nvta-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

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

 

For the quarterly period ended September 30, 2018

 

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      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      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

Non-accelerated filer

 

Smaller reporting company

 

 

 

Emerging growth company

 

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)

Yes      No  

 

The number of shares of the registrant’s common stock outstanding as of November 2, 2018 was 74,617,232.

 

 

 

 


 

TABLE OF CONTENTS

 

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

31

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

Item 4.

Controls and Procedures

44

 

 

 

PART II: Other Information

 

Item 1.

Legal Proceedings

45

Item 1A.

Risk Factors

45

Item 6.

Exhibits

65

SIGNATURES

66

 

 

 

 


 

PART I — Financial Information

 

ITEM 1. Financial Statements.

 

INVITAE CORPORATION

 

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

101,419

 

 

$

12,053

 

Marketable securities

 

 

27,760

 

 

 

52,607

 

Accounts receivable

 

 

25,488

 

 

 

10,422

 

Prepaid expenses and other current assets

 

 

12,659

 

 

 

11,599

 

Total current assets

 

 

167,326

 

 

 

86,681

 

Property and equipment, net

 

 

29,287

 

 

 

30,341

 

Restricted cash

 

 

5,006

 

 

 

5,406

 

Marketable securities, non-current

 

 

367

 

 

 

5,983

 

Intangible assets, net

 

 

31,725

 

 

 

35,516

 

Goodwill

 

 

47,233

 

 

 

46,575

 

Other assets

 

 

3,456

 

 

 

576

 

Total assets

 

$

284,400

 

 

$

211,078

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

8,044

 

 

$

8,606

 

Accrued liabilities

 

 

24,821

 

 

 

22,742

 

Capital lease obligation, current portion

 

 

1,857

 

 

 

2,039

 

Debt, current portion

 

 

8,135

 

 

 

 

Total current liabilities

 

 

42,857

 

 

 

33,387

 

Capital lease obligation, net of current portion

 

 

1,923

 

 

 

3,373

 

Debt, net of current portion

 

 

50,354

 

 

 

39,084

 

Other long-term liabilities

 

 

9,871

 

 

 

13,440

 

Total liabilities

 

 

105,005

 

 

 

89,284

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock

 

 

7

 

 

 

5

 

Accumulated other comprehensive loss

 

 

(46

)

 

 

(171

)

Additional paid-in capital

 

 

666,305

 

 

 

520,558

 

Accumulated deficit

 

 

(486,871

)

 

 

(398,598

)

Total stockholders’ equity

 

 

179,395

 

 

 

121,794

 

Total liabilities and stockholders’ equity

 

$

284,400

 

 

$

211,078

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1


 

INVITAE CORPORATION

 

Condensed Consolidated Statements of Operations

(In thousands, except share and per share amounts)

(Unaudited)

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Test revenue

 

$

36,611

 

 

$

17,310

 

 

$

100,014

 

 

$

40,597

 

Other revenue

 

 

755

 

 

 

838

 

 

 

2,329

 

 

 

2,225

 

Total revenue

 

 

37,366

 

 

 

18,148

 

 

 

102,343

 

 

 

42,822

 

Costs and operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of test revenue

 

 

20,441

 

 

 

13,274

 

 

 

58,964

 

 

 

33,093

 

Research and development

 

 

15,776

 

 

 

11,502

 

 

 

46,926

 

 

 

32,864

 

Selling and marketing

 

 

17,591

 

 

 

13,246

 

 

 

55,222

 

 

 

37,338

 

General and administrative

 

 

13,668

 

 

 

11,102

 

 

 

37,884

 

 

 

25,915

 

Total costs and operating expenses

 

 

67,476

 

 

 

49,124

 

 

 

198,996

 

 

 

129,210

 

Loss from operations

 

 

(30,110

)

 

 

(30,976

)

 

 

(96,653

)

 

 

(86,388

)

Other income (expense), net

 

 

231

 

 

 

(56

)

 

 

2,066

 

 

 

(596

)

Interest expense

 

 

(1,844

)

 

 

(1,128

)

 

 

(4,927

)

 

 

(2,517

)

Net loss before taxes

 

 

(31,723

)

 

 

(32,160

)

 

 

(99,514

)

 

 

(89,501

)

Income tax benefit

 

 

 

 

 

(4,758

)

 

 

 

 

 

(6,614

)

Net loss

 

$

(31,723

)

 

$

(27,402

)

 

$

(99,514

)

 

$

(82,887

)

Net loss per share, basic and diluted

 

$

(0.45

)

 

$

(0.57

)

 

$

(1.56

)

 

$

(1.86

)

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

 

 

70,152,804

 

 

 

48,221,896

 

 

 

63,935,336

 

 

 

44,639,416

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

2


 

INVITAE CORPORATION

 

Condensed Consolidated Statements of Comprehensive Loss

(In thousands)

(Unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

 

$

(31,723

)

 

$

(27,402

)

 

$

(99,514

)

 

$

(82,887

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized income (loss) on available-for-sale marketable

   securities, net of tax

 

 

63

 

 

 

(19

)

 

 

125

 

 

 

(57

)

Comprehensive loss

 

$

(31,660

)

 

$

(27,421

)

 

$

(99,389

)

 

$

(82,944

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

3


 

INVITAE CORPORATION

 

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(99,514

)

 

$

(82,887

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

10,268

 

 

 

5,876

 

Stock-based compensation

 

 

15,711

 

 

 

14,387

 

Amortization of debt issuance costs

 

 

681

 

 

 

326

 

Amortization of premium on marketable securities

 

 

9

 

 

 

108

 

Impairment losses

 

 

1,883

 

 

 

 

Loss on disposal of assets

 

 

 

 

 

268

 

Loss on sales of available-for-sale securities

 

 

24

 

 

 

 

Remeasurements of liabilities associated with business combinations

 

 

593

 

 

 

556

 

Benefit from income taxes

 

 

 

 

 

(6,614

)

Changes in operating assets and liabilities net of effects of business combination:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(4,483

)

 

 

(1,801

)

Prepaid expenses and other current assets

 

 

(1,060

)

 

 

1,761

 

Other assets

 

 

(555

)

 

 

(45

)

Accounts payable

 

 

(1,226

)

 

 

1,278

 

Accrued expenses and other liabilities

 

 

922

 

 

 

61

 

Net cash used in operating activities

 

 

(76,747

)

 

 

(66,726

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of marketable securities

 

 

(1,575

)

 

 

(94,563

)

Proceeds from sales of marketable securities

 

 

19,965

 

 

 

 

Proceeds from maturities of marketable securities

 

 

10,957

 

 

 

52,918

 

Acquisition of businesses, acquired cash

 

 

 

 

 

1,489

 

Purchases of property and equipment

 

 

(4,258

)

 

 

(4,115

)

Other

 

 

(500

)

 

 

 

Net cash provided by (used in) in investing activities

 

 

24,589

 

 

 

(44,271

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from public offerings of common stock, net of issuance costs

 

 

112,480

 

 

 

 

Proceeds from issuance of common stock

 

 

10,732

 

 

 

71,687

 

Proceeds from loan and security agreement

 

 

19,544

 

 

 

39,661

 

Loan payments

 

 

 

 

 

(30,457

)

Capital lease principal payments

 

 

(1,632

)

 

 

(2,153

)

Net cash provided by financing activities

 

 

141,124

 

 

 

78,738

 

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

88,966

 

 

 

(32,259

)

Cash, cash equivalents and restricted cash at beginning of period

 

 

17,459

 

 

 

71,522

 

Cash, cash equivalents and restricted cash at end of period

 

$

106,425

 

 

$

39,263

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information of non-cash investing and financing  activities:

 

 

 

 

 

 

 

 

Equipment acquired through capital leases

 

$

 

 

$

4,849

 

Purchases of property and equipment in accounts payable and accrued liabilities

 

$

1,607

 

 

$

2,022

 

Amounts related to co-development agreement recognized in other assets

 

$

2,750

 

 

$

 

Amounts related to co-development agreement recognized in accrued liabilities

 

$

2,500

 

 

$

 

Warrants issued pursuant to loan and security agreement

 

$

383

 

 

$

740

 

Common stock issued for acquisition of businesses

 

$

6,443

 

 

$

22,876

 

Consideration payable for acquisition of businesses

 

$

 

 

$

12,436

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

INVITAE CORPORATION

Notes to Condensed Consolidated Financial Statements

 

1. Organization and description of business

Invitae Corporation (the “Company”) was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. The Company utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for clinicians and their patients. The Company’s headquarters and main production facility 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 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, the Company’s 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. The Company 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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. The results for the three and nine months ended September 30, 2018 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

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

Use of estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The Company believes judgment is involved in determining revenue recognition (See Note 3, “Revenue, accounts receivable and deferred revenue” for further information); the acquisition-date fair value of intangible assets; the fair value of contingent consideration associated with acquisitions; the recoverability of long-lived assets; impairment of goodwill and intangible assets; stock-based compensation expense; the fair value of its convertible notes; 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.

Concentrations of credit risk and other risks and uncertainties

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

5


 

The Company’s 10% or greater customers and their related revenue as a percentage of total revenue were as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

Medicare

 

 

 

24.6

%

 

*

 

 

 

19.7

%

 

*

United Healthcare

 

 

 

10.0

%

 

 

13.7

%

 

*

 

 

*

*    Less than 10% of total revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Company’s significant customers and their related accounts receivable balance as percentage of total accounts receivable were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

December 31,

2017

 

Medicare

 

 

 

 

 

 

 

10.5

%

 

 

13.1

%

Accounts receivable

The Company receives payment for its tests from partners, patients, institutional customers and third-party payers. See Note 3, “Revenue, accounts receivable and deferred revenue” for further information.

Business combinations

The tangible and identifiable intangible assets acquired and liabilities assumed in a business combination are recorded based on their estimated fair values as of the business combination date, including identifiable intangible assets which either arise from a contractual or legal right or are separable from goodwill. The Company 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.

 

Goodwill

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 annual impairment reviews of its goodwill balance during the fourth fiscal quarter. In testing for impairment, 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 reporting unit’s fair value, the Company will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized cannot exceed the total amount of goodwill allocated to that reporting unit.

The Company did not incur any goodwill impairment losses in any of the periods presented.

 

Fair value of financial instruments

The Company’s financial instruments consist principally of cash and cash equivalents, marketable securities, accounts payable, accrued liabilities, 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.

6


 

See Note 7, “Fair value measurements” for disclosure of the fair value of debt and further information on the fair value of the Company’s financial instruments.

Variable interest entity

The Company has a variable interest in a variable interest entity (“VIE”) through an investment in convertible notes issued by the VIE. The convertible notes do not provide the Company with voting rights in the VIE or with power to direct the activities of the VIE which most significantly affect its economic performance. The Company is not the VIE’s primary beneficiary and does not consolidate the VIE. The Company will continue to assess its investment and future commitments to the VIE. To the extent its relationship with the VIE changes, the Company may be required to consolidate the VIE in future periods.

See Note 7, “Fair value measurements” and Note 8, “Investment in privately held company” for additional disclosures related to the convertible notes, which are recorded as available-for-sale securities.

Revenue recognition

The Company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration it expects 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. Revenue associated with subsequent re-requisition services and family variant tests was de minimis for all periods presented.

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 test revenue

Cost of test 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 and utilities.

Net loss per common share

Basic net loss per common share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the period determined using the treasury stock method. Potentially dilutive securities, consisting of preferred stock, options to purchase common stock, common stock warrants, RSUs and PRSUs, are considered to be common stock equivalents and were excluded from the calculation of diluted net loss per share because their effect would be antidilutive for all periods presented.

Recent accounting pronouncements

The Company evaluates all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (“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 the Company’s condensed consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other-Internal-Use Software, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The Company is currently evaluating the effect that adoption of this ASU will have on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement - Disclosure Framework (Topic 820). The updated guidance improves the disclosure requirements on fair value measurements. The updated guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. The Company is currently evaluating the effect that adoption of this ASU will have on its consolidated financial statements.

7


 

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. Under the new guidance, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The adoption of ASU 2018-07 is not expected to have a significant effect upon the Company’s consolidated financial statements, related disclosures and ongoing financial reporting. The Company plans to implement ASU 2018-07 on January 1, 2019.

In February 2018, the FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220). Under the new guidance, entities will be permitted to reclassify tax effects stranded in accumulated other comprehensive income as a result of tax reform to retained earnings. ASU 2018-02 is effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. When adopted, ASU 2018-02 requires all entities to make new disclosures, regardless of whether they elect to reclassify stranded amounts. The Company is evaluating the effect that ASU 2018-02 will have on its consolidated financial statements, related disclosures and ongoing financial reporting. The Company has not yet selected an implementation date for ASU 2018-02.

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 the Company beginning in the first quarter of 2020 and must be adopted using a modified retrospective approach, with certain exceptions. The Company is currently evaluating the effect that adoption of this ASU will have on its consolidated financial statements.

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 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 and also requires expanded disclosures about leasing arrangements. Topic 842 is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. Entities may initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.    

The Company is evaluating the effect that Topic 842 and related standards will have on its consolidated financial statements, related disclosures and ongoing financial reporting, but expects implementation of Topic 842 to result in the recognition of material right of use assets and corresponding lease liabilities in its consolidated balance sheets, principally relating to facilities leases. The Company plans to implement Topic 842 and related standards on January 1, 2019.

Recently adopted accounting pronouncements – Revenue recognition

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), designed to enable users of financial statements to better understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On January 1, 2018, the Company adopted the provisions of Topic 606 using the modified retrospective method. From adoption to date, the Company has recognized all its revenue from contracts with customers within the scope of Topic 606. In connection with the adoption, the Company recognized the cumulative effect of initially applying this standard as an adjustment to retained earnings on the date of adoption. Comparative information prior to the date of adoption has not been restated and continues to be reported under the accounting standards in effect for those periods.

In connection with the adoption of Topic 606, the Company amended its revenue recognition policy to provide for the recognition of certain variable consideration related to diagnostic tests that was previously deferred pending cash collection. Under Topic 606, the Company records variable consideration based on an estimate of the consideration to which it will be entitled.

Revenue recognition

Adoption of Topic 606, "Revenue from Contracts with Customers"

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective transition method. The provisions of Topic 606 were applied to all customer contracts that were not completed as of the date of adoption. Prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for those periods.

The Company recognizes revenue when control of the promised goods or services is transferred to the customer in an amount that reflects the consideration it expects to be entitled to in exchange for those goods or services. All revenues are generated from contracts with customers.

8


 

Diagnostic tests

The majority of the Company’s revenue is generated from genetic testing services that provide analysis and associated interpretation of the sequencing of parts of the genome. Test orders are placed under written requisitions signed by the patient and/or medical provider, and the Company often enters into contracts with institutions (e.g., hospitals and clinics) and insurance companies that include pricing provisions under which such tests are billed. Billing terms are generally net thirty days.

While the transaction price of diagnostic tests is originally established either via contract or pursuant to the Company’s standard list price, the Company often provides concessions for tests billed to insurance carriers, and therefore the transaction price for patient insurance-billed tests is considered to be variable and revenue is recognized based on an estimate of the consideration to which the Company will be entitled at an amount for which it is probable that a reversal of cumulative consideration will not occur. Making these estimates requires significant judgments based upon such factors as length of payer relationship, historical payment patterns, changes in contract provisions and insurance reimbursement policies. These judgments are reviewed quarterly and revenue recognized is updated, as necessary, until the Company’s obligations are fully settled.

In connection with some diagnostic test orders, the Company offers limited re-requisition rights (“Re-Requisition Rights”) that are considered distinct at contract inception, and therefore certain diagnostic test orders contain two performance obligations, the performance of the original test and the Re-Requisition Rights. When Re-Requisition Rights are granted, the Company allocates the transaction price to each performance obligation based on the relative estimated standalone selling prices. In order to comply with loss contract rules, the allocations are adjusted, if necessary, to ensure the amount deferred for Re-Requisition Rights is no less than the estimated cost of fulfilling the Company’s related obligations.

The Company looks to transfer of control in assessing timing of recognition of revenue in connection with each performance obligation. In general, revenue in connection with diagnostic tests is recognized upon delivery of the underlying clinical report or when the report is made available on the Company’s web portal. Outstanding performance obligations pertaining to orders received but for which the underlying report has not been issued are generally satisfied within a thirty-day period. Revenue in connection with Re-Requisition Rights is recognized as the rights are exercised or expire unexercised, which is generally within ninety days of initial deferral.

Other contracts

The Company also enters into collaboration and genome network contracts. Collaboration agreements provide customers with diagnostic testing and related data aggregation reporting services that are provided over the contract term. Collaboration revenue is recognized as the testing and reporting services are delivered to the customer. Genome network offerings consist of subscription services related to a proprietary software platform designed to connect patients, clinicians, advocacy organizations, researchers and therapeutic developers to accelerate the understanding, diagnosis and treatment of hereditary disease. Such services are recognized on a straight-line basis over the subscription periods.

Amounts due under collaboration and genome network agreements are typically billable on net thirty-day terms.

 

Prior period reclassifications

Statement of cash flow amounts in prior periods have been reclassified to conform with current period presentation, which separates amortization of debt issuance costs from depreciation and amortization. Amortization of debt issuance costs in the nine months ended September 30, 2017 was $0.3 million. 

 

3. Revenue, accounts receivable and deferred revenue

As described in Note 2, the Company adopted Topic 606 effective January 1, 2018. In connection with the adoption the Company utilized the following practical expedients and exemptions:

 

Certain information about remaining performance obligations is not disclosed because the underlying contracts have an original expected duration of one year or less.

 

Sales commissions are expensed when incurred because the amortization period would have been one year or less. Commission costs are recorded as a component of sales and marketing expenses.

 

No adjustments to promised consideration were made for financing as the Company expects, at contract inception, that the period between the transfer of a promised good or service and when the customer pays for that good or service will be one year or less.

The adoption of Topic 606 resulted in a cumulative-effect adjustment to accounts receivable and accumulated deficit of $11.2 million as of January 1, 2018 primarily related to the recognition of uncollected diagnostic test variable consideration as of the date of adoption. Test revenue without adoption of Topic 606 for the three and nine months ended September 30, 2018 includes cash

9


 

collections related to accounts receivable recorded as of January 1, 2018 in connection with the Topic 606 cumulative-effect adjustment.

The effect of the adoption of Topic 606 on financial statement line items in the Company’s condensed consolidated statement of operations for the three and nine months ended September 30, 2018, and the Company’s condensed consolidated balance sheet as of September 30, 2018 was as follows (in thousands, except per share amounts):

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

Without

 

 

Effect of

 

 

 

 

 

 

 

Adoption of

 

 

Adoption

 

 

 

As Reported

 

 

Topic 606

 

 

Higher/(Lower)

 

Test revenue

 

$

36,611

 

 

$

35,120

 

 

$

1,491

 

Net loss

 

$

(31,723

)

 

$

(33,214

)

 

$

1,491

 

Net loss per share, basic and diluted

 

$

(0.45

)

 

$

(0.47

)

 

$

0.02

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

Without

 

 

Effect of

 

 

 

 

 

 

 

Adoption of

 

 

Adoption

 

 

 

As Reported

 

 

Topic 606

 

 

Higher/(Lower)

 

Test revenue

 

$

100,014

 

 

$

98,631

 

 

$

1,383

 

Net loss

 

$

(99,514

)

 

$

(100,897

)

 

$

1,383

 

Net loss per share, basic and diluted

 

$

(1.56

)

 

$

(1.58

)

 

$

0.02

 

 

 

 

As of September 30,

2018

 

 

 

 

 

 

 

Without

 

 

Effect of

 

 

 

 

 

 

 

Adoption of

 

 

Adoption

 

 

 

As Reported

 

 

Topic 606

 

 

Higher/(Lower)

 

Accounts receivable, net

 

$

25,488

 

 

$

12,198

 

 

$

13,290

 

Accumulated deficit

 

$

(486,871

)

 

$

(499,494

)

 

$

12,623

 

Stockholders' equity

 

$

179,395

 

 

$

166,772

 

 

$

12,623

 

Disaggregation of revenue

Test revenue is generated from sales of diagnostic tests to three groups of customers: institutions, such as hospitals and clinics, 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. Accordingly, for purposes of complying with the disclosure requirements of Topic 606, test revenue is disaggregated between these three payer groups. Further, other revenue, consisting principally of revenue recognized under collaboration and genome network agreements, is disaggregated from diagnostic test revenue.

The following table includes the Company’s revenues as disaggregated by payer category (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2018

 

 

2017 (1)

 

 

2018

 

 

2017 (1)

 

Test revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutions

 

$

8,958

 

 

$

5,242

 

 

$

24,761

 

 

$

10,461

 

Patient - direct

 

 

3,280

 

 

 

1,762

 

 

 

9,705

 

 

 

3,368

 

Patient - insurance

 

 

24,373

 

 

 

10,306

 

 

 

65,548

 

 

 

26,768

 

Total test revenue

 

 

36,611

 

 

 

17,310

 

 

 

100,014

 

 

 

40,597

 

Other revenue

 

 

755

 

 

 

838

 

 

 

2,329

 

 

 

2,225

 

Total revenue

 

$

37,366

 

 

$

18,148

 

 

$

102,343

 

 

$

42,822

 

 

(1) As noted above, prior period amounts are presented as originally reported based upon the accounting standards in effect for those periods.

Included in revenue in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2018 was $0.3 million that was included in deferred revenue at January 1, 2018.

10


 

The Company recognizes 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, the Company updated its estimate of the amounts to be recognized for previously delivered tests which resulted in an additional $1.5 million and $3.8 million of test revenue for the three and nine months ended September 30, 2018, respectively. These changes in estimates decreased the Company’s loss from operations by $1.5 million and $3.8 million and decreased basic and diluted net loss per share by approximately $0.02 and $0.06 for the three and nine months ended September 30, 2018, respectively.

Accounts receivable, net

The majority of the Company’s accounts receivable represents amounts billed to institutions (e.g., hospitals, clinics) 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

The Company records deferred revenues when cash payments are received or due in advance of its 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, the Company’s Re-Requisition Rights revenue deferral is no less than the estimated cost of fulfilling its related obligations. The Company recognizes revenue related to Re-Requisition Rights as the rights are exercised or expire unexercised, which is generally within 90 days of initial deferral.

 

4. Business combinations

AltaVoice

 

On January 6, 2017, the Company acquired AltaVoice (formerly Patient Crossroads, Inc.), 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, expands 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:

 

 

(a)

payment of $5.5 million through the issuance of 641,126 shares of the Company’s common stock;

 

(b)

payment of $5.0 million in the Company’s common stock, payable on March 31, 2018, with the common shares deliverable equal to $5.0 million divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2018. This payment was made on April 2, 2018 through the issuance of 716,332 shares of the Company’s common stock;

 

(c)

payment of $5.0 million in the Company’s common stock, which was contingently payable on March 31, 2018 if a milestone based on a certain threshold of revenue was achieved during 2017, with the shares deliverable equal to $5.0 million divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2018. As the foregoing milestone was not achieved, there is a new contingent milestone based on achieving a revenue target during 2017 and 2018. Should the new milestone revenue target be achieved, on March 31, 2019, a payment of up to $5.0 million in the Company’s common stock will be payable. The actual payout is dependent upon the 2017 and 2018 revenue target (capped at $14.0 million) times 75% less $5.5 million. This formula in effect caps the possible payout amount at $5.0 million in the Company’s common shares. The number of shares to be issued will be equal to the payout amount divided by the trailing average share price of the Company’s common stock for the 30 days preceding March 31, 2019.

The first payment of $5.5 million was classified as equity. The second payment was discounted to $4.7 million as of the acquisition date, recorded as a liability, and was accreted to fair value at each reporting date until the extinguishment of the liability on April 2, 2018. The third payment, representing contingent consideration, was determined to have a fair value of $2.2 million as of the acquisition date 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.

11


 

For the second payment, the acquisition-date fair value was $4.7 million, and the Company recorded accretion gains (losses) of $0.0 million and $(0.1) million in other income (expense), net, for the three months ended September 30, 2018 and 2017, respectively and $1.6 million and $(0.2) million for the nine months ended September 30, 2018 and 2017, respectively. The accretion gains in 2018 resulted from an adjustment to the value of the second payment as of March 31, 2018, and principally reflected the difference between the value of the common shares deliverable, based upon the closing price of the Company’s stock on March 29, 2018, and the value per share used to calculate the number of common shares deliverable. The accretion losses in 2017 resulted from adjustments to the discounted value of the second payment, reflecting the passage of time.

For the third payment, whose contingent acquisition-date fair value was $2.2 million, the Company recorded remeasurement losses of $0.1 million and $0.1 million in operating expense for the three months ended September 30, 2018 and 2017, respectively and $1.0 million and $0.4 million in operating expense for the nine months ended September 30, 2018 and 2017, respectively. The remeasurement losses in 2018 reflect updated estimations of fair value of the third payment, based upon achieving a revenue target during 2017 and 2018, as the milestone based on a certain threshold of revenue to be achieved during 2017 was not met. The principal inputs affecting those estimations have been updates to the Company’s revenue forecasts and the passage of time.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash

 

$

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

 

Acquisition-related intangibles included in the above table are finite-lived. Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of ten years. All other acquisition-related intangibles are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Non-compete agreement

 

$

286

 

 

 

5

 

Developed technology

 

 

570

 

 

 

6

 

Customer relationships

 

 

3,389

 

 

 

10

 

 

 

$

4,245

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of AltaVoice resulted in $9.4 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by combining capabilities, technology and data to accelerate the use of genetic information for the diagnosis and treatment of hereditary diseases. In accordance with ASC 350, goodwill will not be amortized but will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $1.4 million relating to the tax consequence of recognizing the fair value of the acquisition-related intangibles, with an equal offset to deferred tax liability. The Company has finalized its assessment of fair value of the assets and liabilities assumed at the acquisition date.

12


 

Ommdom

On June 11, 2017, the Company acquired Ommdom, Inc. (“Ommdom”), a privately held company that develops, commercializes and sells hereditary risk assessment and management software, including CancerGene Connect, a cancer genetic counseling platform. The acquisition expands Invitae’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. CancerGene Connect is a platform for collecting and managing genetic family histories. The platform uses a cloud-based, mobile friendly patient interface to gather family history information from patients prior to a clinician appointment. Then, analysis tools analyze patients’ predisposition to disease and provide actionable analysis to inform therapeutic decisions, such as genetic testing or treatment approaches. In addition, the platform provides clinicians with the ability to look beyond the individual to understand trends across all of their patients.

Pursuant to the terms of a Stock Exchange Agreement, the Company acquired all of the outstanding shares of Ommdom for consideration of $6.1 million, payable entirely in the Company’s common stock. There was no cash consideration nor any contingent payments associated with the acquisition, other than a hold-back amount of $0.6 million. Per the terms of the agreement, the Company was obligated to issue shares of its common stock as follows:

 

(a)

payment of $5.5 million through the issuance of 600,108 shares of the Company’s common stock on the acquisition date; and

 

(b)

payment of $0.6 million through the issuance of 66,582 shares of the Company’s common stock, representing a hold-back amount, and payable on the twelve-month anniversary of the acquisition date. This payment was made on June 11, 2018.

The first payment of $5.5 million was classified as equity. The second payment of $0.6 million was recorded as a stock payable liability on the acquisition date and was reclassified to equity upon the issuance of 66,582 shares of the Company’s common stock on June 11, 2018.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash

 

$

53

 

Accounts receivable

 

 

10

 

Prepaid expense and other assets

 

 

4

 

Trade name

 

 

13

 

Developed technology

 

 

2,335

 

Customer relationships

 

 

147

 

Total identifiable assets acquired

 

 

2,562

 

Accounts payable

 

 

(16

)

Accrued expenses

 

 

(17

)

Deferred tax liability

 

 

(434

)

Total liabilities assumed

 

 

(467

)

Net identifiable assets acquired

 

 

2,095

 

Goodwill

 

 

4,045

 

Net assets acquired

 

$

6,140

 

 

Finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Trade name

 

$

13

 

 

 

5

 

Developed technology

 

 

2,335

 

 

 

5

 

Customer relationships

 

 

147

 

 

 

5

 

 

 

$

2,495

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Ommdom resulted in the recognition of $4.0 million of goodwill. The Company believes this goodwill consists

13


 

principally of expected synergies to be realized by expanding the Company’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. Concurrent with the acquisition, the Company recorded additional goodwill of $0.4 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 Company has finalized its assessment of fair value of the assets and liabilities assumed at acquisition date.

Good Start Genetics

On August 4, 2017, the Company acquired 100% of the fully diluted equity of Good Start, a privately held molecular diagnostics company focused on preimplantation and carrier screening for inherited disorders. The acquisition of Good Start is intended to further Invitae’s plan to create a comprehensive genetic information platform providing high-quality, affordable genetic information coupled with world-class clinical expertise to inform healthcare decisions throughout every stage of an individual’s life. The purchase consideration for the Good Start acquisition consisted of the assumption of the net liabilities of Good Start of $24.4 million at the acquisition date.

Immediately subsequent to the acquisition of Good Start, the Company paid $18.4 million in cash to settle outstanding notes payable, accrued interest and related costs. In addition, and immediately subsequent to the acquisition, the Company settled outstanding convertible promissory notes payable through:

 

(a)

payment of $11.9 million through the issuance of 1,148,283 shares of the Company’s common stock; and

 

(b)

payment of $3.6 million through the issuance of 343,986 shares of the Company’s common stock, representing a hold-back amount payable on the one-year anniversary of the acquisition date. In September 2018, the Company issued 250,044 shares in partial payment of the hold-back amount payable. The remainder of the hold-back amount payable, approximately $1.5 million, will be settled upon resolution of outstanding claims from Good Start customers.    

Also in connection with the acquisition of Good Start and immediately subsequent to the acquisition, the Company paid bonuses to certain members of Good Start’s management team through:

 

(a)

payment of $0.9 million through the issuance of 83,025 shares of the Company’s common stock; and

 

(b)

payment of $0.4 million through the issuance of 37,406 shares of the Company’s common stock, representing a hold-back amount payable on the one-year anniversary of the acquisition date.

These bonus payments were recorded as general and administrative expense.

Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill.

At acquisition date, the Company also recorded $4.8 million as a provisional amount for a deferred tax liability because certain information and analysis related to Good Start’s historical net operating losses that could have affected the Company’s initial valuation was still being obtained or reviewed at that time. This provisional amount for the deferred tax liability was subsequently reversed during the fourth quarter of 2017 based on the results of further analysis of Good Start’s historical net operating losses.

14


 

The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and restricted cash

 

$

1,381

 

Accounts receivable

 

 

2,246

 

Prepaid expense and other assets

 

 

1,579

 

Property and equipment

 

 

1,320

 

Trade name

 

 

460

 

Developed technology

 

 

5,896

 

Customer relationships

 

 

7,830

 

Total identifiable assets acquired

 

 

20,712

 

Accounts payable

 

 

(5,418

)

Accrued expenses

 

 

(6,802

)

Notes payable

 

 

(17,904

)

Convertible promissory notes payable

 

 

(15,430

)

Other liabilities

 

 

(222

)

Total liabilities assumed

 

 

(45,776

)

Net identifiable assets acquired

 

 

(25,064

)

Goodwill

 

 

25,064

 

Net assets acquired

 

$

 

 

In March 2018, June 2018, and September 2018 the Company recorded adjustments to its accounting for the amount recorded as accounts receivable at acquisition. Accordingly, the fair value of accounts receivable was decreased by $0.4 million on March 31, 2018, $0.3 million on June 30, 2018, and $0.1 million on September 30, 2018, with corresponding increases to goodwill.

 

Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of eight years. All other finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Trade name

 

$

460

 

 

 

3

 

Developed technology

 

 

5,896

 

 

 

5

 

Customer relationships

 

 

7,830

 

 

 

8

 

 

 

$

14,186

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of Good Start resulted in the recognition of $25.1 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes. The Company has finalized its assessment of fair value of the assets and liabilities assumed at the acquisition date.

CombiMatrix

On November 14, 2017, the Company completed its acquisition of CombiMatrix in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of July 31, 2017 (the “Merger Agreement”), by and among the Company, Coronado Merger Sub, Inc., a wholly-owned subsidiary of the Company (“Merger Sub”), and CombiMatrix, pursuant to which Merger Sub merged with and into CombiMatrix, with CombiMatrix surviving as a wholly-owned subsidiary of the Company (the “Merger”).

At the closing of the Merger, the Company issued shares of its common stock to (i) CombiMatrix’s common stockholders, at an exchange ratio of 0.8692 of a share of the Company’s common stock (the “Merger Exchange Ratio”) for each share of CombiMatrix common stock outstanding immediately prior to the Merger, (ii) CombiMatrix’s Series F preferred stockholders, at the Merger Exchange Ratio for each share of CombiMatrix common stock underlying Series F preferred stock outstanding immediately prior to the Merger, (iii) holders of outstanding and unexercised in-the-money CombiMatrix stock options, which were fully accelerated to the extent of any applicable vesting period and converted into the right to receive the number of shares of the Company’s common stock equal to the Merger Exchange Ratio multiplied by the number of shares of CombiMatrix common stock issuable upon exercise of such

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option, minus the number of shares of the Company’s common stock determined by dividing the aggregate exercise price for such option by $9.491 (the “Invitae Trailing Average Share Value”), and (iv) holders of outstanding and unsettled CombiMatrix restricted stock units, which were fully accelerated to the extent of any applicable vesting period and converted into the right to receive a number of shares of the Company’s common stock determined by multiplying the number of shares of CombiMatrix common stock that were subject to such restricted stock unit by the Merger Exchange Ratio.

In addition, at the closing of the Merger, (a) all outstanding and unexercised out-of-the money CombiMatrix stock options were cancelled and terminated without the right to receive any consideration, (b) all CombiMatrix Series D Warrants and Series F Warrants outstanding and unexercised immediately prior to the closing of the Merger were assumed by the Company and converted into warrants to purchase the number of shares of the Company’s common stock determined by multiplying the number of shares of CombiMatrix common stock subject to such warrants by the Merger Exchange Ratio, and with the exercise price adjusted by dividing the per share exercise price of the CombiMatrix common stock subject to such warrants by the Merger Exchange Ratio, and (c) certain entitlements under CombiMatrix’s executive compensation transaction bonus plan (the “Transaction Bonus Plan”) were paid in shares of the Company’s common stock or RSUs to be settled in shares of the Company’s common stock. All outstanding and unexercised CombiMatrix Series A, Series B, Series C, Series E, and PIPE warrants were repurchased by CombiMatrix prior to closing pursuant to that certain CombiMatrix Common Stock Purchase Warrants Repurchase Agreement dated July 11, 2016.

Pursuant to the Merger Agreement, the Company issued an aggregate of 2,703,389 shares of its common stock as follows:

 

(a)

payment of $20.5 million through the issuance of 2,611,703 shares of the Company’s common stock to holders of CombiMatrix common stock outstanding;

 

(b)

payment of $0.7 million through the issuance of 85,219 shares of the Company’s RSUs to holders of outstanding and unsettled CombiMatrix restricted stock units;

 

(c)

payment of $0.1 million through the issuance of 3,323 shares of the Company’s common stock to holders of outstanding and unexercised in-the-money CombiMatrix stock options; and

 

(d)

payment of $0.1 million through the issuance of 3,144 shares of the Company’s common stock to holders of CombiMatrix Series F preferred stock.

In addition, and pursuant to the Merger Agreement, the Company issued warrants to purchase an aggregate of 2,077,273 shares of its common stock as follows:

 

(a)

payment of $7.4 million through the issuance of warrants to purchase a total of 1,739,689 shares of the Company’s common stock in exchange for all outstanding CombiMatrix Series F warrants; and

 

(b)

payment of $1,000 through the issuance of warrants to purchase a total of 337,584 shares of the Company’s common stock in exchange for all outstanding CombiMatrix Series D warrants.

In connection with the acquisition of CombiMatrix, the Company paid bonuses to certain members of CombiMatrix’s management team through:

 

(a)

payment of $1.7 million through the issuance of common stock and RSUs totaling 214,976 shares of the Company’s common stock to settle payments pursuant to CombiMatrix’s executive compensation transaction bonus plan (the “Transaction Bonus Plan”), recorded as post-combination compensation expense and included in general and administrative expense; and

 

(b)

payment of $0.2 million through the issuance of 22,966 shares of the Company’s common stock to settle payments pursuant to the Transaction Bonus Plan, recorded as an assumed liability at the acquisition date.

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Assets acquired and liabilities assumed are recorded based on valuations derived from estimated fair value assessments and assumptions used by the Company. The amount recorded as deferred tax liability, $0 at December 31, 2017, is provisional because certain information and analysis related to CombiMatrix’s tax attributes and ownership change history that may affect the Company’s valuation is still being obtained or reviewed. Thus, the provisional measurement of fair value discussed above is subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one year from the acquisition date. While the Company believes that its estimates and assumptions underlying the valuations are reasonable, different estimates and assumptions could result in different valuations assigned to the individual assets acquired and liabilities assumed, and the resulting amount of goodwill. The following table summarizes the fair values of assets acquired and liabilities assumed at the date of acquisition (in thousands):

 

Cash and restricted cash

 

$

1,333

 

Accounts receivable

 

 

4,118

 

Prepaid expense and other assets

 

 

1,299

 

Property and equipment

 

 

437

 

Other assets - non current

 

 

30

 

Favorable leases

 

 

247

 

Trade name

 

 

103

 

Patent licensing agreement

 

 

496

 

Developed technology

 

 

3,162

 

Customer relationships

 

 

12,397

 

Total identifiable assets acquired

 

 

23,622

 

Accounts payable

 

 

(276

)

Accrued expenses

 

 

(3,925

)

Other liabilities

 

 

(180

)

Total liabilities assumed

 

 

(4,381

)

Net identifiable assets acquired

 

 

19,241

 

Goodwill

 

 

8,692

 

Net assets acquired

 

$

27,933

 

 

Customer relationships are being amortized on an accelerated basis, utilizing free cash flows, over a period of 11 years. All other finite-lived intangibles included in the above table are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized, as follows (in thousands):

 

 

 

Gross

Purchased

Intangible

Assets

 

 

Estimated

Useful

Life

(in Years)

 

Favorable leases

 

$

247

 

 

 

2

 

Trade name

 

 

103

 

 

 

1

 

Patent licensing agreement

 

 

496

 

 

 

15

 

Developed technology

 

 

3,162

 

 

 

4

 

Customer relationships

 

 

12,397

 

 

 

11

 

 

 

$

16,405

 

 

 

 

 

 

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The acquisition of CombiMatrix resulted in the recognition of $8.7 million of goodwill. The Company believes this goodwill consists principally of expected synergies to be realized by expanding the Company’s suite of genome management offerings designed to help patients and clinicians use genetic information as part of mainstream medical care. In accordance with ASC 350, goodwill will not be amortized but rather will be tested for impairment at least annually. Goodwill created as a result of the acquisition is not deductible for tax purposes.

 

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5. Goodwill and intangible assets

Goodwill

Details of the Company’s goodwill for the nine months ended September 30, 2018 are as follows (in thousands):

 

<

 

 

AltaVoice

 

 

Ommdom

 

 

Good Start

 

 

CombiMatrix

 

 

Total

 

Balance as of December 31, 2017

 

$

9,432

 

 

$