UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10‑Q

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

¨ 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. 001-36847

Invitae Corporation

(Exact name of the registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 27-1701898 (I.R.S. Employer Identification No.)

1400 16th Street, San Francisco, California 94103

(Address of principal executive offices, Zip Code)

(415) 374-7782

(Registrant’s telephone number, including area code)

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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b 2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	ý
Non-accelerated filer	¨	Smaller reporting company	¨
		Emerging growth company	ý

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.      ý

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨ No  ý

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of exchange on which registered
Common Stock, $0.0001 par value per share	NVTA	New York Stock Exchange

The number of shares of the registrant’s common stock outstanding as of April 26, 2019 was 89,840,831.

TABLE OF CONTENTS

		Page No.
PART I: Financial Information
Item 1.	Consolidated Financial Statements
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Stockholders' Equity	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
PART II: Other Information
Item 1.	Legal Proceedings	33
Item 1A.	Risk Factors	33
Item 6.	Exhibits	55
SIGNATURES		56

PART I — Financial Information

ITEM 1. Consolidated Financial Statements.

INVITAE CORPORATION

Condensed Consolidated Balance Sheets

(in thousands)

(unaudited)

	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	252,502		$	112,158
Marketable securities	28,714			13,727
Accounts receivable	23,700			26,296
Prepaid expenses and other current assets	16,569			13,258
Total current assets	321,485			165,439
Property and equipment, net	25,757			27,886
Operating lease assets	37,290			—
Restricted cash	5,871			6,006
Intangible assets, net	29,156			30,469
Goodwill	50,095			50,095
Other assets	6,845			3,064
Total assets	$	476,499		$	282,959
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	9,867		$	7,812
Accrued liabilities	25,354			26,563
Operating lease obligations	4,419			—
Finance lease obligations	1,960			1,937
Total current liabilities	41,600			36,312
Operating lease obligations, net of current portion	42,634			—
Finance lease obligations, net of current portion	875			1,375
Debt	74,828			74,477
Other long-term liabilities	150			8,956
Total liabilities	160,087			121,120
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock	9			8
Accumulated other comprehensive income (loss)	8			(5		)
Additional paid-in capital	870,784			678,548
Accumulated deficit	(554,389		)	(516,712		)
Total stockholders’ equity	316,412			161,839
Total liabilities and stockholders’ equity	$	476,499		$	282,959

See accompanying notes to unaudited condensed consolidated financial statements.

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INVITAE CORPORATION

Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2019			2018
Revenue:
Test revenue	$	39,619		$	27,053
Other revenue	934			618
Total revenue	40,553			27,671
Cost of revenue	21,254			18,076
Research and development	17,994			15,366
Selling and marketing	24,193			18,924
General and administrative	13,319			11,780
Loss from operations	(36,207		)	(36,475		)
Other income, net	638			1,647
Interest expense	(2,108		)	(1,292		)
Net loss	$	(37,677	)	$	(36,120	)
Net loss per share, basic and diluted	$	(0.47	)	$	(0.66	)
Shares used in computing net loss per share, basic and diluted	79,369			54,382

See accompanying notes to unaudited condensed consolidated financial statements. 

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INVITAE CORPORATION

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

	Three Months Ended March 31,
	2019			2018
Net loss	$	(37,677	)	$	(36,120	)
Other comprehensive income:
Unrealized income on available-for-sale marketable securities, net of tax	13			11
Comprehensive loss	$	(37,664	)	$	(36,109	)

See accompanying notes to unaudited condensed consolidated financial statements.

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INVITAE CORPORATION

Condensed Consolidated Statements of Stockholders' Equity

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2019			2018
Common stock:
Balance, beginning of period	$	8		$	5
Common stock issued	1			—
Balance, end of period	9			5
Accumulated other comprehensive income (loss):
Balance, beginning of period	(5		)	(171		)
Unrealized income on available-for-sale marketable securities, net of tax	13			11
Balance, end of period	8			(160		)
Additional paid-in capital:
Balance, beginning of period	678,548			520,558
Common stock issued in connection with public offering, net	184,490			—
Common stock issued on exercise of stock options, net	2,019			22
Common stock issued pursuant to exercises of warrants	88			169
Common stock issued pursuant to business combinations	416			—
Warrants issued pursuant to loan agreement	—			383
Stock-based compensation expense	5,223			4,393
Other	—			67
Balance, end of period	870,784			525,592
Accumulated deficit:
Balance, beginning of period	(516,712		)	(398,598		)
Cumulative effect of accounting change	—			11,241
Net loss	(37,677		)	(36,120		)
Balance, end of period	(554,389		)	(423,477		)
Total stockholders' equity	$	316,412		$	101,960

See accompanying notes to unaudited condensed consolidated financial statements.

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INVITAE CORPORATION

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(37,677	)	$	(36,120	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	3,286			3,433
Stock-based compensation	5,223			4,393
Remeasurements of liabilities associated with business combinations	(130		)	1,093
Other	388			32
Changes in operating assets and liabilities:
Accounts receivable	2,596			(224		)
Prepaid expenses and other current assets	(3,365		)	(1,156		)
Other assets	1,019			(2,548		)
Accounts payable	(307		)	(1,574		)
Accrued expenses and other liabilities	601			(231		)
Net cash used in operating activities	(28,366		)	(32,902		)
Cash flows from investing activities:
Purchases of marketable securities	(20,781		)	(225		)
Proceeds from sales of marketable securities	—			19,965
Proceeds from maturities of marketable securities	6,000			2,078
Purchases of property and equipment	(2,764		)	(1,871		)
Net cash provided by (used in) in investing activities	(17,545		)	19,947
Cash flows from financing activities:
Proceeds from public offerings of common stock, net of issuance costs	184,490			—
Proceeds from issuance of common stock	2,107			191
Proceeds from debt financing	—			19,792
Finance lease principal payments	(477		)	(638		)
Net cash provided by financing activities	186,120			19,345
Net increase in cash, cash equivalents and restricted cash	140,209			6,390
Cash, cash equivalents and restricted cash at beginning of period	118,164			17,459
Cash, cash equivalents and restricted cash at end of period	$	258,373		$	23,849
Supplemental cash flow information of non-cash investing and financing activities:
Purchases of property and equipment in accounts payable and accrued liabilities	$	2,389		$	658
Investment in privately-held company in other assets and accrued liabilities	$	—		$	1,125
Warrants issued pursuant to loan and security agreement	$	—		$	383
Deferred offering costs included in accounts payable and accrued liabilities	$	—		$	263
Common stock issued for acquisition of businesses	$	416		$	—
Lease assets obtained in exchange for lease obligations, net	$	1,617		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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INVITAE CORPORATION

Notes to Condensed Consolidated Financial Statements

1. Organization and description of business

Invitae Corporation ("Invitae," “the Company," "we," "us," and "our") was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. We utilize an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for clinicians and their patients. Our headquarters and main production facility is located in San Francisco, California. We currently have more than 20,000 genes in production and provide a variety of diagnostic tests that can be used in multiple indications. Our tests include genes associated with hereditary cancer, neurological disorders, cardiovascular disorders, pediatric disorders, metabolic disorders and other hereditary conditions. In addition, and as a result of the acquisitions of Good Start Genetics (“Good Start”) in August 2017 and CombiMatrix Corporation (“CombiMatrix”) in November 2017, our services also include screening and testing in reproductive health, including preimplantation and carrier screening for inherited disorders, prenatal diagnosis, miscarriage analysis and pediatric developmental disorders. To complement these offerings, in the first quarter of 2019, we introduced our Non-invasive Prenatal Screen. Invitae operates in one segment.

Basis of presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018. The results for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the full fiscal year or any other periods.   

2. Summary of significant accounting policies

Principles of consolidation

Our unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base these estimates on historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to future events. Actual results could differ materially from those estimates and assumptions.

Significant estimates and assumptions made by management include the determination of:

• revenue recognition (See Note 3, “Revenue, accounts receivable and deferred revenue” for further information);

• the fair value of assets acquired and liabilities assumed for business combinations;

• the fair value of goodwill and intangible assets;

• the recoverability of long-lived assets;

• our incremental borrowing rate used to calculate our lease obligations;

• stock-based compensation expense and the fair value of awards issued; and

• income tax uncertainties.

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Concentrations of credit risk and other risks and uncertainties

Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, marketable securities and accounts receivable. Our cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits.

Significant customers are those that represent 10% or more of our total revenue presented on the statements of operations. For the significant customer, revenue as a percentage of total revenue were as follows:

	Three Months Ended March 31,
	2019		2018
Medicare	22	%	16	%

Our significant customer and its related accounts receivable balance as a percentage of total accounts receivable was as follows:

	March 31, 2019		December 31, 2018
Medicare	21	%	21	%

Cash, cash equivalents and restricted cash

We consider all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Cash equivalents consist primarily of amounts invested in money market funds.

Restricted cash consists primarily of money market funds that serve as collateral for security deposits for our facility leases and sublease agreements and collateral for a credit card agreement at one of our financial institutions.

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):

	March 31,
	2019		2018
Cash and cash equivalents	$	252,502	$	18,443
Restricted cash	5,871		5,406
Total cash, cash equivalents and restricted cash	$	258,373	$	23,849

Accounts receivable

We receive payment for our tests from partners, patients, institutional customers and third-party payers. See Note 3, “Revenue, accounts receivable and deferred revenue” for further information.

Inventory

We maintain test reagents and other consumables primarily used in sample collection kits which are valued at the lower of cost or net realizable value. Cost is determined using actual costs on a first-in, first-out basis. Our inventory was $8.8 million and $8.3 million as of March 31, 2019 and December 31, 2018, respectively, and was recorded in prepaid expenses and other current assets on our consolidated balance sheets.

Business combinations

The tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. We base the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by our management, which consider our estimates of inputs and assumptions that a market participant would use. Any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed is recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows,

7

discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.

In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under Financial Accounting Standards Board ("FASB") Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We remeasure this liability each reporting period and record changes in the fair value as a component of operating expenses.

Transaction costs associated with acquisitions are expensed as incurred in general and administrative expenses. Results of operations and cash flows of acquired companies are included in our operating results from the date of acquisition.

Goodwill

In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), our goodwill is not amortized but is tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Under ASC 350, we perform annual impairment reviews of our goodwill balance during the fourth fiscal quarter. In testing for impairment, we compare the fair value of our consolidated single reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to the reporting unit.

We have not incurred any goodwill impairment losses in any of the periods presented.

Fair value of financial instruments

Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities, finance leases and debt. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities approximate their current fair value due to the relatively short-term nature of these accounts. Based on borrowing rates available to us, the carrying value of finance leases and debt approximates their fair values.

Revenue recognition

We recognize revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. All revenues are generated from contracts with customers.

Test revenue is generated primarily from the sale of tests that provide analysis and associated interpretation of the sequencing of parts of the genome.

Other revenue consists primarily of revenue from genome network subscription services which is recognized on a straight-line basis over the subscription term, and revenue from collaboration agreements.

Cost of revenue

Cost of revenue reflects the aggregate costs incurred in delivering the genetic testing results to clinicians and includes expenses for personnel-related costs including stock-based compensation, materials and supplies, equipment and infrastructure expenses associated with testing and allocated overhead including rent, equipment depreciation, amortization of acquired intangibles and utilities.

Net loss per share

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities, consisting of convertible preferred stock, options to purchase common stock, common stock warrants, and RSUs, 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.

8

Recent accounting pronouncements

We evaluate all Accounting Standards Updates (“ASUs”) issued by the FASB for consideration of their applicability. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on our consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In June 2016, FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) which requires measurement and recognition of expected credit losses for financial assets. This guidance will become effective for us beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. We are currently evaluating the effect that adoption of this ASU will have on our consolidated financial statements.

Recently adopted accounting pronouncements – Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and in July 2018 issued ASU 2018-10, Codification Improvements to Topic 842, Leases and ASU 2018-11, Leases (Topic 842): Targeted Improvements (the foregoing ASUs collectively referred to as “Topic 842”). Under the new guidance, lessees are required to recognize a lease liability and a right-of-use asset for all leases at the commencement date and also make expanded disclosures about leasing arrangements.

On January 1, 2019, we adopted Topic 842 using the modified retrospective approach in accordance with Topic 842. Adoption of Topic 842 had a material impact on our consolidated balance sheets, but did not have an impact on our consolidated statements of operations. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting under previous lease guidance, ASC 840: Leases. We elected the package of practical expedients permitted under the transition guidance which, among other things, allowed us to carry forward the historical classification of leases in place as of January 1, 2019.

The effect of the adoption of Topic 842 on our consolidated balance sheet as of January 1, 2019 was as follows (in thousands):

	December 31, 2018		Adjustments Due to the Adoption of Topic 842			January 1, 2019
Property and equipment, net	$	27,886	$	(5,159	)	$	22,727
Operating lease assets	$	—	$	36,711		$	36,711
Other assets	$	3,064	$	5,159		$	8,223
Accrued liabilities	$	26,563	$	(490	)	$	26,073
Operating lease obligations	$	—	$	4,697		$	4,697
Operating lease obligations, net of current portion	$	—	$	41,279		$	41,279
Other long-term liabilities	$	8,956	$	(8,775	)	$	181

The adjustments due to the adoption of Topic 842 primarily relate to the recognition of operating and finance lease right-of-use assets and operating lease liabilities. Finance lease assets are recorded within other assets on our consolidated balance sheet and were $5.2 million as of implementation of Topic 842 on January 1, 2019 and $4.8 million as of March 31, 2019.

Under Topic 842, we determine if an arrangement is a lease at inception primarily based on the determination of the party responsible for directing the use of an underlying asset within a contract. Operating leases are included in operating lease assets and operating lease obligations in our consolidated balance sheets. Lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information available at the lease commencement date which includes significant assumptions made by us including our estimated credit rating. Operating lease right-of-use assets also include any lease payments made prior to the lease commencement date and exclude any lease incentives paid or payable at the lease commencement date. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term.

9

As allowed under Topic 842, we elected to not apply the recognition requirements of Topic 842 to short-term leases, that is, leases with terms of 12 months or less which do not include an option to purchase the underlying asset that we are reasonably certain to exercise. For short-term leases, we recognize lease payments as operating expenses on a straight-line basis over the lease term.

As a result of our election of the package of practical expedients permitted under the Topic 842 transition guidance, for assets related to facilities leases we elected to account for lease and non-lease components, such as common area maintenance charges, as a single lease component.

We did not identify any material embedded leases with the adoption of Topic 842 and therefore the implementation of Topic 842 primarily focused on the treatment of our previously identified leases.

3. Revenue, accounts receivable and deferred revenue

Test revenue is generated from sales of diagnostic tests to three groups of customers: institutions, such as hospitals, clinics and partners; patients who pay directly; and patients’ insurance carriers. Amounts billed and collected, and the timing of collections, vary based on whether the payer is an institution, an insurance carrier or a patient. Other revenue consists principally of revenue recognized under collaboration and genome network agreements.

The following table includes our revenues as disaggregated by payer category (in thousands):

	Three Months Ended March 31,
	2019		2018
Test revenue:
Institutions	$	8,154	$	7,231
Patient - direct	3,741		2,850
Patient - insurance	27,724		16,972
Total test revenue	39,619		27,053
Other revenue	934		618
Total revenue	$	40,553	$	27,671

We recognize revenue related to billings based on estimates of the amount that will ultimately be realized. The estimate of the transaction price of test revenue is based on many factors such as length of payer relationship, historical payment patterns, changes in contract provisions and insurance reimbursement policies. Cash collections for certain diagnostic tests delivered may differ from rates originally estimated. As a result of new information, we updated our estimate of the amounts to be recognized for previously delivered tests which resulted in an additional $0.4 million of test revenue for the three months ended March 31, 2019. This change in estimate decreased our loss from operations by $0.4 million and decreased basic and diluted net loss per share by approximately $0.01 for the three months ended March 31, 2019.

Accounts receivable

The majority of our accounts receivable represents amounts billed to institutions (e.g., hospitals, clinics, partners) and estimated amounts to be collected from third-party insurance payers for diagnostic test revenue recognized. Also included is amounts due under the terms of collaboration and genome network agreements for diagnostic testing and data aggregation reporting services provided and proprietary platform access rights transferred.

Deferred revenues

We record deferred revenues when cash payments are received or due in advance of our performance related to one or more performance obligations. The amounts deferred to date primarily consist of consideration received pertaining to the estimated exercise of certain re-requisition rights. In order to comply with loss contract rules, our re-requisition rights revenue deferral is no less than the estimated cost of fulfilling its related obligations. We recognize revenue related to re-requisition rights as the rights are exercised or expire unexercised, which is generally within 90 days of initial deferral.

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4. Business combinations

Good Start Genetics

In August 2017, we 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. As of December 31, 2018, we had a hold-back amount payable for remaining common stock to be issued upon the resolution of outstanding claims from Good Start customers of approximately $1.5 million, of which $0.7 million was settled during the three months ended March 31, 2019.

5. Goodwill and intangible assets

Goodwill

There were no changes in the carrying amounts of goodwill during the three months ended March 31, 2019.

Intangible Assets

The following table presents details of our finite-lived intangible assets as of March 31, 2019 and December 31, 2018 (in thousands):

	March 31, 2019								December 31, 2018
	Cost		Accumulated Amortization			Net		Weighted Average Useful Life (in Years)	Cost		Accumulated Amortization			Net		Weighted Average Useful Life (in Years)
Customer relationships	$	23,763	$	(3,374	)	$	20,389	10.0	$	23,763	$	(2,783	)	$	20,980	10.0
Developed technology	11,963		(4,111		)	7,852		4.8	11,963		(3,482		)	8,481		4.8
Non-compete agreement	286		(129		)	157		5.0	286		(114		)	172		5.0
Trade name	576		(364		)	212		2.7	576		(329		)	247		2.7
Patent licensing agreement	496		(45		)	451		15.0	496		(37		)	459		15.0
Favorable leases	247		(152		)	95		2.2	247		(117		)	130		2.2
	$	37,331	$	(8,175	)	$	29,156		$	37,331	$	(6,862	)	$	30,469

Acquisition-related intangibles included in the above table are finite-lived and are carried at cost less accumulated amortization. Customer relationships are being amortized on an accelerated basis, in proportion to estimated cash flows. All other 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 $1.3 million for each of the three months ended March 31, 2019 and 2018. Amortization expense is recorded to cost of revenue, research and development, sales and marketing and general and administrative expense.

The following table summarizes our estimated future amortization expense of intangible assets with finite lives as of March 31, 2019 (in thousands):

2019 (remainder of year)	$	3,935
2020	5,525
2021	5,829
2022	4,124
2023	3,111
Thereafter	6,632
Total estimated future amortization expense	$	29,156

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6. Balance sheet components

Property and equipment, net

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

	March 31, 2019			December 31, 2018
Leasehold improvements	$	13,063		$	13,034
Laboratory equipment	23,384			22,149
Equipment under capital lease	—			7,129
Computer equipment	4,911			4,723
Software	2,597			2,594
Furniture and fixtures	784			784
Automobiles	20			20
Construction-in-progress	5,151			1,962
Total property and equipment, gross	49,910			52,395
Accumulated depreciation and amortization	(24,153		)	(24,509		)
Total property and equipment, net	$	25,757		$	27,886

Depreciation expense was $1.6 million and $2.1 million for the three months ended March 31, 2019 and 2018, respectively.

Accrued liabilities

Accrued liabilities consisted of the following (in thousands):

	March 31, 2019		December 31, 2018
Accrued compensation and related expenses	$	9,251	$	7,917
Liabilities associated with business combinations	5,910		6,460
Liability associated with co-development agreement	—		2,000
Deferred revenue	1,155		761
Other	9,038		9,425
Total accrued liabilities	$	25,354	$	26,563

Other long-term liabilities

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

	March 31, 2019		December 31, 2018
Lease incentive obligation, non-current	$	—	$	3,280
Deferred rent, non-current	—		5,495
Other non-current liabilities	150		181
Total other long-term liabilities	$	150	$	8,956

 

7. Fair value measurements

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

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

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

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

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

The following tables set forth the fair value of our consolidated financial instruments that were measured at fair value on a recurring basis as of March 31, 2019 and December 31, 2018 (in thousands):

	March 31, 2019
	Amortized Cost		Unrealized				Estimated Fair Value
			Gains		Losses				Level 1		Level 2		Level 3
Financial assets:
Money market funds	$	233,062	$	—	$	—	$	233,062	$	233,062	$	—	$	—
Certificates of deposit	300		—		—		300		—		300		—
Commercial paper	28,406		8		—		28,414		—		28,414		—
Total financial assets	$	261,768	$	8	$	—	$	261,776	$	233,062	$	28,714	$	—
Financial liabilities:
Contingent consideration							$	5,154	—		—		$	5,154
Total financial liabilities							$	5,154	—		—		$	5,154

	March 31, 2019
Reported as:
Cash equivalents	$	227,191
Restricted cash	5,871
Marketable securities	28,714
Total cash equivalents, restricted cash, and marketable securities	$	261,776
Accrued liabilities	$	5,154

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	December 31, 2018
	Amortized Cost		Unrealized					Estimated Fair Value
			Gains		Losses					Level 1		Level 2		Level 3
Financial assets:
Money market funds	$	93,934	$	—	$	—		$	93,934	$	93,934	$	—	$	—
Certificates of deposit	300		—		—			300		—		300		—
Commercial paper	10,908		—		(1		)	10,907		—		10,907		—
U.S. treasury notes	9,990		—		—			9,990		9,990		—		—
U.S. government agency securities	6,001		—		(4		)	5,997		—		5,997		—
Total financial assets	$	121,133	$	—	$	(5	)	$	121,128	$	103,924	$	17,204	$	—
Financial liabilities:
Contingent consideration								$	4,998	—		—		$	4,998
Total financial liabilities								$	4,998	—		—		$	4,998

	December 31, 2018
Reported as:
Cash equivalents	$	101,395
Restricted cash	6,006
Marketable securities	13,727
Total cash equivalents, restricted cash, and marketable securities	$	121,128
Accrued liabilities	$	4,998

There were no transfers between Level 1, Level 2 and Level 3 during the periods presented. The total fair value of investments with unrealized losses at March 31, 2019 was nil. None of the available-for-sale securities held as of March 31, 2019 has been in a continuous unrealized loss position for more than one year. We have not identified any other-than-temporary declines in market value and thus have not recorded any impairment charges on our financial assets during the three months ended March 31, 2019. 

At March 31, 2019, the remaining contractual maturities of available-for-sale securities ranged from zero to three months.

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

As of March 31, 2019, we had a contingent obligation of $5.0 million of our common stock calculated using a 30-day trailing average share price to the former owners of AltaVoice in conjunction with our acquisition of AltaVoice in January 2017. The amount of the contingent obligation was dependent upon 2017 and 2018 revenue attributable to AltaVoice. Since revenue attributable to AltaVoice for the combined period of 2017 and 2018 was greater than the $10 million contingent milestone, in April 2019 we issued 0.2 million shares of our common stock to the former owners of AltaVoice which had a fair value on the date of issuance of $5.2 million.

The fair value of our 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 estimated fair value of our outstanding debt at March 31, 2019 and December 31, 2018 approximated the carrying values.

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8. Commitments and contingencies

Leases

Operating leases

In 2015, we entered into a lease agreement for our headquarters and main production facility in San Francisco, California which commenced in 2016. This lease expires in July 2026 and we may renew the lease for an additional ten years. This optional period was not considered reasonably certain to be exercised and therefore we determined the lease term to be a ten-year period expiring in 2026. In connection with the execution of the lease, we provided a security deposit of approximately $4.6 million which is included in restricted cash in our consolidated balance sheets. We also have other operating leases for office and laboratory space in California and Massachusetts.

As of March 31, 2019, the weighted-average remaining lease term for our operating leases was 6.5 years and the weighted-average discount rate used to determine our operating lease liability was 11.5%. Cash payments included in the measurement of our operating lease liabilities were $2.4 million for the three months ended March 31, 2019.

The components of lease costs, which were included in cost of revenue, research and development, selling and marketing and general and administrative expenses on our consolidated statements of operations were as follows (in thousands):

	Three Months Ended March 31,
	2019			2018
Operating lease costs	$	2,517		$	2,440
Sublease income	(43		)	(39		)
Total operating lease costs	2,474			2,401
Finance lease costs	420			509
Total lease costs	$	2,894		$	2,910

Future minimum payments under non-cancelable operating leases as of March 31, 2019 are as follows (in thousands):

2019 (remainder of year)	$	7,391
2020	9,616
2021	9,738
2022	9,661
2023	8,901
Thereafter	25,716
Future non-cancelable minimum operating lease payments	71,023
Less: minimum payments to be received from non-cancelable subleases	(131		)
Total future non-cancelable minimum operating lease payments, net	70,892
Less: imputed interest	(23,839		)
Total operating lease liabilities	47,053
Less: current portion	(4,419		)
Operating lease obligations, net of current portion	$	42,634

Finance leases

We have entered into various finance lease agreements to obtain laboratory equipment. The terms of our finance leases are generally three years with a weighted-average remaining lease term of 1.4 years as of March 31, 2019 and are typically secured by the underlying equipment. The weighted-average discount rate used to determine the finance lease liability was 6.2%. The portion of the future payments designated as principal repayment was classified as a finance lease obligation on our consolidated balance sheets. Cash payments included in the measurement of our finance lease liabilities were $0.5 million for the three months ended March 31, 2019.

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Future payments under finance leases at March 31, 2019 are as follows (in thousands):

2019 (remainder of year)	$	1,560
2020	1,394
2021	21
Total finance lease obligations	2,975
Less: interest	(140		)
Present value of net minimum finance lease payments	2,835
Less: current portion	(1,960		)
Finance lease obligations, net of current portion	$	875

Debt financing

In November 2018, we entered into a Note Purchase Agreement (the "2018 Note Purchase Agreement") pursuant to which we were eligible to borrow an aggregate principal amount up to $200.0 million over a seven year maturity term which included an initial borrowing of $75.0 million in November 2018. We received net proceeds of $10.3 million after terminating and repaying the balance of our obligations of approximately $64.7 million with our previous lender.

At March 31, 2019, obligations under the 2018 Note Purchase Agreement were $75.0 million which are required to be repaid to the lender in a balloon payment no later than 2025. If we repay prior to the three year anniversary following the initial borrowing, the amount due will be: 117.5% of the principal amount if payment is made within 12 months after the borrowing; 132.5% of the principal amount if payment is made between 12 and 24 months after the borrowing; and 145.0% of the principal amount if payment is made between 24 and 36 months after the borrowing, all less the interest payments we've made since our initial borrowing.

The outstanding principal amount under the 2018 Note Purchase Agreement bears interest at a rate of 8.75% annually. In addition, beginning on January 1, 2020 and continuing until repayment or maturity of any outstanding principal, we will make quarterly payments of 0.5% of our annual net revenues subject to a maximum annual amount of such payments of $1.6 million which will be recognized as interest expense. Through the fixed interest charges and the quarterly revenue payments, we are required to pay total amounts to generate an 11% internal rate of return to the lender on any outstanding principal balances due in a lump-sum upon the repayment or maturity of any outstanding principal. During the three months ended March 31, 2019, the 2018 Note Purchase Agreement bore interest at an average interest rate of 10.6%.

The 2018 Note Purchase Agreement contains quarterly covenants to achieve certain revenue levels as well as additional covenants, including limits on our ability to dispose of assets, undergo a change of 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. Our obligations under the 2018 Note Purchase Agreement are secured by a security interest in substantially all of our and certain of our subsidiaries’ assets.

Debt discounts, including debt issuance costs, related to the 2018 Note Purchase Agreement of $0.7 million were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the 2018 Note Purchase Agreement. Future estimated payments under the 2018 Note Purchase Agreement as of March 31, 2019 are as follows (in thousands):

2019 (remainder of year)	$	5,013
2020	8,297
2021	8,279
2022	8,279
2023	8,279
Thereafter	89,948
Total remaining payments	128,095
Less: debt discount	(694		)
Less: interest	(52,573		)
Total debt	$	74,828

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Interest expense related to our debt financings was $2.0 million and $1.2 million for the three months ended March 31, 2019 and 2018, respectively.

Other commitments

In the normal course of business, we enter into various purchase commitments primarily related to service agreements and laboratory supplies. At March 31, 2019, our total future payments under noncancelable unconditional purchase commitments having a remaining term of over one year were $5.6 million.

Guarantees and indemnifications

As permitted under Delaware law and in accordance with our bylaws, we indemnify our directors and officers for certain events or occurrences while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification is unlimited; however, we maintain director and officer liability insurance. This insurance allows the transfer of the risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of these indemnification agreements is minimal. Accordingly, we did not record any liabilities associated with these indemnification agreements at March 31, 2019 or December 31, 2018.

Contingencies

We were not a party to any material legal proceedings at March 31, 2019, or at the date of this report. We may from time to time become involved in various legal proceedings arising in the ordinary course of business, and the resolution of any such claims could be material.

9. Stockholders’ equity

Shares Outstanding

Shares of convertible preferred and common stock were as follows (in thousands):

	Three Months Ended March 31,
	2019		2018
Convertible preferred stock:
Shares outstanding, beginning of period	3,459		3,459
Conversion into common stock	(3,334	)	—
Shares outstanding, end of period	125		3,459
Common stock:
Shares outstanding, beginning of period	75,481		53,597
Common stock issued in connection with public offering	10,350		—
Common stock issued on exercise of stock options, net	260		11
Common stock issued pursuant to vesting of RSUs	121		66
Common stock issued pursuant to exercises of warrants	15		28
Common stock issued pursuant to business combinations	40		—
Common stock issued upon conversion of preferred stock	3,334		—
Other	—		8
Shares outstanding, end of period	89,601		53,710

2018 Sales Agreement

In August 2018, we entered into a Common Stock Sales Agreement (the “2018 Sales Agreement”) with Cowen and Company, LLC (“Cowen”), under which we may offer and sell from time to time at our sole discretion shares of our common stock through Cowen as our sales agent, in an aggregate amount not to exceed $75.0 million. Cowen may sell the shares by any method permitted by law deemed to be an “at the market” offering as defined in Rule 415 of the Securities Act of 1933, including without limitation sales made directly on The New York Stock Exchange, and also may sell the shares in privately negotiated transactions, subject to our prior approval. Per the terms of the

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agreement, Cowen receives a commission equal to 3% of the gross proceeds of the sales price of all shares sold through it as sales agent under the 2018 Sales Agreement. In March 2019, we amended the 2018 Sales Agreement to increase the aggregate amount of our common stock to be sold under this agreement not to exceed $175.0 million. During 2018, we sold a total of 4.3 million shares of common stock under the 2018 Sales Agreement for aggregate gross proceeds of $61.1 million and net proceeds of $58.9 million. No shares of our common stock were sold under this agreement during 2019.

Public offerings

In March 2019, we sold, in an underwritten public offering, an aggregate of 10.4 million shares of our common stock at a price of $19.00 per share, for gross proceeds of $196.7 million and net proceeds of $184.5 million.

In April 2018, we sold, in an underwritten public offering, an aggregate of 12.8 million shares of our common stock at a price of $4.50 per share, for gross proceeds of $57.5 million and net proceeds of $53.5 million.

Private placement

In August 2017, in a private placement to certain accredited investors, we issued 5.2 million shares of common stock at a price of $8.50 per share, and 3.5 million shares of our Series A convertible preferred stock at a price of $8.50 per share, for gross proceeds of approximately $73.5 million and net proceeds of $68.9 million. The Series A preferred stock is convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like. During the three months ended March 31, 2019, 3.3 million shares of Series A convertible preferred stock were converted to 3.3 million shares of common stock.

10. Stock incentive plans

Stock incentive plans

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

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

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

RSUs generally vest over a period of three years. Typically, the vesting schedule for RSUs provides that 1/3 of the award vests upon each anniversary of the grant date.

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

	Shares Available For Grant		Stock Options Outstanding		Weighted-Average Exercise Price Per Share		Weighted-Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value
Balances at December 31, 2018	118		3,855		$	8.54	6.8	$	9,927
Additional shares reserved	3,019		—
Options cancelled	10		(10	)	9.59
Options exercised	—		(260	)	7.77
RSUs granted	(265	)	—
RSUs cancelled	31		—
Balances at March 31, 2019	2,913		3,585		$	8.60	6.7	$	53,154
Options exercisable at March 31, 2019			2,651		$	8.41	6.3	$	39,794
Options vested and expected to vest at March 31, 2019			3,477		$	8.58	6.6	$	51,593

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

The weighted-average fair value of RSUs granted was $14.45 and $7.81 in the three months ended March 31, 2019 and 2018, respectively.  

The total grant-date fair value of options to purchase common stock vested was $1.1 million and $1.8 million in the three months ended March 31, 2019 and 2018, respectively.

The intrinsic value of options to purchase common stock exercised was $3.3 million and $0.1 million in the three months ended March 31, 2019 and 2018, respectively.

The following table summarizes RSU activity for the three months ended March 31, 2019:

	Number of Shares		Weighted- Average Grant Date Fair Value Per Share
Balance at December 31, 2018	4,031		$	8.35
RSUs granted	265		$	14.45
RSUs vested	(121	)	$	6.50
RSUs cancelled	(31	)	$	8.51
Balance at March 31, 2019	4,144		$	8.79

 2015 employee stock purchase plan

In January 2015, we adopted the 2015 Employee Stock Purchase Plan (the “ESPP”), which became effective upon the closing of the IPO. Employees participating in the ESPP may purchase common stock at 85% of the lesser of the fair market value of common stock on the purchase date or last trading day preceding the offering date. At March 31, 2019, cash received from payroll deductions pursuant to the ESPP was $2.0 million.

The ESPP provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 and continuing through January 1, 2025. At March 31, 2019, a total of 1.0 million shares of common stock were reserved for issuance under the ESPP.

 Stock-based compensation

We use the grant date fair value of our common stock to value both employee and non-employee options when granted. We revalue non-employee options each reporting period using the fair market value of our common stock as of the last day of each reporting period.

No stock options were granted in either three-month period ended March 31, 2019 or 2018 and no stock options granted to non-employees vested in either period.

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The following table summarizes stock-based compensation expense for the three months ended March 31, 2019 and 2018 included in the consolidated statements of operations (in thousands): 

	Three Months Ended March 31,
	2019		2018
Cost of revenue	$	651	$	491
Research and development	1,805		1,483
Selling and marketing	1,243		1,048
General and administrative	1,524		1,371
Total stock-based compensation expense	$	5,223	$	4,393

At March 31, 2019, unrecognized compensation expense related to unvested stock options, net of estimated forfeitures, was $3.5 million, which we expect to recognize on a straight-line basis over a weighted-average period of 1.6 years. Unrecognized compensation expense related to RSUs at March 31, 2019, net of estimated forfeitures, was $22.4 million, which we expect to recognize on a straight-line basis over a weighted-average period of 2.0 years. As of March 31, 2019, there was no capitalized stock-based employee compensation.

11. Net loss per share

The following table presents the calculation of basic and diluted net loss per share for the three months ended March 31, 2019 and 2018 (in thousands, except per share amounts):

	Three Months Ended March 31,
	2019			2018
Net loss	$	(37,677	)	$	(36,120	)
Shares used in computing net loss per share, basic and diluted	79,369			54,382
Net loss per share, basic and diluted	$	(0.47	)	$	(0.66	)

The following common stock equivalents have been excluded from diluted net loss per share for the three months ended March 31, 2019 and 2018 because their inclusion would be anti-dilutive (in thousands): 

March 31,

2019