Note 9. Other Agreements

NuvoGen Obligation

The Company entered into an asset purchase agreement in 2001, as amended, with NuvoGen Research, LLC (“NuvoGen”) to acquire certain intellectual property from NuvoGen. The Company accounted for the transaction as an asset acquisition. However, as the intellectual property was determined to not have an alternative future use, the upfront consideration was expensed. In exchange for the intellectual property, the Company initially paid NuvoGen 5,587 shares of the Company’s common stock, fixed payments of $740,000 over the first two years of the agreement and agreed to pay NuvoGen 6% of its yearly revenue, which would be applied to any fixed payments, until the total aggregate cash compensation paid to NuvoGen under the agreement equaled $15,000,000. Certain terms of the agreement were amended in November 2003, September 2004, November 2012 and February 2014. Pursuant to the latest amendment to the agreement, the Company became required to pay a yearly fixed fee, in quarterly installments, to NuvoGen in the range of $543,750 to $800,000, and may defer any accrued revenue-based payments. No accrued revenue-based payments have been deferred through December 31, 2016. Beginning in 2018, we are obligated to pay the greater of $400,000 or 6% of the Company’s applicable annual revenues, plus amounts, if any, deferred in 2017 by which 6% of revenue exceeds the applicable fixed fee plus 5% interest on such deferred amounts until the obligation is paid in full. The obligation is currently non-interest bearing and was, but is no longer, secured by certain patents and trademarks.

Pursuant to the closing of the Growth Term Loan in August 2014 (see Note 8), the Company agreed to accelerate certain minimum payments pursuant to the asset purchase agreement and NuvoGen agreed to terminate its security interest in the originally pledged patents and trademarks. Remaining minimum payments that were otherwise due for 2014, 2015 and the first quarter of 2016, amounting to $868,750 were paid in advance. The acceleration of payments did not significantly change the minimum cash flows and therefore had no significant accounting effect. Since quarterly payments resumed in the second quarter of 2016, $543,750 has been paid to NuvoGen toward the remaining obligation.

The remaining minimum principal payments due to NuvoGen at December 31, 2016 are as follows, although actual payments could be significantly more than provided in the table in 2018 and beyond to the extent that 6% of revenue exceeds $400,000:

2017	$	800,000
2018		400,000
2019		400,000
2020		400,000
2021		400,000
2022 and beyond		6,298,743
Total NuvoGen obligation payments		8,698,743
Less discount		(76,636	)
Total NuvoGen obligation, net	$	8,622,107

The Company recorded the obligation at the estimated present value of the future payments using a discount rate of 2.5%, the Company’s estimate of its effective borrowing rate for similar obligations. Unamortized debt discount was $76,636 and $283,621 at December 31, 2016 and 2015, respectively. Discount accreted during the years ended December 31, 2016 and 2015 was $206,985, and $281,013, respectively.

Illumina, Inc. Agreement

The Company entered into a development and component supply agreement in 2014 with Illumina, Inc. (“Illumina”) for the development and worldwide commercialization by the Company of up to two complete diagnostic gene expression profiling tests for use with Illumina’s diagnostic instruments, using components supplied by Illumina. The Company refers to these diagnostic gene expression profiling tests as in vitro diagnostic (“IVD”) test kits. The IVD test kits originally could be used in up to two discrete testing fields chosen by the Company, one or both of which could relate to oncology for breast, lung, lymphoma or melanoma tumors, and one of which could relate to transplant, chronic obstructive pulmonary disease, or immunology/autoimmunity. The Company provided notice to Illumina of its first testing selection during the quarter ended March 31, 2015. The Company is in discussions with Illumina regarding, among other things, a potential extension of the original October 2016 deadline to select a second field.

In the fourth quarter of 2015, the Company and Illumina agreed to a development plan for the development and regulatory approval of the selected IVD test kit, following which the Company paid Illumina a $100,000 fee. Illumina has agreed to provide development and regulatory support as part of the plan, which relates to the Company’s HTG EdgeSeq ALKPlus Assay, now in development. The Company is also required to pay Illumina up to $1.0 million in the aggregate upon achievement of specified regulatory milestones relating to the IVD test kit, though none of these regulatory milestones have been reached through December 31, 2016. In addition, the Company has agreed to pay Illumina a single digit percentage royalty on net sales of any IVD test kit that the Company commercializes pursuant to the agreement. Ongoing research and development costs for these programs have been expensed as incurred.

The agreement will expire on the earlier of October 2019 or the date which the last to expire development plan under the agreement is completed. The Company may terminate the agreement at any time upon 90 days’ written notice and may terminate any development plan under the agreement upon 30 days’ prior written notice. Illumina may terminate the agreement upon 30 days’ prior written notice if the Company undergoes certain changes of control. Either party may terminate the agreement upon the other party’s material breach of the agreement that remains uncured for 30 days, or upon the other party’s bankruptcy.

Invetech PTY Ltd. Agreement

In September 2015, the Company entered into a development and professional services agreement with Invetech PTY Ltd. (“Invetech”), for the conduct of research and development of a next generation automated sample library preparation instrument. This instrument is intended for laboratories with low volume sample throughput and further is intended to automate assays designed for the Company’s V2 chemistry. This instrument design and development program is being referred to as Project JANUS.

The agreement requires the execution of a development plan for each stage of the project. Upon full execution and delivery of each development plan, the Company will pay Invetech development fee installments for that development plan. Stage 0 was completed during the second half of 2015. In July 2016, the Company entered into an amendment with Invetech, extending and concluding Stage 1.1 through the end of July 2016 and further suspending Invetech’s project development activities until the Company makes the decision to resume further external development efforts. We anticipate resumption of development efforts in 2017 as our V2 chemistry nears commercialization. The Invetech agreement remains in effect through completion of all tasks and the Company’s acceptance of all deliverables under each development plan unless terminated earlier as provided for in the agreement.

Research and development expense included in the statements of operations relating to Invetech development fee installments was $2.3 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively.

Life Technologies Corporation Agreement

In March 2016, the Company entered into an Authorization, Supply and Regulatory Authorization Agreement with Life Technologies Corporation (“LTC”), a wholly owned subsidiary of Thermo Fisher Scientific, Inc., for the development and worldwide commercialization by the Company of up to five RNA-based next generation sequencing panels (“HTG Assays”) for use with LTC’s sequencing instruments and components supplied to end-users by LTC.

Pursuant to the agreement, the Company has agreed to obtain its requirements for certain components to be used in the development of HTG Assays from LTC. In March 2016, the Company purchased approximately $250,000 of LTC products and equipment in accordance with this agreement. LTC has agreed to provide support in the Company’s efforts to obtain regulatory approval of the HTG Assays. The Company is required to pay LTC a milestone payment in the mid-six figure dollar range upon certain regulatory achievements for each HTG Assay. In addition, the Company has agreed to pay LTC a single digit percentage royalty on net sales of any HTG Assays that the Company commercializes pursuant to the agreement. No milestone or royalty payments have been accrued or made pursuant to this agreement as of December 31, 2016.

Absent early termination, the initial term of the agreement will expire in March 2021 and thereafter will automatically renew for additional two year terms for as long as the Company continues to develop or sell HTG Assays. Either party may terminate the agreement by written notice delivered to the other party at least 60 days prior to the expiration of any then-current term. Either party may also terminate the agreement (a) upon the other party’s material breach that remains uncured for 30 days, (b) upon the other party’s bankruptcy or (c) upon written notice in the event the party providing notice reasonably determines that continued performance under the agreement would violate any regulatory law, or any other applicable law or regulation or U.S. Food and Drug Administration (“FDA”) guidance.

Bristol-Myers Squibb Agreement

In May 2016, the Company entered into a Collaboration Agreement with Bristol-Myers Squibb (“BMS”) for the development, in collaboration with BMS, of two custom assays based on the Company’s HTG EdgeSeq technology. Following development of each custom assay, at BMS’s request, the Company may also perform sample processing services using such custom assay(s) and/or supply the custom assay(s) to BMS or its third-party subcontractors. Additional custom assay development related to immuno-oncology research may be undertaken pursuant to the agreement in accordance with a mutually acceptable work plan, which is incorporated by written amendment.

BMS paid an initial non-refundable, non-creditable program set-up fee, and has agreed to pay an annual non-refundable, non-creditable project management fee in quarterly installments, as well as a fee for each custom assay developed. Each such fee was or is in the low six-figure range. At BMS’s request, custom assay kits will be supplied and sample processing services will be performed by the Company.

The agreement will expire on May 11, 2019 or, if a project is then ongoing, the date of delivery of the final report for such project. Either party may terminate the agreement upon the other party’s material breach or default in the performance of a material obligation under the agreement or if certain warranties or representations are untrue in any material respect (either a “Default”) and such Default remains uncured for 60 days or such longer period if the Default cannot be cured within 60 days. BMS may terminate a project upon 90 days’ prior written notice to the Company.

The agreement is a multiple-element arrangement under ASC 605-25. Custom assay development services, custom kit sales and sample processing services were each designated as an option to purchase additional products or services as described under ASC 605-25, and, as such, will not be considered in the initial allocation of contract consideration based on relative selling prices.

Each custom assay development service has three phases and each phase comprises multiple deliverables. Completion of all three phases is required for BMS to derive benefit from the respective deliverables; therefore, the three phases of a custom assay’s development will be combined as one unit of accounting for revenue recognition purposes.

Under ASC 605-25, fixed or determinable contract consideration is allocated to the deliverables with stand-alone value, and revenue is recognized for each such deliverable according to the method appropriate for each deliverable. All of the fixed or determinable contract consideration will be allocated to one deliverable, which is the research and development services culminating in the delivery of two custom assays.

The quarterly project management fees and the initial set-up fee will be recognized as the custom assay development services are performed on a proportional performance basis. Each custom assay development fee will also be recognized on a proportional performance basis as these services are provided. Because the custom assay fees are contingent upon completion of each individual phase of the design project and the decision by BMS to proceed to the next phase, the amount recognized will be limited to that which BMS is contractually obligated to pay upon completion of that phase.

For the year ended December 31, 2016, $189,442 was recognized under the agreement as service revenue in the statements of operations and $160,106 was recognized as deferred revenue in the balance sheets as of December 31, 2016. No revenue or deferred revenue was recognized relating to this BMS agreement for the year ended December 31, 2015.

Merck KGaA Agreement

In October 2016, the Company entered a Master CDx Agreement, or master agreement, with Merck KGaA, Darmstadt, Germany, (“Merck KGaA”) to serve as the basis for one or more project agreements to develop, seek regulatory approval for, and commercialize companion diagnostics for Merck KGaA drug candidates and corresponding therapeutics. Concurrently, the parties entered into a first project agreement under the master agreement concerning the Company’s sequencing-based DLBCL cell of origin assay (“DLBCL Assay”) and Merck KGaA’s investigational drug, M7583 (the “Project”).

The Project has three stages aligned with timelines and outcomes of M7583 development. During stages 1 and 2, the Company will perform specified DLBCL Assay development activities. In stage 3, the Company will obtain applicable regulatory approvals on the DLBCL Assay and make it commercially available in the United States and certain other jurisdictions.

Stages 2 and 3 each have an up-front payment and all stages of the Project have milestone-based payments. The Company is eligible to receive up to a total of approximately $1,850,000 over the next five years and $9,900,000 over a period of approximately nine years in fixed or determinable contract consideration comprising up-front and milestone payments. In addition, during stages 1 and 2 of the Project, the Company will sell DLBCL Assay kits and/or perform sample processing services upon request of, and as instructed by, Merck KGaA. The up-front and milestone-based payments could be delayed due to the risks of completing development activities and obtaining regulatory approvals within projected timeframes.

Merck KGaA may terminate the Project by providing 90 days’ prior written notice to the Company, at which point Merck KGaA will reimburse HTG for costs incurred during the termination period, of an amount not to exceed non-cancellable, non-reimbursable expenses, and HTG will reimburse Merck KGaA for any costs that have been prepaid without being incurred prior to termination. Further, either party may also terminate the agreement upon the other party’s material breach that remains uncured for 45 days or upon the other party’s bankruptcy.

The agreement is a multiple-element arrangement under ASC 605-25. Kit sales and sample processing services have been designated as an option to purchase additional products or services as described under ASC 605-25, and, as such, will not be considered in the initial allocation of contract consideration based on relative selling prices. The remaining deliverables, including licenses to HTG patents and research and development services, do not have standalone value and are combined into one unit of accounting.

Non-refundable up‑front payments will be received at the initiation of stages 2 and 3. These payments will be recognized as revenue over the period that the research services are expected to occur. All other payments are contingent upon completion of milestones. Costs incurred to date compared to total expected costs are used to determine proportional performance, as this is considered to be representative of the delivery of outputs under the Project. Revenue recognized at any point in time is limited to cash received and amounts contractually due. The Company did not receive any payments and did not recognize any revenue related to the Project for the year ended December 31, 2016.

Other Agreements With Related-Parties

Refer to Note 16 below for discussion of agreements with related parties.