The complaint for this securities class action alleges that Cancer Genetics, Inc. failed to properly account for doubtful collections in some of its accounts, recording them as bad debts when they should have been reductions in net revenue. The complaint says that the improper recording amounts to a violation of the Securities Exchange Act of 1934.
The class for this action is all persons and entities who acquired the publicly-traded securities of Cancer Genetics between March 23, 2017 and April 2, 2018 and were damaged at the corrective disclosures.
Cancer Genetics specializes in the new field of personalized medicine, providing diagnostic products and services that enable precision medicine in cancer treatment.
Well before the beginning of the class period, on October 12, 2015, the company announced that it was acquiring Response Genetics, Inc. The press release was entitled, in part, “Cancer Genetics, Inc. Finalizes Purchase of Los Angeles-based Molecular Profiling Laboratory … Adding $10-$12M in Annual Revenue…”
The complaint quotes statements from public filings during the class period, such as that “the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were effective” during the term covered by the filing, or that “[t]here were no changes in our internal control over financial reporting” during the term covered by the filing.
However, on April 2, 2018, the last day of the class period, after the closing of the markets, the company filed its Form 10-K for 2017. As quoted in the complaint, the 10-K admits that “the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures were not effective at December 31, 2017 as a result of the material weakness in internal controls described below.”
The problems seem to have stemmed from “the low collection patterns during the fourth quarter principally related to clinical service revenues from claims generated by the Los Angeles location,” possibly a reference to the Response Genetics acquisition. The company further explained that it “failed to identify that adjustments which pertained to contractual allowances and reduced expected collections of current quarter revenues should have been recorded as reductions in net revenue rather than bad debt expense.”
A same-day press release adds that “a significant portion of the bad debt expense and write off [was] related to collection issues with respect to the accounts receivable recorded subsequent to the 2015 acquisition of Response Genetics Inc.” It explained that payors were not reimbursing the company for “certain performed Clinical services due to delays in filing its claims, the demands by payors for copies of patient medical records or diagnosis codes which have been difficult to obtain, and reimbursement challenges…”
At the news, the company’s stock price fell by over 33%