SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10‑K
(Mark One)
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20172022☐
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No.
001‑36847Invitae Corporation
(Exact name of the registrant as specified in its charter)
001-36847Delaware
| 27‑1701898
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Invitae Corporation |
| (Exact name of the registrant as specified in its charter) |
| | | | | |
| Delaware | 27-1701898 |
| (State or other jurisdiction of
incorporation or organization)
| (I.R.S. Employer
Identification No.)
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1400 16th Street, San Francisco, California 94103
(Address of principal executive offices, Zip Code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class:class | | Trading Symbol | | Name of each exchange on which registered: | registered |
Common Stock, $0.0001 par value $0.0001 per share | | The NVTA
| | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
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| Securities registered pursuant to Section 12(g) of the Act: None |
Indicate by check mark if the registrant is a well‑knownwell-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐No ☒ Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑TS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒No ☐Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑acceleratednon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”,filer,” “smaller reporting company” and “emerging growth company” in Rule 12b‑212b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | ☐
☒ | | Accelerated filer | ☒
☐ |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company)
| Smaller reporting company | ☐ |
| | | Emerging growth company | ☒
☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑212b-2 of the Exchange Act). Yes ☐No ☒ As of June 30,
2017,2022, the aggregate market value of common stock held by
non‑affiliatesnon-affiliates of the Registrant was approximately
$252.0$569.8 million, based on the closing price of the common stock as reported on The New York Stock Exchange for that date.
The number of shares of the registrant’s Common Stock outstanding as of
March 2, 2018February 24, 2023 was
53,705,786.246,235,501.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors and Section 16(a) Beneficial Ownership Reporting Compliance), 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K incorporate by reference information from the registrant’s proxy statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the registrant’s 20182023 Annual Meeting of Stockholders.
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i
Forward-Looking Statements
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;
•the impact of the COVID-19 pandemic on our business and the actions we have taken or may take in response thereto;
•our mission and strategy for our business, products and technology;
•the implementation of our business model and our success of our strategic realignment efforts;
•the expected costs and benefits of our strategic realignment, including anticipated annualized cash savings, and our ability to achieve positive operating cash flow;
•the expected benefits from and our ability to integrate our acquisitions;
•our ability to obtain regulatory approvals for our tests;
•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;
•our expectations regarding our platform and future offerings;
•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;
•our ability to obtain and maintain adequate reimbursement for our tests;
•regulatory, political and other developments in the United States and foreign countries;
•our ability to attract and retain key scientific, sales, engineering or management personnel;
•our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;
•the effects of litigation or investigations on our business;
•our ability to obtain funding for our operations and to service and repay our debt;
•our future financial performance;
•our beliefs regarding our future growth and the drivers of such growth;
•our expectations regarding environmental, social and governance matters;
•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;
•the impact of macroeconomic conditions, including inflation and recession, on our business; 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 Part I, Item 1A. "Risk Factors" in this Annual Report on Form 10-K. 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. 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.
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.
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties that could affect our ability to successfully implement our business strategy and affect our financial results. You should carefully consider all of the information in this Annual Report and, in particular, the following principal risks and all of the other specific factors described in Part I, Item 1A. "Risk Factors" in this Annual Report on Form 10-K before deciding whether to invest in our company.
•We expect to continue incurring significant losses, and we may not successfully execute our plan to achieve or sustain profitability.
•Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new tests and expand our operations.
•Our strategic realignment and the associated headcount reduction have and are expected to significantly change our business, result in significant expense, may not result in anticipated savings, and will disrupt our business.
•We rely on highly skilled personnel in a broad array of disciplines and, if we are unable to hire, retain or motivate these individuals, or maintain our corporate culture, we may not be able to maintain the quality of our services or grow effectively.
•We need to scale our infrastructure in advance of demand for our tests and other services, and our failure to generate sufficient demand for our tests and other services would have a negative impact on our business and our ability to attain profitability.
•The global macroeconomic environment could negatively impact our business, our financial position and our results of operations.
•We face risks related to health epidemics, including the ongoing COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.
•If third-party payers, including managed care organizations, private health insurers and government health plans, do not provide adequate reimbursement for our tests or we are unable to comply with their requirements for reimbursement, our commercial success could be negatively affected.
•We face intense competition, which is likely to intensify further as existing competitors devote additional resources to, and new participants enter, the markets in which we operate. If we cannot compete successfully, we may be unable to increase our revenue or achieve and sustain profitability.
•The market for patient data software is competitive, and our business will be adversely affected if we are unable to successfully compete.
•Security breaches, privacy issues, loss of data and other incidents could compromise sensitive or personal information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
•If we are not able to continue to generate substantial demand for our tests, our commercial success will be negatively affected.
•Our success will depend on our ability to use rapidly changing genetic data to interpret test results accurately and consistently, and our failure to do so would have an adverse effect on our operating results and business, harm our reputation and could result in substantial liabilities that exceed our resources.
•Impairment in the value of our goodwill or other intangible assets has and may in the future have a material adverse effect on our operating results and financial condition.
•We have a large amount of debt, servicing our debt requires a significant amount of cash, we may not have sufficient cash flow from our business to service our debt, and we may need to refinance all or a significant portion of our debt.
•If the U.S. Food and Drug Administration ("FDA") regulates the tests we currently offer as laboratory-developed tests ("LDTs") as medical devices, we could incur substantial costs and our business, financial condition and results of operations could be adversely affected.
•One of our competitors has alleged that our Anchored Multiplex PCR, or AMP, chemistry and products using AMP are infringing on its intellectual property, and we may be required to redesign the technology, obtain a license, cease using the AMP chemistry altogether and/or pay significant damages, among other consequences, any of which would have a material adverse effect on our business as well as our financial condition and results of operations.
PART I
ITEM 1.
Business.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;
strategic plans for our business, products and technology, including our ability to expand our assay and develop new assays 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, including cost-savings and synergies, from 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 assay 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;
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 developmentsInvitae is 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 rightsbusiness of others;
our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;
our ability to obtain funding for our operations and the growth of our business;
our financial performance;
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.
2
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 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 corporations and organizations in this report.
Overview
Combiningdelivering genetic testing services, digital health solutions and health data services that support a lifetime of patient care throughout life’s journey – from family planning, to proactiveand improved outcomes. We offer genetic testing across multiple clinical areas, including hereditary cancer, precision oncology, women's health, screening, to inherited disease diagnosis – with a unique, rapidly expanding network of patients, healthcare providers, biopharmarare diseases and advocacy partners,pharmacogenomics. Invitae is capturing the broad potential of genetics and helping to expand its use across the healthcare continuum. Through the customapplies proprietary design, and application ofprocess automation, robotics and bioinformatics software solutions tailored to expand the complexityuse and impact of genetic information and achieve efficiencies in sample processing and complex variant interpretation, Invitae can apply its world-class clinical expertise toallowing medical interpretation at scale, simplifying thescale. The result is a new and simplified process offor obtaining and utilizingusing affordable, high-quality genetic information to inform critical healthcare decisions. We also utilize digital health solutions to improve ease-of-use and to deliver actionable information about risk, prevention, treatment, and monitoring. As of December 31, 2022, we have served over 3.6 million patients, and over 2.2 million of those patients have made their information available for data sharing. We believe the depth of our genetic data, along with our approach to combine genetic testing information with third-party patient data, produce an enriched dataset that could lead to valuable insights and benefits to the lives of patients and their families and to the healthcare ecosystem, including providers, biopharma partners, patient advocacy groups and more. Our access and scale enables genomic information to speed the discovery and development of new personalized medical therapies — all while making clinical genetic testing and new solutions available to billions of people.
By pioneering new ways of sharing,
understanding and
understandingapplying genetic information, Invitae is transforming the field of genetics
and the application of healthcare data from
a series of one-time, one-dimensional
testingqueries to
complex information management.We utilize an integrated portfolio of laboratory processes, software toolsa lifelong clinical dialogue with our genes.
Mission and
informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for clinicians and their patients.Mission
strategy
Invitae’s mission is to bring comprehensive genetic information into mainstream medical practice to improve the quality of healthcare for billions of people.
Our goal is to aggregate a majority of the world’s genetic information into a comprehensive network that enables sharing of data among network participants to improve healthcare and clinical outcomes.We were founded on four core principles:
•Patients should own and control their own genetic information;
•Healthcare professionals are fundamental in ordering and interpreting genetic information;
•Driving down the price of genetic information will increase its clinical and personal utility; and
•Genetic information is more valuable when shared.
Our strategy for long-term, profitable growth centers on seven 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:
Those key drivers include:
•Customer experience: We see customer experience for patients, providers, and partners as integral to our long-term growth strategy and as an under-utilized catalyst to move genetics into mainstream medicine. Our view is that providing great service and enabling "ease-of-use", such as efficient ordering, comprehensive choices, and reliable turnaround time, are especially important for physicians.
•Adoption: As we improve customer experience, we expect more physicians would be open and more willing to increase genetic information in their practice. This is particularly true in fostering adoption among non-genetic experts, who are often the first contact for patients in a health journey. This work will be in parallel with our efforts in producing research supporting guideline expansion and broader advocacy for the benefits of genetic testing.
•Attract partners: As we continue to gain adoption and expand our reach, our value proposition to potential partners should increase. These include patient advocacy groups, biopharma partners that utilize our data, testing, network, and services, as well as health systems that intend to implement comprehensive precision medicine.
•Insights and solutions: In parallel with bringing new tools and products to the market, our unique capability to combine phenotypic and genotypic data, through both our genetic testing and third-party patient data, we believe produces a rich dataset that is highly attractive to biopharma partners, patient advocacy groups and more. Our services allow our partners to be more precise and move faster with their efforts, such as identifying and recruiting patients, enabling Investigational New Drug (IND) filings, structuring clinical trials, and eventually bringing new therapies to market.
•Lower cost and higher reimbursement: As our network continues to scale, we expect to lower our costs and increase our margin, while continuing our pursuit of low prices to drive accessibility and affordability of genetic information. Our ability to sustainably lower our prices is also expected to be balanced by our success in improving reimbursements and cash collection. Through the generation of scientific evidence and proactive engagement with stakeholders, we intend to pursue better payment and additional coverage.
•Affordability and accessibility: As we progress, we can continue to drive down prices, yielding more affordability and accessibility of our products for more patients.
•More patients served: All of these efforts should compound upon each other, expanding our reach and increasing the value of each offering, ultimately serving more patients.
Ultimately, we anticipate more solutions to further improve customer experiences, which in turn feed more answers for patients, foster greater adoption, and bring on more partners to create a flywheel effect.
Business overview
We are focused on making comprehensive, high-quality
medical genetic information more accessible
than ever beforeand instrumental to the healthcare ecosystem and stakeholders, including patients, healthcare providers, payers, biopharma partners, patient advocacy groups and more. Medical genetics is central to health outcomes and we are working to bring it to the mainstream by
enhancing the customer experience, lowering
the cost of genetic testing, by creating a network of partnerscosts, removing barriers to
increaseadoption, and expanding insights and solutions. Ultimately, we expect the utility of
genetic information across the
healthcare continuum,accumulated data will compound, enabling improved individual and
ultimately managing that information on behalfpopulation health and advancing the benefits of
our customers.3
molecular medicine around the globe.
As
our market share grows,we grow, we expect that our business will
growexpand and evolve in three stages:
| 1)
| Genetictesting: making genetic testing more affordable and more accessible with fast turnaround time. We believe that there is a significant market opportunity for high volume, low cost genetic testing that can allow us to serve a large number of customers.
|
| 2)
| Genomenetwork:sharing genetic information on a global scale to advance science and medicine. We plan to help patients share their genetic information in a way that benefits them and us by acting as a permission-based broker on their behalf.
|
| 3)
| Genomemanagement:building a secure and trusted genome management infrastructure. By generating and storing large amounts of individualized genetic information for every patient sample, we believe we can create value over the course of disease or lifetime of a customer.
|
1)One patient, one test: 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:
The needs of our customers;
Motivating our employees to serve our customers; and
Our long-term stockholder value.
We believe 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.
Wefirst launched our first commercial offering in November 2013 with an offering of approximately 200 genes, growing the test menu over time to include more than 20,000 genes. In 2017,2022, we accessioned approximately 150,000 samplesprocessed billable volume of 1,290,000 units and generated revenue of approximately $68.2$516.3 million reflecting more than a 150%compared to 1,169,000 units and 170% increase over 2016$460.4 million 2021 billable volume and revenue, respectively. In 2017,
2)One patient, multiple insights: We utilize digital health solutions to deliver actionable information about risk, prevention, treatment, and monitoring. With integration, connectivity, and refined go-to-market strategies, we achieved a full-year gross profit of $18.1 million, comparedare shifting to a full-year gross lossscenario where each patient test provides many opportunities to deliver solutions — for them, for their families and for others in the ecosystem. Our comprehensive portfolio is expected to enable precision medicine, and provide multiple insights for patients as they engage with us across different stages in life and through different health needs. As of $2.8December 31,
2022, we have served over 3.6 million in 2016. In supportpatients, and information from over 2.2 million of our efforts to reduce cost per test, expand our test menu,those patients is available for data sharing.
3)Many patients, many solutions: Each patient engagement generates data and develop a scalable laboratory infrastructure,insights. Aggregating these into solutions for key stakeholders including patients, providers, policymakers, biopharma partners, advocacy groups and others is where we incurred research and development expensesexpect the next phase of $46.5 million, $44.6 million and $42.8 million in 2017, 2016, and 2015, respectively.Our rapid growth in diagnostic testing has accelerated the transition of our business from a traditional sample-by-sample, indication-by-indication, test-by-test market to what we believetransformation will become the most extensive, accurate and accessible network focused on utilization of genetics in personal healthcare. Invitae’s value proposition for customers is simple: Genetic information is more valuable when shared.
Our products today
occur. We are aiming to combine genetic information and clinical data into a seamless genome network to accelerate research, clinical trials and disease management.
We began by building out our initial offering in competitive and technically challenging clinical areas, including comprehensive panels for hundreds of hereditary conditions in cancer, cardiology, neurology, pediatric and rare diseases. In 2017, we expanded our platform of clinical testing services to include assays totaling over 20,000 genes, including our medical exome, and began offering tests that could be used for proactive health and wellness screening. We also established a leading position in family health genetic information services through the strategic acquisition of reproductive health testing capabilities. In August 2017, we acquired Good Start Genetics, Inc., a molecular diagnostics company focused on preimplantation and carrier screening for inherited disorders. Good Start was the first to bring next-generation sequencing to reproductive health with a suite of offerings including carrier screening and preimplantation embryo testing, which provides women, their partners and their clinicians with insightful and actionable information to promote successful pregnancies and help build healthy families. In November 2017, we completed our acquisition of CombiMatrix Corporation, a company which specializes in prenatal diagnosis, miscarriage analysis and pediatric developmental disorders. CombiMatrix’s services include advanced technologies, such as single nucleotide polymorphism chromosomal microarray analysis, next generation sequencing, and long-standing expertise handling a variety of technically challenging sample types.
4
With an established footprint, growing market share and breadth of service covering genetic testing needs across all stages of life, we are focusing our efforts on partnering with patients, family members, healthcare professionals, payers, industry professionals, researchers and clinical trial sponsorsthese stakeholders to advance the development and utility of our genome network.
In January 2017, we acquired AltaVoice, formerly PatientCrossroads,platform. Our real-world data is patient-owned and controlled; and our goal is to enable and build a patient-centered data company with a global platformand patient network through which individuals and partners can access, aggregate, and customize genetic information to further research and create better outcomes. We expect this to allow for collecting, curating, coordinating,the collective insights from many patients to provide multiple solutions for multiple use cases and delivering safeguarded data from patients and clinicians through Patient Insights Networks, also known as PINs, which enable organizations to more efficiently build engaged, research-ready patient communities, recruit for trials, educate, and track patient outcomes.
This acquisition was subsequently complemented by the acquisition of Ommdom, Inc. in June 2017, the provider of a highly efficient, end-to-end platform for collecting and managing genetic family histories, CancerGene Connect.
CancerGene Connect was developed by clinicians for clinicians to streamline the collection, analysis, and management of patient family history information. The platform uses a cloud-based, mobile friendly patient interface to gather family history information prior to a clinician appointment. Once completed, powerful analysis tools using the latest research on hereditary risk analyze a patient’s predisposition to disease and provide actionable analysis to inform therapeutic decisions, such as genetic testing or treatment approaches. In addition, the platform provides clinicians with the ability to look beyond the individual to understand trends across all their patients.
customer types.
In addition to investing in informatics solutions and infrastructure to support our data and patient network development, we have begun partnering withbeen expanding our strategic partnerships, which as of December 31, 2022 numbered more than 100 leading biopharmaceutical companies including Alnylam Pharmaceuticals, Inc., Ariad Pharmaceuticals, Inc. (a subsidiary of Takeda Pharmaceutical Company Limited), AstraZeneca and Merck & Co., Inc., BioMarin Pharmaceutical Inc., Blueprint Medicines Corporation, Jazz Pharmaceuticals plc, MyoKardia, Inc., Parion Sciences, Inc. and others to supportsupporting improved patient diagnosis, clinical trial recruitment and other research-related initiatives. Our
In addition, our biopharmaceutical industry partnerships are complemented by partnerships with leading health systems, executive health programs and leading research institutions, including
The Christ Hospital Health Network, the Cleveland Clinic, the Geisinger Health System, the Mayo Clinic, Memorial Sloan Kettering Cancer Center, MedCan,
NorthShore University HealthSystem, and Stanford Health Care, among others.
Our goal is to build a network through which individuals can access, aggregate and customize information based on their genotype and phenotype and participate in new research, clinical trials, treatment planning or other related purposes that may benefit the individual and/or their clinician. Individuals can also decide to share information if they feel it will benefit them or will contribute more broadly to furthering knowledge about their conditions.
Performance statement
We believe the value of the network we are building can best be expressed as the total number of individuals multiplied by the amount of information per individual multiplied by the number of connections available through the network. Through December 31, 2017, Invitae's ongoing testing business has served more than 220,000 individuals, can generate more than 20,000 potential data points per person and connects over 200,000 individuals through patient insight networks and commercial partners.
Our competitors include companies that offer molecular genetic testing and consulting services, including specialty and reference laboratories that offer traditional singlesingle- and multi gene tests.multi-gene tests and biopharmaceutical companies. Principal competitors include companies such as Ambry Genetics Corporation (“Ambry Genetics”), a subsidiary of Konica MinoltaRealm IDx, Inc. (“Realm IDx”); Athena Diagnostics, a subsidiaryInc. (“Athena Diagnostics”) and Blueprint Genetics, subsidiaries of Quest Diagnostics Incorporated; Baylor Genetics; BlueprintIncorporated (“Quest Diagnostics”); Baylor-Miraca Genetics Laboratories LLC (“Baylor-Miraca Genetics Laboratories”); Caris Life Sciences, Inc. ("Caris Life Sciences"); Centogene AC;AG; Color Genomics,Health, Inc. (“Color Health”); Connective Tissue Gene Test LLC; Cooper Surgical; Counsyl, Inc.; Eurofins Scientific; GeneDx,LLC (“Connective Tissue Gene Test”), a subsidiary of OPKOHealth Network Laboratories, L.P. (“Health Network Laboratories”); Cooper Surgical, Inc. (“Cooper Surgical”); Emory Genetics Laboratory, a subsidiary of Eurofins Scientific; Exact Sciences Corporation (“Exact Sciences”); Foundation Medicine, Inc. ("Foundation Medicine"), a subsidiary of Roche Holding AG; Fulgent Genetics, Inc. (“Fulgent Genetics”); GeneDx Holdings Corp (“GeneDx Holdings”); Guardant Health, Inc. ("Guardant Health"); Integrated Genetics, Sequenom Inc. (“Sequenom”), Correlagen Diagnostics, Inc. (“Correlagen Diagnositcs”), and MNG Laboratories, LLC; Myriad Genetics, Inc.;subsidiaries of Laboratory Corporation of America Holdings;Holdings ("Labcorp"); Myriad Genetics, Inc. (“Myriad Genetics”); Natera, Inc. ("Natera"); PreventionGenetics, LLC; Quest Diagnostics Incorporated;NeoGenomics, Inc. (“NeoGenomics”); Perkin Elmer, Inc. (“Perkin Elmer”); and Progenity,Tempus Labs, Inc. (“Tempus Labs”) as well as other commercial and academic labs.laboratories.
In addition, there are a large number of new entrants into the market for genetic information ranging from informatics and analysis pipeline developers to focused, integrated providers of genetic tools and services for health and wellness, including Illumina, Inc. ("Illumina") which is also one of our suppliers. In addition to the companies that currently offer traditional genetic testing services and research centers, other established and emerging healthcare, information technology and service companies may commercialize competitive products including informatics, analysis, integrated genetic tools and services for health and wellness.
5
We believe the principal competitive factors in our market are:
breadth and depth of content;
•quality;
•accessibility of results;
•turnaround time of testing results;
•price and quality of tests;
•coverage and reimbursement arrangements with third‑partythird-party payers;
•ease-of-use and convenience of testing;
•brand recognition of test provider;
•additional value‑addedvalue-added services and informatics tools;
customer•client service; and
utility•quality of website content.
We believe that we compare favorably with our competitors on the basis of these factors. However,
many of ourcertain competitors and potential competitors have longer operating histories, larger customer bases, greater brand recognition and market penetration
in certain testing categories, substantially greater financial, technological and research and development resources,
and selling and marketing capabilities,
andand/or more experience dealing with
third partythird-party payers. As a result, they may be able to respond more quickly to changes in customer requirements, devote greater resources to the development, promotion and sale of their tests, or sell their tests at prices designed to win significant levels of market share. We may
not be able to compete
less effectively against these
organizations.Regulation
Reimbursement
In September 2014, the American Medical Association, or AMA, published new Current Procedural Terminology, or CPT, codes for genomic sequencing procedures that are effective for datesorganizations in some areas of service on or after January 1, 2015. These include genomic sequencing procedure codes for panels, including hereditary colon cancer syndromes, targeted genomic sequence analysis panels for solid organ neoplasms, targeted genomic sequence analysis panels for hematolymphoid neoplasm or disorders, whole exome analyses, and whole genome analyses. In a final determination under the Medicare Clinical Laboratory Fee Schedule, or CLFS, published in November 2014, the Centers for Medicare and Medicaid Services, or CMS, set the 2015 payment rate for these codes by the gap‑fill process. testing.
Regulation
Reimbursement
Under
the gap‑fill process, local Medicare Administrative Contractors, or MACs, establish rates for those codes that each MAC believes meet the criteria for Medicare coverage and considering laboratory charges and discounts to charges, resources, amounts paid by other payers for the tests, and amounts paid by the MAC for similar tests. In 2015, gap-filled payment rates were established for some, but not all, of the above‑referenced codes. For those codes for which local gap‑filled rates were established in 2015, a national limitation amount for Medicare was established for 2016. Codes for which local gap‑filled rates were not established in 2015 were priced by the local MACs in 2016 insofar as an individual MAC determined that such codes should be covered. Where available, the national limitation amount serves as a cap on the Medicare and Medicaid payment rates for a test procedure. If we are required to report our tests under these codes, there can be no guarantees that Medicare (or its contractors) has or will set adequate reimbursement rates for these codes.The AMA also released several CPT codes effective January 2016 that may be appropriate to report certain of our tests. In a November 2015 final determination, CMS set the calendar year 2016 CLFS payment rate for these new codes by the gap-fill process. CMS and the local MACs went through the gap-fill process in 2016 and announced final gap-filled rates for 2017 on September 30, 2016. The calendar year 2017 national limitation amounts for certain codes were significantly less than the rates at which we have historically offered our tests.
In April 2014, Congress passed the Protecting Access to Medicare Act of 2014 (as amended), or PAMA, which included substantial changes to the way in which clinical laboratory services will be paid under Medicare. Under theand its implementing regulations, implementing PAMA, laboratories that realize at least $12,500 in Medicare Clinical Laboratory Fee Schedule, or CLFS, revenues during the six monthsix-month reporting period and that receive the majority of their Medicare revenue from payments made under the
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CLFS or the Physician Fee Schedule must report, beginning in 2017, and then in 2024 and every three years thereafter (or annually for “advanced diagnostic laboratory tests”), private payer payment rates and volumes for their tests. We do not believe that our tests meet the current definition ofhave advanced diagnostic laboratory test status for our tests, and therefore believe we are required to report private payer rates for our tests on an every three years basis.three-years basis starting next in 2024. Centers for Medicare & Medicaid Services, or CMS, uses the rates and volumes reported by laboratories to develop Medicare payment rates for the tests equal to the volume‑weighted median of the private payer payment rates for the tests. Laboratories that fail to report the required payment information may be subject to substantial civil money penalties.
As set forth under the regulations implementing PAMA, for tests furnished on or after
Since January 1, 2018, Medicare payments for clinical diagnostic laboratory tests
will behave been paid based upon these reported private payer rates. For clinical diagnostic laboratory tests that are assigned a new or substantially revised code, initial payment rates for clinical diagnostic laboratory tests that are not advanced diagnostic laboratory tests will be assigned by the cross‑walk or gap‑fill methodology, as under prior law. Initial payment rates for new advanced diagnostic laboratory tests will be based on the actual list charge for the laboratory test.
The payment rates calculated under PAMA went into effect starting January 1, 2018. Reductions
Where applicable, reductions to payment rates resulting from the new methodology
arewere limited to 10% per test per year in each of the years 2018 through
2020. Rates were held at 2020
levels during 2021 and
2022 and will continue to be held at such levels in 2023. Then, where applicable based upon median private payer rates reported in 2017 or 2024, payment rates may be reduced by up to 15% per test per year in each of
20212024 through
2023.2026 (with a second round of private payer rate reporting in 2024 to establish rates for 2025 through 2027).
PAMA codified Medicare coverage rules for laboratory tests by requiring any local coverage determination to be made following the local coverage determination process. PAMA also authorizes CMS to consolidate coverage policies for clinical laboratory tests among one to four
laboratory‑specificlaboratory-specific Medicare Administrative Contractors, or MACs. These same contractors may also be designated to process claims if CMS determines that such a model is appropriate. It is unclear whether CMS will proceed with contractor consolidation under this authorization.
PAMA also authorized the adoption of new, temporary billing codes and/or unique test identifiers for
FDA‑clearedFDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The American Medical Association has created a new section of billing codes, Proprietary Laboratory Analyses,
or PLAs, to facilitate implementation of this section of PAMA.
At this time, it is unclear how theseThese codes
wouldmay apply to
one or more of our
tests.tests if we apply for PLA coding.
CMS maintains a national coverage determination, or NCD, for next generation sequencing, or NGS, tests for somatic (acquired) and germline (inherited) cancer testing. For somatic cancer testing, the NCD establishes national Medicare coverage for FDA-approved or FDA-cleared NGS-based companion diagnostic assays that report results using report templates that specify treatment options when offered for their FDA-approved or FDA-cleared use(s), ordered by the patient’s treating physician for Medicare beneficiaries with advanced cancer (recurrent, relapsed, refractory, metastatic, or advanced stage III or IV cancer) who have not have previously been tested with the same test using NGS for the same cancer genetic content, and have decided to seek further cancer treatment (e.g., therapeutic chemotherapy). The NCD also gives MACs the authority to establish local coverage for NGS-based somatic cancer assays that are not FDA-approved or FDA-cleared companion diagnostics when offered to patients meeting the above-referenced criteria. It appears that NGS-based somatic cancer tests provided for
patients with cancer that do not meet the above-referenced criteria, e.g., patients with earlier stage cancers, are currently nationally non-covered under the NCD.
The NCD also establishes national Medicare coverage for FDA-approved or FDA-cleared NGS-based germline tests that report results using report templates that specify treatment options when ordered by the patient’s treating physician for patients with ovarian or breast cancer, a clinical indication for germline testing for hereditary breast or ovarian cancer, and a risk factor for germline breast or ovarian cancer, provided the patient has not previously been tested with the same germline test using NGS for the same germline genetic content. The NCD also gives MACs the authority to establish local coverage for NGS-based germline tests for ovarian or breast cancer that are not FDA-approved or FDA-cleared, as well as for NGS-based tests for any other cancer diagnosis (regardless of the test’s FDA regulatory status) when offered to patients meeting the above-referenced criteria for germline testing. Since we already have local coverage for our germline tests for ovarian and breast cancer, we believe that the NCD will not have a material impact on which of our tests will be reimbursable by CMS for Medicare patients.
Clinical Laboratory Improvement Amendments of 1988, or CLIA
Our clinical reference laboratories in California,
North Carolina and
MassachusettsNew Jersey are required to hold certain federal certificates to conduct our business. Under CLIA, we are required to hold certificates applicable to the type of laboratory examinations we perform and to comply with standards covering personnel, facilities administration, inspections, quality control, quality assurance and proficiency testing.
We have current certifications under CLIA to perform testing at our laboratory locations in
San Francisco, California,
Irvine, CaliforniaNorth Carolina, and
Cambridge, Massachusetts.New Jersey. To renew our CLIA certifications, we are subject to survey and inspection every two years to assess compliance with program standards. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratories. The regulatory and compliance standards applicable to the testing we perform may change over time, and any such changes could have a material effect on our business.
If our clinical reference laboratories are out of compliance with CLIA requirements, we may be subject to sanctions such as suspension, limitation or revocation of our CLIA certificates, as well as directed plan of correction, state on‑site monitoring,
significant civil money penalties, civil injunctive suit or criminal penalties. We must maintain CLIA compliance and certifications to be eligible to bill for diagnostic services provided to Medicare and Medicaid beneficiaries. If we were to be found out of compliance with CLIA requirements and subjected to sanction, our business could be harmed.
State laboratory licensure
requirements
We are required to maintain in-state licenses to conduct testing in California,
New Jersey and
Massachusetts.Washington. California,
New Jersey and Washington laws establish standards for day‑to‑day operations of our laboratories in
San Francisco and Irvine, and Massachusettsthose states. Such laws
establish standards applicable to our laboratory in Cambridge. California and Massachusetts laws, respectively, mandate proficiency testing, which involves testing of specimens that have been specifically prepared for the laboratories. If our clinical reference laboratories are out of compliance with
Californiaapplicable standards, the
California Department of Health Services, or DHS,appropriate state agency may suspend, restrict or revoke our licenses to operate our clinical reference laboratories, assess substantial civil money penalties, or impose specific corrective action plans.
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Similarly, if our Cambridge laboratory does not meet Massachusetts standards, the Massachusetts Department of Public Health, or DPH, may suspend, modify, or revoke our license to operate such laboratory, assess fines, or issue an order requiring certain corrective action. Any such actions could materially affect our business. We maintain current licenses in good standing with DHS and DPH.standing. However, we cannot provide assurance that DHS and/or DPHstate regulators will at all times in the future find us to be in compliance with all such laws.
Several states require the licensure of out‑of‑state laboratories that accept specimens from those
states and/or receive specimens from laboratories in those states. Our
laboratories holdCalifornia laboratory holds the required out‑of‑state laboratory licenses for
Florida, Maryland, New York, Pennsylvania,
and Rhode
Island,Island. Our Washington, North Carolina and
our CambridgeNew Jersey laboratories hold the required out-of-state laboratory
maintains an our-of-state laboratory license from California.licenses in California, Maryland, New York, Pennsylvania, and Rhode Island.
In addition to having laboratory licenses in New York, our clinical reference laboratories
in California and in Massachusetts are also required to obtain approval on a test‑specific basis
for the tests they run as LDTs by the New York State Department of Health, or NYDOH, before specific testing is performed on samples from New York.
Other states may adopt similar licensure requirements in the future, which may require us to modify, delay or stop our operations in such jurisdictions. Complying with licensure requirements in new jurisdictions may be expensive, time‑consuming, and subject us to significant and unanticipated delays. If we identify any other state with such requirements, or if we are contacted by any other state advising us of such requirements, we intend to follow instructions from the state regulators as to how we should comply with such requirements.
We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations such as restrictions on the transport of human blood
or saliva necessary for us to perform our tests that may limit our ability to make our tests available outside of the United States.
U.S. Food and Drug Administration, or FDA
Federal oversight of laboratory developed tests
We provide
many of our tests as laboratory‑developed tests, or LDTs. CMS and certain state agencies regulate the performance of LDTs (as authorized by CLIA and state law, respectively).
Historically, the U.S. Food and Drug Administration, or FDA, has exercised enforcement discretion with respect to most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality systemssystem regulations, premarket clearance or premarket approval, and post‑market controls). In recent years, however, the FDA has stated it intends to end its policy of general enforcement discretion and regulate certain LDTs as medical devices. To this end, on October 3,For example, in 2014, the FDA issued two draft guidance documents entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)”, respectively, that set forth a proposed risk‑based regulatory framework that would apply varying levels of FDA oversight to LDTs. TheThese documents have not been finalized to date.
Subsequently, in August 2020, the U.S. Department of Health and Human Services – the parent agency for FDA has indicated– announced that it doesthe FDA “will not intendrequire premarket review of LDTs absent notice-and-comment rulemaking, as opposed to modify its policy of enforcement discretion until the draftthrough guidance documents, are finalized. Subsequently, on January 13, 2017,compliance manuals, website statements, or other informal issuances.” In November 2021, the FDA published a “discussion paper” in which the agency outlined a substantially revised “possible approach” to the oversight of LDTs. The discussion paper explicitly states thatBiden Administration rescinded this policy.
At this time, it is
not a final version of the 2014 draft guidance and that it does not represent the agency’s “formal position”; rather, the discussion paper represents the latest iteration of the agency’s thinking on LDTs, which the agency posted to “spur further dialogue”. Notably, in the discussion paper, the agency expressed its willingness to consider “grandfathering” currently marketed LDTs from most or all FDA regulatory requirements. It is unclear
at this time when, or if, the FDA will finalize its plans to end enforcement discretion
(e.g., via notice and comment rulemaking or otherwise), and even then, the new regulatory requirements are expected to be phased‑in over time. Nevertheless, the FDA may
decideattempt to regulate certain LDTs on a case‑by‑case basis at any time.
Legislative proposals addressing the FDA’s oversight of LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time‑to‑time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time.
If the FDA ultimately regulates certain LDTs,
as medical devices, whether via final guidance, final regulation, or as instructed by Congress, our tests may be subject to certain additional regulatory requirements. Complying with the FDA’s requirements
for medical devices can be expensive, time‑consuming, and subject us to significant or unanticipated delays. Insofar as we may be required to obtain premarket clearance or approval to perform or continue performing an LDT, we cannot assure you that we will be able to obtain such authorization. Even if we
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obtain regulatory clearance or approval where required, such authorization may not be for the intended uses that we believe are commercially attractive or are critical to the commercial success of our tests. As a result, the application of the FDA’s medical device requirements to our tests could materially and adversely affect our business, financial condition, and results of operations.
Notwithstanding the FDA’s current position with respect to oversight of our
tests,LDTs, we may voluntarily decide to pursue FDA pre‑market review for our current
testsLDTs and/or
testsLDTs we may offer in the future if we determine that doing so would be appropriate from a strategic perspective – e.g., if CMS indicated that it no longer intended to cover tests offered as LDTs.
In November 2017, CMS published a draft national coverage determination, or NCD, for next generation sequencing, or NGS, tests for patients with advanced cancer, under which CMS proposed to provide full coverage for FDA-approved tests performed in patients that fall within the test’s FDA-approved labeling, but proposed significant limits on coverage for NGS-based tests offered as LDTs. It is unclear whether CMS will finalize the NCD as proposed. While we do not believe the draft NCD was intended to apply to our tests, it could arguably be interpreted to apply to such tests. If CMS issues a final NCD that applies to our tests and is substantively similar to the draft NCD, our current and future tests may effectively be non-covered under Medicare unless and until we obtain FDA clearance or approval (as applicable).Failure to comply with applicable FDA regulatory requirements may trigger a range of enforcement actions by the FDA including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations, and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.
Medical device regulatory framework
Pursuant to its authority under the Federal Food, Drug, and Cosmetic Act, or FDCA, the FDA has jurisdiction over medical devices, which are defined to include, among other things, in vitro diagnostics, or IVDs. The FDA regulates the research, design, development, pre-clinical and clinical testing, manufacturing, safety, effectiveness, packaging, labeling, storage, recordkeeping, pre-market clearance or approval, adverse event reporting, marketing, promotion, sales, distribution and import and export of medical devices. Specifically, for the tests we may offer in the future that FDA regulates as a device, and if the FDA begins to actively regulate LDTs, then for those tests as well, each new or significantly modified test we seek to commercially distribute in the United States could require either a premarket notification to the FDA requesting permission for commercial distribution under Section 510(k) of the FDCA, also referred to as a 510(k) clearance, or approval from the FDA of a premarket approval, or PMA,
application, unless an exemption applies. Both the 510(k) clearance and PMA processes can be resource intensive, expensive, and lengthy, and require payment of significant user fees.
Device classification
Under the FDCA, medical devices are classified into one of three classes (Class I, Class II or Class III) depending on the degree of risk associated with each medical device and the extent of control needed to provide reasonable assurances with respect to safety and effectiveness.
Class I includes devices with the lowest risk to the patient and are those for which safety and effectiveness can be reasonably assured by adherence to General Controls for Medical Devices, which require compliance with the applicable portions of the FDA’s Quality System Regulation, facility registration and product listing, reporting of adverse events and malfunctions, and appropriate, truthful and non-misleading labeling and promotional materials. While some Class I devices also require premarket clearance by the FDA through the 510(k) premarket notification process described below, most Class I products are exempt from the premarket notification requirements.
Class II devices are those that are subject to the General Controls, as well as Special Controls as deemed necessary by the FDA to ensure the safety and effectiveness of the device. These Special Controls can include performance standards, patient registries, FDA guidance documents and post-market surveillance. Most Class II devices are subject to premarket review by the FDA. Premarket review by the FDA for Class II devices is accomplished through the 510(k) premarket notification process.
Class III devices include devices deemed by the FDA to pose the greatest risk, such as life-supporting, life-sustaining devices, or implantable devices, in addition to those deemed novel and not substantially equivalent to a legally-marketed predicate device. The safety and effectiveness of Class III devices cannot be reasonably assured solely by the General Controls and Special Controls described above. Therefore, these devices are subject to the PMA process, which is generally more costly and time-consuming than the 510(k) process. Through the PMA process, the applicant must submit data and information demonstrating reasonable assurance of the safety and effectiveness of the device for its intended use to the FDA’s satisfaction. Accordingly, a PMA typically includes, but is not limited to, extensive technical information regarding device design and development, pre-clinical and clinical trial data, manufacturing information, labeling and financial disclosure information for the clinical investigators in device studies. The PMA application must provide valid scientific evidence that demonstrates to the FDA’s satisfaction a reasonable assurance of the safety and effectiveness of the device for its intended use.
The 510(k) clearance process
Under the 510(k) clearance process, the manufacturer must submit to the FDA a premarket notification, demonstrating that the device is “substantially equivalent” to a legally marketed predicate device. A predicate device is a legally marketed device that is not subject to a PMA, i.e., a device that was legally marketed prior to May 28, 1976 (pre-amendments device) and for which a PMA is not required, a device that has been reclassified from Class III to Class II or I, or a device that was previously found substantially equivalent through the 510(k) process. To be “substantially equivalent,” the proposed device must have the same intended use as the predicate device, and either have the same technological characteristics as the predicate device or have different technological characteristics, but the information submitted demonstrates that the device is as safe and effective and does not raise different questions of safety or effectiveness than the predicate device. Clinical data is sometimes required to support substantial equivalence.
After a 510(k) premarket notification is submitted, the FDA determines whether to accept it for substantive review. If it lacks necessary information for substantive review, the FDA will refuse to accept the 510(k) premarket notification. If it is accepted for filing, the FDA begins a substantive review. By statute, the FDA is required to complete its review of a 510(k) notification within 90 days of receiving the 510(k) notification. As a practical matter, clearance often takes longer, and clearance is never assured. Although many 510(k) premarket notifications are cleared without clinical data, the FDA may require further information, including data from samples collected in a clinical setting, to make a determination regarding substantial equivalence, which may significantly prolong the review process. If the FDA agrees that the device is substantially equivalent, it will grant clearance to commercially market the device.
If the FDA determines that the device is not “substantially equivalent” to a predicate device, or if the device is automatically classified into Class III because there is no available predicate device, the device sponsor must then fulfill the much more rigorous premarketing requirements of the PMA approval process, or seek reclassification of the device through the De Novo classification process. The De Novo classification process is an alternate pathway to classify medical devices that are automatically classified into Class III but which are low to moderate risk. A
manufacturer can submit a petition for direct de novo review if the manufacturer is unable to identify an appropriate predicate device and the new device or new use of the device presents moderate or low risk. De Novo classification may also be available after receipt of a “not substantially equivalent” letter following submission of a 510(k) to FDA.
After a device receives 510(k) clearance, any modification that could significantly affect its safety or effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k) clearance or, depending on the modification, could require a PMA application. The FDA requires each manufacturer to determine whether the proposed change requires a new submission in the first instance, but the FDA can review any such decision and disagree with a manufacturer’s determination. Many minor modifications are accomplished by an internal letter-to-file in which the manufacturer documents its reasoning for why a change does not require premarket submission to the FDA. The letter-to-file is in lieu of submitting a new 510(k) to obtain clearance for such change. The FDA can always review these letters-to-file in an inspection. If the FDA disagrees with a manufacturer’s determination regarding whether a new premarket submission is required for the modification of an existing 510(k)-cleared device, the FDA can require the manufacturer to cease marketing and/or recall the modified device until 510(k) clearance or approval of a PMA application is obtained. In addition, in November 2013,these circumstances, the FDA issued final guidance regardingcan impose significant regulatory fines or penalties for failure to submit the distributionrequisite application(s).
The PMA approval process
Following receipt of products labeleda PMA application, the FDA conducts an administrative review to determine whether the application is sufficiently complete to permit a substantive review. If it is not, the agency will refuse to file the PMA. If it is, the FDA will accept the application for research use only. Certainfiling and begin the review. The FDA has 180 days to review a filed PMA application, although the review of an application more often occurs over a significantly longer period of time. During this review period, the FDA may request additional information or clarification of information already provided, and the FDA may issue a major deficiency letter to the applicant, requesting the applicant’s response to deficiencies communicated by the FDA.
Before approving or denying a PMA, an FDA advisory committee may review the PMA at a public meeting and provide the FDA with the committee’s recommendation on whether the FDA should approve the submission, approve it with specific conditions, or not approve it. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Prior to approval of a PMA, the FDA may conduct inspections of the reagentsclinical trial data and clinical trial sites, as well as inspections of the manufacturing facility and processes. Overall, the FDA review of a PMA application generally takes between one and three years, but may take significantly longer. The FDA can delay, limit or deny approval of a PMA application for many reasons, including:
•the device may not be shown safe or effective to the FDA’s satisfaction;
•the data from pre-clinical studies and/or clinical trials may be found unreliable or insufficient to support approval;
•the manufacturing process or facilities may not meet applicable requirements; and
•changes in FDA clearance or approval policies or adoption of new regulations may require additional data.
If the FDA evaluation of a PMA is favorable, the FDA will issue either an approval order, or an approvable letter, the latter of which usually contains a number of conditions that must be met in order to secure final approval of the PMA. When and if those conditions have been fulfilled to the satisfaction of the FDA, the agency will issue a PMA approval order authorizing commercial marketing of the device, subject to the conditions of approval and the limitations established in the approval letter. If the FDA’s evaluation of a PMA application or manufacturing facility is not favorable, the FDA will deny approval of the PMA or issue a not approvable letter. The FDA also may determine that additional tests or clinical trials are necessary, in which case the PMA approval may be delayed for several months or years while the trials are conducted and data are submitted in an amendment to the PMA, or the PMA is withdrawn and resubmitted when the data are available. The PMA process can be expensive, uncertain and lengthy and a number of devices for which the FDA approval has been sought by other companies have never been approved by the FDA for marketing.
New PMA applications or PMA supplements are required for modification to the manufacturing process, equipment or facility, quality control procedures, sterilization, packaging, expiration date, labeling, device specifications, ingredients, materials or design of a device that has been approved through the PMA process. PMA supplements often require submission of the same type of information as an initial PMA application, except that the supplement is limited to information needed to support any changes from the device covered by the approved PMA
application and may or may not require as extensive technical or clinical data or the convening of an advisory panel, depending on the nature of the proposed change.
In approving a PMA application, as a condition of approval, the FDA may also require some form of post- approval study or post-market surveillance, whereby the applicant conducts a follow-up study or follows certain patient groups for a number of years and makes periodic reports to the FDA on the clinical status of those patients when necessary to protect the public health or to provide additional or longer term safety and effectiveness data for the device. The FDA may also approve a PMA application with other post-approval conditions intended to ensure the safety and effectiveness of the device, such as, among other things, restrictions on labeling, promotion, sale, distribution and use. New PMA applications or PMA supplements may also be required for modifications to any approved diagnostic tests, including modifications to manufacturing processes, device labeling and device design, based on the findings of post-approval studies.
The investigational device process
In the United States, absent certain exceptions, human clinical trials intended to support the safety and effectiveness of a medical device to obtain FDA clearance or approval require an investigational device exemption, or IDE, application. Investigations that meet certain requirements – i.e., involve tests that are labeled investigational use only (IUO), are noninvasive, do not require an invasive sampling procedure that presents significant risk, do not by design or intention introduce energy into a subject, and are not used as a diagnostic procedure without confirmation of the diagnosis by another, medically established product or procedure — are exempt from the IDE requirement. Some types of studies deemed to present “non-significant risk” are deemed to have an approved IDE — without affirmative submission of an IDE application to the FDA — once certain requirements are addressed and Institutional Review Board, or IRB, approval is obtained. If the device presents a “significant risk” to human health, as defined by the FDA, the sponsor must submit an IDE application to the FDA and obtain IDE approval prior to commencing the human clinical trials.
Where applicable, the IDE application must be supported by appropriate data, such as animal and laboratory testing results, showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. Generally, clinical trials for a significant risk device may begin once the IDE application is approved by the FDA and the study protocol and informed consent are approved by appropriate IRBs at the clinical trial sites. Submission of an IDE will not necessarily result in the ability to commence clinical trials, and although the FDA’s approval of an IDE allows clinical testing to go forward for a specified number of subjects, it does not bind the FDA to accept the results of the trial as sufficient to prove the product’s safety and efficacy, even if the trial meets its intended success criteria.
Such clinical trials must be conducted in accordance with the FDA’s IDE regulations that govern investigational device labeling, prohibit promotion and specify an array of recordkeeping, reporting and monitoring responsibilities of study sponsors and study investigators. Clinical trials must further comply with good clinical practice regulations for IRB approval and for informed consent and other human subject protections. Required records and reports are subject to inspection by the FDA for any clinical trials subject to FDA oversight. The results of clinical testing may be unfavorable, or, even if the intended safety and efficacy success criteria are achieved, may not be considered sufficient for the FDA to grant marketing approval or clearance of a product. The commencement or completion of any clinical trial may be delayed or halted, or be inadequate to support approval of a PMA application or clearance of a 510(k) premarket notification, for numerous reasons.
The Breakthrough Devices Program is a voluntary program intended to expedite the review, development, assessment and review of certain medical devices that provide for more effective treatment or diagnosis of life-threatening or irreversibly debilitating human diseases or conditions, provided the device also represents breakthrough technology, is one for which no approved or cleared treatment exists, offers significant advantages over existing approved or cleared alternatives, or is one whose availability is in the best interest of patients. All submissions for devices designated as Breakthrough Devices will receive priority review, meaning that the review of the submission is placed at the top of the appropriate review queue and receives additional review resources, as needed. Although Breakthrough Device designation or access to any other expedited program may expedite the development or approval process, it does not change the standards for approval. Access to an expedited program may also be withdrawn by the FDA if it believes that the designation is no longer supported by data from our clinical development program. Additionally, qualification for any expedited review procedure does not ensure that we will ultimately obtain regulatory clearance or approval for such product.
Post-market regulation
After a device is cleared or approved for marketing, numerous and pervasive regulatory requirements continue to apply. These include:
•establishment registration and device listing with the FDA;
•labeling regulations and FDA prohibitions against the promotion of investigational products, weor the promotion of “off-label” uses of cleared or approved products;
•medical device reporting regulations, which require that a manufacturer report to the FDA if a device it markets may have caused or contributed to a death or serious injury, or has malfunctioned and the device or a similar device that it markets would be likely to cause or contribute to a death or serious injury, if the malfunction were to recur;
•correction, removal and recall reporting regulations, which require that manufacturers report to the FDA field corrections and product recalls or removals if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health;
•the FDA’s recall authority, whereby the agency can order device manufacturers to recall from the market a product that is in violation of governing laws and regulations; and
•post-market surveillance activities and regulations, which apply when deemed by the FDA to be necessary to protect the public health or to provide additional safety and effectiveness data for the device.
Device manufacturing processes are required to comply with the applicable portions of the QSR, which cover the methods and the facilities and controls for the design, manufacture, testing, production, processes, controls, quality assurance, labeling, packaging, distribution, installation and servicing of finished devices intended for human use. The QSR also requires, among other things, maintenance of a device master file, device history file, and complaint files. Manufacturers are subject to periodic scheduled or unscheduled inspections by the FDA. The discovery of previously unknown problems with products, including unanticipated adverse events or adverse events of increasing severity or frequency, whether resulting from the use of the device within the scope of its clearance or approval or off-label by a physician in our tests are labeled as research use only products. Certainthe practice of medicine, could result in restrictions on the device, including the removal of the product from the market or voluntary or mandatory device recalls.
The FDA has broad regulatory compliance and enforcement powers. If the FDA determines that a manufacturer has failed to comply with applicable regulatory requirements, it can take a variety of compliance or enforcement actions, including the following:
•issuance of warning letters, untitled letters, fines, injunctions, consent decrees and civil penalties;
•requesting or requiring recalls, withdrawals, or administrative detention or seizure of our suppliers may cease selling research use onlyproducts;
•imposing operating restrictions or partial suspension or total shutdown of production;
•refusing or delaying requests for 510(k) marketing clearance or PMA approvals of new products or modified products;
•withdrawing 510(k) clearances or PMA approvals that have already been granted;
•refusal to us and any failure to obtain an acceptable substitute could significantly and adversely affectgrant export approvals for our business, financial condition and results of operations.products; or
•criminal prosecution.
HIPAA and
HITECHstate privacy, security and breach notification laws
Under the administrative simplification provisions of the Health Insurance Portability and Accountability Act of 1996, or HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act
of 2009, or HITECH, the U.S. Department of Health and Human Services issued regulations that establish uniform standards governing the conduct of certain electronic healthcare transactions and requirements for protecting the privacy and security of protected health information,
or PHI, used or disclosed by
most healthcare providers and other covered entities,
including most health care providers and their respective business associates,
includingas well as the business associates’ subcontractors.
Four principal regulations with which weWe are required to comply
have been issued in final form underwith the provisions of HIPAA and
HITECH:HITECH and the regulations implemented thereunder setting forth standards for the privacy
regulations,of PHI; security
regulations,standards for the
protection of electronic PHI; breach notification
rule,requirements; and standards for electronic transactions, which establish standards for common healthcare transactions.
The
HIPAA privacy regulations
coverestablish requirements and restrictions for the use and disclosure of
protected health informationPHI by covered entities as well as business associates, which are
defined to include subcontractorspersons or entities that
create, receive, maintain,perform certain functions for or
transmit protected health information on behalf of a
business associate. Acovered entity that involve the creation, receipt, maintenance, or transmittal of PHI. Business associates are defined to include a subcontractor
means any person to whom a business associate delegates a function, activity, or service, other than in the capacity of the business associate’s workforce. As a general rule, a covered entity or business associate may not use or disclose
protected health informationPHI except as permitted
or required under the privacy regulations. The privacy regulations also
set forthgrant certain rights
that an individual hasto individuals with respect to
his or her protected health information maintained by a covered entity or business associate,their PHI, including the right to access
orand amend certain records containing
his or her protected health information, or totheir PHI, request restrictions on the use or disclosure of
his or her protected health information.their PHI, and request an accounting of disclosures of their PHI.
Covered entities and business associates also must comply with the HIPAA security regulations, which establish requirements for safeguarding the confidentiality, integrity, and availability of protected health informationPHI that is electronically transmitted or electronically stored. The HIPAA security regulations include requirements for implementing workforce training, implementing policies, and conducting an accurate and thorough assessment of the potential risks and vulnerabilities to the confidentiality, integrity, and availability of electronic PHI maintained by the covered entity or business associate.
In addition,
HITECH established, among other things, certain breach notification requirements with which covered entities and business associates must
comply.comply with certain breach notification requirements. In
particular,the event of a breach of unsecured PHI, a covered entity must notify any
affected individual,
whose unsecured protected health information is breached according to the specifications set forth in the breach notification rule. A covered entity must also notify the Secretary of the U.S. Department of Health and Human Services and, under certain circumstances, the media.
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A business associate must notify the relevant covered entity of any breach of unsecured PHI.
Penalties for failure to comply with a requirement of HIPAA or HITECH vary significantly, and, depending on the knowledge and culpability of the HIPAA-regulated entity, may include civil monetary penalties of up to $1.9 million per calendar year for each provision of HIPAA that is violated. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer or use identifiable health information for commercial advantage, personal gain or malicious harm. A covered entity or business associate may also be liable for civil money penalties for a violation that is based on an act or omission of any of its agents as determined according to the federal common law of agency, which may include a business associate or subcontractor business associates. Complying with HIPAA and HITECH requires significant resources, and we may be restricted in our ability to perform certain activities that involve the collection, use, or disclosure of PHI due to the limitations in the HIPAA privacy regulations. Additionally, to the extent that we submit electronic healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA and HITECH, payments to us may be delayed or denied.
The HIPAA
and HITECH privacy, security, and breach notification regulations establish a uniform federal “floor” and do not supersede state laws that are more stringent or provide individuals with greater rights with respect to the privacy or security of, and access to, their records containing
protected health informationPHI or insofar as such state laws apply to personal information that is broader in scope than
protected health informationPHI as defined under HIPAA. Massachusetts, for example, has a state law that protects the privacy and security of personal information of Massachusetts residents.
In addition, every U.S. state has a data breach notification law that requires entities to report certain security breaches to affected consumers and, in some instances, state regulators and consumer reporting agencies. Many states also have laws or regulations that specifically apply to
the use or disclosure ofgenetic testing and genetic information and
that are more stringent than the standards under HIPAA.
There are These state genetic information privacy laws include specific informed consent requirements for the conduct of genetic testing and restrict the collection, use, disclosure, or retention of genetic information. Failure to comply with applicable state laws that impose privacy, security, or breach notification requirements for genetic or other personal information could result in significant civil or criminal penalties, administrative actions, or private causes of action by patients, and criminal finesadversely affect our business, results of operations and other penalties that may be imposed for violating HIPAA. A covered entity or business associate is also liable for civil money penalties for a violation that is based on an act or omission of any of its agents, including a downstream business associate, as determined according to the federal common law of agency. Additionally, to the extent that we submit electronic healthcare claims and payment transactions that do not comply with the electronic data transmission standards established under HIPAA and HITECH, payments to us may be delayed or denied.
reputation.
Federal and
State Consumer Protection Lawsstate consumer protection laws
The Federal Trade Commission, or FTC, is an independent U.S. law enforcement agency charged with protecting consumers and enhancing competition across broad sectors of the economy. The FTC has indicated that it will be considering new data privacy regulations, which, if adopted, could impact our operations if they impose substantial new obligations or restrictions with respect to our data collection and processing activities. The FTC’s primary legal authority with respect to data privacy and security comes from Section 5 of the FTC Act, which prohibits unfair or deceptive practiceacts or practices in the marketplace. The FTC has increasingly useduses this broad authority to police data privacy and security, using its powers to investigate and bring lawsuits. Where appropriate, the FTC can seek a variety of remedies, includingsuch as but not limited to requiring the implementation of comprehensive privacy and security
programs, biennial assessments by independent experts, monetary redress to consumers, and provision of robust notice and choice mechanisms to consumers. In addition to its enforcement mechanisms, the FTC uses a variety of tools to protect consumers’ privacy and personal information, including
pursuing enforcement actions to stop violations of law, conducting studies and issuing reports, hosting public workshops, developing educational materials, and testifying before the U.S. Congress on issues that affect consumer privacy.
The FTC has become more aggressive in its enforcement actions against not only companies, but individual executives as well. To the extent that individual executives become subject to an FTC consent decree, or that an executive subject to a consent decree joins our company, it could impact our operations.
The vast majority of
data privacy cases brought by the FTC fall under the “deceptive”
acts prong of Section 5. These cases often involve a failure on the part of a company to adhere to its own privacy and data protection principles set forth in its policies. To avoid Section 5 violations, the FTC encourages companies to build privacy protections and safeguards into relevant portions of
thetheir business, and
to consider privacy and data protection as the company grows and evolves. In addition, privacy notices should clearly and accurately disclose the type(s) of
personal information the company collects, how the company uses and shares
thethat information, and the security measures used by the company to protect
thethat information.
In recent years, the FTC’s enforcement under Section 5
related to data security has included alleged violations of the “unfairness” prong. Many of these cases have alleged that companies were unfair to consumers because they failed to take reasonable and necessary measures to protect consumer
data, and especially, data that the FTC considers sensitive, such as geolocation data. The FTC has not provided bright line rules defining what constitutes “reasonable and necessary measures” for implementing a cybersecurity program, but it has provided guidance, tips and advice for companies. The FTC has also published past complaints and consent orders, which it urges companies use as
examplesguidance to help avoid an FTC enforcement action, even if a data breach or loss occurs.
In addition to the FTC Act, most U.S. states have unfair and deceptive acts and practices statues, orstatutes, known as UDAP statutes, that substantially mirror the FTC Act and have been applied in the privacy and data security context. These UDAP statutes vary in substance and strength from state to state. Many have broad prohibitions against unfair and deceptive acts and practices, while New York’s UDAP statute, for instance, is limited to only deceptive acts and practice.practices. These statutes generally allow for private rights of action and are enforced by the states’ Attorneys General.
State Consumer Privacy Legislation
The California Consumer Privacy Act, or CCPA, is a comprehensive consumer privacy law that took effect on January 1, 2020 and was further amended as of January 1, 2023. The CCPA regulates how certain for-profit businesses that meet one or more CCPA applicability thresholds collect, use, and disclose the personal information of natural persons who reside in California. Among other things, the CCPA confers to California residents the rights of data transparency, access, deletion, correction, and the ability to opt-out of or limit the use of their personal data for certain purposes. The CCPA also requires a business to implement reasonable security procedures to safeguard personal information against unauthorized access, use, or disclosure.
The CCPA does not apply to personal information that is PHI under HIPAA. The CCPA also does not apply to a HIPAA-regulated entity to the extent that the entity maintains patient information in the same manner as PHI. In addition, almost every U.S.de-identified data as defined under HIPAA is also exempt from the CCPA. Accordingly, we do not have CCPA compliance obligations with respect to most genetic testing and patient information we collect and process. However, we are required to comply with the CCPA insofar as we collect other categories of California consumers’ personal information.
Several states have passed consumer privacy legislation that is substantially similar to the CCPA and will take effect in 2023. The Colorado Privacy Act will take effect on July 1, 2023; the Connecticut Personal Data Privacy Act will take effect on July 1, 2023; the Utah Consumer Privacy Act will take effect on December 31, 2023, and the Virginia Consumer Data Protection Act came into effect on January 1, 2023. Each of these state haslaws provides substantially the same rights to residents of each respective state as does the CCPA for California residents. Unlike the CCPA, however, each of these other state laws excludes information collected from employees or business-to-business contacts. Each of the laws also do not apply to PHI under HIPAA and also generally exempt HIPAA-regulated entities from their reach. The state laws are enforced by their respective state’s Attorney Generals, and none of them includes a private right of action.
Dozens of other states in the United States are currently considering similar consumer data
breach notification law that requires entities to report certain security incidents to affected consumers and state regulators.10
privacy laws, which could impact our operations if enacted.
International Privacy and
Data Protection Lawsdata protection laws
There are a growing number of jurisdictions all overaround the worldglobe that have privacy and data protection laws.laws that may apply to Invitae as it enters or expands its business in jurisdictions outside of the United States. These laws are typically triggered by a company’s establishment or physical location in the jurisdiction, data processing activities that take place in the jurisdiction, and/or the processing of personal information about residents of citizens ofindividuals located in that jurisdiction. Certain international privacy and data protection laws, such as those in the European Union can be(EU), are more restrictive and prescriptiveproscriptive than those in the U.S., while other jurisdictions canmay have laws less restrictive or prescriptiveproscriptive than those in the U.S. Enforcement of these laws varyvaries from jurisdiction to jurisdiction, with a variety of consequences, including civil or criminal penalties, litigation, private rights of action or damage to our reputation.
Europe
The EU’s General Data Protection Regulation, or GDPR, took effect on May 25, 2018. The GDPR applies to any entity established in the EU as well as extraterritorially to any entity outside the EU that offers goods or services to, or monitors the behavior of, individuals who are located in the EU. The GDPR imposes strict requirements on controllers and processors of personal data, including enhanced protections for “special categories” of personal data, which includes sensitive information such as health and genetic information of data subjects. The GDPR also grants individuals various rights in relation to their personal data, including the rights of access, rectification, objection to certain processing and deletion. The GDPR provides an individual with an express right to seek legal remedies if the individual believes his or her rights have been violated. Failure to comply with the requirements of the GDPR or the related national data protection laws of the member states of the EU, which may deviate from or be more restrictive than the GDPR, may result in significant administrative fines issued by EU regulators. Maximum penalties for violations of the EU GDPR are capped at 20 million euros or 4% of an organization's annual global revenue, whichever is greater.
Australia
Australia’s federal Privacy Act 1988, or the Privacy Act, and the 13 Australian Privacy Principles, or the APPs, contained in the Privacy Act, apply to government agencies and private sector organizations with annual turnover exceeding AU $3 million. The Privacy Act extends to all of Australia's external territories, but also applies to an act done, or practice engaged in, or outside Australia (and Australia's external territories) by an organization, or small business operator, that has a link to Australia, such as a continued presence, partnership, incorporation, central management and control, or citizenship in Australia. An organization may also have a link to Australia if the organization conducts business in Australia and collects or stores personal information in Australia. The Privacy Act applies to any collection, holding, use or disclosure of personal information by a regulated entity, with enhanced protections for sensitive information such as genetic information. The Privacy Act prescribes certain rights for individuals, including rights to know why the information is collected, how it is used, and to whom it is disclosed, the right of the individual not to identify themself in certain circumstances, the right of access, the right to stop receiving unwanted direct marketing, the right to correct information, and the right to make a complaint. Australia’s Privacy Commissioner enforces the Privacy Act and any acts that may violate an individual’s privacy. The Privacy Commissioner can levy significant fines on individuals and corporations that violate the Privacy Act.
Canada
Canada has several federal, provincial and territorial privacy statutes that govern the protection of personal information. The Personal Information Protection and Electronic Documents Act 2000, or PIPEDA, applies to the collection, use, and disclosure of personal information in the course of commercial activities in Canada. Although PIPEDA is silent with respect to its extraterritorial application, the Federal Court of Canada has concluded that PIPEDA applies to businesses established in other jurisdictions if there is a “real and substantial connection” between the organization’s activities and Canada. PIPEDA and provincial data protection laws require specific notices regarding openness and transparency and require regulated organizations to obtain consent in order to process such information. Canadian individuals enjoy rights or access and to correct inaccuracies. Violations of Canadian data protection laws can result in significant fines. Canada is evaluating replacing or substantially amending PIPEDA so as to make it similar to the GDPR. Such changes to PIPEDA could impact our operations if enacted. Canada is considering a series of significant amendments to PIPEDA, the implementation of which would be to make PIPEDA more like GDPR. If the amendments to PIPEDA were to come into effect, they could have an impact on our operations in Canada.
India
The Indian Constitution has been interpreted by India's highest court to include a fundamental right to privacy. In addition, the Information Technology Act 2000, as amended, or the IT Act, is the primary national law regulating the collection and use of personal information that is sensitive. The IT Act applies to corporations and other “body corporates” that possess, maintain, or otherwise process personal information, including body corporates that act on behalf of other body corporates. Certain provisions of the IT Act provide liability for negligent handling of personal information. For example, the IT Act provides that any corporation or other body corporate that handles sensitive personal data is liable to pay damages for any loss caused by its negligence in implementing and maintaining reasonable security practices and procedures.
In addition, the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011, or the Data Privacy Rules, issued under the IT Act regulate the use of personal information and sensitive personal data. The Data Privacy Rules mandate that businesses have a privacy policy, obtain consent when collecting or transferring personal information, and inform the data subject about any recipients of that data. The IT Act includes a private right of action for individuals, and authorizes criminal punishment (with a fine, three years in prison, or both) for disclosing personal information without the consent of the data subject or in breach of any relevant contract.
India’s parliament is currently evaluating a new data privacy bill that would bear many similarities with GDPR, but that would also contain certain additional requirements including, for example, possible data localization requirements. If enacted, India’s new law could impact our operations.
Israel
Israel’s data protection regime is governed primarily by the Protection of Privacy Law and the regulations promulgated under it, or the PPL, and the guidelines of the Israeli regulator, the Privacy Protection Authority, or the PPA. The PPL applies to: (1) database owners, database holders, and database managers based in Israel; and (2) data processing operations that take place in Israel, regardless of whether the individuals about whom the data relates are residents or citizens of Israel. The PPL could also be interpreted to apply to non-Israeli database owners, database holders, or database managers that process personal information about Israeli residents or citizens when such processing takes place outside of Israel. Various regulations promulgated under the PPL by the PPA set out rules and procedures for data security, data retention, data subject rights, and cross border transfers of data. These regulations also do not clearly state their jurisdictional scope, such that there is a risk they could be interpreted as applying to foreign-based entities that process data about Israeli citizens.
The PPA is required to maintain a registry of databases and is empowered to supervise compliance with and investigate alleged violations of the PPL and related regulations. The PPA may impose administrative fines for violations of the PPL and related regulations, and willful violations may result in criminal liability and up to five years in prison. A breach of privacy is also actionable, and an individual claimant may obtain monetary compensation or injunctive relief. A court may award statutory damages without proof of damages for breach of privacy rights. If the breach was intentional, the damages may be doubled. The PPL also specifies that an act or omission in breach of certain of its provisions, such as failure to ensure data security, may give rise to a tort claim.
Japan
Japan’s primary data protection law, the Act on the Protection of Personal Information was amended in 2020 to include GDPR-like requirements, including additional transparency requirements, data transfer obligations, enhanced data breach notification requirements, additional data subject rights and stronger penalties for violations, including significant fines. The amendment clarifies that its provisions, obligations and penalties apply to entities outside of Japan that supply goods or services in Japan and handle personal information from an individual in Japan. These amendments went into effect on April 1, 2022.
Information blocking prohibition
On May 1, 2020, the Office of the National Coordinator for Health Information Technology promulgated final regulations under the authority of the 21st Century Cures Act to impose new conditions to obtain and maintain certification of certified health information technology and prohibit certain covered actors, including developers of certified health information technology, health information networks / health information exchanges, and health care providers (including laboratories), from engaging in activities that are likely to interfere with the access, exchange, or use of electronic health information (information blocking). The final regulations further defined exceptions for activities that are permissible, even though they may have the effect of interfering with the access, exchange, or use
of electronic health information. The information blocking regulation effective date was April 5, 2021. Under the 21st Century Cures Act, health care providers that violate the information blocking prohibition will be subject to appropriate disincentives, which the U.S. Department of Health and Human Services has yet to establish through required rulemaking. Developers of certified information technology and health information networks / health information exchanges, however, may be subject to civil monetary penalties of up to approximately $1 million (as adjusted for inflation) per violation. If the government were to conclude that we met the definition of a health information network or health information exchange, we could be potentially subject to such penalties.
However, the U.S. Department of Health and Human Services Office of Inspector General has the authority to impose such penalties and on April 24, 2020 published a proposed rule to codify the civil monetary penalty authority in regulation, which the agency proposed would be effective 60 days after it issues a final rule, but in no event before November 2, 2020. The U.S. Department of Health and Human Services Office of Inspector General has not yet issued a final rule.
Federal, state and foreign fraud and abuse laws
In the United States, there are various fraud and abuse laws with which we must comply, and we are potentially subject to regulation by various federal, state and local authorities, including CMS, other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the U.S. Department of Justice, and individual U.S. Attorney offices within the Department of Justice, and state and local governments. We also may be subject to foreign fraud and abuse laws.
In the United States, the federal
Anti‑KickbackAnti-Kickback Statute prohibits knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for the referral of an individual for the furnishing of or arranging for the furnishing of any item or service for which payment may be made in whole or in part by a federal healthcare program, or the purchasing, leasing, ordering or arranging for or recommending purchasing, leasing or ordering of any good, facility, service or item for which payment may be made in whole or in part by a federal healthcare program. Many courts have held that the
Anti‑KickbackAnti-Kickback Statute may be violated if any one purpose of the remuneration is to induce or reward patient referrals or other federal healthcare program business, regardless of whether there are other legitimate purposes for the arrangement. The definition of “remuneration” has been broadly interpreted to include anything of value, including gifts, discounts, credit arrangements, payments of cash, consulting fees, waivers of
co‑payments,co-payments, ownership interests, and providing anything at less than its fair market value. The
Anti‑KickbackAnti-Kickback Statute is broad and may technically prohibit many innocuous or beneficial arrangements within the healthcare industry. The Anti-Kickback Statute includes several statutory exceptions, and the U.S. Department of Health and Human Services has issued a series of regulatory “safe harbors.” These exceptions and safe harbor regulations set forth certain requirements for various types of arrangements, which, if met, will protect the arrangement from potential liability under the
Anti‑KickbackAnti-Kickback Statute. Although full compliance with the statutory exceptions or regulatory safe harbors ensures against liability under the federal
Anti‑KickbackAnti-Kickback Statute, the failure of a transaction or arrangement to fit within a specific statutory exception or regulatory safe harbor does not necessarily mean that the transaction or arrangement is illegal or that prosecution under the federal
Anti‑KickbackAnti-Kickback Statute will be pursued. Penalties for violations of the
Anti‑KickbackAnti-Kickback Statute are severe, and include imprisonment, criminal fines, civil money penalties, and exclusion from participation in federal healthcare programs. Many states also have
anti‑kickbackanti-kickback statutes, some of which may apply to items or services reimbursed by any
third‑partythird-party payer, including commercial insurers.
There are also federal laws related to healthcare fraud and false statements, among others, that apply to healthcare matters. The healthcare fraud statute prohibits, among other things, knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payers. A violation of this statute is a felony and may result in fines, imprisonment, or exclusion from governmental payer programs such as the Medicare and Medicaid programs. The false statements statute prohibits, among other things, knowingly and willfully falsifying, concealing or covering up a material fact, or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. A violation of this statute is a felony and may result in fines, imprisonment, or exclusion from governmental payer programs.
Another development affecting the healthcare industry is the increased enforcement of the federal False Claims Act and, in particular, actions brought pursuant to the False Claims Act’s “whistleblower” or “qui tam” provisions. The False Claims Act imposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal governmental payer program. The qui tam provisions of the False Claims Act allow a private individual to bring actions on behalf of the federal government alleging that the defendant has defrauded the federal government by presenting or causing to be presented a false claim to the federal government and permit such individuals to share in any amounts paid by the entity to the government in fines or settlement. When an entity is determined to have violated the False Claims
Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil penalties for
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each false claim. For penalties assessed after January 29, 2018,May 9, 2022, whose associated violations occurred after November 2, 2015, the penalties range from $11,181$12,537 to $22,36325,076 for each false claim. The minimum and maximum per claim penalty amounts are subject to annual increases for inflation.
In addition, various states have enacted false claim laws analogous to the federal False Claims Act, and some of these state laws apply where a claim is submitted to any
third‑partythird-party payer and not only a governmental payer program.
Additionally, the civil monetary penalties statute imposes penalties against any person or entity that, among other things, is determined to have
knowingly presented or caused to be presented a claim to a federal health program that the person knows or should know is for an item or service that was not provided as claimed or for a claim that is false or fraudulent. This law also prohibits the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier for items or services reimbursable by Medicare or a state healthcare program. There are several exceptions to the prohibition on beneficiary inducement.
The Eliminating Kickbacks in Recovery Act of 2018, or EKRA, prohibits, among other things, payments for referrals to recovery homes, clinical treatment facilities, and laboratories. EKRA’s reach extends beyond federal health care programs, to include private insurance (i.e., it is an “all payer” statute). For purposes of EKRA, the term “laboratory” is defined broadly and without reference to any connection to substance use disorder treatment. EKRA is a criminal statute and violations can result in fines of up to $200,000, up to 10 years in prison, or both, per violation. The law includes a limited number of exceptions, some of which closely align with corresponding federal Anti-Kickback Statute exceptions and safe harbors and others that materially differ.
We are also subject to the U.S. Foreign Corrupt Practices Act, or FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. In Europe various countries have adopted
anti‑briberyanti-bribery laws providing for severe consequences, in the form of criminal penalties and/or significant fines, for individuals and/or companies committing a bribery offence. Violations of these
anti‑briberyanti-bribery laws, or allegations of such violations, could have a negative impact on our business, results of operations and reputation. For instance, in the United Kingdom, under the Bribery Act 2010, which went into effect in July 2011, a bribery occurs when a person offers, gives or promises to give a financial or other advantage to induce or reward another individual to improperly perform certain functions or activities, including any function of a public nature. Bribery of foreign public officials also falls within the scope of the Bribery Act 2010. Under the new regime, an individual found in violation of the Bribery Act 2010, faces imprisonment of up to ten years. In addition, the individual can be subject to an unlimited fine, as can commercial organizations for failure to prevent bribery.
The Physician Payments Sunshine Act, enacted as part of the Affordable Care Act, also imposed annual reporting requirements on entities including manufacturers of certain devices, medical supplies, drugs and biologics for certain payments and transfers of value that the manufacturer provides, directly or indirectly, to or on behalf of physicians, certain other providers including physician assistants and nurse practitioners, and teaching hospitals. The Physician Payments Sunshine Act also requires entities including applicable manufacturers to report certain ownership and investment interests held by physicians and their immediate family members in such manufacturers. In addition, certain states, such as Vermont and Massachusetts, have enacted laws that impose certain reporting requirements for payments and transfers of value provided to covered healthcare providers. These state laws are not preempted by the federal Physician Payments Sunshine Act to the extent the state law requires the reporting of information that is not required to be reported under the federal Physician Payments Sunshine Act. Finally, certain states such as Massachusetts, Nevada, and Vermont have enacted laws that limit or prohibit the provision of payments or other transfers of value to covered recipients, such as certain health care providers, hospitals, and health benefit plan administrators.
Physician referral prohibitions
A federal law directed at “self‑referrals,“self-referrals,” commonly known as the “Stark Law,” prohibits a physician from referring a patient to an entity for certain Medicare-covered designated health services, including laboratory services, if the physician, or an immediate family member, has a financial relationship with the entity, unless an exception applies. The Stark Law also prohibits an entity from billing for services furnished pursuant to a prohibited referral. A physician or entity that engages in a scheme to circumvent the Stark Law’s referral prohibition may be fined up to $100,000$185,009 for each such arrangement or scheme. In addition, any person who presents or causes to be presented a claim to the Medicare program in violation of the Stark Law is subject to civil monetary penalties of up to $15,000$27,750 per service, an assessment of up to three times the amount claimed and possible exclusion from
participation in federal healthcare programs. Bills submitted in violation of the Stark Law may not be paid by Medicare, and any person collecting any amounts with respect to any such prohibited bill is obligated to refund such amounts. Many states have comparable laws that apply to services covered by other third-party payers. The Stark Law also prohibits state receipt of
Federalfederal Medicaid matching funds for services furnished pursuant to a prohibited referral. This provision of the Stark Law has not been implemented by regulations, but some courts have held that the submission of claims to Medicaid that would be prohibited as
self‑referralsself-referrals under the Stark Law for Medicare could implicate the False Claims Act.
Corporate practice of medicine
Numerous states have enacted laws prohibiting business corporations, such as us, from practicing medicine and employing or engaging clinicians to practice medicine, generally referred to as the prohibition against the corporate practice of medicine. These laws are designed to prevent interference in the medical
decision‑makingdecision-making process by anyone who is not a licensed physician. For example, California’s Medical Board has indicated that determining what diagnostic tests are appropriate for a particular condition and taking responsibility for the ultimate overall care of the patient, including providing treatment options available to the patient, would constitute the unlicensed practice of medicine if performed by an unlicensed person. Violation of these corporate practice of medicine laws may result in civil or criminal fines, as well as sanctions imposed against us and/or the professional through licensure proceedings.
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We rely on a combination of intellectual property rights, including trade secrets, copyrights, trademarks, customary contractual protections and, to a lesser extent, patents, to protect our core technology and intellectual property. With respect to patents, we believe that the practice of patenting individual genes, along with patenting tools and methods specific to individual genes, has impeded the progress of the genetic testing industry beyond single gene tests and is antithetical to our core principle that patients should own and control their own genomic information. In recent years theThe U.S. Supreme Court has issued a series of unanimous (9‑0)(9-0) decisions setting forth limits on the patentability of natural phenomena, natural laws, abstract ideas and their applications—applications — i.e., Mayo Collaborative v. Prometheus Laboratories (2012), or Mayo, Association for Molecular Pathology v. Myriad Genetics (2013), or Myriad, and Alice Corporation v. CLS Bank (2014), or Alice. As discussed below, we believe the Mayo, Myriad and Alice decisions bring clarity to the limits to which patents may cover specific genes, mutations of such genes, or gene‑specificgene-specific technology for determining a patient’s genomic information. U.S. Supreme Court cases have clarified that naturally occurring DNA sequences are natural phenomena, which should not be patentable. On June 13, 2013, the U.S. Supreme Court decided Myriad, a case challenging the validity of patent claims held by Myriad relating to the cancer genes BRCA1 and BRCA2. The Myriad Court held that genomic DNAs that have been isolated from, or have the same sequence as, naturally occurring samples, such as the DNA constituting the BRCA1 and BRCA2 genes or fragments thereof, are not eligible for patent protection. Instead, the Myriad Court held that only those complementary DNAs (cDNAs) which have a sequence that differs from a naturally occurring fragment of genomic DNA may be patent eligible. Because it will be applied by other courts to all gene patents, the holding in Myriad also invalidates patent claims to other genes and gene variants. Prior to Myriad, on August 16, 2012, the U.S. Court of Appeals for the Federal Circuit had held that certain patent claims of Myriad directed to methods of comparing or analyzing BRCA1 and BRCA2 sequences to determine whether or not a person has a variant or mutation are unpatentable abstract processes, and Myriad did not appeal such ruling. We do not currently have any patents or patent applications directed to the sequences of specific genes or variants of such genes, nor do we rely on any such in‑licensedin-licensed patent rights of any third party. We believe that correlations between specific gene variants and a person’s susceptibility to certain conditions or diseases are natural laws that are not patentable under the U.S. Supreme Court’s decision in Mayo. The Mayo case involved patent claims directed to optimizing, on a patient‑specificpatient-specific basis, the dosage of a certain drug by measuring its metabolites in a patient. The Mayo Court determined that patent claims directed at detection of natural correlations, such as the correlation between drug metabolite levels in a patient and that drug’s optimal dosage for such patient, are not eligible for patent protection. The Mayo Court held that claims based on this type of comparison between an observed fact and an understanding of that fact’s implications represent attempts to patent a natural law and, moreover, when the processes for making the comparison are not themselves sufficiently inventive, claims to such processes are similarly patent‑ineligible.patent-ineligible. On June 19, 2014, the U.S. Supreme Court decided Alice, where it amplified its Mayo and Myriad decisions and clarified the analytical framework for distinguishing between patents
that claim laws of nature, natural phenomena and abstract ideas and those that claim patent‑eligiblepatent-eligible applications of such concepts. According to the Alice Court, the analysis depends on whether a patent claim directed to a law of nature, a natural phenomenon or an abstract idea contains additional elements, an “inventive concept,” that “is sufficient to ensure that the patent in practice amounts to significantly more than a patent upon the [ineligible concept] itself;”itself” (citing Mayo). We believe that Mayo, Myriad and Alice not only render as unpatentable genes, gene fragments and the detection of a person’s sequence for a gene, but also have the same effect on generic applications of conventional technology to specific gene sequences. For example, we believe that generic claims to primers or probes directed to specific gene sequences and uses of such primers and probes in determining a person’s genetic information are not patentable. We do not currently have any patents or patent applications directed to such subject matter nor have we in‑licensedin-licensed such patents rights of any third party. Unlike patents directed to specific genes, we do rely upon, in part, patent protection to protect technology that is not
gene‑specificgene-specific and that provides us with a potential competitive advantage as we focus on making comprehensive genetic information less expensive and more broadly available to our customers. In this regard, we have issued U.S. patents, pending U.S.
utility patent applications
a pending PCT application, and
pending non‑U.S.corresponding non-U.S. patents and patent applications directed to various aspects of our laboratory, analytic and business practices. We intend to pursue further patent protection where appropriate.
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For information regarding legal actions that pertain to intellectual property rights, see Note 8, “Commitments and contingencies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this report.
In addition to seeking patent protection for some of our laboratory, analytic and business practices, we also rely on trade secrets, including unpatented
know‑how,know-how, technology and other proprietary information, to maintain and develop our competitive position. We have developed proprietary procedures for both the laboratory processing of patient samples and the analysis of the resulting data to generate clinical reports. For example, we have automated aspects of our processes for curating information about known variants, identifying variants in an individual’s sequence information, associating those variants with known information about their potential effects on disease, and presenting that information for review by personnel responsible for its interpretation and for the delivery of test reports to
clinicians.clinicians and patients. We try to protect these trade secrets, in part, by taking reasonable steps to keep them confidential. This includes entering into nondisclosure and confidentiality agreements with parties who have access to them, such as our employees and certain third parties. We also enter into invention or patent assignment agreements with our employees and consultants that obligate them to assign to us any inventions developed in the course of their work for us. However, we may not enter into such agreements with all relevant parties, and these parties may not abide by the terms of their agreements. Despite measures taken to protect our intellectual property, unauthorized parties might copy or independently develop and commercially exploit aspects of our technology or obtain and use information that we regard as proprietary.
We work hard to achieve a high level of quality in our operations and to provide our customers with a superior experience when interacting with us. As a consequence, our brand is very important to us, as it is a symbol of our reputation and representative of the goodwill we seek to generate with our customers. As a consequence, we have invested significant resources in protection of our trademarks.
We are committed to maintaining compliance with all environmental laws applicable to our operations and products, and also realize that we need to begin to take steps to address our environmental footprint. We take our responsibility for environmental stewardship seriously and believe that we must do our part in addressing global climate change challenges. While we are early on this journey, we are committed to reducing our environmental impact. We aim to integrate sustainable business practices, energy-efficient technologies and eco-friendly products that advance our progress in reducing our carbon footprint, water consumption and waste.
We realize that our effectiveness in executing upon our environmental objectives first begins with understanding our environmental impact and carbon footprint. We engaged a third-party to complete an in-depth analysis of our 2020, 2021 and 2022 emissions, water and waste data. With this insight, we established a baseline from which to facilitate ongoing internal measuring, managing and reporting of these factors. We believe this
foundation now better positions us to improve internal tracking systems, launch eco-friendly initiatives, normalize our metrics and establish science-based targets to reduce our environmental footprint over time.
Our operations require the use of hazardous materials (including biological materials) that subject us to a variety of federal, state and local environmental and safety laws and regulations. Some of these regulations provide for strict liability, holding a party potentially liable without regard to fault or negligence. We could be held liable for damages and fines as a result of our, or others’, business operations should contamination of the environment or individual exposure to hazardous substances occur. We cannot predict how changes in laws or new regulations will affect our business, operations or the cost of compliance.
Raw materials and suppliers
We rely on a limited number of suppliers, or, in some cases, sole suppliers, including Illumina,Agena Bioscience, Inc., Illumina, Integrated DNA Technologies Incorporated, Qiagen N.V.Inc. (“IDT”), Roche Holdings Ltd., QIAGEN N.V. ("QIAGEN") and Twist Bioscience Corporation for certain laboratory reagents, as well as sequencers and other equipment and materials which we use in our laboratory operations. We are in active litigation with affiliates of QIAGEN as described in Note 8, "Commitments and contingencies" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report. We rely on Illumina as the sole supplier of next generation sequencers and associated reagents and as the sole provider of maintenance and repair services for these sequencers. Our laboratory operations could be interrupted if we encounter delays or difficulties in securing these reagents and enzymes, sequencers or other equipment or materials, and if we cannot obtain an acceptable substitute. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. We believe that there are only a few other manufacturers that are currently capable of supplying and servicing the equipment necessary for our laboratory operations, including sequencers and various associated reagents.reagents and enzymes. The use of equipment or materials provided by these replacement suppliers would require us to alter our laboratory operations. Transitioning to a new supplier would be time consuming and expensive, may result in interruptions in our laboratory operations, could affect the performance specifications of our laboratory operations or could require that we revalidate our tests. We cannot assure yoube certain that we wouldwill be able to secure alternative equipment, reagents and other materials, or bring such equipment, reagents and materials on lineonline and revalidate them without experiencing interruptions in our workflow. If we encounter delays or difficulties in securing, reconfiguring or revalidating the equipment and reagents we require for our tests,materials, our business and reputation could be adversely affected.14
Customer
concentration and
geographic concentrationsFor the years ended December 31, 2017, 2016revenue trends
We receive payment for our products and
2015 the percentages of our revenue attributable to sources in the United States were 92%, 83%services from patients, biopharmaceutical partners, third-party payers and
65% respectively; the percentages of our revenue attributable to sources in Canada were 5%, 10% and 25% respectively; and the percentages of our revenue attributable to countries excluding the United States and Canada were 3%, 7%and 10% respectively.other business-to-business customers. As of December 31, 2017 and 2016, our long‑lived assets of $30.3 million and $23.8 million, respectively, were located in the United States.
As of December 31, 2017, substantially all2022, our revenue has been primarily derived from test reports generated from our assays. A singleSee information regarding our customer accountedconcentration in Note 2, “Summary of significant accounting policies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report.
We have historically experienced higher revenue in our fourth quarter compared to other quarters in our fiscal year due in part to higher demand for 13%our tests from patients who have met their annual insurance deductible. Revenue in the fourth quarter of fiscal year 2022 declined as we exited product offerings and geographies related to our strategic realignment. The continued impact of exiting product offerings and geographies coupled with changes in our product and payer mix might cause these historical trends to be different than future trends of revenue or financial performance.
Human capital resources
Our people
The strength of our
revenue forteam and the
year ended December 31, 2017 and 11% ofculture in which we work is essential to our
revenue for the year ended December 31, 2016, and a second single customer accounted for 13% ofability to achieve our
revenue for the year ended December 31, 2015.Employees
broader mission. We had 594approximately 1,700 employees as of December 31, 2022, of which approximately 61% were women and 39% men. Our management team as of December 31, 2022 was 29% women and 71% men.
Diversity, Equity and Inclusion, or DEI
Our DEI mission is to attract, engage, develop and retain talent from diverse backgrounds by fostering community, providing education and support, and advancing inclusive research and health equity globally. Our vision is to cultivate a place where we all belong. As of December 31, 2022, approximately 56% of our workforce was White, 21% Asian, 9% Hispanic, 5% Black or African American, 4% two or more races (not Hispanic or Latino) and 5% not self-identified based on our payroll system and individual self-identification. On our management team,
21% are people who identify as non-White. With the addition of a board member on January 26, 2023, our board of directors is now 50% racially diverse with 38% female representation and an average age of 58.
Our culture and mission
Our team is driven to make a difference for the patients. We aim to be a highly functioning and collaborative team, well equipped to attract, develop and retain diverse talent while driving culture, engagement, and change management in support of business objectives. Our People & Culture business partners are embedded within leadership teams to help support our talent strategy and team development throughout our organization. We provide employees with opportunities to grow and advance, supported by flexible work hours, flexible paid time off (non-accrual), the ability to work remotely for many roles, and the satisfaction of doing meaningful work.
Our total rewards philosophy
We offer a competitive total rewards package, which includes base compensation, incentive compensation, equity, healthcare coverage, 401(k) (with a partial match), an employee stock purchase plan, and a broad range of other benefits including family leave and parental leave for new parents. Our health vendor provides fertility and adoption benefits for our U.S. employees and most of our global employees. Additionally, we have an employer-sponsored genetic testing program, which provides employees and their covered dependents access to our genetic testing at no cost.
Health and safety
We are committed to maintaining and improving the health and safety of our employees. All employees are responsible for maintaining a safe workplace. We promote, train and ensure employees are following our protocols, rules, policies and practices and are reporting accidents, injuries and unsafe equipment, practices or conditions, in accordance with our Code of Business Conduct and Ethics and health and safety policies. In addition, we established an Enterprise Crisis Management Team that, along with the Employee Health and Safety Administrator, comprise the Steering Committee for pandemic response, which is responsible for ensuring our COVID-19 policies and practices meet all necessary standards and regulations. Our response has evolved as the situation has evolved. We monitor, update and align our corporate policies to meet state and federal occupational health and safety rules. We work to ensure employees follow guidance regarding COVID-19 protocols including testing, quarantine requirements, exposure control measures, contact tracing, and masking.
Information about our executive officers
The names of our executive officers and other corporate officers, and their ages as of February 28, 2023, are as follows: | | | | | | | | | | | | | | |
| Name | | Age | | Position |
| Executive officers | | | | |
| Kenneth D. Knight | | 62 | | Chief Executive Officer and Director |
| Yafei (Roxi) Wen | | 50 | | Chief Financial Officer |
| Thomas R. Brida | | 52 | | General Counsel, Chief Compliance Officer and Secretary |
| | | | |
| Robert L. Nussbaum, M.D. | | 73 | | Chief Medical Officer |
| | | | |
| Robert F. Werner | | 49 | | Chief Accounting Officer |
Kenneth D. Knight has served as a director and our Chief Executive Officer since July 2022. Mr. Knight also served as our Chief Operating Officer from June 2020 to July 2022. Prior to joining Invitae, he most recently served as Vice President of transportation services at Amazon.com, Inc., a multinational and diversified technology company, from December 2019 to June 2020, and as Vice President of Amazon’s global delivery services, fulfillment operations and human resources from April 2016 to December 2019. Prior to his time at Amazon, from 2012 to March 2016, Mr. Knight served as general manager of material handling and underground business division at Caterpillar Inc., a manufacturer of machinery and equipment. Prior to that, Mr. Knight served in various capacities at General Motors Company, a vehicle manufacturer, for 27 years, including as executive director of global manufacturing engineering and as manufacturing general manager. Mr. Knight holds a B.S. in Electrical Engineering from the Georgia Institute of Technology and an M.B.A. from the Massachusetts Institute of Technology.
Yafei (Roxi) Wen has served as our Chief Financial officer since June 2021. Prior to joining Invitae, from February 2019 to June 2021, she served as the Chief Financial Officer at Mozilla Corporation, an open-source software company, overseeing finance and accounting, mergers and acquisitions, business development, data and
analytics, information technology and engineering operations, workplace resources and sustainability. Prior to Mozilla, Roxi served as the Chief Financial Officer at Elo Touch Solutions, a touch screen systems and components company, from April 2014 to February 2019, and General Electric Critical Power, an electronics power technology company, from 2008 to 2013, following her experience driving capital market and business finance efforts at Medtronic, a leading medical technology company, from 2002 to 2008. Roxi is a CFA charterholder and has an M.B.A. from the University of Minnesota.
Thomas R. Brida has served as our General Counsel since January 2017, our Chief Compliance Officer since February 2019, and our Secretary since May 2019. Mr. Brida also served as our Deputy General Counsel from January 2016 to January 2017. Prior to joining Invitae, he was Associate General Counsel at Bio-Rad Laboratories, a life science research and clinical diagnostics manufacturer, from January 2004 to January 2016. He holds a B.A. from Stanford University and a J.D. from the U.C. Berkeley School of Law.
Robert L. Nussbaum, M.D. has served as our Chief Medical Officer since August 2015. From April 2006 to August 2015, he was chief of the Division of Genomic Medicine at UCSF Health where he also held leadership roles in the Cancer Genetics and Prevention Program beginning in January 2009 and the Program in Cardiovascular Genetics beginning in July 2007. From April 2006 to August 2015, he served as a member of the UCSF Institute for Human Genetics. Prior to joining UCSF Health, Dr. Nussbaum was chief of the Genetic Disease Research Branch of the National Human Genome Research Institute, one of the National Institutes of Health, from 1994 to 2006. He is a member of the National Academy of Medicine and a fellow at the American Academy of Arts and Sciences. Dr. Nussbaum is a board-certified internist and medical geneticist who holds a B.S. in Applied Mathematics from Harvard College and an M.D. from Harvard Medical School in the Harvard-MIT joint program in Health Sciences and Technology. He completed his residency in internal medicine at Barnes-Jewish Hospital and a fellowship in medical genetics at the Baylor College of Medicine.
Robert F. Werner has served as our Chief Accounting and Principal Accounting Officer since May 2020. Prior to that, Mr. Werner served as our Corporate Controller from September 2017. Prior to joining Invitae, from February 2015 to September 2017, Mr. Werner served as Vice President of Finance and Corporate Controller of Proteus Digital Health, Inc., a digital medicine pharmaceuticals company. Prior to that, Mr. Werner served as Corporate Controller and Principal Accounting Officer of CardioDx, Inc., a molecular diagnostics company, from March 2012 to February 2015. Mr. Werner is a Certified Public Accountant in California and started his career at Ernst & Young LLP. Mr. Werner holds a B.S. in Accounting and a Master of Accountancy in Professional Accounting from Brigham Young University’s Marriott School of Management.
We were incorporated in the State of Delaware on January 13, 2010 under the name Locus Development, Inc. and changed our name to Invitae Corporation in 2012.
In February 2015 we completed an initial public offering of our common stock.Our principal executive offices are located at 1400 16th Street, San Francisco, California 94103, and our telephone number is (415) 374‑7782.374-7782. Our website address is www.invitae.com. The information contained on, or that can be accessed through, our website is not part of this annual reportAnnual Report on Form 10‑K.10-K.
We make available free of charge on our website our annual reportsAnnual Reports on Form 10‑K,10-K, quarterly reports on Form 10‑Q,10-Q, current reports on Form 8‑K8-K and amendments to those reports, as soon as reasonably practicable after we electronically file or furnish such materials to the Securities and Exchange Commission, or SEC. You may obtain a free copy of these reports in the Investor Relations section of our website, www.invitae.com. All reports that we file with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC, 20549. Information about the operation of the Public Reference Room can be obtained by calling the SEC at 1‑800‑SEC‑0330. All reports that we file are also available at www.sec.gov.
ITEM 1A. Risk
Factors.Factors
Risks related to our business and strategy
We expect to continue incurring significant losses, and we may not successfully execute our plan to achieve or sustain profitability.
We have incurred substantial losses since our inception. For the years ended December 31,
2017, 20162022, 2021 and
2015,2020, our net losses were
$123.4 million, $100.3$3.1 billion, $379.0 million and
$89.8$602.2 million, respectively. At December 31,
2017,2022, our accumulated deficit was
$398.6 million. To date, we have generated limited revenue, and we$4.8 billion. We expect to continue to incur significant
losses.losses as we invest in our business. We incurred research and development expenses of $402.1 million, $416.1 million and $240.6 million and selling and marketing expenses of $218.9 million, $225.9 million and $168.3 million in 2022, 2021 and 2020, respectively. Since 2021, widespread inflationary pressures were experienced across global economies, resulting in higher costs for our raw materials, non-material costs, labor and other business costs, and significant increases in the future could adversely affect our results of operations. In addition,
these lossesas a result of the integration of acquired businesses, we may
increase as we focus on scaling our businessbe subject to unforeseen or additional expenditures, costs or liabilities, including costs and
operations and expanding our testing capabilities.potential liabilities associated with litigation. Our prior losses and expected future losses have had and
willmay continue to have an adverse effect on our stockholders’ equity, working capital and stock price. Our failure to achieve and sustain profitability in the future would negatively affect our business, financial condition, results of operations and cash flows, and could cause the market price of our common stock to decline.
We began operations in January 2010 and commercially launched our initial assay in late November
2013; accordingly, we have a relatively limited operating history upon which you can evaluate our business and prospects. Our limited commercial history makes it difficult to evaluate our current business and makes predictions about our future results, prospects or viability subject to significant uncertainty.2013. Our prospects must be considered in light of the risks and difficulties frequently encountered by companies in
their earlya similar stage of development, particularly companies in new and rapidly evolving markets such as ours. These risks include an evolving and unpredictable business model and the management of growth. To address these risks, we must, among other things, increase our customer
base,base; continue to implement and successfully execute our business and marketing
strategy,strategy; successfully enter into other strategic collaborations or relationships; obtain access to capital on acceptable terms and effectively utilize that capital; identify, attract, hire, retain, motivate and successfully integrate employees; continue to expand,
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automate and upgrade our laboratory, technology and data systems,systems; obtain, maintain and maintainexpand coverage and reimbursement by healthcare payers,payers; obtain and maintain sufficient payment by partners, institutions and individuals; provide rapid test turnaround times with accurate results at low prices,prices; provide superior customer service,service; and respond to competitive developments and attract, retain and motivate qualified personnel.developments. We cannot assure you that we will be successful in addressing these risks, and the failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations.
We have acquired and may continue
Our inability to
acquire businesses or assets, form joint ventures or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, or cause us to incur debt or significant expense.As part of our business strategy, we have pursued and may continue to pursue acquisitions of complementary businesses or assets, as well as technology licensing arrangements. We also may pursue strategic alliances that leverage our core technology and industry experience to expand our offerings or distribution, or make investments in other companies. As an organization, we have limited experience with respect to acquisitions as well as the formation of strategic alliances and joint ventures.
In January 2017, we acquired AltaVoice (formerly PatientCrossroads), a privately-owned, patient-centered data company. In June 2017, we acquired Ommdom, Inc., a privately-held company that develops and operates hereditary risk assessment and management software, including CancerGene Connect, a cancer genetic counseling platform. In August 2017, we acquired Good Start Genetics, a privately-held company focusedraise additional capital on preimplantation and carrier screening for inherited disorders. In November 2017, we acquired CombiMatrix Corporation, a publicly-traded company which specializes in prenatal diagnosis, miscarriage analysis and pediatric developmental disorders.
With respect to AltaVoice, Ommdom, Good Start, CombiMatrix, and any acquisitions we may makeacceptable terms in the future may limit our ability to develop and commercialize new tests and expand our operations.
We expect we
will need to raise additional capital to finance operations prior to achieving profitability, or should we make additional acquisitions. We may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. Additional funding may not be
ableavailable to
integrate these acquisitions successfully into our existing business, and we could assume unknownus on acceptable terms, or
contingent liabilities. Any acquisitions by us also could result in significant write-offs orat all. In addition, the
incurrence of debt and contingent liabilities, any of which could harm our operating results. Furthermore, the loss of customers, payers, partners or suppliers following the completion of any acquisitions by us could harm our business. For example, we have experienced a reduction in Good Start’s sales as a result of the termination of a contract by a third-party laboratory that had performed expanded carrier screening for Good Start. Changes in services, sources of revenue, and branding or rebranding initiatives may involve substantial costs and may not be favorably received by customers, resulting in an adverse impact on our financial results, financial condition and stock price. Integration of an acquired company or business also may require management’s time and resources that otherwise would be available for ongoing developmentterms of our
existing business. For example, we have diverted resources from other projects in ordercredit agreement restrict our ability to
develop an expanded carrier screening test as a result of the termination of the third-party laboratory contract with Good Start,incur certain indebtedness and
we may experience difficulties or delays in launching this test. We may also need to divert cash from other uses in order to fund these integration activities. Ultimately, we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment, or these benefits may take longer to realize than we expected.To finance any acquisitions or investments, we may choose to raise additional funds.issue certain equity securities. If we raise funds by issuing equity securities, dilution to our stockholders couldwould result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. In August 2017, in a private placement to certain accredited investors, we offered and sold common stock and Series A convertible preferred stock for gross proceeds of approximately $73.5 million. The Series A preferred stock is a non-voting common stock equivalent and conversion of the Series A preferred stock is prohibited if the holder exceeds a specified threshold of voting security ownership. 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. If we raise funds by issuing debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings, if available, could impose significant restrictions on our operations. If we raise funds through collaborations
The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and licensing arrangements, we might be requiredcould also result in restrictive covenants, such as limitations on our ability to relinquish significantincur additional debt or issue additional equity, limitations on our ability to acquire companies or acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our technologiesbusiness. In addition, the issuance of additional equity securities by us, or products, or grant licenses on terms that are not favorable to us. If the possibility of such issuance, may cause the market price of our common stock is lowto decline. In the event we enter into collaborations or volatile,licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third party on unfavorable terms our rights to tests we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs, selling and marketing initiatives, or potential acquisitions. In addition, we may have to work with a partner on one or more aspects of our tests or market development programs, which could lower the economic value of those tests or programs to our company.
Our strategic realignment and the associated headcount reduction have and are expected to significantly change our business, result in significant expense, may not result in anticipated savings, and will disrupt our business.
On July 18, 2022, we initiated a strategic realignment of our operations and began implementing programs to reduce operating costs and drive future growth aligned with our core genetic testing and data platform and patient network. This realignment involves a significant reduction in our workforce as well as other steps to streamline our operations, including exiting our distributed products business and significantly decreasing our global footprint outside of the United States to less than a dozen countries or territories. Management currently expects that the strategic realignment will be completed in 2023 and estimates that the total costs incurred may be up to $170 million for associated employee severance and benefits, losses on asset disposals, and other restructuring costs including the write-off of prepaid assets related to the exit of certain product offerings, professional service fees and contract exit costs. Actual costs may be higher than we expect. We may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from our realignment efforts due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the expected operational efficiencies and cost savings from the restructuring, our operating results and financial condition would be adversely affected. For example, our divestiture activities may divert management’s attention from our core business operations, result in significant write-offs and other charges, and have an adverse effect on existing relationships with partners, customers, patients and third-party payers. We have also terminated early, changed the scope of, or may not be able to perform under certain contracts as a result of our realignment efforts, and we could incur significant liability if we do not successfully negotiate wind-down provisions or new terms. For example, we have informed certain contractual counterparties that we will not be able to perform under our companion diagnostic development agreements.Any of these or other events could adversely affect our financial condition and results of operations. In addition, we may not be able to acquireretain qualified personnel, which may negatively affect our infrastructure and operations or result in a loss of employees and reduced productivity among remaining employees. For example, our turnaround times in returning test results increased recently. Further, the realignment may yield unintended consequences, such as attrition beyond our intended workforce reduction, reduced employee morale, loss of customers or partners, and other companiesadverse effects on our business.
If our management is unable to successfully manage this transition and realignment activities, our expenses may be more than expected and may vary significant from period to period and we may be unable to implement our business strategy. As a result, our future financial performance, operations, and prospects would be negatively affected.
We rely on highly skilled personnel in a broad array of disciplines and, if we are unable to hire, retain or motivate these individuals, or maintain our corporate culture, we may not be able to maintain the quality of our services or grow effectively.
Our performance, including our research and development programs and laboratory operations, largely depend on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for stock.all areas of our organization, including software developers, geneticists, biostatisticians, certified laboratory scientists and other scientific and technical personnel to process and interpret our genetic tests. In addition, we may need to continue to expand our sales force with qualified and experienced personnel. In July 2022, we initiated a strategic realignment of our operations and began implementing cost reduction programs that will ultimately reduce our workforce by approximately 1,000 employees. This reduction in workforce has and will continue to result in the loss of institutional knowledge and expertise and the reallocation of and combination of certain roles and responsibilities across the organization, all of which could adversely affect our operations. Further, the realignment has and may continue to yield unintended consequences, such as attrition beyond our intended workforce reduction and reduced employee morale. Competition in our industry for qualified employees is intense, and we may not be able to attract or retain qualified personnel in the future due to the competition for qualified personnel among life science and technology businesses as well as universities and public and private research institutions, particularly in the San Francisco Bay Area. In addition, our stockholderscompensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. If the value of our common stock declines significantly, and remains depressed, as it has in the recent past, or if we do not have enough shares authorized to grant equity awards to new and existing employees, we may not be able to recruit and retain qualified employees. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience substantial dilutionconstraints that could adversely affect our ability to scale our business and support our research and development efforts and our clinical laboratory. We believe that our corporate culture fosters innovation, creativity and teamwork. However, as our organization grows and evolves, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our ability to retain and attract employees and our future success.
We need to scale our infrastructure in advance of demand for our tests and other services, and our failure to generate sufficient demand for our tests and other services would have a negative impact on our business and our ability to attain profitability.
Our success depends in large part on our ability to extend our market position, to develop new services, to provide customers with high-quality test reports quickly and at a lower price than our competitors, and to achieve sufficient test volume to realize economies of scale. In order to execute our business model, we intend to continue to invest heavily in order to significantly scale our infrastructure, including our testing capacity and information systems, expand our commercial operations, customer service, billing and systems processes and enhance our internal quality assurance program. We expect that much of this infrastructure growth will be in advance of demand for our tests and other services. Many of our current and future expense levels are fixed. Because the timing and amount of revenue from our services is difficult to forecast, when revenue does not meet our expectations, we may not be able to adjust our spending promptly or reduce our spending to levels commensurate with our revenue. Even if we are able to successfully scale our infrastructure and operations, we cannot assure you that demand for our services will increase at levels consistent with the growth of our infrastructure. If we fail to generate demand commensurate with this growth or if we fail to scale our infrastructure sufficiently in advance of demand to successfully meet such demand, our business, prospects, financial condition and results of operations could be adversely affected.
The global macroeconomic environment could negatively impact our business, our financial position and our results of operations.
Adverse macroeconomic developments, including inflation, slowing growth, rising interest rates, or recession, may adversely affect our business and financial condition. These developments have caused, and could in the future cause, disruptions and volatility in global financial markets and increased rates of default and bankruptcy, and negatively affect business and consumer spending. Adverse economic conditions have and may continue to increase the costs of operating our business, including vendor, supplier and workforce expenses, and may limit our access to capital or may significantly increase our cost of capital. Management continues to evaluate the impact of macroeconomic events, including inflation, on our business and our future plans and intends to take appropriate measures to help alleviate their impact, but there can be no assurance that these efforts will be successful. A weak or declining economy also could strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. A severe or prolonged economic downturn, such as the global financial crisis, could also reduce our ability to raise additional capital when needed on acceptable terms, if at all. Presently, we have customers who have been adversely affected by Russia's invasion of Ukraine, and we have experienced some disruption in our engineering productivity as we have sought to assist contractors in both Ukraine and Russia who have been dislocated or who have chosen to flee Russia. Likewise, the capital and credit markets have been and may continue to be adversely affected by the invasion, the possibility of a wider European or global conflict, and global sanctions imposed in response to the invasion. We cannot predict the future trajectory of these risks, including how the macroeconomic environment will evolve or how it will continue to impact us.
Specifically, difficult macroeconomic conditions, such as cost inflation, decreases in per capita income and level of disposable income, increased and prolonged unemployment or a decline in consumer confidence as a result of additional securitiesCOVID-19 or otherwise, as well as limited or significantly reduced points of access of our tests, could have a material adverse effect on the demand for our tests. Under difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing our tests. Decreased demand for our tests, particularly in the United States, has negatively affected and could continue to negatively affect our overall financial performance.
We face risks related to health epidemics, including the ongoing COVID-19 pandemic, which could have a material adverse effect on our business and results of operations.
Our business has been and could continue to be adversely affected by a widespread outbreak of contagious disease, including the COVID-19 pandemic. Global health concerns relating to COVID-19 have negatively affected the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. As discussed in our prior and current Form 10-K and 10-Q filings, our operations have been and will continue to be impacted by the COVID-19 pandemic and its related economic challenges. Even after COVID-19 has subsided, we may issue for acquisitions. Open market salescontinue to experience an adverse impact to our business as a result of substantial amountsits global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of
our common stock issued to stockholdersthe spread of
companies we acquire could also depress our share price. Alternatively, it may be necessary for us to raise additional funds for our acquisition activities through publicCOVID-19, and, as a result, the ultimate impact of COVID-19 or
private financings. Additional funds may not be available on terms that are favorable to us, or at all. In addition, our Amended 2017 Loan Agreement limits our ability to merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of our capital stocka similar health epidemic is highly uncertain and
make investments, in each case subject to
certain exceptions.16
change.
If third-party payers, including managed care organizations, private health insurers and government health plans, do not provide adequate reimbursement for our tests or we are unable to comply with their requirements for reimbursement, our commercial success could be negatively affected.
Our ability to increase the number of billable tests and our revenue will depend on our success achieving reimbursement for our tests from third-party payers. Reimbursement by a payer may depend on a number of factors, including a payer’s determination that a test is appropriate, medically necessary, and
cost-effective.cost-effective, and/or whether the patient has received prior authorization.
Since each payer makes its own decision as to whether to establish a policy or enter into a contract to cover our tests, as well as the amount it will reimburse for a test, seeking these approvals is a time-consuming and costly process. In addition, the determination by a payer to cover and the amount it will reimburse for our tests will likely be made on an
indication by indicationindication-by-indication basis. To date, we have obtained policy-level reimbursement approval or contractual reimbursement for some indications for our
testgermline tests from
manymost of the large commercial third-party payers in the United States, and the Centers for Medicare
and& Medicaid Services,
or CMS, provides reimbursement for our multi-gene tests for hereditary breast
and ovarian cancer-related disorders as well as colon cancer. We believe that establishing adequate reimbursement from Medicare is an important factor in gaining adoption from healthcare providers. Our claims for reimbursement from third-party payers 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. In cases where there is not a contracted rate for reimbursement, there is typically a greater
co-insurancecoinsurance or
co-paymentcopayment requirement from the patient, which may result in further delay or decreased likelihood of collection.
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
mayoften vary from payer to payer, and
it may be time-consumingwe have needed additional time and
require additional resources to
meet these requirements.comply with them. We
have also experienced, and may
alsocontinue to experience, delays in or denials of coverage if we do not adequately comply with these requirements.
Our third-party payers have also requested, and in the future may request, audits of the amounts paid to us. We have been required to repay certain amounts to payers as a result of such audits, and we could be adversely affected if we are required to repay other payers for alleged overpayments due to lack of compliance with their reimbursement policies. 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 and any future tests we may
develop.develop or acquire. If we fail to expand and maintain broad adoption of, and coverage and reimbursement for, our tests, our ability to generate revenue could be harmed and our future prospects and our business could suffer.
Our inability to raise additional capital on acceptable terms in the future may limit our ability to develop and commercialize new tests and expand our operations.
We expect capital expenditures and operating expenses to increase over the next several years as we expand our infrastructure, commercial operations and research and development activities. We believe our existing cash and cash equivalents as of December 31, 2017, revenue from the sale of our tests, and term loans available to us pursuant to the Amended 2017 Loan Agreement, will be sufficient to meet our anticipated cash requirements for our currently-planned operations for the 12-month period following the filing date of this report. We may need additional funding to finance operations prior to achieving profitability, or should we make additional acquisitions. We may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. If we raise funds by issuing equity securities, dilution to our stockholders would result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings, if available, could impose significant restrictions on our operations. Our obligations under our Amended 2017 Loan Agreement are subject to covenants, including quarterly covenants to achieve certain volume and revenue levels as well as additional covenants, including limits on our 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 our capital stock, repurchase stock and make investments, in each case subject to certain exceptions. The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations on our ability to acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event that we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third party on unfavorable terms our rights to tests we otherwise would seek to develop or commercialize ourselves, or
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reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or selling and marketing initiatives. In addition, we may have to work with a partner on one or more aspects of our tests or market development programs, which could lower the economic value of those tests or programs to our company.
We will need to scale our infrastructure in advance of demand for our tests, and our failure to generate sufficient demand for our tests would have a negative impact on our business and our ability to attain profitability.
Our success will depend in large part on our ability to extend our market position, to provide customers with high quality test reports quickly and at a lower price than our competitors, and to achieve sufficient test volume to realize economies of scale. In order to execute our business model, we intend to continue to invest heavily in order to significantly scale our infrastructure, including our testing capacity and information systems, expand our commercial operations, customer service, billing and systems processes and enhance our internal quality assurance program. We need to continue to hire and retain sufficient numbers of skilled personnel, including software developers, geneticists, biostatisticians, certified laboratory scientists and other scientific and technical personnel to process and interpret our genetic tests. In addition, we may in the future need to expand our sales force with qualified and experienced personnel. We expect that much of this growth will be in advance of demand for our tests. Our current and future expense levels are to a large extent fixed and are largely based on our investment plans and our estimates of future revenue. Because the timing and amount of revenue from our tests is difficult to forecast, when revenue does not meet our expectations we may not be able to adjust our spending promptly or reduce our spending to levels commensurate with our revenue. Even if we are able to successfully scale our infrastructure and operations, we cannot assure you that demand for our tests will increase at levels consistent with the growth of our infrastructure. If we fail to generate demand commensurate with this growth or if we fail to scale our infrastructure sufficiently in advance of demand to successfully meet such demand, our business, prospects, financial condition and results of operations could be adversely affected.
We face intense competition, which is likely to intensify further as existing competitors devote additional resources to, and new participants enter, the
market.markets in which we operate. If we cannot compete successfully, we may be unable to increase our revenue or achieve and sustain profitability.
With the development of next generation sequencing, the clinical genetics market is becoming increasingly competitive, and we expect this competition to intensify in the future. We face competition from a variety of sources, including:
•dozens of relatively specialized competitors focused on inherited clinical genetics and gene sequencing,applied to healthcare, such as Ambry Genetics, Inc., a subsidiary of Konica Minolta Inc.,Realm IDx; Athena Diagnostics a subsidiaryand Blueprint Genetics, subsidiaries of Quest Diagnostics Incorporated, BaylorDiagnostics; Baylor-Miraca Genetics Blueprint Genetics, Inc.,Laboratories; Caris Life Sciences; Centogene AC,AG; Color Genomics, Inc.,Health; Connective Tissue Gene Test, LLC, Cooper Surgical, Counsyl, Inc., Eurofins Scientific, GeneDx, a subsidiary of OPKO Health Inc.,Network Laboratories; Cooper Surgical; Emory Genetics Laboratory, a subsidiary of Eurofins Scientific; Exact Sciences; Foundation Medicine, a subsidiary of Roche Holding AG; Fulgent Genetics; GeneDx Holdings; Guardant Health; Integrated Genetics, Sequenom, Correlagen Diagnostics, and MNG Laboratories, LLC,subsidiaries of Labcorp; Myriad Genetics, Inc., or Myriad, Natera, Inc., PreventionGenetics, LLCGenetics; Natera; NeoGenomics; Perkin Elmer; and Progenity, Inc.;
•a few large, established general testing companies with large market share and significant channel power, such as Laboratory Corporation of America HoldingsLabcorp and Quest Diagnostics Incorporated;
•a large number of clinical laboratories in an academic or healthcare provider setting that perform clinical genetic testing on behalf of their affiliated institutions and often sell and market more broadly; and
•a large number of new entrants into the market for genetic information ranging from informatics and analysis pipeline developers to focused, integrated providers of genetic tools and services for health and wellness including Illumina, Inc., whowhich is also one of our suppliers.
Hospitals, academic medical centers and eventually physician practice groups and individual clinicians may also seek to perform at their own facilities the type of genetic testing we would otherwise perform for them. In this regard, continued development of equipment, reagents, and other materials as well as databases and interpretation services may enable broader direct participation in genetic testing and analysis.
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Participants in closely related markets such as clinical trial or companion diagnostic testing could converge on offerings that are competitive with the type of tests we perform. Instances where potential competitors are aligned with key suppliers or are themselves suppliers could provide such potential competitors with significant advantages.
In addition, the biotechnology and genetic testing fields are intensely competitive both in terms of service and price, and continue to undergo significant consolidation, permitting larger clinical laboratory service providers to increase cost efficiencies and service levels, resulting in more intense competition.
We also face competition as a result of our 2021 acquisition of Ciitizen Corporation ("Ciitizen"). Ciitizen competes with companies in the patient data platform business, including, among others, PicnicHealth, All Stripes Research Inc., Seqster PDM, Inc., Apple Inc. ("Apple"), and Flatiron Health, Inc.
We believe the principal competitive factors in our market are:
•breadth and depth of content;
•reliability;
•accessibility of results;
•turnaround time of testing results;
•price and quality of tests;
•coverage and reimbursement arrangements with third-party payers;
•brand recognition of test provider;
•additional value-added services and informatics tools;
•quality of website content.
Many of our competitors and potential competitors have longer operating histories, larger customer bases, greater brand recognition and market penetration, higher margins on their tests, substantially greater financial, technological and research and development resources,
and selling and marketing capabilities,
lobbying efforts, and more experience dealing with third-party payers. As a result, they may be able to respond more quickly to changes in customer requirements, devote greater resources to the development, promotion and sale of their tests than we do,
or sell their tests at prices designed to win significant levels of market
share.share, or obtain reimbursement from more third-party payers and at higher prices than we do. We may not be able to compete effectively against these organizations. Increased competition and cost-saving initiatives on the part of governmental entities and other third-party payers are likely to result in pricing pressures, which could harm our sales, profitability or ability to gain market share. In addition, competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies as use of next generation sequencing for clinical diagnosis and preventative care increases. Certain of our competitors may be able to secure key inputs from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to website and systems development than we can. In
the past, our competitors have been successful in recruiting our employees and may continue to recruit qualified employees from us. In addition, companies or governments that control access to genetic testing through umbrella contracts or regional preferences could promote our competitors or prevent us from performing certain services.
Some of our competitors have obtained approval or clearance for certain of their tests from the FDA. If payers decide to reimburse only for tests that are FDA-approved or FDA-cleared, or if they are more likely to reimburse for such tests, we may not be able to compete effectively unless we obtain similar approval or clearance for our tests. If we are unable to compete successfully against current and future competitors, we may be unable to increase market acceptance and sales of our tests, which could prevent us from increasing our revenue or achieving profitability and could cause our stock price to decline.
The market for patient data software is competitive, and our business will be adversely affected if we are unable to successfully compete.
The market for patient data software is competitive. Other than product innovation and access to healthcare data, there are no substantial barriers to entry in this market, and established or new entities may enter this market in the future. While software internally developed by enterprises represents indirect competition, we also compete directly with packaged application software vendors. In addition, we face actual or potential competition from larger companies such as Apple, and similar companies that may attempt to sell customer engagement software to their installed base.
We
believe competition will continue to be substantial as current competitors increase the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, broader brand recognition, and significantly greater financial, marketing and other resources. With more established and better-financed competitors, these companies may
not be able to
manage our future growth effectively, which couldundertake more extensive marketing campaigns, adopt more aggressive pricing policies, and make
it difficultmore attractive offers to
execute our business strategy.Our expected future growth could create a strain on our organizational, administrative and operational infrastructure, including laboratory operations, quality control, customer service, marketing and sales, and management. We may not be ablebusinesses to maintain the quality ofinduce them to use their products or expected turnaround times for our tests, or satisfy customer demand as it grows. We may need to continue expanding our sales force to facilitate our growth and we may have difficulties locating, recruiting, training and retaining sales personnel. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls, as well as our reporting systems and procedures. We plan to implement new enterprise software systems in a number of areas affecting a broad range of business processes and functional areas. The time and resources required to implement
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these new systems is uncertain, and failure to complete these activities in a timely and efficient manner could adversely affect our operations.services. If we are unable to compete successfully, our business will be adversely affected.
Security breaches, privacy issues, loss of data and other incidents could compromise sensitive or personal information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
In the ordinary course of our business, we collect and store sensitive data, including protected health information, or PHI, personally identifiable information, genetic information, credit card information, intellectual property and proprietary business information owned or controlled by ourselves or our customers, payers and other parties. We manage and maintain our growth effectively, itapplications and data utilizing a combination of on-site systems, managed data center systems and cloud-based systems. We also communicate PHI and other sensitive patient data through our various customer tools and platforms. In addition to storing and transmitting sensitive data that is subject to multiple legal protections, these applications and data encompass a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate disclosure, inappropriate modification, and the risk of our being unable to adequately monitor and modify our controls over our critical information. Any technical problems that may arise in connection with our data and systems, including those that are hosted by third-party providers, could result in interruptions to our business and operations or exposure to security vulnerabilities. These types of problems may be difficultcaused by a variety of factors, including infrastructure changes, intentional or accidental human actions or omissions, software errors, malware, viruses, security attacks, ransomware fraud, spikes in customer usage and denial of service issues. There continues to be a significant level of in ransomware and cyber security attacks related to the ongoing conflict between Russia and Ukraine, which could result in substantial harm to internal systems necessary for usrunning our critical operations and revenue generating services.
The secure processing, storage, maintenance and transmission of this critical information are vital to
execute our
operations and business strategy, and
we devote significant resources to protecting such information. Although we take what we believe to be reasonable and appropriate measures, including a formal, dedicated enterprise security program, to protect sensitive information from various compromises (including unauthorized access, disclosure, or modification or lack of availability), our
businessinformation technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other disruptions. For example, we have been subject to phishing incidents in the past, and we may experience additional incidents in the future. Any such breach or interruption could compromise our networks, and the information stored therein could be
harmed. Future growth in our businessaccessed by unauthorized parties, altered, publicly disclosed, lost or stolen. Unauthorized access, loss or dissemination could also
make it difficult for us to maintaindisrupt our
corporate culture.Our success will depend in part onoperations, including our ability to generate sales usingconduct our internal sales teamanalyses, provide test results, bill payers or patients, process claims and through alternative marketing strategies.
We may not be able to market or sellappeals, provide customer assistance, conduct research and development activities, collect, process and prepare company financial information, provide information about our current tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business.
In addition to data security risks, we face privacy risks. Should we actually violate, or be perceived to have violated, any future testsprivacy commitments we may develop effectively enoughmake to drive demand sufficientpatients or consumers, we could be subject to support our planned growth. We currently sell our testsa complaint from an affected individual or interested privacy regulator, such as the FTC, a state Attorney General, an EU Member State Data Protection Authority, or a data protection authority in another international jurisdiction. This risk is heightened given the sensitivity of the data we collect.
Any security compromise that causes an apparent privacy violation could also result in legal claims or proceedings and liability and penalties under federal, state, foreign, or multinational laws that regulate the privacy, security, or breach of personal information, such as but not limited to HIPAA, HITECH, the FTC Act, state UDAP data security and data breach notification laws, the GDPR and the UK Data Protection Act of 2018.
There has been unprecedented activity in the development of data protection regulation around the world. As a result, the interpretation and application of consumer, health-related and data protection laws in the United States, through our internal sales forceEurope and elsewhere are often uncertain, contradictory and in flux. The GDPR took effect in May 2018. The GDPR applies to any entity established in the EU as well as extraterritorially to any entity outside the EU that offers goods or services to, or monitors the behavior of, individuals who are located in the EU. Among other requirements, the GDPR imposes strict rules on controllers and processors of personal data, including enhanced protections for “special categories” of personal data, which includes sensitive information such as health and genetic information of data subjects. Maximum penalties for violations of the GDPR are capped at 20.0 million euros or 4% of an organization’s annual global revenue, whichever is greater.
Additionally, the implementation of GDPR has led other jurisdictions to either amend or propose legislation to amend their existing data privacy and cybersecurity laws to resemble the requirements of GDPR. For example, in June 2018, California adopted the California Consumer Privacy Act of 2018, or the CCPA. The CCPA, is a comprehensive consumer privacy law that took effect in January 2020 and was further amended as of January 1, 2023. The CCPA regulates how certain for-profit businesses that meet one or more CCPA applicability thresholds collect, use, and disclose the personal information of natural persons who reside in California. The CCPA does not apply to personal information that is PHI under HIPAA. The CCPA also does not apply to a HIPAA-regulated entity to the extent that the entity maintains patient information in the same manner as PHI. In addition, de-identified data as defined under HIPAA is also exempt from the CCPA. Accordingly, we do not have CCPA compliance obligations with respect to most genetic testing and patient information we collect and process. However, we are required to comply with the CCPA insofar as we collect other categories of California consumers’ personal information.
Virginia, Connecticut, Colorado, and Utah have recently enacted similar privacy acts, and dozens of other states in the United States
with the assistance of distributors. Historically, our sales efforts have been focused primarily on hereditary cancer and our efforts to sell our tests to clinicians outside of oncology may not be successful, or may be difficult to do successfully without significant additional selling and marketing efforts and expense. We significantly increased the size of our sales force in 2017, especially late in 2017 with the integration of the sales forces from our acquired companies and the hiring of new sales personnel. Our future sales will also depend in large part on our ability to develop and substantially expand awareness of our company and our tests through alternative strategies including through education of key opinion leaders, through social media-related and online outreach, education and marketing efforts, and through focused channel partner strategies designed to drive demand for our tests. We have limited experience implementing these types of alternative marketing efforts. We may not be able to drive sufficient levels of revenue using these sales and marketing methods and strategies necessary to support our planned growth, and our failure to do so could limit our revenue and potential profitability.Outside the United States we use distributors to assist with sales, logistics, education, and customer support. Sales practices utilized by our distributors that are locally acceptable may not comply with sales practices standards required under U.S.currently considering similar consumer data privacy laws, that apply to us, which could create additional compliance risk. Ifimpact our sales and marketing efforts are not successful outsideoperations if enacted. Some observers have noted that the United States, we may not achieve significant market acceptance for our tests outsideCCPA could mark the beginning of a trend toward more stringent privacy legislation in the United States, which could increase our potential liability and adversely impactaffect our business.
We rely on highly skilled personnelbusiness, results of operations, and financial condition.
It is possible the GDPR, CCPA and other emerging United States and international data protection laws may be interpreted and applied in a
broad array of disciplines and, ifmanner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we
are unable to hire, retain or motivate these individuals, or maintainchange our
corporate culture, we may not be able to maintain the quality of our services or grow effectively.Our performance, including our research and development programs and laboratory operations, largely depend on our continuing ability to identify, hire, develop, motivate, and retain highly skilled personnel for all areas of our organization, including scientists, biostatisticians, technicians and software developers. Competition in our industry for qualified employees is intense, and we may not be able to attract or retain qualified personnel in the future, including scientists, biostatisticians, technicians and software developers, due to the competition for qualified personnel among life science businesses as well as universities and public and private research institutions, particularly in the San Francisco Bay Area. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints thatpractices, which could adversely affect our abilitybusiness. In addition, these privacy laws and regulations may differ from country to scalecountry and state to state, and our obligations under these laws and regulations vary based on the nature of our activities in the particular jurisdiction, such as whether we collect samples from individuals in the local jurisdiction, perform testing in the local jurisdiction, or process personal information regarding employees or other individuals in the local jurisdiction. Complying with these various laws and regulations could cause us to incur substantial costs or require us to change our business supportpractices and compliance procedures in a manner adverse to our researchbusiness. We can provide no assurance that we are or will remain in compliance with diverse privacy and development effortsdata security requirements in all of the jurisdictions in which we do business. Failure to comply with privacy and data security requirements could result in a variety of consequences, including civil or criminal penalties, litigation, or damage to our clinical laboratory. We believe thatreputation, any of which could have a material adverse effect on our corporate culture fosters innovation, creativity and teamwork. However, as our organization grows, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our ability to retain and attract employees and our future success.
business.
If we are not able to continue to generate substantial demand
offor our tests, our commercial success will be negatively affected.
Our business model assumes that we will be able to generate significant test volume, and we may not succeed in continuing to drive
clinical adoption of our
testtests to achieve sufficient volumes. Inasmuch as detailed genetic data from broad-based testing panels such as our tests have only recently become available at relatively affordable prices, the continued pace and degree of clinical acceptance of the utility of such testing is uncertain. Specifically, it is uncertain how much genetic data will be accepted as necessary or useful, as well as how detailed that data should be, particularly since medical practitioners may have become accustomed to genetic testing that is specific to one or a few genes. Given the substantial amount of additional information available from a broad-based testing panel such
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as ours, there may be distrust as to the reliability of such information when compared with more limited and focused genetic tests. To generate further demand for our tests, we will need to continue to make clinicians aware of the benefits of our tests, including the price, the breadth of our testing options, and the benefits of having additional genetic data available from which to make treatment decisions. Because broad-based testing panels are relatively new, it may be more difficult or take more time for us to expand clinical adoption of our assay beyond our current customer base. In addition, clinicians in other areas of medicine may not adopt genetic testing for hereditary disease as readily as it has been adopted in hereditary cancer and our efforts to sell our tests to clinicians outside of oncology may not be successful. A lack of or delay in clinical acceptance of broad-basedbroad-
based panels such as our tests would negatively impact sales and market acceptance of our tests and limit our revenue growth and potential profitability. Genetic testing iscan be expensive and many potential customers may be sensitive to pricing. In addition, potential customers may not adopt our tests if adequate reimbursement is not available, or if we are not able to maintain low prices relative to our competitors. Also, we may not be successful in increasing demand for our tests through our direct channel, in which we facilitate the ordering of our genetic tests by consumers through an online network of physicians.
If we are not able to generate demand for our tests at sufficient volume, or if it takes significantly more time to generate this demand than we anticipate, our business, prospects, financial condition and results of operations could be materially harmed.
We have devoted a portion of our resources to research and development activities related to our Personalized Cancer Monitoring ("PCM") service for cancer monitoring. The demand for this service is unproven, and we may not be successful in achieving market awareness and demand for these services through our sales and marketing operations.
Our success will depend on our ability to use rapidly changing genetic data to interpret test results accurately and consistently, and our failure to do so would have an adverse effect on our operating results and business, harm our reputation and could result in substantial liabilities that exceed our resources.
Our success depends on our ability to provide reliable, high-quality tests that incorporate rapidly evolving information about the role of genes and gene variants in disease and clinically relevant outcomes associated with those variants. Errors, such as failure to detect genomic variants with high accuracy, or mistakes, such as failure to identify, or incompletely or incorrectly identifying, gene variants or their significance, could have a significant adverse impact on our business.
In August 2017, a client reported a discrepancy between an Invitae test report and a test report issued by another laboratory for the presence of a single rare variant in the MSH2 gene known as the Boland inversion. This gene is associated with Lynch syndrome, which is a familial cancer syndrome that significantly increases the risk of colorectal and other cancers. Our assay had reliably detected the Boland inversion event since its first validation. However, during the implementation of an update to the assay, we omitted the components designed specifically to identify the Boland inversion event. As soon as we learned of the error, we quickly rectified it and implemented three new quality checks designed to ensure this type of error does not happen again. We notified all potential patients impacted by this incident and reanalyzed our previous test results to ensure their accuracy. Less than 10 patients were affected by this incident.
Hundreds of genes can be implicated in some disorders, and overlapping networks of genes and symptoms can be implicated in multiple conditions. As a result, a substantial amount of judgment is required in order to interpret testing results for an individual patient and to develop an appropriate patient report. We classify variants in accordance with published guidelines as benign, likely benign, variants of uncertain significance, likely pathogenic or pathogenic, and these guidelines are subject to change. In addition, it is our practice to offer support to clinicians and geneticists ordering our tests regarding which genes or panels to order as well as interpretation of genetic variants. We also rely on clinicians to interpret what we report and to incorporate specific information about an individual patient into the physician’s treatment decision.
The marketing, sale and use of our genetic tests could subject us to liability for errors in, misunderstandings of, or inappropriate reliance on, information we provide to clinicians,
geneticists or
geneticists,patients, and lead to claims against us if someone were to allege that a test failed to perform as it was designed, if we failed to correctly interpret the test results,
if we failed to update the test results due to a reclassification of the variants according to new published guidelines, or if the ordering physician were to misinterpret test results or improperly rely on them when making a clinical decision.
In addition, our entry into the reproductive health and pharmacogenetic testing markets expose us to increased liability. A product liability or professional liability claim could result in substantial damages and be costly and time-consuming for us to defend. Although we maintain liability insurance, including for errors and omissions, we cannot assure you that such insurance would fully protect us from the financial impact of defending against these types of claims or any judgments, fines or settlement costs arising out of any such claims. Any liability claim, including an errors and omissions liability claim, brought against us, with or without merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any liability lawsuit could cause injury to our reputation or cause us to suspend sales of our tests. The occurrence of any of these events could have an adverse effect on our reputation and results of operations.
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Our industry is subject to rapidly changing technology and new and increasing amounts of scientific data related to genes and genetic variants and their role in disease. Our failure to develop tests to keep pace with these changes could make us obsolete.
In recent years, there have been numerous advances in methods used to analyze very large amounts of genomic information and the role of genetics and gene variants in disease and treatment therapies. Our industry has and will continue to be characterized by rapid technological change, increasingly larger amounts of data, frequent new testing service introductions and evolving industry standards, all of which could make our tests obsolete. Our future success will also depend on our ability to keep pace with the evolving needs of our customers on a timely and cost-effective basis and to pursue new market opportunities that develop as a result of technological and scientific advances. Our tests could become obsolete and our business adversely affected unless we continually update our
offerings to reflect new scientific knowledge about genes and genetic variations and their role in diseases and treatment therapies.
Security breaches, loss of data
Our success will depend in part on our ability to generate sales using our internal sales team and other disruptions could compromise sensitive information relatedthrough alternative marketing strategies.
We may not be able to
market or sell our
businesscurrent tests and any future tests we may develop or
prevent us from accessing critical information and expose usacquire effectively enough to
liability, which could adversely affectdrive demand sufficient to support our
business andplanned growth. We currently sell our
reputation.In the ordinary course of our business, we collect and store sensitive data, including protected health information, personally identifiable information, intellectual property and proprietary business information owned or controlled by ourselves or our customers, payers, and other parties. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems, and cloud-based data center systems. We also communicate sensitive patient datatests primarily through our Invitae Family History Tool, Patient Insights Network,internal sales force. Historically, our sales efforts have been focused primarily on hereditary cancer and more recently on reproductive health. Our efforts to sell our tests to clinicians and patients outside of oncology may not be successful, or PIN,may be difficult to do successfully without significant additional selling and CancerGene Connect platform.marketing efforts and expense. In addition to storing and transmitting sensitive personal information that is subject to myriad legal protections, these applications and data encompass a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate disclosure, inappropriate modification, and the riskefforts of our being unablesales force, future sales will depend in large part on our ability to adequately monitordevelop and modifysubstantially expand awareness of our controls overcompany and our critical information. Any technical problems thattests through alternative strategies including through education of key opinion leaders, through social media-related and online outreach, education and marketing efforts, and through focused channel partner strategies designed to drive demand for our tests. We also may arisecontinue to spend on consumer advertising in connection with our datadirect channel to consumers, which could be costly. We have limited experience implementing these types of marketing efforts. We may not be able to drive sufficient levels of revenue using these sales and systems, including thosemarketing methods and strategies necessary to support our planned growth, and our failure to do so could limit our revenue and potential profitability.
We also use a limited number of distributors to assist internationally with sales, logistics, education and customer support. Sales practices utilized by our distributors that are
hosted by third-party providers, could result in interruptions in our business and operations. These types of problemslocally acceptable may
be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. From time to time, large third-party web hosting providers have experienced outages or other problems that have resulted in their systems being offline and inaccessible. Such outages could materially impact our business and operations.The secure processing, storage, maintenance and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take what we believe to be reasonable and appropriate measures to protect sensitive information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance, or other disruptions. Any such breach or interruption could compromise our networks and the information stored there could be accessed by unauthorized parties, altered, publicly disclosed, lost, or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liabilitynot comply with sales practices standards required under federal or stateU.S. laws that protectapply to us, which could create additional compliance risk. If our sales and marketing efforts are not successful outside the privacy of personal information, such as butUnited States, we may not limited to the Health Insurance Portability and Accountability Act of 1996, or HIPAA, the Health Information Technologyachieve significant market acceptance for Economic and Clinical Heath Act, or HITECH, state data security and data breach notification laws, and related regulatory penalties. Although we have implemented security measures and a formal, dedicated enterprise security program to prevent unauthorized access to patient data, our Invitae Family History Tool, PIN and CancerGene Connect platform are currently accessible through our online portal and/or through our mobile applications, and there is no guarantee we can protect our online portal or our mobile applications from breach. Unauthorized access, loss or dissemination could also disrupt our operations (including our ability to conduct our analyses, provide test results, bill payers or patients, process claims and appeals, provide customer assistance, conduct research and development activities, collect, process, and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manageoutside the administrative aspects of our business) and damage our reputation, any ofUnited States, which could adversely affectimpact our business.
In addition to security risks, we also face privacy risks. While we have policies that govern our privacy practices and procedures that aim to keep our practices consistent with such policies, such procedures are not
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invulnerable to human error. Should we inadvertently break the privacy promises we make to patients or consumers, we could receive a complaint from an affected individual or interested privacy regulator, such as the FTC or a state Attorney General. This risk is heightened given the sensitivity of the data we collect.
Penalties for failure to comply with a requirement of HIPAA and HITECH vary significantly, and include civil monetary penalties of up to $1.5 million per calendar year for each provision of HIPAA that is violated. A person who knowingly obtains or discloses individually identifiable health information in violation of HIPAA may face a criminal penalty of up to $50,000 and up to one-year imprisonment. The criminal penalties increase if the wrongful conduct involves false pretenses or the intent to sell, transfer, or use identifiable health information for commercial advantage, personal gain, or malicious harm. Penalties for unfair or deceptive acts or practices under the FTC Act or state UDAP statutes may also vary significantly.
There has been unprecedented activity
Impairment in the developmentvalue of data protection regulation around the world. As a result, the interpretationour goodwill or other intangible assets has and application of consumer, health-related, and data protection lawsmay in the United States, Europe and elsewhere are often uncertain, contradictory, and in flux. For example, the European Union’s forthcoming General Data Protection Regulation, or GDPR, takes effect in May 2018. While the text of the GDPR has been published, the European authorities have only begun to issue guidance and interpretations of the text, leaving companies in and outside of Europe to interpret the majority of the GDPR on their own. With this new EU law and many others all over the world, it is possible that laws may be interpreted and applied in a manner that is inconsistent with our practices. If so, this could result in government-imposed fines or orders requiring that we change our practices, which could adversely affect our business. In addition, these privacy regulations may differ from country to country, and may vary based on whether testing is performed in the United States or in the local country. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices and compliance procedures in a manner adverse to our business. We can provide no assurance that we are or will remain in compliance with diverse privacy and security requirements in all of the jurisdictions in which we do business. Failure to comply with privacy and security requirements could result in civil or criminal penalties, which couldfuture have a material adverse effect on our operating results and financial condition.
We record goodwill and intangible assets at fair value upon the acquisition of a business.
Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its estimated fair value. Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of our reporting unit has and may in the future result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. These charges in the three months ended June 30, 2022 and any future charges related to intangible assets have, and may in the future have, a material adverse effect on our results of operations or financial condition.
During the three months ended June 30, 2022, as a result of a significant, sustained decline in our stock price and related market capitalization and lower than expected financial performance, we performed an impairment assessment of goodwill, in-process research and development ("IPR&D") intangible assets, and long-lived assets, including definite-lived intangibles.
For our goodwill, we measured the fair value of the reporting unit utilizing the discounted cash flow method under the income approach. This approach relies on significant unobservable inputs including, but not limited to, management's forecasts of projected revenue associated with future cash flows, discount rates, and control premium. Based on this analysis, we recognized a non-cash, pre-tax goodwill impairment charge of $2.3 billion during the three months ended June 30, 2022, which is included in goodwill and IPR&D impairment expense in the consolidated statements of operations.
We also identified indicators of impairment related to the IPR&D intangible asset initially recognized as part of the acquisition of Singular Bio, Inc. ("Singular Bio") that it was more likely than not that the asset is impaired. We identified conditions during the three months ended June 30, 2022 such as alternative technologies and uncertainties around the desired outcome of our in-development asset and other economic factors that raised issues with the realizability of our asset. As a result of our evaluation, we recognized a non-cash, pre-tax impairment charge of $30.0 million during the three months ended June 30, 2022 related to the IPR&D intangible asset, which is included in goodwill and IPR&D impairment expense in the consolidated statements of operations.
We rely on a limited number of suppliers or, in some cases, sole suppliers, for some of our laboratory instruments,
materials and
materials,services, and we may not be able to find replacements or immediately transition to alternative suppliers.
We rely on a limited number of suppliers, or, in some cases, sole suppliers, including
llumina, Inc., Integrated DNA Technologies Incorporated, Qiagen N.V.,Illumina, IDT, QIAGEN, Roche Holdings Ltd.
, and Twist Bioscience Corporation for certain laboratory substances used in the chemical reactions incorporated into our processes, which we refer to as reagents, as well as sequencers and other equipment and materials which we use in our laboratory operations. We do not have
any short- or long-term agreements with
most of our suppliers, and our suppliers could cease supplying these materials and equipment at any time, or fail to provide us with sufficient quantities of materials or materials that meet our specifications. Our laboratory operations could be interrupted if we encounter delays or difficulties in securing these reagents, sequencers or other equipment or materials, and if we cannot obtain an acceptable substitute. Any such interruption could significantly affect our business, financial condition, results of operations and reputation. We rely on Illumina as the sole supplier of next generation sequencers and associated reagents and as the sole provider of maintenance and repair services for these sequencers. Any disruption in Illumina’s operations could impact our supply chain and laboratory operations as well as our ability to conduct our tests, and it could take a substantial amount of time to integrate replacement equipment into our laboratory operations.
We believe that there are only a few other manufacturers that are currently capable of supplying and servicing the equipment necessary for our laboratory operations, including sequencers and various associated reagents. The use of equipment or materials provided by these replacement suppliers would require us to alter our laboratory operations. Transitioning to a new supplier would be time consuming and expensive, may result in interruptions in our laboratory operations, could affect the performance specifications of our laboratory operations or could require that we revalidate our tests. We cannot assure you that we will be able to secure alternative equipment, reagents and other materials, and bring such equipment, reagents and materials
on lineonline and revalidate them without experiencing interruptions in our workflow. In the case of an alternative supplier for Illumina, we cannot assure you that replacement sequencers and associated reagents will be available or will meet our quality control and performance requirements for our laboratory operations. If we encounter delays or difficulties in securing, reconfiguring or revalidating the equipment and reagents we require for our tests, our business, financial condition, results of operations and reputation could be adversely affected.
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If our laboratories in California and Massachusetts become inoperable due to disasters or for any other reason, we will be unable to perform our tests and our business will be harmed.
We perform all of our tests at our production facilities in San Francisco, California, Irvine, California and Cambridge, Massachusetts. Our laboratories and the equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use. Our laboratories may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, fire and power outages, which may render it difficult or impossible for us to perform our tests for some period of time. The inability to perform our tests or the backlog that could develop if our laboratories are inoperable for even a short period of time may result in the loss of customers or harm our reputation. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all.
The loss of any member or change in structure of our senior management team could adversely affect our business.
Our success depends in large part upon the skills, experience and performance of members of our executive management team and others in key leadership positions. The efforts of these persons will be critical to us as we continue to develop our technologies and test processes and focus on scaling our business. If we were to lose one or more key executives, we may experience difficulties in competing effectively, developing our technologies and implementing our business strategy. All of our executives and employees are at-will, which means that either we or the executive or employee may terminate their employment at any time. We do not carry key man insurance for any of our executives or employees. In addition, we do not have a long-term retention agreement in place with our president and chief executive officer. In early 2017, we announced that our former chief executive officer and chairman of the board was appointed executive chairman and our former president and chief operating officer was appointed president and chief executive officer. In March 2018, our executive chairman ceased to be an employee, but continues to serve as chairman of the board. We may experience difficulties as our organization continues to adapt to this new leadership structure.
Development of new tests is a complex process, and we may be unable to commercialize new tests on a timely basis, or at all.
We cannot assure you that we will be able to develop and commercialize new tests on a timely basis. Before we can commercialize any new tests, we will need to expend significant funds in order to:
conduct research and development;
further develop and scale our laboratory processes; and
further develop and scale our infrastructure to be able to analyze increasingly larger and more diverse amounts of data.
Our testing service development process involves risk, and development efforts may fail for many reasons, including:
failure of any test to perform as expected;
lack of validation or reference data; or
failure to demonstrate utility of a test.
As we develop tests, we will have to make significant investments in development, marketing and selling resources. In addition, competitors may develop and commercialize competing tests faster than we are able to do so.
We depend on our information technology systems, and any failure of these systems could harm our business.
We depend on information technology and telecommunications systems for significant elements of our operations, including our laboratory information management system, our bioinformatics analytical software systems, our database of information relating to genetic variations and their role in disease process and drug metabolism, our
patient data platform, our clinical report optimization systems, our customer-facing web-based software, our customer
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reporting, our Patient Insights Networks, or PINs, and our family historyvarious customer tools and risk assessment tools.platforms. We have installed, and expect to expand, a number of enterprise software systems that affect a broad range of business processes and functional areas, including for example, systems handling human resources, financial controls and reporting, customer relationship management, regulatory compliance and other infrastructure operations. In addition, we intend to extend the capabilities of both our preventative and detective security controls by augmenting the monitoring and alerting functions, the network design, and the automatic countermeasure operations of our technical systems. These information technology and telecommunications systems support a variety of functions, including laboratory operations, test validation, sample tracking, quality control, customer service support, billing and reimbursement, research and development activities, scientific and medical curation, and general administrative activities, including financial reporting.
Information technology and telecommunications systems are vulnerable to damage from a variety of sources, including telecommunications or network failures, malicious human acts and natural disasters. Moreover, despite network security and back-up measures, some of our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautionary measures we have taken to prevent unanticipated problems that could affect our information technology and telecommunications systems, failures or significant downtime of our information technology or telecommunications systems or those used by our third-party service providers could prevent us from conducting tests, preparing and providing reports to clinicians, billing payers, processing reimbursement appeals, handling physician or patient inquiries, conducting research and development activities, and managing the administrative and financial aspects of our business. Any disruption or loss of information technology or telecommunications systems on which critical aspects of our operations depend could have an adverse effect on our
business.Any technicalbusiness and results of operations.
Technical problems
thathave arisen, and may arise
in the future, in connection with our data and systems, including those that are hosted by third-party providers,
couldwhich have in the past and may in the future result in interruptions in our business and operations. These types of problems may be caused by a variety of factors, including infrastructure changes, human or software errors, viruses, security attacks, fraud, spikes in customer usage and denial of service issues. From time to time, large third-party web hosting providers have experienced outages or other problems that have resulted in their systems being offline and inaccessible. Such outages could materially impact our business and operations.
If our laboratories or other facilities become inoperable due to disasters, health epidemics or for any other reasons, we will be unable to perform our tests and our business will be harmed.
We perform all of our tests at our production facilities in San Francisco, California, in Iselin, New Jersey, and in Seattle, Washington. We also plan to open a new laboratory and production facility in Morrisville, North Carolina. Our laboratories and the equipment we use to perform our tests would be costly to replace and could require substantial lead time to replace and qualify for use. Our laboratories may be harmed or rendered inoperable or inaccessible due to natural or man-made disasters, including earthquakes, hurricanes, flooding, fire and power outages, or by health epidemics, such as the COVID-19 pandemic, which may render it difficult or impossible for us to perform our tests for some period of time. This risk of natural disaster is especially high for us since we perform the majority of our tests at our San Francisco laboratory, which is located in an active seismic region, and we do not have a redundant facility to perform the same tests in the event our San Francisco laboratory is inoperable. The inability to perform our tests or the backlog that could develop if our laboratories are inoperable for even a short period of time may result in the loss of customers or harm our reputation. If a natural disaster were to damage one of our facilities significantly or if other events were to cause our operations to fail or be significantly curtailed, we may be unable to provide our services, or develop new services. Although we maintain insurance for damage to our property and the disruption of our business, this insurance may not cover all of our potential losses and may not continue to be available to us on acceptable terms, if at all. The inability to open the planned facility in North Carolina, delays in opening such facility or failure to obtain required permits, licenses, or certifications, could result in increased costs and prevent us from realizing the intended benefits of the new facility.
The recent changes in our leadership may adversely affect our business.
In July 2022, in connection with our strategic realignment, we announced the appointment of Kenneth D. Knight, who had served as our Chief Operating Officer since 2020, as our Chief Executive Officer. We also announced that Dr. Sean E. George, who co-founded our company and served as our Chief Executive Officer since 2017, would support our company through a transition period as a consultant. These changes in our executive management, and any future changes, as well as the effects of our business realignment, could disrupt our business, and could impact our ability to preserve our culture, which could negatively affect our ability to recruit and retain personnel. If we are not successful in managing the transition of Mr. Knight into his new role, it could be viewed negatively by our customers, employees or investors and could have an adverse impact on our business. Further, these changes also increase our dependency on other members of our executive management team. If we lose the services of any member of the executive management team or any key personnel, we may not be able to secure a suitable or qualified replacement, which could disrupt our business and could be particularly disruptive considering our strategic realignment.
Development of new tests is a complex process, and we may be unable to commercialize new tests on a timely basis, or at all.
We cannot assure you that we will be able to develop and commercialize new tests on a timely basis. Before we can commercialize any new tests, we will need to expend significant funds in order to:
•conduct research and development;
•further develop and scale our laboratory processes; and
•further develop and scale our infrastructure to be able to analyze increasingly larger and more diverse amounts of data.
Our testing service development process involves risk, and development efforts may fail for many reasons, including:
•failure of any test to perform as expected;
•lack of validation or reference data; or
•failure to demonstrate utility of a test.
As we develop tests, we will have to make significant investments in development, marketing and selling resources. In addition, competitors may develop and commercialize competing tests faster than we are able to do so.
Ethical, legal and social concerns related to the use of genetic information could reduce demand for our tests.
Genetic testing has raised ethical, legal and social issues regarding privacy
rights and the appropriate uses of the resulting information. Governmental authorities could, for social or other purposes, limit or regulate the use of genetic information or genetic testing or prohibit testing for genetic predisposition to certain conditions, particularly for those that have no known cure. Similarly, these concerns may lead patients to refuse to use, or clinicians to be reluctant to order, genomic tests even if permissible. These and other ethical, legal and social concerns may limit market acceptance of our tests or reduce the potential markets for our tests, either of which could have an adverse effect on our business, financial condition or results of operations.
We have acquired and may continue to acquire businesses or assets, form joint ventures or make investments in other companies or technologies that could harm our operating results, dilute our stockholders’ ownership, or cause us to incur debt or significant expense.
As part of our business strategy, we have pursued and expect to continue to evaluate acquisitions of complementary businesses or assets, as well as technology licensing arrangements. We also may pursue strategic alliances that leverage our core technology and industry experience to expand our offerings or distribution, or make investments in other companies. Since 2017, we have acquired numerous companies.
With respect to our acquired businesses and any acquisitions we may make in the future, we may not be able to integrate these businesses successfully into our existing business, and we could assume unknown or contingent liabilities. Acquisitions by us have, and may in the future, result in significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results. Furthermore, as we experienced in the past, the loss of customers, payers, partners, suppliers or key management following the completion of any acquisitions by us could harm our business. In addition, as part of our strategic realignment, we have and may continue to divest assets acquired in previous acquisitions at substantial discounts to the price we paid, or without realizing the benefits we intended at the time of the acquisition. Changes in services, sources of revenue, and branding or rebranding initiatives may involve substantial costs and may not be favorably received by customers, resulting in an adverse impact on our financial results, financial condition and stock price. Integration of an acquired company or business also may require management’s time and resources that otherwise would be available for ongoing development of our existing business. We may also need to divert cash from other uses to fund these integration activities and these new businesses. Ultimately, we may not realize the anticipated benefits of any acquisition, technology license, strategic alliance, joint venture or investment, or these benefits may take longer to realize than we expected.
In connection with certain of our completed acquisitions, we have agreed to pay cash and/or stock consideration that is contingent upon the achievement of specified objectives, such as development objectives, regulatory submissions, regulatory approvals and revenue related to certain products. As of the date of the applicable acquisition, we record a contingent liability representing the estimated fair value of the contingent consideration we expect to pay. On a quarterly basis, we reassess these obligations and, in the event our estimate of the fair value of the contingent consideration changes, we record increases or decreases in the fair value as an adjustment to operating expense, which could have a material impact on our results of operations. In addition, in connection with our strategic realignment, we have recently divested or sublicensed certain product offerings, technologies and assets that we had acquired in prior years.
To finance any acquisitions or investments, we may raise additional funds, which could adversely affect our existing stockholders and our business. If the price of our common stock is low or volatile, we may not be able to acquire other companies for stock. In addition, our stockholders may experience substantial dilution as a result of additional securities we may issue for acquisitions. Open market sales of substantial amounts of our common stock issued to stockholders of companies we acquire could also depress our stock price. Additional funds may not be available on terms that are favorable to us, or at all.
Our international business exposes us to business, regulatory, political, operational, financial and economic risks associated with doing business outside of the United States.
We currently have distribution arrangements in several countries outside of the United States.
Doing business internationally involves a number of risks, including:
•multiple, conflicting and changing laws and regulations such as privacy regulations, tax laws, export and import restrictions, employment laws, regulatory requirements, and other governmental approvals, permits and licenses;
•failure by us or our distributors to obtain regulatory approvals for the use of our tests in various countries;
•complexities and difficulties in obtaining protection and enforcing our intellectual property;
•difficulties in staffing and managing foreign operations;
•complexities associated with managing multiple payer reimbursement regimes, government payers or patient self-pay systems;
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| logistics and regulations associated with shipping samples, including infrastructure conditions and transportation delays;
|
•logistics and regulations associated with shipping samples, including infrastructure conditions, customs and transportation delays;
•limits on our ability to penetrate international markets if we do not to conduct our tests locally;
•natural disasters and outbreaks of disease, including the ongoing COVID-19 pandemic;
•political and economic instability, including wars such as the current conflict in Ukraine, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade, government sanctions and other business restrictions;
•inflationary pressures, such as those the global market is currently experiencing, which have and
may increase costs for materials, supplies, and services; and•regulatory and compliance risks that relate to maintaining accurate information and control over activities that may fall within the purview of the U.S. Foreign Corrupt Practices Act, or FCPA, its books and records provisions, or its anti-bribery provisions.
Any of these factors could significantly harm our international operations and, consequently, our revenue and results of operations.
In addition, applicable export or import laws and regulations such as prohibitions on the export of samples imposed by countries outside of the United States, or international privacy or data restrictions that are different or more stringent than those of the United States, may require that we build additional laboratories or engage in joint ventures or other business partnerships in order to offer our tests internationally in the future. Any such restrictions would impair our ability to offer our tests in such countries and could have an adverse effect on our business, financial condition and results of operations.
Changes
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
At December 31, 2022, we have substantial deferred tax assets consisting of federal and state net operating losses and tax credit carryforwards. At December 31, 2022, our total gross deferred tax assets were $795.5 million. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, our net deferred tax assets have been fully offset by a valuation allowance. Under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its future taxable income may be limited. In general, an “ownership change” occurs if there is a cumulative change in
our ownership by “5% stockholders” that exceeds 50 percentage points over a rolling three-year period. Some of our prior acquisitions have resulted in an ownership change, and we may experience ownership changes in the future. Our existing NOLs and tax credit carryovers may be subject to limitations arising from previous ownership changes, and if we undergo one or more ownership changes in connection with completed acquisitions, or other future transactions in our stock, our ability to utilize NOLs and tax credit carryovers could be further limited by Section 382 of the Internal Revenue Code. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss and tax credit carryforwards to offset U.S.
federal taxable income may be subject to limitations, which could potentially result in increased future tax
laws could adversely impactliability to us.
On December 22, 2017, President Trump signed The annual limitation may result in the expiration of certain net operating loss and tax credit carryforwards before their utilization. In addition, the Tax Cuts and Jobs Act (the "Tax Act") into law. The Tax Act contains significant changes to U.S. federal corporate income taxation, including reduction of the corporate tax rate from 35% to 21% for U.S. taxable income, resulting in a one-time remeasurement of deferred taxes to reflect their value at a lower tax rate of 21%, limitation oflimits the deduction for net operating lossesNOLs to 80% of current year taxable income and eliminationeliminates NOL carrybacks. Also, at the state level, there may be periods during which the use of net operating loss carrybacks, deemed repatriation, resultingNOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
Risks related to our indebtedness
We have a large amount of debt, servicing our debt requires a significant amount of cash, we may not have sufficient cash flow from our business to service our debt, and we may need to refinance all or a significant portion of our debt.
In September 2019, we issued $350.0 million aggregate principal amount of our convertible senior notes due 2024 in one-time taxationa private placement, and in April 2021 we issued $1,150.0 million aggregate principal amount of offshore earningsour convertible senior notes due 2028 in a private placement.
Our substantial leverage could have significant negative consequences for our future operations, including:
•increasing our vulnerability to general adverse economic and industry conditions;
•limiting our ability to obtain additional financial for working capital, acquisitions, research and development expenditures, and general corporate purposes;
•requiring the dedication of a substantial portion of our cash flow or our existing cash to service our indebtedness, thereby reducing the amount of our cash available for other purposes;
•limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we compete; or
•placing us at reduced rates, elimination of U.S. tax on foreign earnings (subjecta possible competitive disadvantage compared to certain exceptions),less leveraged competitors and immediate deductions for certain new investments instead of deductions for depreciation expense over time. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognitioncompetitors that have better access to capital resources.
Our ability to make scheduled payments of the tax effectsprincipal of, new legislation duringto pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the reporting periodfuture sufficient to service our debt, including paying off the principal when due, and make necessary capital expenditures. The conversion prices of our convertible notes are significantly higher than the prevailing market prices for our common stock, and our stock price would have to increase significantly in order for holdings to convert our notes prior to maturity. If we are unable to generate cash flow necessary to service or repay our debt at maturity, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that includesmay be onerous or highly dilutive. Our ability to refinance our indebtedness will depend on the enactment date,capital markets and our financial condition at such time, and the terms of any such refinancing may be less favorable to us than the terms of our current indebtedness. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which was December 22, 2017. Ascould result in a resultdefault on our debt obligations.
We may not have the ability to raise the funds necessary to settle conversions of our convertible senior notes in cash or to repurchase the notes upon a fundamental change, and our current credit agreement contains and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the lower corporate tax rate enacted as partnotes.
Holders of our convertible senior notes have the right to require us to repurchase all or any portion of their notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the Tax Act, we recorded a provisional estimateprincipal amount of the notes to reduce deferred tax assets by $48.8 million.be repurchased, plus accrued and unpaid interest, if any. The reduction in deferred tax assets was offset by a corresponding reduction inrepurchase price for our valuation allowance resulting in no net impact to tax expense. We have determined that the adjustmentconvertible senior notes due 2028 will also include unpaid interest on those notes to the deferred tax assets and valuation allowance recordedmaturity date. In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in connection with the remeasurementlieu of certain deferred tax assets and liabilities is a reasonable estimate at December 31, 2017. Any subsequent adjustment to these amountsdelivering any fractional share), we will be adjusted accordinglyrequired to make cash payments in respect of the quarternotes being converted. However, we only have limited ability to make those cash payments under our credit agreement and, even if the credit agreement limitations are no longer in effect, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of 2018notes surrendered therefor or notes being converted. In addition, our ability to repurchase the notes or to pay cash upon conversions of the notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase notes at a time when the analysisrepurchase is complete. Anyrequired by the indentures governing the notes or to pay any cash payable on future conversions of the notes as required by the indentures would constitute a default under the relevant indenture. A default under an indenture or the occurrence of the fundamental change itself could also lead to a default under our credit agreement and any agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and to repay or repurchase our convertible senior notes.
The conditional conversion feature of our convertible senior notes due 2024, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of our convertible senior notes due 2024 is triggered, holders of such
adjustmentnotes will be entitled to convert the notes at any time during specified periods at their option. If one or more holders elect to convert their notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our
tax positions, tax rate,liquidity. In addition, even if holders do not elect to convert their notes, we could be required under applicable accounting rules to reclassify all or
resultsa portion of
operations.Impairmentthe outstanding principal of the notes as a current rather than long-term liability, which would result in the valuea material reduction of our goodwill or other intangible assets could have a material adverse effect on our operating results and financial condition.
We record goodwill and intangible assets at fair value upon the acquisition of a business. Goodwill represents the excess of amounts paid for acquiring businesses over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets are evaluated for impairment annually, or more frequently if conditions warrant, by comparing the carrying value of a reporting unit to its estimated fair value. Intangible assets with definite lives are reviewed for impairment when events or circumstances indicate that their carrying value may not be recoverable. Declines in operating results, divestitures, sustained market declines and other factors that impact the fair value of a reporting unit could result in an impairment of goodwill or intangible assets and, in turn, a charge to net income. Any such charges could have a material adverse effect on our results of operations or financial condition.
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working capital.
Risks related to government regulation
If the FDA regulates
ourthe tests
we currently offer as LDTs as medical devices, we could incur substantial costs and our business, financial condition and results of operations could be adversely affected.
We provide
many of our tests as laboratory-developed tests, or LDTs.
The Centers for Medicare and Medicaid Services, or CMS and certain state agencies regulate the performance of LDTs (as authorized by
the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and state law, respectively).
Historically, the
U.S. Food and Drug Administration, or FDA has exercised enforcement discretion with respect to most LDTs and has not required laboratories that furnish LDTs to comply with the agency’s requirements for medical devices (e.g., establishment registration, device listing, quality
systemssystem regulations, premarket clearance or premarket approval, and post-market controls).
In recent years, however,See Part I, Item 1. under the
FDA has stated it intends to end its policy of general enforcement discretion and regulate certain LDTs as medical devices. To this end, on October 3, 2014, the FDA issued two draft guidance documents, entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)”, respectively, that set forth a proposed risk-based regulatory framework that would apply varying levels of FDA oversight to LDTs. Subsequently, on January 13, 2017, the FDA published a “discussion paper” in which it outlined a substantially revised “possible approach” to theheading "Regulation—Federal oversight of
LDTs. In March 2017,laboratory developed tests" for a
draft bill titled "The Diagnostics Accuracy and Innovation Act" was released for discussion. The draft bill proposes a risk-based approach to regulate LDTs and creates a new in vitro clinical test categorydescription of
regulated products,applicable federal regulations, which
includes LDTs, and a regulatory structure under the FDA. As proposed, the draft bill grandfathers many existing tests and phases in FDA oversight over a period of years (e.g., companies would have two years from the date the FDA promulgates final implementing regulations before such regulations became effective). We cannot predict if this draft bill will be enacted in its current (or any other) form and cannot quantify the effect of this draft bill on our business.Legislative proposals addressing the FDA’s oversight of LDTs have been introduced in previous Congresses, and we expect that new legislative proposals will be introduced from time-to-time. The likelihood that Congress will pass such legislation and the extent to which such legislation may affect the FDA’s plans to regulate certain LDTs as medical devices is difficult to predict at this time.
incorporated by reference herein.
If the FDA ultimately regulates certain LDTs,
as medical devices, whether via individualized enforcement action,
or more generally as outlined in final guidance or final regulation, or as instructed by Congress, our tests may be subject to certain additional regulatory requirements. Complying with the FDA’s requirements
for medical devices can be expensive, time-consuming and subject us to significant or unanticipated delays. Insofar as we may be required to obtain premarket clearance or approval to perform or continue performing an LDT, we cannot assure you that we will be able to obtain such authorization. Even if we obtain regulatory clearance or approval where required, such authorization may not be for the intended uses that we believe are commercially attractive or are critical to the commercial success of our tests. As a result, the application of the FDA’s
medical device requirements to our tests could materially and adversely affect our business, financial condition and results of operations.
Failure to comply with applicable FDA regulatory requirements may trigger a range of enforcement actions by the FDA including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations, and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.
In addition, in November 2013, the FDA issued final guidance regarding the distribution of products labeled for research use only. Certain of the reagents and other products we use in our tests are labeled as research use only products. Certain of our suppliers may cease selling research use only products to us and any failure to obtain an acceptable substitute could significantly and adversely affect our business, financial condition and results of operations.
If we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our business.
We are subject to CLIA, a federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or treatment of
disease.any disease or impairment of, or the assessment of health of, human beings. CLIA regulations establish specific
requirements and standards with respect to personnel qualifications, facility administration, proficiency testing, quality control, quality assurance and inspections. CLIA certification is also required in order
27
for us to be eligible to bill state and federal healthcare programs, as well as many private third-party payers, for our tests. We have current CLIA certifications to conduct our tests at our laboratories in San Francisco and Irvine, California and Cambridge, Massachusetts. To renew these certifications, we are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratories.
We are also required to maintain
licenses to conduct testing in California. California laws establish standards for day-to-day operation of our clinical reference laboratories in San Franciscocertain in-state and
Irvine, including the training and skills required of personnel and quality control. We also maintain a Massachusetts clinical laboratory license to conduct testing at our laboratory in Cambridge, Massachusetts. We also maintain out-of-state laboratory licenses
and approvals to conduct
testing on specimens from Florida, Maryland, New York, Pennsylvaniatesting. For more information about our federal (CLIA) and
Rhode Island, as well as California with respect to our laboratory in Cambridge.In addition to havingstate laboratory licenses in New York, our clinicaland approvals, please see Part I, Item 1. under the headings "Regulation—Clinical Laboratory Improvement Amendments of 1988, or CLIA" and “Regulation—State laboratory licensure requirements,” which are incorporated by reference laboratories are approved on test-specific bases by the New York State Department of Health, or NYDOH. Other states may adopt similar licensure requirements in the future, which may require us to modify, delay or stop our operations in such jurisdictions.herein. We may also be subject to regulation in foreign jurisdictions as we seek to expand international utilization of our tests or such jurisdictions adopt new licensure requirements, which may require review of our tests in order to offer them or may have other limitations such as restrictions on the transport of samples necessary for us to perform our tests that may limit our ability to make our tests available outside of the United States. Complying with licensure requirements in new jurisdictions may be expensive, time-consuming, and subject us to significant and unanticipated delays.
In order to eventually market certain of our current or future products and services in any particular foreign jurisdiction, we must establish and comply with numerous and varying regulatory requirements on a jurisdiction-by-
jurisdiction basis regarding quality, safety, performance and efficacy. In addition, clinical trials or clinical investigations conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory clearance, authorization or approval in one country does not guarantee regulatory clearance, authorization or approval in any other country. For example, the performance characteristics of certain of our products and services may need to be validated separately in specific ethnic and genetic populations. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods.
Seeking foreign regulatory clearance, authorization or approval could result in difficulties and costs for us and our collaborators and require additional preclinical studies, clinical trials or clinical investigations which could be costly and time-consuming. Regulatory requirements and ethical approval obligations can vary widely from country to country and could delay or prevent the introduction of certain of our products and services in those countries. The foreign regulatory clearance, authorization or approval process involves all of the risks and uncertainties associated with FDA clearance, authorization or approval. If we or our collaborators fail to comply with regulatory requirements in international markets or to obtain and maintain required regulatory clearances, authorizations or approvals in international markets, or if those approvals are delayed, our target market will be reduced and our ability to realize the full market potential of our products and services will be unrealized.
Failure to comply with applicable clinical laboratory licensure requirements may result in a range of enforcement actions, including license suspension, limitation, or revocation, directed plan of action, onsite monitoring, civil monetary penalties, criminal sanctions,
and cancellation of the laboratory’s approval to receive Medicare and Medicaid payment for its services,
exclusion from some healthcare systems' programs, as well as significant adverse publicity. Any sanction imposed under CLIA, its implementing regulations, or state or foreign laws or regulations governing clinical laboratory licensure, or our failure to renew our CLIA
certificate,certifications, a state or foreign license, or accreditation, could have a material adverse effect on our business, financial condition and results of operations. Even if we were able to bring our laboratory back into compliance, we could incur significant expenses and potentially lose revenue in doing so.
The College of American Pathologists, or CAP, maintains a clinical laboratory accreditation program. CAP asserts that its program is “designed to go well beyond regulatory compliance” and helps laboratories achieve the highest standards of excellence to positively impact patient care. While not required to operate a CLIA-certified laboratory, many private insurers require CAP accreditation as a condition to contracting with clinical laboratories to cover their tests. In addition, some countries outside the United States require CAP accreditation as a condition to permitting clinical laboratories to test samples taken from their citizens. We have CAP accreditations for our
San Francisco and Cambridge laboratories. Failure to maintain CAP accreditation could have a material adverse effect on the sales of our tests and the results of our operations.
Complying with numerous statutes and regulations pertaining to our business is an expensive and time-consuming process, and any failure to comply could result in substantial penalties.
Our operations are subject to other extensive federal, state, local and foreign laws and regulations, all of which are subject to change. These laws and regulations currently include, among others:
•HIPAA and HITECH, which establishedset forth comprehensive federal standards with respect to the privacy and security of protected health information, breach notification requirements, and requirements for the use of certain standardized electronic transactions;
amendments to HIPAA under HITECH,•the GDPR, which strengthen and expand HIPAAimposes strict privacy and security compliance requirements increase penaltieson controllers and processors of personal data, including enhanced protections for violators“special categories” of personal data, including sensitive information such as health and expand vicarious liability, extend enforcement authoritygenetic information of data subjects;
•the CCPA and other, similar state consumer privacy laws, which, among other things, regulate how subject businesses may collect, use, and disclose the personal information of consumers in the regulated state, afford rights to state attorneys general,consumers that they may exercise against businesses that collect their information, and impose requirements for breach notification;
require implementation of reasonable security measures to safeguard personal information of consumers;•the federal Anti-Kickback Statute, which prohibits knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for the referral of an individual, for the furnishing of or arrangement for the furnishing of any item or service for which payment may be made in whole or in part by a federal healthcare program, or the purchasing, leasing, ordering, arranging for, or recommend purchasing, leasing or ordering, any good, facility, item or service for which payment may be made, in whole or in part, under a federal healthcare program;
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| the federal physician self-referral law, known as the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity unless an exception applies, and prohibits an entity from billing for designated health services furnished pursuant to a prohibited referral;
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•The Eliminating Kickbacks in Recovery Act of 2018, or EKRA, which prohibits payments for referrals to recovery homes, clinical treatment facilities, and laboratories and reaches beyond federal health care programs, to include private insurance;
•the federal physician self-referral law, known as the Stark Law, which prohibits a physician from making a referral to an entity for certain designated health services covered by the Medicare program, including laboratory and pathology services, if the physician or an immediate family member has a financial relationship with the entity unless an exception applies, and prohibits an entity from billing for designated health services furnished pursuant to a prohibited referral;
•the federal false claims laws,law, which imposeimposes liability on any person or entity that, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment to the federal government;
•the federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies;
•the HIPAA fraud and abuse provisions, which createdcreate new federal criminal statutes that prohibit, among other things, defrauding health care benefit programs, willfully obstructing a criminal investigation of a healthcare offense and falsifying or concealing a material fact or making any materially false statements in connection with the payment for healthcare benefits, items or services;
•other federal and state fraud and abuse laws, such as anti-kickback laws, prohibitions on self-referral, fee-splitting restrictions, insurance fraud laws, anti-markup laws, prohibitions on the provision of tests at no or discounted cost to induce physician or patient adoption, and false claims acts, which may extend to services reimbursable by any third-party payer, including private insurers;
•the 21st Century Cures Act information blocking prohibition, which prohibits covered actors from engaging in certain practices that are likely to interfere with the access, exchange, or use of electronic health information;
•the federal Physician Payments Sunshine Act, which requires reporting of certain payments and other transfers of value made by applicable manufacturers, directly or indirectly, to or on behalf of various healthcare professionals (including doctors, physician assistants, and nurse practitioners) and teaching hospitals, and requires reporting of certain ownership and investment interests held by physicians and their immediate family members as well as similar state laws that require reporting of information in addition to what is required under the federal Physician Payments Sunshine Act;
•state laws that limit or prohibit the provision of certain payments and other transfers of value to certain covered healthcare providers;
•the prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;
•state laws that prohibit other specified practices, such as billing clinicians for testing that they order; waiving coinsurance, copayments, deductibles and other amounts owed by patients; billing a state Medicaid program at a price that is higher than what is charged to one or more other payers; and
•similar foreign laws and regulations that apply to us in the countries in which we operate or may operate in the future.
We have adopted policies and procedures designed to comply with these laws and regulations. In the ordinary course of our business, we conduct internal reviews of our compliance with these laws. Our compliance ismay also be subject to governmental review. The growth of our business and our expansionoperations outside of the United States may increase the potential of violating these laws or our internal policies and procedures. The risk of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. In October 2021, we received a subpoena from the U.S. Attorney’s Office for the District of Massachusetts requesting that we produce certain documents regarding our sponsored testing programs. We have produced documents and information in response to the subpoena and are cooperating fully with the investigation. Although we remain committed to compliance with all applicable laws and regulations, we cannot predict the outcome of this investigation or any other requests or investigations that may arise in the future regarding these or other subject matters. Any action brought against us for violation of thesethe above-referenced or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the
operation of our business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to any applicable penalty associated with the violation, including
significant administrative, civil and criminal penalties, damages, fines,
individual imprisonment, exclusion from participation in Federal healthcare programs, refunding of payments received by us, and curtailment or cessation of our operations. Any of the foregoing consequences could seriously harm our business and our financial results.
Healthcare policy changes, including legislation reforming the U.S. healthcare system, may have a material adverse effect on our financial condition, results of operations and cash flows.
In March 2010,
the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, collectively referred to as the Affordable Care Act was enacted in the United States, which made a number of substantial changes in the way healthcare is financed by both governmental and private insurers.
Among other things,Policy changes or implementation of new health care legislation could result in significant changes to health care systems. In the United States, this could include potential modification or repeal of all or parts of the Affordable Care
Act requires each medical device manufacturer to pay a sales tax equal to 2.3% of the price for which such manufacturer sells its medical devices, and applied to sales of taxable medical devices from January 1, 2013 through December 31, 2015. The medical device tax has been suspended for 2016 through 2019, but is scheduled to return beginning in 2020. It is unclear at this time when, or if, the provision of our LDTs will trigger the medical device tax if the FDA ends its policy of general enforcement discretion and regulates certain LDTs as medical devices. It is possible, however, that this tax will apply to some or all of our tests or tests that are in development.29
Many of the Current Procedure Terminology, or CPT, procedure codes that we use to bill our tests were revised by the American Medical Association, effective January 1, 2013. Moreover, effective January 1, 2015, the AMA released several new codes to report genomic sequencing procedures. In a final determination under the Medicare Clinical Laboratory Fee Schedule, or CLFS, published in November 2014, CMS set the 2015 payment rate for these codes by the gap-fill process. Under the gap-fill process, local Medicare Administrative Contractors, or MACs, establish rates for those codes that each MAC believes meet the criteria for Medicare coverage and considering laboratory charges and discounts to charges, resources, amounts paid by other payers for the tests, and amounts paid by the MAC for similar tests. In 2015, gap-filled payment rates were established for some, but not all, of the above-described codes. For those codes for which local gap-filled rate(s) were established in 2015, a national limitation amount for Medicare was established for 2016. Codes for which local gap-filled rates were not established in 2015 were priced by the local MACs in 2016 insofar as an individual MAC determines that such codes should be covered. Where available, the national limitation amount serves as a cap on the Medicare and Medicaid payment rates for a test procedure.
The AMA also released several CPT codes effective January 1, 2016 that may be appropriate to report certain of our tests. In a November 2015 final determination, CMS set the calendar year 2016 CLFS payment rate for these new codes by the gap-fill process. CMS and the local MACs went through the gap-fill process in 2016 and announced final gap-filled rates for 2017 on September 30, 2016. The calendar year 2017 national limitation amounts for certain codes were significantly less than the rates at which we have historically offered our tests.
Act.
In April 2014, Congress passed the Protecting Access to Medicare Act of 2014, or PAMA, which included substantial changes to the way in which clinical laboratory services
will beare paid under Medicare. Under
the final rule that implements PAMA,
which was promulgated by CMS in June 2016,as amended, and its implementing regulations, clinical laboratories must report to CMS private payer rates beginning in 2017,
and then in 2024 and every three years thereafter for clinical diagnostic laboratory tests that are not advanced diagnostic laboratory tests and every year for advanced diagnostic laboratory tests.
We do not
believe that our tests meet the definition of advancedhave "advanced diagnostic laboratory
test" status for our tests, but in the event that we
seekobtain designation for one or more of our tests as an advanced diagnostic laboratory test and the tests are determined by CMS to meet these criteria or new criteria developed by CMS, we would be required to report private payer data for those tests annually. Otherwise, we will be required to report private payer rates for our tests on an every
three years basis.three-years basis starting in 2023. Laboratories that fail to timely report the required payment information may be subject to substantial civil money penalties.
As set forth in
See Part I, Item 1. under the
PAMA final rule,heading "Regulation—Reimbursement" for
tests furnished on or after January 1, 2018, Medicare payments for clinical diagnostic laboratory tests will be paid based upon these reporteda description of how public and private
payer rates. For clinical diagnostic laboratory tests that are assigned a new or substantially revised code, initial payment rates for clinical diagnostic laboratory tests that are not advanced diagnostic laboratory tests will be assigned by the cross-walk or gap-fill methodology, similar to prior law. Initial payment rates for new advanced diagnostic laboratory tests will be based on the actual list charge for the laboratory test. In April 2016, we announced that CMS had begun providing paymentspayers pay for our
multi-gene tests for hereditary breast cancer-related disorders at an interim payment per test of $622.53. On October 3, 2016, we announced that CMS had priced our multi-gene tests for hereditary breast cancer-related disorders at $925.00 per test. The 2017 CLFS National Limitation Amount, or NLA, for this test was set at $931.47.In November 2017, CMS posted a “final” file that summarizedproducts and services, which is incorporated by reference herein. Changes in these payments and the 2018 CLFS payment rates calculated under the PAMA final rule. This file indicates that the median of private payer rates reported to Medicare for the codemethodologies used to reportdetermine payment amounts could have a significant impact on our multi-gene test for hereditary breast cancer-related disorders was $136.47. The PAMA final rule caps the annual reduction in the calendar year 2018, 2019,financial condition, results of operations and 2020 CLFS payment rates for any test to 10% of the previous year’s rates, so the proposed CLFS payment rate for this test will be substantially higher than the median for at least the next three years (i.e., $838.33 in 2018, $754.50 in 2019, and $679.05 in 2020). The PAMA final rule also caps the annual percentage reduction in 2021, 2022 and 2023 rates to 15% of the previous year’s rate, further phasing-in any reduction required calculated using data reported during 2020. Nevertheless, we expect to experience 10% decreases in Medicare reimbursement per test per year for at least the next three years.
PAMA also authorized the adoption of new, temporary billing codes and/or unique test identifiers for FDA-cleared or approved tests as well as advanced diagnostic laboratory tests. The CPT® Editorial Panel approved a proposal to create a new section of billing codes to facilitate implementation of this section of PAMA, but it is unclear how these codes would apply to our tests.
30
In November 2017, CMS published a draft national coverage determination, or NCD, for next generation sequencing, or NGS, tests for patients with advanced cancer, under which CMS proposed to provide full coverage for FDA-approved tests performed in patients that fall within the test’s FDA-approved labeling, but proposed significant limits on coverage for NGS-based tests offered as LDTs. It is unclear whether CMS will finalize the NCD as proposed. While we do not believe the draft NCD was intended to apply to our tests, it could arguably be interpreted to apply to such tests. If CMS issues a final NCD that applies to our tests and is substantively similar to the draft NCD, our current and future tests may effectively be non-covered under Medicare unless and until we obtain FDA clearance or approval (as applicable).
cash flows.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level, or how any future legislation or regulation may affect us. For instance, the payment reductions imposed by the Affordable Care Act and the expansion of the federal and state governments’ role in the U.S. healthcare industry as well as changes to the reimbursement amounts paid by payers for our tests and future tests or our medical procedure volumes may reduce our profits and have a materially adverse effect on our business, financial condition, results of operations and cash flows.
Notably, Congress enacted legislation in 2017 that eliminates the Affordable Care Act’s “individual mandate” beginning in 2019, which may significantly impact the number of covered lives participating in exchange plans. Moreover, Congress has proposed on several occasions to impose a 20% coinsurance on patients for clinical laboratory tests reimbursed under the clinical laboratory fee schedule, which would increase our billing and collecting costs and decrease our revenue.
If we use hazardous materials in a manner that causes injury, we could be liable for resulting damages.
Our activities currently require the use of hazardous chemicals and biological material. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting damages, and any liability could exceed our resources or any applicable insurance coverage we may have.
In 2018, we decommissioned our laboratory in Massachusetts; however, we could be held liable for any damages resulting from our prior use of hazardous chemicals and biological materials at this facility. Additionally, we are subject on an ongoing basis to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result in substantial fines or other consequences, and either could negatively affect our operating results.
We could be adversely affected by violations of the FCPA and other worldwide anti-bribery laws.
We are subject to the FCPA, which prohibits companies and their intermediaries from making payments in violation of law to non-U.S. government officials for the purpose of obtaining or retaining business or securing any other improper advantage. Our reliance onWe use a limited number of independent distributors to sell our tests internationally, demandswhich requires a high degree of vigilance in maintaining our policy against participation in corrupt activity, because these distributors could be deemed to be our agents, and we could be held responsible for their actions. Other U.S. companies in the medical device and pharmaceutical fields have faced criminal penalties under the FCPA for allowing
their agents to deviate from appropriate practices in doing business with these individuals. We are also subject to similar anti-bribery laws in the jurisdictions in which we operate, including the United Kingdom’s Bribery Act of 2010, which also prohibits commercial bribery and makes it a crime for companies to fail to prevent bribery. These laws are complex and far-reaching in nature, and, as a result, we cannot assure you that we would not be required in the future to alter one or more of our practices to be in compliance with these laws or any changes in these laws or the interpretation thereof. Any violations of these laws, or allegations of such violations, could disrupt our operations, involve significant management distraction, involve significant costs and expenses, including legal fees, and could result in a material adverse effect on our business, prospects, financial condition or results of operations. We could also incur severe penalties, including criminal and civil penalties, disgorgement and other remedial measures.
Risks related to our intellectual property
One of our competitors has alleged that our Anchored Multiplex PCR, or AMP, chemistry and products using AMP are infringing on its intellectual property, and we may be required to redesign the technology, obtain a license, cease using the AMP chemistry altogether and/or pay significant damages, among other consequences, any of which would have a material adverse effect on our business as well as our financial condition and results of operations.
Our AMP chemistry is the foundation of our PCM service. One of our competitors, Natera, Inc., or Natera, has filed complaints against ArcherDX, LLC ("ArcherDX"), Invitae and Genosity, Inc. ("Genosity") alleging that our products using AMP chemistry, and the manufacture, use, sale, and offer for sale of such products, infringe certain patents. A description of this ongoing litigation is provided in Note 8, “Commitments and contingencies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report.
If any of our products or our use of AMP chemistry is found to infringe any of Natera's patents, we could be required to redesign our technology or obtain a license from Natera to continue developing, manufacturing, marketing, selling and commercializing AMP and related products. However, we may not be successful in the redesign of its technology or able to obtain any such license on commercially reasonable terms or at all. Even if we were able to obtain a license, it could be non-exclusive, thereby giving Natera and other third parties the right to use the same technologies licensed to us, and Natera could require us to make substantial licensing, royalty and other payments. We also could be forced, including by court order, to permanently cease developing, manufacturing, marketing and commercializing our products that are found to be infringing. In addition, we could be found liable for significant monetary damages, including treble damages and attorneys’ fees, if we are found to have willfully infringed Natera's asserted patents. Even if we were ultimately to prevail, litigation with Natera could require us to divert substantial financial and management resources that we would otherwise be able to devote to our business.
We cannot reasonably estimate the final outcome, including any potential liability or any range of potential future charges associated with these litigations. However, any finding of infringement by us of Natera's asserted patents could have a material adverse effect on our business, as well as our financial condition and results of operations.
Litigation or other proceedings or third-party claims of intellectual property infringement or misappropriation
maywill require us to spend significant time and money, and could in the future prevent us from selling our tests or impact our stock price.
Our commercial success will depend in part on our avoiding infringement of patents and proprietary rights of third parties, including for example the intellectual property rights of competitors. As we continue to commercialize our tests in their current or an updated form, launch different and expanded tests, and enter new markets,
31
competitors might claim that our tests infringe or misappropriate their intellectual property rights as part of business strategies designed to impede our successful commercialization and entry into new markets. Our activities may be subject to claims that we infringe or otherwise violate patents or other intellectual property rights owned or controlled by third parties. For example, as discussed in the preceding risk factor, we are currently engaged in litigation with a competitor of ArcherDX alleging infringement. We cannot assure you that our operations do not, or will not in the future, infringe existing or future patents. We may be unaware of patents that a third party, including for example a competitor in the genetic testing market, might assert are infringed by our business. There may also be patent applications that, if issued as patents, could be asserted against us. Third parties making claims against us for infringement or misappropriation of their intellectual property rights may seek and obtain injunctive or other equitable relief, which could effectively block our ability to perform our tests. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay our development or sales of any tests or other activities that are the subject of such suit. Defense of these claims, regardless of merit, could cause us to incur substantial expenses and be a substantial diversion of our employee resources. Any adverse ruling or perception of an adverse ruling in defending
ourselves could have a material adverse impact on our business and stock price. In the event of a successful claim of infringement against us by a third party, we may have to (1) pay substantial damages, possibly including treble damages and attorneys’ fees if we are found to have willfully infringed patents; (2) obtain one or more licenses, which may not be available on commercially reasonable terms (if at all); (3) pay royalties; and/or (4) redesign any infringing tests or other activities, which may be impossible or require substantial time and monetary expenditure, all of which could have a material adverse impact on our cash position and business and financial condition.
If licenses to third-party intellectual property rights are or become required for us to engage in our business, we may be unable to obtain them at a reasonable cost, if at all. Even if such licenses are available, we could incur substantial costs related to royalty payments for licenses obtained from third parties, which could negatively affect our gross margins. Moreover, we could encounter delays in the introduction of tests while we attempt to develop alternatives. Defense of any lawsuit or failure to obtain any of these licenses on favorable terms could prevent us from commercializing tests, which could materially affect our ability to grow and thus adversely affect our business and financial condition.
Developments in patent law could have a negative impact on our business.
Although we view current U.S. Supreme Court precedent to be aligned with our belief that naturally occurring DNA sequences and detection of natural correlations between observed facts (such as patient genetic data) and an understanding of that fact’s implications (such as a patient’s risk of disease associated with certain genetic variations) should not be patentable, it is possible that subsequent determinations by the U.S. Supreme Court or other federal courts could limit, alter or potentially overrule current law. Moreover, from time to time the U.S. Supreme Court, other federal courts, the
United StatesU.S. Congress or the U.S. Patent and Trademark Office, or USPTO, may change the standards of patentability, and any such changes could run contrary to, or otherwise be inconsistent with, our belief that naturally occurring DNA sequences and detection of natural correlations between observed facts and an understanding of that fact’s implications should not be patentable, which could result in third parties newly claiming that our business practices infringe patents drawn from categories of patents which we currently view to be invalid as directed to unpatentable subject matter.
For example, on August 2, 2022, Senator Thom Tillis (R-NC) introduced a bill entitled The Patent Eligibility Restoration Act of 2022 that would overrule current U.S. Supreme Court precedent concerning the scope of patentable subject matter. If the proposed bill were to be enacted into law, there could be an increase in third-party claims to patent rights over correlations between patient genetic data and its interpretation and such third parties may assert that our business practices infringe some of those resulting patent rights.
Our inability to effectively protect our proprietary technologies, including the confidentiality of our trade secrets, could harm our competitive position.
We currently rely upon trade secret protection and copyright, as well as non-disclosure agreements and invention assignment agreements with our employees, consultants and
third-parties,third parties, and to a limited extent patent protection, to protect our confidential and proprietary information. Although our competitors have utilized and are expected to continue utilizing similar methods and have aggregated and are expected to continue to aggregate similar databases of genetic testing information, our success will depend upon our ability to develop proprietary methods and databases and to defend any advantages afforded to us by such methods and databases relative to our competitors. If we do not protect our intellectual property adequately, competitors may be able to use our methods and databases and thereby erode any competitive advantages we may have.
We will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies are covered by valid and enforceable patents or are effectively maintained as trade secrets. In this regard, we have applied, and we intend to continue applying, for patents covering such aspects of our technologies as we deem appropriate. However, we expect that potential patent coverage we may obtain will not be sufficient to prevent substantial competition. In this regard, we believe it is probable that others will independently
32
develop similar or alternative technologies or design around those technologies for which we may obtain patent protection. In addition, any patent applications we file may be challenged and may not result in issued patents or may be invalidated or narrowed in scope after they are issued. Questions as to inventorship or ownership may also arise. Any finding that our patents or applications are unenforceable could harm our ability to prevent others from practicing the related technology, and a finding that others have inventorship or ownership rights to our patents and applications could require us to obtain certain rights to practice related technologies, which may not be available on favorable terms, if at all. If we initiate lawsuits to protect or enforce our patents, or litigate against third partythird-party claims, which would be expensive, and, if we lose, we may lose some of our intellectual property rights. Furthermore, these lawsuits may divert the attention of our management and technical personnel.
We expect to rely primarily upon trade secrets and proprietary know-how protection for our confidential and proprietary information, and we have taken security measures to protect this information. These measures, however, may not provide adequate protection for our trade secrets, know-how or other confidential information. Among other things, we seek to protect our trade secrets and confidential information by entering into confidentiality agreements with employees and consultants. There can be no assurance that any confidentiality agreements that we have with our employees and consultants will provide meaningful protection for our trade secrets and confidential information or will provide adequate remedies in the event of unauthorized use or disclosure of such information. Accordingly, there also can be no assurance that our trade secrets will not otherwise become known or be independently developed by competitors. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, such as our trade secrets, were to be disclosed or misappropriated, or if any such information was independently developed by a competitor, our competitive position could be harmed.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect proprietary rights to the same extent as the laws of the United States, and many companies have encountered significant challenges in establishing and enforcing their proprietary rights outside of the United States. These challenges can be caused by the absence of rules and methods for the establishment and enforcement of intellectual property rights outside of the United States. In addition, the legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to healthcare. This could make it difficult for us to stop the infringement of our patents, if obtained, or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Patent protection must ultimately be sought on a country-by-country basis, which is an expensive and time-consuming process with uncertain outcomes. Accordingly, we may choose not to seek patent protection in certain countries, and we will not have the benefit of patent protection in such countries. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
As an example, the complexity and uncertainty of European patent laws have increased in recent years. In Europe, a new unitary patent system will likely be introduced by the end of 2023, which would significantly impact European patents, including those granted before the introduction of such a system. Under the unitary patent system, European applications will soon have the option, upon grant of a patent, of becoming a Unitary Patent which will be subject to the jurisdiction of the Unitary Patent Court (UPC). As the UPC is a new court system, there is no precedent for the court, increasing the uncertainty of any litigation. Patents granted before the implementation of the UPC will have the option of opting out of the jurisdiction of the UPC and remaining as national patents in the UPC countries. Patents that remain under the jurisdiction of the UPC will be potentially vulnerable to a single UPC-based revocation challenge that, if successful, could invalidate the patent in all countries who are signatories to the UPC. We cannot predict with certainty the long-term effects of any potential changes.
Third parties may assert that our employees or consultants have wrongfully used or disclosed confidential information or misappropriated trade secrets.
We employ individuals who were previously employed at universities or genetic testing, diagnostic or other healthcare companies, including our competitors or potential competitors. Although we try to ensure that our employees and consultants do not use the proprietary information or know-how of others in their work for us, we may be subject to claims that we or our employees or consultants have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a former employer or other third parties. Further, we may be subject to ownership disputes in the future arising, for example, from conflicting obligations of consultants or others who are involved in developing our intellectual property. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.
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Risks related to being a public company
We incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies, which could harm our operating results.
As a public company, we incur significant legal, accounting and other expenses,
that we did not incur as a private company, including costs associated with public company reporting requirements. In addition, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, as well as rules implemented by the
Securities and Exchange Commission, or SEC, and the New York Stock Exchange, or NYSE, impose a number of requirements on public companies, including with respect to corporate governance practices. The SEC and other regulators have continued to adopt new rules and regulations and make additional changes to existing regulations that require our compliance. In
July 2010,addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act,
was enacted. There areenacted in 2010, includes significant corporate governance and executive-compensation-related
provisions in the Dodd-Frank Act that require the SEC to adopt additional rules and regulations in these areas.provisions. Our management and other personnel need to devote a substantial amount of time to these compliance and disclosure obligations. If these requirements divert the attention of our management and personnel from other aspects of our business concerns, they could have a material adverse effect on our business, financial condition and results of operations. Moreover, these rules and regulations applicable to public companies substantially increase our legal, accounting and financial compliance costs, require that we hire additional personnel and make some activities more
time-consumingtime consuming and costly. It may also be more expensive for us to obtain director and officer liability insurance.
If we are unable to maintain effective internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected.
We are required to maintain internal control over financial reporting and to report any material weaknesses in such internal controls. Section 404 of the Sarbanes-Oxley Act requires that we evaluate and determine the effectiveness of our internal control over financial reporting and provide a management report on our internal control over financial reporting. If we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We have
only recently compiled the system and process documentation necessary to perform the evaluation needed to comply with Section 404 of the Sarbanes-Oxley Act.
As we acquire companies, we will need to establish adequate controls and integrate them into our internal control system. We
will need to maintain and enhance these processes and controls as we grow and we
have required, and may
continue to require, additional personnel and resources to do so.
During the evaluation and testing process, if we identify one or more material weaknesses in our internal controls, our management will be unable to conclude that our internal control over financial reporting is effective.
Moreover, when we are no longer an emerging growth company, ourOur independent registered public accounting firm
will beis required to issue an attestation report on the effectiveness of our internal control over financial
reporting.reporting every fiscal year. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.
If we are unable to conclude that our internal control over financial reporting is effective, or
when we are no longer an emerging growth company, if our auditors were to express an adverse opinion on the effectiveness of our internal control over financial reporting because we had one or more material weaknesses, investors could lose confidence in the accuracy and completeness of our financial disclosures, which could cause the price of our common stock to decline. Internal control deficiencies could also result in the restatement of our financial results in the future.
We are an emerging growth company and may elect to comply with reduced public company reporting requirements applicable to emerging growth companies, which could make our common stock less attractive to investors.
We are an emerging growth company, as defined under the Securities Act. We will remain an emerging growth company until December 31, 2020, although if our revenue exceeds $1.07 billion in any fiscal year before that time, we would cease to be an emerging growth company as of the end of that fiscal year. In addition, if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our second fiscal quarter of any fiscal year before the end of that five-year period, we would cease to be an emerging growth company as of December 31 of that year. As an emerging growth company, we may choose to take
34
advantage of exemptions from various reporting requirements applicable to certain other public companies, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced financial statement and financial-related disclosures, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirement of holding a nonbinding advisory vote on executive compensation and obtaining stockholder approval of any golden parachute payments not previously approved by our stockholders. We cannot predict whether investors will find our common stock less attractive if we choose to rely on any of these exemptions. If investors find our common stock less attractive as a result of any choices to reduce future disclosure we may make, there may be a less active trading market for our common stock and our stock price may be more volatile.
Risks related to our common stock
General risk factors
Our stock price
may beis volatile, and you may not be able to sell shares of our common stock at or above the price you paid.
Prior to our initial public offering in February 2015, there was no public market for our common stock, and an active and liquid public market for our stock may not develop or be sustained. In addition, the
The trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. These factors include:
•actual or anticipated fluctuations in our operating results;
•effects of our strategic realignment and workforce reduction and our ability to achieve the intended benefits of these activities;
•costs associated with our strategic realignment;
•competition from existing tests or new tests that may emerge;
•announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
•failure to meet or exceed financial estimates and projections of the investment community or that we provide to the public;
•issuance of new or updated research or reports by securities analysts or changed recommendations for our stock;
•our focussubstantial leverage and market perceptions regarding the same;
•the level of short interest in our stock, and the effect of short sellers on long-term goals over short-term results;
the timingprice of our investments in the growth of our business;
•actual or anticipated changes in regulatory oversight of our business;
•additions or departures of key management or other personnel;
•disputes or other developments related to our intellectual property or other proprietary rights, including litigation;
•changes in reimbursement by current or potential payers;
•general economic and market conditions; and
•issuances of significant amounts of our common stock.
In addition, the stock market in general, and the market for stock of life sciences companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies.
The closing price of our common stock on the NYSE ranged from $2.36 to $11.65 between February 1, 2022 through January 31, 2023. Broad market and industry factors,
including the COVID-19 pandemic, as well as general economic, political and geopolitical, and market conditions such as recessions, wars such as the current conflict in Ukraine, elections, interest rate changes, or cost inflation, may seriously affect the market price of our common stock, regardless of our actual operating performance. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
If securities or industry analysts issue an adverse opinion regarding our stock or do not publish research or reports about our company, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts or the content and opinions included in
35
their reports. Securities analysts may elect not to provide research coverage of our company and such lack of research coverage may adversely affect the market price of our common stock. The price of our common stock could also decline if one or more equity research analysts downgrade our common stock, change their price targets, or issue other unfavorable commentary or cease publishing reports about us or our business. If one or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.
Insiders will exercise significant control over our company and will be able to influence corporate matters.
At December 31, 2017, directors, executive officers, 5% or greater stockholders and their affiliates beneficially owned, in the aggregate, 49% of our outstanding capital stock. As a result, these stockholders will be able to exercise significant influence over all matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as a merger or sale of our company or its assets. This concentration of ownership may have the effect of delaying or preventing a third party from acquiring control of our company and could adversely affect the market price of our common stock.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
At December 31, 2017, our total gross deferred tax assets were $106.2 million. Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of federal and state tax net operating losses and tax credit carryforwards. Furthermore, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change net operating loss carryforwards, or NOLs, and other pre-change tax attributes (such as research tax credits) to offset its future taxable income may be limited. In general, an “ownership change” occurs if there is a cumulative change in our ownership by “5% shareholders” that exceeds 50 percentage points over a rolling three-year period. Our existing NOLs and tax credit carryovers may be subject to limitations arising from previous ownership changes, and if we undergo one or more ownership changes in connection with completed acquisitions, or other future transactions in our stock, our ability to utilize NOLs and tax credit carryovers could be further limited by Section 382 of the Internal Revenue Code. As a result, if we earn net taxable income, our ability to use our pre-change net operating loss and tax credit carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. The annual limitation may result in the expiration of certain net operating loss and tax credit carryforwards before their utilization. In addition, the recently enacted Tax Act limits the deduction for NOLs to 80% of current year taxable income and eliminates NOL carrybacks. Also, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
We have never paid dividends on our capital stock, and we do not anticipate paying dividends in the foreseeable future.
We have never paid dividends on any of our capital stock and currently intend to retain any future earnings to fund the growth of our business. In addition,
the terms of our
loancredit agreement
prohibits us from paying dividends onrestrict our
common stock.ability to pay dividends. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements, general business conditions and other factors that our board of directors may deem relevant. As a result, capital appreciation, if any, of our common stock will be the sole source of gain for the foreseeable future.
Anti-takeover provisions in our charter documents and under Delaware law could discourage, delay or prevent a change in control and may affect the trading price of our common stock.
Provisions in our restated certificate of incorporation and our amended and restated bylaws may have the effect of delaying or preventing a change of control or changes in our management. Our restated certificate of incorporation and amended and restated bylaws include provisions that:
•authorize our board of directors to issue, without further action by the stockholders, up to 20,000,000 shares of undesignated preferred stock;
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| •
| require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
|
•require that any action to be taken by our stockholders be effected at a duly called annual or special meeting and not by written consent;
•specify that special meetings of our stockholders can be called only by our board of directors, our chairmanchair of the board or our chief executive officer;
•establish an advance notice procedure for stockholder approvals to be brought before an annual meeting of our stockholders, including proposed nominations of persons for election to our board of directors;
•establish that our board of directors is divided into three classes, Class I, Class II and Class III, with each class serving staggered terms;
•provide that our directors may be removed only for cause;
•provide that vacancies on our board of directors may, except as otherwise required by law, be filled only by a majority of directors then in office, even if less than a quorum; and
•require a super-majority of votes to amend certain of the above-mentioned provisions as well as to amend our bylaws generally.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law regulating corporate takeovers. Section 203 generally prohibits us from engaging in a business combination with an interested stockholder subject to certain exceptions.
Our certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or other employees.
Our certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for:
•any derivative action or proceeding brought on our behalf;
•any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, or other employees to us or our stockholders;
•any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law; or
•any action asserting a claim against us governed by the internal affairs doctrine.
Section 27 of the Securities Exchange Act of 1934, or Exchange Act, creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. As a result, the exclusive forum provision in our certificate of incorporation will not apply to suits brought to enforce any duty or liability created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Section 22 of the Securities Act of 1933, or Securities Act, creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. As a result, the exclusive forum provision in our certificate of incorporation will not apply to suits brought to enforce any duty or liability created by the Securities Act or any other claim for which the federal and state courts have concurrent jurisdiction.
Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the provisions of our certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find these provisions of our certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or
proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
Sales of a substantial number of shares of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. As of December 31, 2022, we had outstanding 245.6 million shares of our common stock, options to purchase 2.4 million shares of our common stock (of which 1.4 million were exercisable as of that date) and outstanding restricted stock units, or RSUs, representing 11.9 million shares of our common stock (which includes an estimated number of RSUs, subject to certain employees' continued service with us, or time-based RSUs, and RSUs that are performance based RSUs, or PRSUs, granted in connection with an acquisition). The foregoing does not include 8.8 million shares of common stock that may be issuable in connection with indemnification hold-backs and contingent consideration related to our acquisitions, shares that may be issuable in the future in connection with the convertible senior notes, or shares issuable pursuant to our May 2021 sales agreement with Cowen and Company, LLC under which we may offer and sell from time to time at our sole discretion shares of our common stock in an aggregate amount not to exceed $400 million. In addition, as of December 31, 2022, 5.5 million and 2.1 million shares of common stock are available for future issuance under our 2015 Stock Incentive Plan and Employee Stock Purchase Plan, respectively, and as of January 1, 2023, 9.8 million and 2.5 million additional shares of common stock became available for future issuance under our 2015 Stock Incentive Plan and our Employee Stock Purchase Plan, respectively. The sale or the availability for sale of a large number of shares of our common stock in the public market could cause the price of our common stock to decline.
ITEM 1B. Unresolved Staff
Comments.Comments
None.
ITEM 2.
Properties.Properties
Our headquarters and main production facility and headquarters is located in San Francisco, California, where we currently lease and occupy 103,213approximately 103,000 square feet of laboratory and office space. The lease for this facility expires in JulyOctober 2026 and we may renew the lease for an additional ten years. We began
Following our strategic realignment, in December 2022, we entered into an agreement to
take occupancy of this facility in the fourth quarter of 2016 and we completed the move to the new facility in the first quarter of 2017.37
Our subsidiary Good Start Genetics leases 42,517sublease 41,630 square feet of laboratory and office space located in Cambridge, Massachusetts and Framingham, Massachusetts, and our subsidiary CombiMatrix leases 12,164a multi-tenant building in Boulder, Colorado. This sublease agreement expires on January 31, 2025.
We also lease approximately 573,000 square feet of
additional office and laboratory
space domestically in California, Colorado, Massachusetts, New Jersey, New York, North Carolina, Texas and
Washington, and internationally in Australia, Belgium, Israel and Japan. As part of our strategic realignment announced in July 2022, we began cost reduction initiatives including office
and laboratory space
consolidation and a reduction in
Irvine, California. We also lease additional facilities in Palo Altoour international footprint. Under this strategic realignment, we decided to cease use of certain leased premises and
Oakland, California.actively began looking to sublease certain facilities.
We believe that our facilities are adequate to meet the needs for our current needs and that additional space will be available on commercially reasonable terms if required.business in the near term.
ITEM 3. Legal
Proceedings.We are notProceedings
For a partydiscussion of legal matters as of December 31, 2022, see Note 8, “Commitments and contingencies” in Notes to any material legal proceedings on the dateConsolidated Financial Statements in Part II, Item 8. of this report. We may from time to time become involved in legal proceedings arising in the ordinary course of business, and the resolution of any such claims could be material.Annual Report, which is incorporated into this item by reference.
ITEM 4. Mine Safety
Disclosure.Disclosure
Not applicable.
Executive Officers of the Registrant
The names of our executive officers and other corporate officers, and their ages as of March 5, 2018, are as follows:
Name
| | Age
| | Position
|
Executive officers
| | | | |
Randal W. Scott, Ph.D.
| | 60
| | Executive Chairman and Director
|
Sean E. George, Ph.D.
| | 44
| | President, Chief Executive Officer, Director and Co-Founder
|
Lee Bendekgey
| | 60
| | Chief Operating Officer and Secretary
|
Shelly D. Guyer
| | 57
| | Chief Financial Officer
|
Robert L. Nussbaum, M.D.
| | 68
| | Chief Medical Officer
|
Other corporate officers
| | | | |
Thomas R. Brida
| | 47
| | General Counsel
|
Patricia E. Dumond
| | 53
| | Chief Accounting Officer
|
Katherine A. Stueland
| | 42
| | Chief Commercial Officer
|
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Randal W. Scott, Ph.D. has served as our Executive Chairman since January 9, 2017 and as a director since 2010. From August 2012 through January 2017, Dr. Scott served as our Chief Executive Officer. From 2000 through August 2012, Dr. Scott held a number of positions at Genomic Health, Inc., a publicly held genomic information company which he co-founded in 2000, most recently serving as the Chief Executive Officer of a wholly-owned subsidiary of Genomic Health, and as a director. Dr. Scott also served as Executive Chairman of the Board of Genomic Health from January 2009 until March 2012 and as Chairman of the Board and Chief Executive Officer from August 2000 until December 2008. Dr. Scott was a founder of Incyte Corporation, which at the time was a genomic information company, and served in various roles from 1991 through 2000, including Chairman of the Board, President and Chief Scientific Officer. Dr. Scott holds a B.S. in Chemistry from Emporia State University and a Ph.D. in Biochemistry from the University of Kansas.
Sean E. George, Ph.D. is one of our co-founders and has been our President and Chief Executive Officer since January 2017, a position he also held from January 2010 through August 2012. Dr. George also served as our President since August 2012 and he has served as our Chief Operating Officer from August 2012 until January 2017. He has also served as a director since January 2010. Prior to co-founding Invitae, Dr. George served as Chief Operating Officer from 2007 to November 2009 at Navigenics, Inc., a personalized medicine company. Previously, he served as Senior Vice President of Marketing and Senior Vice President, Life Science Business at Affymetrix, Inc., a provider of life science and molecular diagnostic products, as well as Vice President, Labeling and Detection Business at Invitrogen Corporation, a provider of tools to the life sciences industry, during his tenure
38
there from 2002 to 2007. Dr. George holds a B.S. in Microbiology and Molecular Genetics from the University of California Los Angeles, an M.S. in Molecular and Cellular Biology from the University of California Santa Barbara, and a Ph.D. in Molecular Genetics from the University of California Santa Cruz.
Lee Bendekgey has served as our Chief Operating Officer since June 2017. Mr. Bendekgey also served as our Chief Financial Officer from November 2013 to June 2017 and as our General Counsel from November 2013 through January 2017. Prior to joining our company, he was the General Counsel of DNAnexus, Inc., a cloud-based genome informatics and data management company, from September 2011 to October 2013. From March 2009 until September 2011, Mr. Bendekgey pursued personal interests. Prior to that, he was Chief Financial Officer and General Counsel for Nuvelo, Inc., a biopharmaceutical company, from July 2004 to March 2009. Mr. Bendekgey also served as General Counsel and Chief Financial Officer for Incyte Corporation from 1998 to July 2004. Mr. Bendekgey holds a B.A. in French and Political Science from Kalamazoo College and a J.D. from Stanford Law School.
Shelly D. Guyer has served as our Chief Financial Officer since June 2017. Ms. Guyer served as Chief Financial Officer of Veracyte, Inc., a genomic diagnostics company, from April 2013 to December 2016 and served as Veracyte’s Secretary from April 2013 to March 2014. Previously, she served as Chief Financial Officer and Executive Vice President of Finance and Administration of iRhythm Technologies, Inc., a digital healthcare company, from April 2008 to December 2012. From March 2006 to August 2007, Ms. Guyer served as Vice President of Business Development and Investor Relations of Nuvelo Inc., a biopharmaceutical company. Prior to joining Nuvelo, Ms. Guyer worked at J.P. Morgan Securities and its predecessor companies for over 17 years, serving in a variety of roles including in healthcare investment banking. Ms. Guyer holds an A.B. in Politics from Princeton University and an M.B.A. from the Haas School of Business at the University of California Berkeley.
Robert L. Nussbaum, M.D. has served as our Chief Medical Officer since August 2015. From April 2006 to August 2015, he was chief of the Division of Genomic Medicine at UCSF Health where he also held leadership roles in the Cancer Genetics and Prevention Program beginning in January 2009 and the Program in Cardiovascular Genetics beginning in July 2007. From April 2006 to August 2015, he served as a member of the UCSF Institute for Human Genetics. Prior to joining UCSF Health, Dr. Nussbaum was chief of the Genetic Disease Research Branch of the National Human Genome Research Institute, one of the National Institutes of Health, from 1994 to 2006. He is a member of the Institute of Medicine and a fellow at the American Academy of Arts and Sciences. Dr. Nussbaum is a board-certified internist and medical geneticist who holds a Bachelor of Science in Applied Mathematics from Harvard College and an M.D. from Harvard Medical School in the Harvard-MIT joint program in Health Sciences and Technology. He completed his residency in internal medicine at Barnes-Jewish Hospital and a fellowship in medical genetics at the Baylor College of Medicine.
Thomas R. Bridahas served as our General Counsel since January 2017. Mr. Brida also served as our Deputy General Counsel from January 2016 to January 2017. Prior to joining Invitae, he was Associate General Counsel at Bio-Rad Laboratories, a life science research and clinical diagnostics manufacturer, from January 2004 to January 2016. He holds a B.A. from Stanford University and a J.D. from U.C. Berkeley School of Law.
Patricia E. Dumond has served as our Chief Accounting Officer since September 2013. From 2003 to August 2013, she held various financial positions at Genomic Health, Inc., most recently as Senior Director, Finance. She holds a B.S. in finance with a minor in accounting from California State University Sacramento.
Katherine A. Stueland has served as our Chief Commercial Officer since October 2016. From January 2014 to October 2016, she served as our head of communications and investor relations. Prior to joining Invitae, Ms. Stueland was a Principal at Vivo Communications, a healthcare communications company, from January 2013 to December 2013. Previously, she served as Vice President, Communications and Investor Relations at Dendreon Corporation, a biotechnology company. Ms. Stueland holds a B.S in English Literature from Miami University in Ohio.
39
PART II
ITEM 5. Market
Forfor Registrant’s Common Equity, Related Stockholder Matters
Andand Issuer Purchases
Ofof Equity
Securities.Securities
Our common stock has been publicly traded on the
New York Stock ExchangeNYSE under the symbol “NVTA” since February 12, 2015. Prior to that time, there was no public market for our common stock.
The following table sets forth for the periods indicated the high and low sales prices per share of our common stock on the New York Stock Exchange: | | High | | | Low | |
Year Ended December 31, 2016 | | | | | | | | |
First quarter | | $ | 11.25 | | | $ | 5.66 | |
Second quarter | | $ | 11.85 | | | $ | 7.14 | |
Third quarter | | $ | 9.84 | | | $ | 7.22 | |
Fourth quarter | | $ | 9.50 | | | $ | 5.76 | |
| | | | | | | | |
Year Ended December 31, 2017 | | | | | | | | |
First quarter | | $ | 11.30 | | | $ | 7.95 | |
Second quarter | | $ | 11.88 | | | $ | 8.17 | |
Third quarter | | $ | 10.44 | | | $ | 8.73 | |
Fourth quarter | | $ | 10.10 | | | $ | 7.50 | |
On March 2, 2018, the closing price of our common stock as reported on the New York Stock Exchange was $6.84 per share.
As of March 2, 2018,February 24, 2023, there were 72276 stockholders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees.
Dividend policy
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
In addition, the terms of the credit agreement restrict our ability to pay dividends. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend on our financial condition, operating results, capital requirements
and general business conditions and other factors that our board of directors may deem relevant.
In addition, the terms of our Loan Agreement prohibit the payment of dividends.The following information shall not be deemed to be soliciting material or to be filed with the SEC, or subject to Regulations 14A or 14C under the Securities Exchange Act of 1934, (“or Exchange Act”)Act, or to the liabilities of Section 18 of the Exchange Act nor shall such information be incorporated by reference into any future filing under the Securities Act or the Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
40
Comparison(*)The above graph shows the cumulative total stockholder return of Historical Cumulative Total Return Among Invitae Corporation,an investment of $100 in cash on December 31, 2017 through December 31, 2022 for: (i) our common stock; (ii) the S&P 500 IndexIndex; and (iii) the S&P 500 Healthcare Index(*).
(*)
| The above graph shows the cumulative total stockholder return of an investment of $100 in cash from February 12, 2015 (the date our common stock commenced trading on the New York Stock Exchange) through December 31, 2017 for: (i) our common stock; (ii) the S&P 500 Index; and (iii) the S&P 500 Healthcare Index. All values assume reinvestment of the full amount of all dividends. The comparisons in the table are required by the SEC and are not intended to be forecasts or indicative of future stockholder returns.
|
| | 2/12/2015 | | | 12/31/2015 | | | 12/31/2016 | | | 12/31/2017 | |
Invitae Corporation | | $ | 100.00 | | | $ | 48.15 | | | $ | 46.57 | | | $ | 53.26 | |
S&P 500 | | $ | 100.00 | | | $ | 97.87 | | | $ | 107.20 | | | $ | 128.02 | |
S&P 500 Healthcare Index | | $ | 100.00 | | | $ | 102.41 | | | $ | 97.94 | | | $ | 117.53 | |
Sales of Unregistered Securities
On August 3, 2017, we completed a private placement of 5,188,235 shares of common stock at a price of $8.50 per share and 3,458,823 shares of Series A Convertible Preferred Stock, $0.0001 par value per share, or the Series A Preferred Stock, at a price of $8.50 per share, to certain accredited investors. The Series A Preferred Stock, which is a common stock equivalent but non-voting and with a blocker on conversion if the holder would exceed a specified threshold of voting security ownership, is convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like. Gross proceeds to us from the private placement were approximately $73.5 million, before deducting fees and certain expenses payable by us. The sale of the sharesfull amount of common stock and Series A Convertible Preferred Stock was made pursuant to the terms of a Securities Purchase Agreement dated as of July 31, 2017.all dividends. The shares issuedcomparisons in the private placement were sold in reliance on the exemption from registration provided by Section 4(a)(2)table are not intended to be forecasts or indicative of the Securities Act of 1933 and Regulation D promulgated thereunder. We relied on this exemption from registration based in part on representations made by the investors. Cowen and Company, LLC and Leerink Partners LLC acted as joint placement agents in connection with the private placement and received fees of approximately $4.4 million. The net proceeds to us from the private placement, after deducting the placement agent fees and other expenses payable by us, were approximately $68.9 million.
41
future stockholder returns.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 12/31/2017 | | 12/31/2018 | | 12/31/2019 | | 12/31/2020 | | 12/31/2021 | | 12/31/2022 |
| Invitae Corporation | | | $ | 100.00 | | | $ | 121.81 | | | $ | 177.64 | | | $ | 460.46 | | | $ | 168.17 | | | $ | 20.48 | |
| S&P 500 | | | $ | 100.00 | | | $ | 93.76 | | | $ | 120.84 | | | $ | 140.49 | | | $ | 178.27 | | | $ | 143.61 | |
| S&P 500 Healthcare Index | | | $ | 100.00 | | | $ | 104.69 | | | $ | 124.25 | | | $ | 138.45 | | | $ | 171.90 | | | $ | 165.80 | |
ITEM 6.
Selected Financial Data.The information set forth below should be read together with “Item[Reserved]
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our financial statements and related notes included elsewhere in this report. The selected consolidated balance sheet data at December 31, 2017 and 2016 and the selected consolidated statements of operations data for each of the years ended December 31, 2017, 2016, and 2015 have been derived from our audited consolidated financial statements that are included elsewhere in this report. The selected consolidated balance sheet data at December 31, 2015, 2014 and 2013 and the selected consolidated statement of operations data for the years ended December 31, 2014 and 2013 have been derived from our audited consolidated financial statements not included in this report. Historical results are not necessarily indicative of results to be expected in any future period. | | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | (In thousands except share and per share data) | |
Consolidated Statements of Operations Data | | | | | | | | | | | | | | | | | | | | |
Test revenue | | $ | 65,169 | | | $ | 24,840 | | | $ | 8,378 | | | $ | 1,604 | | | $ | 148 | |
Other revenue | | | 3,052 | | | | 208 | | | | — | | | | — | | | | — | |
Total revenue | | | 68,221 | | | | 25,048 | | | | 8,378 | | | | 1,604 | | | | 148 | |
Costs and operating expenses: | | | | | | | | | | | | | | | | | | | | |
Cost of test revenue (1) | | | 50,142 | | | | 27,878 | | | | 16,523 | | | | 5,624 | | | | 667 | |
Research and development (1) | | | 46,469 | | | | 44,630 | | | | 42,806 | | | | 22,063 | | | | 16,039 | |
Selling and marketing (1) | | | 53,417 | | | | 28,638 | | | | 22,479 | | | | 8,669 | | | | 2,431 | |
General and administrative (1) | | | 39,472 | | | | 24,085 | | | | 16,047 | | | | 12,600 | | | | 5,764 | |
Total costs and operating expenses | | | 189,500 | | | | 125,231 | | | | 97,855 | | | | 48,956 | | | | 24,901 | |
Loss from operations | | | (121,279 | ) | | | (100,183 | ) | | | (89,477 | ) | | | (47,352 | ) | | | (24,753 | ) |
Other income (expense), net | | | (303 | ) | | | 348 | | | | (94 | ) | | | (79 | ) | | | (26 | ) |
Interest expense | | | (3,654 | ) | | | (421 | ) | | | (211 | ) | | | (61 | ) | | | (59 | ) |
Net loss before taxes | | | (125,236 | ) | | | (100,256 | ) | | | (89,782 | ) | | | (47,492 | ) | | | (24,838 | ) |
Income tax benefit | | | (1,856 | ) | | | — | | | | — | | | | — | | | | — | |
Net loss | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (89,782 | ) | | $ | (47,492 | ) | | $ | (24,838 | ) |
Net loss attributable to common stockholders | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (89,782 | ) | | $ | (47,492 | ) | | $ | (24,989 | ) |
Net loss per share attributable to common stockholders, basic and diluted (2) | | $ | (2.65 | ) | | $ | (3.02 | ) | | $ | (3.18 | ) | | $ | (56.14 | ) | | $ | (36.13 | ) |
Shares used in computing net loss per common share, basic and diluted | | | 46,511,739 | | | | 33,176,305 | | | | 28,213,324 | | | | 846,027 | | | | 691,731 | |
(1)
| Includes employee stock‑based compensation as follows:
|
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | (In thousands) | |
Cost of revenue | | $ | 2,093 | | | $ | 1,353 | | | $ | 368 | | | $ | 102 | | | $ | 11 | |
Research and development | | | 6,158 | | | | 4,976 | | | | 1,545 | | | | 382 | | | | 165 | |
Selling and marketing | | | 3,956 | | | | 1,709 | | | | 688 | | | | 216 | | | | 42 | |
General and administrative | | | 7,014 | | | | 2,661 | | | | 876 | | | | 271 | | | | 42 | |
Total stock based compensation | | $ | 19,221 | | | $ | 10,699 | | | $ | 3,477 | | | $ | 971 | | | $ | 260 | |
(2)
| See Notes 2 and 11 to our audited consolidated financial statements included elsewhere in this report for an explanation of the calculations of our basic and diluted net loss per share attributable to common stockholders.
|
Operations
| | As of December 31, | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | (In thousands) | |
Consolidated Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 12,053 | | | $ | 66,825 | | | $ | 73,238 | | | $ | 107,027 | | | $ | 43,070 | |
Working capital | | | 53,294 | | | | 87,047 | | | | 120,433 | | | | 102,020 | | | | 41,577 | |
Total assets | | | 211,078 | | | | 130,651 | | | | 156,676 | | | | 128,778 | | | | 53,103 | |
Capital lease obligations | | | 5,412 | | | | 1,575 | | | | 3,164 | | | | 3,535 | | | | 2,001 | |
Debt | | | 39,084 | | | | 12,102 | | | | 7,040 | | | | — | | | | — | |
Convertible preferred stock | | | — | | | | — | | | | — | | | | 202,305 | | | | 86,574 | |
Accumulated deficit | | | (398,598 | ) | | | (275,218 | ) | | | (174,962 | ) | | | (85,180 | ) | | | (37,688 | ) |
Total stockholders' equity (deficit) | | | 121,794 | | | | 99,074 | | | | 138,376 | | | | (83,576 | ) | | | (37,280 | ) |
43
ITEM 7. 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 audited consolidated financial statements and the related notes and other financial information included elsewhere in Item 8 of this report.Annual Report on Form 10-K. Historic results are not necessarily indicative of future results.
Business overview
Our mission
We are focused on making comprehensive and high-quality, medical genetic testing information more accessible and instrumental to the healthcare ecosystem and stakeholders, including patients, healthcare providers, payers, biopharma partners, patient advocacy groups, and more. We offer genetic testing across multiple clinical areas, including hereditary cancer, precision oncology, women's health, rare diseases and pharmacogenomics. Medical genetics is central to health outcomes and we are working to bring comprehensive genetic information intoit to the mainstream medical practiceby enhancing the customer experience, lowering the costs, removing barriers to improveadoption, and expanding insights and solutions. Ultimately, we expect the quality of healthcare for billions of people. Our goal is to aggregate a majorityutility of the world’s genetic information intoaccumulated data will compound, enabling improved individual and population health and advancing the benefits of molecular medicine around the globe.
Historically, a
comprehensive network that enables sharingcomponent of
data among network participantsour strategy was to
improve healthcareaugment internal growth with complementary transactions. We did not complete any acquisitions in fiscal year 2022 but did have dispositions related to our strategic realignment. In 2021, we completed the acquisitions of Reference Genomics, Inc. d/b/a One Codex, or One Codex, Genosity, Medneon LLC, or Medneon, Ciitizen, and
clinical outcomes.In 2017, we established a leading position in family health genetic information services through the strategic acquisition of reproductive health testing capabilities. In January 2017, we acquired AltaVoice, formerly PatientCrossroads, a patient-centered data company with a global platform for collecting, curating, coordinating, and delivering safeguarded data from patients and clinicians through Patient Insights Networks, also known as PINs, which enable organizations to more efficiently build engaged, research-ready patient communities, recruit for trials, educate, and track patient outcomes. This acquisition was subsequently complemented by the acquisition of what we believe to be one of the most efficient, end-to-end platforms available for collecting and managing genetic family histories, CancerGene Connect. In August 2017, we acquired Good Start GeneticsStratify Genomics Inc., or Good Start Genetics, a molecular diagnostics company focusedStratify. See Note 4, "Business combinations and dispositions" and Note 5, "Goodwill and intangible assets" in the Notes to Consolidated Financial statements in Part II, Item 8. of this Annual Report on preimplantationForm 10-K for additional information on our recent acquisitions and carrier screening for inherited disorders. In November 2017, we completed our acquisition of CombiMatrix Corporation, or CombiMatrix, a company which specialized in prenatal diagnosis, miscarriage analysis and pediatric developmental disorders.
We have experienced rapid growth. dispositions.
For the years ended December 31, 2017, 20162022, 2021 and 2015,2020, our revenue was $68.2$516.3 million, $25.0$460.4 million and $8.4$279.6 million, respectively, and we incurred net losses of $123.4 million, $100.3$3.1 billion, $379.0 million and $89.8$602.2 million, respectively. At December 31, 2017,2022, our accumulated deficit was $398.6 million.$4.8 billion.
In 2022, 2021 and 2020, we generated 1,290,000, 1,169,000 and 659,000 billable units, respectively. We
increasedcalculate volume using billable units, which are billable events that include individual test reports released and individual reactions shipped related to our
numberprecision oncology products. We refer to the set of
employeesreagents needed to
594 atperform a next generation sequencing ("NGS") test for our research use only ("RUO") product as a "reaction." As part of the strategic realignment, we discontinued the sale of and sublicensed to others our distributed precision oncology products, which includes our RUO kit and IVD product offerings. For the year ended December 31,
2017 from 332 on December 31, 2016. Our sales force grew to 103 at December 31, 2017 from 51 at December 31, 2016. We expect headcount will continue to increase in 2018, as we add staff to support anticipated growth.Sales of our tests have grown significantly. In 2017, 2016 and 2015, we generated2022, approximately 145,000, 57,000 and 19,000 billable tests, respectively. Through December 31, 2017, approximately 21%53% of the billable tests we performed have beenvolume generated were billable to institutionspatients and patients,institutional customers (e.g., hospitals, clinics, medical centers, biopharmaceutical partners), and the remainder have beenwere billable to third-partygovernment and private insurance payers. Many of the gene tests on our assays are tests for which private insurers reimburse.reimbursable by health insurance companies. However, when we do not have reimbursement policies or contracts with private insurers, or at times due to other situations, 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 thea third-party payer. When there is not a contracted rate for reimbursement, there is typically a greater co-insurance or co-paymentpayment requirement from the patient whichthat may result in further delay or decreased likelihood of collection.
We intend to continue to invest in our business. In 2015 we entered into a lease agreementpayment for a new production facility and headquarters in San Francisco, California. This lease expires in July 2026 and at December 31, 2017, aggregate future minimum lease payments for the new facility are approximately $64.2 million. In 2017 we acquired four businesses as described above, and in doing so expanded our suite of genome management offerings and completed our entry into prenatal and perinatal genetic testing.
As a result of these and other factors, 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.
tests.
We believe that the keys to long-term profitable growth are:
•Consistently improve the client experience: efficient ordering; comprehensive choices; reliable turnaround time; easy-to use;
•Lower costs and higher reimbursement: align our future growth will be to increase billable test volumes,cost structure with our streamlined product portfolio and implement operational discipline; reduce the costs associated with performing our genetic tests; achieve broad reimbursement coverage for our tests from third-party payers consistently drive downand increase the price for genetic analysisamount we receive from other types of payers; focus our efforts on testing categories that are more regularly reimbursed to avoid the process of appeals and interpretation, steadily increaseslow or non-existing payment;
•Advance insights and solutions: optimize the amount of genetic content we offer consistently improveand is used by providers across the client experience, driverange of healthcare platforms; deliver actionable insights through digital health solutions; develop our data services;
•Improve affordability and accessibility and serve more patients: provide affordable pricing for genetic analysis and interpretation; partner to reach underserved populations; expand call points;
•Drive adoption: increase physician and patient utilization of our websiteplatform for ordering and delivery of resultsresults; and increase
•Attract new partners: increasing the number of strategic partners working with us to add value for all our clients.44
customer segments. Strategic realignment
On July 18, 2022, we initiated a strategic realignment of our operations and began implementing cost reduction programs in order to accelerate our path to positive operating cash flow. We are in the process of realigning and sharpening our focus on the portfolio of businesses that we believe can generate margins and deliver returns to fuel future investment. In the testing business, we have shifted operational and commercial efforts to accelerate positive cash flow by maintaining robust support of the higher-margin, higher-growth testing opportunities among hereditary cancer, precision oncology, women's health, rare disease and pharmacogenomics. We also plan to continue our expansion and integration of key digital health-based technologies and services in order to create a differentiated model in genetic health. Longer-term, we remain committed to our data platform and patient network. We believe that we hold significant growth potential and intend to continue to prioritize the tools, partnerships and applications that support the development of this platform as the catalyst for the future of healthcare.
The strategic realignment included a reduction in workforce of approximately 1,000 positions, lab and office space consolidation, portfolio optimization, decrease in other operating expenses, as well as a reduced international footprint. Management currently expects the strategic realignment will be completed in 2023 and estimates that the total costs incurred may be up to $170 million for associated employee severance and benefits, asset impairments and losses on asset disposals, and other restructuring costs related to the realignment, which excludes the gain on sale of the RUO kit assets. This reflects the best estimate of management, which may be revised in subsequent periods as the strategic realignment progresses. With the major initiatives in our strategic realignment largely complete as of December 31, 2022, we anticipate annualized cash savings of approximately $326 million, which is expected to be fully realized by the end of fiscal year 2023. We may not realize, in full or in part, the anticipated annualized cash savings due to unforeseen difficulties or delays in implementing further decreases in other operating expenses.
We expect to continue to incur operating losses for the near term as we execute on the strategic realignment of our operations. If we are unable to achieve these objectives and successfully grow revenue and manage our costs, we may not be able to achieve positive operating cash flow in the near term or at all.
Russia and Ukraine Conflict
During the first quarter of 2022, Russia commenced a military invasion of Ukraine, and the ensuing conflict has created disruption in the region and around the world. We have suspended operations in Russia, which has not and is not expected to have a material impact on our operating results. We serve customers globally across a broad geographic base. Neither Russia nor Ukraine has comprised or is expected to comprise a material portion of our total revenue, net loss, or net assets. We continue to closely monitor the ongoing conflict and related sanctions, which could impact our financial results in the future. Other impacts due to this evolving situation are currently unknown and could potentially subject our business to adverse consequences should the situation escalate beyond its current scope. For additional information about the conflict between Russia and Ukraine and its potential effect on our business and results of operations, see risk factors “—The global macroeconomic environment could negatively impact our business, our financial position and our results of operations” and “—Security breaches, privacy issues, loss of data and other incidents could compromise sensitive or personal information related to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation” under the heading “Risks related to our business and strategy” in Part I, Item 1A. "Risk Factors" in this Annual Report on Form 10-K.
Impact of COVID-19
While we expect COVID-19 may continue to impact our business, we have experienced limited disruption since 2020. We have reviewed and adjusted, when necessary, for the impact of COVID-19 on our estimates related to revenue recognition and expected credit losses.
In response to the pandemic, we have implemented measures to protect the health of all of our employees during this time with additional measures in place to better protect our on-site lab production and support teams. Our production facilities currently remain fully operational. Substantially all of the Company’s offices have re-opened in a hybrid working model, subject to operating restrictions which adhere to healthcare guidelines to protect public health and the health and safety of employees. We continue to monitor, update and align our corporate policies to meet state and federal occupational health and safety rules. While we have not experienced significant disruption in our supply
chain, we have experienced supply delays as a result of the COVID-19 pandemic and have also had to obtain supplies from new suppliers.
As a result of government-imposed restrictions, many announced healthcare guidelines resulted in a shift of regular physician visits and healthcare delivery activities to remote/telehealth formats. This is particularly important for patients who, despite the fall-out from COVID-19, continued to be diagnosed with critical diseases, like cancer, and for women who are pregnant or are trying to conceive. We believe our investments in new access platforms and technologies position us well to provide a range of testing to clinicians and patients using a “clinical care from afar” model. An example is our rollout in April 2020 of our Gia telehealth platform, which expands access to remote interaction between patients and clinicians as well as direct ordering of genetic tests.
Although many government-imposed restrictions have been reduced or eliminated, the future impact of the COVID-19 pandemic continues to be highly uncertain. Given the unknown duration and extent of COVID-19’s impact on our business, and the healthcare system in general, we continue to monitor evolving market conditions and have pivoted our focus and investments on the commercial execution of workflows that support remote ordering, online support and telehealth.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law as a stimulus bill intended to bolster the economy, among other things, and provide assistance to qualifying businesses and individuals. The CARES Act included an infusion of funds into the healthcare system. In April 2020, we received $3.8 million as a part of this initiative, and in January 2021, we received an additional $2.3 million. These payments were recognized as other income, net in our consolidated statements of operations in the periods received.
Adverse macroeconomic conditions
Adverse macroeconomic developments, including inflation, slowing growth, rising interest rates, or recession, may adversely affect our business and financial condition. These developments have caused, and could in the future cause, disruptions and volatility in global financial markets and increased rates of default and bankruptcy, and negatively affect business and consumer spending. Adverse economic conditions may also increase the costs of operating our business, including vendor, supplier and workforce expenses, and may limit our access to capital or may significantly increase our cost of capital. Management continues to evaluate the impact of macroeconomic events, including inflation, on our business and our future plans and intends to take appropriate measures to help alleviate their impact, but there can be no assurance that these efforts will be successful.
Factors affecting our performance
Number of billable
testsThe growth in our genetic testing businessunits
Our test revenue is tied to the number of tests
for which we bill
patients, third-party payers
that pay on behalf of patients, and institutions
partners or patients, which(e.g., hospitals, clinics, medical centers, biopharmaceutical partners). We refer to the set of reagents needed to perform an NGS test for our RUO product as a "reaction," and we refer to
billable events that include individual test reports released and individual reactions shipped as billable
tests.units. We
typically bill for our services following delivery of the billable
test report derived from testing samples and interpreting the results.
For units manufactured for use by customers in distributed facilities, we typically bill customers upon shipment of those units. Test orders are placed under signed requisitions or contractual agreements, as we often enter into contracts with insurance companies and institutions. We incur the expenses associated with a
testunit in the period in which the
testunit is processed regardless of when payment is received with respect to that
test.unit. We believe the number of billable
testsunits in any period is an important indicator of the growth in our
business.testing business, and with time, this will translate into the number of customers accessing our platform.
Number and size of research and commercial partnerships
Pharma development services revenue, which we recognize within other revenue in our consolidated statements of operations, is generated primarily from services provided to biopharmaceutical companies and other partners and is related to companion diagnostic development, clinical research, and clinical trial services across the research, development, and commercialization phases of collaborations. The result of these relationships may include the development of new targeted companion diagnostics, which underscore and expand the need for genetic testing and in some cases may lead to intellectual property and/or revenue sharing opportunities with third-party partners. As a result of the strategic realignment, we terminated early or changed the scope of certain collaborations as part of our pharma development services, and are in the process of supporting wind-down activities for certain companion diagnostic development agreements to conclude existing contracts.
Success obtaining and maintaining reimbursement
Our ability to increase
the number of billable testsvolume and
our revenue will depend in part on our success
in achieving broad reimbursement coverage and laboratory service contracts for our tests from third-party
payers.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,
whenwhere 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
and specific tests, 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.
As of March 1, 2018, we have entered in to contractsOur arrangements for laboratory services with
providers covering over 240payers cover approximately 332 million lives, including Medicare,
mostall national
providercommercial health plans, and Medicaid in
27most states,
with the most recent addition ofincluding 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 additional 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, temporary 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 for our testing services and expand the base of clinicians 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
near-term 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,
improvingimprove how we manage our materials,
portingport some tests onto a next generation sequencing platform and
negotiatingnegotiate favorable terms for our materials purchases. We also intend to
continue to design and implement hardware and software tools that
willare designed to reduce
personnel costpersonnel-related costs for both laboratory and clinical operations/medical interpretation by increasing personnel efficiency and thus lowering labor costs per test.
Ability to
expandoptimize our genetic content
As we reduce our costs, we in meeting market needs and create new pathways to test
We intend to continue to
expandreduce the average cost per test, optimize our test menus
by steadily releasing additional geneticand content,
forand offer the
same or lowertests at affordable prices
per test, ultimately leadingin order to
affordable whole genome services. The breadthmeet customer and
flexibility of our offering will be a critical factor in our ability to address new markets for genetic testing services. Both of these will be critical to our abilitypatient needs. In addition, we have and intend to continue to
growidentify new ways to connect our testing services and information to patients. These include direct patient outreach and ordering capacity, the
volumeuse of
billableautomated assistants for physician customers to improve the ease of ordering and processing genetic tests
we deliver.45
Investment inand programs designed to reach underserved patient populations with genetic testing. We also continue to collaborate with strategic partners and identify new market and channel opportunities.
Realignment of our business and timing of expenses
As part of the strategic realignment of our operations announced in July 2022, we initiated a comprehensive plan focused on supporting business lines and geographies that we believe can generate sustainable margins, provide the best return to fuel future investment and accelerate the Company's path to positive cash flow. We believe the plan further helps ensure we remain at the forefront of innovation and advancements in genomics by allocating resources towards our core genetic testing and data and patient network platform that have the potential to improve healthcare outcomes.
We conducted an assessment of our product portfolio as well as the associated research and development and commercial spending. Our plan shifts the focus to programs relevant to the core testing business to drive profitable growth. We also performed an extensive review of internal and external costs and how those expenses align with the business structure. Additional savings are expected to be generated through the ongoing digitization of workflows, elimination of duplication and streamlined processes across the core platforms and rationalization of technology and external services.
As we refocus our operations on our core genomic testing platform, we also plan to continue to invest in our genetic testing and
information management business.data business to drive long-term profitable growth. 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
capabilities as well as our information systems. We also expect to incur software development costs as we seek to further
digitize and automate our laboratory processes and our genetic interpretation and report sign-out procedures, scale our customer service capabilities
to improve our clients' experience, and expand the functionality of our website. We
planwill continue to
hire additional personnel as necessary to support anticipated growth, including software engineers, sales and marketing personnel, research and development personnel, medical specialists, biostatisticians and geneticists. We will also incur
additional costs related to
the expansion ofmarketing and branding as we expand our
production facility in San Franciscoinitiatives beyond our current customer base and focus on providing access to
handle newly acquired tests and to accommodate growth.customers through our website. In addition, we
expect towill 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
Our historical revenue has principally been recognized when cash is received. Of our total revenue of $68.2 million for the year ended December 31, 2017, we recognized $46.4 million on a cash basis and $21.8 million on an accrual basis. In 2018 and future periods we will recognize revenue substantially on an accrual basis, reflecting our adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers.
For the years ended December 31, 2017, 2016 and 2015, amounts billed for tests delivered totaled $157.1 million, $62.6 million and $24.3 million, respectively. In the year ended December 31, 2017, we recognized revenue of $60.6 million related to amounts billed for tests delivered and other revenues during 2017, $7.2 million related to amounts billed for tests delivered in 2016 and $0.4 million related to amounts billed for tests delivered in 2015. It is difficult to predict future revenue from previously delivered but unpaid tests. Accordingly, we cannot provide any assurance as to when, if ever, or to what extent any of these amounts will be collected. Because we are in the early stages of commercializing our tests, we have had limited payment and collection history. Notwithstanding our efforts to obtain payment for these tests, payers may deny our claims, in whole or in part, and we may never receive revenue from any previously delivered but unpaid tests. Revenue from these tests, if any, may not be equal to the billed amount due to a number of factors, including differences in reimbursement rates, the amounts of patient co-payments, the existence of secondary payers and claims denials. In addition, private payers often ask us to refrain from submitting claims for a period of up to 60 days after contract execution, which can cause the timing of payments to vary during the months after contract signing.
To date, we have incurred and recognized expenses for tests in the period in which the test was conducted and we have recognized revenue for tests in the period in which our revenue recognition criteria were met. Effective January 1, 2018, we implemented Financial Accounting Standards Board Accounting Standards Codification, or ASC Topic 2014-09, Revenue from Contracts with Customers or Topic 606, using the modified retrospective method. Under Topic 606 we will
We generally recognize revenue on an accrual basis, which is when a customer obtains control of the promised goods or
services. The accrualservices, typically a test report, or upon shipment of our precision oncology products. Accrual amounts recognized
will beare based on estimates of the consideration that we expect to receive, and such estimates
will be updatedare 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 payments, the existence of secondary payers and claim denials. Some test orders are placed under signed requisitions or contractual agreements, and we often enter into contracts with insurance companies and institutions that include pricing provisions under which such tests are billed.
Pharma development service revenue is generated primarily from custom assay design services, sample processing activities and consultative inputs, which is separate from revenue generated by any related or unrelated product component. Subsequent to the strategic realignment, pharma development service revenue is generated from personalized cancer monitoring services and sample processing activities. Revenue is recognized as services are provided using the input method based on our assessment of performance completed to date toward completion of a contract.
We primarily generate revenue from the saletesting services and sales of our tests, which provide the analysis, and associated interpretation of the sequencing of parts of the genome. Clientsdistributed precision oncology products. Customers are typically billed upon delivery of test results or shipment of products. We also generate revenue from development agreements, access to the physician.data, data analytics and other related services provided for biopharmaceutical partners and other parties. Our ability to increase our revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payers and increase the rate at whichamount we receive from other types of payers, improve payer collections, and grow our relationships with biopharma partners.
As a result of the strategic realignment, we exited certain product lines including our distributed precision oncology products and terminated early or changed the scope of certain collaborations as part of our pharma development services. We are
paidin the process of supporting wind-down activities for
tests performed.certain companion diagnostic development agreements to conclude existing contracts.
Cost of revenue reflects the aggregate costs incurred in delivering
test results to cliniciansour products and services and includes expenses for materials and supplies,
personnelpersonnel-related costs,
freight, costs for lab services, genetic interpretation and clinical trial support, equipment and infrastructure expenses
associated with testing and allocated overhead including rent,
information technology, equipment depreciation,
amortization of acquired intangibles, and utilities.
Costs associated with performing our46
test are recorded as the patient’s sample is processed. We expect cost of revenue to generally increase in line with thean increase in the numberbillable volume. We also expect amortization of tests we perform. However, we expect that theacquired intangible assets, which is not dependent on billed volume, to remain consistent with 2022 expenses. We anticipate our cost per testunit for existing tests will generally decrease over time due to the efficiencies we mayexpect to gain as test volume increases, and from other cost reductions achieved through automation, supply chain and logistics initiatives, process standardization, and other cost reductions.
These reductions in cost per unit will likely be offset by new offerings, which often have a higher costs per unit during the introductory phases before we are able to gain efficiencies. The cost per unit may fluctuate significantly from quarter to quarter.
Our operating expenses are classified into three
categories:categories related to our operational activities: research and development, selling and marketing, and general and administrative. For each category, the largest component is
personnelgenerally personnel-related costs, which include salaries, employee benefit costs, bonuses, commissions, as applicable, and stock-based compensation expense.
Operating expense categories also include goodwill and IPR&D impairment, restructuring and other costs, gain on sale of RUO kit assets, and change in fair value of contingent consideration, which are discussed further below.
Research and development expenses represent costs incurred to develop our technology and future tests.offerings. These costs are principally for process development associated with our efforts to expand the number of genes we
can evaluate,
in our tests, with our efforts to lower the
costcosts per unit and our development of
performingnew products to expand our
test.platform. We have and may continue to partner with other companies to develop new technologies and capabilities we expect to invest capital and incur significant operating costs to support these development efforts. In addition, we incur process development costs to further develop the software we use to operate our
laboratory,laboratories, analyze
thegenerated data,
it generates, process customer orders,
validate clinical activities, enable ease of customer ordering, deliver reports and automate our business processes. These costs consist of
personnelpersonnel-related costs, laboratory supplies and equipment expenses, consulting costs,
amortization of acquired intangible assets, and allocated overhead including rent, information technology, equipment depreciation and utilities.
We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses will increaseto decrease as we continuestreamline our effortsproduct portfolio, shift investments, including the exit of certain business lines and commercial geographies, and reduce labor costs through a reduction in workforce. We expect to develop additional tests, or port some of our acquired testsmake investments to our production facility, reduce testing costs and work on scalingstreamline our technology to provide patients access to testing aligned to scale with our long-term profitable growth targets.
During October 2020 through our acquisition of ArcherDX, we recognized $512.4 million of IPR&D technology for two assets representing a therapy selection IVD and PCM technologies, both using an income approach. During the
business.year ended December 31, 2022, the IVD and PCM products were fully developed resulting in the reclassification of the related IPR&D intangibles to developed technology intangibles, which are finite-lived and amortizable.
Selling and marketing expenses consist of
personnelpersonnel-related costs,
including commissions, 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
will be significantly higherto decrease as a result of a reduction in
2018 principally dueworkforce, targeted sales force expansion and lower marketing spending as we implement a more efficient sales and marketing approach to
the expansion ofsupport our
salesforce over the course of 2017.core genetic testing platform.
General and administrative
General and administrative expenses include executive, finance and accounting, billing and collections, legal and human resources functions.functions as well as other administrative costs. These expenses include personnel-related costs,costs; audit, accounting and legal expenses,expenses; consulting costs, andcosts; allocated overhead including rent, information technology, equipment depreciation, and utilities.utilities; costs incurred in relation to our co-development agreements; and post-combination expenses incurred in relation to companies we acquire. We expect our general and administrative expenses to decrease as a result of our strategic realignment including a reduction in workforce, consolidation of underutilized facilities, digitization of workflows, elimination of duplication and streamlined processes, and rationalization of technology and external services spending.
Goodwill and IPR&D impairment
Goodwill and IPR&D impairment expenses include the impairment loss recognized on goodwill and the IPR&D indefinite-lived intangible asset initially recognized as part of the acquisition of Singular Bio. Goodwill and indefinite-lived intangible assets are assessed for impairment on an annual basis and whenever events and circumstances indicate that these assets may be impaired. We compare the fair value of our reporting unit to its carrying value, including goodwill. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will increase slightlyrecognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value.
Restructuring and other costs
Restructuring and other costs includes employee severance and benefits, assets impairments and losses on asset disposals and other costs. Employee separation costs are comprised of severance, other termination benefit costs, and stock-based compensation expense for the acceleration of RSUs related to workforce reductions. Employee separation costs include one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to employees, unless future service is required, in 2018, comparedwhich case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits is probable and reasonably estimable. Asset impairments and losses on asset disposals include operating lease impairments, losses on disposals of property and equipment and leasehold improvements associated with exiting lines of business, consolidating lab and office space, and reducing our international footprint. Other restructuring costs include the write-off of prepayments made to 2017,certain vendors for which we will no longer benefit from those goods or services, legal and professional fees, and contract exit costs.
Gain on sale of RUO kit assets
The gain on the sale of the RUO kit assets consists of the consideration received including up front consideration subject to a hold-back to satisfy indemnification obligations that may arise.
Change in fair value of contingent consideration
Changes in fair value of contingent consideration are adjustments to contingent consideration related to business combinations. We did not complete any acquisitions in fiscal year 2022, which has reduced our contingent liability balance as we support continued growthof December 31, 2022 and the associated change in fair value of contingent consideration for the year ended December 31, 2022. We expect future fair value changes to fluctuate from period to period due to fair value adjustments that are dependent on many factors, including no new acquisitions in 2022, the value of our common stock and our assessment of the probability of meeting certain acquisition-related milestones within the terms of the respective acquisition agreements, including certain prescribed deadlines for achievement.
With respect to the ArcherDX final milestone, the liability was reduced to zero as of as of June 30, 2021, with the offsetting change recorded as changes in fair value of contingent consideration in our consolidated statements of operations.
The removal of the liability balance and the associated change in fair value of contingent consideration was a result of our reassessment of the steps necessary to achieve clearance or approval based on FDA feedback received principally in the three months ended June 30, 2021. In April 2022, an agreement was entered into with previous ArcherDX stockholders to extend the date of achievement of the ArcherDX final milestone to March 31, 2023. We currently do not believe that this milestone will be achieved within this timeframe. As such, no liability was recorded as of December 31, 2022 or 2021.
Other income (expense), net
Other income (expense), net, primarily consists of
interest income, offset by: losses on extinguishment of debt; adjustments to
the fair value of
acquisition liabilities;our acquisition-related liabilities and
losses on disposalsinterest income. Acquisition-related liabilities include stock payable liabilities arising from business combinations, and we expect the adjustments to fluctuate from period to period primarily due to the volatility of
assets.our common stock. Other income (expense), net also includes income generated from our cash equivalents and marketable securities and amounts received under the CARES Act.
Interest expense is primarily attributable to interest incurred related to our financing obligations under capital lease agreementsdebt financings and finance leases. See Note 8, “Commitments and contingencies” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for additional information.
Income tax benefit
Since we generally establish a full valuation allowance against our
Loandeferred tax assets, our income tax benefit primarily consists of changes in our deferred tax realization assessments as a result of taxable temporary differences assumed in connection with our acquisitions and
Security Agreement.changes in the expected timing of the reversal of taxable temporary differences.
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
judgments, 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.
We evaluate our estimates on an ongoing basis. Our estimates are based on
current facts, our historical experience and on various other factors that
47
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 theour 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.
We generaterecognize revenue primarily from deliverywhen or as control of test reportsthe 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. We utilize the following practical expedients and exemptions:
•Costs to obtain or fulfill a contract are expensed when incurred because the amortization period would have been one year or less, and
•No adjustments to promised consideration were made for financing as we expect, at contract inception, that the period between the transfer of a promised good or service and when the customer pays for that good or service will be one year or less.
Test revenue
Test revenue is comprised of testing services and sales of distributed precision oncology products.
The majority of our assays. Through December 31, 2017,test revenue is generated from genetic testing, in addition to somatic testing for therapy selection and personalized cancer monitoring. These testing services provide analysis and associated interpretation of the sequencing of parts of the genome. Test orders are placed under signed requisitions or contractual agreements, and we have recognized revenue when persuasive evidenceoften enter into contracts with insurance companies and institutions that include pricing provisions under which such tests are billed. Billing terms are generally net 30 to 60 days.
While the transaction price of an arrangement existed; delivery had occurreddiagnostic tests is originally established either via contract or services had been rendered; the fee was fixed or determinable; and collectability was reasonably assured. To date,pursuant to our standard list price, we often provide price concessions for most payers, we have not been abletests billed to demonstrate a predictable pattern of collectability,insurance carriers, and therefore havethe transaction price for patient insurance-billed tests is considered to be variable and revenue is recognized based on an estimate of the consideration to which we will be entitled at an amount for which it is probable that a reversal of cumulative consideration will not occur. Making these estimates requires significant judgments based upon such factors as length of payer relationship, historical payment patterns, changes in contract provisions and insurance reimbursement policies. These judgments are reviewed each reporting period and updated as necessary.
We look to transfer of control in assessing timing of recognition of revenue when payment was received. For payers who demonstrated a consistent patternin connection with each performance obligation. In general, revenue in connection with the service portion of payment ofour diagnostic tests billed at appropriate amounts, weis recognized revenue upon delivery of the underlying clinical report or when the report is made available on our web portal. Outstanding performance obligations pertaining to orders received but for which the underlying report has not been issued are generally satisfied within a 30-day period.
We also generated test
results.revenue through the sale of our distributed precision oncology products, which is comprised primarily of sales of our RUO kit and IVD product offerings for therapy selection. We recognized revenue on these sales once shipment had occurred. Product sales were recorded net of discounts and other deductions. Billing terms were generally net 30 days. As part of the strategic realignment, we exited these product offerings in fiscal year 2022. See Note 4, "Business combinations and dispositions" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for additional information on the disposition of the RUO kit assets. See Note 5, "Goodwill and intangible assets" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K for additional information on the exit of the IVD product offering.
Shipping and handling fees billed to customers are recorded as revenue in the consolidated statements of operations. The associated shipping and handling costs are recorded in cost of revenue.
Other revenue
Other revenue consistsis primarily of revenuegenerated from collaboration agreements and genome network contracts as well as pharma development services provided to biopharmaceutical companies related to companion diagnostic development.
We enter into collaboration and genome network contracts. Collaboration agreements provide customers with diagnostic testing and related data aggregation reporting services that are provided over the contract term. Collaboration revenue is recognized as the data and reporting services are delivered to the customer. Genome network offerings consist of subscription services which we recognizerelated to a proprietary software platform designed to connect patients, clinicians, advocacy organizations, researchers and therapeutic developers to accelerate the understanding, diagnosis and treatment of hereditary disease. Such services are recognized on a straight-line basis over the subscription term,periods. Amounts due under collaboration and genome network agreements are typically billable on net 30-day terms.
Contracts for companion diagnostic development consisted primarily of milestone-based payments along with annual fees and marked-up pass-through costs. The arrangements were treated as short-term contracts for revenue
from collaboration agreements.Effective January 1, 2018, we adopted ASC Topic 606. Under Topic 606 we will recognize the vast majority of test revenue on an accrual basis, that is when a customer obtains controlrecognition purposes because they allow termination of the promised goods or services. The accrual amountsagreements by the customers with 30 to be120 days’ written notice without a termination penalty. Upon termination, customers were required to pay for the proportion of services provided under milestones that were in progress. We recognized under Topic 606 will be based onrevenue in an estimate ofamount that reflected the consideration thatwhich we expect to receive in exchange for those goods or services. We recognized revenue as services are provided based on the progress made toward achieving the performance obligation, utilizing input methods, including labor hours expended and such estimates will be updated and subsequently adjusted as necessary until fully settled. The estimatetests processed, that measure our progress toward the achievement of the consideration that we expect to receive will require significant judgement by management.
milestone.
Business
Combinations — Purchase Accountingcombinations
We apply ASCFinancial Accounting Standards Board ("FASB"), Accounting Standards Codification ("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 and liabilities assumed in a business combination are recorded based on their estimated fair values. The excessvalues as of purchase prices over thosethe 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 values is recorded as goodwill. Acquisition-related expenses are expensed as incurred. While wevalue of identifiable intangible assets acquired in a business combination on third-party valuations that use our best estimatesinformation and assumptions asprovided by our management, which consider our estimates of inputs and assumptions that a part ofmarket participant would use. Any excess purchase price over the processestimated fair value assigned to accurately valuethe net tangible and identifiable intangible assets acquired and liabilities assumed atis recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, estimated cost savings, cash flows, discount rates, estimated useful lives and probabilities surrounding the business combination date, these estimatesachievement of contingent milestones could result in different purchase price allocations and assumptions are inherently uncertainamortization expense in current and subject to refinement. Our key assumptions used have included projected revenue, costfuture periods.
In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of goods sold, and operating expenses for our acquired entities, and discount rates. As a result, during the measurement period, which may be up to one yearliability under ASC 480, Distinguishing Liabilities from the business combination date,Equity, we may record adjustmentsrecognize a liability equal to the assetsfair 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 in change in fair value of contingent consideration in our consolidated statements of operations.
Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of operations and cash flows of 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 periodcompanies are included in our operating results from the date of acquisition.
Asset acquisitions
In circumstances where substantially all of the fair value of the gross assets acquired is concentrated in
a single identifiable asset or group of similar identifiable assets, the
period inasset is not considered a business and we account for the transaction as an asset acquisition. We recognize the assets acquired based on their relative fair value, which
generally includes the
adjustments were determined.transaction costs of the asset acquisition, and no gain or loss is recognized unless the fair value of noncash assets given as consideration differs from the assets’ carrying amounts. The form of consideration transferred may be cash, liabilities incurred, or equity interests issued.
Goodwill
and indefinite lived intangibles
In accordance with ASC 350, Intangibles –- Goodwill and Other or ASC 350, we do not amortize goodwill or other intangible assets with indefinite lives, including in-process research and development, 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 asin the fourth quarter of October 1 each year for our single consolidated reporting unit, and whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. For
Factors that may indicate potential impairment and trigger an interim impairment test include, but are not limited to, current economic, market and geopolitical conditions, including a significant, sustained decline in our annualstock price and market capitalization compared to the net book value, an adverse change in legal factors, business climate or operational performance of the business, or significant changes in the ability of a particular asset (or group of assets) to generate positive cash flows for our strategic business objectives. During the three months ended June 30, 2022, as a result of significant, sustained decline in our stock price and related market capitalization and lower than expected financial performance, we performed an impairment assessment of goodwill, IPR&D intangibles, and long-lived assets, including definite-lived intangibles.
In the quarter ended June 30, 2022, the Company completed a quantitative impairment test for goodwill. In performing the goodwill impairment test, inwe estimated the fourth quarterfair value of fiscal 2017, we performed a quantitative test at the reporting unit level and determinedby utilizing the discounted cash flow method under the income approach. The determination of the fair value substantially exceededof the reporting unit requires significant estimates and assumptions, including significant unobservable inputs. The key inputs to this valuation approach include, but were not limited to, management's forecast of projected revenues associated with future cash flows, discount rates, and control premiums.
When performing our income approach for the reporting unit, we incorporate the use of projected financial information and a discount rate that is developed using market participant-based assumptions. The cash flow projections are based on an 11-year financial forecast developed by management that includes projections of billable units, revenue by test type and mix, rate changes, capital spending trends, investments in working capital to support future revenue and projected cash flow sources and needs, among others. The selected discount rate then considers the risk and nature of the reporting unit’s cash flows and rates of return market participants would require to invest capital in the reporting unit.
Based on this analysis, we recognized a goodwill impairment charge of $2.3 billion during the quarter ended June 30, 2022, which was included in goodwill and IPR&D impairment expense in the consolidated statements of operations. This charge fully impaired the goodwill balance as of June 30, 2022.
We also identified indicators of impairment related to the IPR&D intangible asset initially recognized as part of the acquisition of Singular Bio that is more likely than not that the asset is impaired. The Company identified conditions during the quarter ended June 30, 2022 such as alternative technologies and uncertainties around the desired outcome of our in-development asset and other economic factors that raised issues with the realizability of our asset. As a result of our evaluation, we recognized an impairment charge of $30.0 million during the quarter ended June 30, 2022. The impairment charges are recorded in goodwill and IPR&D impairment expense in the consolidated statements of operations. This charge fully impaired the indefinite-lived intangible asset balance as of June 30, 2022. We did not record any goodwill or intangible asset impairment losses during the years ended December 31, 2021 and 2020, respectively.
Impairment assessment of long-lived assets
A recoverability test was performed for the long-lived assets, including definite-lived intangibles, using the undiscounted cash flows approach, which included significant unobservable inputs including management's forecasts of projected revenue associated with future cash flows and residual value. The cash flow estimates reflected the Company’s assumptions about its use of the long-lived assets and eventual disposition of the asset group. We determined that our long-lived assets held and used, including intangible assets that are subject to amortization, did not have identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and of other asset groups, because the assets are highly interrelated and interdependent. Therefore, the Company evaluated its long-lived assets for impairment on an entity-wide level. As a result of the recoverability test, we concluded that the carrying
amountvalue of
our single reporting unitlong-lived assets was recoverable at June 30, 2022. No impairment was recorded except for operating lease impairments, which are discussed under the heading "Leases" within Note 8, "Commitments and
therefore, found no impairmentcontingencies" in the Notes to Consolidated Financial Statements in Part II, Item 8. of
goodwill.48
this Annual Report on Form 10-K. We also recorded losses on disposal of assets pursuant to the strategic realignment, which are discussed within Note 11, "Restructuring and other costs" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report on Form 10-K.
We incur stock-based compensation expense for awards granted to employees and directors and for inducement awards granted in connection with our business acquisitions. Stock-based compensation expense is measured at the date of grant and is based on the estimated fair value of the award. Compensation cost is recognized as expense on a straight-line basis over the vesting period for options and restricted stock unit or RSU,("RSU") awards, and on an accelerated basis for performance-based restricted stock unit or PRSU,("PRSU") awards. We recognize stock-based
compensation expense associated with PRSU grants when we determine the achievement of performance conditions is probable. In determining the fair value of stock options and
Employee Stock Purchase Plan, or ESPP,employee stock purchase plan ("ESPP") purchases, we estimate the grant date fair value and the resulting stock-based compensation expense using the Black-Scholes option-pricing model. We estimate the grant date fair value of RSU and PRSU awards based on the grant date share price.
We account for stock-based compensation arrangements with non-employees using a fair value approach. The fair value of these options is measured using the Black-Scholes option-pricing model reflecting the same assumptions as applied to employee options in each of the reported periods, other than the expected life, which is assumed to be the remaining contractual life of the option. The compensation expenses of these arrangements are subject to remeasurement over the vesting terms as earned.
For the years ended December 31, 2017, 2016 and 2015, we recorded stock-based compensation expense of $19.2 million, $10.7 million and $3.5 million, respectively. At December 31, 2017, our unrecognized stock-based compensation expense related to unvested stock options, net of estimated forfeitures, was $9.0 million, which we expect to recognize over a weighted-average period of 2.2 years. Unrecognized compensation expense related to RSUs at December 31, 2017 was $14.6 million, which we expect to recognize on a straight-line basis over a weighted-average period of 2.1 years.
The Black-Scholes option-pricing model requires the use of highly subjective assumptions, which determine the fair value of stock-based awards. These assumptions include:
Fair value of common stock—The fair value of each share of common stock is based on the closing price of our common stock on the date of grant as reported on the NYSE.
Expected term—The expected term represents the period that stock-based awards are expected to be outstanding. We useduse the simplified method to determine the expected term, which is based on the mid-point between the vesting date and the end of the contractual term.
Expected volatility—Since we were privately held until our initial public offering in February 2015 and did not have any trading history for our common stock, we have estimatedWe estimate expected volatility based on the averagehistorical volatility for comparable publicly traded life sciences companies, including molecular diagnostics companies,of our common stock over a period equal to the expected term of stock option grantsawards and RSUs. When selecting comparable publicly traded life sciences companies, including molecular diagnostics companies, on which we based our expected stock price volatility, we have selected companies with comparable characteristics to us, including enterprise value, risk profiles, position within the industry, and with historical share price information sufficient to meet the expected life of the stock-based awards. We have computed historical volatility data using daily closing prices for the selected companies’ shares during the equivalent period of the calculated expected term of the stock-based awards. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own stock price becomes available. We estimate expected volatility for ESPP purchases, using our own stock price volatility over the expected six-month term of the ESPP purchase period.periods.
Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of an option. Dividend yield—We have never paid dividends on our common stock and have no plans to pay dividends on our common stock. Therefore, we used an expected dividend yield of zero. In addition to the Black-Scholes assumptions, we estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the adequacy of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior and other factors. The impact from any forfeiture rate adjustment would be recognized in full in the period of adjustment and if the actual number of future forfeitures differs from our estimates, we might be required to record adjustments to stock-based compensation in future periods.
Historically,
Income taxes
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all periods prior toof a deferred tax asset will not be realized. Significant judgment is required in determining the net valuation allowance which includes our initial public offering,evaluation of all available evidence including past operating results, estimates on future taxable income and acquisition-related tax assets and liabilities. As of December 31, 2022, we recorded a full valuation allowance on our net deferred tax assets because we expect that it is more likely than not that our net deferred tax assets will not be realized in the fair values offoreseeable future. Should the shares of common stock underlyingactual amounts differ from our share-based awards were estimated on each grant date by our board of directors. In order to determineestimates, the fair valueamount of our common stock underlying option grants,valuation allowance could be materially impacted.
Results of operations
A discussion regarding our
boardfinancial condition and results of
directors considered, among other things, contemporaneous valuationsoperations for the year ended December 31, 2022 compared to the year ended December 31, 2021 is presented below. A discussion regarding our financial condition and results of
our common stock prepared by an independent third-party valuation firm in accordance withoperations for the
guidance provided byyear ended December 31, 2021 compared to the
American Institute of Certified Public Accountants Practice49
Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. Given the absence of a public trading market for our common stock, our board of directors exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair value of our common stock, including our stage of development; progress of our research and development efforts; our operating and financial performance, including our levels of available capital resources; the rights, preferences and privileges of our convertible preferred stock relative to those of our common stock; sales of our convertible preferred stock in arms’-length transactions; the valuation of publicly traded companiesyear ended December 31, 2020 can be found under Part II, Item 7. in our industry, as well as recently completed mergers and acquisitions of peer companies; equity market conditions affecting comparable public companies; andAnnual Report on Form 10-K for the lack of marketability of our common stock.
In determining a fair value for our common stock, we estimated the enterprise value of our business using the market approach or option pricing back-solve method. The estimated enterprise value was then allocated to the common stock using the Option Pricing Method, or OPM, and the Probability Weighted Expected Return Method, or PWERM, or the hybrid method. The hybrid method applied the PWERM utilizing the probability of two public offering exit scenarios with a low and high value, and the OPM was utilized in the remaining private scenario.
For valuations after the completion of our initial public offering, the fair value of each share of underlying common stock is the closing price of our common stock as reported on the date of grant.
Results of Operations
year ended December 31, 2021.
Comparison of the Years Ended December 31, 20172022 and 20162021 | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | Dollar Change | | % Change | |
| | 2022 | | 2021 | | | |
| Revenue: | | | | | | | | |
| Test revenue | $ | 500,560 | | | $ | 444,072 | | | $ | 56,488 | | | 13% | |
| Other revenue | 15,743 | | | 16,377 | | | (634) | | | (4)% | |
| Total revenue | 516,303 | | | 460,449 | | | 55,854 | | | 12% | |
| Operating expenses: | | | | | | | | |
| Cost of revenue | 417,256 | | | 348,669 | | | 68,587 | | | 20% | |
| Research and development | 402,088 | | | 416,087 | | | (13,999) | | | (3)% | |
| Selling and marketing | 218,881 | | | 225,910 | | | (7,029) | | | (3)% | |
| General and administrative | 192,314 | | | 248,070 | | | (55,756) | | | (22)% | |
| Goodwill and IPR&D impairment | 2,313,047 | | | — | | | 2,313,047 | | | 100% | |
| Restructuring and other costs | 140,331 | | | — | | | 140,331 | | | 100% | |
| Gain on sale of RUO kit assets | (47,354) | | | — | | | (47,354) | | | 100% | |
Change in fair value of contingent consideration
| (1,850) | | | (386,646) | | | 384,796 | | | 100% | |
| Total operating expenses | 3,634,713 | | | 852,090 | | | 2,782,623 | | | NM | |
| Loss from operations | (3,118,410) | | | (391,641) | | | (2,726,769) | | | NM | |
| Other income (expense), net: | | | | | | | | |
| | | | | | | | |
| Change in fair value of acquisition-related liabilities | 15,906 | | | 25,196 | | | (9,290) | | | (37)% | |
| Other income, net | 8,054 | | | 482 | | | 7,572 | | | NM | |
| Total other income, net | 23,960 | | | 25,678 | | | (1,718) | | | (7)% | |
| Interest expense | (56,747) | | | (49,900) | | | (6,847) | | | (14)% | |
| Net loss before taxes | (3,151,197) | | | (415,863) | | | (2,735,334) | | | NM | |
| Income tax benefit | 44,904 | | | 36,857 | | | 8,047 | | | 22% | |
| Net loss | $ | (3,106,293) | | | $ | (379,006) | | | $ | (2,727,287) | | | NM | |
| NM - Not Meaningful | | | | | | | | |
| | Year Ended December 31, | | | Dollar | | | % | |
| | 2017 | | | 2016 | | | Change | | | Change | |
Revenue: | | | | | | | | | | | | | | | | |
Test revenue | | $ | 65,169 | | | $ | 24,840 | | | $ | 40,329 | | | | 162 | % |
Other revenue | | | 3,052 | | | | 208 | | | | 2,844 | | | | 1,367 | % |
Total revenue | | | 68,221 | | | | 25,048 | | | | 43,173 | | | | 172 | % |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of test revenue | | | 50,142 | | | | 27,878 | | | | 22,264 | | | | 80 | % |
Research and development | | | 46,469 | | | | 44,630 | | | | 1,839 | | | | 4 | % |
Selling and marketing | | | 53,417 | | | | 28,638 | | | | 24,779 | | | | 87 | % |
General and administrative | | | 39,472 | | | | 24,085 | | | | 15,387 | | | | 64 | % |
Total operating expenses | | | 189,500 | | | | 125,231 | | | | 64,269 | | | | 51 | % |
Loss from operations | | | (121,279 | ) | | | (100,183 | ) | | | (21,096 | ) | | | 21 | % |
Other income (expense), net | | | (303 | ) | | | 348 | | | | (651 | ) | | | (187 | )% |
Interest expense | | | (3,654 | ) | | | (421 | ) | | | (3,233 | ) | | | 768 | % |
Net loss before taxes | | | (125,236 | ) | | | (100,256 | ) | | | (24,980 | ) | | | 25 | % |
Income tax benefit | | | (1,856 | ) | | | — | | | | (1,856 | ) | | | (100 | )% |
Net loss | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (23,124 | ) | | | 23 | % |
Revenue
The increase in
total revenue of
$43.2$55.9 million for the year ended December 31,
20172022 compared to the same period in
20162021 was
primarily due
primarily to increased
testbillable volume
from our historical business and
test and other revenues from our acquisitions of AltaVoice, Good Start Genetics and CombiMatrix. Revenue recognized on a cash basis was $46.4 million inhigher average revenue per billable unit. Billable volume increased to 1,290,000 during the year ended December 31,
20172022 compared to
$21.3 million1,169,000 in the same period in
2016, and this2021, an increase
was principally attributableof 10%, due to
growth in the business. Average revenue per unit increased
test volumes from our historical business. Revenue recognized on an accrual basis was $21.8 million into $388 during the year ended December 31,
20172022 compared to
$3.6 million$380 in the same period in
2016. Of this increase, $7.2 million was attributable2021 primarily due to
increased test volumes from our historical business, $6.2 million was attributable to revenues relating to our acquisition of Good Start Genetics, $2.8 million was attributable to genome network revenues relating to our acquisition of AltaVoicechanges in payer and
$2.0 million was attributable to revenues relating to our acquisition of CombiMatrix.50
product mix.
The increase in the cost of
test revenue of
$22.3$68.6 million for the year ended December 31,
20172022 compared to the same period in
20162021 was primarily due to
costs associated with increased
test volume partially offset by the effect of cost efficiencies.billable volume. For the year ended December 31,
2017,2022, the number of
samples accessionedunits billed increased to
approximately 150,0001,290,000 from approximately
59,0001,169,000 for the same period in
2016. This increase included approximately 13,000 Good Start Genetics samples and 2,000 CombiMatrix samples.2021. Cost per
sample accessionedunit was
$335$323 in
20172022 compared to
$473$298 in
2016.2021. The
increase in cost per unit is primarily attributable to an increase in amortization of acquired intangible assets of $50.6 million, an increase in inventory and prepaid asset write downs of $18.2 million principally related to the exit of certain product offerings and geographies, and an increase in shipping costs of $6.4 million related to higher volumes and passed through increases in fuel prices. These increases were partially offset by lower lab materials costs of $5.2 million primarily due to a decrease in the
cost per sample was primarily attributable to increased volume
which led to higher labor efficiencies, to production improvements which resultedand change in
lowermix of materials,
and a decrease in other costs
and to automation and software improvements which have reduced the medical interpretation time per report.of $1.4 million.
The
increasedecrease in research and development expense of
$1.8$14.0 million for the year ended December 31,
20172022 compared to the same period in
20162021 was
primarily due
to decreases in lab-related expenses of $37.7 million as a result of lower costs related to external development projects and lab supplies and services, decreases in personnel-related expenses of $19.5 million primarily
due to
personnel costs which increased by $3.3 million principally reflecting the
acquisitions of Good Start Geneticsreduction in workforce related to our strategic realignment, and
CombiMatrix. Facilities anddecreases in information technology costs
increased by $2.8of $3.7 million
reflecting costs associated with our new production facilitydue to lower network and
headquarters, which became fully operational in February 2017. Stock-based compensation costs increased by $1.2 million and depreciation expense increased by $0.7 million.cloud computing expenses. These
cost increasesdecreases were partially offset by
an increaseincreases in acquisition-related compensation expenses of
$6.5$40.3 million
primarily due to a full year of stock-based compensation in
allocations2022 as compared to a partial year of
resources from researchexpense in 2021 related to several acquisitions in the comparative period, and
developmentincreases in professional fees of $6.6 million due to
cost of revenue, reflecting increased test volumes.higher contract labor.
The
increasedecrease in selling and marketing expenses of
$24.8$7.0 million for the year ended December 31,
20172022 compared to the same period in
20162021 was
primarily due
primarily to
increased personneldecreases in marketing expenses of $10.5 million as a result of lower costs
of $16.1 million including increases of $12.4 million in salariesrelated to brand initiatives and
benefits, $2.8 million in sales commissions and $0.9 millionadvertising, decreases in other
payroll related costs. Facilitiesexpenses of $1.9 million, and
decreases in professional fees of $1.7 million due to lower contract labor. These decreases were offset by increases in personnel-related expenses of $2.7 million driven by headcount growth in 2022 prior to our strategic realignment, increases in travel-related expenses of $2.4 million due to more in-person travel as a result of reduced COVID-19 restrictions, and increases in information technology costs
increased by $4.7of $2.0 million
reflecting costs associated with our new production facility and headquarters, which became fully operational in February 2017. Stock based compensation increased by $2.2 million and travel costs increased by $2.1 million reflecting our growing sales force. In addition, marketing costs increased by $1.0 million and professional services costs increased by $0.4 million.These cost increases were partially offset by an increase of $1.9 million in allocations of resources from sales and marketingdue to cost of revenue, reflecting increased test volumes and sign-out activity. In addition, depreciation and amortization costs decreased by $0.2 million.
higher spending on software licenses.
General and administrative
The increasedecrease in general and administrative expenses of $15.4$55.8 million for the year ended December 31, 20172022 compared to the same period in 20162021 was primarily due to increased personneldecreases in acquisition-related compensation expense of $49.1 million as a result of several acquisitions in the comparative period, decreases in legal fees of $9.7 million for litigation-related expenses in the comparative period, and decreases in personnel-related costs of $5.7 million. Headcount increased principally due to hiring an internal billings and collection team to replace third-party billings and collections contractors. Headcount also increased$7.1 million primarily due to the acquisitionsreduction in workforce related to our strategic realignment. These decreases were partially offset by increases in other corporate expenses of Good Start Genetics$6.3 million in 2022 prior to our strategic realignment, and CombiMatrix. Stock-based compensation increased by $4.4increases in facilities-related expenses of $3.8 million due principally to acquisition-related stock compensation expenselease expenses and higher security and building support costs.
Goodwill and IPR&D impairment
We completed an interim impairment test for Good Start Geneticsgoodwill and CombiMatrix. Depreciation and amortization expense increased by $2.3 million, due primarily tothe IPR&D indefinite-lived intangible asset amortizationas of $1.6June 30, 2022, and as a result recorded a non-cash impairment charge of $2.3 billion. See Critical accounting policies and estimates above and Note 5, “Goodwill and intangible assets” in Notes to the Consolidated Financial Statements in Part II, Item 8. "Consolidated Financial Statements" of this Annual Report on Form 10-K for further information.
Restructuring and other costs
During the year ended December 31, 2022, we incurred restructuring and other costs of $140.3 million. Restructuring and other costs were comprised of $65.5 million in 2017employee severance and increased depreciation expensebenefits, $60.5 million in asset impairments and losses on asset disposals, and $14.3 million in other restructuring expenses. We did not have similar expenses for the year ended December 31, 2021. See Note 11, “Restructuring and other costs" in Notes to the Consolidated Financial Statements in Part II, Item 8. "Consolidated Financial Statements" of $0.7 million principallythis Annual Report on Form 10-K for leasehold improvements associated with our new production facilityfurther information.
Gain on sale of RUO kit assets
During the year ended December 31, 2022, we completed the sale and
headquarters. Occupancy costs increased by $2.1 million, principally reflecting costs associated with our new production facilitytransfer to IDT of select assets and
headquarters. Acquisition-related legal and accounting fees increased by $1.8 million, internal billing and collection costs increased by $1.5 million and legal costs increased by $1.2 million. Professional fees increased by $1.4 million, principally due to third-party billings and collection costs reflecting increased sales volumes and costsliabilities related to
running dual billing systems forthe RUO kit product offering, which represents the RUO distributed target enrichment kit and data analysis platform of ArcherDX. After adjustments, the sale resulted in a
portiongain of
2017 as we moved from a third-party billing agency to in-house billing. Information technology costs increased by $1.1 million due principally to computer equipment and software purchases to support headcount growth.These cost increases were offset by increased allocations of technology and facilities-related expenses to other functional areas of $7.5 million, reflecting the allocation of costs associated with our new production facility and
51
headquarters, which became fully operational in February 2017. From February 2016 to January 2017, we recorded rent expense for our new production facility and headquarters as general and administrative expense. Beginning in February 2017, we began allocating this cost across our organization.
Other income (expense), net
The decrease in other income (expense), net of $0.7approximately $47.4 million for the year ended December 31, 2017 compared2022. We did not have a similar gain for the year ended December 31, 2021. See Note 4, “Business combinations and dispositions” in Notes to the same periodConsolidated Financial Statements in 2016 was principally duePart II, Item 8. "Consolidated Financial Statements" of this Annual Report on Form 10-K for further information.
Change in fair value of contingent consideration
The change in fair value of contingent consideration represented income of $1.9 million and $386.6 million for the years ended December 31, 2022 and 2021, respectively. The year ended December 31, 2022 includes fair value adjustments to reduce our contingent consideration liability related to the acquisition of Genelex Solutions, LLC
("Genelex") and the achievement of certain product milestones related to gross revenues received by us for a
loss on extinguishmentpharmacogenetic product reimbursed through certain payers during the earn-out period. The adjustment to decrease our contingent consideration liability primarily related to the probability of
debt of $0.7 million recorded in March 2017. This chargeachieving gross revenue reimbursements during the earn-out period. The year ended December 31, 2021 includes fair value adjustments to reduce our contingent consideration liability primarily related to our
repaymentacquisition of ArcherDX and the remaining development milestones resulting from a decrease in
full, and prior to the
scheduled maturity date, of the balancevalue of our
obligations undercommon stock. The prior year adjustments to decrease our contingent consideration were due to our determination that our outstanding milestone for FDA clearance or approval of a
loan and security agreement entered intotherapy selection IVD will not be achieved in
July 2015, or the
2015 Loan Agreement.Interest expense
timeframe prescribed in the acquisition agreement.
Change in fair value of acquisition-related liabilities
The
increasedecrease in
interest expensechange in fair value of
$3.2acquisition-related liabilities of $9.3 million for the year ended December 31,
20172022 compared to the same period in
2016 was due principally to borrowings, under a loan and security agreement entered into in March 2017, or the 2017 Loan agreement. See Note 7, “Commitments and contingencies” in the Notes to Consolidated Financial Statements included elsewhere in this report. We began borrowed $40.0 million pursuant to the 2017 Loan Agreement in March 2017.Income tax benefit
The income tax benefit of $1.9 million recorded in the year ended December 31, 20172021 was due to changesa decrease in fair value adjustments related to our deferred income tax asset valuation allowances resulting from our acquisitions of AltaVoice in January 2017 and Ommdom in June 2017.
Comparisonstock payable as a result of the Years Ended December 31, 2016decrease in the price of our common stock and 2015
settlement of acquisition-related hold-backs. | | Year Ended December 31, | | | Dollar | | | % | |
| | 2016 | | | 2015 | | | Change | | | Change | |
Revenue: | | | | | | | | | | | | | | | | |
Test revenue | | $ | 24,840 | | | $ | 8,378 | | | $ | 16,462 | | | | 196 | % |
Other revenue | | | 208 | | | | — | | | | 208 | | | n/a | |
Total revenue | | | 25,048 | | | | 8,378 | | | | 16,670 | | | | 199 | % |
Operating expenses: | | | | | | | | | | | | | | | | |
Cost of test revenue | | | 27,878 | | | | 16,523 | | | | 11,355 | | | | 69 | % |
Research and development | | | 44,630 | | | | 42,806 | | | | 1,824 | | | | 4 | % |
Selling and marketing | | | 28,638 | | | | 22,479 | | | | 6,159 | | | | 27 | % |
General and administrative | | | 24,085 | | | | 16,047 | | | | 8,038 | | | | 50 | % |
Total operating expenses | | | 125,231 | | | | 97,855 | | | | 27,376 | | | | 28 | % |
Loss from operations | | | (100,183 | ) | | | (89,477 | ) | | | (10,706 | ) | | | 12 | % |
Other income (expense), net | | | 348 | | | | (94 | ) | | | 442 | | | | (470 | )% |
Interest expense | | | (421 | ) | | | (211 | ) | | | (210 | ) | | | 100 | % |
Net loss before taxes | | | (100,256 | ) | | | (89,782 | ) | | | (10,474 | ) | | | 12 | % |
Income tax benefit | | | — | | | | — | | | | — | | | n/a | |
Net loss | | $ | (100,256 | ) | | $ | (89,782 | ) | | $ | (10,474 | ) | | | 12 | % |
Revenue
The increase in
revenueother income, net of
$16.7$7.6 million for the year ended December 31,
20162022 compared to the same period in
20152021 was due to
increased test volume, which resultedan increase in
increased cash collections, as well as the commencement of payments from CMS for tests provided to Medicare patients. Approximately $21.7 million of revenue in the year ended December 31, 2016 was from tests delivered in 2016. We recorded $3.6 million of revenue in the year ended December 31, 2016interest income earned on
an accrual basis.52
Cost of revenue
our marketable securities investments.
Interest expense
The increase in
the costinterest expense of
test revenue of $11.4$6.8 million for the year ended December 31,
20162022 compared to the same period in
20152021 was
primarilyprincipally due to
costs associated with increased
test volume. Fordebt outstanding during 2022 as compared to the
year ended December 31, 2016 the number of billed test results delivered increased to approximately 57,000 from approximately 19,000 for the same period in 2015. However, the effect of increased test volumes on cost of revenue was partially offset by efficiencies that resulted in lower costs per test. Reagent and laboratory materials costs increased by $3.3 million and costs of other materials associated with fulfilling orders increased by $2.6 million. Personnel costs increased by $2.8 million reflecting stock-based compensation costs that increased by $1.0 million as well as increased headcount and increased time spent processing revenue-generating tests. Allocated technology and facilities-related expenses increased by $2.0 million and costs associated with equipment and equipment maintenance increased by $0.8 million.Research and development
prior year.
Income tax benefit
The increase in
research and development expenses of $1.8 million for the year ended December 31, 2016 compared to the same period in 2015 was primarily driven by costs related to the continued development of our assay platforms. Personnel costs increased by $7.0 million reflecting additional headcount and increased stock-based compensation costs of $3.4 million. Reference materials costs increased by $0.3 million, also reflecting increased headcount, and data storage costs increased by $0.2 million. These cost increases were partially offset by the effects of reduced validation sequencing activities and increased test volumes in 2016. Costs of reagents and laboratory materials decreased by $2.5 million, as validation sequencing activity was greater in 2015 than in 2016, due principally to the expansion of our test menu introduced in October 2015. Increased test volumes resulted in a greater allocation of resources, by $1.8 million, to cost of revenue in 2016. In addition, equipment costs decreased by $0.5 million, costs associated with software and software licenses decreased by $0.3 million, and consulting costs decreased by $0.3 million.Selling and marketing
The increase in selling and marketing expenses of $6.2 million for the year ended December 31, 2016 compared to the same period in 2015 was due primarily to increased personnel costs of $6.1 million, primarily reflecting increased headcount, increased sales commissions of $1.5 million, increased stock-based compensation costs of $1.0 million and increased severance costs of $0.5 million primarily associated with the program to streamline our organization. In addition, costs associated with software and software licenses increased by $0.9 million, allocations of technology and facilities-related expenses increased by $0.7 million and travel costs increased by $0.5 million. These increases were partially offset by a reduction of $1.2 million in market collaboration costs due to the termination of certain collaboration projects and reductions in other consulting costs of $0.8 million.
General and administrative
The increase in general and administrative expensesincome tax benefit of $8.0 million for the year ended December 31, 20162022 compared to the same period in 20152021 was primarily due to increased facilities coststhe release of $5.0 million reflecting facilities leases executed infederal and state valuation allowances as a result of the first quarterreclassification of 2015the IVD and in subsequent periods. In February 2016, we began recognizing rent expensePCM in-process research and development intangibles from indefinite-lived intangibles to developed technology, which enabled the associated deferred tax liability to serve as a source of income to existing finite-lived deferred tax assets for our new production facility and headquarters in San Francisco. Rent expense relating to this facilitywhich a valuation allowance had previously been established. There was $5.8 millionno similar income tax benefit for the year ended December 31, 2016 and we recorded this cost as general and administrative expense. Personnel costs increased by $2.9 million principally reflecting increased headcount but also including increased stock-based compensation costs of $1.8 million. Losses realized on the impairment and disposal of facility assets in 2016 were $1.0 million and were for write-offs of leasehold improvements relating to facility lease terminations and for equipment disposals related to the shutdown of our Chilean operations. Billings and collection costs increased by $1.0 million, reflecting increased billing-related cash collections, and consulting costs increased by $0.5 million, principally due to internal systems development efforts.
These increases were partially offset by increased allocations of technology and facilities-related expenses to other functional groups of $1.1 million. In addition, legal costs were lower by $0.8 million in 2016, principally due to facility lease-related activities in 2015 that were not repeated in 2016. Consulting costs were lower by $0.4 million reflecting reduced headcount growth and related recruiting costs as well as increased utilization of internal resources for recruiting functions.
53
Other income (expense), net
The net increase in other income (expense) of $0.4 million for the year ended December 31, 2016 compared to the same period in 2015 was principally due to increases in interest income, foreign currency exchange gains and other income items.
Interest expense
The increase in interest expense of $0.2 million for the year ended December 31, 2016, compared to the same period in 2015, was principally due to interest expense relating to term loans under the Loan and Security Agreement (the Loan Agreement) executed in July 2015. See Note 7, “Commitments and contingencies” in the Notes to Consolidated Financial Statements included elsewhere in this report. We began borrowing activity pursuant to the Loan Agreement in July 2015 and in 2016 the amount borrowed under the Loan Agreement rose from $7.5 million to $15.0 million.
2021.
Liquidity and capital resources
Liquidity and capital expenditures
We have
generally incurred net losses since our inception. For the years ended December 31,
20172022, 2021 and
2016, we had2020, our net losses
of $123.4were $3.1 billion, $379.0 million and
$100.3$602.2 million, respectively, and we expect to incur additional losses in the
near-term.future. At December 31,
2017,2022, we had an accumulated deficit of
$398.6 million. To date, we have generated only limited$4.8 billion. While our revenue
andhas increased over time, we may never achieve revenue sufficient to offset our expenses.
Since inception, our operations have been financed primarily by fees collected from our customers, net proceeds of $202.3 million from sales of our capital stock as well as borrowing from debt facilities and the issuance of convertible preferred stock, net proceeds of approximately $105.7 million from our initial public offering and net proceeds of $47.1 million fromsenior notes.
In January 2021, we issued, in an underwritten public offering,
of our common stock which closed in November 2016. In addition, in August 2017, we sold common stock and Series A convertible preferred stock in a private placement for net proceeds of approximately $68.9 million.From inception through December 31, 2017, we have entered into various capital lease agreements for an aggregate financing amount of $14.9 million to obtain laboratory equipment. The terms of our capital leases are typically three years. Interest rates for currently outstanding capital leases range from 4.3% to 6.4% and the leases are secured by the underlying equipment.
In addition, in July 2015, we entered into the 2015 Loan Agreement with a bank under which term loans for purchases of equipment up to an aggregate of $15.08.9 million were available in tranches not to exceed $2.5 million. At December 31, 2016, we had borrowed a total of $15.0 million under the 2015 Loan Agreement and our outstanding balance payable to the lender was $12.1 million. In March 2017, in connection with the execution of a new loan agreement, we repaid in full the balance of our obligations under the 2015 Loan Agreement, approximately $12.1 million, and terminated the 2015 Loan Agreement.
On March 15, 2017, we entered into the 2017 Loan Agreement with a lender pursuant to which we borrowed an initial term loan of $40.0 million, and received net proceeds of approximately $39.7 million. Subject to certain conditions, we will also be eligible to borrow a second term loan of $20.0 million in the first quarter of 2018. On February 26, 2018, we entered into the Amended 2017 Loan Agreement with the same lender, under which we will be eligible to borrow a third term loan of $20.0 million in the second quarter of 2018.
Term loans under the Amended 2017 Loan Agreement bear interest at a floating rate equal to an index rate plus 7.73%, where the index rate is the greater of 0.77% or the 30-day U.S. Dollar London Interbank Offered Rate, or LIBOR, as reported in The Wall Street Journal, with the floating rate resetting monthly subject to a floor of 8.5%. We can make monthly interest-only payments until May 1, 2019 (or, subject to certain conditions, May 1, 2020), and thereafter monthly payments of principal and interest are required to fully amortize the borrowed amount by a final maturity date of March 1, 2022. A fee of 5% of each funded draw is due at the earlier of prepayment or loan maturity, a facility fee of 0.5% is due upon funding for each draw, and a prepayment fee of between 1% and 3% of the outstanding balance will apply in the event of a prepayment. Concurrent with each term loan, we will grant to the lender a warrant to acquire shares of our common stock equal to the quotientat a price of 3% of the funded amount divided by a$51.50 per share, exercisefor gross proceeds of $460.0 million and net proceeds of approximately $434.3 million. In April 2020, we issued, in an underwritten public offering, an aggregate of 20.4 million shares of our common stock at a price equal to the lower of the average closing price$9.00 per share, for the previous ten daysgross proceeds of trading (calculated on the day prior to funding) or the closing price on the day prior to funding.$184.0 million and net proceeds of $173.0 million. In connection with the initial term loan,2022, we granted the lender a warrant to purchase 116,845issued 2.4 million shares of common stock at an exerciseaverage price of $10.27$3.99 per share in an "at the market" offering for aggregate proceeds of $10.0 million and net proceeds of $9.7 million. In 2020, we issued 3.6 million shares of common stock at an average price of $26.33 per share in an "at the market" offering for aggregate proceeds of $93.7 million and net proceeds of $90.7 million.
In September 2019, we issued $350.0 million of aggregate principal amount of convertible senior notes due 2024, which bear cash interest at a rate of 2.0% per year. Also in September 2019, we used the funds received through the issuance of our convertible senior notes due 2024 to settle our note purchase agreement we entered into in November 2018. In April 2021, we issued $1,150.0 million of aggregate principal amount of convertible senior notes due 2028, which bear cash interest at a rate of 1.5% per year. Our business may not generate cash flow from operations in the future sufficient to service our debt, including paying off the principal when due, and make necessary
capital expenditures. Holders of our convertible senior notes have the right to require us to repurchase all or any portion of their notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments, which could adversely affect our liquidity. However, we only have limited ability to make those cash payments under our credit agreement and, even if the credit agreement limitations are no longer in effect, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered or to repay outstanding notes when they mature.
In October 2020, in connection with our acquisition of ArcherDX, we issued $275.0 million of our common stock in a private placement at a price of $16.85 per share.
We also entered into a credit agreement to borrow $135.0 million. The
warrants have a termprivate placement and credit agreement closed concurrently with the merger in October 2020. The terms of
ten years from the date of issuance and include a cashless exercise provision.54
Our obligations under the Amended 2017 Loan Agreement are subject to quarterly covenants to achieve certain volume and revenue levels as well as additional covenants, including limits onthis credit agreement restrict our ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens,certain indebtedness, pay dividends, ormake acquisitions and take other distributionsactions. On February 7, 2023, we made a $53.7 million payment which reduced the principal balance of the 2020 Term Loan by $50.0 million and included a $3.0 million prepayment fee, with the remainder attributable to holdersinterest. On February 28, 2023, we repaid the remaining principal balance outstanding of our capital stock, repurchase stock$85.0 million plus outstanding interest of $1.9 million and make investments,a prepayment fee of $5.1 million. See Note 16, “Subsequent events" in each case subjectNotes to certain exceptions. Our obligations under the Amended 2017 Loan Agreement are secured by a security interestConsolidated Financial Statements in Part II, Item 8. "Consolidated Financial Statements" of this Annual Report on substantially all of our assets, excluding our intellectual property.
We estimate our capital expendituresForm 10-K for the full year 2018 will be $6.0 million.
further information.
At December 31,
20172022 and
2016,2021, we had
$76.0$557.1 million and
$97.3 million,$1.1 billion, 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 and potentially to acquire businesses and technologies.operations. 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 estimate our capital expenditures will be approximately $10.0 to $15.0 million for 2023.
We have incurred substantial losses since
our inception, and we expect to continue to incur losses in the near
term.future. We believe our existing cash, cash equivalents and marketable securities as of December 31,
2017, revenue2022 and fees collected from the sale of our
tests,products and
term loans available to us pursuant to the Amended 2017 Loan Agreement,services will be sufficient to meet our anticipated cash requirements for
our currently-planned operations forat least the
12-month period following the filing date of this report.next 12 months.
We
may needexpect to raise additional funding to finance operations
and service debt obligations prior to achieving profitability or should we make additional acquisitions. We regularly consider fundraising opportunities and
willexpect to determine the timing, nature and size of future financings based upon various factors, including market conditions,
debt maturities 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 by selling equity or debt securities or borrowing money. If we
raise funds by issuingissue 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
willmay 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.
We have implemented the guidance in Financial Accounting Standards Board ASU No. 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40), and concluded that there are not conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern for a period of one year following the date that the December 31, 2017 financial statements are issued.
The following table summarizes our cash flows:flows (in thousands): | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2022 | | 2021 | | 2020 | |
| Cash used in operating activities | $ | (492,961) | | | $ | (559,815) | | | $ | (298,502) | | |
| Cash used in investing activities | (174,803) | | | (204,080) | | | (400,583) | | |
| Cash provided by financing activities | 1,758 | | | 1,565,940 | | | 672,993 | | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (666,006) | | | $ | 802,045 | | | $ | (26,092) | | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
| | (in thousands) | |
Cash used in operating activities | | $ | (97,739 | ) | | $ | (76,317 | ) | | $ | (80,655 | ) |
Cash provided by (used in) investing activities | | | (37,195 | ) | | | 16,061 | | | | (60,891 | ) |
Cash provided by financing activities | | | 80,871 | | | | 53,709 | | | | 112,438 | |
Cash flows from operating activities
For the year ended December 31, 2017,2022, cash used in operating activities of $97.7was $493.0 million and principally resulted from our net loss of $123.4$3.1 billion, a $47.4 million gain on the sale of the RUO kit assets, a $44.9 million income tax benefit, non-cash charges for remeasurements of liabilities in connection with business combinations of $17.8 million, and non-cash income tax benefits$1.5 million of amortization of premiums on investment securities. These were partially offset by non-cash
charges of $19.2$2.3 billion for goodwill and IPR&D impairments, $199.3 million for stock-based compensation, $9.2$142.1 million for depreciation and amortization, $60.5 million related to impairments and $1.8losses on disposals of long-lived assets related to our strategic realignment, $15.6 million for amortization of debt discount and issuance costs related to our outstanding debt, $10.2 million of non-cash lease expense, $8.4 million of post-combination deferred compensation expense, and $1.0 million of other adjustments. The net effect on cash for changes in net operating assets was a decrease of cash of $25.3 million due principally to increases in accounts receivable due to timing of collections, inventory and accounts payable, partially offset by increases in accrued liabilities.
For the year ended December 31, 2021, cash used in operating activities was $559.8 million and principally resulted from our net loss of $379.0 million, non-cash charges for remeasurements of liabilities associated with business
combinations.combinations of $411.8 million primarily related to ArcherDX development milestones, and a $36.9 million income tax benefit primarily generated from our acquisitions of One Codex, Genosity, Ciitizen and Stratify. These were partially offset by non-cash charges of $180.1 million for stock-based compensation, $80.5 million for depreciation and amortization, $14.2 million for amortization of debt discount and issuance costs related to our outstanding debt, $9.5 million of post-combination expense primarily comprised of hold-back cash consideration related to our acquisition of Ciitizen and the acceleration of unvested equity from our acquisition of One Codex, $6.2 million of amortization of premiums on investment securities, $3.5 million of non-cash lease expense, and $1.5 million of other adjustments. The net effect on cash
offor changes in net operating assets was a
usedecrease of cash of
$3.1$27.6 million due principally to
the effect of increaseincreases in accounts
receivable.55
receivable due to timing of collections, inventory and accounts payable, partially offset by increases in accrued liabilities.
For the year ended December 31,
2016,2020, cash used in operating activities
of $76.3was $298.5 million
principally resulted from our net loss of $100.3 million offset by non-cash charges of $10.7 million for stock-based compensation, $6.6 million for depreciation and amortization and $1.0 million for asset impairment charges. The net effect on cash of changes in net operating assets was $5.3 million and was due principally to the effect of increases in accrued expenses and other assets.For the year ended December 31, 2015, cash used in operating activities of $80.7 million principally resulted from our net loss of $89.8$602.2 million and $112.1 million related to our income tax benefit generated from business combinations completed in 2020, partially offset by non‑cashnoncash charges of $5.3$158.7 million for stock-based compensation, $92.3 million in remeasurements of liabilities associated with business combinations such as contingent consideration, $91.0 million related to post-combination expense due to the acceleration of unvested equity in the acquisition of ArcherDX, $39.1 million for depreciation and amortization, $3.5$17.2 million for stock‑based compensation and $0.6 million forof amortization of debt discount and issuance costs, $1.2 million of amortization premiums on marketable securities.investment securities, and $0.2 million of other adjustments. The net effect on cash offor changes in net operating assets was $0.3 million.
an inflow of cash of $16.0 million due principally to increases in accounts payable and accrued liabilities, partially offset by increases in inventory and accounts receivable due to timing of collections.
Cash flows from investing activities
For the year ended December 31,
2017,2022, cash used in investing activities of
$37.2$174.8 million
resulted fromwas primarily due to net purchases
of marketable securities exceeding proceeds fromand maturities of marketable securities
by $33.1of $166.0 million and
cash used for purchases of property and equipment of
$6.9$53.3 million, partially offset by
$2.8 million cash acquiredproceeds from
acquisitionthe sale of
businesses.the RUO kit assets of $44.5 million.
For the year ended December 31,
2016,2021, cash
provided byused in investing activities of
$16.2$204.1 million
resulted from proceeds from maturitieswas primarily due to net cash used to acquire One Codex, Genosity and Ciitizen of
marketable securities exceeding purchases of marketable securities by $27.7$247.4 million,
partially offset byand cash used for purchases of property and equipment of
$11.6$54.7 million, partially offset by proceeds from net maturities and purchases of marketable securities of $99.3 million.
For the year ended December 31,
2015,2020, cash used in investing activities of
$65.6$400.6 million
resultedwas primarily
fromrelated to net cash used to acquire Orbicule BV ("Diploid"), Genelex, YouScript and ArcherDX of $383.8 million, purchases of
marketable securities exceeding proceeds fromproperty and equipment of $22.9 million, and other cash outflows of $4.0 million, all partially offset by net sales and maturities of marketable securities
by $54.4 million and purchases of
property and equipment of $6.5$10.1 million.
In addition, restricted cash increased by $4.7 million due to deposits for our new facility lease executed in September 2015 and compensating balances for our Loan Agreement executed in July 2015.Cash flows from financing activities
For the year ended December 31, 2017,2022, cash provided by financing activities of $80.9$1.8 million primarily consisted of cash received from net proceeds from the sale of common stock of $9.7 million and issuances of common stock of $8.1 million. These were partially offset by cash used to settle acquisition obligations of $10.6 million and finance lease principal payments of $5.4 million.
For the year ended December 31, 2021, cash provided by financing activities of $1.6 billion primarily consisted of net proceeds of $68.9 million from the August 2017 private placement, net proceedsissuance of $39.7convertible senior notes due 2024 of $1.1 billion and the public offering of common stock of $434.3 million from an initial term loan under the 2017 Loan Agreement andas well as cash received from employeeissuances of common stock plan purchases,totaling $23.8 million.
For the year ended December 31, 2020, cash provided by financing activities of $673.0 million consisted of cash received from issuances of common stock totaling $284.2 million, including cash received from shares issued through a private placement in October 2020 upon the close of the ArcherDX acquisition, exercises of stock options and exercisesemployee stock plan purchases, net proceeds from the public offerings of warrants totaling $5.7common stock of $263.7 million, and
net proceeds from debt financings of $129.2 million. These cash inflows were partially offset by
aother cash
paymentoutflows of
$18.4 million to settle loan obligations assumed in the Good Start acquisition, other loan payments of $12.1 million and capital lease obligations payments of $3.0$4.1 million.
For the year ended December 31, 2016, cash provided by financing activities of $53.7 million resulted from net proceeds from the underwritten public offering of common stock of $47.1 million, borrowings of $7.5 million under the Loan Agreement and cash received from exercises of stock options of $3.1 million, partially offset by loan payments of $2.4 million and capital lease obligations payments of $1.6 million.
For the year ended December 31, 2015, cash provided by financing activities of $112.4 million resulted primarily from $107.1 million of net proceeds from our initial public offering completed in February 2015 and borrowings of $7.5 million under the Loan Agreement executed in July 2015, partially offset by payments of $2.0 million on our capital lease obligations and loan payments of $0.4 million.
The following table summarizes our contractual obligations, including interest, as of December 31,
20172022 (in thousands):
| Contractual obligations: | | 2018 | | | 2019 and 2020 | | | 2021 and 2022 | | | 2023 and beyond | | | Total | | Contractual obligations: | | 2023 | | 2024 and 2025 | | 2026 and 2027 | | 2028 and beyond | | Total |
Operating leases | | $ | 9,707 | | | $ | 19,145 | | | $ | 19,403 | | | $ | 29,846 | | | $ | 78,101 | | Operating leases | | $ | 23,691 | | | $ | 45,773 | | | $ | 39,852 | | | $ | 91,177 | | | $ | 200,493 | |
Capital leases | | | 2,369 | | | | 3,481 | | | | 21 | | | | — | | | | 5,871 | | |
Term loan | | | 3,691 | | | | 28,575 | | | | 20,198 | | | | — | | | | 52,464 | | |
| Finance leases | | Finance leases | | 5,595 | | | 3,839 | | | — | | | — | | | 9,434 | |
| Convertible senior notes | | Convertible senior notes | | — | | | 349,996 | | | — | | | 1,150,000 | | | 1,499,996 | |
| 2020 Term Loan | | 2020 Term Loan | | — | | | 135,000 | | | — | | | — | | | 135,000 | |
| Purchase commitments | | Purchase commitments | | 19,756 | | | 12,909 | | | 750 | | | — | | | 33,415 | |
Total | | $ | 15,767 | | | $ | 51,201 | | | $ | 39,622 | | | $ | 29,846 | | | $ | 136,436 | | Total | | $ | 49,042 | | | $ | 547,517 | | | $ | 40,602 | | | $ | 1,241,177 | | | $ | 1,878,338 | |
56
In September 2015, we entered into aOperating lease
agreement for our new production facility and headquarters in San Francisco, California, in which we commenced occupancy and operations in January 2017. This lease expires in July 2026. Leases for other facilities in California and in Cambridge, Massachusetts expire at various dates from January 2018 through October 2026.Aggregate future minimum lease payments for these facilities arematurity amounts included in the table above. above do not include sublease income expected to be received under our sublease with IDT. Under the sublease agreement, we expect to receive sublease income for fiscal years ending December 31, 2023, 2024 and 2025 of $0.9 million, $0.9 million and $0.1 million, respectively.
See Note
7,8, “Commitments and contingencies” in
the Notes to Condensed Consolidated Financial Statements.In March 2017, we entered into the 2017 Loan Agreement pursuant to which we borrowed an initial term loan of $40.0 million and received net proceeds of $39.7 million. Subject to certain conditions, and pursuant to the Amended 2017 Loan Agreement, we will also be eligible to borrow a second term loan of $20.0 million in the first quarter of 2018 and a third term loan of $20.0 million in the second quarter of 2018. The amounts in the line item “Term loan” in the table above include principal and interest payments pertaining to the initial term loan of $40.0 million. See Note 7, “Commitments and contingencies” and Note 13, “Subsequent event” in the Notes to Consolidated Financial Statements.
Statements in Part II, Item 8. of this Annual Report for additional details regarding our leases, convertible senior notes, 2020 Term Loan and purchase commitments.
Off-balance sheet arrangements
We have not entered into any off-balance sheet
arrangements and do not have any holdings in variable interest entities.arrangements.
Recent accounting pronouncements
See “Recent accounting pronouncements” in Note 2, “Summary of significant accounting policies” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual 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 7A. Quantitative and Qualitative Disclosures about Market
Risk.Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. We had loan obligations of $39.1 million at December 31, 2017, which resulted from a term loan pursuant to the 2017 Loan Agreement. This loan is subject to a floating interest rate. We had capital lease obligations of $5.4 million as of December 31, 2017, which result from various capital lease agreements to obtain laboratory equipment. Our capital lease obligations carry fixed rates of interest. Our cash, cash equivalents, restricted cash and marketable securities totaled $76.0$557.1 million at December 31, 2017,2022, and consisted primarily of bank deposits, money market funds, U.S. treasuryTreasury notes and U.S. government agency securities. Such interest-bearing instruments carry a degree of risk; however, because our investments are primarily high-quality credit instruments with short-term in duration,durations with high-quality institutions, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. At December 31, 2017,2022, a hypothetical 1%1.0% (100 basis points) increase or decrease in interest rates would not have resulted in a declinematerial change in the fair value of our cash equivalents and portfolio of marketable securities of approximately $389,000.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 maturitymaturity.
Our 2020 Term Loan bears interest at an annual rate equal to three-month LIBOR, subject to a 2.00% LIBOR floor, plus a margin of 8.75% and is therefore sensitive to changes in interest rates. If three-month LIBOR can no longer be determined or declinesif the applicable governmental authority ceases to supervise or sanction such rates, then we will endeavor to agree with the administrative agent, an alternate rate of interest that gives due consideration to the then prevailing market convention for determining interest for comparable loans in the United States; provided that until such alternative rate of interest is agreed, the 2020 Term Loan shall bear interest at the Wall Street Journal Prime Rate. We currently do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations. As of December 31, 2022, a hypothetical 100 basis point increase in interest rates would have an estimated $1.4 million impact per year on our financial position and results of operations, based on the 2020 Term Loan principal outstanding through maturity. By February 28, 2023, we paid the principal balance outstanding plus interest and prepayment fees. As of December 31, 2022, the fair value are determinedof the 2020 Term Loan was $130.0 million. For additional information about the 2020 Term Loan, see Note 8, “Commitments and contingencies” and Note 16, "Subsequent events" in Notes to be other-than-temporary.57
ITEM 8. Financial Statements and Supplementary Data.
Invitae Corporation
Index to Audited Consolidated Financial Statements
in Part II, Item 8. of this Annual Report. Although our convertible senior notes are based on a fixed rate, changes in interest rates could impact the fair value we disclose. As of December 31, 2022, the fair market value of the convertible senior notes due 2024 and due 2028 was $261.6 million and $576.7 million, respectively. For additional information about the convertible senior notes, see Note 8, “Commitments and contingencies” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Annual Report.
ITEM 8. Consolidated Financial Statements and Supplementary Data
Index to Consolidated Financial Statements 58
Report of Independent
RegisteredRegistered Public Accounting FirmTo the Stockholders and Board of Directors of Invitae Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Invitae Corporation (the Company) as of December 31,
20172022 and
2016,2021, the related consolidated statements of operations, comprehensive loss,
convertible preferred stock and stockholders’ equity
(deficit), and cash flows for each of the three years in the period ended December 31,
2017,2022, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31,
20172022 and
2016,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2017,2022, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 28, 2023 expressed an unqualified opinion thereon.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (PCAOB)PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. | | | | | |
| |
| Measurement of test revenue billed to insurance carriers |
| |
| Description of the Matter | During the year ended December 31, 2022, the Company recognized test revenue billed to insurance carriers of $310.3 million. As discussed in Note 2 to the consolidated financial statements, the Company often provides price concessions for tests billed to insurance carriers, and therefore the transaction price for patient insurance-billed tests is considered variable consideration. Revenue for tests billed to insurance carriers was recognized based on an estimate of the consideration to which the Company expects to be entitled at an amount for which it is probable that a reversal of cumulative revenue recognized will not occur.
Auditing the measurement of the Company’s test revenue billed to insurance carriers was complex due to the significant judgment required to determine the amount of consideration to which the Company expects to be entitled. In particular, the estimate of test revenue billed to insurance carriers was based on assumptions in payer behavior such as historical payment patterns, contract provisions and government and private insurance reimbursement policies. |
| |
| | | | | |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s revenue recognition process. For example, we tested controls over management’s review of the significant assumptions and inputs used in the estimate of the amount to which the Company expects to be entitled. We also tested controls over the completeness and accuracy of the current and historical data used in the Company's revenue models.
Our audit procedures over the Company’s test revenue billed to insurance carriers included, among others, assessing the revenue models and testing the significant assumptions and inputs used by the Company in its analysis. We agreed a sample of transactions to the payer contract terms. We compared the significant assumptions and inputs used by management to the Company’s contracted rates, government and private insurance payer collection trends, and other relevant factors. We assessed the completeness and accuracy of the historical cash collections used in the Company’s revenue models. We also assessed the completeness and accuracy of adjustments to estimates of future cash collections resulting from significant contract amendments and changes in collection trends. |
| | | | | |
| Impairment of long-lived assets |
| |
| Description of the Matter | At December 31, 2022, the Company’s property and equipment, net, intangible assets, net, and operating lease assets (collectively, long-lived assets) were $108.7 million, $1,012.5 million, and $106.6 million, respectively. As discussed in Note 2 to the consolidated financial statements, long-lived assets are assessed for recoverability whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When indicators of impairment exist, the Company compares the estimated future undiscounted net cash flows to the carrying amount of the asset group. If the carrying amount of the asset group exceeds the estimated future undiscounted cash flows, an impairment is measured based on the difference between the carrying amount of the asset group and its fair value.
Auditing the Company’s recoverability test for long-lived assets was challenging due to subjective estimates and assumptions used by the Company to determine the undiscounted cash flows associated with the asset group. The estimate of undiscounted cash flows was subject to higher estimation uncertainty due to management’s judgments over significant assumptions, including revenue growth and revenue multiples. Changes in these significant assumptions could have a significant effect on the undiscounted cash flows and resulting recoverability of the asset group. |
| |
| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness, of controls over the Company’s impairment assessment for long-lived assets. For example, we tested controls over management’s review of the significant inputs and assumptions in the determination of undiscounted cash flows, specifically as it relates to revenue growth and revenue multiples.
Our audit procedures over the Company’s impairment assessment for long-lived assets included, among others, assessing the reasonableness of significant assumptions, specifically revenue growth and revenue multiples, and assessing the completeness and accuracy of the underlying data used by the Company in its analyses. We evaluated whether the significant assumptions were reasonable by comparing them to the past performance of the Company, current industry data and current market forecasts, and whether such assumptions were consistent with evidence obtained in other areas of the audit. We also involved our valuation specialists to assist us in evaluating the reasonableness of the Company’s valuation methodologies and assumptions, including the revenue multiples as compared to industry and market data. |
We have served as the Company’s auditor since 2013.
Redwood City,
San Mateo, California
March 5, 2018
59
February 28, 2023
Consolidated Balance Sheets
| | December 31, | | | December 31, | |
| | 2017 | | | 2016 | |
| | | | | | | | |
Assets | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 12,053 | | | $ | 66,825 | |
Marketable securities | | | 52,607 | | | | 25,798 | |
Accounts receivable | | | 10,422 | | | | 1,153 | |
Prepaid expenses and other current assets | | | 11,599 | | | | 8,024 | |
Total current assets | | | 86,681 | | | | 101,800 | |
Property and equipment, net | | | 30,341 | | | | 23,793 | |
Restricted cash | | | 5,406 | | | | 4,697 | |
Marketable securities, non-current | | | 5,983 | | | | — | |
Intangible assets, net | | | 35,516 | | | | — | |
Goodwill | | | 46,575 | | | | — | |
Other assets | | | 576 | | | | 361 | |
Total assets | | $ | 211,078 | | | $ | 130,651 | |
Liabilities and stockholders’ equity | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 8,606 | | | $ | 3,352 | |
Accrued liabilities | | | 22,742 | | | | 6,711 | |
Capital lease obligation, current portion | | | 2,039 | | | | 1,309 | |
Debt, current portion | | | — | | | | 3,381 | |
Total current liabilities | | | 33,387 | | | | 14,753 | |
Capital lease obligation, net of current portion | | | 3,373 | | | | 266 | |
Debt, net of current portion | | | 39,084 | | | | 8,721 | |
Other long-term liabilities | | | 13,440 | | | | 7,837 | |
Total liabilities | | | 89,284 | | | | 31,577 | |
Commitments and contingencies (Note 7) | | | | | | | | |
Stockholders’ equity: | | | | | | | | |
Preferred stock, $0.0001 par value: Authorized: 20,000,000 shares; Issued and outstanding: 3,458,823 and 0 shares as of December 31, 2017 and December 31, 2016, respectively | | | — | | | | — | |
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 53,595,914 and 41,143,513 shares as of December 31, 2017 and December 31, 2016, respectively | | | 5 | | | | 4 | |
Accumulated other comprehensive loss | | | (171 | ) | | | — | |
Additional paid-in capital | | | 520,558 | | | | 374,288 | |
Accumulated deficit | | | (398,598 | ) | | | (275,218 | ) |
Total stockholders’ equity | | | 121,794 | | | | 99,074 | |
Total liabilities and stockholders’ equity | | $ | 211,078 | | | $ | 130,651 | |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Assets | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 257,489 | | | $ | 923,250 | |
| Marketable securities | 289,611 | | | 122,121 | |
| Accounts receivable | 96,148 | | | 66,227 | |
| Inventory | 30,386 | | | 33,516 | |
| Prepaid expenses and other current assets | 19,496 | | | 33,691 | |
| Total current assets | 693,130 | | | 1,178,805 | |
| Property and equipment, net | 108,723 | | | 114,714 | |
| Operating lease assets | 106,563 | | | 121,169 | |
| Restricted cash | 10,030 | | | 10,275 | |
| | | |
| Intangible assets, net | 1,012,549 | | | 1,187,994 | |
| Goodwill | — | | | 2,283,059 | |
| Other assets | 23,121 | | | 23,551 | |
| Total assets | $ | 1,954,116 | | | $ | 4,919,567 | |
| Liabilities and stockholders’ equity | | | |
| Current liabilities: | | | |
| Accounts payable | $ | 13,984 | | | $ | 21,127 | |
| Accrued liabilities | 74,388 | | | 106,453 | |
| Operating lease obligations | 14,600 | | | 12,359 | |
| Finance lease obligations | 5,121 | | | 4,156 | |
| | | |
| Total current liabilities | 108,093 | | | 144,095 | |
| Operating lease obligations, net of current portion | 134,386 | | | 124,369 | |
| Finance lease obligations, net of current portion | 3,780 | | | 5,683 | |
| Debt | 122,333 | | | 113,391 | |
| Convertible senior notes, net | 1,470,783 | | | 1,464,138 | |
| Deferred tax liability | 8,130 | | | 51,696 | |
| Other long-term liabilities | 4,775 | | | 37,797 | |
| Total liabilities | 1,852,280 | | | 1,941,169 | |
| Commitments and contingencies (Note 8) | | | |
| Stockholders’ equity: | | | |
| Preferred stock, $0.0001 par value: 20,000 shares authorized; nil shares issued and outstanding as of December 31, 2022 and 2021, respectively | — | | | — | |
| Common stock, $0.0001 par value: 600,000 and 400,000 shares authorized; 245,562 and 228,116 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 25 | | | 23 | |
| Accumulated other comprehensive loss | (80) | | | (7) | |
| Additional paid-in capital | 4,931,032 | | | 4,701,230 | |
| Accumulated deficit | (4,829,141) | | | (1,722,848) | |
| Total stockholders’ equity | 101,836 | | | 2,978,398 | |
| Total liabilities and stockholders’ equity | $ | 1,954,116 | | | $ | 4,919,567 | |
The accompanying notes are an integral part of these financial statements.
60
Consolidated Statements of Operations
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Revenue: | | | | | | | | | | | | |
Test revenue | | $ | 65,169 | | | $ | 24,840 | | | $ | 8,378 | |
Other revenue | | | 3,052 | | | | 208 | | | | - | |
Total revenue | | | 68,221 | | | | 25,048 | | | | 8,378 | |
Costs and operating expenses: | | | | | | | | | | | | |
Cost of test revenue | | | 50,142 | | | | 27,878 | | | | 16,523 | |
Research and development | | | 46,469 | | | | 44,630 | | | | 42,806 | |
Selling and marketing | | | 53,417 | | | | 28,638 | | | | 22,479 | |
General and administrative | | | 39,472 | | | | 24,085 | | | | 16,047 | |
Total costs and operating expenses | | | 189,500 | | | | 125,231 | | | | 97,855 | |
Loss from operations | | | (121,279 | ) | | | (100,183 | ) | | | (89,477 | ) |
Other income (expense), net | | | (303 | ) | | | 348 | | | | (94 | ) |
Interest expense | | | (3,654 | ) | | | (421 | ) | | | (211 | ) |
Net loss before taxes | | | (125,236 | ) | | | (100,256 | ) | | | (89,782 | ) |
Income tax benefit | | | (1,856 | ) | | | — | | | | — | |
Net loss | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (89,782 | ) |
Net loss per share, basic and diluted | | $ | (2.65 | ) | | $ | (3.02 | ) | | $ | (3.18 | ) |
Shares used in computing net loss per share, basic and diluted | | | 46,511,739 | | | | 33,176,305 | | | | 28,213,324 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenue: | | | | | |
| Test revenue | $ | 500,560 | | | $ | 444,072 | | | $ | 272,310 | |
| Other revenue | 15,743 | | | 16,377 | | | 7,288 | |
| Total revenue | 516,303 | | | 460,449 | | | 279,598 | |
| Operating expenses: | | | | | |
| Cost of revenue | 417,256 | | | 348,669 | | | 198,275 | |
| Research and development | 402,088 | | | 416,087 | | | 240,605 | |
| Selling and marketing | 218,881 | | | 225,910 | | | 168,317 | |
| General and administrative | 192,314 | | | 248,070 | | | 270,029 | |
| Goodwill and IPR&D impairment | 2,313,047 | | | — | | | — | |
| Restructuring and other costs | 140,331 | | | — | | | — | |
| Gain on sale of RUO kit assets | (47,354) | | | — | | | — | |
| Change in fair value of contingent consideration | (1,850) | | | (386,646) | | | 54,544 | |
| Total operating expenses | 3,634,713 | | | 852,090 | | | 931,770 | |
| Loss from operations | (3,118,410) | | | (391,641) | | | (652,172) | |
| Other income (expense), net: | | | | | |
| | | | | |
| Change in fair value of acquisition-related liabilities | 15,906 | | | 25,196 | | | (37,527) | |
| Other income, net | 8,054 | | | 482 | | | 5,195 | |
| Total other income (expense), net | 23,960 | | | 25,678 | | | (32,332) | |
| Interest expense | (56,747) | | | (49,900) | | | (29,766) | |
| Net loss before taxes | (3,151,197) | | | (415,863) | | | (714,270) | |
| Income tax benefit | 44,904 | | | 36,857 | | | 112,100 | |
| Net loss | $ | (3,106,293) | | | $ | (379,006) | | | $ | (602,170) | |
| Net loss per share, basic and diluted | $ | (13.18) | | | $ | (1.80) | | | $ | (4.47) | |
| Shares used in computing net loss per share, basic and diluted | 235,676 | | | 210,946 | | | 134,587 | |
The accompanying notes are an integral part of these financial statements.
61
Consolidated Statements of Comprehensive Loss
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
| | (In thousands) | |
Net loss | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (89,782 | ) |
Other comprehensive income (loss): | | | | | | | | | | | | |
Unrealized income (loss) on available-for-sale marketable securities, net of tax | | | (171 | ) | | | 15 | | | | (15 | ) |
Comprehensive loss | | $ | (123,551 | ) | | $ | (100,241 | ) | | $ | (89,797 | ) |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | |
| Net loss | $ | (3,106,293) | | | $ | (379,006) | | | $ | (602,170) | |
| Other comprehensive (loss) income: | | | | | |
| Unrealized (loss) income on available-for-sale marketable securities, net of tax | (73) | | | (8) | | | 10 | |
| Comprehensive loss | $ | (3,106,366) | | | $ | (379,014) | | | $ | (602,160) | |
The accompanying notes are an integral part of these financial statements.
62
Consolidated Statements of
Convertible Preferred Stock and Stockholders’ Equity
(Deficit) | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | Total | |
| | Convertible | | | | | | | | | | | Additional | | | Other | | | | | | | Stockholders | |
| | Preferred stock | | | Common Stock | | | Paid-In | | | Comprehensive | | | Accumulated | | | Equity | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Deficit | | | (Deficit) | |
| | (In thousands, except share amounts) | |
Balance as of December 31, 2014 | | | 141,131,524 | | | $ | 202,305 | | | | 944,581 | | | $ | — | | | $ | 1,604 | | | $ | — | | | $ | (85,180 | ) | | $ | (83,576 | ) |
Conversion of preferred stock into common stock upon initial public offering | | | (141,131,524 | ) | | | (202,305 | ) | | | 23,521,889 | | | | 3 | | | | 202,302 | | | | — | | | | — | | | | 202,305 | |
Issuance of common stock in connection with initial public offering, net of offering costs of $2,961 | | | — | | | | — | | | | 7,302,500 | | | | 1 | | | | 105,667 | | | | — | | | | — | | | | 105,668 | |
Common stock issued on exercise of stock options | | | — | | | | — | | | | 148,870 | | | | — | | | | 288 | | | | — | | | | — | | | | 288 | |
Vesting of common stock related to early exercise of options | | | — | | | | — | | | | 17,281 | | | | — | | | | 11 | | | | — | | | | — | | | | 11 | |
Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 3,477 | | | | — | | | | — | | | | 3,477 | |
Unrealized loss on investments | | | — | | | | — | | | | — | | | | — | | | | — | | | | (15 | ) | | | — | | | | (15 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (89,782 | ) | | | (89,782 | ) |
Balance as of December 31, 2015 | | | — | | | | — | | | | 31,935,121 | | | | 4 | | | | 313,349 | | | | (15 | ) | | | (174,962 | ) | | | 138,376 | |
Common stock issued on exercise of stock options | | | — | | | | — | | | | 243,916 | | | | — | | | | 744 | | | | — | | | | — | | | | 744 | |
Common stock issued pursuant to vesting of restricted stock units | | | | | | | | | | | 156,810 | | | | (1 | ) | | | — | | | | — | | | | — | | | | (1 | ) |
Common stock issued pursuant to employee stock purchase plan | | | — | | | | — | | | | 369,674 | | | | — | | | | 2,391 | | | | — | | | | — | | | | 2,391 | |
Common stock issued in connection with underwritten public offering, net of offering costs of $3,498 | | | — | | | | — | | | | 8,433,332 | | | | 1 | | | | 47,101 | | | | — | | | | — | | | | 47,102 | |
Vesting of common stock related to early exercise of options | | | | | | | | | | | 4,660 | | | | — | | | | 4 | | | | | | | | | | | | 4 | |
Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 10,699 | | | | — | | | | — | | | | 10,699 | |
Unrealized income (loss) on available-for-sale marketable securities, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | 15 | | | | — | | | | 15 | |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (100,256 | ) | | | (100,256 | ) |
Balance as of December 31, 2016 | | | — | | | | — | | | | 41,143,513 | | | | 4 | | | | 374,288 | | | | — | | | | (275,218 | ) | | | 99,074 | |
Common stock and convertible preferred stock issued in connection with private placement, net of offering costs of $4,599 | | | 3,458,823 | | | | — | | | | 5,188,235 | | | | 1 | | | | 68,896 | | | | — | | | | — | | | | 68,897 | |
Common stock issued on exercise of stock options, net | | | — | | | | — | | | | 386,868 | | | | — | | | | 1,706 | | | | — | | | | — | | | | 1,706 | |
Common stock issued pursuant to vesting of restricted stock units, net | | | — | | | | — | | | | 924,591 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Common stock issued pursuant to acquisition-related transaction bonus | | | — | | | | — | | | | 4,284 | | | | — | | | | — | | | | — | | | | — | | | | — | |
Common stock issued pursuant to exercises of warrants | | | — | | | | — | | | | 232,038 | | | | — | | | | 1,381 | | | | — | | | | — | | | | 1,381 | |
Common stock issued pursuant to employee stock purchase plan | | | — | | | | — | | | | 378,583 | | | | — | | | | 2,635 | | | | — | | | | — | | | | 2,635 | |
Common stock issued pursuant to business combinations | | | — | | | | — | | | | 5,175,931 | | | | — | | | | 50,808 | | | | — | | | | — | | | | 50,808 | |
Common stock issued to settle assumed liabilities | | | — | | | | — | | | | 161,871 | | | | — | | | | 1,272 | | | | — | | | | — | | | | 1,272 | |
Warrants issued pursuant to Loan and Security Agreement | | | — | | | | — | | | | — | | | | — | | | | 740 | | | | — | | | | — | | | | 740 | |
Stock-based compensation expense | | | — | | | | — | | | | — | | | | — | | | | 18,832 | | | | — | | | | — | | | | 18,832 | |
Unrealized income (loss) on available-for-sale marketable securities, net of tax | | | — | | | | — | | | | — | | | | — | | | | — | | | | (171 | ) | | | — | | | | (171 | ) |
Net loss | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (123,380 | ) | | | (123,380 | ) |
Balance as of December 31, 2017 | | | 3,458,823 | | | $ | — | | | | 53,595,914 | | | $ | 5 | | | $ | 520,558 | | | $ | (171 | ) | | $ | (398,598 | ) | | $ | 121,794 | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Common stock: | | | | | |
| Balance, beginning of period | $ | 23 | | | $ | 19 | | | $ | 10 | |
| Common stock issued | 2 | | | 4 | | | 9 | |
| Balance, end of period | 25 | | | 23 | | | 19 | |
| | | | | |
| Accumulated other comprehensive (loss) income: | | | | | |
| Balance, beginning of period | (7) | | | 1 | | | (9) | |
| Unrealized (loss) income on available-for-sale marketable securities, net of tax | (73) | | | (8) | | | 10 | |
| Balance, end of period | (80) | | | (7) | | | 1 | |
| | | | | |
| Additional paid-in capital: | | | | | |
| Balance, beginning of period | 4,701,230 | | | 3,337,120 | | | 1,138,316 | |
| Common stock issued in private placement, net | — | | | — | | | 263,628 | |
| Common stock issued in connection with public offering, net | 9,658 | | | 434,263 | | | 263,685 | |
| Common stock issued on exercise of stock options, net | 643 | | | 8,984 | | | 10,730 | |
| Common stock issued pursuant to exercises of warrants | — | | | 1,242 | | | 974 | |
| Common stock issued pursuant to employee stock purchase plan | 7,513 | | | 13,550 | | | 8,871 | |
| Common stock and equity awards issued pursuant to acquisitions | 15,027 | | | 805,124 | | | 1,524,227 | |
| | | | | |
| Warrants issued pursuant to loan agreement | — | | | — | | | 27,000 | |
| | | | | |
| Stock-based compensation expense | 196,961 | | | 176,435 | | | 110,076 | |
| Reclassification of equity component of convertible senior notes | — | | | (75,488) | | | — | |
| Reclassification of stock payable liabilities | — | | | — | | | (10,387) | |
| | | | | |
| Balance, end of period | 4,931,032 | | | 4,701,230 | | | 3,337,120 | |
| | | | | |
| Accumulated deficit: | | | | | |
| Balance, beginning of period | (1,722,848) | | | (1,360,847) | | | (758,677) | |
| Cumulative effect of accounting change | — | | | 17,005 | | | — | |
| Net loss | (3,106,293) | | | (379,006) | | | (602,170) | |
| Balance, end of period | (4,829,141) | | | (1,722,848) | | | (1,360,847) | |
| Total stockholders' equity | $ | 101,836 | | | $ | 2,978,398 | | | $ | 1,976,293 | |
The accompanying notes are an integral part of these financial statements.
63
Consolidated Statements of Cash Flows
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
| | (In thousands) | |
Cash flows from operating activities: | | | | | | | | | | | | |
Net loss | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (89,782 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
Depreciation and amortization | | | 9,181 | | | | 6,553 | | | | 5,321 | |
Stock-based compensation | | | 19,221 | | | | 10,699 | | | | 3,477 | |
Amortization of premium on marketable securities | | | 136 | | | | 311 | | | | 632 | |
Loss on disposal of assets | | | 268 | | | | 1,030 | | | | 23 | |
Remeasurements of liabilities associated with business combinations | | | 1,810 | | | | — | | | | — | |
Benefit from income taxes | | | (1,856 | ) | | | — | | | | — | |
Changes in operating assets and liabilities net of effects of business combination: | | | | | | | | | | | | |
Accounts receivable | | | (1,963 | ) | | | (843 | ) | | | (309 | ) |
Prepaid expenses and other current assets | | | (641 | ) | | | (1,149 | ) | | | (1,367 | ) |
Other assets | | | (185 | ) | | | 1,465 | | | | 36 | |
Accounts payable | | | (535 | ) | | | (111 | ) | | | 508 | |
Accrued expenses and other liabilities | | | (37 | ) | | | 5,984 | | | | 806 | |
Net cash used in operating activities | | | (97,981 | ) | | | (76,317 | ) | | | (80,655 | ) |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Purchases of marketable securities | | | (101,867 | ) | | | (90,236 | ) | | | (216,994 | ) |
Proceeds from sales of marketable securities | | | — | | | | — | | | | 15,891 | |
Proceeds from maturities of marketable securities | | | 68,768 | | | | 117,922 | | | | 146,676 | |
Acquisition of businesses, acquired cash | | | 2,821 | | | | — | | | | — | |
Purchases of property and equipment | | | (6,675 | ) | | | (11,625 | ) | | | (6,464 | ) |
Net cash provided by (used in) investing activities | | | (36,953 | ) | | | 16,061 | | | | (60,891 | ) |
| | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | |
Proceeds from issuance of common stock upon initial public offering, net of issuance costs | | | — | | | | — | | | | 107,120 | |
Proceeds from underwritten public offering of common stock, net of issuance costs | | | — | | | | 47,102 | | | | — | |
Proceeds from issuance of common stock | | | 74,619 | | | | 3,134 | | | | 288 | |
Proceeds from loan agreement | | | — | | | | 7,500 | | | | 7,500 | |
Proceeds from loan and security agreement | | | 39,661 | | | | — | | | | — | |
Loan payments | | | (30,457 | ) | | | (2,438 | ) | | | (413 | ) |
Capital lease principal payments | | | (2,952 | ) | | | (1,589 | ) | | | (2,010 | ) |
Loan agreement financing costs | | | — | | | | — | | | | (47 | ) |
Net cash provided by financing activities | | | 80,871 | | | | 53,709 | | | | 112,438 | |
| | | | | | | | | | | | |
Net decrease in cash, cash equivalents and restricted cash | | | (54,063 | ) | | | (6,547 | ) | | | (29,108 | ) |
Cash, cash equivalents and restricted cash at beginning of period | | | 71,522 | | | | 78,069 | | | | 107,177 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 17,459 | | | $ | 71,522 | | | $ | 78,069 | |
Supplemental cash flow information: | | | | | | | | | | | | |
Interest paid | | $ | 2,852 | | | $ | 421 | | | $ | 211 | |
Supplemental cash flow information of non-cash investing and financing activities: | | | | | | | | | | | | |
Equipment acquired through capital leases | | $ | 6,789 | | | $ | — | | | $ | 1,639 | |
Conversion of convertible preferred stock to common stock | | $ | — | | | $ | — | | | $ | 202,305 | |
Purchases of property and equipment in accounts payable and accrued liabilities | | $ | 200 | | | $ | 1,644 | | | $ | 603 | |
Warrants issued pursuant to loan and security agreement | | $ | 740 | | | $ | — | | | $ | — | |
Common stock issued for acquisition of businesses | | $ | 50,808 | | | $ | — | | | $ | — | |
Consideration payable for acquisition of businesses | | $ | 13,276 | | | $ | — | | | $ | — | |
Common stock issued to settle assumed liabilities | | $ | 1,272 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net loss | $ | (3,106,293) | | | $ | (379,006) | | | $ | (602,170) | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | |
| Goodwill and IPR&D impairment | 2,313,047 | | | — | | | — | |
| Impairments and losses on disposals of long-lived assets | 60,507 | | | — | | | — | |
| Gain on sale of RUO kit assets | (47,354) | | | — | | | — | |
| Depreciation and amortization | 142,071 | | | 80,472 | | | 39,050 | |
| Stock-based compensation | 199,304 | | | 180,075 | | | 158,747 | |
| Amortization of debt discount and issuance costs | 15,587 | | | 14,226 | | | 17,204 | |
| Remeasurements of liabilities associated with business combinations | (17,756) | | | (411,842) | | | 92,348 | |
| Benefit from income taxes | (44,904) | | | (36,857) | | | (112,100) | |
| Post-combination expense for acceleration of unvested equity and deferred stock compensation | 8,428 | | | 9,530 | | | 91,021 | |
| Amortization of premiums and discounts on investment securities | (1,515) | | | 6,221 | | | 1,236 | |
| Non-cash lease expense | 10,240 | | | 3,496 | | | 777 | |
| Other | 1,018 | | | 1,487 | | | (588) | |
| Changes in operating assets and liabilities, net of businesses acquired: | | | | | |
| Accounts receivable | (29,921) | | | (16,696) | | | (2,814) | |
| Inventory | 3,130 | | | (1,486) | | | (7,832) | |
| Prepaid expenses and other current assets | 14,195 | | | (14,563) | | | (2,010) | |
| Other assets | 3,124 | | | (3,274) | | | 895 | |
| Accounts payable | (2,465) | | | (9,258) | | | 10,186 | |
| Accrued expenses and other long-term liabilities | (13,404) | | | 17,660 | | | 17,548 | |
| Net cash used in operating activities | (492,961) | | | (559,815) | | | (298,502) | |
| Cash flows from investing activities: | | | | | |
| Purchases of marketable securities | (892,361) | | | (325,957) | | | (280,258) | |
| Proceeds from sales of marketable securities | — | | | — | | | 12,832 | |
| Proceeds from maturities of marketable securities | 726,313 | | | 425,293 | | | 277,487 | |
| Acquisition of businesses, net of cash acquired | — | | | (247,396) | | | (383,753) | |
| Proceeds from sale of RUO kit assets | 44,554 | | | — | | | — | |
| Purchases of property and equipment | (53,309) | | | (54,720) | | | (22,865) | |
| Other | — | | | (1,300) | | | (4,026) | |
| Net cash used in investing activities | (174,803) | | | (204,080) | | | (400,583) | |
| Cash flows from financing activities: | | | | | |
| Proceeds from public offerings of common stock, net | 9,658 | | | 434,263 | | | 263,688 | |
| Proceeds from issuance of common stock | 8,157 | | | 23,767 | | | 284,203 | |
| Proceeds from issuance of convertible senior notes, net | — | | | 1,116,427 | | | — | |
| Proceeds from issuance of debt, net | — | | | — | | | 129,214 | |
| Finance lease principal payments | (5,410) | | | (3,759) | | | (2,655) | |
| Settlement of acquisition obligations | (10,647) | | | (4,758) | | | (1,457) | |
| Net cash provided by financing activities | 1,758 | | | 1,565,940 | | | 672,993 | |
| Net (decrease) increase in cash, cash equivalents and restricted cash | (666,006) | | | 802,045 | | | (26,092) | |
| Cash, cash equivalents and restricted cash at beginning of period | 933,525 | | | 131,480 | | | 157,572 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 267,519 | | | $ | 933,525 | | | $ | 131,480 | |
| | | | | |
| Supplemental cash flow information: | | | | | |
| Interest paid | $ | 40,504 | | | $ | 31,400 | | | $ | 12,130 | |
| Supplemental cash flow information of non-cash investing and financing activities: | | | | |
| Consideration receivable for sale of RUO kit assets | $ | 3,000 | | | $ | — | | | $ | — | |
| Equipment acquired through finance leases | $ | 4,472 | | | $ | 8,224 | | | $ | 4,463 | |
| | | | | |
| Purchases of property and equipment in accounts payable and accrued liabilities | $ | 820 | | | $ | 13,222 | | | $ | 1,869 | |
| | | | | |
| | | | | |
| Warrants issued pursuant to debt agreement | $ | — | | | $ | — | | | $ | 27,000 | |
| Common stock issued for acquisition of businesses | $ | 6,600 | | | $ | 802,073 | | | $ | 1,157,958 | |
| Consideration payable for acquisition of businesses | $ | — | | | $ | 46,649 | | | $ | 940,829 | |
| | | | | |
| Operating lease assets obtained in exchange for lease obligations, net | $ | 4,495 | | | $ | 88,777 | | | $ | 14,058 | |
The accompanying notes are an integral part of these financial statements.
64
Notes to Consolidated Financial Statements
December 31, 2017
1. Organization and description of business
Invitae Corporation
(the “Company”("Invitae," “the Company," "we," "us," and "our") was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and
we changed
itsour 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-specificWe offer high-quality, comprehensive, affordable genetic
variation and generate test reports for clinicians and their patients. The Company’s production facility and headquarters is located in San Francisco, California. The Company currently has more than 20,000 genes in production and provides a variety of diagnostic tests that can be used intesting across multiple
indications. The Company’s tests include multiple genes associated withclinical areas, including hereditary cancer,
neurological disorders, cardiovascular disorders, pediatric disorders, metabolic disordersprecision oncology, women's health, rare diseases and
other hereditary conditions. In addition,pharmacogenomics. To augment our portfolio and
asrealize our mission, we have previously acquired multiple assets and businesses that further expanded our test menu and suite of digital health and data offerings and accelerated our entry into key genomics markets. We are building a
result of the acquisitions of Good Start Genetics in August 2017platform to harness genetics to diagnose more patients correctly and
CombiMatrix Corporation in November 2017, the Company’s tests also include preimplantation and carrier screening for inherited disorders, prenatal diagnosis, miscarriage analysis and pediatric developmental disorders. The Companyearlier, while enabling our partners to bring therapies to market faster. Invitae operates in one segment.
The Company has incurred substantial losses since its inception and expects to continue to incur operating losses in the near-term. For the year ended December 31, 2017, the Company’s net loss was $123.4 million. At December 31, 2017, the Company’s accumulated deficit was $398.6 million. To date,
Strategic realignment
On July 18, 2022, the Company
has generated only limited revenue,initiated a strategic realignment of our operations and
it may never achieve revenue sufficientbegan implementing cost reduction programs to
offsetprioritize its
expenses. The Company believes its existing cash, cash equivalentscore genetic testing and
marketable securities asdigital health and data platforms, which was approved by the board of
December 31, 2017, revenue from the saledirectors of
its tests, and amounts available under a loan agreement will be sufficient to meet its anticipated cash requirements for its currently-planned operations for the 12-month period following the filing date of this report.The Company may need to obtain additional funding to finance operations prior to achieving profitability. Company management regularly considers fundraising opportunities and will determine the timing, nature and size of future financings based upon various factors, including market conditions and management’s operating plans. The Company may in the future elect to finance operations by selling equity or debt securities or borrowing money. If additional funding is required, there can be no assurance that additional funds will be available to the Company on acceptable terms on a timely basis, if at all. If the Company is unable to obtainJuly 16, 2022. See Note 11, "Restructuring and other costs" for additional funding when needed, it will need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on the Company’s ability to execute on its business plan, and have an adverse effect on its business, results of operations and future prospects.
The Company has implemented the guidance in Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), and concluded that there are not conditions or events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for a period of one year following the date that the December 31, 2017 financial statements are issued.
information regarding our strategic realignment.
2. Summary of significant accounting policies
Principles of consolidation
The
Our consolidated financial statements include
our accounts and the accounts of
the Company and its wholly ownedour wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make
judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.
The Company believes judgment is involved in determining revenue recognition; the acquisition-date fair value of intangible assets; the fair value of contingent consideration associated with acquisitions; the recoverability of long-lived assets; impairment of goodwill and intangible assets; stock-based compensation expense; and income tax uncertainties. The Company basesWe base these estimates on
current facts, historical and anticipated results, trends and various other assumptions that
the Company believeswe believe are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those
judgments, estimates and assumptions.
65
We evaluate our estimates on an ongoing basis.
Significant estimates and assumptions made by management include the determination of:
•revenue recognition;
•inventory adjustments;
•the fair value of assets and liabilities associated with business combinations;
•the impairment assessment of goodwill and intangible assets;
•the recoverability of long-lived assets;
•our incremental borrowing rates used to calculate our lease balances;
•stock-based compensation expense and the fair value of awards and warrants issued; and
•income tax uncertainties.
Concentrations of credit risk and other risks and uncertainties
Financial instruments that potentially subject
the Companyus to a concentration of credit risk consist of cash, cash equivalents,
restricted cash, marketable securities and accounts receivable.
The Company’sOur cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits.
The Company does not perform evaluations of customers’ financial condition and does not require collateral.
Significant customers are those that represent 10% or more of the Company’sour total revenue for each year presented onin the consolidated statements of operations. For eachOur revenue and accounts receivable from significant customer, revenuecustomers as a percentage of our total revenue isand total accounts receivable was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | Accounts receivable |
| | Year Ended December 31, | | December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| Medicare | 14 | % | | 15 | % | | 19 | % | | 16 | % | | * |
| | | | | | | | | |
| | | | | | | | | |
| | December 31, | |
Customers | | 2017 | | | 2016 | | | 2015 | |
Customer A | | | 13 | % | | | 11 | % | | * | |
Customer B | | * | | | * | | | | 13 | % |
* Less than 10% of total revenue | | | | | | | | | | | | |
Customer A represented 13% of accounts receivable in the consolidated financial statements as of December 31, 2017. No single customer represented 10% or more of accounts receivable in the consolidated financial statements as of December 31, 2016.
Cash,
cash equivalents,
The Company considers 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,
U.S. Treasury notes and
U.S. government agency securities.
Restricted cash consists primarily of money market funds that secure 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 consolidated statements of cash flows (in thousands): | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Cash and cash equivalents | $ | 257,489 | | | $ | 923,250 | |
| Restricted cash | 10,030 | | | 10,275 | |
| Total cash, cash equivalents and restricted cash | $ | 267,519 | | | $ | 933,525 | |
All marketable securities have been classified as “available-for-sale” and are carried at estimated fair value as determined based upon quoted market prices or pricing models for similar securities. Management determines the appropriate classification of its marketable debt securities at the time of purchase and reevaluates such designation at each balance sheet date. Short-term marketable securities have maturities
one year or less
than 365 days at the balance sheet date. Unrealized gains and losses are excluded from earnings and are reported as a component of other comprehensive loss. Realized gains and losses and
declines in fair value judged to be other than temporary,impairments, 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.
For marketable securities in an unrealized loss position, we assess our intent to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of these criteria are met, the security’s amortized cost basis is written down to fair value through other income (expense), net.
We receive payment from patients, biopharmaceutical partners, third-party payers and other business-to-business customers. See Note 3, "Revenue, accounts receivable and deferred revenue" for further information.
Allowances for losses on certain financial assets
We assess our accounts receivables for expected credit losses at each reporting period by disaggregating by payer type and further by portfolios of customers with similar characteristics, such as customer type and geographic location. We then review each portfolio for expected credit losses based on historical payment trends as well as forward looking data and current economic trends. If a credit loss is determined, we record a reduction to our accounts receivable balance with a corresponding general and administrative expense.
We review available-for-sale debt securities in an unrealized loss positions at each balance sheet date and assess whether such unrealized loss positions are credit-related. Our expected loss allowance methodology for these securities is developed by reviewing the extent of the unrealized loss, the issuers’ credit ratings and any changes in those ratings, as well as reviewing current and future economic market conditions and the issuers’ current status and financial condition. The Company receives paymentcredit-related portion of unrealized losses, and any subsequent improvements, are recorded in other income (expense), net. Unrealized gains and losses that are not credit-related are included in accumulated other comprehensive loss.
Deferred revenue
We record a contract liability when cash payments are received or due in advance of our performance related to one or more performance obligations. See Note 3, "Revenue, accounts receivable and deferred revenue" for
its tests from partners, patients, institutional customers and third-party payers. For most payers, the Company has not been able to demonstrate a predictable pattern of collectability, and therefore recognizes revenue when payment is received. For payers who have demonstrated a consistent pattern of payment of tests billed, the Company recognizes revenue, at estimated realizable amounts, upon delivery of test results. Accounts receivable balances primarily represent partner, patient, institutional customer and Medicare billings.Restricted cash
Restricted cashfurther information.
Inventory
Our inventory consists of
money market fundsraw materials, work in progress, and finished goods, which are stated at the lower of cost or net realizable value on a first-in, first-out basis. We periodically analyze our inventory levels and expiration dates, and write down inventory that
serve as: collateralhas become obsolete, inventory that has a cost basis in excess of its net realizable value, and inventory in excess of expected sales requirements as cost of revenue. We record an allowance for
a security deposit for the Company’s lease agreement for its production facilityobsolete inventory using an estimate based on historical trends and
headquarters; collateral for security deposits for facilitiesevaluation of
the Company’s subsidiary Good Start; collateral for a credit card agreement at one of the Company’s financial institutions; and for securing a letter of credit as collateral for a facility sublease agreement.66
Cash, cash equivalents and restricted cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the statements of cash flows (in thousands):
near-term expirations. | | December 31, 2017 | | | December 31, 2016 | |
Cash and cash equivalents | | $ | 12,053 | | | $ | 66,825 | |
Restricted cash | | | 5,406 | | | | 4,697 | |
Total cash, cash equivalents and restricted cash | | $ | 17,459 | | | $ | 71,522 | |
Business combinations
We apply ASC 805, Business Combinations, which 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 tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill.
The Company basesWe base the estimated fair value of identifiable intangible assets acquired in a business combination on
independentthird-party valuations that use information and assumptions provided by
our management, which consider
management’sour 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,
estimated cost savings, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.
In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under FASB Accounting Standards Codification (“ASC”) TopicASC 480, Distinguishing Liabilities from Equity, the Company recognizeswe recognize a liability equal to the fair value of the contingent payments the Company expectswe expect to make as of the acquisition date. The Company remeasuresWe remeasure this liability each reporting period and recordsrecord changes in the fair value as a componentin change in fair value of operating expenses.contingent consideration in our consolidated statements of operations.
Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in
the Company’sour operating results from the date of acquisition.
Asset acquisitions
In circumstances where substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the asset is not considered a business and we account for the transaction as an asset acquisition. We recognize the assets acquired based on their relative fair value, which generally includes the transaction costs of the asset acquisition, and no gain or loss is recognized unless the fair value of noncash assets given as consideration differs from the assets’ carrying amounts. The form of consideration transferred may be cash, liabilities incurred, or equity interests issued.
Amortizable intangible assets include trade names, non-compete agreements, patent licensing agreements, favorable leases, developed technology, and customer relationships, and rights to develop new technology acquired as part of business combinations. Customer relationships acquired through our business combinations in 2017 are amortized on an accelerated basis, utilizing free cash flows, over periods ranging from five years to eleven11 years. All other intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives
ranging from twofive to 1512 years. All intangible assets subject to amortization are reviewed for impairment in accordance with ASC 360, Property, Plant and Equipment. In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company’sour goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, the Company performswe perform annual impairment reviews of itsour goodwill balance during the fourth fiscal quarter. or more frequently if business factors indicate. In testing for impairment, the Company compareswe compare the fair value of itsour reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, the Companywe will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.The Company performed its first
In-process research and development
Intangible assets related to 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. During this period, the assets will not be amortized but will be tested for impairment on an annual impairment reviewbasis and between annual tests if we become aware of its goodwill balance as of October 1, 2017. The Company determined, after performingany events occurring or changes in circumstances that would indicate a quantitative review, that it is more likely than not thatreduction in the fair value of its reporting unitthe 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 projects. If the fair value exceeds the carrying value, there is substantially in excessno impairment. Impairment losses on indefinite-lived intangible assets are recognized based solely on a comparison of the fair value of an asset to its carrying amount. Accordingly, there was no impairment. The Company did not incurvalue, without consideration of any goodwill impairment lossesrecoverability test.
Leases
Under ASC 842, Leases, we determine if an arrangement is a lease at inception. Operating leases are included in anyoperating lease assets and operating lease obligations in our consolidated balance sheets. Finance leases are included in other assets and finance 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 assets and liabilities are recognized at commencement based on the present value of lease payments over the lease term. We generally use our incremental borrowing rate based on the estimated rate of interest for collateralized borrowing over a similar term of the
periods presented.67
Leases
lease payments. The Company rents its facilities under operating lease agreementsasset also includes any lease payments made and recognizes related rentis adjusted for lease incentives. Our lease terms may include options to extend or terminate the lease which are recognized when it is reasonably certain that we will exercise that option. Leases with terms of 12 months or less are not recorded on our balance sheet. Lease expense is recognized on a straight-line basis over the termlease terms, or in some cases, the useful life of the applicable lease agreement. Some ofunderlying asset. We account for the lease agreements contain rent holidays, scheduled rent increases, lease incentives, and renewal options. Rent holidays and scheduled rent increases are included in the determinationnon-lease components of rent expense to be recorded over the lease term. Lease incentives are recognizedour operating right-of-use assets 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 thesingle 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.
component.
Property and equipment,
net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight‑linestraight-line method over the estimated useful lives of the assets, generally between three and seven years. Leasehold improvements are amortized using the straight‑linestraight-line method over the shorter of the estimated useful life of the asset or the term of the lease. Amortization expense of assets acquired through capital leases is included in depreciation and amortization expense in the consolidated statements of operations. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheet and any resulting gain or loss is reflected in the consolidated statements of operations in the period realized. The estimated useful lives of the property and equipment are as follows: | | | | | |
| Furniture and fixtures | | 7 years |
Automobiles | | 7 years |
Manufacturing and Laboratory equipment | | 5 years |
Computer equipment | | 3 years |
Software | | 3 years |
Leasehold improvements | | Shorter of lease term or estimated useful life |
Long‑lived
Long-lived assets
The Company reviews long‑lived
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using discounted cash flows or other appropriate measures of fair value. The Company
During the year ended December 31, 2022, we recognized losses on disposal of property and equipment of $19.1 million, which are recorded
asset impairmentin restructuring and other costs in the consolidated statements of operations. See Note 5, "Goodwill and intangible assets" under the heading "Impairment assessment" and Note 6, "Balance sheet components" under the heading "Property and equipment, net" for additional information. We did not incur any losses
on disposal of
$1.0 million in 2016 relating to leasehold improvementsproperty and
toequipment during the
shutdown of the Company’s Chilean operations. All impairment losses were charged to generalyears ended December 31, 2021 and
administrative expense. There were no impairment losses recorded for any other period presented.2020, respectively.
Fair value of financial instruments
The Company’s
Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities,
capital leasesfinance lease liabilities, and
debt.liabilities associated with business combinations. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities approximate their current fair value due to the relatively short-term nature of these accounts. Based on borrowing rates available to
the Company,us, the carrying value of
capital leasesour finance lease liabilities approximates
their fair values. Liabilities associated with business combinations are recorded at their estimated fair value.
See Note 6, “Fair value measurements” for disclosure
Revenue recognition
We recognize revenue when control of the fair valuepromised 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. We utilize the following practical expedients and exemptions:
•Costs to obtain or fulfill a contract are expensed when incurred because the amortization period would have been one year or less, and
•No adjustments to promised consideration were made for financing as we expect, at contract inception, that the period between the transfer of debta promised good or service and further information onwhen the fair value of the Company’s financial instruments.Revenue recognition
customer pays for that good or service will be one year or less.
Test revenue
Test revenue is comprised of testing services and sales of distributed precision oncology products.
The majority of our test revenue is generated primarily from the sale of tests thatgenetic testing, in addition to somatic testing for therapy selection and personalized cancer monitoring. These testing services provide analysis and associated interpretation of the sequencing of parts of the genome. Revenue associatedTest orders are placed under signed requisitions or contractual agreements, and we often enter into contracts with subsequent re-requisition servicesinsurance companies and family variantinstitution customers that include pricing provisions under which such tests was de minimisare billed. Billing terms are generally net 30 to 60 days.
While the transaction price of diagnostic tests is originally established either via contract or pursuant to our standard list price, we often provide concessions for
all periods presented.68
Testtests billed to insurance carriers, and therefore the transaction price for patient insurance-billed tests is considered to be variable and 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,an estimate of the consideration to which we will be entitled at an amount for which it is probable that a reversal of cumulative consideration will not occur. Making these estimates requires significant judgments based upon such factors as length of payer relationship, historical payment patterns, changes in situations where contractedcontract provisions and insurance reimbursement coverage does not exist,policies. These judgments are reviewed each reporting period and updated as necessary.
We look to transfer of control in assessing timing of recognition of revenue in connection with each performance obligation. In general, revenue in connection with the Company considers whetherservice portion of our diagnostic tests is recognized upon delivery of the Company has sufficient historyunderlying clinical report or when the report is made available on our web portal. Outstanding performance obligations pertaining to reliably estimate a payer’s individual payment patterns. The Company reviewsorders received but for which the number of tests paid against the number of tests billed over at least six months of payment history and the payer’s outstanding balance for unpaid tests to determine whether payments are being made at a consistently high percentage of tests billed and at appropriate amounts given the amount billed. For most payers, the Companyunderlying report has not been ableissued are generally satisfied within a 30-day period.
We also generated test revenue through the sale of our distributed precision oncology products, which is comprised primarily of sales of our RUO kit and IVD product offerings for therapy selection. We recognized revenue on these sales once shipment had occurred. Product sales were recorded net of discounts and other deductions. Billing terms were generally net 30 days. As part of the strategic realignment, we exited these product offerings in fiscal year 2022. See Note 4, "Business combinations and dispositions" for additional information on the disposition of
the RUO kit assets. See Note 5, "Goodwill and intangible assets" for additional information on the exit of the IVD product offering.
Shipping and handling fees billed to demonstrate a predictable patterncustomers are recorded as revenue in the consolidated statements of collectability,operations. The associated shipping and therefore recognizeshandling costs are recorded as cost of revenue.
Other revenue
when payment is received. For payers who have demonstrated a consistent pattern of payment of tests billed at appropriate amounts, the Company recognizes revenue, at estimated realizable amounts, upon delivery of test results. Other revenue consistsis primarily of revenuegenerated from collaboration agreements and genome network contracts as well as pharma development services provided to biopharmaceutical companies related to companion diagnostic development.
We enter into collaboration and genome network contracts. Collaboration agreements provide customers with diagnostic testing and related data aggregation reporting services that are provided over the contract term. Collaboration revenue is recognized as the data and reporting services are delivered to the customer. Genome network offerings consist of subscription services which isrelated to a proprietary software platform designed to connect patients, clinicians, advocacy organizations, researchers and therapeutic developers to accelerate the understanding, diagnosis and treatment of hereditary disease. Such services are recognized on a straight-line basis over the subscription term,periods. Amounts due under collaboration and genome network agreements are typically billable on net 30-day terms.
Contracts for companion diagnostic development consisted primarily of milestone-based payments along with annual fees and marked-up pass-through costs. The arrangements were treated as short-term contracts for revenue
from collaboration agreements.recognition purposes because they allow termination of the agreements by the customers with 30 to 120 days’ written notice without a termination penalty. Upon termination, customers were required to pay for the proportion of services provided under milestones that were in progress. We recognized revenue in an amount that reflected the consideration which we expect to receive in exchange for those goods or services. We recognized revenue as services are provided based on the progress made toward achieving the performance obligation, utilizing input methods, including labor hours expended and tests processed, that measure our progress toward the achievement of the milestone.
Cost of test revenue reflects the aggregate costs incurred in delivering the genetic testing results to cliniciansour products and services and includes expenses for personnel costs including stock-based compensation, materials and supplies, personnel-related costs, freight, costs for lab services and clinical trial support, equipment and infrastructure expenses associated with testing and allocated overhead including rent, information technology costs, equipment depreciation, amortization of acquired intangibles, and utilities. Costs
License Agreements
We have entered and may continue to enter into license agreements to access and utilize certain technology. We evaluate if the license agreement results in the acquisition of an asset or a business and then determine if the acquired asset has the ability to generate revenues or is subject to regulatory approval. When regulatory approval is not required, we record the license as an asset and amortize it over the estimated economic life. When regulatory approval is required, we record the amount paid as a research and development expense.
Advertising
Advertising expenses are expensed as incurred. We incurred advertising expenses of $5.9 million, $20.2 million and $11.4 million during the years ended December 31, 2022, 2021 and 2020, respectively.
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 ESPP purchases. The fair value of RSU awards with time-based vesting terms is based on the grant date share price. We grant 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 on the date of issuance.
Restructuring and other costs
Restructuring and other costs are comprised of employee severance and benefits, asset impairments and losses on asset disposals, and other costs primarily related to implementing our strategic realignment. Employee separation costs are comprised of severance, other termination benefit costs, and stock-based compensation expense for the acceleration of stock awards related to workforce reductions. We recognize costs and liabilities associated with performingexit and disposal activities in accordance with ASC 420, Exit and Disposal Cost Obligations, and other costs and liabilities associated with postemployment nonretirement benefits in accordance with ASC 712, Postemployment Nonretirement Benefits. Liabilities are based on the Company’s testestimate of fair value in the period the liabilities are incurred, with subsequent changes to the liability recognized as adjustments in the period of change. We recognize losses on asset disposals in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. Restructuring and other costs are recognized as an operating expense within the consolidated statements of operations and the related liabilities are recorded aswithin accrued liabilities in the test is processed regardless of whether and when revenue is recognized with respect to that test.consolidated balance sheets.
Income taxes
The Company uses
We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
Stock-based compensation
The Company measures its stock-based payment awards made to employees Significant judgment is required in determining the net valuation allowance which includes our evaluation of all available evidence including past operating results, estimates on future taxable income and directors based on the estimated fair values of the awardsacquisition-related tax assets and recognizes the compensation expense over the requisite service period. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and employee stock purchase plan (“ESPP”) purchases. The fair value of restricted stock unit (“RSU”) awards with time-based vesting terms is based on the grant date share price. The Company grants performance-based restricted stock unit (“PRSU”) awards to certain employees which vest upon the achievement of certain performance conditions, subjectliabilities.
We historically established a full valuation allowance against our deferred tax assets due to the
employees’ continued service relationship with the Company. The probabilityuncertainty surrounding realization of
vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. The Company recognizes such
compensation expense on an accelerated vesting method.Stock-based compensation expense for awards without a performance condition is recognized using the straight-line method. Stock-based compensation expense is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. As such, the Company’s stock-based compensation is reduced for the estimated forfeitures at the date of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company accounts for compensation expense related to stock options granted to non-employees based on fair values estimated using the Black-Scholes option-pricing model. Stock options granted to non-employees are re-measured at each reporting date until the award is vested.
The Company accounts for stock issued as compensation in connection with business combinations based on the fair value of the Company’s common stock on the date of issuance.
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Advertising
Advertising expenses are expensed as incurred. The Company recorded advertising expenses of $0.6 million, $0.5 million and $0.4 million in 2017, 2016 and 2015, respectively.
assets.
Comprehensive loss is composed of two components: net loss and other comprehensive
loss.income (loss). Other comprehensive
lossincome (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity,
(deficit), but are excluded from net loss.
The Company’sOur other comprehensive
lossincome (loss) consists of unrealized
gains or losses on investments in available-for-sale securities.
Net loss per
common share
Basic net loss per
common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities, consisting of preferred stock, options to purchase common stock, common stock warrants,
shares of common stock pursuant to ESPP, common stock issuable in connection with our 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.
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 February 2016,October 2021, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required2021-08, Business Combinations ("Topic 805"): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments of this ASU require entities to recognize and measure contract assets and contract liabilities acquired in a lease liabilitybusiness combination in accordance with ASC 606, Revenue from Contracts with Customers. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with ASC 606 as if it had originated the contracts. The amendments improve
comparability after the business combination by providing consistent recognition and measurement guidance for revenue contracts with customers acquired in a right-of-use assetbusiness combination and revenue contracts with customers not acquired in a business combination. The amendments in this update are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, and should be applied prospectively to all leases (withbusiness combinations occurring after the exceptiondate of short-term leases) atadoption. Early adoption is permitted. We are currently evaluating the commencement date. Lessorimpact this guidance will have on our consolidated financial statements.
Recently adopted accounting underpronouncements
In August 2020, the FASB issued ASU 2016-02 is largely unchanged. ASU 2016-022020-06, Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for certain convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. This new standard is effective for our interim and annual periods beginning January 1, 2022, with early adoption permitted. We elected to adopt the amendments on a modified retrospective basis effective January 1, 2021, which required a cumulative-effect adjustment to retained earnings. The cumulative-effect adjustment resulted in a decrease in accumulated deficit of $17.0 million related to the reversal of the equity component and interimassociated issuance costs as well as adjustment of the related amortization costs of our convertible senior notes due 2024. Reporting periods beginning on or after December 15, 2018January 1, 2021 are presented under this new guidance while prior periods have not been adjusted and early adoption is permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the effect that ASU 2016-02 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company has not yet selected an implementation date for ASU 2016-02.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”), which requires an entity to recognize the amount of revenue to which it expectscontinue to be entitled uponreported in accordance with our historic accounting under U.S. GAAP. See Note 8, "Commitments and contingencies" for additional information about our convertible senior notes.
3. Revenue, accounts receivable and deferred revenue
During the
transfer of control of the promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.Topic 606 provides for the use of either of two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company implemented Topic 606 effective January 1, 2018 using the modified retrospective method.
Based upon its work performed to date,year ended December 31, 2022, the Company expects the implementationchanged its presentation of Topic 606 will have a significantdisaggregated revenue from revenue by services and products to clinical category of our product offerings to better align with our operations. The change had no impact on its accounts receivable at January 1, 2018, and the timing of revenue recognition for its diagnostic test revenue thereafter. Under current GAAP, the Company recognizes test revenue generated from the majority of third-party payers on a cash basis, while under Topic 606, the Company will recognize the vast majority of test revenue on an accrual basis at the time of delivery of genetic test results to its customers. The accrual amounts to be recognized under Topic 606 in periods subsequent to the date of transition will be based on an estimate of the consideration that the Company expects to receive, and such estimates will be updated and subsequently adjusted as necessary until fully settled. This policy change will result in earlier revenue recognition under ASC 606 relative to the cash-basis revenue recognition policy utilized by the Company through December 31, 2017 for many of its payers.
The Company has not completed the work required to implement Topic 606 as of January 1, 2018. The work required to complete the implementation primarily relates to the determination of estimated variable consideration, including such consideration arising from recently acquired businesses, as of the date of transition.
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Recently adopted accounting pronouncements
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350). The amendments in this ASU simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a quantitative assessment. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The amendments in this ASU should be applied on a prospective basis. The Company early adopted ASU 2017-04 effective January 1, 2017 and the adoption of this standard did not have a materialhad no effect on the Company’s consolidated financial statements, related disclosuresour reported results of operations. Presentation of disaggregated revenue by services and ongoing financial reporting.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses. ASU 2017-01 is effective for annual and interim periods beginning after December 15, 2017 and early adoption is permitted. The Company early adopted ASU 2017-01 effective January 1, 2017, and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.
In December 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments in this ASU apply to all entities that have restricted cash or restricted cash equivalents and are required to present a statement of cash flows under Topic 230. ASU 2016-18 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. The Company early adopted ASU 2016-18 effective January 1, 2017, and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments. The ASU is intended to improve financial reporting by reducing diversity in practice of how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual and interim periods beginning on or after December 15, 2016. The Company adopted ASU 2016-15 effective January 1, 2017, and the adoption of this standard did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies accounting for share-based payment award transactions. ASU 2016-09 is effective for annual and interim periods beginning on or after December 15, 2016. The Company adopted ASU 2016-09 effective January 1, 2017, and, upon adoption of this standard, recorded a deferred tax asset for unrecorded excess tax benefits of approximately $0.4 million related to share-based payments through a cumulative effect adjustment to retained earnings, and a corresponding offset of the deferred tax asset with a 100% valuation allowance. In addition, under ASU 2016-09 the Company can elect a policy to account for forfeitures as they occur rather than on an estimated basis. The Company elected to continue its current policy of estimating forfeitures. The adoption of ASU 2016-09 did not have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.
The Company has determined there are no other recently adopted or issued accounting standards that had, or will have, a material impact on its consolidated financial statements.
Prior period reclassifications
Revenue amountsproducts in prior periods have been reclassifiedmodified to conform withto the current period presentation,presentation.
Test revenue is generated from sales of diagnostic tests and precision oncology products to two groups of customers: patients, consideration for which separates testmay be paid directly by the patients or by the patients' insurance carriers, and institutions (e.g., hospitals, clinics, medical centers and biopharmaceutical partners). Amounts billed and collected, and the timing of collections, vary based on the type of customer and the corresponding payer, including the patients' insurance carriers that are paying on behalf of the customer. Data and service revenue from other revenue, which consists principally of revenue fromrecognized for the performance of activities as outlined in biopharmaceutical development contracts and other collaboration and genome network subscriptionagreements.
The following tables present revenue disaggregated by customer and product offering by disease category (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Patient | | Institution | | Year Ended December 31, 2022 | | | | | | | | | | |
| | Insurance | | Direct | | | | | | | | |
| Product: | | | | | | | | | | | | | | | | | |
| Oncology | $ | 208,239 | | | $ | 10,327 | | | $ | 89,922 | | | $ | 308,488 | | | | | | | | | | | |
| Women's health | 70,571 | | | 18,082 | | | 7,127 | | | 95,780 | | | | | | | | | | | |
| Rare diseases | 31,527 | | | 10,044 | | | 24,462 | | | 66,033 | | | | | | | | | | | |
| Data/services | — | | | — | | | 46,002 | | | 46,002 | | | | | | | | | | | |
| Total revenue | $ | 310,337 | | | $ | 38,453 | | | $ | 167,513 | | | $ | 516,303 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Patient | | Institution | | Year Ended December 31, 2021 | | | | | | | | | | |
| | Insurance | | Direct | | | | | | | | |
| Product: | | | | | | | | | | | | | | | | | |
| Oncology | $ | 200,456 | | | $ | 11,341 | | | $ | 70,439 | | | $ | 282,236 | | | | | | | | | | | |
| Women's health | 52,759 | | | 21,316 | | | 8,696 | | | 82,771 | | | | | | | | | | | |
| Rare diseases | 23,701 | | | 9,011 | | | 24,504 | | | 57,216 | | | | | | | | | | | |
| Data/services | — | | | — | | | 38,226 | | | 38,226 | | | | | | | | | | | |
| Total revenue | $ | 276,916 | | | $ | 41,668 | | | $ | 141,865 | | | $ | 460,449 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Patient | | Institution | | Year Ended December 31, 2020 | | | | | | | | | | |
| | Insurance | | Direct | | | | | | | | |
| Product: | | | | | | | | | | | | | | | | | |
| Oncology | $ | 142,552 | | | $ | 6,479 | | | $ | 25,868 | | | $ | 174,899 | | | | | | | | | | | |
| Women's health | 25,050 | | | 12,684 | | | 6,404 | | | 44,138 | | | | | | | | | | | |
| Rare diseases | 13,424 | | | 4,809 | | | 16,320 | | | 34,553 | | | | | | | | | | | |
| Data/services | — | | | — | | | 26,008 | | | 26,008 | | | | | | | | | | | |
| Total revenue | $ | 181,026 | | | $ | 23,972 | | | $ | 74,600 | | | $ | 279,598 | | | | | | | | | | | |
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| | |
We recognize revenue related to billings based on estimates of the amount that will ultimately be realized. Cash collections for certain tests delivered may differ from rates originally estimated. In subsequent periods, we update our estimate of the amounts recognized for previously delivered tests resulting in the following increases to revenue and decreases to our net loss from operations and basic and diluted net loss per share (in millions, except per share data): | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenue | $ | 2.8 | | | $ | 13.5 | | | $ | 4.4 | |
| Loss from operations | $ | (2.8) | | | $ | (13.5) | | | $ | (4.4) | |
| Net loss per share, basic and diluted | $ | (0.01) | | | $ | (0.06) | | | $ | (0.03) | |
| | | | | |
| | | | | |
The increase in revenue from previously delivered tests for the years ended December 31, 2022, 2021 and 2020 was primarily due to higher average revenue per test across all test categories when compared to initial estimates.
Impact of COVID-19
We expect the COVID-19 pandemic may continue to impact our business. We have reviewed and adjusted, when necessary, for the impact of COVID-19 on our estimates related to revenue recognition and expected credit losses.
In March 2020, the CARES Act was signed into law as a stimulus bill intended to bolster the economy, among other things, and provide assistance to qualifying businesses and individuals. The CARES Act included an infusion of funds into the healthcare system. In April 2020, we received $3.8 million as a part of this initiative, and in January 2021, we received an additional $2.3 million. These payments were recognized as other income (expense), net in our consolidated statements of operations during the periods received. At this time, we are not certain of the availability, extent or impact of any future relief provided under the CARES Act.
Accounts receivable
The majority of our accounts receivable represents amounts billed to customers for test and data and service activities, and the estimated amounts to be collected from patients' insurance carriers for test services.
We record a contract asset for services
delivered under certain biopharmaceutical contracts, which are unbilled as of the end of the period. The contract receivable was $1.3 million and
collaboration arrangements.71
$4.3 million as of December 31, 2022 and 2021, respectively, and was included in prepaid expenses and other current assets in the consolidated balance sheets. Deferred revenue
We record a contract liability when cash payments are received or due in advance of our performance related to one or more performance obligations. The deferred revenue balance primarily consists of advanced billings for biopharmaceutical development services, including billings at the initiation of performance-based milestones, and recognized as revenue in the applicable future period when the revenue is earned. Also included are prepayments related to our consumer direct channel. We recognized revenue of $4.7 million and $2.9 million from deferred revenue for the years ended December 31, 2022 and 2021, respectively. The current contract liability was $4.8 million and $9.4 million as of December 31, 2022 and 2021, respectively, which was included in accrued liabilities in the consolidated balance sheets. The long-term contract liability was $0.1 million and $0.7 million as of December 31, 2022 and 2021, respectively, and was included in other long-term liabilities in the consolidated balance sheets.
3.Refund liability
As part of our strategic realignment, we terminated early or changed the scope of several companion diagnostic development contracts with milestones in progress. Upon termination, we recorded a refund liability related to the remaining outstanding performance-based milestones. The refund liability was $4.7 million and $1.2 million as of December 31, 2022 and 2021, respectively, which was included in accrued liabilities in the consolidated balance sheets.
Performance obligations
Test and other revenue are generally recognized upon completion of our performance obligation when or as control of the promised good or service is transferred to the customer, typically a test report or upon shipment of our precision oncology products or other contractually defined milestone(s). The Company has applied the practical expedient in relation to information about our remaining performance obligations, as we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. Most remaining performance obligations are primarily related to PCM services included in test revenue in our consolidated statement of operations and are generally satisfied over one to six months.
4. Business combinations
AltaVoice
On January 6, 2017, and dispositions
Genelex and YouScript
In April 2020, we acquired 100% of the Companyequity interest of Genelex and YouScript to bring pharmacogenetic testing and integrated clinical decision support to Invitae. We acquired AltaVoice (formerly Patient Crossroads, Inc.)Genelex for approximately $13.2 million, primarily in shares of our common stock. Of the stock purchase price consideration issued, approximately 0.1 million shares were subject to a hold-back to satisfy indemnification obligations that may arise. We acquired YouScript for approximately $52.7 million, including cash consideration of $24.5 million and the remainder in shares of our common stock. Of the purchase price consideration for YouScript, approximately $1.4 million and 0.5 million shares of our common stock were subject to a hold-back to satisfy indemnification obligations that may arise.
As of the acquisition date, we recorded stock payable liabilities of $6.2 million to represent the hold-back obligation to issue shares subject to indemnification claims that may arise. In April 2021, the amounts held back to satisfy indemnification obligations for Genelex were released in full to the former shareholders. As of December 31, 2021, the value of these liabilities were $3.5 million related to YouScript and were included in other long-term liabilities in the consolidated balance sheets, with the $15.4 million change in fair value year over year recorded in other income (expense), net in the consolidated statement of operations. In April 2022, the amounts held back to satisfy indemnification obligations for YouScript were released in full to the former shareholders.
We may be required to pay contingent consideration in the form of additional shares of our common stock in connection with the acquisition of Genelex if, within a privately-owned patient-centered data companyspecified period following the closing, we achieve a certain product milestone, in which case we would issue shares of our common stock with a globalvalue equal to a portion of the gross revenues actually received by us for a pharmacogenetic product reimbursed through certain payers during an earn-out period of up to four years. As of the acquisition date, the fair value of this contingent consideration was $2.0 million. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. 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 milestone, the estimated revenues achieved for a pharmacogenetic product and the discount rate 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 is estimated at each reporting date. As of December 31, 2022 and 2021, the fair value of this contingent consideration was immaterial and $1.9 million, respectively.
ArcherDX
In October 2020, we acquired ArcherDX, a genomics analysis company. Under the terms of the agreement, we acquired ArcherDX for upfront consideration consisting of 30.0 million shares of our common stock and $325.0 million in cash, plus up to an additional 27.0 million shares of our common stock payable in connection with the achievement of certain milestones. During the three months ended March 31, 2021, Invitae and the sellers of ArcherDX reached an agreement to reduce the purchase price by $1.2 million based on the final acquired net working capital. This adjustment was recorded during the three months ended March 31, 2021 and reduced the contingent consideration liability and goodwill by approximately $1.2 million.
We were required to pay contingent consideration based on achievement of post-closing development and revenue milestones. The material factors that may impact the fair value of the contingent consideration, and therefore the liability, are (i) the estimated number of shares to be issued, (ii) the volatility of our common stock, (iii) the
probabilities of achievement of milestones within the timeframes prescribed in the acquisition agreement and (iv) discount rates, all of which are Level 3 inputs not supported by market activity with the exception of the volatility of our common stock. Significant changes in any of these inputs may result in a significant change in fair value, which is estimated at each reporting date. Of the five milestones, one milestone was achieved in November 2020, which resulted in the issuance of 5.0 million shares of our common stock and a cash payment of $1.9 million, and three milestones were achieved or deemed to be achieved during the three months ended June 30, 2021, which resulted in the issuance of 13.8 million shares of our common stock and a cash payment of $3.3 million in July 2021. The remaining milestone is based upon receiving FDA clearance or approval of a therapy selection IVD, which per the terms of the acquisition agreement, must be completed by March 31, 2022, subject to certain extensions (the "ArcherDX Final Milestone"). With respect to the ArcherDX Final Milestone, the liability was reduced to zero as of June 30, 2021 from $262.5 million as of March 31, 2021 and $287.7 million as of December 31, 2020, with the offsetting change recorded as changes in fair value of contingent consideration in our consolidated statements of operations. The removal of the liability balance and the associated change in fair value of contingent consideration was a result of our reassessment of the steps necessary to achieve clearance or approval based on FDA feedback received principally in the three months ended June 30, 2021. In April 2022, an agreement was entered into with the previous ArcherDX stockholders to extend the date for achievement of the ArcherDX Final Milestone to March 31, 2023. We currently do not believe that this milestone will be achieved within this timeframe. As such, no liability was recorded as of December 31, 2022.
In connection with the acquisition, we granted awards of common stock to new employees who joined Invitae in connection with our acquisition of ArcherDX that vested upon the achievement of the contingent consideration milestones discussed above and were subject to the employees' continued service with us, unless terminated without cause in which case vesting was only dependent on milestone achievement. As the number of shares that were expected to be issued are fixed, the awards are equity-classified. During the year ended December 31, 2022, we recorded stock-based compensation expense of zero related to the ArcherDX milestones. During the year ended December 31, 2021, we recorded a net $41.8 million in stock-based compensation expense related to the ArcherDX milestones, which includes $38.5 million related to milestones achieved in prior periods, $33.0 million due to an accounting modification of certain awards whereby the employees' continued substantive services were no longer required, offset by a reversal of $29.7 million recognized in prior periods related to the determination that the ArcherDX Final Milestone would not be achieved within the specified timeframe prescribed in the acquisition agreement.
Disposition of RUO kit assets
In December 2022, we completed a transaction with IDT for net cash proceeds of $44.5 million. The transaction value includes total cash consideration of $48.1 million, subject to certain adjustments, including $3.0 million of up front consideration subject to a hold-back to satisfy indemnification obligations that may arise. The disposition is part of our strategic realignment whereby we sold to IDT select assets and liabilities related to the RUO kit product offering, which represents the RUO distributed target enrichment kit and data analysis platform of ArcherDX. The transaction also includes certain licensed rights to our AMP technology. Assets sold primarily include property and equipment and inventory with a carrying value of zero. After adjustments, the sale resulted in a gain of approximately $47.4 million during the three months ended December 31, 2022, and is included in gain on sale of RUO kit assets in our consolidated statements of operations. As of December 31, 2022, the $3.0 million of up front consideration subject to a hold-back is included within other assets in our consolidated balance sheets.
Additionally, we entered into an agreement to sublease office space in Boulder, Colorado. See Note 8, "Commitments and contingencies" under the heading "Leases" for collecting, curating, coordinating,additional information regarding the sublease.
One Codex
In February 2021, we acquired 100% of the equity interest of One Codex, a company developing and delivering safeguarded data from patientscommercializing products and clinicians.services relating to microbiome sequencing, analysis and reporting, for upfront consideration consisting of $17.3 million in cash and 1.4 million shares of our common stock, of which approximately 0.2 million shares were subject to a hold-back to satisfy indemnification obligations that may have arisen following the closing. These shares subject to a hold-back were issued to a third-party at the closing date to hold in escrow until the escrow period is complete, and as such were classified as equity. In February 2022, the amounts held back to satisfy indemnification obligations were released in full to the former stockholders.
Disposition of One Codex intangible assets
In September 2022, we sold our equity interest in One Codex and certain related assets for an immaterial amount of cash proceeds, as part of our strategic realignment. The acquisition, complemented by severaldisposition of One Codex was considered to be an
asset sale as substantially all of the fair value was concentrated in the developed technology and certain customer relationships. The carrying value of assets sold include developed technology of $19.4 million and customer relationships of $0.4 million. The sale resulted in a loss of approximately $19.8 million during the three months ended September 30, 2022, which is included in restructuring and other strategic partnerships, will expandcosts in our consolidated statements of operations. See Note 5, "Goodwill and intangible assets" and Note 11, "Restructuring and other costs" for additional information.
Genosity
In April 2021, we acquired 100% of the Company's genome network, designedfully diluted equity of Genosity, a company providing genomic laboratory services, for approximately $196.0 million, consisting of approximately $120.0 million in cash and 1.9 million shares of our common stock. In connection with this transaction, we granted RSUs having a value of up to connect patients, clinicians, advocacy organizations, researchers$5.0 million to certain continuing employees and therapeutic developers to acceleraterecognized $1.7 million and $0.8 million in stock-based compensation expense for the understanding, diagnosis,years ended December 31, 2022 and treatment of hereditary disease. 2021, respectively.
Pursuant to the terms of the
Stock Purchase Agreement entered into on January 6, 2017,acquisition, we agreed to provide additional shares in the
Company acquired allevent that our common stock share price decreased after the acquisition, but prior to filing a resale registration statement. At the time of the
outstanding shares of AltaVoice for total purchase consideration of $12.4 million, payable inacquisition, we estimated this provision to be $7.0 million. On filing the
Company’s common stock, as follows: | (a)
| payment of $5.5 million throughresale registration statement during the period ended June 30, 2021, the issuance of 641,126 shares of the Company’s common stock;
|
| (b)
| payment of $5.0 million in the Company’s common stock, payable on March 31, 2018, with the common shares deliverable equal to $5.0 million divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2018;
|
| (c)
| payment of $5.0 million in the Company’s common stock, contingently payable on March 31, 2018 if a milestone based on a certain threshold of revenue is achieved during 2017, with the shares deliverable equal to $5.0 million divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2018; or should the foregoing milestone not be achieved, then there is a new contingent milestone based on achieving a revenue target during 2017 and 2018. Should the new milestone revenue target be achieved, then on March 31, 2019, a payment of up to $5.0 million in the Company’s common stock would be payable. The actual payout is dependent upon the 2017 and 2018 revenue target (capped at $14.0 million) times 75% less $5.5 million. This formula in effect caps the possible payout amount at $5.0 million in the Company’s common shares. The number of shares to be issued will be equal to the payout amount divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2019.
|
The first payment of $5.5 million was classified as equity. The second payment was discounted to $4.7 million and recorded as a liability, and will be accreted to fair value at each reporting date until the extinguishment of the liability on March 31, 2018. The third payment, representing contingent consideration, was determined to have a fair value of $2.2 million and was recorded as a liability. The Company’s calculation of this fair value was based on a Monte Carlo simulation, as well as estimates$3.2 million and the difference of $3.8 million was recorded in general and administrative expense in the consolidated statements of operations.
Ciitizen
In September 2021, we acquired 100% of the
30-day trailing priceequity of Ciitizen, a patient-centric health technology company, for approximately $308.3 million, consisting of approximately $87.4 million in cash and 6.3 million shares of our common stock, of which approximately $10.4 million in cash and 0.8 million shares are subject to a hold-back to satisfy indemnification obligations that may arise following the closing. As of December 31, 2022 and 2021, the value of the
Company’s stock
at certain dates, its volatility assumptionspayable liability was $0.4 million and
its revenue forecast. In accordance$12.1 million, respectively, which was recorded in other long-term liabilities in the consolidated balance sheets with
ASC Topic 805, Business Combinations,the
contingent consideration of $2.2 million will be remeasured to fair value
at each reporting date untilchange of $9.7 million and $10.6 million for the
contingency is resolved, with changes in fair value recognized in earnings.For the second payment, whose acquisition-date fair value was $4.7 million, the Companyyears ended December 31, 2022 and 2021, respectively, recorded an accretion loss of $0.2 millionas income in other income (expense), net forin the consolidated statements of operations. In September 2022, the amounts held back to satisfy indemnification obligations were partially released to the former stockholders. The remaining amounts held back to satisfy indemnification obligations are expected to be released in September 2023. In connection with this transaction, we granted RSUs having a value of up to $246.9 million to certain continuing employees. During the years ended December 31, 2022 and 2021, we recorded stock-based compensation expense of $87.2 million and $24.4 million, respectively, primarily in research and development expense. Additionally, during the year ended December 31, 2017. This accretion loss resulted from adjustments2022, we recorded $29.0 million of stock-based compensation expense related to the discounted valueacceleration of RSUs for employees who were terminated as part of our strategic realignment, which is included in restructuring and other costs in the second payment, reflectingconsolidated statements of operations. See Note 10, "Stock incentive plans" for additional information.
5. Goodwill and intangible assets
Goodwill
The changes in the passagecarrying amounts of time. For the third payment, whose contingent acquisition-date fair value was $2.2 million, the Company recorded remeasurement losses of $1.6 million in operating expense for the year ended December 31, 2017. This remeasurement loss reflects an updated estimation of fair value of the third payment, based upon achieving a revenue target during 2017 and 2018,goodwill were as the milestone based on a certain threshold of revenue to be achieved during 2017 was not met. The principal inputs affecting that estimation were updates to the Company’s revenue forecasts and the passage of time.72
follows (in thousands): | | | | | | | | |
| Balance as of December 31, 2021 | | $ | 2,283,059 | |
| Impairment | | (2,283,059) | |
| Balance as of December 31, 2022 | | $ | — | |
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individualIntangible assets acquired and liabilities assumed, and the resulting amount of goodwill.
The following table
summarizes the fair valuespresents details of
our acquired intangible assets
acquired and liabilities assumed at the dateas of
acquisitionDecember 31, 2022 (in thousands):
Cash | | $ | 54 | |
Accounts receivable | | | 274 | |
Prepaid expense and other assets | | | 52 | |
Non-compete agreement | | | 286 | |
Developed technology | | | 570 | |
Customer relationships | | | 3,389 | |
Total identifiable assets acquired | | | 4,625 | |
Accounts payable | | | (28 | ) |
Deferred revenue | | | (202 | ) |
Accrued expenses | | | (21 | ) |
Deferred tax liability | | | (1,422 | ) |
Total liabilities assumed | | | (1,673 | ) |
Net identifiable assets acquired | | | 2,952 | |
Goodwill | | | 9,432 | |
Net assets acquired | | $ | 12,384 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | Cost | | Accumulated
Amortization | | Asset Disposals | | Net | | Weighted-Average
Useful Life
(In Years) | | Weighted-Average
Estimated Remaining
Useful Life
(in Years) |
| Customer relationships | $ | 41,515 | | | $ | (17,675) | | | $ | (359) | | | $ | 23,481 | | | 10.8 | | 6.8 |
| Developed technology | 1,174,506 | | | (183,133) | | | (19,426) | | | 971,947 | | | 10.8 | | 9.3 |
| Non-compete agreement | 286 | | | (286) | | | — | | | — | | | — | | | — | |
| Trade name | 21,085 | | | (3,964) | | | — | | | 17,121 | | | 12.0 | | 9.8 |
| Patent assets and licenses | 495 | | | (156) | | | (339) | | | — | | | — | | | — | |
| Right to develop new technology | 19,359 | | | (2,474) | | | (16,885) | | | — | | | — | | | — | |
| $ | 1,257,246 | | | $ | (207,688) | | | $ | (37,009) | | | $ | 1,012,549 | | | 10.8 | | 9.2 |
The following table presents details of our acquired intangible assets as of December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Cost | | Accumulated
Amortization | | Net | | Weighted-Average
Useful Life
(In Years) | | Weighted-Average
Estimated Remaining
Useful Life
(in Years) |
| Customer relationships | $ | 41,515 | | | $ | (13,096) | | | $ | 28,419 | | | 10.8 | | 7.8 |
| Developed technology | 662,106 | | | (81,902) | | | 580,204 | | | 10.2 | | 9.1 |
| Non-compete agreement | 286 | | | (286) | | | — | | | — | | | — | |
| Trade name | 21,085 | | | (2,207) | | | 18,878 | | | 12.0 | | 10.8 |
| Patent assets and licenses | 495 | | | (136) | | | 359 | | | 15.0 | | 10.9 |
| Right to develop new technology | 19,359 | | | (1,613) | | | 17,746 | | | 15.0 | | 13.8 |
| In-process research and development | 542,388 | | | — | | | 542,388 | | | n/a | | n/a |
| | $ | 1,287,234 | | | $ | (99,240) | | | $ | 1,187,994 | | | 10.4 | | 9.2 |
Acquisition-related intangibles included in the above
tabletables are
finite-lived.generally finite-lived, other than in-process research and development, which has an indefinite life, and are carried at cost less accumulated amortization. Customer relationships
related to our 2017 business combinations are being amortized on an accelerated basis
utilizing freein proportion to estimated cash
flows, over a period of ten years.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 expected to be
realized, as follows (in thousands): | | Gross Purchased Intangible Assets | | | Estimated Useful Life (in Years) | |
Non-compete agreement | | $ | 286 | | | | 5 | |
Developed technology | | | 570 | | | | 6 | |
Customer relationships | | | 3,389 | | | | 10 | |
| | $ | 4,245 | | | | | |
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of AltaVoice resulted in $9.4 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by combining capabilities, technology and data to accelerate the use of genetic information for the diagnosis and treatment of hereditary diseases. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $1.4 million relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles, with an equal offset to deferred tax liability.
The results of operations of AltaVoice for the period from the acquisition date through December 31, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately $159,000 in acquisition and transitional costs associated with the acquisition of AltaVoice duringrealized. During the year ended December 31, 20162022, the IVD and PCM products were fully developed resulting in the three months ended March 31, 2017, which were primarily general and administrative related.
Ommdom
On June 11, 2017, the Company acquired Ommdom, Inc. (“Ommdom”), a privately-held company that develops, commercializes and sells hereditary risk assessment and management software, including CancerGene
73
Connect, a cancer genetic counseling platform. The acquisition expands Invitae’s suitereclassification of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. CancerGene Connect is a platform for collecting and managing genetic family histories. The platform uses a cloud-based, mobile friendly patient interface to gather family history information from patients prior to a clinician appointment. Then, analysis tools analyze patients’ predisposition to disease and provide actionable analysis to inform therapeutic decisions, such as genetic testing or treatment approaches. In addition, the platform provides clinicians with the ability to look beyond the individual to understand trends across all of their patients.
Pursuant to the terms$512.4 million of the Stock Exchange Agreement entered into on June 11, 2017, the Company acquired all of the outstanding shares of Ommdom for consideration of $6.1related IPR&D intangibles to developed technology intangibles, which are finite-lived and amortizable. Amortization expense was $108.4 million, payable entirely in the Company’s common stock. There was no cash consideration nor any contingent payments associated with the acquisition, other than a hold-back amount of $613,000. Per the terms of the agreement, the Company will issue shares of its common stock as follows:
| (a)
| payment of $5.5$58.8 million, and $26.6 million through the issuance of 600,108 shares of the Company’s common stock; and
|
| (b)
| payment of $0.6 million through the issuance of 66,582 shares of the Company’s common stock, representing a hold-back amount, and payable on the twelve-month anniversary of the acquisition date.
|
The first payment of $5.5 million was classified as equity. The second payment of $0.6 million was recorded as a stock payable liability and will be reclassified to equity upon the issuance of the Company’s common stock on the twelve-month anniversary of the acquisition date.
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Cash | | $ | 53 | |
Accounts receivable | | | 10 | |
Prepaid expense and other assets | | | 4 | |
Trade name | | | 13 | |
Developed technology | | | 2,335 | |
Customer relationships | | | 147 | |
Total identifiable assets acquired | | | 2,562 | |
Accounts payable | | | (16 | ) |
Accrued expenses | | | (17 | ) |
Deferred tax liability | | | (434 | ) |
Total liabilities assumed | | | (467 | ) |
Net identifiable assets acquired | | | 2,095 | |
Goodwill | | | 4,045 | |
Net assets acquired | | $ | 6,140 | |
Finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
| | Gross Purchased Intangible Assets | | | Estimated Useful Life (in Years) | |
Trade name | | $ | 13 | | | | 5 | |
Developed technology | | | 2,335 | | | | 5 | |
Customer relationships | | | 147 | | | | 5 | |
| | $ | 2,495 | | | | | |
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Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Ommdom resulted in the recognition of $4.0 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suites of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $434,000 relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles, with an equal offset to deferred tax liability.
The results of operations of Ommdom for the period from the acquisition date through December 31, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, during the year ended December 31, 2017, the Company incurred and expensed approximately $164,000 in acquisition and transitional costs associated with the acquisition of Ommdom, which were primarily general and administrative related.
Good Start Genetics
On August 4, 2017, the Company acquired 100% of the fully diluted equity of Good Start, a privately-held molecular diagnostics company focused on preimplantation and carrier screening for inherited disorders. The acquisition of Good Start is intended to further Invitae’s intention to create a comprehensive genetic information platform providing high-quality, affordable genetic information coupled with world-class clinical expertise to inform healthcare decisions throughout every stage of an individual’s life. The purchase consideration for the Good Start acquisition consisted of the assumption of the net liabilities of Good Start of $24.4 million at the acquisition date, August 4, 2017.
Immediately subsequent to the acquisition of Good Start, the Company paid $18.4 million in cash to settle the outstanding notes payable, accrued interest and related costs. In addition, and immediately subsequent to the acquisition, the Company settled the outstanding convertible promissory notes payable through:
| (a)
| payment of $11.9 million through the issuance of 1,148,283 shares of the Company’s common stock; and
|
| (b)
| payment of $3.6 million through the issuance of 343,986 shares of the Company’s common stock, representing a hold-back amount payable on the one-year anniversary of the acquisition date.
|
Also in connection with the acquisition of Good Start and immediately subsequent to the acquisition, the Company paid bonuses to certain members of Good Start’s management team through:
| (a)
| payment of $0.9 million through the issuance of 83,025 shares of the Company’s common stock; and
|
| (b)
| payment of $0.4 million through the issuance of 37,406 shares of the Company’s common stock, representing a hold-back amount payable on the one-year anniversary of the acquisition date.
|
These bonus payments were recorded as general and administrative expense.
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The amount recorded as accounts receivable is provisional as the Company expects to receive future cash collections pertaining to Good Start revenue activities completed but not recognized at the acquisition date. The amount recorded as deferred tax liability, zero as of December 31, 2017, is provisional because certain information and analysis related to Good Start’s historical net operating losses that may affect the Company’s valuation is still being obtained or reviewed. Thus, the provisional measurement of fair value discussed above is subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill.
At acquisition date, the Company also recorded $4.8 million as a provisional amount for a deferred tax liability because certain information and analysis related to Good Start’s historical net operating losses that may affect the Company’s initial valuation was still being obtained or reviewed at that time. This provisional amount for the deferred tax liability was subsequently reversed during the fourth quarter of 2017 based on the results of further analysis of Good Start’s historical net operating losses.
75
The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Cash and restricted cash | | $ | 1,381 | |
Accounts receivable | | | 2,904 | |
Prepaid expense and other assets | | | 1,579 | |
Property and equipment | | | 1,320 | |
Trade name | | | 460 | |
Developed technology | | | 5,896 | |
Customer relationships | | | 7,830 | |
Total identifiable assets acquired | | | 21,370 | |
Accounts payable | | | (5,418 | ) |
Accrued expenses | | | (6,802 | ) |
Notes payable | | | (17,904 | ) |
Convertible promissory notes payable | | | (15,430 | ) |
Other liabilities | | | (222 | ) |
Total liabilities assumed | | | (45,776 | ) |
Net identifiable assets acquired | | | (24,406 | ) |
Goodwill | | | 24,406 | |
Net assets acquired | | $ | — | |
Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of eight years. All other finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
| | Gross Purchased Intangible Assets | | | Estimated Useful Life (in Years) | |
Trade name | | $ | 460 | | | | 3 | |
Developed technology | | | 5,896 | | | | 5 | |
Customer relationships | | | 7,830 | | | | 8 | |
| | $ | 14,186 | | | | | |
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Good Start resulted in the recognition of $24.4 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes.
The results of operations of Good Start for the period from the acquisition date through December 31, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately $1.7 million in acquisition and transitional costs associated with the acquisition of Good Start during the year ended December 31, 2017, which were recorded as general and administrative expense.
CombiMatrix
On November 14, 2017, the Company completed its acquisition of CombiMatrix in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of July 31, 2017 (the “Merger Agreement”), by and among the Company, Coronado Merger Sub, Inc., a wholly owned subsidiary of the Company (“Merger Sub”), and CombiMatrix, pursuant to which Merger Sub merged with and into CombiMatrix, with CombiMatrix surviving as a wholly owned subsidiary of the Company (the “Merger”).
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At the closing of the Merger, the Company issued shares of its common stock to (i) CombiMatrix’s common stockholders, at an exchange ratio of 0.8692 of a share of the Company’s common stock (the “Merger Exchange Ratio”) for each share of CombiMatrix common stock outstanding immediately prior to the Merger, (ii) CombiMatrix’s Series F preferred stockholders, at the Merger Exchange Ratio for each share of CombiMatrix common stock underlying Series F preferred stock outstanding immediately prior to the Merger, (iii) holders of outstanding and unexercised in-the-money CombiMatrix stock options, which were fully accelerated to the extent of any applicable vesting period and converted into the right to receive the number of shares of the Company’s common stock equal to the Merger Exchange Ratio multiplied by the number of shares of CombiMatrix common stock issuable upon exercise of such option, minus the number of shares of the Company’s common stock determined by dividing the aggregate exercise price for such option by $9.491 (the “Invitae Trailing Average Share Value”), and (iv) holders of outstanding and unsettled CombiMatrix restricted stock units, which were fully accelerated to the extent of any applicable vesting period and converted into the right to receive a number of shares of the Company’s common stock determined by multiplying the number of shares of CombiMatrix common stock that were subject to such restricted stock unit by the Merger Exchange Ratio.
In addition, at the closing of the Merger, (a) all outstanding and unexercised out-of-the money CombiMatrix stock options were cancelled and terminated without the right to receive any consideration, (b) all CombiMatrix Series D Warrants and Series F Warrants outstanding and unexercised immediately prior to the closing of the Merger were assumed by the Company and converted into warrants to purchase the number of shares of the Company’s common stock determined by multiplying the number of shares of CombiMatrix common stock subject to such warrants by the Merger Exchange Ratio, and with the exercise price adjusted by dividing the per share exercise price of the CombiMatrix common stock subject to such warrants by the Merger Exchange Ratio, and (c) certain entitlements under CombiMatrix’s executive compensation transaction bonus plan (the “Transaction Bonus Plan”) were paid in shares of the Company’s common stock or RSUs to be settled in shares of the Company’s common stock. All outstanding and unexercised CombiMatrix Series A, Series B, Series C, Series E, and PIPE warrants were repurchased by CombiMatrix prior to closing pursuant to that certain CombiMatrix Common Stock Purchase Warrants Repurchase Agreement dated July 11, 2016.
Pursuant to the Merger Agreement, the Company issued an aggregate of 2,703,389 shares of its common stock as follows:
| (a)
| payment of $20.5 million through the issuance of 2,611,703 shares of the Company’s common stock to holders of CombiMatrix common stock outstanding;
|
| (b)
| payment of $0.7 million through the issuance of 85,219 shares of the Company’s RSUs to holders of outstanding and unsettled CombiMatrix restricted stock units.
|
| (c)
| payment of $26,000 through the issuance of 3,323 shares of the Company’s common stock to holders of outstanding and unexercised in-the-money CombiMatrix stock options; and
|
| (d)
| payment of $25,000 through the issuance of 3,144 shares of the Company’s common stock to holders of CombiMatrix Series F preferred stock.
|
In addition, and pursuant to the Merger Agreement, the Company issued warrants to purchase an aggregate of 2,077,273 shares of its common stock as follows:
| (a)
| payment of $7.4 million through the issuance of warrants to purchase a total of 1,739,689 shares of the Company’s common stock in exchange for all outstanding CombiMatrix Series F warrants; and
|
| (b)
| payment of $1,000 through the issuance of warrants to purchase a total of 337,584 shares of the Company’s common stock in exchange for all outstanding CombiMatrix Series D warrants.
|
77
In connection with the acquisition of CombiMatrix, the Company paid bonuses to certain members of CombiMatrix’s management team through:
| (a)
| payment of $1.7 million through the issuance of common stock and RSUs totaling 214,976 shares of the Company’s common stock to settle payments pursuant to CombiMatrix’s executive compensation transaction bonus plan (the “Transaction Bonus Plan”), recorded as post-combination compensation expense and included in general and administrative expense; and
|
| (b)
| payment of $0.2 million through the issuance of 22,966 shares of the Company’s common stock to settle payments pursuant to the Transaction Bonus Plan, recorded as an assumed liability at the acquisition date.
|
Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The amount recorded as deferred tax liability, zero at December 31, 2017, is provisional because certain information and analysis related to CombiMatrix’s tax attributes and ownership change history that may affect the Company’s valuation is still being obtained or reviewed. Thus, the provisional measurement of fair value discussed above is subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):
Cash and restricted cash | | $ | 1,333 | |
Accounts receivable | | | 4,118 | |
Prepaid expense and other assets | | | 1,299 | |
Property and equipment | | | 437 | |
Other assets - non current | | | 30 | |
Favorable leases | | | 247 | |
Trade name | | | 103 | |
Patent licensing agreement | | | 496 | |
Developed technology | | | 3,162 | |
Customer relationships | | | 12,397 | |
Total identifiable assets acquired | | | 23,622 | |
Accounts payable | | | (276 | ) |
Accrued expenses | | | (3,925 | ) |
Other liabilities | | | (180 | ) |
Total liabilities assumed | | | (4,381 | ) |
Net identifiable assets acquired | | | 19,241 | |
Goodwill | | | 8,692 | |
Net assets acquired | | $ | 27,933 | |
Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of eleven years. All other finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):
| | Gross Purchased Intangible Assets | | | Estimated Useful Life (in Years) | |
Favorable leases | | $ | 247 | | | | 2 | |
Trade name | | | 103 | | | | 1 | |
Patent licensing agreement | | | 496 | | | | 15 | |
Developed technology | | | 3,162 | | | | 4 | |
Customer relationships | | | 12,397 | | | | 11 | |
| | $ | 16,405 | | | | | |
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Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of CombiMatrix resulted in the recognition of $8.7 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes.
The results of operations of CombiMatrix for the period from the acquisition date through December 31, 2017 are included in the accompanying consolidated statements of operations. Pursuant to ASC 805, the Company incurred and expensed approximately $1.8 million in acquisition and transitional costs associated with the acquisition of CombiMatrix during the year ended December 31, 2017, which were recorded as general and administrative expense.
Pro Forma Financial Information
The financial information in the table below summarizes the combined results of operations of the Company, AltaVoice, Ommdom, Good Start and CombiMatrix on an unaudited pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. The unaudited pro forma financial information has been calculated after adjusting the results of the Company, AltaVoice, Ommdom, Good Start and CombiMatrix to reflect the business combination accounting effects resulting from the acquisitions. These accounting effects consist of income tax benefits relating to the tax consequences of recognizing fair value of acquired intangible assets, amortization expense from acquired intangible assets and stock-based compensation expense relating to acquisitions.
The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of each of the periods presented. The pro forma financial information for the year ended December 31, 2017 combines the adjusted results of the Company for the year ended December 31, 2017, which include the adjusted results of AltaVoice subsequent to January 6, 2017, the adjusted results of Ommdom subsequent to June 11, 2017, the adjusted results of Good Start subsequent to August 4, 2017 and the adjusted results of CombiMatrix for the period subsequent to November 14, 2017 (the acquisition dates for AltaVoice, Ommdom, Good Start and CombiMatrix, respectively), with the adjusted historical results for AltaVoice for the period from January 1, 2017 to January 6, 2017, the adjusted historical results for Ommdom for the period from January 1, 2017 to June 11, 2017, the adjusted historical results of Good Start for the period from January 1, 2017 to August 4, 2017, and the adjusted historical results of CombiMatrix for the period from January 1, 2017 to November 14, 2017. The pro forma financial information for the year ended December 31, 2016 combines the adjusted historical results for the Company for those periods, with the adjusted historical results for AltaVoice, Ommdom, Good Start and CombiMatrix for the same periods.
The following table summarizes the pro forma financial information for the years ended December 31, 20172022, 2021 and 2016 (in thousands):
| | Year Ended December 31, | |
| | 2017 | | | 2016 | |
Total revenue | | $ | 94,001 | | | $ | 62,991 | |
Net loss | | $ | (149,596 | ) | | $ | (123,148 | ) |
Revenue attributable to AltaVoice, Good Start and CombiMatrix since their acquisition dates and recognized in the year ended December 31, 2017 was $2.7 million, $6.2 million and $2.0 million,2020, respectively. As the Company combined operations with AltaVoice, Ommdom, Good Start and CombiMatrix at the acquisition dates, net loss attributable to AltaVoice, Ommdom, Good Start and CombiMatrix since their acquisition dates cannot be practically calculated.
79
4. Goodwill and intangible assets
Goodwill
Details of the Company’s goodwill for the year ended December 31, 2017 are as follows (in thousands):
| | AltaVoice | | | Ommdom | | | Good Start | | | CombiMatrix | | | Total | |
Balance as of December 31, 2016 | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Goodwill acquired | | | 9,432 | | | | 4,045 | | | | 29,366 | | | | 8,692 | | | | 51,535 | |
Goodwill adjustment | | | — | | | | — | | | | (4,960 | ) | | | — | | | | (4,960 | ) |
Balance as of December 31, 2017 | | $ | 9,432 | | | $ | 4,045 | | | $ | 24,406 | | | $ | 8,692 | | | $ | 46,575 | |
The goodwill adjustment was principally due to the reversal, in the fourth quarter of 2017, of a provisional deferred tax liability of $4.8 million recorded in August 2017. The reversal of this deferred tax liability resulted from the completion of the Company’s analysis of Good Start’s historical net operating losses.
Intangible assets
The following table presents details of the Company’s finite-lived intangible assets as of December 31, 2017 (in thousands):
| | Cost | | | Accumulated Amortization | | | Net | | | Weighted Average Useful Life (in Years) | | | Weighted Average Estimated Remaining Useful Life (in Years) | |
Customer relationships | | $ | 23,763 | | | $ | (717 | ) | | $ | 23,046 | | | | 10.0 | | | | 9.6 | |
Developed technology | | | 11,963 | | | | (949 | ) | | | 11,014 | | | | 4.8 | | | | 4.4 | |
Non-compete agreement | | | 286 | | | | (57 | ) | | | 229 | | | | 5.0 | | | | 4.0 | |
Trade name | | | 576 | | | | (78 | ) | | | 498 | | | | 2.7 | | | | 2.3 | |
Patent licensing agreement | | | 496 | | | | (4 | ) | | | 492 | | | | 15.0 | | | | 14.9 | |
Favorable leases | | | 247 | | | | (10 | ) | | | 237 | | | | 2.2 | | | | 2.1 | |
| | $ | 37,331 | | | $ | (1,815 | ) | | $ | 35,516 | | | | 8.2 | | | | 7.8 | |
Acquisition-related intangibles included in the above table are finite-lived. Customer relationships are being amortized on an accelerated basis, in proportion to estimated cash flows, over periods ranging from five to eleven years. All other acquisition-related intangibles are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are realized. Amortization expense was $1.8 million for the year ended December 31, 2017. As all acquisition-related intangible assets were acquired in 2017, no amortization was recorded for year ended December 31, 2016. Intangible assets are carried at cost less accumulated amortization. Amortization expense is recorded toin cost of revenue, research and development, salesand selling and marketing expense.
In August 2022, in conjunction with the strategic realignment, management decided to exit the IVD product offering and
generalwe wrote-off the related intangible asset of $16.9 million. Management also decided to exit the in-vitro fertilization product offering, and
administrative expense.as a result we wrote-off the associated intangible asset of $0.3 million. These charges are included in restructuring and other costs in the consolidated statements of operations. See Note 11, "Restructuring and other costs" for additional information.
See Note 4, "Business combinations and dispositions" for additional information on the sale of our interest in One Codex and the related disposition of developed technology and customer relationships during the three months ended September 30, 2022.
The following table summarizes the Company’sour estimated future amortization expense of intangible assets with finite lives as of December 31, 20172022 (in thousands): | | | | | |
| | |
| 2023 | $ | 114,440 | |
| 2024 | 114,162 | |
| 2025 | 112,408 | |
| 2026 | 112,374 | |
| 2027 | 111,708 | |
| Thereafter | 447,457 | |
| Total estimated future amortization expense | $ | 1,012,549 | |
| | Amount | |
2018 | | $ | 5,059 | |
2019 | | | 5,250 | |
2020 | | | 5,525 | |
2021 | | | 5,829 | |
2022 | | | 4,123 | |
Thereafter | | | 9,730 | |
| | $ | 35,516 | |
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5. Balance sheet components
Cash equivalentsIn December 2021, we acquired 100% of the equity interest of Stratify, a cancer risk stratification company, for $29.0 million consisting of 1.0 million shares of common stock, $4.2 million in assumed liabilities, and marketable securities
The following$8.0 million in cash. We accounted for this transaction as an asset acquisition, as substantially all of the fair value is concentrated in the developed technology acquired. As goodwill is not recorded under an asset acquisition, an $8.7 million deferred tax liability arising from book/tax basis differences increased the value of the assets acquired above the purchase price. As a summary of cash equivalents and marketable securities (in thousands):
| | December 31, 2017 | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
Money market funds | | $ | 5,998 | | | $ | — | | | $ | — | | | $ | 5,998 | |
Certificates of deposit | | | 300 | | | | — | | | | — | | | | 300 | |
U.S. treasury notes | | | 12,010 | | | | — | | | | (19 | ) | | | 11,991 | |
U.S. government agency securities | | | 46,451 | | | | — | | | | (152 | ) | | | 46,299 | |
| | $ | 64,759 | | | $ | — | | | $ | (171 | ) | | $ | 64,588 | |
Reported as: | | | | | | | | | | | | | | | | |
Cash equivalents | | | | | | | | | | | | | | $ | 592 | |
Restricted cash | | | | | | | | | | | | | | | 5,406 | |
Marketable securities | | | | | | | | | | | | | | | 58,590 | |
Total cash equivalents, restricted cash and marketable securities | | | | | | | | | | | | | | $ | 64,588 | |
| | December 31, 2016 | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
Money market funds | | $ | 19,457 | | | $ | — | | | $ | — | | | $ | 19,457 | |
U.S. treasury notes | | | 11,515 | | | | 2 | | | | — | | | | 11,517 | |
U.S. government agency securities | | | 14,283 | | | | — | | | | (2 | ) | | | 14,281 | |
| | $ | 45,255 | | | $ | 2 | | | $ | (2 | ) | | $ | 45,255 | |
Reported as: | | | | | | | | | | | | | | | | |
Cash equivalents | | | | | | | | | | | | | | $ | 14,760 | |
Restricted cash | | | | | | | | | | | | | | | 4,697 | |
Marketable securities | | | | | | | | | | | | | | | 25,798 | |
Total cash equivalents, restricted cash and marketable securities | | | | | | | | | | | | | | $ | 45,255 | |
The total amount of unrealized losses at December 31, 2017 was $171,000. The totalresult, the fair value of investments with unrealized losses at December 31, 2017 was $58.3 million. Nonethe developed technology is $37.5 million, which will be amortized over eight years to cost of revenue. The remaining purchase price of $0.2 million is the fair value of cash and cash equivalents.
In July 2021, we acquired 100% of the available-for-sale securities heldequity interest of Medneon, a digital health artificial intelligence company, for $34.1 million consisting of 0.4 million shares of common stock, $4.9 million in assumed liabilities, and $12.9 million in cash. We accounted for this transaction as an asset acquisition, as substantially all of December 31, 2017 has beenthe fair value is concentrated in the developed technology acquired. The fair value of the developed technology is $33.9 million, which will be amortized over eight years to cost of revenue. The remaining purchase price of $0.2 million is the fair value of cash and cash equivalents.
Impairment assessment
Goodwill and indefinite-lived intangible assets are assessed for impairment on an annual basis and whenever events and circumstances indicate that these assets may be impaired. We evaluate the fair value of long-lived assets, which include property and equipment and finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset may not be fully recoverable. In testing for goodwill impairment, we have the option of first performing a continuous unrealized loss position for more than one year. At December 31, 2017, unrealized losses on available-for-sale investments are not attributedqualitative assessment to credit risk and are considered to be temporary. The Company believesdetermine whether it is more likely than not that investments in an unrealized loss position will be held until maturity or the recoveryfair value of the cost basisreporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the carrying value exceeds its fair value, we perform a quantitative goodwill impairment test to compare to the fair value of our reporting unit to its carrying value, including goodwill.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. Factors that may indicate potential impairment and trigger an impairment test include, but are not limited to, current economic, market and geopolitical conditions, including a significant, sustained decline in our stock price and market capitalization compared to the net book value, an adverse change in legal factors, business climate or operational performance of the investment. To date,business, or significant changes in the ability of a particular asset (or group of assets) to generate positive cash flows for our strategic business objectives.
During the three months ended June 30, 2022, as a result of the significant, sustained decline in our stock price and related market capitalization and lower than expected financial performance, we performed an impairment assessment of goodwill, IPR&D intangible assets, and long-lived assets, including definite-lived intangibles.
For our goodwill, we measured the fair value of the reporting unit utilizing the discounted cash flow method under the income approach. This approach relies on significant unobservable inputs including, but not limited to, management's forecasts of projected revenue associated with future cash flows, discount rates, and control premium. Based on this analysis, we recognized a non-cash, pre-tax goodwill impairment charge of $2.3 billion during the three months ended June 30, 2022, which was included in goodwill and IPR&D impairment expense in the consolidated statements of operations. The goodwill was fully impaired as of June 30, 2022.
We also identified indicators of impairment related to the IPR&D intangible asset initially recognized as part of the acquisition of Singular Bio that it was more likely than not that the asset is impaired. The Company identified conditions during the period ended June 30, 2022 such as alternative technologies and uncertainties around the desired outcome of our in-development asset and other economic factors that raised issues with the realizability of our asset. As a result of our evaluation, we recognized a non-cash, pre-tax impairment charge of $30.0 million during the three months ended June 30, 2022 related to the IPR&D intangible asset. The impairment charges are recorded in
Goodwill and IPR&D impairment expense in the consolidated statements of operations. The indefinite-lived intangible asset was fully impaired as of June 30, 2022. Additionally, we recognized a loss on disposal of property and equipment of $4.8 million during the three months ended June 30, 2022 related to specific equipment that is no longer being utilized on this project and has no alternative future use. The loss on disposal is recorded in restructuring and other costs in the consolidated statements of operations.
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss is recognized when the total estimated future undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount.
A recoverability test was performed for the long-lived assets, including definite-lived intangibles, using the undiscounted cash flows approach, which included significant unobservable inputs including management's forecasts of projected revenue associated with future cash flows, and residual value. The cash flow estimates reflected the Company’s assumptions about its use of the long-lived assets and eventual disposition of the asset group. We determined that our long-lived assets held and used, including intangible assets that are subject to amortization, did not have identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and of other asset groups, because the assets are highly interrelated and interdependent. Therefore, the Company has notevaluated its long-lived assets for impairment on an entity-wide level. As a result of a recoverability test, we concluded that the carrying value of long-lived assets was recoverable at June 30, 2022. No impairment was recorded any impairment chargesexcept for operating lease impairments, which are discussed under the heading "Leases" within Note 8, "Commitments and contingencies." We also recorded losses on marketable securities relateddisposal of assets pursuant to other-than-temporary declinesthe strategic realignment, which are discussed in market value.At December 31, 2017,Note 11, "R
estructuring and other costs." 6. Balance sheet components
Inventory
Inventory consisted of the remaining contractual maturitiesfollowing (in thousands): | | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| Raw materials | $ | 29,992 | | | $ | 27,178 | |
| Work in progress | 382 | | | 5,342 | |
| Finished goods | 12 | | | 996 | |
| Total inventory | $ | 30,386 | | | $ | 33,516 | |
As part of
available-for-sale securities ranged from less than onethe Company's strategic realignment, management decided to
13 months. Forexit certain product offerings. During the
yearsyear ended December 31,
2017, 2016 and 2015, there were no realized gains or losses on available-for-sale securities.81
2022, the Company wrote-off the remaining inventory related to these product offerings of $14.3 million, which is included in cost of revenue in the consolidated statements of operations.
Property and equipment, net
Property and equipment consisted of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| Leasehold improvements | $ | 74,108 | | | $ | 31,159 | |
| Laboratory equipment | 63,562 | | | 61,317 | |
| Computer equipment | 13,712 | | | 15,452 | |
| Furniture and fixtures | 1,428 | | | 2,130 | |
| Construction-in-progress | 23,490 | | | 52,039 | |
| Other | 2,996 | | | 925 | |
| Total property and equipment, gross | 179,296 | | | 163,022 | |
| Accumulated depreciation and amortization | (70,573) | | | (48,308) | |
| Total property and equipment, net | $ | 108,723 | | | $ | 114,714 | |
| | December 31, 2017 | | | December 31, 2016 | |
Leasehold improvements | | $ | 12,623 | | | $ | 1,256 | |
Laboratory equipment | | | 17,705 | | | | 13,644 | |
Equipment under capital lease | | | 11,446 | | | | 5,871 | |
Computer equipment | | | 4,023 | | | | 2,514 | |
Software | | | 2,520 | | | | 2,489 | |
Furniture and fixtures | | | 569 | | | | 238 | |
Automobiles | | | 20 | | | | 20 | |
Construction-in-progress | | | 965 | | | | 12,229 | |
Total property and equipment, gross | | | 49,871 | | | | 38,261 | |
Accumulated depreciation and amortization | | | (19,530 | ) | | | (14,468 | ) |
Total property and equipment, net | | $ | 30,341 | | | $ | 23,793 | |
Depreciation expense was $7.2$28.8 million, $6.6$18.1 million and $5.3$10.5 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Depreciation expense for the year ended December 31, 2022 includes accelerated depreciation of $6.1 million from a change in the estimated useful lives of property and equipment related to the exit of certain product offerings.
As part of our strategic realignment, the Company decided to exit certain business lines, consolidate lab and office space, and reduce our international footprint. During the year ended December 31, 2022, we recognized losses on disposal of property and equipment of $19.1 million, which is included in restructuring and other costs in our consolidated statement of operations. See Note 11, "Restructuring and other costs" for additional information.
See Note 5, "Goodwill and intangible assets" for additional information on the impairment assessment including long-lived assets and the related loss on disposal recognized during the three months ended June 30, 2022.
Accrued liabilities consisted of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| Accrued compensation and related expenses | $ | 25,315 | | | $ | 35,877 | |
| Accrued expenses | 23,628 | | | 32,136 | |
| Compensation and other liabilities associated with business combinations | 5,335 | | | 11,622 | |
| Deferred revenue | 4,814 | | | 9,431 | |
| Accrued interest | 6,646 | | | 6,646 | |
| Accrued royalties | 3,177 | | | 3,669 | |
| Other accrued liabilities | 5,473 | | | 7,072 | |
| Total accrued liabilities | $ | 74,388 | | | $ | 106,453 | |
| | December 31, 2017 | | | December 31, 2016 | |
Accrued compensation and related expenses | | $ | 7,406 | | | $ | 3,072 | |
Accrued laboratory materials purchases | | | 1,242 | | | | 338 | |
Accrued outsourced services | | | 142 | | | | — | |
Accrued professional services | | | 1,077 | | | | 446 | |
Accrued construction in progress | | | — | | | | 1,215 | |
Lease incentive obligation, current | | | 489 | | | | 468 | |
Liabilities associated with business combinations | | | 9,497 | | | | — | |
Other | | | 2,889 | | | | 1,172 | |
Total accrued liabilities | | $ | 22,742 | | | $ | 6,711 | |
Other long-term liabilities
Other long-term liabilities consisted of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| | 2022 | | 2021 |
| | | |
| Compensation and other liabilities associated with business combinations, non-current | $ | 769 | | | $ | 27,919 | |
| Deferred revenue, non-current | 50 | | | 663 | |
| Other | 3,956 | | | 9,215 | |
| Total other long-term liabilities | $ | 4,775 | | | $ | 37,797 | |
| | December 31, 2017 | | | December 31, 2016 | |
Lease incentive obligation, non-current | | $ | 3,831 | | | $ | 4,243 | |
Deferred rent, non-current | | | 5,153 | | | | 3,419 | |
Liabilities associated with business combination | | | 3,779 | | | | — | |
Other non-current liabilities | | | 677 | | | | 175 | |
Total other long-term liabilities | | $ | 13,440 | | | $ | 7,837 | |
6.
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
82
prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.
The three-level hierarchy for the inputs to valuation techniques is summarized as follows:
Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.
Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable.
Level 3—Unobservable inputs that reflect the reporting entity’s own assumptions.
The following tables set forth the fair value of the Company’s consolidatedour financial instruments that were measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 |
| | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | | | | | | |
| Money market funds | | $ | 158,931 | | | $ | — | | | $ | — | | | $ | 158,931 | | | $ | 158,931 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| U.S. Treasury notes | | 193,685 | | | 1 | | | (123) | | | 193,563 | | | 193,563 | | | — | | | — | |
| U.S. government agency securities | | 96,006 | | | 55 | | | (13) | | | 96,048 | | | — | | | 96,048 | | | — | |
| Total financial assets | | $ | 448,622 | | | $ | 56 | | | $ | (136) | | | $ | 448,542 | | | $ | 352,494 | | | $ | 96,048 | | | $ | — | |
| | | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | | | | | | | |
| Stock payable liability | | | | | | | | $ | 744 | | | $ | — | | | $ | — | | | $ | 744 | |
| Contingent consideration | | | | | | | | 25 | | | — | | | — | | | 25 | |
| Total financial liabilities | | | | | | | | $ | 769 | | | $ | — | | | $ | — | | | $ | 769 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | December 31, 2022 |
| Reported as: | | | | | | | | | | | | | | |
| Cash equivalents | | | | | | | | | | | | $ | 148,901 | |
| Restricted cash | | | | | | | | | | | | 10,030 | |
| Marketable securities | | | | | | | | | | | | 289,611 | |
| Total cash equivalents, restricted cash, and marketable securities | | | | $ | 448,542 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other long-term liabilities | | | | | | | | | | | | $ | 769 | |
| | | December 31, 2017 | | | | December 31, 2021 |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | | | | Amortized
Cost | | Gross
Unrealized
Gains | | Gross
Unrealized
Losses | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | | | | | | | | | Financial assets: | | | | | | | | | | | | | | |
Money market funds | | $ | 5,998 | | | $ | — | | | $ | — | | | $ | 5,998 | | Money market funds | | $ | 913,990 | | | $ | — | | | $ | — | | | $ | 913,990 | | | $ | 913,990 | | | $ | — | | | $ | — | |
Certificates of deposit | | | 300 | | | | — | | | | — | | | | 300 | | |
U.S. treasury notes | | | 11,991 | | | | — | | | | — | | | | 11,991 | | |
| | U.S. Treasury notes | | U.S. Treasury notes | | 111,187 | | | — | | | (6) | | | 111,181 | | | 111,181 | | | — | | | — | |
U.S. government agency securities | | | — | | | | 46,299 | | | | — | | | | 46,299 | | U.S. government agency securities | | 10,941 | | | — | | | (1) | | | 10,940 | | | — | | | 10,940 | | | — | |
Total financial assets | | $ | 18,289 | | | $ | 46,299 | | | $ | — | | | $ | 64,588 | | Total financial assets | | $ | 1,036,118 | | | $ | — | | | $ | (7) | | | $ | 1,036,111 | | | $ | 1,025,171 | | | $ | 10,940 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | | | | | | Financial liabilities: | |
| Stock payable liability | | Stock payable liability | | $ | 20,925 | | | $ | — | | | $ | — | | | $ | 20,925 | |
Contingent consideration | | $ | — | | | $ | — | | | $ | 3,779 | | | $ | 3,779 | | Contingent consideration | | 1,875 | | | — | | | — | | | 1,875 | |
Total financial liabilities | | $ | — | | | $ | — | | | $ | 3,779 | | | $ | 3,779 | | Total financial liabilities | | $ | 22,800 | | | $ | — | | | $ | — | | | $ | 22,800 | |
| | | | December 31, 2021 |
| Reported as: | | Reported as: | | |
| Cash equivalents | | Cash equivalents | | $ | 903,715 | |
| Restricted cash | | Restricted cash | | 10,275 | |
| Marketable securities | | Marketable securities | | 122,121 | |
| Total cash equivalents, restricted cash, and marketable securities | | Total cash equivalents, restricted cash, and marketable securities | | $ | 1,036,111 | |
| | | Other long-term liabilities | | Other long-term liabilities | | $ | 22,800 | |
|
| | December 31, 2016 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Financial assets: | | | | | | | | | | | | | | | | |
Money market funds | | $ | 19,457 | | | $ | — | | | $ | — | | | $ | 19,457 | |
U.S. treasury notes | | | 11,517 | | | | — | | | | — | | | | 11,517 | |
U.S. government agency securities | | | — | | | | 14,281 | | | | — | | | | 14,281 | |
Total financial assets | | $ | 30,974 | | | $ | 14,281 | | | $ | — | | | $ | 45,255 | |
The following tables include a rollforward of the stock payable liability and contingent consideration classified within Level 3 of the fair value hierarchy (in thousands): | | | | | | | | | | | |
| |
| | Stock Payable Liability | | Contingent Consideration |
| Fair value at December 31, 2021 | $ | 20,925 | | | $ | 1,875 | |
| Change in fair value | (15,906) | | | (1,850) | |
| Settlements | (4,275) | | | — | |
| Fair value at December 31, 2022 | $ | 744 | | | $ | 25 | |
| | | | | | | | | | | |
| |
| | Stock Payable Liability | | Contingent Consideration |
| Fair value at December 31, 2020 | $ | 39,237 | | | $ | 796,639 | |
| Additions | 31,522 | | | — | |
| Change in fair value | (25,196) | | | (386,646) | |
| Settlements | (24,638) | | | (408,118) | |
| Fair value at December 31, 2021 | $ | 20,925 | | | $ | 1,875 | |
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented.The following table presents the Company’s Level 3 financial instruments that are measured at fair value on a recurring basis (in thousands):
| | Level 3 | |
| | Contingent Consideration Liability | |
Balance as of December 31, 2016 | | $ | — | |
Contingent consideration | | | 2,200 | |
Change in estimate of fair value | | | 1,579 | |
Balance as of December 31, 2017 | | $ | 3,779 | |
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The Company’s Our debt securities of U.S. government agency entitiesagencies 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 partythird-party data providers, including but not limited to benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data.
As At December 31, 2022, the remaining contractual maturities of available-for-sale securities ranged from one to five months. Interest income generated from our investments was $6.8 million, $6.9 million and $4.0 million during the years ended December 31, 2022, 2021 and 2020, respectively.
The total fair value of investments with unrealized losses at December 31, 2022 was $200.3 million. None of the available-for-sale securities held as of December 31, 2017, the Company had a contingent obligation of up to $5.0 million payable2022 have been in the Company’s common stock to the former owners of AltaVoice in conjunction with the Company’s acquisition of AltaVoice in January 2017. The contingency is dependent upon future revenues attributable to AltaVoice. If the revenue attributable to AltaVoicean unrealized loss position for the combined period of 2017 and 2018 is at least $10 million, the Company will make a payment of up to $5.0 million in the Company’s common stock on March 31, 2019.more than one year. The Company estimatedevaluates investments that are in an unrealized loss position for impairment as a result of credit loss. It was determined that no credit losses exist as of December 31, 2022, because the change in market value of those securities has resulted from fluctuations in market interest rates since the time of purchase, rather than a deterioration of the credit worthiness of the issuers. For marketable securities in an unrealized loss position, we assess our intent to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We intend to hold our marketable securities to maturity and it is unlikely that they would be sold before their cost bases are recovered. The cost of securities sold is based on the specific identification method.
Stock payable liabilities relate to certain indemnification hold-backs resulting from business combinations that are settled in shares of our common stock. We elected to account for these liabilities using the fair value option due to the inherent nature of the contingent consideration at $2.2 million atliabilities and the acquisition date of January 6, 2017, based on a Monte Carlo simulation, as well as estimates of the 30-day trailing price of its stock at certain dates, its volatility assumptions and its revenue forecasts, all of which were significant inputschanges in the Level 3 measurement not supported by market activity. The value of the liabilityunderlying shares that will ultimately be subsequently remeasuredissued to settle the liabilities. The estimated fair value at eachof these liabilities is classified as Level 3 and determined based upon the number of shares that are issuable to the sellers and the quoted closing price of our common stock as of the reporting date. The number of shares that will ultimately be issued is subject to adjustment for indemnified claims that existed as of the closing date for each acquisition. Changes to revenue forecastsin the number of shares issued and share price can significantly affect the estimated fair value of the contingent consideration. Changesliabilities. During the years ended December 31, 2022, 2021 and 2020, the change in estimated fair value will berelated to stock payable liabilities recorded as a componentto other income (expense), net was income of operating expenses until the contingency is paid or expires. The change in the fair value$15.9 million and $25.2 million and expense of the contingent consideration between the acquisition date and December 31, 2017 was an increase of $1.6 million.The fair value of the Company’s outstanding debt is estimated using the net present value of future debt payments, discounted at an interest rate that is consistent with market interest rates, which is a Level 2 input. The carrying amount and the estimated fair value of the Company’s outstanding debt at December 31, 2017 and December 31, 2016, are as follows (in thousands):
$37.5 million, respectively. | | December 31, 2017 | | | December 31, 2016 | |
| | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
Debt | | $ | 39,084 | | | $ | 40,526 | | | $ | 12,102 | | | $ | 11,905 | |
7.
8. Commitments and contingencies
Operating leases
In September 2015, the Company entered into a lease agreement for a production facility and headquarters in San Francisco, California. This lease expires in July 2026 and the Company may renew the lease for an additional ten years.
Leases
The Company has determinedentered into various non-cancellable operating lease agreements for office and laboratory space domestically and internationally. The Company's current leases have remaining terms ranging from approximately 1 to 12 years, some of which include options to extend the lease term to be a ten-year period expiringleases. The renewal options were not included in 2026. The lease term commenced when the Company took occupancycalculation of the facility in February 2016. In connection with the execution of theoperating 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 received a $5.2 million lease incentive in the form of reimbursement from the landlord for a portion of the costs of leasehold improvements the Company has made to the facility. The assets purchased with the lease incentive are included in property and equipment, net, in the Company’s consolidated balance sheets and the operating lease incentive is recognizedliabilities as a reductionthey are not reasonably
certain of
rental expense on a straight-line basis over the term of the lease. At December 31, 2017, all of the lease incentive had been utilized by the Company and all related reimbursements had been received from the landlord. Aggregate future minimum lease payments for this facility at December 31, 2017 were approximately $64.2 million.In addition to the security deposit of $4.6 million for its production facility and headquarters, the Company has provided, as collateral for other leases,being exercised. The security deposits of $0.4 million and $0.8 million at December 31, 2017 and December 31, 2016, respectively, which are included in other assets in the Company’s consolidated balance sheets. Security deposits relating to Good Start facilities were $0.4 million at December 31, 2017 andfor our operating leases are included in restricted cash in the Company’sour consolidated balance sheet as of that date.
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Future minimum payments undersheets.
In 2015, we entered into a non-cancelable operating lease agreement for our headquarters and main production facility in San Francisco, California, which commenced in 2016 with an initial lease term extending through 2026. In 2020, we entered into a non-cancelable operating lease agreement for additional office and laboratory space in San Francisco, California, which commenced in 2021 and has an initial lease term extending through 2031. In 2021, we entered into a non-cancelable operating lease agreement for a new laboratory and production facility in Morrisville, North Carolina, which commenced in the same year with an initial lease term extending through 2035.
We have entered into various finance lease agreements to obtain laboratory equipment. The terms of our finance leases are generally three years and are typically secured by the underlying equipment. The portion of the future payments designated as principal repayment and related interest was classified as a finance lease obligation in our consolidated balance sheets. Finance lease assets are recorded within other assets in our consolidated balance sheets.
As part of the strategic realignment, we began cost reduction initiatives including lab and office space consolidation and a reduction in our international footprint. Under this plan, we decided to cease use of certain leased premises and actively began looking to sublease certain facilities, including the related leasehold improvements. We determined that the changes in the intended use of these locations represented an indicator of impairment and performed a test of recoverability on September 30, 2022. For operating leases where the carrying values of right-of-use assets were lower than the undiscounted cash flows expected through sublease, we impaired the right-of-use assets to their fair value. The fair value was determined by utilizing the discounted cash flow method under the income approach. The key inputs to this valuation were expected sublease rental income ranging from $0.1 million to $2.8 million and discount rates ranging from 5.00% to 8.50%. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. During the three months ended September 30, 2022, we recognized an impairment charge of $4.4 million related to the right-of-use assets and $2.3 million for the related leasehold improvements, which are included in restructuring and other costs in our consolidated statements of operations.
In connection with the disposition of the RUO kit assets in December 2022, we entered into an agreement to sublease a portion of our offices in Boulder, Colorado. The sublease term is concurrent with the term of the master lease extending through January 31, 2025, unless earlier terminated and with no option to extend the sublease. Per the sublease agreement, the amount of sublease payments to us will equal the amount of the master lease payments resulting in no adjustments to the right-of-use asset and related lease liability. Sublease income for the year ended December 31,
2017 are as follows (in thousands): | | Amounts | |
2018 | | $ | 9,707 | |
2019 | | | 9,633 | |
2020 | | | 9,512 | |
2021 | | | 9,727 | |
2022 | | | 9,676 | |
Thereafter | | | 29,846 | |
Total minimum lease payments | | $ | 78,101 | |
Rent expense2022 was $8.6 million, $8.6 million and $3.7 millionimmaterial. There was no sublease income for the years ended December 31, 2017, 20162021 and 2015,2020, respectively.
See Note 4, "Business combinations and dispositions" for additional information regarding the disposition of the RUO kit assets.
Supplemental information regarding our operating and finance leases were as follows: | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 |
| Weighted-average remaining lease term: | | | | |
| Operating leases | | 8.9 years | | 9.0 years |
| Finance leases | | 1.8 years | | 2.4 years |
| Weighted-average discount rate: | | | | |
| Operating leases | | 6.7 | % | | 7.0 | % |
| Finance leases | | 7.3 | % | | 7.2 | % |
| Cash payments included in the measurement of lease liabilities (in millions): | | | | |
| Operating leases | | $ | 22.4 | | | $ | 18.3 | |
| Finance leases | | $ | 6.2 | | | $ | 2.9 | |
The components of lease costs, which were included in cost of revenue, research and development, and general and administrative expenses in our consolidated statements of operations, were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Operating lease costs | | $ | 24,671 | | | $ | 21,151 | | | $ | 11,329 | |
| | | | | | |
| Finance lease costs: | | | | | | |
| Amortization of right-of-use assets | | 4,778 | | | 3,488 | | | 2,084 | |
| Interest on lease liabilities | | 840 | | | 496 | | | — | |
| Total lease costs | | $ | 30,289 | | | $ | 25,135 | | | $ | 13,413 | |
Future payments under operating and finance leases as of December 31, 2022 are as follows (in thousands): | | | | | | | | | | | |
| Operating leases | | Finance leases |
| 2023 | $ | 23,691 | |
| $ | 5,595 | |
| 2024 | 28,308 | | | 3,344 | |
| 2025 | 17,465 | | | 495 | |
| 2026 | 23,989 | | | — | |
| 2027 | 15,863 | | | — | |
| Thereafter | 91,177 | | | — | |
| Future non-cancelable minimum lease payments | 200,493 | | | 9,434 | |
| | | |
| | | |
| Less: interest | (51,507) | | | (533) | |
| Total lease liabilities | 148,986 | | | 8,901 | |
| Less: current portion | (14,600) | | | (5,121) | |
| Lease obligations, net of current portion | $ | 134,386 | | | $ | 3,780 | |
Operating lease maturity amounts included in the table above do not include sublease income expected to be received under our sublease. Under the sublease agreement, we expect to receive sublease income for fiscal years ending December 31, 2023, 2024 and 2025 of $0.9 million, $0.9 million and $0.1 million, respectively.
In July 2015, the CompanyOctober 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”)credit agreement with a bankfinancial institution under which termwe borrowed $135.0 million (the "2020 Term Loan") concurrent with the closing of the ArcherDX acquisition. The 2020 Term Loan is secured by a first priority lien on all of our and our subsidiaries' assets, and is guaranteed by us and our subsidiaries. The 2020 Term Loan bears interest at an annual rate equal to three-month LIBOR, subject to a 2.00% LIBOR floor, plus a margin of 8.75%. If three-month LIBOR can no longer be determined or if the applicable governmental authority ceases to supervise or sanction such rates, then we will endeavor to agree with the administrative agent, an alternate rate of interest that gives due consideration to the then prevailing market convention for determining interest for comparable loans were available for purchases of equipment up to an aggregate of $15.0 million. As of December 31, 2016, obligations under the Loan Agreement were $12.1 million.On March 15, 2017, the Company entered into a Loan and Security Agreement (the “Loan and Security Agreement”) with a lender pursuant to which the Company borrowed an initial term loan of $40.0 million, and received net proceeds of approximately $39.7 million. Subject to certain conditions, the Company will also be eligible to borrow a second term loan of $20.0 million in the first quarterUnited States, provided that until such alternative rate of 2018. In connection with entering intointerest is agreed, the 2020 Term Loan and Security Agreement, the Company terminated the Loan Agreement and repaid in full the balance of its obligations under such agreement, approximately $12.1 million. The payment to the lender under the Loan Agreement included a prepayment premium of $670,000, which was classified as extinguishment of debt and included in other income (expense), net.
Term loans under the Loan and Security Agreementshall bear interest at a floating rate equal to an index rate plus 7.73%, where the index rate is the greater of 0.77% or the 30-day U.S. Dollar London Interbank Offered Rate “LIBOR” as reported in The
Wall Street Journal, with Prime Rate. The three-month LIBOR is expected to be available and representative through June 30, 2023. The 2020 Term Loan will mature on (i) June 1, 2024, if at such time our 2024 Notes (defined below) are outstanding and are due to mature on September 1, 2024 (provided that if, prior to such date, the floating rate resetting monthly subject to a floor of 8.5%. The Company is required to make monthly interest-only payments until May 1, 2019 (or, subject to certain conditions, May 1, 2020), and thereafter monthly payments of principal and interest are required to fully amortize the borrowed amount by a final maturity date of Marchat least 80% of the 2024 Notes is extended to a date that is prior to September 1, 2022. A fee2025, the maturity date for the 2020 Term Loan will be automatically extended to a date that is 90 days prior to such 2024 Notes maturity date as extended), or (ii) otherwise, on June 1, 2025. The full amount of 5% of each funded draw is due at the earlier of prepayment or loan maturity, a facility fee of 0.5%2020 Term Loan is due upon funding for each draw, andmaturity. If the 2020 Term Loan is prepaid (whether such prepayment is optional or mandatory), we must pay a prepayment fee of between 1% and 3%6% if the prepayment occurs prior to the third anniversary of the outstanding balance will apply inclosing date or 4% if the eventprepayment occurs after the third anniversary of the closing date and we must also pay a prepayment. Concurrent with each term loan,make-whole fee if the Company will grantprepayment occurs prior to the lender a warrant to acquire sharessecond anniversary of the Company’s common stock equal to the quotient of 3% of the funded amount divided by a per share exercise price equal to the lower of the average closing price for the previous ten days of trading (calculated on the day prior to funding) or the closing price on the day prior to funding.date. In connection with the initial term loan, the Company granted the lender a warrant2020 Term Loan, we issued warrants to purchase 116,8451.0 million shares of our common stock atwith an exercise price of $10.27$16.85 per share.share, exercisable through October 2027. The Companywarrants, which were classified the warrant as equity, were recorded at an amount based on the allocated proceeds and determineddo not require subsequent remeasurement. In October 2020, these warrants were exercised in full through net settlement resulting in the fair valueissuance of the warrant to be $740,000. 0.7 million shares. The
warrant has a termcredit agreement contains customary events of
ten years from the date of issuancedefault and
includes a cashless exercise provision.The Company’s obligations under the Loan and Security Agreement are subject to quarterly covenants to achieve certain revenue levels as well as additional covenants, including limits on the Company’samong others, covenants limiting our ability to dispose of assets,incur debt, incur liens, undergo a change in control, merge with or acquire other entities, incur debt, incur liens,make investments, pay dividends or other distributions to holders of its capital stock,our equity securities, repurchase stock, and make investments,dispose of assets, in each case subject to certain customary exceptions. The Company’s obligations underIn addition, the Loancredit agreement contains financial covenants that require us to maintain a minimum cash balance and Security Agreement are secured by a security interest on substantially all the Company’s assets, excluding its intellectual property.
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Atminimum quarterly revenue levels.
As of December 31,
2017, obligations under2022, the
fair value of the 2020 Term Loan
was $130.0 million. The estimated fair value of the 2020 Term Loan, which use Level 2 fair value inputs, was determined based on a discounted cash flow approach using the contractual term of the loan, market-based parameters such as the three-month LIBOR forward rate, and
Security Agreement were $40.0 million.an estimate for our standalone credit risk. Debt
discounts, including debt issuance costs, related to the
2020 Term Loan
and Security Agreement of
$339,000 and the warrant fair value of $740,000$32.8 million were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the
Loan and Security Agreement. Future payments under the Loan and Security Agreement as of December 31, 2017 are as follows (in thousands): | | Amounts | |
2018 | | $ | 3,691 | |
2019 | | | 12,587 | |
2020 | | | 15,988 | |
2021 | | | 14,716 | |
2022 | | | 5,482 | |
Thereafter | | | — | |
Total remaining debt payments | | | 52,464 | |
Less: amount representing debt discount | | | (916 | ) |
Less: amount representing interest | | | (12,464 | ) |
Present value of remaining debt payments | | | 39,084 | |
Less: current portion | | | — | |
Total non-current debt obligation | | $ | 39,084 | |
2020 Term Loan. Interest expense related to our debt financings, excluding the Loanimpact of our convertible senior notes (defined below), was $24.3 million, $23.7 million and Security Agreement and the Loan Agreement was $3.5$7.4 million $315,000 and $58,000 for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
On February 26, 2018,
Convertible senior notes
Convertible senior notes due 2024
In September 2019, we issued, at par value, $350.0 million aggregate principal amount of 2.00% convertible senior notes due 2024 (the "2024 Notes") in a private offering. The 2024 Notes are senior unsecured obligations and will mature on September 1, 2024, unless earlier converted, redeemed or repurchased. The 2024 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.
Upon conversion, the Company2024 Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate for the 2024 Notes is 33.6293 shares of our common stock per $1,000 principal amount of the 2024 Notes (equivalent to an initial conversion price of approximately $29.74 per share of common stock).
If we undergo a fundamental change (as defined in the indenture governing the 2024 Notes), the holders of the 2024 Notes may require us to repurchase all or any portion of their 2024 Notes for cash at a repurchase price equal to 100% of the principal amount of the 2024 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the redemption date.
The 2024 Notes will be convertible at the option of the holders 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 2024 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 2024 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
lender amended the Loan and Security Agreement (see note 14).Capital leases
The Company has entered into various capital lease agreements to obtain laboratory equipment. The termsconversion rate on each such trading day; (3) if we call any or all of the capital leases are typically three years with interest rates ranging from 4.3%2024 Notes for redemption, at any time prior to 6.4%.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 2024 Notes at any time, regardless of the foregoing circumstances. Since issuance, these notes were convertible at the option of the holders beginning on January 1, 2021 and April 1, 2021 due to the sale price of our common stock during the quarters ended December 31, 2020 and March 31, 2021, respectively. The leases are secured bynotes were not convertible during the underlying equipment. Theyear ended December 31, 2022 and there have been no significant conversions in the periods in which they were convertible.
We may redeem for cash all or any portion of the future payments designated as2024 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 repayment was classifiedamount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Convertible senior notes due 2028
In April 2021, we issued, at 99% of par value, $1,150.0 million aggregate principal amount of 1.5% convertible senior notes due 2028 (the "2028 Notes") in a private offering. The 2028 Notes are senior unsecured obligations and will mature on April 1, 2028, unless earlier converted, redeemed or repurchased. The 2028 Notes bear cash interest at a rate of 1.5% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021. Upon conversion, the 2028 Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
The 2028 Notes will be convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by us. The 2028 Notes will be convertible into shares of our common stock based on an initial conversion rate of 23.1589 shares of common stock per $1,000 principal amount of the 2028 Notes (which is equal to an initial conversion price of $43.18 per share), in each case subject to customary anti-dilution and other adjustments as a capital lease obligationresult of certain extraordinary transactions. None of the 2028 Notes have been converted to date.
We may not redeem the 2028 Notes prior to April 6, 2025. On or after April 6, 2025, the 2028 Notes will be redeemable by us in the event that the closing sale price of our common stock has been at least 150% 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 the redemption notice at a redemption price of 100% of the principal amount of such 2028 Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
With certain exceptions, upon a change of control of the Company or the failure of our common stock to be listed on certain stock exchanges, the holders of the 2028 Notes may require that we repurchase in cash all or part of the principal amount of the Notes at a repurchase price of 100% of the principal amount of the 2028 Notes to be repurchased, plus unpaid interest to, but excluding, the maturity date.
Summary of convertible senior notes
We adopted the provisions of ASU 2020-06 on January 1, 2021. See Note 2, "Summary of significant accounting policies" for additional information. Our 2024 Notes and 2028 Notes (collectively, our "Convertible Senior Notes") consisted of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Outstanding principal | $ | 1,499,996 | | | $ | 1,499,996 | |
| Unamortized debt discount and issuance costs | (29,213) | | | (35,858) | |
| Net carrying amount, liability component | $ | 1,470,783 | | | $ | 1,464,138 | |
As of December 31, 2022, the fair value of the 2024 Notes and 2028 Notes was $261.6 million and $576.7 million, respectively. The estimated fair value of the 2024 Notes and 2028 Notes, which use Level 2 fair value inputs, was determined based on the
consolidated balance sheets.Future payments under capital leases at December 31, 2017 are as follows (in thousands):
| | Amounts | |
2018 | | $ | 2,369 | |
2019 | | | 2,087 | |
2020 | | | 1,394 | |
2021 | | | 21 | |
Total capital lease obligations | | | 5,871 | |
Less: amount representing interest | | | (459 | ) |
Present value of net minimum capital lease payments | | | 5,412 | |
Less: current portion | | | (2,039 | ) |
Total non-current capital lease obligations | | $ | 3,373 | |
Interestestimated or actual bid prices in an over-the-counter market and/or market conditions including the price and volatility of our common stock and comparable company information. We recognized $30.8 million, $24.9 million and $22.0 million of interest expense related to capital leases was $163,000, $103,000 and $141,000 forour Convertible Senior Notes during the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Property Of the interest expense recognized during the years ended December 31, 2022, 2021 and equipment under capital leases was $11.42020, $6.7 million, $5.3 million and $5.9$1.9 million, asrespectively, was related to amortization of issuance costs and the remainder was related to contractual interest incurred.
Other commitments
In the normal course of business, we enter into various purchase commitments primarily related to service agreements and laboratory supplies. At December 31, 2017 and December 31, 2016, respectively. Accumulated depreciation and amortization, collectively, on these assets was $3.0 million and $2.4 million at December 31, 2017 and December 31, 2016, respectively.2022, our total future payments under noncancelable unconditional purchase commitments having a remaining term of over one year were as follows (in thousands):
| | | | | |
| | |
| 2023 | 19,756 | |
| 2024 | 11,065 | |
| 2025 | 1,844 | |
| 2026 | 500 | |
| 2027 | 250 | |
| |
| Total | $ | 33,415 | |
Guarantees and
indemnificationsindemnification
As permitted under Delaware law and in accordance with
the Company’sour bylaws,
the Company indemnifies itswe indemnify our directors and officers for certain events or occurrences while the officer or director is or was serving in such
86
capacity. The maximum amount of potential future indemnification is unlimited; however, the Company maintainswe maintain director and officer liability insurance. This insurance allows the transfer of the risk associated with the Company’sour exposure and may enable itus to recover a portion of any future amounts paid. The Company believesWe believe the fair value of these indemnification agreements is minimal. Accordingly, the Companywe did not record any liabilities associated with these indemnification agreements at December 31, 20172022 or December 31, 2016.
2021.
Contingencies
The Company was
We are and may from time to time be involved in various legal proceedings and claims arising in the ordinary course of business. Legal proceedings, including litigation, government investigations and enforcement actions could result in material costs, occupy significant management resources and entail civil and criminal penalties, even if we ultimately prevail. If an investigation results in a proceeding against us, an adverse outcome could include us being required to pay treble damages, and incur attorneys’ fees, civil or criminal penalties and other adverse actions that could materially and adversely affect our business, financial condition and results of operations. While we believe any
such claims are unsubstantiated, and we believe we are in compliance with applicable laws and regulations applicable to our business, the resolution of any such claims could be material.
We were not a party to any material legal proceedings at December 31, 2017,2022, or at the date of this report. The Company may from time to time become involved in various legal proceedings arisingreport except for matters listed below. We cannot currently predict the outcome of these actions.
Natera, Inc.
On January 27, 2020, Natera filed a lawsuit against ArcherDX (a subsidiary of Invitae effective October 2, 2020) in the ordinary courseUnited States District Court for the District of business,Delaware, alleging that ArcherDX’s products using AMP chemistry, and the resolutionmanufacture, use, sale, and offer for sale of such products, infringe U.S. Patent No. 10,538,814. On March 25, 2020, ArcherDX filed an answer denying Natera’s allegations and asserting certain affirmative defenses and counterclaims, including that U.S. Patent No. 10,538,814 is invalid and not infringed. On April 15, 2020, Natera filed an answer denying ArcherDX’s counterclaims and filed an amended complaint alleging that ArcherDX’s products using AMP chemistry, including STRATAFIDE, PCM, LiquidPlex, ArcherMET, FusionPlex, and VariantPlex, and the manufacture, use, sale, and offer for sale of such products, infringe U.S. Patent No. 10,538,814, U.S. Patent No. 10,557,172, U.S. Patent No. 10,590,482, and U.S. Patent No. 10,597,708, each of which are held by Natera. Natera seeks, among other things, damages and other monetary relief, costs and attorneys’ fees, and an order enjoining ArcherDX from further infringement of such patents. On May 13, 2020, ArcherDX filed an answer to Natera’s amended complaint denying Natera’s allegations and asserting certain affirmative defenses and counterclaims, including that the asserted patents are invalid and not infringed. On June 3, 2020, Natera filed an answer denying ArcherDX’s counterclaims. On June 4, 2020, ArcherDX filed a motion seeking dismissal of Natera’s infringement claims against STRATAFIDE, PCM, and ArcherMET, and for a judgment that U.S. Patent No. 10,538,814, U.S. Patent No. 10,557,172, and U.S. Patent No. 10,590,482 are invalid. On August 6, 2020, Natera filed another complaint against ArcherDX in the United States District Court for the District of Delaware alleging that ArcherDX’s products using AMP chemistry, including STRATAFIDE, PCM, LiquidPlex, ArcherMET, and VariantPlex, and the manufacture, use, sale, and offer for sale of such products, infringe U.S. Patent No. 10,731,220. Natera seeks, among other things, damages and other monetary relief, costs and attorneys’ fees, and an order enjoining ArcherDX from further infringement of the patent. On October 13, 2020, the court issued an order denying ArcherDX's motion for dismissal of Natera’s infringement claims against STRATAFIDE, PCM, and ArcherMET, and declined to enter judgment that U.S. Patent No. 10,538,814, U.S. Patent No. 10,557,172, and U.S. Patent No. 10,590,482 are invalid. On January 12, 2021, the court issued an order granting Natera leave to amend its complaint to add Invitae as a co-defendant and plead allegations that ArcherDX and Invitae induce end-users to infringe the patents-in-suit. Natera filed its second amended complaint ("Second Amended Complaint") on the same day, with service completed on January 15, 2021. ArcherDX and Invitae filed answers to the Second Amended Complaint on January 26, 2021 and February 5, 2021, respectively, denying Natera's allegations and restating certain affirmative defenses and counterclaims of non-infringement and invalidity. The litigations have now been consolidated for all purposes. A claim construction order was issued on June 28, 2021. On October 27, 2021, Natera filed its third amended complaint ("Third Amended Complaint") to add a Certificate of Correction to U.S. Patent No. 10,590,482. On November 3, 2021, ArcherDX filed its answer and counterclaims to Natera's Third Amended Complaint, adding an inequitable conduct defense and declaratory judgment counterclaims. Discovery concluded in December 2021. On January 21, 2022, Natera, ArcherDX and Invitae moved for summary judgment, wherein Natera seeks a determination on certain legal and equitable defenses and ArcherDX and Invitae seek a determination of non-infringement and invalidity of the asserted patents. The court denied the parties' respective summary judgment motions by order dated February 6, 2023. Trial is set for May 8, 2023.
In addition, on October 6, 2020, Natera filed a complaint against Genosity in the United States District Court for the District of Delaware, alleging that Genosity's use of its AsTra products, and the manufacture, use, sale, and offer for sale of such products, infringes U.S. Patent No. 10,731,220. Natera's complaint further alleges that Genosity's accused products use ArcherDX's ctDNA and region-specific primers. Genosity filed an answer to the complaint on February 15, 2021, denying Natera's allegations and setting forth affirmative defenses and counterclaims of non-infringement, invalidity and unenforceability due to inequitable conduct. On March 8, 2021, Natera filed a motion to dismiss and strike certain affirmative defenses and counterclaims brought by Genosity relating to inequitable conduct. The court denied that motion on March 14, 2022. The court granted an order granting the parties' stipulated request to stay the case on April 1, 2022.
QIAGEN Sciences
On July 10, 2018, ArcherDX and the General Hospital Corporation d/b/a Massachusetts General Hospital, which we refer to as MGH, filed a lawsuit in the United States District Court for the District of Delaware against QIAGEN Sciences, LLC, QIAGEN LLC, QIAGEN Beverly, Inc., QIAGEN Gaithersburg, Inc., QIAGEN GmbH and QIAGEN N.V., which is collectively referred to herein as QIAGEN, and a named QIAGEN executive who was a former
member of ArcherDX’s board of directors, alleging several causes of action, including infringement of the ’810 Patent, trade secret misappropriation, breach of fiduciary duty, false advertising, tortious interference and deceptive trade practices. The ’810 Patent relates to methods for preparing a nucleic acid for sequencing and aspects of ArcherDX’s AMP technology. On October 30, 2019, with the permission of the Court, ArcherDX amended ArcherDX’s complaint to add a claim for infringement of the ’597 Patent. The ’597 Patent relates to methods of preparing and analyzing nucleic acids, such as by enriching target sequences prior to sequencing, and aspects of ArcherDX’s AMP technology. The QIAGEN products that ArcherDX alleges infringe the ’810 Patent and the ’597 Patent include, but are not limited to, QIAseq Targeted DNA Panels, QIAseq Targeted RNAscan Panels, QIAseq Index Kits and QIAseq Immune Repertoire RNA Library Kits. ArcherDX is seeking, among other things, damages for ArcherDX’s lost profits due to QIAGEN’s infringement and a permanent injunction enjoining QIAGEN from marketing and selling the infringing products and from using ArcherDX’s trade secrets. On December 5, 2019, QIAGEN and the named QIAGEN executive submitted their answer denying the allegations in ArcherDX’s complaint and asserting affirmative defenses that, among other things, the ’810 Patent and ’597 Patent are not infringed by QIAGEN’s products, that both patents are invalid, and that the complaint fails to state any
suchclaim for which relief may be granted. On March 1, 2021, each of ArcherDX and QIAGEN moved for summary judgment on issues relating to infringement and validity of ArcherDX's patents, breach of fiduciary duty and trade secret misappropriation. On June 18, 2021, ArcherDX informed the court that it would not assert the following claims
could be material.8.to streamline the issues for trial: trade secret misappropriation, false advertising, deceptive trade practices, and tortious interference. The court denied QIAGEN's motion for summary judgment on trade secret misappropriation as moot on June 21, 2021, denied QIAGEN's motion for summary judgment on breach of fiduciary duty on July 26, 2021, and granted QIAGEN's motion for summary judgment of no literal infringement of the '810 Patent on August 21, 2021. Trial proceeded on August 23 through August 27, 2021, resulting in a unanimous jury verdict, which found that: (i) all asserted claims of the '810 and '597 Patents are valid, (ii) QIAGEN willfully infringed the asserted claims of the '810 patent (under the doctrine of equivalents) and the '597 patent (literal infringement), and (iii) ArcherDX and MGH are entitled to recover approximately $4.7 million in damages. On September 30, 2022, the court issued an order denying QIAGEN's post-trial motion for a new trial or altered verdict, granting QIAGEN's post-trial motion to reduce damages to approximately $4.0 million, granting ArcherDX's post-trial motion for ongoing royalty at a rate of 7% along with supplemental damages and interest, and denying ArcherDX's motion for an injunction with leave to renew after an evidentiary hearing. No date has been set for the hearing on ArcherDX's request for an injunction.
9. Stockholders’
Equityequity
Shares outstanding
Shares of convertible preferred and common stock were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Convertible preferred stock: | | | | | | |
| Shares outstanding, beginning of period | | — | | | 125 | | | 125 | |
| | | | | | |
| Conversion into common stock | | — | | | (125) | | | — | |
| Shares outstanding, end of period | | — | | | — | | | 125 | |
| | | | | | |
| Common stock: | | | | | | |
| Shares outstanding, beginning of period | | 228,116 | | | 185,886 | | | 98,796 | |
| Common stock issued in private placement | | — | | | — | | | 16,320 | |
| Common stock issued in connection with public offering | | 2,429 | | | 8,932 | | | 24,005 | |
| Common stock issued on exercise of stock options, net | | 159 | | | 2,068 | | | 2,659 | |
| Common stock issued pursuant to vesting of RSUs | | 10,486 | | | 4,325 | | | 5,304 | |
| Common stock issued pursuant to exercises of warrants | | — | | | 208 | | | 968 | |
| Common stock issued pursuant to employee stock purchase plan | | 2,231 | | | 654 | | | 671 | |
| Common stock issued pursuant to acquisitions | | 2,141 | | | 25,918 | | | 37,163 | |
| | | | | | |
| | | | | | |
| Common stock issued upon conversion of preferred stock | | — | | | 125 | | | — | |
| | | | | | |
| Shares outstanding, end of period | | 245,562 | | | 228,116 | | | 185,886 | |
As of December 31,
2017 and 2016, the Company2022, we had
reserved600 million shares of common stock
on an as‑if converted basis, for issuance as follows:authorized with a par value of $0.0001. The number of authorized shares increased from 400 million to 600 million during the year ended December 31, 2022. | | As of December 31, | |
| | 2017 | | | 2016 | |
Options issued and outstanding | | | 4,114,874 | | | | 4,490,662 | |
RSU awards issued and outstanding | | | 2,387,120 | | | | 1,421,757 | |
Shares available for grant under stock option plan | | | 2,397,234 | | | | 1,375,766 | |
Shares reserved for issuance under the 2015 Employee Stock Purchase Plan | | | 307,538 | | | | 274,686 | |
Common stock underlying warrants | | | 1,962,074 | | | | — | |
Common stock issuable upon conversion of preferred stock | | | 3,458,823 | | | | — | |
Common stock underlying stock payable liabilities | | | 689,347 | | | | — | |
Common stock payable as contingent consideration | | | 550,660 | | | | — | |
Total | | | 15,867,670 | | | | 7,562,871 | |
Private placement
On
In August
3, 2017, in a private placement to certain accredited investors,
the Company sold 5,188,235we issued shares of
its common stock at a price of $8.50 per share, and 3,458,823 shares of itsour 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 a non-voting common stock equivalent and conversion of the Series A preferred stock is prohibited if the holder exceeds a specified threshold of voting security ownership. The Series A preferred stock iswhich are convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like. The Series A
Preferred Stockconvertible preferred stock is a non-voting common stock equivalent with a par value of $0.0001 and has the right to receive dividends first or simultaneously with payment of dividends on common
stock, in an amount equal to the product of (i) the dividend payable on each share of common stock and (ii) the number of shares of common stock issuable upon conversion of a share of Series A Preferred Stock. The Series A Preferred Stock has no voting rights except as required by law, as modified by the Company’s Amended and Restated Certificate of Incorporation.stock. In the event of any liquidation or dissolution of the Company, the Series A
Preferred Stockpreferred stock is entitled to receive $0.001 per share prior to the payment of any amount to any holders of capital stock
of the Company ranking junior to the Series A
Preferred Stockpreferred stock and thereafter shall participate pari passu with the holders of
the Company’sour common stock (on an as-if-converted-to-common-stock basis).
Common During the year ended December 31, 2021, 124,913 shares of Series A convertible preferred stock warrants
were converted into 124,913 shares of common stock. As of December 31, 2017, the2022 and 2021, we had 20 million shares of preferred stock authorized, of which 3,458,823 shares were designated as Series A convertible preferred stock. As of December 31, 2022 and 2021, there were no shares of preferred stock or Series A convertible preferred stock outstanding.
Sales Agreements
In May 2021, we entered into a sales agreement (the "2021 Sales Agreement") with Cowen and Company,
had outstanding warrantsLLC (“Cowen”) under which we may offer and sell from time to
purchasetime at our sole discretion shares of our common stock
through Cowen as
follows:87
Warrant | | Issuance Date | | Expiration Date | | Exercise Price Per Share | | | Number of Warrants Outstanding | |
Warrants issued in exchange for CombiMatrix Series D warrants | | November 14, 2017 | | December 19, 2018 | | $ | 53.84 | | | | 337,584 | |
Warrants issued in exchange for CombiMatrix Series F warrants | | November 14, 2017 | | March 24, 2021 | | $ | 5.95 | | | | 1,507,645 | |
Warrants issued to lender under Loan and Security Agreement | | March 15, 2017 | | March 15, 2027 | | $ | 10.27 | | | | 116,845 | |
| | | | | | | | | | | 1,962,074 | |
The exercise price of warrants issuedour sales agent, in exchange for CombiMatix Series D and Series F warrants was determined pursuantan aggregate amount not to exceed $400.0 million. Per the terms of the Merger Agreement (See Note 3). The exerciseagreement, Cowen will receive a commission of up to 3% of the gross proceeds of the sales price of the warrants issued to the lenderall shares sold through it as sales agent under the Loan2021 Sales Agreement.
During the year ended December 31, 2022, we sold a total of 2.4 million shares of common stock under the 2021 Sales Agreement at an average price of $3.99 per share, for gross proceeds of $10.0 million and Security Agreement wasnet proceeds of $9.7 million. During the year ended December 31, 2020, we sold a total of 3.6 million shares of common stock under the common stock sales agreement entered into with Cowen in August 2018 at an average price of $26.33 per share, for gross proceeds of $93.7 million and net proceeds of $90.7 million.
Public offerings
In January 2021, we sold, in an underwritten public offering, an aggregate of 8.9 million shares of our common stock at a price of $51.50 per share, for gross proceeds of $460.0 million and net proceeds of approximately $434.3 million after deducting underwriting discounts and commissions and offering expenses.
In April 2020, we sold, in an underwritten public offering, an aggregate of 20.4 million shares of our common stock at a price of $9.00 per share, for gross proceeds of $184.0 million and net proceeds of $173.0 million after deducting underwriting discounts and commissions and offering expenses.
Private placement
In connection with our acquisition of ArcherDX, in June 2020 we entered into a definitive agreement to sell $275.0 million in common stock in a private placement at a price of $16.85 per share. We received net proceeds of $263.7 million after deducting placement fees and offering expenses upon the closing
price of the
Company’s common stock on the dateprivate placement in October 2020, concurrently with our acquisition of
the agreement.9.ArcherDX.
10. Stock incentive plans
In 2010,
the Companywe 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 Boardour board of
Directors.directors. Under the terms of the 2010 Plan, options may be granted at an exercise price not less than
the fair market
value.value of our common stock. 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
value of
theour common stock on the grant date, as determined by
the Boardour board of
Directors.directors. The terms of options granted under the 2010 Plan may not exceed ten years.
In January 2015,
the Companywe adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which became effective upon the closing of
the Company’sour initial public
offering (“IPO”). The 2015 Plan had 4,370,452 shares of common stock reserved for future issuance at the time of its effectiveness, which included 120,452 sharesoffering. Shares outstanding under the 2010 Plan
which were transferred to the 2015 Plan upon effectiveness of the 2015 Plan. The 2015 Plan provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 through January 1, 2025. In addition, shares subject to awards under the 2010 Plan that are forfeited or terminated will be added to the 2015 Plan. The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, stock units, stock appreciation rights and other forms of equity compensation, all of which may be granted to employees, including officers, non-employee directors and consultants. Additionally, the 2015 Plan provides for the grant of cash-based awards.
Options granted generally vest over a period of four years. Typically, the vesting schedule for options granted to newly hired employees provides that 1/4 of the award vests upon the first anniversary of the employee’s date of hire, with the remainder of the award vesting monthly thereafter at a rate of 1/48 of the total shares subject to the option. All other options typically vest in equal monthly installments over the four-year vesting schedule.
Upon the acquisition of ArcherDX in October 2020, any option that was outstanding was converted into a fully vested option to purchase a share of our common stock, which resulted in the issuance of options to purchase 3.7 million shares of our common stock.
RSUs generally vest
ratably in annual installments over a period of three years, commencing on the first anniversary of the grant date, with certain awards that include a portion that vests immediately upon grant. The vesting schedule for the 2022 grants approved in April 2022 provides that the awards vest ratably in quarterly installments over a period of two years, with certain awards that include a portion that vests immediately upon grant. Grants to the executive team in 2022 vest ratably in annual installments over a period of three years.
Typically, the vesting schedule forWe have also granted certain awards in connection with our management incentive plan that vest over a period of two years. In June 2019, we granted time-based RSUs
providesin connection with an acquisition and PRSUs that
one third of the award vests upon each anniversary of the grant date.In February 2016, the Company granted PRSUs under the 2015 Plan, which PRSUs could be earnedvested based on the achievement of specified performance conditions, measured over a periodboth of approximately 12 months.which were fully vested as of December 31, 2022. In February 2017, upon the Audit Committee’s determinationDecember 2020, we granted RSUs in connection with an asset acquisition which were fully vested as of December 31, 2022.
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 352,045 fully vested stock units were awarded to holders of PRSUs.Based on its evaluationsa specified 2019 revenue goal. One-third of the probability0.8 million shares that were ultimately awarded under this plan vested during the year ended December 31, 2020 and the remaining shares vested through March 2022. In June 2020, we granted 0.3 million PRSUs under this plan which are based on the level of achievingachievement of a specified 2020 cash burn goal. Upon achievement of the specified 2020 cash burn goal, 0.3 million shares were ultimately awarded and vested in 2021 over a one-year period. These PRSUs had a grant date fair value of $4.2 million based on an estimated issuance of 0.3 million shares and expectation of the performance conditions, the Company recorded stock-based compensation expense of $0.4 million and $1.9 million forconditions. During the years ended December 31, 20172022, 2021 and 2016, respectively,2020, $2.7 million, $2.7 million and $0.7 million were recorded as stock-based compensation expense related to the PRSUs.
88
awards, respectively.
Activity under the 2010 Plan and the 2015 Plan is set forth below (in thousands, except share and per share amountsdata 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, 2021 | 10,242 | | | 3,034 | | | $ | 11.98 | | | 5.5 | | $ | 16,431 | |
| Additional shares reserved | 9,125 | | | — | | | | | | | |
| Options granted | (1,121) | | | 1,121 | | | $ | 3.03 | | | | | |
| Options cancelled | 1,455 | | | (1,455) | | | $ | 12.04 | | | | | |
| Options exercised | — | | | (159) | | | $ | 4.06 | | | | | |
| RSUs and PRSUs granted | (12,508) | | | — | | | | | | | |
| RSUs and PRSUs cancelled | 5,432 | | | — | | | | | | | |
| | | | | | | | | |
| Balances at December 31, 2022 | 12,625 | | | 2,541 | | | $ | 8.49 | | | 6.6 | | $ | 16 | |
| Options exercisable at December 31, 2022 | | | 1,384 | | | $ | 11.21 | | | 4.1 | | $ | 16 | |
| Options vested and expected to vest at December 31, 2022 | | | 2,383 | | | $ | 8.84 | | | 6.1 | | $ | 16 | |
| | Shares Available For Grant | | | Stock Options Outstanding | | | Weighted- Average Exercise Price | | | Weighted- Average Remaining Contractual Life (years) | | | Aggregate Intrinsic Value (000's) | |
Balances at December 31, 2016 | | | 1,375,766 | | | | 4,490,662 | | | $ | 8.21 | | | | 8.11 | | | $ | 5,312 | |
Additional shares reserved | | | 2,923,183 | | | | — | | | | | | | | | | | | | |
Options granted | | | (607,398 | ) | | | 607,398 | | | $ | 9.20 | | | | | | | | | |
Options cancelled | | | 595,763 | | | | (595,763 | ) | | $ | 9.67 | | | | | | | | | |
Options exercised | | | | | | | (387,423 | ) | | $ | 4.38 | | | | | | | | | |
RSUs granted | | | (2,360,511 | ) | | | | | | | | | | | | | | | | |
RSUs cancelled | | | 292,471 | | | | | | | | | | | | | | | | | |
PRSUs cancelled | | | 177,960 | | | | | | | | | | | | | | | | | |
Balances at December 31, 2017 | | | 2,397,234 | | | | 4,114,874 | | | $ | 8.51 | | | | 7.63 | | | $ | 5,128 | |
Options exercisable at December 31, 2017 | | | | | | | 2,213,417 | | | $ | 7.75 | | | | 7.09 | | | $ | 4,411 | |
Options vested and expected to vest at December 31, 2017 | | | | | | | 3,861,828 | | | $ | 8.45 | | | | 7.59 | | | $ | 5,043 | |
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’sour common stock for stock options that were in-the-money.
The weighted-average fair value of options to purchase common stock granted was
$5.82, $6.18$2.07, $22.46 and
$6.26$10.10 in the years ended December 31,
2017, 20162022, 2021 and
2015,2020, respectively.
The weighted-average fair value of RSUs granted was $10.03, $9.80 and $10.72 in the years ended December 31, 2017, 2016 and 2015, respectively. No PRSUs were granted in the year ended December 31, 2017 and the weighted average fair value of PRSUs granted in the year ended December 31, 2016 was $6.50.
The total grant-date fair value of options to purchase common stock vested was
$6.9$1.8 million,
$5.6$2.4 million and
$2.1$2.8 million in the year ended December 31,
20172022, 2021, and
2016,2020, respectively.
The intrinsic value of options to purchase common stock exercised was
$2.1$0.7 million,
$1.4$55.0 million and
$1.2$104.4 million in the years ended December 31,
2017, 20162022, 2021 and
2015,2020, respectively.
The following table summarizes RSU, andincluding PRSU, activity for the year ended December 31, 2017:(in thousands, except per share data): | | | | | | | | | | | |
| | Number of Shares | | Weighted-Average Grant Date Fair Value Per Share |
| Balance at December 31, 2021 | 16,247 | | | $ | 26.21 | |
| RSUs granted | 11,622 | | | $ | 5.58 | |
| Time-based RSUs and PRSUs granted - variable | 886 | | | $ | 2.47 | |
| | | |
| RSUs vested | (11,428) | | | $ | 23.03 | |
| RSUs cancelled | (5,432) | | | $ | 16.67 | |
| Balance at December 31, 2022 | 11,895 | | | $ | 11.70 | |
| | Number of Shares | | | Weighted- Average Grant Date Fair Value | |
Balance at December 31, 2016 | | | 1,421,757 | | | $ | 8.77 | |
RSUs granted | | | 2,360,511 | | | $ | 10.03 | |
RSUs vested | | | (572,672 | ) | | $ | 10.51 | |
PRSUs vested | | | (352,045 | ) | | $ | 6.54 | |
RSUs cancelled | | | (292,471 | ) | | $ | 10.17 | |
PRSUs cancelled | | | (177,960 | ) | | $ | 6.53 | |
Balance at December 31, 2017 | | | 2,387,120 | | | $ | 9.91 | |
2015 employee stock purchase plan
ESPP
In January 2015,
the Companywe adopted the 2015
Employee Stock Purchase Plan (the “ESPP”),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 December 31,
2017,2022, cash received from payroll deductions pursuant to the ESPP was
$0.4$1.3 million.
89
The ESPP provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 and continuing through January 1, 2025. At December 31,
2017,2022, a total of
307,5382.1 million shares of common stock are reserved for issuance under the ESPP.
Stock-based compensation
The Company uses
We use the grant date fair value of
itsour common stock to value
both employee and non-employee options when granted.
The Company revalues non-employee options each reporting period using the fair market value of the Company’s common stock as of the last day of each reporting period.In determining the fair value of stock options and ESPP purchases, the Company useswe use the Black-Scholes option-pricing model and, for stock options, the assumptions discussed below. Each of these inputs is subjective and its determination generally requires significant judgment. The fair value of RSU and PRSU awards is based on the grant date share price. Compensation cost is recognized as expense on a straight-line basis over the vesting period for options and RSUs and on an accelerated basis for PRSUs.
In 2016,
Fair value of common stock—The fair value of each share of common stock is based on the Company modified certainclosing price of our common stock options and RSU awards. The termson the date of grant as reported on the stock option modifications included acceleration of vesting and extensions of post-termination exercise periods. The terms of the RSU award modifications included acceleration of vesting. A total of 14 employees were affected by the stock option and RSU modifications and the total incremental compensation cost relating to these modifications was $323,000.NYSE.
Expected term—The expected term represents the period that the Company’sour stock-based awards are expected to be outstanding and is determined using the simplified method (based on the midpoint between the vesting date and the end of the contractual term). Expected volatility—Because the Company was privately held until February 2015 and did not have any trading history for its common stock prior to its IPO, theWe estimate expected volatility was estimated based on the averagehistorical volatility for comparable publicly traded biopharmaceutical companiesof our common stock over a period equal to the expected term of stock option grants and restricted stock units. When selecting comparable companies on which it has based its expected stock price volatility, the Company selected companies with comparable characteristics to it, including enterprise value, risk profiles, position within the industry,RSUs and with historical share price information sufficient to meet the expected life of the stock-based awards. Historical volatility data has been computed using the daily closing prices for the selected companies’ common stock during the equivalent period of the calculated expected term of the stock-based awards. The Company will continue to apply this process until a sufficient amount of historical information regarding the volatility of its own stock price becomes available. The Company estimates expected volatility for ESPP purchases using its own stock price volatility over the expected six-month term ESPP purchase periods. Risk-free interest rate—The risk-free interest rate is based on the U.S. Treasury zero coupon issues in effect at the time of grant for periods corresponding with the expected term of the option. Dividend yield—The Company hasWe have never paid dividends on itsour common stock and hashave no plans to pay dividends on itsour common stock. Therefore, the Companywe used an expected dividend yield of zero. The fair value of share-based payments for stock options granted to employees and directors was estimated on the date of grant using the Black-Scholes option-pricing model based on the following assumptions: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Fair value of common stock | $2.85 - $5.22 | | $34.90 | | $16.17 - $16.55 |
| Expected term (in years) | 6.0 | | 6.0 | | 6.0 |
| Expected volatility | 77.6% | | 73.5% | | 71.0% |
| Risk-free interest rate | 3.0% | | 1.1% | | 0.5% |
| | | | | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Expected term (in years) | | 6.03 | | | 6.03 | | | 6.03 | |
Expected volatility | | 72.64% | | | 71.42% | | | | 68.2 – 79.7% | |
Risk-free interest rate | | 2.01% | | | 1.37% | | | | 1.28 – 1.86% | |
Dividend yield | | | — | | | | — | | | | — | |
Stock-based compensation related to stock options granted to non-employees is recognized as the stock options vest. The fair value of the stock options granted is calculated at each reporting date using the Black-Scholes option-pricing model based on the following assumptions:
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Expected term (in years) | | | 8.41 – 8.83 | | | | 6.25 – 10.00 | | | | 7.25 – 9.82 | |
Expected volatility | | | 69.9 – 78.70% | | | | 76.92% | | | | 69.9 – 78.70% | |
Risk-free interest rate | | | 1.83 – 2.04% | | | | 1.55 – 2.37% | | | | 1.86 – 2.25% | |
Dividend yield | | | — | | | | — | | | | — | |
The fair value of shares purchased pursuant to the ESPP is estimated using the
Black‑ScholesBlack-Scholes option pricing model. For the years ended December 31,
2017, 20162022, 2021 and
2015,2020, the
weighted averageweighted-average grant date fair value per share for the ESPP was
$2.51, $2.66$2.34, $8.10 and
$2.17, respectively and stock‑based compensation expense for the ESPP was $1.1 million, $0.9 million and $102,000,$10.98, respectively.
The fair value of the shares purchased pursuant to the ESPP was estimated using the following assumptions: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Expected term (in years) | 0.5 | | 0.5 | | 0.5 |
| Expected volatility | 200.6% | | 66.1% | | 105.7% |
| Risk-free interest rate | 3.6% | | 0.0% | | 0.1% |
| | | | | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Expected term (in years) | | | 0.50 | | | | 0.50 | | | | 0.50 | |
Expected volatility | | | 52.50 | % | | | 66.31 | % | | | 74.13 | % |
Risk-free interest rate | | | 1.23 | % | | | 0.50 | % | | | 0.33 | % |
Dividend yield | | — | | | — | | | — | |
The following table summarizes stock-based compensation expense for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, included in the consolidated statements of operations (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cost of revenue | $ | 6,868 | | | $ | 12,033 | | | $ | 8,713 | |
| Research and development | 113,843 | | | 92,407 | | | 91,762 | |
| Selling and marketing | 12,897 | | | 15,641 | | | 14,418 | |
| General and administrative | 35,378 | | | 59,994 | | | 43,854 | |
| Restructuring and other costs | 30,318 | | | — | | | — | |
| Total stock-based compensation expense | $ | 199,304 | | | $ | 180,075 | | | $ | 158,747 | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Cost of test revenue | | $ | 2,093 | | | $ | 1,353 | | | $ | 368 | |
Research and development | | | 6,158 | | | | 4,976 | | | | 1,545 | |
Selling and marketing | | | 3,956 | | | | 1,709 | | | | 688 | |
General and administrative | | | 7,014 | | | | 2,661 | | | | 876 | |
Total stock-based compensation expense | | $ | 19,221 | | | $ | 10,699 | | | $ | 3,477 | |
At December 31, 2017,2022, unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $9.0$3.4 million, which the Company expectswe expect to recognize on a straight-line basis over a weighted-average period of 2.23.3 years. Unrecognized compensation expense related to RSUs, including PRSUs, and awards that are contingently issuable upon the completion of certain milestones related to our acquisitions of ArcherDX and IntelliGene Health Informatics, LLC at December 31, 2017,2022, net of estimated forfeitures, was $14.6$154.0 million, which the Company expectswe expect to recognize on a straight-line basis over a weighted-average period of 2.11.5 years. At
11. Restructuring and other costs
On July 18, 2022, we initiated a strategic realignment of our operations to reduce operating costs and drive future growth aligned with our core genetic testing and data platform and patient network. The strategic realignment includes a reduction in workforce, lab and office space consolidation, portfolio optimization, decrease in other operating expenses, as well as a reduced international footprint. Under this strategic realignment, we reduced our workforce by approximately 1,000 employees with a majority of these employees separating from the Company by September 30, 2022 and the remaining affected employees transitioning over varying periods of time up to 12 months. Employees who were impacted by the restructuring were eligible to receive severance benefits contingent upon an impacted employee’s execution (and non-revocation, where applicable) of a separation agreement, which included a general release of claims against us.
The following table summarizes the expenses related to our strategic realignment recognized in restructuring and other costs in our consolidated statement of operations (in thousands): | | | | | |
| Year Ended December 31, |
| 2022 |
| Employee severance and benefits | $ | 65,556 | |
| Impairments and losses on disposals of long-lived assets | 60,507 | |
| Other restructuring costs | 14,268 | |
| Total restructuring and other costs | $ | 140,331 | |
Employee severance and benefits are comprised of severance, other termination benefit costs, and stock-based compensation expense for the acceleration of RSUs related to workforce reductions. See Note 10, "Stock incentive plans" for additional information about the accelerated vesting of RSUs. Asset impairments and losses on asset disposals include operating lease impairments, losses on disposals of property and equipment and leasehold
improvements associated with exiting lines of business, consolidating lab and office space, and reducing our international footprint. See Note 8, "Commitments and contingencies" under the heading "Leases" for additional information about operating lease impairments. See Note 5, "Goodwill and intangible assets" for additional information about the loss on disposal of property and equipment related to the Singular Bio acquisition and Note 6, "Balance sheet components" for additional information about losses on disposal of property and equipment. Other restructuring costs include the write-off of prepaid assets related to the exit of certain product offerings, legal and professional fees, and contract exit costs.
We expect to incur additional employee severance and benefits expenses up to $1.2 million, and additional other restructuring costs primarily related to third-party costs up to $3.5 million. This reflects the best estimate of the Company, which may be revised in subsequent periods as the strategic realignment progresses.
The following table summarizes the changes in liabilities associated with our strategic realignment initiatives, including restructuring and other costs incurred and cash payments as of December 31, 2017, there was no unrecognized compensation2022 (in thousands): | | | | | | | | | | | | | | | | | |
| | | | | |
| Employee severance and benefits | | Other restructuring costs | | Total |
| Beginning balance | $ | — | | | $ | — | | | $ | — | |
| Accruals | 35,237 | | | 7,405 | | | 42,642 | |
| Payments | (32,974) | | | (5,464) | | | (38,438) | |
| Balance at December 31, 2022 | $ | 2,263 | | | $ | 1,941 | | | $ | 4,204 | |
The restructuring liabilities are included in accrued liabilities in the consolidated balance sheets. We expect that substantially all of the remaining accrued restructuring liabilities will be paid in cash over the next 12 months. The charges recognized in the roll forward of our accrued restructuring liabilities do not include items charged directly to expense
related to PRSUsfor losses on asset disposals, accelerated vesting of RSUs, and
no capitalized stock-based employee compensation.10.other periodic exit costs, as those items are not reflected in our restructuring liabilities in our consolidated balance sheets.
12. Income taxes
The Company
We recorded a benefit for income taxes in the year ended December 31, 2017. The Company did not record a provision or benefit for income taxes during the years ended December 31, 20162022, 2021 and 2015.2020. The components of net loss before income taxes by U.S. and foreign jurisdictions are as follows (in thousands): | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| United States | $ | 3,147,669 | | | $ | 414,657 | | | $ | 712,409 | |
| Foreign | 3,528 | | | 1,206 | | | 1,861 | |
| Total | $ | 3,151,197 | | | $ | 415,863 | | | $ | 714,270 | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
United States | | $ | 124,108 | | | $ | 99,793 | | | $ | 88,112 | |
Foreign | | | 1,128 | | | | 463 | | | | 1,670 | |
Total | | $ | 125,236 | | | $ | 100,256 | | | $ | 89,782 | |
91
The components of the provision for income taxes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Current: | | | | | |
| | | | | |
| | | | | |
| Foreign | 1,338 | | | (2,069) | | | (171) | |
| Total current benefit (expense) for income taxes | 1,338 | | | (2,069) | | | (171) | |
| Deferred: | | | | | |
| Federal | 22,368 | | | 28,348 | | | 94,279 | |
| State | 19,512 | | | 8,809 | | | 17,730 | |
| Foreign | 1,686 | | | 1,769 | | | 262 | |
| Total deferred benefit for income taxes | 43,566 | | | 38,926 | | | 112,271 | |
| Total income tax benefit | $ | 44,904 | | | $ | 36,857 | | | $ | 112,100 | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Current | | $ | — | | | $ | — | | | $ | — | |
Federal | | | — | | | | — | | | | — | |
State | | | — | | | | — | | | | — | |
Foreign | | | — | | | | — | | | | — | |
Total Current | | | — | | | | — | | | | — | |
Deferred | | | | | | | | | | | | |
Federal | | | (1,704 | ) | | | — | | | | — | |
State | | | (152 | ) | | | — | | | | — | |
Foreign | | | — | | | | — | | | | — | |
Total Deferred | | | (1,856 | ) | | | — | | | | — | |
Tax Provision | | $ | (1,856 | ) | | $ | — | | | $ | — | |
The following table presents a reconciliation of the tax expense computed at the statutory federal rate and the Company’sour tax expense for the periods presented: | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| U.S. federal taxes at statutory rate | 21.0 | % | | 21.0 | % | | 21.0 | % |
| State taxes (net of federal benefit) | 0.9 | % | | 7.3 | % | | 3.4 | % |
| Stock-based compensation | (1.2) | % | | (1.2) | % | | (1.6) | % |
| Research and development credits | 0.4 | % | | 3.8 | % | | 1.1 | % |
| Non-deductible expenses | — | % | | (0.9) | % | | (0.7) | % |
| Foreign tax differential | 0.1 | % | | (0.1) | % | | — | % |
| | | | | |
| Acquisition contingent liabilities | 0.1 | % | | 18.5 | % | | (0.8) | % |
| Non-deductible impairment expense | (14.9) | % | | — | % | | — | % |
| Change in valuation allowance | (4.9) | % | | (39.5) | % | | (6.7) | % |
| Total | 1.5 | % | | 8.9 | % | | 15.7 | % |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
U.S. federal taxes at statutory rate | | | 34.0 | % | | | 34.0 | % | | | 34.0 | % |
State taxes (net of federal benefit) | | | 3.3 | % | | | 1.4 | % | | | 0.8 | % |
Stock-based compensation | | | (1.1 | )% | | | (1.7 | )% | | | (— | )% |
Non-deductible expenses | | | (— | )% | | | 0.2 | % | | | (0.8 | )% |
Foreign tax differential | | | (0.3 | )% | | | (0.2 | )% | | | (0.2 | )% |
Other | | | (— | )% | | | 1.1 | % | | | (— | )% |
Change in valuation allowance | | | (34.4 | )% | | | (34.8 | )% | | | (33.8 | )% |
Change in deferred—Tax Reform | | | (39.0 | )% | | | (— | )% | | | (— | )% |
Change in valuation allowance—Tax Reform | | | 39.0 | % | | | (— | )% | | | (— | )% |
Total | | | 1.5 | % | | | (— | )% | | | (— | )% |
The tax effects of temporary differences and carryforwards that give rise to significant portions of the deferred tax assets are as follows (in thousands):
| | | | | | | | | | | |
| | As of December 31, |
| | 2022 | | 2021 |
| Deferred tax assets: | | | |
| Net operating loss carryforwards | $ | 595,301 | | | $ | 530,663 | |
| Tax credits | 49,615 | | | 36,188 | |
| R&D capitalization and amortization | 72,358 | | | 6,202 | |
| Revenue recognition differences | — | | | 2,560 | |
| Leasing liabilities | 36,986 | | | 34,403 | |
| Accruals and other | 41,198 | | | 36,689 | |
| Gross deferred tax assets | 795,458 | | | 646,705 | |
| Valuation allowance | (542,900) | | | (386,950) | |
| Total deferred tax assets | 252,558 | | | 259,755 | |
| Deferred tax liabilities: | | | |
| Amortization and depreciation | (216,899) | | | (277,719) | |
| Revenue recognition differences | (14,180) | | | — | |
| Leasing assets | (29,609) | | | (33,732) | |
| Total deferred tax liabilities | (260,688) | | | (311,451) | |
| Net deferred tax liabilities | $ | (8,130) | | | $ | (51,696) | |
| | As of December 31, | |
| | 2017 | | | 2016 | |
Deferred tax assets: | | | | | | | | |
Net operating loss carryforwards | | $ | 70,825 | | | $ | 76,353 | |
Tax credits | | | 15 | | | | 13 | |
Revenue recognition reserves | | | 29,819 | | | | 14,291 | |
Accruals and other | | | 5,544 | | | | 3,405 | |
Gross deferred tax assets | | | 106,203 | | | | 94,062 | |
Valuation allowance | | | (95,687 | ) | | | (93,666 | ) |
Net deferred tax assets | | | 10,516 | | | | 396 | |
Deferred tax liabilities: | | | | | | | | |
Property and equipment | | | (10,516 | ) | | | (396 | ) |
Total deferred tax liabilities | | | (10,516 | ) | | | (396 | ) |
Net deferred tax assets | | $ | — | | | $ | — | |
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significant changes to the Internal Revenue Code. Changes including among other items, a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%. Although the Tax Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017. As a result of the lower corporate tax rate enacted as
92
part of the Tax Act, the Company recorded a provisional estimate to reduce deferred tax assets by $48.8. The reduction in deferred tax assets was offset by a corresponding reduction in the valuation allowance resulting in no net impact to tax expense.
On December 22, 2017, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. In accordance with SAB 118, the Company has been able to make a reasonable estimate of the impact to deferred taxes as a result of Tax Reform. The Company has recorded a provisional estimate which resulted in a $48.8 million reduction in deferred tax assets as of December 31, 2017. The provisional amount will be updated as IRS, Treasury and state tax guidance is issued and as the Company finalizes its deferred tax accounting for the GSG and CombiMatrix acquisitions.
The Company hashistorically established a full valuation allowance against its deferred tax assets due to the uncertainty surrounding realization of such assets. DuringIn 2022 the Company released approximately $41.9 million of its valuation allowance, primarily due to the release of federal and state valuation allowances as a result of the reclassification of ArcherDX's IVD and PCM in-process research and development intangibles from indefinite-lived intangibles to developed technology, which enabled the associated deferred tax liability to serve as a source of income to existing finite-lived deferred tax assets for which a valuation allowance had previously been established.
Effective for tax years beginning on or after January 1, 2022, pursuant to the Tax Cuts and Jobs Act of 2017, companies are required to capitalize and amortize Internal Revenue Code Section 174 research and experimental expenses paid or incurred over five years for research and development performed in the changeUnited States and 15 years for research and development performed outside of the United States. As a result of the Internal Revenue Code Section 174 research and experimental expense capitalization, the Company recognized a deferred tax asset for the future tax benefit of the amortization deductions with offsetting increase in the valuation allowance of $2.0 million consisted of a $50.8 million increase as result of operations with an offsetting $48.8 million reduction dueon deferred tax assets.
Due to the
Tax Act.overall increase of deferred tax assets, the Company's valuation allowance also increased from the prior year. The
Company's valuation allowance increased by
$33.4$155.9 million, $177.6 million, and $64.0 million during the
yearyears ended December 31,
2016 as a result of operations.2022, 2021 and 2020, respectively.
As of December 31,
2017,2022, the Company had net operating loss carryforwards of approximately
$292.2 million$2.4 billion and
$145.6 million$1.5 billion available to reduce future taxable income, if any, for
Federalfederal and state income tax purposes, respectively.
Of the $2.4 billion, $285.0 million will begin to expire in 2030 while $2.1 billion have no expiration date. The
U.S. Federal and California state net operating loss carryforwards will begin to expire in
2018.2030.
As of December 31,
2017,2022, the Company had research and development credit carryforwards of approximately
$5.5$79.9 million and
$5.1$32.2 million available to reduce
itsour future tax liability, if any, for
Federalfederal and
California state income tax purposes, respectively. The
Federalfederal credit carryforwards begin to expire in 2030. California credit carryforwards have no expiration date.
Internal Revenue Code
("IRC") section 382 places a limitation (the “Section 382 limitation” or “annual limitation”) on the amount of taxable income that can be offset by net operating loss
(“NOL”) carryforwards after a change in control (generally greater than 50% change in ownership) of a loss corporation. Similar provisions exist for states.
In addition, and as a result of the acquisitions of Good Start Genetics in August 2017 and CombiMatrix in November 2017, acquisitions of Singular Bio, Jungla, and Clear Genetics in 2019, acquisitions of YouScript and ArcherDX in 2020, and acquisitions of One Codex, Genosity, Ciitizen, and Stratify in 2021, tax loss carryforwards from acquired entities are also subject to the Section 382 limitation due to the change in control in the acquired entities in the current year.The Company performed an IRC Section 382 analysis for Good Start Genetics and CombiMatrix and concluded that a substantial portion of the acquired operating loss and credit carryovers would expire unused as a result of annual limitations under IRC sections 382 and 383. As a result, the federal and state operating loss and credit carryforwards acquired in connection with the Good Start Genetics and CombiMatrix acquisitions were reduced by the amount of tax attributes estimated to expire during their respective carryforward periods.
In addition,
as a result of equity issued in connection with its 2017 acquisitions, the Company also performed
an IRCa section 382 analysis
through December 31, 2017in 2022 with respect to
its legacyour operating loss and credit carryforwards. The Company concluded while an ownership change occurred in
20172020 as defined under IRC section 382, none of the
Company’s legacyCompany's net operating loss carryforwards would expire unused solely as a result of annual limitations imposed on the use of the carryforwards under IRC sections 382 and 383.
Our policy with respect to undistributed foreign subsidiaries’ earnings is to consider those earnings to be indefinitely reinvested. As a result of the enactment in the Tax Cuts and Job Acts of 2017, if and when funds are actually distributed in the form of dividends or otherwise, we expect minimal tax consequences, except for withholding taxes, which would be applicable in some jurisdiction.
As of December 31,
2017, the Company2022, we had unrecognized tax benefits of
$10.6$59.3 million,
nonewhich primarily relates to research and development credits, $0.2 million of which would currently affect the
Company’sCompany's effective tax rate if recognized due to the
Company’sCompany's valuation allowance against its deferred tax
assets being fully offset byassets. During the year, the Company benchmarked the reserves of similar tax positions within the industry based on IRS and state audits of comparable companies. Based on its analysis, the Company decreased its unrecognized tax benefits to more closely align with other comparable companies within the industry. As these reserves relate primarily to research and development credits which have a
full valuation
allowance.allowance, such adjustments did not impact the Company's income tax provision. Unrecognized tax benefits are not expected to
materially change in the next 12 months.
On November 3, 2022, the Dutch tax authorities published a decree on the Anti-Tax Avoidance Directive 2 (“ATAD2”) that relieves the Company of the application of ATAD2 in Netherlands. As a result, the Company has released $1.7 million of related reserve for the uncertain tax position.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Unrecognized tax benefits, beginning of period | $ | 46,669 | | | $ | 21,965 | | | $ | 26,985 | |
| Gross increases—current period tax positions | 14,161 | | | 18,165 | | | 8,368 | |
| Gross increases—prior period tax positions | 243 | | | 6,539 | | | 53 | |
| Gross decreases—prior period tax positions | (1,739) | | | — | | | (13,441) | |
| Unrecognized tax benefits, end of period | $ | 59,334 | | | $ | 46,669 | | | $ | 21,965 | |
| | Year ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Unrecognized tax benefits, beginning of period | | $ | 7,791 | | | $ | 11,429 | | | $ | 5,661 | |
Gross increases—current period tax positions | | | 2,552 | | | | 782 | | | | 2,993 | |
Gross increases—prior period tax positions | | | 218 | | | | (4,420 | ) | | | 2,775 | |
Unrecognized tax benefits, end of period | | $ | 10,561 | | | $ | 7,791 | | | $ | 11,429 | |
The Company’sCompany's policy is to include penalties and interest expense related to income taxes as a component of tax expense. The Company has not accrued interest and penalties related to the unrecognized tax benefits reflected in the financial statements for the years ended December 31, 2017, 20162022, 2021 and 2015.
2020.
The Company’sCompany's major tax jurisdictions are the United States and California. All of the Company’sCompany's tax years will remain open for examination by the Federal and state tax authorities for three and four years, respectively, from the date of utilization of the net operating loss or research and development credit. The Company does not have any tax audits pending.
11.
13. Net loss per
common share
The following table presents the calculation of basic and diluted net loss per common share for the years ended December 31, 2017, 2016 and 2015 (in thousands, except share and per share amounts)data): | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | |
| | 2022 | | 2021 | | 2020 | | |
| Net loss | $ | (3,106,293) | | | $ | (379,006) | | | $ | (602,170) | | | |
| Shares used in computing net loss per share, basic and diluted | 235,676 | | | 210,946 | | | 134,587 | | | |
| Net loss per share, basic and diluted | $ | (13.18) | | | $ | (1.80) | | | $ | (4.47) | | | |
| | Year ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Net loss | | $ | (123,380 | ) | | $ | (100,256 | ) | | $ | (89,782 | ) |
Shares used in computing net loss per share, basic and diluted | | | 46,511,739 | | | | 33,176,305 | | | | 28,213,324 | |
Net loss per share, basic and diluted | | $ | (2.65 | ) | | $ | (3.02 | ) | | $ | (3.18 | ) |
The following common stock equivalents have been excluded from diluted net loss per share for the years ended December 31, 2017, 2016 and 2015 because their inclusion would be anti-dilutive:
anti-dilutive (in thousands): | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Shares of common stock subject to outstanding options | 3,113 | | | 4,069 | | | 6,878 | |
| Shares of common stock subject to outstanding warrants | — | | | 29 | | | 405 | |
| Shares of common stock subject to outstanding RSUs | 17,874 | | | 9,146 | | | 5,590 | |
| Shares of common stock subject to outstanding PRSUs | 148 | | | 737 | | | 1,658 | |
| Shares of common stock pursuant to ESPP | 1,891 | | | 425 | | | 294 | |
| Shares of common stock underlying Series A convertible preferred stock | — | | | 93 | | | 125 | |
| Shares of common stock subject to Convertible Senior Notes conversion | 38,403 | | | 38,403 | | | 8,371 | |
| Total shares of common stock equivalents | 61,429 | | | 52,902 | | | 23,321 | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
Shares of common stock subject to outstanding options | | | 4,114,874 | | | | 4,490,662 | | | | 3,659,713 | |
Shares of common stock subject to outstanding warrants | | | 1,962,074 | | | | — | | | | — | |
Shares of common stock subject to outstanding RSUs | | | 2,387,120 | | | | 891,752 | | | | 482,818 | |
Shares of common stock subject to outstanding PRSUs | | | — | | | | 530,005 | | | | — | |
Shares of common stock pursuant to ESPP | | | 59,259 | | | | 55,078 | | | | 45,963 | |
Shares of common stock underlying Series A convertible preferred stock | | | 3,458,823 | | | | — | | | | — | |
Shares of common stock subject to unvested early exercise of outstanding options subject to repurchase | | | — | | | | — | | | | 4,659 | |
Total shares of common stock equivalents | | | 11,982,150 | | | | 5,967,497 | | | | 4,193,153 | |
12.
14. Geographic information
Revenue by country is determined based on the billing address of the customer and is summarized as follows (in thousands): | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| United States | $ | 457,061 | | | $ | 404,013 | | | $ | 255,680 | |
| United Kingdom | 9,185 | | | 5,485 | | | 2,185 | |
| Canada | 8,779 | | | 7,553 | | | 4,529 | |
| Germany | 5,445 | | | 8,102 | | | 2,299 | |
| Rest of world | 35,833 | | | 35,296 | | | 14,905 | |
| Total revenue | $ | 516,303 | | | $ | 460,449 | | | $ | 279,598 | |
| | Year Ended December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
United States | | $ | 62,446 | | | $ | 20,758 | | | $ | 5,432 | |
Canada | | | 3,226 | | | | 2,526 | | | | 2,112 | |
Rest of world | | | 2,549 | | | | 1,764 | | | | 834 | |
Total revenue | | $ | 68,221 | | | $ | 25,048 | | | $ | 8,378 | |
94
Long-livedAs of December 31, 2022, 2021 and 2020, our long-lived assets (net) by location are summarized as follows (in thousands):
were primarily located in the United States other than operating lease assets representing our right-of-use for leased facilities in Australia, Belgium and Israel. | | December 31, | |
| | 2017 | | | 2016 | | | 2015 | |
United States | | $ | 30,341 | | | $ | 23,793 | | | $ | 17,180 | |
Chile | | | — | | | | — | | | | 1,529 | |
Total long-lived assets, net | | $ | 30,341 | | | $ | 23,793 | | | $ | 18,709 | |
15. Selected quarterly data (unaudited)
The following table containstables summarize our quarterly financial information for 20172022 and 2016. The Company believes that the following information reflects all normal recurring adjustments necessary2021 (in thousands, except per share amounts): | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | March 31, 2022 | | June 30, 2022 | | September 30, 2022 | | December 31, 2022 |
| Revenue | | $ | 123,691 | | | $ | 136,622 | | | $ | 133,536 | | | $ | 122,454 | |
| Cost of revenue | | $ | 97,116 | | | $ | 110,340 | | | $ | 116,956 | | | $ | 92,844 | |
| Loss from operations | | $ | (213,233) | | | $ | (2,520,331) | | | $ | (289,951) | | | $ | (94,895) | |
| Net loss | | $ | (181,859) | | | $ | (2,523,461) | | | $ | (301,156) | | | $ | (99,817) | |
Net loss per share, basic and diluted (1) | | $ | (0.80) | | | $ | (10.87) | | | $ | (1.27) | | | $ | (0.41) | |
| | | | | | | | |
| | | | | | | | |
| | | Three Months Ended |
| | March 31, 2021 | | June 30, 2021 | | September 30, 2021 | | December 31, 2021 |
| Revenue | | $ | 103,621 | | | $ | 116,312 | | | $ | 114,395 | | | $ | 126,121 | |
| Cost of revenue | | $ | 75,491 | | | $ | 89,331 | | | $ | 87,741 | | | $ | 96,106 | |
| (Loss) income from operations | | $ | (112,364) | | | $ | 128,609 | | | $ | (193,312) | | | $ | (214,574) | |
| Net (loss) income | | $ | (109,492) | | | $ | 133,786 | | | $ | (198,176) | | | $ | (205,124) | |
Net (loss) income per share, basic(1) | | $ | (0.56) | | | $ | 0.66 | | | $ | (0.91) | | | $ | (0.90) | |
Net (loss) income per share, diluted(1) | | $ | (0.56) | | | $ | 0.53 | | | $ | (0.91) | | | $ | (0.90) | |
___________________________________________________________________
(1) Net (loss) income per share is computed independently for a fair statementeach of the quarters presented. Therefore, the sum of quarterly net (loss) income per share information for the periods presented. The operating results for any quarter aremay not necessarily indicative of results for any future period.equal annual net (loss) income per share. | | Three Months Ended | |
(In thousands, except per share amounts) | | Dec 31, 2017 | | | Sept 30, 2017 | | | June 30, 2017 | | | Mar 31, 2017 | | | Dec 31, 2016 | | | Sept 30, 2016 | | | June 30, 2016 | | | Mar 31, 2016 | |
Revenue | | $ | 25,399 | | | $ | 18,148 | | | $ | 14,336 | | | $ | 10,338 | | | $ | 9,236 | | | $ | 6,276 | | | $ | 5,581 | | | $ | 3,955 | |
Loss from operations | | $ | (34,891 | ) | | $ | (30,976 | ) | | $ | (28,075 | ) | | $ | (27,337 | ) | | $ | (24,952 | ) | | $ | (24,906 | ) | | $ | (24,835 | ) | | $ | (25,490 | ) |
Net loss | | $ | (40,493 | ) | | $ | (27,402 | ) | | $ | (28,557 | ) | | $ | (26,928 | ) | | $ | (24,848 | ) | | $ | (24,971 | ) | | $ | (24,847 | ) | | $ | (25,590 | ) |
Net loss per share, basic and diluted | | $ | (0.78 | ) | | $ | (0.57 | ) | | $ | (0.66 | ) | | $ | (0.64 | ) | | $ | (0.69 | ) | | $ | (0.77 | ) | | $ | (0.77 | ) | | $ | (0.80 | ) |
14.
16. Subsequent
eventevents
Payments made on 2020 Term Loan
On February 26, 2018,7, 2023, the Company made a $53.7 million payment which reduced the principal balance of the 2020 Term Loan by $50.0 million and included a $3.0 million prepayment fee, with the remainder attributable to interest. The payment was made by the Company at its sole election.
On February 28, 2023, the Company repaid the remaining principal balance outstanding of $85.0 million plus outstanding interest of $1.9 million and a prepayment fee of $5.1 million.
Debt transactions
On February 28, 2023, the Company announced it has entered into
an agreement (the “Amended 2017 Loan Agreement”) to modify the Loan and Security Agreement pursuant to which the Company is eligible to borrow a third term loan of $20.0 million in the second quarter of 2018.If the third term loan becomes available and is not fully drawn, a line fee of 1% will be applied to the difference between $20.0 million and the amount drawn. The Amended 2017 Loan Agreement adds a quarterly covenant to achieveagreements with certain accession volumes. Substantially all other termsholders of the Amended 2017 Loan Agreement are consistent withcurrently outstanding 2024 Notes. Under the terms of the Loanagreement, Company will (a) exchange approximately $305.7 million aggregate principal amount of the 2024 Notes for approximately $275.3 million aggregate principal amount of its new 4.50% Series A Convertible Senior Secured Notes due 2028 (“New 2028 Notes”) and Security Agreement.
$30.6 million of the Company’s common stock and (b) issue and sell $30.0 million of New 2028 Notes for cash (collectively, the “Transactions”). The Transactions are subject to customary closing conditions and are expected to close on or about March 7, 2023. The New 2028 Notes will be issued pursuant to an indenture. Under the terms of the agreement, the Company will have the option prior to the maturity date to redeem all or any portion of the principal amount of the New 2028 Notes for cash and warrants to purchase common stock at a ratio as outlined in the indenture. The New 2028 Notes will be convertible at any time prior to the maturity date at the option of the holders, subject to a beneficial ownership cap. In addition, prior to such time that the Company obtains stockholder approval for the issuance of shares of common stock in excess of the limitations imposed by the NYSE rules (the “NYSE Cap”), the holder is prohibited from converting New 2028 Notes into shares of common stock in excess of such NYSE Cap and the Company would instead be required to settle any conversion in cash if the Company is not able to obtain the stockholder approval within the grace period specified in the indenture. The New 2028 Notes will be secured by (i) a security interest in substantially all of the assets of the Company and its material subsidiaries and (ii) a pledge of the equity interests of the Company’s direct and indirect material subsidiaries. The indenture includes specific affirmative and restrictive covenants agreed to by the Company.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.Disclosure
Not applicable.
ITEM 9A. Controls and
Procedures.Procedures
Evaluation of disclosure controls and procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule
13a‑15(e)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‑benefitcost-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.
95
Based on their evaluation as of the end of the period covered by this Annual Report on Form
10‑K,10-K, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal
controlscontrol over financial reporting
There was no change in our internal control over financial reporting (as defined in Rule
13a‑15(f)13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item
9A(a)9A above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management’s annual report on internal control over financial reporting
Our management is responsible for establishing and maintaining internal control over our financial reporting. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of its inherent limitations internalin all control over financial reporting may not prevent or detect misstatements.systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within an organization have been detected. Projections of any evaluation of the effectiveness of internal control to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2017.2022. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, in Internal Control—Integrated Framework (2013 Framework). Based on the assessment using those criteria, our management concluded that, as of December 31, 2017,2022, our internal control over financial reporting was effective. Our independent registered public accounting firm, Ernst & Young LLP, has issued an audit report with respect to our internal control over financial reporting, which appears in Part II, Item 8. of this Annual Report on Form 10-K.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Invitae Corporation
Opinion on Internal Control Over Financial Reporting
We have audited Invitae Corporation’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Invitae Corporation (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Invitae Corporation as of December 31, 2022 and 2021, the related consolidated statements of operations, comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 28, 2023 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
San Mateo, California
February 28, 2023
ITEM 9B. Other
Information.Information
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
PART III
ITEM 10. Directors, Executive Officers and Corporate
Governance.Governance
The information required by this item with respect to directors is incorporated by reference from the information under the caption “Election of Directors,” contained in our proxy statement to be filed with the Securities and Exchange Commission no later than 120 days from the end of our fiscal year ended December 31,
20172022 in connection with the solicitation of proxies for our
20182023 Annual Meeting of Stockholders, or the Proxy Statement. Certain information required by this item concerning executive officers is set forth in Part I of this Report under the caption
“Executive Officers of the Registrant”“Information about our executive officers” and is incorporated herein by reference.
There have been no material changes to the procedures by which stockholders may recommend nominees to our
Boardboard of
Directors.directors.
Item 405 of Regulation S-K calls for disclosure of any known late filing or failure by an insider to file a report required by Section 16(a) of the Exchange Act.
ThisTo the extent disclosure
for delinquent reports is
contained inbeing made, it can be found under the
section entitled “Sectioncaption “Delinquent Section 16(a)
Beneficial Ownership Reporting Compliance”Reports” in the Proxy Statement and is incorporated herein by reference.
Our board of directors has adopted a codeCode of ethicsBusiness Conduct and Ethics that applies to each of our directors, officers and employees. The Code of Business Conduct and Ethics set forth the basic principles that guide the business conduct of our employees. Our board of directors has also adopted a Code of Ethics for senior financial officersSenior Financial Officers applicable to our Chief Executive Officer and Chief Financial Officer as well as other key management employees addressing ethical issues. The codeCode of business conductBusiness Conduct and Ethics and the codeCode of ethicsEthics for Senior Financial Officers are each posted on our website www.invitae.com. The codeCode of business conductBusiness Conduct and Ethics and the codeCode of ethicsEthics for Senior Financial Officers can only be amended by the approval of a majority of our board of directors. Any waiver to the codeCode of business conductBusiness Conduct and Ethics for an executive officer or director or any waiver of the codeCode of ethicsEthics for Senior Financial Officers may only be granted by our board of directors or our nominating and corporate governance committee and must be timely disclosed as required by applicable law. We have implemented whistleblower procedures that establish formal protocols for receiving and handling complaints from employees. Any concerns regarding accounting or auditing matters reported under these procedures will be communicated promptly to our audit committee. Stockholders may request a free copy of our codeCode of business conductBusiness Conduct and codeEthics and Code of ethicsEthics for Senior Financial Officers by contacting Invitae Corporation, Attention: Chief Financial Officer, 1400 16th Street, San Francisco, California 94103. None of the materials on, or accessible through, our website is part of this report or incorporated by reference herein.
To date, there have been no waivers under our
codeCode of
business conductBusiness Conduct and Ethics or
codeCode of
ethics.Ethics for Senior Financial Officers. We intend to disclose future amendments to certain provisions of our
codeCode of
business conductBusiness Conduct and Ethics or
codeCode of
ethicsEthics for Senior Financial Officers or waivers of such codes granted to executive officers and directors on our website at
http://www.invitae.com within four business days following the date of such amendment or waiver.
Our Boardboard of Directorsdirectors has appointed an Audit Committee, comprised of Eric Aguiar,Christine M. Gorjanc, Geoffrey S. Crouse, Kimber D. Lockhart and Christine M. Gorjanc.William H. Osborne. The Boardboard of Directorsdirectors has determined that each of the members of our Audit CommitteeMs. Gorjanc and Mr. Crouse qualifies as an Audit Committee Financial Expert"audit committee financial expert" under the definition outlined by the Securities and Exchange Commission. In addition, each of the members of the Audit Committee qualifies as an "independent director" under the current rules of the New York Stock Exchange and Securities and Exchange Commission rules and regulations.
ITEM 11. Executive
Compensation.Compensation
The information required by this item is incorporated by reference from the information under the captions “Election of Directors-Director Compensation”“Director Compensation,” “Compensation Committee Interlocks and Insider Participation” and “Executive Compensation” contained in the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.Matters
The information required by this item is incorporated by reference to the disclosure appearing under the headingscaptions “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation-EquityCompensation—Equity Compensation Plan Information” contained in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions, and Director
Independence.Independence
The information required by this item is incorporated by reference from the information under the caption “Election of Directors-Certaincaptions “Certain Relationships and Related Transactions”Transactions,” "Corporate Governance" and “-Director“Director Independence” contained in the Proxy Statement.
ITEM 14. Principal Accountant Fees and
Services.Services
The information required by this item is incorporated by reference from the information under the caption “Ratification of
the Appointment of Independent Registered Public Accounting Firm” contained in the Proxy Statement.
97
PARTPART IV
ITEM 15. ExhibitsExhibit and Financial Statement Schedules.Schedules
(a)Documents filed as part of this report
1.Financial Statements: Reference is made to the Index to Financial Statements of Invitae Corporation included in Item 8. of Part II hereof.
2.Financial Statement Schedules: All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto.
3.Exhibits: See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified.
(b)Exhibits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Filed Herein |
| | | | | | | | | | | | | |
2.1@ | | | | 8-K | | 2.1 | | 6/24/2020 | | | | |
| | | | | | | | | | | | | |
2.2@^ | | | | 10-Q | | 2.2 | | 8/4/2020 | | | | |
| | | | | | | | | | | | |
| 3.1 | | | | 8-K | | 3.1 | | 2/23/2015 | | | | |
| | | | | | | | | | | | | |
| 3.1.1 | | | | 8-K | | 3.1 | | 8/1/2017 | | | | |
| | | | | | | | | | | | | |
| 3.2 | | | | 8-K | | 3.1 | | 3/23/2021 | | | | |
| | | | | | | | | | | | | |
| 4.1 | | | | 10-K | | 4.1 | | 2/26/2021 | | | | |
| | | | | | | | | | | | |
| 4.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 4.3 | | | | 8-K | | 4.1 | | 9/11/2019 | | | | |
| | | | | | | | | | | | |
| 4.4 | | | | 8-K | | 4.1 | | 4/8/2021 | | | | |
| | | | | | | | | | | | |
| 4.5 | | | | 8-K | | 10.4 | | 8/1/2017 | | | | |
| | | | | | | | | | | | |
4.6@ | | | | 8-K | | 10.2 | | 10/5/2020 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
10.1# | | | | S-1 (File No. 333-201433) | | 10.1 | | 1/9/2015 | | | | |
| | | | | | | | | | | | |
| 10.2 | | | | 8-K | | 10.1 | | 9/4/2015 | | | | |
| | | | | | | | | | | | |
| 10.3 | | | | 8-K | | 10.1 | | 4/23/2021 | | | | |
| | | | | | | | | | | | |
10.4@^ | | | | 8-K | | 10.3 | | 10/5/2020 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Filed Herein |
| 10.5 | | Amendment No. 1, dated as of April 3, 2021, by and among Invitae Corporation, the subsidiary guarantors from time to time party thereto, the lenders party thereto and Perceptive Credit Holdings III, LP, as the Administrative Agent, to Credit Agreement and Guaranty, dated as of October 2, 2020, by and among Invitae Corporation, the subsidiary guarantors from time to time party thereto, the lenders party thereto and Perceptive Credit Holdings III, LP, as the Administrative Agent. | | 8-K | | 10.2 | | 4/5/2021 | | | | |
| | | | | | | | | | | | |
| 10.6 | | Amendment No. 2, dated as of September 20, 2021, by and among Invitae Corporation, the subsidiary guarantors from time to time party thereto, the lenders party thereto and Perceptive Credit Holdings III, LP, as the Administrative Agent, to Credit Agreement and Guaranty, dated as of October 2, 2020, by and among Invitae Corporation, the subsidiary guarantors from time to time party thereto, the lenders party thereto and Perceptive Credit Holdings III, LP, as the Administrative Agent. | | 10-Q | | 10.1 | | 11/9/2021 | | | | |
| | | | | | | | | | | | |
10.7# | | | | 10-Q | | 10.3 | | 11/9/2021 | | | | |
| | | | | | | | | | | | |
10.8# | | | | S-1
(File No. 333-201433) | | 10.6 | | 2/11/2015 | | | | |
| | | | | | | | | | | | |
10.9# | | | | S-1
(File No. 333-201433) | | 10.7 | | 2/11/2015 | | | | |
| | | | | | | | | | | | |
10.10# | | | | 8-K | | 10.1 | | 8/6/2015 | | | | |
| | | | | | | | | | | | |
10.11# | | | | 10-Q | | 10.2 | | 8/6/2019 | | | | |
| | | | | | | | | | | | |
10.12#^ | | | | 10-Q | | 10.3 | | 8/6/2019 | | | | |
| | | | | | | | | | | | |
10.13# | | | | 10-Q | | 10.4 | | 11/9/2021 | | | | |
| | | | | | | | | | | | |
10.14# | | | | 10-Q | | 10.2 | | 11/9/2021 | | | | |
| | | | | | | | | | | | |
10.15# | | | | 10-K | | 10.21 | | 2/26/2021 | | | | |
| | | | | | | | | | | | |
10.16# | | | | 10-K | | 10.16 | | 3/1/2022 | | | | |
| | | | | | | | | | | | |
| 10.17 | | | | 10-K | | 10.14 | | 3/16/2017 | | | | |
| | | | | | | | | | | | |
| 10.18 | | | | 8-K | | 1.1 | | 5/4/2021 | | | | |
| | | | | | | | | | | | |
10.19# | | | | 8-K | | 10.1 | | 6/26/2020 | | | | |
| | | | | | | | | | | | |
10.20# | | | | 8-K | | 10.1 | | 6/11/2021 | | | | |
| | | | | | | | | | | | |
10.21# | | | | 10-Q | | 10.5 | | 8/9/2021 | | | | |
| | | | | | | | | | | | |
10.22# | | | | 10-Q | | 10.6 | | 8/9/2021 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Incorporated by Reference | | |
Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Filing Date | | Filed Herein |
10.23@ | | | | 8-K | | 10.4 | | 10/5/2020 | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| 10.24 | | | | 8-K | | 10.1 | | 4/5/2021 | | | | |
| | | | | | | | | | | | |
10.25# | | | | 10-Q | | 10.1 | | 11/8/2022 | | | | |
| | | | | | | | | | | | |
10.26# | | | | 10-Q | | 10.2 | | 11/8/2022 | | | | |
| | | | | | | | | | | | |
| 21.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 23.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 24.1 | | Power of Attorney (contained on the signature page to this Form 10-K). | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 31.1 | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 31.2 | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
32.1* | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
32.2* | | | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.INS | | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase | | | | | | | | | | X |
| | | | | | | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase | | | | | | | | | | X |
| | | | | | | | | | | | |
| 104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL document and included as Exhibit 101). | | | | | | | | | | |
__________________________________________(a)
| Documents filed as part of this report
|
| 1.
| Financial Statements: Reference is made to the Index to Financial Statements of Invitae Corporation included in Item 8 of Part II hereof.
|
| 2.
| Financial Statement Schedules: All schedules have been omitted because they are not required, not applicable, or the required information is included in the financial statements or notes thereto.
|
| 3.
| Exhibits: See Item 15(b) below. Each management contract or compensating plan or arrangement required to be filed has been identified.
|
Exhibit
Number
| | Description
|
| # | | |
2.1&@
| | Stock Purchase Agreement dated as of January 6, 2017 by and among Invitae Corporation, each of the selling shareholders listed on Schedule 1 thereto, and the sellers’ agent (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8‑K filed January 6, 2017).
|
| | |
2.2@
| | Form of Stock Exchange Agreement dated as of June 11, 2017 by and among Invitae Corporation, each of the selling stockholders listed on Schedule 1 thereto, and the sellers’ agent (incorporated by referenced to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed June 13, 2017).
|
2.3@
| | Agreement and Plan of Merger and Reorganization, dated as of July 31, 2017, by and among Invitae Corporation, Coronado Merger Sub, Inc. and CombiMatrix Corporation (incorporated by referenced to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
2.4@
| | Agreement and Plan of Merger, dated as of July 31, 2017, by and among Invitae Corporation, Bueno Merger Sub, Inc., Good Start Genetics, Inc., the Noteholders, the Management Carveout Plan Participants, and OrbiMed Private Investments III, LP as the Holders’ Representative (incorporated by referenced to Exhibit 2.2 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
3.1
| | Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8‑K filed February 23, 2015).
|
| | |
3.1.1
| | Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock of Invitae Corporation (incorporated by referenced to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
3.2
| | Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8‑K filed February 23, 2015).
|
| | |
4.1
| | Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
4.2
| | Fifth Amended and Restated Investors’ Rights Agreement, dated August 26, 2014, among Invitae Corporation and certain investors (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
4.3
| | Omnibus Approval and Amendment with Respect to: Series F Preferred Stock Purchase Agreement; Fifth Amended and Restated Investors’ Rights Agreement; and Fifth Amended and Restated Voting Agreement, dated October 9, 2014, among Invitae Corporation and certain investors (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
98
Exhibit
Number
| | Description
|
| | |
4.4
| | Form of Invitae Corporation Series D Warrant (incorporated by reference to Exhibit 4.2 to the Registrant’s Registration Statement on Form S‑4 (File No. 333‑220447), as amended, filed September 13, 2017).
|
| | |
4.5
| | Form of Invitae Corporation Series D Warrant Agent Agreement (incorporated by reference to Exhibit 4.3 to the Registrant’s Registration Statement on Form S‑4 (File No. 333‑220447), as amended, filed September 13, 2017).
|
| | |
4.6
| | Form of Invitae Corporation Series F Warrant (incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S‑4 (File No. 333‑220447), as amended, filed September 13, 2017).
|
| | |
4.7
| | Form of Invitae Corporation Series F Warrant Agent Agreement (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S‑4 (File No. 333‑220447), as amended, filed September 13, 2017).
|
| | |
10.1
| | Form of Indemnification Agreement between the Registrant and its officers and directors (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.2#
| | 2010 Stock Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.3#
| | Form of Notice of Stock Option Grant and Stock Option Agreement—Standard Exercise for awards granted under 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.4#
| | Form of Notice of Stock Option Grant and Stock Option Agreement—Early Exercise for awards granted under 2010 Stock Incentive Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.5#
| | 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.6#
| | Form of Notice of Stock Option Grant and Non-Qualified Stock Option Agreement for awards granted under the 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.7#
| | Form of Notice of Restricted Stock Award and Restricted Stock Agreement for awards granted under the 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.7 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.8#
| | Form of Notice of Restricted Stock Unit Award and Restricted Stock Unit Agreement for Awards Granted under the 2015 Stock Incentive Plan (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8‑K filed August 6, 2015).
|
| | |
10.9#
| | Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.8 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.10
| | Lease (Standard Form), dated September 1, 2011, by and between Invitae Corporation (f/k/a Locus Development, Inc.) and Martin E. Harband, Trustee of the Harband Family Trust, as amended (incorporated by reference to Exhibit 10.12 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
99
Exhibit
Number
| | Description
|
| | |
10.11
| | Sublease, dated December 6, 2013, by and between Invitae Corporation and Sutter West Bay Hospitals (incorporated by reference to Exhibit 10.13 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.12
| | Lease, dated October 31, 2012, by and between Invitae Corporation and 278 University Investors, LLC (incorporated by reference to Exhibit 10.14 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.13
| | Sublease, dated November 21, 2014, by and between Invitae Corporation and InMobi Inc (incorporated by reference to Exhibit 10.15 to the Registrant’s Registration Statement on Form S‑1 (File No. 333‑201433), as amended, declared effective on February 11, 2015).
|
| | |
10.14
| | Lease Agreement dated as of September 2, 2015 by and between 1400 16th Street LLC, a Delaware limited liability company, and Invitae Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8‑K filed September 4, 2015).
|
| | |
10.15
| | Loan and Security Agreement dated as of July 17, 2015 between Silicon Valley Bank and Invitae Corporation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8‑K filed July 22, 2015).
|
| | |
10.16&
| | Loan and Security Agreement dated as of March 15, 2017 between Oxford Capital, LLC and Invitae Corporation (incorporated by reference to Exhibit 10.13 to the Registrant’s Amendment No. 2 to Annual Report on Form 10-K for the year ended December 31, 2016).
|
| | |
10.17
| | Form of Warrant to Purchase Common Stock between Oxford Capital, LLC and Invitae Corporation (incorporated by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016).
|
| | |
10.18#
| | Offer Letter, dated May 19, 2017, between Invitae Corporation and Shelly Guyer (incorporated by referenced to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 1, 2017).
|
| | |
10.19
| | Securities Purchase Agreement, dated as of July 31, 2017 (incorporated by referenced to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
10.20
| | Registration Rights Agreement, dated as of July 31, 2017 (incorporated by referenced to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
10.21
| | Amendment to Registration Rights Agreement, dated as of July 31, 2017 (incorporated by referenced to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
10.22
| | Amended and Restated Registration Rights Agreement, dated as of July 31, 2017 (incorporated by referenced to Exhibit 10.4 to the Registrant’s Current Report on Form 8-K filed August 1, 2017).
|
| | |
10.23
| | Marketing and Laboratory Services Agreement dated as of September 25, 2017 by and between Invitae Corporation, Good Start Genetics, Inc. and CombiMatrix Molecular Diagnostics, Inc. (incorporated by referenced to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed September 27, 2017).
|
| | |
12.1*
| | Statement regarding computation of ratios.
|
| | |
21.1*
| | List of Subsidiaries.
|
| | |
23.1*
| | Consent of Independent Registered Public Accounting Firm.
|
| | |
24.1*
| | Power of Attorney (contained on the signature page to this Form 10‑K).
|
| | |
31.1*
| | Principal Executive Officer’s Certifications Pursuant to Section 302 of the Sarbanes‑Oxley Act of 2002.
|
| | |
100
#
| Indicates management contract or compensatory plan or arrangement. |
@ | The schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2)601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request. |
+
| |
| ^ | Portions of this exhibit have been redacted in accordance with Item 601(b)(2)(ii) and Item 601(b)(10)(iv) of Regulation S-K. |
| * | In accordance with Item 601(b)(32)(ii) of Regulation S‑K and SEC Release No. 34‑47986, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Annual Report on Form 10‑K and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act of 1933 except to the extent that the registrantCompany specifically incorporates it by reference. |
&
| Confidential treatment has been granted with respect to certain portions of this exhibit.
|
Copies of the above exhibits not contained herein are available(c)Financial Statement Schedules: Reference is made to any stockholder, upon payment of a reasonable per page fee, upon written request to: Chief Financial Officer, Invitae Corporation, 1400 16th Street, San Francisco, California 94103.
Item 15(a)(2) above.(c)
| Financial Statement Schedules: Reference is made to Item 15(a) 2 above.
|
ITEM 16. Form 10-K
Summary.Summary
SIGNATURES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| INVITAE CORPORATION
| | | | | | | |
| | INVITAE CORPORATION |
| By: | /s/ Sean E. George, Ph.D. Kenneth D. Knight |
| | Sean E. George, Ph.D.
President and Kenneth D. Knight
|
| | Chief Executive Officer |
| | Principal Executive Officer |
Date:
March 5, 2018February 28, 2023
KNOW ALL PERSONS BY THESE
PRESENT,PRESENTS, that each person whose signature appears below constitutes and appoints
Sean E. GeorgeKenneth D. Knight and
Lee Bendekgey,Yafei (Roxi) Wen, and each of them, his true and lawful
attorneys‑in‑fact,attorneys-in-fact, each with full power of substitution, for him or her in any and all capacities, to sign any amendments to this report on Form
10‑K10-K and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said
attorneys‑ in‑factattorneys-in-fact or their substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant on the dates and the capacities indicated.Signature
| | Title
| | Date
| | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
/s/ Sean e. George, Ph.D.Sean E. George, Ph.D.
Kenneth D. Knight | | President and Chief Executive Officer (Principal Executive Officer) and Director
| | March 5, 2018
February 28, 2023 |
| Kenneth D. Knight | | | | |
/s/ Lee Bendekgey
Lee Bendekgey
| | Chief Operating Officer and Secretary
| | March 5, 2018
|
| | | | |
/s/ Shelly D. Guyer Yafei (Roxi) Wen | | Chief Financial Officer
(Principal Financial Officer)
| | March 5, 2018
February 28, 2023 |
Shelly D. Guyer
Yafei (Roxi) Wen | | | |
| | | | |
/s/ Patricia E. Dumond Patricia E. Dumond
Robert F. Werner | | Vice President, Finance
Chief Accounting Officer
(Principal Accounting Officer) | | March 5, 2018
February 28, 2023 |
| Robert F. Werner | | | | |
| | | | |
/s/ Randal W. Scott, Ph.D.Randal W. Scott, Ph.D. | | Executive ChairmanChair of the Board of Directors
and Director | | March 5, 2018
February 28, 2023 |
| Randal W. Scott, Ph.D. | | | | |
| | | | |
| /s/ Eric Aguiar, M.D. | | Director | | February 28, 2023 |
| Eric Aguiar, M.D. | | Director
| | March 5, 2018
|
| | | | |
/s/ Geoffrey S. Crouse | | Director | | February 28, 2023 |
| Geoffrey S. Crouse | | Director
| | March 5, 2018
|
| | | | |
/s/ Christine M. Gorjanc | | Director | | February 28, 2023 |
| Christine M. Gorjanc | | Director
| |
| March 5, 2018
| | | |
| /s/ Kimber D. Lockhart | | Director | | February 28, 2023 |
| Kimber D. Lockhart | | | |
| | | | |
| /s/ Chitra Nayak | | Director | | February 28, 2023 |
| Chitra Nayak | | | |
| | | | |
| /s/ William H. Osborne | | Director | | February 28, 2023 |
| William H. Osborne | | | |
| | | | |
| | | | |
| | | |
102
