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 consolidated financial statements and the related
notes included in our Annual Report on Form 10-K for the year ended December 31,
2020. Historic results are not necessarily indicative of future results.
This report contains forward­looking 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 forward­looking statements.
Forward­looking statements include, but are not limited to, statements about:
•our views regarding the future of genetic testing and its role in mainstream
medical practice;
•the impact of COVID-19 on our business and the actions we have taken or may
take in response thereto;
•our mission and strategy for our business, products and technology, including
our ability to expand our content and develop new content while maintaining
attractive pricing, further enhance our genetic testing service and the related
user experience, build interest in and demand for our tests and attract
potential partners;
•the implementation of our business model;
•the expected benefits from and our ability to integrate our acquisitions;
•our ability to obtain regulatory approvals for our tests;
•the rate and degree of market acceptance of our tests and genetic testing
generally;
•our ability to scale our infrastructure and operations in a cost­effective
manner;
•the timing of and our ability to introduce improvements to our genetic testing
platform and to expand our assays to include additional genes;
•the timing and results of studies with respect to our tests;
•developments and projections relating to our competitors and our industry;
•our competitive strengths;
•the degree to which individuals will share genetic information generally, as
well as share any related potential economic opportunities with us;
•our commercial plans, including our sales and marketing expectations as well as
our ability to expand internationally;
•our ability to obtain and maintain adequate reimbursement for our tests;
•regulatory developments in the United States and foreign countries;
•our ability to attract and retain key scientific, sales, engineering or
management personnel;
•our expectations regarding our ability to obtain and maintain intellectual
property protection and not infringe on the rights of others;
•our ability to obtain funding for our operations and the growth of our
business, including potential acquisitions;
•our financial performance;
•the impact of accounting pronouncements and our critical accounting policies,
judgments, estimates and assumptions on our financial results;
•our expectations regarding our future revenue, cost of revenue, operating
expenses and capital expenditures, and our future capital requirements; and
•the impact of tax laws on our business.
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Forward­looking 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 forward­looking 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 forward­looking statements. Any
forward­looking statements in this report speak only as of the date of this
report. We expressly disclaim any obligation or undertaking to update any
forward­looking statements.
In this report, all references to "Invitae," "we," "us," "our," or "the Company"
mean Invitae Corporation.
Invitae and the Invitae logo are trademarks of Invitae Corporation. AMP™,
STRATAFIDE™, LiquidPlex™, VariantPlex® and FusionPlex®, are the property of
ArcherDX, LLC, a wholly owned subsidiary of Invitae Corporation. We also refer
to trademarks of other companies and organizations in this report.
Summary of risk factors
Our business is subject to numerous risks and uncertainties that could affect
our ability to successfully implement our business strategy and affect our
financial results. You should carefully consider all of the information in this
report and, in particular, the following principal risks and all of the other
specific factors described in this Item 1A. before deciding whether to invest in
our company.
•We face risks related to health epidemics, including the recent COVID-19
pandemic, which could have a material adverse effect on our business and results
of operations.
•We expect to continue incurring significant losses, and we may not successfully
execute our plan to achieve or sustain profitability.
•Our inability to raise additional capital on acceptable terms in the future may
limit our ability to develop and commercialize new tests and expand our
operations.
•We have acquired and may continue to acquire businesses or assets, form joint
ventures or make investments in other companies or technologies that could harm
our operating results, dilute our stockholders' ownership, or cause us to incur
debt or significant expense.
•We rely on highly skilled personnel in a broad array of disciplines and, if we
are unable to hire, retain or motivate these individuals, or maintain our
corporate culture, we may not be able to maintain the quality of our services or
grow effectively.
•We need to scale our infrastructure in advance of demand for our tests, and our
failure to generate sufficient demand for our tests would have a negative impact
on our business and our ability to attain profitability.
•If third-party payers, including managed care organizations, private health
insurers and government health plans do not provide adequate reimbursement for
our tests or we are unable to comply with their requirements for reimbursement,
our commercial success could be negatively affected.
•We face intense competition, which is likely to intensify further as existing
competitors devote additional resources to, and new participants enter, the
market. If we cannot compete successfully, we may be unable to increase our
revenue or achieve and sustain profitability.
•We may not be able to manage our future growth effectively, which could make it
difficult to execute our business strategy.
•Security breaches, privacy issues, loss of data and other incidents could
compromise sensitive or personal information related to our business or prevent
us from accessing critical information and expose us to liability, which could
adversely affect our business and our reputation.
•If we are not able to continue to generate substantial demand of our tests, our
commercial success will be negatively affected.
•If our STRATAFIDE and PCM products and related services do not perform as
expected, we may not realize the expected benefits of our recent acquisition of
ArcherDX.
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•The future growth of our distributed products business is partially dependent
upon regulatory approval and market acceptance of our IVD products, including
STRATAFIDE and PCM.
•Our success will depend on our ability to use rapidly changing genetic data to
interpret test results accurately and consistently, and our failure to do so
would have an adverse effect on our operating results and business, harm our
reputation and could result in substantial liabilities that exceed our
resources.
•If the FDA regulates the tests we currently offer as LDTs as medical devices,
we could incur substantial costs and our business, financial condition and
results of operations could be adversely affected.
•If we are unable to transition to the new European Union IVDR regulations, we
could lose the ability to serve the European market.
•We may not be able to obtain regulatory clearance or approval of our IVD
products, or even if approved, such products may not be approved for guideline
inclusion, which could adversely our ability to realize the intended benefits of
our acquisition of ArcherDX.
•One of ArcherDX's competitors has alleged that its Anchored Multiplex PCR, or
AMP, chemistry and products using AMP are infringing on its intellectual
property, and ArcherDX may be required to redesign the technology, obtain a
license, cease using the AMP chemistry altogether and/or pay significant
damages, among other consequences, any of which would have a material adverse
effect on ArcherDX's business as well as our financial condition and results of
operations, and the intended benefits of our acquisition of ArcherDX.
•We have a large amount of debt, servicing our debt requires a significant
amount of cash, and our debt service obligations may prevent us from taking
actions that we would otherwise consider to be in our best interests.
Mission and strategy
Invitae's mission is to bring comprehensive genetic information into mainstream
medical practice to improve the quality of healthcare for billions of people.
Our goal is to aggregate a majority of the world's genetic information into a
comprehensive network that enables sharing of data among network participants to
improve healthcare and clinical outcomes.
We were founded on four core principles:
•Patients should own and control their own genetic information;
•Healthcare professionals are fundamental in ordering and interpreting genetic
information;
•Driving down the price of genetic information will increase its clinical and
personal utility; and
•Genetic information is more valuable when shared.
Our strategy for long-term growth centers on five key drivers of our business,
which we believe work in conjunction to create a flywheel effect extending our
leadership position in the new market we are building:
                    [[Image Removed: nvta-20210930_g2.jpg]]
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•Expanding our content offering. We intend to continue steadily adding
additional testing and analysis content to the Invitae platform, ultimately
leading to affordable and ongoing access to the molecular information that
enables personalized medicine. The breadth and depth of our offering is a core
and central contribution to an improved user experience.
•Creating a unique user experience. A state-of-the-art interactive platform will
enhance our service offering, leverage the uniquely empowering characteristics
of online sharing of genetic information and, we believe, enable a superior
economic offering to clients. We intend to continue to expend substantial
efforts developing, acquiring and implementing technology-driven improvements to
our customers' experience. We believe that an enhanced user experience and the
resulting benefits to our brand and reputation will help draw customers to us
over and above our direct efforts to do so.
•Driving volume. We intend to increase our brand equity and visibility through a
commitment to precision testing results, excellent service and a variety of
education, marketing and promotional techniques, including scientific
publications and presentations, sales, marketing, public relations, social media
and web technology vehicles. We believe that rapidly increasing the number of
customers using our platform helps us to attract partners.
•Attracting partners. As we add more customers to our platform, we believe our
business becomes particularly attractive to potential partners that can help the
patients in our network further benefit from their genetic information or that
provide us access to new customers who may wish to join our network. We believe
the cumulative effect of the increased volume brought by these strategic
components will allow us to lower the cost of our service and expand patient
access globally.
•Lowering the cost and price of genetic information. Our goal is to provide
customers with a broad menu of genetic content at a reasonable price and rapid
turn-around times in order to grow volume and, in turn, achieve greater
economies of scale. As our customers and our business benefit from further cost
savings, we expect that those cost savings will allow us to deliver still more
comprehensive information at decreasing prices and further improve the customer
experience, allowing us to reap the cumulative benefits from all of the efforts
outlined above.
We seek to differentiate our service in the market by establishing an
exceptional experience for our customers. To that end, we believe that elevating
the needs of the customer over those of our other stakeholders is essential to
our success. Thus, in our decision-making processes, we strive to prioritize, in
order:
•The needs of our customers;
•Motivating our employees to serve our customers; and
•Our long-term stockholder value.
We are certain that focusing on customers as our top priority rather than
short-term financial goals is the best way to build and operate an organization
for maximum long-term value creation.
Business overview
We offer high-quality, comprehensive, affordable genetic testing across multiple
clinical areas, including hereditary cancer, cardiology, neurology, pediatrics,
personalized oncology, metabolic conditions and rare diseases. To augment our
offering and realize our mission, we have acquired multiple assets and
businesses, which expanded our suite of genome management offerings and
established a broader entry into key genomics markets.
To date in 2021, we have completed the acquisitions of Reference Genomics, Inc.
d/b/a One Codex, or One Codex, Genosity, Inc., or Genosity, Medneon LLC, or
Medneon, and Ciitizen Corporation, or Ciitizen. One Codex is a data platform for
applied microbial genomics. Its acquisition adds capabilities across microbiome
and infectious disease testing capabilities and allows us to deliver a
high-quality, low-cost, end-to-end metagenomics product (sequencing and results)
and enables the development of future offerings in infectious disease, preterm
birth and wellness.
Genosity is a genomics and laboratory services company offering software and
laboratory solutions that enable the deployment of complex sequencing-based
cancer testing. The acquisition brings Genosity's specialized capabilities onto
the Invitae platform to accelerate the time to market and decentralization of
Invitae's personalized oncology offerings, including somatic and germline
offerings used in screening, therapy selection and personalized cancer
monitoring.
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The Medneon digital platform combines AI and human insights with actionable
information regarding an individual's cancer risk to inform precision prevention
and management over time at the point-of-care or through telemedicine.
Ciitizen is a patient-centric consumer health tech company working to build a
global platform to help patients collect, organize, store and share their
medical records digitally.
In October 2020, we completed the acquisition of ArcherDX, Inc., or ArcherDX, a
genomics company democratizing precision oncology by offering a suite of
products and services that are accurate, personal, actionable and easy to use in
local settings, thereby empowering clinicians to control the sample, data,
patient care and economics. As part of the acquisition we agreed to pay
contingent consideration based on the achievement of five post-closing
development, regulatory and revenue milestones. The first milestone was achieved
in November 2020, and in June 2021, three additional milestones were achieved or
deemed to be achieved. The remaining milestone is based upon receiving FDA
clearance or approval of STRATAFIDE, which per the terms of the acquisition
agreement, must be completed by March 31, 2022, subject to certain extensions.
Based on the current development timeline, during the three months ended June
30, 2021, we determined that this milestone will not be met by the required
achievement date per the acquisition agreement, although we expect to receive
FDA clearance or approval at a later date.
We have experienced rapid growth. For the years ended December 31, 2020, 2019
and 2018, our revenue was $279.6 million, $216.8 million, and $147.7 million,
respectively, and we incurred net losses of $602.2 million, $242.0 million, and
$129.4 million, respectively. For the nine months ended September 30, 2021 and
2020, our revenue was $334.3 million and $179.2 million, respectively, and we
recognized net loss of $173.9 million and $367.8 million, respectively. At
September 30, 2021, our accumulated deficit was $1.5 billion. To meet the
demands of scaling our business, we increased our number of employees to
approximately 2,900 at September 30, 2021 from approximately 1,500 on
September 30, 2020. Our sales force grew to 335 employees at September 30, 2021
from 306 at September 30, 2020.
Sales of our tests have grown significantly. In 2020, 2019 and 2018, we
generated 659,000, 469,000 and 292,000 billable units, respectively. In the nine
months ended September 30, 2021, we generated 842,000 billable tests compared to
421,000 billable tests in the same period in 2020. We calculate volume using
billable units, which are billable events that include individual test reports
released and individual reactions shipped. We refer to the set of reagents
needed to perform an NGS test as a "reaction." Approximately 57% of the billable
volume generated in the first nine months of 2021 were billable to patients,
biopharmaceutical partners and other business-to-business customers (e.g.,
hospitals, clinics, medical centers), and the remainder were billable to
third-party payers. Many of the gene tests on our assays are tests for which
insurers reimburse. However, when we do not have reimbursement policies or
contracts with private insurers, our claims for reimbursement may be denied upon
submission, and we must appeal the claims. The appeals process is time consuming
and expensive, and may not result in payment. Even if we are successful in
achieving reimbursement, we may be paid at lower rates than if we were under
contract with the third-party payer. When there is not a contracted rate for
reimbursement, there is typically a greater payment requirement from the patient
that may result in further delay in payment for these tests.
We expect to incur operating losses for the near term as we continue to invest
in our business to achieve our revenue growth objectives, including expansion of
our platform to capture the broad potential of genetics across healthcare and
expansion into new laboratory and production facilities, and expect we will need
to raise additional capital in order to fund our operations. If we are unable to
achieve these objectives and successfully manage our costs, we may not be able
to achieve profitability in the near term or at all.
We believe that the keys to our future growth will be to increase billable
volume, achieve broad reimbursement coverage for our tests from third-party
payers and increase our payment amounts from other types of payers, drive down
the price for genetic analysis and interpretation, 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 and increase the number of strategic partners working with us to add
value for our clients. We also believe that providing a unique genetic testing
platform that is agnostic to stage of life or disease category will deliver
unique benefits to customers, payers and other institutions that are seeking to
make genetic information a standard element of healthcare decisions in the
future.
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Impact of COVID-19
Our billable volumes decreased significantly in the second half of March 2020 as
compared to the first few months of 2020 as a result of COVID-19 and related
limitations and priorities across the healthcare system. Our daily test volumes
have recovered from the low in March 2020, although the current COVID-19
pandemic continues to impact our business operations and practices. While we
expect that it may continue to impact our business, we experienced limited
disruption during the third quarter of 2021. We have reviewed and adjusted, when
necessary, for the impact of COVID-19 on our estimates related to revenue
recognition and expected credit losses.
In response to the pandemic we have implemented measures to protect the health
of all of our employees during this time with additional measures in place to
better protect our on-site lab production and support teams. Our production
facilities currently remain fully operational. While we have not experienced
significant disruption in our supply chain, we have experienced supply delays as
a result of the COVID-19 pandemic and have also had to obtain supplies from new
suppliers. Although we do not yet know the full impact COVID-19 may have on our
supply chain, we have increased our inventory on hand to respond to potential
future disruptions that may occur.
Many announced healthcare guidelines call for a shift of regular physician
visits and healthcare delivery activities to remote/telehealth formats. This is
particularly important for patients who, despite the fall-out from COVID-19,
continue to be diagnosed with critical diseases, like cancer, and for women who
are pregnant or are trying to conceive. We believe our investments in new access
platforms and technologies has and will continue to position us well to provide
a range of testing to clinicians and patients using a "clinical care from afar"
model. An example is our rollout in April 2020 of our Gia telehealth platform,
which expands access to remote interaction between patients and clinicians as
well as direct ordering of genetic tests. Such access helped to counteract some
of the adverse in-office impacts of COVID-19, allowing continuation of key
testing categories in a safe environment.
Given the unknown duration and extent of COVID-19's impact on our business, and
the healthcare system in general, we adapted our spending and investment levels
in 2020 and continue to monitor evolving market conditions, including focusing
commercial execution on workflows that support remote ordering, online support
and telehealth.
In March 2020, the Coronavirus Aid, Relief, and Economic Security Act, or CARES
Act, was signed into law as a stimulus bill intended to bolster the economy,
among other things, and provide assistance to qualifying businesses and
individuals. The CARES Act included an infusion of funds into the healthcare
system; in April 2020, we received $3.8 million as a part of this initiative,
and in January 2021, we received an additional $2.3 million. These payments were
recognized as other income, net in our consolidated statement of operations in
the periods received. At this time, we are not certain of the availability,
extent or impact of any future relief provided under the CARES Act.
Factors affecting our performance
Number of billable units
Our centralized test revenue is tied to the number of tests which we bill
third-party payers, biopharmaceutical partners, other business-to-business
customers (e.g., hospitals, clinics, medical centers), or patients. Our
decentralized product revenue is based upon the number of individual reactions
we ship biopharmaceutical partners and other business-to-business customers. We
refer to the set of reagents needed to perform an NGS test as a "reaction," and
we refer to billable events that include individual test reports released and
individual reactions shipped as billable units. We typically bill for our
services following delivery of the billable report derived from testing samples
and interpreting the results. For units manufactured for use by customers in
distributed facilities, we typically bill customers upon shipment of those
units. Test orders are placed under signed requisitions or contractual
agreements, as we often enter into contracts with biopharmaceutical partners,
other business-to-business customers and insurance companies that include
pricing provisions under which such tests are billed. We incur the expenses
associated with a unit in the period in which the unit is processed regardless
of when payment is received with respect to that unit. We believe the number of
billable units in any period is an important indicator of the growth in our
testing business, and with time, this will translate into the number of
customers accessing our platform.
Number and size of research and commercial partnerships
Pharma development services revenue, which we recognize within other revenue in
our consolidated statements of operations, is generated primarily from services
provided to biopharmaceutical companies and other partners and is related to
companion diagnostic development, clinical research, and clinical trial services
across the research, development and commercialization phases of collaborations.
The result of these relationships may
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include the development of new targeted companion diagnostics, which underscore
and expand the need for genetic testing and in some cases may lead to
intellectual property and/or revenue sharing opportunities with third-party
partners.
In addition to research partnerships, we also seek to grow the number of
biopharmaceutical partners and other business-to-business customers for whom we
provide testing technologies, analysis, supplies and expertise to institutions
that provide independent testing services to customers in their respective
regions.
Success obtaining and maintaining reimbursement
Our ability to increase volume and revenue will depend in part on our success
achieving broad reimbursement coverage and laboratory service contracts for our
tests from third-party payers and agreements with institutions and partners.
Reimbursement may depend on a number of factors, including a payer's
determination that a test is appropriate, medically necessary and
cost-effective, as well as whether we are in contract, where we get paid more
consistently and at higher rates. Because each payer makes its own decision as
to whether to establish a policy or enter into a contract to reimburse for our
testing services and specific tests, seeking these approvals is a time-consuming
and costly process. In addition, clinicians and patients may decide not to order
our tests if the cost of the test is not covered by insurance. Because we
require an ordering physician to requisition a test, our revenue growth also
depends on our ability to successfully promote the adoption of our testing
services and expand our base of ordering clinicians. We believe that
establishing coverage and obtaining contracts from third-party payers is an
important factor in gaining adoption by ordering clinicians. Our arrangements
for laboratory services with payers cover approximately 320 million lives,
comprised of Medicare, all national commercial health plans, and Medicaid in
most states, including California (Medi-Cal), our home state.
Ability to lower the costs associated with performing our tests
Reducing the costs associated with performing our genetic tests is both a focus
and a strategic objective of ours. Over the long term, we will need to reduce
the cost of raw materials by improving the output efficiency of our assays and
laboratory processes, modifying our platform-agnostic assays and laboratory
processes to use materials and technologies that provide equal or greater
quality at lower cost, improve how we manage our materials, port some tests onto
a next generation sequencing platform and negotiate favorable terms for our
materials purchases. Our acquisition of Singular Bio, Inc. is a component of
this objective, and we expect the technology acquired in this transaction, once
developed, to help decrease the costs associated with our NIPS offering. We also
intend to continue to design and implement hardware and software tools that are
designed to reduce personnel-related costs for both laboratory and clinical
operations/medical interpretation by increasing personnel efficiency and thus
lowering labor costs per test. Finally, we plan to reduce the cost of providing
test equipment and software to laboratories and other facilities in the United
States. and internationally. Those efforts are designed to enable a more rapid
expansion of genetic testing and patient access, enlarging our geographic
footprint outside the United States while achieving lower costs.
Ability to expand our genetic content and create new pathways to test
We believe our focus on reducing the average cost per test will have a
countervailing force - increasing the number of tests we offer, the content of
each test and the means to connect our testing services with patients and
physicians. We intend to continue to expand our test menus by steadily releasing
additional genetic content for affordable prices, 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, including
internationally, for genetic testing services. Both of these, in conjunction
with our continued focus on strategic partnerships, will be important to our
ability to continue to grow the volume of billable tests we deliver. We have and
will continue to identify new ways to connect our testing services and
information to patients. These include direct patient outreach and ordering
capacity, the use of automated assistants for physician customers to improve the
ease of ordering and processing genetic tests and programs designed to reach
underserved patient populations with genetic testing.
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Investment in our business and timing of expenses
We plan to continue to invest in our genetic testing and information management
business. We deploy state-of-the-art technologies in our genetic testing
services, and we intend to continue to scale our infrastructure, including our
testing capacity and capabilities as well as our information systems. We plan to
do this through the acquisition of assets and businesses and expansion of our
workforce and facilities, such as our new laboratory and production facility in
North Carolina which we expect to support our continued growth by significantly
expanding our testing capacity. We also expect to incur software development
costs as we seek to further automate our laboratory processes and our genetic
interpretation and report sign-out procedures, scale our customer service
capabilities to improve our customers' experience, and expand the functionality
of our website. We also expect to incur costs as we seek to provide the testing
equipment and software necessary to enable decentralized genetic and genomic
testing in the United States and internationally. We will incur costs related to
marketing and branding as we spread our initiatives beyond our current customer
base and focus on providing access to customers through our website. We plan to
hire additional personnel as necessary to support anticipated growth, including
software engineers, sales and marketing personnel, billing personnel, research
and development personnel, medical specialists, biostatisticians and
geneticists. We will also incur additional costs related to the expansion of our
production facilities to accommodate growth and as we expand domestically and
internationally, including increased operating costs and capital expenditures
related to the buildout of our new laboratory and production facility in North
Carolina. In addition, we will incur ongoing expenses as a result of operating
as a public company. The expenses we incur may vary significantly by quarter as
we focus on building out different aspects of our business.
How we recognize revenue
We generally recognize revenue on an accrual basis, which is when a customer
obtains control of the promised goods or services, typically a test report.
Accrual amounts recognized are based on estimates of the consideration that we
expect to receive, and such estimates are adjusted and subsequently recorded
until fully settled. Changes to such estimates may increase or decrease revenue
recognized in future periods. Revenue from our tests may not be equal to billed
amounts due to a number of factors, including differences in reimbursement
rates, the amounts of patient payments, the existence of secondary payers and
claim denials. Some test orders are placed under signed requisitions or
contractual agreements, and we often enter into contracts with biopharmaceutical
partners, other business-to-business customers and insurance companies that
include pricing provisions under which such tests are billed.
Pharma development service revenues are generated primarily from custom assay
design services, sample processing activities and consultative inputs, which is
separate from revenue generated by any related or unrelated product component.
Revenue is recognized as samples are processed or scope of work is completed
based on contracted agreements with those biopharmaceutical customer companies.
Under these collaborations, we also generate revenue from achievement of
milestones, provision of on-going support, and related pass-through costs and
fees. We generally have distinct performance obligations for development
milestones related to our development of a companion diagnostic device. We use a
cost plus a margin approach to estimate the standalone value of our companion
diagnostic development service performance obligations. Revenue is recognized
over time using input or output methods based on our assessments of performance
completed to date toward each milestone.
Financial overview
Revenue
We primarily generate revenue from testing services and sales of distributed
precision oncology products. Customers are typically billed upon delivery of
test results or shipment of products. We also generate revenue from development
agreements, access to data, data analytics and other related services provided
for biopharmaceutical partners and other parties. Our ability to increase our
revenue will depend on our ability to increase our market penetration, obtain
U.S. Food and Drug Administration, or FDA, and other international regulatory
authority approvals on future products and services offerings, obtain contracted
reimbursement coverage from third-party payers, and grow our relationships with
biopharmaceutical customers.
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Cost of revenue
Cost of revenue reflects the aggregate costs incurred in delivering our products
and services and includes expenses for materials and supplies, personnel-related
costs, freight, costs for lab services and clinical trial support, equipment and
infrastructure expenses and allocated overhead including rent, information
technology, equipment depreciation, amortization of acquired intangibles, and
utilities. We expect cost of revenue to generally increase in line with the
increase in billable volume, however, we expect a future increase in
amortization of acquired intangible assets that is not dependent on billed
volume. We anticipate our cost per unit for existing tests will generally
decrease over time due to the efficiencies we expect to gain as volume increases
and from automation and other cost reductions. These reductions in cost per unit
will likely be offset by new offerings which often have a higher costs per unit
during the introductory phases before we are able to gain efficiencies. The cost
per unit may fluctuate significantly from quarter to quarter.
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 generally personnel-related 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 offerings. These costs are principally for process
development associated with our efforts to expand the number of genes we can
evaluate, our efforts to lower the costs per unit and our development of new
products to expand our platform. We have and may continue to partner with other
companies to develop new technologies and capabilities; we expect to invest
capital and incur significant operating costs to support these development
efforts. In addition, we incur process development costs to further develop the
software we use to operate our laboratories, analyze generated data, process
customer orders, validate clinical activities, enable ease of customer ordering,
deliver reports and automate our business processes. These costs consist of
personnel-related costs, laboratory supplies and equipment expenses, consulting
costs, amortization of acquired intangible assets, and allocated overhead
including rent, information technology, equipment depreciation and utilities.
We expense all research and development costs in the periods in which they are
incurred. We expect our research and development expenses to significantly
increase as we continue our efforts to develop additional offerings, make
investments to reduce costs, streamline our technology to provide patients
access to testing, scale our business domestically and internationally and
acquire and integrate new technologies.
Selling and marketing
Selling and marketing expenses consist of personnel-related costs, including
commissions, client service expenses, advertising and marketing expenses,
educational and promotional expenses, market research and analysis, and
allocated overhead including rent, information technology, equipment
depreciation, amortization of acquired intangibles, and utilities. We expect our
selling and marketing expenses to increase as we continue to build our brand and
focus on advertising our products and services.
General and administrative
General and administrative expenses include executive, finance and accounting,
billing and collections, legal and human resources functions as well as other
administrative costs. These expenses include personnel-related costs; audit,
accounting and legal expenses; consulting costs; allocated overhead including
rent, information technology, equipment depreciation, and utilities; costs
incurred in relation to our co-development agreements; and post-combination
expenses incurred in relation to companies we acquire. We expect our general and
administrative expenses to generally increase as we support continued growth of
operations.
Change in fair value of contingent consideration
Changes in fair value of contingent consideration are adjustments related to
contingent consideration acquired primarily through business combinations. We
expect these expenses to fluctuate significantly period to period due to fair
value adjustments that are dependent on many factors, including the value of our
common stock and our assessment of the probability of meeting certain
acquisition-related milestones within the terms of the respective acquisition
agreements, including certain prescribed deadlines for achievement.
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Other income (expense), net
Other income (expense), net, primarily consists of adjustments to the fair value
of our stock payable liabilities arising from business combinations, and we
expect it to fluctuate significantly from period to period due to the volatility
of our common stock. Other income (expense), net also includes income generated
from our cash equivalents and marketable securities and amounts received under
the CARES Act.
Interest expense
Interest expense is primarily attributable to interest incurred related to our
debt and finance leases. See Note 8, "Commitments and contingencies" in Notes to
Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report for
more details.
Income tax benefit
Since we generally establish a full valuation allowance against our deferred tax
balances, our income tax benefit primarily consists of tax impacts of our
deferred income tax assessments resulting from our acquisitions.
Critical accounting policies and estimates
Management's discussion and analysis of our financial condition and results of
operations is based on our consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles, or
U.S. GAAP. The preparation of these financial statements requires us to make
judgments, estimates and assumptions that affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, as well as the reported revenue generated and
expenses incurred during the reporting periods. We evaluate our estimates on an
ongoing basis. Our estimates are based on current facts, our historical
experience and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions and any such differences may be material. We believe
that our accounting policies are critical to understanding our historical and
future performance, as these policies relate to the more significant areas
involving management's judgments and estimates.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and estimates
described in our Annual Report on Form 10-K for the fiscal year ended December
31, 2020. See Note 2, "Summary of significant accounting policies" in the Notes
to Condensed Consolidated Financial Statements for information regarding recent
accounting pronouncements.
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Results of operations
Three Months Ended September 30, 2021 and 2020
The following sets forth our consolidated statements of operations data for each
of the periods indicated (in thousands, except percentage changes). Our
historical results are not necessarily indicative of our results of operations
to be expected for any future period.
                                                    Three Months Ended September 30,               Dollar                %
                                                        2021                    2020               Change             Change
Revenue:
Test revenue                                    $         111,676          $    67,326          $  44,350               66%
Other revenue                                               2,719                1,402              1,317               94%
Total revenue                                             114,395               68,728             45,667               66%

Cost of revenue                                            87,741               46,643             41,098               88%
Research and development                                   97,511               37,802             59,709              158%
Selling and marketing                                      55,501               37,800             17,701               47%
General and administrative                                 86,820               27,810             59,010              212%
Change in fair value of contingent
consideration                                             (19,866)                (504)           (19,362)              N/M

Loss from operations                                     (193,312)             (80,823)          (112,489)             139%
Other income (expense), net                                 3,357              (15,771)            19,128             (121)%
Interest expense                                          (14,069)              (6,308)            (7,761)             123%
Net loss before taxes                                    (204,024)            (102,902)          (101,122)              98%
Income tax benefit                                         (5,848)                   -             (5,848)            (100)%
Net loss                                        $        (198,176)         $  (102,902)         $ (95,274)              93%


Revenue
The increase in total revenue of $45.7 million for the three months ended
September 30, 2021 compared to the same period in 2020 was due primarily to
increased billable volume due to growth in our business as well as due to
businesses acquired. Billable volume increased to approximately 296,000 in the
three months ended September 30, 2021 compared to 157,000 in the same period of
2020, an increase of 89 percent, due to growth in the business. Average revenue
per unit decreased to $377 per unit in the three months ended September 30, 2021
compared to $429 per unit in the comparable prior period primarily due to
changes in payer and product mix, the impact of business acquisitions and
reductions in pricing for some payers as we focus on providing cost effective
genetic testing.
Cost of revenue
The increase in the cost of revenue of $41.1 million for the three months ended
September 30, 2021 compared to the same period in 2020 was primarily due to
increased billable volume, the impact of business acquisitions, and charges
related to excess inventory, partially offset by the effect of cost
efficiencies. Cost per unit was $296 in the three months ended September 30,
2021 compared to $297 for the same period in 2020. The cost per unit slightly
decreased primarily due to better cost absorption and operations productivity.
These decreases were partially offset by an increase in amortization of acquired
intangible assets of $8.7 million, an increase in write downs of certain
inventory items of $2.9 million, as well as changes in product mix.
Research and development
The increase in research and development expense of $59.7 million for the three
months ended September 30, 2021 compared to the same period in 2020 was due to
growth in the business as well as the impact of business acquisitions. The
increase primarily relates to increases in personnel-related expenses of $22.7
million largely due to personnel acquired via acquisition, $11.2 million in
allocations from primarily cost of revenue personnel allocations to research and
development, $9.8 million in professional fees, $7.2 million in lab-related
expenses due primarily to increased costs related to lab supplies, $4.3 million
in technology costs, and $2.0 million in depreciation and amortization costs.
                                       39

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Selling and marketing
The increase in selling and marketing expense of $17.7 million for the three
months ended September 30, 2021 compared to the same period in 2020 was due
primarily to the growth of the business and principally consisted of increases
in personnel-related costs of $9.1 million primarily reflecting increased
headcount and includes an increase in sales commissions of $1.6 million,
marketing costs of $4.1 million, travel-related costs of $1.4 million,
depreciation and amortization expense of $0.9 million, technology costs of $0.4
million, and professional fees of $0.2 million.
General and administrative
The increase in general and administrative expense of $59.0 million for the
three months ended September 30, 2021 compared to the same period in 2020 was
due principally to growth in the business which resulted in an increase of $40.2
million in legal and accounting services primarily due to increased
acquisition-related transaction costs, personnel-related costs by $10.6 million,
$5.3 million in occupancy expense, $5.2 million in professional fees and $3.7
million in information technology expenses for software licenses and related
costs.
Change in fair value of contingent consideration
The increase in the change in fair value of contingent consideration of $19.4
million for the three months ended September 30, 2021 compared to the same
period in 2020 was due principally to adjustments to decrease our contingent
consideration liability primarily related to our acquisition of ArcherDX.
Other income (expense), net
The increase in other income, net of $19.1 million for the three months ended
September 30, 2021 compared to the same period in 2020 was primarily due to
decreases in fair value adjustments related to our stock payable liabilities of
$19.6 million due to the decrease in the price of our common stock, partially
offset by a decrease of amounts received under the CARES Act.
Interest expense
The increase in interest expense of $7.8 million for the three months ended
September 30, 2021 compared to the same period in 2020 was primarily due to
increased debt outstanding compared to the prior year period, partially offset
by the impact of the adoption of ASU 2020-06, which reduced the interest expense
recognized related to our convertible senior notes during 2021.
Income tax benefit
The increase in income tax benefit of $5.8 million was primarily due to the net
deferred tax liabilities assumed in connection with our acquisition of Ciitizen
in September 2021, while there was no similar income tax benefit in the prior
year period.
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Nine Months Ended September 30, 2021 and 2020
The following sets forth our consolidated statements of operations data for each
of the periods indicated (in thousands, except percentage changes). Our
historical results are not necessarily indicative of our results of operations
to be expected for any future period.
                                                    Nine Months Ended September 30,               Dollar                %
                                                       2021                    2020               Change             Change
Revenue:
Test revenue                                    $        322,448          $   175,503          $ 146,945               84%
Other revenue                                             11,880                3,664              8,216              224%
Total revenue                                            334,328              179,167            155,161               87%

Cost of revenue                                          252,563              130,017            122,546               94%
Research and development                                 284,323              168,433            115,890               69%
Selling and marketing                                    163,705              119,440             44,265               37%
General and administrative                               197,640               77,638            120,002              155%
Change in fair value of contingent
consideration                                           (386,836)               4,328           (391,164)              N/M

Loss from operations                                    (177,067)            (320,689)           143,622              (45)%
Other income (expense), net                                9,846              (32,499)            42,345             (130)%
Interest expense                                         (35,869)             (17,244)           (18,625)             108%
Net loss before taxes                                   (203,090)            (370,432)           167,342              (45)%
Income tax benefit                                       (29,208)              (2,600)           (26,608)              N/M
Net loss                                        $       (173,882)         $  (367,832)         $ 193,950              (53)%


Revenue
The increase in total revenue of $155.2 million for the nine months ended
September 30, 2021 compared to the same period in 2020 was due primarily to
increased billable volume product mix and pricing due to growth in our business
and due to businesses acquired. Billable volume increased to 842,000 in the nine
months ended September 30, 2021 compared to 421,000 in the same period of 2020,
an increase of 100 percent, due to growth in the business as well as the impact
of COVID-19 on billable volume in the prior year period. Average revenue per
test decreased to $383 per test in the nine months ended September 30, 2021
compared to $417 per test in the comparable prior period primarily due to
changes in payer and product mix, as well as reductions in pricing for some
payers as we focus on providing cost effective genetic testing.
Cost of revenue
The increase in the cost of revenue of $122.5 million for the nine months ended
September 30, 2021 compared to the same period in 2020 was primarily due to
increased billable volume, the impact of business acquisitions, and an increase
in certain inventory reserves, partially offset by the effect of cost
efficiencies. Cost per unit was $300 in the nine months ended September 30, 2021
compared to $309 for the same period in 2020. The decrease in cost per unit in
the nine months ended September 30, 2021 was primarily attributable to lower
billable volume during the prior year period as a result of COVID-19 partially
offset by an increase in amortization of acquired intangible assets of $22.4
million, an increase in write downs of certain inventory items of $9.9 million,
as well as changes in product mix.
Research and development
The increase in research and development expense of $115.9 million for the nine
months ended September 30, 2021 compared to the same period in 2020 was due to
the growth of the business as well as the impact of business acquisitions and
primarily relates to increases in personnel-related expenses of $44.7 million,
$22.1 million in lab-related expenses due primarily to increased costs related
to lab services and supplies, $20.2 million in professional fees, $9.8 million
related to allocations from other functional areas including facilities and IT,
$9.3 million in technology costs, and $5.5 million in depreciation and
amortization expense.
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Selling and marketing
The increase in selling and marketing expense of $44.3 million for the nine
months ended September 30, 2021 compared to the same period in 2020 was due
primarily to the growth of the business and our increased spending on sales
initiatives subsequent to our cut backs in the second quarter of 2020 as a
response to COVID-19. The increase in selling and marketing expenses principally
consisted of the following elements: personnel-related costs increased by $32.1
million reflecting increased headcount and sales commissions of $5.7 million;
allocated expenses primarily from facilities and IT increased by $3.5 million;
$2.7 million in depreciation and amortization; marketing expenses for branding
initiatives and advertising by $2.2 million; and an increase in technology
expense by $1.5 million.
General and administrative
The increase in general and administrative expense of $120.0 million for the
nine months ended September 30, 2021 compared to the same period in 2020 was due
primarily to costs due to the growth of the business and the effect of our
business acquisitions, including: personnel-related costs by $57.2 million which
includes stock-based compensation of $34.0 million, which was primarily due to
the acceleration of certain awards granted in our acquisition of ArcherDX offset
by a reduction in stock-based compensation due to the reduction in likelihood of
completing a development milestone within the timeframe prescribed in the
acquisition agreement; legal and accounting services by $50.8 million; occupancy
costs by $11.9 million; information technology costs by $8.4 million due to
software licenses and related expenses; and professional fees by $6.5 million.
These costs were partially offset by a decrease of $17.2 million in allocations
of technology and facilities-related expenses to other functional areas.
Change in fair value of contingent consideration
The increase in the change in fair value of contingent consideration of $391.2
million for the nine months ended September 30, 2021 compared to the same period
in 2020 was due principally to adjustments to decrease our contingent
consideration liability related to ArcherDX resulting from a decrease in the
value of our common stock and the removal of our contingent consideration
liability relating to the outstanding milestone for FDA clearance or approval of
STRATAFIDE due to our determination that this milestone will not be achieved in
the timeframe prescribed in the acquisition agreement, although we expect to
receive FDA clearance or approval at a later date.
Other income (expense), net
The increase in other income, net of $42.3 million for the nine months ended
September 30, 2021 compared to the same period in 2020 was due principally to
fair value adjustments related to our stock payable liabilities of $47.1 million
due to the decrease in the price of our common stock, partially offset by
amounts received under the CARES Act and the net changes in amounts recognized
related to our marketable securities.
Interest expense
The increase in interest expense of $18.6 million for the nine months ended
September 30, 2021 compared to the same period in 2020 was due principally to
increased debt outstanding as compared to the prior year period, partially
offset by the impact of the adoption of ASU 2020-06, which reduced the interest
expense recognized related to our convertible senior notes during 2021.
Income tax benefit
The increase in income tax benefit of $26.6 million was due to the net deferred
tax liabilities assumed in connection with our acquisitions of One Codex,
Genosity and Ciitizen in 2021 as compared to only $2.6 million from our
acquisition of YouScript in April 2020.
Liquidity and capital resources
Liquidity and capital expenditures
We have generally incurred net losses since our inception. For the nine months
ended September 30, 2021 and 2020, we had net losses of $173.9 million and
$367.8 million, respectively, and we expect to incur additional losses in the
future. At September 30, 2021, we had an accumulated deficit of $1.5 billion.
While our revenue has increased over time, we may never achieve revenue
sufficient to offset our expenses.
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Since inception, our operations have been financed primarily by fees collected
from our customers, net proceeds from sales of our capital stock as well as
borrowing from debt facilities and the issuance of convertible senior notes.
In April 2020, we issued, in an underwritten public offering, an aggregate of
20.4 million shares of our common stock at a price of $9.00 per share, for gross
proceeds of $184.0 million and net proceeds of $173.0 million. In 2020, we
issued 3.6 million shares of common stock at an average price of $26.33 per
share in an "at the market" offering for aggregate proceeds of $93.7 million and
net proceeds of $90.7 million. In January 2021, we issued, in an underwritten
public offering, an aggregate of 8.9 million shares of our common stock at a
price of $51.50 per share, for gross proceeds of $460.0 million and net proceeds
of $434.3 million.
In September 2019, we issued $350.0 million of aggregate principal amount of
convertible senior notes due 2024, which bear cash interest at a rate of 2.0%
per year. Also in September 2019, we used the funds received through the
issuance of our convertible senior notes due 2024 to settle our Note Purchase
Agreement we entered into in November 2018. In April 2021, we issued $1.2
billion of aggregate principal amount of convertible senior notes due 2028,
which bear cash interest at a rate of 1.5% per year.
In October 2020 in connection with our acquisition of ArcherDX, we issued $275.0
million of our common stock in a private placement at a price of $16.85 per
share to a syndicate of life sciences investors. We also entered into a credit
facility to borrow $135.0 million. The private placement and credit facility
closed concurrently with the merger in October 2020. The terms of this credit
facility restrict our ability to incur certain indebtedness, pay dividends, make
acquisitions and take other actions.
At September 30, 2021 and December 31, 2020, we had $1.3 billion and $360.7
million, respectively, of cash, cash equivalents, restricted cash and marketable
securities.
Our primary uses of cash are to fund our operations as we continue to grow our
business, enter into partnerships and potentially to acquire businesses and
technologies. Cash used to fund operating expenses is affected by the timing of
when we pay expenses, as reflected in the change in our outstanding accounts
payable and accrued expenses.
We have incurred substantial losses since inception, and we expect to continue
to incur losses in the future. We believe our existing cash, cash equivalents
and marketable securities as of September 30, 2021 and fees collected from the
sale of our products and services will be sufficient to meet our anticipated
cash requirements for at least the next 12 months.
We may need or choose to raise additional funding to finance operations prior to
achieving profitability or should we make additional acquisitions. We regularly
consider fundraising opportunities and expect to determine the timing, nature
and size of future financings based upon various factors, including market
conditions and our operating plans. We may in the future elect to finance
operations by selling equity or debt securities or borrowing money. We also may
elect to finance future acquisitions. If we issue equity securities, dilution to
stockholders may result. Any equity securities issued may also provide for
rights, preferences or privileges senior to those of holders of our common
stock. If we raise funds by issuing additional debt securities, these debt
securities would have rights, preferences and privileges senior to those of
holders of our common stock. In addition, the terms of additional debt
securities or borrowings could impose significant restrictions on our
operations. If additional funding is required, there can be no assurance that
additional funds will be available to us on acceptable terms on a timely basis,
if at all. If we are unable to obtain additional funding when needed, we may
need to curtail planned activities to reduce costs. Doing so will likely have an
unfavorable effect on our ability to execute on our business plan and have an
adverse effect on our business, results of operations and future prospects.
The following table summarizes our cash flows (in thousands):
                                                                     Nine

Months Ended September 30,


                                                                        2021                    2020
Net cash used in operating activities                            $       (383,897)         $  (184,920)
Net cash used in investing activities                                    (374,583)             (88,291)
Net cash provided by financing activities                               1,558,909              228,760
Net increase (decrease) in cash, cash equivalents and restricted
cash                                                             $        800,429          $   (44,451)


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Cash flows from operating activities
For the nine months ended September 30, 2021, cash used in operating activities
of $383.9 million principally resulted from our net loss of $173.9 million,
non-cash charges of remeasurements of liabilities in connection with business
combinations of $396.0 million, primarily relating to ArcherDX development
milestones and a $29.2 million income tax benefit primarily generated from our
acquisitions of One Codex, Genosity and Ciitizen. These were partially offset by
non-cash charges of $131.8 million for stock-based compensation, $56.8 million
for depreciation and amortization, $10.4 million for amortization of debt
discount and issuance costs related to our outstanding debt and $7.9 million of
post-combination expense primarily comprised of hold-back cash consideration
related to our acquisition of Ciitizen and the acceleration of unvested equity
from our acquisition of One Codex. The net effect on cash of changes in net
operating assets was an increase of cash of $1.0 million.
For the nine months ended September 30, 2020, cash used in operating activities
of $184.9 million principally resulted from our net loss of $367.8 million and a
$2.6 million income tax benefit generated from our acquisition of YouScript,
partially offset by non-cash charges of $102.3 million for stock-based
compensation, remeasurements of liabilities in connection with business
combinations of $42.4 million, $23.0 million for depreciation and amortization
and $11.1 million for amortization of debt discount and issuance costs related
to our Convertible Senior Notes. The net effect on cash of changes in net
operating assets was an increase of cash of $7.2 million.
Cash flows from investing activities
For the nine months ended September 30, 2021, cash used in investing activities
of $374.6 million was due primarily to net cash used to acquire One Codex,
Genosity and Ciitizen of $239.8 million, net purchases of marketable securities
of $97.9 million and cash used for purchases of property and equipment of $35.5
million.
For the nine months ended September 30, 2020, cash used in investing activities
of $88.3 million was due to net cash used to acquire Diploid, Genelex and
YouScript of $57.6 million, net purchases of marketable securities of $14.7
million and cash used for purchases of property and equipment of $14.0 million.
Cash flows from financing activities
For the nine months ended September 30, 2021, cash provided by financing
activities of $1.6 billion primarily consisted of net proceeds from the issuance
of our 2028 Notes of $1.1 billion and the public offering of common stock of
$434.3 million as well as cash received from issuances of common stock of $15.8
million.
For the nine months ended September 30, 2020, cash provided by financing
activities of $228.8 million consisted of net proceeds from the public offerings
of common stock of $217.5 million, cash received from issuances of common stock
of $9.1 million, partially offset by finance lease principal payments of $1.5
million.
Contractual obligations
The following table summarizes our contractual obligations, including interest,
as of September 30, 2021 (in thousands):
                                              Remainder of
Contractual obligations:                          2021              2022 and 2023           2024 and 2025           2026 and beyond             Total
Operating leases                             $     4,886          $        7,998          $       52,860          $           131,621       $   197,365
Finance leases                                     1,000                   8,570                   1,806                            -            11,376
Convertible senior notes                               -                       -                 349,996                    1,150,000         1,499,996
2020 Term Loan                                         -                       -                 135,000                            -           135,000
Purchase commitments                               8,527                  49,345                   8,825                            -            66,697
Total                                        $    14,413          $       65,913          $      548,487          $         1,281,621       $ 1,910,434


See Note 8, "Commitments and contingencies" in the Notes to Condensed
Consolidated Financial Statements for additional details regarding our leases,
convertible senior notes, 2020 Term Loan and purchase commitments.
Off-balance sheet arrangements
We have not entered into any off-balance sheet arrangements.
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Recent accounting pronouncements
See "Recent accounting pronouncements" in Note 2, "Summary of significant
accounting policies" in the Notes to Condensed Consolidated Financial Statements
included elsewhere in this report for a discussion of recently adopted
accounting pronouncements and accounting pronouncements not yet adopted, and
their expected effect on our financial position and results of operations.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risks in the ordinary course of our business. These
risks primarily relate to interest rates. Our cash, cash equivalents, restricted
cash and marketable securities totaled $1.3 billion at September 30, 2021, and
consisted primarily of bank deposits, money market funds, U.S. treasury notes,
and U.S. government agency securities. Such interest-bearing instruments carry a
degree of risk; however, because our investments are primarily high-quality
credit instruments with short-term durations with high-quality institutions, we
have not been exposed to, nor do we anticipate being exposed to, material risks
due to changes in interest rates. At September 30, 2021, a hypothetical 1.0%
(100 basis points) increase or decrease in interest rates would not have
resulted in a material change in the fair value of our cash equivalents and
marketable securities. Fluctuations in the value of our cash equivalents and
marketable securities caused by a change in interest rates (gains or losses on
the carrying value) are recorded in other comprehensive gain (loss) and are
realized if we sell the underlying securities prior to maturity.
Our 2020 Term Loan bears interest at an annual rate equal to three-month LIBOR,
subject to a 2.00% LIBOR floor, plus a margin of 8.75% and is therefore
sensitive to changes in interest rates. If three-month LIBOR can no longer be
determined or if the applicable governmental authority ceases to supervise or
sanction such rates, then we shall endeavor to agree with the administrative
agent, an alternate rate of interest that gives due consideration to the then
prevailing market convention for determining interest for comparable loans in
the United States; provided that until such alternative rate of interest is
agreed, the 2020 Term Loan shall bear interest at the Wall Street Journal Prime
Rate. We currently do not use interest rate derivative instruments to manage our
exposure to interest rate fluctuations.
Although our convertible senior notes are based on a fixed rate, changes in
interest rates could impact their fair market value. As of September 30, 2021,
the fair market value of the convertible senior notes due 2024 and due 2028
was $429.5 million and $1.2 billion respectively. For additional information
about the convertible senior notes, see Note 8, "Commitments and contingencies"
in Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of
this Quarterly Report.
ITEM 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
We maintain "disclosure controls and procedures," as such term is defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that
are designed to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating our disclosure
controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the disclosure
controls and procedures are met. Our disclosure controls and procedures have
been designed to meet reasonable assurance standards. Additionally, in designing
disclosure controls and procedures, our management necessarily was required to
apply its judgment in evaluating the cost-benefit relationship of possible
disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly
Report on Form 10-Q, our Chief Executive Officer (our principal executive
officer) and Chief Financial Officer (our principal financial officer) have
concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
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(b) Changes in internal control over financial reporting
During the quarterly period covered by this Quarterly Report on Form 10-Q, there
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

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