UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to _______________
Commission
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(I.R.S. Employer Identification No.) |
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Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| None | N//A | N/A |
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)
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Indicate
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405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☐ | |
| Smaller reporting company
| ||
| Emerging Growth Company
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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. ☐
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
| Class | Shares Outstanding November 4, 2022 | |
| Common Stock, par value $0.01 per share |
INTERPACE BIOSICENCES, INC.
FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2022
TABLE OF CONTENTS
| 2 |
PART I. FINANCIAL INFORMATION
INTERPACE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable | ||||||||
| Other current assets | ||||||||
| Current assets of discontinued operations | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other intangible assets, net | ||||||||
| Operating lease right of use assets | ||||||||
| Other long-term assets | ||||||||
| Long-term assets of discontinued operations | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued salary and bonus | ||||||||
| Other accrued expenses | ||||||||
| Line of credit - current | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Contingent consideration | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Line of credit | ||||||||
| Note payable at fair value | ||||||||
| Other long-term liabilities | ||||||||
| Long-term liabilities of discontinued operations | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 9) | ||||||||
| Redeemable preferred stock, $ par value; shares authorized, shares Series B issued and outstanding | ||||||||
| Stockholders’ deficit: | ||||||||
| Common stock, $ par value; shares authorized; and shares issued, respectively; and shares outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Treasury stock, at cost ( and shares, respectively) | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities, preferred stock and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 3 |
INTERPACE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except for per share data)
| Three Months | Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Transition expense | ||||||||||||||||
| Gain on DiamiR transaction | ( | ) | ||||||||||||||
| Acquisition related amortization expense | ||||||||||||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Interest accretion expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Related party interest | ( | ) | ( | ) | ||||||||||||
| Note payable interest | ( | ) | ( | ) | ||||||||||||
| Other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss from continuing operations before tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| (Benefit) provision for income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss from continuing operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted loss per share of common stock: | ||||||||||||||||
| From continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| From discontinued operations | ( | ) | $ | ( | ) | ( | ) | ( | ) | |||||||
| Net loss per basic and diluted share of common stock | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares and common share equivalents outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements
| 4 |
INTERPACE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(unaudited, in thousands)
| For The Three and Nine | For The Three and Nine | |||||||||||||||
| Months Ended | Months Ended | |||||||||||||||
| September 30, 2022 | September 30, 2021 | |||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||
| Common stock: | ||||||||||||||||
| Balance at January 1 | $ | $ | ||||||||||||||
| Common stock issued | ||||||||||||||||
| Restricted stock issued | ||||||||||||||||
| Common stock issued through ESPP | ||||||||||||||||
| Balance at March 31 | ||||||||||||||||
| Common stock issued | ||||||||||||||||
| Balance at June 30 | ||||||||||||||||
| Common stock issued | ||||||||||||||||
| Common stock issued through ESPP | ||||||||||||||||
| Balance at September 30 | ||||||||||||||||
| Treasury stock: | ||||||||||||||||
| Balance at January 1 | $ | ( | ) | $ | ( | ) | ||||||||||
| Treasury stock purchased | ( | ) | ||||||||||||||
| Balance at March 31 | ( | ) | ( | ) | ||||||||||||
| Treasury stock purchased | ( | ) | ||||||||||||||
| Balance at June 30 | ( | ) | ( | ) | ||||||||||||
| Treasury stock purchased | ||||||||||||||||
| Balance at September 30 | $ | ( | ) | $ | ( | ) | ||||||||||
| Additional paid-in capital: | ||||||||||||||||
| Balance at January 1 | $ | $ | ||||||||||||||
| Common stock issued | ||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||
| Balance at March 31 | ||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||
| Balance at June 30 | ||||||||||||||||
| Common stock issued | ||||||||||||||||
| Stock-based compensation expense | ||||||||||||||||
| Balance at September 30 | $ | $ | ||||||||||||||
| Accumulated deficit: | ||||||||||||||||
| Balance at January 1 | $ | ( | ) | $ | ( | ) | ||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Balance at March 31 | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Balance at June 30 | ( | ) | ( | ) | ||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||
| Balance at September 30 | ( | ) | ( | ) | ||||||||||||
| Total stockholders’ deficit | $ | ( | ) | $ | ( | ) | ||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
INTERPACE BIOSCIENCES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
| For The Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Interest accretion expense | ||||||||
| Bad debt recovery | ( | ) | ||||||
| Mark to market on warrants | ( | ) | ||||||
| Goodwill impairment | ||||||||
| Intangible asset impairment | ||||||||
| Amortization of deferred financing fees | ||||||||
| Interest - note payable | ||||||||
| Stock-based compensation | ||||||||
| ESPP expense | ||||||||
| Change in fair value of note payable | ||||||||
| Change in fair value of contingent consideration | ( | ) | ( | ) | ||||
| Gain on DiamiR transaction | ( | ) | ||||||
| Other gains and expenses, net | ( | ) | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Other current assets | ( | ) | ( | ) | ||||
| Other long-term assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued salaries and bonus | ( | ) | ( | ) | ||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Long-term liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activity | ||||||||
| Proceeds from sale of Interpace Pharma Solutions, net | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Sale of property and equipment | ||||||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Issuance of common stock, net of expenses | ||||||||
| Loan proceeds - related parties | ||||||||
| Financing fees - related party | ( | ) | ||||||
| Proceeds from notes payable | ||||||||
| Borrowings on line of credit | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash, cash equivalents and restricted cash | ||||||||
| Cash, cash equivalents and restricted cash from continuing operations– beginning | ||||||||
| Cash, cash equivalents and restricted cash from discontinued operations– beginning | ||||||||
| Cash, cash equivalents and restricted cash – beginning | $ | $ | ||||||
| Cash, cash equivalents and restricted cash from continuing operations– ending | $ | $ | ||||||
| Cash, cash equivalents and restricted cash from discontinued operations– ending | ||||||||
| Cash, cash equivalents and restricted cash – ending | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
INTERPACE BIOSCIENCES, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular information in thousands, except per share amounts)
| 1. | OVERVIEW |
Nature of Business
Interpace Biosciences, Inc. (“Interpace” or the “Company”) is a company that provides molecular diagnostics, bioinformatics and pathology services for evaluation of risk of cancer by leveraging the latest technology in personalized medicine for improved patient diagnosis and management. We develop and commercialize genomic tests and related first line assays principally focused on early detection of patients with indeterminate biopsies and at high risk of cancer using the latest technology.
COVID-19 pandemic
There continues to be widespread impact from the COVID-19 pandemic. Beginning in the first quarter of 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains. We have also previously been affected by temporary laboratory closures, employment and compensation adjustments and impediments to administrative activities. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location.
In addition, we have experienced and are experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID-19 pandemic and general global economic conditions.
The continuing impact that the COVID-19 pandemic will have on our operations, including duration, severity and scope, remains highly uncertain and cannot be fully predicted at this time. While we believe we have generally recovered from the adverse impact that the COVID-19 pandemic had on our business during 2020, we believe that the COVID-19 pandemic could continue to adversely impact our results of operations, cash flows and financial condition in the future.
We continue to monitor the COVID-19 pandemic and the guidance that is being provided by relevant federal, state and local public health authorities and may take additional actions based upon their recommendations. It is possible that we may have to make adjustments to our operating plans in reaction to developments that are beyond our control.
| 2. | BASIS OF PRESENTATION |
The accompanying unaudited interim condensed consolidated financial statements and related notes (the “Interim Financial Statements”) should be read in conjunction with the consolidated financial statements of the Company and its wholly-owned subsidiaries (Interpace Diagnostics Lab Inc., Interpace Diagnostics Corporation, and Interpace Diagnostics, LLC), and related notes as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities & Exchange Commission (“SEC”) on March 31, 2022 and as amended on April 29, 2022.
| 7 |
The Interim Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Interim Financial Statements include all normal recurring adjustments that, in the judgment of management, are necessary for a fair presentation of such interim financial statements. Discontinued operations include the Company’s wholly owned subsidiaries: Group DCA, LLC, InServe Support Solutions; and TVG, Inc., its Commercial Services business unit which was sold on December 22, 2015 and its Interpace Pharma Solutions business (“Pharma Solutions”) which was sold on August 31, 2022. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the nine-month period ended September 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022.
| 3. | GOING CONCERN |
The accompanying consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. Accordingly, the accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this uncertainty.
In
October 2021, the Company entered into a $
In
January 2022, the Company’s registration statement for a rights offering filed with the Securities and Exchange Commission (SEC)
became effective; however, the rights offering was subsequently terminated later in January 2022 when the Company announced that the
Centers for Medicare & Medicaid Services, or CMS, issued a new billing policy whereby CMS will no longer reimburse for the use of
the Company’s ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for
the same beneficiary on the same date of service. However, on February 28, 2022, the Company announced that the National Correct Coding
Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT®
(0245U) and ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. In May 2022, the Company
was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022.
However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT® (0245U) from $
On
August 31, 2022, the Company closed on the sale of its Pharma Solutions business for a total purchase price of $
| 8 |
Discontinued Operations.
For
the nine months ended September 30, 2022, we had an operating loss from continuing operations of $
We will not generate positive cash flows from operations for the year ending December 31, 2022. We intend to meet our ongoing capital needs by using our available cash and availability under the Comerica Loan Agreement, as well as through targeted margin improvement; collection of accounts receivable; containment of costs; and the potential use of other financing options and other strategic alternatives. However, if we are unable to meet the financial covenants under the Comerica Loan Agreement, the revolving line of credit and notes payable will become due and payable immediately.
We continue to explore various strategic alternatives, dilutive and non-dilutive sources of funding, including equity and debt financings, strategic alliances, business development and other sources in order to provide additional liquidity. With the delisting of our common stock from Nasdaq in February 2021, our ability to raise additional capital on terms acceptable to us has been adversely impacted. There can be no assurance that we will be successful in obtaining such funding on terms acceptable to us.
Our consolidated financial statements assume we will continue as a going concern. Our ability to continue as a going concern depends on having working capital for vendor payments, meeting short-term obligations on other accrued liabilities, and amongst other requirements, making interest payments on our debt obligations. Without positive operating margins and sufficient working capital and the ability to meet our debt obligations, our business will be jeopardized and we may not be able to continue in our current structure, if at all. Under these circumstances, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations. With the proceeds received from the sale of the Pharma Solutions business, as well as the expected improvement in future operating cash flows associated with the disposition, as of the date of this filing, the Company anticipates that current cash and cash equivalents, available eligible borrowings on its Comerica Loan Agreement and forecasted cash receipts will be sufficient to meet its anticipated cash requirements through the next twelve months.
Further, along with many laboratories, we may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which was posted on June 9, 2022 and is currently under consideration by our local Medicare Administrative Contractor, Novitas Solutions, Inc. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing LCD for one of our molecular tests, PancraGEN®. If Novitas restricts coverage for PancraGEN®, our liquidity could be negatively impacted beginning in Fiscal 2023.
The Company anticipates that current cash and cash equivalents and forecasted cash receipts would still be sufficient to meet its anticipated cash requirements through the next twelve months, from the date of this filing.
| 4. | DISCONTINUED OPERATIONS |
On August 31, 2022, the Company and Interpace Pharma Solutions, Inc. (the “Subsidiary”, and together with the Company as used in this Note 4, “Interpace”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Flagship Biosciences, Inc. (the “Purchaser”) pursuant to which the Purchaser agreed to (i) acquire substantially all of the assets of the Subsidiary used in Subsidiary’s business of complex molecular analysis for the early diagnosis and treatment of cancer and supporting the development of targeted therapeutics (the “Business”) and (ii) assume and pay certain liabilities related to the purchased assets as set forth in the Purchase Agreement (collectively, the “Transaction”). The Transaction closed on August 31, 2022.
| 9 |
As
consideration for the Transaction, under the Purchase Agreement, Interpace received a total purchase price of approximately $
The Purchase Agreement includes a one-year commitment of Interpace not to compete with the Business, recruit or hire any former employees of the Subsidiary who accept employment with the Purchaser in connection with the Transaction, or divert or attempt to divert from Purchaser any business to be performed from any of the contracts or agreements with customers as set forth in the Purchase Agreement. The Purchase Agreement also contains customary representations and warranties, post-closing covenants and mutual indemnification obligations for, among other things, any inaccuracy or breach of any representation or warranty and any breach or non-fulfillment of any covenant.
In connection with the Transaction, on August 31, 2022, Interpace and Purchaser entered into a Shared Services Agreement (the “Shared Services Agreement”) pursuant to which Interpace agreed to provide, or cause its affiliates to provide, to the Purchaser certain services set forth in the Shared Services Agreement on a transitional basis and subject to the terms and conditions set forth in the Shared Services Agreement (the “Services”). As consideration for the Services provided by Interpace, Purchaser will pay Interpace the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s obligations to provide the Services will terminate with respect to each Service as set forth in the Shared Services Agreement.
The Purchaser is identified as a related party as an affiliate of Ampersand and an affiliate of BroadOak have each provided equity financing to the Purchaser, collectively own a majority of the Purchaser’s outstanding equity securities and are represented on its Board of Directors.
The Company intends to use the remaining net proceeds to fund its future business activities and for general working capital purposes. As a result of the sale, the gain on sale and all operations from Interpace Pharma Solutions have been classified as discontinued operations for all periods presented.
A reconciliation of the accounting for the Company’s Pharma Solutions business is as follows:
| Gain on Sale | ||||
| Purchase price | $ | |||
| Earnout received | ||||
| Working capital adjustment, net | ( | ) | ||
| Less: transaction costs | ( | ) | ||
| Total net consideration | $ | |||
| Assets and liabilities disposed of, net (1) | ( | ) | ||
| Gain on sale | $ | |||
| (1) |
| 10 |
The components of liabilities classified as discontinued operations consist of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| Accounts receivable, net | $ | $ | ||||||
| Other | ||||||||
| Current assets of discontinued operations | ||||||||
| Property and equipment, net | ||||||||
| Other intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other | ||||||||
| Long-term assets of discontinued operations | ||||||||
| Total assets | $ | $ | ||||||
| Accounts payable | ||||||||
| Accrued salary and bonus | ||||||||
| Other (1) | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Other | ||||||||
| Long-term liabilities of discontinued operations | ||||||||
| Total liabilities | $ | $ | ||||||
| (1) |
The table below presents the significant components of its former Pharma Solutions business unit’s results included within loss from discontinued operations, net of tax in the condensed consolidated statements of operations for the three-and nine-months ended September 30, 2022 and 2021.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain (loss) on sale of Pharma Solutions | ||||||||||||||||
| Income tax (benefit) expense | ( | ) | ||||||||||||||
| Loss from discontinued operations, net of tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
The income tax benefit for the three months ended September 30, 2022 pertained to the reversal of a credit as a result of the Pharma Solutions sale. The income tax expense for both the three months ended September 30, 2021 and the nine months ended September 30, 2022 and 2021 pertained to interest accrued on uncertain tax position liabilities.
Cash
used from discontinued operations, operating activities, for the nine months ended September 30, 2022 was approximately $
| 11 |
| 5. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Accounting Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the circumstances. Significant estimates include accounting for valuation allowances related to deferred income taxes, contingent consideration, allowances for doubtful accounts, revenue recognition, unrecognized tax benefits, and asset impairments involving other intangible assets. The Company periodically reviews these matters and reflects changes in estimates in earnings as appropriate. Actual results could materially differ from those estimates.
Revenue Recognition
We derive our revenues from the performance of proprietary assays or tests. The Company’s performance obligation is fulfilled upon the completion, review and release of test results to the customer. The Company subsequently bills third-party payers or direct-bill payers for the tests performed. Under Accounting Standards Codification 606, revenue is recognized based on the estimated transaction price or net realizable value, which is determined based on historical collection rates by each payer category for each proprietary test offered by the Company. To the extent the transaction price includes variable consideration, for all third party and direct-bill payers and proprietary tests, 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.
We
regularly review the ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates
and adjust the NRV’s and related contractual allowances accordingly. If actual collections and related NRV’s vary significantly
from our estimates, we will adjust the estimates of contractual allowances, which affects net revenue in the period such variances become
known. The Company recorded an NRV adjustment of $
For our pharma services, project level activities, including study setup and project management, are satisfied over the life of the contract while performance-related obligations are satisfied at a point in time as the Company processes samples delivered by the customer. Revenues are recognized at a point in time when the test results or other deliverables are reported to the customer.
Financing and Payment
For non-Medicare claims, our payment terms vary by payer category. Payment terms for direct-payers in our clinical services are typically thirty days and in our pharma services, up to sixty days. Commercial third-party-payers are required to respond to a claim within a time period established by their respective state regulations, generally between thirty to sixty days. However, payment for commercial third-party claims may be subject to a denial and appeal process, which could take up to two years in some instances where multiple appeals are submitted. The Company generally appeals all denials from commercial third-party payers. We bill Medicare directly for tests performed for Medicare patients and must accept Medicare’s fee schedule for the covered tests as payment in full.
Costs to Obtain or Fulfill a Customer Contract
Sales commissions are expensed in the period in which they have been earned. These costs are recorded in sales and marketing expense in the condensed consolidated statements of operations.
Accounts Receivable
The Company’s accounts receivable represent unconditional rights to consideration and are generated using its clinical services and pharma services. The Company’s clinical services are fulfilled upon completion of the test, review and release of the test results. In conjunction with fulfilling these services, the Company bills the third-party payer or direct-bill payer. Contractual adjustments represent the difference between the list prices and the reimbursement rates set by third-party payers, including Medicare, commercial payers, and amounts billed to direct-bill payers. Specific accounts may be written off after several appeals, which in some cases may take longer than twelve months.
| 12 |
Leases
The Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases with terms greater than twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term. Unless a lease provides all of the information required to determine the implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of the lease payments. We use the implicit interest rate in the lease when readily determinable.
Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that option. Leases with terms of twelve months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or liability. See Note 8, Leases.
Other Current Assets
Other current assets consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| Lab supply inventory | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Other | ||||||||
| Total other current assets | $ | $ | ||||||
Long-Lived Assets, including Finite-Lived Intangible Assets
Finite-lived intangible assets are stated at cost less accumulated amortization. Amortization of finite-lived acquired intangible assets is recognized on a straight-line basis, using the estimated useful lives of the assets of approximately two years to ten years in acquisition-related amortization expense in the condensed consolidated statements of operations.
The Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary.
| 13 |
A reconciliation of the number of shares of common stock, par value $ per share, used in the calculation of basic and diluted loss per share for the three- and nine-month periods ended September 30, 2022 and 2021 is as follows:
| Three Months | Nine Months Ended | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Basic weighted average number of common shares | ||||||||||||||||
| Potential dilutive effect of stock-based awards | ||||||||||||||||
Diluted weighted average number of common shares | ||||||||||||||||
The
Company’s Series B Convertible Preferred Stock, on an as converted basis into common stock of
| Three Months | Nine Months Ended | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Options | ||||||||||||||||
| Restricted stock units (RSUs) | ||||||||||||||||
| Warrants | ||||||||||||||||
| 6. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill
was attributable to the acquisition of our Pharma Solutions business in July 2019. The original carrying value of the intangible
assets acquired was $
| As of September 30, 2022 | As of December 31, 2021 | |||||||||||
| Life | Carrying | Carrying | ||||||||||
| (Years) | Amount | Amount | ||||||||||
| (unaudited) | ||||||||||||
| Asuragen acquisition: | ||||||||||||
| Thyroid | $ | $ | ||||||||||
| RedPath acquisition: | ||||||||||||
| Pancreas test | ||||||||||||
| Barrett’s test | ||||||||||||
| CLIA Lab | ||||||||||||
| Total | $ | $ | ||||||||||
| Accumulated Amortization | ( | ) | ( | ) | ||||||||
| Net Carrying Value | $ | $ | ||||||||||
| 14 |
Amortization
expense from continuing operations was approximately $
| 2022 | 2023 | 2024 | 2025 | 2026 | Total | |||||||||||||||||
| $ | $ | $ | $ | $ | $ | |||||||||||||||||
The following table displays a roll forward of the carrying amount of goodwill from December 31, 2021 to September 30, 2022:
| Carrying | ||||
| Amount | ||||
| Balance as of December 31, 2021 | $ | |||
| Impairment from sale of Pharma Solutions Business | ( | ) | ||
| Balance as of September 30, 2022 | $ | |||
| 7. | FAIR VALUE MEASUREMENTS |
Cash and cash equivalents, accounts receivable and accounts payable approximate fair value due to their relative short-term nature. The Company’s financial liabilities reflected at fair value in the condensed consolidated financial statements include contingent consideration, warrant liability and note payable. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
| Level 1: | Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities. |
| 15 |
| Level 2: | Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities. | |
| Level 3: | Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The valuation methodologies used for the Company’s financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below:
| As of September 30, 2022 | Fair Value Measurements | |||||||||||||||||||
| Carrying | Fair | As of September 30, 2022 | ||||||||||||||||||
| Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| (unaudited) | ||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent consideration: | ||||||||||||||||||||
| Asuragen (1) | $ | $ | $ | $ | $ | |||||||||||||||
| Other accrued expenses: | ||||||||||||||||||||
| Warrant liability (2) | ||||||||||||||||||||
| Note payable: | ||||||||||||||||||||
| BroadOak loan | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| (1)(2) | See Note 10, Accrued Expenses and Long-Term Liabilities |
| As of December 31, 2021 | Fair Value Measurements | |||||||||||||||||||
| Carrying | Fair | As of December 31, 2021 | ||||||||||||||||||
| Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent consideration: | ||||||||||||||||||||
| Asuragen (1) | $ | $ | $ | $ | $ | |||||||||||||||
| Other accrued expenses: | ||||||||||||||||||||
| Warrant liability (2) | ||||||||||||||||||||
| Note payable: | ||||||||||||||||||||
| BroadOak loan | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| (1)(2) | See Note 10, Accrued Expenses and Long-Term Liabilities |
In connection with the acquisition of certain assets from Asuragen, Inc., the Company recorded contingent consideration related to contingent payments and other revenue-based payments. The Company determined the fair value of the contingent consideration based on a probability-weighted income approach derived from revenue estimates. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement.
| 16 |
In connection with the BroadOak loan, the Company records the loan at fair value. The fair value of the loan is determined by a probability-weighted approach regarding the loan’s change in control feature. See Note 14, Notes Payable, for more details. The fair value measurement is based on the estimated probability of a change in control and thus represents a Level 3 measurement.
A roll forward of the carrying value of the Contingent Consideration Liability, 2017 Underwriters’ Warrants and BroadOak loans to September 30, 2022 is as follows:
| December 31, 2021 | Issued | Reclassified | Earned | Accretion/Interest Accrued | Adjustment to Fair Value/ Mark to Market | September 30, 2022 | ||||||||||||||||||||||
| (unaudited) | ||||||||||||||||||||||||||||
| Asuragen | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | |||||||||||||||||
| Underwriters Warrants | ( | ) | ||||||||||||||||||||||||||
| BroadOak loans | ||||||||||||||||||||||||||||
| BroadOak Convertible Note | ( | ) | ||||||||||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||
Certain of the Company’s non-financial assets, such as other intangible assets, are measured at fair value on a nonrecurring basis when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.
| 8. | LEASES |
Finance lease assets are included in fixed assets, net of accumulated depreciation.
The table below presents the lease-related assets and liabilities recorded in the Condensed Consolidated Balance Sheet:
| Classification on the Balance Sheet | September 30, 2022 | |||||
| (unaudited) | ||||||
| Assets | ||||||
| Financing lease assets | Property and equipment, net | $ | ||||
| Operating lease assets | Operating lease right of use assets | |||||
| Total lease assets | $ | |||||
| Liabilities | ||||||
| Current | ||||||
| Financing lease liabilities | Other accrued expenses | $ | ||||
| Operating lease liabilities | Other accrued expenses | |||||
| Total current lease liabilities | $ | |||||
| Noncurrent | ||||||
| Financing lease liabilities | Other long-term liabilities | |||||
| Operating lease liabilities | Operating lease liabilities, net of current portion | |||||
| Total long-term lease liabilities | ||||||
| Total lease liabilities | $ | |||||
| 17 |
The
weighted average remaining lease term for the Company’s operating leases was
The table below reconciles the cash flows to the lease liabilities recorded on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2022:
| Operating Leases | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| Total minimum lease payments | ||||
| Less: amount of lease payments representing effects of discounting | ||||
| Present value of future minimum lease payments | ||||
| Less: current obligations under leases | ||||
| Long-term lease obligations | $ | |||
On October 31, 2022, the Company entered into a fourth lease amendment with its Pittsburgh laboratory landlord. See Note 20, Subsequent Events, for more detail.
| 9. | COMMITMENTS AND CONTINGENCIES |
Litigation
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm the Company’s business. There is no pending litigation involving the Company at this time.
| 18 |
Due to the nature of the businesses in which the Company is engaged, it is subject to certain risks. Such risks include, among others, risk of liability for personal injury or death to persons using products or services that the Company promotes or commercializes. There can be no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company’s business activities. There is also the risk of employment related litigation and other litigation in the ordinary course of business.
The Company could also be held liable for errors and omissions of its employees in connection with the services it performs that are outside the scope of any indemnity or insurance policy. The Company could be materially adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; if the indemnity, although applicable, is not performed in accordance with its terms; or if the Company’s liability exceeds the amount of applicable insurance or indemnity.
| 10. | ACCRUED EXPENSES AND LONG-TERM LIABILITIES |
Other accrued expenses consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| Accrued royalties | $ | $ | ||||||
| Contingent consideration | ||||||||
| Operating lease liability | ||||||||
| Interest payable | ||||||||
| Warrant liability | ||||||||
| Accrued sales and marketing - diagnostics | ||||||||
| Accrued lab costs - diagnostics | ||||||||
| Accrued professional fees | ||||||||
| Taxes payable | ||||||||
| Unclaimed property | ||||||||
| All others | ||||||||
| Total other accrued expenses | $ | $ | ||||||
Long-term liabilities consisted of the following as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | |||||||
| (unaudited) | ||||||||
| Uncertain tax positions | $ | $ | ||||||
| Other | ||||||||
| Total other long-term liabilities | $ | $ | ||||||
| 11. | STOCK-BASED COMPENSATION |
Historically, .
| 19 |
| September 30, 2022 | September 30, 2021 | |||||||
| (unaudited) | ||||||||
| Risk-free interest rate | % | % | ||||||
| Expected life | years | years | ||||||
| Expected volatility | % | % | ||||||
| Dividend yield | ||||||||
During March 2021, the Company granted stock options with an exercise price of $ and RSUs. The market value of the Company’s common stock was $ at the grant date of these awards. The Company recognized approximately $ million and $ million of stock-based compensation expense within continuing operations during the three-month periods ended September 30, 2022 and 2021, respectively and approximately $ million and $ million of stock-based compensation expense during the nine-month periods ended September 30, 2022 and 2021, respectively. The following table has a breakout of stock-based compensation expense from continuing operations by line item.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative* | ||||||||||||||||
| Total stock compensation expense | $ | $ | $ | $ | ||||||||||||
| * |
| 12. | INCOME TAXES |
Generally, accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year. The authoritative guidance for accounting for income taxes allows use of the discrete method when it provides a better estimate of income tax expense. Due to the Company’s valuation allowance position, it is the Company’s position that the discrete method provides a more accurate estimate of income tax expense and therefore income tax expense for the current quarter has been presented using the discrete method. As the year progresses, the Company refines its estimate based on the facts and circumstances by each tax jurisdiction. The following table summarizes income tax expense on loss from continuing operations and the effective tax rate for the three- and nine-month periods ended September 30, 2022 and 2021:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| (unaudited) | (unaudited) | |||||||||||||||
| Provision (benefit) for income tax | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||
| Effective income tax rate | % | % | ( | )% | % | |||||||||||
Income
tax benefit for the three months ended September 30, 2022 was primarily due to the reversal of certain credits as a result of the
Pharma Solutions sale and income tax expense for the nine-month period ended September 30, 2022 was primarily due to minimum state
and local taxes. The income tax benefit for both the three- and nine-month periods ended September 30, 2021 was due to the
Company’s participation in the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the
“Program”) sponsored by The New Jersey Economic Development Authority. The Program enables approved biotechnology
companies with unused net operating losses (“NOLs”) and unused research and development credits to sell these benefits
for at least
| 20 |
| 13. | SEGMENT INFORMATION |
We
operate under
| 14. | NOTES PAYABLE |
BroadOak Loan
On
October 29, 2021, the Company and its subsidiaries entered into the BroadOak Loan Agreement, providing for a term loan in the aggregate
principal amount of $
The BroadOak Loan Agreement contains affirmative and negative restrictive covenants that are applicable from and after the date of the Term Loan advance. These restrictive covenants, which include restrictions on certain mergers, acquisitions, investments, encumbrances, etc., could adversely affect our ability to conduct our business. The BroadOak Loan Agreement also contains customary events of default.
In connection with the BroadOak Loan Agreement, the Company and its subsidiaries entered into that certain First Amendment to Loan and Security Agreement and Consent with Comerica, dated as of November 1, 2021 (the “Comerica Amendment”), pursuant to which Comerica consented to the Company’s and its subsidiaries’ entry into the BroadOak Loan Agreement, and amended that certain Loan and Security Agreement among Comerica, the Company and its subsidiaries (the “Comerica Loan Agreement”) to, among other things, permit the indebtedness, liens and encumbrances contemplated by the BroadOak Loan Agreement.
As a condition for BroadOak to extend the Term Loan to the Company and its subsidiaries, the Company’s existing creditor, Comerica, and BroadOak entered into that certain Subordination and Intercreditor Agreement, dated as of November 1, 2021, pursuant to which BroadOak agreed to subordinate all of the indebtedness and obligations of the Company and its subsidiaries owing to BroadOak to all of the indebtedness and obligations of the Company and its subsidiaries owing to Comerica (the “Intercreditor Agreement”). BroadOak further agreed to subordinate all of its respective security interests in assets or property of the Company and its subsidiaries to Comerica’s security interests in such assets or property. The Intercreditor Agreement provides that it is solely for the benefit of BroadOak and Comerica and is not for the benefit of the Company or any of its subsidiaries.
The Company concluded that the Note met the definition of a “recognized financial liability” which is an acceptable financial instrument eligible for the fair value option under ASC 825-10-15-4, and did not meet the definition of any of the financial instruments listed within ASC 825-10-15-5 that are not eligible for the fair value option. The Note is not convertible and does not have any component recorded to shareholders’ equity. Accordingly, the Company elected the fair value option for the Note.
| 21 |
BroadOak Convertible Note
On
May 5, 2022, the Company issued the Convertible Note to BroadOak, pursuant to which BroadOak funded a term loan in the aggregate principal
amount of $
The
Convertible Note was to be converted into shares of common stock of the Company in connection with, and upon the consummation of, a private
placement transaction pursuant to which the Company would issue common stock to certain investors, and such conversion would be subject
to the same terms and conditions (including purchase price per share) applicable to the purchase of common stock of the Company by such
investors. Since the private placement transaction was not consummated by August 5, 2022 (the “Maturity Date”), the Convertible
Note was converted into an additional term loan advance under the Company’s existing BroadOak Loan Agreement on the Maturity Date
and was thereafter subject to the terms of the definitive financing agreements for the BroadOak Loan Agreement until repaid in accordance
with the terms thereof. The Convertible Debt bears interest at a fixed rate of interest equal to
In connection with the issuance of the Convertible Note, on May 5, 2022, the Company and its subsidiaries entered into a) a consent letter (the “Comerica Consent”) with Comerica, pursuant to which Comerica consented to the issuance of the Convertible Note, the incurrence of the Convertible Debt and the conversion of the Convertible Debt into common stock of the Company or an additional term loan advance under the BroadOak Loan Agreement in accordance with the terms of the Convertible Note, and b) a First Amendment to Loan and Security Agreement and Consent (the “BroadOak Amendment”) with BroadOak, pursuant to which, among other things, BroadOak consented to the issuance of the Convertible Note, the incurrence of the Convertible Debt and the conversion of the Convertible Debt into common stock of the Company or an additional term loan advance under the BroadOak Loan Agreement in accordance with the terms of the Convertible Note.
The Convertible Debt is subordinated in right of payment to all of the indebtedness and obligations of the Company owing to Comerica under the Company’s existing senior secured credit facility with Comerica. In connection with the issuance of the Convertible Note, on May 5, 2022, the Company, BroadOak and Comerica entered into a First Amendment to Subordination and Intercreditor Agreement (the “Intercreditor Amendment”), pursuant to which, among other things, BroadOak agreed that the Convertible Debt is subordinated to all of the indebtedness and obligations of the Company owing to Comerica on the same terms and conditions applicable to the indebtedness and obligations of the Company under the BroadOak Loan Agreement.
Related Party Secured Promissory Note
On
January 7, 2021, the Company entered into secured promissory notes in the amount of $
| 22 |
On
September 29, 2021, the Company and Ampersand amended the Ampersand Note to change its maturity date to the earlier of (a) October 31,
2021 and (b) the date on which all amounts become due upon the occurrence of any event of default as defined in the Ampersand Note. On
September 29, 2021, the Company and 1315 Capital amended the 1315 Capital Note to change its maturity date in a similar manner. The Company
used the proceeds of the BroadOak Term Loan discussed above to repay in full at their maturity all outstanding indebtedness under the
promissory notes with Ampersand, dated January 7, 2021 and as last amended on September 29, 2021, in the amount of $
| 15. | SUPPLEMENTAL CASH FLOW INFORMATION |
Supplemental Disclosures of Non Cash Activities
(in thousands)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Taxes accrued for treasury stock purchased | $ | $ | ||||||
| Investment in DiamiR | $ | $ | ||||||
| Purchase of property and equipment included in accounts payable | $ | $ | ||||||
Transaction costs from the sale of Pharma Solutions included in accounts payable | $ | 137 | $ | - | ||||
| 16. | EQUITY |
Preferred Stock Issuance: Securities Purchase and Exchange Agreement
On
January 10, 2020, the Company entered into a Securities Purchase and Exchange Agreement (the “Securities Purchase and Exchange
Agreement”) with 1315 Capital and Ampersand (collectively, the “Investors”) pursuant to which the Company agreed to
sell to the Investors an aggregate of $
In
addition, the Company agreed to exchange $
In April 2020, the Company entered into support agreements with each of the Series B Investors, pursuant to which Ampersand and 1315 Capital, respectively, consented to, and agreed to vote (by proxy or otherwise), all shares of Series B Preferred Stock registered in its name or beneficially owned by it and/or over which it exercises voting control as of the date of the Support Agreement and any other shares of Series B Preferred Stock legally or beneficially held or acquired by such Series B Investor after the date of the Support Agreement or over which it exercises voting control, in favor of any Fundamental Action desired to be taken by the Company as determined by the Board. For purposes of each Support Agreement, “Fundamental Action” means any action proposed to be taken by the Company and set forth in Section 4(d)(i), 4(d)(ii), 4(d)(v), 4(d)(vi), 4(d)(viii) or 4(d)(ix) of the Certificate of Designation of Series B Preferred Stock or Section 8.5.1.1, 8.5.1.2, 8.5.1.5, 8.5.1.6, 8.5.1.8 or 8.5.1.9 of the Amended and Restated Investor Rights Agreement. The support agreement between the Company and Ampersand was terminated by mutual agreement on July 9, 2020; however, the support agreement entered into with 1315 Capital remains in effect. During October 2021, Ampersand and 1315 Capital provided consent to the Company to enter into the Comerica Loan Agreement and the BroadOak Term Loan.
| 23 |
As of September 30, 2022 and December 31, 2021, there were Series B issued and outstanding shares of preferred stock, respectively.
| 17. | WARRANTS |
Warrants outstanding and warrant activity for the nine-months ended September 30, 2022 are as follows:
| Description | Classification | Exercise Price | Expiration Date | Warrants Issued | Balance
December 31, 2021 | Warrants Exercised | Warrants Cancelled/ Expired | Balance
September 30, 2022 | ||||||||||||||||||||
| $ | ( | ) | ||||||||||||||||||||||||||
| $ | ( | ) | ||||||||||||||||||||||||||
| $ | ||||||||||||||||||||||||||||
| $ | ( | ) | ( | ) | ||||||||||||||||||||||||
| $ | ( | ) | ||||||||||||||||||||||||||
| $ | ( | ) | ||||||||||||||||||||||||||
| ( | ) | ( | ) | |||||||||||||||||||||||||
As
of September 30, 2022, the weighted average exercise price of the outstanding warrants is $
| 18. | REVOLVING LINE OF CREDIT |
On
October 13, 2021, the Company and its subsidiaries entered into the Comerica Loan Agreement with Comerica, providing for a revolving
credit facility of up to $
| 24 |
The
amount that may be borrowed under the Credit Facility is the lower of (i) the revolving limit of $
The
Credit Facility matures on September 30, 2023, and is secured by a first priority lien on substantially all of the assets of the Company
and its subsidiaries. As of September 30, 2022, the balance of the revolving line was $
The
Comerica Loan Agreement contains affirmative and negative restrictive covenants that are applicable whether or not any amounts are outstanding
under the Comerica Loan Agreement. These restrictive covenants, which include restrictions on certain mergers, acquisitions, investments,
encumbrances, etc., could adversely affect our ability to conduct our business. The Comerica Loan Agreement also contains financial covenants
requiring specified minimum liquidity and minimum revenue thresholds, which the Company was in compliance with as of September 30, 2022,
and also contains customary events of default. In April 2022, Comerica waived certain covenants specifically relating to the Company
receiving financial statements with a going concern comment or qualification. In April 2022 and August 2022, Comerica waived certain
covenants specifically relating to failure to maintain bank accounts outside of Comerica in an aggregate amount not to exceed $
As a condition for Comerica to extend the Credit Facility to the Company and its subsidiaries, the Company’s existing creditors, Ampersand and 1315 Capital (the “Existing Creditors”), entered into that certain Subordination Agreement, dated as of October 13, 2021, pursuant to which each Existing Creditor agreed to subordinate all of the indebtedness and obligations of the Company and its subsidiaries owing to such Existing Creditor to all of the indebtedness and obligations of the Company and its subsidiaries owing to Comerica (the “Subordination Agreement”). Each Existing Creditor further agreed to subordinate all of its respective security interests in assets or property of the Company and its subsidiaries to Comerica’s security interests in such assets or property. The Subordination Agreement provides that it is solely for the benefit of Comerica and each of the Existing Creditors and is not for the benefit of the Company or any of its subsidiaries.
| 19. | RECENT ACCOUNTING STANDARDS |
Accounting Pronouncements Pending Adoption
In February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies. ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December 15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its consolidated financial statements.
In August 2020, the FASB issued ASU 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), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU 2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this will have any impact on its consolidated financial statements.
| 20. | SUBSEQUENT EVENTS |
Extension of Pittsburgh Lease
On
October 31, 2022, the Company entered into a fourth amendment (the “Amendment”) to its existing Pittsburgh laboratory lease
(the “Lease”) for
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INTERPACE BIOSCIENCES, INC
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements that are not historical facts, including statements about our plans, objectives, beliefs and expectations, are forward-looking statements. Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,” “should,” “could,” “may,” “will” or similar words and expressions. These forward-looking statements are contained throughout this Form 10-Q.
Forward-looking statements are only predictions and are not guarantees of future performance. These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control or predict. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. Such factors include, but are not limited to, the following:
| ● | the effect of the Coronavirus (COVID-19) pandemic which has materially and adversely affected our business and financial results, particularly during portions of 2020, due to the slowdown in demand for our clinical services, a reduction in samples received and testing volume and delayed third party collections and other factors and which may continue to have an adverse effect on our future business; | |
| ● | our expectations of future revenues, expenditures, capital or other funding requirements; | |
| ● | our ability to continue to perform, bill and receive reimbursement for our PancraGEN molecular test under the existing LCD, given that such LCD is currently under review by Novitas, the Company’s Medicare administrative contractor; | |
| ● | our secured lenders have the right to foreclose on substantially all of our assets if we are unable to timely repay our outstanding obligations; | |
| ● | our dependence on sales and reimbursements from our clinical services for all of our revenue; the ability to continue to generate sufficient revenue from these and other products and/or solutions that we develop in the future is important for our ability to meet our financial and other targets; | |
| ● | our revenue recognition is based, in part, on our estimates for future collections which may prove to be incorrect with the changes in reimbursement rates for ThyGeNEXT® by Medicare causing us to revise our NRV’s which will reduce revenues in future periods; | |
| ● | our ability to finance our business on acceptable terms in the future, which may limit the ability to grow our business, develop and commercialize products and services, develop and commercialize new molecular clinical service solutions and technologies; | |
| ● | our obligations to make royalty and milestone payments to our licensors; | |
| ● | our dependence on third parties for the supply of some of the materials used in our clinical services tests; |
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| ● | the potential adverse impact of current and future laws, licensing requirements and governmental regulations upon our business operations, including but not limited to the evolving U.S. regulatory environment related to laboratory developed tests (“LDTs”), pricing of our tests and services and patient access limitations; | |
| ● | our reliance on our sales and marketing activities for future business growth and our ability to continue to expand our sales and marketing activities; | |
| ● | our being subject to the controlling interests of our two private equity investors who control, on an as-converted basis, an aggregate of 65% of our outstanding shares of common stock through their holdings of our Series B Preferred Stock, and this concentration of ownership along with their authority for designation rights for a majority of our directors and their right to approve certain of our actions has a substantial influence on our decisions; | |
| ● | our ability to implement our business strategy; and | |
| ● | the potential impact of existing and future contingent liabilities on our financial condition. |
Please see Part I – Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on March 31, 2022, as well as other documents we file with the SEC from time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations as expressed in the forward-looking statements discussed in this Form 10-Q. Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of the report in which they are set forth and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
OVERVIEW
We are a fully integrated commercial company that provides molecular diagnostics, bioinformatics and pathology services for evaluation of risk of cancer by leveraging the latest technology in personalized medicine for improved patient diagnosis and management. We develop and commercialize genomic tests and related first line assays principally focused on early detection of patients with indeterminate biopsies and at high risk of cancer using the latest technology.
Impact of Our Reliance on CMS and Novitas
In January 2022, CMS stated they would no longer reimburse for the use of the Company’s ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for the same beneficiary on the same date of service. However, on February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. In May 2022, the Company was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022. However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT® (0245U) from $2,919 to $806.59 retroactively effective to January 1, 2022. On July 20, 2022 the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price of $806.59. As a result of the ThyGeNEXT® pricing change, the Company reduced its NRV rates for ThyGeNEXT® Medicare billing to reflect the $806.59 pricing for tests performed during the second quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment of $0.7 million during the second quarter of 2022 to reduce revenue recorded during the first quarter of 2022. The Company estimates the ThyGeNEXT® pricing change will negatively impact Fiscal 2022 revenue by approximately $5.0 million. During July 2022, the Company began implementing cost-savings initiatives including a reduction in headcount and incidental expenses and a freeze on all non-essential travel and hiring.
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Further, along with many laboratories, we may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which was posted on June 9, 2022 and is currently under consideration by our local Medicare Administrative Contractor, Novitas Solutions, Inc. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing LCD for one of our molecular tests, PancraGEN®. If Novitas restricts coverage for PancraGEN®, our liquidity could be negatively impacted beginning in Fiscal 2023.
Impact of COVID-19 Pandemic
There continues to be widespread impact from the COVID-19 pandemic. Beginning in the first quarter of 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains. We have also previously been affected by temporary laboratory closures, employment and compensation adjustments and impediments to administrative activities. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location.
In addition, we have experienced and are experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID-19 pandemic and general global economic conditions.
The continuing impact that the COVID-19 pandemic will have on our operations, including duration, severity and scope, remains highly uncertain and cannot be fully predicted at this time. While we believe we have generally recovered from the adverse impact that the COVID-19 pandemic had on our business during 2020, we believe that the COVID-19 pandemic could continue to adversely impact our results of operations, cash flows and financial condition in the future.
We continue to monitor the COVID-19 pandemic and the guidance that is being provided by relevant federal, state and local public health authorities and may take additional actions based upon their recommendations. It is possible that we may have to make adjustments to our operating plans in reaction to developments that are beyond our control.
Impact of the ongoing military conflict between Russia and Ukraine.
In late February 2022, Russia invaded Ukraine, significantly amplifying already existing geopolitical tensions among Russia and other countries in the region and in the west, including the U.S. Russia’s invasion, the responses of countries and political bodies to Russia’s actions, the larger overarching tensions, and Ukraine’s military response and the potential for wider conflict have resulted in financial market volatility and capital markets disruption, potentially increasing in magnitude, and could have severe adverse effects on regional and global economic markets and international relations. The extent and duration of the military action, sanctions and resulting market disruptions, including inflation, are impossible to predict, but could be substantial.
Following Russia’s actions, various countries, including the U.S., Canada and the United Kingdom, as well as the European Union, issued broad-ranging economic sanctions against Russia. Such sanctions included, among other things, a prohibition on doing business with certain Russian companies, officials and oligarchs; a commitment by certain countries and the European Union to remove selected Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT) electronic banking network that connects banks globally; a ban on Russian oil and gas imports to the U.S.; and restrictive measures to prevent the Russian Central Bank from undermining the impact of the sanctions. The current sanctions (and potential further sanctions in response to continued Russian military activity) and other actions may have adverse effects on regional and global economic markets and lead to instability and lack of liquidity in capital markets, potentially making it more difficult for us to obtain additional funds and increasing the volatility of our stock price. Any of the abovementioned factors could affect our business, prospects, financial condition, and operating results.
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We are also monitoring other macro-economic and geopolitical developments such as inflation and cybersecurity risks so that the Company can be prepared to react to new developments as they arise.
Revenue Recognition
Clinical services derive revenues from the performance of proprietary assays or tests. Our performance obligation is fulfilled upon completion, review and release of test results to the customer, at which time we bill third-party payers or direct-bill payers for the tests performed. Under Accounting Standards Codification 606, revenue is recognized based upon the estimated transaction price or net realizable value (“NRV”), which is determined based on historical collection rates by each payer category for each proprietary test offered. To the extent that the transaction price includes variable consideration, for all third party and direct-bill payers and proprietary tests, we estimate the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience.
The ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates are regularly reviewed and we adjust the NRV’s and related contractual allowances accordingly. If actual collections and related NRV’s vary significantly from our estimates, we adjust the estimates of contractual allowances, which affects net revenue in the period such variances become known.
Cost of Revenue
Cost of revenue consists primarily of the costs associated with operating our laboratory and other costs directly related to our tests. Personnel costs, which constitute the largest portion of cost of services, include all labor-related costs, such as salaries, bonuses, fringe benefits and payroll taxes for laboratory personnel. Other direct costs include, but are not limited to, laboratory supplies, certain consulting expenses, royalty expenses, and facility expenses.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data. The trends illustrated in this table may not be indicative of future results.
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Consolidated Results of Continuing Operations for the Quarter Ended September 30, 2022 Compared to the Quarter Ended September 30, 2021 (in thousands)
| Three Months Ended September 30, | ||||||||||||||||
| 2022 | 2022 | 2021 | 2021 | |||||||||||||
| % to | % to | |||||||||||||||
| revenue | revenue | |||||||||||||||
| Revenue, net | $ | 8,189 | 100.0 | % | $ | 8,057 | 100.0 | % | ||||||||
| Cost of revenue | 3,457 | 42.2 | % | 3,620 | 44.9 | % | ||||||||||
| Gross profit | 4,732 | 57.8 | % | 4,437 | 55.1 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 2,236 | 27.3 | % | 2,244 | 27.9 | % | ||||||||||
| Research and development | 191 | 2.3 | % | 322 | 4.0 | % | ||||||||||
| General and administrative | 2,767 | 33.8 | % | 2,566 | 31.8 | % | ||||||||||
| Transition expense | — | 0.0 | % | 236 | 2.9 | % | ||||||||||
| Acquisition related amortization expense | 318 | 3.9 | % | 894 | 11.1 | % | ||||||||||
| Total operating expenses | 5,512 | 67.3 | % | 6,262 | 77.7 | % | ||||||||||
| Operating loss | (780 | ) | -9.5 | % | (1,825 | ) | -22.7 | % | ||||||||
| Interest accretion expense | (38 | ) | -0.5 | % | (106 | ) | -1.3 | % | ||||||||
| Related party interest | — | 0.0 | % | (151 | ) | -1.9 | % | |||||||||
| Note payable interest | (230 | ) | -2.8 | % | — | 0.0 | % | |||||||||
| Other (expense) income, net | (217 | ) | -2.6 | % | 49 | 0.6 | % | |||||||||
| Loss from continuing operations before tax | (1,265 | ) | -15.4 | % | (2,033 | ) | -25.2 | % | ||||||||
| Benefit for income taxes | (11 | ) | -0.1 | % | (714 | ) | -8.9 | % | ||||||||
| Loss from continuing operations | (1,254 | ) | -15.3 | % | (1,319 | ) | -16.4 | % | ||||||||
| Loss from discontinued operations, net of tax | (12,954 | ) | -158.2 | % | (2,242 | ) | -27.8 | % | ||||||||
| Net loss | $ | (14,208 | ) | -173.5 | % | $ | (3,561 | ) | -44.2 | % | ||||||
Revenue, net
Revenue, net for the three months ended September 30, 2022 increased by $0.1 million, or 2%, to $8.2 million, compared to $8.1 million for the three months ended September 30, 2021.
Cost of revenue
Cost of revenue for the three months ended September 30, 2022 was $3.5 million, as compared to $3.6 million for the three months ended September 30, 2021. As a percentage of revenue, cost of revenue was approximately 42% for the three months ended September 30, 2022 and 45% for the three months ended September 30, 2021, the percentage decrease was due to the small decrease in costs for the quarter.
Gross profit
Gross profit was approximately $4.7 million for the three months ended September 30, 2022 and $4.4 million for the three months ended September 30, 2021. The gross profit percentage was approximately 58% for the three months ended September 30, 3022 and 55% for the three months ended September 30, 2021.
Sales and marketing expense
Sales and marketing expense was approximately $2.2 million for both the three months ended September 30, 2022 and the three months ended September 30, 2021. As a percentage of revenue, sales and marketing expense decreased to 27% from 28% in the comparable prior year period due to the increase in revenue.
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Research and development
Research and development expense was $0.2 million for the three months ended September 30, 2022 and $0.3 million for the three months ended September 30, 2021. As a percentage of revenue, research and development expense decreased to 2% from 4% in the comparable prior year period.
General and administrative
General and administrative expense was approximately $2.8 million for the three months ended September 30, 2022 and $2.6 million for the three months ended September 30, 2021. The increase can be primarily attributed to an increase in employee compensation costs.
Transition expense
Transition expense was approximately $0.2 million for the three months ended September 30, 2021. In 2021, these expenses were related to one-time corporate expenses.
Acquisition amortization expense
During the three months ended September 30, 2022 and September 30, 2021, we recorded amortization expense of approximately $0.3 million and $0.9 million, respectively, which is related to intangible assets associated with prior acquisitions.
Operating loss
Operating loss from continuing operations was $0.8 million for the three months ended September 30, 2022 as compared to $1.8 million for the three months ended September 30, 2021. The lower operating loss from continuing operations was primarily attributable to the reduction in operating expenses.
Benefit for income taxes
The income tax benefit was approximately $11,000 for the three months ended September 30, 2022 and $0.7 million for the three months ended September 30, 2021. Income tax benefit for the three months ended September 30, 2022 was primarily due to the reversal of certain credits as a result of the Pharma Solutions sale. Income tax benefit for the three months ended September 30, 2021 primarily pertained to the Company’s sale of net operating losses (“NOLs”) of approximately $0.7 million under the State of New Jersey’s Technology Business Tax Certificate Transfer Program.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $13.0 million for the three months ended September 30, 2022 and a loss from discontinued operations of approximately $2.2 million for the three months ended September 30, 2021. The loss from discontinued operations for the three months ended September 30, 2022 included the impairment of Pharma Solutions assets.
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Consolidated Results of Continuing Operations for the Nine Months Ended September 30, 2022 Compared to the Nine Months Ended September 30, 2021 (in thousands)
| Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2022 | 2021 | 2021 | |||||||||||||
| % to | % to | |||||||||||||||
| revenue | revenue | |||||||||||||||
| Revenue, net | $ | 23,506 | 100.0 | % | $ | 24,006 | 100.0 | % | ||||||||
| Cost of revenue | 10,286 | 43.8 | % | 10,205 | 42.5 | % | ||||||||||
| Gross profit | 13,220 | 56.2 | % | 13,801 | 57.5 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 6,987 | 29.7 | % | 6,931 | 28.9 | % | ||||||||||
| Research and development | 626 | 2.7 | % | 1,178 | 4.9 | % | ||||||||||
| General and administrative | 8,636 | 36.7 | % | 7,389 | 30.8 | % | ||||||||||
| Transition expense | - | 0.0 | % | 897 | 3.7 | % | ||||||||||
| Gain on DiamiR transaction | - | 0.0 | % | (235 | ) | -1.0 | % | |||||||||
| Acquisition related amortization expense | 953 | 4.1 | % | 2,682 | 11.2 | % | ||||||||||
| Change in fair value of contingent consideration | (311 | ) | -1.3 | % | (57 | ) | -0.2 | % | ||||||||
| Total operating expenses | 16,891 | 71.9 | % | 18,785 | 78.3 | % | ||||||||||
| Operating loss | (3,671 | ) | -15.6 | % | (4,984 | ) | -20.8 | % | ||||||||
| Interest accretion expense | (123 | ) | -0.5 | % | (375 | ) | -1.6 | % | ||||||||
| Related party interest | - | 0.0 | % | (372 | ) | -1.5 | % | |||||||||
| Note payable interest | (620 | ) | -2.6 | % | - | 0.0 | % | |||||||||
| Other (expense) income, net | (20 | ) | -0.1 | % | (248 | ) | -1.0 | % | ||||||||
| Loss from continuing operations before tax | (4,434 | ) | -18.9 | % | (5,979 | ) | -24.9 | % | ||||||||
| Provision (benefit) for income taxes | 24 | 0.1 | % | (684 | ) | -2.8 | % | |||||||||
| Loss from continuing operations | (4,458 | ) | -19.0 | % | (5,295 | ) | -22.1 | % | ||||||||
| Loss from discontinued operations, net of tax | (15,936 | ) | -67.8 | % | (5,919 | ) | -24.7 | % | ||||||||
| Net loss | $ | (20,394 | ) | -86.8 | % | $ | (11,214 | ) | -46.7 | % | ||||||
Revenue, net
Revenue, net for the nine months ended September 30, 2022 decreased by $0.5 million, or 2%, to $23.5 million, compared to $24.0 million for the nine months ended September 30, 2021. The decrease in net revenue was largely driven by the NRV adjustment related to the Medicare pricing change on ThyGeNEXT® discussed previously.
Cost of revenue
Cost of revenue for the nine months ended September 30, 2022 was $10.3 million, as compared to $10.2 million for the nine months ended September 30, 2021. As a percentage of revenue, cost of revenue was approximately 44% for the nine months ended September 30, 2022 and 43% for the nine months ended September 30, 2021. The percentage increase was due to the small decrease in revenue discussed above.
Gross profit
Gross profit was approximately $13.2 million for the nine months ended September 30, 2022 and $13.8 million for the nine months ended September 30, 2021. The gross profit percentage was approximately 56% for the nine months ended September 30, 3022 and 58% for the nine months ended September 30, 2021. The decrease was a result of the NRV pricing adjustment discussed above.
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Sales and marketing expense
Sales and marketing expense was approximately $7.0 million for the nine months ended September 30, 2022 and $6.9 million for the nine months ended September 30, 2021. As a percentage of revenue, sales and marketing expense increased to 30% from 29% in the comparable prior year period primarily due to the decrease in revenue.
Research and development
Research and development expense was $0.6 million for the nine months ended September 30, 2022 and $1.2 million for the nine months ended September 30, 2021. As a percentage of revenue, research and development expense decreased to 3% from 5% in the comparable prior year period.
General and administrative
General and administrative expense was approximately $8.6 million for the nine months ended September 30, 2022 and $7.4 million for the nine months ended September 30, 2021. The increase can be primarily attributed to an increase in employee compensation costs and an increase in professional fees.
Transition expense
Transition expense was approximately $0.9 million for the nine months ended September 30, 2021. In 2021, these expenses were related to one-time legal expenses and employee severance costs.
Acquisition amortization expense
During the nine months ended September 30, 2022 and September 30, 2021, we recorded amortization expense of approximately $1.0 million and $2.7 million, respectively, which is related to intangible assets associated with prior acquisitions.
Change in fair value of contingent consideration
During the nine months ended September 30 2022, there was a $0.3 million decrease in the contingent consideration liability and a $0.1 million decrease for the nine months ended September 30, 2021.
Operating loss
Operating loss from continuing operations was $3.7 million for the nine months ended September 30, 2022 as compared to $5.0 million for the nine months ended September 30, 2021. The lower operating loss was primarily attributable to the decrease in amortization expense discussed above.
Provision (benefit) for income taxes
Income tax expense was approximately $24,000 for the nine months ended September 30, 2022 which was primarily driven by minimum state and local taxes. The income tax benefit of $0.7 million for the nine months ended September 30, 2021 was related to the sale of the NOLs discussed above in the three-months section.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $15.9 million for the nine months ended September 30, 2022 and a loss from discontinued operations of approximately $5.9 million for the nine months ended September 30, 2021. The loss for the nine months ended September 30, 2022 was primarily attributed to the impairment of goodwill and intangible assets associated with the Pharma Solutions business.
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Non-GAAP Financial Measures
In addition to the United States generally accepted accounting principles, or GAAP, results provided throughout this document, we have provided certain non-GAAP financial measures to help evaluate the results of our performance. We believe that these non-GAAP financial measures, when presented in conjunction with comparable GAAP financial measures, are useful to both management and investors in analyzing our ongoing business and operating performance. We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way that management views financial results.
In this 10-Q, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, acquisition related expenses, transition expenses, non-cash stock based compensation, interest and taxes, and other non-cash expenses including asset impairment costs, bad debt expense, loss on extinguishment of debt, goodwill impairment and change in fair value of contingent consideration, and warrant liability. The table below includes a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.
Reconciliation of Adjusted EBITDA (Unaudited)
($ in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Loss from continuing operations (GAAP Basis) | $ | (1,254 | ) | $ | (1,319 | ) | $ | (4,458 | ) | $ | (5,295 | ) | ||||
| Transition expenses | - | 236 | - | 897 | ||||||||||||
| Depreciation and amortization | 353 | 967 | 1,076 | 2,911 | ||||||||||||
| Stock-based compensation | 501 | 428 | 1,110 | 1,139 | ||||||||||||
| Tax (benefit) expense | (11 | ) | (714 | ) | 24 | (684 | ) | |||||||||
| Interest accretion expense | 38 | 106 | 123 | 375 | ||||||||||||
| Financing interest and related costs | 230 | 174 | 620 | 482 | ||||||||||||
| Gain on DiamiR transaction | - | - | - | (235 | ) | |||||||||||
| Mark to market on warrant liability | (3 | ) | (71 | ) | (71 | ) | 137 | |||||||||
| Change in fair value of note payable | 206 | - | 46 | - | ||||||||||||
| Change in fair value of contingent consideration | - | - | (311 | ) | (57 | ) | ||||||||||
| Adjusted EBITDA | $ | 60 | $ | (193 | ) | $ | (1,841 | ) | $ | (330 | ) | |||||
LIQUIDITY AND CAPITAL RESOURCES
The accompanying consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
In October 2021, we entered into the Comerica Loan Agreement with Comerica, providing for a revolving credit facility of up to $7,500,000 (the “Credit Facility”). The Company is using the proceeds of the Credit Facility for working capital and other general corporate purposes.
The amount that may be borrowed under the Credit Facility is the lower of (i) the revolving limit of $7,500,000 (the “Revolving Line”) and (ii) 80% of the Company’s eligible accounts receivable plus an applicable non-formula amount consisting of $2,000,000 of additional availability at close not based upon the Company’s eligible accounts receivable, with such additional availability reducing by $250,000 per quarter beginning with the quarter ending June 30, 2022. Borrowings on the Credit Facility are limited to $5,000,000 until 80% of the Company’s and its subsidiaries’ customers are paying into a collection account or segregated governmental account with Comerica. The Revolving Line can also include, at the Company’s option, credit card services with a sublimit of $300,000. Borrowings on the Revolving Line are subject to an interest rate equal to prime plus 0.50%, with prime being the greater of (x) Comerica’s stated prime rate or (y) the sum of (A) the daily adjusting LIBOR rate plus (B) 2.5% per annum. The Company is also required to pay an unused facility fee quarterly in arrears in an amount equal to 0.25% per annum on the average unused but available portion of the Revolving Line for such quarter. See Note 18, Revolving Line of Credit, for more details. Comerica has a first priority security interest in substantially all of the Company’s and its subsidiaries’ assets.
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In addition, also in October 2021, the Company entered into the BroadOak Loan Agreement with BroadOak, providing for a term loan in the aggregate principal amount of $8,000,000 (the “Term Loan”). Funding of the Term Loan took place on November 1, 2021. The Term Loan matures upon the earlier of (i) October 31, 2024 or (ii) the occurrence of a change in control, and bears interest at the rate of 9% per annum. The Term Loan is secured by a security interest in substantially all of the Company’s and its subsidiaries’ assets and is subordinate to the Company’s $7,500,000 revolving credit facility with Comerica Bank. The Term Loan has an origination fee of 3% of the Term Loan amount, and a terminal payment equal to (i) 15% of the original principal amount of the Term Loan if the change of control occurs on or prior to the first anniversary of the funding of the Term Loan, (ii) 20% of the original principal amount of the Term Loan if the change of control occurs after the first anniversary but on or prior to the second anniversary of the funding of the Term Loan and (iii) 30% of the original principal amount of the Term Loan if the change of control occurs after the second anniversary of the funding of the Term Loan, or if the Term Loan is repaid on its maturity date. Upon receipt of the term loan, the proceeds were used to repay in full at their maturity the notes extended by Ampersand and 1315 Capital discussed above. See Note 14, Notes Payable, for more details. In May 2022, the Company issued a Convertible Note to BroadOak, pursuant to which BroadOak funded a term loan in the aggregate principal amount of $2.0 million. See Note 14, Notes Payable, for more details. The Company is using the proceeds of the Convertible Debt for general corporate purposes and working capital.
The BroadOak Loan Agreement contains affirmative and negative restrictive covenants, including restrictions on certain mergers, acquisitions, investments and encumbrances which could adversely affect our ability to conduct our business. The BroadOak Loan Agreement also contains customary events of default. The Comerica Loan Agreement contains affirmative and negative restrictive covenants that are applicable whether or not any amounts are outstanding under the Comerica loan agreement. These restrictive covenants, which include restrictions on certain mergers, acquisitions, investments, encumbrances, etc., could adversely affect our ability to conduct our business. The Comerica Loan Agreement also contains financial covenants requiring specified minimum liquidity and minimum revenue thresholds and also contains customary events of default. However, if we are unable to meet the financial covenants under the Comerica Loan Agreement, the revolving line of credit and notes payable will become due and payable immediately.
In January 2022, the Company’s registration statement for a rights offering filed with the Securities and Exchange Commission (SEC) became effective; however, the rights offering was subsequently terminated later in January 2022 when the Company announced that the Centers for Medicare & Medicaid Services, or CMS, issued a new billing policy whereby CMS will no longer reimburse for the use of the Company’s ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for the same beneficiary on the same date of service. On February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. In May 2022, the Company was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022. However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT® (0245U) from $2,919 to $806.59 retroactively effective to January 1, 2022. On July 20, 2022 the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price for ThyGeNEXT® of $806.59. As a result of the ThyGeNEXT® pricing change, the Company reduced its net realizable value, or NRV rates for ThyGeNEXT® Medicare billing to reflect the $806.59 pricing for tests performed during the second quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment of $0.7 million during the second quarter of 2022 to reduce revenue recorded during the first quarter of 2022. During July 2022, the Company began implementing cost-savings initiatives including a reduction in headcount and incidental expenses and a freeze on all non-essential travel and hiring.
On August 31, 2022, the Company closed on the sale of its Pharma Solutions business for a total purchase price of $7,000,000 ($500,000 of which has been deposited into escrow), subject to a potential post-closing working capital adjustment, In addition, we received the earnout payment of $1,043,000. See Note 4, Discontinued Operations.
For the nine months ended September 30, 2022, we had an operating loss from continuing operations of $3.7 million. As of September 30, 2022, we had cash and cash equivalents of $6.3 million, total current assets of $12.7 million, net of restricted cash, and current liabilities of $14.8 million. As of November 4, 2022, we had approximately $6.6 million of cash on hand, net of restricted cash.
During the nine months ended September 30, 2022, net cash used in operating activities was $7.4 million. The main component of cash used in operating activities was our net loss of $20.4 million, partially offset by depreciation and amortization expense of $2.2 million and non-cash impairment charges of $12.3 million. During the nine months ended September 30, 2021, net cash used in operating activities was $7.5 million. The main component of cash used in operating activities was our net loss of $11.2 million which was partially offset by non-cash expenses of $6.2 million.
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During the nine months ended September 30, 2022, net cash provided from investing activities was $7.3 million, which primarily pertained to the net proceeds received from the sale of our Pharma Solutions business unit. During the nine months ended September 30, 2021, net cash used in investing activities was $0.2 million
For the nine months ended September 30, 2022, cash provided from financing activities was $3.1 million, of which $1.0 million was from the drawdown on the Revolving Line and $2.0 million was the Convertible Debt agreement entered into with BroadOak. See Note 14, Notes Payable, for more details. For the nine months ended September 30, 2021, cash provided from financing activities was $7.7 million, of which $7.4 million were the net proceeds from the Company’s secured promissory notes with Ampersand and 1315. See Note 14, Notes Payable, for more details.
We will not generate positive cash flows from operations for the year ending December 31, 2022. We intend to meet our ongoing capital needs by using our available cash and availability under the Comerica Loan Agreement, as well as through targeted margin improvement; collection of accounts receivable; containment of costs; and the potential use of other financing options and other strategic alternatives. However, if we are unable to meet the financial covenants under the Comerica Loan Agreement, the revolving line of credit and notes payable will become due and payable immediately.
The Company continues to explore various strategic alternatives, dilutive and non-dilutive sources of funding, including equity and debt financings, strategic alliances, business development and other sources in order to provide additional liquidity. With the Company’s delisting of its common stock from Nasdaq in February 2021, its ability to raise additional capital on terms acceptable to the Company has been adversely impacted. There can be no assurance that the Company will be successful in obtaining such funding on terms acceptable to the Company.
Further, along with many laboratories, we may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which was posted on June 9, 2022 and is currently under consideration by our local Medicare Administrative Contractor, Novitas Solutions, Inc. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing LCD for one of our molecular tests, PancraGEN®. If Novitas restricts coverage for PancraGEN®, our liquidity could be negatively impacted beginning in Fiscal 2023.
Our consolidated financial statements assume we will continue as a going concern. Our ability to continue as a going concern depends on having working capital for vendor payments, meeting short-term obligations on other accrued liabilities, and amongst other requirements, making interest payments on our debt obligations. Without positive operating margins and sufficient working capital and the ability to meet our debt obligations, our business will be jeopardized and we may not be able to continue in our current structure, if at all. Under these circumstances, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations. With the proceeds received from the sale of the Pharma Solutions business, as well as the expected improvement in future operating cash flows associated with the disposition, as of the date of this filing, the Company anticipates that current cash and cash equivalents t and forecasted cash receipts would still be sufficient to meet its anticipated cash requirements through the next twelve months.
Inflation
We do not believe that inflation had a significant impact on our results of operations for the periods presented. However, inflation and supply chain disruptions, whether caused by restrictions or slowdowns in shipping or logistics, increases in demand for certain goods used in our operations, or otherwise, could impact our operations in the near term.
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Critical Accounting Estimates
See Note 5, Summary of Significant Accounting Policies and Note 19, Recent Accounting Standards to the Interim Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for information regarding newly adopted and recent accounting pronouncements. See also Note 1, Nature of Business and Significant Accounting Policies to our financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our critical accounting policies. There have been no material changes to such critical accounting policies. We believe our most critical accounting policies include accounting for contingent consideration, revenue recognition, intangible and long-lived assets, research and development expenses and stock-based compensation expense.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a smaller reporting company, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives including that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In addition, management is required to apply its judgment in evaluating the benefits of possible disclosure controls and procedures relative to their costs to implement and maintain.
Based on the evaluation of the Company’s disclosure controls and procedures, as that term is defined in Rule 13a-15(e) under the Exchange Act the Chief Executive Officer of the Company and the Principal Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2022.
Reference should be made to our Form 10-K for the year ended December 31, 2021 filed with the SEC on March 31, 2022 for additional information regarding discussion of the effectiveness of the Company’s controls and procedures.
Changes in Internal Controls
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Not applicable as we are a smaller reporting company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
| + | Exhibits 32.1 and 32.2 are being furnished herewith and shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that section, nor shall such exhibits be deemed to be incorporated by reference to any registration statement or other document filed under the Securities Act or the Exchange Act, except as otherwise stated in any such filing. | |
| & | Denotes compensatory plan, compensation arrangement or management contract. | |
| * | The schedules and exhibits to this Exhibit have been omitted. The Company agrees to furnish a copy of the omitted schedules and exhibits to the Securities and Exchange Commission on a supplemental basis upon its request. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: November 14, 2022 | Interpace Biosciences, Inc. |
| (Registrant) | |
| /s/ Thomas W. Burnell | |
| Thomas W. Burnell | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 14, 2022 | /s/ Thomas Freeburg |
| Thomas Freeburg | |
| (Principal Financial Officer) | |
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