XML 41 R25.htm IDEA: XBRL DOCUMENT v3.10.0.1
Related Party Transactions
12 Months Ended
Dec. 31, 2018
Related Party Transactions [Abstract]  
Related Party Transactions

Note 16. Related Party Transactions

QML Master Assay Development, Commercialization and Manufacturing Agreement

In November 2016, the Company and QML entered into the Governing Agreement, which creates a framework for QML and the Company to combine their technological and commercial strengths to offer biopharmaceutical companies a complete NGS-based solution for the development, manufacture and commercialization of companion diagnostic assays. Under the Governing Agreement, the parties jointly seek companion diagnostic programs with biopharmaceutical companies, QML enters into sponsor project agreements with interested biopharmaceutical companies for specified projects, and QML and the Company enter into statements of work, which set forth the rights and obligations of QML and the Company with respect to each project.

The parties’ relationship under the Governing Agreement is exclusive in the oncology field. Such exclusivity in the oncology field may be lost and become non-exclusive if certain performance targets are not met. Projects may be undertaken in non-oncology fields at each party’s discretion on a non-exclusive basis.

QML and the Company share net profits under each statement of work, based on whether development of particular assays under a statement of work are primarily based on HTG or QML intellectual property. Each statement of work provides additional financial terms for the corresponding Project, which terms depend on the respective development and/or commercialization activities of the parties.

The Governing Agreement has a five-year term. However, either party may terminate the Governing Agreement upon (i) the other party’s uncured material breach, bankruptcy or insolvency, (ii) specified events affecting all statements of work, or (iii) a change of control by either party, except neither party will have such change of control termination right to the extent the termination of the Governing Agreement relates to SOW One, SOW Two or SOW Three (each defined below). In the event a party terminates the Governing Agreement for its own change of control, a $2.0 million termination payment will be payable to the non-terminating party.

The Company has determined that SOW One, SOW Two and SOW Three (each defined below) are collaborative arrangements and that QML meets the definition of a customer under ASC 606. Additionally, each SOW is a separate contract with a single performance obligation to provide development services. Under each SOW, QML pays the Company a monthly fee for development work performed by the Company and its subcontractors. The monthly fee is based on the employee and materials costs incurred during the month, which is subject to significant variability from period to period and unknown until the costs are incurred. Therefore, the monthly fee, which is based on use of hours and costs as a measure of progress, is included in the transaction price and recognized as revenue over time when the costs are incurred and the monthly fee is billed to QML. As the Company has the right to consideration from the customer in an amount that corresponds directly to the value to the customer of its performance completed to date, revenue in the amount to which the Company has the right to invoice is recognized. It is at this time that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company and QML also will share any net profits resulting from performance of the development work as determined pursuant to the Governing Agreement. Such profit sharing payment(s) is deemed to be variable consideration using the expected value method and is included in the transaction price upon completion of the respective SOW deliverables, acceptance of corresponding deliverables, and the mutual agreement by QML and the Company on the calculation of net profit, which is when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur.

Because each SOW has an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations for each SOW

Statement of Work No. One

In June 2017, the Company and QML entered into the first statement of work under the Governing Agreement, which has been twice amended in December 2017 and March 2018 (collectively, “SOW One”). SOW One addressed the activities of the Company and QML in support of the development and potential commercialization of a next generation sequencing-based companion diagnostic assay that was the subject of a sponsor project agreement between QML and a biopharmaceutical company (“Pharma One”). In May 2018, SOW One was terminated by QML as a result of Pharma One’s termination of the development of its product candidate project. The Company discontinued development activities related to the project following wind down activities completed in the second quarter of 2018.

Revenue of $2,297,742, including only SOW One Monthly Fees, and $99,394 of SOW One profit sharing payments has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2018, compared to $2,604,892 , including only SOW One Monthly Fees and $1,272,080 of SOW One profit sharing payments, for the year ended December 31, 2017. Costs relating to development activities conducted by the Company pursuant to SOW One of $1,716,115 and $2,129,138 have been included in research and development expense in the accompanying consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively. Accounts receivable relating to SOW One of $0 and $2,429,152 remained in the accompanying consolidated balance sheets as of December 31, 2018 and 2017, respectively.

Statement of Work No. Two

In October 2017, the Company and QML entered into the second statement of work under the Governing Agreement (“SOW Two”), which was made effective as of June 2, 2017 (“Onset Date”). The Company and QML amended SOW Two twice in August 2018 and an additional time in September 2018.

SOW Two addresses development activities conducted by the Company and QML since the Onset Date and those expected to be further conducted by parties in connection with what is expected to be a multi-stage project leading to the potential development and commercialization of an NGS-based companion diagnostic assay in support of one or more therapeutic product candidate development and commercialization programs for a third-party pharmaceutical company. The initial-phase investigational use only (“IUO”) development activities under SOW Two have been completed and the first two amendments of SOW Two relate to the next phases, which include the use of the IUO assay developed in the initial-phase in a retrospective clinical trial and in additional disease indications. The third amendment to SOW Two provides that profit sharing relating to the original development activities and the development activities contemplated by the first SOW Two amendment will, in each case, commence upon the later of (i) the third amendment effective date, which is September 27, 2018, and (ii) the completion of the respective development activities, rather than at the end of each calendar quarter, provided that such modification to the profit-sharing commencement date only applies to development activities that had not yet been subject to profit-sharing as of the third amendment effective date. QML will continue to pay the Company for the development services to be performed under SOW Two. The Company and QML will share in any net profits (as determined under the Governing Agreement) generated during the work on an approximately quarterly basis throughout the term of SOW Two, except as otherwise specified in the third amendment to SOW Two.

The Supplement Agreement initially entered into concurrent with SOW Two was also amended in August 2018 and made effective as of July 2018. This amendment establishes certain rights and obligations of the parties with regard to confidential information and other intellectual property needed to perform, and/or produced as a result of the next phase project activities contemplated by the SOW Two amendments and does not materially change the terms and conditions agreed upon by the parties in the original Supplement Agreement.    

Revenue of $5,988,021, including SOW Two Monthly Fees of $4,208,194 and SOW Two profit sharing payments of $1,779,827, has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2018. Revenue of $4,060,341, including SOW Two Monthly Fees of $2,988,211 and SOW Two profit sharing payments of $1,072,130 has been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2017. Costs relating to development activities conducted by the Company pursuant to SOW Two of $3,625,332 and $2,645,825 have been included in research and development expense in the accompanying consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively. Accounts receivable relating to SOW Two of $1,007,950 and $1,796,157 remained in the accompanying consolidated balance sheets as of December 31, 2018 and 2017, respectively.

Statement of Work No. Three

In January 2018, the Company and QML entered into a third statement of work under the Governing Agreement (“SOW Three”) and amended SOW Three in September 2018. SOW Three relates to development activities for a next generation sequencing-based clinical-trial assay (“SOW Three Project”) in connection with a sponsor project agreement between QML and a pharmaceutical company (“Pharma Three”). Initial assay development activities under SOW Three have been completed, and the first amendment to SOW Three provides for the development of an IUO assay, subsequent retrospective testing of clinical trial samples, design verification and, subject to satisfactory achievement of relevant performance and regulatory milestones, regulatory submissions in the United States and EU necessary for the commercialization of a companion diagnostic for a corresponding Pharma Three drug.  

Under the terms of SOW Three, the Company has agreed to assign its rights in certain SOW Three Project-related intellectual property (“Project IP”) predominantly related to Pharma Three’s drug candidate(s) to QML for ultimate assignment to Pharma Three in accordance with the sponsor project agreement between QML and Pharma Three. Improvements to the background intellectual property of the Company, QML and Pharma Three generally will be owned solely by the respective party. Otherwise, Project IP will be jointly owned among the Company, QML and Pharma Three.The development activities to be performed under SOW Three are expected to extend through the first half of the fiscal year ended December 31, 2020, with key development milestones, testing and regulatory filings occurring throughout the period. QML will pay the Company for the development services performed for SOW Three. In addition, the Company and QML will share in any net profits (as determined under the Governing Agreement) generated during the work on an approximately quarterly basis throughout the term of SOW Three.

Revenue of $3,997,346, including SOW Three Monthly Fees of $3,641,715 and SOW Three profit sharing payments of $355,631 have been included in collaborative development services revenue in the accompanying consolidated statements of operations for the year ended December 31, 2018. Costs relating to development activities conducted by the Company pursuant to SOW Three of $2,667,030 have been included in research and development expense in the accompanying consolidated statements of operations for the year ended December 31, 2018. No costs or revenue relating to SOW Three were included in the accompanying consolidated statements of operations for the year ended December 31, 2017 as SOW Three was not established until January 2018. Accounts receivable relating to SOW Three of $363,869 and $0 remained in the accompanying consolidated balance sheets as of December 31, 2018 and 2017, respectively.

QNAH Stock Purchase Agreement

Pursuant to a stock purchase agreement, entered concurrent with the Governing Agreement, QNAH, purchased 833,333 shares of the Company’s common stock on November 17, 2016 at $2.40 per share, for a total purchase price of $2.0 million.

The purchase price for the shares of common stock purchased by QNAH reflected the parties’ agreement as to the fair market value of the shares. However, the portion of the purchase price per share that exceeded the most recently reported closing price of the Company’s common stock, or $175,000 in the aggregate, was attributed to the Governing Agreement and recorded as deferred revenue. This deferred revenue is being recognized on a straight-line basis over the Governing Agreement’s five-year term. The Company recognized $35,000 and $4,375 of this consideration as revenue for the years ended December 31, 2018 and 2017, respectively.

The second tranche closing contemplated by the stock purchase agreement did not occur, and accordingly, QNAH did not purchase any additional shares under the stock purchase agreement. QNAH does not have, and as of December 31, 2017 did not have, any further obligation to purchase common stock under the stock purchase agreement.

QNAH Convertible Note Agreement

In October 2017, the Company issued a subordinated convertible promissory note to QNAH in the principal amount of $3.0 million against receipt of cash proceeds equal to such principal amount. The QNAH Convertible Note bears simple interest at the rate of 3.0% per annum and matures on October 26, 2020 (the “Maturity Date”). Neither interest nor principal payment are due until the Maturity Date, subject to earlier conversion. QNAH may elect to convert all or any portion of the outstanding principal balance of the Note and all unpaid accrued interest thereon at any time prior to the Maturity Date into shares of the Company’s common stock at a conversion price of $3.984 per share.

Debt issuance costs of $25,787 and $40,510 relating to the QNAH Convertible Note are being presented as a direct reduction of Convertible Note, related party – net of debt issuance costs as of December 31, 2018 and December 31, 2017, respectively. Amortization of the QNAH Convertible Note deferred financing costs was $13,454 and $1,269 for the years ended December 31, 2018 and 2017, respectively. Interest accrued on the QNAH Convertible Note for the years ended December 31, 2018 and 2017 was $90,000 and $8,630, respectively. Both amounts were included in interest expense in the accompanying consolidated statements of operations.