INTERPACE BIOSCIENCES, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the Risk Factors sections of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See Forward-Looking Statement Information at the beginning of this Form 10-K.
Company 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.
Strategic Disposition of Pharma Business
On
As consideration for the Transaction, under the Purchase Agreement, the Company
received a total purchase price of approximately
The Purchase Agreement includes a one-year commitment of the Company not to compete with the Business, recruit or hire any former employees of the Subsidiary who accept employment with the Purchaser in connection with the Transaction, or divert or attempt to divert from Purchaser any business to be performed from any of the contracts or agreements with customers as set forth in the Purchase Agreement. The Purchase Agreement also contains customary representations and warranties, post-closing covenants and mutual indemnification obligations for, among other things, any inaccuracy or breach of any representation or warranty and any breach or non-fulfillment of any covenant.
In connection with the Transaction, on
The Purchaser is identified as a related party of the Company and is as an
affiliate of both Ampersand 2018 Limited Partnership ("Ampersand"), a private
equity investor in the Company, and
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The Company is using the remaining net proceeds of the Transaction to fund its future business activities and for general working capital purposes. As a result of the sale, the gain on sale and all operations from the Subsidiary have been classified as discontinued operations for all periods presented.
Impact of Our Reliance on CMS and Novitas
In
Further, along with many laboratories, we may be affected by the Proposed Local
Coverage Determination ("LCD") DL39365, which was posted on
Impact of COVID-19 Pandemic
Beginning in the first quarter of 2021, there has been a trend in many parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for logistics and supply chains. We have also previously been affected by temporary laboratory closures, employment and compensation adjustments and impediments to administrative activities. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical and long-lasting and may vary from location to location.
In addition, we have experienced and are experiencing varying levels of inflation resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID-19 pandemic and general global economic conditions.
The continuing impact that the COVID-19 pandemic will have on our operations, including duration, severity and scope, remains highly uncertain and cannot be fully predicted at this time. While we believe we have generally recovered from the adverse impact that the COVID-19 pandemic had on our business during 2020, we believe that the COVID-19 pandemic could continue to adversely impact our results of operations, cash flows and financial condition in the future.
At this time, the
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We continue to monitor the COVID-19 pandemic and the guidance that is being provided by relevant federal, state and local public health authorities and may take additional actions based upon their recommendations. It is possible that we may have to make adjustments to our operating plans in reaction to developments that are beyond our control.
Impact of the ongoing military conflict between
In
We have no way to predict the progress or outcome of the war in
Clinical services
Our clinical services provide clinically useful molecular diagnostic tests, bioinformatics and pathology services for evaluating cancer risk 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 to help personalized medicine and improve patient diagnosis and management. Our tests and services provide mutational analysis of genomic material contained in suspicious cysts, nodules and lesions with the goal of better informing treatment decisions in patients at risk of thyroid, pancreatic, and other cancers. The laboratory developed molecular diagnostic tests we offer are designed to enable healthcare providers to better assess cancer risk, helping to avoid unnecessary surgical treatment in patients at low risk. We currently have five commercialized molecular diagnostic tests in the marketplace: PancraGEN®, which is a pancreatic cyst and pancreaticobiliary solid lesion genomic test for the diagnosis and prognosis of pancreatic cancer; PanDNA, a "molecular only" version of PancraGEN® that provides physicians a snapshot of a limited number of factors enabling physicians to better assess risk of pancreaticobiliary cancers using our proprietary PathFinderTG® platform? ThyGeNEXT®, which is an expanded oncogenic mutation panel that helps identify malignant thyroid nodules? ThyraMIR®v2, which assesses thyroid nodules for risk of malignancy utilizing a proprietary microRNA gene expression assay; and RespriDx®, which is a genomic test that helps physicians differentiate metastatic or recurrent lung cancer from the presence of newly formed primary lung cancer and which also utilizes our PathFinderTG® platform to compare the genomic fingerprint of two or more sites of lung cancer. In addition, BarreGEN®, a molecular based assay that helps resolve the risk of progression of Barrett's Esophagus to esophageal cancer, is currently in a clinical evaluation program (CEP) whereby we gather information from physicians using BarreGEN® to assist us in gathering clinical evidence relative to the safety and performance of the test. We currently have a multicenter study underway to further assess the ability of BarreGEN® to accurately predict progression to high grade dysplasia or cancer and to assist us in positioning our product for full launch, partnering, and potentially supporting reimbursement with payers.
Our mission is to provide personalized medicine through genomics-based
diagnostics and innovation to advance patient care based on rigorous science.
Our laboratory is licensed pursuant to federal law under CLIA and are accredited
by CAP and
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We leverage our laboratory to develop and commercialize our assays and products. We aim to provide physicians and patients with diagnostic options for detecting genomic and other molecular alterations that are associated with gastrointestinal, endocrine, and lung cancers. Our customers consist primarily of physicians, hospitals and clinics.
The global molecular diagnostics market is estimated to be
We believe that the molecular diagnostics market offers significant growth and strong patient value given the substantial opportunity it affords to lower healthcare costs by helping to reduce unnecessary surgeries and ensuring the appropriate frequency of monitoring. We are keenly focused on growing our test volumes, securing additional insurance coverage and reimbursement, maintaining and growing our current reimbursement and supporting revenue growth for our molecular diagnostic tests, introducing related first line product and service extensions, as well as expanding our business by developing and promoting synergistic products in our markets. We also believe that BarreGEN® is a potentially significant pipeline product, and we are providing necessary resources to accelerate our development process. Further, we believe BarreGEN® is synergistic with our capabilities in the gastrointestinal market, which is one of the sectors in which we operate.
In
Nasdaq Delisting
On
Nasdaq commenced with delisting the Company's common stock from the Nasdaq
Capital Market and suspended trading in the Company's common stock effective at
the open of business on
OTCQX
On
On
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DESCRIPTION OF REPORTING SEGMENTS
We operate under one segment which is the business of developing and selling diagnostic clinical services.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with
Revenue and Cost of Revenue
The Company's revenue is primarily generated from the performance of its
proprietary molecular diagnostic tests for its clinical customers. Prior to the
disposition of our Pharma business in
Revenue Recognition ASC 606 Revenue Recognition
Clinical services derive their revenues from the performance of their proprietary assays or tests. The Company's performance obligation is fulfilled upon completion, review and release of test results to the customer. The Company subsequently bills third-party payers or direct-bill payers for the tests performed. Revenue is recognized based on 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 by the Company. To the extent the transaction price includes variable consideration, for all third party and direct-bill payers and proprietary tests, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience.
For our clinical services, we regularly review the ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates and adjust the NRV's and related contractual allowances accordingly. If actual collections and related NRV's vary significantly from our estimates, we adjust the estimates of contractual allowances, which would affect net revenue in the period such variances become known.
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.
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Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that option. Leases with terms of twelve months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an asset or liability. See Note 8, Leases.
Long-Lived Assets, including Finite-Lived Intangible Assets
We review 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.
Contingencies
In the normal course of business, we are subject to various contingencies. Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated, or otherwise disclosed, in accordance with ASC 450, Contingencies. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event we determine that a loss is not probable, but is reasonably possible, and it becomes possible to develop what we believe to be a reasonable range of possible loss, then we will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. We are currently a party to legal proceedings that are incidental to our business. As required, we have accrued our estimate of the probable costs for the resolution of these claims. These estimates are developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Predicting the outcome of claims and litigation, and estimating related costs and exposures, involves substantial uncertainties that could cause actual costs to vary materially from estimates.
Income Taxes
Income taxes are based on income for financial reporting purposes calculated using our expected annual effective rate and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes.
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We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of our assets and liabilities based on enacted tax laws and rates. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. A valuation allowance is established, when necessary, to reduce the deferred income tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We operate in multiple tax jurisdictions and provide taxes in each jurisdiction where we conduct business and are subject to taxation. The breadth of our operations and the complexity of the various tax laws require assessments of uncertainties and judgments in estimating the ultimate taxes we will pay. The final taxes paid are dependent upon many factors, including negotiations with taxing authorities in various jurisdictions, outcomes of tax litigation and resolution of proposed assessments arising from federal and state audits. We have established estimated liabilities for uncertain federal and state income tax positions. Uncertain tax positions are recognized in the financial statements when it is more likely than not (for example, a likelihood of more than fifty percent) that a position taken or expected to be taken in a tax return would be sustained upon examination by tax authorities that have full knowledge of all relevant information. A recognized tax position is then measured as the largest amount of benefit that is greater than fifty percent likely to be realized upon ultimate settlement. We adjust our accruals for unrecognized tax benefits as facts and circumstances change, such as the progress of a tax audit. We believe that any potential audit adjustments will not have a material adverse effect on our financial condition or liquidity. However, any adjustments made may be material to our consolidated results of operations or cash flows for a reporting period. Penalties and interest, if incurred, would be recorded as a component of current income tax expense.
Significant judgment is also required in evaluating the need for and magnitude
of appropriate valuation allowances against deferred tax assets. We currently
have significant deferred tax assets resulting from net operating loss
carryforwards and deductible temporary differences. The realization of these
assets is dependent on generating future taxable income. We perform an analysis
quarterly to determine whether the expected future income will more likely than
not be sufficient to realize the deferred tax assets. Our recent operating
results and projections of future income weighed heavily in our overall
assessment. The existing and forecasted levels of pretax earnings for financial
reporting purposes are not sufficient to generate future taxable income and
realize our deferred tax assets and, as a result, we established a full federal
and state valuation allowance for the net deferred tax assets at
The NOL carry forwards are subject to review and possible adjustment by the
Internal Revenue Service and state tax authorities. NOL, and tax credit carry
forwards may become subject to an annual limitation in the event of certain
cumulative changes in the ownership interest of significant stockholders over a
three year period in excess of 50%, as defined under Sections 382 and 383 of the
Code as well as similar state tax provisions. The amount of the annual
limitation, if any, will be determined based on the value of our company
immediately prior to an ownership change. Subsequent ownership changes may
further affect the limitation in future years. Additionally,
Stock Compensation Costs
The compensation cost associated with the granting of stock-based awards is based on the grant date fair value of the stock award. We recognize the compensation cost, net of estimated forfeitures, over the shorter of the vesting period or the period from the grant date to the date when retirement eligibility is achieved. Forfeitures are initially estimated based on historical information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period-to-period.
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We primarily use the Black-Scholes option pricing model to determine the fair value of stock options. The determination of the fair value of stock-based payment awards is made on the date of grant and is affected by our stock price as well as assumptions made regarding a number of complex and subjective variables. These assumptions include: our expected stock price volatility over the term of the awards; actual and projected employee stock option exercise behaviors; the risk-free interest rate; and expected dividend yield.
Changes in the valuation assumptions could result in a significant change to the cost of an individual award. However, the total cost of an award is also a function of the number of awards granted, and as result, we have the ability to manage the cost and value of our equity awards by adjusting the number of awards granted.
CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the selected statements of operations data ($ in thousands) as a percentage of revenue for the periods indicated. The trends illustrated in this table may not be indicative of future operating results.
Years Ended December 31,
2022 2022 2021 2021
% to % to
revenue revenue
Revenue, net $ 31,838 100.0 % $ 33,117 100.0 %
Cost of revenue 13,607 42.7 % 14,314 43.2 %
Gross profit 18,231 57.3 % 18,803 56.8 %
Operating expenses:
Sales and marketing 9,125 28.7 % 9,177 27.7 %
Research and development 703 2.2 % 1,493 4.5 %
General and administrative 10,973 34.5 % 10,705 32.3 %
Transition expense - 0.0 % 897 2.7 %
Loss on DiamiR transaction - 0.0 % 13 0.0 %
Acquisition related amortization
expense 1,270 4.0 % 3,192 9.6 %
Change in fair value of contingent
consideration (223 ) -0.7 % (338 ) -1.0 %
Total operating expenses 21,848 68.6 % 25,139 75.9 %
Operating loss (3,617 ) -11.4 % (6,336 ) -19.1 %
Interest accretion expense (158 ) -0.5 % (496 ) -1.5 %
Related party interest - 0.0 % (424 ) -1.3 %
Note payable interest (850 ) -2.7 % (120 ) -0.4 %
Other expense, net (1,211 ) -3.8 % (366 ) -1.1 %
Loss from continuing operations
before tax (5,836 ) -18.3 % (7,742 ) -23.4 %
Provision (benefit) for income
taxes 29 0.1 % (705 ) -2.1 %
Loss from continuing operations (5,865 ) -18.4 % (7,037 ) -21.2 %
Loss from discontinued operations,
net of tax (16,093 ) -50.5 % (7,906 ) -23.9 %
Net loss $ (21,958 ) -69.0 % $ (14,943 ) -45.1 %
Revenue, net
Consolidated revenue for the year ended
68 Cost of revenue
Consolidated cost of revenue for the year ended
Gross Profit
Consolidated gross profit for the year ended
Sales and marketing expense
Sales and marketing expense was
Research and development
Research and development expense was
General and administrative
General and administrative expense for the year ended
Transition expense
Transition expense was approximately
Loss on DiamiR transaction
During the year ended
Acquisition related amortization expense
During the years ended
Change in fair value of contingent consideration
During the year ended
69 Operating loss
There were consolidated operating losses from continuing operations of
Other expense, net
During the years ended
Provision (benefit) for income taxes
Income tax expense of
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of
Non-GAAP Financial Measures
In addition to
In this 10-K, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, acquisition related expenses, non-cash stock based compensation, interest and taxes, and other non-cash expenses including asset impairment costs, goodwill impairment, change in fair value of contingent consideration, 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)
Years Ended
December 31,
2022 2021
Loss from continuing operations (GAAP Basis)
- 13
Depreciation and amortization 1,429 3,469
Stock-based compensation 1,237 1,145
Taxes expense/(benefit) 29 (705 )
Interest accretion expense 158 496
Financing interest and related costs 850 950
Mark to market on warrant liability (71 ) 50
Change in fair value of note payable 1,224 (58 )
Change in fair value of contingent consideration (223 ) (338 ) Adjusted EBITDA
$ (1,232 ) $ (2,015 )
LIQUIDITY AND CAPITAL RESOURCES
In
The amount that may be borrowed under the Credit Facility is the lower of (i)
the revolving limit of
In addition, also in
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The BroadOak Loan Agreement contains affirmative and negative restrictive covenants, including restrictions on certain mergers, acquisitions, investments and encumbrances which could adversely affect our ability to conduct our business. The BroadOak Loan Agreement also contains customary events of default. The Comerica Loan Agreement contains affirmative and negative restrictive covenants that are applicable whether or not any amounts are outstanding under the Comerica loan agreement. These restrictive covenants, which include restrictions on certain mergers, acquisitions, investments, encumbrances, etc., could adversely affect our ability to conduct our business. The Comerica Loan Agreement also contains financial covenants requiring specified minimum liquidity and minimum revenue thresholds and also contains customary events of default. However, if we are unable to meet the financial covenants under the Comerica Loan Agreement, the revolving line of credit and notes payable will become due and payable immediately.
In
On
For the year ended
During the year ended
During the year ended
For the year ended
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We did not generate positive cash flows from operations for the year ending
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
Further, along with many laboratories, we may be affected by the Proposed Local
Coverage Determination ("LCD") DL39365, which was posted on
As ofDecember 31, 2022 , contractual obligations with terms exceeding one year and estimated minimum future rental payments required by non-cancelable operating leases with initial or remaining lease terms exceeding one year are as follows: Less than 1 to 3 3 to 5 After Total 1 Year Years Years 5 Years Operating lease obligations$ 3,232 $ 832 $ 1,025 $ 1,100 $ 275 Total$ 3,232 $ 832 $ 1,025 $ 1,100 $ 275
With the proceeds received from the sale of the Pharma Solutions business, as well as the expected improvement in future operating cash flows associated with the disposition, as of the date of this filing, the Company anticipates that current cash and cash equivalents and forecasted cash receipts will be sufficient to meet its anticipated cash requirements through the next twelve months.
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