| Summary of Significant Accounting Policies | 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”), and follow the requirements
of the Securities and Exchange Commission (“SEC”) for
interim reporting. As permitted under those rules, certain
footnotes or other financial information that are normally required
by U.S. GAAP can be condensed or omitted. These financial
statements have been prepared on the same basis as the
Company’s annual financial statements and, in the opinion of
management, reflect all adjustments, consisting only of normal
recurring adjustments that are necessary for a fair statement of
the Company’s financial information. The condensed balance
sheet as of December 31, 2014 has been derived from audited
financial statements as of that date but does not include all of
the financial information required by U.S. GAAP for complete
financial statements. Operating results for the three and nine
months ended September 30, 2015 are not necessarily indicative
of the results that may be expected for the year ending
December 31, 2015.
The accompanying unaudited condensed financial statements and
related financial information should be read in conjunction with
the audited financial statements and the related notes thereto for
the year ended December 31, 2014 included in the
Company’s Annual Report on Form 10-K filed on March 31,
2015 with the SEC.
Use of Estimates
The preparation of unaudited condensed financial statements in
conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses in the unaudited
condensed financial statements and accompanying notes. On an
ongoing basis, management evaluates its estimates, including those
related to (i) revenue recognition, (ii) the differences
between amounts billed and estimated receipts from payers,
(iii) the determination of the accruals for clinical studies,
(iv) the determination of refunds to be requested by
third-party payers, (v) the fair value of assets and
liabilities as applicable, (vi) the valuation of warrants to
purchase convertible preferred stock, (vii) the determination
of fair value of the Company’s common stock, (viii) the
fair value of contingent consideration in a business acquisition,
(ix) the fair value of the embedded features associated with
the subordinated convertible note, (x) the fair value of the
embedded features associated with long-term debt,
(xi) measurement of stock-based compensation expense,
(xii) the determination of the valuation allowance and
estimated tax benefit associated with deferred tax assets and net
deferred tax liability, (xiii) any impairment of long-lived
assets including in-process technology and goodwill and
(xiv) legal contingencies. Actual results could differ from
those estimates.
Concentrations of Credit Risk and Other Risks and
Uncertainties
Financial instruments that potentially subject the Company to
credit risk consist of cash and cash equivalents and accounts
receivable. The Company’s policy is to invest its cash and
cash equivalents in money market funds, obligations of U.S.
government agencies and government-sponsored entities, commercial
paper, and various bank deposit accounts. These financial
instruments were held in Company accounts at two financial
institutions. The counterparties to the agreements relating to the
Company’s investments consist of financial institutions of
high credit standing. The Company is exposed to credit risk in the
event of default by the financial institutions to the extent of
amounts recorded on the balance sheets which may be in excess of
insured limits.
The Company is also subject to credit risk from its accounts
receivable which are derived from revenue earned from AlloMap tests
provided for patients located in the U.S. and billed to various
third-party payers. For the nine months ended September 30,
2015 and 2014, approximately 50% of testing revenue was derived
from Medicare. No other payers represented more than 10% of testing
revenue for these periods. At September 30, 2015 and
December 31, 2014 approximately 34% and 78%, respectively, of
accounts receivable was from Medicare. At September 30, 2015,
approximately 16% of accounts receivable was from Aetna. No other
payer represented more than 10% of accounts receivable at
September 30, 2015 and December 31, 2014.
Reimbursement and Regulatory Risk
The Company is also subject to reimbursement and regulatory risk.
We receive a substantial portion of our revenues from Medicare, and
the loss of, or a significant reduction in, reimbursement from
Medicare would severely and adversely affect our financial
performance. On September 25, 2015, Centers for Medicare and
Medicaid Services (“CMS”) announced proposed changes in
reimbursement policies for a number of established molecular
diagnostic tests, including AlloMap. Under the current proposed fee
schedule, AlloMap reimbursement would be reduced by 77% effective
January 1, 2016. For additional information, see Risk Factors
section in Part II of this Form 10-Q.
Cash Equivalents
Cash equivalents consist of short-term, highly liquid investments
with original maturities of three months or less from the date of
purchase. Cash equivalents consist primarily of amounts invested in
money market funds and checking accounts.
Impairment of Long-lived Assets
The Company evaluates its long-lived assets for indicators of
possible impairment when events or changes in circumstances
indicate the carrying amount of an asset may not be recoverable.
The Company then compares the carrying amounts of the assets with
the future net undiscounted cash flows expected to be generated by
such asset. Should an impairment exist, the impairment loss would
be measured based on the excess carrying value of the asset over
the asset’s fair value determined using discounted estimates
of future cash flows. The Company has not identified any such
impairment losses to date.
Fair Value of Financial Instruments
Fair value is defined as the price that would be received from
selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
When determining fair value, the Company considers the principal or
most advantageous market in which the Company would transact, and
it takes into consideration the assumptions that market
participants would use when pricing the asset or liability. The
Company’s assessment of the significance of a particular
input to the fair value measurement of an asset or liability
requires management to make judgments and to consider specific
characteristics of that asset or liability.
The carrying amounts of certain of the Company’s financial
instruments, including cash equivalents, accounts receivable,
accounts payable, and accrued liabilities, approximate fair value
due to their short maturities. The carrying amounts of the
convertible preferred stock warrant liability and contingent
consideration liability represent their fair values.
Testing Revenue
The Company recognizes revenue for tests delivered when the
following criteria are met: (i) persuasive evidence that an
arrangement exists; (ii) delivery has occurred or services
rendered; (iii) the fee is fixed or determinable; and
(iv) collectability is reasonably assured.
The first criterion is satisfied when a third-party payer makes a
coverage decision or enters into a contractual arrangement with the
Company for the test. The second criterion is satisfied when the
Company performs the test and delivers the test result to the
ordering physician. The third criterion is satisfied if the
third-party payer’s coverage decision or reimbursement
contract specifies a price for the test. The fourth criterion is
satisfied based on management’s judgments regarding the
collectability of the fees charged under the arrangement. Such
judgments include review of past payment history. AlloMap testing
may be considered investigational by some payers and not covered
under their reimbursement policies. Others may cover the test, but
not pay a set or determinable amount. As a result, in the absence
of a reimbursement agreement or sufficient payment history,
collectability cannot reasonably be assured so revenue is not
recognized at the time the test is delivered.
If all criteria set forth above are met, revenue is recognized.
When the first, third or fourth criteria are not met but
third-party payers make a payment to the Company for tests
performed, the Company recognizes revenue on the cash basis in the
period in which the payment is received.
Revenue is recognized on the accrual basis net of adjustments for
differences between amounts billed and the estimated receipts from
payers. The amount the Company expects to collect may be lower than
the agreed upon amount due to several factors, such as the amount
of patient co-payments, the existence of secondary payers and claim
denials. Estimated receipts are based upon historical payment
practices of payers. Differences between estimated and actual cash
receipts are recorded as an adjustment to revenue, which have been
immaterial to date.
During the three and nine months ended September 30, 2015, the
Company changed its revenue recognized from one and four of its
payers, respectively, from cash to accrual basis based on the
Company’s revenue recognition criteria being met. The impact
of this change in accounting estimate is to increase revenues by
$47,000 and $187,000 for the three and nine months ended
September 30, 2015, respectively. The impact to net loss per
share is less than one cent for the three and nine months ended
September 30, 2015.
Taxes assessed by governmental authorities on revenue, including
sales and value added taxes, are excluded from revenue in the
statements of operations.
Collaboration and License Revenue
The Company generates revenue from collaboration and license
agreements. Collaboration and license agreements may include
non-refundable upfront payments, partial or complete reimbursement
of research and development costs, contingent payments based on the
occurrence of specified events under the agreements, license fees
and royalties on sales of products or product candidates if they
are successfully commercialized. The Company’s performance
obligations under the collaborations may include the transfer of
intellectual property rights in the form of licenses, obligations
to provide research and development services and obligations to
participate on certain development committees with the
collaboration partners. The Company makes judgments that affect the
periods over which it recognizes revenue. The Company periodically
reviews its estimated periods of performance based on the progress
under each arrangement and accounts for the impact of any change in
estimated periods of performance on a prospective basis.
Cost of Testing
Cost of testing reflects the aggregate costs incurred in delivering
the Company’s AlloMap test results to clinicians. The
components of cost of testing are materials and service costs,
direct labor costs, including stock-based compensation, equipment
and infrastructure expenses associated with testing samples,
shipping, logistics and specimen processing charges to collect and
transport samples and allocated overhead including rent,
information technology, equipment depreciation and utilities and
royalties. Costs associated with performing tests (except
royalties) are recorded as the test is processed regardless of
whether and when revenue is recognized with respect to that test.
As a result, our cost of testing as a percentage of revenue may
vary significantly from period to period because we do not
recognize all revenue in the period in which the associated costs
are incurred. Royalties for licensed technology, calculated as a
percentage of test revenues, are recorded as license fees in cost
of testing at the time the test revenues are recognized.
Business Combinations
In accordance with ASC 805, Business Combinations
Goodwill and indefinite-lived intangible assets including acquired
in-process technology are reviewed for impairment on an annual
basis during the fourth quarter of each fiscal year or more
frequently if events or circumstances indicate that goodwill or
indefinite-lived intangible assets may be impaired. The
Company’s assessment of goodwill uses both quantitative and
qualitative factors to determine if its sole reporting unit’s
fair value is more likely than not to exceed its carrying value. In
the event the Company determines that it is more likely than not
that it’s reporting unit’s fair value is less than its
carrying amount, quantitative testing is performed comparing
recorded values to estimated fair value. If the fair value exceeds
the carrying value, goodwill is not impaired. If the carrying value
exceeds the fair value, then the Company would calculate the
potential impairment loss by comparing the implied fair value of
goodwill with the carrying value. If the implied fair value of
goodwill is less than the carrying value, then an impairment charge
would be recorded. For indefinite-lived intangible assets, if the
fair value exceeds the carrying value, without consideration of any
recoverability test, then there is no impairment. The Company has
not identified any impairment losses to date.
In those circumstances where an acquisition involves a contingent
consideration arrangement that meets the definition of a liability
under ASC 480, Distinguishing Liabilities from Equity
Transaction costs associated with these acquisitions are expensed
as incurred in general and administrative expenses. Results of
operations and cash flows of acquired companies are included in the
Company’s operating results from the date of acquisition.
Stock-based Compensation
The Company uses the Black-Scholes option pricing model
(“Black-Scholes Model”), which requires the use of
estimates such as stock price volatility and expected option lives,
to value employee stock options. The Company estimates the expected
option lives using historical data, volatility using data of
similar companies in the diagnostics industry, risk-free rates
based on the implied yield currently available in the U.S. Treasury
zero-coupon issues with a remaining term equal to the expected
option lives, and dividend yield based on the Company’s
expectations and historical data.
The Company uses the straight-line attribution method for
recognizing compensation expense. Compensation expense is
recognized on awards ultimately expected to vest and reduced for
forfeitures that are estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures are estimated based on the
Company’s historical experience.
Compensation expense for stock options issued to nonemployees is
recorded over the service performance period. Options subject to
vesting are required to be periodically remeasured over their
service performance period, which is generally the same as the
vesting period.
Warrants
The Company had freestanding warrants enabling counterparties to
purchase shares of its convertible preferred stock which were
converted to warrants to purchase common stock on the
Company’s IPO date.
In accordance with the accounting guidance regarding distinguishing
liabilities from equity, freestanding warrants for convertible
preferred stock that are contingently redeemable are classified as
liabilities on the balance sheet and recorded at their estimated
fair value. These warrants are remeasured at each balance sheet
date and any change in estimated fair value is recognized in other
(expense) income, net, on the statements of operations.
Upon the completion of the Company’s IPO in July 2014,
preferred stock warrants were converted into warrants to purchase
common stock or expired, and, accordingly, the liability was
reclassified to equity and became no longer subject to
remeasurement.
The Company has issued warrants to purchase shares of its common
stock in connection with financing activities (see Note 9). The
Company accounts for these warrants as equity at fair value on the
date the warrants are issued. The fair value of the outstanding
warrants is estimated using the Black-Scholes Model. The
Black-Scholes Model requires inputs such as the expected term of
the warrants, expected volatility and risk-free interest rate.
Certain of these inputs are subjective and require significant
analysis and judgment to develop. For the estimate of the expected
term, the Company uses the full remaining contractual term of the
warrant.
Comprehensive Loss
Net loss and comprehensive loss are the same for all periods
presented.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
No. 2014-09, Revenue from Contracts with Customers
In April 2015, the FASB issued ASU 2015-03,
Interest—Imputation of Interest (Subtopic 835-30):
Simplifying the Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU 2015-05
Intangibles—Goodwill and Other—Internal-Use Software
(Subtopic 350-40) (“ASU 2015-05”). This ASU provides
guidance to customers about whether a cloud computing arrangement
includes a software license. If a cloud computing arrangement
includes a software license, then the customer should account for
the software license element of the arrangement consistent with the
acquisition of other software licenses. If a cloud computing
arrangement does not include a software license, the customer
should account for the arrangement as a service contract. This ASU
will be effective for annual periods, including interim periods
beginning after December 15, 2015. Early adoption is
permitted. An entity can elect to adopt the amendments either
(1) prospectively to all arrangements entered into or
materially modified after the effective date or
(2) retrospectively. For prospective transition, the only
disclosure requirements at transition are the nature of and reason
for the change in accounting principle, the transition method, and
a qualitative description of the financial statement line items
affected by the change. For retrospective transition, the
disclosure requirements at transition include the requirements for
prospective transition and quantitative information about the
effects of the accounting change. The Company is currently
evaluating the impact of adopting ASU 2015-05 on its financial
statements. |
