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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 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
 
Invitaelogo1.jpg
Invitae Corporation
(Exact name of the registrant as specified in its charter)
 
Delaware 27-1701898
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)
 1400 16th Street, San Francisco, California 94103
(Address of principal executive offices, Zip Code)
 (415) 374-7782
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of exchange on which registered
Common Stock, $0.0001 par value per share
NVTA
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b 2 of the Exchange Act.
Large accelerated filer
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 May 5, 2023 was 260,674,728.



TABLE OF CONTENTS
 




PART I — Financial Information
ITEM 1. Condensed Consolidated Financial Statements
INVITAE CORPORATION
Condensed Consolidated Balance Sheets
(in thousands)
(unaudited)
 
March 31,
2023		 December 31,
2022
Assets    
Current assets:    
Cash and cash equivalents $ 161,197  $ 257,489 
Marketable securities 217,501  289,611 
Accounts receivable 85,592  96,148 
Inventory 19,070  30,386 
Prepaid expenses and other current assets 20,908  19,496 
Total current assets 504,268  693,130 
Property and equipment, net 95,445  108,723 
Operating lease assets 78,051  106,563 
Restricted cash 10,034  10,030 
Intangible assets, net 981,888  1,012,549 
Other assets 21,977  23,121 
Total assets $ 1,691,663  $ 1,954,116 
Liabilities and stockholders’ (deficit) equity
Current liabilities:
Accounts payable $ 11,903  $ 13,984 
Accrued liabilities 85,131  74,388 
Operating lease obligations 16,374  14,600 
Finance lease obligations 4,870  5,121 
Convertible senior secured notes, current portion (at fair value) 71,902  — 
Total current liabilities 190,180  108,093 
Operating lease obligations, net of current portion 143,744  134,386 
Finance lease obligations, net of current portion 2,529  3,780 
Debt —  122,333 
Convertible senior notes, net 1,169,374  1,470,783 
Convertible senior secured notes, net of current portion (at fair value) 211,036  — 
Deferred tax liability 7,130  8,130 
Other long-term liabilities 4,326  4,775 
Total liabilities 1,728,319  1,852,280 
Commitments and contingencies (Note 7)
Stockholders’ (deficit) equity:
Common stock 26  25 
Accumulated other comprehensive loss (108) (80)
Additional paid-in capital 4,984,750  4,931,032 
Accumulated deficit (5,021,324) (4,829,141)
Total stockholders’ (deficit) equity (36,656) 101,836 
Total liabilities and stockholders’ (deficit) equity $ 1,691,663  $ 1,954,116 
See accompanying notes to unaudited condensed consolidated financial statements.
1


INVITAE CORPORATION
Condensed Consolidated Statements of Operations
(in thousands, except per share data)
(unaudited)
 
  Three Months Ended March 31,
  2023 2022
Revenue:    
Test revenue $ 112,623  $ 119,497 
Other revenue 4,733  4,194 
Total revenue 117,356  123,691 
Operating expenses:
Cost of revenue 88,442  97,116 
Research and development 61,978  128,236 
Selling and marketing 44,510  60,144 
General and administrative 45,241  51,428 
Restructuring and other costs 52,556  — 
Total operating expenses 292,727  336,924 
Loss from operations (175,371) (213,233)
Other (expense) income, net:
Loss on extinguishment of debt, net (10,822) — 
Debt issuance costs (19,859) — 
Change in fair value of convertible senior secured notes 18,304  — 
Change in fair value of acquisition-related liabilities 218  10,003 
Other income, net 5,883  436 
Total other (expense) income, net (6,276) 10,439 
Interest expense (11,496) (13,985)
Net loss before taxes (193,143) (216,779)
Income tax benefit 960  34,920 
Net loss $ (192,183) $ (181,859)
Net loss per share, basic and diluted $ (0.77) $ (0.80)
Shares used in computing net loss per share, basic and diluted 249,907  228,470 

See accompanying notes to unaudited condensed consolidated financial statements. 
2


INVITAE CORPORATION
Condensed Consolidated Statements of Comprehensive Loss
(in thousands)
(unaudited)
 
  Three Months Ended March 31,
  2023 2022
Net loss $ (192,183) $ (181,859)
Other comprehensive income (loss):
Unrealized income (loss) on available-for-sale marketable securities, net of tax 143  (778)
Changes in fair value attributable to instrument-specific credit risk of convertible senior secured notes measured at fair value, net of tax (171) — 
Comprehensive loss $ (192,211) $ (182,637)
 
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 March 31,
  2023 2022
Common stock:
Balance, beginning of period
 $ 25  $ 23 
Common stock issued
 1  — 
Balance, end of period
 26  23 
Accumulated other comprehensive loss:
Balance, beginning of period (80) (7)
Unrealized income (loss) on available-for-sale marketable securities, net of tax 143  (778)
Changes in fair value attributable to instrument-specific credit risk of convertible senior secured notes measured at fair value, net of tax (171) — 
Balance, end of period (108) (785)
Additional paid-in capital:
Balance, beginning of period
 4,931,032  4,701,230 
Common stock issued in connection with the exchange of convertible senior notes due 2024 23,461  — 
Common stock issued on exercise of stock options, net
 1  425 
Common stock and equity awards issued pursuant to acquisitions 1,063  1,660 
Stock-based compensation expense
 29,193  46,087 
Balance, end of period
 4,984,750  4,749,402 
Accumulated deficit:
Balance, beginning of period
 (4,829,141) (1,722,848)
Net loss (192,183) (181,859)
Balance, end of period
 (5,021,324) (1,904,707)
Total stockholders' (deficit) equity $ (36,656) $ 2,843,933 

See accompanying notes to unaudited condensed consolidated financial statements.
4


INVITAE CORPORATION
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
  Three Months Ended March 31,
  2023 2022
Cash flows from operating activities:    
Net loss $ (192,183) $ (181,859)
Adjustments to reconcile net loss to net cash used in operating activities:
Impairments and losses on disposals of long-lived assets, net 50,354  — 
Depreciation and amortization 34,963  27,100 
Stock-based compensation 29,193  46,822 
Amortization of debt discount and issuance costs 3,022  3,883 
Loss on extinguishment of debt, net 10,822  — 
Debt issuance costs 19,859  — 
Change in fair value of convertible senior secured notes (18,304) — 
Remeasurements of liabilities associated with business combinations (218) (10,003)
Benefit from income taxes (960) (34,920)
Post-combination expense for acceleration of unvested equity and deferred stock compensation 830  1,660 
Amortization of premiums and discounts on investment securities (2,949) 570 
Non-cash lease expense 3,111  1,286 
Other 824  674 
Changes in operating assets and liabilities, net of businesses acquired:
Accounts receivable 10,556  (14,172)
Inventory 11,316  (9,941)
Prepaid expenses and other current assets (1,412) 1,654 
Other assets 163  (1,984)
Accounts payable (1,942) 22,863 
Accrued expenses and other long-term liabilities 8,557  (1,176)
Net cash used in operating activities (34,398) (147,543)
Cash flows from investing activities:
Purchases of marketable securities (126,053) (550,541)
Proceeds from maturities of marketable securities 201,255  121,933 
Purchases of property and equipment (1,324) (20,848)
Net cash provided by (used in) investing activities 73,878  (449,456)
Cash flows from financing activities:
Proceeds from issuance of common stock, net 1  425 
Proceeds from issuance of Series B convertible senior secured notes due 2028 30,000  — 
Payments for debt issuance costs and prepayment fees (28,014) — 
Repayment of debt (135,000) — 
Finance lease principal payments (1,289) (1,330)
Settlement of acquisition obligations (1,466) (15)
Net cash used in financing activities (135,768) (920)
Net decrease in cash, cash equivalents and restricted cash (96,288) (597,919)
Cash, cash equivalents and restricted cash at beginning of period 267,519  933,525 
Cash, cash equivalents and restricted cash at end of period $ 171,231  $ 335,606 
Supplemental cash flow information of non-cash investing and financing activities:
Equipment acquired through finance leases $ —  $ 4,472 
Purchases of property and equipment in accounts payable and accrued liabilities $ 579  $ 11,675 
Common stock issued for acquisition of businesses $ 233  $ — 
Exchange of convertible senior notes due 2024 $ (302,941) $ — 
Exchange for convertible senior secured notes due 2028 $ 301,071  $ — 

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, rare diseases and pharmacogenomics. To augment our portfolio and realize our mission, we have previously acquired multiple assets and businesses that further expanded our test menu and suite of digital health and offerings and accelerated our entry into key genomics markets. We are building a platform to harness genetics to diagnose more patients correctly and earlier, while enabling our strategic partners to bring therapies to market faster. 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 to prioritize its core genetic testing and digital health and data platforms, which was approved by the board of directors of the Company on July 16, 2022. See Note 10, "Restructuring 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 (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. The results for the three months ended March 31, 2023 are not necessarily indicative of the results expected for the full fiscal year or any other periods.  
2. Summary of significant accounting policies
Principles of consolidation
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 future events. Actual results could differ materially from those judgments, estimates and assumptions. We evaluate our estimates on an ongoing basis.
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 may exceed federally insured limits.
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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):
March 31, 2023 March 31, 2022
Cash and cash equivalents $ 161,197  $ 325,331 
Restricted cash 10,034  10,275 
Total cash, cash equivalents and restricted cash $ 171,231  $ 335,606 
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 the convertible senior secured notes due 2028 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 our 4.50% Series A and B convertible senior secured notes due 2028 (collectively, the "Senior Secured 2028 Notes") and stock payable liabilities resulting from business combinations.
The convertible senior secured notes accounted for under the fair value option election pursuant to Accounting Standards Codification ("ASC") 825, Financial Instruments, are each a debt host financial instrument containing embedded features which 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 (expense) income, 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.
In circumstances where an acquisition involves certain indemnification hold-backs that are settled in shares of our common stock, we recognize a stock payable liability 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. We remeasure this liability each reporting period and record changes in the fair value related to stock payable liabilities in other income (expense), net in our condensed consolidated statements of operations.
Restructuring and other costs
Restructuring and other costs are comprised of employee severance and benefits, asset impairments and losses on asset disposals, and other costs primarily related to implementing our strategic realignment. 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 losses on asset disposals in accordance with ASC 360, Impairment or Disposal of Long-
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Lived Assets. Restructuring 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 consolidated financial statements at the date of adoption. The amendments will be applied prospectively to 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.
The following tables present disaggregated revenue by customer and product offering by category (in thousands):
  Patient Institution Three Months Ended March 31, 2023
  Insurance Direct
Product:
Oncology $ 50,615  $ 1,705  $ 7,986  $ 60,306 
Women's health 20,210  3,412  1,259  24,881 
Rare diseases 11,427  2,389  6,316  20,132 
Data/services —  —  12,037  12,037 
Total revenue $ 82,252  $ 7,506  $ 27,598  $ 117,356 
  Patient Institution Three Months Ended March 31, 2022
  Insurance Direct
Product:
Oncology $ 48,538  $ 3,436  $ 20,201  $ 72,175 
Women's health 16,765  6,004  2,022  24,791 
Rare diseases 6,601  2,717  6,265  15,583 
Data/services —  —  11,142  11,142 
Total revenue $ 71,904  $ 12,157  $ 39,630  $ 123,691 
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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 (decreases) increases to revenue and (decreases) increases 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 March 31,
  2023 2022
Revenue $ (3.0) $ 1.1 
(Loss) income from operations $ (3.0) $ 1.1 
Net (loss) income per share, basic and diluted $ (0.01) $ 0.00 
Accounts receivable
The majority of our accounts receivable represents amounts billed to customers for test and 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 $1.1 million and $1.3 million as of March 31, 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 $2.1 million from deferred revenue during the three months ended March 31, 2023. The current contract liability was $5.7 million and $4.8 million as of March 31, 2023 and December 31, 2022, respectively, which was included in accrued liabilities in the condensed consolidated balance sheets. The long-term contract liability was $36 thousand and $0.1 million at March 31, 2023 and December 31, 2022, respectively, and 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 $2.5 million and $4.7 million as of March 31, 2023 and December 31, 2022, respectively, which was included in accrued liabilities in the condensed consolidated balance sheets.
Performance obligations
Test and other revenue are generally recognized upon completion of our performance obligation when or as control of the promised good or service is transferred to the customer, which is typically a test report, or upon shipment of our precision oncology products or other contractually defined milestone(s). The Company has applied the practical expedient in relation to information about our remaining performance obligations, as we have a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the Company’s performance completed to date. Most remaining performance obligations are primarily related to Personalized Cancer Monitoring ("PCM") services included in test revenue in our condensed consolidated statement of operations and are generally satisfied over one to six months.
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4. Intangible assets
The following table presents details of our acquired intangible assets as of March 31, 2023 (in thousands):
March 31, 2023
 
Cost
Accumulated
Amortization
 Asset Disposals
Net
 Weighted-Average
Useful Life
(In Years)
Customer relationships $ 40,928  $ (18,577) $ —  $ 22,351  10.8
Developed technology 1,138,702  (193,796) (2,051) 942,855  10.8
Trade name 21,072  (4,390) —  16,682  12.0
  $ 1,200,702  $ (216,763) $ (2,051) $ 981,888  10.8
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
Net
 Weighted-Average
Useful Life
(In Years)
Customer relationships $ 41,515  $ (17,675) $ (359) $ 23,481  10.8
Developed technology 1,174,506  (183,133) (19,426) 971,947  10.8
Non-compete agreement 286  (286) —  —  —
Trade name 21,085  (3,964) —  17,121  12.0
Patent assets and licenses 495  (156) (339) —  —
Right to develop new technology 19,359  (2,474) (16,885) —  —
  $ 1,257,246  $ (207,688) $ (37,009) $ 1,012,549  10.8
Acquisition-related intangibles included in the above tables are generally finite-lived and are carried at cost less accumulated amortization. Customer relationships are being amortized on an accelerated basis in proportion to estimated cash flows. All other finite-lived acquisition-related intangibles are being amortized on a straight-line basis over their estimated lives, which approximates the pattern in which the economic benefits of the intangible assets are expected to be realized. Amortization expense was $28.6 million and $20.2 million for the three months ended March 31, 2023 and 2022, respectively. Amortization expense is recorded in cost of revenue, research and development, and selling and marketing expense in our condensed consolidated statements of operations.
In March 2023, we decided to cease development of acquired technology focused on informing clinical decisions as management continued to evaluate its investments in development. 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 and other costs in the condensed consolidated statements of operations. See Note 10, "Restructuring and other costs" for additional information.
The following table summarizes our estimated future amortization expense of intangible assets with finite lives as of March 31, 2023 (in thousands):
2023 (remainder of year) $ 85,559 
2024 113,800 
2025 112,046 
2026 112,012 
2027 111,346 
Thereafter 447,125 
Total estimated future amortization expense $ 981,888 
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5. Balance sheet components
Inventory
Inventory consisted of the following (in thousands):
  March 31, 2023 December 31, 2022
Raw materials $ 18,913  $ 29,992 
Work in progress 157  382 
Finished goods —  12 
Total inventory $ 19,070  $ 30,386 
Property and equipment, net
Property and equipment consisted of the following (in thousands):
March 31, 2023 December 31, 2022
Leasehold improvements $ 72,184  $ 73,095 
Laboratory equipment 62,267  67,261 
Computer equipment 13,368  13,511 
Furniture and fixtures 1,364  1,427 
Construction-in-progress 14,186  21,006 
Other 5,955  2,996 
Total property and equipment, gross 169,324  179,296 
Accumulated depreciation (73,879) (70,573)
Total property and equipment, net $ 95,445  $ 108,723 
Depreciation expense was $5.4 million and $5.6 million for the three months ended March 31, 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 is included in restructuring and other costs in our condensed consolidated statement of operations. See Note 7, "Commitments and contingencies" and Note 10, "Restructuring and other costs" for additional information.
Accrued liabilities
Accrued liabilities consisted of the following (in thousands):
  March 31, 2023 December 31, 2022
Accrued compensation and related expenses $ 33,424  $ 25,315 
Accrued expenses 32,394  23,628 
Compensation and other liabilities associated with business combinations 3,881  5,335 
Deferred revenue 5,721  4,814 
Accrued interest 62  6,646 
Accrued royalties 2,421  3,177 
Other accrued liabilities 7,228  5,473 
Total accrued liabilities $ 85,131  $ 74,388 
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.
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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.
The following tables set forth the fair value of our financial instruments that were measured at fair value on a recurring basis (in thousands):
  March 31, 2023
 
Amortized
Cost
 Gross Unrealized Gains Gross Unrealized Losses
Estimated
Fair Value
      
  Level 1 Level 2 Level 3
Financial assets:              
Money market funds $ 169,399  $ —  $ —  $ 169,399  $ 169,399  $ —  $ — 
U.S. Treasury notes 33,042  11  —  33,053  33,053  —  — 
U.S. government agency securities 184,395  53  —  184,448  —  184,448  — 
Total financial assets $ 386,836  $ 64  $ —  $ 386,900  $ 202,452  $ 184,448  $ — 
Financial liabilities:
Stock payable liability $ 300  $ —  $ —  $ 300 
Contingent consideration 25  —  —  25 
Convertible senior secured notes 282,938  —  —  282,938 
Total financial liabilities $ 283,263  $ —  $ —  $ 283,263 
  March 31, 2023
Reported as:  
Cash equivalents $ 159,365 
Restricted cash 10,034 
Marketable securities 217,501 
Total cash equivalents, restricted cash, and marketable securities $ 386,900 
Convertible senior secured notes, current portion $ 71,902 
Convertible senior secured notes, net of current portion 211,036 
Other long-term liabilities 325 
Total liabilities $ 283,263 

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  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 $ 158,931  $ —  $ —  $ 158,931  $ 158,931  $ —  $ — 
U.S. Treasury notes 193,685  1  (123) 193,563  193,563  —  — 
U.S. government agency securities 96,006  55  (13) 96,048  —  96,048  — 
Total financial assets $ 448,622  $ 56  $ (136) $ 448,542  $ 352,494  $ 96,048  $ — 
Financial liabilities:
Stock payable liability $ 744  $ —  $ —  $ 744 
Contingent consideration 25  —  —  25 
Total financial liabilities $ 769  $ —  $ —  $ 769 
  December 31, 2022
Reported as:  
Cash equivalents $ 148,901 
Restricted cash 10,030 
Marketable securities 289,611 
Total cash equivalents, restricted cash, and marketable securities $ 448,542 
Other long-term liabilities $ 769 
There were no transfers between Level 1, Level 2 and Level 3 during the periods presented. Our debt securities of U.S. government agencies are classified as Level 2 as they are valued based upon quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs obtained from various third-party data providers, including but not limited to benchmark yields, interest rate curves, reported trades, broker/dealer quotes and reference data. At March 31, 2023, the remaining contractual maturities of available-for-sale securities ranged from zero to three months. Interest income generated from our investments was $2.0 million and $1.2 million during the three months ended March 31, 2023 and 2022, respectively, which is included in other income, net in the condensed consolidated statements of operations.
The total fair value of investments with unrealized losses at March 31, 2023 was zero. None of the available-for-sale securities held as of March 31, 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 March 31, 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.
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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):
  Stock Payable Liability Contingent Consideration Convertible Senior Secured Notes
Fair value at December 31, 2022 $ 744  $ 25  $ — 
Issuance of convertible senior secured notes at fair value —  —  301,071 
Changes in fair value (218) —  (18,304)
Changes in fair value related to instrument-specific credit risk —  —  171 
Settlements (226) —  — 
Fair value at March 31, 2023 $ 300  $ 25  $ 282,938 
  Stock Payable Liability Contingent Consideration
Fair value at December 31, 2021 $ 20,925  $ 1,875 
Change in fair value (10,003) 154 
Fair value at March 31, 2022 $ 10,922  $ 2,029 
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 $0.2 million and $10.0 million during the three months ended March 31, 2023 and 2022, respectively, which is recorded in change in fair value of acquisition-related liabilities in the condensed consolidated statements of operations.
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 other (expense) income, net was zero and expense of $0.2 million during the three months ended March 31, 2023 and 2022, respectively.
In March 2023, the Company issued 4.50% Series A convertible senior secured notes due 2028 (“Series A Notes”) with an aggregate principal amount of $275.3 million, and Series B convertible senior secured notes due 2028 (the "Series B Notes") with an aggregate principal amount of $30.0 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 convertible senior secured 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,
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(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 will record changes in fair value, inclusive of related accrued interest, through the condensed consolidated statement 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 March 31, 2023, the estimated fair value was $282.9 million. During the three months ended March 31, 2023, the corresponding change in fair value of the Senior Secured 2028 Notes was a gain of $18.3 million, which is included in other (expense) income, net in the condensed consolidated statements of operations. The change in fair value related to instrument-specific credit risk was $0.2 million, 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 March 31, 2023 and March 7, 2023 were as follows:
March 31, 2023 March 7, 2023
Stock price $1.35 $1.65
Conversion price $2.58 $2.58
Volatility 110.0  % 107.5  %
Risk-free interest rate 3.64  % 4.35  %
Credit spread 13.74  % 13.76  %
Cost of debt 17.4  % 18.1  %
Term (years) 4.96 5.02
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 a portion of the new laboratory and production facilities in Morrisville, North Carolina and the related impairment in the first quarter of 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 on March 31, 2023. For operating leases where the carrying values of the asset group were lower than the undiscounted cash flows expected through sublease, we impaired the asset group to their fair value. The fair value
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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 million for the related leasehold improvements, which are included in restructuring and other costs in our condensed consolidated statement of operations.
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 on March 31, 2023. For operating leases where the carrying values of the asset group were lower 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 is included in restructuring and other costs in our consolidated statements of operations.
Sublease income was $0.4 million during the three months ended March 31, 2023. There was no sublease income for the three months ended March 31, 2022.
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 is secured by a first priority lien on all of our and our subsidiaries' assets, and is guaranteed by us and our subsidiaries. The 2020 Term Loan bears interest at an annual rate equal to three-month LIBOR, subject to a 2.00% LIBOR floor, plus a margin of 8.75%. If three-month LIBOR can no longer be determined or if the applicable governmental authority ceases to supervise or sanction such rates, then we will endeavor to agree with the administrative agent, an alternate rate of interest that gives due consideration to the then prevailing market convention for determining interest for comparable loans in the United States, provided that until such alternative rate of interest is agreed, the 2020 Term Loan shall bear interest at the Wall Street Journal Prime Rate. The three-month LIBOR is expected to be available and representative through June 30, 2023. The 2020 Term Loan will mature on (i) June 1, 2024, if at such time our 2024 Notes (defined below) are outstanding and are due to mature on September 1, 2024 (provided that if, prior to such date, the maturity date of at least 80% of the 2024 Notes is extended to a date that is prior to September 1, 2025, the maturity date for the 2020 Term Loan will be automatically extended to a date that is 90 days prior to such 2024 Notes maturity date as extended), or (ii) otherwise, on June 1, 2025. The full amount of the 2020 Term Loan is due upon maturity. If the 2020 Term Loan is prepaid (whether such prepayment is optional or mandatory), we must 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 must also pay a make-whole fee if the prepayment occurs prior to the second anniversary of the closing date.
The credit agreement contains customary events of default and covenants, including among others, covenants limiting our ability to incur debt, incur liens, undergo a change in control, merge with or acquire other entities, make investments, pay dividends or other distributions to holders of our equity securities, repurchase stock, and dispose of assets, in each case subject to certain customary exceptions. In addition, the credit agreement contains financial covenants that require us to maintain a minimum cash balance and minimum quarterly revenue levels.
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 $4.1 million and $5.9 million for the three months ended March 31, 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
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issuance costs of $11.2 million and prepayment fees of $8.1 million, which are included in loss on extinguishment of debt, net in the condensed consolidated statements of operations.
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 three months ended March 31, 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 30th 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 outstanding 2024 Notes. As of March 31, 2023, the outstanding principal balance of the 2024 Note was $44.3 million.
Convertible senior notes due 2028
In April 2021, we issued, at 99% of par value, $1,150.0 million aggregate principal amount of 1.5% convertible senior notes due 2028 (the "2028 Notes") in a private offering. The 2028 Notes are our senior unsecured obligations and will mature on April 1, 2028, unless earlier converted, redeemed or repurchased. The 2028 Notes bear cash interest at a rate of 1.5% per year, payable semi-annually in arrears on April 1 and October 1 of each year, beginning on October 1, 2021. Upon conversion, the 2028 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.
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The 2028 Notes will be convertible at the option of the holder at any time until the second scheduled trading day prior to the maturity date, including in connection with a redemption by us. The 2028 Notes will be convertible into shares of our common stock based on an initial conversion rate of 23.1589 shares of common stock per $1,000 principal amount of the 2028 Notes (which is equal to an initial conversion price of $43.18 per share), in each case subject to customary anti-dilution and other adjustments as a result of certain extraordinary transactions. None of the 2028 Notes have been converted to date.
We may not redeem the 2028 Notes prior to April 6, 2025. On or after April 6, 2025, the 2028 Notes will be redeemable by us in the event that the closing sale price of our common stock has been at least 150% 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 the redemption notice at a redemption price of 100% of the principal amount of such 2028 Notes, plus accrued and unpaid interest to, but excluding, the redemption date.
With certain exceptions, upon a change of control of the Company or the failure of our common stock to be listed on certain stock exchanges, the holders of the 2028 Notes may require that we repurchase all or part of the principal amount of the Notes at a repurchase price of 100% of the principal amount of the 2028 Notes to be repurchased, plus unpaid interest to, but excluding, the maturity date.
Summary of convertible senior notes
Our 2024 Notes and 2028 Notes (collectively, our "Convertible Senior Notes") consisted of the following (in thousands):
March 31, 2023 December 31, 2022
Outstanding principal $ 1,194,269  $ 1,499,996 
Unamortized debt discount and issuance costs (24,895) (29,213)
Net carrying amount $ 1,169,374  $ 1,470,783 
As of March 31, 2023, the fair value of the 2024 Notes and 2028 Notes was $38.9 million and $492.4 million, respectively. The estimated fair value of the 2024 Notes and 2028 Notes, which use Level 2 fair value inputs, was determined based on the estimated or actual bid prices in an over-the-counter market and/or market conditions including the price and volatility of our common stock and comparable company information. We recognized $7.2 million and $7.7 million of interest expense related to our Convertible Senior Notes during the three months ended March 31, 2023 and 2022, respectively. Of the interest expense recognized, $1.5 million and $1.6 million during the three months ended March 31, 2023 and 2022, respectively, was related to amortization of issuance costs and the remainder was related to contractual interest incurred.
Convertible senior secured notes due 2028
In February 2023, we entered into purchase and exchange agreements with certain holders of the outstanding 2024 Notes. Under the terms of the agreements, we (a) exchanged $305.7 million aggregate principal amount of 2024 Notes for $275.3 million aggregate principal amount of Series A Notes and 14,219,859 shares of the Company’s common stock and (b) issued and sold $30.0 million aggregate principal amount of Series B Notes for cash.
The Senior Secured 2028 Notes are our senior secured obligations and will mature on March 15, 2028, unless earlier converted, redeemed or repurchased. The Senior Secured 2028 Notes bear cash interest at a rate of 4.50% per year, payable quarterly in arrears on March 15, June 15, September 15 and December 15 of each year, beginning on June 15, 2023.
Based on the initial conversion price of $2.58, the Senior Secured 2028 Notes will be initially convertible into an aggregate of 118,316,667 shares of common stock, and after taking into account the maximum number of additional shares issuable in certain circumstances as described in the indenture, an aggregate of 141,979,975 shares of common stock.
At any time prior to the 60th day prior to the maturity date of the Senior Secured 2028 Notes, we have the option to redeem all or any portion of the principal amount of the Senior Secured 2028 Notes for cash equal to the principal amount of the Senior Secured 2028 Notes to be redeemed. Upon redemption of any Senior Secured 2028 Notes, we will (i) issue warrants to purchase shares of common stock, unless the aggregate principal amount of Senior Secured 2028 Notes outstanding represents less than 10% of the aggregate principal amount of Senior Secured 2028 Notes initially issued and certain other conditions are satisfied, and (ii) make a make-whole payment
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as determined pursuant to the indenture governing the Senior Secured 2028 Notes, together with accrued and unpaid interest through the redemption date. In addition, in certain circumstances, we may be required to issue additional shares of common stock for any Senior Secured 2028 Notes converted in connection with a notice of optional redemption. The indenture governing the Senior Secured 2028 Notes also provides for the issuance of warrants to purchase shares of common stock in connection with the prepayment of the Senior Secured 2028 Notes upon acceleration of the Senior Secured 2028 Notes following the occurrence of an event of default under the indenture as a result of the failure by the Company to settle any conversion. Any warrants issued will cover the same number of shares of the common stock underlying and at an exercise price equal to the conversion price of the redeemed or prepaid Senior Secured 2028 Notes. The number of shares issuable upon conversion or exercise is subject to customary anti-dilution and other adjustments (as defined in the indenture governing the Senior Secured 2028 Notes).
The Senior Secured 2028 Notes will be convertible at any time prior to the maturity date at the option of the holders, subject to a beneficial ownership cap. In addition, prior to such time that the Company obtains stockholder approval for the issuance of shares of common stock in excess of the limitations imposed by the NYSE rules (the “NYSE Cap”), holders of the Series A Notes are prohibited from converting their notes or exercising any warrants issued in respect of the Series A Notes into shares of common stock in excess of such NYSE Cap and we would instead be required to settle any conversion in cash if we are not able to obtain the stockholder approval prior to September 30, 2023 (the grace period specified in the indenture). The cash settlement amount upon conversion of a Series A Note by a holder prior to stockholder approval is equal to the product of the shares of common stock in excess of the NYSE Cap multiplied by the arithmetic average of the volume weighted average price of our common stock on each of the five consecutive trading days immediately preceding the conversion date. After obtaining stockholder approval, the full amount of the outstanding balance of the Senior Secured 2028 Notes will be convertible into shares of common stock, with no conversion limitations. There can be no assurance that we will be successful in obtaining stockholder approval for the proposal to approve the issuance of shares of common stock pursuant to the conversion of the Senior Secured 2028 Notes or the exercise of any warrants issued in respect to the Senior Secured 2028 Notes in excess of the limitations imposed by the NYSE Cap prior to September 30, 2023. If we fail to obtain stockholder approval, we may not have enough available cash or be able to obtain financing at the time we are required to settle any conversion.
If we undergo a major transaction (as defined in the indenture), holders may require us to repurchase for cash all or part of their Senior Secured 2028 Notes at a purchase price equal to 100% of the principal amount of the Senior Secured 2028 Notes to be repurchased, plus (i) accrued and unpaid interest to, but excluding, the repurchase date and (ii) the make-whole amount as determined pursuant to the indenture governing the Senior Secured 2028 Notes. In addition, at the election of the holders of the Senior Secured 2028 Notes, we may be required to issue additional shares of common stock for any Senior Secured 2028 Notes converted in connection with a major transaction.
The Senior Secured 2028 Notes are guaranteed by our material subsidiaries and secured by (i) a security interest in substantially all of the assets of the Company and its domestic material subsidiaries and (ii) a pledge of the equity interests of the Company's direct and indirect subsidiaries, subject to certain customary exceptions. The indenture contains certain specified events of default, the occurrence of which would entitle the holders of the Senior Secured 2028 Notes to demand repayment of all outstanding principal and accrued interest on the Notes, together with a make-whole payment as determined pursuant to the indenture. The indenture also includes specific affirmative and restrictive covenants agreed to by the Company. In addition, the indenture also contains financial covenants that will require us to maintain revenue in the prior four quarters of not less than $250.0 million and, starting with the quarter ending March 31, 2025, a minimum liquidity of at least 15% of the amount of our secured indebtedness then outstanding. As of March 31, 2023, we are in compliance with all restrictive and financial covenants.
We elected the fair value option to account for the Senior Secured 2028 Notes, which requires the notes to be accounted for as a single liability 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 date. We have elected not to present the interest expenses separate from the fair value changes of the Senior Secured 2028 Notes. Considering the terms of settlement noted above, we elected the fair value option for the Senior Secured 2028 Notes as we believe it best reflects the underlying economics and also for simplification and cost-benefit considerations of accounting such Senior Secured 2028 Notes at fair value versus bifurcation of the embedded derivatives.
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 March 31, 2023, the estimated fair value of the Senior Secured 2028 Notes was $282.9 million. The portion of the estimated fair value of Series A Notes for which conversion is subject
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to stockholder approval and for which the Company has a cash settlement obligation is classified as a current liability with the remainder classified as a long-term liability in the condensed consolidated balance sheets. The current liability was determined based on the product of the shares of common stock in excess of the NYSE Cap multiplied by the arithmetic average of the volume weighted average price of our common stock on each of the five consecutive trading dates immediately preceding March 31, 2023. The long-term liability represents the portion of the Senior Secured 2028 Notes for which we have the intent and the ability to settle the obligations by issuing shares. During the three months ended March 31, 2023, the corresponding change in fair value of the Senior Secured 2028 Notes was a gain of $18.3 million, which is included in other (expense) income, net in the condensed consolidated statements of operations. During the three months ended March 31, 2023, the change in fair value related to instrument-specific credit risk was $0.2 million, which is included in the condensed consolidated statements of comprehensive loss.
In connection with the issuance of the Senior Secured 2028 Notes, we incurred approximately $19.9 million of debt issuance costs primarily related to legal and consulting fees paid to third parties, which were expensed as incurred during the three months ended March 31, 2023 and included in other (expense) income, net in the condensed consolidated statements of operations.
The exchange of the 2024 Notes for the Senior Secured 2028 Notes was treated as an extinguishment of debt, and we recognized a gain on extinguishment of $8.5 million representing the difference between the fair value of the Series A Notes immediately prior to the exchange plus the fair value of common shares issued and the carrying amount of the 2024 Notes, which is included in loss on extinguishment of debt, net in the condensed consolidated statements of operations.
Other commitments
In the normal course of business, we enter into various purchase commitments primarily related to service agreements and laboratory supplies. At March 31, 2023, our total future payments under noncancelable unconditional purchase commitments having a remaining term of over one year were $35.6 million.
Guarantees and indemnification
As permitted under Delaware law and in accordance with our bylaws, we indemnify our directors and officers for certain events or occurrences while the officer or director is or was serving in such capacity. The maximum amount of potential future indemnification is unlimited; however, we maintain director and officer liability insurance. This insurance allows the transfer of the risk associated with our exposure and may enable us to recover a portion of any future amounts paid. We believe the fair value of these indemnification agreements is minimal. Accordingly, we did not record any liabilities associated with these indemnification agreements at March 31, 2023 or December 31, 2022.
Contingencies
We are and may from time to time be involved in various legal proceedings and claims arising in the ordinary course of business. Legal proceedings, including litigation, government investigations and enforcement actions could result in material costs, occupy significant management resources and entail civil and criminal penalties, even if we ultimately prevail. If an investigation results in a proceeding against us, an adverse outcome could include us being required to pay treble damages, and incur attorneys’ fees, civil or criminal penalties and other adverse actions that could materially and adversely affect our business, financial condition and results of operations. While we believe any such claims are unsubstantiated, and we believe we are in compliance with applicable laws and regulations applicable to our business, the resolution of any such claims could be material.
We were not a party to any material legal proceedings at March 31, 2023, or at the date of this report except for matters listed below. We cannot currently predict the outcome of these actions.
Natera, Inc.
On January 27, 2020, Natera filed a lawsuit against ArcherDX (a subsidiary of Invitae effective October 2, 2020) in the United States District Court for the District of Delaware, alleging that ArcherDX’s products using Anchored Multiplex PCR ("AMP") chemistry, and the manufacture, use, sale, and offer for sale of such products, infringe U.S. Patent No. 10,538,814. On March 25, 2020, ArcherDX filed an answer denying Natera’s allegations and asserting certain affirmative defenses and counterclaims, including that U.S. Patent No. 10,538,814 is invalid and not infringed. On April 15, 2020, Natera filed an answer denying ArcherDX’s counterclaims and filed an amended complaint alleging that ArcherDX’s products using AMP chemistry, including STRATAFIDE, PCM,
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LiquidPlex, ArcherMET, FusionPlex, and VariantPlex, and the manufacture, use, sale, and offer for sale of such products, infringe U.S. Patent No. 10,538,814, U.S. Patent No. 10,557,172, U.S. Patent No. 10,590,482, and U.S. Patent No. 10,597,708, each of which are held by Natera. Natera seeks, among other things, damages and other monetary relief, costs and attorneys’ fees, and an order enjoining ArcherDX from further infringement of such patents. On May 13, 2020, ArcherDX filed an answer to Natera’s amended complaint denying Natera’s allegations and asserting certain affirmative defenses and counterclaims, including that the asserted patents are invalid and not infringed. On June 3, 2020, Natera filed an answer denying ArcherDX’s counterclaims. On June 4, 2020, ArcherDX filed a motion seeking dismissal of Natera’s infringement claims against STRATAFIDE, PCM, and ArcherMET, and for a judgment that U.S. Patent No. 10,538,814, U.S. Patent No. 10,557,172, and U.S. Patent No. 10,590,482 are invalid. On August 6, 2020, Natera filed another complaint against ArcherDX in the United States District Court for the District of Delaware alleging that ArcherDX’s products using AMP chemistry, including STRATAFIDE, PCM, LiquidPlex, ArcherMET, and VariantPlex, and the manufacture, use, sale, and offer for sale of such products, infringe U.S. Patent No. 10,731,220. Natera seeks, among other things, damages and other monetary relief, costs and attorneys’ fees, and an order enjoining ArcherDX from further infringement of the patent. On October 13, 2020, the court issued an order denying ArcherDX's motion for dismissal of Natera’s infringement claims against STRATAFIDE, PCM, and ArcherMET, and declined to enter judgment that U.S. Patent No. 10,538,814, U.S. Patent No. 10,557,172, and U.S. Patent No. 10,590,482 are invalid. On January 12, 2021, the court issued an order granting Natera leave to amend its complaint to add Invitae as a co-defendant and plead allegations that ArcherDX and Invitae induce end-users to infringe the patents-in-suit. Natera filed its second amended complaint (“Second Amended Complaint”) on the same day, with service completed on January 15, 2021. ArcherDX and Invitae filed answers to the Second Amended Complaint on January 26, 2021 and February 5, 2021, respectively, denying Natera's allegations and restating certain affirmative defenses and counterclaims of non-infringement and invalidity. The litigations have now been consolidated for all purposes. A claim construction order was issued on June 28, 2021. On October 27, 2021, Natera filed its third amended complaint (“Third Amended Complaint”) to add a Certificate of Correction to U.S. Patent No. 10,590,482. On November 3, 2021, ArcherDX filed its answer and counterclaims to Natera's Third Amended Complaint, adding an inequitable conduct defense and declaratory judgment counterclaims. Discovery concluded in December 2021. On January 21, 2022, Natera, ArcherDX and Invitae moved for summary judgment, wherein Natera seeks a determination on certain legal and equitable defenses and ArcherDX and Invitae seek a determination of non-infringement and invalidity of the asserted patents. Those motions were denied by order dated February 6, 2023, and trial began on May 8, 2023.
In addition, on October 6, 2020, Natera filed a complaint against Genosity in the United States District Court for the District of Delaware, alleging that Genosity's use of its AsTra products, and the manufacture, use, sale, and offer for sale of such products, infringes U.S. Patent No. 10,731,220. Natera's complaint further alleges that Genosity's accused products use ArcherDX's ctDNA and region-specific primers. Genosity filed an answer to the complaint on February 15, 2021, denying Natera's allegations and setting forth affirmative defenses and counterclaims of non-infringement, invalidity and unenforceability due to inequitable conduct. On March 8, 2021, Natera filed a motion to dismiss and strike certain affirmative defenses and counterclaims brought by Genosity relating to inequitable conduct. The court denied that motion on March 14, 2022. The court granted an order granting the parties' stipulated request to stay the case on April 1, 2022.
QIAGEN Sciences
On July 10, 2018, ArcherDX and the General Hospital Corporation d/b/a Massachusetts General Hospital, which we refer to as MGH, filed a lawsuit in the United States District Court for the District of Delaware against QIAGEN Sciences, LLC, QIAGEN LLC, QIAGEN Beverly, Inc., QIAGEN Gaithersburg, Inc., QIAGEN GmbH and QIAGEN N.V., which is collectively referred to herein as QIAGEN, and a named QIAGEN executive who was a former member of ArcherDX’s board of directors, alleging several causes of action, including infringement of the ’810 Patent, trade secret misappropriation, breach of fiduciary duty, false advertising, tortious interference and deceptive trade practices. The ’810 Patent relates to methods for preparing a nucleic acid for sequencing and aspects of ArcherDX’s AMP technology. On October 30, 2019, with the permission of the Court, ArcherDX amended ArcherDX’s complaint to add a claim for infringement of the ’597 Patent. The ’597 Patent relates to methods of preparing and analyzing nucleic acids, such as by enriching target sequences prior to sequencing, and aspects of ArcherDX’s AMP technology. The QIAGEN products that ArcherDX alleges infringe the ’810 Patent and the ’597 Patent include, but are not limited to, QIAseq Targeted DNA Panels, QIAseq Targeted RNAscan Panels, QIAseq Index Kits and QIAseq Immune Repertoire RNA Library Kits. ArcherDX is seeking, among other things, damages for ArcherDX’s lost profits due to QIAGEN’s infringement and a permanent injunction enjoining QIAGEN from marketing and selling the infringing products and from using ArcherDX’s trade secrets. On December 5, 2019, QIAGEN and the named QIAGEN executive submitted their answer denying the allegations in ArcherDX’s complaint and asserting affirmative defenses that, among other things, the ’810 Patent and ’597 Patent are not infringed by
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QIAGEN’s products, that both patents are invalid, and that the complaint fails to state any claim for which relief may be granted. On March 1, 2021, each of ArcherDX and QIAGEN moved for summary judgment on issues relating to infringement and validity of ArcherDX's patents, breach of fiduciary duty and trade secret misappropriation. On June 18, 2021, ArcherDX informed the court that it would not assert the following claims to streamline the issues for trial: trade secret misappropriation, false advertising, deceptive trade practices, and tortious interference. The court denied QIAGEN's motion for summary judgment on trade secret misappropriation as moot on June 21, 2021, denied QIAGEN's motion for summary judgment on breach of fiduciary duty on July 26, 2021, and granted QIAGEN's motion for summary judgment of no literal infringement of the '810 Patent on August 21, 2021. Trial proceeded on August 23 through August 27, 2021, resulting in a unanimous jury verdict, which found that: (i) all asserted claims of the '810 and '597 Patents are valid, (ii) QIAGEN willfully infringed the asserted claims of the '810 patent (under the doctrine of equivalents) and the '597 patent (literal infringement), and (iii) ArcherDX and MGH are entitled to recover approximately $4.7 million in damages. On September 30, 2022, the court issued an order denying QIAGEN's post-trial motion for a new trial or altered verdict, granting ArcherDX's post-trial motion for ongoing royalty at a rate of 7% along with supplemental damages and interest, and denying ArcherDX's motion for an injunction with leave to renew after an evidentiary hearing. No date has been set for the hearing on ArcherDX's request for an injunction.
8. Stockholders’ equity
Shares outstanding
Shares of common stock were as follows (in thousands):
  Three Months Ended March 31,
  2023 2022
Common stock:
Shares outstanding, beginning of period 245,562  228,116 
Common stock issued in connection with the convertible senior notes exchange 14,220  — 
Common stock issued on exercise of stock options, net 1  87 
Common stock issued pursuant to vesting of RSUs 715  621 
Common stock issued pursuant to acquisitions 177  — 
Shares outstanding, end of period 260,675  228,824 
Common Stock
As of March 31, 2023 and December 31 2022, we had 600 million shares of common stock authorized with a par value of $0.0001.
Convertible preferred stock
In August 2017, in a private placement to certain accredited investors, we issued shares of our Series A convertible preferred stock which are convertible into common stock on a one-for-one basis, subject to adjustment for events such as stock splits, combinations and the like. The Series A convertible preferred stock is a non-voting common stock equivalent with a par value of $0.0001 and has the right to receive dividends first or simultaneously with payment of dividends on common stock. In the event of any liquidation or dissolution of the Company, the Series A preferred stock is entitled to receive $0.001 per share prior to the payment of any amount to any holders of capital stock ranking junior to the Series A preferred stock and thereafter shall participate pari passu with the holders of our common stock (on an as-if-converted-to-common-stock basis). As of March 31, 2023 and December 31, 2022, we had 20 million shares of preferred stock authorized, of which 3,458,823 shares were designated as Series A convertible preferred stock. As of March 31, 2023 and December 31, 2022, there were no shares of preferred stock or Series A convertible preferred stock outstanding.
Sales Agreement
In May 2021, we entered into a sales agreement (the "2021 Sales Agreement") with Cowen and Company, LLC (“Cowen”) under which we may offer and sell from time to time at our sole discretion shares of our common stock through Cowen as our sales agent, in an aggregate amount not to exceed $400.0 million. Per the terms of the agreement, Cowen will receive a commission of up to 3% of the gross proceeds of the sales price of all shares sold through it as sales agent under the 2021 Sales Agreement.
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During the three months ended March 31, 2023 and 2022, we did not sell any common stock under the 2021 Sales Agreement.
Senior Secured 2028 Notes
In connection with the issuance of the Senior Secured 2028 Notes on March 7, 2023, we and Deerfield Partners, L.P. (the "selling stockholder"), also entered into a registration rights agreement ("Registration Rights Agreement"). Pursuant to the Registration Rights Agreement, on March 17, 2023, we filed a registration statement to register 111,627,888 shares of common stock issuable upon conversion of the Series B Notes or exercise of the warrants ("Registrable Securities") issuable in connection with certain prepayments of the Series B Notes or Series A Notes, which registration statement was declared effective on April 21, 2023. The selling stockholder may from time to time offer and sell any or all of such issued shares of common stock. We will not receive any proceeds from the sale of shares of our common stock by the selling stockholder. We will receive the proceeds from any exercise of the warrants on a cash basis.
Additionally, under the terms of the purchase and exchange agreements, we exchanged $305.7 million aggregate principal amount of 2024 Notes for $275.3 million aggregate principal amount of Series A Notes and 14,219,859 shares of the Company’s common stock, and we issued and sold $30.0 million aggregate principal amount of Series B Notes for cash. See Note 7, "Commitments and contingencies" under the heading "Convertible senior notes—Convertible senior secured notes due 2028" for additional information.
9. Stock incentive plans
Stock incentive plans
In 2010, we adopted the 2010 Incentive Plan (the “2010 Plan”). The 2010 Plan provides for the granting of stock-based awards to employees, directors and consultants under terms and provisions established by our board of directors. Under the terms of the 2010 Plan, options may be granted at an exercise price not less than the fair market value of our common stock. For employees holding more than 10% of the voting rights of all classes of stock, the exercise prices for incentive and nonstatutory stock options must be at least 110% of fair market value of our common stock on the grant date, as determined by our board of directors. The terms of options granted under the 2010 Plan may not exceed ten years.
In January 2015, we adopted the 2015 Stock Incentive Plan (the “2015 Plan”), which became effective upon the closing of our initial public offering. Shares outstanding under the 2010 Plan were transferred to the 2015 Plan upon effectiveness of the 2015 Plan. The 2015 Plan provides for automatic annual increases in shares available for grant, beginning on January 1, 2016 through January 1, 2025. In addition, shares subject to awards under the 2010 Plan that are forfeited or terminated will be added to the 2015 Plan. The 2015 Plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock awards, stock units, stock appreciation rights and other forms of equity compensation, all of which may be granted to employees, including officers, non-employee directors and consultants. Additionally, the 2015 Plan provides for the grant of cash-based awards.
Options granted generally vest over a period of four years. Typically, the vesting schedule for options granted to newly hired employees provides that 1/4 of the award vests upon the first anniversary of the employee’s date of hire, with the remainder of the award vesting monthly thereafter at a rate of 1/48 of the total shares subject to the option. All other options typically vest in equal monthly installments over the four-year vesting schedule. Upon the acquisition of ArcherDX in October 2020, any option that was outstanding was converted into a fully vested option to purchase a share of our common stock, which resulted in the issuance of options to purchase 3.7 million shares of our common stock.
Restricted stock units ("RSUs") generally vest ratably in annual installments over a period of three years, commencing on the first anniversary of the grant date, with certain awards that include a portion that vests immediately upon grant. The vesting schedule for the 2022 grants approved in April 2022 provides that the awards vest ratably in quarterly installments over a period of two years, with certain awards that include a portion that vests immediately upon grant. Grants to the executive team in 2022 vest ratably in annual installments over a period of three years. We have also granted certain awards in connection with our management incentive plan that vest over a period of two years.
In April 2021, we granted RSUs in connection with the acquisition of Genosity Inc. ("Genosity") having a value of up to $5.0 million to certain continuing employees. During both the three months ended March 31, 2023 and 2022, we recognized $0.4 million in stock-based compensation expense primarily reported in research and development expense in our condensed consolidated statements of operations. In September 2021, we granted RSUs in connection with the acquisition of the Ciitizen Corporation having a value of up to $246.9 million to certain
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continuing employees. During the three months ended March 31, 2023 and 2022, we recognized stock-based compensation expense of $14.7 million and $24.9 million, respectively, primarily reported in research and development expense in our condensed consolidated statements of operations.
Activity under the 2010 Plan and the 2015 Plan is set forth below (in thousands, except per share data and years):
  Shares Available For Grant Stock Options Outstanding Weighted-Average Exercise Price Per Share Weighted-Average Remaining Contractual Life (Years) Aggregate Intrinsic Value
Balances at December 31, 2022 12,625  2,541  $ 8.49  6.6 $ 16 
Additional shares reserved 9,822  — 
Options granted (29) 29  2.46 
Options cancelled 257  (257) 8.20 
Options exercised —  (1) 0.86 
RSUs and PRSUs granted (197) — 
RSUs and PRSUs cancelled 425  — 
Balances at March 31, 2023 22,903  2,312  $ 8.45  6.7 $ 4 
Options exercisable at March 31, 2023 1,163  $ 11.94  4.2 $ 4 
Options vested and expected to vest at March 31, 2023 2,118  $ 8.94  6.4 $ 4 
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock options and the fair value of our common stock for stock options that were in-the-money.
The following table summarizes RSU, including PRSU, activity (in thousands, except per share data):
  Number of Shares Weighted- Average Grant Date Fair Value Per Share
Balance at December 31, 2022 11,895  $ 11.70 
RSUs granted 197  $ 2.27 
RSUs vested (715) $ 10.47 
RSUs cancelled (425) $ 13.54 
Balance at March 31, 2023 10,952  $ 11.54 
Stock-based compensation
The following table summarizes stock-based compensation expense included in the condensed consolidated statements of operations (in thousands):
  Three Months Ended March 31,
  2023 2022
Cost of revenue $ 948  $ 1,865 
Research and development 18,846  31,994 
Selling and marketing 2,599  2,909 
General and administrative 6,589  10,054 
Restructuring and other costs 211  — 
Total stock-based compensation expense $ 29,193  $ 46,822 
Stock-based compensation expense included in restructuring expense was related to the accelerated vesting of RSUs held by certain employees whose employment was terminated as part of the strategic realignment.
10. Restructuring and other costs
In July 2022, we initiated a strategic realignment of our operations to reduce operating costs and drive future growth aligned with our core genetic testing and data platform and patient network. The strategic realignment includes a reduction in workforce, lab and office space consolidation, portfolio optimization, decrease in other operating expenses, as well as a reduced international footprint. Under this strategic realignment, we reduced our workforce by approximately 1,000 employees with a majority of these employees separating from the Company by September 30, 2022 and the remaining affected employees transitioning over varying periods of time up to 12
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months. Employees who were impacted by the restructuring were eligible to receive severance benefits contingent upon an impacted employee’s execution (and non-revocation, where applicable) of a separation agreement, which included a general release of claims against us.
The following table summarizes the expenses related to our strategic realignment recognized in restructuring and other costs in our condensed consolidated statement of operations (in thousands):
Three Months Ended March 31,
2023
Employee severance and benefits $ 1,283 
Impairments and losses on disposals of long-lived assets, net 50,354 
Other restructuring costs 919 
Total restructuring and other costs $ 52,556 
Employee severance and benefits are comprised of severance, other termination benefit costs, and stock-based compensation expense for the acceleration of RSUs related to workforce reductions. See Note 9, "Stock incentive plans" for additional information about the accelerated vesting of RSUs. Asset impairments and losses on asset disposals, net include operating lease impairments, losses on disposals of leasehold improvements associated with the exit of certain lab and office space and the related equipment. See Note 7, "Commitments and contingencies" under the heading "Leases" for additional information about operating lease impairments. See Note 5, "Balance sheet components" for additional information about net losses on disposal of property and equipment. Other restructuring costs include professional fees in relation to restructuring activities and contract exit costs including our decision to cease development of acquired technology. See Note 4, "Intangible assets" for additional information. There were no restructuring and other costs for the three months ended March 31, 2022.
We expect to incur additional employee severance and benefits expenses up to $0.6 million, and additional other restructuring costs primarily related to third-party costs up to $5.5 million. This reflects the best estimate of the Company as of the date hereof, which may be revised in subsequent periods as the strategic realignment plan progresses.
The following table summarizes the changes in liabilities associated with our strategic realignment initiatives, including restructuring and other costs incurred and cash payments as of March 31, 2023 (in thousands):
Employee severance and benefits Other restructuring costs Total
Beginning balance $ —  $ —  $ — 
Accruals 35,237  7,405  42,642 
Payments (32,974) (5,464) (38,438)
Balance at December 31, 2022 2,263  1,941  4,204 
Accruals 1,072  994  2,066 
Payments (2,486) (1,223) (3,709)
Balance at March 31, 2023 $ 849  $ 1,712  $ 2,561 
The restructuring liabilities are included in accrued liabilities in the condensed consolidated balance sheets. We expect that substantially all of the remaining accrued restructuring liabilities will be paid in cash in 2023. The charges recognized in the roll forward of our accrued restructuring liabilities do not include items charged directly to expense for asset impairments and losses on disposals of long-lived assets, accelerated vesting of RSUs, and other periodic exit costs, as those items are not reflected in our restructuring liabilities in our condensed consolidated balance sheets.
11. Income taxes
During the three months ended March 31, 2023 and 2022, we recorded an income tax benefit of $1.0 million and $34.9 million, respectively. The income tax benefit for the three months ended March 31, 2023 is primarily related to a $0.9 million release of federal valuation allowances as a result of impact on our deferred taxes related to Internal Revenue Code Section 174 research and experimental expense capitalization and right-of-use and fixed assets impairment, which enabled the associated deferred tax liability to serve as a source of income to support the realization of existing deferred tax assets for which a valuation allowance had previously been established.
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As of March 31, 2023, we maintained $59.3 million of unrecognized tax benefits, of which $0.2 million, if recognized, would affect the Company’s effective tax rate. The remainder has been recorded as a reduction to the Company’s deferred tax assets and, if recognized, would not have an impact on the effective tax rate due to existing valuation allowance against such deferred tax assets. It is possible that the Company’s unrecognized tax benefits could change within the next twelve months due to activities of tax authorities, including possible settlement of audits, should any arise, or through normal expiration of statutes of limitations.
The Company’s policy is to include penalties and interest expense related to income taxes as a component of tax expense. As of March 31, 2023, there were no accrued interest and penalties related to the unrecognized tax benefits.
Effective for tax years beginning on or after January 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 in the United States and 15 years for research and development performed outside of the United States. As a result of the Internal Revenue Code Section 174 research and experimental expense capitalization, the Company recognized a deferred tax asset for the future tax benefit of the amortization deductions with offsetting increase in the valuation allowance on deferred tax assets.
The Inflation Reduction Act of 2022 ("IRA") was signed into law on August 16, 2022. The bill was meant to address the high inflation rate in the U.S. through various climate, energy, healthcare and other incentives. These incentives are meant to be paid for by the tax provisions included in the IRA, such as a new 15 percent corporate minimum tax, a 1 percent new excise tax on stock buybacks, additional IRS funding to improve taxpayer compliance and others. At this time, none of the IRA tax provisions are expected to have a material impact to the Company's tax provision. The Company will continue to monitor for updates to the Company's business along with guidance issued with respect to the IRA to determine whether any adjustments are needed to the Company's tax provision in future periods.
12. Net loss per share
The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share data):
  Three Months Ended March 31,
  2023 2022
Net loss $ (192,183) $ (181,859)
Shares used in computing net loss per share, basic and diluted 249,907  228,470 
Net loss per share, basic and diluted $ (0.77) $ (0.80)
Common stock issuable in connection with our Convertible Senior Notes and the Senior Secured 2028 Notes participate in any dividends that may be declared by the Company and are therefore considered to be participating securities. The net losses were attributable entirely to common stockholders since the participating securities did not have a contractual obligation to share in the Company’s losses.
The following common stock equivalents have been excluded from diluted net loss per share because their inclusion would be anti-dilutive (in thousands):
  Three Months Ended March 31,
  2023 2022
Shares of common stock subject to outstanding options 2,366  2,972 
Shares of common stock subject to outstanding RSUs and PRSUs 11,399  15,935 
Shares of common stock pursuant to ESPP 3,528  1,428 
Shares of common stock subject to convertible senior notes conversion 28,122  38,403 
Shares of common stock subject to convertible senior secured notes conversion 32,866  — 
Total shares of common stock equivalents 78,281  58,738 
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13. Geographic information
Revenue by country is determined based on the billing address of the customer and is summarized as follows (in thousands):
  Three Months Ended March 31,
  2023 2022
United States $ 110,464  $ 108,295 
Canada 2,101  2,297 
United Kingdom 1,186  2,147 
Rest of world 3,605  10,952 
Total revenue $ 117,356  $ 123,691 
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ITEM 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes 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 ended December 31, 2022. Historic results are not necessarily indicative of future results.
This report contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements in this report other than statements of historical fact, including statements identified by words such as “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar expressions, are forward‑looking statements. Forward‑looking statements include, but are not limited to, statements about:
•our views regarding the future of genetic testing and its role in mainstream medical practice;
•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 the success of our strategic realignment efforts;
•the expected costs and benefits of our strategic realignment, including anticipated annualized cash savings, and our ability to achieve positive operating cash flow;
•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 cost‑effective manner;
•our expectations regarding our platform and future offerings;
•the timing and results of studies with respect to our tests;
•developments and projections relating to our competitors and our industry;
•our competitive strengths;
•the degree to which individuals will share genetic information generally, as well as share any related potential economic opportunities with us;
•our commercial plans;
•our ability to obtain and maintain adequate reimbursement for our tests;
•regulatory, political and other developments in the United States and foreign countries;
•our ability to attract and retain key scientific, sales, engineering or management personnel;
•our expectations regarding our ability to obtain and maintain intellectual property protection and not infringe on the rights of others;
•the effects of litigation or investigations on our business;
•our ability to obtain funding for our operations and to service and repay our debt;
•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;
•the impact of macroeconomic conditions, including inflation and recession, on our business; and
•the impact of tax laws on our business.
Forward‑looking statements are subject to a number of risks and uncertainties that could cause actual results to differ materially from those expected. These risks and uncertainties include, but are not limited to, those risks discussed in 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 forward‑looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Any forward‑looking 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 forward‑looking statements.
In this report, all references to “Invitae,” “we,” “us,” “our,” or “the Company” mean Invitae Corporation.
Invitae and the Invitae logo are trademarks of Invitae Corporation. 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.
•Our strategic realignment and the associated headcount reduction have and are expected to significantly change our business, result in significant expense, may not result in anticipated savings, and will disrupt our business.
•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.
•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 need to scale our infrastructure in advance of demand for our tests and other services, and our failure to generate sufficient demand for our tests and other services would have a negative impact on our business and our ability to attain profitability.
•The global macroeconomic environment could negatively impact our business, our financial position and our results of operations.
•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.
•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.
•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 for our tests, our commercial success will be negatively affected.
•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.
•Impairment in the value of our intangible assets has and may in the future have a material adverse effect on our operating results and financial condition.
•We have a large amount of debt, servicing our debt requires a significant amount of cash, we may not have sufficient cash flow from our business to service our debt, and we may need to refinance all or a significant portion of our debt.
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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.
•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.
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.
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, profitable growth centers on seven 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:
flywheelslideupdatedQ4.jpg
Those key drivers include:
•Customer experience:  We see customer experience for patients, providers, and partners as integral to our long-term growth strategy and as an under-utilized catalyst to move genetics into mainstream medicine. Our view is that providing great service and enabling "ease-of-use", such as efficient ordering, comprehensive choices, and reliable turnaround time, are especially important for physicians.
•Adoption:  As we improve customer experience, we expect more physicians would be open and more willing to increase genetic information in their practice. This is particularly true in fostering adoption among non-genetic experts, who are often the first contact for patients in a health journey. This work will be in parallel with our efforts in producing research supporting guideline expansion and broader advocacy for the benefits of genetic testing.
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•Attract partners.  As we continue to gain adoption and expand our reach, our value proposition to potential partners should increase. These include patient advocacy groups, biopharma partners that utilize our data, testing, network, and services, as well as health systems that intend to implement comprehensive precision medicine.
•Insights and solutions:  In parallel with bringing new tools and products to the market, our capability to combine phenotypic and genotypic data, through both our genetic testing and third-party patient data, we believe produces a rich dataset that is highly attractive to biopharma partners, patient advocacy groups and more. We believe our services allow our strategic partners to be more precise and move faster with their efforts, such as identifying and recruiting patients, enabling Investigational New Drug (IND) filings, structuring clinical trials, and eventually bringing new therapies to market.
•Lower cost and higher reimbursement:  As our network continues to scale, we expect to lower our costs and increase our margin, while continuing our pursuit of affordable prices to drive accessibility of genetic information. Our ability to sustainably provide affordable pricing is also expected to be balanced by our success in improving reimbursements and cash collection. Through the generation of scientific evidence and proactive engagement with stakeholders, we intend to pursue better payment and additional coverage.
•Affordability and accessibility:  As we progress, we anticipate having more flexibility in our pricing strategy, aiming at more affordability and accessibility of our products for more patients.
•More patients served:  All of these efforts should compound upon each other, expanding our reach and increasing the value of each offering, ultimately serving more patients.
Ultimately, we anticipate more solutions to further improve customer experiences, which in turn feed more answers for patients, foster greater adoption, and bring on more partners to create a flywheel effect.
Business overview
We are focused on making comprehensive, high-quality medical genetic testing information more accessible and instrumental to the healthcare ecosystem and stakeholders, including patients, healthcare providers, payers, biopharma partners, patient advocacy groups and more. We offer genetic testing across multiple clinical areas, including hereditary cancer, precision oncology, women’s health, rare diseases and pharmacogenomics. Medical genetics is central to health outcomes and we are working to bring it to the mainstream by enhancing the customer experience, lowering costs, removing barriers to adoption, and expanding insights and solutions. Ultimately, we expect the utility of the accumulated data will compound, enabling improved individual and population health and advancing the benefits of molecular medicine around the globe.
For the years ended December 31, 2022, 2021 and 2020, our revenue was $516.3 million, $460.4 million, and $279.6 million, respectively, and we incurred net losses of $3.1 billion, $379.0 million, and $602.2 million, respectively. For the three months ended March 31, 2023 and 2022, our revenue was $117.4 million and $123.7 million, respectively, and we recognized net losses of $192.2 million and $181.9 million, respectively. At March 31, 2023, our accumulated deficit was $5.0 billion.
In 2022, 2021 and 2020, we generated 1,290,000, 1,169,000 and 659,000 billable units, respectively. In the three months ended March 31, 2023, we generated 255,000 billable units compared to 322,000 billable units in the same period in 2022. We calculate volume using billable units, which are billable events that include individual test reports released and individual reactions shipped related to our precision oncology products. We refer to the set of reagents needed to perform a next generation sequencing ("NGS") test for our research use only ("RUO") product as a "reaction." As part of the strategic realignment, we discontinued the sale of and sublicensed to others our distributed precision oncology products, which includes our RUO kit and IVD product offerings. Approximately 36% of the billable volume generated in the first three months of 2023 were billable to patients and institutional customers (e.g., hospitals, clinics, medical centers, biopharmaceutical partners), 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, or at times due to other situations, 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.
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We believe that the keys to long-term profitable growth are:
•Consistently improve the client experience: efficient ordering; comprehensive choices; reliable turnaround time; easy-to-use;
•Lower costs and higher reimbursement: align our cost structure with our streamlined product portfolio and implement operational discipline; reduce the costs associated with performing our genetic tests; achieve broad reimbursement coverage for our tests from third-party payers and increase the amount we receive from other types of payers; focus our efforts on testing categories that are more regularly reimbursed to avoid the process of appeals and slow or non-existing payment;
•Advance insights and solutions: optimize the amount of genetic content we offer and is used by providers across the range of healthcare platforms; deliver actionable insights through digital health solutions; develop our data services;
•Improve affordability and accessibility and serve more patients: provide affordable pricing for genetic analysis and interpretation; partner to reach underserved populations; expand call points;
•Drive adoption: increase physician and patient utilization of our platform for ordering and delivery of results; and
•Attract new partners: increasing the number of strategic partners working with us to add value for all our customer segments.
Strategic realignment
On July 18, 2022, we initiated a strategic realignment of our operations and began implementing cost reduction programs in order to accelerate our path to positive operating cash flow. We are in the process of realigning and sharpening our focus on the portfolio of businesses that we believe can generate margins and deliver returns to fuel future investment. In the testing business, we have shifted operational and commercial efforts to accelerate positive cash flow by maintaining robust support of the higher-margin, higher-growth testing opportunities among hereditary cancer, precision oncology, women's health, rare disease and pharmacogenomics. We also plan to continue our expansion and integration of key digital health-based technologies and services in order to create a differentiated model in genetic health. Longer-term, we remain committed to our data platform and patient network. We believe that we hold significant growth potential and intend to continue to prioritize the tools, partnerships and applications that support the development of this platform as the catalyst for the future of healthcare.
The strategic realignment included a reduction in workforce of approximately 1,000 positions, lab and office space consolidation, portfolio optimization, decrease in other operating expenses, as well as a reduced international footprint. Management currently expects the strategic realignment will be completed in 2023 and estimates that the total costs incurred may be up to $170 million for associated employee severance and benefits, asset impairments and losses on disposals of long-lived assets, and other restructuring costs related to the realignment. This reflects the best estimate of management as of the date hereof, which may be revised in subsequent periods as the strategic realignment progresses. The estimate of total cost incurred excludes the $47.4 million gain on the sale of the RUO kit assets recognized during the three months ended December 31, 2022. We anticipate annualized cash savings of approximately $326 million, which is expected to be fully realized by the end of 2023. We may not realize, in full or in part, the anticipated annualized cash savings due to unforeseen difficulties or delays in implementing further decreases in other operating expenses.
We expect to continue to incur operating losses for the near term as we execute the strategic realignment of our operations. If we are unable to achieve these objectives and successfully grow revenue and manage our costs, we may not be able to achieve positive operating cash flow in the near term or at all.
Russia and Ukraine Conflict
During the first quarter of 2022, Russia commenced a military invasion of Ukraine, and the ensuing conflict has created disruption in the region and around the world. We have suspended operations in Russia, 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. Neither Russia nor Ukraine 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 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
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information about the conflict between Russia and Ukraine and its potential effect on our business and results of operations.
Adverse macroeconomic conditions
Adverse macroeconomic developments, including inflation, slowing growth, rising interest rates, or recession, may adversely affect our business and financial condition. These developments have caused, and could in the future cause, disruptions and volatility in global financial markets, including in banking and financial institutions, and increased rates of default and bankruptcy, and negatively affect business and consumer spending. Adverse economic conditions may also increase the costs of operating our business, including vendor, supplier and workforce expenses, and may limit our access to capital or may significantly increase our cost of capital. Management continues to evaluate the impact of macroeconomic events, including inflation, on our business and our future plans and intends to take appropriate measures to help alleviate their impact, but there can be no assurance that these efforts will be successful.
Impact of COVID-19
We expect the COVID-19 pandemic may continue to impact our business. 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. We continue to monitor, update and align our corporate policies to meet state and federal occupational health and safety rules. While we have not experienced significant disruption in our supply chain, we have experienced supply delays as a result of the COVID-19 pandemic and have also had to obtain supplies from new suppliers.
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 is 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 position us well to provide a range of testing to clinicians and patients using a “clinical care from afar” model. An example is 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.
Factors affecting our performance
Number of billable units
Our test revenue is tied to the number of tests which we bill patients, third-party payers that pay on behalf of patients, and institutions (e.g., hospitals, clinics, medical centers, biopharmaceutical partners). We refer to billable events that include individual test reports released and individual reactions shipped as billable units. We refer to the set of reagents needed to perform an NGS test for our RUO kit product as a "reaction." 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 insurance companies and institutions. 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.
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Number and size of research and commercial partnerships
Pharma development service revenue, which we recognize within other revenue in our condensed 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. As a result of the strategic realignment, we terminated early or changed the scope of certain collaborations as part of our pharma development services, and are in the process of supporting wind-down activities for certain companion diagnostic development agreements to conclude existing contracts.
Success obtaining and maintaining reimbursement
Our ability to increase volume and revenue will depend in part on our success achieving broad reimbursement coverage and laboratory service contracts for our tests from third-party payers and agreements with institutions and partners. Reimbursement may depend on a number of factors, including a payer’s determination that a test is appropriate, medically necessary and cost-effective, as well as whether we are in contract, where we get paid more consistently and at higher rates. Because each payer makes its own decision as to whether to establish a policy or enter into a contract to reimburse for our testing services and specific tests, seeking these approvals is a time-consuming and costly process. In addition, clinicians and patients may decide not to order our tests if the cost of the test is not covered by insurance. Because we require an ordering physician to requisition a test, our revenue growth also depends on our ability to successfully promote the adoption of our testing services and expand our base of ordering clinicians. We believe that establishing coverage and obtaining contracts from third-party payers is an important factor in gaining adoption by ordering clinicians. Our arrangements for laboratory services with payers cover approximately 332 million lives, comprised of Medicare, all national commercial health plans, and Medicaid in most states, including California (Medi-Cal), our home state.
Ability to lower the costs associated with performing our tests
Reducing the costs associated with performing our genetic tests is both a focus and a strategic objective of ours. Over the long term, we will need to reduce the cost of raw materials by improving the output efficiency of our assays and laboratory processes, modifying our platform-agnostic assays and laboratory processes to use materials and technologies that provide equal or greater quality at lower cost, improve how we manage our materials, port some tests onto a next generation sequencing platform and negotiate favorable terms for our materials purchases. 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.
Ability to optimize our genetic content in meeting market needs and create new pathways to test
We intend to continue to reduce the average cost per test, optimize our test menus and content, and offer the tests at affordable prices in order to meet customer and patient needs. In addition, 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. We also continue to collaborate with strategic partners and identify new market and channel opportunities.
Realignment of our business and timing of expenses
As part of the strategic business realignment of our operations announced in July 2022, we initiated a comprehensive plan focused on supporting business lines and geographies that we believe can generate sustainable margins, provide the best return to fuel future investment and accelerate the company's path to positive cash flow. We believe the plan further helps ensure we remain at the forefront of innovation and advancements in genomics by allocating resources towards our core genetic testing and data and patient network platform that have the potential to improve healthcare outcomes.
We conducted an assessment of our product portfolio as well as the associated research and development and commercial spending. Our plan shifts the focus to programs relevant to the core testing business to drive profitable growth. We also performed an extensive review of internal and external costs and how those expenses align with the business structure. Additional savings are expected to be generated through the ongoing digitization
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of workflows, elimination of duplication and streamlined processes across the core platforms and rationalization of technology and external services.
As we refocus our operations on our core genomic testing platform, we also plan to continue to invest in our genetic testing and data business to drive long-term profitable growth. 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 also expect to incur software development costs as we seek to further digitize and automate our laboratory processes and our genetic interpretation and report sign-out procedures, scale our customer service capabilities to improve our clients' experience, and expand the functionality of our website. We will continue to incur costs related to marketing and branding as we expand our initiatives beyond our current customer base and focus on providing access to customers through our website. 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 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 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 insurance companies and institutions 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. Subsequent to the strategic realignment, pharma development service revenue is generated from personalized cancer monitoring services and sample processing activities. Revenue is recognized as services are provided using the input method based on our assessment of performance completed to date toward completion of a contract.
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 biopharma partners and other parties. Our ability to increase our revenue will depend on our ability to increase our market penetration, obtain contracted reimbursement coverage from third-party payers and increase the amount we receive from other types of payers, improve payer collections, and grow our relationships with biopharma partners.
As a result of the strategic realignment, we exited certain product lines including our distributed precision oncology products and terminated early or changed the scope of certain collaborations as part of our pharma development services. We are in the process of supporting wind-down activities for certain companion diagnostic development agreements to conclude existing contracts.
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 an increase in billable volume. We also expect amortization of acquired intangible assets, which is not dependent on billed volume, to remain consistent with 2022 expenses. 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 other cost reductions achieved through automation, supply chain and logistics initiatives, process standardization, and other cost reductions. These reductions in cost per unit will likely be offset by new offerings, which often have 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.
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Operating expenses
Our operating expenses are classified into three categories related to our operational activities: 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. Operating expenses also include restructuring and other costs, which is discussed below.
Research and development
Research and development expenses represent costs incurred to develop our technology and future offerings. These costs are principally for process development associated with our efforts to expand the number of genes we can evaluate, our efforts to lower the costs per unit and our development of new products to expand our platform. We have and may continue to partner with other companies to develop new technologies and capabilities we expect to invest capital and incur significant operating costs to support these development efforts. In addition, we incur process development costs to further develop the software we use to operate our laboratories, analyze generated data, process customer orders, validate clinical activities, enable ease of customer ordering, deliver reports and automate our business processes. These costs consist of personnel-related costs, laboratory supplies and equipment expenses, consulting costs, amortization of acquired intangible assets, and allocated overhead including rent, information technology, equipment depreciation and utilities.
We expense all research and development costs in the periods in which they are incurred. We expect our research and development expenses to decrease in fiscal year 2023 as compared to fiscal year 2022 as we streamline our product portfolio, shift investments, including the exit of certain business lines and commercial geographies, and reduce labor costs through a reduction in workforce. We expect to make investments to reduce costs and streamline our technology to provide patients access to testing aligned to scale with our long-term profitable growth targets.
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 decrease in fiscal year 2023 as compared to fiscal year 2022 as a result of a reduction in workforce, targeted sales force expansion and lower marketing spending as a result of a more efficient sales and marketing approach to support our core genetic testing platform.
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 decrease in fiscal year 2023 as compared to fiscal year 2022 as a result of our strategic realignment including a reduction in workforce, consolidation of underutilized facilities, digitization of workflows, elimination of duplication and streamlined processes, and rationalization of technology and external services spending.
Restructuring and other costs
Restructuring and other costs include employee severance and benefits, asset impairments and losses on disposals of long-lived assets 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 RSUs related to workforce reductions. Employee severance and benefit costs include one-time termination benefits that are recognized as a liability at estimated fair value, at the time of communication to employees, unless future service is required, in which case the costs are recognized ratably over the future service period. Ongoing termination benefits are recognized as a liability at estimated fair value when the amount of such benefits is probable and reasonably estimable. Asset impairments and losses on disposals of long-lived assets include operating lease impairments and losses on disposals of property and equipment and leasehold improvements associated with the exit of certain lab and office space. Other restructuring costs include professional fees and contract exit costs.
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Other (expense) income, net
Other (expense) income, net primarily consists of loss on extinguishment of debt, net, debt issuance costs, changes in the fair value of convertible senior secured notes and our acquisition-related liabilities, and interest income generated from our cash equivalents and marketable securities.
Interest expense
Interest expense is primarily attributable to interest incurred related to our debt and finance leases. See Note 7, “Commitments and contingencies” in Notes to Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for additional information.
Income tax benefit
Since we generally establish a full valuation allowance against our deferred tax assets, our income tax benefit primarily consists of changes in our deferred tax realization assessments as a result of taxable temporary differences assumed in connection with our acquisitions and changes in the expected timing of the reversal of taxable temporary differences.
Critical accounting policies and estimates
Management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported revenue generated and expenses incurred during the reporting periods. We evaluate our estimates on an ongoing basis. Our estimates are based on current facts, our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions and any such differences may be material. We believe that our accounting policies 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.
The following discussion is related to estimating the fair value of our new Senior Secured 2028 Notes as of March 31, 2023, and should be read in conjunction with our critical accounting policies and estimates disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. Except as presented below, there have been no material changes from the critical accounting policies and estimates described in our Annual Report on Form 10-K. 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.
Fair value of Senior Secured 2028 Notes
We elected the fair value option to measure our Senior Secured 2028 Notes due to the complexity of the various conversion and settlement options available to both the holders of such notes and Invitae. We utilize the binomial lattice model, specifically a lattice model to estimate the fair value of the convertible senior secured 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. We will record changes in fair value, inclusive of 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 the condensed consolidated statements of comprehensive loss, if applicable.
As of March 31, 2023, the estimated fair value of the Senior Secured 2028 Notes was $282.9 million. The portion of the estimated fair value of Series A Notes for which conversion is subject to stockholder approval and for which we have a cash settlement obligation is classified as a current liability with the remainder classified as a long-
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term liability in the condensed consolidated balance sheets. The current liability was determined based on the product of the shares of common stock in excess of the NYSE Cap multiplied by the arithmetic average of the volume weighted average price of our common stock on each of the five consecutive trading dates immediately preceding March 31, 2023. The long-term liability represents the portion of the Senior Secured 2028 Notes for which we have the intent and the ability to settle the obligations by issuing shares.
The determination of fair value requires considerable judgment and is highly sensitive to changes in underlying assumptions. Remeasuring the fair value of our Senior Secured 2028 Notes on a recurring basis through earnings requires the estimation of significant unobservable inputs, which involve inherent uncertainties and application of management judgment. Using different estimates or assumptions would have materially affected our results. For example, as of March 31, 2023:
•A 1,000 basis point, or ten percent, decrease or increase to the estimated stock price assumption would have decreased or increased, respectively, the estimated fair value of our Senior Secured 2028 Notes and increased or decreased, respectively, the associated gains recognized through first quarter 2023 earnings by $12.2 million and $10.1 million, respectively.
•A 1,000 basis point, or ten percent, decrease or increase to the cost of debt assumption would have increased or decreased, respectively, the estimated fair value of our Senior Secured 2028 Notes and decreased or increased, respectively, the associated gains recognized through first quarter 2023 earnings by $10.9 million and $12.1 million, respectively.
•A 1,000 basis point, or ten percent, decrease or increase to the estimated stock price volatility assumption would have decreased or increased, respectively, the estimated fair value of our Senior Secured 2028 Notes and increased or decreased, respectively, the associated gains recognized through first quarter 2023 earnings by $7.3 million and $4.8 million, respectively.
Results of operations
Three Months Ended March 31, 2023 and 2022
The following sets forth our condensed 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
Change
%
Change
  2023 2022
Revenue:        
Test revenue $ 112,623  $ 119,497  $ (6,874) (6)%
Other revenue 4,733  4,194  539  13%
Total revenue 117,356  123,691  (6,335) (5)%
Operating expenses:    
Cost of revenue 88,442  97,116  (8,674) (9)%
Research and development 61,978  128,236  (66,258) (52)%
Selling and marketing 44,510  60,144  (15,634) (26)%
General and administrative 45,241  51,428  (6,187) (12)%
Restructuring and other costs 52,556  —  52,556  100%
Total operating expenses 292,727  336,924  (44,197) (13)%
Loss from operations (175,371) (213,233) 37,862  18%
Other (expense) income, net:
Loss on extinguishment of debt, net (10,822) —  (10,822) (100)%
Debt issuance costs (19,859) —  (19,859) (100)%
Change in fair value of convertible senior secured notes 18,304  —  18,304  100%
Change in fair value of acquisition-related liabilities 218  10,003  (9,785) (98)%
Other income, net 5,883  436  5,447  NM
Total other (expense) income, net (6,276) 10,439  (16,715) NM
Interest expense (11,496) (13,985) 2,489  18%
Net loss before taxes (193,143) (216,779) 23,636  11%
Income tax benefit 960  34,920  (33,960) (97)%
Net loss $ (192,183) $ (181,859) $ (10,324) (6)%
NM - Not Meaningful
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Revenue
The decrease in total revenue of $6.3 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to decreased billable volume partially offset by higher average revenue per billable unit. Billable volume decreased due to the exit of certain product offerings, including the RUO kit and IVD product offerings, and geographies as a result of the strategic realignment. Billable volume decreased to approximately 255,000 in the three months ended March 31, 2023 compared to 322,000 in the same period of 2022, a decrease of 21 percent. Average revenue per billable unit was $442 per unit in the three months ended March 31, 2023 compared to $372 per unit in the comparable prior period primarily due to changes in payer and product mix.
Cost of revenue
The decrease in the cost of revenue of $8.7 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to a decrease in billable volume, partially offset by a higher cost per billable unit. Cost per unit was $347 in the three months ended March 31, 2023 compared to $302 for the same period in 2022. The cost per unit increased primarily due to lower billable volume and an increase in amortization of acquired intangible assets of $9.0 million due to a full quarter of amortization expense in 2023 as compared to a partial quarter of amortization expense in 2022 due to the completion of certain in-process research and development ("IPR&D") assets. This increase was offset by lower lab materials costs of $10.8 million primarily due to a decrease in volume related to the exit of certain product offerings and geographies as a result of the strategic realignment, and change in mix of materials, decreases in personnel-related costs of $4.4 million due to a reduction in workforce related to our strategic realignment, decreases in information technology costs of $1.1 million due to lower spending on software licenses and cloud computing, and decreases in other costs of $1.4 million.
Research and development
The decrease in research and development expense of $66.3 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to lower personnel-related expenses of $40.7 million due to the reduction in workforce related to our strategic realignment, decreases in in lab-related expenses of $10.9 million as a result of lower costs related to external development projects and lab supplies and services, decreases in information technology costs of $4.4 million due to lower spending on software licenses and cloud computing, decreases in facilities-related expenses of $3.7 million due to lower lease expenses and security and building support costs, decreases in professional fees of $3.7 million due to lower contract labor, and decreases in other expenses of $2.9 million.
Selling and marketing
The decrease in selling and marketing expense of $15.6 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to lower personnel-related expenses of $11.9 million due to the reduction in workforce related to our strategic realignment, decreases in marketing costs of $0.7 million as a result of lower spending on brand initiatives and adverting, and decreases in other expenses of $3.0 million.
General and administrative
The decrease in general and administrative expense of $6.2 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to lower personnel-related costs of $8.4 million primarily due to the reduction in workforce related to our strategic realignment, and decreases in professional and outside services of $3.0 million due to lower contract labor. These decreases were partially offset by lower functional overhead expense allocations related to information technology and facilities-related expenses of $5.2 million.
Restructuring and other costs
During the three months ended March 31, 2023, we incurred restructuring and other costs of $52.6 million. Restructuring and other costs were comprised of $50.4 million in impairments and losses on disposals of long-lived assets, net, $1.3 million in employee severance and benefits, and $0.9 million in other restructuring expenses. We did not have similar expenses for the three months ended March 31, 2022. See Note 10, “Restructuring and other costs" in Notes to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information.
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Loss on extinguishment of debt, net
During the three months ended March 31, 2023, we incurred a net loss on extinguishment of debt of $10.8 million. In connection with the settlement of our 2020 Term Loan in February 2023, we incurred debt extinguishment costs of $19.3 million, composed of an $11.2 million write-off of unamortized debt issuance costs and $8.1 million of prepayment fees. In February 2023, we also entered into purchase and exchange agreements with certain holders of the outstanding 2024 Notes for the new Senior Secured 2028 Notes, shares of common stock, and cash. These exchanges resulted in a gain on extinguishment of debt of $8.5 million related to the 2024 Notes. See Note 7, “Commitments and contingencies" in Notes to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information.
Debt issuance costs
During the three months ended March 31, 2023, we incurred debt issuance costs of $19.9 million related to the issuance of our Senior Secured 2028 Notes. See Note 7, “Commitments and contingencies" in Notes to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information.
Change in fair value of convertible senior secured notes
During the three months ended March 31, 2023, we recorded a gain of $18.3 million related to the change in fair value of our Senior Secured 2028 Notes. We elected the fair value option to account for our Senior Secured 2028 Notes, which requires the notes to be measured at their issue-date estimated fair value and then subsequently remeasured at estimated fair value as of each reporting date. The gain during the three months ended March 31, 2023 was primarily due to the decrease in our stock price since the issue-date estimated fair value. See Note 6, “Fair value measurement" and Note 7, “Commitments and contingencies" in Notes to the Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q for further information.
Change in fair value of acquisition-related liabilities
The decrease in change in fair value of acquisition-related liabilities of $9.8 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to a decrease in fair value adjustments related to our stock payable liabilities as a result of the decrease in the price of our common stock and settlement of acquisition-related hold-backs.
Other income, net
The increase in other income, net of $5.4 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to an increase in interest income earned on our marketable securities investments.
Interest expense
The decrease in interest expense of $2.5 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to the repayment of the 2020 Term Loan in February 2023.
Income tax benefit
The decrease in income tax benefit of $34.0 million for the three months ended March 31, 2023 compared to the same period in 2022 was primarily due to a $34.6 million release of federal and state valuation allowances for the three months ended March 31, 2022 as a result of the reclassification of ArcherDX'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 current period for the three months ended March 31, 2023.
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Liquidity and capital resources
Liquidity and capital expenditures
We have generally incurred net losses since our inception. For the three months ended March 31, 2023 and 2022, we had net losses of $192.2 million and $181.9 million, respectively, and we expect to incur additional losses in the future. At March 31, 2023, we had an accumulated deficit of $5.0 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.
In the third quarter of 2022, we issued 2.4 million shares of common stock at an average price of $3.99 per share in an "at the market" offering for aggregate proceeds of $10.0 million and net proceeds of $9.7 million.
In September 2019, we issued $350.0 million of aggregate principal amount of 2024 Notes, which bear cash interest at a rate of 2.0% per year. Also in September 2019, we used the funds received through the issuance of the 2024 Notes to settle our note purchase agreement we entered into in November 2018. In April 2021, we issued $1,150.0 million of aggregate principal amount of 2028 Notes, which bear cash interest at a rate of 1.5% per year.
In February 2023, we entered into purchase and exchange agreements with certain holders of the outstanding 2024 Notes. Under the terms of the agreements, we (a) exchanged $305.7 million aggregate principal amount of 2024 Notes for $275.3 million aggregate principal amount of Series A Notes and 14,219,859 shares of common stock and (b) issued and sold $30.0 million aggregate principal amount of Series B Notes for cash. The Senior Secured 2028 Notes bear cash interest at a rate of 4.50% per year.
Prior to such time that we obtain stockholder approval for the issuance of shares of common stock in excess of the limitations imposed by the NYSE Cap, holders of the Series A Notes are prohibited from converting their notes or exercising any warrants issued in respect of those notes in excess of such NYSE Cap and we would instead be required to settle any conversion in cash if we are not able to obtain the stockholder approval prior to September 30, 2023. The cash settlement amount upon conversion of a Series A Note by a holder prior to stockholder approval is equal to the product of the shares of common stock in excess of the NYSE Cap multiplied by the arithmetic average of the volume weighted average price of our common stock on each of the five consecutive trading days immediately preceding the conversion date. After obtaining stockholder approval, the full amount of the outstanding balance of the Senior Secured 2028 Notes will be convertible into shares of common stock, with no conversion limitations. We intend to seek to obtain such stockholder approval at our annual meeting scheduled to be held on June 5, 2023. There can be no assurance that we will be successful in obtaining stockholder approval for the proposal to approve the issuance of shares of common stock pursuant to the conversion of the Senior Secured 2028 Notes or the exercise of any warrants issued in respect to the Senior Secured 2028 Notes in excess of the limitations imposed by the NYSE Cap prior to September 30, 2023. If we fail to obtain stockholder approval, we may not have enough available cash or be able to obtain financing at the time we are required to settle any conversion.
Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations in the future sufficient to service our debt, including paying off the principal when due, and make necessary capital expenditures. Holders of our convertible senior notes have the right to require us to repurchase all or any portion of their notes upon the occurrence of a fundamental change at a fundamental change repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments, which could adversely affect our liquidity. However, we only have limited ability to make those cash payments under our credit agreement and, even if the credit agreement limitations are no longer in effect, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered or to repay outstanding notes when they mature.
In October 2020, in connection with our acquisition of ArcherDX, 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. In February 2023, we repaid, prior to
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maturity date, the principal balance outstanding of $135.0 million plus accrued interest of $2.6 million and prepayment fees of $8.1 million.
At March 31, 2023 and December 31, 2022, we had $171.2 million and $267.5 million, respectively, of cash, cash equivalents, and restricted cash and marketable securities of $217.5 million and $289.6 million, respectively. Our primary use of cash is to fund our operations. 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 near future. We believe our existing cash, cash equivalents and marketable securities as of March 31, 2023 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 expect to raise additional funding to finance operations and service debt obligations 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, debt maturities and our operating plans. We may in the future elect to finance operations by selling equity or debt securities or borrowing money. If we issue equity securities, dilution to stockholders may result. Any equity securities issued may also provide for rights, preferences or privileges senior to those of holders of our common stock. If we raise funds by issuing additional debt securities, these debt securities would have rights, preferences and privileges senior to those of holders of our common stock. In addition, the terms of additional debt securities or borrowings could impose significant restrictions on our operations. If additional funding is required, there can be no assurance that additional funds will be available to us on acceptable terms on a timely basis, if at all. If we are unable to obtain additional funding when needed, we may need to curtail planned activities to reduce costs. Doing so will likely have an unfavorable effect on our ability to execute on our business plan and have an adverse effect on our business, results of operations and future prospects.
The following table summarizes our cash flows (in thousands):
  Three Months Ended March 31,
  2023 2022
Net cash used in operating activities $ (34,398) $ (147,543)
Net cash provided by (used in) investing activities 73,878  (449,456)
Net cash used in financing activities (135,768) (920)
Net decrease in cash, cash equivalents and restricted cash $ (96,288) $ (597,919)
Cash flows from operating activities
For the three months ended March 31, 2023, cash used in operating activities of $34.4 million principally resulted from our net loss of $192.2 million, an $18.3 million gain related to the change in fair value of convertible senior secured notes, $2.9 million of amortization of premiums and discounts on investment securities, a $1.0 million income tax benefit, and non-cash charges for remeasurements of liabilities in connection with business combinations of $0.2 million. These were partially offset by non-cash charges of $50.4 million related to impairments and losses on disposals of long-lived assets, $35.0 million for depreciation and amortization, $29.2 million for stock-based compensation, $19.9 million of debt issuance costs, $10.8 million of loss on extinguishment of debt, $3.1 million of non-cash lease expense, $3.0 million for amortization of debt discount and issuance costs related to our outstanding debt, $0.8 million of post-combination share-based compensation expense, and other activities of $0.8 million. The net effect on cash for changes in net operating assets was an increase of cash of $27.2 million.
For the three months ended March 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 in cash of $2.8 million.
Cash flows from investing activities
For the three months ended March 31, 2023, cash provided by investing activities of $73.9 million was primarily due to net purchases and maturities of marketable securities of $75.2 million and cash used for purchases of property and equipment of $1.3 million.
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For the three months ended March 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.
Cash flows from financing activities
For the three months ended March 31, 2023, cash used in financing activities of $135.8 million primarily consisted of the repayment of the 2020 Term Loan of $135.0 million, debt issuance costs related to the convertible senior notes exchange and prepayment fees on our 2020 Term Loan of $28.0 million, settlement of acquisition obligations of $1.5 million, and finance lease principal payments of $1.3 million. These were partially offset by proceeds from the issuance of Series B Notes of $30.0 million.
For the three months ended March 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.
Contractual obligations
The following table summarizes our contractual obligations, including interest, as of March 31, 2023 (in thousands):
Contractual obligations: Remainder of 2023 2024 and 2025 2026 and 2027 2028 and beyond Total
Operating leases $ 17,928  $ 54,807  $ 39,759  $ 98,429 $ 210,923 
Finance leases 4,154  3,839  —  — 7,993 
Convertible senior notes —  44,269  —  1,150,000 1,194,269 
Convertible senior secured notes —  —  —  305,257 305,257 
Purchase commitments 17,388  17,425  750  — 35,563 
Total $ 39,470  $ 120,340  $ 40,509  $ 1,553,686 $ 1,754,005 
Operating lease maturity amounts included in the table above do not include sublease income expected to be received under our subleases. We expect to receive sublease income for fiscal years ending December 31, 2023, 2024 and 2025 of $0.7 million, $0.9 million and $0.1 million, respectively.
See Note 7, "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, 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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ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business. These risks primarily relate to interest rates. Our cash, cash equivalents, restricted cash and marketable securities totaled $388.7 million at March 31, 2023, and consisted primarily of bank deposits, money market funds, U.S. treasury notes, and U.S. government agency securities. Such interest-bearing instruments carry a degree of risk; however, because our investments are primarily high-quality credit instruments with short-term durations with high-quality institutions, we have not been exposed to, nor do we anticipate being exposed to, material risks due to changes in interest rates. At March 31, 2023, a hypothetical 1.0% (100 basis points) increase or decrease in interest rates would not have resulted in a material change in the fair value of our cash equivalents and marketable securities. Fluctuations in the value of our cash equivalents and marketable securities caused by a change in interest rates (gains or losses on the carrying value) are recorded in other comprehensive (loss) income and are realized if we sell the underlying securities prior to maturity.
In February 2023, we repaid our 2020 Term Loan including the principal balance outstanding of $135.0 million plus accrued interest of $2.6 million. We did not use interest rate derivative instruments to manage our exposure to interest rate fluctuations related to our 2020 Term Loan prior to repayment.
Although our convertible senior notes are based on a fixed rate, changes in interest rates could impact their fair market value. As of March 31, 2023, the fair market value of the 2024 Notes and 2028 Notes was $38.9 million and $492.4 million, respectively. We elected the fair value option to account for the Senior Secured 2028 Notes, which requires the notes to be remeasured at estimated fair value as of each reporting date. Under the fair value election, we will record changes in fair value, inclusive of related accrued interest, through the condensed consolidated statement of operations as a fair value adjustment of the Senior Secured 2028 Notes 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 income, if applicable. Fluctuations and volatility of our stock price can significantly affect the estimated fair value of the Senior Secured 2028 Notes and the corresponding change in fair value as of each reporting period. For additional information about the convertible senior notes, see Note 6, "Fair value measurements" and Note 7, “Commitments and contingencies” in Notes to Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q.
ITEM 4.  Controls and Procedures
(a) Evaluation of disclosure controls and procedures
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, or Exchange Act, that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission ("SEC") rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Our disclosure controls and procedures have been designed to meet reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer) have concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
(b) Changes in internal control over financial reporting
During the quarterly period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — Other Information
ITEM 1.  Legal Proceedings.
For discussion of legal matters as of March 31, 2023, see Note 7, "Commitments and contingencies" in Notes to Condensed Consolidated Financial Statements in Part I, Item 1. of this Quarterly Report on Form 10-Q, which is incorporated to this item by reference.
ITEM 1A. Risk Factors
Risks related to our business and strategy
We expect to continue incurring significant losses, and we may not successfully execute our plan to achieve or sustain profitability.
We have incurred substantial losses since our inception. For the three months ended March 31, 2023 and 2022, we had net losses of $192.2 million and $181.9 million, respectively. For the years ended December 31, 2022, 2021 and 2020, our net losses were $3.1 billion, $379.0 million and $602.2 million, respectively. At March 31, 2023, our accumulated deficit was $5.0 billion. We expect to continue to incur significant losses as we invest in our business. We incurred research and development expenses of $62.0 million and $128.2 million for the three months ended March 31, 2023 and 2022, respectively, and selling and marketing expenses of $44.5 million and $60.1 million for the three months ended March 31, 2023 and 2022, respectively. We incurred research and development expenses of $402.1 million, $416.1 million and $240.6 million in 2022, 2021 and 2020, respectively, and selling and marketing expenses of $218.9 million, $225.9 million and $168.3 million in 2022, 2021 and 2020, respectively. Since 2021, widespread inflationary pressures were experienced across global economies, resulting in higher costs for our raw materials, non-material costs, labor and other business costs, and significant increases in the future could adversely affect our results of operations. In addition, as a result of the integration of acquired businesses, we may be subject to unforeseen or additional expenditures, costs or liabilities, including costs and potential liabilities associated with litigation. Our prior losses and expected future losses have had and may continue to have an adverse effect on our stockholders’ equity, working capital and stock price. Our failure to achieve and sustain profitability in the future would negatively affect our business, financial condition, results of operations and cash flows, and could cause the market price of our common stock to decline.
We began operations in January 2010 and commercially launched our initial assay in late November 2013. Our prospects must be considered in light of the risks and difficulties frequently encountered by companies in a similar stage of development, particularly companies in new and rapidly evolving markets such as ours. These risks include an evolving and unpredictable business model and the management of growth. To address these risks, we must, among other things, increase our customer base; continue to implement and successfully execute our business and marketing strategy; successfully enter into other strategic collaborations or relationships; obtain access to capital on acceptable terms and effectively utilize that capital; identify, attract, hire, retain, motivate and successfully integrate employees; continue to expand, automate and upgrade our laboratory, technology and data systems; obtain, maintain and expand coverage and reimbursement by healthcare payers; obtain and maintain sufficient payment by partners, institutions and individuals; provide rapid test turnaround times with accurate results at low prices; provide superior customer service; and respond to competitive developments. We cannot assure you that we will be successful in addressing these risks, and the failure to do so could have a material adverse effect on our business, prospects, financial condition and results of operations.
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 expect we will need to raise additional capital to finance operations prior to achieving profitability, or should we make additional acquisitions. We may seek to raise additional capital through equity offerings, debt financings, collaborations or licensing arrangements. Additional funding may not be available to us on acceptable terms, or at all. In addition, the terms of our credit agreement restrict our ability to incur certain indebtedness and issue certain equity securities. If we raise funds by issuing equity securities, dilution to our stockholders would result. Any equity securities issued also may provide for rights, preferences or privileges senior to those of holders of our common stock. The terms of debt securities issued or borrowings, if available, could impose significant restrictions on our operations.
The incurrence of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability
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to incur additional debt or issue additional equity, limitations on our ability to acquire companies or acquire or license intellectual property rights, and other operating restrictions that could adversely affect our ability to conduct our business. In addition, the issuance of additional equity securities by us, or the possibility of such issuance, may cause the market price of our common stock to decline. In the event we enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms. These agreements may require that we relinquish or license to a third party on unfavorable terms our rights to tests we otherwise would seek to develop or commercialize ourselves, or reserve certain opportunities for future potential arrangements when we might be able to achieve more favorable terms. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs, selling and marketing initiatives, or potential acquisitions. In addition, we may have to work with a partner on one or more aspects of our tests or market development programs, which could lower the economic value of those tests or programs to our company.
Our strategic realignment and the associated headcount reduction have and are expected to significantly change our business, result in significant expense, may not result in anticipated savings, and will disrupt our business.
On July 18, 2022, we initiated a strategic realignment of our operations and began implementing programs to reduce operating costs and drive future growth aligned with our core genetic testing and data platform and patient network. This realignment involves a significant reduction in our workforce as well as other steps to streamline our operations, including exiting our distributed products business and significantly decreasing our global footprint outside of the United States to less than a dozen countries or territories. Management currently expects that the strategic realignment will be completed in 2023 and estimates that the total costs incurred may be up to $170 million for associated employee severance and benefits, losses on disposal of long-lived assets, and other restructuring costs including the write-off of prepaid assets related to the exit of certain product offerings, professional service fees and contract exit costs. Actual costs may be higher than we expect. We may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from our realignment efforts due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the expected operational efficiencies and cost savings from the restructuring, our operating results and financial condition would be adversely affected. For example, our divestiture activities may divert management’s attention from our core business operations, result in significant write-offs and other charges, and have an adverse effect on existing relationships with partners, customers, patients and third-party payers. We have also terminated early, changed the scope of, or may not be able to perform under certain contracts as a result of our realignment efforts, and we could incur significant liability if we do not successfully negotiate wind-down provisions or new terms. For example, we have informed certain contractual counterparties that we will not be able to perform under our companion diagnostic development agreements. Any of these or other events could adversely affect our financial condition and results of operations. In addition, we may not be able to retain qualified personnel, which may negatively affect our infrastructure and operations or result in a loss of employees and reduced productivity among remaining employees. For example, our turnaround times in returning test results increased recently. Further, the realignment may yield unintended consequences, such as attrition beyond our intended workforce reduction, reduced employee morale, loss of customers or partners, and other adverse effects on our business.
If our management is unable to successfully manage this transition and realignment activities, our expenses may be more than expected and may vary significant from period to period and we may be unable to implement our business strategy. As a result, our future financial performance, operations, and prospects would be negatively affected.
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.
Our performance, including our research and development programs and laboratory operations, largely depend on our continuing ability to identify, hire, develop, motivate and retain highly skilled personnel for all areas of our organization, including software developers, geneticists, biostatisticians, certified laboratory scientists and other scientific and technical personnel to process and interpret our genetic tests. In addition, we may need to continue to expand our sales force with qualified and experienced personnel. In July 2022, we initiated a strategic realignment of our operations and began implementing cost reduction programs that will ultimately reduce our workforce by approximately 1,000 employees. This reduction in workforce has and will continue to result in the loss of institutional knowledge and expertise and the reallocation of and combination of certain roles and responsibilities across the
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organization, all of which could adversely affect our operations. Further, the realignment has and may continue to yield unintended consequences, such as attrition beyond our intended workforce reduction and reduced employee morale. Competition in our industry for qualified employees is intense, and we may not be able to attract or retain qualified personnel in the future due to the competition for qualified personnel among life science and technology businesses as well as universities and public and private research institutions, particularly in the San Francisco Bay Area. In addition, our compensation arrangements, such as our equity award programs, may not always be successful in attracting new employees and retaining and motivating our existing employees. If the value of our common stock declines significantly, and remains depressed, as it has in the recent past, or if we do not have enough shares authorized to grant equity awards to new and existing employees, we may not be able to recruit and retain qualified employees. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints that could adversely affect our ability to scale our business and support our research and development efforts and our clinical laboratory. We believe that our corporate culture fosters innovation, creativity and teamwork. However, as our organization grows and evolves, we may find it increasingly difficult to maintain the beneficial aspects of our corporate culture. This could negatively impact our ability to retain and attract employees and our future success.
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.
Our ability to increase the number of billable tests and our revenue will depend on our success achieving reimbursement for our tests from third-party payers. Reimbursement by a payer may depend on a number of factors, including a payer’s determination that a test is appropriate, medically necessary, and cost-effective, and/or whether the patient has received prior authorization.
Since each payer makes its own decision as to whether to establish a policy or enter into a contract to cover our tests, as well as the amount it will reimburse for a test, seeking these approvals is a time-consuming and costly process. In addition, the determination by a payer to cover and the amount it will reimburse for our tests will likely be made on an indication-by-indication basis. To date, we have obtained policy-level reimbursement approval or contractual reimbursement for some indications for our germline tests from most of the large commercial third-party payers in the United States, and the Centers for Medicare & Medicaid Services, or CMS, provides reimbursement for our multi-gene tests for hereditary breast and ovarian cancer-related disorders as well as colon cancer. We believe that establishing adequate reimbursement from Medicare is an important factor in gaining adoption from healthcare providers. Our claims for reimbursement from third-party payers 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. In cases where there is not a contracted rate for reimbursement, there is typically a greater coinsurance or copayment requirement from the patient, which may result in further delay or decreased likelihood of collection.
In cases where we have established reimbursement rates with third-party payers, we face additional challenges in complying with their procedural requirements for reimbursement. These requirements often vary from payer to payer, and we have needed additional time and resources to comply with them. We have also experienced, and may continue to experience, delays in or denials of coverage if we do not adequately comply with these requirements. Our third-party payers have also requested, and in the future may request, audits of the amounts paid to us. We have been required to repay certain amounts to payers as a result of such audits, and we could be adversely affected if we are required to repay other payers for alleged overpayments due to lack of compliance with their reimbursement policies. In addition, we have experienced, and may continue to experience, delays in reimbursement when we transition to being an in-network provider with a payer.
We expect to continue to focus our resources on increasing adoption of, and expanding coverage and reimbursement for, our current tests and any future tests we may develop or acquire. If we fail to expand and maintain broad adoption of, and coverage and reimbursement for, our tests, our ability to generate revenue could be harmed and our future prospects and our business could suffer.
We need to scale our infrastructure in advance of demand for our tests and other services, and our failure to generate sufficient demand for our tests and other services would have a negative impact on our business and our ability to attain profitability.
Our success depends in large part on our ability to extend our market position, to develop new services, to provide customers with high-quality test reports quickly and at a lower price than our competitors, and to achieve sufficient test volume to realize economies of scale. In order to execute our business model, we intend to continue to invest heavily in order to significantly scale our infrastructure, including our testing capacity and information
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systems, expand our commercial operations, customer service, billing and systems processes and enhance our internal quality assurance program. We expect that much of this infrastructure growth will be in advance of demand for our tests and other services. Many of our current and future expense levels are fixed. Because the timing and amount of revenue from our services is difficult to forecast, when revenue does not meet our expectations, we may not be able to adjust our spending promptly or reduce our spending to levels commensurate with our revenue. Even if we are able to successfully scale our infrastructure and operations, we cannot assure you that demand for our services will increase at levels consistent with the growth of our infrastructure. If we fail to generate demand commensurate with this growth or if we fail to scale our infrastructure sufficiently in advance of demand to successfully meet such demand, our business, prospects, financial condition and results of operations could be adversely affected.
The global macroeconomic environment could negatively impact our business, our financial position and our results of operations.
Adverse macroeconomic developments, including inflation, slowing growth, rising interest rates, or recession, may adversely affect our business and financial condition. These developments have caused, and could in the future cause, disruptions and volatility in global financial markets and increased rates of default and bankruptcy, and negatively affect business and consumer spending. Adverse economic conditions have and may continue to increase the costs of operating our business, including vendor, supplier and workforce expenses, and may limit our access to capital or may significantly increase our cost of capital. Management continues to evaluate the impact of macroeconomic events, including inflation, on our business and our future plans and intends to take appropriate measures to help alleviate their impact, but there can be no assurance that these efforts will be successful. A weak or declining economy also could strain our suppliers, possibly resulting in supply disruption, or cause our customers to delay making payments for our services. A severe or prolonged economic downturn, such as the global financial crisis, could also reduce our ability to raise additional capital when needed on acceptable terms, if at all. Presently, we have customers who have been adversely affected by Russia's invasion of Ukraine, and we have experienced some disruption in our engineering productivity as we have sought to assist contractors in both Ukraine and Russia who have been dislocated or who have chosen to flee Russia. Likewise, the capital and credit markets have been and may continue to be adversely affected by the invasion, the possibility of a wider European or global conflict, and global sanctions imposed in response to the invasion. We cannot predict the future trajectory of these risks, including how the macroeconomic environment will evolve or how it will continue to impact us.
Specifically, difficult macroeconomic conditions, such as cost inflation, decreases in per capita income and level of disposable income, increased and prolonged unemployment or a decline in consumer confidence as a result of COVID-19 or otherwise, as well as limited or significantly reduced points of access of our tests, could have a material adverse effect on the demand for our tests. Under difficult economic conditions, consumers may seek to reduce discretionary spending by forgoing our tests. Decreased demand for our tests, particularly in the United States, has negatively affected and could continue to negatively affect our overall financial performance.
Adverse developments affecting the financial services industry could adversely affect our current and projected business operations and our financial condition and results of operations.
Adverse developments that affect financial institutions have in the past and may in the future lead to bank failures and market-wide liquidity problems. For example, Silicon Valley Bank (“SVB”), Signature Bank and Silvergate Capital Corp. were each placed into receivership in March 2023. In addition, on May 1, 2023, the Federal Deposit Insurance Corporation (“FDIC”) seized First Republic Bank and sold its assets to JPMorgan Chase & Co. Widespread demands for customer withdrawals or other liquidity demands may exceed other banks' access to cash and similarly be placed into receivership or sold. Additionally, it is uncertain whether the U.S. Department of Treasury, FDIC and Federal Reserve Board will provide access to uninsured funds in the future in the event of the closure of other banks or financial institutions, or that they would do so in a timely fashion.
While we have not experienced any material impact to our liquidity or to our current and projected business operations, financial condition or results of operations as a result of these matters, uncertainty remains over liquidity concerns in the broader financial services industry, and our business, our business partners or industry as a whole may be adversely impacted in ways that we cannot predict at this time.
Although we assess our banking relationships as we believe necessary or appropriate, our access to cash in amounts adequate to finance or capitalize our current and projected future business operations could be significantly impaired by factors that affect the financial institutions with which we have banking relationships. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations
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under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could also include factors involving financial markets or the financial services industry generally. The results of events or concerns that involve one or more of these factors could include a variety of material and adverse impacts on our current and projected business operations and our financial condition and results of operations. These could include, but may not be limited to, delayed access to deposits or other financial assets or the uninsured loss of deposits or other financial assets; or termination of cash management arrangements and/or delays in accessing or actual loss of funds subject to cash management arrangements.
In addition, widespread investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. Any decline in available funding or access to our cash and liquidity resources could, among other risks, adversely impact our ability to meet our operating expenses, financial obligations or fulfill our other obligations, result in breaches of our financial and/or contractual obligations or result in violations of federal or state wage and hour laws. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our liquidity and our current and/or projected business operations and financial condition and results of operations.
We maintain our cash at financial institutions, often in balances that exceed federally insured limits.
We maintain the majority of our cash and cash equivalents in accounts at banking institutions in the United States that we believe are of high quality. Cash held in these accounts often exceed the FDIC insurance limits. If such banking institutions were to fail, we could lose all or a portion of amounts held in excess of such insurance limitations. As noted above, the FDIC recently took control of SVB, Signature Bank, Silvergate Capital Corp and First Republic Bank. While we did have an account at SVB, our deposits were not affected as a result of such change. In the event of failure of any of the financial institutions where we maintain our cash and cash equivalents, there can be no assurance that we would be able to access uninsured funds in a timely manner or at all. Any inability to access or delay in accessing these funds could adversely affect our business and financial position.
We hold a significant amount of marketable securities in U.S. treasury notes and U.S. government agency securities.
At March 31, 2023 and December 31, 2022, we had $171.2 million and $267.5 million, respectively, of cash, cash equivalents, and restricted cash and marketable securities of $217.5 million and $289.6 million, respectively. Our marketable securities are held primarily in the form of U.S. treasury notes and U.S. government agency securities. The current statutory limit on U.S. debt, commonly known as the debt ceiling, of $31.4 trillion was reached in January, requiring the Treasury Department to take accounting measures to continue normally financing U.S. government obligations while avoiding exceeding the debt ceiling. It is expected, however, the U.S. government will exhaust these measures by June 2023. If the debt ceiling is not raised, the U.S. government may not be able to fulfill its funding obligations and there could be significant disruption to all discretionary programs and wider financial and economic repercussions. In addition, the value of our marketable securities could decline.
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.
Our business has been and could continue to be adversely affected by a widespread outbreak of contagious disease, including the COVID-19 pandemic. Global health concerns relating to COVID-19 have negatively affected the macroeconomic environment, and the pandemic has significantly increased economic volatility and uncertainty. As discussed in our prior and current Form 10-K and 10-Q filings, our operations have been and will continue to be impacted by the COVID-19 pandemic and its related economic challenges. Even after COVID-19 has subsided, we may continue to experience an adverse impact to our business as a result of its global economic impact, including any recession that has occurred or may occur in the future.
There are no comparable recent events which may provide guidance as to the effect of the spread of COVID-19, and, as a result, the ultimate impact of COVID-19 or a similar health epidemic is highly uncertain and subject to change.
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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.
With the development of next generation sequencing, the clinical genetics market is becoming increasingly competitive, and we expect this competition to intensify in the future. We face competition from a variety of sources, including:
•dozens of relatively specialized competitors focused on genetics applied to healthcare, such as Ambry Genetics Corporation, a subsidiary of Realm IDx.; Athena Diagnostics, Inc. and Blueprint Genetics, subsidiaries of Quest Diagnostics Incorporated (“Quest Diagnostics”); Baylor-Miraca Genetics Laboratories LLC; Caris Life Sciences, Inc.; Centogene AG; Color Health, Inc.; Connective Tissue Gene Test LLC, a subsidiary of Health Network Laboratories, L.P.; Cooper Surgical, Inc.; Emory Genetics Laboratory, a subsidiary of Eurofins Scientific; Foundation Medicine, Inc., a subsidiary of Roche Holding AG; Fulgent Genetics, Inc.; Guardant Health, Inc.; Integrated Genetics, Sequenom Inc., Correlagen Diagnostics, Inc., and MNG Laboratories, subsidiaries of Laboratory Corporation of America Holdings (“Labcorp”); Myriad Genetics, Inc.; Natera, Inc. (“Natera”); Perkin-Elmer, Inc.; and Sema4 Genomics; as well as other commercial and academic laboratories;
•a few large, established general testing companies with large market share and significant channel power, such as Labcorp and Quest Diagnostics;
•a large number of clinical laboratories in an academic or healthcare provider setting that perform clinical genetic testing on behalf of their affiliated institutions and often sell and market more broadly; and
•a large number of new entrants into the market for genetic information ranging from informatics and analysis pipeline developers to focused, integrated providers of genetic tools and services for health and wellness including Illumina, Inc. (“Illumina”), which is also one of our suppliers.
Hospitals, academic medical centers and eventually physician practice groups and individual clinicians may also seek to perform at their own facilities the type of genetic testing we would otherwise perform for them. In this regard, continued development of equipment, reagents, and other materials as well as databases and interpretation services may enable broader direct participation in genetic testing and analysis.
Participants in closely related markets such as clinical trial or companion diagnostic testing could converge on offerings that are competitive with the type of tests we perform. Instances where potential competitors are aligned with key suppliers or are themselves suppliers could provide such potential competitors with significant advantages.
In addition, the biotechnology and genetic testing fields are intensely competitive both in terms of service and price, and continue to undergo significant consolidation, permitting larger clinical laboratory service providers to increase cost efficiencies and service levels, resulting in more intense competition.
We also face competition as a result of our 2021 acquisition of Ciitizen Corporation ("Ciitizen"). Ciitizen competes with companies in the patient data platform business, including, among others, PicnicHealth, All Stripes Research Inc., Seqster PDM, Inc., Apple Inc. ("Apple"), Flatiron Health, Inc.
We believe the principal competitive factors in our market are:
•breadth and depth of content;
•quality;
•reliability;
•accessibility of results;
•turnaround time of testing results;
•price and quality of tests;
•coverage and reimbursement arrangements with third-party payers;
•convenience of testing;
•brand recognition of test provider;
•additional value-added services and informatics tools;
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•client service; and
•quality of website content.
Many of our competitors and potential competitors have longer operating histories, larger customer bases, greater brand recognition and market penetration, higher margins on their tests, substantially greater financial, technological and research and development resources, selling and marketing capabilities, lobbying efforts, and more experience dealing with third-party payers. As a result, they may be able to respond more quickly to changes in customer requirements, devote greater resources to the development, promotion and sale of their tests than we do, sell their tests at prices designed to win significant levels of market share, or obtain reimbursement from more third-party payers and at higher prices than we do. We may not be able to compete effectively against these organizations. Increased competition and cost-saving initiatives on the part of governmental entities and other third-party payers are likely to result in pricing pressures, which could harm our sales, profitability or ability to gain market share. In addition, competitors may be acquired by, receive investments from or enter into other commercial relationships with larger, well-established and well-financed companies as use of next generation sequencing for clinical diagnosis and preventative care increases. Certain of our competitors may be able to secure key inputs from vendors on more favorable terms, devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to website and systems development than we can. In the past, our competitors have been successful in recruiting our employees and may continue to recruit qualified employees from us. In addition, companies or governments that control access to genetic testing through umbrella contracts or regional preferences could promote our competitors or prevent us from performing certain services. Some of our competitors have obtained approval or clearance for certain of their tests from the FDA. If payers decide to reimburse only for tests that are FDA-approved or FDA-cleared, or if they are more likely to reimburse for such tests, we may not be able to compete effectively unless we obtain similar approval or clearance for our tests. If we are unable to compete successfully against current and future competitors, we may be unable to increase market acceptance and sales of our tests, which could prevent us from increasing our revenue or achieving profitability and could cause our stock price to decline.
The market for patient data software is competitive, and our business will be adversely affected if we are unable to successfully compete.
The market for patient data software is competitive. Other than product innovation and access to healthcare data, there are no substantial barriers to entry in this market, and established or new entities may enter this market in the future. While software internally developed by enterprises represents indirect competition, we also compete directly with packaged application software vendors. In addition, we face actual or potential competition from larger companies such as Apple, and similar companies that may attempt to sell customer engagement software to their installed base.
We believe competition will continue to be substantial as current competitors increase the sophistication of their offerings and as new participants enter the market. Many of our current and potential competitors have longer operating histories, larger customer bases, broader brand recognition, and significantly greater financial, marketing and other resources. With more established and better-financed competitors, these companies may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies, and make more attractive offers to businesses to induce them to use their products or services. If we are unable to compete successfully, our business will be adversely affected.
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.
In the ordinary course of our business, we collect and store sensitive data, including protected health information, or PHI, personally identifiable information, genetic information, credit card information, intellectual property and proprietary business information owned or controlled by ourselves or our customers, payers and other parties. We manage and maintain our applications and data utilizing a combination of on-site systems, managed data center systems and cloud-based systems. We also communicate PHI and other sensitive patient data through our various customer tools and platforms. In addition to storing and transmitting sensitive data that is subject to multiple legal protections, these applications and data encompass a wide variety of business-critical information including research and development information, commercial information, and business and financial information. We face a number of risks relative to protecting this critical information, including loss of access risk, inappropriate disclosure, inappropriate modification, and the risk of our being unable to adequately monitor and modify our controls over our critical information. Any technical problems that may arise in connection with our data and
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systems, including those that are hosted by third-party providers, could result in interruptions to our business and operations or exposure to security vulnerabilities. These types of problems may be caused by a variety of factors, including infrastructure changes, intentional or accidental human actions or omissions, software errors, malware, viruses, security attacks, ransomware fraud, spikes in customer usage and denial of service issues. There continues to be a significant level of ransomware and cyber security attacks related to the ongoing conflict between Russia and Ukraine, which could result in substantial harm to internal systems necessary for running our critical operations and revenue generating services.
The secure processing, storage, maintenance and transmission of this critical information are vital to our operations and business strategy, and we devote significant resources to protecting such information. Although we take what we believe to be reasonable and appropriate measures, including a formal, dedicated enterprise security program, to protect sensitive information from various compromises (including unauthorized access, disclosure, or modification or lack of availability), our information technology and infrastructure may be vulnerable to attacks by hackers or viruses or breached due to employee error, malfeasance or other disruptions. For example, we have been subject to phishing incidents in the past, and we may experience additional incidents in the future. Any such breach or interruption could compromise our networks, and the information stored therein could be accessed by unauthorized parties, altered, publicly disclosed, lost or stolen.
Unauthorized access, loss or dissemination could also disrupt our operations including our ability to conduct our analyses, provide test results, bill payers or patients, process claims and appeals, provide customer assistance, conduct research and development activities, collect, process and prepare company financial information, provide information about our tests and other patient and physician education and outreach efforts through our website, and manage the administrative aspects of our business.
In addition to data security risks, we face privacy risks. Should we actually violate, or be perceived to have violated, any privacy commitments we make to patients or consumers, we could be subject to a complaint from an affected individual or interested privacy regulator, such as the U.S. Department of Health and Human Services (HHS) Office for Civil Rights (OCR), the FTC, a state Attorney General, an EU Member State Data Protection Authority, or a data protection authority in another international jurisdiction. This risk is heightened given the sensitivity of the data we collect.
Any security compromise that causes an apparent privacy violation could also result in legal claims or proceedings and liability and penalties under federal, state, foreign, or multinational laws that regulate the privacy, security, or breach of personal information, such as but not limited to HIPAA, HITECH, the FTC Act, state UDAP data security and data breach notification laws, the GDPR and the UK Data Protection Act of 2018.
There has been unprecedented activity in the development of data protection regulation around the world. As a result, the interpretation and application of consumer, health-related and data protection laws in the United States, Europe and elsewhere are often uncertain, contradictory and in flux. The GDPR took effect in May 2018. The GDPR applies to any entity established in the EU as well as extraterritorially to any entity outside the EU that offers goods or services to, or monitors the behavior of, individuals who are located in the EU. Among other requirements, the GDPR imposes strict rules on controllers and processors of personal data, including enhanced protections for “special categories” of personal data, which includes sensitive information such as health and genetic information of data subjects. Maximum penalties for violations of the GDPR are capped at 20.0 million euros or 4% of an organization’s annual global revenue, whichever is greater.
Additionally, the implementation of GDPR has led other jurisdictions to either amend or propose legislation to amend their existing data privacy and cybersecurity laws to resemble the requirements of GDPR. For example, in June 2018, California adopted the California Consumer Privacy Act of 2018, or the CCPA. The CCPA, is a comprehensive consumer privacy law that took effect in January 2020 and was further amended as of January 1, 2023. The CCPA regulates how certain for-profit businesses that meet one or more CCPA applicability thresholds collect, use, and disclose the personal information of natural persons who reside in California. The CCPA does not apply to personal information that is PHI under HIPAA. The CCPA also does not apply to a HIPAA-regulated entity to the extent that the entity maintains patient information in the same manner as PHI. In addition, de-identified data as defined under HIPAA is also exempt from the CCPA. Accordingly, we do not have CCPA compliance obligations with respect to most genetic testing and patient information we collect and process. However, we are required to comply with the CCPA insofar as we collect other categories of California consumers’ personal information.