Revenues

Adoption of New Revenue Recognition Standard

In January 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers using the modified retrospective method applied to contracts existing as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new guidance, while prior period amounts are not adjusted and continue to be reported in accordance with previous guidance.

Upon adoption, we recorded a reduction of $75 to the opening balance of accumulated deficit as of January 1, 2018. This adjustment is related to the change in revenue recognition associated with our drug testing kit sales. Sales of our drug testing kits include two performance obligations: sales of the device and laboratory services. Under this new accounting standard, we adjusted the allocation of the transaction price to the performance obligations and the estimate of unexercised rights (“breakage”) associated with the contracts. Prior to the adoption of the new guidance, we used the residual value method to allocate the transaction prices. With the adoption of ASU 2014-09, we allocated transition prices based upon the stand-alone selling price, or fair value method. This change in methodology also impacted our estimated breakage amount.

The following table summarizes the impact of the new revenue standard adjustment on our opening balance sheet:

	Balance at			New Revenue			Balance at
	December 31, 2017			Standard Adjustment			January 1, 2018
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Deferred revenue		1,314			75			1,389
STOCKHOLDERS' EQUITY
Accumulated deficit		(119,510	)		(75	)		(119,585	)

The adoption of this new standard had an immaterial impact on our reported total revenues and operating income, as compared to what would have been reported under the prior standard. We expect the impact of adoption in future periods to continue to be immaterial. Our accounting policies under the new standard were applied prospectively and are noted below.

Revenue Policies

Product sales. Revenue from product sales is recognized upon transfer of control of a product to a customer based on an amount that reflects the consideration we are entitled to, net of allowances for any discounts or rebates.

Our net revenues recorded for sales of the OraQuick^® In-Home HIV test represent total gross revenues, less an allowance for expected returns, and customer allowances for cooperative advertising, discounts, rebates, and chargebacks. The allowance for expected returns is an estimate established by management, based upon currently available information, and is adjusted to reflect known changes in the factors that impact this estimate. Other customer allowances are at contractual rates and are recorded as a reduction of gross revenue when recognized in our consolidated statements of operations.

We record shipping and handling charges billed to our customers as product revenue and the related expense as cost of products sold.

Arrangements with multiple-performance obligations. In arrangements involving more than one performance obligation, each required performance obligation is evaluated to determine whether it qualifies as a distinct performance obligation based on whether (i) the customer can benefit from the good or service either on its own or together with other resources that are readily available and (ii) the good or services is separately identifiable from other promises in the contract. The consideration under the arrangement is then allocated to each separate distinct performance obligation based on their respective relative stand-alone selling price. The estimated selling price of each deliverable reflects our best estimate of what the selling price would be if the deliverable was regularly sold by us on a stand-alone basis or using an adjusted market assessment approach if selling price on a stand-alone basis is not available. The consideration allocated to each distinct performance obligation is recognized as revenue when control is transferred for the related goods or services.

Other revenues. Other revenues consist primarily of royalty income, funding of research and development efforts and cost reimbursements under a charitable support agreement. Royalties from licensees are based on third-party sales of licensed products and are recorded when the related third-party product sale occurs. Funding and charitable support reimbursements are recorded as the activities are being performed in accordance with the respective agreements.

As part of our litigation settlement agreement with Ancestry.com DNA LLC (“Ancestry”) and its contract manufacturer, we granted Ancestry a royalty-bearing, non-exclusive, worldwide license to certain patents and patent applications related to the collection of DNA in human saliva. The license granted to Ancestry is limited to saliva DNA collection kits sold or used as part of Ancestry’s genetic testing service offerings and does not cover the sale or use of collection kits outside of Ancestry’s business. During the three and nine months ended September 30, 2018, we recorded $1,132 and $4,827, respectively, in royalty income under this agreement.

On June 12, 2015, we were awarded a grant for up to $10,400 in total funding from the U.S. Department of Health and Human Services (“HHS”) Office of the Assistant Secretary for Preparedness and Response’s Biomedical Advanced Research and Development Authority (“BARDA”) related to our OraQuick^® Ebola rapid antigen test. The three-year, multi-phased grant, with an original expiration date of October 2018, was recently amended and extended through December 31, 2019, included an initial commitment of $1,800 and options for up to an additional $8,600 to fund certain clinical and regulatory activities. In September 2015 and July 2017, BARDA exercised options to provide $7,200 and $1,330, respectively, in additional funding for our OraQuick^® Ebola test. Amounts related to this grant are recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred. During the three and nine months ended September 30, 2018, $782 and $2,581, respectively, were recognized in connection with this grant. During the three and nine months ended September 30, 2017, $386 and $1,260, respectively, were recognized in connection with this grant.

In August 2016, we were awarded a contract for up to $16,600 in total funding from BARDA related to our rapid Zika test. The six-year, multi-phased contract includes an initial commitment of $7,000 and options for up to an additional $9,600 to fund the evaluation of additional product enhancements, and clinical and regulatory activities. In May 2017, BARDA exercised an option to provide $2,600 in additional funding for our rapid Zika test. Funding received under this contract is recorded as other revenue in our consolidated statements of operations as the activities are being performed and the related costs are incurred. During the three and nine months ended September 30, 2018, $301 and $1,959, respectively, were recognized as other revenue in connection with this grant. During the three and nine months ended September 30, 2017, $553 and $1,787, respectively, were recognized in connection with this grant.

In June 2017, we entered into a four-year Charitable Support Agreement with the Bill & Melinda Gates Foundation (“Gates Foundation”) that allows us to offer our OraQuick^® HIV self-test at an affordable price in 50 developing countries with funding from the Gates Foundation. The funding consists of support payments tied to volume of product sold by us and reimbursement of certain related costs. The funding from the Gates Foundation will be in an aggregate amount not to exceed $20,000 over the four-year term or $6,000 each year of the agreement. Funding received under this agreement in the form of support payments for product purchases is recorded as a component of product revenue. During the three and nine months ended September 30, 2018, $840 and $3,571, respectively, of support payments were recognized in product revenue in connection with this agreement. During the three and nine months ended September 30, 2017, $458 related to support payments was recognized in product revenue. Funding received in the form of reimbursement of certain related costs is recorded as other revenue in our consolidated statements of operations. During the three and nine months ended September 30, 2018, $220 and $1,544, respectively, were recognized in other revenue for reimbursement of certain related costs. During the three and nine months ended September 30, 2017 $218 was recognized in other revenue in connection with this agreement.

Deferred Revenue. We record deferred revenue when funds are received prior to the recognition of the associated revenue. Deferred revenue as of September 30, 2018 and December 31, 2017 includes customer prepayments of $1,882 and $1,045, respectively. Deferred revenue as of September 30, 2018 and December 31, 2017 also includes $1,224 and $269, respectively, associated with a long-term contract that has variable pricing based on volume. The average price over the life of the contract was determined and revenue is recognized at that rate.

Financing and Payment. Our payment terms vary by the type and location of our customer and products or services offered. Payment terms differ by jurisdiction and customer but payment is generally required in a term ranging from 30 to 120 days from date of shipment or satisfaction of the performance obligation.

For certain products or services and customer types, we may require payment before the products are delivered or services are rendered to the customer.

Practical expedients and exemptions. Taxes assessed by governmental authorities, such as sales or value-added taxes, are excluded from product revenues.

Other than for sales of our OraQuick^® In-Home HIV test to the retail trade, we generally do not grant product return rights to our customers except for warranty returns. Historically, returns arising from warranty issues have been infrequent and immaterial. Accordingly, we expense warranty returns as incurred.

As a result of the return rights granted to our customers for our OraQuick^® In-Home HIV test, we have recorded an estimate of expected returns as a reduction of gross OraQuick^® In-Home HIV product revenues in our consolidated statements of operations. This estimate reflects our historical sales experience to retailers and consumers, as well as other retail factors, and is reviewed regularly to ensure that it reflects potential product returns. As of September 30, 2018 and December 31, 2017, the reserve for sales returns and allowances was $181 and $217, respectively. If actual product returns differ materially from our reserve amount, or if a determination is made that this product’s distribution would be discontinued in whole or in part by certain retailers, then we would need to adjust our reserve. Should the actual level of product returns vary significantly from our estimates, our operating and financial results could be materially affected.

Sales commissions are expensed when incurred if the amortization period is one year or less. These costs are recorded in sales and marketing expense in the consolidated statements of operations. If the amortization period exceeds one year, we defer the cost of the commission and expense it over the life of the related sales contract.

Revenues by product. The following table represents total net revenues by product line:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
OraQuick®	$	12,016	$	16,248	$	40,813	$	46,887
Oragene®		23,803		17,777		56,259		42,931
Intercept®		1,743		1,860		5,811		6,026
Histofreezer®		2,199		2,426		6,526		7,676
Other products		3,689		2,846		11,177		8,251
Net product revenues		43,450		41,157		120,586		111,771

Royalty income		1,132		-		4,827		-
BARDA funding		1,083		939		4,540		3,047
Charitable support reimbursement		220		218		1,544		218
Other revenues		2,435		1,157		10,911		3,265

Net revenues	$	45,885	$	42,314	$	131,497	$	115,036

Revenues by geographic area. The following table represents total net revenues by geographic area, based on the location of the customer:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
United States	$	36,883	$	29,063	$	99,860	$	78,871
Europe		1,982		3,204		7,187		8,765
Other regions		7,020		10,047		24,450		27,400
	$	45,885	$	42,314	$	131,497	$	115,036

Customer and Vendor Concentrations. One of our customers accounted for 18% and 37% of our accounts receivable as of September 30, 2018 and December 31, 2017, respectively. The same customer accounted for approximately 39% and 27% of our net consolidated revenues for the three and nine months ended September 30, 2018 and 25% and 19% of our net consolidated revenues for the three and nine months ended September 30, 2017, respectively. Another customer accounted for 11% and 10% of our net consolidated revenues for the three and nine months ended September 30, 2017, respectively.

We currently purchase certain products and critical components of our products from sole-supply vendors. If these vendors are unable or unwilling to supply the required components and products, we could be subject to increased costs and substantial delays in the delivery of our products to our customers. Also, our subsidiary, DNAG, uses two third-party suppliers to manufacture its products. Our inability to have a timely supply of any of these components and products could have a material adverse effect on our business, as well as our financial condition and results of operations.