GENOMIC HEALTH INC

The Company assesses whether it is the primary beneficiary of a variable interest entity (“VIE”) at the inception of the arrangement and at each reporting date. This assessment is based on the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and the Company’s obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company continuously performs this assessment, as changes to existing relationships or future transactions may result in the consolidation or deconsolidation of a VIE.

In June 2016, the Company entered into a collaboration agreement with Epic Sciences, which was superseded and replaced in March 2019 by a license agreement and laboratory services agreement with Epic Sciences, under which the Company was granted an exclusive license and distribution rights to commercialize Epic Sciences’ AR-V7 test in the United States, which is marketed under the Company’s trademark as the Oncotype DX AR-V7 Nucleus Detect test. 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, clinical utility and clinical validation studies, and seeking Medicare coverage and a Medicare payment rate from the Centers for Medicare and Medicaid Services (“CMS”) for the test. The license and laboratory service agreement has a term of 10 years from June 2016, unless terminated earlier under certain circumstances. The Oncotype DX AR-V7 Nucleus Detect test became commercially available in February 2018. In October 2018, Palmetto GBA (“Palmetto”), the Medicare Administrative Contractor that sets Medicare coverage policies, approved coverage for the use of the Oncotype DX AR-V7 test through its final local coverage determination (“LCD”), providing initial coverage for eligible Medicare patients for dates of service on or after December 10, 2018. The Company recognizes revenues for the test performed under this arrangement and Epic Sciences receives a fee per test performed that represents the fair market value for the testing services they perform.

Under collaboration agreement, in 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 has been recognized as an additional cost of purchases of Oncotype DX AR-V7 Nucleus Detect tests, which the Company believes would be at a discount to fair value. In June 2018, the Company invested an additional $2.5 million in Epic Sciences preferred stock.

The Company has operating for office and laboratory facilities, data centers and certain equipment, some of which include options to extend for 5 years and finance leases for certain equipment. The Company's leases have remaining lease terms of 1 to 9 years. Under Topic 842, the Company determines if an arrangement is a lease at inception. ROU assets and liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date or remeasurement date in determining the present value of lease payments. The incremental borrowing rate is a hypothetical rate based on the Company’s understanding of what its credit rating was as of such date. Leases with an initial term of 12 months or less ("short-term leases") and leases deemed immaterial are not recorded on the condensed consolidated balance sheet. Certain of the Company’s lease contracts include obligations to pay for other services, such as operations and maintenance. The Company accounts for these other services as a component of the lease when related payments are fixed or vary depending on an index or a rate.

The $102,000, or 1%, increase in general and administrative expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due to a $412,000 increase in billing and collections partially offset by a $443,000 decrease in contract labor and consulting services related to the evaluation of our business for process improvements and information technology enhancements in 2018.  Personnel-related expenses were flat period over period as a result of increases in bonus accruals, stock compensation expense and payroll taxes totaling $641,000 offset by a decrease in salary and benefits of $633,000. The decrease in salary and benefits for the three months ended March 31, 2019 is primarily due to the $909,000 in severance and other personnel-related costs related to our cessation of Oncotype SEQ in March 2018.

We do not have the ability to independently conduct the clinical studies or other studies that may be required to obtain FDA, EU and other regulatory clearance or approval for our IVD products. Accordingly, we expect to rely on third parties, such as medical institutions and clinical investigators, to conduct such studies. Our reliance on these third parties for clinical development activities will reduce our control over these activities. These third-party contractors may not complete activities on schedule or conduct studies in accordance with regulatory requirements or the study design. Our reliance on third parties that we do not control will not relieve us of any applicable requirement to ensure compliance with various procedures required under good clinical practices and regulatory requirements. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if the third parties need to be replaced or if the quality or accuracy of the data they obtain is compromised due to their failure to adhere to our clinical protocols or regulatory requirements or for other reasons, the studies may be extended, delayed, suspended or terminated, and we may not be able to obtain regulatory approval for our diagnostic products in a timely manner, or at all.