UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form | ||
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended September 30, 2023
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File No. 001-36847
(Exact name of the registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices, Zip Code)
(415 ) 374-7782
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b 2 of the Exchange Act.
x | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | Emerging growth company | |||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of November 6, 2023 was 286,492,840 .
TABLE OF CONTENTS
| Page No. | ||||||||
PART I — Financial Information
ITEM 1. Condensed Consolidated Financial Statements
INVITAE CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
| September 30, 2023 | December 31, 2022 | ||||||||||
| Assets | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Marketable securities | |||||||||||
| Accounts receivable | |||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Operating lease assets | |||||||||||
| Restricted cash | |||||||||||
| Intangible assets, net | |||||||||||
| Other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| Liabilities and stockholders’ (deficit) equity | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Operating lease obligations | |||||||||||
| Finance lease obligations | |||||||||||
Convertible senior notes, net current portion | |||||||||||
| Total current liabilities | |||||||||||
| Operating lease obligations, net of current portion | |||||||||||
| Finance lease obligations, net of current portion | |||||||||||
| Debt | |||||||||||
| Convertible senior notes, net | |||||||||||
| Convertible senior secured notes (at fair value) | |||||||||||
| Deferred tax liability | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (Note 7) | |||||||||||
| Stockholders’ (deficit) equity: | |||||||||||
| Common stock | |||||||||||
| Accumulated other comprehensive income (loss) | ( | ||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Total stockholders’ (deficit) equity | ( | ||||||||||
| Total liabilities and stockholders’ (deficit) equity | $ | $ | |||||||||
1
INVITAE CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Test revenue | $ | $ | $ | $ | |||||||||||||||||||
| Other revenue | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Cost of revenue | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Selling and marketing | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Goodwill and IPR&D impairment | |||||||||||||||||||||||
Restructuring, impairment and other costs | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| Loss from operations | ( | ( | ( | ( | |||||||||||||||||||
| Other income (expense), net: | |||||||||||||||||||||||
Gain (loss) on extinguishment of debt, net | ( | ||||||||||||||||||||||
| Debt issuance costs | ( | ( | |||||||||||||||||||||
| Change in fair value of convertible senior secured notes | |||||||||||||||||||||||
| Change in fair value of acquisition-related liabilities | ( | ||||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Total other income, net | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Net loss before taxes | ( | ( | ( | ( | |||||||||||||||||||
| Income tax benefit | |||||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Net loss per share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Shares used in computing net loss per share, basic and diluted | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
2
INVITAE CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Other comprehensive (loss) income: | |||||||||||||||||||||||
Unrealized (loss) income on available-for-sale marketable securities, net of tax | ( | ( | |||||||||||||||||||||
| Changes in fair value attributable to instrument-specific credit risk of convertible senior secured notes measured at fair value, net of tax | |||||||||||||||||||||||
| Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
3
INVITAE CORPORATION
Condensed Consolidated Statements of Stockholders' (Deficit) Equity
(in thousands)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Common stock: | |||||||||||||||||||||||
Balance, beginning of period | $ | $ | $ | $ | |||||||||||||||||||
Common stock issued | |||||||||||||||||||||||
Balance, end of period | |||||||||||||||||||||||
| Accumulated other comprehensive income (loss): | |||||||||||||||||||||||
| Balance, beginning of period | ( | ( | ( | ||||||||||||||||||||
| Unrealized (loss) income on available-for-sale marketable securities, net of tax | ( | ( | |||||||||||||||||||||
| Changes in fair value attributable to instrument-specific credit risk of convertible senior secured notes measured at fair value, net of tax | |||||||||||||||||||||||
| Balance, end of period | ( | ( | |||||||||||||||||||||
Additional paid-in capital: | |||||||||||||||||||||||
Balance, beginning of period | |||||||||||||||||||||||
| Common stock issued in connection with the exchange of convertible senior notes due 2024 | |||||||||||||||||||||||
Common stock issued in connection with public offering, net | ( | ( | |||||||||||||||||||||
Common stock issued on exercise of stock options, net | |||||||||||||||||||||||
Common stock issued pursuant to employee stock purchase plan | |||||||||||||||||||||||
| Common stock and equity awards issued pursuant to acquisitions | |||||||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||
Balance, end of period | |||||||||||||||||||||||
Accumulated deficit: | |||||||||||||||||||||||
Balance, beginning of period | ( | ( | ( | ( | |||||||||||||||||||
| Net loss | ( | ( | ( | ( | |||||||||||||||||||
Balance, end of period | ( | ( | ( | ( | |||||||||||||||||||
| Total stockholders' (deficit) equity | $ | ( | $ | $ | ( | $ | |||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
4
INVITAE CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net loss | $ | ( | $ | ( | |||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||
| Goodwill and IPR&D impairment | |||||||||||
| Impairments and losses on disposals of long-lived assets, net | |||||||||||
| Depreciation and amortization | |||||||||||
| Stock-based compensation | |||||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Loss on extinguishment of debt, net | |||||||||||
| Debt issuance costs | |||||||||||
| Change in fair value of convertible senior secured notes | ( | ||||||||||
| Remeasurements of liabilities associated with business combinations | ( | ( | |||||||||
| Benefit from income taxes | ( | ( | |||||||||
| Post-combination expense for acceleration of unvested equity and deferred stock compensation | |||||||||||
| Amortization of premiums and discounts on investment securities | ( | ||||||||||
| Non-cash lease expense | |||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities, net of businesses acquired: | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventory | |||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||
| Other assets | ( | ||||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses and other long-term liabilities | ( | ( | |||||||||
| Net cash used in operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Purchases of marketable securities | ( | ( | |||||||||
| Proceeds from maturities of marketable securities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sale of property and equipment | |||||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| Cash flows from financing activities: | |||||||||||
(Loss) proceeds from public offerings of common stock, net of issuance costs | ( | ||||||||||
| Proceeds from issuance of common stock, net | |||||||||||
| Proceeds from issuance of Series B convertible senior secured notes due 2028 | |||||||||||
| Payments for debt issuance costs and prepayment fees | ( | ||||||||||
| Repayment of debt | ( | ||||||||||
| Finance lease principal payments | ( | ( | |||||||||
| Settlement of acquisition obligations | ( | ( | |||||||||
| Net cash (used in) provided by financing activities | ( | ||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental cash flow information of non-cash investing and financing activities: | |||||||||||
| Equipment acquired through finance leases | $ | $ | |||||||||
| Purchases of property and equipment in accounts payable and accrued liabilities | $ | $ | |||||||||
Common stock issued for settlement of hold-back liabilities | $ | $ | |||||||||
| Exchange of convertible senior notes due 2024 | $ | ( | $ | ||||||||
| Exchange for convertible senior secured notes due 2028 | $ | $ | |||||||||
| Operating lease assets obtained in exchange for lease obligations, net | $ | $ | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
5
INVITAE CORPORATION
Notes to Condensed Consolidated Financial Statements
1. Organization and description of business
Invitae Corporation ("Invitae," “the Company," "we," "us," and "our") was incorporated in the State of Delaware on January 13, 2010, as Locus Development, Inc. and we changed our name to Invitae Corporation in 2012. We offer high-quality, comprehensive, affordable genetic testing across multiple clinical areas, including hereditary cancer, precision oncology, women's health, and rare diseases. Invitae operates in one segment.
Strategic realignment
On July 18, 2022, the Company initiated a strategic realignment of our operations and began implementing cost reduction programs, which was approved by the board of directors of the Company on July 16, 2022.
See Note 10, "Restructuring, impairment and other costs" for additional information regarding our strategic realignment.
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results expected for the full fiscal year or any other periods.
Liquidity and Going Concern
The accompanying condensed consolidated financial statements have been prepared using the going concern basis of accounting, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business and does not include any adjustments relating to the recoverability and classification of recorded asset and liability amounts that might result from the outcome of the uncertainties described below.
Pursuant to Accounting Standards Codification ("ASC") 205-40, Presentation of Financial Statements — Going Concern (“ASC 205-40”), management must evaluate whether there are conditions and events, considered in aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern for one year after the date that these condensed consolidated financial statements are issued. In accordance with ASC 205-40, management’s analysis can only include the potential mitigating impact of management’s plans that have not been fully implemented as of the issuance date if (a) it is probable that management’s plans will be effectively implemented on a timely basis, and (b) it is probable that the plans, when implemented, will alleviate the relevant conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern.
The Company has generally incurred net losses since its inception and had an accumulated deficit of $6.2 billion and $4.8 billion as of September 30, 2023 and December 31, 2022, respectively. The Company had net losses of $3.1 billion, $379.0 million and $602.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company used net cash in operating activities of $493.0 million, $559.8 million and $298.5 million during the years ended December 31, 2022, 2021 and 2020, respectively. The Company had net losses of $942.1 million and $301.2 million for the three months ended September 30, 2023 and 2022, respectively, and $1.3 billion and $3.0 billion for the nine months ended September 30, 2023 and 2022, respectively. Included in the Company's net loss for the three months ended September 30, 2023 are non-cash items such as $881.2 million for impairments and losses on disposals of long-lived assets, net. Included in the Company's net loss for the three months ended September 30, 2022 are non-cash items such as $55.5 million for impairments and losses on disposals of long-lived assets, net. Included in the Company’s net loss for the nine months ended September 30, 2023 are non-cash items such as $1.0 billion for impairments and losses on disposals of long-lived assets, net. Included in the Company’s net loss for the nine months ended September 30, 2022 are non-cash items such as a $2.3 billion loss on
6
impairment of goodwill and in-process research and development (“IPR&D”) intangible asset and $60.3 million related to impairments and losses on disposals of long-lived assets, net. See Note 4, “Intangible assets, net” for additional information. The Company used net cash in operating activities of $156.2 million and $410.9 million for the nine months ended September 30, 2023 and 2022, respectively.
At September 30, 2023 and December 31, 2022, the Company had $254.6 million and $547.1 million, respectively, of cash, cash equivalents, and marketable securities. The Company expects to incur additional operating losses and negative operating cash flows in the near term.
As a result of losses, projected cash needs, and current liquidity level, substantial doubt exists about the Company’s ability to continue as a going concern.
The Company’s ability to continue as a going concern is contingent upon successful execution of management’s intended plan over the next twelve months to reduce operating costs and improve the Company’s liquidity, which includes, without limitation:
•Reducing operating costs by a reduction in lab and office space through consolidation, and focusing and eliminating certain business activities and services.
•Seeking additional capital through the issuance of debt or equity securities, or the sale of assets.
While operational improvement efforts and expense control have resulted in margin expansion and stronger financial performance in the nine months ended September 30, 2023, the Company is engaging with stakeholders on a path forward and has formed a special committee of its board of directors focused on improving the Company’s capital position. The Company is exploring a number of options, including, but not limited to, raising capital, asset sales, business and research and development refocusing efforts, capital expenditure and operating expense reductions, and addressing its debt obligations.
The condensed consolidated financial statements do not include any adjustments that may result from the outcome of this going concern uncertainty.
Since inception, the Company’s operations have been financed primarily by fees collected from its customers, net proceeds from sales of its capital stock as well as borrowing from debt facilities and the issuance of convertible senior notes. The Company will need to raise additional funding to finance operations and service or repay debt obligations, however there is no assurance that it will be successful in obtaining such additional financing. If the Company raises additional capital through debt financing, the Company may be subject to covenants limiting or restricting the Company’s ability to take specific actions, such as incurring additional debt, capital expenditures or sale of assets. If the Company raises additional capital through public or private equity offerings, the ownership interest of our existing stockholders would be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect the Company’s existing stockholders’ rights. There can be no assurance that additional capital will be available to the Company or, if available, would be available in sufficient amounts or on terms acceptable to us or on a timely basis. If sufficient funds on acceptable terms are not available when needed, the Company could be further required to curtail planned activities to reduce costs, which could include reductions in workforce, elimination of business operations and services, and significant reductions in operating expenses, liquidation of assets or pursuing bankruptcy proceedings. Doing so may potentially have an unfavorable effect on the Company’s ability to execute its business plan and have an adverse effect on the Company’s business, results of operations and future prospects.
2. Summary of significant accounting policies
Principles of consolidation
Our unaudited condensed consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base these estimates on current facts, historical and anticipated results, trends and various other assumptions that we believe are reasonable under the circumstances, including assumptions as to
7
Prior period reclassifications
Certain prior period amounts have been reclassified to conform with the current period presentation. Loss on disposal of property and equipment and impairment charges related to right-of-use assets and the related leasehold improvements are now included in restructuring, impairment and other costs in the condensed consolidated statements of operations. This reclassification had no effect on the previously reported results of operations.
Concentrations of credit risk and other risks and uncertainties
Financial instruments that potentially subject us to a concentration of credit risk consist of cash, cash equivalents, restricted cash, marketable securities and accounts receivable. Our cash and cash equivalents are primarily held by financial institutions in the United States. Such deposits often exceed federally insured limits.
Cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets are reconciled to the amounts reported in the condensed consolidated statements of cash flows as follows (in thousands):
| September 30, 2023 | September 30, 2022 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | |||||||||
Fair value of financial instruments
Our financial instruments consist principally of cash and cash equivalents, marketable securities, accounts receivable, accounts payable, accrued liabilities, operating and finance leases obligations, liabilities associated with business combinations, and convertible senior notes. The carrying amounts of certain of these financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued and other current liabilities approximate their current fair value due to the relatively short-term nature of these accounts. Based on borrowing rates available to us, the carrying value of our operating and finance leases approximates their fair values. Liabilities associated with business combinations and our 4.50 % Series A convertible senior secured notes due 2028 (the “Series A Notes”) and 4.50 % Series B convertible senior secured notes due 2028 (the “Series B Notes” and, together with the Series A Notes, the "Senior Secured 2028 Notes") are recorded at their estimated fair value.
Fair value option election
The fair value option provides an election that allows an entity to irrevocably elect to record certain financial assets and liabilities at fair value on an instrument-by-instrument basis at initial recognition. We have elected to apply the fair value option to the Senior Secured 2028 Notes and stock payable liabilities resulting from business combinations.
The Senior Secured 2028 Notes accounted for under the fair value option election pursuant to ASC 825, Financial Instruments, are each a debt host financial instrument containing embedded features that would otherwise be required to be bifurcated from the debt-host and recognized as separate derivative liabilities subject to initial and recurring estimated fair value measurements under ASC 815, Derivatives and Hedging. Notwithstanding, ASC 825 provides for the fair value option election, to the extent not otherwise prohibited by ASC 825, to be afforded to financial instruments. When the fair value option election is applied to financial liabilities, bifurcation of an embedded derivative is not required, and the financial liability is initially measured at its issue-date estimated fair value and then subsequently remeasured at estimated fair value on a recurring basis as of each reporting period date. The estimated fair value adjustment related to the portion of the change in fair value attributed to a change in the instrument-specific credit risk is recognized as a component of other comprehensive loss, with the remaining amount of the fair value adjustment recognized in other income (expense), net in our condensed consolidated statements of operations. We have elected to present the component related to accrued interest in the change in fair value of the Senior Secured 2028 Notes.
8
Restructuring, impairment and other costs
Restructuring, impairment and other costs are comprised of employee severance and benefits, asset impairments and losses on asset disposals, and other costs. Employee severance and benefit costs are comprised of severance, other termination benefit costs, and stock-based compensation expense for the acceleration of stock awards related to workforce reductions. We recognize costs and liabilities associated with exit and disposal activities in accordance with ASC 420, Exit and Disposal Cost Obligations, and other costs and liabilities associated with nonretirement postemployment benefits in accordance with ASC 712, Nonretirement Postemployment Benefits. Liabilities are based on the estimate of fair value in the period the liabilities are incurred, with subsequent changes to the liability recognized as adjustments in the period of change. We recognize asset impairments and losses on disposals of long-lived assets in accordance with ASC 360, Impairment or Disposal of Long-Lived Assets. Restructuring, impairment and other costs are recognized as an operating expense within the condensed consolidated statements of operations and related liabilities are recorded within accrued liabilities in the condensed consolidated balance sheets.
Recent accounting pronouncements
We evaluate all Accounting Standards Updates (“ASUs”) issued by the Financial Accounting Standards Board (the "FASB") for consideration of their applicability. ASUs not included in the disclosures in this report were assessed and determined to be either not applicable or are not expected to have a material impact on our condensed consolidated financial statements.
Recently adopted accounting pronouncements
In October 2021, the FASB issued ASU 2021-08, Business Combinations ("Topic 805"): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The amendments of this ASU require entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers. The Company adopted the amendments in this update on January 1, 2023 with no impact to our condensed consolidated financial statements at the date of adoption. The amendments will be applied prospectively to any future business combinations.
3. Revenue, accounts receivable and deferred revenue
Test revenue is generated from sales of diagnostic tests and precision oncology products to two groups of customers: patients, consideration for which may be paid directly by the patients or the patients' insurance carriers, and institutions (e.g., hospitals, clinics, medical centers and biopharmaceutical partners). Amounts billed and collected, and the timing of collections, vary based on the type of customer and the corresponding payer, including the patients' insurance carriers that are paying on behalf of the customer. Data and service revenue consists principally of revenue recognized for the performance of activities outlined in biopharmaceutical development contracts and other collaboration and genome network agreements.
9
The following tables present disaggregated revenue by customer and product offering by category (in thousands):
| Patient | Institution | Three Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Insurance | Direct | |||||||||||||||||||||||||
| Product: | ||||||||||||||||||||||||||
| Oncology | $ | $ | $ | $ | ||||||||||||||||||||||
| Women's health | ||||||||||||||||||||||||||
| Rare diseases | ||||||||||||||||||||||||||
| Data/services | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Patient | Institution | Three Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Insurance | Direct | |||||||||||||||||||||||||
| Product: | ||||||||||||||||||||||||||
| Oncology | $ | $ | $ | $ | ||||||||||||||||||||||
| Women's health | ||||||||||||||||||||||||||
| Rare diseases | ||||||||||||||||||||||||||
| Data/services | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Patient | Institution | Nine Months Ended September 30, 2023 | ||||||||||||||||||||||||
| Insurance | Direct | |||||||||||||||||||||||||
| Product: | ||||||||||||||||||||||||||
| Oncology | $ | $ | $ | $ | ||||||||||||||||||||||
| Women's health | ||||||||||||||||||||||||||
| Rare diseases | ||||||||||||||||||||||||||
| Data/services | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Patient | Institution | Nine Months Ended September 30, 2022 | ||||||||||||||||||||||||
| Insurance | Direct | |||||||||||||||||||||||||
| Product: | ||||||||||||||||||||||||||
| Oncology | $ | $ | $ | $ | ||||||||||||||||||||||
| Women's health | ||||||||||||||||||||||||||
| Rare diseases | ||||||||||||||||||||||||||
| Data/services | ||||||||||||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||||||||||||
10
We recognize revenue related to billings based on estimates of the amount that will ultimately be realized. Cash collections for certain tests delivered may differ from rates originally estimated. In subsequent periods, we update our estimate of the amounts recognized for previously delivered tests resulting in the following (decrease) increase to revenue and (decrease) increase to our net (loss) income from operations and basic and diluted net (loss) income per share (in millions, except per share data):
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
| Revenue | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| (Loss) income from operations | $ | ( | $ | $ | ( | $ | ||||||||||||||||||||
| Net (loss) income per share, basic and diluted | $ | $ | $ | ( | $ | |||||||||||||||||||||
Accounts receivable
The majority of our accounts receivable represents amounts billed to customers for test, data and service activities, and estimated amounts to be collected from patients' insurance carriers for test services.
We record a contract asset for services delivered under certain biopharmaceutical contracts, which are unbilled as of the end of the period. The contract receivable was $1.8 million and $1.3 million as of September 30, 2023 and December 31, 2022, respectively, and was included in prepaid expenses and other current assets in the condensed consolidated balance sheets.
Deferred revenue
We record a contract liability when cash payments are received or due in advance of our performance related to one or more performance obligations. The deferred revenue balance primarily consists of advanced billings for biopharmaceutical development services, including billings at the initiation of performance-based milestones, and recognized as revenue in the applicable future period when the revenue is earned. Also included are prepayments related to our consumer direct channel. We recognized revenue of $1.9 million and $2.3 million from deferred revenue during the three and nine months ended September 30, 2023, respectively. The current contract liability was $4.8 zero and $0.1 million as of September 30, 2023 and December 31, 2022, respectively, which was included in other long-term liabilities in the condensed consolidated balance sheets.
Refund liability
As part of our strategic realignment, we terminated early or changed the scope of several companion diagnostic development contracts with milestones in progress. Upon termination, we recorded a refund liability related to the remaining outstanding performance-based milestones. During the three months ended March 31, 2023, we recorded settlement activity associated with the early termination of a companion diagnostic contract. The refund liability was $1.6 million and $4.7 million as of September 30, 2023 and December 31, 2022, respectively, which was included in accrued liabilities in the condensed consolidated balance sheets.
Performance obligations
11
4. Intangible assets, net
The following table presents details of our acquired intangible assets as of September 30, 2023 (in thousands):
| September 30, 2023 | |||||||||||||||||||||||||||||
Cost | Accumulated Amortization | Asset Disposals/Impairments | Net | Weighted-Average Useful Life (In Years) | |||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Developed technology | ( | ( | |||||||||||||||||||||||||||
| Trade name | ( | ( | — | ||||||||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||
The following table presents details of our acquired intangible assets as of December 31, 2022 (in thousands):
| December 31, 2022 | |||||||||||||||||||||||||||||
Cost | Accumulated Amortization | Asset Disposals/Impairments | Net | Weighted-Average Useful Life (In Years) | |||||||||||||||||||||||||
| Customer relationships | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||
| Developed technology | ( | ( | |||||||||||||||||||||||||||
| Non-compete agreement | ( | — | |||||||||||||||||||||||||||
| Trade name | ( | ||||||||||||||||||||||||||||
| Patent assets and licenses | ( | ( | — | ||||||||||||||||||||||||||
| Right to develop new technology | ( | ( | — | ||||||||||||||||||||||||||
| $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||
Acquisition-related intangibles included in the above tables were generally definite-lived and were carried at cost less accumulated amortization. Customer relationships were being amortized on an accelerated basis in proportion to estimated cash flows. All other definite-lived acquisition-related intangibles were being amortized on a straight-line basis over their estimated lives, which approximated the pattern in which the economic benefits of the intangible assets were expected to be realized. Amortization expense was $25.6 million and $29.6 million for the three months ended September 30, 2023 and 2022, respectively, and $81.9 million and $79.8 million for the nine months ended September 30, 2023 and 2022, respectively. Amortization expense is recorded in cost of revenue, research and development, and selling and marketing expenses in our condensed consolidated statements of operations.
Impairment assessment
Goodwill and indefinite-lived intangible assets are assessed for impairment on an annual basis and whenever events or changes in circumstances indicate that these assets may be impaired. We evaluate the fair value of long-lived assets, which include property and equipment, right-of-use assets and definite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset may not be fully recoverable. In testing for goodwill impairment, we have the option of first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If we elect to bypass the qualitative assessment, or if a qualitative assessment indicates it is more likely than not that the carrying value exceeds its fair value, we perform a quantitative goodwill impairment test to compare to the fair value of our reporting unit to its carrying value, including goodwill. If the carrying value, including goodwill, exceeds the reporting unit’s fair value, we will recognize an impairment loss for the amount by which the carrying amount exceeds the reporting unit’s fair value.
During the three months ended June 30, 2022, as a result of the significant, sustained decline in our stock price and related market capitalization and lower than expected financial performance, we performed an impairment assessment of goodwill, IPR&D intangible assets, and long-lived assets, including definite-lived intangibles. Based on this analysis, we recognized a non-cash, pre-tax goodwill impairment charge of $2.3 billion during the three months ended June 30, 2022, which was included in goodwill and IPR&D impairment expense in the condensed consolidated statements of operations. The goodwill was fully impaired as of June 30, 2022.
12
We also identified indicators of impairment related to the IPR&D intangible asset initially recognized as part of the acquisition of Singular Bio, Inc. ("Singular Bio") that it was more likely than not that the asset is impaired. We recognized a non-cash, pre-tax impairment charge of $30.0 million during the three months ended June 30, 2022 related to the IPR&D intangible asset. The impairment charges are recorded in goodwill and IPR&D impairment expense in the condensed consolidated statements of operations. The indefinite-lived intangible asset was fully impaired as of June 30, 2022. Additionally, we recognized a loss on disposal of property and equipment of $4.8 million during the three months ended June 30, 2022 related to specific equipment that is no longer being utilized on this project and has no alternative future use. The loss on disposal is recorded in restructuring, impairment and other costs in the condensed consolidated statements of operations for the nine months ended September 30, 2022.
In March 2023, we decided to cease the use of acquired technology focused on informing clinical decisions as management continued our portfolio optimization. During the three months ended March 31, 2023, we wrote-off the remaining carrying value of the related developed technology intangible asset of $2.1 million and recognized $1.0 million for related contractual obligations, which are included in restructuring, impairment and other costs in the condensed consolidated statements of operations for the nine months ended September 30, 2023. See Note 10, "Restructuring, impairment and other costs" for additional information.
In June 2023, we decided to cease the use of acquired technology focused on pharmacogenetic testing as management continued our portfolio optimization. During the three months ended June 30, 2023, we wrote-off the remaining carrying value of the related developed technology intangible asset of $5.5 million, which is included in restructuring, impairment and other costs in the condensed consolidated statements of operations for the nine months ended September 30, 2023. See Note 10, "Restructuring, impairment and other costs" for additional information.
During the three months ended June 30, 2023, while exploring strategic alternatives in relation to the use of our acquired technology for our patient data platform to help patients collect, organize, store and share their medical records digitally, the developed technology was tested for recoverability. Based on the results of our testing, we wrote-off the remaining carrying value of the related developed technology intangible asset of $74.8 million, which is included in restructuring, impairment and other costs in the condensed consolidated statements of operations for the nine months ended September 30, 2023.
In September 2023, we decided to cease the use of acquired technology focused on additional pharmacogenetic testing and cancer risk stratification, along with an acquired tradename. During the three months ended September 30, 2023, we wrote-off the remaining carrying value of the related developed technology and tradename intangible assets of $43.7 million and $15.8 million, respectively, which are included in restructuring, impairment and other costs in the condensed consolidated statements of operations. See Note 10, "Restructuring, impairment and other costs" for additional information.
The Company evaluates the carrying value of long-lived assets, which include definite-lived intangible assets, property and equipment, net and right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amounts of the asset or asset group may not be fully recoverable. If the sum of the expected future cash flows, on an undiscounted basis, is less than the carrying amount of the asset group, an impairment loss equal to the excess of the carrying amount over the fair value of the individual asset within the asset group is recognized.
13
During the three months ended September 30, 2023, as a result of difficult debt markets to obtain additional financing and the substantial doubt about the Company’s ability to continue as a going concern an impairment assessment of long-lived assets was performed. A recoverability test was performed for the long-lived assets, including definite-lived intangibles, using the undiscounted cash flows approach, which included unobservable inputs including management's forecasts of projected revenue associated with future cash flows, and residual value. The cash flow estimates reflected the Company’s assumptions about its use of the long-lived assets and eventual disposition of the asset group. The Company determined that our long-lived assets held and used, including intangible assets that are subject to amortization, did not have identifiable cash flows that are largely independent of the cash flows of other assets and liabilities and of other asset groups. Therefore, the Company evaluated its long-lived assets for impairment on an entity-wide level. The Company concluded that the carrying value of the entity-wide asset group was not recoverable as it exceeded the future net undiscounted cash flows that are expected to be generated from the use and/or eventual disposition of the asset group.
To measure, allocate and recognize the impairment loss, the Company, with the assistance of a third-party valuation specialist, determined the fair value of the asset group using the discounted cash flow method using the income approach. To determine the fair value of the individual assets within the asset group, the Company utilized the discounted cash flow method of the income approach for its intangible assets, the replacement cost less depreciation approach for property and equipment and the income approach for the right-of-use assets. Based on the analysis, the Company recognized non-cash impairment charges of $788.7
The fair value assessments represent Level 3 non-recurring fair value measurements. The fair value of the assets involves unobservable inputs including, but not limited to, management’s forecasts of projected revenue associated with future cash flows and risk-adjusted discount rates.
5. Balance sheet components
Inventory
| September 30, 2023 | December 31, 2022 | ||||||||||
| Raw materials | $ | $ | |||||||||
| Work in progress | |||||||||||
| Finished goods | |||||||||||
| Total inventory | $ | $ | |||||||||
During the second quarter of 2023, management decided to exit certain product offerings. During the three months ended June 30, 2023, we wrote-off the remaining inventory related to these product offerings of $0.7 million, which is included in cost of revenue in the condensed consolidated statements of operations for the nine months ended September 30, 2023.
Property and equipment, net
Property and equipment consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Leasehold improvements | $ | $ | |||||||||
| Laboratory equipment | |||||||||||
| Computer equipment | |||||||||||
| Furniture and fixtures | |||||||||||
| Construction-in-progress | |||||||||||
| Other | |||||||||||
| Total property and equipment, gross | |||||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Total property and equipment, net | $ | $ | |||||||||
14
Depreciation expense was $5.2 million and $9.7 million for the three months ended September 30, 2023 and 2022, respectively, and $15.6 million and $21.1 million for the nine months ended September 30, 2023 and 2022, respectively.
During the first quarter of 2023, we decided to exit certain leased premises and we recognized a loss on disposal of property and equipment, net of $8.5 million during the three months ended March 31, 2023 for related lab equipment and leasehold improvements, which was included in restructuring, impairment and other costs in our condensed consolidated statements of operations. See Note 4, "Intangible assets, net" for additional information on impairment assessment.
During the third quarter of 2023, we decided to exit certain leased premises and we recognized a loss on disposal of property and equipment, net of $21.6 million for the related leasehold improvements, construction-in-process, and computer equipment, which was included in restructuring, impairment and other costs in our condensed consolidated statements of operations. See Note 4, "Intangible assets, net for additional information on impairment assessment.
See Note 7, "Commitments and contingencies" and Note 10, "Restructuring, impairment and other costs" for additional information including further discussion related to right-of-use asset impairments.
Accrued liabilities
Accrued liabilities consisted of the following (in thousands):
| September 30, 2023 | December 31, 2022 | ||||||||||
| Accrued compensation and related expenses | $ | $ | |||||||||
Accrued litigation expense | |||||||||||
| Accrued expenses | |||||||||||
| Deferred revenue | |||||||||||
| Other accrued liabilities | |||||||||||
| Accrued royalties | |||||||||||
| Accrued interest | |||||||||||
| Compensation and other liabilities associated with business combinations | |||||||||||
| Total accrued liabilities | $ | $ | |||||||||
6. Fair value measurements
Financial assets and liabilities are recorded at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the reporting date. The authoritative guidance establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity.
The three-level hierarchy for the inputs to valuation techniques is summarized as follows:
Level 1—Observable inputs such as quoted prices (unadjusted) for identical instruments in active markets.
Level 2—Observable inputs such as quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, or model-derived valuations whose significant inputs are observable.
Level 3—Unobservable inputs that reflect the reporting entity’s own assumptions.
15
The following tables set forth the fair value of our financial instruments that were measured at fair value on a recurring basis (in thousands):
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| U.S. Treasury notes | ( | ||||||||||||||||||||||||||||||||||||||||
| U.S. government agency securities | ( | ||||||||||||||||||||||||||||||||||||||||
| Total financial assets | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||||||||||||||
Convertible senior secured notes | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Contingent consideration | |||||||||||||||||||||||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||
| Reported as: | |||||
| Cash equivalents | $ | ||||
| Restricted cash | |||||
| Marketable securities | |||||
| Total cash equivalents, restricted cash, and marketable securities | $ | ||||
| Convertible senior secured notes | $ | ||||
| Other long-term liabilities | |||||
| Total liabilities | $ | ||||
| December 31, 2022 | |||||||||||||||||||||||||||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Estimated Fair Value | ||||||||||||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||||||||||||||
| Financial assets: | |||||||||||||||||||||||||||||||||||||||||
| Money market funds | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| U.S. Treasury notes | ( | ||||||||||||||||||||||||||||||||||||||||
| U.S. government agency securities | ( | ||||||||||||||||||||||||||||||||||||||||
| Total financial assets | $ | $ | $ | ( | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Financial liabilities: | |||||||||||||||||||||||||||||||||||||||||
| Stock payable liability | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| Contingent consideration | |||||||||||||||||||||||||||||||||||||||||
| Total financial liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
| December 31, 2022 | |||||
| Reported as: | |||||
| Cash equivalents | $ | ||||
| Restricted cash | |||||
| Marketable securities | |||||
| Total cash equivalents, restricted cash, and marketable securities | $ | ||||
| Other long-term liabilities | $ | ||||
16
There were no five months . Interest income generated from our investments was $2.2 million and $2.0 million during the three months ended September 30, 2023 and 2022, respectively, and $6.5 million and $5.0 million for the nine months ended September 30, 2023 and 2022, respectively, which was included in other income (expense), net in the condensed consolidated statements of operations.
The total fair value of investments with unrealized losses at September 30, 2023 was $36.1 million. None of the available-for-sale securities held as of September 30, 2023 have been in an unrealized loss position for more than one year. The Company evaluates investments that are in an unrealized loss position for impairment as a result of credit loss. It was determined that no credit losses exist as of September 30, 2023, because the change in market value of those securities has resulted from fluctuations in market interest rates since the time of purchase, rather than a deterioration of the credit worthiness of the issuers. For marketable securities in an unrealized loss position, we assess our intent to sell, or whether it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. We intend to hold our marketable securities to maturity and it is unlikely that they would be sold before their cost bases are recovered. The cost of securities sold is based on the specific identification method.
17
The following tables include a rollforward of the stock payable liability, contingent consideration, and Senior Secured 2028 Notes classified within Level 3 of the fair value hierarchy (in thousands):
| Three Months Ended September 30, 2023 | |||||||||||||||||
| Stock Payable Liability | Contingent Consideration | Convertible Senior Secured Notes | |||||||||||||||
| Fair value at June 30, 2023 | $ | $ | $ | ||||||||||||||
| Issuance of convertible senior secured notes at fair value | |||||||||||||||||
| Changes in fair value | ( | ( | |||||||||||||||
| Changes in fair value related to instrument-specific credit risk | ( | ||||||||||||||||
| Settlements | ( | ||||||||||||||||
| Cash payments for interest | ( | ||||||||||||||||
Fair value at September 30, 2023 | $ | $ | $ | ||||||||||||||
| Nine Months Ended September 30, 2023 | |||||||||||||||||
| Stock Payable Liability | Contingent Consideration | Convertible Senior Secured Notes | |||||||||||||||
| Fair value at December 31, 2022 | $ | $ | $ | ||||||||||||||
| Issuance of convertible senior secured notes at fair value | |||||||||||||||||
| Changes in fair value | ( | ( | |||||||||||||||
| Changes in fair value related to instrument-specific credit risk | ( | ||||||||||||||||
| Settlements | ( | ||||||||||||||||
| Cash payments for interest | ( | ||||||||||||||||
Fair value at September 30, 2023 | $ | $ | $ | ||||||||||||||
| Three Months Ended September 30, 2022 | |||||||||||
| Stock Payable Liability | Contingent Consideration | ||||||||||
| Fair value at June 30, 2022 | $ | $ | |||||||||
| Change in fair value | |||||||||||
| Settlements | ( | ||||||||||
Fair value at September 30, 2022 | $ | $ | |||||||||
| Nine Months Ended September 30, 2022 | |||||||||||
| Stock Payable Liability | Contingent Consideration | ||||||||||
| Fair value at December 31, 2021 | $ | $ | |||||||||
| Change in fair value | ( | ( | |||||||||
| Settlements | ( | ||||||||||
Fair value at September 30, 2022 | $ | $ | |||||||||
Stock payable liabilities relate to certain indemnification hold-backs resulting from business combinations that are settled in shares of our common stock. We elected to account for these liabilities using the fair value option due to the inherent nature of the liabilities and the changes in value of the underlying shares that will ultimately be issued to settle the liabilities. The estimated fair value of these liabilities is classified as Level 3 and determined based upon the number of shares that are issuable to the sellers and the quoted closing price of our common stock as of the reporting date. The number of shares that will ultimately be issued is subject to adjustment for indemnified claims that existed as of the closing date for each acquisition. Changes in the number of shares issued and share price can significantly affect the estimated fair value of the liabilities. The change in fair value related to stock payable liabilities was income of $0.1 million and $0.5 million during the three months ended September 30, 2023 and 2022, respectively, and income of $0.4 million and $15.7 million for the nine months ended September 30, 2023 and 2022, respectively, which was recorded in change in fair value of acquisition-related liabilities in the condensed consolidated statements of operations.
18
Contingent consideration relates to the obligation we may be required to pay in the form of additional shares of our common stock resulting from the acquisition of Genelex in April 2020. The amount of the contingent obligation is dependent upon the achievement of a certain product milestone, at which time we would issue shares of our common stock with a value equal to a portion of the gross revenues actually received by us for a pharmacogenetic product reimbursed through certain payers during an earn-out period of up to four years . The estimated fair value of the contingent consideration is based upon significant inputs not observable in the market and, therefore, represents a Level 3 measurement. The material factors that may impact the fair value of the contingent consideration, and therefore, this liability, are the probabilities and timing of achieving the related milestone, the estimated revenues achieved for a pharmacogenetic product and the discount rate used to estimate the fair value. Significant changes in any of the probabilities of success would result in a significant change in the estimated fair value of the liability. The change in fair value related to contingent consideration recorded to general and administrative expense was zero zero and a gain of $1.8 million during the nine months ended September 30, 2023 and 2022, respectively.
In March 2023, the Company issued Series A Notes in an aggregate principal amount of $275.3 million, and Series B Notes in an aggregate principal amount of $30.0 million. In August 2023, the Company issued additional Series A Notes in an aggregate principal amount of $0.1 million.
The Company elected the fair value option to account for the Senior Secured 2028 Notes. We utilize the binomial lattice model, specifically a lattice model to estimate the fair value of the Senior Secured 2028 Notes at issuance and subsequent reporting dates. The estimated fair value of the Senior Secured 2028 Notes is determined using Level 3 inputs and assumptions unobservable in the market. This model incorporates the terms and conditions of the Senior Secured 2028 Notes and assumptions related to stock price, expected stock price volatility, risk-free interest rate, market credit spread, and cost of debt. The stock price is based on the publicly traded price of our common stock as of the measurement date. We estimate the volatility of our stock price based on the historical and implied volatilities of our publicly traded common stock. The risk-free interest rate is based on interpolated U.S. Treasury rates, commensurate with a similar term to the Senior Secured 2028 Notes. The most significant assumptions in the binomial lattice model impacting the fair value of the Senior Secured 2028 Notes are (i) the estimated stock price, (ii) the estimated cost of debt, and (iii) the volatility of our common stock. Significant changes in any of these inputs may result in a significant change in the fair value of the Senior Secured 2028 Notes.
Under the fair value election as prescribed by ASC 825, we record changes in fair value, inclusive of related accrued interest, through the condensed consolidated statements of operations as a fair value adjustment of the convertible senior secured debt each reporting period, with the portion of the change that results from a change in the instrument-specific credit risk recorded separately in other comprehensive loss, if applicable. The portion of total changes in fair value of debt attributable to changes in instrument-specific credit risk are determined through specific measurement of periodic changes in the risk-free interest rate, credit spread, and cost of debt assumptions. The initial carrying amount of the Senior Secured 2028 Notes, measured at the estimated fair value on the date of issuance, was $301.1 million. As of September 30, 2023, the estimated fair value was $196.2 million. During the three and nine months ended September 30, 2023, the corresponding change in fair value of the Senior Secured 2028 Notes was a gain of $33.5 million and $72.4 million, respectively, which is included in other income (expense), net in the condensed consolidated statements of operations. The change in fair value related to instrument-specific credit risk was $16.5 million and $25.4 million during the three and nine months ended September 30, 2023, respectively, which is included in the condensed consolidated statements of comprehensive loss. See Note 7, "Commitments and contingencies" under the heading "Convertible senior notes—Convertible senior secured notes due 2028" for a description of the Senior Secured 2028 Notes.
Significant inputs into the binomial lattice model as of September 30, 2023 and March 7, 2023 were as follows:
| September 30, 2023 | March 7, 2023 | ||||||||||
| Stock price | $ | $ | |||||||||
| Conversion price | $ | $ | |||||||||
| Volatility | % | % | |||||||||
| Risk-free interest rate | % | % | |||||||||
| Credit spread | % | % | |||||||||
| Cost of debt | % | % | |||||||||
| Term (years) | |||||||||||
19
7. Commitments and contingencies
Leases
The Company has entered into various non-cancellable operating lease agreements for office and laboratory space domestically and internationally. The Company's current leases have remaining terms ranging from approximately 1 to 12 years, some of which include options to extend the leases. The renewal options were not included in the calculation of the operating lease assets and the operating lease liabilities as they are not reasonably certain of being exercised. The security deposits for our operating leases are included in restricted cash in our condensed consolidated balance sheets.
In 2015, we entered into a non-cancelable operating lease agreement for our headquarters and main production facility in San Francisco, California, which commenced in 2016 with an initial lease term extending through 2026. In 2020, we entered into a non-cancelable operating lease agreement for additional office and laboratory space in San Francisco, California, which commenced in 2021 and has an initial lease term extending through 2031. In 2021, we entered into a non-cancelable operating lease agreement for a new laboratory and production facilities in Morrisville, North Carolina, which commenced in the same year with an initial lease term extending through 2035. See the discussion below regarding management's decision to exit the operating leases for additional office and laboratory space in San Francisco, California and the new laboratory and production facilities in Morrisville, North Carolina and the related impairments in 2023.
We have entered into various finance lease agreements to obtain laboratory equipment. The terms of our finance leases are generally three years and are typically secured by the underlying equipment. The portion of the future payments designated as principal repayment and related interest was classified as a finance lease obligation in our condensed consolidated balance sheets. Finance lease assets are recorded within other assets in our condensed consolidated balance sheets.
During the first quarter of 2023, we decided to exit certain leased premises and actively began looking to sublease certain facilities, including the related leasehold improvements. We determined that the changes in the intended use of these locations represented an indicator of impairment and performed a test of recoverability as of March 31, 2023. For operating leases where the carrying values of the asset group were higher than the undiscounted cash flows expected through sublease, we impaired the asset group to their fair value. The fair value was determined by utilizing the discounted cash flow method under the income approach. The key inputs to this valuation were expected sublease rental income ranging from $7.6 million to $35.7 million and a discount rate ranging from 7.0 % to 8.0 %. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. During the three months ended March 31, 2023, we recognized an impairment charge of $37.8 million related to the right-of-use assets and $2.0
During the first quarter of 2023, we reassessed certain leases previously impaired as part of the strategic realignment for additional impairment due to the continued decline in market conditions and changes in the ability to sublease the properties. We determined that the changes in market conditions represented an indicator of impairment and performed a test of recoverability as of March 31, 2023. For operating leases where the carrying values of the asset group were higher than the undiscounted cash flows expected through sublease, we further impaired the asset group to their fair value. The fair value was determined by utilizing the discounted cash flow method under the income approach. The key inputs to this valuation were expected sublease rental income ranging from $0.3 million to $1.9 million and discount rates ranging from 7.50 % to 7.75 %. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. During the three months ended March 31, 2023, we recognized an impairment charge of $2.3 million related to the right-of-use assets, which was included in restructuring, impairment and other costs in our consolidated statements of operations.
During the second quarter of 2023, we reassessed certain leases previously impaired as part of the strategic realignment for additional impairment due to the continued decline in market conditions and changes in the ability to sublease the properties. We determined that the changes in market conditions represented an indicator of impairment and performed a test of recoverability as of June 30, 2023. For operating leases where the carrying values of the asset group were higher than the undiscounted cash flows expected through sublease, we further impaired the asset group to their fair value. The fair value was determined by utilizing the discounted cash flow method under the income approach. The key inputs to this valuation were expected sublease rental income ranging from $0.1 million to $0.4 million and a discount rate of 7.75 %. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. During the three months
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ended June 30, 2023, we recognized an impairment charge of $0.6 million related to the right-of-use assets, which was included in restructuring, impairment and other costs in our consolidated statements of operations.
During the third quarter of 2023, we decided to exit certain leased premises and actively began looking to sublease certain facilities, including the related leasehold improvements. We determined that the changes in the intended use of these locations represented an indicator of impairment and performed a test of recoverability as of September 30, 2023. For operating leases where the carrying values of the asset group were higher than the undiscounted cash flows expected through sublease, we impaired the asset group to their fair value. The fair value was determined by utilizing the discounted cash flow method under the income approach. The key inputs to this valuation were expected sublease rental income of $50.9 million and a discount rate of 7.5 %. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. During the three months ended September 30, 2023, we recognized an impairment charge of $9.9 million related to the right-of-use assets and $17.1 million for the related leasehold improvements, which was included in restructuring, impairment and other costs in our condensed consolidated statements of operations.
During the third quarter of 2023, we reassessed certain leases previously impaired as part of the strategic realignment for additional impairment due to the continued decline in market conditions and changes in the ability to sublease the properties. We determined that the changes in market conditions represented an indicator of impairment and performed a test of recoverability as of September 30, 2023. For operating leases where the carrying values of the asset group were higher than the undiscounted cash flows expected through sublease, we impaired the asset group to their fair value. The fair value was determined by utilizing the discounted cash flow method under the income approach. The key inputs to this valuation were expected sublease rental income ranging from less than $0.1 million to $33.6 million and a discount rate range of 7.50 % to 7.75 %. This fair value measurement is based on significant inputs not observable in the market and, therefore, represents a Level 3 measurement. During the three months ended September 30, 2023, we recognized an impairment charge of $0.6 million related to the right-of-use assets which was included in restructuring, impairment and other costs in our condensed consolidated statements of operations.
During the three months ended September 30, 2023, as a result of the exit of the leased space described above, the Company also recognized an impairment charge of $0.8 million related to a finance lease which was included in restructuring, impairment and other costs in our condensed consolidated statements of operations.
Sublease income was $0.4 million and $1.1 million during the three and nine months ended September 30, 2023, respectively, which is included in other income (expense), net in the condensed consolidated statements of operations. There was no
Debt financing
In October 2020, we entered into a credit agreement with a financial institution under which we borrowed $135.0 million (the "2020 Term Loan") concurrent with the closing of the ArcherDX, Inc. ("ArcherDX") acquisition. The 2020 Term Loan bore interest at an annual rate equal to three-month LIBOR, subject to a 2.00 % LIBOR floor, plus a margin of 8.75 %. If the 2020 Term Loan is prepaid (whether such prepayment is optional or mandatory), we were required to pay a prepayment fee of 6 % if the prepayment occurs prior to the third anniversary of the closing date or 4 % if the prepayment occurs after the third anniversary of the closing date and we were also required to pay a make-whole fee if the prepayment occurs prior to the second anniversary of the closing date.
Debt discounts, including debt issuance costs, related to the 2020 Term Loan of $32.8 million were recorded as a direct deduction from the debt liability and are being amortized to interest expense over the term of the 2020 Term Loan. Interest expense related to our debt financings, excluding the impact of our convertible senior notes (defined below), was zero and $6.0 million for the three months ended September 30, 2023 and 2022, respectively, and $4.1 million and $17.8 million for the nine months ended September 30, 2023 and 2022, respectively.
In February 2023, we repaid, prior to the maturity date, the principal balance outstanding of $135.0 million plus accrued interest of $2.6 million. During the three months ended March 31, 2023, we incurred debt extinguishment costs of $19.3 million related to the prepayment, which included the write-off of unamortized debt issuance costs of $11.2 million and prepayment fees of $8.1 million, which was included in loss on extinguishment of debt, net in the condensed consolidated statements of operations.
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Convertible senior notes
Convertible senior notes due 2024
In September 2019, we issued, at par value, $350.0 million aggregate principal amount of 2.00 % convertible senior notes due 2024 (the "2024 Notes") in a private offering. The 2024 Notes are our senior unsecured obligations and will mature on September 1, 2024, unless earlier converted, redeemed or repurchased. The 2024 Notes bear cash interest at a rate of 2.0 % per year, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on March 1, 2020.
Upon conversion, the 2024 Notes will be convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. The initial conversion rate for the 2024 Notes is 33.6293 shares of our common stock per $1,000 principal amount of the 2024 Notes (equivalent to an initial conversion price of approximately $29.74 per share of common stock).
If we undergo a fundamental change (as defined in the indenture governing the 2024 Notes), the holders of the 2024 Notes may require us to repurchase all or any portion of their 2024 Notes for cash at a repurchase price equal to 100 % of the principal amount of the 2024 Notes to be repurchased plus accrued and unpaid interest to, but excluding, the redemption date.
The 2024 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding March 1, 2024, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on December 31, 2019 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price for the 2024 Notes on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2024 Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if we call any or all of the 2024 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after March 1, 2024 until the close of business on the business day immediately preceding the maturity date, holders may convert their 2024 Notes at any time, regardless of the foregoing circumstances. Since issuance, these notes were convertible at the option of the holders during the quarters beginning on January 1, 2021 and April 1, 2021 due to the sale price of our common stock during the quarters ended December 31, 2020 and March 31, 2021, respectively. The notes were not convertible during the nine months ended September 30, 2023 and there have been no significant conversions in the periods in which they were convertible.
We may redeem for cash all or any portion of the 2024 Notes, at our option, on or after September 6, 2022 and on or before the 30 th scheduled trading day immediately before the maturity date if the last reported sale price of the common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100 % of the principal amount of the notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
See the discussion below regarding the purchase and exchange agreements with certain holders of the outst