Genomic Health, Inc.
GENOMIC HEALTH INC (Form: 10-Q, Received: 11/08/2018 16:39:49)

Table of Contents  

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2018

 

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: 000-51541

 

GENOMIC HEALTH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

77-0552594

(State or other jurisdiction of

 

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

incorporation or organization)

 

 

 

301 Penobscot Drive

Redwood City, California 94063

(Address of principal executive offices, including Zip Code)

 

(650) 556-9300

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☐

 

Accelerated filer ☒

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒ 

 

The number of outstanding shares of the registrant’s Common Stock, $0.0001 par value, was 36,123,297  as of October 31, 2018.

 

 

 

 


 

Table of Contents  

GENOMIC HEALTH, INC.

INDEX

 

 

 

 

 

 

 

 

    

    

    

Page

 

PART I :

 

FINANCIAL INFORMATION

 

 

 

Item 1.  

 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Operations

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss)

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

Item 2.  

 

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

 

23

 

Item 3.  

 

Quantitative and Qualitative Disclosures about Market Risk

 

42

 

Item 4.  

 

Controls and Procedures

 

43

 

PART II :

 

OTHER INFORMATION

 

43

 

Item 1.  

 

Legal Proceedings

 

43

 

Item 1A.  

 

Risk Factors

 

44

 

Item 6.  

 

Exhibits

 

63

 

Signatures  

 

 

 

63

 

 

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Table of Contents  

PART  1: FINANCIAL INFORMATIO N

 

Item 1. Financial Statements

GENOMIC HEALTH, INC.

Condensed Consolidated Balance Sheet s

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

ASSETS

    

 

    

    

 

    

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

69,242

 

$

45,518

 

Short-term marketable securities

 

 

114,021

 

 

84,057

 

Accounts receivable (net of allowance for doubtful accounts; 2018—$1,041 2017—$3,884)

 

 

51,553

 

 

31,161

 

Prepaid expenses and other current assets

 

 

11,886

 

 

13,524

 

Total current assets

 

 

246,702

 

 

174,260

 

Property and equipment, net

 

 

39,804

 

 

46,440

 

Other assets

 

 

13,860

 

 

10,917

 

Total assets

 

$

300,366

 

$

231,617

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

6,545

 

$

156

 

Accrued compensation and employee benefits

 

 

29,132

 

 

24,953

 

Accrued expenses and other current liabilities

 

 

14,303

 

 

14,084

 

Other current liabilities

 

 

425

 

 

323

 

Total current liabilities

 

 

50,405

 

 

39,516

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

3,944

 

 

3,810

 

Commitments and contingencies

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock

 

 

 3

 

 

 3

 

Additional paid-in capital

 

 

491,409

 

 

464,637

 

Accumulated other comprehensive loss

 

 

(50)

 

 

(294)

 

Accumulated deficit

 

 

(215,235)

 

 

(245,945)

 

    Treasury stock, at cost

 

 

(30,110)

 

 

(30,110)

 

Total stockholders’ equity

 

 

246,017

 

 

188,291

 

Total liabilities and stockholders’ equity

 

$

300,366

 

$

231,617

 

 

See accompanying notes.

 

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GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Product revenues

 

$

101,258

 

$

83,821

 

$

289,502

 

$

253,287

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of product revenues

 

 

15,518

 

 

13,433

 

 

48,635

 

 

40,904

 

Research and development

 

 

15,433

 

 

17,212

 

 

47,552

 

 

47,868

 

Selling and marketing

 

 

40,051

 

 

38,303

 

 

122,143

 

 

120,464

 

General and administrative

 

 

18,498

 

 

17,505

 

 

56,702

 

 

52,651

 

Total operating expenses

 

 

89,500

 

 

86,453

 

 

275,032

 

 

261,887

 

Income (loss) from operations

 

 

11,758

 

 

(2,632)

 

 

14,470

 

 

(8,600)

 

Interest income

 

 

676

 

 

263

 

 

1,492

 

 

627

 

Gain on sale of equity securities

 

 

 —

 

 

 —

 

 

 —

 

 

2,807

 

Unrealized gain on equity securities

 

 

127

 

 

 —

 

 

1,538

 

 

 —

 

Other income (expense), net

 

 

39

 

 

340

 

 

101

 

 

792

 

Income (loss) before income taxes

 

 

12,600

 

 

(2,029)

 

 

17,601

 

 

(4,374)

 

Income tax expense

 

 

375

 

 

162

 

 

834

 

 

1,362

 

Net income (loss)

 

$

12,225

 

$

(2,191)

 

$

16,767

 

$

(5,736)

 

Basic net income (loss) per share

 

$

0.34

 

$

(0.06)

 

$

0.47

 

$

(0.17)

 

Diluted net income (loss) per share

 

$

0.32

 

$

(0.06)

 

$

0.45

 

$

(0.17)

 

Shares used in computing basic net income (loss) per share

 

 

35,925

 

 

34,675

 

 

35,558

 

 

34,373

 

Shares used in computing diluted net income (loss) per share.

 

 

38,026

 

 

34,675

 

 

37,044

 

 

34,373

 

 

See accompanying notes.

 

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GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Comprehensive Incom e (Loss)

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

Net income (loss)

    

$

12,225

 

$

(2,191)

 

$

16,767

 

$

(5,736)

 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss), net, on available-for-sale marketable securities, net of tax of $0 for the three and nine months ended September 30, 2018 and 2017, respectively

 

 

15

 

 

(1)

 

 

64

 

 

(98)

 

Reclassification adjustment for net gain on sale of equity securities included in net loss

 

 

 —

 

 

 —

 

 

 —

 

 

(1,127)

 

Comprehensive income (loss)

 

$

12,240

 

$

(2,192)

 

$

16,831

 

$

(6,961)

 

 

See accompanying notes.

 

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GENOMIC HEALTH, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

2017

 

Operating activities

    

 

 

 

 

 

 

Net income (loss)

 

$

16,767

    

$

(5,736)

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

9,348

 

 

8,573

 

Employee stock-based compensation

 

 

15,742

 

 

15,257

 

Write-off of previously capitalized software costs

 

 

2,347

 

 

76

 

Impairment of long-lived assets

 

 

2,095

 

 

22

 

Loss on disposal of property and equipment

 

 

23

 

 

35

 

Outside director restricted stock awarded in lieu of fees

 

 

150

 

 

150

 

Gain on sale of equity securities

 

 

 —

 

 

(2,807)

 

Unrealized gain on revaluation of equity investment

 

 

(1,538)

 

 

 —

 

Write-off of convertible promissory note

 

 

1,329

 

 

 —

 

Deferred tax benefit from unrealized gain on available-for-sale marketable securities, net

 

 

 —

 

 

820

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,269)

 

 

(405)

 

Prepaid expenses and other assets

 

 

1,168

 

 

2,149

 

Accounts payable

 

 

5,919

 

 

5,725

 

Accrued compensation and employee benefits

 

 

4,179

 

 

(3,281)

 

Accrued expenses and other liabilities

 

 

726

 

 

890

 

Net cash provided by operating activities

 

 

51,986

 

 

21,468

 

Investing activities

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(6,953)

 

 

(10,403)

 

Proceeds from sale of property and equipment

 

 

 —

 

 

10

 

Purchases of marketable securities

 

 

(116,529)

 

 

(88,152)

 

Maturities of marketable securities

 

 

86,925

 

 

59,402

 

Proceeds from sales of marketable securities

 

 

 —

 

 

10,155

 

Other investments

 

 

(2,500)

 

 

 —

 

Net cash used in investing activities

 

 

(39,057)

 

 

(28,988)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from issuance of common stock under stock plans

 

 

15,989

 

 

14,685

 

Withholding taxes related to restricted stock units net share settlement

 

 

(5,109)

 

 

(4,540)

 

Net cash provided by financing activities

 

 

10,880

 

 

10,145

 

Net increase in cash, cash equivalents and restricted cash

 

 

23,809

 

 

2,625

 

Cash, cash equivalents and restricted cash at the beginning of period

 

 

45,708

 

 

40,585

 

Cash, cash equivalents and restricted cash at the end of period

 

$

69,517

 

$

43,210

 

Non-cash investing and financing activities

 

 

 

 

 

 

 

Accrued purchases of property and equipment

 

$

900

 

$

1,381

 

Change in fair value of investments

 

$

209

 

$

 —

 

 

See accompanying notes.

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GENOMIC HEALTH, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2018

(Unaudited)

 

Note 1. Organization and Summary of Significant Accounting Policies

 

The Company

 

Genomic Health, Inc. (the “Company”) is a global healthcare company that provides actionable genomic information to personalize cancer treatment decisions. The Company develops and globally commercializes genomic based clinical laboratory services that analyze the underlying biology of cancer, allowing physicians and patients to make individualized treatment decisions. The Company was incorporated in Delaware in August 2000. The Company’s first product, the Oncotype DX breast cancer test, was launched in 2004 and is used for early stage invasive breast cancer patients to predict the likelihood of breast cancer recurrence and the likelihood of chemotherapy benefit. In January 2010, the Company launched its second product, the Oncotype DX colon cancer test, which is used to predict the likelihood of colon cancer recurrence in patients with stage II disease. The tests for invasive breast and colon cancer result in a quantitative score referred to as a Recurrence Score. In December 2011, the Company made Oncotype DX available for patients with ductal carcinoma in situ (“DCIS”), a pre-invasive form of breast cancer. This test provides a DCIS Score that is used to predict the likelihood of local disease recurrence. In June 2012, the Company began offering the Oncotype DX colon cancer test for use in patients with stage III disease treated with oxaliplatin containing adjuvant therapy. In May 2013, the Company launched the Oncotype DX prostate cancer test, which provides a Genomic Prostate Score (“GPS”) to predict disease aggressiveness in men with low risk prostate cancer and to improve treatment decisions for prostate cancer patients, in conjunction with the Gleason score, or tumor grading. In February 2018, the Oncotype DX AR-V7 Nucleus Detect test for men with metastatic castration-resistant prostate cancer (“mCRPC”) became commercially available.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. The Company had two wholly-owned subsidiaries at September 30, 2018: Genomic Health International Holdings, LLC, which was established in Delaware in 2010 and supports the Company’s international sales and marketing efforts; and Oncotype Laboratories, Inc., which was established in 2012, and is inactive. Genomic Health International Holdings, LLC has eight wholly-owned subsidiaries. The functional currency for the Company’s wholly-owned subsidiaries incorporated outside the United States is the U.S. dollar. All significant intercompany balances and transactions have been eliminated.

 

Basis of Presentation and Use of Estimates

 

The accompanying interim period condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The condensed consolidated balance sheet as of September 30, 2018, condensed consolidated statements of operations and comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017, and condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. The condensed consolidated balance sheet at December 31, 2017 has been derived from audited financial statements, but it does not include certain information and notes required by GAAP for complete consolidated financial statements.

 

The preparation of financial statements in conformity with GAAP requires management to make judgments, assumptions and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures in the Company’s condensed consolidated financial statements and accompanying notes. Actual results could differ materially from those estimates.

 

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The accompanying interim period condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

 

During the first quarter of 2018, the Company adopted new accounting guidance related to revenue recognition, accounting for financial instruments and presentation of restricted cash in the statement of cash flows, each of which is described below. There have been no other significant changes in the Company’s accounting policies during the three and nine months ended September 30, 2018 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2017.

 

The Company recast prior period consolidated statement of cash flows to conform with the adoption of the new accounting guidance related to presentation of restricted cash in the statement of cash flows as described below.

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers , the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 2 for further discussion on Revenues.

 

Concentration of Risk

 

The Company is subject to credit risk from its portfolio of cash equivalents and marketable securities. The Company invests in money market funds through a major U.S. bank and is exposed to credit risk in the event of default by the financial institution to the extent of amounts recorded on the consolidated balance sheets. The Company invests in short term, investment grade debt instruments and by policy limits the amount in any one type of investment, except for securities issued or guaranteed by the U.S. government. Under its investment policy, the Company limits amounts invested in such securities by credit rating, maturity, industry group, investment type and issuer, except for securities issued by the U.S. government. The Company is not exposed to any significant concentrations of credit risk from these financial instruments. The goals of the Company’s investment policy, in order of priority, are as follows: safety and preservation of principal and diversification of risk; liquidity of investments sufficient to meet cash flow requirements; and a competitive after tax rate of return.

 

The Company is also subject to credit risk from its accounts receivable related to its product sales. The majority of the Company’s accounts receivable arise from product sales in the United States. Reimbursement on behalf of patients covered by Medicare accounted for 23% and 24% of the Company’s product revenues for the three and nine months ended September 30, 2018 and 24% and 23% for the three and nine months ended September 30, 2017. Accounts receivable on behalf of patients directly covered by Medicare represented 15% and 23% of the Company’s total accounts receivable at September 30, 2018 and December 31, 2017, respectively. No other third party payor represented more than 10% of the Company’s product revenues or accounts receivable balances for these periods.

 

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Investments in Privately Held Companies

 

The Company determines whether its investments in privately held companies are debt or equity based on their characteristics, in accordance with the applicable accounting guidance for such investments. The Company also evaluates the investee to determine if the entity is a variable interest entity (“VIE”) and, if so, whether the Company is the primary beneficiary of the VIE, in order to determine whether consolidation of the VIE is required in accordance with accounting guidance for consolidations. If consolidation is not required and the Company owns less than 50.1% of the voting interest of the entity, the investment is evaluated to determine if the equity method of accounting should be applied. The equity method applies to investments in common stock or in substance common stock where the Company exercises significant influence over the investee, typically represented by ownership of 20% or more of the voting interests of an entity.

 

Prior to January 1, 2018, if the equity method did not apply, investments in privately held companies determined to be equity securities were accounted for using the cost method. As discussed below, on January 1, 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which changed the way it accounts for non-marketable securities. The Company adjusts the carrying value of its non-marketable equity securities for changes from observable transactions for identical or similar investments of the same issuer, less impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net.

 

Investments in privately held companies determined to be debt securities are accounted for as available-for-sale or held-to-maturity securities, in accordance with the applicable accounting guidance for such investments.

 

During the years ended December 31, 2017 and 2016, the Company invested $1.4 million and $6.1 million, respectively, in the subordinated convertible promissory notes of Epic Sciences, Inc. (“Epic Sciences”). See Note 6, “Collaboration and Commercial Technology Licensing Agreements,” for additional information regarding the terms of this investment. On March 8, 2017, all of the Company’s investment in the subordinated convertible promissory notes were converted into preferred stock of Epic Sciences representing approximately 9% of Epic Sciences’ voting interests, at which time the Company estimated the fair value of the subordinated convertible promissory notes to be approximately $7.1 million. In June 2018, the Company invested an additional $2.5 million in preferred stock of Epic Sciences as part of a new equity financing. As a result of this transaction, the Company’s ownership interest in Epic Sciences was reduced to approximately 8%.  The preferred stock represents a variable interest in the investee. The Company has concluded it is not the primary beneficiary and thus has not consolidated the investee pursuant to the requirements of FASB ASC 810, Consolidation . The Company will continue to assess its investment and future commitments to the investee and to the extent its relationship with the investee changes, may be required to consolidate the investee in future periods. The Company determined that the investment is an equity investment for which the Company does not have the ability to exercise significant influence. Prior to the adoption of ASU 2016-01, the Company accounted for such preferred stock using the cost method of accounting and accordingly recorded such preferred stock in other assets. There were no identified events or changes in circumstances that had a significant adverse effect on the fair value of the preferred stock during the remainder of the year ended December 31, 2017. On January 1, 2018, the Company adopted ASU No. 2016-01 which changed the way it accounts for non-marketable equity securities. The Company adjusts the carrying value of its non-marketable equity securities for changes from observable transactions for identical or similar investments of the same issuer, less impairment. All gains and losses on non-marketable equity securities, realized and unrealized, are recognized in other income (expense), net. As of September 30, 2018, the carrying value of the preferred stock of Epic Sciences was $10.8 million, of which $8.3 million was remeasured to fair value based on observable transactions during the six months ended June 30, 2018. There were no observable transactions during the three months ended September 30, 2018. The upward adjustment of $1.2 million during the nine months ended September 30, 2018 was recorded as an unrealized gain on equity securities and included as an adjustment to the carrying value of other assets held at September 30, 2018. The preferred stock of Epic Sciences is classified within Level 3 in the fair value hierarchy because the Company estimated the value during the nine months ended September 30, 2018 utilizing an option pricing model that considered a recent observable transaction and other unobservable inputs including volatility and long-term plans of Epic Sciences.

 

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During the year ended December 31, 2017, the Company invested $2.0 million in a convertible promissory note of Cleveland Diagnostics, Inc. (“Cleveland Diagnostics”). The investment in the convertible promissory note represented a variable interest in the investee. The Company had concluded it was not the primary beneficiary and thus had not consolidated the investee pursuant to the requirements of FASB ASC 810. The Company determined that it did not have the ability to exercise significant influence over the investee company.  In June 2018, the Company made a business decision to terminate its milestone-based collaboration with Cleveland Diagnostics and wrote off the convertible promissory note. See Note 6, “Collaboration and Commercial Technology Licensing Agreements,” for additional information. 

 

Derivative Financial Instruments

 

The Company hedges a portion of its foreign currency exposures related to outstanding monetary assets and liabilities using foreign currency forward contracts. The foreign currency forward contracts, included in other current assets on the consolidated balance sheets, the Company uses to hedge the exposure are not designated as hedges, and as a result, changes in their fair value are recorded in other income (expense). As of September 30, 2018 and December 31, 2017, the Company had foreign currency contracts with notional amounts of $22.6 million and $16.1 million, respectively.

 

Impairment of Long Lived Assets

 

The Company reviews long lived assets, which include property and equipment, intangible assets and investments in privately held companies, for impairment whenever events or changes in business circumstances indicate that the carrying amounts of the assets may not be fully recoverable. For property and equipment and intangible assets, an impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. Impairment, if any, is assessed using undiscounted cash flows. For investments in non-marketable equity securities, evidence of impairment might include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain an earnings capacity which would justify the carrying amount of the investment. If the fair value of the investment is determined to be less than the carrying value, the asset is written down to its fair value. During the nine months ended September 30, 2018, the Company wrote off $2.1 million and $2.3 million of previously capitalized equipment and software development costs, respectively, due to disposal activities. See Note 11, “Restructuring Costs” for additional information regarding the disposal activities. There was no impairment recorded during the three months ended September 30, 2018. During the three and nine months ended September 30, 2017, the Company wrote off $98,000 of previously capitalized equipment and software development costs.  

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) .   Topic 606 supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition , and requires entities to recognize revenue when they transfer control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company adopted Topic 606 as of January 1, 2018 using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. The Company recorded an increase to opening accounts receivable, net, and a reduction to opening accumulated deficit of $14.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact related to certain payors who were not accrual payors. See Note 2 for additional information.

 

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities . This ASU changes accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. In addition, it clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The Company adopted the ASU as of January 1, 2018 using the modified retrospective method for marketable equity securities and the prospective method for non-marketable equity securities. The Company recorded a reduction to accumulated deficit of $180,000 as of January 1, 2018 due to the cumulative impact of adopting the ASU, with the impact related to unrealized loss of Biocartis N.V. (“Biocartis”) common stock at December 31, 2017. The Company has elected to use the measurement alternative for its

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non-marketable equity securities, defined as cost adjusted for changes from observable transactions for identical or similar investments of the same issuer, less impairment. The adoption of ASU 2016-01 increases the volatility of other income (expense), net, as a result of the remeasurement of the Company’s equity securities.

 

In November 2016, the FASB issued ASU Nos. 2016-15 and 2016-18 amending the presentation of restricted cash within the statement of cash flows. The guidance requires that restricted cash be included within cash and cash equivalents on the statement of cash flows. The ASU became effective retrospectively for reporting periods beginning after December 15, 2017. The Company adopted these standards effective January 1, 2018.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) . The new guidance requires lessees to recognize a right-of-use asset and a lease liability for almost all leases on the balance sheet. Additional qualitative and quantitative disclosures will also be required. The ASU is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The Company will adopt the new standard effective January 1, 2019 using the prospective approach. The Company is currently in the process of the reviewing lease contracts, reviewing other contracts for potential embedded leases, establishing new processes and internal controls and evaluating practical expedient and accounting policy elections. Although the Company is in the process of evaluating the impact of adoption of the ASU on its consolidated financial statements, the Company currently believes the most significant change will be related to the recognition of right-of-use assets and lease liabilities on the Company's consolidated balance sheet for real estate operating leases. The adoption of the ASU is not expected to have a material impact to the Company’s consolidated statements of income.

 

Note 2.  Revenues

 

Adoption of ASC Topic 606, Revenue from Contracts with Customers

 

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605. See Note 1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for the Company’s revenue recognition policy under Topic 605.

 

The Company recorded a one-time increase to opening accounts receivable, net, and a reduction to opening accumulated deficit of $14.1 million as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact related to certain payors who were not accrual payors.

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In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s condensed consolidated balance sheet as of September 30, 2018 and statements of operations for the three and nine months ended September 30, 2018 was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Reported

 

Balance Without Adoption of ASC 606

 

Adjustments

 

 

 

 

 

 

(In thousands)

 

 

 

Income statement

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Product revenues

 

$

101,258

    

$

100,903

    

$

355

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

18,498

 

 

19,351

 

 

(853)

 

Net income

 

 

12,225

 

 

11,017

 

 

1,208

 

 

 

 

 

 

 

 

 

 

 

 

Income statement

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

Product revenues

 

 

289,502

    

 

290,731

    

 

(1,229)

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

56,702

 

 

59,082

 

 

(2,380)

 

Net income

 

 

16,767

 

 

15,616

 

 

1,151

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet at September 30, 2018

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

51,553

 

 

34,667

 

 

16,886

 

Equity:

 

 

 

 

 

 

 

 

 

 

Accumulated deficit

 

 

(215,235)

 

 

(230,509)

 

 

15,274

 

 

Revenue Recognition

 

Revenues are recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The estimated uncollectible amounts that were historically classified as bad debt expense are now generally considered implicit price concessions that are a direct reduction to accounts receivable rather than allowance for doubtful accounts.

 

The majority of the Company’s historical product revenues have been derived from the sale of its Oncotype DX breast cancer test. For product revenues, the Company estimates the transaction price which is the amount of consideration it expects to be entitled to receive in exchange for providing services based on its historical collection experience using a portfolio approach as a practical expedient to account for patient contracts as collective groups rather than individually. The Company monitors its estimates of transaction price to depict conditions that exist at each reporting date. If the Company subsequently determines that it will collect more consideration than it originally estimated for a contract with a patient, it will account for the change as an increase in the estimate of the transaction price in the period identified.  Similarly, if the Company subsequently determines that the amount it expects to collect from a patient is less than it originally estimated, it will generally account for the change as a decrease in the estimate of the transaction price, provided that such downward adjustment does not result in a significant reversal of cumulative revenue recognized. 

 

The Company’s performance obligations are satisfied at one point in time when test reports are delivered. The Company also provides services to patients with whom the Company does not have contracts as defined in Topic 606. The Company recognizes revenue for these patients when contracts as defined in Topic 606 are established at the amount of consideration to which it expects to be entitled or when the Company receives substantially all of the consideration subsequent to the performance obligations being satisfied.

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During the nine months ended September 30, 2018, cash collections for certain tests delivered during the six months ended June 30, 2018 came in at rates higher than originally accrued. As a result, the Company changed its estimate of the amounts to be recognized for these tests and recognized an additional $1.9 million and $2.8 million of revenue for the three and nine months ended September 30, 2018, respectively. These changes in estimates resulted in increases in diluted net income per share of approximately $0.05 and $0.07 for the three and nine months ended September 30, 2018, respectively.

 

The following table presents the Company’s product revenues disaggregated by revenue source:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

(In thousands)

 

(In thousands)

 

Invasive breast cancer test

    

$

92,063

 

$

75,861

 

$

263,092

 

$

232,435

 

Prostate cancer test

 

 

6,997

 

 

5,542

 

 

19,614

 

 

13,046

 

Other

 

 

2,198

 

 

2,418

 

 

6,796

 

 

7,806

 

Total product revenues

 

$

101,258

 

$

83,821

 

$

289,502

 

$

253,287

 

 

Contract revenues are generally derived from studies conducted with biopharmaceutical and pharmaceutical companies. The specific methodology for revenue recognition is determined on a case-by-case basis according to the facts and circumstances applicable to a given contract. The Company typically uses an input method that recognizes revenue based on the Company’s efforts to satisfy the performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. Advance payments received in excess of revenues recognized are classified as deferred revenue until such time as the revenue recognition criteria have been met.

 

Note 3.  Net Income (Loss) Per Share

 

Basic net income (loss) per share is calculated by dividing net income (loss) for the period by the weighted-average number of common shares outstanding for the period without consideration of potential common shares. Diluted earnings per share is calculated using the weighted-average number of common shares outstanding including the dilutive effect of stock awards as determined under the treasury stock method. In periods when the Company has a net loss, stock awards are excluded from the calculation of diluted net loss per share as their inclusion would have an antidilutive effect.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

    

 

(In thousands, except per share amounts)

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Net income (loss)

 

$

12,225

 

$

(2,191)

 

$

16,767

 

$

(5,736)

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares of common stock outstanding used in the calculation of basic net income (loss) per share

 

 

35,925

 

 

34,675

 

 

35,558

 

 

34,373

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options to purchase common stock

 

 

1,555

 

 

 —

 

 

1,046

 

 

 —

 

 

Restricted stock units

 

 

522

 

 

 —

 

 

417

 

 

 —

 

 

ESPP

 

 

24

 

 

 —

 

 

23

 

 

 —

 

 

Total

 

 

2,101

 

 

 —

 

 

1,486

 

 

 —

 

 

Weighted-average shares of common stock outstanding used in the calculation of diluted net income (loss) per share

 

 

38,026

 

 

34,675

 

 

37,044

 

 

34,373

 

 

Basic net income (loss) per share

 

$

0.34

 

$

(0.06)

 

$

0.47

 

$

(0.17)

 

 

Diluted net income (loss) per share

 

$

0.32

 

$

(0.06)

 

$

0.45

 

$

(0.17)

 

 

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The Company excluded stock awards of 65,000 and 547,000 for the three and nine months ended September 30, 2018 from the computation of diluted net income per share because their effect was anti-dilutive.

 

The Company excluded potentially dilutive stock awards of 793,000 and 782,000 for the three and nine months ended September 30, 2017 from the computation of diluted net loss per share because their effect was anti-dilutive.

 

 

 

 

Note 4.  Cash and Cash Equivalents, and Marketable Securities

 

The following tables set forth the Company’s cash and cash equivalents, and marketable securities as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

2018

 

2017

 

   (In thousands) 

Cash and cash equivalents

 

 

 

 

 

 

Cash

 

$

43,197

 

$

35,303

Money market deposits

 

 

18,056

 

 

10,215

Commercial paper

 

 

7,989

 

 

 -

Total cash and cash equivalents

 

 

69,242

 

 

45,518

Marketable securities

 

 

 

 

 

 

Commercial paper

 

 

73,784

 

 

30,272

Corporate debt securities

 

 

36,417

 

 

50,260

Corporate equity securities

 

 

3,820

 

 

3,525

Total marketable securities

 

 

114,021

 

 

84,057

Total cash and cash equivalents, and marketable securities

 

$

183,263

 

$

129,575

 

 

 

 

 

 

 

 

The following tables summarize the Company’s available-for-sale securities that are measured at fair value as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

Cost or

 

Gross

 

Gross

 

Total

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(In thousands)

Commercial paper

    

$

73,810

    

$

 4

    

$

(30)

    

$

73,784

Corporate debt securities

 

 

36,440

 

 

 —

 

 

(23)

 

 

36,417

Total

 

$

110,250

 

$

 4

 

$

(53)

 

$

110,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

Cost or

 

Gross

 

Gross

 

Total

 

 

Amortized

 

Unrealized

 

Unrealized

 

Estimated

 

 

Cost

 

Gains

 

Losses

 

Fair Value

 

 

(In thousands)

Commercial paper

    

$

30,315

    

$

 —

    

$

(43)

    

$

30,272

Corporate debt securities

 

 

50,331

 

 

 2

 

 

(73)

 

 

50,260

Corporate equity securities

 

 

4,020

 

 

 —

 

 

(495)

 

 

3,525

Total

 

$

84,666

 

$

 2

 

$

(611)

 

$

84,057

 

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All of the Company’s marketable securities had contractual maturities of one year or less as of September 30, 2018 and December 31, 2017.

 

The following table provides the breakdown of the available-for-sale marketable securities with unrealized losses as of the dates indicated:

 

 

 

 

 

 

 

 

 

 

In a Loss Position for

 

 

Less Than 12 Months

 

 

Gross

 

 

 

 

 

Unrealized

 

Estimated

 

 

Losses

 

Fair Value

 

 

(In thousands)

As of September 30, 2018:

 

 

 

 

 

 

Commercial paper

    

$

(30)

    

$

62,438

Corporate debt securities

 

 

(23)

 

 

36,417

Total

 

 

(53)

 

$

98,855

As of December 31, 2017:

 

 

 

 

 

 

Commercial paper

 

$

(43)

 

$

30,272

Corporate debt securities

 

 

(73)

 

 

45,110

Corporate equity securities

 

 

(495)

 

 

3,525

Total

 

$

(611)

 

$

78,907

 

Marketable Equity Securities

 

Prior to January 1, 2018, the Company accounted for its marketable equity securities at fair value with unrealized gains and losses recognized in accumulated other comprehensive income on the balance sheet. Realized gains and losses on marketable equity securities sold or impaired were recognized in other income (expense), net.

 

On January 1, 2018, the Company adopted the ASU No. 2016-01 which changed the way the Company accounts for marketable equity securities. The Company’s marketable equity securities are measured at fair value and starting January 1, 2018, unrealized gains and losses are recognized in other income (expense), net. Upon adoption, the Company reclassified $180,000 of unrealized loss related to marketable equity securities from accumulated other comprehensive income to opening accumulated deficit.

 

In December 2017, the Company invested €3.4 million or $4.0 million in 270,000 shares of the common stock of Biocartis, a public company listed on the Euronext exchange. This corporate equity security investment was accounted for as an available-for-sale marketable security and valued at €3.0 million or $3.5 million at December 31, 2017. During the year ended December 31, 2017, $180,000 of unrealized losses relating to changes in the fair value of this investment were recorded in other comprehensive income. These securities are subject to a lock-up agreement which expires in December 2018. In accordance with ASU No 2016-01, the Company recorded an increase in fair value of $127,000 and $345,000 and a foreign currency revaluation gain of $42,000 and loss of $50,000, in other income (expense), net for the three and nine months ended September 30, 2018, respectively.

 

During the three months ended March 31, 2017, the Company sold its remaining shares of the common stock of Invitae Corporation for net proceeds of $10.2 million based on a cost of $6.28 per share, resulting in a realized gain of $2.8 million. There were no shares sold during the three and nine months ended September 30, 2018. During the three months ended March 31, 2017, $1.1 million of unrealized gain, net of tax of $821,000 related to the shares sold was reclassified out of accumulated other comprehensive income into earnings.

 

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Note 5.  Fair Value Measurements

 

Fair Value Hierarchy

 

The Company measures certain financial assets, including cash equivalents and marketable securities, at their fair value on a recurring basis. The fair value of these financial assets was determined based on a hierarchy of three levels of inputs, of which the first two are considered observable and the last unobservable, as follows:

 

Level 1:   Quoted prices in active markets for identical assets or liabilities;

 

Level 2:   Observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and

 

Level 3:   Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis

 

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 did not have any non-financial assets or liabilities that were measured or disclosed at fair value on a recurring basis at either September 30, 2018 or December 31, 2017. The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis at September 30, 2018 and December 31, 2017 by level within the fair value hierarchy:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actively Quoted

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Balance at

 

 

Assets

 

Inputs

 

Inputs

 

September 30,

 

 

Level 1

 

Level 2

 

Level 3

 

2018

 

 

(In thousands)

As of September 30, 2018:

    

 

    

    

 

    

    

 

    

    

 

    

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

18,056

    

$

 —

    

$

 —

    

$

18,056

Commercial paper

 

 

 —

 

 

81,773

 

 

 —

 

 

81,773

Corporate debt securities

 

 

 —

 

 

36,417

 

 

 —

 

 

36,417

Corporate equity securities

 

 

 —

 

 

3,820

 

 

 —

 

 

3,820

Total

 

$

18,056

 

$

122,010

 

$

 —

 

$

140,066

 

 

 

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Actively Quoted

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

Balance at

 

 

Assets

 

Inputs

 

Inputs

 

December 31,

 

 

Level 1

 

Level 2

 

Level 3

 

2017

 

 

(In thousands)

As of December 31, 2017:

    

 

    

    

 

    

    

 

    

    

 

    

Assets

 

 

 

 

 

 

 

 

 

 

 

 

Money market deposits

 

$

10,215

    

$

 —

    

$

 —

    

$

10,215

Commercial paper

 

 

 —

 

 

30,272

 

 

 —

 

 

30,272

Corporate debt securities

 

 

 —

 

 

50,260

 

 

 —

 

 

50,260

Corporate equity securities

 

 

 —

 

 

3,525

 

 

 —

 

 

3,525

Convertible promissory note

 

 

 —

 

 

 —

 

 

1,329

 

 

1,329

Total

 

$

10,215

 

$

84,057

 

$

1,329

 

$

95,601

 

The Company’s commercial paper and corporate debt securities are classified as Level 2 as they are valued using multi-dimensional relational pricing models that use observable market inputs, including benchmark yields, reported trades, broker-dealer quotes, issuer spreads, benchmark securities, bids, offers and reference data. Not all inputs listed are available for use in the evaluation process on any given day for each security evaluation. In addition, market indicators and industry and economic events are monitored and may serve as a trigger to acquire further corroborating market data. The Company’s corporate equity securities are classified as Level 2 while subject to certain restrictions on sale.

 

The Company estimated its investment in a convertible promissory note of Cleveland Diagnostics to be approximately $1.3 million at December 31, 2017. The convertible promissory note was classified as Level 3 as it was valued using unobservable inputs that were primarily based on the Company’s estimate of the fair value of the underlying preferred stock into which the note would be convertible.  In June 2018, the Company made a business decision to terminate its milestone-based collaboration with Cleveland Diagnostics and wrote off the convertible promissory note. See Note 6, “Collaboration and Commercial Technology Licensing Agreements,” for additional information.

 

 

Note 6. Collaboration and Commercial Technology Licensing Agreements

 

The Company has entered into a variety of collaboration and specimen transfer agreements relating to its development efforts. The Company recorded collaboration expenses of $2.6 million and $6.4 million for the three and nine months ended September 30, 2018, respectively, and $4.3 million and $6.2 million for the three and nine months ended September 30, 2017, respectively, relating to services provided in connection with these agreements. In addition to these expenses, some of the agreements contain provisions for royalties from inventions resulting from the collaborations. The Company has specified options and rights relating to joint inventions arising out of these collaborations.

 

The Company is a party to various agreements under which it licenses technology on a non-exclusive basis in the field of human diagnostics. Access to these licenses enables the Company to process its tests. While certain agreements contain provisions for fixed annual payments, license fees are generally calculated as a percentage of product revenues, with rates that vary by agreement and may be tiered, and payments that may have annual minimum or maximum amounts. The Company recognized costs recorded under these agreements totaling $64,000 and $198,000 for the three and nine months ended September 30, 2018, respectively, and $68,000 and $258,000 for the three and nine months ended September 30, 2017, respectively, which were included in cost of product revenues.

 

In June 2016, the Company entered into a collaboration agreement with Epic Sciences, under which the Company was granted exclusive distribution rights to commercialize Epic Sciences’ AR-V7 Nucleus Detect test in the United States, which is marketed as Oncotype DX AR-V7 Nucleus Detect. The Company has primary responsibility, in accordance with applicable laws and regulations, for marketing and promoting the test, order fulfillment, billing and collections of receivables, claims appeals, customer support, and providing and maintaining order management systems for the test. Epic Sciences is responsible for performing all tests, performing studies, including analytic and clinical

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validation studies, and seeking Medicare coverage and a Medicare payment rate from the Centers for Medicare and Medicaid Services (“CMS”) for the test. Future revenues generated from the test will be shared by the Company and Epic Sciences in accordance with the terms of the agreement. During 2016 and 2017, the Company invested $7.5 million in subordinated convertible promissory notes of Epic Sciences that converted into shares of Epic Sciences preferred stock in March 2017. The subordinated convertible promissory notes had been recognized at fair value, which the Company estimated to be approximately $7.1 million while the difference of $375,000 was deferred as of December 31, 2017 and will be recognized as an additional cost of future purchases of Oncotype DX AR-V7 Nucleus Detect tests, which the Company believes will be at a discount to fair value. The Company originally agreed to invest an additional $2.5 million in Epic Sciences preferred stock, upon achievement of one of the milestones. In June 2018, prior to the achievement of the milestone, the Company invested an additional $2.5 million in Epic Sciences preferred stock and the milestone payment was waived by Epic Sciences. Additional terms of the agreement include the Company’s obligation to pay Epic Sciences $4.0 million upon achievement of certain milestones. The collaboration agreement has a term of 10 years, unless terminated earlier under certain circumstances.

 

In September 2017, the Company entered into an exclusive license and development agreement with Biocartis, a molecular diagnostics company based in Belgium, to develop and commercialize an in vitro diagnostic (“IVD”) version of the Oncotype DX breast cancer test on Biocartis’ Idylla platform that can be performed locally by laboratory partners and in hospitals around the world. Under the terms of the license and development agreement, the Company has an exclusive, worldwide, royalty-bearing license to develop and commercialize an IVD version of the Oncotype DX breast cancer test on the Biocartis Idylla platform, and an option to expand the collaboration to include additional tests in oncology and urology. The Company has primary responsibility for developing, validating and obtaining regulatory authorizations and registrations for IVD Oncotype DX tests to be performed on the Idylla platform. The Company is also responsible for manufacturing and commercialization activities with respect to such tests. Pursuant to the license and development agreement, the Company recorded a one-time upfront license and option fee of €2.8 million, or $3.2 million, which is included in research and development expenses in the year ended December 31, 2017. In December 2017, the Company purchased 270,000 ordinary shares of Biocartis at the market price of €12.50 for a total cost of €3.4 million or $4.0 million. This investment is subject to a lock-up agreement that expires in December 2018. The investment has been recognized at fair value, which the Company believes to be $3.8 million and $3.5 million at September 30, 2018 and December 31, 2017, respectively. In September 2018, the Company extended its option to expand the collaboration to include urology, and recorded a €1.0 million, or $1.2 million, expense. Additional terms of the license and development agreement include the Company’s obligation to pay Biocartis an aggregate of €5.5 million in cash upon achievement of certain milestones, and royalties based primarily on the future sales volumes of the Company’s test performed on the Idylla platform and expansion of the collaboration to include additional tests in oncology and urology.

 

In November 2017, the Company entered into an exclusive licensing agreement with Cleveland Diagnostics to develop and commercialize new prostate cancer tests based on Cleveland Diagnostics' IsoPSA reagents and technology. During the year ended December 31, 2017, the Company invested $2.0 million in a convertible promissory note of Cleveland Diagnostics. The convertible promissory note has been recognized at fair value, which the Company estimated to be approximately $1.3 million at December 31, 2017 based on the Company’s estimate of the fair value of the underlying preferred stock into which the note is convertible. In June 2018, the Company made a business decision to discontinue development of the IsoPSA assay and terminate its agreement with Cleveland Diagnostics following its internal review for advancing an early stage technology into the next phase of product development. As a result, the Company wrote off the convertible promissory note and interest accrued through the termination date in the aggregate amount of $1.4 million in the second quarter of 2018.

 

Note 7. Commitments and Contingencies

 

Lease Obligations

 

The Company has entered into non-cancellable operating leases for laboratory and office facilities. Rental expense under operating lease agreements was $1.5 million and $4.7 million for the three and nine months ended September 30, 2018, respectively, and $1.6 million and $4.7 million for the three and nine months ended September 30, 2017, respectively.

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Future non‑cancelable commitments under these operating leases at September 30, 2018 were as follows:

 

 

 

 

 

 

    

Annual

 

 

Payments

 

 

(In thousands)

Years Ending December 31,

 

 

 

2018 (remainder of year)

 

$

1,568

2019

 

 

6,841

2020

 

 

7,005

2021

 

 

4,797

2022

 

 

4,174

2023 and thereafter

 

 

1,081

Total minimum payments

 

$

25,466

 

Contingencies

From time to time, the Company may be subject to various legal proceedings and claims arising in the ordinary course of business. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual in its consolidated financial statements. An estimated loss contingency is accrued in the consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Legal proceedings, including litigation, government investigations and enforcement actions, could result in material costs, occupy significant management resources and entail civil and criminal penalties, even if the Company ultimately prevails.  Any of the foregoing consequences could result in serious harm to the Company’s business, results of operations and financial condition.

 

 

Note 8. Stock-Based Compensation

 

Stock Options

 

The following table summarizes the activities for stock options for the nine months ended September 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Options

 

 

Number of

 

Weighted-Average

 

 

Shares

 

Exercise Price

 

 

(In thousands)

 

 

Balance at December 31, 2017

 

3,460

 

$

26.42

Options granted

 

667

 

$

35.12

Options exercised

 

(586)

 

$

22.93

Options forfeited

 

(111)

 

$

29.68

Options expired