flgt-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended 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: 001-37894

 

FULGENT GENETICS, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Delaware

81-2621304

( State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

4978 Santa Anita Avenue

Temple City, CA

91780

(Address of principal executive offices)

(Zip Code)

(626) 350-0537

(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

 

 

  

Small reporting company

 

 

 

 

 

Emerging growth company

 

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

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

As of November 1, 2018, there were 18,069,174 outstanding shares of the registrant’s common stock.

 

 

 

 

 


 

Table of Contents

 

 

Page

PART I—FINANCIAL INFORMATION

1

Item 1. Financial Statements (Unaudited)

1

Condensed Consolidated Balance Sheets

1

Condensed Consolidated Statements of Operations

2

Condensed Consolidated Statements of Comprehensive Income (Loss)

3

Condensed Consolidated Statements of Stockholders’ Equity

4

Condensed Consolidated Statements of Cash Flows

5

Notes to the Condensed Consolidated Financial Statements

6

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

19

PART II—OTHER INFORMATION

28

Item 1. Legal Proceedings

28

Item 1A. Risk Factors

28

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 6. Exhibits

52

Exhibit Index

53

Signatures

54

 

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

FULGENT GENETICS, INC.

Condensed Consolidated Balance Sheets

(in thousands, except par value data)

(unaudited)

 

 

September 30,

 

 

December 31,

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

$

8,489

 

 

$

6,490

 

Marketable securities

 

24,114

 

 

 

19,994

 

Trade accounts receivable, net of allowance for doubtful accounts of $516 and $287, as of September 30, 2018 and December 31, 2017, respectively

 

6,077

 

 

 

4,005

 

Other current assets

 

2,370

 

 

 

2,438

 

Total current assets

 

41,050

 

 

 

32,927

 

Marketable securities, long term

 

4,250

 

 

 

14,883

 

Equity method investments

 

1,746

 

 

 

1,937

 

Fixed assets, net

 

6,853

 

 

 

7,272

 

Deferred tax asset

 

929

 

 

 

126

 

Other long-term assets

 

18

 

 

 

39

 

Total assets

$

54,846

 

 

$

57,184

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Accounts payable

$

1,024

 

 

$

2,089

 

Accrued liabilities

 

1,231

 

 

 

911

 

Total current liabilities

 

2,255

 

 

 

3,000

 

Other long-term liabilities

 

11

 

 

 

6

 

Total liabilities

 

2,266

 

 

 

3,006

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

Common stock, $0.0001 par value per share, 50,000 shares authorized, 18,057 and 17,847 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

2

 

 

 

2

 

Preferred stock, $0.0001 par value per share, 1,000 shares authorized, no shares issued or outstanding at September 30, 2018 and December 31, 2017

 

 

 

 

 

Additional paid-in capital

 

113,600

 

 

 

111,884

 

Accumulated other comprehensive loss

 

(57

)

 

 

(44

)

Accumulated deficit

 

(60,965

)

 

 

(57,664

)

Total stockholders’ equity

 

52,580

 

 

 

54,178

 

Total liabilities and stockholders’ equity

$

54,846

 

 

$

57,184

 

 

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

 

1


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenue

$

5,625

 

 

$

4,503

 

 

$

15,678

 

 

$

14,449

 

Cost of revenue

 

2,612

 

 

 

2,268

 

 

 

7,928

 

 

 

6,006

 

     Gross profit

 

3,013

 

 

 

2,235

 

 

 

7,750

 

 

 

8,443

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

          Research and development

 

1,438

 

 

 

1,128

 

 

 

4,108

 

 

 

2,899

 

          Selling and marketing

 

1,115

 

 

 

1,383

 

 

 

3,524

 

 

 

3,125

 

          General and administrative

 

1,306

 

 

 

1,205

 

 

 

4,159

 

 

 

3,831

 

Total operating expenses

 

3,859

 

 

 

3,716

 

 

 

11,791

 

 

 

9,855

 

Operating loss

 

(846

)

 

 

(1,481

)

 

 

(4,041

)

 

 

(1,412

)

Interest and other income

 

143

 

 

 

145

 

 

 

336

 

 

 

384

 

Loss before income taxes and equity loss in investee

 

(703

)

 

 

(1,336

)

 

 

(3,705

)

 

 

(1,028

)

Benefit from income taxes

 

(318

)

 

 

(415

)

 

 

(852

)

 

 

(419

)

Loss before equity loss in investee

 

(385

)

 

 

(921

)

 

 

(2,853

)

 

 

(609

)

Equity loss in investee

 

(210

)

 

 

(172

)

 

 

(701

)

 

 

(277

)

Net loss

$

(595

)

 

$

(1,093

)

 

$

(3,554

)

 

$

(886

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

$

(0.03

)

 

$

(0.06

)

 

$

(0.20

)

 

$

(0.05

)

     Diluted

$

(0.03

)

 

$

(0.06

)

 

$

(0.20

)

 

$

(0.05

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Basic

 

18,012

 

 

 

17,752

 

 

 

17,931

 

 

 

17,713

 

     Diluted

 

18,012

 

 

 

17,752

 

 

 

17,931

 

 

 

17,713

 

 

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

 


2


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

(unaudited)

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net loss

$

(595

)

 

$

(1,093

)

 

$

(3,554

)

 

$

(886

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Foreign currency translation gain (loss)

 

(23

)

 

 

68

 

 

 

(44

)

 

 

68

 

     Net unrealized gain on marketable securities, net of tax

 

48

 

 

 

10

 

 

 

31

 

 

 

45

 

Comprehensive loss

$

(570

)

 

$

(1,015

)

 

$

(3,567

)

 

$

(773

)

 

 

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

3


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(in thousands)

(unaudited)

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Additional

Paid-In Capital

 

 

Accumulated

Other Comprehensive

Income (Loss)

 

 

Accumulated

Deficit

 

 

Total

Equity

 

Balance at December 31, 2016

 

 

17,676

 

 

$

2

 

 

$

109,734

 

 

$

(103

)

 

$

(55,154

)

 

$

54,479

 

Equity-based compensation

 

 

 

 

 

 

 

 

2,119

 

 

 

 

 

 

 

 

 

2,119

 

Exercise of common stock options

 

 

81

 

 

 

 

 

 

31

 

 

 

 

 

 

 

 

 

31

 

Restricted stock awards

 

 

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

59

 

 

 

 

 

 

59

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,510

)

 

 

(2,510

)

Balance at December 31, 2017

 

 

17,847

 

 

$

2

 

 

$

111,884

 

 

$

(44

)

 

$

(57,664

)

 

$

54,178

 

Equity-based compensation

 

 

 

 

 

 

 

 

1,706

 

 

 

 

 

 

 

 

 

1,706

 

Exercise of common stock options

 

 

29

 

 

 

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

Restricted stock awards

 

 

181

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

327

 

 

 

327

 

Cumulative tax effect of accounting change

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(74

)

 

 

(74

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

(13

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,554

)

 

 

(3,554

)

Balance at September 30, 2018

 

 

18,057

 

 

$

2

 

 

$

113,600

 

 

$

(57

)

 

$

(60,965

)

 

$

52,580

 

 

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

4


 

FULGENT GENETICS, INC.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

 

Nine Months Ended

September 30,

 

 

 

2018

 

 

2017

 

Cash flow from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(3,554

)

 

$

(886

)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating

   activities:

 

 

 

 

 

 

 

 

Equity-based compensation

 

 

1,706

 

 

 

1,538

 

Depreciation

 

 

1,625

 

 

 

1,255

 

Loss on disposal of fixed asset

 

 

88

 

 

 

5

 

Amortization of premium of marketable securities

 

 

239

 

 

 

286

 

Provision for bad debt

 

 

230

 

 

 

11

 

Deferred taxes

 

 

(887

)

 

 

 

Equity loss in investee

 

 

701

 

 

 

277

 

Other

 

 

18

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,993

)

 

 

759

 

Other current assets

 

 

215

 

 

 

(1,546

)

Accounts payable

 

 

(175

)

 

 

14

 

Taxes payable

 

 

 

 

 

(124

)

Accrued liabilities

 

 

334

 

 

 

983

 

Net cash (used in) provided by operations

 

 

(1,453

)

 

 

2,572

 

Cash flow from investing activities:

 

 

 

 

 

 

 

 

Purchases of fixed assets

 

 

(2,199

)

 

 

(1,754

)

Sale of marketable securities

 

 

 

 

 

3,781

 

Purchase of marketable securities

 

 

(13,165

)

 

 

(5,252

)

Maturities of marketable securities

 

 

19,360

 

 

 

5,400

 

Purchase of equipment contributed to Equity Method Investee

 

 

(510

)

 

 

(2,461

)

Net cash provided by (used in) investing activities

 

 

3,486

 

 

 

(286

)

Cash flow from financing activities:

 

 

 

 

 

 

 

 

Payment of initial public offering costs

 

 

 

 

 

(801

)

Proceeds from exercise of stock options

 

 

10

 

 

 

27

 

Net cash provided by (used in) financing activities

 

 

10

 

 

 

(774

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(44

)

 

 

69

 

Net decrease in cash

 

 

1,999

 

 

 

1,581

 

Cash balance at beginning of period

 

 

6,490

 

 

 

7,897

 

Cash balance at end of period

 

$

8,489

 

 

$

9,478

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Income taxes paid

 

$

1

 

 

$

757

 

Supplemental disclosures of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Fixed assets included in accounts payable

 

$

73

 

 

$

899

 

 

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

5


 

FULGENT GENETICS, INC.

Notes to the Condensed Consolidated Financial Statements

(unaudited)

 

Note 1. Overview and Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). These financial statements include the assets, liabilities, revenues and expenses of all wholly-owned subsidiaries and entities in which the Company has a controlling financial interest or is deemed to be the primary beneficiary. In determining whether the Company is the primary beneficiary of an entity, the Company applies a qualitative approach that determines whether it has both (1) the power to direct the economically significant activities of the entity and (2) the obligation to absorb losses of, or the right to receive benefits from, the entity that could potentially be significant to that entity. The Company uses the equity method to account for its investments in entities that it does not control, but in which it has the ability to exercise significant influence over operating and financial policies. All significant intercompany accounts and transactions are eliminated from the accompanying condensed consolidated financial statements.

Nature of the Business

Fulgent Genetics, Inc., together with its subsidiaries (collectively referred to as the “Company,” unless otherwise noted or the context otherwise requires), is a technology company with a focus on offering comprehensive genetic testing to provide physicians with clinically actionable diagnostic information they can use to improve the quality of patient care. The Company has developed a proprietary technology platform that allows it to offer a broad and flexible test menu and continually expand and improve its proprietary genetic reference library. The Company’s current test menu offers single-gene tests and pre-established, multi-gene, disease-specific panels that collectively test for many genetic conditions, including various cancers, cardiovascular diseases, neurological disorders and pediatric conditions. The Company’s existing customer base consists primarily of hospitals and medical institutions, which are frequent and high-volume users of genetic tests and which typically pay the Company directly for its tests.

Unaudited Interim Financial Information

The accompanying unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2017, which are included in the Company’s annual report on Form 10-K filed with the Securities and Exchange Commission on March 20, 2018 (the “2017 Annual Report”), and, in the opinion of management, include all adjustments, which are normal and recurring in nature, necessary for a fair presentation of the Company’s financial position and results of operations. Operating results for interim periods are not necessarily indicative of the results that may be expected for a full fiscal year or any other period. The accompanying condensed consolidated balance sheet as of December 31, 2017 has been derived from the Company’s audited consolidated financial statements at that date but does not include all of the disclosures required by U.S. GAAP. As such, the information included in this quarterly report on Form 10-Q should be read in conjunction with the Company’s audited consolidated financial statements included in the 2017 Annual Report, including the notes thereto.

 

 

 

Note 2. Summary of Significant Accounting Policies

See the summary of the Company’s significant accounting policies set forth in the notes to its consolidated financial statements included in the 2017 Annual Report.

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting periods. These estimates, judgments and assumptions are based on historical data and experience available at the date of the accompanying condensed consolidated financial statements, as well as various other factors management believes to be reasonable under the circumstances. Actual results could differ from these estimates.

On an on-going basis, management evaluates its estimates, primarily those related to: (i) revenue recognition criteria, (ii) accounts receivable and allowances for doubtful accounts, (iii) the useful lives of fixed assets, (iv) estimates of tax liabilities and (v) equity method investments.

6


 

Foreign Currency Translation and Foreign Currency Transactions

The Company translates the assets and liabilities of its non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recognized in foreign currency translation included in other comprehensive income (loss) in the accompanying condensed consolidated statements of stockholders’ equity. Losses from these translations were $23,000 and $44,000 in the three and nine months ended September 30, 2018, respectively, and gains and losses from these translations were not significant in the comparable periods of 2017.The Company and its subsidiaries that use the U.S. dollar as their functional currency remeasure monetary assets and liabilities at exchange rates in effect at the end of each period, and inventories, property and nonmonetary assets and liabilities at historical rates. Losses from these remeasurements were $7,000 and $74,000 in the three and nine months ended September 30, 2018, respectively, and gains and losses from these remeasurements were not significant in the comparable periods of 2017.

Concentration of Customers

In certain periods, a small number of customers has accounted for a significant portion of the Company’s revenue. In the three and nine months ended September 30, 2018, after aggregating customers that are under common control or are affiliates, one customer contributed 13% of our revenue. In the three months ended September 30, 2017, after aggregating customers that are under common control or are affiliates, one customer contributed 11% of our revenue, and another two customers represent one customer for concentration disclosure purposes as they are managed by the same customer in the PRC, which contributed 12% of our revenue collectively. In the nine months ended September 30, 2017, after aggregating customers that are under common control or are affiliates, three customers each contributed 11% of our revenue, and one of the customers and another customer represent one customer for concentration disclosure purposes as they are managed by the same customer in the PRC and contributed 18% of our revenue collectively.

Revenue Recognition

Effective January 1, 2018, the Company began recognizing revenue in accordance with FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The Company adopted ASC 606 utilizing the modified retrospective method, meaning the cumulative effect of applying the standard was recognized to opening retained earnings as of January 1, 2018. To reflect the impact of the adoption, the Company recorded an adjustment of $327,000 to beginning accumulated deficit and accounts receivable and an adjustment of ($74,000) to beginning accumulated deficit and deferred taxes. ASC 606 provides for a five-step model that includes identifying the contract with a customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations, and recognizing revenue when, or as, an entity satisfies a performance obligation.

Performance Obligations

Genetic Testing Services

Clinical – Institutional and Patient Direct Pay

Our clinical institutional contracts included within genetic testing services typically have a single performance obligation to deliver genetic testing services to the ordering facility or patient. Some arrangements involve the delivery of genetic testing services to research institutions, which we refer to as “sequencing as a service.” In arrangements with hospitals, patients who pay directly, medical or research institutions, the transaction price is stated within the contract and is therefore fixed consideration. For most of our clinical volume, we identified the hospital, patients, medical or research institutions as the customer in Step 1 of the model and have determined a contract exists with those customers in Step 1. As these contracts typically have a single performance obligation, no allocation of the transaction price is required in Step 4 of the model. Control over genetic testing services is transferred to our ordering facility at a point in time. Specifically, we determined the customer obtains control of the promised service upon our delivery of test results.

7


 

Clinical – Insurance

 

Our clinical insurance contracts included within genetic testing services typically have a single performance obligation to deliver genetic testing services to the ordering facility or patient. For most of our clinical insurance volume, we identified the patient as the customer in Step 1 of the model and have determined a contract exists with the patient in Step 1. In arrangements with insurance patients, the transaction price is stated within the contract, however, we accept payments from third-party payors that are less than the contractually stated price and is therefore variable consideration. In developing the estimate of variable consideration, we utilize the expected value method under a portfolio approach. Our estimate requires significant judgment and is developed using historical reimbursement data from payors and patients, as well as known current reimbursement trends not reflected in the historical data. As these contracts typically have a single performance obligation, no allocation of the transaction price is required in Step 4 of the model. Control over genetic testing services is transferred to our ordering physicians at a point in time. Specifically, we determined the customer obtains control of the promised service upon our delivery of the test results.

 

Certain incremental costs pertaining to both clinical insurance and institutional, such as commissions, are incurred in obtaining clinical contracts. Historically contract costs have not been significant to the financial statements. We have elected to utilize the practical expedient to expense incremental costs of obtaining a contract that meet the capitalization criteria, as the amortization period of any contract acquisition asset would be one year or less due to the short-term nature of the customer life.

Significant Judgments and Contract Estimates

Genetic Testing Services

Accounting for clinical insurance contracts includes estimation of the transaction price, defined as the amount we expect to be entitled to receive in exchange for providing the services under the contract. Due to our out-of-network status with the majority of payors, estimation of the transaction price represents variable consideration. In order to estimate variable consideration, we utilize a portfolio approach in which payors with similar reimbursement experience are grouped into portfolios. Our estimates of variable consideration are based primarily on historical reimbursement data. Certain assumptions will also be adjusted based on known and anticipated factors not reflected in the historical reimbursement data. We monitor these accrual estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required. Both the initial accrual estimate and any subsequent revision to the estimate contain uncertainty and require the use of judgment in the estimation of the transaction price and application of the constraint for variable consideration. If actual results in the future vary from the Company’s estimates, the Company will adjust these estimates, which would affect revenue and earnings in the period such variances become known.

Accounting Pronouncements Recently Adopted

ASU 2014-09

The Company adopted ASU 2014-09 Revenue from Contracts with Customers and all related amendments (collectively codified as ASC 606) on January 1, 2018 utilizing the modified retrospective method, meaning the cumulative effect of applying the standard to all contracts completed as of the date of initial application was recognized to opening retained earnings as of January 1, 2018. Comparative information from prior periods has not been restated and continues to be reported under the accounting standards in effect for those periods.

Financial Statement Impact of Adoption ASC 606

The cumulative effect of changes made to the Condensed Consolidated Balance Sheet at January 1, 2018 for the adoption of ASC 606 were as follows:

 

 

Balance at

December 31, 2017

 

 

Adjustments Due to

ASC 606

 

 

Balance at

January 1, 2018

 

 

(in thousands)

 

Condensed Consolidated Balance Sheet data

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

     Accounts receivable

$

4,005

 

 

$

327

 

 

$

4,332

 

     Deferred tax asset / (liability)

 

126

 

 

 

(74

)

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

     Accumulated deficit

$

(57,664

)

 

$

253

 

 

$

(57,411

)

 

8


 

In accordance with ASC 606 requirements under the modified retrospective method of adoption, the disclosure of the impacts to condensed consolidated financial statements as of and for the three and nine months ended September 30, 2018 were as follows:

 

 

As

reported

 

 

Adjustments

Due to ASC

606

 

 

Balances

without the

adoption of

Topic 606

 

 

(in thousands)

 

Condensed Consolidated Balance Sheet data

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

     Accounts receivable

$

6,077

 

 

$

(62

)

 

$

6,015

 

     Deferred tax asset

 

929

 

 

 

13

 

 

 

942

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

     Accumulated deficit

$

(60,965

)

 

$

(49

)

 

$

(61,014

)

 

 

For the Three Months ended September 30, 2018

 

 

As

reported

 

 

Adjustments

Due to ASC

606

 

 

Balances

without the

adoption of

Topic 606

 

 

(in thousands, except per share data)

 

Condensed Consolidated Statement of Operations data:

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

5,625

 

 

$

83

 

*

$

5,708

 

Provision for (benefit from) income taxes

 

(318

)

 

 

38

 

 

 

(280

)

Net income (loss)

 

(595

)

 

 

45

 

 

 

(550

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

     Basic & Diluted

$

(0.03

)

 

$

(0.00

)

 

$

(0.03

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine Months ended September 30, 2018

 

 

As

reported

 

 

Adjustments

Due to ASC

606

 

 

Balances

without the

adoption of

Topic 606

 

 

(in thousands, except per share data)

 

Condensed Consolidated Statement of Operations data:

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

15,678

 

 

$

265

 

*

$

15,943

 

Provision for (benefit from) income taxes

 

(852

)

 

 

61

 

 

 

(791

)

Net income (loss)

 

(3,554

)

 

 

204

 

 

 

(3,350

)

Net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

     Basic & Diluted

$

(0.20

)

 

$

0.01

 

 

$

(0.19

)

 

*

Revenue under ASC 605 would have been greater than under ASC 606 because the amount of cash receipts in 2018 from current and prior period insurance billings was greater than the estimated collections for services delivered and billed in 2018.

 

There was no impact on the condensed consolidated statements of cash flows for the nine months ended September 30, 2018.

9


 

Disaggregation of Revenue

The Company classifies its customers into three payor types, Clinical Institutional, Patients who pay directly or Clinical Insurance, as we believe this best depicts how the nature, amount, timing, and uncertainty of our revenue and cash flows are affected by economic factors. The following table summarizes revenue from contracts with customers by payor type for the three and nine months ended September 30, 2018.

 

 

Three months ended

 

 

Nine months ended

 

 

September 30, 2018

 

 

September 30, 2018

 

 

(in thousands)

 

Genetic Testing Services by payor

 

 

 

 

 

 

 

     Institutional

$

5,334

 

 

$

14,594

 

     Patient

 

148

 

 

 

407

 

     Insurance

 

143

 

 

 

677

 

Total Revenue

$

5,625

 

 

$

15,678

 

 

There was no material variable consideration recognized in the current period that relates to performance obligations that were completed in the prior period.

Transaction Price Allocated to Future Performance Obligations

ASC 606 requires that the Company disclose the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as September 30, 2018. ASC 606 provides certain practical expedients that limit the requirement to disclose the aggregate amount of transaction price allocated to unsatisfied performance obligations.

The Company applied the practical expedient to not disclose the amount of transaction price allocated to unsatisfied performance obligations when the performance obligation is part of a contract that has an original expected duration of one year or less. The Company does not have material future obligations associated with Genetic Testing Services that extend beyond one year.

ASU No. 2016-01

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, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments, including a provision that requires equity investments (except for investments accounted for under the equity method of accounting) to be measured at fair value, with changes in fair value recognized in current earnings. The ASU was effective for the Company in the first quarter of 2018, with early adoption permitted. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

ASU No. 2016-15

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The standard clarifies the way certain cash receipts and cash payments are classified with the objective of reducing the existing diversity in practice. The standard was effective for fiscal years and interim periods beginning after December 15, 2017. The adoption of this update did not have a material impact on our Consolidated Financial Statements.

Recent Accounting Pronouncements

We evaluate all Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) for consideration of their applicability. ASUs not included in our disclosures were assessed and determined to be either not applicable or are not expected to have a material impact on our Consolidated Financial Statements.

10


 

ASU No. 2016-02

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The update is aimed at making leasing activities more transparent and comparable and requires substantially all leases be recognized by lessees on their balance sheet as a right-of-use asset and corresponding lease liability, including leases currently accounted for as operating leases. This guidance is effective for annual and interim periods beginning on or after December 15, 2018 and early adoption is permitted. The standard requires the use of a modified retrospective transition approach for existing leases. The Company plans to implement ASU 2016-02 on January 1, 2019. using the modified retrospective approach and are still evaluating whether we will elect the practical expedients allowed in the standard. We continue to evaluate the impact of the adoption of ASU 2016-02 on our consolidated financial statements; however, we expect that the adoption of ASU 2016-02 will primarily impact our real-estate leases.

ASU No. 2016-13

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The standard will be effective for annual reporting periods beginning after December 15, 2019, including interim periods within those reporting periods. Early adoption is permitted. The Company has not yet evaluated the effect this ASU will have on its consolidated financial statements and related disclosures.

ASU No. 2017-08

In March 2017, the FASB issued ASU No. 2017-08, Receivables–Nonrefundable Fees and Other Costs (Subtopic 310-20). Under the ASU, entities must amortize to the earliest call date the premium on certain purchased callable debt securities. The ASU does not require any accounting change for debt securities held at a discount. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all entities, including in an interim period. The Company has not yet evaluated the effect this ASU will have on its consolidated financial statements and related disclosures.

ASU No. 2018-02

In February 2018, the FASB issued ASU No. 2018-02, Income Statement–Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. federal government on December 22, 2017 (the “2017 Tax Act”). Consequently, the amendments eliminate the stranded tax effects resulting from the 2017 Tax Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, (1) for public business entities for reporting periods for which financial statements have not yet been issued and (2) for all other entities for reporting periods for which financial statements have not yet been made available for issuance. The Company is currently evaluating the effect this ASU will have on its consolidated financial statements and related disclosures.

 

11


 

Note 3. Marketable Securities

The Company’s marketable securities consisted of the following:

 

 

September 30, 2018

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Money market accounts

$

4,726

 

 

$

 

 

$

 

 

$

4,726

 

   Commercial paper

 

899

 

 

 

 

 

 

 

 

 

899

 

   Corporate debt securities

 

23,291

 

 

 

2

 

 

 

(78

)

 

 

23,215

 

   Less: cash equivalents

 

(4,726

)

 

 

 

 

 

 

 

 

(4,726

)

      Total short-term marketable securities

 

24,190

 

 

 

2

 

 

 

(78

)

 

 

24,114

 

   Corporate debt securities

 

4,295

 

 

 

 

 

 

(45

)

 

 

4,250

 

      Total long-term marketable securities

 

4,295

 

 

 

 

 

 

(45

)

 

 

4,250

 

      Total marketable securities

$

28,485

 

 

$

2

 

 

$

(123

)

 

$

28,364

 

 

 

December 31, 2017

 

 

Amortized

Cost Basis

 

 

Unrealized

Gains

 

 

Unrealized

Losses

 

 

Aggregate

Fair Value

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Money market accounts

$

723

 

 

$

 

 

$

 

 

$

723

 

   Corporate debt securities

 

20,040

 

 

 

2

 

 

 

(48

)

 

 

19,994

 

   Less: cash equivalents

 

(723

)

 

 

 

 

 

 

 

 

(723

)

      Total short-term marketable securities

 

20,040

 

 

 

2

 

 

 

(48

)

 

 

19,994

 

   Corporate debt securities

 

14,999

 

 

 

 

 

 

(116

)

 

 

14,883

 

      Total long-term marketable securities

 

14,999

 

 

 

 

 

 

(116

)

 

 

14,883

 

      Total marketable securities

$

35,039

 

 

$

2

 

 

$

(164

)

 

$

34,877

 

 

Management determined that the gross unrealized losses of $123,000 on the Company’s marketable securities as of September 30, 2018 were temporary in nature. Gross unrealized losses on the Company’s marketable securities were $164,000 as of December 31, 2017. The Company currently does not intend to sell these securities prior to maturity and does not consider these investments to be other-than-temporarily impaired as of September 30, 2018.

 

 

Note 4. Fair Value Measurements

The authoritative guidance on fair value measurements establishes a framework with respect to measuring assets and liabilities at fair value on a recurring basis and non-recurring basis. Under the framework, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The framework also establishes a three-tier hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability and are developed based on the best information available in the circumstances. The hierarchy consists of the following three levels:

 

 

Level 1:

Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

 

Level 2:

Inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

 

Level 3:

Inputs are unobservable inputs for the asset or liability.

 

12


 

The following table presents information about our financial assets measured at fair value on a recurring basis, based on the three-tier fair value hierarchy:

 

 

September 30, 2018

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

(in thousands)

 

Marketable securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Money market accounts

$

4,726

 

 

$

4,726

 

 

$

 

 

$

 

   Commercial paper

 

899

 

 

 

 

 

 

899

 

 

 

 

   Corporate debt securities