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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
File Number:
|
|
| (Exact name of registrant as specified in its charter) |
|
|
|
|
| (State or other jurisdiction of | (I.R.S. Employer | |
| Incorporation or organization) | Identification No.) |
|
|
| (Address of principal executive offices and zip code) |
|
|
| (Registrant’s telephone number, including area code) |
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)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
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
|
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. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
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 3, 2023 | |
| Common Stock, par value $0.01 per share |
INTERPACE BIOSICENCES, INC.
FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2023
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, | |||||||
| 2023 | 2022 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ |
|
$ |
|
||||
| Accounts receivable |
|
|
||||||
| Other current assets |
|
|
||||||
| Total current assets |
|
|
||||||
| Property and equipment, net |
|
|
||||||
| Intangible assets, net |
|
|
||||||
| Operating lease right of use assets |
|
|
||||||
| Other long-term assets |
|
|
||||||
| 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 |
|
|
||||||
| Note payable at fair value |
|
|
||||||
| Other long-term liabilities |
|
|
||||||
| 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)
| For The Three Months | For The Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue, net | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Cost of revenue |
|
|
|
|
||||||||||||
| Gross profit |
|
|
|
|
||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing |
|
|
|
|
||||||||||||
| Research and development |
|
|
|
|
||||||||||||
| General and administrative |
|
|
|
|
||||||||||||
| Acquisition related amortization expense |
|
|
|
|
||||||||||||
| Change in fair value of contingent consideration |
(
|
) | ||||||||||||||
| Total operating expenses |
|
|
|
|
||||||||||||
| Operating (loss) income from continuing operations |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
| Interest accretion expense |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Note payable interest |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Other expense, net |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| (Loss) income from continuing operations before tax |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
| Provision (benefit) for income taxes |
|
(
|
) |
|
|
|||||||||||
| (Loss) income from continuing operations |
(
|
) |
(
|
) |
|
(
|
) | |||||||||
| Loss from discontinued operations, net of tax |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Basic income (loss) per share of common stock: | ||||||||||||||||
| From continuing operations | $ |
(
|
) | $ |
(
|
) | $ |
|
$ |
(
|
) | |||||
| From discontinued operations |
(
|
) |
(
|
) |
(
|
) |
(
|
) | ||||||||
| Net loss per basic and diluted share of common stock | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
| Diluted income (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)
| Additional | ||||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Paid in | Accumulated | |||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||
| Balance -December 31, 2021 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Issuance of common stock |
|
|
- |
|
|
|||||||||||||||||||||||
| Treasury stock purchased |
|
(
|
) |
(
|
) | |||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance -March 31, 2022 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Issuance of common stock |
|
- | ||||||||||||||||||||||||||
| Treasury stock purchased |
|
(
|
) |
(
|
) | |||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance -June 30, 2022 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Issuance of common stock |
|
- |
|
|
||||||||||||||||||||||||
| Treasury stock purchased | - | |||||||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance -September 30, 2022 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Balance -December 31, 2022 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Issuance of common stock |
|
- | ||||||||||||||||||||||||||
| Treasury stock purchased |
|
(
|
) |
(
|
) | |||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||
| Net income | - | - |
|
|
||||||||||||||||||||||||
| Balance -March 31, 2023 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||
| Net income | - | - |
|
|
||||||||||||||||||||||||
| Balance -June 30, 2023 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
| Issuance of common stock |
|
- | ||||||||||||||||||||||||||
| Treasury stock purchased | - |
|
(
|
) |
(
|
) | ||||||||||||||||||||||
| Stock-based compensation expense | - | - |
|
|
||||||||||||||||||||||||
| Net loss | - | - |
(
|
) |
(
|
) | ||||||||||||||||||||||
| Balance -September 30, 2023 |
|
$ |
|
|
$ |
(
|
) | $ |
|
$ |
(
|
) | $ |
(
|
) | |||||||||||||
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, | ||||||||
| 2023 | 2022 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net loss | $ |
(
|
) | $ |
(
|
) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization |
|
|
||||||
| Interest accretion expense |
|
|
||||||
| Amortization of deferred financing fees |
|
|
||||||
| Stock-based compensation |
|
|
||||||
| ESPP expense |
|
|||||||
| Goodwill impairment |
|
|||||||
| Intangible asset impairment |
|
|||||||
| Change in fair value of note payable |
|
|
||||||
| Mark to market on warrants |
(
|
) | ||||||
| Change in fair value of contingent consideration |
(
|
) | ||||||
| Other changes in operating assets and liabilities: | ||||||||
| Accounts receivable |
|
|
||||||
| Other current assets |
|
(
|
) | |||||
| Operating lease right of use assets |
|
|||||||
| Other long-term assets |
(
|
) | ||||||
| Accounts payable |
|
(
|
) | |||||
| Accrued salaries and bonus |
(
|
) |
(
|
) | ||||
| Other accrued expenses |
(
|
) |
(
|
) | ||||
| Operating lease liabilities |
(
|
) | ||||||
| Other long-term liabilities |
|
|
||||||
| Net cash provided by (used in) operating activities |
|
(
|
) | |||||
| Cash Flows From Investing Activity | ||||||||
| Proceeds from sale of Interpace Pharma Solutions, net |
|
|
||||||
| Working capital adjustment on sale of Interpace Pharma Solutions |
(
|
) | ||||||
| Purchase of property and equipment |
(
|
) |
(
|
) | ||||
| Net cash provided by investing activities |
|
|
||||||
| Cash Flows From Financing Activities | ||||||||
| Issuance of common stock, net of expenses |
|
|||||||
| Proceeds from convertible debt |
|
|||||||
| (Payments) borrowings on line of credit |
(
|
) |
|
|||||
| Net cash (used in) 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. The Company develops and commercializes 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.
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, 2022, as filed with the Securities & Exchange Commission (“SEC”) on March 27, 2023 and as amended on April 28, 2023.
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, TVG, Inc., its commercial services business unit which was sold on December 22, 2015 and its Interpace Pharma Solutions, Inc. 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, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023.
3. LIQUIDITY
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 its local Medicare Administrator Contractor, Novitas Solutions Inc. (“Novitas”)
re-priced ThyGeNEXT
®
(0245U) from $
| 7 |
Further, along with many laboratories, the Company may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which is currently under consideration by Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular tests, PancraGEN ® . On June 5, 2023 the Company announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which if finalized, would have established non-coverage for the Company’s widely used PancraGEN ® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the final Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies and tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation and submitted detailed written comments supporting the use of PancraGEN ® . The timing and content of any final implemented LCD is uncertain at this time; the process could potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, the Company is able to continue offering PancraGEN ® and the related Point2 ® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN ® test, the Company’s liquidity could be negatively impacted.
For
the nine months ended September 30, 2023, the Company had operating income from continuing operations of $
The
Company expects to generate positive cash flows from operations for the year ending December 31, 2023. The Company intends to meet
its ongoing capital needs by using its available cash, 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 the
Company is unable to meet the financial covenants under the Comerica Loan Agreement, as amended, the revolving line of credit and
notes payable will become due and payable immediately. As of November 1, 2023, the Company had $
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 delisting
of its common stock from Nasdaq in February 2021, and the possible removal of its common stock from trading on the OTCQX
®
if
it failed to meet minimum market capitalization of $
With the improvement in operating cash flows associated with the disposition of the Pharma Solutions business, and the Company’s improved operating performance, as of the date of this filing, the Company anticipates that current cash and cash equivalents and forecasted cash receipts will be sufficient to meet its anticipated cash requirements through the next twelve months.
| 8 |
4. DISCONTINUED OPERATIONS
Liabilities
classified as discontinued operations as of both September 30, 2023 and December 31, 2022 consists of accrued expenses of which $
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, 2023 and 2022.
| For The Three Months Ended | For The Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Revenue, net | $ | $ |
|
$ | $ |
|
||||||||||
| Loss from discontinued operations |
(
|
) |
(
|
) |
(
|
) | ||||||||||
| Income tax expense |
|
(
|
) |
|
|
|||||||||||
| Loss from discontinued operations, net of tax | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | $ |
(
|
) | ||||
Cash
used from discontinued operations, operating activities, for the nine months ended September 30, 2022, was approximately $
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 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
Our clinical services derive its revenues from the performance of its 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.
| 9 |
For
our clinical services, 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 discontinued Pharma Solutions, project level activities, including study setup and project management, were satisfied over the life of the contract while performance-related obligations were satisfied at a point in time as the Company processes samples delivered by the customer. Revenues were 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 discontinued Pharma Solutions, were 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 its since discontinued Pharma Solutions. 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. Pharma Solutions represented, primarily, the performance of laboratory tests in support of clinical trials for Pharma Solutions customers. The Company billed these services directly to the customer.
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 .
| 10 |
Other Current Assets
Other current assets consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Lab supplies | $ |
|
$ |
|
||||
| Prepaid expenses |
|
|
||||||
| Funds in escrow |
|
|||||||
| Other |
|
|
||||||
| Total other current assets | $ |
|
$ |
|
||||
In
the third quarter of 2023, the $
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.
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, 2023 and 2022 is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Basic weighted average number of common shares |
|
|
|
|
||||||||||||
| Potential dilutive effect of stock-based awards |
|
|||||||||||||||
| Diluted weighted average number of common shares |
|
|
|
|
||||||||||||
| 11 |
The Company’s Series B Redeemable Preferred Stock, on an as converted basis into common stock of shares for the three- and nine-months ended September 30, 2023, and the following outstanding stock-based awards and warrants, were excluded from the computation of the effect of dilutive securities on loss per share for the following periods as they would have been anti-dilutive (rounded to thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Options |
|
|
|
|
||||||||||||
| Restricted stock units (RSUs) |
|
|
|
|
||||||||||||
| Warrants |
|
|
||||||||||||||
|
|
|
|
|
|||||||||||||
6. INTANGIBLE ASSETS
The net carrying value of the identifiable intangible assets from all acquisitions as of September 30, 2023 and December 31, 2022 are as follows:
|
As of September 30, 2023 |
As of December 31, 2022 |
||||||||||
| Life | Carrying | Carrying | |||||||||
| (Years) | Amount | Amount | |||||||||
| Asuragen acquisition: | |||||||||||
| Thyroid |
|
$ |
|
$ |
|
||||||
| RedPath acquisition: | |||||||||||
| Pancreas test |
|
|
|
||||||||
| Barrett’s test |
|
|
|
||||||||
| CLIA Lab |
|
|
|
||||||||
| Total | $ |
|
$ |
|
|||||||
| Accumulated Amortization |
(
|
) |
(
|
) | |||||||
| Net Carrying Value | $ |
|
$ |
|
|||||||
Amortization
expense was approximately $
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. | |
| 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. |
| 12 |
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, 2023 | Fair Value Measurements | |||||||||||||||||||
| Fair | As of September 30, 2023 | |||||||||||||||||||
| Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent consideration: | ||||||||||||||||||||
| Asuragen (1) | $ |
|
$ |
|
$ | $ | $ |
|
||||||||||||
| Note payable: | ||||||||||||||||||||
| BroadOak loan |
|
|
|
|||||||||||||||||
| $ |
|
$ |
|
$ | $ | $ |
|
|||||||||||||
| (1) |
|
| Fair Value Measurements | ||||||||||||||||||||
| As of December 31, 2022 | As of December 31, 2022 | |||||||||||||||||||
| Amount | Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent consideration: | ||||||||||||||||||||
| Asuragen (1) | $ |
|
$ |
|
$ | $ | $ |
|
||||||||||||
| Note payable: | ||||||||||||||||||||
| BroadOak loan |
|
|
|
|||||||||||||||||
| $ |
|
$ |
|
$ | $ | $ |
|
|||||||||||||
| 13 |
| (1) |
|
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.
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 and BroadOak Loan to September 30, 2023 is as follows:
| Adjustment | ||||||||||||||||||||||||
| Transferred | Accretion/ | to Fair Value/ | ||||||||||||||||||||||
| December 31, 2022 | Issued | to Accrued Expenses | Interest Accrued | Mark to Market |
September 30, 2023 |
|||||||||||||||||||
| Asuragen | $ |
|
$ | $ |
(
|
) | $ |
|
$ | $ |
|
|||||||||||||
| BroadOak loans |
|
|
|
|||||||||||||||||||||
| $ |
|
$ | $ |
(
|
) | $ |
|
$ |
|
$ |
|
|||||||||||||
Certain of the Company’s non-financial assets, such as 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
The table below presents the lease-related assets and liabilities recorded in the Condensed Consolidated Balance Sheet:
| Classification on the Balance Sheet | September 30, 2023 | December 31, 2022 | ||||||||
| Assets | ||||||||||
| Operating lease assets | Operating lease right of use assets |
|
|
|||||||
| Total lease assets | $ |
|
$ |
|
||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating lease liabilities | Other accrued expenses |
|
|
|||||||
| Total current lease liabilities | $ |
|
$ |
|
||||||
| Noncurrent | ||||||||||
| Operating lease liabilities | Operating lease liabilities, net of current portion |
|
|
|||||||
| Total long-term lease liabilities |
|
|
||||||||
| Total lease liabilities | $ |
|
$ |
|
||||||
The
weighted average remaining lease term for the Company’s operating leases was
| 14 |
The table below reconciles the cash flows to the lease liabilities recorded on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2023:
| Operating Leases | ||||
| 2023 - remaining three months | $ |
|
||
| 2024 |
|
|||
| 2025 |
|
|||
| 2026 |
|
|||
| 2027-2028 |
|
|||
| 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 | $ |
|
||
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.
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.
| 15 |
10. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following as of September 30, 2023 and December 31, 2022:
| September 30, 2023 | December 31, 2022 | |||||||
| Accrued royalties | $ |
|
$ |
|
||||
| Contingent consideration |
|
|
||||||
| Operating lease liability |
|
|
||||||
| Accrued sales and marketing - diagnostics |
|
|
||||||
| Accrued lab costs - diagnostics |
|
|
||||||
| Accrued professional fees |
|
|
||||||
| Taxes payable |
|
|
||||||
| Unclaimed property |
|
|
||||||
| All others |
|
|
||||||
| Total other accrued expenses | $ |
|
$ |
|
||||
Historically,
| September 30, 2022 | ||||
| Risk-free interest rate | % | |||
| Expected life | years | |||
| Expected volatility | % | |||
| Dividend yield | ||||
The Company recognized approximately $ million and $ million of stock-based compensation expense within continuing operations during the three-month periods ended September 30, 2023 and 2022, respectively and approximately $ million and $ million for the nine-month periods ended September 30, 2023 and 2022, 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, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Cost of revenue | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| Sales and marketing |
|
|
|
|
||||||||||||
| General and administrative * |
|
|
|
|
||||||||||||
| Total stock compensation expense | $ |
|
$ |
|
$ |
|
$ |
|
||||||||
| * |
|
| 16 |
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, 2023 and 2022:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Provision (benefit) for income tax | $ |
|
$ |
(
|
) | $ |
|
$ |
|
|||||||
| Effective income tax rate |
(
|
)% |
|
% |
|
% |
(
|
)% | ||||||||
Income tax expense for both periods was primarily due to state franchise taxes.
Other long-term liabilities consisted of uncertain tax positions as of September 30, 2023 and December 31, 2022.
13. SEGMENT INFORMATION
We operate under one segment which is the business of developing and selling clinical services.
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.
| 17 |
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.
BroadOak Convertible Note
On
May 5, 2022, the Company issued a Convertible Note to BroadOak, pursuant to which BroadOak funded an 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.
The Convertible Debt bore interest at a fixed rate of
The Company entered into 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. For current updates to the BroadOak Loan Agreement, see Note 19, Subsequent Events .
| 18 |
15. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosures of Non Cash Activities
(in thousands)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2023 | 2022 | |||||||
| Taxes accrued for repurchase of restricted shares | $ |
|
$ |
|
||||
| Purchase of property and equipment included in accounts payable |
|
|
||||||
| Transaction costs from the sale of Pharma Solutions included in accounts payable |
|
|||||||
16. MEZZANINE EQUITY
Redeemable Preferred Stock
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 $
Voting
On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder of outstanding shares of Series B Preferred Stock will be entitled to cast the number of votes equal to the number of whole shares of the Company’s common stock into which the shares of Series B Preferred Stock held by such holder are convertible as of the record date for determining stockholders entitled to vote on such matter. Except as provided by law or by the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (the “Certificate of Designation”), holders of Series B Preferred Stock will vote together with the holders of common stock as a single class and on an as-converted to common stock basis.
Director Designation Rights
| 19 |
Conversion
The
Certificate of Designation provides that from and after the Issuance Date and subject to the terms of the Certificate of Designation,
each share of Series B Preferred Stock is convertible, at any time and from time to time, at the option of the holder into a number of
shares of common stock equal to dividing the amount equal to the greater of the Stated Value of such Series B Preferred Stock, plus any
dividends declared but unpaid thereon, or such amount per share as would have been payable had each such share been converted into common
stock immediately prior to a liquidation, by six dollars ($
Mandatory Conversion
If
the Company consummates the sale of shares of common stock to the public in a firm-commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act pursuant to which the price of the common stock in such offering is at least
equal to twelve dollars ($
) (subject to adjustment in the event of any stock dividend, stock split, combination, or other similar
recapitalization affecting such shares) and such offering does not include warrants (or any other convertible security) and results in
at least $
Liquidation
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or Deemed Liquidation (as defined in the Certificate of Designation) (a “Liquidation”), the holders of shares of Series B Preferred Stock then outstanding will be entitled to be paid out of the assets of the Company available for distribution to its stockholders (on a pari passu basis with the holders of any class or series of preferred stock ranking on liquidation on a parity with the Series B Preferred Stock), and before any payment will be made to the holders of common stock or any other class or series of preferred stock ranking on liquidation junior to the Series B Preferred Stock by reason of their ownership thereof, an amount per share of Series B Preferred Stock equal to the greater of (i) the Stated Value of such share of Series B Preferred Stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had each such share been converted into common stock immediately prior to such Liquidation.
As of September 30, 2023 and December 31, 2022, there were Series B issued and outstanding shares of preferred stock, respectively.
17. 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 $
The
amount that may be borrowed under the Credit Facility is the lower of (i) the revolving limit of $
| 20 |
The
Credit Facility matured 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, 2023, the balance of the revolving line was
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 $
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, 2023, and also contains customary events of default.
18. RECENT ACCOUNTING STANDARDS
Accounting Pronouncements Adopted
The FASB issued new guidance under ASC Topic 326, Financial Instruments Credit Losses. The guidance changes the allowance on accounts receivable from an incurred method to an expected method. The Company adopted ASC Topic 326 on January 1, 2023 and it had no material effect on the condensed consolidated financial statements.
19. SUBSEQUENT EVENTS
Amendment to BroadOak Loan and Security Agreement
On October 24, 2023, the Company entered into a Second Amendment to Loan and Security Agreement (“Amendment”) with BroadOak. The primary changes to the original BroadOak Loan Agreement were as follows:
| ● |
The
Company made a one-time payment in an aggregate amount equal to $
|
|
| ● |
Effective
November 1, 2023, the interest rate under the BroadOak Loan Agreement is to be reduced from
|
|
| ● | The Company has the option to request an extension of the Loan Maturity Date in writing no less than sixty days prior to the Loan Maturity Date. If BroadOak agrees to the extension, the Loan Maturity Date would automatically be extended. |
Updates to Revolving Line of Credit
On
October 6, 2023, effective September 30, 2023, the Company entered into a Fifth Amendment to its Loan and Security Agreement (the
“Fifth Amendment to the Comerica Loan Agreement”) with Comerica Bank providing for a revolving credit facility of up to
$
The Fifth Amendment to 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 adjusted EBITDA thresholds. Pursuant to the Fifth Amendment to the Comerica Loan Agreement, Comerica consented to waive a covenant constituting an event of default under the Comerica Loan Agreement regarding a going concern qualification issued in connection with the Company’s 2022 fiscal year audit.
| 21 |
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:
| ● | we have a history of operating losses and our clinical services have generated limited revenue; | |
| ● | our expectations of future revenues, expenditures, capital or other funding requirements; | |
| ● | our reliance on Medicare reimbursement for our clinical services and our being subject to decisions of the Center for Medicare and Medicaid Services (“CMS”) regarding reimbursement and pricing of our clinical services which could have a material adverse effect on our business and financial results; | |
| ● | our ability to continue to perform, bill and receive reimbursement for our PancraGEN ® molecular test long-term under the existing local coverage determination (“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 our clinical service products 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 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 64.4% 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; | |
| ● | the delisting of our common stock from Nasdaq and subsequent trading on OTCQX ® has adversely affected and may continue to adversely affect our common stock and business and financial condition; | |
| ● | geopolitical and other economic and political conditions or events (such as the wars in Ukraine and Israel/Gaza); | |
| ● | 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, 2022 filed with the SEC on March 27, 2023, and as amended on April 28, 2023, 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. 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. In August 2022, the Company sold its Pharma Solutions business. Effective January 1, 2023, the gapfill price for ThyGeNEXT ® was set at $1,266.07.
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Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by our local Medicare Administrative Contractor, Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular tests, PancraGEN ® . On June 5, 2023 we announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which, if finalized, would have established non-coverage for the Company’s widely used PancraGEN ® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the final Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies and tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation and submitted detailed written comments supporting the use of PancraGEN ® . The timing and content of any final implemented LCD is uncertain at this time; the process could potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN ® and the related Point2 ® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN ® test, the Company’s liquidity could be negatively impacted.
Impact of the ongoing military conflict between Russia and Ukraine and the war between Israel and Hamas.
In February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, this war has led, and could continue to lead, to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social instability, and increases in cyberattacks, intellectual property theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business.
We have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any resulting government reactions, are rapidly developing and beyond our control.
Further, on October 7, 2023, Hamas, a U.S. designated Foreign Terrorist Organization, launched terrorist attacks against Israel. Israel then declared war on Hamas and there is currently an armed conflict in Israel and the Gaza Strip. The extent and duration of the wars in Ukraine and Israel/Gaza expanding geopolitical tensions and any resulting market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an unknown period of time. Any of the above-mentioned factors could materially adversely affect our business, financial condition, and results of operations.
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.
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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.
Condensed Consolidated Results of Continuing Operations for the Quarter Ended September 30, 2023 Compared to the Quarter Ended September 30, 2022 (unaudited, in thousands)
| Three Months Ended September 30, | ||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | |||||||||||||
| % to | % to | |||||||||||||||
| revenue | revenue | |||||||||||||||
| Revenue, net | $ | 9,078 | 100.0 | % | $ | 8,189 | 100.0 | % | ||||||||
| Cost of revenue | 4,124 | 45.4 | % | 3,457 | 42.2 | % | ||||||||||
| Gross profit | 4,954 | 54.6 | % | 4,732 | 57.8 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 2,498 | 27.5 | % | 2,236 | 27.3 | % | ||||||||||
| Research and development | 149 | 1.6 | % | 191 | 2.3 | % | ||||||||||
| General and administrative | 2,124 | 23.4 | % | 2,767 | 33.8 | % | ||||||||||
| Acquisition related amortization expense | 199 | 2.2 | % | 318 | 3.9 | % | ||||||||||
| Total operating expenses | 4,970 | 54.7 | % | 5,512 | 67.3 | % | ||||||||||
| Operating loss | (16 | ) | -0.2 | % | (780 | ) | -9.5 | % | ||||||||
| Interest accretion expense | (26 | ) | -0.3 | % | (38 | ) | -0.5 | % | ||||||||
| Note payable interest | (230 | ) | -2.5 | % | (230 | ) | -2.8 | % | ||||||||
| Other expense, net | (252 | ) | -2.8 | % | (217 | ) | -2.6 | % | ||||||||
| Loss from continuing operations before tax | (524 | ) | -5.8 | % | (1,265 | ) | -15.4 | % | ||||||||
| Provision (benefit) for income taxes | 4 | 0.0 | % | (11 | ) | -0.1 | % | |||||||||
| Loss from continuing operations | (528 | ) | -5.8 | % | (1,254 | ) | -15.3 | % | ||||||||
| Loss from discontinued operations, net of tax | (86 | ) | -0.9 | % | (12,954 | ) | -158.2 | % | ||||||||
| Net loss | $ | (614 | ) | -6.8 | % | $ | (14,208 | ) | -173.5 | % | ||||||
Revenue, net
Consolidated revenue, net for the three months ended September 30, 2023 increased by $0.9 million, or 11%, to $9.1 million, compared to $8.2 million for the three months ended September 30, 2022. The increase in net revenue was largely driven by increased test volumes as compared to the prior year.
Cost of revenue
Consolidated cost of revenue for the three months ended September 30, 2023 was $4.1 million, as compared to $3.5 million for the three months ended September 30, 2022. As a percentage of revenue, cost of revenue was approximately 45% for the three months ended September 30, 2023 and 42% for the three months ended September 30, 2022, the percentage increase primarily being due to increased lab costs.
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Gross profit
Consolidated gross profit was approximately $5.0 million for the three months ended September 30, 2023 and $4.7 million for the three months ended September 30, 2022. The gross profit percentage was approximately 55% for the three months ended September 30, 3023 and 58% for the three months ended September 30, 2022.
Sales and marketing expense
Sales and marketing expense was approximately $2.5 million for the three months ended September 30, 2023 and $2.2 million for the three months ended September 30, 2022. As a percentage of revenue, sales and marketing expense increased to 28% from 27% in the comparable prior year period.
Research and development
Research and development expense was approximately $0.1 million for the three months ended September 30, 2023 and $0.2 million for the three months ended September 30, 2022. As a percentage of revenue, research and development expense was approximately 2% in both periods.
General and administrative
General and administrative expense was approximately $2.1 million for the three months ended September 30, 2023 and $2.8 million for the three months ended September 30, 2022. The decrease was primarily driven by a decrease in professional services of $0.5 million.
Acquisition amortization expense
During the three months ended September 30, 2023 and September 30, 2022, we recorded amortization expense of approximately $0.2 million and $0.3 million, respectively, which is related to intangible assets associated with prior acquisitions.
Operating loss
Operating loss from continuing operations was $16,000 for the three months ended September 30, 2023, as compared to an operating loss of $0.8 million for the three months ended September 30, 2022. The improved operating loss was primarily attributable to the decrease in general and administrative expenses discussed above.
Provision (benefit) for income taxes
Income tax expense was approximately $4,000 for the three months ended September 30, 2023 and a benefit of $11,000 for the three months ended September 30, 2022.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $0.1 million for the three months ended September 30, 2023 and a loss from discontinued operations of approximately $13.0 million for the three months ended September 30, 2022. The loss from discontinued operations for the three months ended September 30, 2022 included operating losses associated with the former Pharma Solutions unit.
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Condensed Consolidated Results of Continuing Operations for the Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022 (unaudited, in thousands)
| Nine Months Ended September 30, | ||||||||||||||||
| 2023 | 2023 | 2022 | 2022 | |||||||||||||
| % to | % to | |||||||||||||||
| revenue | revenue | |||||||||||||||
| Revenue, net | $ | 29,931 | 100.0 | % | $ | 23,506 | 100.0 | % | ||||||||
| Cost of revenue | 12,163 | 40.6 | % | 10,286 | 43.8 | % | ||||||||||
| Gross profit | 17,768 | 59.4 | % | 13,220 | 56.2 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 7,444 | 24.9 | % | 6,987 | 29.7 | % | ||||||||||
| Research and development | 484 | 1.6 | % | 626 | 2.7 | % | ||||||||||
| General and administrative | 7,515 | 25.1 | % | 8,636 | 36.7 | % | ||||||||||
| Acquisition related amortization expense | 834 | 2.8 | % | 953 | 4.1 | % | ||||||||||
| Change in fair value of contingent consideration | - | 0.0 | % | (311 | ) | -1.3 | % | |||||||||
| Total operating expenses | 16,277 | 54.4 | % | 16,891 | 71.9 | % | ||||||||||
| Operating income (loss) | 1,491 | 5.0 | % | (3,671 | ) | -15.6 | % | |||||||||
| Interest accretion expense | (92 | ) | -0.3 | % | (123 | ) | -0.5 | % | ||||||||
| Note payable interest | (682 | ) | -2.3 | % | (620 | ) | -2.6 | % | ||||||||
| Other expense, net | (408 | ) | -1.4 | % | (20 | ) | -0.1 | % | ||||||||
| Income (loss) from continuing operations before tax | 309 | 1.0 | % | (4,434 | ) | -18.9 | % | |||||||||
| Provision for income taxes | 12 | 0.0 | % | 24 | 0.1 | % | ||||||||||
| Income (loss) from continuing operations | 297 | 1.0 | % | (4,458 | ) | -19.0 | % | |||||||||
| Loss from discontinued operations, net of tax | (385 | ) | -1.3 | % | (15,936 | ) | -67.8 | % | ||||||||
| Net loss | $ | (88 | ) | -0.3 | % | $ | (20,394 | ) | -86.8 | % | ||||||
Revenue, net
Consolidated revenue, net for the nine months ended September 30, 2023 increased by $6.4 million, or 27%, to $29.9 million, compared to $23.5 million for the nine months ended September 30, 2022. The increase in net revenue was largely driven by increased test volumes as compared to the prior year as well as improved collections.
Cost of revenue
Consolidated cost of revenue for the nine months ended September 30, 2023 was $12.2 million, as compared to $10.3 million for the nine months ended September 30, 2022. As a percentage of revenue, cost of revenue was approximately 41% for the nine months ended September 30, 2023 and 44% for the nine months ended September 30, 2022, the percentage decrease was due to the increase in revenue discussed above.
Gross profit
Consolidated gross profit was approximately $17.8 million for the nine months ended September 30, 2023 and $13.2 million for the nine months ended September 30, 2022. The gross profit percentage was approximately 59% for the nine months ended September 30, 3023 and 56% for the nine months ended September 30, 2022. The increase was primarily due to the increase in revenue discussed above.
Sales and marketing expense
Sales and marketing expense was approximately $7.4 million for the nine months ended September 30, 2023 and $7.0 million for the nine months ended September 30, 2022. As a percentage of revenue, sales and marketing expense decreased to 25% from 30% in the comparable prior year period primarily due to the increase in revenue.
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Research and development
Research and development expense was $0.5 million for the nine months ended September 30, 2023 and $0.6 million for the nine months ended September 30, 2022. As a percentage of revenue, research and development expense decreased to 2% from 3% in the comparable prior year period.
General and administrative
General and administrative expense was approximately $7.5 million for the nine months ended September 30, 2023 and $8.6 million for the nine months ended September 30, 2022. The decrease can be primarily attributed to a decrease in employee compensation costs compared to the prior year.
Acquisition amortization expense
During the nine months ended September 30, 2023 and September 30, 2022, we recorded amortization expense of approximately $0.8 million and $1.0 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 due to the impact of the ThyGeNEXT ® pricing change on future projected revenues.
Operating income (loss)
Operating income from continuing operations was $1.5 million for the nine months ended September 30, 2023 as compared to an operating loss of $3.7 million for the nine months ended September 30, 2022. The operating income was primarily attributable to the increases in revenue and gross profit discussed above.
Provision for income taxes
Income tax expense was approximately $12,000 for the nine months ended September 30, 2023 and $24,000 for the nine months ended September 30, 2022. Income tax expense for both periods was primarily driven by minimum state and local taxes.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $0.4 million for the nine months ended September 30, 2023 and a loss from discontinued operations of approximately $15.9 million for the nine months ended September 30, 2022. The loss for the nine months ended September 30, 2022 was primarily attributed to the impairment of goodwill and intangible assets associated with the Pharma Solutions business. The loss from discontinued operations for the nine months ended September 30, 2023 pertained to state taxes and close out costs associated with Pharma Solutions.
Non-GAAP Financial Measures
In addition to the United States generally accepted accounting principles, or GAAP, results provided throughout this document, we have provided certain non-GAAP financial measures to help evaluate the results of our performance. We believe that these non-GAAP financial measures, when presented in conjunction with comparable GAAP financial measures, are useful to both management and investors in analyzing our ongoing business and operating performance. We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way that management views financial results.
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In this Quarterly Report on Form 10-Q, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, non-cash stock based compensation, interest and taxes, and other non-cash expenses including change in fair value of notes payable and warrant liability. The table below includes a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.
Reconciliation of Adjusted EBITDA (Unaudited)
($ in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| (Loss) income from continuing operations (GAAP Basis) | $ | (528 | ) | $ | (1,254 | ) | $ | 297 | $ | (4,458 | ) | |||||
| Depreciation and amortization | 241 | 353 | 954 | 1,076 | ||||||||||||
| Stock-based compensation | 152 | 501 | 501 | 1,110 | ||||||||||||
| Tax expense (benefit) | 4 | (11 | ) | 12 | 24 | |||||||||||
| Interest accretion expense | 26 | 38 | 92 | 123 | ||||||||||||
| Note payable interest | 230 | 230 | 682 | 620 | ||||||||||||
| Mark to market on warrant liability | - | (3 | ) | - | (71 | ) | ||||||||||
| Change in fair value of note payable | 259 | 206 | 400 | 46 | ||||||||||||
| Change in fair value of contingent consideration | - | - | - | (311 | ) | |||||||||||
| Adjusted EBITDA | $ | 384 | $ | 60 | $ | 2,938 | $ | (1,841 | ) | |||||||
LIQUIDITY AND CAPITAL RESOURCES
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 was using the proceeds of the Credit Facility for working capital and other general corporate purposes.
The amount that could 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 17, 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.
On October 6, 2023, effective September 30, 2023, the Company entered into a Fifth Amendment to its Loan and Security Agreement (the “Fifth Amendment to the Comerica Loan Agreement”) with Comerica Bank providing for a revolving credit facility of up to $5,000,000. This agreement will expire on September 30, 2024. The Company may use 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 $5,000,000 and (ii) 80% of the Company’s eligible accounts receivable plus up to but not exceeding $1.5 million in the Company’s Medicare accounts (excluding Medicare Advantage thyroid accounts). Borrowings on the Revolving Line are subject to an interest rate equal to the Term SOFR Screen Rate plus one-tenth of one percent.
The Fifth Amendment to 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 adjusted EBITDA thresholds. As of November 1, 2023 the Company did not owe anything on the line of credit and had $4.75 million in potential availability to borrow on the line.
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In addition, in October 2021, the Company entered into a Loan and Security Agreement with BroadOak Fund V.L.P. (“BroadOak”), providing for a term loan in the aggregate principal amount of $8,000,000 (the “Term Loan” or “BroadOak Loan Agreement”). 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.
On October 24, 2023, the Company entered into a Second Amendment to Loan and Security Agreement with BroadOak. The primary changes to the original agreement were as follows:
| ● | The Company made a one-time payment in an aggregate amount equal to $2,500,000, on October 30, 2023 and applied to the payment in full satisfaction of the $3,000,000 Terminal Payment (as defined in the BroadOak Loan Agreement). See Note 14, Notes Payable , regarding the Terminal Payment. | |
| ● | Effective November 1, 2023, the interest rate under the BroadOak Loan Agreement is to be reduced from 9% to 8% through the maturity date of October 31, 2024 or earlier, upon the occurrence of a change in control (“Loan Maturity Date”). | |
| ● | The Company has the option to request an extension of the Loan Maturity Date in writing no less than sixty days prior to the Loan Maturity Date. If BroadOak agrees to the extension, the Loan Maturity Date would automatically be extended. |
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. Effective January 1, 2023, the gapfill price for ThyGeNEXT ® was set at $1,266.07.
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On August 31, 2022, the Company closed on the sale of its Pharma Solutions business for a total sale price of $6.2 million after a post-closing working capital adjustment.
For the nine months ended September 30, 2023, we had operating income from continuing operations of $1.5 million. As of the nine months ended September 30, 2023, we had cash and cash equivalents of $5.0 million, total current assets of $11.4 million and current liabilities of $12.3 million. As of November 3, 2023, we had approximately $3.1 million of cash on hand.
During the nine months ended September 30, 2023, net cash provided by operating activities was $2.6 million. The main component of cash provided by operating activities included non-cash expenses of $2.0 million. 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, 2023, net cash provided by investing activities was $0.1 million. 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.
For the nine months ended September 30, 2023, cash used in financing activities was $2.5 million, which were payments made on the Revolving Line. 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.
The Company expects to generate positive cash flows from operations for the year ending December 31, 2023 and we intend to meet our ongoing capital needs by using our available cash, 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 anticipates that current cash and cash equivalents and forecasted cash receipts will be sufficient to meet its anticipated cash requirements through the next twelve months.
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 delisting of our common stock from Nasdaq in February 2021 and the possible removal of our common stock from trading on the OTCQX ® if we had failed to meet minimum market capitalization of $5 million for ten consecutive trading days by July 3, 2023, our 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. The Company was notified in May 2023 that it had met the market cap requirements and was cleared to remain on OTCQX ® . The Company currently expects to receive a notification from the OTC on the failure of its common stock from meeting the minimum market capitalization of $5 million for ten consecutive trading days and its possible removal from trading on the OTCQX®.
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 18, 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, 2022, as amended, 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.
Off-Balance Sheet Arrangements
None.
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 Chief 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 Chief 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 Chief Financial Officer of the Company have concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2023.
Reference should be made to our Form 10-K for the year ended December 31, 2022 filed with the SEC on March 27, 2023, as amended, 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.
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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, Use of Proceeds, and Issuer Purchases of Equity Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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. | |
| * | Filed herewith. |
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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 8, 2023 | Interpace Biosciences, Inc. |
| (Registrant) | |
| /s/ Thomas W. Burnell | |
| Thomas W. Burnell | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 8, 2023 | /s/ Christopher McCarthy |
| Christopher McCarthy | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
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