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HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Members of
Genesis Acquisition Holdings Corp. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Genesis Acquisition Holdings Corp. and subsidiaries (the "Successor Company") as of December 31, 2017, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders' equity/deficit, and cash flows, for the period March 1, 2017 to December 31, 2017 and the related notes. In addition, we have audited the accompanying consolidated balance sheet of Genoptix, Inc. and subsidiaries (the "Predecessor Company") as of December 31, 2016, the related consolidated statements of operations, comprehensive loss, convertible preferred stock and stockholders' equity/deficit, and cash flows, for the periods January 1, 2017 to February 28, 2017 and the year ended December 31, 2016, and the related notes (collectively referred to as the "consolidated financial statements"). Genesis Acquisition Holdings Corp. and Genoptix Inc. are collectively referred to as the "Company".
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for the period March 1, 2017 to December 31, 2017 (Successor Company), the period January 1, 2017 to February 28, 2017 and the year ended December 31, 2016 (Predecessor Company), in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 and Note 3 to the consolidated financial statements, effective March 1, 2017, Genoptix, Inc. was acquired by Genesis Acquisition Holdings Corp. in a business combination. As a result of the acquisition, the consolidated financial statements for the period after March 1, 2017, are presented on a different basis than those for periods before March 1, 2017, as a result of the application of purchase accounting, and, therefore, are not comparable to prior periods. Our opinion is not modified with respect to this matter.
As discussed in Note 1, the accompanying consolidated financial statements of the Predecessor Company have been prepared from the separate accounts and records maintained by Novartis Finance Corporation ("Novartis") and include certain allocations of costs from Novartis that may not necessarily be indicative of the conditions that would have existed or the results of operations if the Predecessor Company had been operated as a separate entity apart from Novartis. Our opinion is not modified with respect to this matter.
/s/ DELOITTE & TOUCHE LLP
San Diego, California
Genesis Acquisition Holdings Corp.
Consolidated Balance Sheets
(in thousands except share and per share data)
| As of December 31, | As of September 30, (Unaudited) | |||||||||||
| Predecessor | Successor | Successor | ||||||||||
| Assets | 2016 | 2017 | 2018 | |||||||||
| Current Assets | ||||||||||||
| Cash and cash equivalents | $ | - | $ | 15,687 | $ | 12,030 | ||||||
| Restricted cash | - | 111 | 70 | |||||||||
| Accounts receivable, net | 27,202 | 23,458 | 20,574 | |||||||||
| Inventory | 2,142 | 2,275 | 2,270 | |||||||||
| Other current assets | 1,586 | 3,578 | 3,576 | |||||||||
| Total current assets | 30,930 | 45,109 | 38,520 | |||||||||
| Property and Equipment, net | 26,278 | 19,173 | 18,253 | |||||||||
| Intangible assets, net | 32,516 | 2,429 | 1,980 | |||||||||
| Goodwill | 221,041 | 9,294 | 9,294 | |||||||||
| Other assets | 324 | 265 | 224 | |||||||||
| Total Assets | $ | 311,089 | $ | 76,270 | $ | 68,271 | ||||||
| Liabilities and Stockholders' Equity/(Deficit) | ||||||||||||
| Current Liabilities | ||||||||||||
| Accounts payable | 4,979 | 4,775 | 2,082 | |||||||||
| Accrued expenses | 5,022 | 3,651 | 2,575 | |||||||||
| Employee-related liabilities | 13,986 | 7,335 | 4,744 | |||||||||
| Other current liabilities | 174 | 575 | 280 | |||||||||
| Short-term portion of capital leases and debt | - | 2,170 | 4,046 | |||||||||
| Total current liabilities | 24,161 | 18,506 | 13,727 | |||||||||
| Long-term Liabilities | ||||||||||||
| Long-term portion of loans, net | - | 8,975 | 6,564 | |||||||||
| Long-term deferred rent and lease incentives | 412 | 103 | 69 | |||||||||
| Long-term income taxes payable | 2,532 | 1,852 | 1,852 | |||||||||
| Deferred income tax liability, net | - | 375 | (59 | ) | ||||||||
| Other long-term liabilities | 7 | 100 | 100 | |||||||||
| Total long-term liabilities | 2,951 | 11,405 | 8,526 | |||||||||
| Total Liabilities | $ | 27,112 | $ | 29,911 | $ | 22,253 | ||||||
| Commitments and contingencies - See Note 8 | ||||||||||||
| Preferred Stock | - | 50,438 | 50,438 | |||||||||
| Stockholders Equity/(Deficit) | ||||||||||||
| Common stock, $0.001 par value | - | - | 3 | |||||||||
| Additional paid-in capital | - | 485 | 1,115 | |||||||||
| Parent company investment | 283,405 | - | - | |||||||||
| Accumulated other comprehensive income | 572 | - | - | |||||||||
| Accumulated deficit | - | (4,564 | ) | (5,538 | ) | |||||||
| Total Stockholders Equity/(Deficit) | $ | 283,977 | $ | (4,079 | ) | $ | (4,420 | ) | ||||
| Total Liabilities, Preferred Stock and Stockholders' Equity/(Deficit) | $ | 311,089 | $ | 76,270 | $ | 68,271 |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Operations
(in thousands except share data)
| Predecessor | Predecessor | Successor | ||||||||||
| Year Ended December 31, 2016 | Two Months Ended February 28, 2017 | Ten Months Ended December 31, 2017 | ||||||||||
| NET REVENUE | $ | 131,612 | $ | 19,435 | $ | 97,025 | ||||||
| COST OF REVENUE | 85,228 | 10,989 | 55,621 | |||||||||
| GROSS PROFIT | 46,384 | 8,446 | 41,404 | |||||||||
| - | ||||||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 21,325 | 3,437 | 24,866 | |||||||||
| Research and development | 4,430 | 658 | 2,887 | |||||||||
| Sales and marketing | 32,620 | 5,195 | 18,442 | |||||||||
| Total operating expenses | 58,375 | 9,290 | 46,195 | |||||||||
| - | ||||||||||||
| LOSS FROM OPERATIONS | (11,991 | ) | (844 | ) | (4,791 | ) | ||||||
| Interest and other income | 173 | 109 | 79 | |||||||||
| Interest and other expense | (1,160 | ) | (240 | ) | (1,097 | ) | ||||||
| Intangible asset impairment | - | (26,344 | ) | - | ||||||||
| Loss before taxes | (12,978 | ) | (27,319 | ) | (5,809 | ) | ||||||
| Income tax expense (benefit) | 691 | 105 | (1,245 | ) | ||||||||
| NET LOSS | (13,669 | ) | (27,424 | ) | (4,564 | ) | ||||||
| Deemed dividends on preferred stock | - | - | 3,354 | |||||||||
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (13,669 | ) | $ | (27,424 | ) | $ | (7,918 | ) |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Operations
(in thousands except share data)
| Predecessor | Successor | Successor | ||||||||||
| Two Months Ended February 28, 2017 | Seven Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| NET REVENUE | $ | 19,435 | $ | 70,985 | $ | 74,344 | ||||||
| COST OF REVENUE | 10,989 | 41,242 | 37,917 | |||||||||
| GROSS PROFIT | 8,446 | 29,743 | 36,427 | |||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 3,437 | 18,518 | 18,685 | |||||||||
| Research and development | 658 | 2,097 | 2,369 | |||||||||
| Sales and marketing | 5,195 | 13,297 | 16,115 | |||||||||
| Total operating expenses | 9,290 | 33,912 | 37,169 | |||||||||
| LOSS FROM OPERATIONS | (844 | ) | (4,169 | ) | (742 | ) | ||||||
| Interest and other income | 109 | 36 | 326 | |||||||||
| Interest and other expense | (240 | ) | (758 | ) | (1,013 | ) | ||||||
| Intangible asset impairment | (26,344 | ) | - | - | ||||||||
| Loss before taxes | (27,319 | ) | (4,891 | ) | (1,429 | ) | ||||||
| Income tax expense (benefit) | 105 | (430 | ) | (455 | ) | |||||||
| NET LOSS | $ | (27,424 | ) | $ | (4,461 | ) | $ | (974 | ) | |||
| Deemed dividends on preferred stock | - | 2,343 | 3,030 | |||||||||
| NET LOSS AVAILABLE TO COMMON STOCKHOLDERS | $ | (27,424 | ) | $ | (6,804 | ) | $ | (4,004 | ) |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Comprehensive Loss
| Predecessor | Predecessor | Successor | ||||||||||
| Year Ended December 31, 2016 | Two Months Ended February 28, 2017 | Ten Months Ended December 31, 2017 | ||||||||||
| Net Loss | $ | (13,669 | ) | $ | (27,424 | ) | $ | (4,564 | ) | |||
| Unrealized gain (loss) on post-retirement benefit plan | (277 | ) | 14 | - | ||||||||
| Total Comprehensive Loss | $ | (13,946 | ) | $ | (27,410 | ) | $ | (4,564 | ) |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Comprehensive Loss
| Predecessor | Successor | Successor | ||||||||||
| Two Months Ended February 28, 2017 | Seven Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Net Loss | (27,424 | ) | (4,461 | ) | (974 | ) | ||||||
| Unrealized gain on post-retirement benefit plan | 14 | - | - | |||||||||
| Total Comprehensive Loss | $ | (27,410 | ) | $ | (4,461 | ) | $ | (974 | ) |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Cash Flows
| Predecessor | Predecessor | Successor | ||||||||||
| Year Ended December 31, 2016 | Two Months Ended February 28, 2017 | Ten Months Ended December 31, 2017 | ||||||||||
| Net Loss | $ | (13,669 | ) | $ | (27,424 | ) | $ | (4,564 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used by) operating activities: | ||||||||||||
| Depreciation and amortization | 7,422 | 1,250 | 4,177 | |||||||||
| Amortization of debt issuance cost and debt discount | - | - | 133 | |||||||||
| Bad debt expense (recovery) | 277 | (38 | ) | 50 | ||||||||
| Impairment of intangible assets | - | 26,344 | - | |||||||||
| Stock-based compensation | 1,318 | 78 | 485 | |||||||||
| Loss on disposal of property | 12 | 119 | 27 | |||||||||
| Post-employment plan expense (income) | 212 | (112 | ) | - | ||||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||||||
| Accounts receivable | 1,984 | (1,017 | ) | 4,748 | ||||||||
| Inventory | 270 | 145 | (277 | ) | ||||||||
| Prepaid expenses and other current assets | 883 | 516 | (1,581 | ) | ||||||||
| Other long-term assets | 37 | - | 129 | |||||||||
| Deferred long-term tax liability | 619 | 31 | (1,468 | ) | ||||||||
| Accounts payable | 3,634 | (2,934 | ) | 2,730 | ||||||||
| Accrued expenses | 576 | (503 | ) | (868 | ) | |||||||
| Employee related expenses | 1,335 | (6,435 | ) | 761 | ||||||||
| Other current liabilities | 134 | 125 | 289 | |||||||||
| Deferred rent and lease incentives | 65 | 146 | (277 | ) | ||||||||
| Other long-term payables | 8 | (8 | ) | - | ||||||||
| Net cash provided by (used in) operating activities | $ | 5,117 | $ | (9,717 | ) | $ | 4,494 | |||||
| Purchase of property, plant and equipment | (2,141 | ) | (63 | ) | (1,105 | ) | ||||||
| Purchase of intangible assets | (120 | ) | - | (26 | ) | |||||||
| Proceeds from sale of disposal of fixed assets | 7 | - | 10 | |||||||||
| Acquisition of business | - | - | (49,027 | ) | ||||||||
| Net cash used in investing activities | $ | (2,254 | ) | $ | (63 | ) | $ | (50,148 | ) | |||
| Draw down on line of credit, net of issuance cost | - | - | 99,184 | |||||||||
| Repayment of line of credit | - | - | (97,824 | ) | ||||||||
| Issuance of notes payable, net of issuance cost | - | - | 9,655 | |||||||||
| Proceeds from issuance of preferred stock, net | - | - | 50,437 | |||||||||
| Net cash transferred (to) / from parent | (2,863 | ) | 9,780 | - | ||||||||
| Net cash (used in) provided by financing activities | $ | (2,863 | ) | $ | 9,780 | $ | 61,452 | |||||
| Change in cash, cash equivalents and restricted cash | - | - | 15,798 | |||||||||
| Balance at beginning of the period | - | - | - | |||||||||
| Balance at end of the period | $ | - | $ | - | $ | 15,798 | ||||||
| Supplemental disclosures of cash flow information | ||||||||||||
| Interest paid | $ | - | $ | - | $ | 944 | ||||||
| Income taxes paid | $ | - | $ | - | $ | 8 | ||||||
| Supplemental schedule of non-cash investing and financing activities | ||||||||||||
| Property, plant and equipment included in accounts payable | $ | 1 | $ | 5 | $ | 131 |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Cash Flows
| Predecessor | Successor | Successor | ||||||||||
| Two Months Ended February 28, 2017 | Seven Months Ended September 30, 2017 | Nine Months Ended September 30, 2018 | ||||||||||
| (Unaudited) | (Unaudited) | |||||||||||
| Net Loss | $ | (27,424 | ) | $ | (4,461 | ) | $ | (974 | ) | |||
| Adjustments to reconcile net loss to net cash provided by (used by) operating activities: | ||||||||||||
| Depreciation and amortization | 1,250 | 2,868 | 4,219 | |||||||||
| Amortization of debt issuance cost and debt discount | - | 92 | 127 | |||||||||
| Bad debt expense (recovery) | (38 | ) | 50 | - | ||||||||
| Impairment of intangible assets | 26,344 | - | - | |||||||||
| Stock-based compensation | 78 | 397 | 422 | |||||||||
| Loss on disposal of property | 119 | 26 | 462 | |||||||||
| Post-employment plan expense (income) | (112 | ) | - | - | ||||||||
| Changes in operating assets and liabilities: | - | - | - | |||||||||
| Accounts receivable | (1,017 | ) | 3,270 | 3,846 | ||||||||
| Inventory | 145 | 204 | 5 | |||||||||
| Prepaid expenses and other current assets | 516 | (860 | ) | 344 | ||||||||
| Other long-term assets | - | 122 | 20 | |||||||||
| Deferred long-term tax liability | 31 | (584 | ) | (434 | ) | |||||||
| Accounts payable | (2,934 | ) | 3,459 | (3,443 | ) | |||||||
| Accrued expenses | (503 | ) | (1,047 | ) | (1,075 | ) | ||||||
| Employee related expenses | (6,435 | ) | (1,587 | ) | (2,668 | ) | ||||||
| Other current liabilities | 125 | 203 | (167 | ) | ||||||||
| Deferred rent and lease incentives | 146 | (160 | ) | (163 | ) | |||||||
| Other long-term payables | (8 | ) | - | - | ||||||||
| Net cash provided by (used in) operating activities | $ | (9,717 | ) | $ | 1,992 | $ | 521 | |||||
| Purchase of property, plant and equipment | (63 | ) | (603 | ) | (1,582 | ) | ||||||
| Notes Receivable | - | - | (1,234 | ) | ||||||||
| Proceeds from sale of disposal of fixed assets | - | 10 | 27 | |||||||||
| Acquisition of business | - | (49,027 | ) | (1,000 | ) | |||||||
| Net cash used in investing activities | $ | (63 | ) | $ | (49,620 | ) | $ | (3,789 | ) | |||
| Draw down on line of credit, net of issuance cost | - | 73,065 | 72,500 | |||||||||
| Repayment of line of credit | - | (71,071 | ) | (73,141 | ) | |||||||
| Issuance of notes payable, net of issuance cost | - | 9,655 | - | |||||||||
| Proceeds from issuance of preferred stock, net | - | 50,437 | 212 | |||||||||
| Net cash transferred (to) / from parent | 9,780 | - | - | |||||||||
| Net cash (used in) provided by financing activities | $ | 9,780 | $ | 62,086 | $ | (429 | ) | |||||
| Change in cash, cash equivalents and restricted cash | - | 14,458 | (3,698 | ) | ||||||||
| Balance at beginning of the period | - | - | 15,798 | |||||||||
| Balance at end of the period | $ | - | $ | 14,458 | $ | 12,100 |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity/(Deficit)
| Convertible Preferred Shares | Common Stock | Parent Company Investment | Additional Paid In Capital | Accumulated Deficit | Accumulated other comprehensive income (loss) | Total Stockholder Equity(Deficit) | |||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||
| Predecessor: | |||||||||||||||||||||||||||||
| Balance at December 31, 2015 | - | $ | - | - | $ | - | $ | 299,619 | $ | - | $ | - | $ | 295 | $ | 299,914 | |||||||||||||
| Actuarial gain on post-employment and retirement plans | - | - | - | - | - | - | - | 277 | 277 | ||||||||||||||||||||
| Stock based compensation | - | - | - | - | 1,318 | - | - | - | 1,318 | ||||||||||||||||||||
| Net loss | - | - | - | - | (13,669 | ) | - | - | - | (13,669 | ) | ||||||||||||||||||
| Net transfers to parent | - | - | - | - | (3,863 | ) | - | - | - | (3,863 | ) | ||||||||||||||||||
| Balance at December 31, 2016 | - | $ | - | - | $ | - | $ | 283,405 | $ | - | - | $ | 572 | $ | 283,977 | ||||||||||||||
| Actuarial gain on post-employment and retirement plans | - | - | - | - | - | - | - | (14 | ) | (14 | ) | ||||||||||||||||||
| Stock based compensation | - | - | - | - | 78 | - | - | - | 78 | ||||||||||||||||||||
| Net loss | - | - | - | - | (27,424 | ) | - | - | - | (27,424 | ) | ||||||||||||||||||
| Net transfers from parent | - | - | - | - | 9,969 | - | - | - | 9,969 | ||||||||||||||||||||
| Balance at February 28, 2017 | - | $ | - | - | $ | - | $ | 266,028 | $ | - | $ | - | $ | 558 | $ | 266,586 | |||||||||||||
| Successor: | |||||||||||||||||||||||||||||
| Issuance of common stock | - | - | 1 | - | - | - | - | - | - | ||||||||||||||||||||
| Issuance of Series A convertible preferred stock at $1.00 per share, net of issuance costs of $68 | 50,505 | 50,438 | - | - | - | - | - | - | - | ||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | 485 | - | - | 485 | ||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (4,564 | ) | - | (4,564 | ) | ||||||||||||||||||
| Balance at December 31, 2017 | 50,505 | $ | 50,438 | 1 | $ | - | $ | - | $ | 485 | $ | (4,564 | ) | $ | - | $ | (4,079 | ) | |||||||||||
| (Unaudited): | |||||||||||||||||||||||||||||
| Issuance of restricted stock | - | - | 1,778 | 2 | - | (2 | ) | - | - | - | |||||||||||||||||||
| Issuance of common stock for stock options | - | - | 784 | 1 | - | 209 | - | - | 210 | ||||||||||||||||||||
| Stock based compensation | - | - | - | - | - | 423 | - | - | 423 | ||||||||||||||||||||
| Net loss | - | - | - | - | - | - | (974 | ) | - | (974 | ) | ||||||||||||||||||
| Balance at September 30, 2018 (unaudited) | 50,505 | $ | 50,438 | 2,562 | $ | 3 | $ | - | $ | 1,115 | $ | (5,538 | ) | $ | - | $ | (4,420 | ) |
The accompanying notes are an integral part of the financial statements
Genesis Acquisition Holdings Corp.
Notes to Consolidated Financial Statements
(Information as of September 30, 2018 and for the seven months ended September 30, 2017 and nine months ended September 30, 2018 is unaudited)
1. Nature of Business and Basis of Presentation
Genesis Acquisition Holdings, Corp. ("Genesis," the "Successor" or the "Parent Company") was incorporated in the
state of Delaware in December 2016 in order to acquire 100% of the outstanding common stock of the Predecessor (as hereinafter defined) on March 1, 2017 ("Acquisition Date"), as more fully described in Note 3 (the "Acquisition").
Genoptix, Inc., ("Genoptix" or the "Predecessor"), was incorporated in Delaware on January 20, 1999 and became a
wholly-owned subsidiary of Novartis Finance Corporation ("Novartis" or "Former Parent Company") in March 2011. Genoptix survived the Acquisition and is included in the Successor entity's consolidated financial statements.
Genoptix has three wholly-owned subsidiaries: (i) Molecular Diagnostics LLC. ("MDx") domiciled in Puerto Rico, (ii) Minuet Diagnostics, Inc. ("Minuet"), and (iii) CynoGen, Inc. ("CynoGen", "PersonalizeDx" or "PDx"). Genesis, Genoptix, MDx, Minuet and PDx are collectively referred to as the Company. Both Minuet and PDx, a wholly-owend subsidiary of Minuet, were acquired by the Company in March 2018.
The Company operates as a certified "high complexity" clinical laboratory in accordance with The Centers for Medicare & Medicaid Services' Clinical Laboratory Improvement Amendments of 1988, or CLIA, and is dedicated to the delivery of clinical diagnostic services to oncologists, pathologists, hematologists, and hospitals throughout the United States. Prior to the Acquisition Date, Genoptix also provided clinical trial services to pharmaceutical companies ("BioPharma"). Immediately prior to the Acquisition, pursuant to a Spin-Out Agreement, Genoptix and MDx transferred their BioPharma assets and liabilities to Navigate Biopharma Services, Inc., a newly created subsidiary of Novartis.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). These principles require management to make certain estimates and assumptions in determining assets, liabilities, revenue, expenses and related disclosures. Actual amounts could differ materially from those estimates.
The consolidated balance sheets have been presented as of December 31, 2017 for the Successor, and as of December 31, 2016 for the Predecessor company. The consolidated statements of operations, comprehensive loss, cash flows and convertible preferred stock and stockholders' equity (deficit) include the periods March 1, 2017 through December 31, 2017, for the Successor, and year ended December 31, 2016 and the period January 1, 2017 through February 28, 2017 for the Predecessor. As a result of the Genesis acquisition and associated purchase accounting, the Successor financial statements have been presented on a different basis than the Predecessor financial statements, and are therefore not comparable. The Predecessor and Successor periods are demarcated by a black line in the consolidated financial statements.
The Predecessor consolidated financial statements include amounts that have been derived from the accounting records of Novartis using the historical results of operations and historical cost basis of the assets and liabilities of the Company. The accompanying Predecessor consolidated balance sheet does not include certain Predecessor stockholders' assets or liabilities that are not specifically identifiable to the Company. Novartis used a centralized approach to cash management and the financing of its operations. The majority of the Predecessor's cash was available for use and was regularly "swept" into accounts maintained by Novartis. Cash transfers to and from the Novartis's cash management accounts were accounted for through "Net transfers to parent" in the accompanying consolidated financial statements as the Former Parent Company did not intend to repay or seek reimbursement for these net cash transfers. Since none of the Novartis's debt at the corporate level was specifically used for the Company, none of the Novartis's debt has been included in the Company's Predecessor consolidated balance sheets, nor has interest expense been allocated to the Company for the Predecessor periods presented. See Note 9, Related-Party Transactions, for a further discussion of related-party transactions with the Former Parent Company.
The consolidated statements of operations include all revenues and costs attributable to the Company, including a charge or allocation of the costs for support services and corporate costs incurred by Novartis on behalf of the Company. See Note 9, Related-Party Transactions, for further discussion of these charges and allocations.
The BioPharma business has also been excluded from the Predecessor's financial statements. All of the allocations and estimates in the consolidated financial statements are based on assumptions that management believes are reasonable. However,
Genesis Acquisition Holdings Corp.
Notes to Consolidated Financial Statements
(Information as of September 30, 2018 and for the seven months ended September 30, 2017 and nine months ended September 30, 2018 is unaudited)
these allocations and estimates include costs which are not necessarily indicative of the amounts that would have resulted if the Company had been operated on a stand-alone basis in the Predecessor periods.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of September 30, 2018, consolidated statement of operations, comprehensive loss convertible preferred stock and stockholders' equity (deficit), and cash flows for the seven months ended September 30, 2017 and for the nine months ended September 30, 2018 are unaudited. The unaudited consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) considered necessary to state fairly our financial position as of September 30, 2018, and our results of operations and cash flows for the period January 1, 2017 through February 28, 2017 for the Predecessor and the period March 1, 2017 through September 30, 2017 and the nine months ended September 30, 2018 for the Successor. The results for the nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ended December 31, 2018 or for any other interim period.
Principles of Consolidation
The Company's industry is highly regulated. The manner in which licensed physicians can organize to perform and bill for medical services is governed by state laws and regulations. Business corporations, like the Company, often are not permitted to employ physicians to practice medicine or to own corporations that employ physicians to practice medicine or to otherwise exercise control over the medical judgments or decisions of physicians.
The Company coordinates the provision of medical services through Cartesian Medical Group, Inc. ("Cartesian"). Cartesian employs the physicians who provide medical services on behalf of the Company. The relationship between the Company and Cartesian is governed by the Clinical Laboratory Professional Services Agreement, or PSA, entered into by Genoptix and Cartesian. The PSA was entered into on December 31, 2005 and amended and restated on April 4, 2017. Under the PSA, Cartesian provides all medical services and the Company exclusively manages non-medical aspects, including entering into non-employment related contracts. Claims, demands and rights to charge, bill and collect for medical services rendered are assigned from Cartesian to the Company. The Company is specifically responsible for the billing and collection of all charges for the medical services rendered by Cartesian and provides Cartesian with certain services, including payroll, laboratory and medical office space and non-medical business functions, such as supplies, utilities and insurance. Under the provisions of the PSA, the Company records the revenue assigned to it and expenses the cost of the services provided by it. The PSA is automatically renewed on a yearly basis but may be terminated by the Company at any time with 60 days' prior notice, and either party may terminate the PSA upon an uncured material breach by the other party. Cartesian has no operating assets. The Company has also entered into a Succession Agreement that limits the ability of Cartesian's sole owner to transfer his ownership interest in Cartesian to an entity or person designated by the Company. The Company determined it has a controlling financial interest in Cartesian and consolidates the results of Cartesian based on the criteria as required by Accounting Standards Codification (ASC) Topic 810, Consolidations.
The consolidated financial statements of the Predecessor include the accounts of Genoptix, MDx and Cartesian, but exclude BioPharma.
The consolidated financial statements of the Successor include the accounts of Genesis, Genoptix, MDx, Minuet, PDx and
All intercompany transactions and balances have been eliminated.
2. Significant Accounting Policies
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and these notes to consolidated financial statements. The most significant estimates in the Company's consolidated financial statements include revenue recognition for sales to non-contracted payors, allowance for doubtful accounts, and the valuation of intangible assets, income taxes and stock-based compensation. Actual results could differ from those estimates.
Genesis Acquisition Holdings Corp.
Notes to Consolidated Financial Statements
(Information as of September 30, 2018 and for the seven months ended September 30, 2017 and nine months ended September 30, 2018 is unaudited)
Operating segments are identified as components of an enterprise about which discrete financial information is available for evaluation by the chief operating decision-maker in making decisions regarding resource allocation and assessing performance. To date, the Company has viewed its operations and managed its business as one segment, operating in the United States.
Cash and Cash Equivalents
The Company considers all liquid investments with original maturities of 90 days or less to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds whose cost equals fair market value.
Restricted cash balances relate primarily to temporary restrictions caused by the timing of lockbox collections under borrowing arrangements (see Note 5 "Loan Facilities").
The Company's accounts receivable are reported for all clinical services payers based on the amount expected to be
collected, which considers implicit price concessions. Implicit price concessions represent differences between
amounts billed and the estimated consideration the Company expects to receive based on negotiated discounts,
historical collection experience and other anticipated adjustments, including anticipated payer denials. The majority
of accounts receivable are due from commercial insurance carriers and government health care programs, such as
Medicare, and other directly billed healthcare institutions such as hospitals, clinics and individuals.
Included in accounts receivable are earned but unbilled receivables of $6.0 million, $1.9 million, and $2.2 million as of December 31, 2016 and 2017 and September 30, 2018, respectively. Delays ranging from one day up to several weeks between the date of service and billing can occur due to delays in obtaining certain required payer-specific documentation from internal and external sources. Earned but unbilled receivables are aged from date of service and are considered in the analysis of historical receivables performance and collectability.
See the Revenue Recognition policy section for a further discussion of the Company's revenue recognition policy.
Inventory, which consists primarily of reagents and laboratory supplies, is stated at the lower of first-in, first-out cost or market basis.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated over the estimated useful lives of the assets, ranging from three to forty years, using the straight-line method. Leasehold improvements are amortized over the lesser of the estimated useful lives of the assets or the remaining lease term. Major repairs, which extend the useful life of an asset, are capitalized in the property and equipment accounts. Routine maintenance and repairs are expensed as incurred.
The Company tests property, plant and equipment for impairment whenever events or circumstances indicate that a certain asset may be impaired. Once identified, the amount of the impairment is computed by comparing the carrying value of the assets to the fair value, which is based on the discounted estimated future cash flows. The Predecessor did not record impairment charges on property, plant and equipment for the year ended December 31, 2016 and the period between January 1, 2017 and February 28, 2017. The Successor has not recorded impairment charges on property and equipment for the period between the Acquisition Date and December 31, 2017 and for the nine months ended September 30, 2018.