Foundation Medicine, Inc.
Foundation Medicine, Inc. (Form: 10-Q, Received: 08/01/2017 16:19:19)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017

OR

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

For the transition period from            to           

Commission File Number: 001-36086

 

FOUNDATION MEDICINE, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware

27-1316416

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer
Identification No.)

 

150 Second Street

Cambridge MA

02141

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (617) 418-2200

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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  

As of July 28, 2017, the registrant had 36,021,729 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 


 

FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical facts contained in this Quarterly Report on Form 10-Q are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “will,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

 

our plans or ability to obtain reimbursement coverage and thereafter payment for FoundationOne, FoundationOne Heme, FoundationACT, FoundationFocus CDx BRCA , and our universal companion diagnostic assay, including expectations as to our ability or the amount of time it will take to achieve successful reimbursement coverage and thereafter payment from third-party payors, such as commercial insurance companies and health maintenance organizations, and government insurance programs, such as Medicare and Medicaid;

 

the evolving treatment paradigm for cancer, including physicians’ issuance and acceptance of practice guidelines, and the use in clinical practice of molecular information and targeted oncology therapeutics and the market size for molecular information services;

 

physicians’ need for molecular information services and any perceived advantage of our services over those of our competitors, including the ability of our molecular information platform to help physicians treat their patients’ cancers, our first mover advantage in providing comprehensive molecular information services on a commercial scale or the sustainability of our competitive advantages;

 

our ability to generate revenue from sales of services enabled by our molecular information platform to physicians in clinical practice and our biopharmaceutical partners, including our ability to increase adoption of our molecular information services, and to maintain and expand existing or to develop new relationships with biopharmaceutical partners;

 

our plans and ability to develop, receive approval for, and commercialize new services, including our universal companion diagnostic assay, and improvements to our existing services;

 

our ability to increase the commercial success of our molecular information services;

 

the outcome or success of our clinical trials;

 

the ability of our molecular information platform to enhance our biopharmaceutical partners’ ability to develop targeted oncology therapies;

 

our ability to comprehensively assess cancer tissue simultaneously for all known genomic alterations across all known cancer-related genes, including our ability to update our molecular information platform to interrogate new cancer genes and incorporate new targeted oncology therapies and clinical trials;

 

our ability to scale our molecular information platform, including the capacity to process additional tests at high specificity and sensitivity as our volume increases;

 

our ability to capture, aggregate, analyze, or otherwise utilize genomic data in new ways;

 

the acceptance of our publications in peer-reviewed journals or our presentations at scientific and medical conference presentations;

 

our plans and ability to expand our laboratory operations;

 

our relationships with our suppliers from whom we obtain laboratory reagents, equipment, or other materials which we use in our molecular information platform, some of which are sole source arrangements;

 

anticipated increases in our sales and marketing costs due to expansions in our sales force and marketing activities within and outside of the United States;

 

our ability to operate outside of the United States in compliance with evolving legal and regulatory requirements;

 

our ability to meet future anticipated demand by making additional investments in personnel, infrastructure, and systems to scale our laboratory operations;

 

the expansion of the capabilities of FoundationICE, the newest version of our online Interactive Cancer Explorer portal, and the development and launch of its associated applications;

2


 

 

federal, state, and foreign regulatory requirements, including potential United State s Food and Drug Administration, or FDA, regulation of our molecular information services or future services ;

 

our plans to seek approval from the FDA or other regulatory authorities for certain of our services or future services, as well as our ability to secure such approvals;

 

our ability to protect and enforce our intellectual property rights, including our trade secret protected proprietary rights in our molecular information platform;

 

our anticipated cash needs and our estimates regarding our capital requirements and our needs for additional financing, as well as our ability to obtain such additional financing on reasonable terms;

 

our ability to recognize the benefits of our broad strategic collaboration with affiliates of Roche Holdings, Inc. and Roche’s ability to successfully market and sell our services outside of the United States;

 

our ability to borrow all available amounts under our credit facility with Roche Finance Ltd, and our ability to comply with our covenants and other obligations contained in the credit agreement;

 

anticipated trends and challenges in our business and the markets in which we operate; and

 

other factors discussed elsewhere in this Quarterly Report on Form 10-Q.

Any forward-looking statements in this Quarterly Report on Form 10-Q reflect our current views with respect to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under Part II, Item 1A. “Risk Factors” in this Quarterly Report and our prior filings with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

Unless the context requires otherwise, references in this Quarterly Report to “we,” “us”, “our” and “Foundation” refer to Foundation Medicine, Inc. and our subsidiary. We own various U.S. federal trademark registrations and applications, and unregistered trademarks and service marks. Foundation Medicine®, FoundationOne®, FoundationACT®, Interactive Cancer Explorer®, FoundationICE®, GeneKit®, Once. And for All®, and The Molecular Information Company® are all registered trademarks of Foundation in the United States, and several of these marks are at various stages of the registration process in other countries. FoundationFocus™, FoundationCORE™, PatientMatch™, Precision Medicine Exchange Consortium™, SmartTrials™, and FoundationACCESS™ are also trademarks of Foundation. Other trademarks or service marks that may appear in this Quarterly Report are the property of their respective holders. For convenience, we do not use the ® and ™ symbols in each instance in which one of our trademarks appears throughout this Quarterly Report, but this should not be construed as any indication that we will not assert, to the fullest extent under applicable law, our rights thereto.

 

3


 

FOUNDATION MEDICINE, INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended June 30, 2017

 

 

 

 

 

PAGE

PART I. FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

a)

 

Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

 

5

b)

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three and Six Months Ended June 30, 2017 and 2016

 

6

c)

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

 

7

d)

 

Notes to Condensed Consolidated Financial Statements

 

8

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

25

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

38

Item 4.

 

Controls and Procedures

 

38

PART II. OTHER INFORMATION

 

39

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 6.

 

Exhibits

 

50

SIGNATURES

 

51

 

 

4


 

FOUNDATION MEDICINE, INC.

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

36,532

 

 

$

63,617

 

Marketable securities

 

 

34,985

 

 

 

79,402

 

Accounts receivable

 

 

13,645

 

 

 

8,206

 

Receivable due from Roche

 

 

4,082

 

 

 

2,007

 

Inventory

 

 

8,922

 

 

 

10,438

 

Prepaid expenses and other current assets

 

 

5,102

 

 

 

5,251

 

Total current assets

 

 

103,268

 

 

 

168,921

 

Property and equipment, net

 

 

38,713

 

 

 

41,486

 

Restricted cash

 

 

2,305

 

 

 

1,395

 

Other assets

 

 

2,080

 

 

 

2,233

 

Total assets

 

$

146,366

 

 

$

214,035

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,175

 

 

$

11,898

 

Accrued expenses and other current liabilities

 

 

25,269

 

 

 

20,578

 

Deferred revenue

 

 

1,926

 

 

 

2,104

 

Roche related-party deferred revenue

 

 

3,742

 

 

 

3,747

 

Current portion of deferred rent

 

 

1,384

 

 

 

2,324

 

Total current liabilities

 

 

47,496

 

 

 

40,651

 

Deferred rent, net of current portion and other non-current liabilities

 

 

9,354

 

 

 

8,538

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 shares authorized; 35,938,814 and

   35,281,001 shares issued and outstanding at June 30, 2017 and December 31,

   2016, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

525,041

 

 

 

509,664

 

Accumulated other comprehensive loss

 

 

65

 

 

 

(14

)

Accumulated deficit

 

 

(435,594

)

 

 

(344,808

)

Total stockholders’ equity

 

 

89,516

 

 

 

164,846

 

Total liabilities and stockholders’ equity

 

$

146,366

 

 

$

214,035

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

5


 

FOUNDATION MEDICINE, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Molecular information services

 

$

24,777

 

 

$

17,001

 

 

$

40,371

 

 

$

31,376

 

Related-party molecular information services from Roche

 

 

5,520

 

 

 

5,682

 

 

 

11,024

 

 

 

11,236

 

Pharma research and development services

 

 

1,215

 

 

 

3,711

 

 

 

2,302

 

 

 

6,759

 

Related-party pharma research and development services from Roche

 

 

3,492

 

 

 

1,843

 

 

 

7,635

 

 

 

9,244

 

Total revenue

 

 

35,004

 

 

 

28,237

 

 

 

61,332

 

 

 

58,615

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of molecular information services

 

 

19,537

 

 

 

11,484

 

 

 

36,654

 

 

 

21,512

 

Cost of related-party molecular information services from Roche

 

 

2,045

 

 

 

471

 

 

 

2,945

 

 

 

1,833

 

Selling and marketing

 

 

17,115

 

 

 

14,481

 

 

 

33,551

 

 

 

28,274

 

General and administrative

 

 

17,648

 

 

 

12,503

 

 

 

32,925

 

 

 

21,727

 

Research and development

 

 

22,973

 

 

 

18,500

 

 

 

46,258

 

 

 

31,956

 

Total costs and expenses

 

 

79,318

 

 

 

57,439

 

 

 

152,333

 

 

 

105,302

 

Loss from operations

 

 

(44,314

)

 

 

(29,202

)

 

 

(91,001

)

 

 

(46,687

)

Interest income, net

 

 

56

 

 

 

208

 

 

 

146

 

 

 

386

 

Other income

 

 

-

 

 

 

 

 

 

144

 

 

 

-

 

Net loss

 

$

(44,258

)

 

$

(28,994

)

 

$

(90,711

)

 

$

(46,301

)

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain/(loss) on available-for-sale securities

 

 

12

 

 

 

73

 

 

 

(6

)

 

 

237

 

Foreign currency translation adjustment

 

 

102

 

 

 

 

 

 

85

 

 

 

 

Total other comprehensive income

 

 

114

 

 

 

73

 

 

 

79

 

 

 

237

 

Comprehensive loss

 

$

(44,144

)

 

$

(28,921

)

 

$

(90,632

)

 

$

(46,064

)

Net loss per common share, basic and diluted

 

$

(1.24

)

 

$

(0.84

)

 

$

(2.55

)

 

$

(1.34

)

Weighted-average common shares outstanding, basic and diluted

 

 

35,660,430

 

 

 

34,613,513

 

 

 

35,544,003

 

 

 

34,575,260

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

6


 

FOUNDATION MEDICINE, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(90,711

)

 

$

(46,301

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

8,841

 

 

 

7,236

 

Stock-based compensation expense

 

 

13,125

 

 

 

7,670

 

Amortization of premiums and discounts on marketable securities

 

 

18

 

 

 

148

 

Gain on disposal of long-lived assets

 

 

(139

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(5,439

)

 

 

(3,056

)

Receivable from Roche

 

 

(2,076

)

 

 

(1,627

)

Inventory

 

 

1,655

 

 

 

(2,168

)

Prepaid expenses and other current assets

 

 

195

 

 

 

2,688

 

Other assets

 

 

(778

)

 

 

18

 

Accounts payable

 

 

4,431

 

 

 

4,797

 

Accrued expenses and other current liabilities

 

 

4,184

 

 

 

2,323

 

Deferred rent and other non-current liabilities

 

 

(126

)

 

 

(991

)

Deferred revenue

 

 

(178

)

 

 

467

 

Roche related-party deferred revenue

 

 

(5

)

 

 

 

Net cash used in operating activities

 

 

(67,003

)

 

 

(28,796

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,705

)

 

 

(11,996

)

Purchases of marketable securities and other investments

 

 

(4,996

)

 

 

(77,445

)

Proceeds from maturities of marketable securities

 

 

49,390

 

 

 

62,453

 

Net cash provided by (used in) investing activities

 

 

37,689

 

 

 

(26,988

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

2,188

 

 

 

303

 

Net cash provided by financing activities

 

 

2,188

 

 

 

303

 

Net decrease in cash and cash equivalents

 

 

(27,126

)

 

 

(55,481

)

Effect of exchange rate changes on cash and cash equivalents

 

 

41

 

 

 

 

Cash and cash equivalents at beginning of period

 

 

63,617

 

 

 

117,763

 

Cash and cash equivalents at end of period

 

$

36,532

 

 

$

62,282

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

150

 

 

 

 

Acquisition of property and equipment included in accounts payable and accrued

   expenses

 

$

1,247

 

 

$

1,941

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

 

7


 

FOUNDATION MEDICINE, INC.

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

1.

Nature of Business and Basis of Presentation

Foundation Medicine, Inc., and its wholly-owned subsidiaries, Foundation Medicine Securities Corporation and FMI Germany GmbH (collectively, the “Company”), is a molecular information company focused on fundamentally changing the way in which patients with cancer are evaluated and treated. The Company believes an information-based approach to making clinical treatment decisions based on comprehensive genomic profiling will become a standard of care for patients with cancer. The Company derives revenue from selling services that are enabled by its molecular information platform to physicians and biopharmaceutical companies.

The Company’s molecular information services for genomic profiling, FoundationOne for solid tumors, FoundationOne Heme for blood-based cancers, or hematologic malignancies, including leukemia, lymphoma, myeloma, pediatric cancers, and advanced sarcomas, FoundationACT, a blood-based (liquid biopsy) assay to measure circulating tumor DNA (“ctDNA”), and FoundationFocus CDx BRCA , an FDA approved, companion diagnostic assay to aid in identifying women with ovarian cancer for whom treatment with Rubraca™ (rucaparib) is being considered, are widely available comprehensive genomic profiles designed for use in the routine care of patients with cancer. To accelerate its commercial growth and enhance its competitive advantage, the Company is developing and commercializing new molecular information services for physicians and biopharmaceutical companies, strengthening its commercial organization, introducing new marketing, education and provider engagement efforts, growing its molecular information knowledgebase, called FoundationCORE, aggressively pursuing reimbursement from regional and national third-party payors, publishing scientific and medical advances, and fostering relationships throughout the oncology community.

The accompanying condensed consolidated financial statements are unaudited. In the opinion of management, the unaudited condensed consolidated financial statements contain all adjustments considered normal and recurring and necessary for their fair presentation. Interim results are not necessarily indicative of results to be expected for the year. These interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these unaudited condensed consolidated financial statements do not include all of the information and footnotes necessary for a complete presentation of financial position, results of operations, comprehensive loss and cash flows. The Company’s audited consolidated financial statements as of and for the year ended December 31, 2016 included information and footnotes necessary for such presentation and were included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 2, 2017 and as subsequently amended on Form 10-K/A filed with the SEC on March 30, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2016.

 

2.

Summary of Significant Accounting Policies

Summary of Accounting Policies

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in the Company’s audited consolidated financial statements as of and for the year ended December 31, 2016, and the notes thereto, which are included in the Company’s Annual Report on Form 10-K. There have been no material changes to the significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

Reclassifications

Certain reclassifications have been made to the revenue captions of the Condensed Consolidated Statements of Operations and Comprehensive Loss to conform to the current classifications. These reclassifications had no net effect on the Company’s consolidated results.

Revenue Recognition

The Company derives revenue from the provision of molecular information services provided to its ordering physicians and biopharmaceutical customers, as well as from pharma research and development services provided to its biopharmaceutical customers. Molecular information services include molecular profiling and the delivery of other molecular information derived from the Company’s platform. Pharma research and development services include the development of new platforms and information solutions, including companion diagnostic development. The Company currently receives payments from commercial third-party payors, Medicare, certain hospitals and cancer centers with which it has direct-bill relationships, individual patients, and its biopharmaceutical customers.

The Company recognizes revenue in accordance with FASB ASC Topic 605, Revenue Recognition (“ASC 605”). Accordingly, the Company recognizes revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists;

8


 

(ii) del ivery has occurred; (iii) the fee is fixed or determinable; and (iv) collectability is reasonably assured. Criterion (i) is satisfied when the Company has an arrangement or contract in place. Criterion (ii) is satisfied when the Company delivers a report t o the ordering physician or the biopharmaceutical customer. Determination of criteria (iii) and (iv) are based on management’s judgments regarding whether the fee is fixed or determinable, and whether the collectability of the fee is reasonably assured.

The Company recognizes revenue on a cash basis when it cannot conclude that criteria (iii) and (iv) have been met. The Company currently recognizes revenue on a cash basis from sales of its molecular information services to certain clinical customers, including payments received from commercial third-party payors, Medicare, and from patients who make co-payments, pay deductibles or from other amounts that the Company has been unable to collect from third-party payors. The Company uses judgment in its assessment of whether the fee is fixed or determinable and whether collectability is reasonably assured in determining when to recognize revenue in the future as it continues to gain payment experience with third-party payors and patients. Accordingly, the Company expects to recognize revenue on a cash basis for these clinical customers until it has sufficient history to reliably estimate payment patterns. The Company’s molecular information services are delivered electronically, and as such there are no shipping and handling fees incurred by the Company or billed to customers. The Company’s molecular information services are exempt from state sales taxation due to the nature of the services. As a result, the Company does not charge customers state sales tax.

The Company recognizes revenue from the sale of its molecular information services to clinical customers, including certain hospitals, cancer centers, other institutions and patients, at the time results of the test are reported to physicians, if criteria (i) through (iv) above are met.

Revenue from sales of the Company’s services to biopharmaceutical customers are based on a negotiated price per test or on the basis of an agreement to provide certain testing volume, data access, or pharma research and development services over a defined period. The Company recognizes revenue upon delivery of the test results, or over the period in which pharma research and development services are provided, as appropriate.

The Company performs pharma research and development services for its biopharmaceutical customers utilizing its molecular information platform. Contracts for pharma customers are primarily analyzed as multiple-element arrangements given the nature of the service deliverables. For pharma research and development services performed, the Company is compensated in various ways, including (1) through the reimbursement of costs incurred; (2) through non-refundable regulatory and other developmental milestone payments; and (3) through royalty and sales milestone payments. For some multiple-element arrangements, including the R&D Collaboration agreement with Roche, the Company will be reimbursed for either all or a portion of the research and development costs incurred. The Company performs pharma research and development services as part of its normal activities. The Company records these payments as Pharma research and development services revenue in the Consolidated Statements of Operations and Comprehensive Loss, using a proportional performance model over the period which the unit of accounting is delivered or based on the level of effort expended to date over the total expected effort, whichever is considered the most appropriate measure of performance. The research and development costs incurred by the Company under these arrangements are included as Research and development expenses in the Company’s Consolidated Statements of Operations and Comprehensive Loss given these costs are related to the development of new services to be owned and offered by the Company to its customers.

The Company analyzes multiple-element arrangements based on the guidance in FASB ASC Topic 605-25, Revenue Recognition-Multiple-Element Arrangements (“ASC 605-25”). Pursuant to the guidance in ASC 605-25, the Company evaluates multiple-element arrangements to determine (1) the deliverables included in the arrangement and (2) whether the individual deliverables represent separate units of accounting or whether they must be accounted for as a combined unit of accounting. This evaluation involves subjective determinations and requires management to make judgments about the individual deliverables and whether such deliverables are separable from the other aspects of the contractual relationship. Deliverables are considered separate units of accounting if: (i) the delivered items have value to the customer on a standalone basis and (ii) the arrangement includes a general right of return relative to the delivered items and delivery or performance of the undelivered items is considered probable and substantially in the control of the Company. In assessing whether an item has standalone value, the Company considers factors such as the research, development and commercialization capabilities of a third party and the availability of the associated expertise in the general marketplace. In addition, the Company considers whether the other party in the arrangement can use the other deliverables for their intended purpose without the receipt of the remaining elements, whether the value of the deliverable is dependent on the undelivered items, and whether there are other vendors that can provide the undelivered elements.

Arrangement consideration that is fixed or determinable is allocated among the separate units of accounting using the relative selling price method. Then, the applicable revenue recognition criteria in ASC 605-25 is applied to each of the separate units of accounting in determining the appropriate period and pattern of recognition. The Company determines the selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, the Company determines the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence (“VSOE”) of selling price, if available, third-party evidence (“TPE”) of selling price if VSOE is not available, or best estimate of selling price (“BESP”) if neither VSOE nor TPE is available. The Company typically uses BESP to estimate the selling price, since it generally does not have VSOE or TPE of selling price for its units of accounting under multiple-element arrangements. Determining the BESP for a unit of accounting requires significant judgment. In developing the BESP for a unit of accounting, the Company considers applicable market conditions

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and estimated costs. The Company validates the BESP for units of accounting by evaluating whether changes in the key assumptions used to determine the BESP will have a significant effect on the allocation of arrangement consideration between multipl e units of accounting. The Company recognizes arrangement consideration allocated to each unit of accounting when all of the revenue recognition criteria in ASC 605-25 are satisfied for that particular unit of accounting.

At the inception of an arrangement that includes milestone payments to the Company, the Company evaluates whether each milestone is substantive and at risk to both parties on the basis of the contingent nature of the milestone. This evaluation includes an assessment of whether: (i) the consideration is commensurate with either the Company’s performance to achieve the milestone or the enhancement of the value of the delivered items as a result of a specific outcome resulting from the Company’s performance to achieve the milestone, (ii) the consideration relates solely to past performance, and (iii) the consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. The Company evaluates factors such as the scientific, clinical, regulatory, commercial, and other risks that must be overcome to achieve the respective milestone and the level of effort and investment required to achieve the respective milestone in making this assessment. There is considerable judgment involved in determining whether a milestone satisfies all of the criteria required to conclude that a milestone is substantive. Generally, once a substantive milestone has been achieved, the Company will recognize revenue related to that milestone using a proportional performance model over the period which the unit of accounting is delivered or based on the level of effort expended to date over the total expected effort, whichever is considered the most appropriate measure of performance. Revenue from commercial milestone payments are accounted for as royalties and recorded as revenue upon achievement of the milestone, assuming all other revenue recognition criteria are met.

The Company also recognizes royalty revenue in the period of sale of the related service(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and the Company has no remaining performance obligations, assuming all other revenue recognition criteria are met. To date, royalty revenue recognized by the Company has been immaterial.

Cost of Revenue

Cost of molecular information services generally consists of specific reagents, specific consumable lab supplies, and shared costs that are allocated to the Company’s molecular information services – its FoundationOne, FoundationOne Heme, FoundationACT and FoundationFocus CDx BRCA tests – either on a direct or indirect basis, resulting in an overall cost for each specific test. The shared costs that are allocated to each test include personnel expenses (comprised of salaries, bonuses, employee benefits and stock-based compensation expenses), depreciation of laboratory equipment and amortization of leasehold improvements, shipping costs, third-party laboratory costs, and certain overhead expenses.

Costs associated with performing tests are recorded as tests are processed. These costs are recorded regardless of whether revenue is recognized with respect to those tests. Because the Company currently recognizes revenue on a cash basis from commercial third-party payors and patients who make co-payments, pay deductibles or pay other amounts that the Company has been unable to collect from their insurers, the costs of those tests are often recognized in advance of any associated revenues.

Cost of Related-party molecular information services from Roche is generally derived by taking the cost per test described above and applying it to each of the FoundationOne, FoundationOne Heme and FoundationACT tests processed for Roche. Costs of Related-party molecular information services from Roche are associated with performing molecular information services for Roche under both the (i) molecular information platform program within the Company’s R&D Collaboration Agreement with Roche, and (ii) the Company’s Ex-U.S. Commercialization Agreement with Roche. Revenues from tests performed by the Company under the molecular information platform and the Ex-U.S. Commercialization Agreement are recognized in the Related-party molecular information services from Roche caption within the Company’s Consolidated Statements of Operations and Comprehensive Loss.

Research and Development Expenses

Research and development expenses consist primarily of costs incurred for the development of new and enhanced services, immunotherapy testing, companion diagnostic development, significant service improvements, clinical trials to evaluate the clinical utility of the Company’s services, the development of our FoundationCORE knowledgebase, and various technology applications such as FoundationICE and Patient-Match. Costs to develop the Company’s technology capabilities are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs. The Company’s research and development activities include the following costs:

 

personnel-related expenses such as salaries, bonuses, employee benefits, and stock-based compensation;

 

fees for contractual and consulting services;

 

costs to manage and synthesize our medical data and to expand FoundationCORE;

 

clinical trials;

 

laboratory supplies; and

 

allocated overhead expenses.

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Costs incurred for the performance of pharma research and development services requested by the Company’s biopharmaceutical customers, including non-molecular information services costs incurred under the R&D Collaboration Agre ement with Roche, are included as Research and development expenses in the Consolidated Statements of Operations and Comprehensive Loss, given that these costs are related to the development of new servic es to be owned and offered by the Company to its customers. Revenues from these services are recognized in the Pharma research and development services and Related-party pharma research and development service s from Roche captions within the Company’s Consolidated Statements of Operations and Comprehens ive Loss.

Recent Accounting Pronouncements

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards that are not yet effective will not have a material impact on its financial position or results of operations upon adoption.

In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which supersedes the revenue recognition requirements in Accounting Standards Codification 605 (“ASC 605”) and most industry-specific guidance. The new standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this core principle, ASU 2014-09 includes provisions within a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation. The update also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB decided to delay the effective date of ASU 2014-09 through the issuance of an additional ASU, which revised the effective date for ASU 2014-09 to annual and interim periods beginning on or after December 15, 2017, with early adoption permitted, but not earlier than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. In May 2014, the FASB and International Accounting Standards Board formed The Joint Transition Resource Group for Revenue Recognition ("TRG"), consisting of financial statement preparers, auditors, and users, to seek feedback on potential issues related to the implementation of the new revenue standard. As a result of feedback from the TRG, the FASB issued additional guidance throughout 2016 to provide clarification, implementation guidance and practical expedients to address some of the challenges of implementation. The new ASUs have the same effective date and transition requirements as ASU 2014-09. We refer to these ASUs which comprise Accounting Standards Codification 606 (“ASC 606”) and Accounting Standards Codification 340-40 (“ASC 340-40”) collectively as the “new standard”.

The Company intends to adopt the new standard on January 1, 2018 utilizing the modified retrospective method, meaning the cumulative effect of applying the standard will be recognized to opening retained earnings at the date of initial application. The Company has a project team in place, including engagement of a third-party service provider, to analyze the impact of ASU 2014-09 and the related ASUs across all revenue streams. The Company has substantially completed a diagnostic review of current accounting policies and a sample of existing baseline contracts to identify potential differences that would result from applying the requirements under the new standard. In the second quarter of 2017, the Company began drafting its new accounting policies, including evaluation of any variations in key terms from the baseline contract reviews, and evaluating the new disclosure requirements, including any necessary changes to our business processes, systems, and controls to support the additional required disclosures.

The Company has identified two revenue streams for their contracts with customers: 1) molecular information services and 2) pharma research and development services. For the molecular information services revenue stream, the Company is in the process of evaluating the application of the new standard to arrangements with certain clinical customers and is not yet able to estimate the anticipated impact to our consolidated financial statements from the application of the new standard. Currently, for certain clinical customers, the Company will defer revenue recognition until cash receipt when the price pursuant to the underlying customer arrangement is not fixed and determinable and collectability is not reasonably assured. The Company is in the process of evaluating the accounting for these arrangements under the new standard. For the Company’s pharma research and development services revenue stream, the Company has not yet identified any significant implementation matters to be resolved, but the Company is in the process of evaluating their application of the new standard and cannot at this time estimate the anticipated impact to our consolidated financial statements from the application of the new standard. For both revenue streams, the Company expects that the disclosures in our notes to the consolidated financial statements related to revenue recognition will be significantly expanded under the new standard.

The Company believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon adoption effective the beginning of fiscal year 2018. The Company will continue to monitor new customer contracts throughout the remainder of 2017. Additionally, the FASB has issued, and may issue in the future, interpretive guidance which may cause our evaluation to change.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax

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consequences, classification of awards as either equity or liabilities, forfeiture rates, and classification on the stateme nt of cash flows. ASU 2016-09 became effective for fiscal years beginning after December 15, 2016 . The adoption of ASU 2016-09 resulted in an immaterial forfeiture rate adjustment, which was recorded in accumulated deficit upon adoption of the standard on January 1, 2017 .

Effective as of January 1, 2017, the Company adopted a change in accounting policy in accordance with ASU 2016-09 to account for excess tax benefits and tax deficiencies as income tax expense or benefit, treated as discrete items in the reporting period in which they occur, and to recognize previously unrecognized deferred tax assets that arose directly from (or the use of which was postponed by) tax deductions related to equity compensation in excess of compensation recognized for financial reporting. The recognition of the federal and state excess tax benefit net operating losses increased the net operating loss deferred tax asset by $14.9 million. No prior periods were restated as a result of this change in accounting policy as the Company maintains a valuation allowance against its deferred tax assets, which also increased by $14.9 million after adoption.

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities, including for operating leases (See Note 12), on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is still performing its assessment of ASU 2016-02, however expects that substantially all of its operating lease commitments will be subject to the new guidance.

In November 2016, the FASB issued ASU 2016-18,  Restricted Cash  (“ASU 2016-18”). ASU 2016-18 provides guidance on the classification of restricted cash and cash equivalents in the statement of cash flows. Although it does not provide a definition of restricted cash or restricted cash equivalents, it states that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2016-18 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

In May 2017, the FASB issued ASU 2017-09, Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-18 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted, including adoption in an interim period. The adoption of ASU 2017-09 is not expected to have a material effect on the Company’s consolidated financial statements or disclosures.

 

3.

Significant Agreements

Roche Holdings, Inc. and its affiliates

Summary of the Transaction

On January 11, 2015, the Company signed a broad strategic collaboration with Roche Holdings, Inc. and certain of its affiliates (collectively, “Roche”) to further advance the Company’s leadership position in genomic analysis and molecular information solutions in oncology. The transaction, which is a broad multi-part arrangement that includes a research & development (“R&D”) collaboration, a commercial collaboration, a U.S. medical education collaboration, and an equity investment with certain governance provisions, closed on April 7, 2015.

Under the terms of the transaction, Roche (a) made a primary investment of $250,000,000 in cash through the purchase of 5,000,000 newly issued shares of the Company’s common stock at a purchase price of $50.00 per share and (b) completed a tender offer to acquire 15,604,288 outstanding shares of the Company’s common stock at a price of $50.00 per share. Immediately following the closing of the transaction, Roche owned approximately 61.3% of the outstanding shares. As of June 30, 2017, Roche’s ownership was approximately 58.5% of the outstanding shares. Upon the closing of the transaction, the size of the Board of Directors of the Company (“Board”) was increased to nine, including three designees of Roche. In October 2016, Michael Dougherty was appointed as a member of the Board to fill the existing vacancy. In February 2017, the Board was increased to ten members when Troy Cox succeeded Michael Pellini, M.D. as the Company’s Chief Executive Officer and became a member of the Board. Effective as of Mr. Cox’s election, Michael Pellini, M.D. became Chairman of the Board.

The Company assessed the agreements related to each of the R&D collaboration, commercial collaboration, and the U.S. medical education collaboration and determined they should be treated as a single contract for accounting purposes.

Summary of the R&D Collaboration Agreement

Under the terms of the Collaboration Agreement by and among the Company, F. Hoffmann-La Roche Ltd, and Hoffmann-La Roche Inc., dated January 11, 2015, as amended (the “R&D Collaboration Agreement”), Roche could pay the Company more than $150,000,000 over a period of five years to access its molecular information platform, to reserve capacity for sample profiling, and to fund R&D programs. Amounts under the R&D Collaboration Agreement will be received as services are performed and obligations are fulfilled under each platform program. Roche will utilize the Company’s molecular information platform to standardize sample

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profiling conducted as part of its clinical trials, to enable comparability of clinical trial results for R&D purposes, and to better understand the potential for combination therapies. In addition, Roche and t he Company will jointly develop solutions related to cancer immunotherapy testing, blood-based genomic analysis using ctDNA assays, and next generation companion diagnostics, each of which represents a distinct platform within the R&D Collaboration Agreeme nt. The R&D Collaboration Agreement is governed by a Joint Management Committee (“JMC”) formed by an equal number of representatives from the Company and Roche. There are also other sub-committees for each platform that will be established to oversee the d ay to day responsibilities of the respective platform. The JMC will, among other activities, review and approve R&D plans and establish and set expectations for the other platform sub-committees. The JMC and other sub-committees, although considered delive rables under the arrangement, are immaterial in relation to the entire arrangement and therefore were not considered when allocating consideration.

On April 6, 2016, the Company and Roche entered into the First Amendment to the R&D Collaboration Agreement, which reduced certain restrictions on the Company’s activities in immuno-oncology and revised certain criteria for the achievement of a development milestone.

On June 16, 2016, the Company and Roche entered into the Second Amendment to the R&D Collaboration Agreement, which set forth the terms of an omnibus development program to provide for R&D projects that do not fall within the scope of the other programs already covered by the R&D Collaboration Agreement. For the new R&D projects contemplated during 2016 under the Second Amendment to the R&D Collaboration Agreement, Roche will reimburse the Company for certain R&D costs incurred for the agreed upon work. In addition, Roche will be required to make certain milestone payments upon the achievement of specified clinical events up to $13,000,000 in the aggregate. All milestone payments are considered substantive. The R&D reimbursements and clinical milestone payments will be recognized using a proportional performance model when earned by the Company .

On July 25, 2016, the Company and Roche entered into a Third Amendment to the R&D Collaboration Agreement, which modified certain exclusivity provisions relating to cancer immunotherapy.

On December 20, 2016, the Company and Roche entered into a Fourth Amendment to the R&D Collaboration Agreement, which further modified certain exclusivity provisions relating to cancer immunotherapy.

Molecular Information Platform Program

Under the molecular information platform program within the R&D Collaboration Agreement, the following deliverables were identified: (i) cross-licenses for access to relevant intellectual property (“IP”), (ii) reserved capacity for sample profiling, (iii) access to the Company’s molecular information database, (iv) full-time equivalent persons (“FTEs”) per year for performance of database queries and the delivery of results, and (v) sample profiling above the reserved capacity limit.

The Company determined which deliverables within the arrangement have standalone value from the other undelivered elements, and identified the following separate units of accounting: (i) reserved capacity for sample profiling, (ii) access to the Company’s molecular information database and FTEs per year for the performance of database queries and the delivery of results, and (iii) sample profiling above the reserved capacity limit. The cross-licenses grant each party access to relevant IP to perform under the contract or to exploit the deliverables. The licenses are delivered at the inception of the arrangement and relate to development and sample profiling work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the development and sample profiling activities and have little value to Roche without these other deliverables. Therefore, the licenses are combined with the other units of accounting identified under the molecular information platform program and do not have standalone value.

The Company identified allocable consideration of approximately $85,000,000 related to the molecular information platform program, which was allocated to the individual units of accounting based on the best estimate of selling price (“BESP”). Revenue related to reserved capacity for sample profiling will be recognized on a straight-line basis as the capacity is available for each individual contract year within the arrangement. The database access and FTE payments will be recognized ratably over the five-year contract life. The FTEs will perform database queries and will deliver results of the requested database queries. The value to Roche is not only the access to the database, but also the service being performed by the FTEs. Therefore, the Company concluded the FTEs should be combined with the database access as one unit of accounting. For any sample profiling provided above the reserved capacity, the Company will recognize revenue as the service is provided based on the BESP.

Immunotherapy Testing Platform Development Program

Under the immunotherapy testing platform development program within the R&D Collaboration Agreement, the following deliverables were identified: (i) cross-licenses for access to relevant IP, (ii) obligations to perform R&D services for immuno-biomarker discovery and signature identification, and (iii) obligations to provide sample profiling using immunotherapy clinical study assays.

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The Company determined which deliverables within the arrangement have standalone value from the other undelivered elements, a nd identified the following separate units of accounting: (i) obligations to perform R&D services for immuno-biomarker discovery and signature identification and (ii) obligations to provide sample profiling using immunotherapy clinical study assays. The cr oss-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the deliverables. The licenses are delivered at the inception of the arrangement and relate to R&D work performed u nder the platform. The Company does not sell the licenses separately as they are closely connected to the R&D activities and have little value to Roche without these other deliverables. Therefore, the licenses are combined with the other units of accountin g identified under the immunotherapy testing platform development program and do not have standalone value.

Under this platform, Roche will reimburse the Company for certain R&D costs incurred related to the immuno-biomarker discovery and signature identification activities, as well as costs incurred in the development of immunotherapy assays for clinical studies. In addition, Roche will be required to make certain milestone payments upon the achievement of specified clinical events under the immunotherapy testing platform development program. Clinical milestone payments up to $6,600,000 in the aggregate are triggered upon the initiation of Roche clinical trials using immunotherapy assays developed under the R&D Collaboration Agreement and are considered substantive. The R&D reimbursements and clinical milestone payments will be recognized using a proportional performance model when earned by the Company.

Circulating Tumor DNA (ctDNA) Platform Development Program

Under the ctDNA platform development program within the R&D Collaboration Agreement, the following deliverables were identified: (i) cross-licenses for access to relevant IP, (ii) obligations to perform R&D services for the development of a ctDNA clinical trial assay, including its analytical validation, and (iii) sample profiling resulting from the development of a ctDNA clinical assay.

The Company determined which deliverables within the arrangement have standalone value from the other undelivered elements, and identified the following separate units of accounting: (i) obligations to perform R&D services for the development of a ctDNA clinical trial assay and (ii) delivery of clinical sample profiling resulting from the development of a ctDNA clinical assay. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the deliverables. The licenses are delivered at the inception of the arrangement and relate to R&D work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the R&D activities and have little value to Roche without these other deliverables. Therefore, the licenses are combined with the other units of accounting identified under the ctDNA platform development program and do not have standalone value.

The Company was responsible for all R&D costs under the ctDNA platform development program. Roche was required to make certain milestone payments upon the achievement of specified events. Milestone payments up to $12,000,000 in the aggregate are triggered upon successful analytical validation of a ctDNA assay and delivery of a ctDNA clinical trial assay for use in Roche clinical trials. All milestones were considered substantive and were recognized using a proportional performance model when earned by the Company.

Companion Diagnostics (CDx) Development Program

Under the CDx development program within the R&D Collaboration Agreement, the following deliverables were identified: (i) cross-licenses for access to relevant IP and (ii) obligations to perform R&D services for the development of CDx assays for use in connection with certain Roche products.

The Company determined which deliverables within the arrangement have standalone value from the other undelivered elements, and concluded all deliverables under the CDx development program represent a single unit of accounting. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the deliverables. The licenses are delivered at the inception of the arrangement and relate to R&D work performed under the platform. The Company does not sell the licenses separately as they are closely connected to the R&D activities and have little value to Roche without these other deliverables. Therefore, the licenses are combined with the obligation to perform R&D services for the development of a CDx assay as a single unit of accounting.

Under this platform, Roche will reimburse the Company for certain costs incurred related to R&D under the CDx development program with respect to approved and investigational markers. In addition, Roche will be required to make certain milestone payments upon the achievement of specified regulatory and commercial events under the CDx development program. Regulatory milestone payments of $600,000 are triggered upon obtaining FDA approval of a premarket approval application for each CDx product developed under the arrangement and are considered substantive. The R&D reimbursements and regulatory milestone payments will be recognized using a proportional performance model when earned by the Company. Commercial milestone payments are triggered upon the performance of a specified number of CDx assays for certain commercial clinical diagnostic uses. Any commercial milestone payments received by the Company will be treated similar to royalties and recognized in their entirety when earned.

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Termination of the R&D Collaboration Agreement

The R&D Collaboration Agreement may be terminated by either the Company or Roche on a program-by-program basis, upon written notice, in the event of the other party’s uncured material breach. Roche may also terminate the entire R&D Collaboration Agreement or an individual program under the R&D Collaboration Agreement for any reason upon written notice to the Company, subject to certain exceptions. If the R&D Collaboration Agreement is terminated, license and IP rights are returned to each party and the Company must return to Roche or dispose of any unused samples delivered for profiling purposes. If Roche terminates the R&D Collaboration Agreement as a result of a breach by the Company, Roche retains the license rights granted to certain IP of the Company, and the Company shall refund to Roche any reserved capacity fees and database access fees previously received by the Company that were unused based on the passage of time up to termination for the given contract year. If the R&D Collaboration Agreement is terminated by Roche without cause, or by the Company due to a breach by Roche, the Company has a right to receive the contractual payments it would have expected to receive for each program had the agreement not been terminated.

Summary of the Ex-U.S. Commercialization Agreement

In addition to the R&D Collaboration Agreement, the Company entered into a commercial collaboration agreement with Roche designed to facilitate the delivery of the Company’s services outside the United States (“Ex-U.S.”) in partnership with Roche (the “Ex-U.S. Commercialization Agreement”). Pursuant to the Ex-U.S. Commercialization Agreement, on April 7, 2016, Roche obtained Ex-U.S. commercialization rights to the Company’s existing services and to future co-developed services. The Company remains solely responsible for commercialization of its services within the United States. The selected geographic areas where Roche exercised its commercialization rights constitute the “Roche Territory.” For those geographic areas that Roche does not select, the commercialization rights for such geographic areas revert back to the Company. The Ex-U.S. Commercialization Agreement is governed by the JMC. There is also a Joint Operational Committee (“JOC”) that has been established to oversee the activities under the Ex-U.S. Commercialization Agreement. The JMC will have the responsibilities as outlined under the R&D Collaboration Agreement. The JMC and JOC, although considered deliverables under the arrangement, are immaterial in relation to the entire arrangement and therefore were not considered when allocating consideration.

Under the Ex-U.S. Commercialization Agreement, the following deliverables were identified: (i) the right, granted by means of a license, for Roche to market and sell the Company’s services in the Roche Territory and (ii) obligations to perform sample profiling and other services relating to Company services sold by Roche in the Roche Territory. The Company concluded that the license is delivered at the inception of the arrangement. The Company does not sell the license separately as it is closely connected to the sample profiling and other services and has little value to Roche without these services being performed. Therefore, the deliverables identified will be combined as a single unit of accounting under the Ex-U.S. Commercialization Agreement and revenue will be recognized as the service is performed for each test sold by Roche.

Roche will reimburse the Company for costs incurred in performing sample profiling and other services relating to Company services sold by Roche in the Roche Territory. These reimbursements will be recognized as revenue in the period the sample profiling or other service has been completed. In addition, Roche will be required to make a one-time milestone payment of $10,000,000 when the aggregate gross margin on sales of certain of the Company’s services reaches $100,000,000 in the Roche Territory in any calendar year. Roche may also pay delay fees to the extent Roche fails to launch Company services in specific countries within a specified timeframe. This milestone payment and these fees will be treated similarly to royalties and recognized in their entirety when earned.

The Company is entitled to receive, on a quarterly basis, tiered royalty payments ranging from the mid-single digits to high-teens based on a percentage of the aggregate gross margin generated on sales of specified services in the Roche Territory during any calendar year. Royalty payments are recognized in the period when earned.

The Ex-U.S. Commercialization Agreement may be terminated by either the Company or Roche in its entirety or on a country-by-country or product-by-product basis, upon written notice, in the event of the other party’s uncured material breach. Roche may also terminate the Ex-U.S. Commercialization Agreement without cause on a product-by-product and/or country-by-country basis, upon written notice to the Company, after the initial five-year term. If the Ex-U.S. Commercialization Agreement is terminated, the license and IP rights granted by the Company to Roche terminate. In addition, if Roche terminates the Ex-U.S. Commercialization Agreement as a result of a breach by the Company, Roche may seek damages via arbitration or be eligible to receive either a one-time payment reflecting the value of the terminated services or a royalty on sales of the terminated products based on the royalty Roche would have paid the Company for the terminated products had the Ex-U.S. Commercialization Agreement not been terminated.

On May 9, 2016, the Company and Roche entered into the First Amendment to the Ex-U.S. Commercialization Agreement, which established procedures for each party to track and inform the other party concerning any adverse events, in the event such adverse events occur.

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Summary of the U.S. Education Agreement

Within the United States, the Company has entered into the U.S. Education Collaboration Agreement (the “U.S. Education Agreement”) with Genentech, Inc. (“Genentech”), an affiliate of Roche. Genentech has agreed to engage its pathology education team to provide information and medical education to health care providers regarding comprehensive genomic profiling in cancer. The Company will pay Genentech on a quarterly basis for costs incurred by Genentech in conducting the education activities based on a number of factors. The total amount of payments to be made over the course of the arrangement is immaterial and all payments will be expensed as incurred.

IVD Collaboration Agreement

On April 6, 2016, the Company entered into a Master IVD Collaboration Agreement (the “IVD Collaboration Agreement”) with F. Hoffmann-La Roche Ltd and Roche Molecular Systems, Inc. , which memorializes in a definitive agreement the terms set forth in that certain Binding Term Sheet for an In Vitro Diagnostics Collaboration, by and between F. Hoffmann-La Roche Ltd and the Company, which was entered into in connection with the Company’s strategic collaboration with Roche.

The IVD Collaboration Agreement provides terms for the Company and Roche to collaborate non-exclusively to develop and commercialize  in vitro  diagnostic versions of certain existing Company tests, including FoundationOne and FoundationOne Heme, and future Company tests, including those developed under the R&D Collaboration Agreement.

The IVD Collaboration Agreement expires on April 7, 2020, unless earlier terminated as provided therein. Roche also has the right, in its sole discretion, to extend the term of the IVD Collaboration Agreement for additional two year periods of time during any period of time in which Roche continues to hold at least 50.1% of the Company’s capital stock. Either party may terminate the IVD Collaboration Agreement for an uncured breach of the agreement, or for insolvency or bankruptcy.

Biopharmaceutical Partner

In July 2012, the Company entered into a Master Services Agreement (“Services Agreement”) with a biopharmaceutical partner (“Partner”) to perform sample profiling at the Partner’s request. The Services Agreement established the legal and administrative framework for the partnership between the entities. The Services Agreement also included a right for the Partner to initiate an exclusive negotiation with the Company for the development of a Companion Diagnostic (“CDx”). In March 2014, the Company and Partner expanded the scope of work by executing a Companion Diagnostic Agreement (“Amended Agreement”), thereby amending the Services Agreement to include the joint development and regulatory approval for a CDx. The Amended Agreement defined the term of the arrangement as the earlier of five years or receipt of certain regulatory approvals of a CDx. The Company concluded that the amendment to the original Services Agreement represented a material modification to the arrangement pursuant to ASC 605 as the Amended Agreement increased total consideration by a significant amount. Additionally, the deliverables under the Amended Agreement changed significantly. At the date of the modification, there was no deferred revenue balance on the consolidated balance sheet related to the original Services Agreement with this Partner.

The Company identified seven deliverables under the Amended Agreement: (i) cross-licenses for access to relevant IP, (ii) obligations to continue to perform sample profiling pursuant to the original Services Agreement, (iii) obligations to perform specific R&D activities for the development of a CDx assay for use in connection with the Partner’s product, (iv) obligations to assist in obtaining regulatory approval of the Partner’s product at its request, (v) participation on a JSC to manage the overall development of the CDx assay, (vi) obligations to perform analytical validation of the CDx assay, and (vii) obligations to make the CDx assay commercially available, following any required regulatory approval. The obligation to make the CDx assay commercially available is dependent on successful development and regulatory approval. As such, the Company determined that this was a contingent deliverable and therefore arrangement consideration was not allocated to this deliverable.

The Company then determined the following deliverables were separate units of accounting: (i) obligations to continue to perform sample profiling pursuant to the original Services Agreement, (ii) obligations to perform specific R&D activities for the development of a CDx assay for use in connection with the Partner’s product and to provide assistance in obtaining regulatory approval of the Partner’s product at its request, (iii) obligations to perform analytical validation of the CDx assay, and (iv) obligations to make the CDx assay commercially available, following any regulatory approval obtained. The cross-licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit the deliverables. The licenses are delivered at the inception of the arrangement and primarily relate to the R&D development activities performed under the Amended Agreement. The Company does not sell the licenses separately as they are closely connected to the R&D development activities and have little value to the Partner without the performance of such activities. The JSC obligations do not have standalone value and are also closely connected to the R&D development activities under the Amended Agreement. The JSC obligations, although considered deliverables under the arrangement, are immaterial in relation to the entire arrangement. Therefore, the licenses and JSC obligations were combined with the R&D development activities, or unit (ii) identified above.

16


 

Under the Amended Agreement, the Partner pays a fixed fee for each sample to be profiled; will reimburse the Company for a portion of costs incurred in performing analytical validation of the CDx assay; and will be required to m ake certain substantive milestone and other payments upon the achievement of specified regulatory and clinical events tied to the development and commercialization of the CDx. The fixed or determinable consideration under the Amended Agreement was allocate d to the units of accounting based on the BESP. Consideration allocated to sample profiling is recognized as results of sample profiling are delivered, which is when the recognition criteria in ASC 605-25 has been satisfied. Consideration allocated to the R&D development activities and the analytical validation work is recognized using the proportional performance method. As of December 31, 2016 , the CDx assay had achieved regulatory approval and the regulatory and development obligations under the Amende d Agreement had been completed.

Under the Amended Agreement, the Company recognized revenue of $830,000 and $1,300,000 for the three and six months ended June 30, 2017, respectively, and $4,040,000 and $6,864,000 for the three and six months ended June 30, 2016, respectively. Revenue for the three and six months ended June 30, 2017 primarily related to sample profiling and royalties earned on the Partner’s commercial product sales. Revenue for the three and six months ended June 30, 2016 primarily related to sample profiling and milestone payments received upon the achievement of specified regulatory and clinical events tied to the R&D development activities of the CDx.

 

4.

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturity from the date of purchase of three months or less to be cash equivalents. Cash and cash equivalents include bank demand deposits and money market funds that invest primarily in U.S. government-backed securities and treasuries. Cash equivalents are carried at cost, which approximates their fair value.

 

5.

Marketable Securities

The following table summarizes the available-for-sale securities held at June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

June 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

$

35,000

 

 

$

 

 

$

(15

)

 

$

34,985

 

Total

 

$

35,000

 

 

$

 

 

$

(15

)

 

$

34,985

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

$

79,411

 

 

$

 

 

$

(9

)

 

$

79,402

 

Total

 

$

79,411

 

 

$

 

 

$

(9

)

 

$

79,402

 

 

The estimated market value of marketable securities by maturity date is as follows (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Due in one year or less

 

$

34,985

 

 

$

79,402

 

Due after one year through two years

 

 

 

 

 

 

Total

 

$

34,985

 

 

$

79,402

 

 

The amortized cost of available-for-sale securities is adjusted for amortization of premiums and accretion of discounts to maturity. There were no realized gains or losses recognized on the sale or maturity of available-for-sale securities during the six months ended June 30, 2017 and 2016, respectively, and as a result, the Company did not reclassify any amounts out of accumulated other comprehensive loss for the same period.

 

6.

Restricted Cash

Restricted cash consists of deposits securing collateral letters of credit issued in connection with the Company’s operating leases. As of each of June 30, 2017 and December 31, 2016, the Company had restricted cash of $2,305,000 and $1,395,000, respectively.

 

17


 

7.

Accounts Receivable

The Company’s accounts receivable consist primarily of amounts due from biopharmaceutical customers, and from certain hospitals, cancer centers and other institutions with whom it has negotiated price per test (direct bill) relationships for tests performed using its molecular information platform. There are no accounts receivable associated with amounts that are billed to commercial third-party payors or directly to patients, because this revenue is recognized on a cash basis.

Two customer account balances consisting of $5,535,000 and $4,082,000 were greater than 10% of the total accounts receivable balance, including receivables due from Roche, representing 31% and 23%, respectively, of total accounts receivable at June 30, 2017. Three customer account balances consisting of $2,079,000, $2,007,000 and $1,319,000 were greater than 10% of the total accounts receivable balance, including receivables due from Roche, representing 20%, 20% and 13%, respectively, of total accounts receivable at December 31, 2016.

 

8.

Inventory

Inventories are stated at the lower of cost or market on a first-in, first-out basis and are comprised of the following (in thousands):

 

 

 

June 30,

2017

 

 

December 31, 2016

 

Raw materials

 

$

6,256

 

 

$

8,293

 

Work-in-process

 

 

2,666

 

 

 

2,145

 

 

 

$

8,922

 

 

$

10,438

 

 

9.

Property and Equipment

Property and equipment and related accumulated depreciation and amortization are as follows (in thousands):

 

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Lab equipment

 

$

37,591

 

 

$

34,727

 

Computer equipment

 

 

11,534

 

 

 

11,534

 

Software

 

 

7,642

 

 

 

5,429

 

Furniture and office equipment

 

 

3,854

 

 

 

3,638

 

Leasehold improvements

 

 

25,644

 

 

 

24,730

 

Construction in progress

 

 

2,917

 

 

 

4,512

 

 

 

 

89,182

 

 

 

84,570

 

Less: accumulated depreciation and amortization

 

 

(50,469

)

 

 

(43,084

)

 

 

$

38,713

 

 

$

41,486

 

 

Depreciation and amortization expense for the three and six months ended June 30, 2017 was $4,375,000 and $8,841,000, respectively, and for the three and six months ended June 30, 2016 was $4,167,000 and $7,236,000, respectively. The Company classifies capitalized internal use software in lab equipment, computer equipment and software based on its intended use.

 

10.

Accrued Expenses

Accrued expenses and other current liabilities consisted of the following (in thousands):

 

 

 

June 30, 2017

 

 

December 31, 2016

 

Payroll and employee-related costs

 

$

14,140

 

 

$

13,044

 

Professional services

 

 

3,966

 

 

 

2,221

 

Property and equipment purchases

 

 

423

 

 

 

115

 

Other

 

 

6,740

 

 

 

5,198

 

 

 

$

25,269

 

 

$

20,578

 

 

 

18


 

11.

Debt

On July 31, 2017, the Company entered into an Amendment Letter Agreement (the “Amendment”) with Roche Finance Ltd (“Roche Finance”), amending the Credit Facility Agreement, dated August 2, 2016, between the Company and Roche (the “Existing Credit Facility” and, as amended, the “Roche Credit Facility”). The effectiveness of the Amendment is subject to certain customary closing conditions.

The Amendment amends certain provisions of the Existing Credit Facility to provide for an extension of the period during which the Company may borrow funds from three to four years, ending August 2, 2020 (the “Draw Period”), and an increase in the available funds from $100 million to $200 million, of which $80 million is available immediately, $70 million will be available upon the achievement of certain milestones, and $50 million will be available upon the achievement of certain additional milestones. Pursuant to the Amendment, loans made under the Roche Credit Facility will bear interest at 6.5% per annum, as compared to 5% under the Existing Credit Facility. The Company shall pay Roche quarterly during the Draw Period and for six months thereafter accrued interest on the outstanding principal of the loans. Beginning six months after the Draw Period and for five years thereafter, the Company shall pay Roche quarterly equal payments of principal, with accrued interest, in arrears until maturity of the Roche Credit Facility on February 2, 2026 (the “Final Maturity Date”). The Company shall also pay Roche a quarterly commitment fee of 0.4% per annum on the available commitment until the end of the Draw Period, as compared to 0.3% under the Existing Credit Facility. The other provisions of the Existing Credit Facility remain substantially unchanged. The proceeds from the Roche Credit Facility are intended to be used for research and development and commercialization, corporate development, and working capital management.    

The Roche Credit Facility is secured by a lien on all of the Company’s tangible and intangible personal property, including, but not limited to, shares of its subsidiaries (65% of the equity interests in the case of foreign subsidiaries), intellectual property, insurance, trade and intercompany receivables, inventory and equipment, and contract rights, and all proceeds and services thereof (other than certain excluded assets).

The Roche Credit Facility contains certain affirmative covenants, including, among others, obligations for the Company to provide monthly and annual financial statements, to meet specified minimum cash requirements, to provide tax gross-up and indemnification protection, and to comply with laws. The Roche Credit Facility also contains certain negative covenants, including, among others, restrictions on the Company’s ability to dispose of certain assets, to acquire another company or business, to encumber or permit liens on certain assets, to incur additional indebtedness (subject to customary exceptions), and to pay dividends on the Company’s common stock. The Company was in compliance with its covenants under the Roche Credit Facility as of June 30, 2017.

The Roche Credit Facility contains customary events of default, including, among others, defaults due to non-payment, bankruptcy, failure to comply with covenants, breaches of a representation and warranty, change of control, or material adverse effect and judgment defaults. Upon the occurrence and continuation of an event of default following applicable notice and cure periods, amounts due under the Roche Credit Facility may be accelerated. The Company had no events of default under the Roche Credit Facility as of June 30, 2017.

As of June 30, 2017, there were no outstanding balances under the Roche Credit Facility as the Company had not yet drawn down any funds on the available balance.

 

12.

Net Loss per Common Share

Basic net loss per share is calculated by dividing net loss applicable to common stockholders by the weighted-average shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting the weighted-average shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the treasury-stock method and the if-converted method. For purposes of the diluted net loss per share calculation, stock options, and unvested restricted stock are considered to be common stock equivalents, but are excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive. Therefore, basic and diluted net loss per share applicable to common stockholders was the same for all periods presented.

The following potential common stock equivalents were not included in the calculation of diluted net loss per common share because the inclusion thereof would be antidilutive.

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Outstanding stock options

 

 

1,012,833

 

 

 

1,384,000

 

 

 

1,012,833

 

 

 

1,384,000

 

Unvested restricted stock

 

 

1,524,058

 

 

 

1,546,882

 

 

 

1,524,058

 

 

 

1,546,882

 

Total

 

 

2,536,891

 

 

 

2,930,882

 

 

 

2,536,891

 

 

 

2,930,882

 

 

 

19


 

13.

Fair Value Measurements

The Company is required to disclose information on all assets and liabilities reported at fair value that enables an assessment of the inputs used in determining the reported fair values. FASB ASC Topic 820, Fair Value Measurements and Disclosures establishes a hierarchy of inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of a company. Unobservable inputs are inputs that reflect a company’s assumptions about the inputs that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances. The fair value hierarchy applies only to the valuation inputs used in determining the reported fair value of the investments and is not a measure of the investment credit quality. The hierarchy defines three levels of valuation inputs:

 

Level 1 inputs

Quoted prices in active markets for identical assets or liabilities

 

 

Level 2 inputs

Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly

 

 

Level 3 inputs

Unobservable inputs that reflect a company’s own assumptions about the assumptions market participants would use in pricing the asset or liability

The fair value hierarchy prioritizes valuation inputs based on the observable nature of those inputs. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.

The Company’s financial instruments consist of cash and cash equivalents, marketable securities, restricted cash, accounts receivable, accounts payable, and accrued liabilities. The carrying amount of cash and cash equivalents, restricted cash, accounts receivable, accounts payable, and accrued liabilities approximate their fair values because of the short-term nature of the instruments.

The following tables present information about the Company’s assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

 

 

 

Fair Value Measurement at June 30, 2017

 

 

 

Quoted Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

15,895

 

 

$

 

 

$

 

 

$

15,895

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

 

29,990

 

 

 

4,995

 

 

 

 

 

 

34,985

 

Total assets

 

$

45,885

 

 

$

4,995

 

 

$

 

 

$

50,880

 

 

 

 

Fair Value Measurement at December 31, 2016

 

 

 

Quoted Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

56,147

 

 

$

 

 

$

 

 

$

56,147

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

 

71,999

 

 

 

7,403

 

 

 

 

 

$

79,402

 

Total

 

$

128,146

 

 

$

7,403

 

 

$

 

 

$

135,549

 

 

The Company measures eligible assets and liabilities at fair value, with changes in value recognized in the statement of operations and comprehensive loss. Fair value treatment may be elected either upon initial recognition of an eligible asset or liability or, for an existing asset or liability, if an event triggers a new basis of accounting. Items measured at fair value on a recurring basis during the three and six months ended June 30, 2017 include marketable securities. The Company did not elect to remeasure any other

20


 

existing financial assets or liabilities, and did not elect the fair value option for any other financial assets and liabilities transacted during th e three and six months ended June 30, 2017 and 2016 .

The fair values of the Company’s marketable securities are determined through market and observable sources and have been classified as Level 1 and Level 2. These assets have been initially valued at the transaction price and subsequently valued utilizing third-party pricing services. The pricing services use many inputs to determine value, including reportable trades, benchmark yields, credit spreads, broker/dealer quotes, and other industry and economic events. The Company validates the prices provided by third-party pricing services by reviewing their pricing methods and obtaining market values from other pricing sources. After completing these validation procedures, the Company did not adjust or override any fair value measurements provided by third-party pricing services as of June 30, 2017.

 

 

14.

Stockholders’ Equity

The Company has reserved for future issuance the following number of shares of common stock:

 

 

 

June 30,

2017

 

 

December 31, 2016

 

Unvested restricted stock

 

 

1,524,058

 

 

 

1,297,054

 

Common stock options

 

 

1,012,833

 

 

 

1,267,329

 

Shares available for issuance under the 2013 Stock Option and

   Incentive Plan

 

 

3,170,156

 

 

 

2,398,031

 

Shares available for issuance under the 2013 Employee Stock

   Purchase Plan

 

 

788,503

 

 

 

788,503

 

 

 

 

6,495,550

 

 

 

5,750,917

 

 

2010 and 2013 Stock Incentive Plans

In 2010, the Company adopted the Foundation Medicine, Inc. 2010 Stock Incentive Plan (the “2010 Stock Plan”) under which it granted restricted stock, incentive stock options (“ISOs”) and non-statutory stock options to eligible employees, officers, directors and consultants to purchase up to 1,162,500 shares of common stock. In the year ended December 31, 2013, the Company amended the 2010 Stock Plan to increase the number of shares of common stock available for issuance to 4,232,500.

In 2013, in conjunction with its initial public offering, the Company adopted the Foundation Medicine, Inc. 2013 Stock Option and Incentive Plan (the “2013 Stock Plan”) under which it may grant restricted and unrestricted stock, restricted stock units, ISOs, non-statutory stock options, stock appreciation rights, cash-based awards, performance share awards and dividend equivalent rights to eligible employees, officers, directors and consultants to purchase up to 1,355,171 shares of common stock. In connection with the establishment of the 2013 Stock Plan, the Company terminated the 2010 Stock Plan and the 512,568 shares which remained available for grant under the 2010 Stock Plan were included in the number of shares authorized under the 2013 Stock Plan. Shares forfeited or repurchased from the 2010 Stock Plan are returned to the 2013 Stock Plan for future issuance. On January 1, 2017 and 2016, the number of shares reserved and available for issuance under the 2013 Stock Plan increased by 1,403,616 and   1,379,782 shares of common stock, respectively, pursuant to a provision in the 2013 Stock Plan that provides that the number of shares reserved and available for issuance will automatically increase each January 1, beginning on January 1, 2014, by 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number as determined by the compensation committee of the Board.  

The terms of stock award agreements, including vesting requirements, are determined by the Board, or permissible designee thereof, subject to the provisions of the 2010 Stock Plan and the 2013 Stock Plan. Options, restricted stock, and restricted stock units granted by the Company typically vest over a four-year period. The options are exercisable from the date of grant for a period of 10 years. The exercise price for stock options granted is equal to the closing price of the Company’s common stock on the applicable date of grant.

Restricted Stock

For restricted stock, including restricted stock units, granted to employees, the intrinsic value on the date of grant is recognized as stock-based compensation expense ratably over the period in which the restrictions lapse. For restricted stock granted to non-employees the intrinsic value is remeasured at each vesting date and at the end of the reporting period. The following table shows a roll forward of restricted stock activity pursuant to the 2010 Stock Plan and the 2013 Stock Plan:

21


 

 

 

 

Number of

Shares

 

Unvested at December 31, 2016

 

 

1,297,054

 

Granted

 

 

719,896

 

Vested

 

 

(417,977

)

Cancelled

 

 

(74,915

)

Unvested at June 30, 2017

 

 

1,524,058

 

Total stock-based compensation expense recognized for restricted stock awards was $6,071,000 and $11,710,000 for the three and six months ended June 30, 2017, respectively, and $3,760,000 and $5,873,000 for the three and six months ended June 30, 2016, respectively.

Stock Options

A summary of stock option activity under the 2010 Stock Plan and the 2013 Stock Plan for the six months ended June 30, 2017 is as follows:

 

 

 

Number of

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term

(In Years)

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Outstanding as of December 31, 2016

 

 

1,267,329

 

 

$

16.22

 

 

 

6.6

 

 

$

8,355

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(239,836

)

 

 

9.12

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(14,660

)

 

 

24.34

 

 

 

 

 

 

 

 

 

Outstanding as of June 30, 2017

 

 

1,012,833

 

 

$

17.79

 

 

 

6.2

 

 

$

22,795

 

Exercisable as of June 30, 2017

 

 

840,484

 

 

$

15.98

 

 

 

6.1

 

 

$

20,294

 

The Company recorded total stock-based compensation expense for stock options granted to employees, directors and non-employees from the 2010 Stock Plan and the 2013 Stock Plan of $655,000 and $1,415,000 for the three and six months ended June 30, 2017, respectively, and $871,000 and $1,797,000 for the three and six months ended June 30, 2016, respectively.

The Company recorded stock-based compensation expense in the statements of operations and comprehensive loss as follows (in thousands):

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Cost of revenue

 

$

563

 

 

$

521

 

 

$

1,658

 

 

$

820

 

Selling and marketing

 

 

1,297

 

 

 

860

 

 

 

2,517