11. SALES SERVICE REVENUE, NET AND ACCOUNTS RECEIVABLE

Adoption of ASC Topic 606, “Revenue from contracts with customers”

On January 1, 2018, the Company adopted ASC 606 that amends the guidance for the recognition of revenue from contracts with customers to transfer goods and services by using the modified-retrospective method applied to any contracts that were not completed as of January 1, 2018. The Company performed a comprehensive review of its existing revenue arrangements following the five-step model:

Step 1: Identification of the contract with the customer. Sub-steps include determining the customer in a contract; Initial contract identification and determine if multiple contracts should be combined and accounted for as a single transaction.

Step 2: Identify the performance obligation in the contract. Sub-steps include identifying the promised goods and services in the contract and identifying which performance obligations within the contract are distinct.

Step 3: Determine the transaction price. Sub-steps include variable consideration, constraining estimates of variable consideration, the existence of a significant financing component in the contract, noncash consideration and consideration payable to a customer.

Step 4: Allocate transaction price. Sub-steps include assessing the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to the customer.

Step 5: Satisfaction of performance obligations. Sub-steps include ascertaining the point in time when an asset is transferred to the customer and the customer obtains control of the asset upon which time the Company recognizes revenue.

Based on the Company's analysis, there were no changes identified that impacted the amount or timing of revenues recognized under the new guidance as compared to the previous guidance (ASC 605). Additionally, the Company's analysis indicated that there were no changes to how costs to obtain and fulfill our customer contracts would be recognized under the new guidance as compared to the previous guidance. Accordingly, the initial application of the new revenue standard did not result in the recognition of a cumulative effect adjustment to the opening balance of accumulated deficit as of January 1, 2018.

Nature of Contracts and Customers

The Company’s contracts and related performance obligations are similar for its customers and the sales process for all customers start upon the receipt of requisition forms from the customers for patient diagnostic testing and the execution of contracts for biomarker testing and clinical research. Payment terms for the services provided are 30 days, unless separately negotiated.

Diagnostic testing

Control of the laboratory testing services is transferred to the customer at a point in time. As such, the Company recognizes revenue for laboratory testing services at a point in time based on the delivery method (web-portal access or fax) for the patient’s laboratory report, per the contract.

Clinical research grants

Control of the clinical research services are transferred to the customer over time. The Company will recognize revenue utilizing the “effort based” method, measuring its progress toward complete satisfaction of the performance obligation.

Biomarker testing and clinical project services

Control of the biomarker testing and clinical project services are transferred to the customer over time. The Company utilizes an “effort based” method of assessing performance and measures progress towards satisfaction of the performance obligation based upon the delivery of results.

The Company generates revenue from the provision of diagnostic testing provided to patients, biomarker testing provided to bio-pharma customers and clinical research grants funded by both bio-pharma customers and government health programs.

Disaggregation of Revenues by Transaction Type

We operate in one business segment and, therefore, the results of our operations are reported on a consolidated basis for purposes of segment reporting, consistent with internal management reporting. Revenues, net of contractual allowances and adjustments for the three and six months ended June 30, 2018 and 2017 were as follows (prior-period amounts are not adjusted under the modified-retrospective method of adoption):



	For the Three Months Ended June 30,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total
	2018		2017		2018		2017		2018		2017
Medicaid	$	11	$	8	$	-	$	-	$	11	$	8
Medicare		281		131		-		-		281		131
Self-pay		20		34		-		-		20		34
Third party payers		219		143		-		-		219		143
Contract diagnostics		-		-		368		-		368		-
Revenues, net of contractual allowances	$	531	$	316	$	368	$	-	$	899	$	316



	For the Six Months Ended June 30,
(dollars in thousands)	Diagnostic Testing				Biomarker Testing				Total
	2018		2017		2018		2017		2018		2017
Medicaid	$	23	$	20	$	-	$	-	$	23	$	20
Medicare		415		289		-		-		415		289
Self-pay		46		54		-		-		46		54
Third party payers		350		256		-		-		350		256
Contract diagnostics		-		-		856		-		856		-
Revenues, net of contractual allowances	$	834	$	619	$	856	$	-	$	1,690	$	619

Revenue from the Medicare and Medicaid programs account for a portion of the Company’s patient diagnostic service revenue. Laws and regulations governing those programs are extremely complex and subject to interpretation. As a result, there is at least a reasonable possibility that recorded estimates will change by a material amount in the near term.

Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience. The Company does not typically enter arrangements where multiple contracts can be combined as the terms regarding services are generally found within a single agreement/requisition form. The Company derives its revenues from three types of transactions: diagnostic testing, clinical research grants from state and federal research programs, and other revenues from the Company’s ICP technology and bio-pharma projects encompassing genetic diagnostics.

Deferred revenue

Deferred revenue, or unearned revenue, refers to advance payments for products or services that are to be delivered in the future. The Company records such prepayment of unearned revenue as a liability, as revenue that has not yet been earned, but represents products or services that are owed to a customer. As the product or service is delivered over time, the Company recognizes the appropriate amount of revenue from deferred revenue. For the period ended June 30, 2018 and December 31, 2017, the deferred revenue was $116,000 and $66,000, respectively.

Contractual Allowances and Adjustments

We are reimbursed by payors for services we provide. Payments for services covered by payors average less than billed charges. We monitor revenue and receivables from payors and record an estimated contractual allowance for certain revenue and receivable balances as of the revenue recognition date to properly account for anticipated differences between amounts estimated in our billing system and amounts ultimately reimbursed by payors. Accordingly, the total revenue and receivables reported in our financial statements are recorded at the amounts expected to be received from these payors. For service revenue, the contractual allowance is estimated based on several criteria, including unbilled claims, historical trends based on actual claims paid, current contract and reimbursement terms and changes in customer base and payor/product mix. The billing functions for the remaining portion of our revenue are contracted and fixed fees for specific services and are recorded without an allowance for contractual discounts. The following table presents our revenues initially recognized for each associated payor class during the three and six months ended June 30, 2018 and 2017.



	For the Three Months Ended June 30,
					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2018		2017		2018		2017		2018		2017
Medicaid	$	26	$	41	$	(15)	$	(33)	$	11	$	8
Medicare		292		128		(11)		3		281		131
Self-pay		20		58		-		(24)		20		34
Third party payers		531		300		(312)		(157)		219		143
Contract diagnostics		368		-		-		-		368		-
		1,237		527		(338)		(211)		899		316
Clinical research grants and other		60		-		-		-		60		-
	$	1,297	$	527	$	(338)	$	(211)	$	959	$	316



	For the Six Months Ended June 30,
					Contractual Allowances and				Revenues, net of Contractual
	Gross Revenues				adjustments				Allowances and adjustments
	2018		2017		2018		2017		2018		2017
Medicaid	$	41	$	65	$	(18)	$	(45)	$	23	$	20
Medicare		429		294		(14)		(5)		415		289
Self-pay		46		78		-		(24)		46		54
Third party payers		848		595		(498)		(339)		350		256
Contract diagnostics		856		-		-		-		856		-
		2,220		1,032		(530)		(413)		1,690		619
Clinical research grants and other		65		-		-		-		65		-
	$	2,285	$	1,032	$	(530)	$	(413)	$	1,755	$	619

Allowance for Doubtful Accounts

The Company provides for a general allowance for collectability of services when recording net sales. The Company has adopted the policy of recognizing net sales to the extent it expects to collect that amount. Reference FASB 954-605-45-5 and ASU 2011-07, Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts. The change in the allowance for doubtful accounts is directly related to the increase in patient service revenues. The following table presents our reported revenues net of the collection allowance and adjustments for the three and six months ended June 30, 2018 and 2017.



	For the Three Months Ended June 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2018		2017		2018		2017		2018		2017
Medicaid	$	11	$	8	$	(12)	$	(2)	$	(1)	$	6
Medicare		281		131		(42)		(23)		239		108
Self-pay		20		34		-		(6)		20		28
Third party payers		219		143		(88)		(25)		131		118
Contract diagnostics		368		-		-		-		368		-
		899		316		(142)		(56)		757		260
Clinical research grants and other		60		-		-		-		60		-
	$	959	$	316	$	(142)	$	(56)	$	817	$	260



	For the Six Months Ended June 30,
	Revenues, net of
(dollars in thousands)	Contractual Allowances				Allowances for doubtful
	and adjustments				accounts				Total
	2018		2017		2018		2017		2018		2017
Medicaid	$	23	$	20	$	(23)	$	(4)	$	-	$	16
Medicare		415		289		(62)		(53)		353		236
Self-pay		46		54		-		(10)		46		44
Third party payers		350		256		(141)		(44)		209		212
Contract diagnostics		856		-		-		-		856		-
		1,690		619		(226)		(111)		1,464		508
Clinical research grants and other		65		-		-		-		65		-
	$	1,755	$	619	$	(226)	$	(111)	$	1,529	$	508

Costs to Obtain or Fulfill a Customer Contract

Sales commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded in operating expenses in the condensed consolidated statements of operations.

Shipping and handling costs are comprised of inbound and outbound freight and associated labor. The Company accounts for shipping and handling activities related to contracts with customers as fulfillment costs which are included in cost of sales in the condensed consolidated statements of operations.

Accounts Receivable

The Company has provided an allowance for potential credit losses, which has been determined based on management’s industry experience. The Company grants credit without collateral to its patients, most of who are insured under third party payer agreements.

The following summarizes the mix of receivables:



	June 30, 2018		December 31, 2017
Medicaid	$	37	$	37
Medicare		774		256
Self-pay		103		53
Third party payers		797		1,066
Contract diagnostic services		392		445
Other		-		-
	$	2,103	$	1,857
Less allowance for doubtful accounts		(1,351)		(1,127)
Accounts receivable, net	$	752	$	730

The following table presents the roll-forward of the allowance for doubtful accounts for the six months ended June 30, 2018.



			Allowance for
			Doubtful
(dollars in thousands)			Accounts
Balance, January 1, 2018			$	(1,127)
Collection Allowance:
Medicaid	$	(23)
Medicare		(62)
Third party payers		(141)
Service revenue, net		(226)
Bad debt expense	$	2
Total charges				(224)
Balance, June 30, 2018			$	(1,351)