prog-10q_20210331.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

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

 

For the quarterly period ended March 31, 2021

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: 001-39334

 

 

Progenity, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

27-3950390

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

 

4330 La Jolla Village Drive, Suite 200, San Diego, CA

 

92122

(Address of principal executive offices)

 

(Zip Code)

 

(855) 293-2639

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

 

 

Common Stock, par value $0.001 per share

 

PROG

 

The Nasdaq Global Market

 

 

 

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, 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

 

 

  

Smaller 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 April 30, 2021, the registrant had 60,474,632 shares of common stock, par value $0.001 per share, outstanding.

 

 

 


 

 

Progenity, Inc.

INDEX

 

PART I—FINANCIAL INFORMATION

 

 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

1

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets - As of March 31, 2021, and December 31, 2020

 

1

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations - Three Months Ended March 31, 2021, and 2020

 

2

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Deficit - Three Months Ended March 31, 2021, and 2020

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 2021, and 2020

 

5

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements

 

7

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

30

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

42

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

42

 

PART II—OTHER INFORMATION

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

43

 

 

 

 

 

Item 1A.

 

Risk Factors

 

45

 

 

 

 

 

Item 6.

 

Exhibits

 

53

 

 

 

 

Signatures

 

54

 

 

TRADEMARKS AND CERTAIN TERMS

In this Quarterly Report on Form 10-Q, “Progenity,” “we,” “us” and “our” refer to Progenity, Inc., and our wholly-owned subsidiaries on a consolidated basis, unless the context otherwise provides.

Progenity® is a registered service mark of Progenity. Any other brand names or trademarks appearing in this Quarterly Report on Form 10-Q are the property of their respective holders.

 

 

i


 

 

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements.

PROGENITY, INC.

Condensed Consolidated Balance Sheets

(In thousands, except share and per share data)

(Unaudited)

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

65,276

 

 

$

92,076

 

Accounts receivable, net

 

 

13,206

 

 

 

12,682

 

Inventory

 

 

12,377

 

 

 

12,219

 

Prepaid expenses and other current assets

 

 

10,312

 

 

 

9,361

 

Total current assets

 

 

101,171

 

 

 

126,338

 

Property and equipment, net

 

 

17,377

 

 

 

17,842

 

Other assets

 

 

199

 

 

 

198

 

Goodwill

 

 

6,219

 

 

 

6,219

 

Other intangible assets, net

 

 

3,611

 

 

 

3,843

 

Total assets

 

$

128,577

 

 

$

154,440

 

Liabilities and Stockholders' Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,625

 

 

$

17,410

 

Accrued expenses and other current liabilities

 

 

53,783

 

 

 

54,677

 

Warrant liability

 

 

10,154

 

 

 

 

Current portion of mortgages payable

 

 

275

 

 

 

271

 

Current portion of capital lease obligations

 

 

225

 

 

 

312

 

Total current liabilities

 

 

80,062

 

 

 

72,670

 

Capital lease obligations, net of current portion

 

 

15

 

 

 

46

 

Mortgages payable, net of current portion

 

 

2,726

 

 

 

2,795

 

Convertible notes, net of unamortized discount of $9,296 and $9,614 as of March 31, 2021 and December 31, 2020, respectively

 

 

159,204

 

 

 

158,886

 

Embedded derivative liability

 

 

3,542

 

 

 

18,370

 

Other long-term liabilities

 

 

8,535

 

 

 

8,667

 

Total liabilities

 

$

254,084

 

 

$

261,434

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' deficit:

 

 

 

 

 

 

 

 

Common stock – $0.001 par value. 350,000,000 shares authorized as

   of March 31, 2021 and December 31, 2020; 63,903,974 and 59,287,331 shares

   issued as of March 31, 2021 and December 31, 2020, respectively; 60,340,365 and

   55,772,303 shares outstanding as of March 31, 2021 and December 31, 2020, respectively

 

 

63

 

 

 

59

 

Additional paid-in capital

 

 

466,740

 

 

 

452,992

 

Accumulated deficit

 

 

(573,538

)

 

 

(541,274

)

Treasury stock – at cost; 3,563,609 and 3,515,028 shares of common stock as of March 31, 2021 and December 31, 2020, respectively

 

 

(18,772

)

 

 

(18,771

)

Total stockholders' deficit

 

 

(125,507

)

 

 

(106,994

)

Total liabilities and stockholders' deficit

 

$

128,577

 

 

$

154,440

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1


 

 

PROGENITY, INC.

Condensed Consolidated Statements of Operations

(In thousands, except share and per share data)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Revenues

 

$

24,526

 

 

$

16,828

 

Cost of sales

 

 

22,234

 

 

 

26,570

 

Gross profit (loss)

 

 

2,292

 

 

 

(9,742

)

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

11,673

 

 

 

11,240

 

Selling and marketing

 

 

14,648

 

 

 

14,436

 

General and administrative

 

 

22,219

 

 

 

17,108

 

Total operating expenses

 

 

48,540

 

 

 

42,784

 

Loss from operations

 

 

(46,248

)

 

 

(52,526

)

Interest expense

 

 

(3,520

)

 

 

(2,302

)

Gain on warrant liability

 

 

2,650

 

 

 

 

Interest and other income (expense), net

 

 

14,854

 

 

 

(20

)

Loss before income taxes

 

 

(32,264

)

 

 

(54,848

)

Income tax benefit

 

 

 

 

 

(37,696

)

Net loss

 

$

(32,264

)

 

$

(17,152

)

Net loss per share, basic and diluted

 

$

(0.56

)

 

$

(3.43

)

Weighted average number of shares outstanding used in calculating net loss

   per share, basic and diluted

 

 

57,493,800

 

 

 

4,993,393

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2


 

 

PROGENITY, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands, except share data)

(Unaudited)

 

 

 

Common Stock

 

 

Series A and A-1

Preferred Stock

 

 

Series B Preferred Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Treasury Stock

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Deficit

 

Balance at December 31, 2020

 

 

59,287,331

 

 

$

59

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

452,992

 

 

$

(541,274

)

 

 

(3,515,028

)

 

$

(18,771

)

 

$

(106,994

)

Issuance of common stock, net

 

 

4,370,629

 

 

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11,258

 

 

 

 

 

 

 

 

 

 

 

 

11,262

 

Issuance of common stock upon exercise

   of options

 

 

71,284

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

88

 

 

 

 

 

 

 

 

 

 

 

 

88

 

Issuance of common stock upon vesting

   of restricted stock unit awards

 

 

174,730

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(228

)

 

 

 

 

 

(48,581

)

 

 

(1

)

 

 

(229

)

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,630

 

 

 

 

 

 

 

 

 

 

 

 

2,630

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(32,264

)

 

 

 

 

 

 

 

 

(32,264

)

Balance at March 31, 2021

 

 

63,903,974

 

 

$

63

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

466,740

 

 

$

(573,538

)

 

 

(3,563,609

)

 

$

(18,772

)

 

$

(125,507

)

 

3


 

 

PROGENITY, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

(In thousands, except share data)

(Unaudited)

 

 

 

Common Stock

 

 

Series A and A-1

Preferred Stock

 

 

Series B Preferred Stock

 

 

Additional

Paid-In

 

 

Accumulated

 

 

Treasury Stock

 

 

Total

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Shares

 

 

Amount

 

 

Deficit

 

Balance at December 31, 2019

 

 

8,451,415

 

 

$

9

 

 

 

4,120,000

 

 

$

4

 

 

 

101,867,405

 

 

$

102

 

 

$

283,260

 

 

$

(348,478

)

 

 

(3,474,572

)

 

$

(18,771

)

 

$

(83,874

)

Issuance of common stock upon exercise

   of options

 

 

56,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103

 

 

 

 

 

 

 

 

 

 

 

 

103

 

Issuance of Series B Preferred Stock, net

   of issuance cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,033,796

 

 

 

6

 

 

 

14,066

 

 

 

 

 

 

 

 

 

 

 

 

14,072

 

Stock-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,057

 

 

 

 

 

 

 

 

 

 

 

 

2,057

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,152

)

 

 

 

 

 

 

 

 

(17,152

)

Balance at March 31, 2020

 

 

8,508,144

 

 

$

9

 

 

 

4,120,000

 

 

$

4

 

 

 

107,901,201

 

 

$

108

 

 

$

299,486

 

 

$

(365,630

)

 

 

(3,474,572

)

 

$

(18,771

)

 

$

(84,794

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

4


 

 

PROGENITY, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Operating Activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(32,264

)

 

$

(17,152

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Non-cash revenue reserve

 

 

187

 

 

 

 

Depreciation and amortization

 

 

1,249

 

 

 

1,701

 

Stock-based compensation expense

 

 

2,630

 

 

 

2,057

 

Amortization of debt discount

 

 

386

 

 

 

 

Inventory write-down

 

 

178

 

 

 

(27

)

Loss on disposal of property and equipment

 

 

 

 

 

18

 

Change in fair value of derivative liability

 

 

(14,828

)

 

 

 

Change in fair value of warrant liability

 

 

(2,650

)

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(525

)

 

 

6,550

 

Inventory

 

 

(336

)

 

 

984

 

Income tax receivable

 

 

 

 

 

(37,662

)

Prepaid expenses and other current assets

 

 

(894

)

 

 

460

 

Accounts payables

 

 

(2,214

)

 

 

727

 

Accrued expenses and other liabilities

 

 

579

 

 

 

(25,405

)

Other long-term liabilities

 

 

(62

)

 

 

36,863

 

Net cash used in operating activities

 

 

(48,564

)

 

 

(30,886

)

Investing Activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(463

)

 

 

(1,094

)

Net cash used in investing activities

 

 

(463

)

 

 

(1,094

)

Financing Activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock, net

 

 

11,631

 

 

 

103

 

Proceeds from issuance of Series B Preferred Stock, net

 

 

 

 

 

11,374

 

Proceeds from issuance of common stock warrants

 

 

12,804

 

 

 

 

Payment of deferred offering costs

 

 

(75

)

 

 

(616

)

Payments for insurance financing

 

 

(1,950

)

 

 

 

Principal payments on mortgages payable

 

 

(66

)

 

 

(62

)

Principal payments on capital lease obligations

 

 

(117

)

 

 

(215

)

Net cash provided by financing activities

 

 

22,227

 

 

 

10,584

 

Net decrease in cash and cash equivalents

 

 

(26,800

)

 

 

(21,396

)

Cash and cash equivalents at beginning of period

 

 

92,076

 

 

 

33,042

 

Cash and cash equivalents at end of period

 

$

65,276

 

 

$

11,646

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

5


 

PROGENITY, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

(41

)

 

$

(51

)

Cash paid for income taxes

 

 

(7

)

 

 

(5

)

 

 

 

 

 

 

 

 

 

Supplemental schedule of non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of preferred stock in settlement of interest payable

 

 

 

 

 

1,801

 

Issuance of preferred stock for settlement of deferred issuance costs

 

 

 

 

 

897

 

Equity offering costs incurred but not paid

 

 

281

 

 

 

682

 

Issuance of stock options in settlement of accrued bonuses

 

 

 

 

 

754

 

Purchases of property and equipment in accounts payable

 

 

89

 

 

 

278

 

Warrant issuance costs incurred but not paid

 

 

148

 

 

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.


6


 

 

PROGENITY, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Description of Business

Progenity, Inc. (the “Company” or “Progenity”), a Delaware corporation, commenced operations in 2010 with its corporate office located in San Diego, California. Progenity’s primary operations include a licensed Clinical License Improvement Amendment and College of American Pathologists certified laboratory located in Michigan specializing in the molecular testing markets serving women’s health providers in the obstetric, gynecological, fertility, and maternal fetal medicine specialty areas in the United States.

The Company has expertise in the national reference laboratory, clinical genetics, laboratory molecular testing, and biotechnology markets. Distribution is managed by a dedicated women’s health physician sales force and a field operations team who support all logistical functions in receiving clinical samples to the laboratory for analysis. The Company’s core business is focused on the prenatal carrier screening and noninvasive prenatal test market, targeting preconception planning, and routine pregnancy management for genetic disease risk assessment. Through its affiliation with Mattison Pathology, LLP (“Mattison”), a Texas limited liability partnership doing business as Avero Diagnostics (“Avero”), located in Lubbock and Dallas, Texas, the Company’s operations have expanded to provide anatomic and molecular pathology testing products in the United States.

Liquidity

As of March 31, 2021, the Company had cash and cash equivalents of $65.3 million and an accumulated deficit of $573.5 million. For the three months ended March 31, 2021, the Company reported a net loss of $32.3 million and cash used in operating activities of $48.6 million. The Company’s primary sources of capital have historically been the sale of common stock, private placements of preferred stock and incurrence of debt. As of March 31, 2021, the Company had $159.2 million of Convertible Notes outstanding (see Note 7), and mortgages outstanding of $3.0 million (see Note 9). Management does not believe that the current available cash and cash equivalents will be sufficient to fund the Company’s planned expenditures and meet its obligations for at least 12 months following the financial statement issuance date without raising additional funding. As a result, there is substantial doubt about the Company’s ability to continue as a going concern for 12 months following the issuance date of the condensed consolidated financial statements for the three months ended March 31, 2021.

The Company’s ability to continue as a going concern is dependent upon its ability to raise additional funding. Management believes that the Company’s liquidity position provides sufficient runway to achieve critical research and development pipeline milestones and show continued progress in the molecular testing activities into mid-2021. Management intends to raise additional capital through equity offerings and/or debt financings, or from other potential sources of liquidity, which may include new collaborations, licensing or other commercial agreements for one or more of the Company’s research programs or patent portfolios. Adequate funding, if needed, may not be available to the Company on acceptable terms, or at all. The Company’s ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic. If the Company is unable to raise capital when needed or on attractive terms, it would be forced to delay, reduce, or eliminate its research and development programs or other operations. If any of these events occur, the Company’s ability to achieve its operational goals would be adversely affected.

Uncertainties Related to the COVID-19 Pandemic

The ongoing COVID ‑19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. The Company has been materially and negatively affected by the COVID-19 pandemic; however, the extent of the impact of the COVID-19 pandemic on the Company’s operational and financial performance, including its ability to execute its business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and related restrictions on travel and transports, all of which are uncertain and cannot be predicted. The Company could be further negatively affected by the widespread outbreak of an illness or any other communicable disease, or any other public health crisis that results in economic and trade disruptions, including the disruption of global supply chains. An extended period of global supply chain and economic disruption could materially affect the Company’s business, results of operations, access to sources of liquidity and financial condition.

The estimates used for, but not limited to, determining the amount to be collected for accounts receivable, fair value of long-lived assets, and fair value of goodwill could be impacted by the pandemic. While the full impact of COVID-19 is unknown at this time, the Company has made appropriate estimates based on the facts and circumstances available as of the reporting date. These estimates may change as new events occur and additional information is obtained.

7


 

2. Summary of Significant Accounting Policies

Basis of Presentation

The Company’s condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, as filed with the Securities and Exchange Commission, (“SEC”), from which management derived the Company’s condensed consolidated balance sheet as of December 31, 2020. The condensed consolidated financial statements include the accounts of Progenity, Inc., its wholly owned subsidiaries, and an affiliated professional partnership with Avero with respect to which the Company currently has a specific management arrangement. The Company has determined that Avero is a variable interest entity and that the Company is the primary beneficiary resulting in the consolidation of Avero as required by the accounting guidance for consolidation (see Note 3). All significant intercompany balances and transactions have been eliminated in consolidation.

Unaudited Interim Financial Information

The accompanying condensed consolidated balance sheet as of March 31, 2021, the statements of operations and the statements of stockholders’ deficit for the three months ended March 31, 2021 and 2020 and the statements of cash flows for the three months ended March 31, 2021 and 2020 are unaudited. The unaudited interim financial statements have been prepared on the same basis as the audited annual financial statements and, in the opinion of management, reflect all adjustments, consisting of normal recurring adjustments, that are necessary for the fair statement of the Company’s financial position as of March 31, 2021, and the results of its operations and its cash flows for the three months ended March 31, 2021 and 2020. The financial data and other information disclosed in these notes related to the three months ended March 31, 2021 and 2020 are also unaudited. The results for the three months ended March 31, 2021 are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods, or any future year or period, particularly in light of the COVID-19 pandemic and its impact on domestic and global economies. The balance sheet as of December 31, 2020 included herein was derived from the audited financial statements as of that date. Certain disclosures have been condensed or omitted from the interim financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates include the estimate of variable consideration in connection with the recognition of revenue, the valuation of stock options, the valuation of goodwill and intangible assets, the valuation of derivative liability associated with the Convertible Notes, accrual for reimbursement claims and settlements, the valuation of the warrant liability, assessing future tax exposure and the realization of deferred tax assets, the useful lives and the recoverability of property and equipment. The Company bases these estimates on historical and anticipated results, trends, and various other assumptions that the Company believes are reasonable under the circumstances, including assumptions as to future events. These estimates form the basis for making judgments about the carrying values of assets and liabilities and recorded revenues and expenses that are not readily apparent from other sources. Actual results could differ from those estimates and assumptions.

 

Revenue Recognition

Revenue is recognized in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”). In accordance with ASC 606, the Company follows a five-step process to recognize revenues: 1) identify the contract with the customer, 2) identify the performance obligations, 3) determine the transaction price, 4) allocate the transaction price to the performance obligations and 5) recognize revenues when the performance obligations are satisfied.

Revenue is primarily derived from providing molecular testing products, which are reimbursed through arrangements with third-party payors, laboratory distribution partners, and amounts from individual patients. Third-party payors include commercial payors, such as health insurance companies, health maintenance organizations and government health benefit programs, such as Medicare and Medicaid. The Company’s contracts generally contain a single performance obligation, which is the delivery of the test results, and the Company satisfies its performance obligation at a point in time upon the delivery of the results, which then triggers the billing for the product. The amount of revenue recognized reflects the amount of consideration the Company expects to be entitled to (the “transaction price”) and considers the effects of variable consideration. Revenue is recognized when control of the promised product is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those products.

8


 

The Company applies the following practical expedients and exemptions:

 

Incremental costs incurred to obtain a contract are expensed as incurred because the related amortization period would have been one year or less. The costs are included in selling and marketing expenses.

 

No adjustments to amounts of promised consideration are made for the effects of a significant financing component because the Company expects, at contract inception, that the period between the transfer of a promised good or service and customer payment for that good or service will be one year or less.

Payor Concentration

The Company relies upon reimbursements from third-party government payors and private-payor insurance companies to collect accounts receivable. The Company’s significant third-party payors and their related accounts receivable balances and revenues as a percentage of total accounts receivable balances and revenues are as follows:

 

 

Percentage of Accounts Receivable

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Blue Shield of Texas

 

 

19.5

%

 

 

17.8

%

Government Health Benefits Programs

 

 

23.9

%

 

 

26.2

%

Aetna

 

 

5.2

%

 

 

4.0

%

United Healthcare

 

 

5.8

%

 

 

6.6

%

 

 

 

 

Percentage of Revenue

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2021

 

 

2020

 

Blue Shield of Texas

 

 

22.7

%

 

 

16.6

%

Government Health Benefits Programs

 

 

23.4

%

 

 

18.2

%

Aetna

 

 

7.7

%

 

 

7.6

%

United Healthcare

 

 

6.8

%

 

 

20.7

%

 

Accounts Receivable

Accounts receivable is recorded at the transaction price and considers the effects of variable consideration. The total consideration the Company expects to collect is an estimate and may be fixed or variable. Variable consideration includes reimbursement from third-party payors, laboratory distribution partners, and amounts from individual patients, and is adjusted for disallowed cases, discounts, and refunds using the expected value approach. The Company monitors these estimates at each reporting period based on actual cash collections in order to assess whether a revision to the estimate is required.

Embedded Derivative Related to Convertible Notes

During 2020, the Company issued Convertible Notes with an embedded derivative that is required to be bifurcated from their host contract and remeasured to fair value at each balance sheet date. Any resulting gain or loss related to the change in the fair value of the embedded derivative is recorded to other income (expense), net on the consolidated statements of operations. Changes in the Company’s assumptions, such as the Company’s stock price and volatility of common stock, could result in material changes in the valuation in future periods.

Stock-Based Compensation

Stock-based compensation related to stock options, restricted stock units (“RSUs”) and the 2020 Employee Stock Purchase Plan (“ESPP”) awards granted to the Company’s employees is measured at the grant date based on the fair value of the award. The fair value is recognized as expense over the requisite service period, which is generally the vesting period of the respective awards. Compensation related to service-based awards is recognized starting on the grant date on a straight-line basis over the vesting period, which is typically four years. For the ESPP, the requisite service period is generally the period of time from the offering date to the purchase date. The Company accounts for the forfeitures in the period in which they occur. The fair value of each restricted stock unit award is estimated based on the market price of the underlying common stock on the date of the grant.

The determination of the fair value of each stock award using the option-pricing model is affected by the Company’s assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the fair value of

9


 

the common stock at the date of grant, the expected term of the awards, the expected stock price volatility over the term of the awards, risk-free interest rate, and dividend rate. The Company’s assumptions with respect to these variables are as follows:

Fair Value of Common Stock—Prior to the IPO, the Company’s common stock was not publicly traded, therefore the Company estimated the fair value of its common stock. Following the IPO, the fair value of the Company’s common stock for awards with service-based vesting is the closing selling price per share of its common stock as reported on the Nasdaq Global Market on the date of grant or other relevant determination date.

Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. The Company determines the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For stock options granted to non-employees, the expected term equals the remaining contractual term of the option from the vesting date. For the ESPP, the expected term is the period of time from the offering date to the purchase date.

Expected Volatility—Given the limited period of time the Company’s stock has been traded in an active market, the expected volatility is estimated by taking the average historical price volatility for industry peers, consisting of several public companies in the Company’s industry that are similar in size, stage, or financial leverage, over a period of time commensurate with to the expected term of the awards.

Risk-Free Interest Rate—The risk-free interest rate is calculated using the average of the published interest rates of U.S. Treasury zero-coupon issues with maturities that are commensurate with the expected term.

Dividend Rate—The dividend yield assumption is zero, as the Company has no plans to make dividend payments.

Net Loss Per Share

Basic and diluted net loss per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. The Company considers all series of preferred stock to be participating securities as the holders of such stock are entitled to receive non-cumulative dividends on an as-converted basis in the event that a dividend is paid on common stock. Under the two-class method, the net loss attributable to common stockholders is not allocated to the preferred stock as the holders of preferred stock do not have a contractual obligation to share in the Company’s losses. Under the two-class method, net income is attributed to common stockholders and participating securities based on their participation rights. Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net loss attributable to common stockholders is calculated by adjusting net loss with dividends to preferred stockholders, if any. As the Company has reported net losses for all periods presented, all potentially dilutive securities are antidilutive and, accordingly, basic net loss per share equals diluted net loss per share.

Comprehensive Loss

The Company did not have any other comprehensive income or loss for any of the periods presented, and therefore comprehensive loss was the same as the Company’s net loss.

Recent Accounting Pronouncements Adopted

 

In December 2019, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplified income tax accounting in various areas. The Company has evaluated and adopted ASU 2019-12 on January 1, 2021, which did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840), and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method for finance leases or on a straight-line basis over the term of the lease for operating leases. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. In June 2020, the FASB issued ASU No. 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, which further defers the effective date for certain entities. As a result, the ASU is now effective for EGCs for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after

10


 

December 15, 2022. If Company maintains EGC status, it will adopt the new standard in the fourth quarter of 2022 using the modified retrospective method, under which the Company will apply the new lease standard to existing and new leases as of January 1, 2022, but prior periods will not be restated and will continue to be reported under Topic 840 guidance in effect during those periods. The Company plans to adopt the new lease standard effective January 1, 2022, using the effective date method with the cumulative effect of the change, if any, reflected in retained earnings as of January 1, 2022. The Company plans to elect the package of practical expedients available in the new lease standard, allowing it not to reassess: (a) whether expired or existing contracts contain leases under the new definition of a lease; (b) lease classification for expired or existing leases; and (c) whether previously capitalized initial direct costs would qualify for capitalization under the new lease standard.

The Company continues to monitor FASB activity to assess certain interpretative issues and the associated implementation of the new standard and is in the process of reviewing its lease arrangements, including property, equipment and vehicle leases. The Company is not yet able to estimate the anticipated impact to its consolidated financial statements from the implementation of the new standard as it continues to interpret the principles of the new standard.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses, which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this standard is 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. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments–Credit Losses, which included an amendment of the effective date. The standard is effective for the Company for annual reporting periods beginning after December 15, 2022. The Company does not expect the adoption of this standard to have a significant impact on its consolidated financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40)-Accounting for Convertible Instruments and Contracts in an Entity's Own Equity, which simplifies the accounting for convertible instruments, amends the guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share calculations as a result of these changes. The standard is effective for the Company for annual reporting periods beginning after December 15, 2023. The Company is currently evaluating the impact the adoption of this standard may have on its consolidated financial statements.

3. Variable Interest Entity

In June 2015, the Company entered into a series of agreements with Avero. The Company entered into a purchase agreement to acquire certain assets from Mattison used in the operations of Avero. The purchase agreement was accounted for under the acquisition method in accordance with the provisions of ASC Topic 805, Business Combinations. The Company entered into a nominee agreement which provides it with the right, but not the obligation, to purchase, or to designate a person(s) to purchase, the stock of Avero at any time for a nominal amount.

The Company also entered into a management services arrangement that authorizes the Company to perform the management services in the manner that it deems reasonably appropriate to meet the day-to-day business needs of Avero. The Company’s management services include funding ongoing operational needs, directing activities related to contract negotiation, billing, human resources, and legal and administrative matters and processes, among others. In exchange for the management services provided, the Company is entitled to receive an annual management fee equal to the amount of the net operating income of Avero. The term of the agreement with Avero is 10 years, subject to automatic renewals. The agreement can be terminated by either party with a 90-day notice before the end of the term.

Through the management services arrangement with Avero, the Company has (1) the power to direct the activities of Avero that most significantly impact its economic performance, and (2) the obligation to absorb losses of Avero or the right to receive benefits from Avero that could potentially be significant to Avero. Based on these determinations, the Company has determined that Avero is a variable interest entity and that the Company is the primary beneficiary. The Company does not own any equity interest in Avero; however, as these agreements provide the Company the controlling financial interest in Avero, the Company consolidates Avero’s balances and activities within its consolidated financial statements.

In December 2018, Avero entered into a settlement agreement with Cigna (the “Cigna settlement obligation”) whereby Avero agreed to pay an aggregate amount of $12.0 million with an upfront payment of $6.0 million and the remaining $6.0 million was paid over 24 months. The Company provided financial support to Avero in the amount of $0.8 million during the three months ended March 31, 2020, related to the Cigna settlement obligation, which was fully settled as of December 31, 2020. The Company did not provide any additional financial support to Avero during the three months ended March 31, 2021 and 2020, other than the Cigna settlement obligation and agreed upon management services.

11


 

The following table presents the assets and liabilities of Avero that are included in the Company’s condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 (in thousands). The creditors of Avero have no recourse to the general credit of the Company, with the exception of $1.7 million and $1.7 million in mortgage payable guaranteed by the Company as of March 31, 2021 and December 31, 2020, respectively (see Note 9). The assets and liabilities exclude intercompany balances that eliminate in consolidation:

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Assets of Avero that can only be used to settle obligations of Avero

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,162

 

 

$

556

 

Accounts receivable, net

 

 

6,333

 

 

 

6,047

 

Inventory

 

 

3,310

 

 

 

3,382

 

Prepaid expenses and other current assets

 

 

127

 

 

 

1,254

 

Property and equipment, net

 

 

5,258

 

 

 

5,436

 

Other assets

 

 

30

 

 

 

30

 

Goodwill

 

 

6,219

 

 

 

6,219

 

Other intangible assets, net

 

 

3,611

 

 

 

3,843

 

Total assets of Avero that can only be used to settle obligations of Avero

 

$

26,050

 

 

$

26,767

 

Liabilities of Avero

 

 

 

 

 

 

 

 

Accounts payable

 

$

4,516

 

 

$

4,722

 

Accrued expenses and other accrued liabilities

 

 

3,300

 

 

 

3,472

 

Current portion of capital lease obligations

 

 

39

 

 

 

46

 

Current portion of mortgage payable

 

 

200

 

 

 

199

 

Capital lease obligations, net of current portion

 

 

 

 

 

4

 

Mortgage payable, net of current portion

 

 

1,469

 

 

 

1,520

 

Other long-term liabilities

 

 

367

 

 

 

428

 

Total liabilities of Avero

 

$

9,891

 

 

$

10,391

 

 

4. Revenues

Revenue is derived from contracts with healthcare insurers, government payors, laboratory partners and patients in connection with sales of prenatal genetic, anatomic or molecular pathology tests. The Company enters into contracts with healthcare insurers related to tests provided to patients who have health insurance coverage. Insurance carriers are considered third-party payors on behalf of the patients, and the patients who receive genetic, anatomic or molecular pathology test products are considered the customers. Tests may be billed to insurance carriers, patients, or a combination of insurance carriers and patients. The Company also sells tests to laboratory partners, which are also considered to be customers. The Company’s test volumes began to decrease in the second half of March 2020 as a result of the COVID-19 pandemic spreading in the United States and resulting limitations and reordering of priorities across the U.S. healthcare system. The Company expects test volumes to continue to be adversely affected by COVID-19 and cannot predict when volumes will return to normal. 

In accordance with ASC 606, a performance obligation represents a promise in a contract to transfer a distinct good or service to a customer and the consideration should be allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. The Company has evaluated its contracts with healthcare insurers, government payors, laboratory partners and patients and identified a single performance obligation in those contracts, the delivery of a test result. The Company satisfies its performance obligation at a point in time upon the delivery of the test result, at which point the Company can bill for its products. The amount of revenue recognized reflects the transaction price and considers the effects of variable consideration, which is discussed below.

Once the Company satisfies its performance obligations upon delivery of a test result and bills for the product, the timing of the collection of payments may vary based on the payment practices of the third-party payor. The Company bills patients directly for co-pays and deductibles that they are responsible for and also bills patients directly in cases where the customer does not have insurance.

The Company has established an accrual for refunds of payments previously made by healthcare insurers based on historical experience and executed settlement agreements with healthcare insurers. The refunds are accounted for as reductions in revenues in the statement of operations as an element of variable consideration. In the United States, the American Medical Association (“AMA”) generally assigns specific billing codes for laboratory tests under a coding system known as Current Procedure Terminology (“CPT”), which the Company and its ordering healthcare providers must use to bill and receive reimbursement for molecular tests. Effective January 1, 2019, the AMA issued a CPT code for genetic testing for severe inherited conditions that includes sequencing of at least 15 genes, which affects potential reimbursement for the Company’s Preparent expanded carrier screening tests. As part of the Company’s

12


 

work to improve its compliance program, including its internal auditing and monitoring function, the Company commissioned a third-party review of its billing processes. In connection with that audit, the Company identified that it had not effectively transitioned to the implementation of the new CPT code in 2019, and as a result the Company received an overpayment of approximately $10.3 million from government payors during 2019 and early 2020. As of December 31, 2020, the Company settled all existing obligations to the relevant government programs as due and will continue to settle any future obligation as they arise.

The transaction price is an estimate and may be fixed or variable. Variable consideration includes reimbursement from healthcare insurers, government payors, and patients and is adjusted for estimates of disallowed cases, discounts, and refunds using the expected value approach. Tests billed to healthcare insurers and directly to patients can take up to nine months to collect and the Company may be paid less than the full amount billed or not paid at all. For insurance carriers and government payors, management utilizes the expected value method using a portfolio of relevant historical data for payors with similar reimbursement characteristics. The portfolio estimate is developed using historical reimbursement data from payors and patients, as well as known current reimbursement trends not reflected in the historical data. Such variable consideration is included in the transaction price only to the extent it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainties with respect to the amount are resolved. The Company monitors these estimates at each reporting period based on actual cash collections and the status of settlement agreements with third-party payors, in order to assess whether a revision to the estimate is required. Both the initial 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. The consideration expected from laboratory partners is generally a fixed amount.

The Company has established an accrual for refunds of payments previously made by healthcare insurers based on historical experience and executed settlement agreements with healthcare insurers. The refunds are accounted for as reductions in revenues in the statement of operations as an element of variable consideration.

The Company periodically updates its estimate of the variable consideration recognized for previously delivered performance obligations. These updates resulted in an additional $2.4 million of revenue reported for the three months ended March 31, 2021, and a reduction of $12.8 million of revenue reported for the three months ended March 31, 2020. These amounts included (i) adjustments for actual collections versus estimated variable consideration as of the beginning of the reporting period and (ii) cash collections and the related recognition of revenue in the current period for tests delivered in prior periods due to the release of the constraint on variable consideration, offset by (iii) reductions in revenue for the accrual for reimbursement claims and settlements described in Note 10.

Disaggregation of Revenues

The following table shows a further disaggregation of revenues by payor type (in thousands):

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

Commercial third-party payors

 

$

16,453

 

 

$

21,562

 

Government health benefit programs(1)

 

 

  5,726

 

 

 

(6,143

)

Patient/laboratory distribution partners

 

 

  2,347

 

 

 

1,409

 

Total revenues

 

$

24,526

 

 

$

16,828

 

____________

 

 

 

 

 

 

 

 

(1) The revenue amounts include accruals for reimbursement claims and settlements included in the estimates of variable consideration recorded during the three months ended March 31, 2021 and 2020. Revenue recognized reflect the effects of variable consideration, and include adjustments for estimates of disallowed cases, discounts, and refunds. The variable consideration includes reductions in revenues for the accrual for reimbursement claims and settlements.

 

 

13


 

 

5. Balance Sheet Components

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consisted of the following (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Prepaid expenses

 

$

9,629

 

 

$

9,116

 

Other current assets

 

 

683

 

 

 

245

 

Total

 

$

10,312

 

 

$

9,361

 

 

Property and Equipment, Net

Property and equipment, net consisted of the following (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Computers and software

 

$

14,738

 

 

$

14,591

 

Building and leasehold improvements

 

 

9,462

 

 

 

9,458

 

Laboratory equipment

 

 

7,791

 

 

 

7,678

 

Furniture, fixtures, and office equipment

 

 

1,686

 

 

 

1,686

 

Construction in progress

 

 

3,021

 

 

 

2,784

 

Land

 

 

1,091

 

 

 

1,091

 

Total property and equipment

 

 

37,789

 

 

 

37,288

 

Less accumulated depreciation and amortization

 

 

(20,412

)

 

 

(19,446

)

Property and equipment, net

 

$

17,377

 

 

$

17,842

 

 

Capital leases included in property and equipment, net consisted of the following (in thousands):

 

 

 

March 31,

2021

 

 

December 31,

2020

 

Capital leases

 

$

2,467

 

 

$

2,467

 

Less accumulated depreciation and amortization

 

 

(2,055

)

 

 

(1,954

)

Capital leases included in property and equipment, net

 

$

412

 

 

$

513

 

 

Depreciation expense was $1.1 million and $1.0 million for the three months ended March 31, 2021 and 2020, respectively.

Intangible Assets, Net

Intangible assets, net consisted of the following (in thousands):

 

March 31, 2021

 

Cost

 

 

Accumulated

amortization

 

 

Net

 

Payor relationships

 

$

7,230

 

 

$

(4,218

)

 

$

3,012

 

Trade names

 

 

1,410

 

 

 

(822

)

 

 

588

 

Noncompete agreements

 

 

384

 

 

 

(373

)

 

 

11

 

Intangible assets, net

 

$

9,024

 

 

$

(5,413

)

 

$

3,611

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

Cost

 

 

Accumulated

amortization

 

 

Net

 

Payor relationships

 

$

7,230

 

 

$

(4,037

)