Foundation Medicine, Inc.
Foundation Medicine, Inc. (Form: 10-Q, Received: 05/09/2017 16:16:33)

 

 

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 March 31, 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 May 5, 2017, the registrant had 35,642,290 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 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 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’ use of molecular information and targeted oncology therapeutics and the market size for molecular information products;

 

physicians’ need for molecular information products and any perceived advantage of our products 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 products on a commercial scale or the sustainability of our competitive advantages;

 

our ability to generate revenue from sales of products 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 products, and expand existing or develop new relationships with biopharmaceutical partners;

 

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

 

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

 

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;

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

 

our plans to seek approval from the FDA or other regulatory authorities for certain of our products or future products, 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 products 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.

 

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FOUNDATION MEDICINE, INC.

REPORT ON FORM 10-Q

For the Quarterly Period Ended March 31, 2017

 

 

 

 

 

PAGE

PART I. FINANCIAL INFORMATION

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

a)

 

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

 

5

b)

 

Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2017 and 2016

 

6

c)

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 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

 

22

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

32

Item 4.

 

Controls and Procedures

 

32

PART II. OTHER INFORMATION

 

33

Item 1.

 

Legal Proceedings

 

33

Item 1A.

 

Risk Factors

 

33

Item 6.

 

Exhibits

 

38

SIGNATURES

 

39

 

 

4


 

FOUNDATION MEDICINE, INC.

Condensed Consolidated Balance Sheets

(unaudited)

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

49,075

 

 

$

63,617

 

Marketable securities

 

 

49,976

 

 

 

79,402

 

Accounts receivable

 

 

5,858

 

 

 

8,206

 

Receivable due from Roche

 

 

4,870

 

 

 

2,007

 

Inventory

 

 

10,349

 

 

 

10,438

 

Prepaid expenses and other current assets

 

 

5,338

 

 

 

5,251

 

Total current assets

 

 

125,466

 

 

 

168,921

 

Property and equipment, net

 

 

39,553

 

 

 

41,486

 

Restricted cash

 

 

1,395

 

 

 

1,395

 

Other assets

 

 

2,140

 

 

 

2,233

 

Total assets

 

$

168,554

 

 

$

214,035

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

10,427

 

 

$

11,898

 

Accrued expenses and other current liabilities

 

 

19,240

 

 

 

20,578

 

Deferred revenue

 

 

1,985

 

 

 

2,104

 

Roche related-party deferred revenue

 

 

293

 

 

 

3,747

 

Current portion of deferred rent

 

 

2,418

 

 

 

2,324

 

Total current liabilities

 

 

34,363

 

 

 

40,651

 

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

 

 

7,874

 

 

 

8,538

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock, $0.0001 par value, 150,000,000 shares authorized; 35,575,570 and

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

   2016, respectively

 

 

4

 

 

 

4

 

Additional paid-in capital

 

 

517,698

 

 

 

509,664

 

Accumulated other comprehensive loss

 

 

(49

)

 

 

(14

)

Accumulated deficit

 

 

(391,336

)

 

 

(344,808

)

Total stockholders’ equity

 

 

126,317

 

 

 

164,846

 

Total liabilities and stockholders’ equity

 

$

168,554

 

 

$

214,035

 

 

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

 

 

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FOUNDATION MEDICINE, INC.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(unaudited)

(In thousands, except share and per share data)

 

 

 

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Revenue

 

$

16,681

 

 

$

17,423

 

Related-party revenue from Roche

 

 

9,647

 

 

 

12,955

 

Total revenue

 

 

26,328

 

 

 

30,378

 

Costs and expenses:

 

 

 

 

 

 

 

 

Cost of revenue

 

 

17,117

 

 

 

10,028

 

Cost of Roche related-party revenue

 

 

900

 

 

 

1,362

 

Selling and marketing

 

 

16,436

 

 

 

13,793

 

General and administrative

 

 

15,277

 

 

 

9,224

 

Research and development

 

 

23,285

 

 

 

13,456

 

Total costs and expenses

 

 

73,015

 

 

 

47,863

 

Loss from operations

 

 

(46,687

)

 

 

(17,485

)

Interest income, net

 

 

90

 

 

 

178

 

Other income

 

 

144

 

 

 

 

Net loss

 

$

(46,453

)

 

$

(17,307

)

Other comprehensive (loss)/gain income:

 

 

 

 

 

 

 

 

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

 

 

(18

)

 

 

164

 

Foreign currency translation adjustment

 

 

(17

)

 

 

 

Total other comprehensive (loss) income

 

 

(35

)

 

 

164

 

Comprehensive loss

 

$

(46,488

)

 

$

(17,143

)

Net loss per common share, basic and diluted

 

$

(1.31

)

 

$

(0.50

)

Weighted-average common shares outstanding, basic and diluted

 

 

35,426,296

 

 

 

34,537,007

 

 

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

 

 

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FOUNDATION MEDICINE, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited)

(In thousands)

 

 

 

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(46,453

)

 

$

(17,307

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

4,466

 

 

 

3,069

 

Stock-based compensation expense

 

 

6,399

 

 

 

3,039

 

Amortization of premiums and discounts on marketable securities

 

 

14

 

 

 

78

 

Gain on disposal of long-lived assets

 

 

(139

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

2,348

 

 

 

(839

)

Receivable from Roche

 

 

(2,863

)

 

 

(1,965

)

Inventory

 

 

178

 

 

 

1,249

 

Prepaid expenses and other current assets

 

 

(30

)

 

 

1,429

 

Other assets

 

 

82

 

 

 

23

 

Accounts payable

 

 

278

 

 

 

2,582

 

Accrued expenses and other current liabilities

 

 

(1,780

)

 

 

1,664

 

Deferred rent and other non-current liabilities

 

 

(571

)

 

 

(563

)

Deferred revenue

 

 

(120

)

 

 

1,080

 

Roche related-party deferred revenue

 

 

(3,453

)

 

 

(3,512

)

Net cash used in operating activities

 

 

(41,644

)

 

 

(9,973

)

Investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,863

)

 

 

(7,566

)

Purchases of marketable securities and other investments

 

 

(4,996

)

 

 

(31,809

)

Proceeds from maturities of marketable securities

 

 

34,390

 

 

 

17,500

 

Net cash provided by (used in) investing activities

 

 

25,531

 

 

 

(21,875

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

1,571

 

 

 

143

 

Net cash provided by financing activities

 

 

1,571

 

 

 

143

 

Net decrease in cash and cash equivalents

 

 

(14,542

)

 

 

(31,705

)

Cash and cash equivalents at beginning of period

 

 

63,617

 

 

 

117,763

 

Cash and cash equivalents at end of period

 

$

49,075

 

 

$

86,058

 

Supplemental disclosure of non-cash investing and financing activities

 

 

 

 

 

 

 

 

Cash paid for interest

 

 

75

 

 

 

 

Acquisition of property and equipment included in accounts payable and accrued

   expenses

 

$

696

 

 

$

2,097

 

 

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

 

 

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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 products that are enabled by its molecular information platform to physicians and biopharmaceutical companies.

The Company’s molecular information products 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 products 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.

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 and the International Accounting Standards Board jointly 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

8


 

changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB de cided 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 earli er 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 Recogn ition ("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 throu ghout 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.

The Company intends to adopt ASU 2014-09 on January 1, 2018, and is currently evaluating the method of adoption and the potential impact that ASU 2014-09 may have on its financial position, results of operations, and disclosures. The ASUs may be adopted using either the full retrospective method, in which case the standard would be applied to each prior reporting period presented, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized to opening retained earnings at the date of initial application. The Company has a project team in place to analyze the impact of ASU 2014-09 and the related ASUs across all revenue streams. This includes performing a diagnostic review of current accounting policies to identify potential differences that would result from applying the requirements under the new standard, as well as reviewing a sample of existing baseline contracts to validate the diagnostic findings. Upon completion of this first project phase which is expected in the second quarter of 2017, the Company will begin drafting its accounting policies, including 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 believes it is following an appropriate timeline to allow for proper recognition, presentation, and disclosure upon adoption effective the beginning of fiscal year 2018. Additionally, the FASB has issued, and may issue in the future, interpretive guidance which may cause the Company’s 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 consequences, classification of awards as either equity or liabilities, forfeiture rates, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. 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 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.

 

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 March 31, 2017, Roche’s

9


 

ownership was approximately 59 .1% 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 vaca ncy. 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 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 the 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 Agreement. 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 day 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 deliverables 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

10


 

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 data base 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 data base 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.

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 immuno-biomarker discovery and signature identification and (ii) obligations to provide sample profiling using immunotherapy clinical study assays. 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 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-

11


 

licenses grant each party access to relevant IP of the other party to perform such party’s obligations under the contract and to exploit t he 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 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.

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 products and 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 products and services and to future co-developed products and services. The Company remains solely responsible for commercialization of its products and 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 products in the Roche Territory and (ii) obligations to perform sample profiling and other services relating to Company products and 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 product sold by Roche.

Roche will reimburse the Company for costs incurred in performing sample profiling and other services relating to Company products 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 products 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 products 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 products in the Roche Territory during any calendar year. Royalty payments are recognized in the period when earned.

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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 lic ense 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-tim e payment reflecting the value of the terminated products 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.

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 products, including FoundationOne and FoundationOne Heme, and future Company products, 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.

13


 

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 A greement, (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) obli gations 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 perfor m 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 t o 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.

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 make 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 allocated to the units of accounting based on the BESP. Consideration allocated to sample profiling is recognized as samples 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 Amended Agreement had been completed.

Under the Amended Agreement, the Company recognized revenue of $306,000 and $2,824,000 for the three months ended March 31, 2017 and 2016, respectively. Revenue for the three months ended March 31, 2017, primarily related to sample profiling and royalties earned on commercial product sales. Revenue for the three months ended March 31, 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 March 31, 2017 and December 31, 2016 (in thousands):

 

 

 

Amortized

Cost

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Fair Value

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Description:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

$

50,003

 

 

$

 

 

$

(27

)

 

$

49,976

 

Total

 

$

50,003

 

 

$

 

 

$

(27

)

 

$

49,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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):

 

 

 

March 31,

2017

 

 

December 31, 2016

 

Due in one year or less

 

$

49,976

 

 

$

79,402

 

Due after one year through two years

 

 

 

 

 

 

Total

 

$

49,976

 

 

$

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 three

14


 

months ended March 31, 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 March 31, 2017 and December 31, 2016, the Company had restricted cash of $1,395,000.

 

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 $4,870,000 and $1,443,000 were greater than 10% of the total accounts receivable balance, including receivables due from Roche, representing 45% and 13%, respectively, of total accounts receivable at March 31, 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):

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Raw materials

 

$

6,608

 

 

$

8,293

 

Work-in-process

 

 

3,741

 

 

 

2,145

 

 

 

$

10,349

 

 

$

10,438

 

 

9.

Property and Equipment

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

 

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Lab equipment

 

$

33,750

 

 

$

34,727

 

Computer equipment

 

 

11,534

 

 

 

11,534

 

Software

 

 

6,177

 

 

 

5,429

 

Furniture and office equipment

 

 

3,638

 

 

 

3,638

 

Leasehold improvements

 

 

25,541

 

 

 

24,730

 

Construction in progress

 

 

5,455

 

 

 

4,512

 

 

 

 

86,095

 

 

 

84,570

 

Less: accumulated depreciation and amortization

 

 

(46,542

)

 

 

(43,084

)

 

 

$

39,553

 

 

$

41,486

 

 

Depreciation and amortization expense for the three months ended March 31, 2017 and 2016   was $4,466,000 and $3,069,000, respectively. The Company classifies capitalized internal use software in lab equipment, computer equipment and software based on its intended use.

 

15


 

10.

Accrued Expenses

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

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Payroll and employee-related costs

 

$

8,833

 

 

$

13,044

 

Professional services

 

 

3,368

 

 

 

2,221

 

Property and equipment purchases

 

 

198

 

 

 

115

 

Other

 

 

6,841

 

 

 

5,198

 

 

 

$

19,240

 

 

$

20,578

 

 

 

11.

Debt

On August 2, 2016, the Company entered into a credit facility agreement (the “Roche Credit Facility”) with Roche Finance Ltd (“Roche Finance”). Pursuant to the Roche Credit Facility, during the three-year period ending August 2, 2019 (the “Draw Period”), the Company may borrow up to $100,000,000, of which $80,000,000 is available to the Company immediately, subject to certain initial conditions being satisfied, and $20,000,000 will be available upon the achievement of certain milestones. During the Draw Period, the Company shall pay Roche Finance a quarterly commitment fee of 0.3% on the available balance of the Roche Credit Facility. The proceeds from the Roche Credit Facility are intended to be used for product development and commercialization, corporate development, and working capital management. Loans made under the Roche Credit Facility bear interest at 5% per annum. The Company shall pay Roche Finance, quarterly during the Draw Period, accrued interest on the outstanding principal of the loans. Following the Draw Period, and for five years thereafter, the Company shall pay Roche Finance quarterly equal payments of principal, with accrued interest, until maturity of the Roche Credit Facility on August 2, 2024. The Company may prepay all or a portion of the Roche Credit Facility, subject to certain conditions and prepayment fees, as specified in the Roche Credit Facility.

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 products 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 March 31, 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 March 31, 2017.

As of March 31, 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.

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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

 

 

 

March 31,

 

 

 

2017

 

 

2016

 

Outstanding stock options

 

 

1,059,795

 

 

 

1,473,251

 

Unvested restricted stock

 

 

1,468,022

 

 

 

1,038,298

 

Total

 

 

2,527,817

 

 

 

2,511,549

 

 

 

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 March 31, 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 March 31, 2017

 

 

 

Quoted Prices

in Active

Markets

(Level 1)

 

 

Significant

Other

Observable

Inputs

(Level 2)

 

 

Significant

Unobservable

Inputs

(Level 3)

 

 

Total

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

35,834

 

 

$

 

 

$

 

 

$

35,834

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agency securities and treasuries

 

 

44,985

 

 

 

4,991

 

 

 

 

 

 

49,976

 

Total assets

 

$

80,819

 

 

$

4,991

 

 

$

 

 

$

85,810

 

17


 

 

 

 

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 months ended March 31, 2017 include marketable securities. The Company did not elect to remeasure any other existing financial assets or liabilities, and did not elect the fair value option for any other financial assets and liabilities transacted during the three months ended March 31, 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 March 31, 2017.

 

 

14.

Stockholders’ Equity

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

 

 

 

March 31, 2017

 

 

December 31, 2016

 

Unvested restricted stock

 

 

1,468,022

 

 

 

1,297,054

 

Common stock options

 

 

1,059,795

 

 

 

1,267,329

 

Shares available for issuance under the 2013 Stock Option and

   Incentive Plan

 

 

3,542,474

 

 

 

2,398,031

 

Shares available for issuance under the 2013 Employee Stock

   Purchase Plan

 

 

788,503

 

 

 

788,503

 

 

 

 

6,858,794

 

 

 

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

18


 

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:

 

 

 

Number of

Shares

 

Unvested at December 31, 2016

 

 

1,297,054

 

Granted

 

 

332,196

 

Vested

 

 

(95,968

)

Cancelled

 

 

(65,260

)

Unvested at March 31, 2017

 

 

1,468,022

 

Total stock-based compensation expense recognized for restricted stock awards was $5,639,000 and $2,113,000, for the three months ended March 31, 2017 and 2016, respectively.

Stock Options

A summary of stock option activity under the 2010 Stock Plan and the 2013 Stock Plan for the three months ended March 31, 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

 

 

(198,601

)

 

 

7.91

 

 

 

 

 

 

 

 

 

Cancelled

 

 

(8,933

)

 

 

18.40

 

 

 

 

 

 

 

 

 

Outstanding as of March 31, 2017

 

 

1,059,795

 

 

$

17.76

 

 

 

6.6

 

 

$

16,483

 

Exercisable as of March 31, 2017

 

 

833,893

 

 

$

15.53

 

 

 

6.4

 

 

$

14,520

 

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 $760,000 and $926,000 for the three months ended March 31, 2017 and 2016, respectively.

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

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Cost of revenue

 

$

1,095

 

 

$

299

 

Selling and marketing

 

 

1,220

 

 

 

796

 

General and administrative

 

 

2,778

 

 

 

1,306

 

Research and development

 

 

1,306

 

 

 

638

 

Total

 

$

6,399

 

 

$

3,039

 

 

19


 

As of March 31, 2017 , unrecognized compensation cost of approximately $ 25,542 ,000 related to non-vested stock options and restricted stock awards is expected to be recognized over weighted-average periods of 2.0 years.

There were no stock options granted during the three months ended March 31, 2017. The weighted-average assumptions used to estimate the fair value of stock options using the Black-Scholes option pricing model for the three months ended March 31, 2016 were as follows:

 

 

 

Three Months Ended

 

 

 

March 31, 2016

 

Expected volatility

 

 

59.2

%

Risk-free interest rate

 

 

1.9

%

Expected option term (in years)

 

 

6.25

 

Expected dividend yield

 

 

0.0

%

 

 

15.

Commitments and Contingencies

150 Second Street

In 2013, the Company signed a lease (the “Headquarters Lease”) for approximately 61,591 square feet of office and laboratory space (the “Existing Premises”) at 150 Second Street in Cambridge, Massachusetts (the “Headquarters Building”).  The Headquarters Lease commenced in September 2013, and initially had an eight year expected term. The Headquarters Lease is subject to fixed rate escalation increases and the landlord waived the Company’s rent obligation for the first 10.5 months of the lease, having an initial value of $3,300,000. The landlord also agreed to fund up to $9,239,000 in tenant improvements. The Company recorded the tenant improvements as leasehold improvements and deferred rent on the consolidated balance sheet. Deferred rent is amortized as a reduction in rent expense over the term of the Headquarters Lease. The Company recognizes rent expense on a straight-line basis over the expected lease term. In connection with the Company’s termination of its prior lease at One Kendall Square, the rent abatement was reduced to approximately $1,841,000 and the expected term of the Headquarters Lease was reduced to 7.5 years. The Company began to record rent expense in April 2013 upon gaining access to and control of the space. Upon execution of the Headquarters Lease, the Company paid a security deposit of $1,725,000 which was reduced to approximately $864,000 in 2014. The security deposit is included in restricted cash in the accompanying balance sheet as of March 31, 2017 and December 31, 2016.

On June 30, 2014, the Company executed a Second Amendment to Lease amending the Headquarters Lease, resulting in the Company leasing 8,164 square feet of additional space in the Headquarters Building commencing in November 2014. The Company began recording rent expense upon gaining access to and control of the additional space in July 2014. The landlord also funded $1,020,500 in normal tenant improvements.

On September 30, 2016, the Company entered into three separate yet related agreements to expand its premises at the Headquarters Building. In connection with these agreements, on May 1, 2017 (“Effective Date”), bluebird bio, Inc. (“Bluebird”) surrendered approximately 53,455 square feet of space previously leased by Bluebird in the Headquarters Building (“Bluebird Premises”), and the Company became the sole tenant of the Headquarters Building, leasing approximately 123,210 square feet of office and laboratory space. The three agreements include a Third Amendment to Lease with the landlord to amend the Headquarters Lease (“Third Amendment”), an Assignment and Assumption of Lease (the “Assignment”) with Bluebird for the assignment of the lease dated as of June 3, 2013, as amended, between the landlord and Bluebird (the “Bluebird Lease”) to the Company, and a Consent to Assignment (the “Consent”), among the landlord, the Company and Bluebird, providing required consents for the assignment of the Bluebird Lease to the Company.  

On the Effective Date, the Headquarters Lease was amended as provided in the Third Amendment. Pursuant to the Third Amendment: (i) the Company is entitled to a partial abatement of base rent payable under the Headquarters Lease for each of the first two calendar months following the Effective Date (provided the Company is not in default under the Third Amendment or the Bluebird Lease), (ii) the term of the Headquarters Lease was extended through April 30, 2024, (iii) the Company has the right to extend the term for one subsequent five-year period, (iv) the Company will pay annual base rent on the Existing Premises (ranging from $70.51 to $83.42 per square foot) in accordance with the rent schedule attached to the Third Amendment, with semi-annual adjustments beginning in January and July of each calendar year, and (v) the landlord will provide up to $2,500,000 in tenant improvement allowances to improve the Headquarters Building, including the Existing Premises, the Bluebird Premises and the lobby.  Pursuant to the Assignment, the Company assumed the Bluebird Lease and will pay annual base rent on the Bluebird Premises (ranging from $62.83 to $72.84 per square foot) in accordance with the Bluebird Lease. T he Third Amendment also requires the Company to increase its security deposit by amending the letter of credit for the Headquarters Lease to $1,771,009, and to amend the terms of the letter of credit to serve as security for both the Third Amendment and the Bluebird Lease.

20


 

Legal Matters

From time to time, the Company is party to litigation arising in the ordinary course of its business. As of March 31, 2017, the Company is not currently a party to any significant litigation.

 

16.

Related Party Transactions

Roche Holdings, Inc. and its affiliates

Revenue from Roche was $9,647,000 for the three months ended March 31, 2017. Included in the $9,647,000 recognized from Roche for the three months ended March 31, 2017 was $4,446,000 of revenue earned under the Molecular Information Platform Program, $4,231,000 from the reimbursement of R&D and other costs under the CDx Development, Immunotherapy Testing Platform Development, and other R&D programs, and $970,000 of other Roche-related revenue. Roche-related revenue represented 36.6% of the Company’s total revenue for the three months ended March 31, 2017. Costs of related-party revenue from Roche were $900,000 for the three months ended March 31, 2017, which consisted of costs incurred under the Molecular Information Platform Program and costs related to the delivery of products outside of the United States under the Ex-U.S. Commercialization Agreement. At March 31, 2017, $4,870,000 and $293,000 was included in total accounts receivable and deferred revenue, respectively, related to this arrangement. At December 31, 2016, $2,007,000 and $3,747,000 was included in total accounts receivable and deferred revenue, respectively, related to this arrangement.

Revenue from Roche was $12,955,000 for the three months ended March 31, 2016, which primarily consisted of payments made for the reserved capacity arrangement, access to the Company’s molecular information platform, a $7,000,000 milestone achieved related to the ctDNA platform development program, and the reimbursement of R&D costs under the R&D Collaboration Agreement. Roche-related revenue represented 42.6% of the Company’s total revenue for the three months ended March 31, 2016. Costs of related party revenue from Roche were $1,362,000 for the three months ended March 31, 2016, which consisted of costs incurred under the molecular information platform program within the R&D Collaboration Agreement .

There were no other material Roche-related balances included in the condensed consolidated financial statements at March 31, 2017, or for the three months ended March 31, 2017 and 2016.

Other related party transactions

The Company recognized revenue of $85,000 and $31,000 for the three months ended March 31, 2017 and 2016, respectively, from an arrangement with an entity affiliated with a member of the Company’s Board executed during the year ended December 31, 2013. At March 31, 2017 and December 31, 2016, there was $85,000 and $0, respectively, included in accounts receivable related to this arrangement.

 

17.

Subsequent Events

 

On April 21, 2017, the Company entered into a Second Amendment to Lease (the “Palo Alto Amendment”) with PAOC, LLC (“PAOC”) amending the lease between the Company and PAOC for the lease of approximately 1,975 square feet of office space located in a building at 525 University Avenue, Palo Alto, California. The Palo Alto Amendment extended the term of the lease for a period of 60 months, expiring on April 30, 2022.

The Company will pay rent of $17,775 per month, beginning in June 2017, subject to annual 3% increases beginning May 1, 2018, throughout the term of the amended lease. The Company is entitled to an abatement of fixed rent for the month of May 2017.

21


 

Item 2. Management’s Discus sion and Analysis of Financial Condition and Results of Operations

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016. This discussion contains forward-looking statements that involve significant risks and uncertainties. As a result of many factors, such as those set forth under “Risk Factors” in Part II, Item 1A. of this Quarterly Report and our prior filings with the SEC, our actual results may differ materially from those anticipated in these forward-looking statements.

Overview

We are a molecular information company focused on fundamentally changing the way in which patients with cancer are evaluated and treated. We believe an information-based approach to making clinical treatment decisions based on comprehensive genomic profiling will become a standard of care for patients with cancer. We derive revenue from selling products that are enabled by our molecular information platform to physicians and biopharmaceutical companies. Our platform includes proprietary methods and algorithms for analyzing specimens across all types of cancer, and for incorporating that information into clinical care in a concise and user-friendly fashion. Our products provide genomic information about each patient’s individual cancer, enabling physicians to optimize treatments in clinical practice and biopharmaceutical companies to develop targeted oncology therapies more effectively. We believe we have a significant first mover advantage in providing a portfolio of comprehensive genomic profiling and molecular information products on a commercial scale.

Our clinical molecular information products, FoundationOne for solid tumors, FoundationOne Heme for blood-based cancers, or hematologic malignancies, including leukemia, lymphoma, myeloma, pediatric cancers, and advanced sarcomas, FoundationACT (Assay for Circulating Tumor DNA), a blood-based (liquid biopsy) assay to measure circulating tumor DNA, or ctDNA, and FoundationFocus CDx BRCA , a 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 and in research. To accelerate commercial growth and enhance our competitive advantage, we are continuing to develop and commercialize new molecular information products for physicians and biopharmaceutical companies, strengthen our commercial organization, introduce new marketing, education and provider engagement efforts, grow our molecular information knowledgebase, FoundationCORE, aggressively pursue reimbursement from government payors and regional and national commercial payors, publish scientific and medical advances, and foster relationships throughout the oncology community. We believe our molecular information products address a global market opportunity of $12-15 billion.

Since our inception in 2009, we have devoted substantially all of our resources to the development of our molecular information platform, the commercialization of FoundationOne and FoundationOne Heme, and the development of new products such as FoundationACT and FoundationFocus CDx BRCA . We have incurred significant losses since our inception, and as of March 31, 2017 our accumulated deficit was $391.3 million. We expect to continue to incur operating losses over the near term as we expand our commercial operations, conduct clinical trials, invest in our molecular information platform and additional products, including FoundationACT and our universal companion diagnostic, and invest in our infrastructure.

FoundationOne, FoundationOne Heme, and FoundationACT have been commercialized as laboratory developed tests, or LDTs, which are subject to the Clinical Laboratory Improvement Amendments of 1988, or CLIA, and are not currently regulated as medical devices under the Federal Food, Drug and Cosmetic Act. In addition to FoundationFocus CDx BRCA , we are seeking FDA approval for our universal companion diagnostic assay based on our FoundationOne platform, with an indication for use as a companion diagnostic across a diverse range of solid tumors. We believe our work developing companion diagnostic assays with our biopharmaceutical partners accelerates our progress in this area, and is a key component of our strategy to develop a universal companion diagnostic assay. If approved, this assay could be the first FDA-approved comprehensive genomic profiling assay to incorporate multiple companion diagnostics to support precision medicine in oncology, and would be a key differentiator for us.

Recent Developments

We are working with the FDA and the U.S. Centers for Medicare & Medicaid Services, or CMS, in a process called Parallel Review. The Parallel Review program is intended to facilitate the development and FDA review of innovative new products that have the potential to improve outcomes.  Our goal is to obtain approval of a Premarket Approval Application, or PMA, from the FDA and, in parallel, a favorable National Coverage Determination, or NCD, from CMS for Medicare reimbursement for our universal companion diagnostic assay based on our FoundationOne platform. The FDA and CMS accepted our application for Parallel Review of this assay in the second quarter of 2016. We cannot predict whether the PMA for this assay will be approved by the FDA, or whether the NCD will be granted by CMS. In addition, during the second quarter of 2016, the FDA accepted our request to review our universal companion diagnostic assay based on our FoundationOne platform under the Expedited Access Pathway, or EAP program, a voluntary program for sponsors of breakthrough devices. As a participant in the EAP program, the FDA has indicated that they will endeavor to work with us to reduce the time and cost of the approval decision for our assay

22


 

including the implementation of priority review, interac tive review, senior management involvement, and assignment of a case manager.

On September 30, 2016, we entered into three agreements related to the expansion of our headquarters located at 150 Second Street, Cambridge, Massachusetts, or the Headquarters Building. On May 1, 2017, or the Effective Date, we assumed the lease for approximately 53,455 square feet of space leased by bluebird bio, Inc., or Bluebird, in the Headquarters Building, or the Bluebird Premises. Combined with 69,755 square feet currently leased by us, we have become the sole tenant of the Headquarters Building, leasing approximately 123,210 square feet of office and laboratory space, or the Combined Premises. On the Effective Date, the term of our lease of the Combined Premises was extended through April 30, 2024, and we will have the right to extend the term for one subsequent five-year period.

In January 2017, we announced the appointment of Troy Cox as our new Chief Executive Officer, effective February 6, 2017, or the Commencement Date. The Board was increased in size to ten directors and elected Mr. Cox to become a member of the Board effective as of the Commencement Date. Michael Pellini, M.D. resigned as our Chief Executive Officer, effective as of the Commencement Date. Dr. Pellini remained a member of the Board and began serving as Chairman of the Board as of the Commencement Date. Alexis Borisy relinquished his position as Chairman of the Board, but will continue to serve on the Board of Directors following the Commencement Date.

In January 2017, we began submitting claims to Palmetto GBA, or Palmetto, the Company’s Medicare Administrative Contractor, or MAC, in North Carolina, for FoundationOne test requisitions where components of our testing services were performed in our North Carolina facility. In March 2017, we began receiving payment for eligible non-small cell lung cancer, or NSCLC, claims submitted under Palmetto’s local coverage determination, or LCD, based upon the allowable rate of $3,416 per test.

Financial Operations Overview

Revenue

We derive our revenue from selling products that are enabled by our molecular information platform. The information provided in our test results is branded as FoundationOne, FoundationOne Heme, FoundationACT, or FoundationFocus CDx BRCA for our clinical customers and is not branded for our biopharmaceutical customers. The principal focus of our commercial operations is to continue to drive adoption of products enabled by our molecular information platform. In particular, we seek to increase sales volume of our molecular information products, FoundationOne, FoundationOne Heme, FoundationACT, and FoundationFocus CDx BRCA  in the clinical setting and to increase the volume of tests and other services enabled by our molecular information platform that we perform for our biopharmaceutical customers.

For the majority of physician orders within the United States, the payment we ultimately receive depends upon the rate of reimbursement from commercial third-party payors and government payors. We are not currently a participating provider with most commercial third-party payors and, therefore, do not have specific coverage decisions from those third-party payors for our products with established payment rates. Currently, most of the commercial third-party payors that reimburse our claims do so based upon Current Procedural Terminology, or CPT, codes, the predominant methodology, or based on other methods such as percentages of charges or other formulas that are not made known to us. In addition, a small portion of commercial third-party payors outsource our claims to preferred provider organizations or third-party administrators, who process our claims and pay us directly at negotiated rates. Coverage and payment is determined by each third-party payor on a case-by-case basis. As of March 31, 2017, we were not a participating provider in any state Medicaid program, and therefore, did not have coverage determinations under which our tests were covered by these Medicaid programs. As of March 31, 2017, we were a participating provider in the Medicare program on a limited basis. An LCD exists for certain patients with NSCLC within the jurisdiction where our Research Triangle Park, North Carolina laboratory facility is located. An LCD that reflects coverage for our validated comprehensive genomic profiling products does not exist within the jurisdiction where our Cambridge, Massachusetts laboratory facility is located. At the end of 2013, we began the process of submitting claims for our tests to Medicare. We may also negotiate rates with patients if the patient is responsible for payment. Our efforts in obtaining reimbursement based on individual claims, including pursuing appeals or reconsiderations of claim denials, take a substantial amount of time, and bills may not be paid for many months or at all. Furthermore, if a third-party payor denies coverage after final appeal, payment may not be received at all.

We currently recognize revenue on a cash basis from most commercial third-party payors and from patients who make co-payments, pay deductibles, or pay other amounts that we have been unable to collect from their third-party payors because the payment is not fixed or determinable and collectability is not reasonably assured, as a result of the fact that we do not have coverage decisions in place with most third-party payors and have a limited history of collecting claims. We expect to use judgment in assessing whether the fee is fixed or determinable and whether collectability is reasonably assured as we continue to gain payment experience with third-party payors and patients. Costs associated with performing tests are recorded as tests are processed. These costs are recorded regardless of when or whether revenue is recognized with respect to those tests. Because we currently recognize revenue on a cash basis from commercial third-party payors, the costs of those tests are recognized in advance of any associated revenues. Our

23


 

revenue from these payors is generally lower and our net loss is higher than if w e were recognizing revenue from these payors on an accrual basis in the period during which the work was performed and costs were incurred.

We currently have an operating laboratory facility located in Cambridge, Massachusetts, and during 2016 we establish ed a second operating laboratory facility in Research Triangle Park, North Carolina. Although we are in the process of seeking an NCD for our universal companion diagnostic assay based on our FoundationOne platform as part the Parallel Review process, ther e are  currently no NCDs  that establish whether and how our tests are covered by Medicare. In the absence of NCDs, local MACs that administer the Medicare program in various regions have some discretion in determining coverage, the reimbursement rate, and payment for tests. Palmetto, the MAC covering our laboratory in North Carolina, issued a final LCD to cover well-validated comprehensive genomic profiles for initially diagnosed Stage IIIB and Stage IV NSCLC patients, or the Palmetto LCD. The local MAC for our Cambridge laboratory, National Government Services, has not elected to follow the same standards for determining coverage. In February 2016, National Government Services announced a final LCD effective April 1, 2016, to provide coverage for hotspot tests of 5 to 50 genes for patients with metastatic NSCLC. We do not believe this LCD reflects coverage for our validated comprehensive genomic profiling products, which include comprehensive analysis of greater than 50 genes and all classes of alterations. We intend to continue to seek a positive coverage determination from National Government Services, which, if obtained, may establish payment for the Medicare claims we submit to this local MAC covering our laboratory in Massachusetts.

Following discussions with NHIC, Corp., the predecessor to National Government Services,  we agreed to  not submit claims for FoundationOne tests provided to Medicare patients while this MAC assessed the appropriate coding, coverage, and payment for FoundationOne as a whole. To a ccommodate this MAC’s request, we deferred the submission of claims until November 2013, when we commenced the process of submitting claims to National Government Services for FoundationOne and FoundationOne Heme tests for Medicare patients with dates of service on or after November 1, 2013. We have submitted these claims for FoundationOne and FoundationOne Heme tests to National Government Services using a miscellaneous CPT code, and have not recognized any revenue from Medicare for those claims to date. There are, however, a subset of Medicare patients that fall under the 14-Day Rule, requiring us to bill the ordering institution directly instead of billing Medicare. We have recognized some revenue for these patients upon receipt of payment from the instit ution. As of March 31, 2017 , National Government Services has either denied the FoundationOne or FoundationOne Heme claims that we have submitted or not processed and reimbursed us for the claims in a manner that we believe is consistent with applicable processing guidelines. In August 2016, we began submitting claims for FoundationACT tests associated with our Cambridge, Massachusetts laboratory to National Government Services using stacked CPT codes, and as of March 31, 2017, we have recognized revenue from those claims.

In the future, a MAC having jurisdiction over any one of our operational laboratory facilities could issue a negative coverage determination for one or more of our tests that would apply to future claims and that MAC could defer processing claims pending a coverage or payment determination. If a claim is paid by a MAC assigned to the jurisdiction in which one of our operational laboratory facilities is located, either upon acceptance of the claim or following a successful appeal of a denied claim, we will generate revenue from Medicare for our testing. In January 2017, we began submitting claims to Palmetto for FoundationOne test requisitions where components of our testing services were performed in our North Carolina facility. In March 2017, we began receiving payment for eligible NSCLC claims submitted under the Palmetto LCD based upon the allowable rate of $3,416 per test. FoundationOne, FoundationOne Heme, FoundationACT, and FoundationFocus CDx BRCA tests for patients covered by Medicare, including those patients that fell under the 14-Day Rule, represented approximately 31% and 30% of total tests reported to physicians in the United States during the three months ended March 31, 2017 and 2016, respectively.

We expect that our current lack of broad coverage decisions and the general uncertainty around reimbursement for our tests will continue to negatively impact our revenue and earnings, both because we will not recognize revenue for tests performed, particularly if our test volumes increase period-to-period, and because the absence of Medicare or other significant coverage decisions may lead physicians to not order a meaningful number of tests. Following our achievement of a coverage decision from a commercial third-party payor or a government payor, or once we have a sufficient history of claims collections with any such payor that we conclude the fees for our tests for individuals insured by such payor are sufficiently fixed or determinable and collectability is reasonably assured, we anticipate that we will begin to recognize revenue from such payor on an accrual basis. As of March 31, 2017, we had cash, cash equivalents, and marketable securities of approximately $99.1 million. If we are not able to obtain coverage decisions from additional commercial third-party payors and government payors over the longer term, and our available cash and marketable securities balances, cash flows from operations, and available borrowings are insufficient to satisfy our liquidity requirements, we may require additional capital beyond our currently anticipated amounts. Additional capital may not be available on reasonable terms, or at all, and may be subject to the prior consent of Roche pursuant to our Investor Rights Agreement with Roche dated January 11, 2015, or the Investor Rights Agreement, and the Credit Facility Agreement with Roche Finance Ltd dated August 2, 2016, or Roche Credit Facility.

We recognize revenue from the sale of our tests to certain hospitals, cancer centers, other institutions, and patients at the time results are reported to physicians if all revenue recognition criteria have been met.

We also receive a small portion of revenue from patients who make co-payments and pay deductibles. In addition, while we take on the primary responsibility for obtaining third-party reimbursement on behalf of patients, including appeals for any initial denials,

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we ultimately do bill patients for amounts that we have been unable to collect from their insurance providers. We initiated the process to seek reimbursement from Medicare at the end of 2013, and we may also decide to provide appropriate notices to patients covered by Medicare to enable us to bill a patient for all or part of a claim that is denied cove rage by Medicare. We offer a comprehensive patient assistance program to support patients whose incomes are below certain thresholds and to allow for extended payment terms, as necessary, given the patient’s economic situation.

Revenue from our biopharmaceutical customers is based on a negotiated price per test or on the basis of agreements to provide certain testing volumes or other deliverables over defined periods. We recognize revenue upon delivery of the test results, or over the period that testing volume or other deliverables are provided, as appropriate, assuming all other revenue recognition criteria have been met.

Certain of our arrangements include multiple deliverables. We analyze multiple-element arrangements based on the guidance in Financial Accounting Standards Board, or FASB, Accounting Standards Codification Topic 605-25, Revenue Recognition-Multiple-Element Arrangements, or ASC 605-25. Pursuant to the guidance in ASC 605-25, we evaluate 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 provided that: (i) the delivered items have value to the customer on a standalone basis and (ii) if the arrangement includes a general right of return relative to the delivered items, the delivery or performance of the undelivered items is considered probable and substantially in our control. In assessing whether an item has standalone value, we consider 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, we consider 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. We determine the selling price of a unit of accounting following the hierarchy of evidence prescribed by ASC 605-25. Accordingly, we determine the estimated selling price for units of accounting within each arrangement using vendor-specific objective evidence, or VSOE, of selling price, if available, third-party evidence, or TPE, of selling price if VSOE is not available, or best estimate of selling price, or BESP, if neither VSOE nor TPE is available. We typically use BESP to estimate the selling price, since we generally do not have VSOE or TPE of selling price for our 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, we consider applicable market conditions and estimated costs. We validate 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 multiple units of accounting. We recognize 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, we evaluate 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 our performance to achieve the milestone or the enhancement of the value of the delivered items as a result of a specific outcome resulting from our 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. We evaluate 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, we 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.

We also recognize royalty revenue in the period of sale of the related product(s), based on the underlying contract terms, provided that the reported sales are reliably measurable and we have no remaining performance obligations, assuming all other revenue recognition criteria are met.

For some multiple-element arrangements, we are reimbursed for either all or a portion of the research and development costs incurred. We perform research and development services as part of our revenue activities and, therefore, believe such activities are a part of our primary business. We record these reimbursements as revenue in the statement of operations using a proportional

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performance model over the period which the unit of accounting is delivered or based on the level of effort expen ded to date over the total expected effort, whichever is considered the most appropriate measure of performance.

We expect our domestic revenue to increase over time as we expand our commercial efforts within the United States. Positive reimbursement decisions from additional commercial third-party payors and government payors, such as Medicare and Medicaid, would eliminate much of the uncertainty around payment and could allow us to recognize revenue earlier and potentially increase our overall revenue growth and test volume growth from ordering physicians within the United States. In addition, under our Ex-U.S. Commercialization Agreement with Roche, we are now being reimbursed by Roche for the cost of each test and a portion of the resulting gross margin, as compared to the direct-sales, patient pay model under which we had been previously operating for international volume, which we expect will reduce our average revenue per test for patients outside the United States. However, we expect volume outside the United States to increase, and, therefore, over time revenues under the Ex-U.S. Commercialization Agreement are expected to increase as well. We also expect to grow our biopharmaceutical customer base.

Cost of Revenue and Operating Expenses

We allocate certain overhead expenses, such as rent, utilities, and depreciation to cost of revenue and operating expense categories based on headcount and facility usage. As a result, an overhead expense allocation is reflected in cost of revenue and each operating expense category.

Cost of Revenue

Cost of revenue consists of personnel expenses, including salaries, bonuses, employee benefits and stock-based compensation expenses, cost of laboratory supplies, depreciation of laboratory equipment and amortization of leasehold improvements, shipping costs, third-party laboratory costs, provisions for inventory excess and obsolescence, and certain allocated overhead expenses. We expect these costs will increase in absolute dollars as we increase our sales volume, but will decrease as a percentage of revenue over time as our sales increase and we gain operating efficiencies.

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 we currently recognize revenue on a cash basis from commercial third-party payors and patients who make co-payments, pay deductibles or pay other amounts that we have been unable to collect from their insurers, the costs of those tests are often recognized in advance of any associated revenues.

Selling and Marketing Expenses

Our selling and marketing expenses include costs associated with our sales organization, including our direct sales force and sales management, client services, marketing, reimbursement, and business development personnel who are focused on our biopharmaceutical customers. These expenses consist principally of salaries, commissions, bonuses, employee benefits, travel, and stock-based compensation, as well as marketing and educational activities, and allocated overhead expenses. We expense all selling and marketing costs as incurred.

During the three months ended March 31, 2017 and 2016, our selling and marketing expenses represented approximately 62% and 45%, respectively, of our total revenue. We expect our selling and marketing expenses to continue to increase in absolute dollars as we expand our sales force, grow our client service infrastructure, and increase our marketing and medical affairs activities to drive further awareness and adoption of our current molecular information products, and any future products we may develop.

General and Administrative Expenses

Our general and administrative expenses include costs for our executive, accounting and finance, legal, and human resources functions. These expenses consist principally of salaries, bonuses, employee benefits, travel, and stock-based compensation, as well as professional services fees such as consulting, audit, tax, legal and billing fees, general corporate costs, and allocated overhead expenses. We expense all general and administrative expenses as incurred.

We expect that our general and administrative expenses will continue to increase, primarily due to the costs associated with increased infrastructure and headcount. These costs include additional legal and accounting expenses, including ongoing litigation involving a patent infringement claim asserted by us, and an increase in billing costs related to our anticipated increase in revenues.

Research and Development Expenses

Our research and development expenses consist primarily of costs incurred for the development of new and enhanced products and services, immunotherapy testing, companion diagnostic development, significant product improvements, clinical trials to evaluate the clinical utility of our tests, the development of our FoundationCORE knowledgebase, and various technology applications. Costs

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to develop our technology capabilities are recorded as research and development unless they meet the criteria to be capitalized as internal-use software costs. Our 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 reagents and supplies; and

 

allocated overhead expenses.

We expect that our overall research and development expenses will continue to increase in absolute dollars as we continue to innovate our molecular information platform, develop additional products, expand our genomic and medical data management resources, and conduct our ongoing and new clinical trials.

Interest Income, Net

Interest income, net includes interest income and interest expense. Interest income is earned on our cash, cash equivalents, and marketable securities. Interest expense consists primarily of the amortization of deferred financing costs, and the quarterly commitment fee on the available balance under the Roche Credit Facility.

Other Income

Other income for the three months ended March 31, 2017 includes the gain on disposal of certain long-lived assets and foreign exchange transactions.

 

Results of Operations

Comparison of Three Months Ended March 31, 2017 and 2016

 

 

Three Months Ended March 31,

 

 

Change

 

 

 

2017

 

 

2016

 

 

$

 

 

%

 

 

 

(in thousands, except percentages)

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

16,681

 

 

$

17,423

 

 

$

(742

)

 

 

(4

)%

Related-party revenue from Roche

 

 

9,647

 

 

 

12,955

 

 

 

(3,308

)

 

 

(26

)%

Total revenue

 

 

26,328

 

 

 

30,378

 

 

 

(4,050

)

 

 

(13

)%

Costs and expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue