stated rental adjustment terms. In addition, per the terms of the lease, the Company will receive a $5.2 million lease incentive in the form of reimbursement of payments from the landlord for a portion of the costs of leasehold improvements the Company makes to the facility. The assets purchased with the lease incentive will be included in property and equipment, net in the Company’s consolidated balance sheets and the lease incentive will be recognized as a reduction of rental expense on a straight-line basis over the term of the lease. At September 30, 2015, none of the incentive had been utilized by the Company. At September 30, 2015, aggregate future minimum lease payments for the new facility are approximately $72.0 million.

 

In March 2015, the Company leased additional space in San Francisco and Oakland, California. The leases expire in April and June 2017, respectively. In April 2015 the Company leased additional space in Cambridge, Massachusetts; this lease expires in January 2018. At September 30, 2015, aggregate future minimum lease payments for these facilities are approximately $2.3 million.

 

Future minimum payments under non-cancelable operating leases as of September 30, 2015 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2015 (remainder of year)

 

$

997 

 

2016

 

6,585 

 

2017

 

7,526 

 

2018

 

7,279 

 

2019

 

7,477 

 

Thereafter

 

50,878 

 

 

 

 

 

Total minimum lease payments

 

$

80,742 

 

 

 

 

 

 

 

Rent expense was $1.0 million and $2.7 million for the three and nine months ended September 30, 2015, respectively, and $0.4 million and $1.1 million for the three and nine months ended September 30, 2014, respectively.

 

Equipment Financing

 

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank under which term loans for purchases of equipment up to an aggregate of $15.0 million are available in tranches not to exceed $2.0 million, other than the initial $2.5 million tranche on the date of the Loan Agreement. The Company may request additional tranches to finance the purchase of equipment through December 31, 2016, subject to certain restrictions. The term loans under the Loan Agreement bear interest at a floating rate equal to 0.25% below the prime rate as published in the Wall Street Journal effective on the date the change in the prime rate becomes effective. The Company is required to repay the outstanding principal and accrued but unpaid interest on each tranche in equal monthly installments beginning one month after each advance and ending on July 17, 2020 (the “Term Date”). Any then-unpaid principal and interest on advances under the Loan Agreement are payable on the Term Date. The Company may, at its option, prepay the borrowings by paying the lender a prepayment premium.

 

The Company’s obligations under the Loan Agreement are subject to covenants, including covenants to maintain a minimum liquidity level with the bank, and additional covenants limiting the Company’s ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of its capital stock, repurchase stock and make investments, in each case subject to certain exceptions. As of September 30, 2015, the Company was in compliance with all covenants under the Loan Agreement. The Company’s obligations under the Loan Agreement are secured by a security interest on substantially all of its assets, excluding its intellectual property and certain other assets.

 

At September 30, 2015, obligations under the Loan Agreement were $4.8 million. Debt issuance costs related to the Loan Agreement of $47,000 were recorded as a direct deduction from the debt liability and will be amortized to interest expense over the term of the Loan Agreement in accordance with ASU 2015-03.

 

Guarantees and indemnifications

 

As permitted under Delaware law and in accordance with the Company’s bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification is unlimited; however, the Company maintains director and officer liability insurance. This insurance allows the transfer of the risk associated with the Company’s exposure and may enable it to recover a portion of any future amounts paid. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, the Company did not record any liabilities associated with these indemnification agreements as of September 30, 2015 or December 31, 2014.

 

Contingencies

 

On November 25, 2013, the University of Utah Research Foundation, the Trustees of the University of Pennsylvania, HSC Research and Development Limited Partnership, Endorecherche, Inc. and Myriad Genetics, Inc. (collectively, the Myriad Plaintiffs) filed a complaint in the District of Utah (the Utah Action), alleging that certain of the Company’s genetic testing services infringe certain claims of various U.S. Patents (collectively, the Myriad Patents). On November 26, 2013, the Company filed a complaint for declaratory judgment in the Northern District of California (the California Action), asserting that the Myriad Patents are invalid and the Company does not infringe them, and the Myriad Plaintiffs counterclaimed alleging that the Company infringes the Myriad Patents. Although the Utah Action was dismissed, on February 19, 2014, the Judicial Panel on Multidistrict Litigation granted the Myriad Plaintiffs’ motion to consolidate for pre-trial proceedings all actions concerning the Myriad Patents (the MDL Proceedings), with the MDL Proceedings taking place in the District of Utah. On January 23, 2015, the Myriad Plaintiffs stipulated to the dismissal with prejudice of all of their claims and granted the Company a covenant not to sue for all of the patents they had asserted against the Company. On January 26, 2015, the court issued an order dismissing the California Action with prejudice, thereby ending the litigation.

 

On September 16, 2015, GeneDx, Inc. and Bio-Reference Laboratories, Inc. filed an action against the Company in the U.S. District Court for the District of New Jersey. The Complaint alleges that Invitae wrongfully solicited and hired employees away from the Plaintiffs in order to acquire access to trade secrets and other confidential business information belonging to the Plaintiffs. The Complaint alleges claims for relief based on legal theories of unfair competition, tortious interference with prospective economic advantage, tortious interference with contract, and trade secret misappropriation, and seeks injunctive relief; damages, including punitive damages; and attorneys’ fees and costs. On October 22, 2015, Invitae filed a motion to dismiss the action for lack of personal jurisdiction and, in the alternative, to transfer the action to the U.S. District Court for the Northern District of California. Plaintiffs’ response to that motion is currently due on November 23, 2015. The Company believes the action is without merit and intends to defend itself vigorously. The Company expects to incur costs associated with defending this action.

 

The Company was not a party to any other material legal proceedings at September 30, 2015, or at the date of this report. The Company may from time to time become involved in various legal proceedings arising in the ordinary course of business, and the resolution of any such claims could be material.

Stock plans
Stock plans

 

6. Stock plans

 

Stock incentive plans

 

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

 

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

 

Options granted generally vest over a period of four years. Typically, the vesting schedule for options granted to newly hired employees provides that 1/4 of the grant vests upon the first anniversary of the employee’s date of hire, with the remainder of the shares 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.

 

2015 employee stock purchase plan

 

In January 2015, the Company adopted the 2015 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the closing of the IPO. A total of 325,000 shares of common stock are reserved for issuance under the ESPP. Eligible employees may purchase common stock at 85% of the lesser of the fair market value of common stock on the purchase date or last trading day preceding the offering date. The ESPP provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 through January 1, 2025. The Company determined the initial ESPP purchase period will commence in the fourth quarter of 2015.

 

Summary of option activity

 

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

 

 

 

Shares
available
for grant

 

Stock
options
outstanding

 

Weighted-
average
exercise
price

 

Weighted-average
remaining
contractual life
(years)

 

Aggregate
intrinsic
value

 

Balances at December 31, 2014

 

276,805

 

1,923,332

 

$

4.37

 

8.90

 

$

15,946

 

Additional shares reserved

 

4,370,452

 

 

 

 

 

 

 

Options granted

 

(1,465,204

)

1,465,204

 

$

10.90

 

 

 

 

 

Options cancelled

 

176,831

 

(176,831

)

$

7.64

 

 

 

 

 

Options exercised

 

 

 

(139,232

)

$

1.96

 

 

 

 

 

Restricted stock units granted

 

(443,568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2015

 

2,915,316

 

3,072,473

 

$

7.41

 

8.89

 

$

5,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2015

 

 

 

646,578

 

$

2.65

 

7.41

 

$

3,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest at September 30, 2015

 

 

 

2,981,092

 

$

7.35

 

8.87

 

$

5,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The weighted-average fair value of options to purchase common stock granted was $7.02 and $3.03 per share in the nine months ended September 30, 2015 and 2014, respectively.

 

The fair value of options to purchase common stock vested was $1.1 million and $360,000 in the nine months ended September 30, 2015 and 2014, respectively.

 

The intrinsic value of options to purchase common stock exercised was $1.2 million and $369,000 in the nine months ended September 30, 2015 and 2014, respectively.

 

Early exercise of stock options

 

The 2010 Plan allows for the granting of options that may be exercised before the options have vested. Shares issued as a result of early exercise that have not vested are subject to repurchase by the Company upon termination of the purchaser’s employment or services, at the price paid by the purchaser, and are not deemed to be issued for accounting purposes until those related shares vest. The amounts received in exchange for these shares have been recorded as a liability on the accompanying balance sheets and will be reclassified into common stock and additional paid-in-capital as the shares vest. The Company’s right to repurchase these shares generally lapses 1/4 after a one-year cliff then at a monthly rate of 1/48 thereafter.

 

At September 30, 2015 and December 31, 2014, there were 8,080 and 23,903 shares of common stock outstanding, respectively, pursuant to the early exercise of stock options and subject to the Company’s right of repurchase at prices ranging from $0.30 to $1.26 per share. At September 30, 2015 and December 31, 2014, liabilities associated with these shares were $6,000 and $14,000, respectively.

 

Stock-based compensation

 

The fair value of share-based payments for option granted to employees and directors was estimated on the date of grant using the Black-Scholes option-pricing valuation model based on the following assumptions. The Company did not grant stock options in the three months ended September 30, 2014.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Expected term (in years)

 

6.03 

 

 

6.03 

 

6.03 

 

Expected volatility

 

68.9 – 69.0

%

%

68.9 – 79.7

%

85.7 – 86.7

%

Risk-free interest rate

 

1.67 – 1.73

%

%

1.28 – 1.73

%

1.75 – 1.91

%

Dividend yield

 

 

 

 

 

 

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

 

 

 

As of September 30,

 

 

 

2015

 

2014

 

Expected term (in years)

 

7.51 – 9.27

 

8.51 – 9.63

 

Expected volatility

 

68.9 – 90.27

%

85.27 

%

Risk-free interest rate

 

1.72 – 1.82

%

2.30 – 2.46

%

Dividend yield

 

 

 

 

The following table summarizes stock-based compensation expense related to stock options for the three and nine months ended September 30, 2015 and 2014 included in the condensed consolidated statements of operations (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Cost of revenue

 

$

61 

 

$

23 

 

$

195 

 

$

47 

 

Research and development

 

373 

 

83 

 

823 

 

231 

 

Selling and marketing

 

144 

 

35 

 

403 

 

90 

 

General and administrative

 

184 

 

73 

 

416 

 

170 

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

762 

 

$

214 

 

$

1,837 

 

$

538 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2015, unrecognized compensation expense related to unvested options, net of estimated forfeitures, was $13.0 million, which the Company expects to recognize on a straight-line basis over a weighted- average period of 3.5 years.

 

Net loss per common share
Net loss per common share

 

7. Net loss per common share

 

The following table presents the calculation of basic and diluted net loss per share for the three and nine months ended September 30, 2015 and 2014 (in thousands, except share and per share amounts):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net loss

 

$

(22,527

)

$

(12,615

)

$

(65,422

)

$

(32,187

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

31,852,796

 

885,999

 

26,962,821

 

819,704

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.71

)

$

(14.24

)

$

(2.43

)

$

(39.27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following outstanding common stock equivalents have been excluded from diluted net loss per share for the three and nine months ended September 30, 2015 and 2014 because their inclusion would be anti-dilutive:

 

 

 

Three and nine Months Ended
September 30,

 

 

 

2015

 

2014

 

Shares of common stock subject to outstanding options

 

3,072,473 

 

1,373,810 

 

Shares of common stock subject to outstanding restricted stock units

 

440,568 

 

 

Shares of common stock subject to conversion from convertible preferred stock

 

 

17,605,215 

 

Shares of common stock subject to unvested early exercise of outstanding options subject to repurchase

 

8,080 

 

30,157 

 

 

 

 

 

 

 

Total common stock equivalents

 

3,521,121 

 

19,009,182 

 

 

 

 

 

 

 

 

Geographic information
Geographic information

 

8. Geographic information

 

Revenue by country is determined based on the billing address of the ordering physician. The following presents revenue by country for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

United States

 

$

1,601 

 

$

227 

 

$

3,493 

 

$

467 

 

Canada

 

341 

 

81 

 

1,081 

 

156 

 

Singapore

 

113 

 

 

249 

 

 

Israel

 

44 

 

 

149 

 

89 

 

Rest of world

 

88 

 

 

245 

 

17 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

2,187 

 

$

310 

 

$

5,217 

 

$

729 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

September 30,
2015

 

December 31,
2014

 

United States

 

$

17,005 

 

$

13,858 

 

Chile

 

1,647 

 

1,814 

 

 

 

 

 

 

 

Total long-lived assets, net

 

$

18,652 

 

$

15,672 

 

 

 

 

 

 

 

 

 

 

Summary of significant accounting policies (Policies)

 

Principles of consolidation

 

The Company’s unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company believes judgment is involved in determining revenue recognition; the recoverability of long-lived assets; stock-based compensation expense; and income tax uncertainties. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those estimates and assumptions.

 

Customer concentration

 

Significant customers are those which represent 10% or more of the Company’s total revenue for each period presented in the condensed consolidated statements of operations. For each significant customer, revenue as a percentage of total revenue was as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Customers

 

2015

 

2014

 

2015

 

2014

 

Customer A

 

*

%

12.0 

%

*

%

*

%

Customer B

 

*

%

*

%

*

 

11.6 

%

 

 

*Less than 10% of total revenue

 

Cash equivalents

 

The Company considers all highly liquid marketable securities with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market funds and U.S government agency securities.

 

Marketable securities

 

All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its marketable securities in debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Short-term marketable securities have maturities less than 365 days as of the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive income (loss). Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income (expense), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest and other income (expense), net.

 

Restricted cash

 

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

 

Internal-use software

 

The Company capitalizes third-party costs incurred in the application development stage to design and implement the software used in its tests and in the Invitae Family History Tool mobile application. Costs incurred in the application development stage of the software and the mobile application are capitalized and are amortized over an estimated useful life of three years on a straight line basis.

 

During the nine months ended September 30,  2015 and 2014, the Company capitalized $1.5 million and $375,000, respectively, of software development costs.

 

Deferred offering costs

 

Deferred offering costs, which primarily consist of direct incremental legal, accounting and printer fees relating to the IPO, were initially capitalized. As of December 31, 2014, the Company capitalized $1.9 million of deferred offering costs in other assets on the consolidated balance sheets. The deferred offering costs were subsequently offset against IPO proceeds upon the closing of the offering in February 2015.

 

Leases

 

The Company rents its facilities under operating lease agreements and recognizes related rent expense on a straight-line basis over the term of the lease. Some of the lease agreements contain rent holidays, scheduled rent increases, lease incentives, and renewal options. Rent holidays and scheduled rent increases are included in the determination of rent expense to be recorded over the lease term. Lease incentives are recognized as a reduction of rent expense on a straight-line basis over the term of the lease. Renewals are not assumed in the determination of the lease term unless they are deemed to be reasonably assured at the inception of the lease. The Company recognizes rent expense beginning on the date it obtains the legal right to use and control the leased space.

 

Fair value of financial instruments

 

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

 

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

 

Revenue recognition

 

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

 

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

 

Cost of revenue

 

Cost of revenue reflects the aggregate costs incurred in delivering the genetic testing results to physicians and includes expenses for personnel costs including stock-based compensation, materials and supplies, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation and utilities. Costs associated with performing the Company’s test are recorded as the test is processed regardless of whether and when revenue is recognized with respect to that test.

 

Foreign currency transactions

 

The Company uses the U.S. dollar as its functional currency for its subsidiary in Chile. Foreign currency assets and liabilities are remeasured into U.S. dollars using the end of period exchange rates except for nonmonetary assets and liabilities, which are remeasured using historical exchange rates. Expenses are remeasured using an average exchange rate for the respective period. No revenue has been recorded in Chile for the periods presented. Gains or losses from foreign currency transactions are included in interest income and other income (expense), net, in the condensed consolidated statements of operations. Foreign currency transaction gains and losses have not been significant to the condensed consolidated financial statements for all periods presented.

 

Net loss per common share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share in the periods presented is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive. Common shares subject to repurchase are excluded from the weighted-average shares. At September 30, 2015 and 2014, 8,080 and 30,157 shares subject to repurchase, respectively, are excluded from basic net loss per share calculation.

 

Recent accounting pronouncements

 

In April, 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 simplifies the presentation of debt issuance costs and requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability instead of as an asset. ASU 2015-03 is effective for annual and interim periods beginning on or after December 15, 2015 and early adoption is permitted. The Company early adopted ASU 2015-03 in the second quarter of 2015 and the adoption of this standard did not have an impact on the Company’s consolidated financial statements.

 

 

In May, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). ASU 2015-14 defers the effective date of ASU 2014-09 for public business entities by one year to annual reporting periods beginning after December 15, 2017. Therefore, the new standard will become effective for the Company on January 1, 2018 and early application is permitted for periods beginning on or after January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected an implementation date or a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

In August 2014, the FASB issued ASU No. 2014-15 (Subtopic 205- 40), Presentation of Financial Statements—Going Concern: Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”), which provides guidance about management’s responsibility to evaluate whether there is substantial doubt about the Company’s ability to continue as a going concern and to provide related footnote disclosure. ASU 2014-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early application is permitted. The adoption of this standard is not expected to have an impact on the Company’s consolidated financial statements.

Summary of significant accounting policies (Tables)
Schedule significant customer, revenue as a percentage

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

Customers

 

2015

 

2014

 

2015

 

2014

 

Customer A

 

*

%

12.0 

%

*

%

*

%

Customer B

 

*

%

*

%

*

 

11.6 

%

 

 

*Less than 10% of total revenue

Balance sheet components (Tables)

 

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

 

 

 

September 30, 2015

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Money market funds

 

$

30,327

 

$

 

$

 

$

30,327

 

U.S. treasury notes

 

8,034

 

4

 

 

8,038

 

U.S. government agency securities

 

91,207

 

9

 

(2

)

91,214

 

 

 

 

 

 

 

 

 

 

 

 

 

$

129,568

 

$

13

 

$

(2

)

$

129,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

$

26,479

 

Restricted cash

 

 

 

 

 

 

 

4,847

 

Marketable securities

 

 

 

 

 

 

 

98,253

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents, restricted cash and marketable securities

 

 

 

 

 

 

 

$

129,579

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Amortized
Cost

 

Gross
Unrealized
Gains

 

Gross
Unrealized
Losses

 

Estimated
Fair
Value

 

Money market funds

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported as:

 

 

 

 

 

 

 

 

 

Cash equivalents

 

 

 

 

 

 

 

$

15,017 

 

Restricted cash

 

 

 

 

 

 

 

150 

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents and restricted cash

 

 

 

 

 

 

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes the available-for-sale securities that were in an unrealized loss position as of September 30, 2015, having been in such a position for less than 12 months, and none having been deemed to be other-than-temporarily impaired (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Gross Unrealized
Losses

 

Estimated Fair
Value

 

U.S. government agency securities

 

$

 

$

6,717 

 

 

 

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

 

 

 

 

September 30,
2015

 

December 31,
2014

 

Leasehold improvements

 

$

2,548

 

$

1,914

 

Laboratory equipment

 

9,859

 

6,528

 

Equipment under capital lease

 

8,224

 

3,735

 

Computer equipment

 

2,341

 

1,156

 

Internal-use software

 

2,301

 

800

 

Software

 

67

 

31

 

Furniture and fixtures

 

198

 

158

 

Automobiles

 

20

 

 

Construction-in-progress

 

236

 

4,853

 

 

 

 

 

 

 

Total property and equipment, gross

 

25,794

 

19,175

 

Accumulated depreciation and amortization

 

(7,142

)

(3,503

)

 

 

 

 

 

 

Total property and equipment, net

 

$

18,652

 

$

15,672

 

 

 

 

 

 

 

 

 

 

 

Accrued liabilities consisted of the following (in thousands):

 

 

 

September 30,
2015

 

December 31,
2014

 

Accrued compensation and related expenses

 

$

1,639 

 

$

1,439 

 

Accrued professional services

 

262 

 

1,030 

 

Accrued costs for construction-in-progress

 

29 

 

32 

 

Other

 

1,446 

 

736 

 

 

 

 

 

 

 

Total accrued liabilities

 

$

3,376 

 

$

3,237 

 

 

 

 

 

 

 

 

 

 

Fair value measurements (Tables)

 

The following tables set forth the fair value of the Company’s consolidated financial instruments that were measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014 (in thousands):

 

 

 

September 30, 2015

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

30,327 

 

$

 

$

 

$

30,327 

 

U.S. treasury notes

 

8,038 

 

 

 

8,038 

 

U.S. government agency securities

 

 

91,214 

 

 

91,214 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

38,365 

 

$

91,214 

 

$

 

$

129,579 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Financial assets:

 

 

 

 

 

 

 

 

 

Money market funds

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total financial assets

 

$

15,167 

 

$

 

$

 

$

15,167 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The carrying amount and the estimated fair value of the Company’s outstanding debt at September 30, 2015, and December 31, 2014, are as follows (in thousands):

 

 

 

September 30, 2015

 

December 31, 2014

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

Debt

 

$

4,788 

 

$

4,747 

 

$

 

$

 

 

Commitments and Contingencies (Tables)
Schedule of future minimum payments under operating lease

 

Future minimum payments under non-cancelable operating leases as of September 30, 2015 are as follows (in thousands):

 

Year ending December 31,

 

Amounts

 

2015 (remainder of year)

 

$

997 

 

2016

 

6,585 

 

2017

 

7,526 

 

2018

 

7,279 

 

2019

 

7,477 

 

Thereafter

 

50,878 

 

 

 

 

 

Total minimum lease payments

 

$

80,742 

 

 

 

 

 

 

 

Stock plans (Tables)

 

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

 

 

 

Shares
available
for grant

 

Stock
options
outstanding

 

Weighted-
average
exercise
price

 

Weighted-average
remaining
contractual life
(years)

 

Aggregate
intrinsic
value

 

Balances at December 31, 2014

 

276,805

 

1,923,332

 

$

4.37

 

8.90

 

$

15,946

 

Additional shares reserved

 

4,370,452

 

 

 

 

 

 

 

Options granted

 

(1,465,204

)

1,465,204

 

$

10.90

 

 

 

 

 

Options cancelled

 

176,831

 

(176,831

)

$

7.64

 

 

 

 

 

Options exercised

 

 

 

(139,232

)

$

1.96

 

 

 

 

 

Restricted stock units granted

 

(443,568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at September 30, 2015

 

2,915,316

 

3,072,473

 

$

7.41

 

8.89

 

$

5,376

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at September 30, 2015

 

 

 

646,578

 

$

2.65

 

7.41

 

$

3,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options vested and expected to vest at September 30, 2015

 

 

 

2,981,092

 

$

7.35

 

8.87

 

$

5,324

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following table summarizes stock-based compensation expense related to stock options for the three and nine months ended September 30, 2015 and 2014 included in the condensed consolidated statements of operations (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Cost of revenue

 

$

61 

 

$

23 

 

$

195 

 

$

47 

 

Research and development

 

373 

 

83 

 

823 

 

231 

 

Selling and marketing

 

144 

 

35 

 

403 

 

90 

 

General and administrative

 

184 

 

73 

 

416 

 

170 

 

 

 

 

 

 

 

 

 

 

 

Total stock-based compensation expense

 

$

762 

 

$

214 

 

$

1,837 

 

$

538 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Expected term (in years)

 

6.03 

 

 

6.03 

 

6.03 

 

Expected volatility

 

68.9 – 69.0

%

%

68.9 – 79.7

%

85.7 – 86.7

%

Risk-free interest rate

 

1.67 – 1.73

%

%

1.28 – 1.73

%

1.75 – 1.91

%

Dividend yield

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30,

 

 

 

2015

 

2014

 

Expected term (in years)

 

7.51 – 9.27

 

8.51 – 9.63

 

Expected volatility

 

68.9 – 90.27

%

85.27 

%

Risk-free interest rate

 

1.72 – 1.82

%

2.30 – 2.46

%

Dividend yield

 

 

 

 

Net loss per common share (Tables)

 

The following table presents the calculation of basic and diluted net loss per share for the three and nine months ended September 30, 2015 and 2014 (in thousands, except share and per share amounts):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net loss

 

$

(22,527

)

$

(12,615

)

$

(65,422

)

$

(32,187

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

31,852,796

 

885,999

 

26,962,821

 

819,704

 

 

 

 

 

 

 

 

 

 

 

Net loss per share, basic and diluted

 

$

(0.71

)

$

(14.24

)

$

(2.43

)

$

(39.27

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three and nine Months Ended
September 30,

 

 

 

2015

 

2014

 

Shares of common stock subject to outstanding options

 

3,072,473 

 

1,373,810 

 

Shares of common stock subject to outstanding restricted stock units

 

440,568 

 

 

Shares of common stock subject to conversion from convertible preferred stock

 

 

17,605,215 

 

Shares of common stock subject to unvested early exercise of outstanding options subject to repurchase

 

8,080 

 

30,157 

 

 

 

 

 

 

 

Total common stock equivalents

 

3,521,121 

 

19,009,182 

 

 

 

 

 

 

 

 

Geographic information (Tables)

 

Revenue by country is determined based on the billing address of the ordering physician. The following presents revenue by country for the three and nine months ended September 30, 2015 and 2014 (in thousands):

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2015

 

2014

 

2015

 

2014

 

United States

 

$

1,601 

 

$

227 

 

$

3,493 

 

$

467 

 

Canada

 

341 

 

81 

 

1,081 

 

156 

 

Singapore

 

113 

 

 

249 

 

 

Israel

 

44 

 

 

149 

 

89 

 

Rest of world

 

88 

 

 

245 

 

17 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

2,187 

 

$

310 

 

$

5,217 

 

$

729 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

September 30,
2015

 

December 31,
2014

 

United States

 

$

17,005 

 

$

13,858 

 

Chile

 

1,647 

 

1,814 

 

 

 

 

 

 

 

Total long-lived assets, net

 

$

18,652 

 

$

15,672 

 

 

 

 

 

 

 

 

 

 

Organization and description of business (Details) (USD $)
In Millions, except Share data, unless otherwise specified
0 Months Ended 9 Months Ended 1 Months Ended
Feb. 12, 2015
Sep. 30, 2015
segment
Dec. 31, 2014
Feb. 12, 2015
IPO
Jan. 31, 2015
Common Stock
Feb. 28, 2015
Common Stock
IPO
Feb. 12, 2015
Common Stock
IPO
Feb. 12, 2015
Preferred Stock
IPO
Feb. 28, 2015
Maximum
Common Stock
IPO
Number of operating segments
 
 
 
 
 
 
 
 
Reverse Stock Split, conversion ratio
 
 
 
 
0.1667 
 
 
 
 
Number of common stock shares issued
 
31,924,026 
944,581 
 
 
7,302,500 
 
 
 
Sale price on common stock (in dollars per share)
 
 
 
 
 
$ 16.00 
 
 
 
Net proceeds from issue of common stock
 
 
 
 
 
$ 105.7 
 
 
 
Number additional shares on common stock can be purchased by underwriters
 
 
 
 
 
 
 
 
952,500 
Number of common stock shares converted from preferred stock
 
 
 
 
 
23,521,889 
 
 
 
Shares authorized
420,000,000 
 
 
 
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