Recently adopted standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify the accounting and reporting for employee share-based payment transactions. The pronouncement is effective for interim and annual periods beginning after December 31, 2016 with early adoption permitted. The adoption of the guidance in ASU No. 2016-09 in the first quarter of 2017 did not have a material impact on the Company’s consolidated financial statements.

New standards not yet adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets to recognize assets and liabilities for the rights and obligations created by the leases on the balance sheet. A lessee will be required to recognize assets and liabilities for leases with terms that exceed twelve months. The standard will also require disclosures to help investors and financial statement users better understand the amount, timing and uncertainty of cash flows arising from leases. The disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. The guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its consolidated financial position and results of operations. The expectation is that the adoption will include an increase in assets and liabilities.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The key focus of the new standard is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve this key focus, there is a five-step approach outlined in the standard. Entities are permitted to apply the new standard under the full retrospective method, subject to certain practical expedients, or the modified retrospective method that requires the application of the guidance only to contracts that are uncompleted on the date of initial application. The Company will adopt the new revenue standard and subsequently issued amendments as of January 1, 2018 using the modified retrospective method.

The Company has formed an implementation team, which includes internal accounting resources and a third-party consulting firm, to oversee the adoption of the new standard. The implementation team has performed a detailed review of the Company’s contracts and revenue streams to identify potential differences in accounting as a result of the new standard and its appropriate application.

The Company’s revenue is generated from the performance of its proprietary tests. The Company’s performance obligation is fulfilled upon completion, review and release of test results and subsequent billing to the third-party payer or hospital. The Company currently recognizes revenue related to billings for Medicare, Medicare Advantage, and hospitals on an accrual basis, net of contractual adjustment, when there is a predictable pattern of collectability. Contractual adjustments represent the difference between the list prices and the reimbursement rate set by Medicare and Medicare Advantage, or the amounts billed to hospitals, which approximates the Medicare rate. Upon ultimate collection, the amount received from Medicare, Medicare Advantage and hospitals with a predictable pattern of payment is compared to the previous estimates and the contractual allowance is adjusted, if necessary. The net amount derived is referred to as the “net realizable value” for the particular test and payer group from which reimbursement is received. The derived “net realizable value” is then applied to future periods until recalculated.

Currently, for certain third-party payers that do not have established contractual reimbursement rates or a predictable pattern of collectability, including commercial insurance carriers, Medicaid and certain hospitals, the Company believes that the fee is fixed or determinable and collectability is reasonably assured only upon request of third-party payer notification of payment or when cash is received, and recognizes revenue at that time.

Under the new standard, the Company will be required to estimate the variable consideration within the transaction price for all third-party payers and proprietary tests and recognize revenue as the Company satisfies its performance obligations. For those third-party payers and proprietary tests where the Company currently recognizes revenue upon request of third-party payer notification of payment or when cash is received, the Company will recognize revenues upon completion, review and release of test results based on the estimated transaction price, subject to a constraint. As a result, the Company expects to recognize a significant portion of its revenues earlier under the new standard than it recognizes under current guidance, using the net realizable value for each test within each payer group.

The Company completed its preliminary analysis of the ASC 606 impact and plans to incorporate further analysis of first quarter 2018 collections from its commercial payer base in order to finalize its ASC 606 adjustments. This analysis will be completed prior to filing its first quarter 2018 Form 10-Q. Management currently estimates the impact of recording the cumulative catch-up adjustment under the modified retrospective method to be in the range of $1.0 million to $1.5 million, which will be recorded as an increase to opening retained earnings on January 1, 2018. Prior periods will not be retrospectively adjusted. The Company also continues to finalize its analysis of additional or modified internal controls over financial reporting and the required disclosures that will be required to be included in our Form 10-Q for the first quarter of 2018.