Invitae Corp - Quarter Report: 2015 June (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2015

 

o         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)

 

 

458 Brannan Street, San Francisco, California 94107

(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 x  No o

 

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 x  No o

 

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):

 

 

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

 

The number of shares of the registrant’s Common Stock outstanding as of July 31, 2015 was 31,813,461.

 

 

Table of Contents

 

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		15
Item 3.	Qualitative and Quantitative Disclosures About Market Risk		24
Item 4.	Controls and Procedures		24
PART II: Other Information
Item 1.	Legal Proceedings		25
Item 1A.	Risk Factors		25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 6.	Exhibits		46
SIGNATURES			47

 

Table of Contents

 

PART I — Financial Information

 

ITEM 1. Financial Statements.

 

INVITAE CORPORATION

 

Condensed Consolidated Balance Sheets

 

(In thousands, except share and per share amounts)

 

		June 30,			December 31,
		2015			2014
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	47,518		$	107,027
Marketable securities		123,408			—
Prepaid expenses and other current assets		3,149			2,616
Total current assets		174,075			109,643
Property and equipment, net		18,833			15,672
Restricted cash		203			150
Other assets		1,733			3,313
Total assets		$	194,844		$	128,778
Liabilities, convertible preferred stock, and stockholders’ equity (deficit)
Current liabilities:
Accounts payable		$	4,046		$	2,862
Accrued liabilities		3,636			3,237
Capital lease obligation, current portion		1,757			1,524
Total current liabilities		9,439			7,623
Capital lease obligation, net of current portion		2,371			2,011
Other long-term liabilities		379			401
Liabilities related to early exercise of stock options		8			14
Total liabilities		12,197			10,049
Commitments and contingencies (Note 5)
Convertible preferred stock, $0.0001 par value; 0 and 141,131,524 shares authorized, 0 and 141,131,524 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively		—			202,305
Stockholders’ equity (deficit):
Preferred stock, $0.0001 par value; 20,000,000 and 0 shares authorized, no shares issued and outstanding as of June 30, 2015 and December 31, 2014		—			—
Common stock, $0.0001 par value; 400,000,000 and 160,131,524 shares authorized, 31,812,958 and 944,581 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively		4			—
Accumulated other comprehensive gain (loss)		4			—
Additional paid-in capital		310,714			1,604
Accumulated deficit		(128,075		)	(85,180		)
Total stockholders’ equity (deficit)		182,647			(83,576		)
Total liabilities, convertible preferred stock, and stockholders’ equity (deficit)		$	194,844		$	128,778

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INVITAE CORPORATION

 

Condensed Consolidated Statements of Operations

 

(In thousands, except share and per share amounts)

 

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Revenue		$	1,801		$	301		$	3,030		$	419
Costs and operating expenses:
Cost of revenue		3,866			963			7,065			1,574
Research and development		11,837			5,078			20,292			10,043
Selling and marketing		6,189			1,771			10,929			3,437
General and administrative		4,034			3,005			7,474			4,900
Total costs and operating expenses		25,926			10,817			45,760			19,954
Loss from operations		(24,125		)	(10,516		)	(42,730		)	(19,535		)
Interest and other income (expense), net		(98		)	(6		)	(102		)	(3		)
Interest expense		(35		)	(17		)	(63		)	(34		)
Net loss		$	(24,258	)	$	(10,539	)	$	(42,895	)	$	(19,572	)
Net loss per share, basic and diluted		$	(0.76	)	$	(12.81	)	$	(1.75	)	$	(24.90	)
Shares used in computing net loss per share, basic and diluted		31,809,683			822,558			24,477,309			786,006

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INVITAE CORPORATION

 

Condensed Consolidated Statements of Comprehensive Loss

 

(In thousands)

 

(Unaudited)

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Net loss		$	(24,258	)	$	(10,539	)	$	(42,895	)	$	(19,572	)
Other comprehensive income (loss):
Unrealized gain on available-for-sale marketable securities, net of tax		30			—			4			—
Comprehensive loss		$	(24,228	)	$	(10,539	)	$	(42,891	)	$	(19,572	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INVITAE CORPORATION

 

Condensed Consolidated Statements of Cash Flows

 

(In thousands)

 

(Unaudited)

 

		Six Months Ended June 30,
		2015			2014
Cash flows from operating activities:
Net loss		$	(42,895	)	$	(19,572	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,295			967
Stock-based compensation		1,075			324
Amortization of premium on marketable securities		329			—
Loss on disposal of assets		15			—
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(533		)	(766		)
Other assets		154			(191		)
Accounts payable		1,362			(75		)
Accrued expenses and other liabilities		(261		)	650
Net cash used in operating activities		(38,459		)	(18,663		)
Cash flows from investing activities:
Purchase of marketable securities		(165,214		)	—
Proceeds from sales and maturities of marketable securities		41,481			—
Purchases of property and equipment		(3,372		)	(2,069		)
Change in restricted cash		(53		)	(30		)
Net cash used in investing activities		(127,158		)	(2,099		)
Cash flows from financing activities:
Proceeds from issuance of common stock upon initial public offering, net of issuance costs		107,116			—
Proceeds from exercise of stock options		63			134
Capital lease principal payments		(1,046		)	(403		)
Loan agreement financing costs		(25		)	—
Net cash provided by (used in) financing activities		106,108			(269		)
Net decrease in cash and cash equivalents		(59,509		)	(21,031		)
Cash and cash equivalents at beginning of period		107,027			43,070
Cash and cash equivalents at end of period		$	47,518		$	22,039
Supplemental cash flow information:
Interest paid		$	64		$	17
Supplemental cash flow information of non-cash investing and financing activities:
Conversion of convertible preferred stock to common stock		$	202,305		$	—
Purchases of property and equipment in accounts payable and accrued liabilities		$	460		$	(13	)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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INVITAE CORPORATION

 

Notes to Condensed Consolidated Financial Statements

 

1. Organization and description of business

 

Invitae Corporation (the “Company”) was incorporated in the state of Delaware on January 13, 2010, as Locus Development, Inc. and changed its name to Invitae Corporation in 2012. The Company utilizes an integrated portfolio of laboratory processes, software tools and informatics capabilities to process DNA-containing samples, analyze information about patient-specific genetic variation and generate test reports for physicians and their patients. The Company has two laboratories: one in San Francisco, California and a second in Santiago, Chile. The Company’s current product is an assay of 221 genes that can be used for multiple indications. The test includes multiple genes associated with hereditary cancer, neurological disorders, cardiovascular disorders and other hereditary conditions. The Company operates in one segment.

 

Reverse stock split

 

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

 

Initial public offering

 

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

 

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

 

Basis of presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014. The results for the three and six months ended June 30, 2015 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 Company’s unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

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Use of estimates

 

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

 

Customer concentration

 

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

 

		Three Months Ended June 30,				Six Months Ended June 30,
Customers		2015		2014		2015		2014
Customer A		13	%	—	%	*	%	—	%
Customer B		*		28	%	*		20	%

 

*                                         Less than 10% of total revenue

 

Cash equivalents

 

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

 

Marketable securities

 

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

 

Restricted cash

 

Restricted cash consists of money market funds that serve as collateral for a credit card agreement at one of the Company’s financial institutions, and for securing a letter of credit as collateral for the Company’s Cambridge Massachusetts facility sublease agreement.

 

Internal-use software

 

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

 

During the six months ended June 30, 2015 and 2014, the Company capitalized $750,000 and $150,000, respectively, of software development costs.

 

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Deferred offering costs

 

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

 

Fair value of financial instruments

 

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

 

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

 

Revenue recognition

 

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

 

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

 

Cost of revenue

 

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

 

Foreign currency transactions

 

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

 

Net loss per common share

 

Basic net loss per common share is calculated by dividing the net loss by the weighted-average number of common shares outstanding during the period, without consideration of common stock equivalents. Diluted net loss per common share in the periods presented is the same as basic net loss per common share, since the effects of potentially dilutive securities are antidilutive. Common shares subject to repurchase are excluded from the weighted-average shares. At June 30, 2015 and 2014, 12,306 and 40,070 shares subject to repurchase, respectively, are excluded from basic net loss per share calculation.

 

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Recent accounting pronouncements

 

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

 

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

 

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

 

3. Balance sheet components

 

Cash equivalents and marketable securities

 

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

 

		June 30, 2015
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Money market funds		$	6,587		$	—		$	—		$	6,587
U.S. treasury notes		2,024			1			—			2,025
U.S. government agency securities		126,432			11			(8		)	126,435
		$	135,043		$	12		$	(8	)	$	135,047
Reported as:
Cash equivalents											$	11,436
Restricted cash											203
Marketable securities											123,408
Total cash equivalents, restricted cash and marketable securities											$	135,047

 

		December 31, 2014
		Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Estimated Fair Value
Money market funds		$	15,167		$	—		$	—		$	15,167
		$	15,167		$	—		$	—		$	15,167
Reported as:
Cash equivalents											$	15,017
Restricted cash											150
Total cash equivalents and restricted cash											$	15,167

 

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

 

		Gross Unrealized Losses			Estimated Fair Value
U.S. government agency securities		$	8		$	32,604

 

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

 

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

 

Property and equipment, net

 

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

 

		June 30, 2015			December 31, 2014
Leasehold improvements		$	2,522		$	1,914
Laboratory equipment		9,450			6,528
Equipment under capital lease		8,224			3,735
Computer equipment		2,238			1,156
Internal-use software		1,551			800
Software		67			31
Furniture and fixtures		198			158
Automobiles		20			—
Construction-in-progress		293			4,853
Total property and equipment, gross		24,563			19,175
Accumulated depreciation and amortization		(5,730		)	(3,503		)
Total property and equipment, net		$	18,833		$	15,672

 

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

 

Accrued liabilities

 

Accrued liabilities consisted of the following (in thousands):

 

		June 30, 2015			December 31, 2014
Accrued compensation and related expenses		$	1,371		$	1,439
Accrued costs of equipment		671			—
Accrued professional services		148			1,030
Accrued costs for construction-in-progress		—			32
Other		1,446			736
Total accrued liabilities		$	3,636		$	3,237

 

4. Fair value measurements

 

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

 

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

 

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

 

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

 

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

 

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

 

		June 30, 2015
		Level 1			Level 2			Level 3			Total
Financial assets:
Money market funds		$	6,587		$	—		$	—		$	6,587
U.S. treasury notes		2,025			—			—			2,025
U.S. government agency securities		—			126,435			—			126,435
Total financial assets		$	8,612		$	126,435		$	—		$	135,047

 

		December 31, 2014
		Level 1			Level 2			Level 3			Total
Financial assets:
Money market funds		$	15,167		$	—		$	—		$	15,167
Total financial assets		$	15,167		$	—		$	—		$	15,167

 

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

 

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

 

5. Commitments and contingencies

 

New Leases

 

In March 2015, the Company leased additional space in San Francisco and Oakland, California. The leases expire in April and June 2017, respectively. In April 2015 the Company leased additional space in Cambridge, Massachusetts; this lease expires in January 2018. At June 30, 2015, aggregate future minimum lease payments for these facilities are approximately $2.7 million.

 

Guarantees and indemnifications

 

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

 

Contingencies

 

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

 

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

 

6. Stock incentive plans

 

Stock incentive plans

 

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

 

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

 

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

 

2015 employee stock purchase plan

 

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

 

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Summary of option activity

 

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

 

		Shares available for grant		Stock options outstanding		Weighted- average exercise price			Weighted-average remaining contractual life (years)		Aggregate intrinsic value
Balances at December 31, 2014		276,805		1,923,332		$	4.37		8.90		$	15,946
Additional shares reserved		4,370,452		—		—
Granted		(313,570	)	313,570		$	12.57
Cancelled		55,334		(55,334	)	$	5.44
Exercised		—		(32,391	)	$	1.95
Balances at June 30, 2015		4,389,021		2,149,177		$	5.57		8.57		$	19,999
Options exercisable at June 30, 2015				642,739		$	2.21		7.67		$	8,141
Options vested and expected to vest at June 30, 2015				2,100,574		$	5.52		8.56		$	19,651

 

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

 

The weighted-average fair value of options to purchase common stock granted was $9.32 and $3.02 per share in the six months ended June 30, 2015 and 2014, respectively.

 

The fair value of options to purchase common stock vested was $757,000 and $164,000 in the six months ended June 30, 2015 and 2014, respectively.

 

The intrinsic value of options to purchase common stock exercised was $403,000 and $368,000 in the six months ended June 30, 2015 and 2014, respectively.

 

Early exercise of stock options

 

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

 

At June 30, 2015 and December 31, 2014, there were 12,306 and 23,903 shares of common stock outstanding, respectively, subject to the Company’s right of repurchase at prices ranging from $0.30 to $1.26 per share. At June 30, 2015 and December 31, 2014, liabilities associated with shares issued with repurchase rights were $8,000 and $14,000, respectively.

 

Stock-based compensation

 

The fair value of share-based payments for option granted to employees and directors was estimated on the date of grant using the Black-Scholes option- pricing valuation model based on the following assumptions:

 

		Three Months Ended June 30,				Six Months Ended June 30,
		2015		2014		2015		2014
Expected term (in years)		6.03		6.03		6.03		6.03
Expected volatility		83.8	%	85.7	%	83.8	%	85.7 – 88.9%
Risk-free interest rate		1.64	%	1.75 – 1.76	%	1.28 – 1.64	%	1.62 – 1.91	%
Dividend yield		—		—		—		—

 

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

 

		As of June 30,
		2015		2014
Expected term (in years)		7.76 –9.09		6.03 – 9.88
Expected volatility		83.8	%	85.7 – 88.9	%
Risk-free interest rate		1.86 –2.03	%	1.62 – 2.51	%
Dividend yield		—		—

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Cost of revenue		$	58		$	18		$	134		$	24
Research and development		237			86			450			148
Selling and marketing		135			36			259			55
General and administrative		107			52			232			97
Total stock-based compensation expense		$	537		$	192		$	1,075		$	324

 

As of June 30, 2015, unrecognized compensation expense related to unvested options, net of estimated forfeitures, was $7.0 million, which the Company expects to recognize on a straight-line basis over a weighted- average period of 3.2 years.

 

7. Net loss per common share

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
Net loss		$	(24,258	)	$	(10,539	)	$	(42,895	)	$	(19,572	)
Shares used in computing net loss per share, basic and diluted		31,809,683			822,558			24,477,309			786,006
Net loss per share, basic and diluted		$	(0.76	)	$	(12.81	)	$	(1.75	)	$	(24.90	)

 

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

 

		Three and six Months Ended June 30,
		2015		2014
Shares of common stock subject to outstanding options		2,149,177		1,532,962
Shares of common stock subject to conversion from convertible preferred stock		—		13,521,920
Shares of common stock subject to unvested early exercise of outstanding options subject to repurchase		12,306		40,074
Total common stock equivalents		2,161,483		15,094,956

 

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8. Geographic information

 

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
United States		$	968		$	152		$	1,939		$	253
Canada		612			54			738			66
Israel		67			84			106			85
Rest of world		154			11			247			15
Total revenue		$	1,801		$	301		$	3,030		$	419

 

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

 

		June 30, 2015			December 31, 2014
United States		$	17,139		$	13,858
Chile		1,694			1,814
Total long-lived assets, net		$	18,833		$	15,672

 

9. Subsequent event

 

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

 

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

 

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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included in Item 1 of Part I of this report, and together with our audited financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014. Historic results are not necessarily indicative of future results.

 

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this report other than statements of historical fact, including statements identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, are forward- looking statements. Forward-looking statements include, but are not limited to, statements about:

 

·                  our views regarding the future of genetic testing and its role in mainstream medical practice;

 

·                  strategic plans for our business, products and technology, including our ability to expand our assay and develop new assays while maintaining attractive pricing, further enhance our genetic testing process and the related user experience, build interest in and demand for our tests (including by driving traffic to our website) and attract potential partners;

 

·                  the implementation of our business model;

 

·                  the rate and degree of market acceptance of our tests and genetic testing generally;

 

·                  our ability to scale our infrastructure and operations in a cost- effective manner;

 

·                  the timing of and our ability to introduce improvements to our genetic testing platform and to expand our current assay to include additional genes;

 

·                  our expectations with respect to future hiring;

 

·                  the timing and results of studies with respect to our tests;

 

·                  developments and projections relating to our competitors and our industry;

 

·                  the degree to which individuals will share genetic information generally, as well as share any related potential economic opportunities with us;

 

·                  our commercial plans, including our sales and marketing expectations;

 

·                  our ability to obtain and maintain adequate reimbursement for our tests;

 

·                  regulatory developments in the United States and foreign countries;

 

·                  our ability to retain key scientific or management personnel;

 

·                  our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;

 

·                  our expectations regarding the time during which we will be an emerging growth company under the JOBS Act;

 

·                  our ability to obtain funding for our operations;

 

·                  our financial performance; and

 

·                  our expectations regarding our future revenue, cost of revenue, operating expenses and capital expenditures, and our future capital requirements.

 

Forward-looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed in Item 1A of Part II of this report. Although we believe that the expectations and assumptions reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Any forward-looking statements in this report speak only as of the date of this report. We expressly disclaim any obligation or undertaking to update any forward-looking statements.

 

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This report contains statistical data and estimates that we obtained from industry publications and reports. These publications typically indicate that they have obtained their information from sources they believe to be reliable, but do not guarantee the accuracy and completeness of their information. Some data contained in this report is also based on our internal estimates. Although we have not independently verified the third-party data, we believe it to be reasonable.

 

In this report, all references to “Invitae,” “we,” “us,” “our,” or “the company” mean Invitae Corporation.

 

Invitae and the Invitae logo are trademarks of Invitae Corporation. We also refer to trademarks of other corporations and organizations in this report.

 

Business Overview

 

Our mission is to bring comprehensive genetic information into mainstream medical practice to improve the quality of healthcare for billions of people. Our goal is to aggregate most of the world’s genetic tests into a single service with higher quality, faster turnaround time and lower price than many single gene tests today. By aggregating large numbers of currently available genetic tests into a single service, we can achieve great economies of scale that allow us to not only provide primary single gene or multi-gene tests but also to generate and store additional genetic information on behalf of the patient for future use. We refer to the service of managing genetic information over the course of disease or the lifetime of a patient as “genome management.” In addition, as more individuals gain access to their genetic information, we believe that sharing genetic information will provide an economic opportunity for patients and us to participate in advancing the understanding and treatment of disease.

 

We launched our first commercial offering in late November 2013, an assay of 216 genes comprising 85 different genetic disorders and 17 targeted panels, and began selling and marketing our panels with a focused effort on hereditary cancers, including breast, colon and pancreatic cancer. In the first quarter of 2015, we introduced a substantial improvement to our genetic testing platform that allows us to sequence certain genes with features that are more difficult to analyze and to include additional genes in our offering, which increased the size of our assay to 221 genes. This important addition to our test menu is the result of a series of process improvements that we believe will enable us to further expand our test menu throughout the course of the year while maintaining our strategy of lowering the cost of genetic testing. In addition, we plan to introduce in the second half of 2015 an expansion of our current offering to over 500 genes. This expanded offering would double the amount of genetic content we are able to provide at a fixed cost, which would further drive down the cost per reportable gene.

 

We charge $1,500 per indication for out-of-network third-party payors and $950 per indication for contracted in-network payors and contracted institutions. In addition, effective June 1, 2015, we began offering an upfront patient-pay price of $475 per indication for orders placed online and connected to a patient account.

 

We also currently offer re-requisition of additional data within the same indication for no additional charge when ordered within 90 days of the date of service. In addition, clients may obtain test results on genes that are in other indications or panels, or genes within the same indication or panel more than 90 days after the date of initial service, for an additional fee. Importantly, we are providing turnaround time of less than three weeks for the substantial majority of our tests. Since our initial launch, we have marketed additional panels based on the same assay of 221 genes.

 

We have experienced rapid growth in recent periods. Our revenue increased $2.6 million, or 623%, from $0.4 million for the six months ended June 30, 2014 to $3.0 million for the six months ended June 30, 2015. For the six months ended June 30, 2015 and 2014, we incurred a net loss of $42.9 million and $19.6 million, respectively. As of June 30, 2015, we had an accumulated deficit of $128.1 million. We also increased our number of employees to 243 at June 30, 2015 from 118 on June 30, 2014. Our sales force grew to 21 at June 30, 2015 from six at June 30, 2014.

 

Since our commercial launch, we have delivered more than 10,600 billable tests as of June 30, 2015. Sales of our tests have grown significantly from over 700 billable tests in the six months ended June 30, 2014 to more than 6,700 billable tests in the six months ended June 30, 2015, which we believe is evidence that our value proposition is attractive to our clients. We estimate that the U.S. market for hereditary cancer tests is greater than $650.0 million per year and thus represents a key growth opportunity for us. On a historical basis through June 30, 2015, approximately 28% of the billable tests we performed have been billable to institutions and patients, and the remainder have been billable to third-party payors. Many of the gene tests on our assay are tests for which private

 

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insurers reimburse. However, because we do not have reimbursement policies or contracts with very many private insurers, our claims for reimbursement from them may be denied upon submission, and we must appeal the claims. The appeals process is time consuming and expensive, and may not result in payment. Even if we are successful in achieving reimbursement, we may be paid at lower rates than if we were under contract with the third-party payor. When there is not a contracted rate for reimbursement, there is typically a greater co-insurance or co-payment requirement from the patient which may result in further delay or decreased likelihood of collection.

 

We intend to continue to invest aggressively in our business and we expect to continue to incur additional expenditures as a public company. As a result of these and other factors, we expect to incur operating losses for the foreseeable future and may need to raise additional capital in order to fund our operations. If we are unable to achieve our revenue growth objectives and successfully manage our costs, we may not be able to achieve profitability.

 

We believe that the keys to our future growth will be to steadily increase the amount of genetic content we offer, consistently improve the client experience, drive physician and patient utilization of our website for ordering and delivery of results, increase the number of partners working with us to add value for our clients and consistently drive down the price per gene for genetic analysis and interpretation.

 

Factors affecting our performance

 

Ability to lower the costs associated with performing our tests

 

Reducing the costs associated with performing our genetic tests is both a near-term focus and a strategic objective of ours. Over the long term we will need to reduce the cost of raw materials by improving the output efficiency of our assay and laboratory processes, modifying our platform-agnostic assay and laboratory processes to use materials and technologies that provide equal or greater quality at lower cost, improving how we manage our inventory and negotiating favorable terms for our materials purchases. We also intend to design and implement hardware and software tools that will reduce personnel cost for both laboratory and clinical operations by increasing personnel efficiency and thus lowering labor costs per test.

 

Ability to expand our genetic content

 

As we reduce our costs, we intend to continue to expand our test menus by steadily releasing additional genetic content for the same or lower prices per test, ultimately leading to affordable whole genome services. The breadth and flexibility of our offering will be a critical factor in our ability to address new markets for genetic testing services. Both of these will be critical to our ability to continue to grow the volume of billable tests we deliver.

 

Number of billable tests

 

The growth in our genetic testing business is tied to the number of tests for which we bill third-party payors, institutions or patients, which we refer to as billable tests. We bill for our services following delivery of the billable test report derived from testing patient samples and interpreting the results. We incur the expenses associated with a test in the period in which the test is processed regardless of when payment is received with respect to that test. We believe the number of billable tests in any period is an important indicator of the growth in our business.

 

Success obtaining third party reimbursement

 

Our ability to increase the number of billable tests and our revenue will depend in part on our success achieving broad reimbursement coverage for our tests from third-party payors. Reimbursement may depend on a number of factors, including a payor’s determination that a test is appropriate, medically necessary and cost-effective. Because each payor makes its own decision as to whether to establish a policy or enter into a contract to reimburse for our testing services, seeking these approvals is a time-consuming and costly process. In addition, physicians may decide not to order our tests if the cost of the test is not covered by insurance. Because we require an ordering physician to requisition a test, our revenue growth also depends on our ability to successfully promote the adoption of our testing services and expand our base of ordering physicians. We believe that establishing coverage from third-party payors, including the Center for Medicare and Medicaid Services, or CMS, is an important factor in gaining adoption by ordering physicians. We have received approval as a Medicare provider, which allows us to bill for our services to Medicare patients. Further we have entered into reimbursement contracts with Blue Shield of California, SelectHealth, Capital Health Plan of Florida and Ohio State Health Plan. If we are not able to obtain and maintain adequate reimbursement from third-party payors for our testing services and expand the base of physicians ordering our tests, we may not be able to effectively increase the number of billable tests or our revenue.

 

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Investment in our business and timing of expenses

 

We plan to continue to invest significantly in our genetic testing, genome management and genome network business. We deploy state-of-the-art and costly technologies in our genetic testing services, and we intend to significantly scale our infrastructure, including our testing capacity and information systems. We also expect to incur software development costs as we seek to further automate our laboratory processes and genetic interpretation and report sign-out procedures, conduct ongoing research and development activities, scale our customer service capabilities and expand the functionality of our website. As part of our growth, we also plan to hire additional personnel, including software engineers, sales and marketing personnel, research and development personnel, medical specialists, biostatisticians and geneticists. In addition, we expect to incur additional expenses as a result of operating as a public company. The expenses we incur may vary significantly by quarter, as we focus on building out different aspects of our business.

 

How we recognize revenue

 

Our historical revenue has been recognized when cash is received. We do not expect to recognize significant amounts of revenue on an accrual basis for some period of time. Until we achieve and maintain a predictable pattern of collection at a consistent payment amount from a large number of payors, we will continue to recognize the substantial majority of our revenue when cash is received. Additionally, as we commercialize new test offerings, we will need to achieve a predictable pattern of collection at a consistent payment amount for each payor for each new product offering prior to being able to recognize the related test revenue on an accrual basis. Because the timing and amount of cash payments received from payors is difficult to predict, we expect that our revenue will fluctuate significantly in any given quarter.

 

For the six months ended June 30, 2015 and 2014, amounts billed for tests delivered totaled $9.1 million and $1.1 million, respectively. In the first six months of 2015, we recognized revenue, when cash was received, of $1.8 million related to amounts billed for tests delivered during the six months ended June 30, 2015 and $1.2 million related to amounts billed for tests delivered during the year ended December 31, 2014. It is difficult to predict future revenue from previously delivered but unpaid tests. Accordingly, we cannot provide any assurance as to when, if ever, or to what extent any of these amounts will be collected. Because we are in the early stages of commercializing our tests, we have had limited payment and collection history. Notwithstanding our efforts to obtain payment for these tests, payors may deny our claims, in whole or in part, and we may never receive revenue from any previously delivered but unpaid tests. Revenue from these tests, if any, may not be equal to the billed amount due to a number of factors, including differences in reimbursement rates, the amounts of patient co-payments, the existence of secondary payors and claims denials.

 

We incur and recognize expenses for tests in the period in which the test is conducted and recognize revenue for tests in the period in which our revenue recognition criteria are met. Accordingly, any revenue that we receive in respect of previously delivered but unpaid tests will favorably impact our liquidity and results of operations in future periods.

 

Financial overview

 

Revenue

 

We generate revenue from the sale of our tests which provide the analysis and associated interpretation of the sequencing of parts of the genome. Clients are billed upon delivery of test results to the physician. As we do not have sufficient history of collection and are not yet able to determine a predictable pattern of collection, we currently recognize revenue when cash is received. Our ability to increase our revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payors and increase the rate at which we are paid for tests performed.

 

Cost of revenue

 

Cost of revenue reflects the aggregate costs incurred in delivering test results to physicians and includes expenses for materials and supplies, personnel costs, equipment and infrastructure expenses associated with testing and allocated overhead including rent, information technology, equipment depreciation and utilities. Costs associated with performing our test are recorded as the patient’s sample is processed regardless of when the test is billed or when revenue is recognized with respect to that test. As a result, our cost of revenue as percentage of revenue may vary significantly from period to period because we generally do not recognize revenue in the period in which costs are incurred. We expect cost of revenue to generally increase in line with the increase in the number of tests we perform. However, we expect that the cost per test will decrease over time due to the efficiencies we may gain as test volume increases and from automation and other cost reductions.

 

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Operating expenses

 

Our operating expenses are classified into three categories: research and development, selling and marketing, and general and administrative. For each category, the largest component is personnel costs, which include salaries, employee benefit costs, bonuses, commissions, as applicable, and stock-based compensation expense.

 

Research and development

 

Research and development expenses represent costs incurred to develop our technology and future tests, including costs associated with our efforts to expand the number of genes we can evaluate in our tests. These costs consist of personnel costs, laboratory supplies and equipment expenses, consulting costs and allocated overhead including rent, information technology, equipment depreciation and utilities.

 

We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses will substantially increase in absolute dollars in future periods as we continue to invest in research and development activities related to developing additional tests. We expect that in the next 12 months the substantial increase in research and development expenses will be for the continued development and support of our assay of 221 genes and other new testing services and programs under development.

 

Selling and marketing

 

Selling and marketing expenses consist of personnel costs, client service expenses, direct marketing expenses, educational and promotional expenses, market research and analysis, and allocated overhead including rent, information technology, equipment depreciation and utilities. We expect our selling and marketing expenses to substantially increase over the next 12 months, primarily driven by the cost of hiring additional account executives and business development personnel associated with efforts to further penetrate the domestic market.

 

General and administrative

 

General and administrative expenses include executive, finance and accounting, legal and human resources functions. These expenses include personnel-related costs, audit and legal expenses, consulting costs, and allocated overhead including rent, information technology, equipment depreciation and utilities. We expect our general and administrative expenses will increase as we scale our operations. We also expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and the New York Stock Exchange, additional insurance expenses, investor relations activities and other administration and professional services.

 

Interest income and other income (expense), net

 

Interest income and other income (expense), net, primarily consists of interest income and the net exchange gain/loss on foreign currency transactions related to the operations of our subsidiary in Chile.

 

Interest expense

 

Interest expense is attributable to our financing obligation under our capital lease agreements in connection with the purchase of laboratory equipment.

 

Critical accounting policies and estimates

 

Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material.

 

There have been no material changes in our critical accounting policies during the three and six months ended June 30, 2015, as compared to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

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Recent Accounting Pronouncements

 

See Note 2, “Summary of significant accounting policies” in the Notes to Condensed Consolidated Financial Statements for a discussion of recently adopted accounting pronouncements and accounting pronouncements not yet adopted, and their expected impact on our financial position and results of operations.

 

Results of operations

 

Comparison of the three months ended June 30, 2015 and 2014

 

		Three Months Ended June 30,						Dollar			%
		2015			2014			Change			Change
		(In thousands)
Revenue		$	1,801		$	301		$	1,500		498	%
Operating expenses:
Cost of revenue		3,866			963			2,903			301	%
Research and development		11,837			5,078			6,759			133	%
Selling and marketing		6,189			1,771			4,418			249	%
General and administrative		4,034			3,005			1,029			34	%
Total operating expenses		25,926			10,817			15,109			140	%
Loss from operations		(24,125		)	(10,516		)	(13,609		)	129	%
Interest income and other income (expense), net		(98		)	(6		)	(92		)	1,533	%
Interest expense		(35		)	(17		)	(18		)	106	%
Net loss		$	(24,258	)	(10,539		)	$	(13,719	)	130	%

 

Comparison of the six months ended June 30, 2015 and 2014

 

		Six Months Ended June 30,						Dollar			%
		2015			2014			Change			Change
		(In thousands)
Revenue		$	3,030		$	419		$	2,611		623	%
Operating expenses:
Cost of revenue		7,065			1,574			5,491			349	%
Research and development		20,292			10,043			10,249			102	%
Selling and marketing		10,929			3,437			7,492			218	%
General and administrative		7,474			4,900			2,574			53	%
Total operating expenses		45,760			19,954			25,806			129	%
Loss from operations		(42,730		)	(19,535		)	(23,195		)	119	%
Interest income and other income (expense), net		(102		)	(3		)	(99		)	3,300	%
Interest expense		(63		)	(34		)	(29		)	85	%
Net loss		$	(42,895	)	(19,572		)	$	(23,323	)	119	%

 

Revenue

 

The increase in revenue of $1.5 million for the three months ended June 30, 2015 compared to the same period in 2014 was principally due to increased testing activities, which resulted in increased cash collections. Approximately $1.5 million of revenue in the three months ended June 30, 2015 was from cash collections for tests delivered in 2015.

 

The increase in revenue of $2.6 million for the six months ended June 30, 2015 compared to the same period in 2014 was due to increased testing activities, which resulted in increased cash collections. Approximately $1.8 million of revenue in the six months ended June 30, 2015 was from cash collections for tests delivered in 2015.

 

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