nvta-10q_20170331.htm

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-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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 is a shell company (as defined in Rule 12b-2 of the Exchange Act)

The number of shares of the registrant’s Common Stock outstanding as of April 28, 2017 was 42,314,403.

	March 31,			December 31,
	2017			2016
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	43,439		$	66,825
Marketable securities		53,342			25,798
Accounts receivable		2,032			1,153
Prepaid expenses and other current assets		8,582			8,024
Total current assets		107,395			101,800
Property and equipment, net		26,604			23,793
Restricted cash		4,697			4,697
Intangible assets, net		4,122			—
Goodwill		9,432			—
Other assets		372			361
Total assets		152,622			130,651
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	4,953		$	3,352
Accrued liabilities		13,112			6,711
Capital lease obligation, current portion		1,647			1,309
Debt, current portion		—			3,381
Total current liabilities		19,712			14,753
Capital lease obligation, net of current portion		1,166			266
Debt, net of current portion		38,921			8,721
Other long-term liabilities		10,524			7,837
Total liabilities	$	70,323		$	31,577
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.0001 par value: Authorized: 20,000,000 shares; Issued and outstanding: no shares as of March 31, 2017 and December 31, 2016		—			—
Common stock, $0.0001 par value: Authorized: 400,000,000 shares; Issued and outstanding: 42,307,799 and 41,143,513 shares as of March 31, 2017 and December 31, 2016, respectively		4			4
Accumulated other comprehensive loss		(36	)		—
Additional paid-in capital		384,477			374,288
Accumulated deficit		(302,146	)		(275,218	)
Total stockholders’ equity		82,299			99,074
Total liabilities and stockholders’ equity	$	152,622		$	130,651

See accompanying notes to unaudited condensed consolidated financial statements.

	Three Months Ended March 31,
	2017			2016
Revenue	$	10,338		$	3,955
Costs and operating expenses:
Cost of revenue		9,329			5,987
Research and development		10,023			10,660
Selling and marketing		11,572			7,043
General and administrative		6,751			5,755
Total costs and operating expenses		37,675			29,445
Loss from operations		(27,337	)		(25,490	)
Other income (expense), net		(691	)		(16	)
Interest expense		(322	)		(84	)
Net loss before taxes	$	(28,350	)	$	(25,590	)
Income tax benefit		(1,422	)		—
Net loss	$	(26,928	)	$	(25,590	)
Net loss per share, basic and diluted	$	(0.64	)	$	(0.80	)
Shares used in computing net loss per share, basic and diluted		42,318,136			31,964,541

See accompanying notes to unaudited condensed consolidated financial statements.

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net loss	$	(26,928	)	$	(25,590	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,733			1,555
Stock-based compensation		3,278			1,465
Amortization of premium on marketable securities		40			91
Loss on disposal of assets		268			186
Changes in operating assets and liabilities net of effects of business combination:
Accounts receivable		(605	)		—
Prepaid expenses and other current assets		(506	)		(1,969	)
Other assets		(11	)		162
Accounts payable		1,858			(394	)
Accrued expenses and other liabilities		(1,157	)		506
Net cash used in operating activities		(22,030	)		(23,988	)

Cash flows from investing activities:
Purchases of marketable securities		(45,113	)		(60,319	)
Proceeds from maturities of marketable securities		17,493			37,500
Acquisition of business, acquired cash		54			—
Purchases of property and equipment		(1,343	)		(1,037	)
Net cash used in investing activities		(28,909	)		(23,856	)

Cash flows from financing activities:
Proceeds from exercise of stock options		696			210
Proceeds from loan agreement		—			2,500
Proceeds from loan and security agreement		39,661			—
Loan payments		(12,102	)		(386	)
Capital lease principal payments		(702	)		(404	)
Net cash provided by financing activities		27,553			1,920

Net decrease in cash, cash equivalents and restricted cash		(23,386	)		(45,924	)
Cash, cash equivalents and restricted cash at beginning of period		71,522			78,069

Cash, cash equivalents and restricted cash at end of period	$	48,136		$	32,145

Supplemental cash flow information:
Interest paid	$	296		$	84

Supplemental cash flow information of non-cash investing and financing activities:
Equipment acquired through capital leases	$	1,940		$	—
Purchases of property and equipment in accounts payable and accrued liabilities	$	3,050		$	410
Warrants issued pursuant to loan and security agreement	$	740		$	—
Common stock issued for acquisition of business	$	5,475		$	—
Consideration payable for acquisition of business	$	6,909		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

Invitae Corporation (the “Company”) was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. The Company utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for clinicians and their patients. The Company’s production facility and headquarters is located in San Francisco, California. The Company currently has more than 20,000 genes in production and provides a variety of diagnostic tests that can be used in multiple indications. The Company’s tests include multiple genes associated with hereditary cancer, neurological disorders, cardiovascular disorders, pediatric disorders, metabolic disorders and other hereditary conditions. The Company operates in one segment.

The Company has incurred substantial losses since its inception and expects to continue to incur operating losses in the near-term future. For the year ended December 31, 2016, the Company’s net loss was $100.3 million, and for the three months ended March 31, 2017, the Company’s net loss was $26.9 million. At March 31, 2017, the Company’s accumulated deficit was $302.1 million. To date, the Company has generated only limited revenue, and it may never achieve revenue sufficient to offset its expenses. The Company believes its existing cash and cash equivalents as of March 31, 2017, and revenue from the sale of its tests will be sufficient to meet its anticipated cash requirements for the 12-month period following the filing date of this report. Beyond this 12-month period, the Company intends to generate sufficient cash from operations to fund its future operating needs, but there can be no assurance it will be able to do so.

The Company may need to raise additional funding to finance operations prior to achieving profitability. Company management regularly considers fundraising opportunities and will determine the timing, nature and amount of financings based upon various factors, including market conditions and management’s operating plans. The Company may in the future elect to finance operations by selling equity or debt securities or borrowing money. If additional funding is required, there can be no assurance that additional funds will be available to the Company on acceptable terms on a timely basis, if at all. If the Company is unable to obtain 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 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 March 31, 2017 financial statements are issued.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The results for the three months ended March 31, 2017 are not necessarily indicative of the results expected for the full fiscal year or any other periods.

During the quarter ended September 30, 2016, the Company identified immaterial classification errors in the condensed consolidated financial statements for the quarters ended March 31, 2016 and June 30, 2016, related to the classification of asset impairment charges. Based on a quantitative and qualitative analysis of the errors as required by authoritative guidance, management concluded the errors had no material effect on any of the Company’s previously issued financial statements, were immaterial to the Company’s results for the first and second quarters of 2016, did not affect the expected full year results for 2016, and had no material effect on the trend of financial statements.

As a result of the immaterial classification errors discussed above, the unaudited condensed consolidated financial statements for the three months ended March 31, 2016 reflect the following immaterial reclassification adjustment: reclassification for asset impairment charges from other income (expense) to general and administrative expense of $0.2 million.

The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

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

Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company’s cash and cash equivalents are held by financial institutions in the United States. Such deposits may exceed federally insured limits.

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

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 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, 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.

The Company receives payment for its tests from 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 at appropriate amounts, the Company recognizes revenue, at estimated realizable amounts, upon delivery of test results. Accounts receivable balances primarily represent patient, institutional customer and Medicare billings.

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

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited statements of cash flows (in thousands):

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 bases the estimated fair value of identifiable intangible assets acquired in a business combination on independent valuations that use information and assumptions provided by management, which consider management’s estimates of inputs and assumptions that a market participant would use. Any excess purchase price over the estimated fair value assigned to the net tangible and identifiable intangible assets acquired and liabilities assumed is recorded to goodwill. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows, discount rates, estimated useful lives and probabilities surrounding the achievement of contingent milestones could result in different purchase price allocations and amortization expense in current and future periods.

In circumstances where an acquisition involves a contingent consideration arrangement that meets the definition of a liability under FASB Accounting Standards Codification (“ASC”) Topic 480, Distinguishing Liabilities from Equity, the Company recognizes a liability equal to the fair value of the contingent payments the Company expects to make as of the acquisition date. The Company remeasures this liability each reporting period and records 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 the Company’s operating results from the date of acquisition.

Amortizable intangible assets include non-compete agreements, developed technology and customer relationships acquired as part of a business combination. Intangible assets subject to amortization are amortized using the straight-line method over their estimated useful lives ranging from five to ten years and are reviewed for impairment in accordance with Accounting Standards Codification (“ASC”) 360, Property, Plant and Equipment.

In accordance with ASC 350, Intangibles-Goodwill and Other (“ASC 350”), the Company’s 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 performs the annual impairment review of its goodwill balance as of October 1. In testing for goodwill, the Company compares the fair value of its reporting unit to its carrying value including the goodwill of that unit. If the carrying value, including goodwill, exceeds the unit’s fair value, the Company will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

The Company acquired goodwill as part of a business combination in January 2017, and therefore has not previously tested for or recorded any goodwill impairment charges.

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

The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, capital 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 the Company, the carrying value of capital leases approximates fair value. The Company believes the fair value of the term debt approximates recorded amounts as of March 31, 2017 as the interest rates on the term debt are variable and are based on market interest rates after consideration of default and credit risk (using level 2 inputs).

See Note 5, “Fair value measurements” for further information on the fair value of the Company’s financial instruments.

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

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

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

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

The Company measures its stock-based payment awards made to employees and directors based on the estimated fair values of the awards and recognizes the compensation expense over the requisite service period. The Company uses the Black-Scholes option-pricing model to estimate the fair value of its stock option awards and employee stock purchase plan (“ESPP”) purchases. The fair value of restricted stock unit (“RSU”) awards with time-based vesting terms is based on the grant date share price. The Company grants performance-based restricted stock unit (“PRSU”) awards to certain employees which vest upon the achievement of certain performance conditions, subject to the employees’ continued service relationship with the Company. The probability of vesting is assessed at each reporting period and compensation cost is adjusted based on this probability assessment. The Company recognizes such compensation expense on 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 model. Stock options granted to non-employees are re-measured at each reporting date until the award is vested.

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 options to purchase common stock, common stock warrants, 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.

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 qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. 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 nature of and reason for the change in accounting principle should be disclosed upon transition. ASU 2017-04 is effective for annual periods beginning after December 15, 2019 and early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted ASU 2017-04 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 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 and early adoption is permitted. The Company early 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 June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. ASU-2016-13 is effective for annual and interim periods beginning on or after December 15, 2019 and early adoption is permitted. The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements, related disclosures and ongoing financial reporting.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which simplifies accounting for share-based payment award transactions. ASU-2016-09 is effective for annual and interim periods beginning on or after December 15, 2016 and early adoption is permitted. The Company 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.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases (with the exception of short-term leases) at the commencement date. Lessor accounting under ASU 2016-02 is largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. Under ASU 2016-02, lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lessees and lessors may not apply a full retrospective transition approach. The Company is evaluating the effect that ASU 2014-02 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 (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606). ASU 2015-14 defers the effective date of ASU 2014-09 for public business entities by one year to annual reporting periods beginning after December 15, 2017. Therefore, the new standard will become effective for the Company on January 1, 2018 and early application is permitted for periods beginning on or after January 1, 2017. The new standard permits the use of two methods of adoption: retrospectively to each prior reporting period presented (the full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The Company plans to implement ASU 2014-09 effective January 1, 2018 using the modified retrospective method. While the Company continues to evaluate the effect that ASU 2014-09 will have on its consolidated financial statements, related disclosures and ongoing financial reporting, it anticipates the adoption of ASC 2014-09 will result in changes in the timing of revenue recognition. The Company currently recognizes revenue for the majority of third-party payers on a cash basis. Under ASU 2014-09, the Company anticipates it will recognize revenue from third-party payers, with whom it has contracts, on an accrual basis. Therefore, the timing of revenue recognition for third-party payers will be accelerated under ASC-2014-09, in comparison to the Company’s current revenue recognition practices.

In January 2017, the Company acquired AltaVoice (formerly Patient Crossroads), a privately-owned patient-centered data company with a global platform for collecting, curating, coordinating, and delivering safeguarded data from patients and clinicians. The acquisition, complemented by several other strategic partnerships, will expand the Company's genome network, designed to connect patients, clinicians, advocacy organizations, researchers, and therapeutic developers to accelerate the understanding, diagnosis, and treatment of hereditary disease. Pursuant to the terms of the Stock Purchase Agreement entered into on January 6, 2017, the Company acquired all of the outstanding shares of AltaVoice for total purchase consideration of $12.4 million, payable in the Company’s common stock, as follows:

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 remeasured 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. In accordance with ASC Topic 805, Business Combinations, the contingent consideration of $2.2 million will be remeasured to fair value at each reporting date until the contingency is resolved, with changes in fair value recognized in earnings.

The allocation of the purchase price is 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):

Acquisition-related intangibles included in the above table are finite-lived and 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):

The following table presents information about acquisition-related intangibles as of March 31, 2017 (in thousands):

	Cost		Accumulated Amortization			Net		Estimated Remaining Useful Life (in Years)
Non-compete agreements	$	286	$	(14	)	$	272		4.8
Developed technology		570		(24	)		546		5.8
Customer relationships		3,389		(85	)		3,304		9.8
	$	4,245	$	(123	)	$	4,122

Estimated future amortization expense of acquisition-related intangibles as of March 31, 2017 is as follows (in thousands):

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 March 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 during the year ended December 31, 2016 and the three months ended March 31, 2017, which were primarily general and administrative related.

The unaudited financial information in the table below summarizes the combined results of operations of the Company and AltaVoice on a pro forma basis, as though the companies had been combined as of the beginning of each of the periods presented. 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 acquisition had taken place at the beginning of each of the periods presented. The unaudited pro forma financial information for the three months ended March 31, 2017 combines the results of the Company for the three months ended March 31, 2017, which include the results of AltaVoice subsequent to January 6, 2017 (the acquisition date), with the historical results for AltaVoice for the period from January 1, 2017 to January 6, 2017. The unaudited pro forma financial information for the three months ended March 31, 2016 combines the historical results for the Company for that period, with the historical results for AltaVoice for the same period.

The following table summarizes the pro forma financial information for the three months ended March 31, 2017 and 2016 (in thousands):

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

	March 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Money market funds	$	6,942	$	—	$	—		$	6,942
U.S. treasury notes		14,015		—		(10	)		14,005
U.S. government agency securities		39,363		—		(26	)		39,337
	$	60,320	$	—	$	(36	)	$	60,284
Reported as:
Cash equivalents								$	2,245
Restricted cash									4,697
Marketable securities									53,342
Total cash equivalents, restricted cash and marketable securities								$	60,284

	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 March 31, 2017 was $36,000. None of the available-for-sale securities held as of March 31, 2017 has been in a continuous unrealized loss position for more than one year. At March 31, 2017, unrealized losses on available-for-sale investments are not attributed to credit risk and are considered to be temporary. The Company believes it is more likely than not that investments in an unrealized loss position will be held until maturity or the recovery of the cost basis of the investment. To date, the Company has not recorded any impairment charges on marketable securities related to other-than-temporary declines in market value.

At March 31, 2017, the remaining contractual maturities of available-for-sale securities were less than one year. For the three months ended March 31, 2017, there were no realized gains or losses on available-for-sale securities.

	March 31, 2017			December 31, 2016
Leasehold improvements	$	11,687		$	1,256
Laboratory equipment		16,573			13,644
Equipment under capital lease		4,489			5,871
Computer equipment		2,759			2,514
Software		2,489			2,489
Furniture and fixtures		523			238
Automobiles		58			20
Construction-in-progress		3,294			12,229
Total property and equipment, gross		41,872			38,261
Accumulated depreciation and amortization		(15,268	)		(14,468	)
Total property and equipment, net	$	26,604		$	23,793

Depreciation and amortization expense was $1.7 million and $1.6 million for the three months ended March 31, 2017 and 2016, respectively.

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

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

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

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

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

The following tables set forth the fair value of the Company’s consolidated financial instruments that were measured at fair value on a recurring basis as of March 31, 2017 and December 31, 2016 (in thousands):

	March 31, 2017
	Level 1		Level 2		Level 3		Total
Financial assets:
Money market funds	$	6,942	$	—	$	—	$	6,942
U.S. treasury notes		14,005		—		—		14,005
U.S. government agency securities		—		39,337		—		39,337
Total financial assets	$	20,947	$	39,337	$	—	$	60,284

Financial liabilities:
Contingent consideration	$		$	—	$	2,200	$	2,200
Total financial liabilities	$	—	$	—	$	2,200	$	2,200

	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

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):

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

As of March 31, 2017, the Company had a contingent obligation up to $5.0 million payable 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 such revenues are least $10 million in 2017, the Company will make a payment of $5.0 million in the Company’s common stock on March 31, 2018. If revenue attributable to AltaVoice is less than $10 million in 2017, but the combined revenue attributable to AltaVoice 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. The Company estimated the fair value of the contingent consideration at $2.2 million, 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 inputs in the Level 3 measurement not supported by market activity. The value of the liability will be subsequently remeasured to fair value at each reporting date. Changes in estimated fair value will be recorded as a component of operating expenses until the contingency is paid or expires. There was no change in the fair value of the contingent consideration between the acquisition date and March 31, 2017.

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 March 31, 2017 and December 31, 2016, are as follows (in thousands):

In September 2015, the Company entered into a lease agreement for a headquarters and production facility in San Francisco, California. This lease expires in July 2026 and the Company may renew the lease for an additional ten years. The Company has determined the lease term to be a ten-year period expiring in 2026. The lease term commenced when the Company took occupancy of the facility in February 2016. In connection with the execution of the lease, the Company provided a security deposit of approximately $4.6 million which is included in restricted cash in the Company’s consolidated balance sheets. Minimum annual rent under the lease is subject to increases based on stated rental adjustment terms. In addition, per the terms of the lease, the Company will receive a $5.2 million lease incentive in the form of reimbursement from the landlord for a portion of the costs of leasehold improvements the

Company makes to the facility. The assets purchased with the lease incentive are included in property and equipment, net, in the Company’s consolidated balance sheets and the lease incentive is recognized as a reduction of rental expense on a straight-line basis over the term of the lease. At March 31, 2017, all of the lease incentive had been utilized by the Company. Aggregate future minimum lease payments for the new facility at March 31, 2017 were approximately $68.6 million.

In addition to the security deposit of approximately $4.6 million for the new facility, the Company has provided, as collateral for other leases, security deposits of $0.8 million at March 31, 2017 and at December 31, 2016, which are included in other assets in the Company’s consolidated balance sheets.

Future minimum payments under non-cancelable operating leases as of March 31, 2017 are as follows (in thousands):

Rent expense was $2.2 million and $1.6 million for the three months ended March 31, 2017 and 2016, respectively.

In July 2015, the Company entered into a Loan and Security Agreement (the “Loan Agreement”) with a bank under which term 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 quarter of 2018. In connection with entering into the 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 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 (LIBOR) as reported in The Wall Street Journal, with the floating rate resetting monthly subject to a floor of 8.5%. The Company 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, the Company will grant to the lender a warrant to acquire shares 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. In connection with the initial term loan, the Company granted the lender a warrant to purchase 116,845 shares of common stock at an exercise price of $10.27 per share. The Company classified the warrant as equity and determined the fair value of the warrant to be $740,000. The warrant has a term of ten years from the date of issuance 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’s ability to dispose of assets, undergo a change in control, merge with or acquire other entities, incur debt, incur liens, pay dividends or other distributions to holders of its capital stock, repurchase stock and make investments, in each case subject to certain exceptions. The Company’s obligations under the Loan and Security Agreement are secured by a security interest on substantially all the Company’s assets, excluding its intellectual property.

At March 31, 2017, obligations under the Loan and Security Agreement were $40.0 million. Debt issuance costs related to the Loan and Security Agreement of $339,000 and the warrant fair value of $740,000 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 March 31, 2017 are as follows (in thousands):

Large accelerated filer	☐		Accelerated filer	☒
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☐
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Item No.		Page No.
PART I: Financial Information
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	1
	Condensed Consolidated Statements of Operations	2
	Condensed Consolidated Statements of Comprehensive Loss	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Qualitative and Quantitative 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 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 6.	Exhibits	52
SIGNATURES		53

	Amount
Remainder of 2017	$	368
2018		491
2019		491
2020		491
2021		491
Thereafter		1,790
	$	4,122

	March 31, 2017		December 31, 2016
Accrued compensation and related expenses	$	3,543	$	3,072
Accrued laboratory materials purchases		797		338
Accrued professional services		663		446
Accrued construction in progress		965		1,215
Lease incentive obligation, current		468		468
Liabilities associated with business combination		4,762		—
Other		1,914		1,172
Total accrued liabilities	$	13,112	$	6,711

	March 31, 2017		December 31, 2016
Lease incentive obligation, non-current	$	4,126	$	4,243
Deferred rent, non-current		4,024		3,419
Liabilities associated with business combination		2,200		—
Other non-current liabilities		174		175
Total other long-term liabilities	$	10,524	$	7,837

	March 31, 2017		March 31, 2016
Cash and cash equivalents	$	43,439	$	27,314
Restricted cash		4,697		4,831
Total cash, cash equivalents and restricted cash	$	48,136	$	32,145

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

	Gross Purchased Intangible Asset		Estimated Useful Life (in Years)
Non-compete agreements	$	286	5
Developed technology		570	6
Customer relationships		3,389	10
	$	4,245

	Level 3
	Contingent Consideration Liability
Balance as of December 31, 2016	$	—
Contingent consideration		2,200
Balance as of March 31, 2017	$	2,200

	Amounts
2017 (remainder of year)	$	5,134
2018		6,898
2019		6,946
2020		6,917
2021		7,079
Thereafter		37,137
Total minimum lease payments	$	70,111

	Amounts
2017 (remainder of year)	$	2,310
2018		3,455
2019		12,367
2020		15,843
2021		14,651
Thereafter		5,479
Total remaining debt payments		54,105
Less: amount representing debt discount		(1,079	)
Less: amount representing interest		(14,105	)