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 ☐ No
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 1, 2024 | |
| Common Stock, par value $ per share |
INTERPACE BIOSICENCES, INC.
FORM 10-Q FOR PERIOD ENDED SEPTEMBER 30, 2024
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, | |||||||
| 2024 | 2023 | |||||||
| (unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for credit loss of $ | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, 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 | ||||||||
| Note payable at fair value, current | ||||||||
| Current liabilities of discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Operating lease liabilities, net of current portion | ||||||||
| Note payable at fair value | ||||||||
| Other long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| 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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Acquisition related amortization expense | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Operating income (loss) from continuing operations | ( | ) | ||||||||||||||
| Interest accretion expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Note payable interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income (loss) from continuing operations before tax | ( | ) | ||||||||||||||
| Provision for income taxes | ||||||||||||||||
| Income (loss) from continuing operations | ( | ) | ||||||||||||||
| Loss from discontinued operations, net of tax | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Basic income (loss) per share of common stock: | ||||||||||||||||
| From continuing operations | $ | $ | ( | ) | $ | $ | ||||||||||
| From discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) per basic share of common stock | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
| Diluted income (loss) per share of common stock: | ||||||||||||||||
| From continuing operations | $ | $ | ( | ) | $ | $ | ||||||||||
| From discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net income (loss) per 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, 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 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Balance -December 31, 2023 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Issuance of common stock | - | ( | ) | |||||||||||||||||||||||||
| Treasury stock purchased | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance -March 31, 2024 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance -June 30, 2024 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
| Issuance of common stock | - | |||||||||||||||||||||||||||
| Treasury stock purchased | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Stock-based compensation expense | - | - | ||||||||||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||||||
| Balance -September 30, 2024 | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||
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, | ||||||||
| 2024 | 2023 | |||||||
| Cash Flows From Operating Activities | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Interest accretion expense | ||||||||
| Amortization of deferred financing fees | ||||||||
| Stock-based compensation | ||||||||
| Bad debt expense reversal | ( | ) | ||||||
| Credit loss expense | ||||||||
| Change in fair value of note payable | ||||||||
| Amortization on operating lease right of use asset | ||||||||
| Other changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other current assets | ||||||||
| Accounts payable | ||||||||
| Accrued salaries and bonus | ( | ) | ( | ) | ||||
| Other accrued expenses | ( | ) | ||||||
| Operating lease liabilities | ( | ) | ( | ) | ||||
| Other long-term liabilities | ||||||||
| Net cash provided by operating activities | ||||||||
| Cash Flows From Investing Activity | ||||||||
| Working capital adjustment on sale of Interpace Pharma Solutions | ( | ) | ||||||
| Proceeds from sale of Interpce Pharma Solutions, net | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Net cash (used in) provided by investing activities | ( | ) | ||||||
| Cash Flows From Financing Activities | ||||||||
| Payments made on note payable | ( | ) | ||||||
| Payments on line of credit | ( | ) | ||||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents from continuing operations– beginning | ||||||||
| Cash and cash equivalents from discontinued operations– beginning | ||||||||
| Cash and cash equivalents – beginning | $ | $ | ||||||
| Cash and cash equivalents from continuing operations– ending | $ | $ | ||||||
| Cash and cash equivalents from discontinued operations– ending | ||||||||
| Cash and cash equivalents – 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, 2023, as filed with the Securities & Exchange Commission (“SEC”) on April 1, 2024 and as amended on April 26, 2024.
The Interim Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The Interim Financial Statements include all normal recurring adjustments that, in the judgment of management, are necessary for a fair presentation of such interim financial statements. Discontinued operations include the Company’s wholly owned subsidiaries: Group DCA, LLC, InServe Support Solutions; and TVG, Inc., its Commercial Services business unit, which was sold on December 22, 2015 and its Interpace Pharma Solutions business (“Pharma Solutions”) which was sold on August 31, 2022. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the three-month period ended September 30, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024.
3. LIQUIDITY
In
October 2021, the Company entered into a $
Along with many laboratories, the Company may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which is currently under consideration by Novitas, the Company’s medical administrator contractor. 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. On July 29, 2024 the Company announced that CMS granted Novitas an undefined extension to the final decision for the LCD. 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.
| 7 |
For
the nine months ended September 30, 2024, the Company had operating income from continuing operations of $
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.
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, the Company’s ability to raise additional capital on terms acceptable to it has been adversely impacted. There can be no assurance that the Company will be successful in obtaining such funding on terms acceptable to it.
On October 10, 2024, Ampersand and 1315 Capital exchanged (the “Exchange”) shares of the Company’s Series B convertible preferred stock of the Company, par value $ per share (the “Series B Preferred Stock”) for shares of the Company’s Series C Preferred Stock, par value $ per share (the “Series C Preferred Stock”). See Note 18, Subsequent Events. The Company believes that the shares of Series C Preferred Stock will constitute stockholders’ equity under generally accepted accounting principles. The Exchange is the first significant step for the Company to seek an uplisting of its common stock to Nasdaq. Other steps may need to be taken in order to satisfy Nasdaq listing requirements, including meeting Nasdaq’s stockholder equity and minimum bid price requirements. The Company believes that a Nasdaq listing would assist it in raising additional capital, increasing investor interest and trading volume in its common stock, and pursuing acquisitions. No assurance can be given that a Nasdaq listing will be achieved.
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 from the date of the filing of this report.
4. DISCONTINUED OPERATIONS
Liabilities classified as discontinued operations as of both September 30, 2024 and December 31, 2023 consists of accrued expenses which are liabilities related to the former Commercial Services business unit.
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, 2024 and 2023.
| For The Three Months Ended | For The Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Revenue, net | $ | $ | $ | $ | ||||||||||||
| Loss from discontinued operations | ( | ) | ||||||||||||||
| Income tax expense | ||||||||||||||||
| Loss from discontinued operations, net of tax | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| 8 |
Cash
used from discontinued operations, operating activities, was $
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 credit losses, 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
We derive our revenues from the performance of proprietary assays or tests. The Company’s performance obligation is fulfilled upon the completion, review and release of test results to the customer. We subsequently bill 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, we estimate the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience.
We regularly review the ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates and adjust the NRV’s and related contractual allowances accordingly. If actual collections and related NRV’s vary significantly from our estimates, we will adjust the estimates of contractual allowances, which affects net revenue in the period such variances become known.
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 now discontinued pharma services, 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.
| 9 |
Accounts Receivable
The
Company’s accounts receivable represent unconditional rights to consideration and are generated using its clinical services. The
Company’s clinical services are fulfilled upon completion of the test, review and release of the test results. In conjunction with
fulfilling these services, the Company bills the third-party payer or direct-bill payer. Contractual adjustments represent the difference
between the list prices and the reimbursement rates set by third-party payers, including Medicare, commercial payers, and amounts billed
to direct-bill payers. Specific accounts may be written off after several appeals, which in some cases may take longer than twelve months.
The allowance for credit losses balance was $
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 7, Leases.
Other Current Assets
Other current assets consisted of the following as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||
| Lab supplies | $ | $ | ||||||
| Prepaid expenses | ||||||||
| Other | ||||||||
| Total other current assets | $ | $ | ||||||
Long-Lived Assets, including Finite-Lived Intangible Assets
Finite-lived
intangible assets are stated at cost less accumulated amortization. Amortization of finite-lived acquired intangible assets is recognized
on a straight-line basis, using the estimated useful lives of the assets of approximately
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.
| 10 |
A reconciliation of the number of shares of common stock, par value $ per share, used in the calculation of basic and diluted income (loss) per share for the three- and nine-month periods ended September 30, 2024 and 2023 is as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Basic weighted average number of common shares | ||||||||||||||||
| Potential dilutive effect of stock-based awards | ||||||||||||||||
| Diluted weighted average number | ||||||||||||||||
| of common shares | ||||||||||||||||
The Company’s Series B Redeemable Preferred Stock, on an as converted basis into common stock of shares for the three- and nine-months ended September 30, 2024, and the following outstanding stock-based awards, were excluded from the computation of the effect of dilutive securities on income (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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Options | ||||||||||||||||
| Restricted stock units (RSUs) | ||||||||||||||||
6. 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. |
| 11 |
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, 2024 | Fair Value Measurements | |||||||||||||||||||
| Fair | As of September 30, 2024 | |||||||||||||||||||
| Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent consideration: | ||||||||||||||||||||
| Asuragen (1) | $ | $ | $ | $ | $ | |||||||||||||||
| Note payable: | ||||||||||||||||||||
| BroadOak loan | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| (1) |
| As of December 31, 2023 | Fair Value Measurements | |||||||||||||||||||
| Carrying | Fair | As of December 31, 2023 | ||||||||||||||||||
| Amount | Value | Level 1 | Level 2 | Level 3 | ||||||||||||||||
| Liabilities: | ||||||||||||||||||||
| Contingent consideration: | ||||||||||||||||||||
| Asuragen (1) | $ | $ | $ | $ | $ | |||||||||||||||
| Note payable: | ||||||||||||||||||||
| BroadOak loan | ||||||||||||||||||||
| $ | $ | $ | $ | $ | ||||||||||||||||
| (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 Term 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 13, 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.
| 12 |
A roll forward of the carrying value of the Contingent Consideration Liability and BroadOak Loan to September 30, 2024 is as follows:
| Adjustment | ||||||||||||||||||||||||
| to Fair | ||||||||||||||||||||||||
| December 31, 2023 | Payments | Transferred to Accrued Expenses | Accretion/Interest Accrued | Value/ Mark to Market | September 30, 2024 | |||||||||||||||||||
| 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.
7. 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, 2024 | December 31, 2023 | ||||||||
| 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
| 13 |
The table below reconciles the cash flows to the lease liabilities recorded on the Company’s Condensed Consolidated Balance Sheet as of September 30, 2024:
| Operating Leases | ||||
| 2024 - remaining three months | $ | |||
| 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 | $ | |||
8. 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.
| 14 |
9. OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following as of September 30, 2024 and December 31, 2023:
| September 30, 2024 | December 31, 2023 | |||||||
| Accrued royalties | $ | $ | ||||||
| Contingent consideration | ||||||||
| Operating lease liability | ||||||||
| Accrued sales and marketing | ||||||||
| Accrued lab costs | ||||||||
| Accrued professional fees | ||||||||
| Taxes payable | ||||||||
| All others | ||||||||
| Total other accrued expenses | $ | $ | ||||||
Historically,
There were stock option awards issued during the nine months ended September 30, 2024 and September 30, 2023.
The Company recognized approximately $ million and $ million of stock-based compensation expense within continuing operations during the three-month periods ended September 30, 2024 and 2023, respectively, and approximately $ million and $ million for the nine-month periods ended September 30, 2024 and 2023, 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, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Cost of revenue | $ | $ | $ | $ | ||||||||||||
| Sales and marketing | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total stock compensation expense | $ | $ | $ | $ | ||||||||||||
11. 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 income from continuing operations and the effective tax rate for the three- and nine-month periods ended September 30, 2024 and 2023:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Provision 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, 2024 and December 31, 2023.
| 15 |
12. SEGMENT INFORMATION
We operate under
13. NOTES PAYABLE
BroadOak Loan
On October 29, 2021, the Company and its
subsidiaries entered into the Term Loan with BroadOak, providing for a term loan in the aggregate principal amount of $
The Term Loan 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 Term Loan also contains customary events of default.
The Company concluded that the Term Loan 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 stockholders’ deficit. Accordingly, the Company elected the fair value option for the Note.
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 $
On October 24, 2023, the Company entered into a Second Amendment to Loan and Security Agreement (the “Second Amendment”) with BroadOak. The primary changes to the original Term Loan were as follows:
| ● | The Company made a one-time payment in an aggregate amount equal to $ |
| 16 |
| ● | Effective November 1, 2023, the interest rate under the Term Loan was reduced from | |
| ● | The Company had 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 agreed to the extension, the Loan Maturity Date would automatically be extended. |
On March 29, 2024, the Company entered into a Third Amendment to Loan and Security Agreement with BroadOak (the “Third Amendment”). The primary changes to the Second Amendment were as follows:
| ● | ||
| ● | Beginning April 1, 2024, the Company will make $ |
The Third Amendment was treated as a debt modification which is accounted for prospectively. Since the Term Loan is carried at fair value under the fair value option, the Second Amendment did not result in any extinguishment gain or loss upon amendment, and the impact of the revised terms was incorporated into the Company’s first quarter 2024 fair value calculation.
The balance of the loan outstanding at September
30, 2024 was $
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental Disclosures of Non-Cash Activities
(in thousands)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Taxes accrued for repurchase of restricted shares | $ | $ | ||||||
| Purchase of property and equipment included in accounts payable | ||||||||
15. 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
$
| 17 |
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 “Series B 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
On November 15, 2023, Edward Chan, a director designated by 1315 Capital to the Board, provided notice to the Company of his resignation from the Board, effective immediately. Further, on December 7, 2023, Robert Gorman, a director designated by Ampersand to the Board, provided notice to the Company of his resignation as a director and as Chairman of the Board, effective immediately.
As of the date of this report, each of 1315 Capital and Ampersand has appointed one director to the Board, and each has not appointed a second director to the Board.
Conversion
The Series B Certificate of Designation
provides that from and after the Issuance Date and subject to the terms of the Series B 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 ($
| 18 |
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 Series B 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, 2024 and December 31, 2023, there were issued and outstanding shares of Series B Preferred Stock, respectively. See Note 18, Subsequent Events, for updates regarding the status of the Series B Preferred Stock.
16. 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 $
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 providing for a revolving credit facility of up to $
In February 2024, the Company terminated the Comerica Loan Agreement. The Company did not owe anything outstanding on the line of credit at the time of termination and does not owe anything further to Comerica.
17. RECENT ACCOUNTING STANDARDS
Accounting Pronouncements Adopted
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU 2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. This was adopted on January 1, 2024 and there was no impact upon adoption.
| 19 |
Accounting Pronouncements Pending
In November 2023, the FASB modified authoritative guidance within the codification’s Segment Reporting topic (ASC 280), which enhanced the disclosure requirements for significant segment expenses and other segment items. The authoritative guidance will become effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. The Company will adopt the standard as of the effective date.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU requires public entities, on an annual basis, to provide disclosure of specific categories in the rate reconciliation, as well as disclosure of income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact the adoption of this standard on its financial statements.
18. SUBSEQUENT EVENTS
On October 10, 2024, the Company and the Investors entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which the Investors exchanged (the “Exchange”) an aggregate of shares of the Company’s Series B Preferred Stock, comprised of shares of Series B Preferred Stock held by Ampersand and shares of Series B Preferred Stock held by 1315 Capital, which represented all of the Company’s issued and outstanding Series B Preferred Stock, for newly created shares of Series C Preferred Stock, at an issuance price per share of $. In the Exchange, Ampersand received shares of Series C Preferred Stock and 1315 received shares of Series C Preferred Stock.
The
Series C Preferred Stock is convertible into the Company’s common stock at a conversion price of $
In connection with the Exchange, on October 11, 2024 the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series C Convertible Preferred Stock (the “Series C Certificate of Designation”), with the Secretary of State of the State of Delaware. The Series C Certificate of Designation set forth the rights and obligations of the Series C Preferred Stock, including with respect to voting rights, conversion rights, certain protective provisions and liquidation rights. Please refer to the Company’s current report on Form 8-K, filed with the SEC on October 15, 2024, for more information.
The closing of the transactions contemplated by the Exchange Agreement occurred on October 11, 2024, following the satisfaction of customary conditions set forth in the Exchange Agreement and did not result in the receipt of any cash proceeds by the Company.
| 20 |
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:
| ● | our history of operating losses prior to fiscal 2023; | |
| ● | 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 lender has 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; |
| 21 |
| ● | 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 84.1% of our outstanding shares of common stock through their holdings of our Series C Preferred Stock, this concentration of ownership may have a substantial influence on our decisions; | |
| ● | the delisting of our common stock from Nasdaq has adversely affected and may continue to adversely affect our common stock and business and financial condition; | |
| ● | our ability to successfully uplist our shares of common stock onto Nasdaq; | |
| ● | 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, 2023 filed with the SEC on April 1, 2024, and as amended on April 26, 2024, 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
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. On July 29, 2024 the Company announced that CMS granted Novitas an undefined extension to the final decision for the LCD. 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.
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U.S. Food and Drug Administration Regulation of LDTs
While subject to oversight by CMS through its enforcement of the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), the Food and Drug Administration (“FDA”) has claimed regulatory authority over laboratories that produce LDTs, a type of in vitro diagnostic test that is designed, manufactured and used within a single laboratory. The FDA has regulatory responsibility over, among other areas, instruments, test kits, reagents and other devices used in clinical laboratories to perform diagnostic testing in the United States.
Historically, the FDA has exercised enforcement discretion over most LDTs. On April 29, 2024, however, the FDA published a final rule on LDTs, in which the FDA outlines its plans to end enforcement discretion for many LDTs in five stages over a four-year period. In Phase 1 (effective May 6, 2025), clinical laboratories running LDTs will be required to comply with medical device (adverse event) reporting and correction/removal reporting requirements, as well as requirements for maintenance of complaint files under the FDA’s quality systems regulation (QSR). In Phase 2 (effective May 6, 2026), clinical laboratories will be required to comply with all other device requirements (e.g., registration/listing, labeling, investigational use), except for the remaining QSR requirements and premarket review. In Phase 3 (effective May 6, 2027), clinical laboratories will be required to comply with all remaining applicable QSR requirements. In Phase 4 (effective November 6, 2027), clinical laboratories will be required to comply with premarket review requirements for high-risk tests (i.e., tests subject to the premarket approval (PMA) requirement). Finally, in Phase 5 (effective May 6, 2028), clinical laboratories will be required to comply with premarket review requirements for moderate- and low-risk tests (i.e., tests subject to the de novo or 510(k) requirement).
Under the final rule, several types of tests will be eligible for some degree of continued enforcement discretion. For example, LDTs approved by the New York State Department of Health will be exempt from premarket review requirements but will remain subject to the requirements of Phases 1 through 3. Similarly, LDTs first marketed prior to May 6, 2024 that are not subsequently modified, or are modified only in certain limited ways, will be exempt from the premarket review and most quality systems requirements, but will remain subject to the requirements of Phases 1 and 2. The FDA notes, however, that it retains discretion to pursue enforcement action for violations of the Federal Food, Drug and Cosmetic Act at any time and intends to do so when appropriate. The FDA further explains that it may update any of the enforcement discretion policies set forth in the final rule as circumstances warrant or if the circumstances that inform those policies change, consistent with the FDA’s good guidance practices.
To the extent the FDA ultimately regulates certain LDTs, our LDTs may be subject to certain additional regulatory requirements. Complying with the FDA’s requirements can be expensive, time-consuming, and subject us to significant or unanticipated delays. Insofar as we may be required to obtain premarket clearance or approval to perform or continue performing an LDT, we cannot assure you that we will be able to obtain such authorization. Even if we obtain regulatory clearance or approval where required, such authorization may not be for the intended uses that we believe are commercially attractive or are critical to the commercial success of our tests. As a result, the application of the FDA’s requirements to our tests could materially and adversely affect our business, financial condition, and results of operations.
Failure to comply with applicable requirements could result in a range of enforcement actions by the FDA, such as warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations, and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.
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Legislative proposals have also been introduced that, if enacted, would potentially supersede the final rule. In March 2017, members of Congress posted a discussion draft of “The Diagnostics Accuracy and Innovation Act”. The discussion draft included language that, if enacted, would have established a new regulatory framework for the oversight of in vitro clinical tests (“IVCTs”) which include LDTs. In March 2020, members of Congress introduced “The Verifying Accurate, Leading-edge IVCT Development (VALID) Act.” This bill has been re-introduced in substantially similar forms over the years, and, most recently in March 2023. Under the most recent version of the VALID Act, a risk-based approach would be used to regulate IVCTs while grandfathering many existing IVCTs from certain requirements. Each test will be classified as high-risk, moderate-risk, or low-risk. Pre-market review will be required for high-risk tests. To market a high-risk IVCT, reasonable assurance of analytical and clinical validity for the intended use must be established. Under VALID, a precertification process would be established which will allow a laboratory to establish that the facilities, methods, and controls used in the development of certain IVCTs meet quality system requirements. If pre-certified, IVCTs falling within the scope of a certification order will not be subject to pre-market review. The new regulatory framework would include quality control and post-market reporting requirements. The FDA would have the authority to withdraw from the market IVCTs if there is a reasonable likelihood that such tests will cause death or serious adverse health consequences (among other criteria). Failure to comply with applicable regulatory requirements could result in enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions. However, we cannot predict if this (or any other bill) will be enacted in its current (or any other) form and cannot quantify the effect of such proposals on our business.
Whether via statute, regulation, or sub-regulatory action, any FDA effort to end enforcement discretion for LDTs is likely to continue to be met with resistance by certain sections of industry. Multiple lawsuits have been filed challenging the April 2024 LDT final rule, in which the plaintiffs argue that the FDA lacks authority to regulate LDTs as medical devices. We cannot predict the likelihood of success of these or any other such actions, nor can we quantify the effect of such efforts on our business.
Revenue Recognition
Clinical services derive revenues from the performance of proprietary assays or tests. Our performance obligation is fulfilled upon completion, review and release of test results to the customer, at which time we bill third-party payers or direct-bill payers for the tests performed. Under Accounting Standards Codification 606, revenue is recognized based upon the estimated transaction price or net realizable value (“NRV”), which is determined based on historical collection rates by each payer category for each proprietary test offered. To the extent that the transaction price includes variable consideration, for all third party and direct-bill payers and proprietary tests, we estimate the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience.
The ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates are regularly reviewed and we adjust the NRV’s and related contractual allowances accordingly. If actual collections and related NRV’s vary significantly from our estimates, we adjust the estimates of contractual allowances, which affects net revenue in the period such variances become known.
Cost of Revenue
Cost of revenue consists primarily of the costs associated with operating our laboratory and other costs directly related to our tests. Personnel costs, which constitute the largest portion of cost of services, include all labor-related costs, such as salaries, bonuses, fringe benefits and payroll taxes for laboratory personnel. Other direct costs include, but are not limited to, laboratory supplies, certain consulting expenses, royalty expenses, and facility expenses.
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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, 2024 Compared to the Quarter Ended September 30, 2023 (unaudited, in thousands)
| Three Months Ended September 30, | ||||||||||||||||
| 2024 | 2024 | 2023 | 2023 | |||||||||||||
| % to | % to | |||||||||||||||
| revenue | revenue | |||||||||||||||
| Revenue, net | $ | 12,295 | 100.0 | % | $ | 9,078 | 100.0 | % | ||||||||
| Cost of revenue | 4,789 | 39.0 | % | 4,124 | 45.4 | % | ||||||||||
| Gross profit | 7,506 | 61.0 | % | 4,954 | 54.6 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 2,864 | 23.3 | % | 2,498 | 27.5 | % | ||||||||||
| Research and development | 199 | 1.6 | % | 149 | 1.6 | % | ||||||||||
| General and administrative | 2,538 | 20.6 | % | 2,124 | 23.4 | % | ||||||||||
| Acquisition related amortization expense | - | 0.0 | % | 199 | 2.2 | % | ||||||||||
| Total operating expenses | 5,601 | 45.6 | % | 4,970 | 54.7 | % | ||||||||||
| Operating income (loss) | 1,905 | 15.5 | % | (16 | ) | -0.2 | % | |||||||||
| Interest accretion expense | (4 | ) | 0.0 | % | (26 | ) | -0.3 | % | ||||||||
| Note payable interest | (141 | ) | -1.1 | % | (230 | ) | -2.5 | % | ||||||||
| Other expense, net | (394 | ) | -3.2 | % | (252 | ) | -2.8 | % | ||||||||
| Income (loss) from continuing operations before tax | 1,366 | 11.1 | % | (524 | ) | -5.8 | % | |||||||||
| Provision for income taxes | 4 | 0.0 | % | 4 | 0.0 | % | ||||||||||
| Income (loss) from continuing operations | 1,362 | 11.1 | % | (528 | ) | -5.8 | % | |||||||||
| Loss from discontinued operations, net of tax | (82 | ) | -0.7 | % | (86 | ) | -0.9 | % | ||||||||
| Net income (loss) | $ | 1,280 | 10.4 | % | $ | (614 | ) | -6.8 | % | |||||||
Revenue, net
Revenue, net for the three months ended September 30, 2024 increased by $3.2 million, or 35%, to $12.3 million, compared to $9.1 million for the three months ended September 30, 2023. 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, 2024 was $4.8 million, as compared to $4.1 million for the three months ended September 30, 2023. As a percentage of revenue, cost of revenue decreased to 39% for the three months ended September 30, 2024 from 45% for the three months ended September 30, 2023. This decrease was due to the increase in revenue mentioned above.
Gross profit
Consolidated gross profit was approximately $7.5 million for the three months ended September 30, 2024 and $5.0 million for the three months ended September 30, 2023. The gross profit percentage increased to 61% for the three months ended September 30, 3024 from 55% for the three months ended September 30, 2023, respectively. This improvement was primarily due to the increase in revenue discussed above, which resulted in fixed costs becoming a smaller percentage of cost of revenue which in turn improved the gross profit percentage.
Sales and marketing expense
Sales and marketing expense was approximately $2.9 million for the three months ended September 30, 2024 and $2.5 million for the three months ended September 30, 2023. The increase was primarily attributable to increased headcount and related employee costs. As a percentage of revenue, sales and marketing expense was 23% for the three months ended September 30, 2024 as compared to 28% for the three months ended September 30, 2023.
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Research and development
Research and development expense was approximately $0.2 million for the three months ended September 30, 2024 and $0.1 million for the three months ended September 30, 2023. As a percentage of revenue, research and development expense was approximately 2% in both periods.
General and administrative
General and administrative expense was approximately $2.5 million for the three months ended September 30, 2024 and $2.1 million for the three months ended September 30, 2023. The increase can be primarily attributed to an increase in employee costs and legal and professional fees during the quarter.
Acquisition amortization expense
During the three months ended September 30, 2023, we recorded amortization expense of approximately $0.2 million, which was related to intangible assets associated with prior acquisitions. There was no amortization expense during the three months ended September 30, 2024.
Operating income (loss)
Operating income from continuing operations was $1.9 million for the three months ended September 30, 2024 as compared to an operating loss from continuing operations of $0.02 million for the three months ended September 30, 2023. The increase in operating income from continuing operations was primarily attributable to the increases in revenue and gross profit discussed above.
Provision for income taxes
Income tax expense was approximately $4,000 for both the three months ended September 30, 2024 and the three months ended September 30, 2023.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $0.1 million for both the three months ended September 30, 2024 and for the three months ended September 30, 2023, respectively.
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Condensed Consolidated Results of Continuing Operations for the Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023 (unaudited, in thousands)
| Nine Months Ended September 30, | ||||||||||||||||
| 2024 | 2024 | 2023 | 2023 | |||||||||||||
| % to | % to | |||||||||||||||
| revenue | revenue | |||||||||||||||
| Revenue, net | $ | 34,610 | 100.0 | % | $ | 29,931 | 100.0 | % | ||||||||
| Cost of revenue | 13,602 | 39.3 | % | 12,163 | 40.6 | % | ||||||||||
| Gross profit | 21,008 | 60.7 | % | 17,768 | 59.4 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Sales and marketing | 8,571 | 24.8 | % | 7,444 | 24.9 | % | ||||||||||
| Research and development | 483 | 1.4 | % | 484 | 1.6 | % | ||||||||||
| General and administrative | 6,918 | 20.0 | % | 7,515 | 25.1 | % | ||||||||||
| Acquisition related amortization expense | - | 0.0 | % | 834 | 2.8 | % | ||||||||||
| Total operating expenses | 15,972 | 46.1 | % | 16,277 | 54.4 | % | ||||||||||
| Operating income | 5,036 | 14.6 | % | 1,491 | 5.0 | % | ||||||||||
| Interest accretion expense | (34 | ) | -0.1 | % | (92 | ) | -0.3 | % | ||||||||
| Note payable interest | (514 | ) | -1.5 | % | (682 | ) | -2.3 | % | ||||||||
| Other expense, net | (406 | ) | -1.2 | % | (408 | ) | -1.4 | % | ||||||||
| Income from continuing operations before tax | 4,082 | 11.8 | % | 309 | 1.0 | % | ||||||||||
| Provision for income taxes | 12 | 0.0 | % | 12 | 0.0 | % | ||||||||||
| Income from continuing operations | 4,070 | 11.8 | % | 297 | 1.0 | % | ||||||||||
| Loss from discontinued operations, net of tax | (260 | ) | -0.8 | % | (385 | ) | -1.3 | % | ||||||||
| Net income (loss) | $ | 3,810 | 11.0 | % | $ | (88 | ) | -0.3 | % | |||||||
Revenue, net
Revenue, net for the nine months ended September 30, 2024 increased by $4.7 million, or 16%, to $34.6 million, compared to $29.9 million for the nine months ended September 30, 2023. 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 nine months ended September 30, 2024 was $13.6 million, as compared to $12.2 million for the nine months ended September 30, 2023. As a percentage of revenue, cost of revenue was approximately 39% for the nine months ended September 30, 2024 as compared to 41% for the nine months ended September 30, 2023.
Gross profit
Consolidated gross profit was approximately $21.0 million for the nine months ended September 30, 2024 and $17.8 million for the nine months ended September 30, 2023. The gross profit percentage was approximately 61% for the nine months ended September 30, 3024 and 59% for the nine months ended September 30, 2023. The increase was primarily due to the increase in revenue discussed above.
Sales and marketing expense
Sales and marketing expense was approximately $8.6 million for the nine months ended September 30, 2024 and $7.4 million for the nine months ended September 30, 2023. The increase was primarily due to increased employee costs. As a percentage of revenue, sales and marketing expense was approximately 25% in both periods.
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Research and development
Research and development expense was approximately $0.5 million for both the nine months ended September 30, 2024 and September 30, 2023, respectively. As a percentage of revenue, research and development expense decreased to 1% from 2% in the comparable prior year period.
General and administrative
General and administrative expense was approximately $6.9 million for the nine months ended September 30, 2024 and $7.5 million for the three months ended September 30, 2023. The decrease can be primarily attributed to a decrease in legal and related professional fees.
Acquisition amortization expense
During the nine months ended September 30, 2023, we recorded amortization expense of approximately $0.8 million, which was related to intangible assets associated with prior acquisitions. There was no amortization expense during the nine months ended September 30, 2024.
Operating income
Operating income from continuing operations was $5.0 million for the nine months ended September 30, 2024 as compared to operating income from continuing operations of $1.5 million for the nine months ended September 30, 2023. The increase in operating income from continuing operations was primarily attributable to the increase in revenue and gross profit discussed above.
Provision for income taxes
Income tax expense was approximately $12,000 for both the nine months ended September 30, 2024 and September 30, 2023.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $0.3 million for the nine months ended September 30, 2024 and a loss from discontinued operations of approximately $0.4 million for the nine months ended September 30, 2023.
Non-GAAP Financial Measures
In addition to the United States generally accepted accounting principles (“GAAP”) results provided throughout this document, we have provided certain non-GAAP financial measures to help evaluate the results of our performance. We believe that these non-GAAP financial measures, when presented in conjunction with comparable GAAP financial measures, are useful to both management and investors in analyzing our ongoing business and operating performance. We believe that providing the non-GAAP information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way that management views financial results.
In this Quarterly Report on Form 10-Q, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, non-cash stock based compensation, interest and taxes, and other non-cash expenses including change in fair value of notes payable and warrant liability. The table below includes a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.
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Reconciliation of Adjusted EBITDA (Unaudited)
($ in thousands)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Income (loss) from continuing operations (GAAP Basis) | $ | 1,362 | $ | (528 | ) | $ | 4,070 | $ | 297 | |||||||
| Depreciation and amortization | 85 | 241 | 205 | 954 | ||||||||||||
| Stock-based compensation | 86 | 152 | 218 | 501 | ||||||||||||
| Taxes expense | 4 | 4 | 12 | 12 | ||||||||||||
| Interest accretion expense | 4 | 26 | 34 | 92 | ||||||||||||
| Note payable interest | 141 | 230 | 514 | 682 | ||||||||||||
| Interest income | (10 | ) | (21 | ) | (40 | ) | (34 | ) | ||||||||
| Change in fair value of note payable | 404 | 259 | 445 | 400 | ||||||||||||
| Adjusted EBITDA | $ | 2,076 | $ | 363 | $ | 5,458 | $ | 2,904 | ||||||||
LIQUIDITY AND CAPITAL RESOURCES
In October 2021, the Company entered into a Loan and Security Agreement with BroadOak, providing for a term loan in the aggregate principal amount of $8,000,000 (the “Term Loan”). Funding of the Term Loan took place on November 1, 2021. The Term Loan was scheduled to mature 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 was subordinate to the Company’s former $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 13, 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 which was converted into a subordinated term loan and was added to the outstanding balance of the Term Loan. See Note 13, Notes Payable, for more details.
On October 24, 2023, the Company entered into a Second Amendment to the Loan and Security Agreement with BroadOak (the “Second Amendment”). The primary changes to the Term Loan 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 the payment in full satisfaction of the $3,000,000 Terminal Payment (as defined in the Term Loan). See Note 13, Notes Payable, regarding the Terminal Payment. | |
| ● | Effective November 1, 2023, the interest rate under the Term Loan was 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 agreed to the extension, the Loan Maturity Date would automatically be extended. |
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On March 29, 2024, the Company entered into a Third Amendment to the Loan and Security Agreement with BroadOak (the “Third Amendment”), extending the loan maturity date to June 30, 2025. The primary changes to the Second Amendment were as follows:
| ● | The maturity date was extended to June 30, 2025. | |
| ● | Beginning April 1, 2024, the Company will make $500,000 monthly payments with the remaining loan balance due on the new maturity date. |
The Term Loan 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 Term Loan also contains customary events of default. The balance of the loan at September 30, 2024 was $5.9 million.
For the nine months ended September 30, 2024, we had operating income from continuing operations of $5.0 million. As of the nine months ended September 30, 2024, we had cash and cash equivalents of $2.1 million, total current assets of $11.1 million and current liabilities of $18.8 million. As of November 1, 2024, we had approximately $1.8 million of cash and cash equivalents.
During the nine months ended September 30, 2024, net cash provided by operating activities was $3.5 million. The main component of cash provided by operating activities was our net income of $3.8 million, partially offset by an increase in accounts receivable of $2.3 million. 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, 2024, net cash used in investing activities was approximately $0.7 million which pertained to upgrades to the lab and the purchase of lab equipment. During the nine months ended September 30, 2023, net cash provided by investing activities was $0.1 million.
For the nine months ended September 30, 2024, cash used in financing activities was $4.1 million, which were payments made on the BroadOak Term Loan. For the nine months ended September 30, 2023, cash used in financing activities was $2.5 million, which were payments made on the Comerica Revolving Line of Credit.
We intend to meet our ongoing capital needs by using our available cash generated from operations 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.
The Company continues to explore various strategic alternatives, dilutive and non-dilutive sources of funding, including equity and debt financings, strategic alliances, business development and other sources in order to provide additional liquidity. With the Company’s delisting of its common stock from Nasdaq in February 2021, 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.
On October 10, 2024, Ampersand and 1315 Capital exchanged 47,000 shares of Series B Preferred Stock for 47,000 shares of Series C Preferred Stock (the “Exchange”). See Note 18, Subsequent Events. The Company believes that the 47,000 shares of Series C Preferred Stock will constitute stockholders’ equity under generally accepted accounting principles. The Exchange is the first significant step for the Company to seek an uplisting of its common stock to Nasdaq. Other steps may need to be taken in order to satisfy Nasdaq listing requirements, including meeting Nasdaq’s stockholder equity and minimum bid price requirements. The Company believes that a Nasdaq listing would assist it in raising additional capital, increasing investor interest and trading volume in its common stock, and pursuing acquisitions. No assurance can be given that a Nasdaq listing will be achieved.
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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. On July 29, 2024 the Company announced that CMS granted Novitas an undefined extension to the final decision for the LCD. 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.
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.
Critical Accounting Policies
See Note 5, Summary of Significant Accounting Policies and Note 17, 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, 2023, 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 revenue recognition, leases, income taxes and stock-based compensation expense.
Off-Balance Sheet Arrangements
None.
Subsequent Event
On October 10th, 2024, the Company, Ampersand and 1315 Capital (the “Investors”) entered into an Exchange Agreement (the “Exchange Agreement”) pursuant to which the Investors exchanged an aggregate of 47,000 shares of the Company’s existing Series B Preferred Stock of the Company comprised of 28,000 shares of Series B Preferred Stock held by Ampersand and 19,000 shares of Series B Preferred Stock held by 1315 Capital, which represented all of the Company’s issued and outstanding Series B Preferred Stock, for 47,000 newly created shares of Series C Preferred Stock, at an issuance price per share of $1,000. In the Exchange, Ampersand received 28,000 shares of Series C Preferred Stock and 1315 received 19,000 shares of Series C Preferred Stock.
The Series C Preferred Stock is convertible into the Company’s common stock at a conversion price of $2.02 per share of common stock (subject to further adjustment in the event of any stock dividend, stock split, combination, or other similar recapitalization affecting such shares) which was the closing price of the common stock on the date of the Exchange Agreement. The Series C Preferred Stock does not have a liquidation preference over the common stock in the event of a sale or dissolution of the Company, does not have director designation rights and includes limited customary protective provisions. The Series B Preferred Stock had a conversion price of $6.00 per share of common stock and included additional protective provisions not applicable to the Series C Preferred Stock, including (i) limitations on the Board of Directors of the Company to declare dividends, (ii) director designation rights for each of the Investors, (iii) liquidation rights of holders upon “deemed liquidation” events, including a liquidation preference over the common stock, (iv) limitations on the ability to authorize, issue or create debt securities, (v) limitations on the ability to enter into mergers or acquisitions and (vi) limitations on the ability to conduct public offerings of the Company’s common stock. The Series C Preferred Stock is convertible into 23,267,326 shares of common stock.
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The closing of the transactions contemplated by the Exchange Agreement occurred on October 11, 2024, following the satisfaction of customary conditions set forth in the Exchange Agreement and did not result in the receipt of any cash proceeds by the Company.
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 principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2024. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Based on management’s evaluation of the Company’s disclosure controls and procedures, the principal executive officer and principal financial officer of the Company identified a material weakness in the Company’s internal control over financial reporting in the quarterly period ended March 31, 2024 related to the timing of revenue recognition based on the Company’s revenue recognition policy and have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2024 as a result of such material weakness in the Company’s internal control over financial reporting.
The Company has adopted a remediation plan, pursuant to which the Company plans to amend its internal controls to mitigate the material weakness, which was identified by management, including by updating its procedures regarding the testing of revenue recognition, and reviewing the procedures which ensure that revenue is recorded in the period in which it is earned. The Company believes implementation of these processes and appropriate testing of their effectiveness will remediate the material weakness in the Company’s internal control over financial reporting.
Changes in Internal Controls over Financial Reporting
Other than the material weakness and the adoption of the remediation plan discussed above, 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 and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
| * | Filed Herewith. |
| + | 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. |
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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, 2024 | Interpace Biosciences, Inc. |
| (Registrant) | |
| /s/ Thomas W. Burnell | |
| Thomas W. Burnell | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| Date: November 8, 2024 | /s/ Christopher McCarthy |
| Christopher McCarthy | |
| Chief Financial Officer | |
| (Principal Financial Officer) |
| 34 |