UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2023
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: 000-24249
Interpace Biosciences, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
22-2919486
(I.R.S. Employer
Identification No.)
Waterview Plaza, Suite 310
2001 Route 46, Parsippany, NJ 07054
(Address of principal executive offices and zip code)
(855) 776-6419
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
None
Trading Symbol(s)
N/A
Name of each exchange on which registered
N/A
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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.
Yes ☒ No ☐
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). Yes ☒ No ☐
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 ☐
Emerging growth company ☐
Accelerated filer ☐
Non-accelerated filer ☒
Smaller reporting 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s common stock, $0.01 par value per share, held by non-affiliates of the registrant on June 30, 2023, the last business day of
the registrant’s most recently completed second fiscal quarter, was $3,785,811 (based on the closing sales price of the registrant’s common stock on that date). Shares of the
registrant’s common stock held by each officer and director and each person who owns 10% or more of the outstanding common stock of the registrant have been excluded
because such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 15, 2024, 4,376,398 shares of the registrant’s common stock, $0.01 par value per share, were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K will be incorporated by reference from certain portions of the Registrant’s definitive proxy statement for the 2024 annual
meeting of stockholders, or Proxy Statement, or will be included in an amendment hereto, to be filed within 120 days of the end of the fiscal year ended December 31, 2023.
Except with respect to information specifically incorporated by reference in this Annual Report on Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
Interpace Biosciences, Inc.
Annual Report on Form 10-K
PART I
PART II
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 1C. Cybersecurity
Item 2.
Item 3.
Item 4. Mine Safety Disclosures
Properties
Legal Proceedings
Reserved
Item 5. Market for our Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
2
Page
4
26
59
59
59
60
60
60
60
61
72
72
72
72
73
73
73
73
73
73
74
74
77
78
FORWARD LOOKING STATEMENT INFORMATION
This Annual Report on Form 10-K, and the documents incorporated by reference in this document, our press releases and oral statements made from time to time by us or
on our behalf, may contain “forward-looking statements” within the meaning of the federal securities laws, including Section 27A of the Securities Act of 1933, as amended (or
the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In this context, forward-looking statements are not historical
facts and include statements about our plans, objectives, beliefs and expectations. Forward-looking statements include statements preceded by, followed by, or that include the
words “believes,” “expects,” “anticipates,” “seeks,” “plans,” “estimates,” “intends,” “projects,” “targets,” “should,” “could,” “may,” “will,” “can,” “can have,” “likely,” or the
negatives thereof or other comparable words and expressions regarding beliefs, plans, expectations or intentions regarding the future. These forward-looking statements are
contained throughout this Form 10-K, including, but not limited to, statements found in Part I – Item 1 – “Business” and Part II – Item 7 – “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
Forward-looking statements are only predictions and are not guarantees of future performance. These statements are based on current expectations and assumptions
involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to
predict accurately and many of which are beyond our control. These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause
our actual results to be materially different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control or
predict. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors. Such factors include, but are
not limited to, the following:
● we have a history of operating losses prior to fiscal 2023 and our clinical services have generated limited revenue;
● our expectations of future revenues, expenditures, capital or other funding requirements;
● our reliance on Medicare reimbursement for our clinical services and our being subject to decisions of the Center for Medicare and Medicaid Services (“CMS”)
regarding reimbursement and pricing of our clinical services which could have a material adverse effect on our business and financial results;
● our ability to continue to perform, bill and receive reimbursement for our PancraGEN® molecular test long-term under the existing local coverage determination
(“LCD”), given that such LCD is currently under review by Novitas, the Company’s Medicare administrative contractor;
● our secured lenders have the right to foreclose on substantially all of our assets if we are unable to timely repay our outstanding obligations;
● our dependence on sales and reimbursements from our clinical services for all of our revenue;
● the ability to continue to generate sufficient revenue from our clinical service products and other products and/or solutions that we develop in the future is important
for our ability to meet our financial and other targets;
● our ability to finance our business on acceptable terms in the future, which may limit the ability to grow our business, develop and commercialize products and
services, develop and commercialize new molecular clinical service solutions and technologies;
● our obligations to make royalty and milestone payments to our licensors;
● our dependence on third parties for the supply of some of the materials used in our clinical services tests;
3
● the potential adverse impact of current and future laws, licensing requirements and governmental regulations upon our business operations, including but not limited to
the evolving U.S. regulatory environment related to laboratory developed tests (“LDTs”), pricing of our tests and services and patient access limitations;
● our reliance on our sales and marketing activities for future business growth and our ability to continue to expand our sales and marketing activities;
● our being subject to the controlling interests of our two private equity investors who control, on an as-converted basis, an aggregate of 64.2% of our outstanding shares
of common stock through their holdings of our Series B Preferred Stock, and this concentration of ownership along with their authority for designation rights for a
majority of our directors and their right to approve certain of our actions has a substantial influence on our decisions;
● the delisting of our common stock from Nasdaq has adversely affected and may continue to adversely affect our common stock and business and financial condition;
● geopolitical and other economic and political conditions or events (such as the wars in Ukraine and Israel/Gaza);
● our ability to implement our business strategy; and
● the potential impact of existing and future contingent liabilities on our financial condition.
Please see Part I - Item 1A – “Risk Factors” of this Form 10-K, as well as other documents we file with the U.S. Securities and Exchange Commission, or the SEC, from
time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations and from the forward-looking statements discussed
herein. 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 this Form 10-K and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for
any reason.
In this Form 10-K, references to “we,” “our,” “us,” “Interpace” and the “Company” refer to Interpace Biosciences, Inc., including consolidated subsidiaries as of December
31, 2023.
PART I
ITEM 1.
BUSINESS
Company Overview
We are a company that provides esoteric molecular diagnostic testing, and pathology services to aid physicians in their evaluation of cancer risk in patients with
indeterminate biopsies and a perceived high risk of cancer from clinical features. Utilizing the latest technology in personalized medicine, we develop and commercialize
genomic tests and related first-line assays that can help improve patient diagnosis and management.
Customer Category
Clinical services
Types of Customers
Nature of Services
● Hospitals
● Physicians
● Cancer Centers
● Clinics
● Commercial laboratories
● Pathology groups
4
Clinical services that help guide patient management decisions by
providing information on the diagnosis and prognosis of indeterminate
specimens. Guidance on genetic marker-related pharmaceutical treatment
options, when available, is also provided.
Our clinical services’ customers consist primarily of physicians, hospitals, cancer centers, commercial laboratories, pathology groups and clinics. Our largest customer for
ThyGeNEXT® and ThyraMIR®v2 products in 2022 was Laboratory Corporation of America® or LabCorp. Our revenue channels include reimbursement by Medicare,
Medicare Advantage, Medicaid, and direct client billings (for example, hospitals and clinics), and commercial payers such as Blue Cross Blue Shield, Aetna, Cigna, United
Healthcare and others.
Strategic Disposition of Pharma Business
On August 31, 2022, Interpace Biosciences, Inc. (“Interpace” or the “Company”) and Interpace Pharma Solutions, Inc. (the “Subsidiary) entered into an Asset Purchase
Agreement (the “Purchase Agreement”) with Flagship Biosciences, Inc. (the “Purchaser”) pursuant to which the Purchaser agreed to (i) acquire substantially all of the assets of
the Subsidiary used in Subsidiary’s business of complex molecular analysis for the early diagnosis and treatment of cancer and supporting the development of targeted
therapeutics (the “Business”) and (ii) assume and pay certain liabilities related to the purchased assets as set forth in the Purchase Agreement (collectively, the “Transaction”).
The Transaction closed on August 31, 2022.
As consideration for the Transaction, under the Purchase Agreement, the Company received a total purchase price of approximately $6.2 million after working capital and
other adjustments ($0.5 million of which was deposited into escrow), subject to the assumption by the Purchaser of certain specified liabilities. In addition, subject to the terms
and conditions set forth in the Purchase Agreement, Purchaser was obligated to pay the Company an earnout of up to $2.0 million based on revenue for the period beginning
September 1, 2021, and ending August 31, 2022. The Company received an earnout payment of approximately $1.0 million in September 2022 which is the fully settled
amount and there will be no further earnout payments in the future. In the third quarter of 2023, the $0.5 million funds in escrow were released to the Company.
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 August 31, 2022, the Company, the Subsidiary and the Purchaser entered into a Shared Services Agreement (the “Shared Services
Agreement”) pursuant to which Interpace agreed to provide, or cause its affiliates to provide, to the Purchaser certain services set forth in the Shared Services Agreement on a
transitional basis and subject to the terms and conditions set forth in the Shared Services Agreement (the “Services”). As consideration for the Services provided by the
Company, the Purchaser is paying the Company the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s obligations to provide
the Services will terminate with respect to each Service as set forth in the Shared Services Agreement.
The Purchaser is identified as a related party of the Company and is an affiliate of both Ampersand 2018 Limited Partnership (“Ampersand”), a private equity investor in
the Company, and BroadOak Fund V, L.P. (“BroadOak”), a secured lender to the Company. Ampersand and BroadOak have each provided equity financing to the Purchaser,
collectively own a majority of the Purchaser’s outstanding equity securities and are represented on its Board of Directors.
5
The Company used 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 the ongoing military conflict between Russia and Ukraine and the war between Israel and Hamas.
In February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, this war
has led, and could continue to lead, to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social
instability, and increases in cyberattacks, intellectual property theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business.
We have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any resulting government reactions,
are rapidly developing and beyond our control.
Further, on October 7, 2023, Hamas, a U.S. designated Foreign Terrorist Organization, launched terrorist attacks against Israel. Israel then declared war on Hamas and there
is currently an armed conflict in Israel and the Gaza Strip. The extent and duration of the wars in Ukraine and Israel/Gaza expanding geopolitical tensions and any resulting
market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an unknown period of time. Any of the
above-mentioned factors could materially adversely affect our business, financial condition, and results of operations.
We are also monitoring other macro-economic and geopolitical developments such as inflation and cybersecurity risks so that the Company can be prepared to react to new
developments as they arise.
Market Overview
Global Molecular Diagnostic Market
The global esoteric molecular diagnostics market is estimated to be $25.9 billion (USD) in 2023 and is expected to grow to $54.9 billion (USD) by 2030 with a Compound
Annual Growth rate or CAGR of 11.3% between 2023 and 2030, according to Coherent Market Insights (Report Code: CMI6261, published November 2023).
We believe that the specialty 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; supporting revenue growth for our molecular diagnostic tests; introducing related
first-line product and service extensions; and 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 continuing to support the development process.
United States Clinical Oncology Market
Despite many advances in the treatment of cancer, it remains one of the greatest areas of unmet medical need According to estimates from the International Agency for
Research on Cancer (IARC), by 2040 it is expected that there will be 16.3 million cancer deaths worldwide simply due to the growth and aging of the global population. Within
the United States, cancer is the second most common cause of death, exceeded only by heart disease.
6
In 2024, it is expected that there will be 2.0 million new cancer cases and almost 612,000 cancer-related deaths, or more than 1,600 deaths each day. In the United States,
while pancreatic cancer represents only about 3% of all new cancer cases, it is the third leading cause of cancer death. The incidence, deaths and economic loss caused by
cancer are staggering. Cancer-attributed medical care costs in the United States are substantial and projected to increase dramatically by 2030 to an estimated $246 billion
(USD). The following table taken from Common Cancer Types, originally published by the National Cancer Institute (Updated: March 7,2023) shows estimated new cases and
deaths in 2023 in the United States for selected major cancer types:
Cancer Type
Bladder
Breast (Female – Male)
Colon and Rectal (Combined)
Kidney (Renal Cell and Renal Pelvis)
Leukemia (All Type)
Liver and Intrahepatic Bile Duct
Lung (Including Bronchus)
Melanoma
Non-Hodgkin’s Lymphoma
Pancreatic
Prostate
Thyroid
Our Strategy
Estimated New Cases
82,290
297,790-2,800
153,020
81,800
59,610
41,210
238,340
97,610
80,550
64,050
288,300
43,720
Estimated Deaths
16,710
43,170-530
52,550
14,890
23,380
29,380
127,070
7,990
20,180
50,550
34,700
2,120
Our primary goal is to become a leader in providing high-quality and dependable personalized medicine with exceptional growth. Our strategy is to grow our business
organically and by selectively partnering—which could potentially include licensing, acquisitions or mergers, to generate positive returns for our shareholders. We expect to not
only continue to further develop our existing gastrointestinal and endocrine assays but to also expand our presence in other markets where we have expertise and access. Our
existing customer base and broad-based capabilities provide us a unique window not only into our current customers’ needs but also permit us to anticipate their future needs.
The key tactics to achieve our goals include:
● Expanding awareness and use of our existing commercial products, especially PancraGEN®, ThyGeNEXT® and ThyraMIR®v2 through omnichannel marketing
programs;
● Continuing the clinical development and commercialization of BarreGEN®, our esophageal cancer risk classifier for Barrett’s Esophagus, and accelerating and further
expanding clinical studies for our inline assays;
● Implementation of automation and focus on improved operating efficiencies in the clinical laboratories to provide consistent superior quality testing and reporting at
reduced costs;
● Broadening coverage and reimbursement for our clinical tests including:
○ Continuing support of an internal managed care team;
○ Utilizing Key Opinion Leaders to educate on the validity and utility of our testing services; and
○ Establishing payer relationship and in-network contracts serving our diagnostic customers.
● Expanding our commercial sales staff rationally, while supporting our products with high quality data and studies;
● Exploring partnering opportunities to acquire new technologies; and
● Expanding understanding and utilization of our bioinformatics data to improve our assays and elevate scientific understanding of the genetic drivers of cancer
progression and aggressiveness.
7
Our Service Offerings
Our business is based on the increasing clinician demand for molecular- and biomarker-based characterization of cancers to help inform patient management decisions.
Molecular-based testing often produces higher value and more accurate cancer diagnostic information than traditional clinical assessments and non-genetic diagnostic
methods. Our proprietary and unique disease-focused esoteric tests aim to provide actionable information that can guide patient management decisions, potentially resulting in
decreased costs.
We continue to pursue the strategy of trying to demonstrate increased value and efficacy with payers who wish to contain costs and academic collaborators seeking to
develop new insights and treatments.
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 clinical services’ customers consist primarily of physicians, hospitals and clinics.
Clinical services
Our clinical services business commercializes clinically useful molecular diagnostic tests and molecular pathology services. We commercialize genomic tests and related
first-line assays principally focused on risk-stratification of cancer using the latest technology to help personalize 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 surgery or surveillance
treatment decisions in patients suspected of thyroid, pancreatic, and other cancers. The molecular diagnostic tests we offer enable healthcare providers to stratify cancer risk,
helping to avoid unnecessary surgical treatment in patients at low risk, while also helping to identify patients that would benefit from increased surveillance or surgical
intervention.
Our mission is to assist healthcare providers in the diagnosis, triage, and treatment of patients through advanced diagnostics. Our laboratory is licensed pursuant to federal
law under Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) and are accredited by College of American Pathologists (“CAP”) and our products are approved
by New York State. We are leveraging our laboratory to refine 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 other cancers. Our customers consist primarily of physicians,
hospitals, and clinics.
We currently have five commercialized molecular diagnostic tests in the marketplace: PancraGEN®, a pancreatic cyst and pancreaticobiliary solid lesion genomic test that
helps physicians better risk-stratify pancreaticobiliary cancers using our proprietary PathFinderTG® platform and full integration of clinical factors; PanDNA®, an alternate
reporting option of the PathFinderTG platform, that provides physicians the “molecular only” information provided within PancraGEN; ThyGeNEXT®, an expanded oncogenic
mutation panel that helps “rule-in” and “rule-out” malignancy in thyroid nodules; ThyraMIR®v2, used in combination with ThyGeNEXT®, which further stratifies thyroid
nodules for malignancy risk utilizing a proprietary microRNA gene expression classifier; and RespriDx® a genomic test that also utilizes our PathFinderTG® platform, to help
physicians differentiate metastatic or recurrent lung cancer from the presence of newly formed primary lung cancer.
8
Gastrointestinal Cancer Products
Our current diagnostic assay, PancraGEN®, is a reporting option of our proprietary PathFinderTG® platform. This platform is designed to use advanced clinical algorithms
to accurately risk-stratify patients suspected of having pancreatic cancer by assessing panels of DNA abnormalities in patients who have pancreaticobiliary lesions (cysts or
solid masses). PanDNA® is a “molecular only” reporting option of PathFinderTG® and is used by physicians who prefer to perform their own integration of first-line testing
results to stratify pancreatic cancer risk.
Based on the American Cancer Society Cancer 2024 Cancer Facts and Figures, pancreatic cancer is the third leading cause of cancer deaths in the U.S. (estimated) with an
average five-year survival rate of 13%. PancraGEN® and PanDNA® assess the risk of malignancy in pancreatic cysts and pancreaticobiliary solid lesions, which have potential
for developing into cancer. We believe that PancraGEN® is the leader in the market for integrated molecular diagnostic tests for determining risk of pancreaticobiliary
malignancy. We currently estimate that the immediate addressable market for PancraGEN® is approximately 124,000 indeterminate pancreaticobiliary lesions annually or
approximately $200 million annually based on the current size of the patient population and reimbursement rates. To date, PancraGEN® testing has been used in almost 70,000
clinical cases. The National Pancreatic Cyst Registry study published in Endoscopy in 2015 demonstrated that PancraGEN® more accurately determined the malignancy
potential of pancreatic cysts than international consensus 2012 imaging criteria, helping to ensure that surgery is reserved for the most appropriate patients. This is important
because pancreatic surgery is high-risk surgery with over 40% postoperative morbidity rates and 0%–15% postoperative mortality rates. (Ahola, et al, March 2020,
doi.org/10.1177/1457496919900411) When molecular analysis is not performed, the vast majority of all pancreatic cyst surgeries are performed on cystic lesions that do not
harbor malignancy.
The American Gastroenterological Association 2015 Guidelines have cautioned that many pancreatic surgeries have been performed unnecessarily for lesions that will not
progress to invasive adenocarcinoma. In addition, the 2016 guidelines published by the American Society of Gastroenterology Endoscopy (ASGE) in Gastrointestinal
Endoscopy included a specific recommendation for use of molecular testing in specific circumstances where other types of testing and analysis have not provided sufficient
data on which to determine the best course of action for patient treatment.
Most recently, the International Association of Pancreatology (IAP) reviewed and revised their guidelines with a main objective being to update their patient management
algorithm. These revised guidelines indicate that molecular markers can be used when the diagnosis of a pancreatic cyst is unclear and will alter surveillance. Additionally, the
guidelines further indicate that molecular markers, such as the ones found within PancraGEN®, can be useful in identifying the presence of high-grade dysplasia and invasive
carcinoma. (Pancreatology. 2023 Dec 28: S1424-3903(23)01883-5. doi: 10.1016/j.pan.2023.12.009). Accordingly, we believe that PancraGEN® provides a highly reliable
diagnostic and prognostic option that can accurately stratify cancer risk in circumstances where risk of cancer is otherwise uncertain.
Endocrine Cancer Products
We currently market and sell a combination testing platform that can inform cancer risk in indeterminate thyroid nodules—those that are not clearly malignant or benign by
cytology. ThyGeNEXT® is a next generation DNA and RNA sequencing oncogene and mRNA fusion panel. The markers within the ThyGeNEXT® oncogene panel provide
clinical utility by informing diagnosis, prognosis, and targeted treatment guidance aligned to FDA-approved therapies for RET, NTRK, and other markers found within the
panel. ThyGeNEXT® works with our unique microRNA-based endocrine cancer diagnostic test, ThyraMIR®v2. This assay measures the expression of eleven distinct
microRNAs. The combined analysis of the ThyGeNEXT® and ThyraMIR®v2 test results provides very narrow malignancy risk ranges to help guide patient management
decision-making.
We estimate the total market for our endocrine (thyroid) cancer assays is approximately $300 million (USD) annually based on the current size of the patient population,
estimated numbers of indeterminate biopsies and reimbursement rates. The mutational analysis provided by ThyGeNEXT® can help inform treatment alone when strong driver
BRAF V600E-like mutations are found. However, reflex to ThyraMIR®v2 occurs approximately 85% of the time to provide a greater understanding of malignancy risk and is
especially helpful when weaker drivers of malignancy, such as RAS-like mutations, are found.
9
Endocrinologists, ear, nose and throat (“ENT”), and other specialists evaluate thyroid nodules for possible cancer by collecting cells through Fine Needle Aspiration
(“FNA”) that are then analyzed by cytopathologists to determine whether or not a thyroid nodule is cancerous. It is estimated that approximately 25% or well over 100,000
biopsies analyzed annually yield indeterminate results, meaning they cannot be diagnosed as definitely being malignant or benign by cytopathology alone. In the past,
guidelines recommended that some patients with indeterminate cytopathology results undergo surgery to remove all or part of their thyroid to obtain an accurate diagnosis by
looking directly at the thyroid tissue. According to a study published by Wang, et al. in 2011, in approximately 77% of these cases, the thyroid nodule proved to be benign.
Current practice and guidelines, such as those from the National Comprehensive Cancer Network (“NCCN”) and American Thyroid Association (“ATA”), support use of
molecular analysis for nodules with indeterminate cytology results as this testing can prove beneficial to further characterize these lesions and help support optimal patient
management.
Lung Cancer Product—RespriDx® Test and Metastatic versus Primary Platform
RespriDx® compares the mutational fingerprint of two or more sites of cancer to determine whether the neoplastic deposits are representative of a recurrence (metastasis)
of lung cancer or a new primary or independent tumor. The test, which currently provides only nominal revenues, defines the presence or absence of cancer in atypical cytology
by comparing the mutational profile with that of known previous cancer. RespriDx® assists in determining the most appropriate course of treatment, whether chemotherapy,
surgery, or other modalities.
CLIA Certified and CAP Accredited Laboratory
Our testing is performed in our state-of-the-art CLIA certified and College of American Pathologists (“CAP”) accredited laboratory in Pittsburgh, Pennsylvania. CLIA is a
federal law regulating clinical laboratories that perform testing on specimens derived from humans for the purpose of providing information for the diagnosis, prevention or
treatment of disease. Clinical laboratories must be certified under CLIA in order to perform testing on human specimens, unless they fall within an exception to CLIA
certification, such as research laboratories that test human specimens but do not report patient-specific results for the diagnosis, prevention or treatment of any disease or
impairment of, or the assessment of the health of individual patients. CLIA certification is also required to be eligible to bill Federal and State healthcare programs, as well as
many private third-party payers, for diagnostic testing and services. In addition, proprietary tests must also be recognized as part of an accredited program under CLIA so that
they can be offered in a CLIA-certified laboratory. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, quality control, quality assurance and
inspections. For renewal of CLIA certification, clinical laboratories are subject to survey and inspection every two years. Moreover, CLIA inspectors may make random
inspections of clinical laboratories outside of the renewal process.
Sales and Marketing
Our sales and marketing efforts consist of both direct and indirect sales channels with efforts focused predominantly in the United States. We also have collaborative
arrangements with other laboratory services companies.
Our commercialization efforts for our clinical services are mainly focused on endocrine (thyroid), and gastroenterologic (pancreatic) cancers. Communication of our
marketing messaging and value propositions is accomplished through multiple channels, including two field-based commercial sales teams of approximately 41 representatives
and managers. In addition, we employ medical science liaisons (MSLs)—therapeutic specialists with advanced scientific training to aid in communicating complex scientific
and medical information to leading physicians. Other channels of communication include print, digital advertising, social media, a web presence, peer-reviewed publications,
and trade show exhibits. We believe that our molecular diagnostic tests provide value to payers, physicians, and patients by improving patient care and lowering healthcare
costs through avoidance of unnecessary surgeries, reducing the morbidity associated with unnecessary surgeries for patients, and providing better diagnostic and prognostic
insights to physicians. We support the value propositions of our tests through rigorous science that supports the analytical and clinical validity as well as clinical utility of our
tests. We believe our repository of bioinformatics data accumulated from our testing is a valuable tool in developing and refining our analytics while also potentially being an
even more valuable tool in the future.
10
We also communicate to payers, integrated delivery systems and hospital systems about our molecular diagnostic tests’ value through highly trained professionals who are
experienced in reimbursement and business-to-business selling and through face-to-face meetings, phone calls, digital communications and advisory boards.
Competition
We compete on the basis of factors such as reputation, scientific expertise, service quality, management experience, performance record, customer satisfaction,
accessibility, flexibility, ability to respond to specific customer needs, integration skills, and product portfolio and price. Increased competition and/or a decrease in demand for
our clinical and pharma services may also lead to other forms of competition. We believe that our business has a variety of competitive advantages that allow us to compete
successfully in the marketplace. While we believe we compete effectively with respect to each of these factors, certain competitors of ours are substantially larger than us and
have greater capital, personnel, and other resources than we have. Many of our competitors also offer broader product lines outside of the molecular diagnostic testing market,
and many have greater brand recognition than we do. Moreover, our competitors may make rapid technological developments that may result in our technologies and products
becoming obsolete before we recover the expenses incurred to develop them or before they generate significant revenue. Increased competition may lead to pricing pressures
and competitive practices that could have a material adverse effect on our market share and our ability to attract new business opportunities as well as our business, financial
condition and results of operations.
We also compete with physicians and the medical community who use traditional methods or local institution-created tests to diagnose gastrointestinal and endocrine
cancers. We believe that we will need to continue to educate physicians and the medical community on the value and benefits of our molecular diagnostic tests in order to
change clinical practices and continue to support the use of molecular diagnostic tests in clinical guidelines.
Specifically, in regard to our thyroid diagnostic tests, Veracyte, Inc., or Veracyte, has a molecular thyroid nodule cancer diagnostic test (Afirma) that is the current market
leader and competes with our ThyGeNEXT® and ThyraMIR®v2 tests. Quest Diagnostics Incorporated, or Quest, currently offers a diagnostic test similar to the earlier version
of our ThyGeNEXT® test and distributes the Afirma test in partnership with Veracyte. CBLPath, Inc., or CBL, offers ThyroSeq®, a diagnostic test that analyzes genetic
alterations using next-generation sequencing. In addition, other thyroid based endocrine competitors include Qualisure Diagnostics/Protean Biodiagnostics., or other companies
we are not aware of.
We are currently not aware of any direct competitors to PancraGEN® that fully integrate clinical, imaging, cytology, and molecular information to stratify patients’ risk for
malignancy and inform physicians on the best course of action, i.e., surgery or surveillance and surveillance interval length. The University of Pittsburgh Medical Center now
offers PancreaSeq®, a Next Generation Sequencing “gene only” panel that focuses on the analysis of mutations in oncogenes and tumor suppressor genes, most of which may
help establish the type of pancreatic cyst present and some of which may help establish the presence of malignancy. Some of these related genomic regions are included in
PancraGEN®. This competitive laboratory test also does not follow current physician patient management decision-making which includes the integration of clinical features to
fully characterize a patient’s risk for pancreatic cancer. Importantly, there has been no long-term clinical validation or utility studies completed on any gene panel for pancreatic
cyst fluid other than that associated with PancraGEN®. PancraGEN® has been validated in multiple studies and peer reviewed publications and has been used in almost 70,000
patients with up to approximately 8 years of patient follow-up information.
Given the size of the Barrett’s Esophogus market, there are companies who are either in the process of developing assays and LDTs to identify the condition or who have
started to commercialize diagnostic tests, such as the methylated biomarker test currently being marketed by Lucid Diagnostics. We anticipate that this space will become
increasingly competitive as new diagnostic tests come to market in the future.
11
It is also possible that we face future competition from other laboratory-developed tests (LDT’s), developed by commercial laboratories or by other diagnostic companies
utilizing new, unforeseen technologies in the gastrointestinal and endocrine cancer molecular diagnostic tests space.
Research and Development
We continue to generate and publish clinical evidence mainly related to our key products, including ThyGeNEXT® and ThyraMIR®v2 and PancraGEN®.
We conduct our research and development activities at our CLIA-certified and CAP-accredited laboratory in Pittsburgh, Pennsylvania. Our research and development
efforts primarily focus on providing data and analyses necessary to support and improve our existing products on the market. Additionally, our research and development
activities provide product line extension of our existing products as well as new product opportunities utilizing our proprietary platforms and extensive bioinformatics
repositories and databases.
As part of our growth strategy, we may enter into collaborative relationships with research and academic institutions for the development of additional or enhanced tests to
further increase the depth and breadth of our test offerings. Where appropriate, we may also enter into licensing agreements with our collaborative partners to both license
intellectual property for use in our test panels as well as licensing such intellectual property out.
Our research and development costs are primarily clinical costs and were approximately $0.6 million and $0.7 million in 2023 and 2022, respectively.
Intellectual Property
Patents, trademarks and other proprietary rights are important to us. We generate our own intellectual property portfolio and hold numerous patents and patent applications
covering our existing and future products and technologies. As of December 31, 2023, we owned nine issued United States Patents. The U.S. patents are directed to, amongst
other things, methods of measuring carcinoembryonic antigen in a biological sample; methods for treating subject with a high risk of disease progression from Barrett’s
metaplasia to esophageal adenocarcinoma; and methods of treating a subject identified with a papillary thyroid carcinoma. As of December 31, 2023, we owned four issued
patents outside of the United States, one each in Australia, Canada, Japan, and Israel. As of December 31, 2023, we owned two pending patent applications in the United States.
Provided all maintenance fees and annuities are paid, our issued United States patents expire from 2031 through 2034, our foreign patents expire in 2031, and our pending
patent applications, if issued, are expected to expire between 2027 and 2038, absent any disclaimers, adjustments or extensions. Our patents are directed to certain of the
technologies relating to detecting, diagnosing, and classifying thyroid tumors, pancreatic cysts and other forms of gastrointestinal disorders, such as Barrett’s esophagus.
In addition to our own molecular diagnostic test development efforts, we are currently using, and intend to use in the future, certain tests and biomarkers that have been
developed by third parties or by us in collaboration with third parties. While a significant amount of intellectual property in the field of molecular diagnostic tests is already in
the public domain, ThyraMIR®v2, ThyGeNEXT®, and some of the future tests developed by us, or by third parties on our behalf for use in our tests, may require, that we
license the right to use certain intellectual property from third parties and pay customary royalties or make one time payments.
On August 13, 2014, we consummated an agreement to acquire certain fully developed thyroid and other tests in development for thyroid cancer, associated intellectual
property and a biobank with more than 5,000 patient tissue samples pursuant to an asset purchase agreement, or the Asuragen Asset Purchase Agreement. We paid $8.0 million
at closing and paid an additional $0.5 million to Asuragen for certain integral transition service obligations set forth in a transition services agreement, entered into concurrently
with the Asuragen Asset Purchase Agreement. We also entered into two license agreements with Asuragen (the Asuragen License Agreement and the CPRIT License
Agreement) relating to our ability to sell the fully developed diagnostic tests and other tests in development for thyroid cancer. Under the Asuragen License Agreement, we
owed a $500,000 milestone payment, all of which was paid in installments throughout 2016 and paid in full as of January 13, 2017. We are further obligated to pay royalties on
the future net sales of tests based on the miRInform® pancreas platform, if developed, on the future net sales of tests based on the miRInform® thyroid platform (i.e.,
ThyGeNEXT®) and potentially on certain other thyroid diagnostics tests.
12
In October 2014, we acquired RedPath Integrated Pathology Inc. (RedPath) which included its pancreatic and gastrointestinal assets. Additionally, we have a broad and
growing trademark portfolio. We have secured trademark registrations for the marks AccuCEA® (or TM), PancraGEN®, PanDNA®, BarreGEN® and miRInform® in the
United States, and miRInform® with the World Intellectual Property Organization.
We rely on a combination of trade secrets and proprietary processes to protect our intellectual property. We enter into non-disclosure agreements with certain vendors and
suppliers to attempt to ensure the confidentiality of our intellectual property. We also enter into non-disclosure agreements with our customers. In addition, we require that all
our employees sign confidentiality and intellectual property assignment agreements.
Raw Material and Suppliers
We procure reagents, equipment and other materials that we use to perform our tests from sole suppliers. We also purchase components used in our collection kits from
sole-source suppliers. Some of these items are unique to these suppliers and vendors. Our most significant suppliers for reagents and supplies include Thermo Fisher Scientific
Inc., Illumina, Inc., Qiagen N.V., and F. Hoffmann-La Roche AG. While we have developed alternate sourcing strategies for most of these materials and vendors, we cannot be
certain whether these strategies will be effective or the alternative sources will be available when we need them. If these suppliers can no longer provide us with the materials
we need to perform the tests and for our collection kits, if the materials do not meet our quality specifications or are otherwise unusable, if we cannot obtain acceptable
substitute materials, or if we elect to change suppliers, an interruption in test processing could occur, we may not be able to deliver patient reports and we may incur higher one-
time switching costs. Any such interruption may significantly affect our future revenue, cause us to incur higher costs, and harm our customer relationships and reputation. In
addition, in order to mitigate these risks, we maintain inventories of these supplies at higher levels than would be the case if multiple sources of supply were available. If our
test volume decreases or we switch suppliers, we may hold excess lab supplies with expiration dates that occur before use which would adversely affect our losses and cash
flow position. As we introduce any new test, we may experience supply issues as we ramp test volume.
Government Regulations and Industry Guidelines
The healthcare industry, and thus our business, is subject to extensive Federal, State, local and foreign regulation. Both Federal and State governmental agencies continue
to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal enforcement efforts. We believe that we have structured our business
operations and relationships with our customers to comply with applicable legal requirements. However, it is possible that governmental entities or other third parties could
interpret these laws differently and assert otherwise. We discuss below the statutes and regulations that are most relevant to our business and most frequently cited in
enforcement actions.
Regulations over Our Clinical Laboratory
The conduct and provision of our services are regulated under the CLIA. CLIA requires us to maintain Federal certification. CLIA imposes requirements relating to test
processes, personnel qualifications, facilities and equipment, recordkeeping, quality assurance and participation in proficiency testing. CLIA compliance and certification are
also a condition for participation by clinical laboratories in the Medicare Program and for eligibility to bill for services provided to governmental healthcare program
beneficiaries. As a condition of CLIA certification, our laboratory is subject to survey and inspection every other year, in addition to being subject to additional random
inspections. The biennial survey is typically conducted by a State agency, or, if the laboratory is accredited, a CMS-approved accreditation organization. Potential sanctions for
failure to meet these certification, accreditation and licensure requirements include suspension, revocation or limitation of a laboratory’s CLIA certification, accreditation or
license, which is necessary to conduct business, cancellation or suspension of the laboratory’s ability to receive Medicare or Medicaid reimbursement, as well as imposition of
plans to correct deficiencies, injunctive actions and civil monetary and criminal penalties. The loss or suspension of a CLIA certification, imposition of a fine or other penalties,
or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could harm our business.
13
In addition to CLIA requirements, we participate in the accreditation program of the College of American Pathologists (“CAP”). Under CMS requirements, accreditation
by CAP is sufficient to satisfy the requirements of CLIA. Failure to maintain CAP accreditation could have a material adverse effect on the sales of our tests and the results of
our operations.
In addition to CLIA certification, we are required to hold state licenses in certain states. Some state licensing requirements differ from federal regulation and may impose
additional or different requirements. CLIA does not preempt state laws that are more stringent. If we were to lose our CLIA certification, CAP Accreditation, or required state
licenses for our laboratory, whether as a result of revocation, suspension or limitation, we would no longer be able to provide our services, which would have a material adverse
effect on our business, financial condition and results of operations.
Our laboratory is also subject to licensing and regulation under Federal, State and local laws relating to hazard communication and employee right-to-know regulations,
and the safety and health of laboratory employees. Additionally, our laboratory is subject to applicable Federal and State laws and regulations and licensing requirements
relating to the handling, storage and disposal of hazardous waste and laboratory specimens, including the regulations of the Environmental Protection Agency, the Department
of Transportation, and the National Fire Protection Agency. The regulations of the United States Department of Transportation, Public Health Service and Postal Service apply
to the surface and air transportation of laboratory specimens. Typically, we use outside vendors who are contractually obligated to comply with applicable laws and regulations
to dispose of hazardous waste. These vendors are licensed or otherwise qualified to handle and dispose of such waste.
In addition to its comprehensive regulation of safety in the workplace, the United States Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus, by
preventing or minimizing any exposure through needle stick or similar penetrating injuries. Although we believe that we are currently in compliance in all material respects
with such Federal, State and local laws, failure to comply with such laws could subject us to denial of the right to conduct business, fines, criminal penalties and other
enforcement actions.
Potential U.S. Food and Drug Administration Regulation of Laboratory Developed Tests (“LDTs”)
While subject to oversight by CMS through its enforcement of CLIA, the FDA has claimed regulatory authority over all 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. However, in July 2014, the FDA issued two draft guidance documents: “Framework for
Regulatory Oversight of Laboratory Developed Tests,” which provided an overview of how the FDA would regulate LDTs through a risk-based framework, and “FDA
Notification and Medical Device Reporting for Laboratory Developed Tests,” which described how FDA would implement a proposed notification process applicable to LDT
manufacturers, including adverse event reporting.
On January 13, 2017, the FDA released a discussion paper on LDTs which outlined a substantially-revised approach for regulating LDTs. According to the 2017 discussion
paper, previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements (grandfathering), except for adverse event and malfunction
reporting. Since many LDTs currently on the market would be grandfathered in, pre-market review of new and significantly modified LDTs could be phased-in over a four-year
period, as opposed to the nine years proposed in the Framework for Regulatory Oversight draft guidance. In addition, tests introduced after the effective date, but before their
phase-in date, could continue to be offered during pre-market review.
The discussion paper notes that FDA will focus on analytical and clinical validity as the basis for marketing authorization. The evidence of the analytical and clinical
validity of all LDTs would be made publicly available. Laboratories developing LDTs would be encouraged to submit prospective change protocols in their pre-market
submission that outline specific types of anticipated changes, the procedures that will be followed to implement them and the criteria that will be met prior to implementation.
14
On September 29, 2023, the FDA published a proposed rule on LDTs, in which FDA proposes to end enforcement discretion for virtually all LDTs in five stages over a
four-year period from the date FDA publishes a final rule. In Phase 1 (effective one year post-finalization), laboratories would be required to comply with medical device
(adverse event) reporting and correction/removal reporting requirements. In Phase 2 (effective two years post-finalization), laboratories would be required to comply with all
other device requirements (e.g., registration/listing, labeling, investigational use), except for quality systems and premarket review. In Phase 3 (effective three years post-
finalization), laboratories would be required to comply with quality systems requirements. In Phase 4 (effective three and a half years post-finalization, but not before October
1, 2027), laboratories would be required to comply with premarket review requirements for high-risk tests (i.e., tests subject to premarket approval (PMA) requirement).
Finally, in Phase 5 (effective four years post-finalization, but not before April 1, 2028), laboratories would be required comply with premarket review requirements for
moderate- and low-risk tests (i.e., tests subject to de novo or 510(k) requirement). Unlike previous proposals, the proposed rule does not “grandfather” existing tests. The
content and timing of any final rule on LDTs is uncertain at this time.
Despite the regulatory approaches proposed over the past decade, FDA currently exercises enforcement discretion over most LDTs. If FDA ceases to exercise enforcement
discretion over LDTs, failure to comply with applicable requirements could result in 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.
Regulatory and legislative proposals have been introduced alongside FDA’s regulatory proposals. In March 2017, members of Congress posted a discussion draft of “The
Diagnostics Accuracy and Innovation Act” (DAIA). 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 was 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. 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 will include quality control and post-market reporting requirements. The FDA will 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
can result in enforcement action by the FDA, such as fines, product suspensions, warning letters, recalls, injunctions and other civil and criminal sanctions.
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. We cannot predict if September 2023 proposed rule, VALID (or any other bill or proposal) will be finalized in its current (or any other) form and cannot
quantify the effect of such proposals on our business.
Healthcare, Fraud, Abuse and Anti-Kickback Laws
The Anti-Kickback Statute makes it a felony for a person or entity, including a laboratory, to knowingly and willfully offer, pay, solicit or receive remuneration, directly or
indirectly, in order to induce business that is reimbursable under any Federal healthcare program. A violation of the Anti-Kickback Statute may result in imprisonment of up to
10 years and fines of up to $100,000 for each violation, or both. Convictions under the Anti-Kickback Statute result in mandatory exclusion from federal health care programs,
generally for a minimum of five years. In addition, HHS has the authority to impose civil assessments and fines and to exclude healthcare providers and others engaged in
prohibited activities from Medicare, Medicaid and other federal healthcare programs. Actions, which violate the Anti-Kickback Statute, also incur liability under the Federal
False Claims Act, discussed in more detail below, which prohibits, among other things, knowingly presenting, or causing to be presented, a false or fraudulent claim for
payment to the U.S. Government.
15
Although the Anti-Kickback Statute applies only to federal health care programs, a number of states have passed statutes substantially similar to the Anti-Kickback Statute,
which prohibits similar conduct toward other payers, including some that apply to all other health plans and third-party payers. Federal and state law enforcement authorities
scrutinize arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to improperly induce
patient care referrals or induce the purchase or prescribing of particular products or services. The law enforcement authorities, the courts and Congress have also demonstrated a
willingness to look behind the formalities of a transaction to determine the underlying purpose of payments between healthcare providers and actual or potential referral
sources. Several courts have taken a broad interpretation of the scope of the Anti-Kickback Statute, holding that the statute may be violated if merely one purpose of a payment
arrangement is to induce referrals for or purchases of items or services reimbursable by federal health care programs.
In addition to the Anti-Kickback Statute, the U.S. enacted the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, as part of the Substance Use-Disorder Prevention
that Promotes Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act). EKRA is an all-payer anti-kickback law that makes it a criminal offense to,
among other things, pay any remuneration to induce referrals to, or in exchange for an individual using the services of a recovery home, a substance use clinical treatment
facility, or laboratory. Although it appears that EKRA was intended to reach patient brokering and similar arrangements to induce patronage of substance use recovery and
treatment, the language in EKRA is broadly written. The term “laboratory” is defined broadly and without reference to any connection to substance use disorder treatment.
EKRA is a criminal statute and violations can result in fines of up to $200,000, up to 10 years in prison, or both, per violation. As drafted, EKRA does not clearly protect
incentive compensation to sales employees, a practice that is common in the industry. The government has not issued or proposed regulations or other guidance interpreting
EKRA.
Several other healthcare fraud and abuse laws could have an effect on our business. For example, provisions of the Social Security Act permit Medicare and Medicaid to
exclude an entity that charges the federal healthcare programs substantially in excess of its usual charges for its services. The terms “usual charge” and “substantially in excess”
are ambiguous and subject to varying interpretations. Further, the Federal False Claims Act, discussed in more detail below, prohibits, among other things, a person from
knowingly submitting a claim, making a false record or statement in order to secure payment or retaining an overpayment by the federal government. In addition to actions
initiated by the government itself, the statute authorizes actions to be brought on behalf of the federal government by a private party, known as a relator, having knowledge of
the alleged fraud. Because the complaint is initially filed under seal, the action may be pending for some time before the defendant is even aware of the action. If the
government is ultimately successful in obtaining redress in the matter or if the relator succeeds in obtaining redress without the government’s involvement, then the relator will
receive a percentage of the recovery. Penalties under the federal False Claims Act can include up to three times the damages sustained by the federal program and up to almost
$14,000 and $28,000 per claim (these per-claim penalties are adjusted for inflation from time to time). Further, numerous states have enacted state false claims acts that apply to
state government programs. Finally, the Social Security Act includes its own provisions that prohibit the filing of false claims or submitting false statements in order to obtain
payment. Violation of these provisions may result in fines, imprisonment or both, and possible exclusion from Medicare or Medicaid programs.
We are also subject to the federal physician self-referral prohibitions, commonly known as the Stark Law, and state equivalents. These restrictions generally prohibit us
from billing a patient or Medicare for any clinical laboratory services and certain other “designated health services,” when the physician ordering the service, or any member of
such physician’s immediate family, has an investment interest in or compensation arrangement with us, unless the arrangement meets an exception to the prohibition. The
government has also claimed in FCA litigation that the Stark Law applies to Medicaid claims. Some states have also enacted state Stark Law equivalents that can apply, for
example, to that state’s Medicaid plan and/or commercial payors.
16
Persons or entities found to violate the Stark Law are required to refund any payments received pursuant to a referral prohibited by these laws to the patient, or the
Medicare program, as applicable. Sanctions for a violation of the Stark Law include the following:
● denial of payment for the services provided in violation of the prohibition;
● refunds of amounts collected by an entity in violation of the Stark Law;
● a civil penalty of up to $29,899 for each service arising out of the prohibited referral;
● possible exclusion from federal healthcare programs, including Medicare and Medicaid; and
● a civil penalty of up to $199,338 against parties that enter into a scheme to circumvent the Stark Law’s prohibition.
These penalty amounts are adjusted each year for inflation. The Stark Law prohibitions apply regardless of the reasons for the financial relationship and the referral. No
finding of intent to violate the Stark Law is required for a violation. In addition, violations of the Stark Law may also serve as the basis for liability under the Federal False
Claims Act.
Additionally, the Federal Civil Monetary Penalties Law prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program
beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services reimbursable by
Medicare or a state healthcare program, unless an exception applies.
We do retain healthcare practitioners as key opinion leaders providing consultation in various aspects of the business. These arrangements, as any arrangement that includes
compensation to a healthcare provider may trigger Federal or State anti-kickback, Stark Law, and other fraud and abuse liability. Our arrangements with healthcare providers
are designed to meet available safe harbors and exceptions provided in the anti-kickback laws and Stark laws and other relevant laws or otherwise comply with such laws.
There is no guarantee that the government will find that these arrangements are designed properly or that they do not trigger liability. Under existing laws, all arrangements
must have a legitimate purpose and compensation must be fair market value. These terms require some subjective analysis. Safe harbors in the anti-kickback laws do not
necessarily equate to exceptions in the Stark Law; and there is no guarantee that the government will not have issue with the relationships between the laboratories and the
healthcare providers.
HIPAA, Fraud and Privacy Regulations
The Federal government’s efforts to combat fraud in the healthcare setting were consolidated and strengthened under Public Law 104-191, the Health Insurance Portability
and Accountability Act of 1996, or HIPAA. HIPAA aimed to combat fraud committed against all health plans, both public and private by, among other things creating two new
Federal offenses: healthcare fraud (18 U.S. Code § 1347) and false statements relating to healthcare matters (18 U.S. Code § 1035). These provisions prohibit: (1) the knowing
and willful execution, or attempted execution, of a scheme or artifice (a) to defraud any healthcare benefit program (including private payers), or (b) to obtain, by means of
false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any health care benefit program, in
connection with the delivery of or payment for healthcare benefits, items, or services; and (2) the knowing and willful (a) falsification, concealment or covering up of a material
fact by any trick, scheme or device, or (b) making of any materially false, fictitious or fraudulent statement or representation, or making or using any materially false writing or
document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry, in connection with the delivery of or payment for healthcare benefits,
items or services. A violation of these provisions is a felony and may result in fines, imprisonment and/or exclusion from government-sponsored programs.
17
HIPAA, along with the Health Information Technology for Economic and Clinical Health Act (HITECH) and the various regulations promulgated thereunder, also establish
uniform standards governing the conduct of certain electronic healthcare transactions and the security and privacy of individually identifiable health information maintained or
transmitted by certain healthcare providers, health plans and healthcare clearinghouses, which are referred to as “covered entities,” as well as individuals or entities to the extent
they use such individually identifiable health information perform functions as a “business associate” for or on behalf of a covered entity. Individually identifiable health
information maintained by covered entities and business associates is referred to as “protected health information” or “PHI.” The regulations promulgated under HIPAA
governing covered entities and business associates include the following subparts: “Privacy of Individually Identifiable Health Information”, which establishes conditions for
the permissible use and disclosure of protected health information by covered entities and establishes certain rights of individuals who are the subject of such information (45
C.F.R. §§ 164.500, et seq.); “Administrative Requirements”, which establishes electronic standards for common healthcare transactions, such as claims information, plan
eligibility, payment information and the use of electronic signatures (45 C.F.R. §§ 162.100, et seq.); “Security Standards for the Protection of Electronic Protected Health
Information”, which requires covered entities and their business associates to implement and maintain certain security measures to safeguard certain electronic protected health
information (45 C.F.R. §§ 164.302, et seq.); and “Notification in the Case of Breach of Unsecured Protected Health Information”, which requires business associates to provide
certain notifications to covered entities and covered entities to provide certain notifications to affected individuals, HHS and, in some cases, relevant media outlets following a
breach of unsecured protected health information (45 C.F.R. §§ 164.400, et seq.). As a covered entity, and also in our capacity as a business associate to certain of our
customers, we are subject to these standards. We may also be liable for violations of HIPAA by any individual or entity, which may include a business associate, that is acting as
our agent under the federal common law of agency. While the government intended this legislation to reduce administrative expenses and burdens for the healthcare industry,
our compliance with certain provisions of these standards entails significant costs for us and requires us to follow specific policies and procedures when we use and disclose
protected health information. If we are found to be in violation of HIPAA, HITECH, or their respective implementing regulations, we may be subject to potentially significant
penalties, including civil and criminal penalties, damages and fines, and may incur damage to our reputation. Such enforcement actions could have an adverse effect on our
business.
In addition to Federal regulations issued under HIPAA and HITECH, many states have enacted privacy and security statutes or regulations regarding individually
identifiable health information that, in some cases, are more stringent than those issued under HIPAA and HITECH. In those cases, it may be necessary to modify our planned
operations and procedures to comply with the more stringent laws as HIPAA and HITECH do not preempt state laws to the extent such state laws are broader in scope, impose
more stringent requirements for individually identifiable health information, or give individuals more rights with respect to their individually identifiable health information. If
we fail to comply with applicable state laws, rules, or regulations, we could be subject to additional sanctions or other liabilities under those laws, rules, and regulations.
Federal and State Consumer Protection Laws
The Federal Trade Commission, or FTC, is an independent U.S. law enforcement agency charged with protecting consumers and enhancing competition across broad
sectors of the economy. In 2022, the FTC has said that it will be evaluating new data privacy regulations, which, if adopted, could impact our operations. The FTC’s authority
with respect to data privacy and security comes from Section 5 of the FTC Act. The FTC uses its broad grant of authority to regulate data privacy and security, using its powers
to investigate and bring lawsuits. Where appropriate, the FTC can seek a variety of remedies, such as but not limited to requiring the implementation of comprehensive privacy
and security programs, biennial assessments by independent experts, monetary redress to consumers, and provision of robust notice and choice mechanisms to consumers.
In addition to the FTC Act, many U.S. states have unfair and deceptive acts and practices statutes, known as UDAP statutes, that are substantively similar to the FTC Act
and have been applied in the privacy and data security context. These UDAP statutes vary in substance and strength from state to state. Many have broad prohibitions against
unfair and deceptive acts and practices. These statutes generally allow for private rights of action, and are enforced by the states’ Attorneys General.
18
More than a dozen states have adopted comprehensive consumer privacy laws that are in effect or will take effect within the next 12 to 24 months, and regulate how certain
for-profit businesses collect, use, and disclose the personal information of consumers who reside in each respective state. While the specific consumer rights vary from state-to-
state, generally these laws confer to consumers in the state the right to: receive notice of information collection and use practices; access, delete, correct, or transfer personal
information and opt out of the “sale” of their personal information or the use of their information for targeted advertising. These laws also require companies to adopt
reasonable measures to safeguard the personal information that is collected and regulate categories of “sensitive” data such as information associated with minors, citizenship,
and other personal data for which these state laws have designated special protection. These laws do not, however, apply to personal information that constitutes PHI under
HIPAA, de-identified data as defined under HIPAA or in some instances, HIPAA-regulated entities. As a result, we do not or likely will not have compliance obligations with
respect to most testing and patient information we collect and process. However, we are required to comply with these consumer privacy laws insofar as we collect other
categories of consumers’ personal information, for example from website visitors. These state consumer privacy laws are generally enforced by the respective state Attorney
General. California’s law also includes a private right of action for certain data breaches.
Washington State has passed the My Health My Data Act or MHMDA, which comes into effect on March 31, 2024. MHMDA regulates consumer health data that is not
otherwise subject to HIPAA. The definition of “consumer health data” is broad and applies to a variety of health-related information including non-health information that is
used to infer some aspect of current or future medical conditions. MHMDA requires additional transparency requirements related to how companies handle non-HIPAA covered
health data as well as additional technical safeguards for “consumer health data.” MHMDA also requires that companies obtain the consent of individuals for certain uses of
their “consumer health data.” MHMDA also gives Washington residents a variety of rights, similar to those in the state consumer privacy laws discussed above, and related to
the resident’s “consumer health data.” Unlike the consumer state laws, MHMDA includes a private right of action. Should the company become subject to an action brought
under MHMDA, it could have an impact on our operations. Nevada and Connecticut has passed substantially similar consumer privacy health laws that have or will come into
effect in 2024. However, the Nevada and Connecticut laws do not include a private right of action.
Dozens of other states in the United States are currently considering similar, consumer data privacy laws, which could impact our operations if enacted.
Healthcare Reform
The United States and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system. The United States
government, state legislatures and foreign governments also have shown significant interest in implementing cost-containment programs to limit the growth of government-paid
healthcare costs, including price controls, restrictions on reimbursement and requirements for substitution of generic products for branded prescription drugs.
In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA (also known as the Affordable Care Act), as amended by the
Health Care and Education Reconciliation Act, a sweeping law intended to broaden access to health insurance and coverage for patients, reduce or constrain the growth of
healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees
on the health industry, coordinate and promote research on comparative clinical effectiveness of different technologies and procedures, and impose additional health policy
reforms. PPACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorous coverage criteria, new payment
methodologies and in additional downward pressure on pricing and implemented changes which significantly affect the pharmaceutical, medical device and clinical laboratory
industries. There have been legislative and administrative actions to make changes to PPACA, including repeal and replacement of certain provisions.
The PPACA has also been subject to challenges in the courts; however, the U.S. Supreme Court most recently upheld the surviving elements of the law in 2021.
19
Further changes to the PPACA remain possible, although the Biden Administration has signaled that it plans to build on the Affordable Care Act and expand the number of
people who are eligible for subsidies under it. President Biden has used executive orders to undo changes to the PPACA made by the Trump administration and indicated he
would advocate for legislation to build on the PPACA. It is unknown what form any such changes or any law would take, and how or whether it may affect our business in the
future. We expect that changes or additions to the PPACA, the Medicare and Medicaid programs, and changes stemming from other healthcare reform measures, especially with
regard to healthcare access, financing or other legislation in individual states, could have a material adverse effect on the healthcare industry.
We expect that additional federal, state and foreign healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which could result in limited coverage and reimbursement and reduced demand for our products, once approved, or
additional pricing pressures.
Third Party Coverage and Reimbursement for our Clinical Services
Our customers’ bills are paid by many different payer groups. The majority of reimbursement dollars for traditional laboratory services are provided by traditional
commercial insurance products, most notably preferred provider organizations, or PPOs, and other managed care plans, as well as government healthcare programs, such as
Medicare and Medicaid. PPOs, HMOs and other managed care plans typically contract with a limited number of laboratories and then designate the laboratory or laboratories to
be used for tests ordered by participating physicians. We are currently an out-of-network provider with most payers, which means we do not have a contract with payers to pay
a specific rate for our tests. We are subject to applicable state laws regarding who should be billed, how they should be billed, how business should be conducted, and how
patient obligations regarding cost sharing should be handled. In addition, if we become an “in-network” provider for certain payers in the future, we will also be subject to the
terms of contracts (which could include reduced reimbursement rates) and may be subject to discipline, breach of contract actions, non-renewal or other contractually provided
remedies for non-compliance with the contract’s requirements and/or applicable laws.
We generally bill third-party payers and individual patients for testing services on a test-by-test basis. Third-party payers include Medicare, private insurance companies,
institutional direct clients and Medicaid, each of which has different billing requirements. Medicare reimbursement programs are complex and often ambiguous, and are
continuously being evaluated and modified by CMS. Our ability to receive timely reimbursements from third-party payers is dependent on our ability to submit accurate and
complete billing statements, and/or correct and complete missing and incorrect billing information. Missing and incorrect information on reimbursement submissions slows
down the billing process and increases the aging of accounts receivable. We must bill Medicare directly for tests performed for Medicare patients and must accept Medicare’s
fee schedule for the covered tests as payment in full. State Medicaid programs are generally prohibited from paying more than the Medicare fee schedule. Since 2021, we have
been contracted with XIFIN, Inc. (“XIFIN”), a healthcare billing services management company, to help manage our third-party billing.
Some billing arrangements require us to bill multiple payers, and there are several other factors that complicate billing (e.g., disparity in coverage and information
requirements among various payers; and incomplete or inaccurate billing information provided by ordering physicians). Several private payers have implemented pre-
authorization requirements for molecular and genetic testing, including Anthem Blue Cross Blue Shield and United Healthcare, as well as various lab benefit companies such as
American Imaging Management, Inc., or AIM, and Beacon Lab Benefits Solutions, or Beacon. In addition, more commercial payers are contracting with and delegating risk for
lab services costs to lab benefits management companies (e.g. eviCore healthcare, AIM, and Beacon). This requires us to go through their technology assessment process to
secure coverage and obtain a contract as an in-network lab provider for our services. We incur additional costs as a result of our participation in Medicare and Medicaid
programs because diagnostic testing services are subject to complex, stringent and frequently ambiguous federal and state laws and regulations, including those relating to
coverage, billing and reimbursement. Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies and procedures adds
further cost and complexity to the billing process. Further, our billing systems require significant technology investment and, as a result of marketplace demands, we need to
continually invest in our billing systems. Changes in laws and regulations could further complicate our billing and increase our billing expense. CMS establishes procedures
and continuously evaluates and implements changes to the reimbursement process and requirements for coverage.
20
As an integral part of our billing compliance program, we investigate reported failures or suspected failures to comply with federal and state healthcare reimbursement
requirements. Any Medicare or Medicaid overpayments are reimbursed by us. As a result of these efforts, we have periodically identified and reported overpayments,
reimbursed the payers for overpayments and taken appropriate corrective action.
Historically, due to the nature of our business, we have performed requested testing and have reported test results regardless of collectability or form of reimbursement. We
submit claims for reimbursement on a best efforts basis including the use of a third-party revenue cycle management firm. If at times the billing information is incorrect or
incomplete, we subsequently attempt to contact the healthcare provider or patient to obtain any missing information and to rectify incorrect billing information. Missing or
incorrect information on requisitions complicates and slows down the billing process and may also impact revenue recognition. The increased use of electronic ordering reduces
the incidence of missing or incorrect information, and we are seeking to electronically integrate with more and more payers and clients.
There are a number of factors that influence coverage and reimbursement for molecular diagnostic tests. In the United States, the American Medical Association assigns
specific CPT codes, which are necessary for reimbursement of molecular diagnostic tests. Once the CPT code is established, CMS establishes reimbursement payment levels
and coverage rules under Medicare, and private payers establish rates and coverage rules independently. However, the availability of a CPT code is not a guarantee of coverage
or adequate reimbursement levels, and the revenues generated from our tests will depend, in part, on the extent to which third-party payers provide coverage and establish
adequate reimbursement levels.
United States and other government regulations governing coverage and reimbursement for molecular diagnostic testing may affect, directly or indirectly, the design of our
tests and the potential market for their use. The availability of third-party reimbursement for our tests and services may be limited or uncertain. Third-party payers may deny
coverage if they determine that the tests or service has not received appropriate FDA or other government regulatory clearances, is not used in accordance with cost-effective
treatment methods as determined by the payer, or is deemed by the third-party payer to be experimental, unnecessary or inappropriate. Furthermore, third-party payers,
including Federal and State healthcare programs, government authorities, private managed care providers, private health insurers and other organizations, frequently challenge
the prices, medical necessity, and cost-effectiveness of healthcare products and services, including laboratory tests. Such payers may limit coverage of our tests to specific,
limited circumstances, may not provide coverage at all, or may not provide adequate reimbursement rates, if covered. Further, one payer’s determination to provide coverage
does not assure that other payers will also provide coverage for the test. Adequate third-party reimbursement may not be available to enable us to maintain price levels
sufficient to maintain our revenue and growth. Coverage policies and third-party reimbursement rates may change at any time.
Government payers, such as Medicare and Medicaid, have taken steps and are expected to continue to take steps to control the cost, utilization and delivery of healthcare
services, including clinical test services. For example, Medicare has adopted policies under which it does not pay for many commonly ordered clinical tests unless the ordering
physician has provided an appropriate diagnosis code supporting the medical necessity of the test. Physicians are required by law to provide diagnostic information when they
order clinical tests for Medicare and Medicaid patients.
Currently, Medicare does not require the beneficiary to pay a co-payment for diagnostic information services reimbursed under the Clinical Laboratory Fee Schedule.
Certain Medicaid programs require Medicaid recipients to pay co-payment amounts for diagnostic information services.
The Medicare Part B program contains fee schedule payment methodologies for clinical testing services performed for covered patients. Historically, the Medicare Clinical
Laboratory Fee Schedule, or CLFS, has been subject to local variations in pricing. In April 2014, President Obama signed the Protecting Access to Medicare Act of 2014, or
PAMA, which included a substantial new payment system for clinical laboratory tests under the CLFS. Under PAMA, CLFS rates are based upon the weighted median of
private payor rates reported for each type of laboratory test. PAMA requires laboratories that receive a majority of their Medicare revenue from payments made under the CLFS
and the Physician Fee Schedule, and at least $12,500 in CLFS revenue during the six month data collection period to report private payor data collected from such 6-month
period (January 1 through June 30 in the applicable year) to CMS between January 1 through March 31 of the following year. CMS posted the first new Medicare CLFS rates
(based on weighted median private payer rates) in November 2017 and the new rates became effective on January 1, 2018. CMS published final rules implementing these
changes in 2016 and 2018. The result of the PAMA calculations was an increase in our reimbursement rate for ThyGenX® of approximately 40% for our Medicare volume.
However, on July 26, 2018, we received a coding update from CMS, which changed the billable procedure code (CPT) for ThyGeNEXT®. This code change resulted in a
reduction of the fee schedule for payments to us. We have recently presented clinical data to CMS adding additional markers to the panel that we run that increase our gene
families above 50. If approved, reimbursement for the new panel will exceed the previously approved rate. There can be no assurances that our request will be successful and
that the rate will be escalated.
21
PAMA, as amended by the Protecting Medicare and American Farmers from Sequester Cuts Act, among other laws, revised payment reductions and the data reporting
schedule for approved Clinical Diagnostic Laboratory Tests (“CDLTs”) that are not ADLTs. Under these laws, the next data reporting period is January 1, 2025 through March
31, 2025, and will be based upon the data collected during the January 1, 2019 to June 30, 2019 period. Any reductions to payment rates resulting from the new methodology
are limited to 10% per test per year in each of the years 2018 through 2020 and to 15% per test per year in each of the years 2025 through 2027. Payments will not be reduced
for 2021-2024 for CDLTs.
Under the revised Medicare Clinical Laboratory Fee Schedule, reimbursement for clinical laboratory testing was reduced for most tests in 2018, 2019, and 2020. PAMA (as
amended) calls for further revisions of the Medicare Clinical Laboratory Fee Schedule for years after 2024, based on surveys of market rates.
Penalties for violations of laws relating to billing government healthcare programs and for violations of federal and state fraud and abuse laws include: (1) exclusion from
participation in Medicare/Medicaid programs; (2) asset forfeitures; (3) civil and criminal fines and penalties; and (4) the loss of various licenses, certificates and authorizations
necessary to operate our business. Civil monetary penalties for a wide range of violations may be assessed on a per violation basis. A parallel civil remedy under the federal
False Claims Act provides for penalties on a per violation basis, plus damages of up to three times the amount claimed.
Historically, most Medicare and Medicaid beneficiaries were covered under the traditional Medicare and Medicaid programs administered by the federal government.
Reimbursement from traditional Medicare and Medicaid programs represented approximately 51% and 45% of our consolidated net revenues during 2023 and 2022,
respectively. Over the last several years, the federal government has continued to expand its contracts with private health insurance plans for Medicare beneficiaries and has
encouraged such beneficiaries to switch from the traditional programs to the private programs, called “Medicare Advantage” programs. There has been growth of health
insurance providers offering Medicare Advantage programs and of beneficiary enrollment in these programs. Commercial health plans that might not cover one or all of our
tests for their commercially insured members are required to follow the Novitas LCD coverage policy for their Medicare Advantage members. To the extent we maintain the
LCD coverage policies with Novitas for our products, any shift of members from traditional Medicare to Medicare Advantage plans doesn’t represent a risk of lost revenue. In
recent years, in an effort to control costs, states also have mandated that Medicaid beneficiaries enroll in private managed care arrangements.
The current position of our laboratory is that it does not meet the definition of an “Applicable Manufacturer” under the “Sunshine Act” section of PPACA and therefore is
not subject to the disclosure requirements contained in PPACA. However, as new regulations are implemented and diagnostic tests reclassified, this may change and the
laboratory business may be subject to PPACA as are other companies. There is no guarantee that our interpretation of the law is now or will be in the future consistent with
government guidance and interpretation.
In December 2019, our Medicare Administrative Contractor (MAC) issued a new draft local coverage determination (LCD) for our ThyGeNEXT® test, representing an
increase of approximately $2,400 per assay over previous reimbursement coverage. This increase in reimbursement rates reflected the expansion of the ThyGeNEXT® panel to
aid in identifying the appropriate patients for surgery.
22
In January 2022, the Company announced that CMS issued a new billing policy whereby CMS would no longer reimburse for the use of the Company’s ThyGeNEXT®
and ThyraMIR® tests when billed together by the same provider/supplier for the same beneficiary on the same date of service. On February 28, 2022, the Company announced
that the National Correct Coding Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for
ThyGeNEXT® (0245U) and ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. CMS was previously reimbursing the Company for one of its two
thyroid tests, and had agreed to retroactively reimburse for the second test once they had completed their internal administrative adjustments. We were notified by CMS/NCCI
that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022. As of the date of this filing, the Company has no remaining
outstanding collections regarding this matter and is fully up to date with CMS. Effective January 1, 2023, the gapfill price for ThyGeNEXT® was set at $1,266.07.
Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by Novitas. If finalized, this Proposed
LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular tests, PancraGEN®. On June 5, 2023 we
announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which if implemented, 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, we 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 the updated
proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN® and the related Point2® fluid chemistry tests for amylase, CEA, and glucose. In
the event Novitas ultimately restricts coverage for the PancraGEN® test, our liquidity could be negatively impacted.
Reporting Segments
We operate under one segment which is the business of developing and selling diagnostic clinical services.
Employees
As of February 29, 2024, we had 108 full time employees and 108 total employees. We are not party to a collective bargaining agreement with any labor union.
Corporate Information
We were originally incorporated in New Jersey in 1986 and began commercial operations as PDI, Inc., a contract sales organization or CSO in 1987. In connection with
PDI, Inc.’s initial public offering, it reincorporated in Delaware in 1998. In 2015 the CSO business and assets were sold, and we operated our molecular diagnostics business as
Interpace Diagnostics Group, Inc. (IDXG). We conduct our business through our wholly-owned subsidiaries, Interpace Diagnostics, LLC, which was formed in Delaware in
2013 and Interpace Diagnostics Corporation (formerly known as RedPath Integrated Pathology, Inc.), which was formed in Delaware in 2007, On November 12, 2019, we
changed the name of Interpace Diagnostics Group, Inc. to Interpace Biosciences, Inc. Our executive offices are located at Waterview Plaza, Suite 310, 2001 Route 46,
Parsippany, New Jersey 07054. Our telephone number is (855) 776-6419.
Business Development
Series B Preferred Stock Investment by 1315 Capital and Ampersand
On January 10, 2020, we entered into a Securities Purchase and Exchange Agreement (the “Securities Purchase and Exchange Agreement”) with 1315 Capital II, L.P., a
Delaware limited partnership (“1315 Capital”), and Ampersand (together with 1315 Capital, the “Investors”) pursuant to which we sold to the Investors, in a private placement
pursuant to Regulation D and Section 4(a)(2) under the Securities Act, an aggregate of $20,000,000 in Series B Preferred Stock, at an issuance price per share of $1,000.
Pursuant to the Securities Purchase and Exchange Agreement, 1315 Capital purchased 19,000 shares of Series B Preferred Stock at an aggregate purchase price of $19,000,000
and Ampersand purchased 1,000 shares of Series B Preferred Stock at an aggregate purchase price of $1,000,000.
23
In addition, we exchanged $27,000,000 of the Company’s existing Series A Preferred Stock held by Ampersand, represented by 270 shares of Series A Preferred Stock,
which represented all of the Company’s issued and outstanding Series A Preferred Stock, for 27,000 newly created shares of Series B Preferred Stock (such shares of Series B
Preferred Stock, the “Exchange Shares” and such transaction, the “Exchange”). Following the Exchange, no shares of Series A Preferred Stock remain designated, authorized,
issued or outstanding. Under the terms of the Securities Purchase and Exchange Agreement, Ampersand also agreed to waive all dividends and weighted-average anti-dilution
adjustments accrued to date on the Series A Preferred Stock.
For so long as each of Ampersand and 1315 Capital holds at least sixty percent (60%) of the Series B Preferred Stock issued to it on January 15, 2020, such Investor will be
entitled to elect two directors to the Board, provided that one of the directors qualifies as an “independent director” under Rule 5605(a)(2) of the listing rules of the Nasdaq
Stock Market (or any successor rule or similar rule promulgated by another exchange on which the Company’s securities are then listed or designated) (“Independent
Director”). However, if at any time such Investor holds less than sixty percent (60%), but at least forty percent (40%), of the Series B Preferred Stock issued to them on January
15, 2020, such Investor would only be entitled to elect one director to the Board. Any director elected pursuant to the terms of the Certificate of Designation may be removed
without cause by, and only by, the affirmative vote of the holders of Series B Preferred Stock. A vacancy in any directorship filled by the holders of Series B Preferred Stock
may be filled only by vote or written consent in lieu of a meeting of such holders of Series B Preferred Stock or by any remaining director or directors elected by such holders
of Series B Preferred Stock. As previously disclosed in Current Reports on Form 8-K filed with the SEC on November 16, 2023 and December 12, 2023, Edward Chan, a
director designated by 1315 Capital, and Robert Gorman, a director designated by Ampersand, resigned from the Board on November 15, 2023 and December 7, 2023,
respectively. Following these resignations, 1315 Capital and Ampersand have two designated directors out of the five directors currently serving on the Board.
The Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (the “Certificate of Designation”) provides that 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 our common stock equal to dividing the amount
equal to the greater of the stated value of $1,000 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 our common stock immediately prior to a liquidation, by six dollars ($6.00) (subject to adjustment in the event of any
stock dividend, stock split, combination, or other similar recapitalization affecting such shares). The aggregate number of shares of our common stock that may be issued
through conversion of the currently outstanding Series B Preferred Stock is 7,833,334 shares (subject to appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares). On any matter presented to our stockholders 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 our 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, 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.
24
The Series B Preferred Stock entitles the holders thereof to certain protective provisions. In particular, for so long as any shares of Series B Preferred Stock are outstanding,
the written consent of the holders of at least seventy five percent (75%) of the then outstanding shares of Series B Preferred Stock (voting as a single class) is required for us to
amend, waive, alter or repeal the preferences, rights, privileges or powers of the holders of the Series B Preferred Stock, amend, alter or repeal any provision of the Certificate
of Designation in a manner adverse to the holders of the Series B Preferred Stock, authorize, create or issue any equity securities senior to or pari passu with the Series B
Preferred Stock, or increase or decrease the number of directors constituting the Board. Moreover, for so long as thirty percent (30%) of the Series B Preferred Stock
outstanding as of January 15, 2020 remains outstanding (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares, including the Reverse Stock Split effected in January 2020), the written consent of the holders representing at least seventy-five percent
(75%) of the of the outstanding shares of Series B Preferred Stock (voting as a single class) is required for us to: (A) authorize, create or issue any debt securities for borrowed
money or funded debt (1) pursuant to which we issue shares, warrants or any other convertible security, or (2) in excess of $4,500,000 initially, with such amount to be
increased in connection with an aggregate consolidated revenue milestone, but excluding certain specified permitted transactions; (B) merge with or acquire all or substantially
all of the assets of one or more other companies or entities with a value in excess of $20,000,000, to be increased in connection with an aggregate consolidated revenue
milestone; (C) materially change our business; (D) consummate any Liquidation (as defined in the Certificate of Designation); (E) transfer material intellectual property rights
other than in the ordinary course of business; (F) declare or pay any cash dividend or make any cash distribution on any of our equity interests other than the Series B Preferred
Stock; (G) repurchase or redeem any shares of our capital stock, except for the redemption of the Series B Preferred Stock pursuant to the terms of the Certificate of
Designation, or repurchases of our common stock under agreements previously approved by the Board with employees, consultants, advisors or others who performed services
for us in connection with the cessation of such employment or service; (H) incur any additional individual debt, indebtedness for borrowed money or other additional liabilities
pursuant to we issue shares, warrants or any other convertible security, or incur any individual debt, indebtedness for borrowed money or other liabilities pursuant to which we
do not issue shares, warrants or any other convertible security exceeding, in each case, $4,500,000 initially, with such amount to be increased in connection with an aggregate
consolidated revenue milestone, but excluding certain specified permitted transactions; (I) change any of our accounting methods, except for those changes required by GAAP
or applicable regulatory agencies or authorities; or (J) conduct a public offering of common stock registered with the SEC, including any at-the-market offering of our common
stock.
The holders of our Series B Preferred Stock have preferential rights with respect to distributions upon a liquidation or sale of the Company, including certain business
combinations or sales of assets deemed to be a liquidation. Accordingly, no distributions upon liquidation may be made to the holders of common stock until the holders of the
Series B Preferred Stock have been paid their liquidation preference. As a result, it is possible that, on a liquidation event (including a sale of the Company) and depending on
the price thereof, all amounts available for the holders of equity of the Company would be paid to the holders of Series B Preferred Stock, and that the holders of common stock
would not receive any payment. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or Deemed Liquidation (as defined in the Certificate
of Designation) (a “Liquidation”), the holders of shares of Series B Preferred Stock then outstanding will be entitled to be paid out of the assets of the Company available for
distribution to its stockholders (on a pari passu basis with the holders of any class or series of preferred stock ranking on liquidation on a parity with the Series B Preferred
Stock), and before any payment will be made to the holders of common stock or any other class or series of preferred stock ranking on liquidation junior to the Series B
Preferred Stock by reason of their ownership thereof, an amount per share of Series B Preferred Stock equal to the greater of (i) the Stated Value of such share of Series B
Preferred Stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had each such share been converted into common
stock immediately prior to such Liquidation.
During April 2020, the Company applied for various federal stimulus loans, grants and advances made available under Title 1 of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act, including a loan request under the Small Business Administration (SBA) Paycheck Protection Program (PPP). In connection with the
Company’s application for the PPP loan, both Ampersand and 1315 Capital consented to, and agreed to vote their shares of Series B Preferred Stock in favor of any
“Fundamental Action” taken by the Company as determined by the Company’s Board of Directors. “Fundamental Actions” include the Company’s ability to a) authorize, create
or issue any debt securities for borrowed money or funded debt; b) merge with or acquire all or substantially all of the assets of one or more other companies or entities with a
value in excess of $20 million; c) transfer, by sale, exclusive license or otherwise, material intellectual property rights of the Company or any of its direct or indirect
subsidiaries, other than those accomplished in the ordinary course of business; d) declare or pay any cash dividend or make any cash distribution on any equity interests of the
Company other than the Series B Shares; e) incur any additional individual debt, indebtedness for borrowed money or other additional liabilities; and f) change any accounting
methods or practices of the Company, except for those changes required by GAAP or applicable regulatory agencies or authorities. Subsequently, the Company and Ampersand
agreed that Ampersand no longer was required to vote its shares of Series B Preferred Stock in favor of any “Fundamental Action” taken by the Company as determined by the
Company’s Board of Directors.
25
Available Information
We maintain an internet website at www.interpace.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments
to those reports are available free of charge through the “Investor Relations” portion of our website, as soon as reasonably practicable after they are filed with the SEC. The
content contained in, or that can be accessed through, our website is not incorporated into this Form 10-K.
ITEM 1A. RISK FACTORS
In addition to the other information provided in this Annual Report on Form 10-K, including our financial statements and the related notes in Part II - Item 8, you should
carefully consider the following factors in evaluating our business, operations and financial condition. Additional risks and uncertainties not presently known to us, which we
currently deem immaterial or that are similar to those faced by other companies in our industry or businesses in general, such as competitive conditions, may also impair our
business operations. The occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Summary of Risk Factors
Our business is subject to numerous risks and uncertainties, discussed in more detail in the following section. These risks include, among others, the following key risks:
● we have a history of operating losses;
● 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 (“Novitas”);
● our secured lenders have the right to foreclose on substantially all of our assets if we are unable to timely repay our outstanding obligations;
● our dependence on sales and reimbursements from our clinical services for all of our revenue;
● the ability to continue to generate sufficient revenue from our clinical service products and other products and/or solutions that we develop in the future is important
for our ability to meet our financial and other targets;
● our ability to finance our business on acceptable terms in the future, which may limit the ability to grow our business, develop and commercialize products and
services, develop and commercialize new molecular clinical service solutions and technologies;
● our obligations to make royalty and milestone payments to our licensors;
● our dependence on third parties for the supply of some of the materials used in our clinical services tests;
● 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;
26
● our reliance on our sales and marketing activities for future business growth and our ability to continue to expand our sales and marketing activities;
● our being subject to the controlling interests of our two private equity investors who control, on an as-converted basis, an aggregate of 64.2% of our outstanding shares
of common stock through their holdings of our Series B Preferred Stock, and this concentration of ownership along with their authority for designation rights for a
majority of our directors and their right to approve certain of our actions has a substantial influence on our decisions;
● the delisting of our common stock from Nasdaq has adversely affected and may continue to adversely affect our common stock and business and financial condition;
● geopolitical and other economic and political conditions or events (such as the wars in Ukraine and Israel/Gaza);
● our ability to implement our business strategy; and
● the potential impact of existing and future contingent liabilities on our financial condition.
Risks Related to our Business
We face substantial risks due to our operating history of net losses, negative working capital and insufficient cash flows, and lack of liquidity to pay our current
obligations and if we are unable to continue our business, our shares may have little or no value.
Our ability to maintain being a profitable operating company is dependent upon our ability to continue to generate revenues and/or obtain financing adequate to
support our cost structure.
For the fiscal year ended December 31, 2023, we had operating income from continuing operations of $2.8 million. As of December 31, 2023, we had cash and cash
equivalents of $3.5 million and current liabilities of $17.5 million. We may need to attempt to raise additional equity capital by selling shares of common stock or other dilutive
or non-dilutive means, if necessary. However, investing in our securities may be an unattractive investment for potential investors. These factors, among others, may make it
difficult to raise any additional capital.
We depend on a few payers for a significant portion of our revenue for our clinical services, and if one or more significant payers, including CMS, stops providing
reimbursement or decreases the amount of reimbursement for our tests, or if we are unable to successfully negotiate additional reimbursement contracts for our clinical
services tests, our revenue could decline and our commercial success could be compromised.
Revenue for clinical services tests performed on patients covered by Medicare was approximately 51% of our revenue for the fiscal year ended December 31, 2023.
The percentage of our revenue derived from significant payers for our clinical services tests is expected to fluctuate from period to period as our revenue increases, as additional
payers provide reimbursement for such tests, and in the event that one or more payers were to stop reimbursing for our clinical services tests or change their reimbursement
amounts.
In January 2022, the Company announced that CMS issued a new billing policy whereby CMS will no longer reimburse for the use of the Company’s ThyGeNEXT®
and ThyraMIR®v2 tests when billed together by the same provider/supplier for the same beneficiary on the same date of service. On February 28, 2022, the Company
announced that the National Correct Coding Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change
for ThyGeNEXT® (0245U) and ThyraMIR®v2 (0018U) tests has been retroactively reversed to January 1, 2022. CMS was reimbursing the Company for one of its two thyroid
tests, and had agreed to retroactively reimburse for the second test once they had completed their internal administrative adjustments. We were notified by CMS/NCCI that
processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022. As of the date of this filing the Company has no remaining
outstanding collections regarding this matter and is fully up to date with CMS. Effective January 1, 2023, the gapfill price for ThyGeNEXT® was set at $1,266.07.
27
Novitas has been and is the current regional MAC that handles claims processing for Medicare services with jurisdiction for PancraGEN®, ThyGeNEXT®,
ThyraMIR®v2, and RespriDx®. On a five-year rotational basis, Medicare requests bids for its regional MAC services. Any future changes in the MAC processing or coding for
Medicare claims for our molecular diagnostic tests could result in a change in the coverage or reimbursement rates for such molecular diagnostic tests, or the loss of coverage.
Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by our local Medicare
Administrative Contractor, Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of
our molecular tests, PancraGEN®. On June 5, 2023 we announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which, if finalized, would have
established non-coverage for the Company’s widely used PancraGEN® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the
final Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies
and tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation
and submitted detailed written comments supporting the use of PancraGEN®. The timing and content of any final implemented LCD is uncertain at this time; the process could
potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN® and the related
Point2® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN® test, the Company’s liquidity could be
negatively impacted.
Our PancraGEN®, ThyraMIR®v2 and ThyGeNEXT® tests are reimbursed by Medicare based on applicable CPT codes. RespriDx® is currently only covered by the
Medicare Advantage program and our BarreGEN® assay is not reimbursed at all. Any future reductions from the current reimbursement rates for our clinical services tests
would have a material adverse effect on business and results of operations.
Although we have entered into contracts with certain third-party payers which establish allowable rates of reimbursement for our clinical services tests, payers may
suspend or discontinue reimbursement at any time, may require or increase co-payments from patients, or may reduce the reimbursement rates paid to us. Any such actions
could have a negative effect on our revenue for our clinical services tests.
The war between Russia and Ukraine or the war between Israel and Hamas could materially adversely affect our business, results of operations, and financial
condition.
In February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, this war
has led, and could continue to lead, to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social
instability, and increases in cyberattacks, intellectual property theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business.
We have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any resulting government reactions,
are rapidly developing and beyond our control.
Further, on October 7, 2023, Hamas, a U.S. designated Foreign Terrorist Organization, launched terrorist attacks against Israel. Israel then declared war on Hamas and there
is currently an armed conflict in Israel and the Gaza Strip as well as elsewhere in the Middle East. The extent and duration of the wars in Ukraine and Israel/Gaza expanding
geopolitical tensions and any resulting market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an
unknown period of time. Any of the above-mentioned factors could materially adversely affect our business, financial condition, and results of operations.
We are also monitoring other macro-economic and geopolitical developments such as inflation and cybersecurity risks so that the Company can be prepared to react to new
developments as they arise.
Adverse developments affecting financial institutions, companies in the financial services industry or the financial services industry generally, including those we
do business with, could adversely affect our operations and liquidity.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial
services industry or the financial services industry generally, or concerns or rumors about any events of these kinds, have in the past and may in the future lead to market-wide
liquidity problems. For example, on March 10, 2023, Silicon Valley Bank was closed by the California Department of Financial Protection and Innovation, which appointed the
Federal Deposit Insurance Corporation, or the FDIC, as receiver.
28
Our access to our cash and cash equivalents and our ability to access bank financing in amounts adequate to finance our operations could be significantly impaired by
the financial institutions with which we have arrangements directly facing liquidity constraints or failures. In addition, investor concerns regarding the U.S. or international
financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic
limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire or take down financing on acceptable terms or at all. Any material decline
in available funding or our ability to access our cash and cash equivalents or our ability to access bank financing could adversely impact our ability to meet our operating
expenses and result in breaches of our contractual obligations which could have material adverse impacts on our operations and liquidity.
We have a history of operating losses, and our clinical services have generated limited revenue. We may continue to incur net losses for the foreseeable future and
may never sustain profitability.
Although we expect our revenue to grow in the future, there can be no assurance that we will continue to achieve revenue sufficient to offset expenses. Over the next
several years, we expect to continue to devote resources to increase adoption of, and reimbursement for, our clinical services tests and assays and to use our bioinformatics data
to develop and enhance our clinical services products and services, and (ii) develop and acquire additional products and services. However, although we achieved profitability
in 2023, our business may not sustain profitability, and our failure to sustain profitability in the future could have a material adverse effect on our business, financial condition
and results of operations, as well as cause the market price of our common stock to decline.
Our quarterly and annual revenues and operating results may vary which may cause the price of our common stock to fluctuate.
Our quarterly and annual operating results may vary as a result of a number of factors, including:
● uncertainty of cash collections which could impact or affect net realizable values of sales of our tests and services;
● inability of our laboratory to perform tests;
● progress or lack of progress in developing and commercializing tests and services;
● favorable or unfavorable decisions about our tests or services or reimbursement rates from government regulators, insurances companies, customers, or other third
party payers;
● the commencement, delay, cancellation or completion of sales and marketing programs;
● timing and amount of expenses for implementing new programs and accuracy of estimates of resources required for ongoing programs;
● adoption of and coverage and reimbursement for our tests;
● changes in our relationships with key collaborators, suppliers, customers and third parties;
● fluctuations in net revenue due to changes in the valuation of our patient accounts;
● periodic stock-based compensation and awards;
● fluctuations in R&D, business development and spending for clinical trials;
29
● timing and integration of any acquisitions; and
● changes in regulations related to diagnostics, pharmaceutical, biotechnology and healthcare companies.
We believe that quarterly, and in certain instances annual, comparisons of our financial results are not necessarily meaningful and should not be relied upon as an
indication of future performance. Fluctuations in quarterly and annual results could materially and adversely affect the market price of our common stock in a manner unrelated
to our long-term operating performance.
We depend on sales and reimbursements from our clinical services for all of our revenue, and we will need to generate sufficient revenue from these and other
products and/or solutions that we develop or acquire to grow our business.
All of our revenue is derived from our clinical services business. We have molecular diagnostics tests and complimentary service extensions that are in development,
but there can be no assurance that we will be able to successfully commercialize or sufficiently increase revenues from those tests. If we are unable to increase sales of our
molecular diagnostic tests, expand reimbursement for these tests, or successfully develop and commercialize other molecular diagnostic tests, our revenue and our ability to
achieve and sustain profitability would be impaired, and this could have a material adverse effect on our business, financial condition and results of operations, and the market
price of our common stock could decline.
We rely on third-parties to process and transmit claims to payers for our clinical services, and any delay in processing or transmitting could have an adverse effect
on our revenue and financial condition.
We rely on third-parties to provide overall processing of claims and to transmit actual claims to payers based on specific payer billing formats. If claims for our clinical
services are not submitted to payers on a timely basis, or if we are again required to switch to a different third-party processor to handle claim submissions, we may experience
delays in our ability to process claims and receive payment from payers, which could have a material adverse effect on our business, financial condition and results of
operations.
Due to how we recognize revenue, our quarterly revenue and operating results are likely to fluctuate.
We adopted Financial Accounting Standards Board (“FASB”) ASC 606 2014-09, “Revenue from Contracts with Customers (Topic 606)” (or “ASC 606”) effective
January 1, 2018. As of this date, all revenue is recognized on the accrual basis, based upon actual collection histories for tests and services and respective payers or payer
groups. Due to this change in accounting and the estimations required under ASC 606, our quarterly revenue and operating results are likely to fluctuate. As we recognize
revenue from payers under ASC 606, we may subsequently determine that certain judgments underlying estimated reimbursement change, or that the estimates we used at the
time we accrued such revenue vary materially from the actual reimbursements subsequently realized, and our financial results could be negatively impacted in future quarters.
As a result, comparing our operating results on a period-to-period basis may be difficult due to fluctuations resulting from the estimation process under ASC 606 and
such comparisons may not be meaningful. You should not rely on our past results as an indication of our future performance. In addition, these fluctuations in revenue may
make it difficult in the near term for us, research analysts and investors to accurately forecast our revenue and operating results. If our revenue or operating results fall below
consensus expectations, the price of our common stock would likely decline.
A deterioration in the collectability of our accounts receivable could have a material adverse effect on our business, financial condition and results of operations.
Collection of accounts receivable from third-party payers and clients is critical to our operating performance. Our primary collection risks are (i) the risk of
overestimating our net revenue at the time of billing, which may result in us receiving less than the recorded receivable, (ii) the risk of non-payment as a result of denied claims,
(iii) in certain states, the risk that clients will fail to remit insurance payments to us when the commercial insurance company pays out-of-network claims directly to the client
and (iv) resource and capacity constraints that may prevent us from handling the volume of billing and collection issues in a timely manner. Additionally, our ability to hire and
retain experienced personnel affects our ability to bill and collect accounts in a timely manner. We routinely review accounts receivable balances in conjunction with these
factors and other economic conditions that might ultimately affect the collectability of the client accounts and factor them into our estimation of collectability as warranted.
Significant changes in business operations, payer mix or economic conditions, including changes resulting from legislation or other health reform efforts (including to repeal or
significantly change the Affordable Care Act), could affect our collection of accounts receivable, cash flows and results of operations. In addition, increased client concentration
in states that permit commercial insurance companies to pay out-of-network claims directly to the client instead of the provider, could adversely affect our collection of
receivables. Unexpected changes in reimbursement rates by third-party payers could have a material adverse effect on our business, financial condition and results of
operations.
30
Our business is substantially dependent on third-party reimbursement. Any change in the overall health care reimbursement system may adversely impact our
business.
Our revenues are substantially dependent on third-party reimbursement. We are paid directly by private insurers and governmental agencies, often on a fixed fee basis.
If the average fees allowable by private insurers or governmental agencies were reduced, the negative impact on revenues could have a material effect on our business, financial
condition, results of operations and cash flows. Also, if amounts owed to us by payors are reduced or not paid on a timely basis, we may be required to increase our concessions
and/or decrease our revenues. Changes to the health care reimbursement system that favor other technologies or treatment regimens and reduce our reimbursements may
adversely affect our ability to market our services profitably. Overall, such dependency and potential changes could materially and adversely affect our business, financial
condition, results of operations and cash flows.
Our inability to finance our business on acceptable terms in the future may limit our ability to develop and commercialize products and services and grow our
business.
We may need to finance our business in the future through collaborations, equity offerings, debt financings, licensing arrangements or other dilutive or non-dilutive
means. On January 7, 2021, we entered into promissory notes (“Notes”) with our two private equity investors in the aggregate amount of $5 million with a maturity date of June
30, 2021 which were secured by all of our assets. In October 2021, the Company entered into a $7.5 million revolving credit facility with Comerica Bank (“Comerica”). In
addition, also in October 2021, the Company entered into an $8.0 million term loan with BroadOak, the proceeds of which were used to repay in full at their maturity the Notes
extended by our two private equity investors. 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 agreement was repaid in full in 2023 and the agreement was terminated in February 2024. The Comerica loan agreement contained affirmative and
negative restrictive covenants that were applicable whether or not any amounts are outstanding under the Comerica loan agreement. These restrictive covenants, which included
restrictions on certain mergers, acquisitions, investments, encumbrances, etc., could have adversely affected our ability to conduct our business. The Comerica loan agreement
also contained financial covenants requiring specified minimum liquidity and minimum revenue thresholds and also contains customary events of default. 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 million. In August 2022, the
Convertible Note was converted into a subordinated term loan and was added to the outstanding BroadOak loan balance discussed above.
We may need additional funding to repay the BroadOak loan, which has a maturity date of June 30, 2025, as well as to continue operations. Additional funding may
not be available to us on acceptable terms, or at all. If we seek to raise funds by issuing additional equity securities, dilution to our stockholders could result. Any public
offering of equity securities must be approved by the holders of our Series B Preferred Stock who are our private equity investors. In addition, we are currently ineligible to use
a Form S-3 shelf registration statement. If we are unable to timely repay the Comerica and BroadOak borrowings when due, Comerica and BroadOak will have the right to
foreclose on our assets (BroadOak being subordinated to Comerica). The incurrence of additional indebtedness or the issuance of certain equity securities could result in
increased fixed payment obligations and could also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity,
limitations on our ability to acquire or license intellectual property rights, limitations on our ability to enter into mergers or acquisition of assets, and other operating restrictions
that could adversely affect our ability to conduct our business.
31
If we are unable to timely repay our outstanding obligations, our secured lender will have the right to foreclose on our assets.
In October 2021, the Company entered into an $8.0 million term loan with BroadOak, which is secured by all of our assets and has a maturity date of June 30, 2025. 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 million. In August
2022, the Convertible Note was converted into a subordinated term loan and was added to the outstanding BroadOak loan balance discussed above. We may need additional
funding to repay these outstanding obligations as well as to continue operations. Additional funding may not be available to us on acceptable terms, or at all. If we are unable to
timely repay these outstanding obligations, our secured lenders will have the right to foreclose on substantially all of our assets.
Risks Related to our Preferred Stock
We have issued and may issue additional preferred stock in the future, and the terms of the preferred stock may reduce the value of our common stock.
We are authorized to issue up to five million shares of preferred stock in one or more series. Our Board may determine the terms of future preferred stock offerings
without further action by our stockholders. If we issue additional preferred stock, it could affect stockholder rights or reduce the market value of our outstanding common stock.
In particular, specific rights granted to future holders of preferred stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption
rights, sinking fund provisions, and restrictions on our ability to merge with or sell our assets to a third party. We have designated, issued and sold an aggregate of 47,000
outstanding shares of Series B Preferred Stock.
Two private equity firms and their affiliate’s control, on an as-converted basis, an aggregate of 64.2% of our outstanding shares of common stock through their
holdings of our Series B Preferred Stock, and this concentration of ownership along with their authority for designation rights for a majority of our directors and their
right to approve certain of our actions has a substantial influence on our decisions.
Ampersand holds 28,000 shares of our Series B Preferred Stock and 1315 Capital holds 19,000 shares of our Series B Preferred Stock. Accordingly, on an as converted
basis, Ampersand and its affiliates beneficially own 38.2% of the Company’s outstanding common stock of 4,376,398 shares and 1315 Capital and its affiliates beneficially own
26.0%. The conversion and sale by such holders of one or more large blocks of our common stock could have a negative impact on the market price of our common stock.
These stockholders, acting together, have control over the outcome of matters submitted to our stockholders for approval, including the election of directors and any
merger, consolidation or sale of all or substantially all of our assets. Holders of Series B Preferred Stock were granted director designation rights over a majority of our Board.
As previously disclosed in Current Reports on Form 8-K filed with the SEC on November 16, 2023 and December 12, 2023, Edward Chan, a director designated by 1315
Capital, and Robert Gorman, a director designated by Ampersand, resigned from the Board on November 15, 2023 and December 7, 2023, respectively. Following these
resignations, 1315 Capital and Ampersand have two designated directors out of the five directors currently serving on the Board. Accordingly, these stockholders, acting
together, have significant influence over our management and affairs. This concentration of ownership might harm the market price of our common stock by delaying, deterring
or preventing a change in control, making some transactions more difficult or impossible to complete without the support of these shareholders, regardless of the impact of this
transaction on our other shareholders. Such ownership interests could effectively deter a third party from making an offer to buy us, which might involve a premium over our
current stock price or other benefits for our stockholders, or otherwise prevent changes in the control or management. For example, this concentration of ownership may have
the effect of impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us.
32
The holders of our Series B Preferred Stock have preferential rights that may be adverse to holders of our common stock.
The holders of our Series B Preferred Stock have preferential rights with respect to distributions upon a liquidation or sale of the Company, including certain business
combinations or sales of assets deemed to be a liquidation. Accordingly, no distributions upon liquidation may be made to the holders of common stock until the holders of the
Series B Preferred Stock have been paid their liquidation preference. As a result, it is possible that, on a liquidation event (including a sale of the Company) and depending on
the price thereof, all amounts available for the holders of equity of the Company would be paid to the holders of Series B Preferred Stock, and that the holders of common stock
would not receive any payment. In addition, the holders of Series B Preferred Stock have the right to approve certain actions of the Company.
In April 2020, 1315 Capital consented to, and agreed to vote (by proxy or otherwise) their Series B Preferred Stock in favor of any “Fundamental Action” taken by the
Company as determined by the Company’s Board of Directors. “Fundamental Actions” include the Company’s ability to a) authorize, create or issue any debt securities for
borrowed money or funded debt; b) merge with or acquire all or substantially all of the assets of one or more other companies or entities with a value in excess of $20 million;
c) transfer, by sale, exclusive license or otherwise, material intellectual property rights of the Company or any of its direct or indirect subsidiaries, other than those
accomplished in the ordinary course of business; d) declare or pay any cash dividend or make any cash distribution on any equity interests of the Company other than the Series
B Shares; e) incur any additional individual debt, indebtedness for borrowed money or other additional liabilities; and f) change any accounting methods or practices of the
Company, except for those changes required by GAAP or applicable regulatory agencies or authorities.
Risks Related to our Clinical Services
Billing for our clinical services tests is complex, and we must dedicate substantial time and resources to the billing process to be paid for our clinical services tests.
Billing for clinical services is complex, time consuming and expensive. Depending on the billing arrangement and applicable law, we bill various payers, including
Medicare, insurance companies and patients, all of which have different billing requirements. To the extent laws or contracts require us to bill patient co-payments or co-
insurance; we must also comply with these requirements. We may also face increased risk in our collection efforts, including write-offs of doubtful accounts and long collection
cycles, which could have a material adverse effect on our clinical services, results of operations and financial condition. Among others, the following factors make the billing
process complex:
● differences between the list price for our molecular diagnostic tests and the reimbursement rates of payers;
● compliance with complex federal and state regulations related to billing Medicare;
● changes in billing policy reimbursement by CMS;
● disputes among payers as to which party is responsible for payment;
● differences in coverage among payers and the effect of patient co-payments or co-insurance;
● differences in information and billing requirements among payers;
● incorrect or missing billing information;
● the resources required to manage the billing and claims appeals process including those of our billing service providers;
33
● our inability to bill timely and accurate requisitions and process denials efficiently may result in delayed collections and reduced reimbursement rates; and
● the overall performance and effectiveness of our billing service providers.
As we grow and introduce new clinical services tests and other services, we will likely need to add new codes to our billing process as well as our financial reporting
systems. Failure or delays in effecting these changes in external billing and internal systems and processes could negatively affect our revenue and cash flow from our clinical
services. Additionally, our billing activities require us to implement compliance procedures and oversight, train and monitor our employees or contractors, challenge coverage
and payment denials, assist patients in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal
compliance policies and procedures. Payers also conduct external audits to evaluate payments, which add further complexity to the billing process. These billing complexities,
and the related uncertainty in obtaining payment for our diagnostic solutions, could negatively affect our revenue and cash flow, our ability to achieve profitability, and the
consistency and comparability of our results of operations.
If payers do not provide reimbursement, rescind or modify their reimbursement policies or delay payments for clinical services, or if we are unable to successfully
negotiate additional reimbursement contracts for our clinical services tests, our commercial success could be compromised.
Physicians may generally not order our clinical services tests unless payers reimburse a substantial portion of the test price. There is uncertainty concerning third-party
reimbursement of any test incorporating new molecular diagnostic technology. Reimbursement by a payer may depend on a number of factors, including a payer’s
determination that tests such as our molecular diagnostic tests are: (a) not experimental or investigational; (b) pre-authorized and appropriate for the patient; (c) cost-effective;
(d) supported by peer-reviewed publications; and (e) included in clinical practice guidelines. Since each payer generally makes its own decision as to whether to establish a
policy or enter into a contract to reimburse our clinical services tests, seeking these approvals is a time-consuming and costly process. Although we have contracted rates of
reimbursement with certain payers, which establishes allowable rates of reimbursement for our PancraGEN®, ThyGeNEXT®, ThyraMIR®v2 and RespriDx® assays, payers
may suspend or discontinue reimbursement at any time, may require or increase co-payments from patients, may impose pre-authorization requirements or may reduce the
reimbursement rates paid to us. Any such actions could have a negative effect on our revenue for our clinical services tests.
We have contracted rates of reimbursement with select payers for PancraGEN®, ThyGeNEXT® and ThyraMIR®v2 and to a limited extent, RespriDx®. Without a
contracted rate for reimbursement, claims may be denied upon submission, and we may need to appeal the claims. The appeals process is time consuming and expensive, and
may not result in payment. We expect to continue to focus resources on increasing adoption of and coverage and reimbursement for our molecular diagnostic tests. We cannot,
however, predict whether, under what circumstances, or at what payment levels payers will reimburse us for our molecular diagnostic tests, if at all. In addition to our current
commercial products on the market and in our pipeline, the launch of any new molecular diagnostic tests in the future may require that we expend substantial time and
resources in order to obtain and retain reimbursement. Also, payer consolidation can create uncertainty as to whether coverage and contracts with existing payers will even
remain in effect. Finally, commercial payers may tie their allowable rates to Medicare rates, and should Medicare reduce their rates, we may be negatively impacted. If we fail
to establish broad adoption of and reimbursement for our assays, or if we are unable to maintain existing reimbursement from payers, our ability to generate revenue for our
clinical services tests could be harmed and this could have a material adverse effect on our business, financial condition and results of operations.
We may experience a reduction in revenue if physicians decide not to order our clinical services tests.
If we are unable to create or maintain sufficient demand for our clinical services tests or if we are unable to expand our product offerings, we may not maintain
profitability. To generate demand, we will need to continue to educate physicians and the medical community on the value and benefits of our clinical services tests in order to
change clinical practices through clinical trials, published papers, presentations at scientific conferences and one-on-one education by our commercial sales force, which are
costly and time-consuming. In addition, our ability to obtain and maintain adequate reimbursement from third-party payers for our clinical services tests will be critical to
generating revenue.
34
In many cases, practice guidelines in the United States have recommended therapies or surgery to determine if a patient’s condition is malignant or benign.
Accordingly, physicians may be reluctant to order a diagnostic test that may suggest surgery is unnecessary. In addition, our assays are performed at our laboratory rather than
by a pathologist in a local laboratory, so pathologists may be reluctant to support our tests. Moreover, guidelines for the diagnosis and treatment of thyroid nodules may change
to recommend another type of treatment protocol, and these changes may result in medical practitioners deciding not to use our molecular diagnostic tests. These facts may
make physicians reluctant to use our assays, which could limit our ability to generate revenue from our clinical services tests and achieve profitability, which could have a
material adverse effect on our business, financial condition and results of operations.
We may experience a reduction in revenue if patients decide not to use our clinical services tests.
Some patients may decide not to use our clinical services tests due to price, all or part of which may be payable directly by the patient if the patient’s insurer denies
reimbursement in full or in part. Many insurers seek to shift more of the cost of healthcare to patients in the form of higher deductibles, co-payments, or premiums. In addition,
the economic environment in the United States may result in the loss of healthcare coverage. Implementation of provisions of PPACA provided coverage for many patients,
particularly in the individual market, who were previously either uninsured or faced high premiums. However, premiums for many of the plans participating in the exchanges
established as part of this legislation have increased and some health plans have chosen to drop out of these networks in specific markets or the program altogether. In 2018,
Congress passed legislation revising certain provisions of PPACA and federal agencies also have issued final rules to repeal or revise regulations governing the implementation
of certain provisions of PPACA which may negatively impact our revenues. Overall, the scope and timing of any further legislation, judicial action or federal regulations to
limit, revise, or replace PPACA or regulations governing its implementation is uncertain, but if enacted could have a significant impact on the U.S. healthcare system and our
revenues. These events may result in an increase of uninsured patients, increases in premiums, and reductions in coverage for some patients. Patients may therefore delay or
forego medical checkups or treatment due to their inability to pay for our clinical services tests, which could have a negative effect on our revenues. We do have a Patient
Assistance Program that allows eligible patients to apply for assistance in covering a portion of their out of pocket obligation or all costs for claims denied as non-covered for
our clinical services tests if they meet the criteria for participation.
If our clinical services tests do not perform as expected, we may not be able to achieve widespread market adoption among physicians, which would cause our
operating results, reputation, and business to suffer.
Our success depends in part on the market’s confidence that we can provide reliable, high-quality molecular information products. There is no guarantee that the
accuracy and reproducibility we have demonstrated to date will continue, particularly for clinical samples, as our test volume increases. We believe that our customers are likely
to be particularly sensitive to product defects and errors, including if our products fail to detect genomic alterations with high accuracy from clinical specimens or if we fail to
list, or inaccurately include, certain treatment options and available clinical trials in our product reports. As a result, the failure of our products to perform as expected would
significantly impair our operating results and our reputation. We may be subject to legal claims arising from any defects or errors in our clinical services tests.
Our profitability will be impaired by our obligations to make royalty and milestone payments to our licensors for our clinical services tests.
In connection with our acquisition of certain assets of Asuragen in 2014, we currently license certain patents and know-how from Asuragen relating to (i) miRInform®
thyroid and pancreas cancer diagnostic tests and other tests in development for thyroid cancer (the “Asuragen License Agreement”), and (ii) the sale of diagnostic devices and
the performance of certain services relating to thyroid cancer (the “CPRIT License Agreement”). Pursuant to the Asuragen License Agreement and the CPRIT License
Agreement, we are obligated to make certain royalty and milestone payments to Asuragen and the Cancer Prevention & Research Institute of Texas, or CPRIT. Under the
Asuragen License Agreement, we are obligated to pay royalties on the future net sales of tests utilizing the miRInform® thyroid platform (i.e., ThyGeNEXT®), potentially on
certain other thyroid diagnostics tests and potentially on other tests in development for thyroid cancer. A similar obligation exists if we elect to launch any molecular tests
utilizing the miRInform® pancreas platform. We are also required by the CPRIT License Agreement with Asuragen to make certain related royalty payments to CPRIT. The
Asuragen obligation regarding royalty payments expires in August 2024.
35
When performing the ThyraMIR®v2 test, we use products supplied by Exiqon A/S (now a part of Qiagen), subject to a license agreement with Exiqon A/S. The license
agreement obligates us to pay royalties on the future net sales of our assays that utilize licensed patents and know-how obtained from Exiqon A/S. Our profitability will be
impaired by our obligations to make royalty payments to our licensors. Although we believe, under such circumstances, that the increase in revenue will exceed the
corresponding royalty payments, our obligations to our licensors could have a material adverse effect on our business, financial condition, and results of operations if we are
unable to manage our operating costs and expenses at profitable levels.
If we breach certain agreements with Asuragen, it could have a material adverse effect on our sales and commercialization efforts for our thyroid cancer
diagnostic tests as well as any potential tests in development for thyroid cancer utilizing their technology and the sale of diagnostic devices and the performance of certain
services relating to thyroid cancer.
Under the CPRIT License Agreement, we are obligated to pay 5% of net sales on sales of certain diagnostic devices and the performance of services relating to thyroid
cancer that incorporate technology developed and funded under an agreement between Asuragen and the Cancer Prevention and Research Institute of Texas, subject to a
maximum deduction of 3.5% for royalties paid to third parties. Both of the Asuragen License Agreement and the CPRIT License Agreement continue until terminated by (i)
mutual agreement of the parties or (ii) either party in the event of a material breach of the respective agreement by the other party. The Asuragen royalty obligation expires in
August 2024.
If we materially breach or fail to perform any provision under the CPRIT License Agreement, Asuragen will have the right to terminate our license from CPRIT, and
upon the effective date of such termination, our right to practice the licensed technology would end. To the extent such licensed technology rights relate to our molecular
diagnostic tests currently on the market, we would expect to exercise all rights and remedies available to us, including attempting to cure any breach by us, and otherwise seek
to preserve our rights under the technology licensed to us, but we may not be able to do so in a timely manner, at an acceptable cost to us or at all. Any uncured, material breach
under these license agreements could result in our loss of rights to practice the technology licensed to us under these license agreements, and to the extent such rights and other
technology relate to our molecular diagnostic tests currently on the market, it could have a material adverse effect on our sales and commercialization efforts for NGS-based
thyroid and pancreatic cancer molecular diagnostic tests and other tests in development for thyroid cancer, and the sale of molecular diagnostic tests and the performance of
certain services relating to thyroid cancer.
Under the agreement, neither party will be held responsible for a default or breach for failure or delay in performing its obligations when such failure or delay is
caused by or results from events beyond reasonable control of the non-performing party, including fires, floods, earthquakes, hurricanes, embargoes, shortages, epidemics or
pandemics, quarantines war, acts of war, etc.
Clinical utility studies are important in demonstrating to both customers and payers a molecular diagnostic test’s clinical relevance and value. If we are unable to
identify collaborators willing to work with us to conduct clinical utility studies, or the results of those studies do not demonstrate that a molecular diagnostic test provides
clinically meaningful information and value, commercial adoption of such test may be slow, which would negatively impact our business.
Clinical utility studies show when and how to use a molecular diagnostic clinical test and describe the particular clinical situations or settings in which it can be
applied and the expected results. Clinical utility studies also show the impact of the molecular diagnostic test results on patient care and management. Clinical utility studies are
typically performed with collaborating oncologists or other physicians at medical centers and hospitals, analogous to a clinical trial, and generally result in peer-reviewed
publications. Sales and marketing representatives use these publications to demonstrate to customers how to use a molecular diagnostic clinical test, as well as why they should
use it. These publications are also used with payers to obtain coverage for a molecular diagnostic test, helping to assure there is appropriate reimbursement. We will need to
conduct additional studies for our molecular diagnostic tests and other diagnostic tests we plan to introduce, to increase the market adoption and obtain coverage and adequate
reimbursement. Should we not be able to perform these studies, should the costs or length of time required for these studies exceed their value, or should their results not
provide clinically meaningful data and value for oncologists and other physicians, adoption of our molecular diagnostic tests could be impaired, and we may not be able to
obtain coverage and adequate reimbursement for them.
36
We rely on sole suppliers for some of the materials used in our tests and services, and we may not be able to find replacements or transition to alternative suppliers
in a timely manner.
We rely on sole suppliers for certain materials that we use to perform our tests and services for our endocrine cancer diagnostic tests. We also purchase reagents used in
our tests and services from sole-source suppliers. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these
strategies will be effective or the alternative sources will be available in a timely manner. If these suppliers can no longer provide us with the materials we need to perform our
tests and services, if the materials do not meet our quality specifications, or if we cannot obtain acceptable substitute materials, an interruption in test processing and services
could occur. Any such interruption may directly impact our revenue and cause us to incur higher costs. In particular, the continued spread of the coronavirus globally could
materially and adversely impact our operations including without limitation our supply chain, which may have a material and adverse effect on our business, financial condition
and results of operations.
We may experience problems in scaling our operations, or delays or reagent and supply shortages for our tests and services that could limit the growth of our
revenue.
If we encounter difficulties in scaling our operations as a result of, among other things, quality control and quality assurance issues and availability of reagents and raw
material supplies, we will likely experience reduced sales of our tests and services, increased repair or re-engineering costs, and defects and increased expenses due to switching
to alternate suppliers, any of which would reduce our revenues and gross margins. Although we attempt to match our capabilities to estimates of marketplace demand, to the
extent demand materially varies from our estimates, we may experience constraints in our operations and delivery capacity, which could adversely impact revenue in a given
fiscal period. Should our need for raw materials and reagents used in our tests and services fluctuate, we could incur additional costs associated with either expediting or
postponing delivery of those materials or reagents.
If we are unable to support demand for our tests and services, or any of our future tests, services or solutions, our business could suffer.
As demand for our tests and services grow, we will also need to continue to scale up our testing capacity and processing technology, expand customer service, billing
and systems processes and enhance our internal quality assurance program. We will also need additional certified laboratory scientists and other scientific and technical
personnel to process higher volumes of our tests and services. We cannot assure you that increases in scale, related improvements and quality assurance will be implemented
successfully or that appropriate personnel will be available. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result
in higher costs of processing tests or inability to meet demand. There can be no assurance that we will be able to perform our testing and services on a timely basis at a level
consistent with demand, or that our efforts to scale our operations will not negatively affect the quality of test results. If we encounter difficulty meeting market demand or
quality standards, our reputation could be harmed and our future prospects and our business could suffer, causing a material adverse effect on our business, financial condition
and results of operations.
37
Developing new tests and related services and solutions involves a lengthy and complex process, and we may not be able to commercialize on a timely basis, or at
all, other tests, assays, services and solutions under development.
Developing new tests, services and solutions will require us to devote considerable resources to research and development, which we may not be in a position to do.
We may face challenges obtaining sufficient numbers of samples to validate a newly acquired or developed test or service. In order to develop and commercialize new tests and
services, we need to:
● expend significant funds to conduct substantial research and development;
● conduct successful analytical and clinical studies;
● scale our laboratory processes to accommodate new tests and services; and
● build and maintain the commercial infrastructure to market and sell new tests and services.
Typically, few research and development projects result in commercial products, and success in early clinical studies often is not replicated in later studies. At any
point, we may abandon development of a test, service or solutions or we may be required to expend considerable resources repeating clinical studies, which would adversely
affect the timing for generating revenue from such test, service or solution. If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study or
if we fail to sufficiently demonstrate analytical validity, we might choose to abandon the development of the test, service or solution which could harm our business. In
addition, competitors may develop and commercialize new competing tests, services and solutions faster than us or at a lower cost, which could have a material adverse effect
on our business, financial condition and results of operations.
If we are unable to develop or acquire tests, services and solutions to keep pace with rapid technological, medical and scientific change, our operating results and
competitive position in the market could be affected.
Recently, there have been numerous advances in technologies relating to diagnostics, particularly diagnostics that are based on genomic information. These advances
require us to continuously develop our technology and to work to develop new solutions to keep pace with evolving standards of care. Our services could become obsolete
unless we continually innovate and expand our product offerings to include new clinical applications. If we are unable to develop or acquire new tests, services and solutions or
to demonstrate the applicability of our tests and services for other diseases, our sales could decline and our competitive position could be harmed.
If we cannot enter into new clinical study collaborations, our product development and subsequent commercialization could be delayed.
In the past, we have entered into clinical study collaborations related to our tests and services, and our success in the future depends in part on our ability to enter into
additional collaborations with highly regarded institutions. This can be difficult due to internal and external constraints placed on these organizations. Some organizations may
limit the number of collaborations they have with any one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative
and related infrastructure to enable collaboration with many companies at once, which can extend the time it takes to develop, negotiate and implement a collaboration.
Moreover, it may take longer to obtain the samples we need which could delay our trials, publications, and product launches and reimbursement. Additionally, organizations
often insist on retaining the rights to publish the clinical data resulting from the collaboration. The publication of clinical data in peer-reviewed journals is a crucial step in
commercializing and obtaining reimbursement for our diagnostic tests, and our inability to control when and if results are published may delay or limit our ability to derive
sufficient revenue from them.
38
If the FDA changes its enforcement policy as to LDTs or disagrees with our position that our clinical services tests are LDTs covered by the FDA’s current
enforcement discretion policy, we could be subject to a number of enforcement actions, any of which could have a material adverse effect on our clinical services and/or
incur substantial costs and delays associated with trying to obtain pre-market clearance or approval and comply with applicable pre- and post-market requirements.
Clinical laboratory tests like our clinical services tests are regulated under CLIA as well as by applicable state laws and may also be subject to FDA regulation,
depending on how the test is classified. For example, the FDA regulates in vitro diagnostic tests (also called in vitro diagnostics or “IVDs”), specimen collection kits, analyte
specific reagents (ASRs), and instruments used in conducting diagnostic testing as medical devices. Most tests offered as LDTs are currently subject to enforcement discretion
by the FDA. LDTs are defined by FDA as IVDs that are intended for clinical use and are designed, manufactured, and used within a single CLIA-certified, high-complexity
clinical laboratory.
Given the history of attempts by FDA and Congress to regulate LDTs, there is substantial uncertainty concerning whether FDA’s enforcement discretion policy will
continue. Most recently, on September 29, 2023, the FDA published a proposed rule on LDTs, in which FDA proposes to end enforcement discretion for virtually all LDTs in
five stages over a four-year period from the date FDA publishes a final rule. In Phase 1 (effective one year post-finalization), laboratories would be required to comply with
medical device (adverse event) reporting and correction/removal reporting requirements. In Phase 2 (effective two years post-finalization), laboratories would be required to
comply with all other device requirements (e.g., registration/listing, labeling, investigational use), except for quality systems and premarket review. In Phase 3 (effective three
years post-finalization), laboratories would be required to comply with quality systems requirements. In Phase 4 (effective three and a half years post-finalization, but not
before October 1, 2027), laboratories would be required to comply with premarket review requirements for high-risk tests (i.e., tests subject to premarket approval (PMA)
requirement). Finally, in Phase 5 (effective four years post-finalization, but not before April 1, 2028), laboratories would be required comply with premarket review
requirements for moderate- and low-risk tests (i.e., tests subject to de novo or 510(k) requirement). Unlike previous proposals, the proposed rule does not “grandfather” existing
tests. The content and timing of any final rule on LDTs is uncertain at this time.
If we are required to submit applications to FDA for our currently-marketed clinical tests and any tests that we may develop in the future, we may be required to
conduct additional studies, which may be time-consuming and costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance
with the FDA’s regulations would increase the cost of conducting our clinical services, and subject us to heightened regulation by the FDA and penalties for failure to comply
with these requirements. Failure to comply with applicable regulatory requirements can result in enforcement action 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, authorization or approval, as well as significant adverse publicity. Any other regulatory or legislative proposals that would increase general FDA
oversight of clinical laboratories or LDTs could negatively impact our business if additional requirements are imposed. We are monitoring developments and anticipate that our
clinical services products will be able to comply with requirements that are ultimately imposed by the FDA. In the meantime, we maintain our CLIA accreditation and state
licenses, which permit the use of LDTs for diagnostic purposes.
Similarly, notwithstanding any change in existing enforcement policies, if the FDA seeks to enforce the applicable medical device regulations against our clinical
services tests, we could be subject to a wide range of penalties and would likely be prohibited from continuing to offer the applicable tests in interstate commerce until we have
obtained FDA approval, authorization or clearance through the Premarket Approval (PMA) , de novo or 510(k) process, respectively, as applicable. Additionally, we could be
subject to enforcement for noncompliance with the FDA’s regulations on marketing and promotional communications, manufacturing, quality and safety standards, labeling,
storage, registration and listing, recordkeeping, adverse event reporting, and any other regulations applicable to IVDs. Any adverse enforcement action against us may have a
material adverse effect on our clinical services and results of operations.
If we are sued for product liability or errors and omissions liability related to our tests and services, we could face substantial liabilities that exceed our resources.
The marketing, sale and use of our tests and services could lead to product liability claims if someone were to allege that the test or service failed to perform as it was
designed. We may also be subject to liability for errors in the results we provide to physicians or for a misunderstanding of, or inappropriate reliance upon, the information we
provide. A product liability or errors and omissions liability claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain
product liability and errors and omissions insurance, we cannot be certain that our insurance would fully protect us from the financial impact of defending against these types of
claims or any judgments, fines or settlement costs arising out of such claims. Any product liability or errors and omissions liability claim brought against us, with or without
merit, could increase our insurance rates or prevent us from securing insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our
reputation or cause us to suspend sales of our products and solutions. The occurrence of any of these events could have a material adverse effect on our business, financial
condition and results of operations.
39
Our failure to comply with fraud and abuse laws or payer regulations could result in our being excluded from participation in Medicare, Medicaid, or other
governmental payer programs, subject to fines, penalties, and repayment obligations, decrease our revenues and adversely affect our results of operations and financial
condition for our clinical services.
The Medicare program is administered by CMS, which, like the states that administer their respective state Medicaid programs, imposes extensive and detailed
requirements on diagnostic services providers, including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit
reimbursement claims and how we provide our specialized diagnostic services. In addition, federal and state laws prohibit fraudulent billing and provide for the recovery of
overpayments. In particular, if we fail to comply with federal and state documentation, coding and billing rules, we could be subject to liability under the federal False Claims
Act, including criminal and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs. The False Claims Act prohibits individuals and
companies from knowingly submitting false claims for payments to, or improperly retaining overpayments from, the government. Private payers also have complex
documentation, coding, and billing rules, and can bring civil actions against laboratories. Our failure to comply with applicable Medicare, Medicaid and other third-party payer
rules could result in liability under the False Claims Act, our inability to participate in a governmental payer program, recoupment or returning funds already paid to us, civil
monetary penalties, criminal penalties and/or limitations on the operational function of our laboratory, all of which could adversely affect our results of operations and financial
condition.
Risks Related to our Operations
The loss of members of our senior management team or our inability to attract and retain key personnel could adversely affect our business.
As a small company with approximately 110 employees, the success of our business depends largely on the skills, experience and performance of members of our
senior management team, including our chief executive officer, and others in key management positions The efforts of these persons will be critical to us as we continue to
grow our clinical services and develop and/or acquire additional molecular diagnostic tests. If we were to lose one or more of these key employees, we may experience
difficulties in competing effectively, developing our technologies and implementing our business strategy. In addition, our commercial laboratory operations depend on our
ability to attract and retain highly skilled scientists, including licensed clinical laboratory scientists. We may not be able to attract or retain qualified scientists and technicians in
the future due to the competition for qualified personnel, and we may have to pay higher salaries to attract and retain qualified personnel. We may also be at a disadvantage in
recruiting and retaining key personnel as our small size, limited resources, and limited liquidity may be viewed as providing a less stable environment, with fewer opportunities
than would be the case at one of our larger competitors. If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may
experience constraints that could adversely affect our ability to support our clinical laboratory and commercialization.
If we lose the support of key opinion leaders or KOL’s, it may limit our revenue growth from our tests or services and our ability to achieve profitability.
We have established relationships with leading oncology opinion leaders at premier cancer institutions and oncology networks. If these key opinion leaders determine
that our existing products and services or other products and services that we develop are not clinically effective, that alternative technologies are more effective, or if they elect
to use internally developed products, we would encounter significant difficulty validating our testing platform, driving adoption, or establishing our tests as a standard of care,
which would limit our revenue growth and our ability to achieve profitability.
40
We have limited experience in marketing and selling our products, and if we are unable to expand our direct sales and marketing force to adequately address our
customer’s needs, our business may be adversely affected.
Although we have been selling commercial products since 2014, genomic diagnostics is a relatively new area of science, and we continue to focus and refine our
efforts to sell, market and receive reimbursement for our clinical service products and to leverage our bioinformatics data. We may not be able to market, sell, or distribute our
existing products or services or other products or services we may develop effectively enough to support our planned growth.
Our future sales will depend in large part on our ability to develop, and substantially expand, our sales force and to increase the scope of our marketing efforts. Our
target market of physicians is a large and diverse market. As a result, we believe it is necessary to develop a sales force that includes sales representatives with specific technical
backgrounds. We will also need to attract and develop marketing personnel with industry expertise. Competition for such employees is intense. We may not be able to attract
and retain personnel or be able to build an efficient and effective sales and marketing force, which could negatively impact sales and market acceptance of our products and
services and limit our revenue growth and potential profitability.
Our expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit, maintain, and integrate
additional employees. Our future financial performance and our ability to commercialize our products and leverage our data and to compete effectively will depend in part on
our ability to manage this potential future growth effectively, without compromising quality.
If our sales force is less successful than anticipated, our business expansion plans could suffer and our ability to generate revenues could be diminished. In
addition, we have limited history selling our clinical services tests on a direct basis, and leveraging our bioinformatics data and our limited history makes forecasting
difficult.
If our sales force is not successful, or new additions to our sales team fail to gain traction among our customers, we may not be able to increase market awareness and
sales of our molecular diagnostic tests. If we fail to establish our clinical services tests in the marketplace, it could have a negative effect on our ability to sell subsequent
products or services and hinder the desired expansion of our business. We have growing, however limited, historical experience forecasting the direct sales of our clinical
services products. Our ability to produce product quantities that meet customer demand is dependent upon our ability to forecast accurately and plan production accordingly.
If we are unable to compete successfully in the markets our clinical services operate in, we may be unable to increase or sustain our revenue or achieve
profitability.
We compete with physicians and the medical community who use traditional methods to diagnose gastrointestinal, endocrine and lung cancers and to conduct clinical
trials. In many cases, practice guidelines in the United States have recommended non-molecular testing like cytology or diagnostic surgery to determine if a patient’s condition
is malignant or benign. As a result, we believe that we will need to continue to educate physicians and the medical community on the value and benefits of our clinical services
tests in order to impact clinical practices. In addition, we face competition from other companies that offer diagnostic tests. Specifically, in regard to our thyroid diagnostic
tests, Veracyte, Inc. (“Veracyte”) has thyroid nodule cancer diagnostic tests which are currently on the market that compete with our ThyGeNEXT® and ThyraMIR®v2 tests.
Quest Diagnostics Inc. currently offers Veracyte’s tests via a co-marketing agreement, and CBLPath, Inc. is offering a diagnostic test performed via the University of Pittsburgh
Medical Center (UPMC) that analyzes genetic alterations using next-generation sequencing mutation panel for pancreatic cysts. While we do not believe we currently have
significant direct competition for PancraGEN® in the gastrointestinal market, technology such as a next-generation sequencing mutation panel could in the future lead to
increased competition.
41
It is also possible that we face future competition from laboratory developed tests, or LDTs, developed by commercial laboratories such as Quest and/or other
diagnostic companies developing new molecular diagnostic tests or technologies. Furthermore, we may be subject to competition as a result of the new, unforeseen technologies
that can be developed by our competitors in the gastrointestinal and endocrine cancer molecular diagnostic testing space. To compete successfully, we must be able to
demonstrate, among other things, that our test results are accurate and cost effective, and we must secure a meaningful level of reimbursement for our tests. Since our clinical
services began in 2014, many of our potential competitors have stronger brand recognition and greater financial capabilities than we do. Others may develop a test with a lower
price than ours that could be viewed by physicians and payers as functionally equivalent to our molecular diagnostic tests or offer a test at prices designed to promote market
penetration, which could force us to lower the price of our clinical services tests and affect our ability to achieve and maintain profitability. If we are unable to compete
successfully against current and future competitors, we may be unable to increase market acceptance of our clinical services tests and overall sales, which could prevent us from
increasing our revenue or achieving profitability and cause the market price of our common stock to decline. As we add new clinical services tests and other products and
services, we will likely face many of these same competitive risks that we do currently.
If we cannot license rights to use third-party technologies on reasonable terms, we may not be able to commercialize new products or services in the future.
In the future, we may license third-party technology to develop or commercialize new products or offer new services. In return for the use of a third-party’s
technology, we may agree to pay the licensor royalties based on sales of our solutions. Royalties are a component of cost of revenue and affect the margins on our solutions. We
may also need to negotiate licenses to patents and patent applications after introducing a commercial product. Our business may suffer if we are unable to enter into the
necessary licenses on acceptable terms, or at all, if any necessary licenses are subsequently terminated, if the licensors fail to abide by the terms of the license or fail to prevent
infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable.
Unfavorable results of legal proceedings could have a material adverse effect on our business, financial condition and results of operations.
We are subject to various legal proceedings and claims that arise in or outside the ordinary course of business. The results of legal proceedings cannot be predicted
with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause significant expense and diversion of management
attention. If we do not prevail in the legal proceedings, we may be faced with significant monetary damages or injunctive relief against us that could have a material adverse
effect on our business, financial condition and results of operations.
If a catastrophe strikes our laboratory or if it becomes inoperable for any other reason, we will be unable to perform our testing and our business will be harmed.
The laboratory and equipment we use to perform our tests and services would be costly to replace and could require substantial lead time to replace and qualify for use
if they became inoperable. Our facilities may be harmed or rendered inoperable by natural or man-made disasters, including earthquakes, flooding, power outages, and health
epidemics or pandemics, which may render it difficult or impossible for us to perform our testing or services for some period of time or to receive and store samples. The
inability to perform our tests or services for even a short period of time, including due to disruption in staffing, supplies, distribution, or transport or temporary closures may
result in the loss of customers or harm our reputation, and we may be unable to regain those customers in the future. Although we maintain insurance for damage to our
property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue to be available to us on acceptable
terms, if at all.
42
If we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We are subject to federal, state and local laws, rules and regulations governing the use, discharge, storage, handling and disposal of biological material, chemicals and
waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from the use, storage, handling or disposal of these materials. In the
event of contamination or injury, we could be held liable for any resulting damages, remediation costs and any related penalties or fines, and any liability could exceed our
resources or any applicable insurance coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may
result in substantial fines or other consequences, and either could have a significant impact on our operating results.
Security breaches, loss of data and other disruptions to us or our third-party service providers could compromise sensitive information related to our business or
prevent us from accessing critical information and expose us to liability, which could adversely affect our business and our reputation.
Our business requires that we and our third-party service providers collect and store sensitive data, including PHI, personally identifiable information such as genetic
information or credit card information about patients or other individuals, and our proprietary business and financial information. We must comply with the HIPAA and
HITECH privacy, security, and breach notification regulations with respect to PHI in our capacity as a covered entity and business associate, and with consumer protection and
consumer privacy laws that apply to our processing of this sensitive data, which may increase our operational costs. Furthermore, the privacy, security, and breach notification
regulations implemented under HIPAA and HITECH as well as other federal and state consumer protection and consumer privacy laws and regulations that may apply to us
provide for significant fines and other penalties, including potential civil and criminal fines and penalties, for non-compliance. We face a number of risks relative to our
protection of, and our service providers’ protection of, this critical information, other personally identifiable information, and our proprietary business and financial
information, including loss of access, fraudulent modifications, inappropriate disclosure and inappropriate access, as well as risks associated with our ability to identify and
audit such events. The secure processing, storage, maintenance and transmission of this critical information is vital to our operations and business strategy, and we devote
significant resources to protecting such information. Although we take measures to protect sensitive information from unauthorized access or disclosure, our information
technology and infrastructure may be vulnerable to attacks by hackers or viruses or otherwise breached due to employee error, malfeasance or other activities. If such event
would occur and cause interruptions in our operations, our networks would be compromised and the information we store on those networks could be accessed by unauthorized
parties, publicly disclosed, modified without our knowledge, lost or stolen. In 2017, we discovered malware installed on certain servers. After an internal investigation, we do
not believe that any PHI or other sensitive data on the affected servers was accessed or compromised. We removed the malware and enhanced our cybersecurity procedures.
Additionally, we engage third-party contractors who, insofar as they are our business associates, are contractually and legally obligated to safeguard and maintain the
confidentiality of any PHI that they create, receive, maintain, transmit, use, or disclose on our behalf. Unauthorized persons may be able to gain access to PHI stored by such
third-party contractors, including in their computer networks. Any wrongful use or disclosure of PHI by us or our third-party contractors, including disclosure due to data theft
or unauthorized access to our or our third-party contractors’ computer networks, could subject us to fines or penalties that could adversely affect our business and results of
operations. Although HIPAA and HITECH and their implementing regulations do not expressly provide for a private right of damages, they permit state attorneys general to
bring civil actions and obtain damages on behalf of state residents for violations, and enjoin further violations, of the privacy and security regulations implemented under
HIPAA. We also could incur damages under state laws to private parties for the wrongful use or disclosure of confidential health information or other private personal
information by us or our third-party contractors. Unauthorized access, loss, modification or dissemination could disrupt our operations, including our ability to process tests,
provide test results, bill payers or patients, process claims, provide customer assistance services, conduct research and development activities, collect, process and prepare
company financial information, provide information about our solution and other patient and physician education and outreach efforts through our website, or manage the
administrative aspects of our business and damage our reputation, any of which could adversely affect our business. In addition, the interpretation and application of consumer,
health-related or other data protection laws in the United States are often uncertain, contradictory and in flux, particularly as more states enact comprehensive consumer privacy
laws. It is possible that these various laws may be interpreted and applied in a manner that is inconsistent with our practices. Complying with these various laws could cause us
to incur substantial costs or require us to change our business practices, systems, and compliance procedures in a manner adverse to our business.
43
We may need to increase the size of our organization, and we may experience difficulties in managing this growth.
We are a small company with approximately 110 employees. We may increase the number of employees in the future depending on the progress and growth of our
business. Future growth will impose significant added responsibilities on members of management, including the need to identify, attract, retain, motivate and integrate
additional employees with the necessary skills to support the growing complexities of our business. Rapid and significant growth may place strain on our administrative,
financial and operational infrastructure. Our future financial performance and our ability to sell or promote our existing tests and services and develop and commercialize new
tests and services and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must be able to:
● manage our clinical studies effectively;
● integrate additional management, administrative, manufacturing and regulatory personnel;
● maintain sufficient administrative, accounting and management information systems and controls; and
● hire and train additional qualified personnel.
We may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results. We may need to reduce the size of our
organization in order to maintain profitability and we may experience difficulties in managing these reductions.
Risks Related to Regulation within our Markets
If we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform our tests or experience disruptions to our
business.
We are subject to CLIA regulations, a Federal law that regulates clinical laboratories that perform testing on specimens derived from humans for the purpose of
providing information for the diagnosis, prevention or treatment of any disease, or impairment of, or the assessment of the health of, human beings. CLIA regulations mandate
specific personnel qualifications, facilities administration, quality systems, inspections and proficiency testing. CLIA certification is also required in order for us to be eligible
to bill federal and state healthcare programs, as well as many private third-party payers, for our molecular diagnostic tests. To renew these certifications, we are subject to
survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory. We are also required to maintain State
licenses to conduct testing in our Pittsburgh, Pennsylvania laboratory. Pennsylvania law requires that we maintain a license and establish standards for the day-to-day operation
of our clinical reference laboratory in Pittsburgh, Pennsylvania. In addition, our Pittsburgh laboratory is required to be licensed by certain states, including California,
Maryland, New York and Rhode Island. New York law requires us to obtain test-specific approval before offering our tests as LDT. California, Maryland, New York and Rhode
Island laws also mandate proficiency testing for laboratories licensed under the laws of each respective State regardless of whether such laboratories are located in California,
Maryland, New York or Rhode Island. If we were unable to obtain or maintain our CLIA certificate for our laboratory, whether as a result of revocation, suspension or
limitation, we would no longer be able to perform our current clinical services, which could have a material adverse effect on our business, financial condition and results of
operations. If we were to lose our licenses issued by States where we are required to hold licenses, if such licenses expired or were not renewed, or if we failed to obtain and
maintain a State license that we are required to hold, we may be subject to significant fines, penalties and liability, and may be forced to cease testing (if Pennsylvania) or cease
testing specimens from those States (if California, New York, Maryland, or Rhode Island), which could have a material adverse effect on our business, financial condition and
results of operations. New molecular diagnostic tests we may develop may be subject to new requirements by governmental bodies, including state governments, and we may
not be able to offer our new molecular diagnostic tests in such jurisdictions until such requirements are met.
44
Legislation reforming the U.S. healthcare system may have a material adverse effect on our financial condition and operations.
PPACA made changes that significantly affected the pharmaceutical, medical device and clinical laboratory industries. For example, PPACA includes coordination and
promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to revise Medicare payment methodologies, such as bundling of
payments across the continuum of care by providers and physicians, and initiatives to promote quality indicators in payment methodologies. PPACA also includes significant
new fraud and abuse measures, including required disclosures of financial arrangements with physicians, lower thresholds for violations and increasing potential penalties for
such violations. The effect of PPACA and any potential changes that may be necessitated by the legislation is uncertain, any of which may potentially affect our business.
Our current position is that we do not meet the definition of an “Applicable Manufacturer” under the Physician Payments Sunshine Act of the PPACA and are therefore
not subject to the disclosure requirements contained in PPACA. If the government were to reach a different conclusion, our failure to disclose could result in significant
monetary penalties and potential claims from certain third parties.
PPACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorous coverage criteria, new payment
methodologies and in additional downward pressure on the price that we receive for any approved product or service, and could seriously harm our future revenues. Any
reduction in reimbursement from Medicare or other government programs may result in a similar reduction in payments from private payers. The implementation of cost
containment measures or other healthcare reforms may compromise our ability to generate revenue, attain profitability or commercialize our products. At the same time, there
have been significant ongoing efforts to repeal, revise, or replace PPACA; however, the U.S. Supreme Court upheld the surviving portions of the law in 2021.
President Biden has used executive orders to undo certain changes to the PPACA made by the Trump administration and has indicated it will advocate for legislation to
build on the PPACA. It is unknown what form any such changes or any law would take, and how or whether it may affect our business in the future. We expect that changes or
additions to the PPACA, the Medicare and Medicaid programs, and changes stemming from other healthcare reform measures, especially with regard to healthcare access,
financing or other legislation in individual states, could have a material adverse effect on the healthcare industry.
For example, Medicare payment rates have been – and in the future, will continue to be, to varying extents, subject to sequestration. Reductions resulting from the
Congressional sequester are applied to total claim payments made; however, they do not currently result in a rebasing of the negotiated or established Medicare or Medicaid
reimbursement rates.
State legislation on reimbursement applies to Medicaid reimbursement and Managed Medicaid reimbursement rates within that state. Some states have passed or
proposed legislation that would revise reimbursement methodology for clinical laboratory payment rates under those Medicaid programs.
In April 2014, President Obama signed the Protecting Access to Medicare Act, or PAMA, which included a substantial new payment system for clinical laboratory
tests under the CLFS. Under PAMA, CLFS payment rates are based upon the weighted median of private payor rates for each type of laboratory test. To calculate these rates,
PAMA requires CLIA-certified laboratories that receive a majority of their Medicare revenue from payments made under the CLFS and the Physician Fee Schedule, and receive
at least $12,500 in CLFS revenue, within the 6-month reporting period, to report private payor rates and volumes for their tests with specific CPT codes based on final
payments made during a 6-month period of data collection (from January 1 through June 30 of the applicable year). For most laboratory tests, the CLFS is updated every three
years, but rates are updated annually for Advanced Diagnostic Laboratory Tests, or ADLTs. The first private payor rate-based CLFS was based on data collected from January 1
through June 30, 2016, and became effective on January 1, 2018. CMS published final rules implementing these changes in 2016 and 2018.
45
Under the revised Medicare Clinical Laboratory Fee Schedule, reimbursement for clinical laboratory testing was reduced for most tests in 2018, 2019, and 2020.
PAMA (as revised) calls for further revisions of the Medicare Clinical Laboratory Fee Schedule for years after 2024, based on surveys of market rates. Further reductions in
reimbursement may result from such revisions.
PAMA, as amended by the Protecting Medicare and American Farmers from Sequester Cuts Act, among other laws, revised payment reductions and the data reporting
schedule for CDLTs that are not ADLTs. Under these laws, the next data reporting period is January 1, 2025 through March 31, 2025, and will be based upon the data collected
during the January 1, 2019 to June 30, 2019 period. Any reductions to payment rates resulting from the new methodology are limited to 10% per test per year in each of the
years 2018 through 2020 and to 15% per test per year in each of the years 2025 through 2027. Payments will not be reduced for 2021 through 2024 for CDLTs.
We cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the United States in which we may do
business, or the effect any future legislation or regulation will have on us. There is additional uncertainty in light of the current Presidential administration. The taxes imposed
by federal legislation, cost reduction measures and the expansion in the role of the U.S. government in the healthcare industry may result in decreased revenue, lower
reimbursement by payers for our tests or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.
Complying with numerous statutes and regulations pertaining to our services is an expensive and time-consuming process, and any failure to comply could result
in substantial penalties.
We are subject to regulation by both the federal government and the governments of the states in which we conduct our operations. The federal and state laws which
may apply to us include, but are not limited to:
● The Food, Drug and Cosmetic Act, as supplemented by various other statutes;
● CLIA and state licensing requirements;
● Manufacturing and promotion laws;
● Medicare and Medicaid billing and payment regulations applicable to clinical laboratories;
● The Eliminating Kickbacks in Recovery Act of 2018 (EKRA), which, among other things, prohibits the solicitation, receipt, payment or offer of any remuneration
(including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, in return for referring a patient or patronage to a recovery home,
clinical treatment facility, or laboratory for services covered by both government and private payers;
● The Federal Anti-Kickback Statute (and state equivalents), which, among other things, prohibits knowingly and willfully offering, paying, soliciting, or receiving
remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of an item or
service that is reimbursable, in whole or in part, by a federal health care program;
● The Federal physician self-referral law, commonly referred to as the “Stark Law,” (and state equivalents), which prohibits a physician from making a referral for, and
an entity receiving the referral from billing for, certain designated health services covered by the Medicare program, including clinical laboratory services, if the
physician or an immediate family member has a financial relationship with the entity providing the designated health services, unless the financial relationship falls
within an applicable exception to the prohibition;
● HIPAA, which establishes comprehensive federal standards with respect to the privacy and security of PHI and requirements for the use of certain standardized
electronic transactions, and amendments made in 2013 to HIPAA under the Health Information Technology for Economic and Clinical Health Act, which strengthen
and expand HIPAA privacy and security compliance requirements, increase penalties for violators, extend enforcement authority to state attorneys general, and impose
requirements for breach notification;
46
● The FTC Act and various state consumer privacy laws, which require regulated entities to take reasonable steps to safeguard the personal information of consumers,
make certain disclosures about our data privacy and security practices to the public and certain state or federal regulators, minimize our use of personal information of
consumers, and provide consumers with certain rights as to their personal data such as the right to correct or delete their personal information;
● The Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare or state healthcare program
beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular provider, practitioner, or supplier of services
reimbursable by Medicare or a state healthcare program, unless an exception applies;
● The Federal False Claims Act (and state equivalents), which imposes liability on any person or entity that, among other things, knowingly presents, or causes to be
presented, a false or fraudulent claim for payment to the federal government;
● The federal transparency requirements under the PPACA, including the provisions commonly referred to as the Physician Payments Sunshine Act, and similar state
laws that require certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare, Medicaid or Children’s Health
Insurance Program to report annually to CMS information related to certain payments and other transfers of value, directly or indirectly, to physicians (defined to
include doctors of medicine, osteopathy, dentists, optometrists, podiatrists and chiropractors), physician assistants, nurse practitioners, clinical nurse specialists,
certified registered nurse anesthetists, anesthesiologist assistants, and certified nurse midwives, and teaching hospitals, and ownership and investment interests held by
physicians and their immediate family members;
● The 21st Century Cures Act information blocking provision prohibiting certain covered actors (including laboratories) from engaging in certain practices that are likely
to interfere with the access, exchange, or use of electronic health information;
● Other federal and state fraud and abuse laws, prohibitions on self-referral and kickbacks, fee-splitting restrictions, prohibitions on the provision of products at no or
discounted cost to induce physician or patient adoption, and false claims acts, transparency, reporting, and disclosure requirements, which may extend to services
reimbursable by any third-party payer, including private insurers;
● The prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims to any other party;
● The Protecting Access to Medicare Act of 2014, as amended, which requires us to report private payer rates and test volumes for specific CPT codes on a triennial
basis and imposes penalties for failures to report, omissions, or misrepresentations;
● The rules regarding billing for diagnostic tests reimbursable by the Medicare program, which among other requirements, prohibit a physician or other supplier from
marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other supplier if the test is performed by a
physician who does not “share a practice” with the billing physician or other supplier; and
● State laws that prohibit other specified practices related to billing such as billing physicians for testing that they order, waiving coinsurance, co-payments, deductibles,
and other amounts owed by patients, and billing a State Medicaid program at a price that is higher than what is charged to other payers.
In recent years U.S. Attorneys’ Offices have increased scrutiny of the healthcare industry, as have Congress, the Department of Justice, the Department of Health and
Human Services’ Office of the Inspector General and the Department of Defense. Many of these bodies have all issued subpoenas and other requests for information to conduct
investigations of, and commenced civil or criminal litigation against, healthcare companies based on financial arrangements with health care providers, regulatory compliance,
product promotional practices and documentation, and coding and billing practices. Whistleblowers have filed numerous qui tam lawsuits against healthcare companies under
the federal and state False Claims Acts in recent years, in part because the whistleblower can receive a portion of the government’s recovery under such suits.
47
The growth of our business may increase the potential of violating these laws, regulations or our internal policies and procedures. The risk of our being found in
violation of these or other laws and regulations is further increased by the fact that many have not been fully interpreted by the regulatory authorities or the courts, and their
provisions are open to a variety of interpretations. Violations of federal or state regulations may incur investigation or enforcement action by the FDA, Department of Justice,
State agencies, or other legal authorities, and may result in substantial civil, criminal, or other sanctions. Any action brought against us for violation of these or other laws or
regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our
business. If our operations are found to be in violation of any of these laws and regulations, we may be subject to civil and criminal penalties, damages and fines, we could be
required to refund payments received by us, we could face possible exclusion from Medicare, Medicaid and other federal or state healthcare programs and we could even be
required to cease our operations. Any of the foregoing consequences could have a material adverse effect on our business, financial condition and results of operations.
A failure to comply with federal and state laws and regulations pertaining to our payment practices could result in substantial penalties.
We retain healthcare practitioners as key opinion leaders providing consultation in various aspects of our business, maintain a sales force, and contract for marketing
services. These arrangements, like any arrangement that includes compensation to a healthcare provider or potential referral source, may trigger federal or state anti-kickback,
Stark Law liability, and False Claims Act liability. There are no guarantees that the federal or state governments will find that these arrangements are designed properly or that
they do not trigger liability under federal and state laws. Under existing laws, arrangements generally must be commercially reasonable and often compensation must be fair
market value. These terms require some subjective analysis. Safe harbors in the anti-kickback laws do not necessarily equate to exceptions in the Stark Law, and there is no
guarantee that the government will agree with our payment practices with respect to the relationships between our laboratory and the healthcare providers, sales force members,
or other parties. A failure to comply with Federal and State laws and regulations pertaining to our payment practices could result in substantial penalties and adversely affect our
business, financial condition and results of operations.
In addition, federal law prohibits any entity from offering or transferring to a Medicare or Medicaid beneficiary any remuneration that the entity knows or should know
is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier of Medicare or Medicaid payable items or services, including waivers of
copayments and deductible amounts (or any part thereof) and transfers of items or services for free or for other than fair market value, unless an exception applies. Entities
found in violation may be liable for civil monetary penalties of up to $24,164 for each wrongful act, adjusted for inflation. Further, federal and state anti-kickback statutes or
similar laws may be implicated by arrangements with patients to waive, reduce, or limit copays or other payment amounts, such as our Patient Assistance Program. Third-party
payers, including commercial payers and government payers, may prohibit, limit, or restrict certain financial arrangements with patients. Violation of these laws or payment
policies could result in significant fines, penalties, liability, recoupment, and exclusion from Medicare and Medicaid, which could have a material adverse effect on our
business, results of operations, financial condition and cash flows.
In 2018, the U.S. enacted the Eliminating Kickbacks in Recovery Act, or EKRA, as part of the Substance Use-Disorder Prevention that Promotes Opioid Recovery and
Treatment for Patients and Communities Act (SUPPORT Act). EKRA is an all-payer anti-kickback law that makes it a criminal offense to, among other things, pay any
remuneration to induce referrals to, or in exchange for, an individual using the services of a recovery home, a substance use clinical treatment facility, or laboratory. Although it
appears that EKRA was intended to reach patient brokering and similar arrangements to induce patronage of substance use recovery and treatment, the language in EKRA is
broadly written. The term “laboratory” is defined broadly and without reference to any connection to substance use disorder treatment. EKRA is a criminal statute and
violations can result in fines of up to $200,000, up to 10 years in prison, or both, per violation. As drafted, EKRA does not clearly protect incentive compensation to sales
employees, a practice that is common in the industry. A failure to comply with EKRA could result in substantial penalties and other adverse consequences that adversely affect
our business, financial condition and results of operations.
48
Our business activities may be subject to the Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery and anti-corruption laws.
Our business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries in which we operate,
including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others to give anything of value, either directly or indirectly, to a non-
U.S. government official in order to influence official action, or otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and
records that accurately and fairly reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business is
heavily regulated and therefore involves significant interaction with public officials, potentially including officials of non-U.S. governments. Additionally, in many other
countries, the health care providers who prescribe pharmaceuticals are employed by their government, and the purchasers of pharmaceuticals are government entities; therefore,
our dealings with these prescribers and purchasers are subject to regulation under the FCPA. Recently, the SEC and Department of Justice have increased their FCPA
enforcement activities with respect to pharmaceutical companies. There is no certainty that all of our employees, agents, contractors, or collaborators, or those of our affiliates,
will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations of these laws and regulations could result in fines,
criminal sanctions against us, our officers, or our employees, the closing down of our facilities, requirements to obtain export licenses, cessation of business activities in
sanctioned countries, implementation of compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to
offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts, our ability to attract and retain
employees, and our business, prospects, operating results, and financial condition.
Changes in governmental regulation could negatively impact our business operations and increase our costs.
The pharmaceutical, biotechnology and healthcare industries are subject to a high degree of governmental regulation. Significant changes in these regulations affecting
our business could result in the imposition of additional restrictions on our business, additional costs to us in providing our tests or services to our customers or otherwise
negatively impact our business operations. Changes in governmental regulations mandating price controls and limitations on patient access to our products could also reduce,
eliminate or otherwise negatively impact our sales. Additional changes may be forthcoming in light of the current Presidential administration.
Risks Relating To Our Intellectual Property
If we are unable to protect our intellectual property effectively, our business would be harmed.
We rely on patent protection as well as trademark, trade secret and other intellectual property rights protection and contractual restrictions to protect our proprietary
technology. If we fail to protect our intellectual property, third parties may be able to compete more effectively against us and we may incur substantial litigation costs in our
attempts to recover or restrict use of our intellectual property. While we apply for patents covering our products and technologies and uses thereof, we may fail to apply for
patents on important products and technologies in a timely fashion or at all, or we may fail to apply for patents in relevant jurisdictions. Others could seek to design around our
current or future patented technologies. We may not be successful in defending any challenges made against our patents or patent applications. Any successful third-party
challenge to our patents could result in the unenforceability or invalidity of such patents and increased competition to our business. The outcome of patent litigation, such as
oppositions or post-grant reviews can be uncertain and any attempt by us to enforce our patent rights against others may not be successful, or, if successful, may take substantial
time and result in substantial cost, and may divert our efforts and attention from other aspects of our business.
49
Monitoring unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be, adequate. If we were to
enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive and time consuming, and the outcome would be unpredictable.
Further, competitors could willfully infringe our intellectual property rights, design around our protected technology or develop their own competitive technologies that
arguably fall outside of our intellectual property rights. Others may independently develop similar or alternative products and technologies or replicate any of our products and
technologies. If our intellectual property does not adequately protect us against competitors’ products and methods, our competitive position could be adversely affected, as
could our business and the results of our operations. To the extent our intellectual property offers inadequate protection, or is found to be invalid or unenforceable, we would be
exposed to a greater risk of competition. If our intellectual property does not provide adequate coverage of our competitors’ products, our competitive position could be
adversely affected, as could our overall business. Both the patent application process and the process of managing patent disputes can be time consuming and expensive.
Changes in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our molecular diagnostic tests.
As is the case with other companies operating in our industry, our success is somewhat dependent on intellectual property, particularly on obtaining and enforcing
patents. Obtaining and enforcing patents of molecular diagnostics tests, like our molecular diagnostic tests in our PancraGEN® and miRInform® platforms (including
ThyGeNEXT®), involves both technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. From time-to-time the U.S. Supreme
Court, other Federal courts, the U.S. Congress or the United States Patent and Trademark Office, or the USPTO, may change the standards of patentability and any such
changes could have a negative impact on our business. For instance, on October 30, 2008, the Court of Appeals for the Federal Circuit issued a decision that methods or
processes cannot be patented unless they are tied to a machine or involve a physical transformation.
The U.S. Supreme Court later reversed that decision in Bilski v. Kappos, finding that the “machine-or-transformation” test is not the only test for determining patent
eligibility. The Court, however, declined to specify how and when processes are patentable. On March 30, 2012, in the case Mayo Collaborative Services v. Prometheus
Laboratories, Inc., the U.S. Supreme Court reversed the Federal Circuit’s application of Bilski and invalidated a patent focused on a process for identifying a proper dosage for
an existing therapeutic because the patent claim embodied a law of nature. On July 3, 2012, the USPTO released a memorandum entitled “2012 Interim Procedure for Subject
Matter Eligibility Analysis of Process Claims Involving Laws of Nature,” with guidelines for determining patentability of diagnostic or other processes in line with the Mayo
decision. On June 13, 2013, in Association for Molecular Pathology v. Myriad Genetics, the Supreme Court held that a naturally occurring DNA segment is a product of nature
and not patent eligible merely because it has been isolated. The Supreme Court did not address the patentability of any innovative method claims involving the manipulation of
isolated genes. On March 4, 2014, the USPTO released a memorandum entitled “2014 Procedure for Subject Matter Eligibility Analysis Of Claims Reciting Or Involving Laws
Of Nature/Natural Principles, Natural Phenomena, And/Or Natural Products.” This memorandum provides guidelines for the USPTO’s new examination procedure for subject
matter eligibility under 35 U.S.C. § 101 for claims embracing natural products or natural principles.
On June 12, 2015, the Federal Circuit issued a decision in Ariosa v. Sequenom holding that a method for detecting a paternally inherited nucleic acid of fetal origin
performed on a maternal serum or plasma sample from a pregnant female were unpatentable as directed to a naturally occurring phenomenon. On July 30, 2015, the USPTO
released a Federal Register Notice entitled, “July 2015 Update on Subject Matter Eligibility,” This Notice updated the USPTO guidelines for the USPTO’s procedure for subject
matter eligibility under 35 U.S.C. § 101 for claims embracing natural products or natural principles phenomenon. On May 4, 2016, the USPTO released life science examples
that were intended to be used in conjunction with the USPTO guidance on subject matter eligibility. Although the guidelines and examples do not have the force of law, patent
examiners have been instructed to follow them. On February 6, 2019, the Federal Circuit for Court of Appeals issued a decision in Athena Diagnostics, Inc. v. Mayo
Collaborative Servs., LLC, which relied on the decisions from Mayo and Ariosa, to find a claim directed to a method for diagnosing neurotransmission or developmental
disorders related to muscle specific tyrosine kinase not eligible for patenting under 35 U.S.C. § 101. What constitutes a law of nature and a sufficient inventive concept
continues to remain uncertain, and it is possible that certain aspects of diagnostic tests will continue to be considered natural laws and, therefore, ineligible for patent protection.
50
Some aspects of our technology involve processes that may be subject to this evolving standard and we cannot guarantee that any of our pending or issued claims will
be patentable or upheld as valid as a result of such evolving standards. In addition, patents we own or license that issued before these recent cases may be subject to challenge
in court or before the USPTO in view of these current legal standards. Accordingly, the evolving interpretation and application of patent laws in the United States governing the
eligibility of diagnostics for patent protection may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned and licensed patents.
Changes in either the patent laws or in interpretations and application of patent laws may also diminish the value of our existing intellectual property or intellectual property
that we continue to develop. We cannot predict the breadth of claims that may be allowed or enforceable in our patents or in third-party patents.
We may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our business, operating results
or financial condition.
We may receive notices of claims of direct or indirect infringement or misappropriation or misuse of other parties’ proprietary rights from time to time and some of
these claims may lead to litigation. We cannot assume that we will prevail in such actions, or that other actions alleging misappropriation or misuse by us of third-party trade
secrets, infringement by us of third-party patents and trademarks or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted
against us. We might not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first to file patent
applications for these inventions. No assurance can be given that other patent applications will not have priority over our patent applications. If third parties bring these
proceedings against our patents, we could incur significant costs and experience management distraction. Litigation may be necessary for us to enforce our patents and
proprietary rights or to determine the scope, coverage and validity of the proprietary rights of others. Defending any litigation, and particularly patent litigation, is expensive
and time-consuming, and the outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us. It is also possible that we might not be able
to obtain licenses to technology that we require on acceptable terms or at all. In addition, if we resort to legal proceedings to enforce our intellectual property rights or to
determine the validity, scope and coverage of the intellectual property or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we
were to prevail. Any litigation that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect on our
business, financial condition and operating results.
In the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, and obtain one or more licenses from third
parties, or be prohibited from selling our products. We may not be able to obtain these licenses on acceptable terms, if at all. We could incur substantial costs related to royalty
payments for licenses obtained from third parties, which could negatively affect our financial results. In addition, our agreements with some of our customers, suppliers or other
entities with whom we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the types of claims
described above. If we are required or agree to defend or indemnify third parties in connection with any infringement claims, we could incur significant costs and expenses that
could have a material adverse effect on our business, financial condition, and results of operations.
Other Risks Related to our Business
Our ability to use our net operating loss carryforwards may be limited and may result in increased future tax liability to us.
We incurred net losses from 2015-2022 and may never achieve sustained profitability. As of the fiscal year ended December 31, 2023, we had U.S. federal and state
net operating losses, or NOLs, of approximately $125.8 million and $60.8 million, respectively. Subject to the final two sentences of this paragraph, the federal and state NOL
carryforwards will begin to expire, if not utilized, beginning in 2028 for certain states. These NOL carryforwards could expire unused and be unavailable to offset future income
tax liabilities. Under current federal income tax law, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely, but the
deductibility of such federal NOLs is limited to 80% of Federal taxable income.
51
To the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any. We may be limited in the portion of
NOL and tax credit carryforwards that we can use in the future to offset taxable income for U.S. federal and state income tax purposes. Sections 382 and 383 of Internal
Revenue Code of 1986, or the Code, limit the use of NOLs and tax credits after a cumulative change in corporate ownership of more than 50% occurs within a three-year
period. The limitation could prevent us from using some or all of our NOLs and tax credits, as it places a formula limit of how much of our NOL and tax credit carryforwards
we would be permitted to use in a tax year. The amount of the annual limitation, if any, will be determined based on the value of our company immediately prior to an
ownership change. During the periods 2017 through 2019, the company experienced greater than 50% changes in ownership and as a result, NOLs attributable to the pre-
ownership change are subject to a substantial annual limitation under Section 382 of the Code due to the ownership changes. The Company has adjusted their NOL
carryforwards to address the impact of the Section 382 ownership changes. Federal Net Operating Losses of $71.2 million are subject to annual limitation for ownership
changes and the Company is utilizing $1.0 million during the current year. The remaining $55.6 million of NOLs incurred post July 15, 2019 are not subject to any annual
limitation and can be carried forward indefinitely. Subsequent ownership changes may further affect the limitation in future years. In the event we have undergone or will
undergo an ownership change under Section 382 of the Code, if we earn net taxable income, our ability to use our pre-change NOL carryforwards to offset U.S. federal taxable
income may become subject to these limitations, which could potentially result in increased future tax liability to us.
Comprehensive tax reform could adversely affect our business and financial condition.
New income, sales and use or other tax laws or regulations could be enacted at any time, which could adversely affect our business operations and financial
performance. Further, existing tax laws and regulations could be interpreted, modified or applied adversely to us. These events could require us to pay additional taxes on a
prospective or retroactive basis, as well as penalties, interest and other costs for past amounts deemed to be due. New laws, or laws that are changed, modified or newly
interpreted or applied, also could increase our compliance, operating and other costs, as well as the costs of our products. For example, the Tax Cuts and Jobs Act of 2017
enacted many significant changes to the U.S. tax laws, some of which were further modified by the Coronavirus Aid, Relief, and Economic Security Act, and may be modified
in the future by the current or a future presidential administration. In addition, it is uncertain if and to what extent various states will conform to current federal law, or any
newly enacted federal tax legislation. Changes in corporate tax rates, the realization of net operating losses, and other deferred tax assets relating to our operations, the taxation
of foreign earnings, and the deductibility of expenses could have a material impact on the value of our deferred tax assets and could increase our future tax expense.
We may acquire businesses or assets or make investments in other companies or testing, service or solution technologies that could harm our operating results,
dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As part of our strategy, we may pursue acquisitions of synergistic businesses or other related assets. If we make any further acquisitions, we may not be able to
integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent liabilities. Any future acquisition by us also could result in
significant write-offs or the incurrence of debt and contingent liabilities, any of which could harm our operating results and financial condition. Integration of an acquired
company or business will also likely require management resources that otherwise would be available for ongoing development of our existing business. We may not identify or
complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits of any acquisition. To finance any acquisitions
or investments, we may choose to issue shares of our common stock as consideration, which would dilute the ownership of our stockholders. If the price of our common stock
is low or volatile, we may not be able to acquire other companies for stock. Alternatively, it may be necessary for us to raise additional funds for these activities through public
or private financings. Additional funds may not be available on terms that are favorable to us, or at all. If these funds are raised through the sale of equity or convertible debt
securities, dilution to our stockholders could result. The holders of our Series B Preferred Stock have the right to approve any public offering. Consummating an acquisition
poses a number of risks including:
● we may not be able to accurately estimate the financial impact of an acquisition on our overall business;
52
● an acquisition may require us to incur debt or other obligations, incur large and immediate write-offs, issue capital stock potentially dilutive to our stockholders or
spend significant cash, or may negatively affect our operating results and financial condition;
● if we spend significant funds or incur additional debt or other obligations, our ability to obtain financing for working capital or other purposes could decline;
● worse than expected performance of an acquired business may result in the impairment of intangible assets;
● we may be unable to realize the anticipated benefits and synergies from acquisitions as a result of inherent risks and uncertainties, including difficulties integrating
acquired businesses or retaining key personnel, partners, customers or other key relationships, and risks that acquired entities may not operate profitably or that
acquisitions may not result in improved operating performance;
● we may fail to successfully manage relationships with customers, distributors and suppliers;
● our customers may not accept new molecular diagnostic tests;
● we may fail to effectively coordinate sales and marketing efforts of our acquired businesses;
● we may fail to combine product offerings and product lines of our acquired businesses timely and efficiently;
● an acquisition may involve unexpected costs or liabilities, including as a result of pending and future shareholder lawsuits relating to acquisitions or exercise by
stockholders of their statutory appraisal rights, or the effects of purchase accounting may be different from our expectations;
● an acquisition may involve significant contingent payments that may adversely affect our future liquidity or capital resources;
● accounting for contingent payments requires significant judgment and changes to the assumptions used in determining the fair value of our contingent payments could
lead to significant volatility in earnings;
● acquisitions and subsequent integration of these companies may disrupt our business and distract our management from other responsibilities; and
● the costs of an unsuccessful acquisition may adversely affect our financial performance.
Additional risks of integration of an acquired business include:
● differing information technology, internal control, financial reporting and record-keeping systems;
● differences in accounting policies and procedures;
● unanticipated additional transaction and integration-related costs;
● facilities or operations of acquired businesses in remote locations and the inherent risks of operating in unfamiliar legal and regulatory environments; and
● new products, including the risk that any underlying intellectual property associated with such products may not have been adequately protected or that such products
may infringe on the proprietary rights of others.
53
If our information technology or communications systems fail or we experience a significant interruption in their operation, our reputation, business and results
of operations could be materially and adversely affected.
The efficient operation of our business is dependent on our information technology and communications systems. Increasingly, we are also dependent upon our ability
to electronically interface with our customers. The failure of these systems to operate as anticipated could disrupt our business and result in decreased revenue and increased
overhead costs. In addition, we do not have complete redundancy for all of our systems and our disaster recovery planning cannot account for all eventualities. Our information
technology and communications systems, including the information technology systems and services that are maintained by third party vendors, are vulnerable to damage or
interruption from natural disasters, fire, terrorist attacks, epidemics, pandemics including COVID-19, malicious attacks by computer viruses or hackers, power loss, failure of
computer systems, Internet, telecommunications or data networks. In 2017, we discovered malware installed on certain clinical services servers. We do not believe that any data
on the affected servers was accessed or compromised. We removed the malware, and enhanced our cybersecurity procedures. Additionally, our services are largely dependent
on our partially internally developed and partially purchased Laboratory Information Management Systems or LIMS, which is our automated basis of managing operations and
storing data and customer information. If these systems or services become unavailable or suffer a security breach, or are uneconomical or impossible to update and modify, we
may expend significant resources to address these problems, and our reputation, business and results of operations could be materially and adversely affected.
Risks Related To Our Common Stock Price
The price and trading volume of our common stock may be highly volatile and could be further affected by events not within our control, and an investment in our
common stock could suffer a decline in value.
During 2023, our common stock traded at a low of $0.62 and a high of $3.54. During 2022, our common stock traded at a low of $0.51 and a high of $8.69. Volatility
in our stock price or trading volume may be in response to various factors, some of which may be beyond our control. In addition to the other factors discussed or incorporated
by reference herein, factors that may cause fluctuations in our stock price or trading volume, include, among others:
● general volatility in the trading markets;
● the impact of the delisting of our common stock from Nasdaq;
● adverse research and development results;
● significant fluctuations in our quarterly operating results;
● significant changes in our cash and cash equivalent reserves;
● our liquidity and ability to obtain additional capital, including the market’s reaction to any announced capital-raising transactions;
● market assessments of any announced strategic transaction, including the likelihood that it would be completed and the timing for completion;
● potential negative market reaction to the terms or volume of any issuance of shares of our common stock, preferred stock or other securities to new investors, pursuant
to strategic or capital-raising transactions or to employees, directors or other service providers;
● sales of substantial amounts of our common stock, or the perception that substantial amounts of our common stock may be sold, by stockholders in the public market;
● announcements regarding our business or the business of our competitors;
54
● announcements regarding our equity offerings;
● strategic actions by us or our competitors, such as acquisitions or restructurings;
● industry and/or regulatory developments;
● changes in revenue mix;
● changes in revenue and revenue growth rates for us and for the industries in which we operate;
● changes in accounting standards, policies, guidance, interpretations or principles;
● statements or changes in opinions, ratings or earnings estimates made, or the failure to make, by brokerage firms or industry analysts relating to the markets in which
we operate or expect to operate; and
● general market and economic conditions.
The issuance of additional shares of our common stock in any future offerings could be dilutive to stockholders.
The issuance of additional shares of our common stock in any future offerings could be dilutive to stockholders. In order to raise additional capital, such securities may
be at prices that are not the same as the price per share in previous offerings. We cannot assure investors that we will be able to sell shares or other securities in any other
offering at a price per share that is equal to or greater than the price per share paid by investors in previous offerings, and investors purchasing shares or other securities in the
future could have rights superior to existing stockholders. Moreover, to the extent that we issue options or warrants to purchase, or securities convertible into or exchangeable
for, shares of our common stock in the future (including our Series B Preferred Stock), and those options, warrants or other securities are exercised, converted or exchanged,
stockholders may experience further dilution.
The delisting of our common stock from Nasdaq and potential delisting from OTCQX® has adversely affected our common stock and business and financial
condition.
On February 25, 2020, our common stock was delisted from the Nasdaq Capital Market (“Nasdaq”) and commenced trading on the OTCQX® Best Market tier of the
OTC Markets Group Inc. (the “OTCQX”), an electronic quotation service operated by OTC Markets Group Inc.
Trading in stock quoted on the OTCQX is often thin, volatile, and characterized by wide fluctuations in trading prices, due to many factors that may have little to do
with the issuer’s operations, results or business prospects. The availability of buyers and sellers represented by this volatility could lead to a market price for our Common
Stock that is unrelated to operating performance. Moreover, the OTCQX is not a stock exchange, and trading of securities quoted on the OTCQX is often more volatile than the
trading of securities listed on a stock exchange like Nasdaq or the New York Stock Exchange. The OTCQX quotation system may provide less liquidity than Nasdaq.
Prices for securities traded solely on the OTCQX quotation system may be difficult to obtain, and holders of our common stock may be unable to resell their shares at
or near their original acquisition price or at any price. Further, our delisting from Nasdaq and commencement of trading on the OTCQX has and may continue to have negative
implications, including an adverse effect on the price of our common stock, increased volatility in our common stock, the loss of federal preemption of state securities laws,
greater difficulty in raising capital through the public or private sale of equity securities, deterring broker-dealers from making a market in or otherwise seeking or generating
interest in our common stock, a loss of current or future coverage by certain sell-side analysts, deterring certain institutions and persons from investing in our securities at all
and a loss of confidence of our customers, collaborators, vendors, suppliers and employees, which could harm our business and future prospects.
55
On December 28, 2023, we received notice from the OTCQX indicating that the Company’s market capitalization has been below the required $5 million for 30
consecutive calendar days preceding the date of such notice, and that the Company no longer meets the standards for continued qualification for the OTCQX U.S. tier under the
OTCQX Rules for U.S. Companies section 3.2.b.2. On March 20, 2024 we received notice from the OTCQX indicating that the Company’s market capitalization has stayed
above the required $5 million for ten consecutive trading days preceding the date of such notice, and that the Company currently satisfies the standards for continued
qualification for the OTCQX U.S. tier under the OTCQX Rules for U.S. Companies.
The risks associated with penny stock classification could affect the marketability of the Company’s common stock and stockholders could find it difficult to sell
their shares.
If the Company’s shares of Common Stock do not maintain a trading price of $5.00 or more per share, the Company’s common stock will be subject to “penny stock”
rules as defined in Exchange Act Rule 3a51-1. The SEC adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Transaction costs
associated with purchases and sales of penny stocks are likely to be higher than those for other securities. Penny stocks generally are equity securities with a price of less than
$5.00.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure
document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the
market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given
to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation.
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules; the broker-dealer must make a special
written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in the secondary market for the Company’s common stock and stockholders may find it more difficult
to sell their shares.
Risks Relating to Being a Public Company
We will continue to incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public companies, which
could harm our operating results.
As a public company, we are incurring significant legal, accounting and other expenses. In addition to being required to comply with certain requirements of the
Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), we are required to comply with certain requirements of the Dodd Frank Wall Street Reform and Consumer Protection
Act, as well as rules and regulations subsequently implemented by the SEC, including the establishment and maintenance of effective disclosure and financial controls and
changes in corporate governance practices. We expect that compliance with these requirements will continue to increase our legal and financial compliance costs and will make
some activities more time consuming and costly. In addition, we expect that our management and other personnel will continue to need to divert attention from operational and
other business matters to devote substantial time to these public company requirements.
For example, in 2020, our Audit Committee conducted an independent investigation in accordance with Section 10A of the Exchange Act into complaints of certain
employment and billing and compliance matters and concluded that the allegations made in the complaints were unsubstantiated and that there was no evidence of any illegal
acts. The completion of the investigation caused us to be late in filing our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020.
We also spent considerable management time in connection with our restatement of previously issued financial statements contained in our Annual Reports on Form
10-K for the years ended December 31, 2014 through 2019 as well as the financial statements contained in the Quarterly Reports on Form 10-Q for each quarterly period within
those fiscal years as well as the quarterly periods ended March 31, 2020 and June 30, 2020. This was due to evaluating and recording an impairment charge and amortization
expense relating to our BarreGen asset, as disclosed in Item 9A of our Report on Form 10-K for the fiscal year 2021.
56
Further, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and
procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the
effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, if we lose our status as a “smaller reporting
company,” we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting. Our
compliance with Section 404 of the Sarbanes-Oxley Act, as applicable, requires us to incur substantial accounting expense and expend significant management efforts. We
currently do not have an internal audit group, and we will need to continue to hire additional accounting and financial staff with appropriate public company experience and
technical accounting knowledge. If we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed
to be material weaknesses, such as the material weakness described in Item 9A of this report, the market price of our stock could decline and we could be subject to sanctions or
investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.
If we are unable to maintain and implement effective internal controls over financial reporting, investors may lose confidence in the accuracy and completeness of
our reported financial information and the market price of our common stock may be negatively affected.
As a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. See the
material weakness described in Item 9A. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal control over
financial reporting and provide a management report on our internal controls on an annual basis. If we have material weaknesses in our internal control over financial reporting,
we may not detect errors on a timely basis and our financial statements may be materially misstated. We will need to maintain and enhance these processes and controls as we
grow, and we will require additional management and staff resources to do so. Additionally, even if we conclude our internal controls are effective for a given period, we may in
the future identify one or more material weaknesses in our internal controls, in which case our management will be unable to conclude that our internal control over financial
reporting is effective. Even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm may
conclude that there are material weaknesses with respect to our internal controls or the level at which our internal controls are documented, designed, implemented or reviewed.
If we are unable to conclude that our internal control over financial reporting is effective, investors could lose confidence in the accuracy and completeness of our
financial disclosures, which could cause the price of our common stock to decline. Irrespective of compliance with Section 404, any failure of our internal control over financial
reporting could have a material adverse effect on our reported operating results and harm our reputation. Internal control deficiencies could also result in a restatement of our
financial results.
Risks Relating to Our Corporate Structure and Our Common Stock
We have a substantial number of authorized shares of common and preferred stock available for future issuance that could cause dilution of our stockholders’
interest, adversely impact the rights of holders of our common stock and cause our stock price to decline.
We have a total of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized for issuance. As of December 31, 2023, we had 95,648,555
shares of common stock and 4,953,000 shares of preferred stock available for issuance. As of December 31, 2023, we have reserved 692,688 shares of our common stock for
issuance under our 2019 Equity Incentive Plan and 1,000,007 shares of our common stock for issuance under our Employee Stock Purchase Plan and 1,677,248 additional
shares available for future grants of awards under our 2019 Equity Incentive Plan. As of December 31, 2023, the aggregate number of shares of common stock that may be
issued through conversion of all of the outstanding Series B Preferred Stock is 7,833,334. Provided that we have a sufficient number of unreserved authorized capital stock
available, we may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire additional shares of our capital stock. We may
also make acquisitions that result in issuances of additional shares of our capital stock. Those additional issuances of capital stock could result in substantial dilution of our
existing stockholders. Furthermore, the book value per share of our common stock may be reduced. This reduction would occur if the exercise price of any issued warrants, the
conversion price of any convertible notes or the conversion ratio of any issued preferred stock is lower than the book value per share of our common stock at the time of such
exercise or conversion. Additionally, new investors in any subsequent issuances of our securities could gain rights, preferences and privileges senior to those of holders of
common stock.
57
The addition of a substantial number of shares of our common stock into the market or the registration of any of our other securities under the Securities Act may
significantly and negatively affect the prevailing market price for our common stock. The future sales of shares of our common stock issuable upon the exercise of outstanding
warrants and options may have a depressive effect on the market price of our common stock, as such warrants and options would be more likely to be exercised at a time when
the price of our common stock is greater than the exercise price.
Any weakness in our disclosure controls and procedures and our internal controls could have a material adverse effect on us.
As discussed in “Item 9A-Controls and Procedures,” our senior management has identified material weaknesses in our disclosure controls and procedures and our internal
controls over financial reporting. We cannot assure you that additional material weaknesses will not be identified in the future. Any such failure could adversely affect our
ability to report financial results on a timely and accurate basis, which could have other material effects on our business, reputation, results of operations, financial condition or
liquidity. Material weaknesses in internal controls over financial reporting or disclosure controls and procedures could also cause investors to lose confidence in our reported
financial information which could have an adverse effect on the trading price of our securities.
We have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock.
Our certificate of incorporation, as amended, and amended and restated bylaws include provisions, such as providing for three classes of directors, which may make it
more difficult to remove our directors and management and may adversely affect the price of our common stock. In addition, our certificate of incorporation, as amended,
authorizes the issuance of “blank check” preferred stock, which allows our Board to create one or more classes of preferred stock with rights and preferences greater than those
afforded to the holders of our common stock without separate shareholder approval. This provision could have the effect of delaying, deterring or preventing a future takeover
or a change in control, unless the takeover or change in control is approved by our Board. We are also subject to laws that may have a similar effect. For example, Section 203
of the General Corporation Law of the State of Delaware prohibits us from engaging in a business combination with an interested stockholder for a period of three years from
the date the person became an interested stockholder unless certain conditions are met. As a result of the foregoing, it will be difficult for another company to acquire us and,
therefore, could limit the price that possible investors might be willing to pay in the future for shares of our common stock. In addition, the rights of our common stockholders
are subject to, and may be adversely affected by, the rights of holders of our Series B Preferred Stock as well as any class or series of preferred stock that may be issued in the
future and by the rights of holders of warrants issued in the future.
We may be subject to securities litigation, which is expensive and could divert our management’s attention.
The market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their securities have been subject to
securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our
management’s attention from other business concerns, which could seriously harm our business.
The indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage lawsuits against its
directors, officers, and employees.
Our certificate of incorporation, as amended, contains provisions permitting us to enter into indemnification agreements with our directors, officers, and employees.
The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the cost of settlement or damage awards against directors and officers,
which we may be unable to recoup. These provisions and resultant costs may also discourage us from bringing a lawsuit against our directors and officers for breaches of their
fiduciary duties and may similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions, if successful,
might otherwise benefit us and our stockholders.
58
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cyber Risk Management and Strategy
We have developed and maintain processes designed to assess, identify, and manage cybersecurity risks from potential unauthorized occurrences on or through our
information technology systems that may result in adverse effects on the confidentiality, integrity, and availability of these systems and the data residing therein. The scope of
these processes includes risks that may be associated with both our internally managed information technology (“IT”) systems and key business functions and sensitive data
operated or managed by or maintained at third-party service providers. These processes are managed and monitored by a dedicated information technology team, which is led
by our head of IT, and include mechanisms, controls, technologies, systems, and other processes designed to prevent or mitigate data loss, theft, misuse, or other security
incidents or vulnerabilities affecting the data and maintain a stable information technology environment. We constantly monitor our information technology environment for
abnormal behavior, conduct penetration and vulnerability testing, data recovery testing, security audits, and ongoing risk assessments, including due diligence on our key
technology vendors and other third party service providers that have access to the personal information we collect, use, store, and transmit. We also conduct periodic employee
trainings on cyber and information security, among other topics. We leverage standard industry tools from a software and hardware perspective and maintain a cybersecurity
risk insurance policy.
We consider cybersecurity, along with other significant risks that we face, within our overall enterprise risk management framework. In the last fiscal year, we have not
identified risks from known cybersecurity threats, including as a result of any prior cybersecurity incidents, which have materially affected us, but we face certain ongoing
cybersecurity risks threats that, if realized, are reasonably likely to materially affect us.
Governance Related to Cybersecurity Risks
The Board of Directors, as a whole and at the committee level, has oversight for the most significant risks facing us and for our processes to identify, prioritize, assess,
manage, and mitigate those risks. The Compliance Committee, which is comprised solely of independent directors, has been designated by our Board to oversee cybersecurity
risks. The Compliance Committee receives periodic updates on cybersecurity and information technology matters and related risk exposures. The Board also receives updates
from management and the Compliance Committee on cybersecurity risks on at least an annual basis.
Our Vice President of Information Technology has over 10 years of experience managing information technology and cybersecurity matters. The Vice President of
Information Technology, together with our senior leadership team, are responsible for assessing and managing cybersecurity risks and they work collaboratively across our
company to implement policies and procedures designed to protect our information and systems from cybersecurity threats and to respond promptly to any material
cybersecurity incidents in accordance with our incident response plans. A cross-functional team is responsible for responding to cybersecurity incidents.
ITEM 2.
PROPERTIES
Our corporate headquarters are located in Parsippany, New Jersey. Our Parsippany, New Jersey lease is month-to-month. Our diagnostic laboratory facility is located in
Pittsburgh, Pennsylvania where we lease approximately 21,400 square feet. Our Pittsburgh, Pennsylvania lease runs through June 30, 2028.
Accordingly, we believe that our current facilities are adequate for our current and foreseeable operations and that suitable additional space will be available if needed.
59
ITEM 3.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings. We may from time to time become involved in legal proceedings arising in the ordinary course of business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR OUR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Effective February 25, 2021, our common stock was delisted from The Nasdaq Capital Market and began trading on the OTCQX Best Market under the symbol “IDXG.”
OTCQX Best Market quotations reflect inter-dealer prices and may not necessarily represent actual transactions.
On December 28, 2023, we received notice from the OTCQX indicating that the Company’s market capitalization has been below the required $5 million for 30
consecutive calendar days preceding the date of such notice, and that the Company no longer meets the standards for continued qualification for the OTCQX U.S. tier under the
OTCQX Rules for U.S. Companies section 3.2.b.2. On March 20, 2024 we received notice from the OTCQX indicating that the Company’s market capitalization has stayed
above the required $5 million for ten consecutive trading days preceding the date of such notice, and that the Company currently satisfies the standards for continued
qualification for the OTCQX U.S. tier under the OTCQX Rules for U.S. Companies.
Holders of Record
We had 191 stockholders of record as of February 29, 2024. Not reflected in the number of stockholders of record are persons who beneficially own shares of common
stock held in nominee or street name.
Dividends
We have not declared any cash dividends and do not intend to declare or pay any cash dividends in the foreseeable future. Future earnings, if any, will be used to finance
the future operation and growth of our businesses.
Unregistered Sales of Equity Securities
None.
Use of Proceeds
None.
Repurchases
None.
ITEM 6.
RESERVED
60
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 August 31, 2022, the Company and Interpace Pharma Solutions, Inc. (the “Subsidiary”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with
Flagship Biosciences, Inc. (the “Purchaser”) pursuant to which the Purchaser agreed to (i) acquire substantially all of the assets of the Subsidiary used in Subsidiary’s business
of complex molecular analysis for the early diagnosis and treatment of cancer and supporting the development of targeted therapeutics (the “Business”) and (ii) assume and pay
certain liabilities related to the purchased assets as set forth in the Purchase Agreement (collectively, the “Transaction”). The Transaction closed on August 31, 2022.
As consideration for the Transaction, under the Purchase Agreement, the Company received a total purchase price of approximately $6.2 million after working capital and
other adjustments ($0.5 million of which was deposited into escrow), subject to the assumption by the Purchaser of certain specified liabilities. In addition, subject to the terms
and conditions set forth in the Purchase Agreement, Purchaser was obligated to pay the Company an earnout of up to $2.0 million based on revenue for the period beginning
September 1, 2021 and ending August 31, 2022. The Company received an earnout payment of approximately $1.0 million in September 2022 which is the fully settled amount
and there will be no further earnout payments in the future. In the third quarter of 2023, the $0.5 million funds in escrow were released to the Company.
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 August 31, 2022, the Company, the Subsidiary and the Purchaser entered into a Shared Services Agreement (the “Shared Services
Agreement”) pursuant to which the Company agreed to provide, or cause its affiliates to provide, to the Purchaser certain services set forth in the Shared Services Agreement on
a transitional basis and subject to the terms and conditions set forth in the Shared Services Agreement (the “Services”). As consideration for the Services provided by the
Company, the Purchaser is paying the Company the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s obligations to provide
the Services will terminate with respect to each Service as set forth in the Shared Services Agreement.
The Purchaser is identified as a related party of the Company and is as an affiliate of both Ampersand, a private equity investor in the Company, and BroadOak, a secured
lender to the Company. Ampersand and BroadOak have each provided equity financing to the Purchaser, collectively own a majority of the Purchaser’s outstanding equity
securities and are represented on its Board of Directors.
61
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 January 2022, CMS stated they would no longer reimburse for the use of the Company’s ThyGeNEXT® and ThyraMIR® tests when billed together by the same
provider/supplier for the same beneficiary on the same date of service. However, on February 28, 2022, the Company announced that the National Correct Coding Initiative
(NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and ThyraMIR® (0018U)
tests has been retroactively reversed to January 1, 2022. In May 2022, the Company was notified by CMS/NCCI that processing of claims for dates of service after January 1,
2022 would be completed beginning July 1, 2022. However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT® (0245U) from $2,919 to $806.59
retroactively effective to January 1, 2022. On July 20, 2022, the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price of $806.59. As a result of
the ThyGeNEXT® pricing change, the Company reduced its NRV rates for ThyGeNEXT® Medicare billing to reflect the $806.59 pricing for tests performed during the second
quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment of $0.7 million during the second
quarter of 2022 to reduce revenue recorded during the first quarter of 2022. During July 2022, the Company began implementing cost-savings initiatives including a reduction
in headcount and incidental expenses and a freeze on all non-essential travel and hiring. In August 2022, the Company sold its Pharma Solutions business. Effective January 1,
2023, the gapfill price for ThyGeNEXT® was set at $1,266.07.
Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by our local Medicare Administrative
Contractor, Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular
tests, PancraGEN®. On June 5, 2023 we announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which, if finalized, would have established
non-coverage for the Company’s widely used PancraGEN® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the final
Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies and
tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation and
submitted detailed written comments supporting the use of PancraGEN®. The timing and content of any final implemented LCD is uncertain at this time; the process could
potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN® and the related
Point2® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN® test, the Company’s liquidity could be
negatively impacted.
Impact of the ongoing military conflict between Russia and Ukraine and the war between Israel and Hamas.
In February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is highly unpredictable, this war
has led, and could continue to lead, to significant market and other disruptions, including instability in financial markets, supply chain interruptions, political and social
instability, and increases in cyberattacks, intellectual property theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business.
We have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any resulting government reactions,
are rapidly developing and beyond our control.
Further, on October 7, 2023, Hamas, a U.S. designated Foreign Terrorist Organization, launched terrorist attacks against Israel. Israel then declared war on Hamas and there
is currently an armed conflict in Israel and the Gaza Strip and elsewhere in the Middle East. The extent and duration of the wars in Ukraine and Israel/Gaza expanding
geopolitical tensions and any resulting market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an
unknown period of time. Any of the above-mentioned factors could materially adversely affect our business, financial condition, and results of operations.
62
We are also monitoring other macro-economic and geopolitical developments such as inflation and cybersecurity risks so that the Company can be prepared to react to new
developments as they arise.
Clinical services
Our clinical services business commercializes clinically useful molecular diagnostic tests and molecular pathology services. We commercialize genomic tests and related
first-line assays principally focused on risk-stratification of cancer using the latest technology to help personalize 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 surgery or surveillance
treatment decisions in patients suspected of thyroid, pancreatic, and other cancers. The molecular diagnostic tests we offer enable healthcare providers to stratify cancer risk,
helping to avoid unnecessary surgical treatment in patients at low risk, while also helping to identify patients that would benefit from increased surveillance or surgical
intervention.
Our mission is to assist healthcare providers in the diagnosis, triage, and treatment of patients through advanced diagnostics. Our laboratory is licensed pursuant to federal
law under Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) and are accredited by College of American Pathologists (“CAP”) and our products are approved
by New York State. We are leveraging our laboratory to refine 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 other cancers. Our customers consist primarily of physicians,
hospitals, and clinics.
We currently have five commercialized molecular diagnostic tests in the marketplace: PancraGEN®, a pancreatic cyst and pancreaticobiliary solid lesion genomic test that
helps physicians better risk-stratify pancreaticobiliary cancers using our proprietary PathFinderTG® platform and full integration of clinical factors; PanDNA®, an alternate
reporting option of the PathFinderTG platform, which provides physicians the “molecular only” information provided within PancraGEN; ThyGeNEXT®, an expanded
oncogenic mutation panel that helps “rule-in” and “rule-out” malignancy in thyroid nodules; ThyraMIR®v2, used in combination with ThyGeNEXT®, which further stratifies
thyroid nodules for malignancy risk utilizing a proprietary microRNA gene expression classifier; and RespriDx® a genomic test that also utilizes our PathFinderTG® platform,
to help physicians differentiate metastatic or recurrent lung cancer from the presence of newly formed primary lung cancer.
The global esoteric molecular diagnostics market is estimated to be $25.9 billion (USD) in 2023 and is expected to grow to $54.9 billion (USD) by 2030 with a Compound
Annual Growth rate or CAGR of 11.3% between 2023 and 2030, according to Coherent Market Insights (Report Code: CMI6261, published November 2023).
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.
OTCQX
On February 24, 2021, the Company was approved to have its common stock quoted on the OTCQX® Best Market tier of the OTC Markets Group Inc. (the “OTCQX”), an
electronic quotation service operated by OTC Markets Group Inc. The trading of the Company’s common stock commenced on OTCQX at the open of business on February
25, 2021 under the trading symbol IDXG.
63
On December 28, 2023, we received notice from the OTCQX indicating that the Company’s market capitalization has stayed below the required $5 million for 30
consecutive calendar days preceding the date of such notice, and that the Company no longer meets the standards for continued qualification for the OTCQX U.S. tier under the
OTCQX Rules for U.S. Companies section 3.2.b.2. On March 20, 2024 we received notice from the OTCQX indicating that the Company’s market capitalization has stayed
above the required $5 million for ten consecutive trading days preceding the date of such notice, and that the Company currently satisfies the standards for continued
qualification for the OTCQX U.S. tier under the OTCQX Rules for U.S. Companies.
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 U.S. generally accepted accounting principles, or (“GAAP”). The preparation of financial statements
and related disclosures in conformity with GAAP requires management to make judgments, estimates and assumptions at a specific point in time that affect the amounts
reported in our consolidated financial statements and disclosed in the accompanying notes. These assumptions and estimates are inherently uncertain. Outlined below are
accounting policies, which are important to our financial position and results of operations and require our management to make significant judgments in their application.
Some of those judgments can be subjective and complex. Management’s estimates are based on historical experience, information from third-party professionals, facts and
circumstances available at the time and various other assumptions that are believed to be reasonable. Actual results could differ from those estimates. Additionally, changes in
estimates could have a material impact on our consolidated results of operations in any one period. For a summary of all of our significant accounting policies, including the
accounting policies discussed below, see Note 1, Nature of Business and Significant Accounting Policies, to our consolidated financial statements included in this Annual
Report on Form 10-K.
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 August 2022, we also generated revenue from DNA-based testing services in support of clinical trials for its pharma services customers. The Company’s
performance obligation is fulfilled upon completion, review and release of test results and subsequent billing to the third-party payer, hospital or service provider.
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.
64
Leases
The Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”) assets represent the Company’s right
to use an underlying asset for the lease term while lease liabilities represent our obligation to make lease payments arising from the lease. All leases with terms greater than
twelve months result in the recognition of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease term.
Unless a lease provides all of the information required to determine the implicit interest rate, we use our incremental borrowing rate based on the information available at the
commencement date in determining the present value of the lease payments. We use the implicit interest rate in the lease when readily determinable.
Our lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably certain that we will exercise that
option. Leases with terms of twelve months or less at the commencement date are expensed on a straight-line basis over the lease term and do not result in the recognition of an
asset or liability. See Note 8, Leases.
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.
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 December 31, 2023 and 2022, as we determined that it was more likely than not that these assets would not be realized.
65
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, U.S. tax laws
limit the time during which these carry forwards may be applied against future taxes, therefore, we may not be able to take full advantage of these carry forwards for federal
income tax purposes. During 2021, the Company completed a 382 assessment of the available NOLs under Section 382 and determined that the Company underwent an
ownership change on September 30, 2017 and July 15, 2019, and as a result, NOLs attributable to the pre-ownership change are subject to a substantial annual limitation under
Section 382 of the Code due to the multiple ownership changes. The Company has adjusted their NOL carryforwards to address the impact of the 382 ownership change.
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.
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.
66
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.
CONSOLIDATED RESULTS OF OPERATIONS
Revenue, net
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Acquisition related amortization expense
Change in fair value of contingent consideration
Total operating expenses
Operating income (loss)
Interest accretion expense
Note payable interest expense
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)
Revenue, net
2023
Years Ended December 31,
2022
2023
% to
revenue
$
100.0%
40.6%
59.4%
25.4%
1.6%
23.3%
2.1%
0.0%
52.5%
7.0%
-0.3%
-2.2%
-1.7%
2.8%
0.0%
2.8%
-0.8%
31,838
13,607
18,231
9,125
703
10,973
1,270
(223)
21,848
(3,617)
(158)
(850)
(1,211)
(5,836)
29
(5,865)
(16,093)
2.0%
$
(21,958)
$
$
40,214
16,310
23,904
10,233
636
9,363
861
7
21,100
2,804
(112)
(896)
(667)
1,129
17
1,112
(310)
802
2022
% to
revenue
100.0%
42.7%
57.3%
28.7%
2.2%
34.5%
4.0%
-0.7%
68.6%
-11.4%
-0.5%
-2.7%
-3.8%
-18.3%
0.1%
-18.4%
-50.5%
-69.0%
Consolidated revenue for the year ended December 31, 2023 increased by $8.4 million, or 26%, to $40.2 million, compared to $31.8 million for the year ended December
31, 2022. The increase in net revenue was largely driven by increased test volumes as compared to the prior year as well as improved collections.
Cost of revenue
Consolidated cost of revenue for the year ended December 31, 2023 increased by $2.7 million, or 20%, to $16.3 million, compared to $13.6 million for the year ended
December 31, 2022. This increase was primarily driven by the increased test volumes discussed above.
Gross Profit
Consolidated gross profit for the year ended December 31, 2023 increased $5.7 million, or 31%, to $23.9 million, compared to $18.2 million for the year ended December
31, 2022. The increase can be attributed to the increase in revenue.
Sales and marketing expense
Sales and marketing expense was $10.2 million for the year ended December 31, 2023 and $9.1 million for the year ended December 31, 2022. As a percentage of revenue,
sales and marketing expense decreased to 25% from 29% in the comparable prior year period due to the higher revenue for the year ended December 31, 2023.
67
Research and development
Research and development expense was $0.6 million for the year ended December 31, 2023 and $0.7 million for the year ended December 31, 2022. As a percentage of
revenue, research and development expense decreased to 1.6% from 2.2% in the prior year period.
General and administrative
General and administrative expense for the year ended December 31, 2023 was $9.4 million as compared to $11.0 million for the year ended December 31, 2022. The decrease
can be primarily attributed to a decrease in employee compensation costs compared to the prior year. As a percentage of net revenue, general and administrative expense was
23% for the year ended December 31, 2023 as compared to 34% for the year ended December 31, 2022.
Acquisition related amortization expense
During the years ended December 31, 2023 and December 31, 2022, we recorded amortization expense of approximately $0.9 million and $1.3 million, respectively, which
is related to intangible assets associated with our acquisitions.
Change in fair value of contingent consideration
During the year ended December 31, 2023, there was a $7,000 increase in the contingent consideration liability. During the year ended December 31, 2022, there was a
$0.2 million decrease in the contingent consideration liability.
Operating income (loss)
Operating income from continuing operations was $2.8 million for the year ended December 31, 2023 as compared to an operating loss of $3.6 million for the year ended
December 31, 2022. The operating income was primarily attributable to the increases in revenue and gross profit discussed above.
Other expense, net
During the years ended December 31, 2023 and December 31, 2022, there were other expenses, net of approximately $0.7 million and $1.2 million, respectively. The
amounts are primarily related to the fair value adjustments recorded on the note payable.
Provision for income taxes
Income tax expense was approximately $17,000 for the year ended December 31, 2023 and $29,000 for the year ended December 31, 2022. Income tax expense for both
periods was primarily driven by Texas Gross Receipts Tax.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of $0.3 million for the year ended December 31, 2023 as compared to a loss from discontinued operations of $16.1 million for
the year ended December 31, 2022. The loss for the year ended December 31, 2022 was primarily attributed to the impairment of goodwill and intangible assets associated with
the disposition of the Pharma business in August 2022 as well as eight months of Pharma operating losses before the disposition.
Non-GAAP Financial Measures
In addition to the United States generally accepted accounting principles, or GAAP, results provided throughout this document, we have provided certain non-GAAP
financial measures to help evaluate the results of our performance. We believe that these non-GAAP financial measures, when presented in conjunction with comparable GAAP
financial measures, are useful to both management and investors in analyzing our ongoing business and operating performance. We believe that providing the non-GAAP
information to investors, in addition to the GAAP presentation, allows investors to view our financial results in the way that management views financial results.
68
In this 10-K, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing
business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, acquisition related expenses, non-cash stock-based
compensation, interest and taxes, and other non-cash expenses including asset impairment costs, change in fair value of contingent consideration, change in fair value of notes
payable, and warrant liability. The table below includes a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.
Reconciliation of Adjusted EBITDA (Unaudited)
($ in thousands)
Income (loss) from continuing operations (GAAP Basis)
Depreciation and amortization
Stock-based compensation
Tax expense
Interest accretion expense
Financing interest and related costs
Interest income
Mark to market on warrant liability
Change in fair value of note payable
Change in fair value of contingent consideration
Adjusted EBITDA
Years Ended
December 31,
2023
2022
1,112 $
1,026
630
17
112
938
(53)
-
678
7
4,467 $
(5,865)
1,429
1,237
29
158
850
-
(71)
1,224
(223)
(1,232)
$
$
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” or “BroadOak Loan Agreement”). 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 is subordinate to the Company’s $7,500,000 revolving credit facility with Comerica Bank. The Term Loan has an origination
fee of 3% of the Term Loan amount, and a terminal payment equal to (i) 15% of the original principal amount of the Term Loan if the change of control occurs on or prior to the
first anniversary of the funding of the Term Loan, (ii) 20% of the original principal amount of the Term Loan if the change of control occurs after the first anniversary but on or
prior to the second anniversary of the funding of the Term Loan and (iii) 30% of the original principal amount of the Term Loan if the change of control occurs after the second
anniversary of the funding of the Term Loan, or if the Term Loan is repaid on its maturity date. Upon receipt of the term loan, the proceeds were used to repay in full at their
maturity the notes extended by Ampersand and 1315 Capital discussed above. See Note 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. 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 primary changes to the original agreement
were as follows:
● The Company made a one-time payment in an aggregate amount equal to $2,500,000, on October 30, 2023 and applied the payment in full satisfaction of
the $3,000,000 Terminal Payment (as defined in the BroadOak Loan Agreement). See Note 13, Notes Payable, regarding the Terminal Payment.
69
● Effective November 1, 2023, the interest rate under the BroadOak Loan Agreement is to be reduced from 9% to 8% through the maturity date of October
31, 2024 or earlier, upon the occurrence of a change in control (“Loan Maturity Date”).
● The Company has the option to request an extension of the Loan Maturity Date in writing no less than sixty days prior to the Loan Maturity Date. If
BroadOak agrees to the extension, the Loan Maturity Date would automatically be extended.
On March 29, 2024, the Company entered into a Third Amendment to the Loan and Security Agreement with BroadOak, extending the loan maturity date to June 30, 2025.
See Note 20, Subsequent Events, for more details.
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.
In January 2022, the Company’s registration statement for a rights offering filed with the Securities and Exchange Commission (SEC) became effective; however, the
rights offering was subsequently terminated later in January 2022 when the Company announced that the Centers for Medicare & Medicaid Services, or CMS, issued a new
billing policy whereby CMS will no longer reimburse for the use of the Company’s ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for
the same beneficiary on the same date of service. On February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued a response
on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and ThyraMIR® (0018U) tests has been retroactively reversed
to January 1, 2022. In May 2022, the Company was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning
July 1, 2022. However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT® (0245U) from $2,919 to $806.59 retroactively effective to January 1,
2022. On July 20, 2022, the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price for ThyGeNEXT® of $806.59. As a result of the
ThyGeNEXT® pricing change, the Company reduced its net realizable value, or NRV rates for ThyGeNEXT® Medicare billing to reflect the $806.59 pricing for tests
performed during the second quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment of
$0.7 million during the second quarter of 2022 to reduce revenue recorded during the first quarter of 2022. Effective January 1, 2023, the gapfill price for ThyGeNEXT® was
set at $1,266.07.
In October 2021, we entered into the Comerica Loan Agreement with Comerica, providing for a revolving credit facility of up to $7,500,000 (the “Credit Facility”). The
Company is using the proceeds of the Credit Facility for working capital and other general corporate purposes.
The amount that could be borrowed under the Credit Facility was the lower of (i) the revolving limit of $7,500,000 (the “Revolving Line”) and (ii) 80% of the Company’s
eligible accounts receivable plus an applicable non-formula amount consisting of $2,000,000 of additional availability at close not based upon the Company’s eligible accounts
receivable, with such additional availability reducing by $250,000 per quarter beginning with the quarter ending June 30, 2022. Borrowings on the Credit Facility were limited
to $5,000,000 until 80% of the Company’s and its subsidiaries’ customers are paying into a collection account or segregated governmental account with Comerica. The
Revolving Line also included, at the Company’s option, credit card services with a sublimit of $300,000. Borrowings on the Revolving Line were subject to an interest rate
equal to prime plus 0.50%, with prime being the greater of (x) Comerica’s stated prime rate or (y) the sum of (A) the daily adjusting LIBOR rate plus (B) 2.5% per annum. The
Company was also required to pay an unused facility fee quarterly in arrears in an amount equal to 0.25% per annum on the average unused but available portion of the
Revolving Line for such quarter. See Note 18, Revolving Line of Credit, for more details. Comerica had a first priority security interest in substantially all of the Company’s and
its subsidiaries’ assets.
On October 6, 2023, effective September 30, 2023, the Company entered into a Fifth Amendment to its Loan and Security Agreement (the “Fifth Amendment to the Comerica
Loan Agreement”) with Comerica Bank providing for a revolving credit facility of up to $5,000,000. This agreement was terminated in February 2024.
The Fifth Amendment to the Comerica Loan Agreement contained affirmative and negative restrictive covenants that are applicable whether or not any amounts are
outstanding under the Comerica Loan Agreement. These restrictive covenants, which included restrictions on certain mergers, acquisitions, investments, encumbrances, etc. The
Comerica Loan Agreement also contained financial covenants requiring specified minimum liquidity and minimum adjusted EBITDA thresholds. As of December 31, 2023 the
Company had a zero balance on the line of credit.
70
On August 31, 2022, the Company closed on the sale of its Pharma Solutions business for a total sale price of $6.2 million after a post-closing working capital adjustment.
See Note 4, Discontinued Operations.
For the year ended December 31, 2023, we had operating income from continuing operations of $2.8 million. As of the year ended December 31, 2023, we had cash and
cash equivalents of $3.5 million, total current assets of $10.3 million, net of restricted cash, and current liabilities of $17.5 million. As of March 22, 2024, we had
approximately $2.8 million of cash on hand, net of restricted cash.
During the year ended December 31, 2023, net cash provided by operating activities was $3.8 million. The main component of cash provided by operating activities was
net income of $0.8 million, and non-cash expenses of $2.5 million. During the year ended December 31, 2022, net cash used in operating activities was $7.7 million. The main
component of cash used in operating activities was our net loss of $22.0 million, partially offset by depreciation and amortization expense of $2.6 million and non-cash
impairment charges of $12.4 million.
During the year ended December 31, 2023, there was net cash used in investing activities of $0.1 million. During the year ended December 31, 2022, net cash provided
from investing activities was $6.2 million, which primarily pertained to the net proceeds received from the sale of our Pharma Solutions business unit.
For the year ended December 31, 2023, cash used in financing activities was $5.0 million, of which $2.5 million was from the repayment on the Revolving Line and $2.5
million was the terminal payment made to BroadOak. See Note 13, Notes Payable, for more details. For the year ended December 31, 2022, cash provided from financing
activities was $3.0 million, of which $1.0 million was from the drawdown on the Revolving Line and $2.0 million was the Convertible Debt agreement entered into with
BroadOak. See Note 13, Notes Payable, for more details.
We generated positive cash flows from operations for the year ending December 31, 2023. We intend to meet our ongoing capital needs by using our available cash as well
as through targeted margin improvement; collection of accounts receivable; containment of costs; and the potential use of other financing options and other strategic
alternatives.
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.
Further, along with many laboratories, we may be affected by the Proposed LCD DL39365, which is currently under consideration by our local Medicare Administrative
Contractor, Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular
tests, PancraGEN®. On June 5, 2023 we announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which, if finalized, would have established
non-coverage for the Company’s widely used PancraGEN® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing the final
Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same companies and
tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public meeting presentation and
submitted detailed written comments supporting the use of PancraGEN®. The timing and content of any final implemented LCD is uncertain at this time; the process could
potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, we are able to continue offering PancraGEN® and the related
Point2® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN® test, the Company’s liquidity could be
negatively impacted.
71
As of December 31, 2023, 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:
Operating lease obligations
Total
Total
$
$
2,400
2,400
$
$
Less than
1 Year
1 to 3
Years
3 to 5
Years
After
5 Years
575
575
$
$
1,000
1,000
$
$
825
825
$
$
-
-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a “smaller reporting company” for purposes of the disclosure requirements of Item 305 of Regulation S-K and, therefore, we are not required to provide this
information.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and the financial statement schedule specified by this Item 8, together with the report thereon of EisnerAmper LLP are presented following Item 15 of
this Annual Report on Form 10-K.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2023. The term
“disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or 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 Securities and Exchange Commission’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 this evaluation, management identified a material weakness in the Company’s internal control over financial reporting in the fourth quarter of 2023 related
to properly identifying the timing of when revenue should be recognized as stated in the revenue recognition policy. Based on that evaluation, our principal executive officer
and principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this Annual Report on Form 10-K
as a result of the identified material control weakness.
Remediation Plan - The Company plans to amend its control activities designed to mitigate the significant risk identified, including updating its procedures regarding the
testing of revenue recognition, specifically to review the procedures identifying the timing differences to ensure revenue is recorded in the period earned. The Company
believes implementation of these processes and appropriate testing of their effectiveness will remediate this material control weakness.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f).
Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. All internal control systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
72
As of December 31, 2023, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control-Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that, as of December 31, 2023, our internal
control over financial reporting was not effective based on those criteria.
Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth quarter of the fiscal year ended December 31, 2023.
ITEM 9B. OTHER INFORMATION
On March 29, 2024, the Company entered into a Third Amendment to Loan and Security Agreement with BroadOak. The primary changes to the Second Amendment
to Loan and Security Agreement 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.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
Information relating to directors and executive officers of the registrant that is responsive to Item 10 of this Annual Report on Form 10-K will be included in an
amendment hereto or will be included in our Proxy Statement for our 2024 annual meeting of stockholders and such information is incorporated by reference
herein.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation of the registrant that is responsive to Item 11 of this Annual Report on Form 10-K will be included in an
amendment hereto or will be included in our Proxy Statement for our 2024 annual meeting of stockholders and such information is incorporated by reference
herein.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information relating to security ownership of certain beneficial owners and management of the registrant that is responsive to Item 12 of this Annual Report on
Form 10-K will be included in an amendment hereto or will be included in our Proxy Statement for our 2024 annual meeting of stockholders and such information
is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information relating to certain relationships and related transactions of the registrant that is responsive to Item 13 of this Annual Report on Form 10-K will be
included in an amendment hereto or will be included in our Proxy Statement for our 2024 annual meeting of stockholders and such information is incorporated by
reference herein.
73
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to principal accounting fees and services of the registrant that is responsive to Item 14 of this Annual Report on Form 10-K will be included
in an amendment hereto or will be included in our Proxy Statement for our 2024 annual meeting of stockholders and such information is incorporated by reference
herein.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
The following documents are filed as part of this Form 10-K:
(1)
(2)
Financial Statements – See Index to Financial Statements on page F-1 of this Form 10-K.
Financial Statement Schedule
Schedule II: Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
(3)
Exhibits
Exhibit
No.
Description
2.1
2.2
3.1+
3.2
4.1
4.2
Asset Purchase Agreement, dated August 13, 2014, by and between Interpace Diagnostics, LLC and Asuragen, Inc., incorporated by reference to Exhibit 2.2 of
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 5, 2014.
Asset Purchase Agreement, dated August 31, 2022 by and among Interpace Biosciences, Inc., Interpace Pharma Solutions, Inc. and Flagship Biosciences, Inc.,
incorporated by reference to Exhibit 2.1 of the Company’s Current Report on Form 8-K filed with the SEC on September 7, 2022.
Conformed version of Certificate of Incorporation of Interpace Biosciences, Inc., as amended by the Certificate of Amendment, effective January 15, 2020, and
the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock, filed January 17, 2020, incorporated by reference
to Exhibit 3.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on April 22, 2020, as amended from
time to time.
Amended and Restated Bylaws of Interpace Biosciences, Inc., incorporated by reference to Exhibit 3.2 of the Company’s Current Report on Form 8-K, filed
with the SEC on November 14, 2019.
Description of Securities, incorporated by reference to Exhibit 4.1 of the Company’s Annual Report on Form 10-K, filed with the SEC on April 1, 2021.
Specimen Certificate Representing the Common Stock, incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-3 (File No.
333-227728), filed with the SEC on October 5, 2018.
10.1*
Amended and Restated 2004 Stock Award and Incentive Plan, incorporated by reference to Annex A of the Company’s definitive proxy statement, filed with the
SEC on August 14, 2017.
10.2*
Form of Restricted Stock Unit Agreement for Employees, incorporated by reference to Exhibit 10.1 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2018, filed with the SEC on May 15, 2018.
74
Exhibit
No.
10.3*
Description
Form of Restricted Stock Unit Agreement for Directors, incorporated by reference to Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q for the
quarter ended March 31, 2018, filed with the SEC on May 15, 2018.
10.4*
Form of Non-Qualified Stock Option Agreement, incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2018, filed with the SEC on May 15, 2018.
10.5*
Form of Incentive Stock Option Agreement, incorporated by reference to Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018, filed with the SEC on May 15, 2018.
10.6*
Interpace Diagnostics Group, Inc. 2019 Equity Incentive Plan, incorporated by reference to Exhibit 4.1 of the Company’s quarterly report on Form 10-Q for the
quarter ended September 30, 2019, filed with the SEC on November 14, 2019.
10.7*
Amendment to the Interpace Biosciences, Inc. 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.8 of the Company’s quarterly report on Form
10-Q for the quarter ended March 31, 2020, filed with the SEC on June 26, 2020.
10.8*
Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 4.3
of the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2019, filed with the SEC on November 14, 2019.
10.9*
Form of Interpace Biosciences, Inc. 2019 Equity Incentive Plan Restricted Stock Unit And Restricted Stock Unit Agreement, incorporated by reference to
Exhibit 10.9 of the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2020, filed with the SEC on June 26, 2020.
10.10*
Form of Stock Option Grant Notice and Stock Option Agreement under the 2019 Equity Incentive Plan, incorporated by reference to Exhibit 4.4 of the
Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2019, filed with the SEC on November 14, 2019.
10.11*
Interpace Diagnostics Group, Inc. Employee Stock Purchase Plan, incorporated by reference to Exhibit 4.2 of the Company’s quarterly report on Form 10-Q for
the quarter ended September 30, 2019, filed with the SEC on November 14, 2019.
10.12*
Incentive Stock Option Agreement between Interpace Diagnostics Group, Inc. and Jack E. Stover, incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, filed with the SEC on October 20, 2016.
10.13*
Employment Agreement, dated November 23, 2020, between Thomas W. Burnell and Interpace Biosciences, Inc., incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K, filed with the SEC on November 25, 2020.
10.14*
Employment Agreement, dated July 24, 2023, between Christopher McCarthy and Interpace Biosciences, Inc., incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K, filed with the SEC on August 2, 2023.
10.15*
Form of Indemnification Agreement by and between Interpace Diagnostics Group, Inc. and its directors and executive officers, incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on August 8, 2016.
10.16*
Form of Indemnification Agreement by and between Interpace Biosciences, Inc. and Indemnitee, incorporated by reference to Exhibit 10.2 of the Company’s
Current Report on Form 8-K, filed with the SEC on January 17, 2020.
10.17*
Agreement, dated January 21, 2022, between Dr. Vijay Aggarwal and Interpace Biosciences, Inc., incorporated by reference to Exhibit 10.1 of the Company’s
Current Report on Form 8-K, filed with the SEC on January 27, 2022.
10.18
License Agreement, dated August 13, 2014, by and between Interpace Diagnostics, LLC and Asuragen, Inc., incorporated by reference to Exhibit 10.31 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 5, 2014.
75
Exhibit
No.
10.19
Description
CPRIT License Agreement, dated August 13, 2014, by and between Interpace Diagnostics, LLC and Asuragen, Inc., incorporated by reference to Exhibit 10.32
of the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 5, 2014.
10.20
Supply Agreement, dated August 13, 2014, by and between Interpace Diagnostics, LLC and Asuragen, Inc., incorporated by reference to Exhibit 10.33 of the
Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 5, 2014.
10.21
Guaranty, dated August 13, 2014 by the Company in favor of Asuragen, Inc., incorporated by reference to Exhibit 10.34 of the Company’s Quarterly Report on
Form 10-Q for the quarter ended September 30, 2014, filed with the SEC on November 5, 2014.
10.22
Lease Agreement, dated March 31, 2017, by and between Saddle Lane Realty, LLC and the Company, incorporated by reference to Exhibit 10.53 of the
Company’s Registration Statement on Form S-1 (333-218140), as amended on June 13, 2017.
10.23
First Amendment, dated September 26, 2017, by and between Saddle Lane Realty, LLC and Interpace Diagnostics Corporation, incorporated by reference to
Exhibit 10.36 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on April 22, 2020, as amended from
time to time.
10.24
Amendment No. 2 to Lease, dated March 15, 2018, between Saddle Lane Realty, LLC and Interpace Diagnostics Corporation, incorporated by reference to
Exhibit 10.45 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 23, 2018.
10.25
Fourth Lease Amendment (the “Amendment”) by and between Interpace Biosciences, Inc. and Saddle Lane Realty, LLC, dated as of October 31, 2022,
incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the SEC on November 4, 2022.
10.26
Securities Purchase Agreement, dated July 15, 2019, by and between Interpace Diagnostics Group, Inc. and Ampersand 2018 Limited Partnership, incorporated
by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K, filed with the SEC on July 19, 2019.
10.27
10.28
10.29
Form of Voting Agreement, incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K, filed with the SEC on July 19, 2019.
Securities Purchase and Exchange Agreement, dated January 10, 2020, by and among Interpace Biosciences, Inc., 1315 Capital II, L.P. and Ampersand 2018
Limited Partnership, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on January 14, 2020.
Amended and Restated Investor Rights Agreement, dated as of January 15, 2020, by and among Interpace Biosciences, Inc., 1315 Capital II, L.P. and
Ampersand 2018 Limited Partnership, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with the SEC on January
17, 2020.
10.30
Support Agreement, dated April 2, 2020, by and between 1315 Capital II, L.P. and Interpace Biosciences, Inc., incorporated by reference to Exhibit 10.2 of the
Company’s quarterly report on Form 10-Q for the quarter ended June 30, 2020, filed with the SEC on October 19, 2020.
76
Exhibit
No.
10.31
10.32
10.33
10.34
10.35
10.36
Description
Loan and Security Agreement by and between Comerica Bank, Interpace Biosciences, Inc., Interpace Diagnostics Corporation, Interpace Diagnostics, LLC and
Interpace Pharma Solutions, Inc., dated October 13, 2021, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K, filed with
the SEC on October 19, 2021.
Subordination Agreement by and between Ampersand 2018 Limited Partnership, 1315 Capital II. L.P., Comerica Bank Interpace Biosciences, Inc., Interpace
Diagnostics Corporation, Interpace Diagnostics, LLC and Interpace Pharma Solutions, Inc., dated October 13, 2021, incorporated by reference to Exhibit 10.2 of
the Company’s Current Report on Form 8-K, filed with the SEC on October 19, 2021.
Loan and Security Agreement by and between BroadOak Fund V, L.P., Interpace Biosciences, Inc., Interpace Diagnostics Corporation, Interpace Diagnostics,
LLC and Interpace Pharma Solutions, Inc., dated October 29, 2021, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K,
filed with the SEC on November 3, 2021.
Second Amendment to Loan and Security Agreement by and between BroadOak Fund V, L.P., Interpace Biosciences, Inc., Interpace Diagnostics Corporation,
Interpace Diagnostics, LLC and Interpace Pharma Solutions, Inc., dated October 24, 2023, incorporated by reference to Exhibit 10.1 of the Company’s Current
Report on Form 8-K, filed with the SEC on October 27, 2023.
First Amendment to Loan and Security Agreement by and between Comerica Bank, Interpace Biosciences, Inc., Interpace Diagnostics Corporation, Interpace
Diagnostics, LLC and Interpace Pharma Solutions, Inc., dated November 1, 2021, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on
Form 8-K, filed with the SEC on November 3, 2021.
Subordination and Intercreditor Agreement by and between Comerica Bank, BroadOak Fund V, L.P., Interpace Biosciences, Inc., Interpace Diagnostics
Corporation, Interpace Diagnostics, LLC and Interpace Pharma Solutions, Inc., dated as of November 1, 2021, incorporated by reference to Exhibit 10.3 of the
Company’s Current Report on Form 8-K, filed with the SEC on November 3, 2021.
10.37*
Amendment to the Interpace Biosciences, Inc. 2019 Equity Incentive Plan, incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form
8-K, filed with the SEC on November 15, 2022.
10.38*
Amendment to the Interpace Biosciences, Inc. Employee Stock Purchase Plan, incorporated by reference to Exhibit 10.2 of the Company’s Current Report on
Form 8-K, filed with the SEC on November 15, 2022.
10.39+
Third Amendment to Loan and Security Agreement by and between BroadOak Fund V, L.P., Interpace Biosciences, Inc., Interpace Diagnostics Corporation,
Interpace Diagnostics, LLC and Interpace Pharma Solutions, Inc., dated March 29, 2024.
16.1
Letter from BDO USA, LP dated April 13, 2022, incorporated by reference to Exhibit 16.1 of the Company’s Current Report on Form 8-K, filed with the SEC
on April 14, 2022.
21.1
Subsidiaries of the Registrant, incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019,
filed with the SEC on April 22, 2020, as amended from time to time.
23.1
31.1
31.2
32.1
Consent of EisnerAmper, LLP, filed herewith.
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished
herewith.
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, furnished
herewith.
101 INS Inline XBRL Instance Document
101 SCH Inline XBRL Taxonomy Extension Schema Document
101 CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101 LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101 PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibits 101)
*
+
Denotes compensatory plan, compensation arrangement or management contract.
Filed herewith.
ITEM 16.
Form 10-K Summary
The Company has opted to not provide a summary.
77
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
SIGNATURES
Date: April 1, 2024
INTERPACE BIOSCIENCES, INC.
/s/ Thomas W. Burnell
Thomas W. Burnell
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the
capacities indicated and on the dates indicated.
Name
Title
/s/ Thomas W. Burnell
Thomas W. Burnell
/s/ Christopher McCarthy
Christopher McCarthy
/s/ Stephen J. Sullivan
Stephen J. Sullivan
/s/ Joseph Keegan
Joseph Keegan
/s/ Vijay Aggarwal
Vijay Aggarwal
/s/ Fortunato Ron Rocca
Fortunato Ron Rocca
President, Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
78
Date
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
April 1, 2024
Interpace Biosciences, Inc.
Index to Consolidated Financial Statements
and Financial Statement Schedules
Report of Independent Registered Public Accounting Firm (EisnerAmper LLP; Philadelphia, PA; PCAOB ID #274)
Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2023 and 2022
Consolidated Statements of Operations for the years ended December 31, 2023 and 2022
Consolidated Statements of Stockholders’ Deficit for the years ended December 31, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
Schedule II. Valuation and Qualifying Accounts
F-1
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Interpace Biosciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Interpace Biosciences, Inc. and Subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the
related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years then ended, and the related notes and the financial statement schedule
identified in Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of their operations and their cash flows for each of the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We
believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we
are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Variable Consideration in Revenue
As described in Note 1 to the consolidated financial statements, the Company’s clinical services derive revenue from the performance of its proprietary assays or tests. The
Company’s performance obligation is fulfilled upon the completion, review and release of test results to the customer. The Company subsequently bills third-party payers or
direct-bill payers for the tests performed. 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, the Company
estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical experience.
We identified the estimation of the variable consideration as a critical audit matter due to the significant judgement and estimation required by management in their assessment.
This led to a high degree of auditor subjectivity and significant audit effort was required in performing our procedures and evaluating audit evidence relating to estimates and
assumptions made by management.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
Our procedures included, among other things, (i) obtaining an understanding of management’s process and evaluating the design of controls related to revenue recognition; (ii)
assessing the reasonableness of management’s estimates of variable consideration utilizing the expected value method based on its historical experience; (iii) comparing the
Company’s estimates of variable consideration to the history of cash ultimately received from its payors; and (iv) testing the historical accuracy of cash collections used in the
Company’s assumptions relating to variable consideration.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2022.
EISNERAMPER LLP
Philadelphia, Pennsylvania
April 1, 2024
F-2
INTERPACE BIOSCIENCES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2023
December 31,
2022
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Other current assets
Total current assets
Property and equipment, net
Other intangible assets, net
Operating lease right of use assets
Other long-term assets
Total assets
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable
Accrued salary and bonus
Other accrued expenses
Note payable at fair value, current
Line of credit - current
Current liabilities of discontinued operations
Total current liabilities
Contingent consideration
Operating lease liabilities, net of current portion
Note payable at fair value
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 11)
$
$
$
$
$
$
3,498
4,983
1,841
10,322
790
-
1,864
45
13,021
1,544
1,969
8,201
5,100
-
660
17,474
-
1,472
4,243
4,968
28,157
4,828
5,032
2,294
12,154
480
861
2,439
45
15,979
1,050
1,456
8,419
-
2,500
858
14,283
518
1,848
11,165
4,701
32,515
Redeemable preferred stock, $.01 par value; 5,000,000 shares authorized, 47,000 shares Series B
issued and outstanding
46,536
46,536
Stockholders’ deficit:
Common stock, $.01 par value; 100,000,000 shares authorized; 4,447,489 and 4,367,830 shares issued,
respectively; 4,351,445 and 4,296,710 shares outstanding, respectively
Additional paid-in capital
Accumulated deficit
Treasury stock, at cost (96,044 and 71,120 shares, respectively)
Total stockholders’ deficit
Total liabilities and stockholders’ deficit
405
188,146
(248,215)
(2,008)
(61,672)
(33,515)
Total liabilities, preferred stock and stockholders’ deficit
$
13,021
$
405
187,516
(249,017)
(1,976)
(63,072)
(30,557)
15,979
The accompanying notes are an integral part of these consolidated financial statements
F-3
INTERPACE BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share data)
For The Years
Ended December 31,
2023
2022
Revenue, net
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Acquisition related amortization expense
Change in fair value of contingent consideration
Total operating expenses
Operating income (loss) from continuing operations
Interest accretion expense
Note payable interest expense
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 net income (loss) per share of common stock:
From continuing operations
From discontinued operations
Net income (loss) per basic share of common stock
Diluted net 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 consolidated financial statements
F-4
$
40,214
16,310
23,904
10,233
636
9,363
861
7
21,100
2,804
(112)
(896)
(667)
1,129
17
1,112
(310)
802
$
$
$
$
$
0.26
(0.07)
0.19
0.25
(0.07)
0.18
4,317
4,364
31,838
13,607
18,231
9,125
703
10,973
1,270
(223)
21,848
(3,617)
(158)
(850)
(1,211)
(5,836)
29
(5,865)
(16,093)
(21,958)
(1.38)
(3.80)
(5.18)
(1.38)
(3.80)
(5.18)
4,238
4,238
INTERPACE BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands)
Additional
Common Stock
Treasury Stock
Balance -December 31, 2021
Issuance of common stock
Treasury stock purchased
Exercise of warrants
Stock-based compensation expense
Net loss
Balance -December 31, 2022
Issuance of common stock
Treasury stock purchased
Stock-based compensation expense
Net income
Balance -December 31, 2023
Shares
4,228,169
139,652
9
-
-
4,367,830
79,659
-
-
4,447,489
Amount
403
$
2
-
-
-
-
405
-
-
-
-
405
$
$
Shares Amount
(1,868)
$
-
(108)
-
-
-
(1,976)
-
(32)
-
-
(2,008)
32,757
-
38,363
-
-
-
71,120
-
24,924
-
-
96,044
$
$
$
Deficit
Paid in Accumulated
Capital
$ 186,106
106
-
-
1,304
-
$ 187,516
-
-
630
-
$ 188,146
(227,059)
-
-
-
-
(21,958)
(249,017)
-
-
-
802
(248,215)
$
$
Total
$ (42,418)
108
(108)
-
1,304
(21,958)
$ (63,072)
-
(32)
630
802
$ (61,672)
The accompanying notes are an integral part of these consolidated financial statements
F-5
INTERPACE BIOSCIENCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Years Ended December 31,
2022
2023
Cash Flows From Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
$
802
$
(21,958)
Depreciation and amortization
Interest accretion expense
Goodwill impairment
Intangible asset impairment
Amortization of deferred financing fees
Stock-based compensation
Amortization on operating lease right of use asset
ESPP expense
Change in fair value of note payable
Deferred income taxes
Change in fair value of contingent consideration
Other gains and expenses, net
Other changes in operating assets and liabilities:
Accounts receivable
Other current assets
Other long-term assets
Accounts payable
Accrued salaries and bonus
Accrued liabilities
Operating lease liabilities
Long-term liabilities
Net cash provided by (used in) operating activities
Cash Flows From Investing Activity
Proceeds from sale of Interpace Pharma Solutions, net
Purchase of property and equipment
Net cash (used in) provided by investing activities
Cash Flows From Financing Activities
Issuance of common stock, net of expenses
Payment of BroadOak terminal payment
Proceeds from convertible debt issuance
Payments on line of credit
Borrowings on line of credit
Cash paid for repurchase of restricted shares
Net cash (used in) provided by 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 consolidated financial statements
F-6
1,026
112
-
-
42
630
575
-
678
-
7
-
49
(89)
-
489
513
(936)
(376)
267
3,789
383
(470)
(87)
-
(2,500)
-
(2,500)
-
(32)
(5,032)
(1,330)
4,828
-
4,828
3,498
-
3,498
$
$
$
2,560
158
8,433
3,964
60
1,258
942
46
1,223
(93)
(223)
(71)
(133)
(216)
34
(735)
(1,421)
(549)
(1,142)
171
(7,692)
6,528
(322)
6,206
108
-
2,000
-
1,000
(108)
3,000
1,514
2,922
392
3,314
4,828
-
4,828
1. Nature of Business and Significant Accounting Policies
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.
Principles of Consolidation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The consolidated
financial statements include the accounts of Interpace Biosciences, Inc. fka Interpace Diagnostics Group, Inc., Interpace Diagnostics Corporation, and Interpace
Diagnostics, LLC.
Discontinued operations include the Company’s wholly-owned subsidiaries: Group DCA, LLC (“Group DCA”), InServe Support Solutions (Pharmakon), TVG, Inc. (TVG,
dissolved December 31, 2014) its Commercial Services (“CSO”) business unit 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.
The Company has one reporting segment: the Company’s clinical services business. The Company’s current reporting segment structure is reflective of the way the
Company’s management views the business, makes operating decisions and assesses performance. This structure allows investors to better understand Company
performance, better assess prospects for future cash flows, and make more informed decisions about the Company.
Accounting Estimates
The preparation of 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, notes payable, allowances for doubtful accounts and notes, revenue recognition, and unrecognized tax benefits. The Company periodically reviews these
matters and reflects changes in estimates as appropriate. Actual results could materially differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include unrestricted cash accounts, money market investments and highly liquid investment instruments with original maturity of three months
or less at the date of purchase.
Accounts Receivable, Net
The Company’s accounts receivables represent unconditional rights to consideration and are generated using its proprietary tests. 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. No
allowance for credit losses has been recorded during the periods presented. The opening accounts receivable balance as of January 1, 2022, was $4.7 million.
F-7
Other current assets
Other current assets consisted of the following as of December 31, 2023 and 2022:
Lab supplies
Prepaid expenses
Funds in escrow
Other
Total other current assets
Property and Equipment, net
December 31, 2023
December 31, 2022
$
$
1,227 $
590
-
24
1,841 $
1,224
390
500
180
2,294
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is recognized on a straight-line basis, using the
estimated useful lives of: five to twelve years for furniture and fixtures; two to five years for office and computer equipment; three to twelve years for lab equipment; and
leasehold improvements are amortized over the shorter of the estimated service lives or the terms of the related leases which are currently one to five years. Repairs and
maintenance are charged to expense as incurred. Upon disposition, the asset and related accumulated depreciation and amortization are removed from the related accounts
and any gains or losses are reflected in operations.
Software Costs
Internal-Use Software - It is the Company’s policy to capitalize certain costs incurred in connection with developing or obtaining internal-use software. Capitalized
software costs are included in property and equipment on the consolidated balance sheet and amortized over the software’s useful life, generally three to seven years.
Software costs that do not meet capitalization criteria are expensed immediately.
See Note 6, Property and Equipment, for further information.
Long-Lived Assets, including Finite-Lived Intangible Assets
Finite-lived intangible assets are stated at cost less accumulated amortization. Amortization of finite-lived acquired intangible assets is recognized on a straight-line basis,
using the estimated useful lives of the assets of approximately two years to ten years in acquisition related amortization expense in the Consolidated Statements of
Operations.
The Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value
of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the related asset group, an impairment
loss is recognized by reducing the recorded value of the asset group to its fair value. 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. There were no asset impairment losses recorded in 2023 and the
Company recorded an impairment charge of $3.8 million for finite-lived intangible assets associated with the Company’s sale of its Pharma Solutions business in 2022.
Contingencies
In the normal course of business, the Company is 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 is reasonably estimable, 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 the Company determines that
a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the
Company 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, the Company 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. The Company is not currently involved in any legal proceedings of a material nature and, accordingly, the Company
has not accrued estimated costs related to any legal claims.
F-8
Revenue Recognition
We derive our revenues from the performance of proprietary assays or tests. The Company’s performance obligation is fulfilled upon the completion, review and release of
test results to the customer. The Company subsequently bills third-party payers or direct-bill payers for the tests performed. Under Accounting Standards Codification 606,
revenue is recognized based on the estimated transaction price or net realizable value, which is determined based on historical collection rates by each payer category for
each proprietary test offered by the Company. To the extent the transaction price includes variable consideration, for all third party and direct-bill payers and proprietary
tests, the Company estimates the amount of variable consideration that should be included in the transaction price using the expected value method based on historical
experience.
We regularly review the ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates and adjust the net realizable values
(“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 pharma
services, up to sixty days. Commercial third-party-payers are required to respond to a claim within a time period established by their respective state regulations, generally
between thirty to sixty days. However, payment for commercial third-party claims may be subject to a denial and appeal process, which could take up to two years in some
instances where multiple appeals are submitted. The Company generally appeals all denials from commercial third-party payers. We bill Medicare directly for tests
performed for Medicare patients and must accept Medicare’s fee schedule for the covered tests as payment in full.
Cost of revenue
Cost of revenue consists primarily of the costs associated with operating our laboratories 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.
Stock-Based Compensation
The compensation cost associated with the granting of stock-based awards is based on the grant date fair value of the stock award. The Company recognizes 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. The Company primarily uses 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 the Company’s stock price as well as assumptions made regarding a number of complex and subjective variables. These assumptions include: 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. The fair
value of restricted stock units, or RSUs, and restricted shares is equal to the closing stock price on the date of grant.
See Note 14, Stock-Based Compensation, for further information.
F-9
Treasury Stock
Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired stock is recorded as treasury stock. Upon reissuance of shares, the
Company records any difference between the weighted-average cost of such shares and any proceeds received as an adjustment to additional paid-in capital.
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.
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.
Income taxes
Income taxes are based on income for financial reporting purposes calculated using the Company’s annual tax 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. Any interest or penalties on income tax are recognized
as a component of income tax expense.
The Company accounts 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 basis and financial reporting basis of the Company’s 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.
The Company operates in multiple tax jurisdictions and pays or provides for the payment of taxes in each jurisdiction where it conducts business and is subject to taxation.
The breadth of the Company’s operations and the complexity of the tax law require assessments of uncertainties and judgments in estimating the ultimate taxes the
Company 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. Uncertain tax positions are recognized in the financial statements when it is more likely than
not (i.e., 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. The Company adjusts accruals for unrecognized tax benefits as facts and circumstances change, such as the progress of a tax audit.
However, any adjustments made may be material to the Company’s 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. Deferred tax assets are
regularly reviewed for recoverability. The Company currently has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary
differences, which should reduce taxable income in future periods, if generated. The realization of these assets is dependent on generating future taxable income.
F-10
Income (Loss) per Share
Basic earnings per common share are computed by dividing net income by the weighted average number of shares outstanding during the year including any unvested
share-based payment awards that contain nonforfeitable rights to dividends. Diluted earnings per common share are computed by dividing net income by the sum of the
weighted average number of shares outstanding and dilutive common shares under the treasury method. Unvested share-based payment awards that contain nonforfeitable
rights to dividends or dividend equivalents (whether paid or unpaid), are participating securities and are included in the computation of earnings per share pursuant to the
two-class method. As a result of the losses incurred in 2022, the potentially dilutive common shares have been excluded from the earnings per share computation for this
period because its inclusion would have been anti-dilutive. Additionally, preferred shares have been excluded in the denominator of the earnings per share computation, on
an if-converted basis, as such shares would have been anti-dilutive.
Reclassifications
The Company reclassified certain prior period balances to conform to the current year presentation.
2. Recent Accounting Standards
Accounting Pronouncements Adopted
The FASB issued new guidance under ASC Topic 326, Financial Instruments Credit Losses. The guidance changes the allowance on accounts receivable from an incurred
method to an expected method. The Company adopted ASC Topic 326 on January 1, 2023 which requires the Company to look at its history of write-offs to come up with
an expected loss rate and apply that to its current accounts receivable balance. It had no material effect on the consolidated financial statements.
Accounting Pronouncements Pending
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s
Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity,
including convertible instruments and contracts on an entity’s own equity. The ASU 2020-06 amendments are effective for fiscal years beginning after December 15, 2023,
and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect this will have any impact on its consolidated financial statements.
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.
3. Liquidity
In October 2021, the Company entered into a $7.5 million revolving credit facility with Comerica Incorporated (“Comerica”) (the “Comerica Loan Agreement”). See Note
18, Revolving Line of Credit, and Note 20, Subsequent Events for more details and for updates to the revolving credit facility. Also in October 2021, the Company entered
into an $8.0 million term loan with BroadOak Fund V, L.P. (“BroadOak”) (the “BroadOak Loan Agreement”), the proceeds of which were used to repay in full at their
maturity the existing secured promissory note with Ampersand Capital Partners (“Ampersand”) (the “Ampersand Note”) and 1315 Capital II, L.P (“1315 Capital”) (the
“1315 Capital Note”). In May 2022, the Company entered into a Subordinated Convertible Promissory Note agreement with BroadOak for an additional $2.0 million (the
“Convertible Note”), which was converted into a subordinated term loan and was added to the outstanding BroadOak Loan Agreement balance. See Note 13, Notes
Payable, for more details.
At December 31, 2023, the Company has a $10 million principal balance of notes payable that required the principal to be paid on or before the maturity date of October
31, 2024. In March 2024, the Company had the terms of the Loan Agreement updated. See Note 20, Subsequent Events, for more details.
F-11
Along with many laboratories, the Company may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which is currently under consideration by
Novitas. If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing Medicare coverage for one of our molecular tests,
PancraGEN®. On June 5, 2023 the Company announced that Novitas issued the final LCD of Genetic Testing for Oncology (L39365) which if finalized, would have
established non-coverage for the Company’s widely used PancraGEN® test effective July 17, 2023. On July 6, 2023, Novitas announced that it would not be implementing
the final Genetic Testing for Oncology LCD (L39365) as scheduled on July 17, 2023. Novitas then issued a new virtually identical proposed LCD affecting the same
companies and tests and reaching the same conclusions as noted in the previously rescinded LCD on July 27, 2023. In response, the Company participated in a public
meeting presentation and submitted detailed written comments supporting the use of PancraGEN®. The timing and content of any final implemented LCD is uncertain at
this time; the process could potentially take a year or longer from issuance of the updated proposed LCD to reach a conclusion. As a result, the Company is able to continue
offering PancraGEN® and the related Point2® fluid chemistry tests for amylase, CEA, and glucose. In the event Novitas ultimately restricts coverage for the PancraGEN®
test, the Company’s liquidity could be negatively impacted.
For the year ended December 31, 2023, the Company had operating income from continuing operations of $2.8 million. As of December 31, 2023, the Company had cash
and cash equivalents of $3.5 million, total current assets of $10.3 million and current liabilities of $17.5 million. As of March 22, 2024, the Company had approximately
$2.8 million of cash on hand.
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.
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 issuance of the consolidated financial statements.
4. Discontinued Operations
On August 31, 2022, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Flagship Biosciences, Inc. (the “Purchaser”) pursuant to
which the Purchaser agreed to (i) acquire substantially all of the assets of Interpace Pharma Solutions, Inc. used in its business of complex molecular analysis for the early
diagnosis and treatment of cancer and supporting the development of targeted therapeutics (the “Business”) and (ii) assume and pay certain liabilities related to the
purchased assets (collectively, the “Transaction”). The Transaction closed on August 31, 2022.
As consideration for the Transaction, Interpace received a total sale price of approximately $6.2 million after working capital and other adjustments ($0.5 million of which
has been deposited into escrow). In addition, the Purchaser paid the Company an earnout of approximately $1.0 million based on revenue for the period beginning
September 1, 2021 and ending August 31, 2022. In the third quarter of 2023, the $0.5 million funds in escrow were released to the Company.
The Purchase Agreement includes a one-year commitment of Interpace not to compete with the Business, recruit or hire any former employees of the Subsidiary who
accept employment with the Purchaser in connection with the Transaction, or divert or attempt to divert from Purchaser any business to be performed from any of the
contracts or agreements with customers as set forth in the Purchase Agreement. The Purchase Agreement also contains customary representations and warranties, post-
closing covenants and mutual indemnification obligations for, among other things, any inaccuracy or breach of any representation or warranty and any breach or non-
fulfillment of any covenant.
F-12
In connection with the Transaction, on August 31, 2022, Interpace and Purchaser entered into a Shared Services Agreement (the “Shared Services Agreement”) pursuant to
which Interpace agreed to provide, or cause its affiliates to provide, to the Purchaser certain services set forth in the Shared Services Agreement on a transitional basis and
subject to the terms and conditions set forth in the Shared Services Agreement (the “Services”). As consideration for the Services provided by Interpace, Purchaser will pay
Interpace the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s obligations to provide the Services will terminate with
respect to each Service as set forth in the Shared Services Agreement.
The Purchaser is identified as a related party as an affiliate of Ampersand and an affiliate of BroadOak and have each provided equity financing to the Purchaser.
Collectively, they own a majority of the Purchaser’s outstanding equity securities and are represented on its Board of Directors.
The Company intends to use the remaining net proceeds to fund its future business activities and for general working capital purposes. As a result of the sale, the gain on
sale and all operations from Interpace Pharma Solutions have been classified as discontinued operations for all periods presented.
A reconciliation of the accounting for the Company’s Pharma Solutions business in 2023 and 2022 is as follows:
Purchase price
Earnout received
Working capital adjustment, net
Less: transaction costs
Total net consideration
Assets and liabilities disposed of, net (1)
Gain (loss) on sale
Gain (loss) on Sale
2023
2022
- $
-
(117)
-
(117) $
-
(117) $
7,000
1,043
(766)
(307)
6,970
(6,970)
-
$
$
$
(1) includes goodwill and intangible assets written down prior to the Transaction. The goodwill write-down was approximately $8.4 million and the write-down of intangible
assets was approximately $3.8 million.
The components of assets and liabilities classified as discontinued operations consist of the following as of December 31, 2023 and December 31, 2022:
Accrued salary and bonus
Other (1)
Current liabilities of discontinued operations
December 31,
2023
December 31,
2022
$
- $
660
660
92
766
858
(1) Includes $660 and $766 of liabilities related to the former Commercial Services business unit for the periods ending December 31, 2023 and December 31, 2022,
respectively.
F-13
The table below presents the significant components of its former Pharma Solutions and Commercial Services business units’ results included within loss from
discontinued operations, net of tax in the consolidated statements of operations for the years ended December 31, 2023 and 2022.
Revenue, net
Loss from discontinued operations
Income tax expense
Loss from discontinued operations, net of tax
For The Years Ended
December 31,
2023
2022
$
$
- $
(43)
267
(310) $
5,678
(15,968)
125
(16,093)
The income tax expense for the years ended December 31, 2023 and December 31, 2022 primarily pertained to the interest accrued on uncertain tax position liabilities.
Cash used from discontinued operations, operating activities, for the year ended December 31, 2023 was approximately $0.1 million. There was cash provided by
discontinued operations, investing activities, for the year ended December 31, 2023 of $0.4 million which pertained to the net proceeds released from escrow for the
Pharma Solutions sale net of final working capital adjustments. Cash used from discontinued operations, operating activities, for the year ended December 31, 2022 was
approximately $2.8 million. There was cash provided by discontinued operations, investing activities, for the year ended December 31, 2022 of $6.5 million which
pertained to the net proceeds received from the Pharma Solutions sale. Depreciation and amortization expense within discontinued operations for the year ended December
31, 2022 was $1.1 million. There was no depreciation and amortization expense within discontinued operations for the year ended December 31, 2023.
5. 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 consolidated financial statements include contingent consideration and notes 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 for assets and liabilities include certain unobservable inputs in the assumptions and projections used in determining the fair value assigned to such
assets or liabilities.
F-14
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.
Liabilities:
Contingent consideration:
Asuragen (1)
Note payable:
BroadOak loan
Liabilities:
Contingent consideration:
Asuragen (1)
Note payable:
BroadOak loan
As of December 31, 2023
Fair Value Measurements
As of December 31, 2023
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
453 $
453 $
10,000
10,453 $
9,343
9,796 $
- $
-
- $
- $
-
- $
453
9,343
9,796
As of December 31, 2022
Fair Value Measurements
As of December 31, 2022
Carrying
Amount
Fair Value
Level 1
Level 2
Level 3
1,088 $
1,088 $
10,000
11,088 $
11,165
12,253 $
- $
-
- $
- $
-
- $
1,088
11,165
12,253
$
$
$
$
(1)(2)
See Note 10, Accrued Expenses and Other Long-Term Liabilities
In connection with the acquisition of certain assets from Asuragen, 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.
F-15
The Company records the BroadOak 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.
December 31,
2022
Payments
Transferred
to Accrued
Expenses
Accretion/
Interest
Accrued
Adjustment
to Fair Value/
Mark to
Market
December 31,
2023
Asuragen
BroadOak loan
$
1,088 $
- $
(754) $
112 $
11,165
(2,500)
-
-
$
12,253 $
(2,500) $
(754) $
112 $
7 $
678
685 $
453
9,343
9,796
Certain of the Company’s non-financial assets, such as other intangible assets are measured at fair value on a nonrecurring basis when there is an indicator of impairment
and recorded at fair value only when an impairment charge is recognized.
6. Property and Equipment
Property and equipment consisted of the following as of December 31, 2023 and 2022:
Furniture and fixtures
Lab and office equipment
Computer equipment
Internal-use software
Leasehold improvements
Property and equipment
Less accumulated depreciation and amortization
Net property and equipment
December 31,
2023
2022
$
69 $
2,510
233
253
269
3,334
(2,544)
$
790 $
69
2,243
233
139
175
2,859
(2,379)
480
Depreciation and amortization expense from continuing operations was approximately $0.2 million for the years ended December 31, 2023 and 2022, respectively. There
was zero internal-use software amortization expense included in depreciation and amortization expense in 2023 and 2022, and $0.1 million of internal use unamortized
software costs at December 31, 2023 and zero at December 31, 2022. The costs were unamortized as they were not in use at December 31, 2023.
F-16
7. Intangible Assets
The net carrying value of the identifiable intangible assets from all acquisitions within continuing operations as of December 31, 2023 and December 31, 2022 are as
follows:
Asuragen acquisition:
Thyroid
RedPath acquisition:
Pancreas test
Barrett’s test
CLIA Lab
Total
Accumulated Amortization
Net Carrying Value
Life
(Years)
9
7
9
2.3
As of
December 31, 2023
Carrying
Amount
As of
December 31, 2022
Carrying
Amount
$
$
$
8,519
$
16,141
6,682
609
31,951
$
(31,951)
-
$
8,519
16,141
6,682
609
31,951
(31,090)
861
Amortization expense from continuing operations was approximately $0.9 million and $1.3 million for the years ended December 31, 2023 and 2022, respectively. The
Company’s identifiable intangible assets were fully amortized as of December 31, 2023.
8. Leases
The Company leases facilities and certain equipment under agreements classified as operating leases, which expire at various dates through June 2028. Substantially all of
the property leases provide for increases based upon use of utilities and landlord’s operating expenses as well as pre-defined rent escalations. Total operating lease expense
from continuing operations under these agreements for the years ended December 31, 2023 and 2022 was approximately $0.8 million and $0.9 million, respectively. Total
cash paid under these agreements for the years ended December 31, 2023 and 2022 was approximately $0.8 million and $0.9 million, respectively.
The table below presents the lease-related assets and liabilities recorded in the Consolidated Balance Sheet:
Classification on the
Balance Sheet
December 31, 2023
December 31, 2022
Assets
Operating lease assets
Total lease assets
Liabilities
Current
Operating lease liabilities
Total current lease liabilities
Noncurrent
Operating lease liabilities
Total long-term lease liabilities
Total lease liabilities
Operating lease right of use assets
Other accrued expenses
Operating lease liabilities, net of current portion
F-17
$
$
$
1,864
1,864
377
377
1,472
1,472
1,849
$
$
$
2,439
2,439
578
578
1,848
1,848
2,426
The weighted average remaining lease term for the Company’s operating leases was 4.3 years as of December 31, 2023 and 5.0 years as of December 31, 2022 and the
weighted average discount rate for those leases was 11.8% and 11.7% as of December 31, 2023 and December 31, 2022, respectively. The Company’s operating lease
expenses are recorded within “Cost of revenue” and “General and administrative expenses.”
The table below reconciles the undiscounted cash flows to the lease liabilities recorded on the Company’s Consolidated Balance Sheet as of December 31, 2023:
2024
2025
2026
2027-2028
Total minimum lease payments
Less: amount of lease payments representing effects of discounting
Present value of future minimum lease payments
Less: current obligations under leases
Long-term lease obligations
Operating Leases
575
450
550
825
2,400
551
1,849
377
1,472
$
$
9. Retirement Plans
The Company offers an employee 401(k) saving plan. Under the Interpace Biosciences, Inc. 401(k) Plan, employees may contribute up to 50% of their pre- or post-tax base
compensation. The Company currently offers a safe harbor matching contribution equal to 100% of the first 3% of the participant’s contributed base salary plus 50% of the
participant’s base salary contributed exceeding 3% but not more than 5%. Participants are not allowed to invest any of their 401(k) funds in the Company’s common stock.
The Company’s total contribution expense from continuing operations related to the 401(k) plan for the years ended December 31, 2023 and December 31, 2022 was
approximately $0.3 million in both periods.
10. Accrued Expenses and Other Long-Term Liabilities
Other accrued expenses consisted of the following as of December 31, 2023 and 2022:
Accrued royalties
Contingent consideration
Operating lease liability
Accrued sales and marketing - diagnostics
Accrued lab costs - diagnostics
Accrued professional fees
Taxes payable
Unclaimed property
All others
Total other accrued expenses
December 31, 2023
$
December 31, 2022
6,268 $
453
377
43
68
241
261
35
455
8,201 $
4,909
569
578
40
167
641
262
565
688
8,419
$
Other long-term liabilities consisted of uncertain tax positions as of December 31, 2023 and 2022.
F-18
11. 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.
12. 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 $20.0 million in Series B Preferred Stock of
the Company, at an issuance price per share of $1,000 (“New Investment Shares”). Pursuant to the Securities Purchase and Exchange Agreement, 1315 Capital agreed to
purchase 19,000 shares of Series B Preferred Stock at an aggregate purchase price of $19.0 million and Ampersand agreed to purchase 1,000 shares of Series B Preferred
Stock at an aggregate purchase price of $1.0 million.
In addition, the Company agreed to exchange $27.0 million of the Company’s existing Series A convertible preferred stock, par value $0.01 per share, held by Ampersand
(the “Series A Preferred Stock”), represented by 270 shares of Series A Preferred Stock with a stated value of $100,000 per share, which represents all of the Company’s
issued and outstanding Series A Preferred Stock, for 27,000 newly issued shares of Series B Preferred Stock (such shares of Series B Preferred Stock, the “Exchange
Shares” and such transaction, the “Exchange”). Following the Exchange, no shares of Series A Preferred Stock remained designated, authorized, issued or outstanding. The
Series B Preferred Stock has a conversion price of $6.00.
Voting
On any matter presented to the stockholders of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of
stockholders in lieu of meeting), each holder of outstanding shares of Series B Preferred Stock will be entitled to cast the number of votes equal to the number of whole
shares of the Company’s common stock into which the shares of Series B Preferred Stock held by such holder are convertible as of the record date for determining
stockholders entitled to vote on such matter. Except as provided by law or by the Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible
Preferred Stock (the “Certificate of Designation”), holders of Series B Preferred Stock will vote together with the holders of common stock as a single class and on an as-
converted to common stock basis.
F-19
Director Designation Rights
The Certificate of Designation also provides each Investor with the following director designation rights: for so long such Investor holds at least sixty percent (60%) of the
Series B Preferred Stock issued to it on the Issuance Date (as defined therein), such Investor will be entitled to elect two directors to the Company’s Board of Directors (the
“Board”), provided that one of the directors qualifies as an “independent director” under Rule 5605(a)(2) of the listing rules of the Nasdaq Stock Market (or any successor
rule or similar rule promulgated by another exchange on which the Company’s securities are then listed or designated) (“Independent Director”). However, if at any time
such Investor holds less than sixty percent (60%), but at least forty percent (40%), of the Series B Preferred Stock issued to them on the Issuance Date, such Investor would
only be entitled to elect one director to the Board. Any director elected pursuant to the terms of the Certificate of Designation may be removed without cause by, and only
by, the affirmative vote of the holders of Series B Preferred Stock. A vacancy in any directorship filled by the holders of Series B Preferred Stock may be filled only by
vote or written consent in lieu of a meeting of such holders of Series B Preferred Stock or by any remaining director or directors elected by such holders of Series B
Preferred Stock.
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.
Conversion
The Certificate of Designation provides that from and after the Issuance Date and subject to the terms of the Certificate of Designation, each share of Series B Preferred
Stock is convertible, at any time and from time to time, at the option of the holder into a number of shares of common stock equal to dividing the amount equal to the
greater of the Stated Value of such Series B Preferred Stock, plus any dividends declared but unpaid thereon, or such amount per share as would have been payable had
each such share been converted into common stock immediately prior to a liquidation, by six dollars ($6.00) (subject to adjustment in the event of any stock dividend,
stock split, combination, or other similar recapitalization affecting such shares). The aggregate number of shares of common stock that may be issued through conversion
of all of the New Investment Shares and Exchange Shares is 7,833,334 shares (subject to appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares).
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 ($12.00) (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 $25,000,000.00 in proceeds, net of the underwriting discount and commissions, to the Company, and the common stock
continues to be listed for trading on the Nasdaq Capital Market or another exchange, all outstanding shares of Series B Preferred Stock will automatically be converted into
shares of common stock, at the then effective Series B Conversion Ratio (as defined in the Certificate of Designation).
Liquidation
Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or Deemed Liquidation (as defined in the Certificate of Designation) (a
“Liquidation”), the holders of shares of Series B Preferred Stock then outstanding will be entitled to be paid out of the assets of the Company available for distribution to
its stockholders (on a pari passu basis with the holders of any class or series of preferred stock ranking on liquidation on a parity with the Series B Preferred Stock), and
before any payment will be made to the holders of common stock or any other class or series of preferred stock ranking on liquidation junior to the Series B Preferred
Stock by reason of their ownership thereof, an amount per share of Series B Preferred Stock equal to the greater of (i) the Stated Value of such share of Series B Preferred
Stock, plus any dividends declared but unpaid thereon, or (ii) such amount per share as would have been payable had each such share been converted into common stock
immediately prior to such Liquidation.
F-20
As of December 31, 2023 and December 31, 2022, there were 47,000 Series B issued and outstanding shares of preferred stock, respectively.
13. Notes Payable
BroadOak Loan
On October 29, 2021, the Company and its subsidiaries entered into the BroadOak Loan Agreement, providing for a term loan in the aggregate principal amount of
$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 $7,500,000 revolving credit facility with Comerica Bank. See Note 18, Revolving Line of
Credit. The Term Loan had 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.
The BroadOak Loan Agreement contains affirmative and negative restrictive covenants that are applicable from and after the date of the Term Loan advance. These
restrictive covenants, which include restrictions on certain mergers, acquisitions, investments, encumbrances, etc., could adversely affect our ability to conduct our
business. The BroadOak Loan Agreement also contains customary events of default.
In connection with the BroadOak Loan Agreement, the Company and its subsidiaries entered into that certain First Amendment to Loan and Security Agreement and
Consent with Comerica, dated as of November 1, 2021 (the “Comerica Amendment”), pursuant to which Comerica consented to the Company’s and its subsidiaries’ entry
into the BroadOak Loan Agreement, and amended that certain Loan and Security Agreement among Comerica, the Company and its subsidiaries (the “Comerica Loan
Agreement”) to, among other things, permit the indebtedness, liens and encumbrances contemplated by the BroadOak Loan Agreement.
As a condition for BroadOak to extend the Term Loan to the Company and its subsidiaries, the Company’s existing creditor, Comerica, and BroadOak entered into that
certain Subordination and Intercreditor Agreement, dated as of November 1, 2021, pursuant to which BroadOak agreed to subordinate all of the indebtedness and
obligations of the Company and its subsidiaries owing to BroadOak to all of the indebtedness and obligations of the Company and its subsidiaries owing to Comerica (the
“Intercreditor Agreement”). BroadOak further agreed to subordinate all of its respective security interests in assets or property of the Company and its subsidiaries to
Comerica’s security interests in such assets or property. The Intercreditor Agreement provides that it is solely for the benefit of BroadOak and Comerica and is not for the
benefit of the Company or any of its subsidiaries.
The Company concluded that the Note met the definition of a “recognized financial liability” which is an acceptable financial instrument eligible for the fair value option
under ASC 825-10-15-4, and did not meet the definition of any of the financial instruments listed within ASC 825-10-15-5 that are not eligible for the fair value option.
The Note is not convertible and does not have any component recorded to shareholders’ equity. Accordingly, the Company elected the fair value option for the Note.
On October 24, 2023, the Company entered into a Second Amendment to Loan and Security Agreement (“Amendment”) with BroadOak. The primary changes to the
original BroadOak Loan Agreement were as follows:
● The Company made a one-time payment in an aggregate amount equal to $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 BroadOak Loan Agreement). See above regarding the Terminal Payment.
● Effective November 1, 2023, the interest rate under the BroadOak Loan Agreement 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”).
F-21
● The Company has the option to request an extension of the Loan Maturity Date in writing no less than sixty days prior to the Loan Maturity Date. If
BroadOak agrees to the extension, the Loan Maturity Date would automatically be extended.
The Second Amendment was treated as a debt modification which is accounted for prospectively. Since the BroadOak 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 fourth quarter 2023 fair value calculation.
In March 2024, the Company entered into a Third Amendment of the BroadOak Loan Agreement. See Note 20, Subsequent Events, for more details.
14. Stock-Based Compensation
The Company’s stock-incentive program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and
directors, and to align stockholder and employee interests. Currently, the Company is able to grant options, stock appreciation rights (“SARs”) and restricted shares from
the Interpace Biosciences, Inc. 2019 Equity Incentive Plan. No new grants may be made under the Company’s prior stock incentive plan, the Interpace Diagnostics Group,
Inc. (now known as Interpace Biosciences, Inc.) Amended and Restated 2004 Stock Award and Incentive Plan (the “2004 Plan”). Unless earlier terminated by action of the
Company’s board of directors, the 2004 Plan will remain in effect until such time as no stock remains available for delivery and the Company has no further rights or
obligations under the 2004 Plan with respect to outstanding awards thereunder.
Historically, stock options have been granted with an exercise price equal to the market value of the common stock on the date of grant, expire 10 years from the date they
are granted, and generally vested over a one to three-year period for employees and members of the Board. Upon exercise, new shares will be issued by the Company. The
restricted shares and restricted stock units (“RSUs”) granted to employees generally have a three-year graded vesting period and are subject to accelerated vesting and
forfeiture under certain circumstances. Restricted shares and RSUs granted to Board members generally have a three-year graded vesting period and are subject to
accelerated vesting and forfeiture under certain circumstances.
The Company primarily uses 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 on the date of grant using an option-pricing model is affected by the Company’s stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include the Company’s expected stock price volatility over the term of the awards, actual and projected employee stock option
exercise behaviors, risk-free interest rate and expected dividends. Expected volatility is based on historical volatility. As there is no trading volume for the Company’s
options, implied volatility is not representative of the Company’s current volatility so the historical volatility of the Company’s common stock is determined to be more
indicative of the Company’s expected future stock performance. The expected life is determined using the safe-harbor method. The Company expects to use this simplified
method for valuing employee options until more detailed information about exercise behavior becomes available over time. The Company bases the risk-free interest rate
on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. The Company does not anticipate paying any cash dividends in the
foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. The Company estimates forfeitures at the time of grant and revise
those estimates in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and
records stock-based compensation expense only for those awards that are expected to vest. The Company recognizes compensation cost, net of estimated forfeitures,
arising from the issuance of stock options on a straight-line basis over the vesting period of the grant.
The Company began an employee stock purchase plan in 2020 and recognized approximately $46,000 in expense related to that plan for the year ended December 31,
2022. The Company suspended its plan in July 2022 as there were no shares available in the original authorized shares pool. In November 2022, the shareholders approved
an increase to the pool of an additional one million shares.
As of December 31, 2023, we have reserved 692,688 shares of our common stock for issuance under our 2019 Equity Incentive Plan, 1,000,007 shares of our common
stock for issuance under our Employee Stock Purchase Plan and 1,677,248 additional shares available for future grants of awards under our 2019 Equity Incentive Plan.
F-22
The estimated compensation cost associated with the granting of restricted stock and restricted stock units is based on the fair value of the Company’s common stock on the
date of grant. The Company recognizes the compensation cost, net of estimated forfeitures, arising from the issuance of restricted stock and restricted stock units on a
straight-line basis over the shorter of the vesting period or the period from the grant date to the date when retirement eligibility is achieved.
There were no stock options granted in 2023. The following table provides the weighted average assumptions used in determining the fair value of the stock options
granted during the year ended December 31, 2022:
Risk-free interest rate
Expected life
Expected volatility
Dividend yield
December 31, 2022
1.75%
6.0 years
129.88%
-
The weighted-average fair value of stock options granted during the year ended December 31, 2022 was estimated to be $4.50. There were no options exercised in 2023 or
2022.
Stock-based compensation from continuing operations for the years ended December 31, 2023 and 2022 is as follows:
RSUs and restricted stock
Performance-based awards
Options
Total stock-based compensation expense
$
$
2023
2022
313 $
58
259
630 $
498
71
622
1,191
A summary of stock option activity for the year ended December 31, 2023, and changes during such year, is presented below:
Outstanding at January 1, 2023
Granted
Forfeited or expired
Outstanding at December 31, 2023
Exercisable at December 31, 2023
Vested and expected to vest
Weighted-
Average
Grant
Price
$
Weighted-Average
Remaining
Contractual
Period (in years)
6.46
-
6.07
6.52
6.95
6.79
7.57
-
-
6.47
6.29
6.45
Aggregate
Intrinsic
Value
$
-
-
-
-
-
-
Shares
527,844
-
(72,000)
455,844
336,826
376,509
F-23
A summary of the change in of the Company’s non-vested options for the year ended December 31, 2023 is presented below:
Nonvested at January 1, 2023
Granted
Vested
Forfeited
Nonvested at December 31, 2023
Shares
Weighted- Average
Grant Date Fair Value
257,764 $
-
(129,574)
(9,172)
119,018 $
4.63
-
4.70
4.56
4.55
The aggregate fair value of options vested during the years ended December 31, 2023 and 2022 was $0.6 million and $0.7 million, respectively. The weighted-average
grant date fair value of options vested during the year ended December 31, 2022 was $5.02.
A summary of the Company’s non-vested shares of restricted stock and restricted stock units for the year ended December 31, 2023, and changes during such year, is
presented below:
Nonvested at January 1, 2023
Granted
Vested
Forfeited
Nonvested at December 31, 2023
Weighted-
Average
Grant Date
Fair Value
Average
Remaining
Vesting
Period (in years)
Aggregate
Intrinsic
Value
3.47
1.32
4.30
6.52
2.14
0.98
-
-
-
0.84
$
$
258,965
-
-
-
255,792
Shares
249,005
87,500
(79,659)
(20,002)
236,844
$
$
The aggregate fair value of restricted stock units vested during each of the years ended December 31, 2023 and 2022 was $0.3 million and $0.6 million, respectively.
As of December 31, 2023, there was approximately $0.3 million of total unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options and
restricted stock units which will be expensed over the next three years.
15. Revenue Sources
The Company’s clinical services customers consist primarily of physicians, hospitals and clinics. Its revenue channels include Medicare, Medicare Advantage, Medicaid,
Client Billings (hospitals, etc.), and commercial payers. The following sets forth the net revenue generated by revenue channel accounting for more than 10% of the
Company’s revenue from continuing operations during the years ended December 31, 2023 and 2022, respectively. For the years ended December 31, 2023 and December
31, 2022, revenue from Medicare was approximately 37% and 45% of total revenue, respectively.
Customer
Medicare
Commercial Payors
Client Billings
Medicare Advantage
Years Ended December 31,
2022
2023
$
$
$
$
14,830 $
11,797 $
7,711 $
5,512 $
14,413
7,154
5,679
4,384
F-24
16. Income Taxes
The provision for income taxes on continuing operations for the years ended December 31, 2023 and 2022 is comprised of the following:
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Provision for income taxes
2023
2022
$
$
- $
17
17
-
-
-
17 $
-
29
29
-
-
-
29
The Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient to realize the deferred tax assets. The
Company’s recent operating results and projections of future income weighed heavily in the Company’s overall assessment. As a result of this analysis, the Company
continues to maintain a full valuation allowance against its federal and state net deferred tax assets at December 31, 2023 as the Company believes that it is more likely
than not that these assets will not be realized.
The tax effects of significant items comprising the Company’s deferred tax assets and (liabilities) as of December 31, 2023 and 2022 are as follows:
Deferred tax assets:
Federal net operating loss carryforwards
State net operating loss carryforwards
Compensation
Allowances and reserves
Intangible assets
State taxes
Credit carryforward
163(j) interest
Deferred revenue
Capitalized 174
Valuation allowance
Deferred tax liability:
Property and equipment
Leases
Deferred tax liability-net valuation allowance
2023
2022
26,429 $
3,780
2,021
421
3,201
1,049
1
1,411
94
268
(38,654)
21
(17)
(4)
- $
26,713
3,639
2,059
395
3,584
987
1
1,279
94
158
(38,256)
653
(650)
(3)
-
$
$
F-25
The Company’s deferred tax asset and deferred tax liabilities are included within Other long-term liabilities, within the consolidated balance sheet as of December 31,
2023 and 2022. Federal tax attribute carryforwards at December 31, 2023, consist primarily of approximately $125.8 million of federal net operating losses. In addition, the
Company has approximately $60.8 million of state net operating losses carryforwards post 382 ownership change. The utilization of the federal carryforwards as an
available offset to future taxable income is subject to limitations under federal income tax laws. Under current federal income tax law, federal NOLs incurred in tax years
beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such federal NOLs is limited to 80% of Federal Taxable Income, and
current state net operating losses not utilized begin to expire this year.
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 Internal Revenue Code of 1986, as amended, or 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, U.S. tax laws limit the time during which these carry forwards may be applied against future taxes, therefore, we may not
be able to take full advantage of these carry forwards for federal income tax purposes. During 2021, the Company completed a 382 assessment of the available NOLs under
Section 382 and determined that the Company underwent an ownership change on March 30, 2017 and July 15, 2019 and as a result, NOLs attributable to the pre-
ownership change are subject to a substantial annual limitation under Section 382 of the Internal Revenue Code due to the multiple ownership changes. The Company has
adjusted their NOL carryforwards to address the impact of the 382 ownership change. Federal Net Operating Losses of $71.2 million are subject to annual limitation for
ownership changes and the Company is utilizing $1.0 million during the current year. The remaining $55.6 million of NOLs incurred post July 15, 2019 are not subject to
any annual limitation and can be carried forward indefinitely.
A reconciliation of the difference between the federal statutory tax rates and the Company’s effective tax rate from continuing operations is as follows:
Federal statutory rate
State income tax rate, net of Federal tax benefit
Meals and entertainment
Valuation allowance
Effective tax rate
2023
2022
21.0%
1.4%
2.1%
(23.0%)
1.5%
21.0%
3.6%
(0.4%)
(24.7%)
(0.5%)
The following table summarizes the change in uncertain tax benefit reserves for the two years ended December 31, 2023:
Balance of unrecognized benefits as of January 1, 2022
Additions for tax positions of prior years
Balance as of January 1, 2023
Additions for tax positions of prior years
Balance as of December 31, 2023
Unrecognized
Tax Benefits
$
$
$
877
-
877
-
877
As of both December 31, 2023 and 2022, the total amount of gross unrecognized tax benefits was $0.9 million. The total amount of unrecognized tax benefits that, if
recognized, would affect the effective tax rate as of both December 31, 2023 and 2022 was $0.9 million.
F-26
The Company recognized interest and penalties of $0.2 million related to uncertain tax positions in income tax expense during each of the years ended December 31, 2023
and 2022. At December 31, 2023 and 2022, accrued interest and penalties, net were $4.0 million and $3.8 million, respectively, and are included in the Other long-term
liabilities in the consolidated balance sheets.
The Company and its subsidiaries file a U.S. Federal consolidated income tax return and consolidated and separate income tax returns in numerous states and local tax
jurisdictions. The following tax years remain subject to examination as of December 31, 2023:
Jurisdiction
Federal
State and Local
Tax Years
2019 – 2023
2018 – 2023
To the extent there was a failure to file a tax return in a previous year; the statute of limitation will not begin until the return is filed. There were no examinations in process
by the Internal Revenue Service as of December 31, 2023.
17. Basic and Diluted Net Income (Loss) per Share
A reconciliation of the number of shares used in the calculation of basic and diluted earnings per share for the years ended December 31, 2023 and 2022 are as follows
(rounded to thousands):
Basic weighted average number of common shares
Potential dilutive effect of stock-based awards
Diluted weighted average number of common shares
Years Ended December 31,
2023
2022
4,317
47
4,364
4,238
-
4,238
The Company’s Series B Preferred Stock, on an as converted basis of 7,833,334 shares and the following outstanding stock-based awards were excluded from the
computation of the effect of dilutive securities on loss per share for the following periods as they would have been anti-dilutive (rounded to thousands):
Options
Restricted stock units (RSUs)
18. Revolving Line of Credit
Years Ended December 31,
2023
2022
456
237
693
528
249
777
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
$7,500,000 (the “Credit Facility”). The Company may use the proceeds of the Credit Facility for working capital and other general corporate purposes.
The amount that may be borrowed under the Credit Facility is the lower of (i) the revolving limit of $7,500,000 (the “Revolving Line”) and (ii) 80% of the Company’s
eligible accounts receivable plus an applicable non-formula amount consisting of $2,000,000 of additional availability at close not based upon the Company’s eligible
accounts receivable, with such additional availability reducing by $250,000 per quarter beginning with the quarter ending June 30, 2022. Borrowings on the Credit Facility
are limited to $5,000,000 until 80% of the Company’s and its subsidiaries’ customers are paying into a collection account or segregated governmental account with
Comerica. The Revolving Line can also include, at the Company’s option, credit card services with a sublimit of $300,000. Borrowings on the Revolving Line are subject
to an interest rate equal to prime plus 0.50%, with prime being the greater of (x) Comerica’s stated prime rate or (y) the sum of (A) the daily adjusting LIBOR rate plus (B)
2.5% per annum. The Company is also required to pay an unused facility fee quarterly in arrears in an amount equal to 0.25% per annum on the average unused but
available portion of the Revolving Line for such quarter.
F-27
In April 2022, Comerica waived certain covenants specifically relating to the Company receiving financial statements with a going concern comment or qualification. In
April 2022 and August 2022, Comerica waived certain covenants specifically relating to failure to maintain bank accounts outside of Comerica in an aggregate amount not
to exceed $0.5 million during the transition period. Additionally, in August 2022, Comerica waived certain covenants relating to failure to segregate collections made from
government account debtors from collections made from all other account debtors and customers.
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 contained financial covenants requiring specified minimum liquidity and minimum revenue thresholds,
which the Company was in compliance with as of December 31, 2023, and also contained customary events of default.
As of December 31, 2023, the balance of the revolving line was zero.
On October 6, 2023, effective September 30, 2023, the Company entered into a Fifth Amendment to its Loan and Security Agreement (the “Fifth Amendment to the
Comerica Loan Agreement”) with Comerica Bank providing for a revolving credit facility of up to $5,000,000. This agreement was originally scheduled to expire on
September 30, 2024 but has since been terminated. The Company could have used the proceeds of the Credit Facility for working capital and other general corporate
purposes. The amount that could have been borrowed under the Credit Facility was the lower of (i) the revolving limit of $5,000,000 and (ii) 80% of the Company’s
eligible accounts receivable plus up to but not exceeding $1.5 million in the Company’s Medicare accounts (excluding Medicare Advantage thyroid accounts). Borrowings
on the Revolving Line were subject to an interest rate equal to the Term Secured Overnight Financing Rate (“SOFR”) Screen Rate plus one-tenth of one percent.
The Fifth Amendment to the Comerica Loan Agreement contained affirmative and negative restrictive covenants that were applicable whether or not any amounts are
outstanding under the Comerica Loan Agreement. These restrictive covenants, which included restrictions on certain mergers, acquisitions, investments, encumbrances,
etc., could have adversely affected our ability to conduct our business. The Comerica Loan Agreement also contained financial covenants requiring specified minimum
liquidity and minimum adjusted EBITDA thresholds. Pursuant to the Fifth Amendment to the Comerica Loan Agreement, Comerica consented to waive a covenant
constituting an event of default under the Comerica Loan Agreement regarding a going concern qualification issued in connection with the Company’s 2022 fiscal year
audit.
See Note 20, Subsequent Events, for updates on the current status of the Comerica line.
F-28
19. Supplemental Cash Flow Information
Supplemental Disclosure of Other Cash Flow Information
(in thousands)
Years Ended
December 31,
2023
2022
Cash paid for taxes
Cash paid for interest
$
$
270 $
1,092 $
251
971
Supplemental Disclosures of Non Cash Activities
(in thousands)
Years Ended
December 31,
2023
2022
Purchase of property and equipment included in accounts payable
Conversion of convertible debt into notes payable
$
5 $
-
-
2,000
20. Subsequent Events
Line of Credit
In February 2024, the Company ended the Comerica Loan Agreement. The Company did not owe anything outstanding on the Line at the time of termination and does
not owe anything further to Comerica Bank.
BroadOak Amendment
On March 29, 2024, the Company entered into a Third Amendment to Loan and Security Agreement with BroadOak. The primary changes to the Second Amendment
to Loan and Security Agreement were as follows:
● The maturity date was extended to June 30, 2025.
● Beginning April 1, 2024, the Company will make $500,000 monthly payments with the remaining loan balance due on the new maturity date.
F-29
INTERPACE BIOSCIENCES, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2023 AND 2022
($ in thousands)
Balance at
Beginning
of Period
Additions
(Reductions)
Charged to
Operations
(1)
Deductions
Other
Balance at
end
of Period
$
$
$
$
$
72
869
33,170
869
38,256
-
-
-
-
-
(72)
-
5,086
-
398
$
$
$
$
$
-
869
38,256
869
38,654
Description
2022
Allowance for doubtful accounts
Allowance for doubtful notes
Tax valuation allowance
Allowance for doubtful notes
Tax valuation allowance
2023
(1) Includes payments and actual write offs, as well as changes in estimates in the reserves.
F-30
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of Interpace Biosciences, Inc. on Form S-8 (Nos. 333-61231, 333-60512, 333-177969, 333-201070,
333-214260, 333-252574, 333-234284 and 333-224554) of our report dated April 1, 2024, on our audits of the financial statements as of December 31, 2023 and 2022 and for
each of the years then ended, which report is included in this Annual Report on Form 10-K to be filed on or about April 1, 2024.
Exhibit 23.1
/s/ EisnerAmper LLP
EISNERAMPER LLP
Philadelphia, Pennsylvania
April 1, 2024
Exhibit 31.1
I, Thomas W. Burnell, certify that:
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2023 of Interpace Biosciences, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: April 1, 2024
/s/ Thomas W. Burnell
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Christopher McCarthy, certify that:
CERTIFICATION PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2023 of Interpace Biosciences, Inc. (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: April 1, 2024
/s/ Christopher McCarthy
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Interpace Biosciences, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2023 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Thomas W. Burnell, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 1, 2024
/s/ Thomas W. Burnell
Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Interpace Biosciences, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2023 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Christopher McCarthy, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 1, 2024
/s/ Christopher McCarthy
Chief Financial Officer
(Principal Financial Officer)
Exhibit 10.39