INVITAE CORPORATION 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 and other financial information included in Part I, Item 1. of this Form 10-Q, and together with our audited consolidated financial statements and the related notes and other information included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 the COVID-19 pandemic 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;
•the implementation of our business model and our success entering new markets;
•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;
•our expectations regarding our platform and future offerings;
•the timing and results of studies with respect to our tests;
•developments and expectations 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, political and other developments in
•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;
•the effects of litigation or investigations on our business;
•our ability to obtain funding for our operations and the growth of our business, including potential acquisitions;
•our future financial performance;
•our beliefs regarding our future growth and the drivers of such growth;
•our expectations regarding environmental, social and governance matters;
•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.
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 Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q.
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. Any forwardlooking statements
in this report speak
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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 and theInvitae logo are trademarks ofInvitae Corporation . AMP™, LiquidPlex™, VariantPlex® and FusionPlex®, are the property ofArcherDX, LLC , a wholly-owned subsidiary ofInvitae 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 Quarterly Report and, in particular, the following principal risks and all of the other specific factors described in Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q before deciding whether to invest in our company.
•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 other products and services, and our failure to generate sufficient demand for our products and services would have a negative impact on our business and our ability to attain profitability. •We face risks related to health epidemics, including the ongoing COVID-19 pandemic, which could have a material adverse effect on our business and results of operations. •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 markets in which we operate. 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.
•The market for patient data software is competitive, and our business will be adversely affected if we are unable to successfully compete.
•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 therapy selection IVDs and PCM products and related services do not perform as expected, we may not realize the expected benefits of our acquisition ofArcherDX .
•The future growth of our distributed products business is partially dependent upon regulatory approval and market acceptance of our IVD products.
•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.
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--------------------------------------------------------------------------------•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, we could lose
the ability to serve the
•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 affect our ability to realize the intended
benefits of our acquisition of
•One of our competitors has alleged that our Anchored Multiplex PCR, or AMP, chemistry and products using AMP are infringing on its intellectual property, and we 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 our business as well as our financial condition and results of operations, and the intended benefits of our acquisition ofArcherDX .
•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:
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•Expanding our content offering. We intend to continue steadily adding
additional testing and analysis content to the
•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 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 are focused on making comprehensive, high-quality genetic information more accessible and instrumental to the healthcare ecosystem and stakeholders, including patients, providers and physicians, payers, pharmaceutical partners and more. Our comprehensive and convenient physical and digital platform of risk assessment and the resulting data that is actionable and guided is designed to power healthcare decisions across our stakeholders, importantly providing patients a lifetime partner inInvitae to best guide and manage their personal and familial health decisions. We offer genetic testing across multiple clinical areas, including hereditary cancer, cardiology, neurology, pediatrics, personalized oncology, metabolic conditions and rare diseases. Medical genetics is central to health outcomes and we are bringing it to the mainstream by lowering the costs and removing barriers to adoption, which is driven by our user-friendly and comprehensive Invitae Digital Health Platform. Ultimately, the utility of the accumulated data will compound, enabling improved individual and population health and advancing the benefits of molecular medicine around the globe. We have experienced rapid growth. For the years endedDecember 31, 2021 , 2020 and 2019, our revenue was$460.4 million ,$279.6 million , and$216.8 million , respectively, and we incurred net losses of$379.0 million ,$602.2 million , and$242.0 million , respectively. For the three months endedMarch 31, 2022 and 2021, our revenue was$123.7 million and$103.6 million , respectively, and we recognized net losses of$181.9 million and$109.5 million , respectively. AtMarch 31, 2022 , our accumulated deficit was$1.9 billion . To meet the demands of scaling our business, we increased our number of employees to approximately 2,900 atMarch 31, 2022 from approximately 2,300 onMarch 31, 2021 . Our sales force grew to 380 employees atMarch 31, 2022 from 300 atMarch 31, 2021 . 26 -------------------------------------------------------------------------------- Sales of our tests have grown significantly. In 2021, 2020 and 2019, we generated 1,169,000, 659,000 and 469,000 billable units, respectively. In the three months endedMarch 31, 2022 , we generated 322,000 billable units compared to 259,000 billable units in the same period in 2021. 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 a next generation sequencing ("NGS") test as a "reaction." Approximately 57% of the billable volume generated in the first three months of 2022 were billable to patients, biopharmaceutical partners and other business-to-business customers (e.g., hospitals, clinics, medical centers), and the remainder were billable to government and private insurance payers. Many of the gene tests on our assays are reimbursable by health insurance companies. 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 the amount we receive from other types of payers, advance digital health solutions and data services, drive down the price for genetic analysis and interpretation, reduce the costs associated with performing our genetic tests, steadily increase the amount of genetic content we offer and is used by providers across the range of healthcare platforms, consistently improve the client experience, drive physician and patient utilization of our platform 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. The accumulation of genetic and patient information will ultimately enable the healthcare ecosystem and stakeholders, including patients, providers and physicians, payers, pharmaceutical partners and more to achieve improved outcomes.
During the first quarter of 2022,Russia commenced a military invasion ofUkraine , and the ensuing conflict has created disruption in the region and around the world. We have suspended operations inRussia , which has not had and is not expected to have a material impact on our operating results. We serve customers globally across a broad geographic base. NeitherRussia norUkraine has comprised or is expected to comprise a material portion of our total revenue, net loss, or net assets. We continue to closely monitor the ongoing conflict and related sanctions, which could impact our financial results in the future. Other impacts due to this rapidly evolving situation are currently unknown and could potentially subject our business to adverse consequences should the situation escalate beyond its current scope. See Part II, Item 1A. "Risk Factors" in this Quarterly Report on Form 10-Q for additional information about the conflict betweenRussia andUkraine and its potential effect on our business and results of operations.
Impact of COVID-19
While we expect the COVID-19 pandemic may continue to impact our business, we
experienced limited disruption during the first three months of 2022 and full
year 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. Substantially all of the
Company's offices have re-opened in a hybrid working model, subject to operating
restrictions which adhere to healthcare guidelines to protect public health and
the health and safety of employees. While we have not experienced significant
disruption in our supply chain, we have experienced supply delays and higher
logistics costs as a result of the COVID-19 pandemic and have also had to obtain
supplies from new suppliers. We have increased our inventory on hand to respond
to potential future disruptions that may occur to ensure we are able to meet
customer demand.
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-------------------------------------------------------------------------------- As a result of government-imposed restrictions, many announced healthcare guidelines resulted in a shift of regular physician visits and healthcare delivery activities to remote/telehealth formats. This was particularly important for patients who, despite the fall-out from COVID-19, continued 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 inApril 2020 of our Gia telehealth platform, which expands access to remote interaction between patients and clinicians as well as direct ordering of genetic tests. Although many government-imposed restrictions have been reduced or eliminated, the future impact of the COVID-19 pandemic continues to be highly uncertain. Given the unknown duration and extent of COVID-19's impact on our business, and the healthcare system in general, we continue to monitor evolving market conditions and have pivoted our focus and investments on the commercial execution of workflows that support remote ordering, online support and telehealth. InMarch 2020 , the Coronavirus Aid, Relief, and Economic Security Act ("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 and inJanuary 2021 we received$2.3 million as part of this initiative. This payment was recognized as other income, net in our consolidated statement of operations in the period received.
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. 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 service 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 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
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-------------------------------------------------------------------------------- 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 323 million lives, comprised of Medicare, all national commercial health plans, and Medicaid in most states, includingCalifornia (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. 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 inthe United States and internationally. Those efforts are designed to enable more rapid expansion of genetic testing and patient access, enlarging our geographic footprint outsidethe 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 intend to 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.
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 inNorth Carolina and the genomic laboratory space added through the acquisition of Genosity, 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 inthe 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 inNorth 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, or
upon shipment of our precision oncology products. Accrual amounts recognized are
based on estimates of the consideration that we expect to receive, and such
estimates are
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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 revenue is 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 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.
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, genetic interpretation 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
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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. As a percentage of revenue, we expect
research and development expenses to trend lower as we continue our efforts on
scaling our business and operations and expanding our testing capabilities.
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 while trending lower as a percentage of revenue as we continue our efforts on scaling our business and operations as we expand our testing capabilities.
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 while trending lower as a percentage of revenue as we continue our efforts on scaling our business and operations as we expand our testing capabilities.
Change in fair value of contingent consideration
Changes in fair value of contingent consideration are adjustments related to contingent consideration related to 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. With respect to theArcherDX final milestone, the liability was reduced to nil as of as ofDecember 31, 2021 from$262.5 million as ofMarch 31, 2021 , with the offsetting change recorded as changes in fair value of contingent consideration in our consolidated statements of operations. The removal of the liability balance and the associated change in fair value of contingent consideration was a result of our reassessment of the steps necessary to achieve clearance or approval based on FDA feedback received principally in the three months endedJune 30, 2021 . Subsequent toMarch 31, 2022 , an agreement was entered into with previousArcherDX stockholders to extend the date of achievement of theArcherDX Final Milestone toMarch 31, 2023 . We do not believe achievement of the conditions prescribed in the acquisition agreement will occur within this timeframe. We expect FDA clearance or approval of a therapy selection IVD at a later date subject to resolution of the necessary steps. As such, no liability was recorded as ofMarch 31, 2022 .
Other income, net
Other income, 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, 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 on
Form 10-Q for additional information.
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--------------------------------------------------------------------------------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 withU.S. generally accepted accounting principles, orU.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 discussed below 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 endedDecember 31, 2021 . See Note 2, "Summary of significant accounting policies" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for information regarding recent accounting pronouncements.
Results of operations
Three Months Ended
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 March 31, Dollar %
2022 2021 Change Change
Revenue:
Test revenue $ 119,497 $ 99,276 $ 20,221 20%
Other revenue 4,194 4,345 (151) (3)%
Total revenue 123,691 103,621 20,070 19%
Cost of revenue 97,116 75,491 21,625 29%
Research and development 128,236 80,358 47,878 60%
Selling and marketing 60,144 51,240 8,904 17%
General and administrative 51,274 72,517 (21,243) (29)%
Change in fair value of contingent
consideration 154 (63,621) 63,775 100%
Loss from operations (213,233) (112,364) (100,869) (90)%
Other income, net 10,439 4,465 5,974 NM
Interest expense (13,985) (8,393) (5,592) (67)%
Net loss before taxes (216,779) (116,292) (100,487) (86)%
Income tax benefit (34,920) (6,800) (28,120) NM
Net loss $ (181,859) $ (109,492) $ (72,367) (66)%
NM - Not Meaningful
32
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Revenue
The increase in total revenue of$20.1 million for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to an increase in billable volume due to growth in our business, partially offset by a lower average revenue per unit. Billable volume increased to approximately 322,000 in the three months endedMarch 31, 2022 compared to 259,000 in the same period of 2021, an increase of 24 percent. Average revenue per unit decreased to$372 per unit in the three months endedMarch 31, 2022 compared to$383 per unit in the comparable prior period primarily due to changes in product and payer mix. Cost of revenue The increase in the cost of revenue of$21.6 million for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to an increase in billable volume and a higher cost per unit. Cost per unit was$302 in the three months endedMarch 31, 2022 compared to$290 for the same period in 2021. The cost per unit increased primarily due to changes in product mix, an increase in amortization of acquired intangible assets of$9.6 million , and a$3.2 million increase in personnel-related costs as a result of headcount growth.
Research and development
The increase in research and development expense of$47.9 million for the three months endedMarch 31, 2022 compared to the same period in 2021 was due to growth in the business as well as the impact of acquisitions. The increase in research and development expenses principally consisted of the following elements: personnel-related costs increased$36.6 million primarily driven by acquisition-related stock-based compensation expenses as well as headcount growth; professional fees increased$8.8 million ; other expenses increased$4.4 million ; technology costs increased$1.6 million due to higher spending on equipment and software licenses; facilities-related expenses increased$0.7 million ; and depreciation and amortization increased$0.6 million . These increases were offset by a decrease of$4.8 million in lab-related expenses due to lower costs related to lab services and supplies.
Selling and marketing
The increase in selling and marketing expense of
General and administrative
The decrease in general and administrative expense of$21.2 million for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to a decrease in personnel-related costs of$25.2 million due to lower acquisition-related stock-based compensation expense, partially offset by headcount growth. This decrease was partially offset by increases in professional services of$2.2 million and other corporate expenses of$1.8 million .
Change in fair value of contingent consideration
The change in fair value of contingent consideration represented an expense of$0.2 million and income of$63.6 million for the three months endedMarch 31, 2022 and 2021, respectively. The prior year period includes fair value adjustments to reduce our contingent consideration liability primarily related to our acquisition ofArcherDX and the remaining development milestones.
Other income, net
The increase in other income, net of$6.0 million for the three months endedMarch 31, 2022 compared to the same period in 2021 was primarily due to increases in fair value adjustments of$6.6 million related to our stock payable liabilities due to the decrease in the price of our common stock.
Interest expense
The increase in interest expense of
33
--------------------------------------------------------------------------------Income tax benefit
The increase in income tax benefit of$28.1 million was primarily due to a$34.6 million release of federal and state valuation allowances as a result of the reclassification ofArcherDX's STRATAFIDE and PCM in-process research and development intangibles from indefinite-lived intangibles to developed technology, which enabled the associated deferred tax liability to serve as a source of income to existing finite-lived deferred tax assets for which a valuation allowance had previously been established. There was no similar income tax benefit in the prior year period. The income tax benefit of$6.8 million for the three months endedMarch 31, 2021 was primarily due to the net deferred tax liabilities assumed in connection with our acquisition of One Codex duringFebruary 2021 . Effective for tax years beginning on or afterJanuary 1, 2022 , pursuant to the Tax Cuts and Jobs Act of 2017, companies are required to capitalize and amortize Internal Revenue Code section 174 research and experimental expenses paid or incurred over five years for research and development performed inthe United States and 15 years for research and development performed outside ofthe United States .
Liquidity and capital resources
Liquidity and capital expenditures
We have generally incurred net losses since our inception. For the three months endedMarch 31, 2022 and 2021, we had net losses of$181.9 million and$109.5 million , respectively, and we expect to incur additional losses in the future. AtMarch 31, 2022 , we had an accumulated deficit of$1.9 billion . While our revenue has increased over time, we may never achieve revenue sufficient to offset our expenses.
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.
InJanuary 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 . InSeptember 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 inSeptember 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 inNovember 2018 . InApril 2021 , we issued$1,150.0 million of aggregate principal amount of convertible senior notes due 2028, which bear cash interest at a rate of 1.5% per year. InOctober 2020 , in connection with our acquisition ofArcherDX , we entered into a credit facility to borrow$135.0 million which closed concurrently with the merger. The terms of this credit facility restrict our ability to incur certain indebtedness, pay dividends, make acquisitions and take other actions.
At
Our primary uses of cash are to fund our operations as we continue to grow our business, enter into partnerships and 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 ofMarch 31, 2022 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, 34 -------------------------------------------------------------------------------- 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):
Three Months Ended
2022 2021
Net cash used in operating activities $ (147,543) $ (89,520)
Net cash used in investing activities (449,456) (273,558)
Net cash (used in) provided by financing activities (920) 436,091
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(597,919)
Cash flows from operating activities
For the three months endedMarch 31, 2022 , cash used in operating activities of$147.5 million principally resulted from our net loss of$181.9 million , a$34.9 million income tax benefit and non-cash charges for remeasurements of liabilities in connection with business combinations of$9.8 million . These were partially offset by non-cash charges of$46.8 million for stock-based compensation,$27.1 million for depreciation and amortization,$3.9 million for amortization of debt discount and issuance costs related to our outstanding debt and$1.7 million of post-combination expense. The net effect on cash for changes in net operating assets was a decrease of cash of$2.8 million . For the three months endedMarch 31, 2021 , cash used in operating activities of$89.5 million principally resulted from our net loss of$109.5 million , non-cash charges of remeasurements of liabilities in connection with business combinations of$67.0 million primarily relating toArcherDX development milestones and a$6.8 million income tax benefit primarily generated from our acquisition of One Codex. These were partially offset by non-cash charges of$58.8 million for stock-based compensation,$16.6 million for depreciation and amortization,$3.0 million of post-combination expense related to the acceleration of unvested equity from our acquisition of One Codex and$2.7 million for amortization of debt discount and issuance costs related to our outstanding debt. The net effect on cash of changes in net operating assets was an increase of cash of$8.9 million .
Cash flows from investing activities
For the three months endedMarch 31, 2022 , cash used in investing activities of$449.5 million was primarily due to net purchases and maturities of marketable securities of$428.6 million and cash used for purchases of property and equipment of$20.8 million . For the three months endedMarch 31, 2021 , cash used in investing activities of$273.6 million was primarily due to net purchases of marketable securities of$251.2 million , net cash used to acquire One Codex of$15.0 million and cash used for purchases of property and equipment of$6.4 million .
Cash flows from financing activities
For the three months endedMarch 31, 2022 , cash used in financing activities of$0.9 million primarily consisted of finance lease principal payments of$1.3 million as well as cash received from issuances of common stock of$0.4 million . For the three months endedMarch 31, 2021 , cash provided by financing activities of$436.1 million primarily consisted of net proceeds from the public offering of common stock of$434.3 million and cash received from issuances of common stock of$2.6 million . 35
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Contractual obligations
The following table summarizes our contractual obligations, including interest,
as of
Remainder of
Contractual obligations: 2022 2023 and 2024 2025 and 2026 2027 and beyond Total
Operating leases $ 17,191 $ 51,103 $ 50,663 $ 76,731 $ 195,688
Finance leases 4,710 8,939 495 - 14,144
Convertible senior notes - 349,996 - 1,150,000 1,499,996
2020 Term Loan - 135,000 - - 135,000
Purchase commitments 19,507 33,598 2,117 - 55,222
Total $ 41,408 $ 578,636 $ 53,275 $ 1,226,731 $ 1,900,050
See Note 8, "Commitments and contingencies" in the Notes to Condensed
Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on
Form 10-Q 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.
Recent accounting pronouncements
See "Recent accounting pronouncements" in Note 2, "Summary of significant accounting policies" in the Notes to Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q 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.
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