INTERPACE
BIOSCIENCES, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share data)
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
13,370
|
|
|
$
|
2,321
|
|
Accounts receivable,
net of allowance for doubtful accounts of $275 and $25, respectively
|
|
|
9,799
|
|
|
|
10,197
|
|
Other
current assets
|
|
|
4,976
|
|
|
|
3,851
|
|
Total current
assets
|
|
|
28,145
|
|
|
|
16,369
|
|
Property and equipment, net
|
|
|
6,610
|
|
|
|
6,814
|
|
Other intangible assets, net
|
|
|
32,470
|
|
|
|
33,501
|
|
Goodwill
|
|
|
8,433
|
|
|
|
8,433
|
|
Operating lease right of use assets
|
|
|
2,811
|
|
|
|
3,892
|
|
Other long-term
assets
|
|
|
42
|
|
|
|
42
|
|
Total
assets
|
|
$
|
78,511
|
|
|
$
|
69,051
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,456
|
|
|
$
|
4,812
|
|
Accrued salary
and bonus
|
|
|
1,865
|
|
|
|
2,341
|
|
Other accrued
expenses
|
|
|
8,639
|
|
|
|
9,379
|
|
Current
liabilities from discontinued operations
|
|
|
766
|
|
|
|
766
|
|
Total current
liabilities
|
|
|
15,726
|
|
|
|
17,298
|
|
Contingent consideration
|
|
|
2,264
|
|
|
|
2,391
|
|
Operating lease liabilities, net
of current portion
|
|
|
1,384
|
|
|
|
2,591
|
|
Line of credit
|
|
|
1,200
|
|
|
|
3,000
|
|
Other long-term
liabilities
|
|
|
4,563
|
|
|
|
4,573
|
|
Total liabilities
|
|
|
25,137
|
|
|
|
29,853
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note
8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value;
5,000,000 shares authorized,
|
|
|
|
|
|
|
|
|
270 Series A
shares issued and outstanding
|
|
|
-
|
|
|
|
26,172
|
|
47,000 Series
B shares issued and outstanding
|
|
|
46,536
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock,
$.01 par value; 100,000,000 shares authorized; 4,055,454 and 3,932,370 shares issued, respectively; 4,043,673 and 3,920,589
shares outstanding, respectively
|
|
|
402
|
|
|
|
393
|
|
Additional paid-in
capital
|
|
|
182,580
|
|
|
|
182,514
|
|
Accumulated deficit
|
|
|
(174,423
|
)
|
|
|
(168,160
|
)
|
Treasury
stock, at cost (11,781 and 11,781 shares, respectively)
|
|
|
(1,721
|
)
|
|
|
(1,721
|
)
|
Total
stockholders’ equity
|
|
|
6,838
|
|
|
|
13,026
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
31,975
|
|
|
$
|
42,879
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities, preferred stock and stockholders’ equity
|
|
$
|
78,511
|
|
|
$
|
69,051
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INTERPACE
BIOSCIENCES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited,
in thousands, except for per share data)
|
|
Three
Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenue, net
|
|
$
|
9,200
|
|
|
$
|
6,010
|
|
Cost of revenue
(excluding amortization of $1,031 and $813, respectively)
|
|
|
6,113
|
|
|
|
2,622
|
|
Gross profit
|
|
|
3,087
|
|
|
|
3,388
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Sales and marketing
|
|
|
2,481
|
|
|
|
2,411
|
|
Research and
development
|
|
|
809
|
|
|
|
528
|
|
General and administrative
|
|
|
4,887
|
|
|
|
2,912
|
|
Acquisition
related amortization expense
|
|
|
1,031
|
|
|
|
813
|
|
Total
operating expenses
|
|
|
9,208
|
|
|
|
6,664
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,121
|
)
|
|
|
(3,276
|
)
|
Interest accretion
|
|
|
(109
|
)
|
|
|
(129
|
)
|
Other income
(expense), net
|
|
|
47
|
|
|
|
48
|
|
Loss from continuing
operations before tax
|
|
|
(6,183
|
)
|
|
|
(3,357
|
)
|
Provision
for income taxes
|
|
|
15
|
|
|
|
5
|
|
Loss from continuing
operations, net of tax
|
|
|
(6,198
|
)
|
|
|
(3,362
|
)
|
Less
adjustment for preferred stock deemed dividend
|
|
|
(3,033
|
)
|
|
|
-
|
|
Loss from continuing operations attributable
to common stockholders
|
|
|
(9,231
|
)
|
|
|
(3,362
|
)
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations,
net of tax
|
|
|
(65
|
)
|
|
|
(57
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common stockholders
|
|
$
|
(9,296
|
)
|
|
$
|
(3,419
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted loss per share
of common stock:
|
|
|
|
|
|
|
|
|
From continuing
operations
|
|
$
|
(2.31
|
)
|
|
$
|
(0.96
|
)
|
From
discontinued operations
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
Net loss per
basic and diluted share of common stock
|
|
$
|
(2.32
|
)
|
|
$
|
(0.97
|
)
|
Weighted average number of common
shares and common share equivalents outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,004
|
|
|
|
3,515
|
|
Diluted
|
|
|
4,004
|
|
|
|
3,515
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INTERPACE
BIOSCIENCES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited,
in thousands)
|
|
For
The Three Months Ended
|
|
|
For
The Three Months Ended
|
|
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
|
3,932
|
|
|
$
|
393
|
|
|
|
2,877
|
|
|
$
|
287
|
|
Common
stock issued
|
|
|
37
|
|
|
|
1
|
|
|
|
9
|
|
|
|
1
|
|
Restricted
stock issued
|
|
|
6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock issued through market sales
|
|
|
80
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
Common
stock issued through offerings
|
|
|
-
|
|
|
|
-
|
|
|
|
933
|
|
|
|
94
|
|
Balance
at March 31
|
|
|
4,055
|
|
|
|
402
|
|
|
|
3,819
|
|
|
|
382
|
|
Treasury
stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
|
12
|
|
|
|
(1,721
|
)
|
|
|
7
|
|
|
|
(1,680
|
)
|
Treasury
stock purchased
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
|
|
(32
|
)
|
Balance
at March 31
|
|
|
12
|
|
|
|
(1,721
|
)
|
|
|
10
|
|
|
|
(1,712
|
)
|
Additional
paid-in capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
|
|
|
|
|
182,514
|
|
|
|
|
|
|
|
175,820
|
|
Common
stock issued through offerings, net of expenses
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
5,868
|
|
Extinguishment
of Series A Shares
|
|
|
|
|
|
|
(828
|
)
|
|
|
|
|
|
|
-
|
|
Beneficial
Conversion Feature in connection with Series B Issuance
|
|
|
|
|
|
|
2,205
|
|
|
|
|
|
|
|
-
|
|
Amortization
of Beneficial Conversion Feature
|
|
|
|
|
|
|
(2,205
|
)
|
|
|
|
|
|
|
-
|
|
Common
stock issued through market sales
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
-
|
|
Stock-based
compensation expense
|
|
|
|
|
|
|
418
|
|
|
|
|
|
|
|
266
|
|
Balance
at March 31
|
|
|
|
|
|
|
182,580
|
|
|
|
|
|
|
|
181,954
|
|
Accumulated
deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at January 1
|
|
|
|
|
|
|
(168,160
|
)
|
|
|
|
|
|
|
(141,489
|
)
|
Net
loss
|
|
|
|
|
|
|
(6,263
|
)
|
|
|
|
|
|
|
(3,419
|
)
|
Adoption
of ASC 842
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
55
|
|
Balance
at March 31
|
|
|
|
|
|
|
(174,423
|
)
|
|
|
|
|
|
|
(144,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ equity
|
|
|
|
|
|
$
|
6,838
|
|
|
|
|
|
|
$
|
35,771
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
INTERPACE
BIOSCIENCES, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited,
in thousands)
|
|
For
The Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,263
|
)
|
|
$
|
(3,419
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,235
|
|
|
|
873
|
|
Interest
accretion
|
|
|
109
|
|
|
|
129
|
|
Mark
to market on warrants
|
|
|
(26
|
)
|
|
|
(3
|
)
|
Stock-based
compensation
|
|
|
418
|
|
|
|
538
|
|
Bad
debt expense
|
|
|
250
|
|
|
|
-
|
|
Other
gains and expenses, net
|
|
|
-
|
|
|
|
18
|
|
Other
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
148
|
|
|
|
(1,738
|
)
|
(Increase)
decrease in other current assets
|
|
|
(1,125
|
)
|
|
|
11
|
|
(Decrease)
increase in accounts payable
|
|
|
(356
|
)
|
|
|
93
|
|
(Decrease)
increase in accrued salaries and bonus
|
|
|
(476
|
)
|
|
|
325
|
|
(Decrease)
increase in accrued liabilities
|
|
|
(1,052
|
)
|
|
|
156
|
|
Increase
in long-term liabilities
|
|
|
16
|
|
|
|
57
|
|
Net
cash used in operating activities
|
|
|
(7,122
|
)
|
|
|
(2,960
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Investing Activity
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
-
|
|
|
|
(12
|
)
|
Sale
of property and equipment
|
|
|
-
|
|
|
|
13
|
|
Net
cash provided by investing activity
|
|
|
-
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities
|
|
|
|
|
|
|
|
|
Issuance
of common stock, net of expenses
|
|
|
434
|
|
|
|
6,015
|
|
Payments
on Line of Credit
|
|
|
(1,800
|
)
|
|
|
-
|
|
Issuance
of Series B preferred stock, net of expenses
|
|
|
19,537
|
|
|
|
-
|
|
Net
cash provided by financing activities
|
|
|
18,171
|
|
|
|
6,015
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
11,049
|
|
|
|
3,056
|
|
Cash
and cash equivalents – beginning
|
|
|
2,321
|
|
|
|
6,068
|
|
Cash
and cash equivalents – ending
|
|
$
|
13,370
|
|
|
$
|
9,124
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements.
Nature
of Business
The
Company enables personalized medicine, offering specialized
services along the therapeutic value chain from early diagnosis and prognostic planning to targeted therapeutic applications and
pharma services. The Company 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 also provides
pharmacogenomics testing, genotyping, biorepository and other specialized services to the pharmaceutical and biotech industries.
The Company advances personalized medicine by partnering with pharmaceutical, academic, and technology leaders to effectively
integrate pharmacogenomics into their drug development and clinical trial programs with the goals of delivering safer, more effective
drugs to market more quickly, and improving patient care.
Impact
of COVID-19 pandemic
We
have taken what we believe are all necessary precautions to safeguard our employees from the Coronavirus (COVID-19) pandemic.
We are following the Centers for Disease Control and Prevention’s (“CDC”) guidance and local restrictions.
The majority of our employees who do not work in a lab are currently on a telecommunication work arrangement and have generally
been able to successfully work remotely. Our labs require in-person staffing and as of the date of this report, we have been able
to successfully operate our labs through a combination of social distancing and protective equipment. Our employees in the lab
are wearing what we believe is appropriate protective gear. There can be no assurance that key employees will not become ill or
that we will able to continue to operate our labs. We have furloughed a number of employees as a result of reductions in customer
demand.
The
extent to which the COVID-19 pandemic impacts our operations is dependent on future developments, which are still
highly uncertain and cannot be fully predicted at this time, and include the duration, severity and scope of the outbreak
and the actions taken to contain or treat the coronavirus outbreak. In particular, the spread of the coronavirus globally is adversely
affecting global economies and financial markets which could materially and adversely impact our operations including, without
limitation, the functioning of our laboratories, the availability of supplies including reagents, the progress and data collection
of our pharma services, customer demand and travel and employee health and availability.
We
believe that the COVID-19 pandemic will adversely impact our results of operations, cash flows and financial condition for the
second quarter of fiscal 2020 and possibly beyond. Our fiscal 2020 first quarter revenue was impacted by lower than expected clinical
service volume throughout March 2020, which we believe has resulted from the temporary reduction in non-essential testing procedures
in connection with the COVID-19 pandemic. Our pharma services first quarter revenue increased throughout the first quarter and
average daily accessions improved in March 2020 as compared to January and February 2020. However, as of the date of this Report,
our overall business is still down approximately 30% from our run rate before the pandemic.
We
continue to monitor the rapidly evolving situation and guidance from authorities, including federal, state and local public health
authorities and may take additional actions based on their recommendations. In these dynamic circumstances, there may be developments
outside our control requiring us to adjust our operating plan.
At
this time, we do not anticipate any lab closures beyond temporary work stoppages from time to time to clean and disinfect the
labs. Lab supplies including reagents have been secured to mitigate any potential supply chain issues for the foreseeable future
and we are not observing any shortages due to supply chain issues. Our third party clinical services billing and collections company
has taken steps to continue operations remotely.
We
are monitoring the situation on a daily basis and have developed contingency plans to potentially mitigate the anticipated adverse
financial impact of the COVID-19 pandemic. These contingency plans include significant cost saving actions to offset any volume
shortfall and additional action plans to react to further potential declines. While we are continuing to make progress on a
regular basis in returning to volumes prior to the pandemic there is, however, no guarantee in the future we will recover the
business which has been lost or inactive.
The
accompanying unaudited interim condensed consolidated financial statements and related notes (the “Interim Financial Statements”)
should be read in conjunction with the consolidated financial statements of Interpace Biosciences, Inc. (the “Company”
or “Interpace”), and its wholly-owned subsidiaries, Interpace Diagnostics Lab Inc., Interpace Diagnostics Corporation,
Interpace Pharma Solutions, Inc. and Interpace Diagnostics, LLC, and related notes as included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2019, as filed with the SEC on April 22, 2020 and amended on May 29, 2020
(the “Form 10-K”).
The
condensed Interim Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles
in the United States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial
statements. The condensed Interim Financial Statements include all normal recurring adjustments that, in the judgment of management,
are necessary for a fair presentation of such interim financial statements. Discontinued operations include the Company’s
wholly owned subsidiaries: Group DCA, LLC, or Group DCA; InServe Support Solutions; and TVG, Inc. and its Commercial Services
(“CSO”) business unit which was sold on December 22, 2015. All significant intercompany balances and transactions
have been eliminated in consolidation. Operating results for the three-month period ended March 31, 2020 are not necessarily indicative
of the results that may be expected for the fiscal year ending December 31, 2020. All information related to common stock, stock
options, restricted stock units, warrants and earnings per share have been retroactively adjusted to give effect to the reverse
stock split (1 for 10) that occurred in January 2020.
As
of March 31, 2020, the Company had cash and cash equivalents of $13.4 million, net accounts receivable of $9.8 million,
total current assets of $28.1 million and total current liabilities of $15.7 million. For the three-months ended March
31, 2020, the Company had a net loss of $6.3 million and cash used in operating activities was $7.1 million.
We
do not expect to generate positive cash flows from operations for the year ending December 31, 2020. We intend to meet our ongoing
capital needs by using our available cash, proceeds under the Securities Purchase and Exchange Agreement, additional borrowings
under the Line of Credit as well as by increasing our line of credit limit as a result of the additional accounts receivable
acquired in July 2019 as part of our acquisition of the Biopharma business of Cancer Genetics, Inc. or CGI, now our pharma
services (which requires a modification to the bank agreement and approval by Silicon Valley Bank (“SVB”), revenue
growth and margin improvement, collecting accounts receivable, containing costs as well as exploring other financing options.
Management believes that the Company has sufficient cash on hand and sufficient access to cash to sustain operations through
at least June 30, 2021.
In
September 2019, we entered into the Equity Distribution Agreement (the “Agreement”) with Oppenheimer & Co. Inc.,
as sales agent (the “Agent”), pursuant to which we may, from time to time, issue and sell shares of our common stock
in an aggregate offering price of up to $4.8 million through the Agent. See Note 16, Equity, for more details. As of March
31, 2020, approximately 178,000 shares of common stock were sold for net proceeds of approximately $0.7 million. As a result of
the preferred shares transaction mentioned below, additional shares may no longer be sold under the ATM arrangement without a
majority approval by the holders of the preferred shares. See Note 16, Equity, for more detail.
In
January 2020, we sold 20,000 Series B preferred shares to investors, led by 1315 Capital, for net proceeds of approximately
$19.5 million. See Note 16, Equity, for more detail.
The
Company maintains an up to a $4.0 million secured Line of Credit facility including a 3-year term loan for $850,000 with SVB.
The proceeds of the term loan are expected to be used for laboratory capital expenditures and will be repaid monthly. The balance
of the Line of Credit is available for working capital purposes as a revolving line of credit and has a three-year term. The borrowing
limit of the revolving line of credit is the lower of 80% of the Company’s eligible accounts receivable (as adjusted by
SVB) and the aggregate amount of cash collections with respect to accounts receivable during the three prior calendar months.
Term loan outstanding amounts incur interest at a rate per annum equal to the greater of the Wall Street Journal Prime Rate (the
“Prime Rate”) and 5.00%. Revolving Line outstanding amounts incur interest at a rate per annum equal to the Prime
Rate plus 0.5%. As of March 31, 2020, $1.2 million was outstanding and $2.2 million was remaining on the Line of Credit.
See
Note 1, Overview, regarding the adverse impact of the COVID-19 pandemic on our results of operations, cash flows and financial
condition for the second quarter of fiscal 2020 and possibly beyond.
During
April 2020, the Company applied for various federal stimulus grants and advances made available under Title 1 of the Coronavirus
Aid, Relief, and Economic Security (CARES) Act. As of May 1, 2020, we received $2.1 million in advances under the Centers for
Medicare & Medicaid Services (CMS) accelerated and advance payment program, as well as a $0.65 million grant from the Department
of Health and Human Services (HSS). The CMS advance will be offset against future Medicare billings of the Company, and the HSS
grant is subject to certain conditions regarding its use, including developing coronavirus and serology tests. These grants and
advances require certain certifications by the Company and impose specific limitations on the use of the proceeds. Based on these
restrictions and limitations, the Company is treating the $0.65 million HSS grant as restricted cash until we have clarity on
how the funds can be utilized by the Company based on the specific requirements of the HSS.
During
April and early May 2020, the Company made payments totaling $888,000 to CGI for funds withheld from the Excess Consideration
Note to satisfy certain adjustments and indemnification obligations under the Asset Purchase Agreement. The funds used to satisfy
this obligation were not included in cash and cash equivalents as of December 31, 2019 and March 31, 2020. These funds and the
related liability were included in Other Assets and Other Current Liabilities, respectively, as of those period ends, and the
settlement of the liability had no net impact on the Company’s operating cash flow or liquidity.
As
of June 17, 2020 we have approximately $16.2 million of cash on hand. Also as of June 17, 2020, the Company
has no further availability on its credit facility, but is in the process of completing an agreement with SVB to expand the credit
facility. No assurance can be given that such an expansion agreement will be entered into.
4.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting
Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates
are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed
to be reasonable under the circumstances. Significant estimates include accounting for valuation allowances related to deferred
income taxes, contingent consideration, allowances for doubtful accounts, revenue recognition, unrecognized tax benefits, and
asset impairments involving other intangible assets. The Company periodically reviews these matters and reflects changes in estimates
in earnings as appropriate. Actual results could materially differ from those estimates.
Revenue
Recognition
Our
clinical services derive its revenues from the performance of its proprietary assays or tests. The Company’s performance
obligation is fulfilled upon the completion, review and release of test results to the customer. The Company subsequently bills
third-party payers or direct-bill payers for the tests performed. Under Accounting Standards Codification 606, revenue is recognized
based on the estimated transaction price or 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 will adjust the estimates of contractual allowances, which would
affect net revenue in the period such variances become known.
For
our pharma services, performance obligations are satisfied at a point in time as the Company processes samples delivered by the
customer. Project level activities, including study setup and project management, are satisfied over the life of the contract.
Revenues are recognized at a point in time when the test results or other deliverables are reported to the customer.
Deferred
Revenue
For
our pharma services, project level fee revenue is recognized as deferred revenue and recorded at fair value. It represents payments
received in advance of services rendered and is recognized ratably over the life of the contract.
Financing
and Payment
For
non-Medicare claims, our payment terms vary by payer category. Payment terms for direct-payers in our clinical or diagnostics
business 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.
Costs
to Obtain or Fulfill a Customer Contract
Sales
commissions are expensed when incurred because the amortization period would have been one year or less. These costs are recorded
in sales and marketing expense in the condensed consolidated statements of operations.
Accounts
Receivable
The
Company’s accounts receivables represent unconditional rights to consideration and are generated using its clinical services
and pharma services. The Company’s clinical services are fulfilled upon completion of the test, review and release of the
test results. In conjunction with fulfilling these services, the Company bills the third-party payer or direct-bill payer. Contractual
adjustments represent the difference between the list prices and the reimbursement rates set by third party payers, including
Medicare, commercial payers, and amounts billed to direct-bill payers. Specific accounts may be written off after several appeals,
which in some cases may take longer than twelve months. Pharma services represent, primarily, the performance of laboratory tests
in support of clinical trials for pharma services customers. The Company bills these services directly to the customer.
Leases
The
Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”)
assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent our
obligation to make lease payments arising from the lease. All leases with terms greater than twelve months result in the recognition
of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease
term. Unless a lease provides all of the information required to determine the implicit interest rate, we use our incremental
borrowing rate based on the information available at the commencement date in determining the present value of the lease payments.
We use the implicit interest rate in the lease when readily determinable.
Our
lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably
certain that we will exercise that option. Leases with terms of twelve months or less at the commencement date are expensed on
a straight-line basis over the lease term and do not result in the recognition of an asset or liability. See Note 7, Leases.
Other
Current Assets
Other
current assets consisted of the following as of March 31, 2020 and December 31, 2019:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Lab supply inventory
|
|
|
1,885
|
|
|
|
1,825
|
|
Prepaid expenses
|
|
|
826
|
|
|
|
971
|
|
Funds in escrow
|
|
|
888
|
|
|
|
888
|
|
Due from CGI
|
|
|
1,297
|
|
|
|
92
|
|
Other
|
|
|
80
|
|
|
|
75
|
|
Total
other current assets
|
|
$
|
4,976
|
|
|
$
|
3,851
|
|
Long-Lived
Assets, including Finite-Lived Intangible Assets
Finite-lived
intangible assets are stated at cost less accumulated amortization. Amortization of finite-lived acquired intangible assets is
recognized on a straight-line basis, using the estimated useful lives of the assets of approximately two years to ten years in
acquisition related amortization expense in the condensed consolidated statements of operations.
The
Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to
its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected
cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates
are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss
is deemed to be necessary.
Basic
and Diluted Net Loss per Share
A
reconciliation of the number of shares of common stock, par value $0.01 per share (the “Common Stock”), used in the
calculation of basic and diluted loss per share for the three-month periods ended March 31, 2020 and 2019 is as follows:
|
|
Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
(unaudited)
|
|
Basic weighted average number of common shares
|
|
|
4,004
|
|
|
|
3,515
|
|
Potential dilutive
effect of stock-based awards
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average number
of common shares
|
|
|
4,004
|
|
|
|
3,515
|
|
The
Company’s Preferred Stock, on an as converted basis of 7,833,334 shares for the three months ended March 31, 2020,
and the following outstanding stock-based awards and warrants were excluded from the computation of the effect of dilutive securities
on loss per share for the following periods as they would have been anti-dilutive (rounded to thousands):
|
|
Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
Options
|
|
|
578
|
|
|
|
394
|
|
Stock-settled stock appreciation rights
(SARs)
|
|
|
-
|
|
|
|
3
|
|
Restricted stock
|
|
|
6
|
|
|
|
-
|
|
Restricted stock units (RSUs)
|
|
|
36
|
|
|
|
61
|
|
Warrants
|
|
|
1,420
|
|
|
|
1,420
|
|
|
|
|
2,040
|
|
|
|
1,878
|
|
5.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill
is attributable to the acquisition of our pharma services in July 2019. The carrying value of the intangible assets acquired was
$15.6 million, with goodwill of approximately $8.3 million and identifiable intangible assets of approximately $7.3 million. The
goodwill balance at March 31, 2020 was $8.4 million. The net carrying value of the identifiable intangible assets from all acquisitions
as of March 31, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
As
of March 31, 2020
|
|
|
As
of December 31, 2019
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Life
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thyroid
|
|
|
9
|
|
|
$
|
8,519
|
|
|
$
|
8,519
|
|
RedPath acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pancreas test
|
|
|
7
|
|
|
|
16,141
|
|
|
|
16,141
|
|
Barrett’s
test
|
|
|
9
|
|
|
|
18,351
|
|
|
|
18,351
|
|
Pharma services acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
10
|
|
|
|
1,600
|
|
|
|
1,600
|
|
Customer relationships
|
|
|
8
|
|
|
|
5,700
|
|
|
|
5,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLIA Lab
|
|
|
2.3
|
|
|
$
|
609
|
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
50,920
|
|
|
$
|
50,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
$
|
(18,450
|
)
|
|
$
|
(17,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Carrying Value
|
|
|
|
|
|
$
|
32,470
|
|
|
$
|
33,501
|
|
The
following table displays a roll forward of the carrying amount of goodwill from December 31, 2019 to March 31, 2020:
|
|
Carrying
|
|
|
|
Amount
|
|
Balance as of December 31, 2019
|
|
$
|
8,433
|
|
Adjustments
|
|
|
-
|
|
Balance as of March 31, 2020
|
|
$
|
8,433
|
|
Amortization
expense was approximately $1.0 million and $0.8 million for the three-month periods ended March 31, 2020 and 2019, respectively.
Estimated amortization expense for the next five years is as follows:
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,145
|
|
|
$
|
5,781
|
|
|
$
|
3,859
|
|
|
$
|
3,859
|
|
|
$
|
3,149
|
|
6.
|
FAIR
VALUE MEASUREMENTS
|
Cash
and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their relative short-term nature.
The Company’s financial liabilities reflected at fair value in the condensed consolidated financial statements include contingent
consideration and warrant liability. Fair value is the price that would be received to sell an asset or paid to transfer a liability
in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various
methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions
that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent
in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable
inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable
inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according
to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair
values into three broad levels as follows:
|
Level
1:
|
Valuations
for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving
identical assets or liabilities.
|
|
|
|
|
Level
2:
|
Valuations
for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing
services for identical or similar assets or liabilities.
|
|
|
|
|
Level
3:
|
Valuations
incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
|
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The valuation methodologies used for the Company’s financial instruments measured on a recurring basis at fair value, including
the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below:
|
|
As
of March 31, 2020
|
|
Fair
Value Measurements
|
|
|
Carrying
|
|
Fair
|
|
As
of March 31, 2020
|
|
|
Amount
|
|
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
Contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
(1)
|
|
$
|
2,866
|
|
|
$
|
2,866
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,866
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability (2)
|
|
|
55
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
|
|
$
|
2,921
|
|
|
$
|
2,921
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,921
|
|
|
|
As
of December 31, 2019
|
|
Fair
Value Measurements
|
|
|
Carrying
|
|
Fair
|
|
As
of December 31, 2019
|
|
|
Amount
|
|
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
(1)
|
|
$
|
2,893
|
|
|
$
|
2,893
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,893
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability (2)
|
|
|
82
|
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
|
|
$
|
2,975
|
|
|
$
|
2,975
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,975
|
|
(1)(2)
See Note 9, Accrued Expenses and 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.
A
roll forward of the carrying value of the Contingent Consideration Liability and the Underwriters’ Warrants to March 31,
2020 is as follows:
|
|
|
|
|
|
|
|
Cancellation
|
|
Adjustment
|
|
|
|
|
|
|
|
|
|
|
of Obligation/
|
|
to Fair Value/
|
|
|
|
|
December 31,
2019
|
|
Payments
|
|
Accretion
|
|
Conversions
Exercises
|
|
Mark
to
Market
|
|
March 31,
2020
|
|
|
(unaudited)
|
Asuragen
|
|
$
|
2,893
|
|
|
$
|
(136
|
)
|
|
$
|
109
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriters
Warrants
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
55
|
|
|
|
$
|
2,975
|
|
|
$
|
(136
|
)
|
|
$
|
109
|
|
|
$
|
-
|
|
|
$
|
(27
|
)
|
|
$
|
2,921
|
|
Certain
of the Company’s non-financial assets, such as other intangible assets and goodwill, 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.
Finance
lease assets are included in fixed assets, net of accumulated depreciation.
The
table below presents the lease-related assets and liabilities recorded in the Condensed Consolidated Balance Sheet:
|
|
Classification
on the Balance Sheet
|
|
March
31, 2020
|
|
|
|
|
(unaudited)
|
Assets
|
|
|
|
|
|
|
Financing lease assets
|
|
Property and equipment,
net
|
|
$
|
475
|
|
Operating lease
assets
|
|
Operating lease
right of use assets
|
|
|
2,811
|
|
Total lease assets
|
|
|
|
$
|
3,286
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Financing lease
liabilities
|
|
Other accrued expenses
|
|
$
|
160
|
|
Operating
lease liabilities
|
|
Other accrued
expenses
|
|
|
1,251
|
|
Total current lease
liabilities
|
|
|
|
$
|
1,411
|
|
Noncurrent
|
|
|
|
|
|
|
Financing lease
liabilities
|
|
Other long-term liabilities
|
|
|
85
|
|
Operating
lease liabilities
|
|
Operating lease
liabilities, net of current portion
|
|
|
1,384
|
|
Total
long-term lease liabilities
|
|
|
|
|
1,469
|
|
Total lease liabilities
|
|
|
|
$
|
2,880
|
|
The
weighted average remaining lease term for the Company’s operating leases was 2.6 years as of March 31, 2020 and the weighted
average discount rate for those leases was 6.0%. The Company’s operating lease expenses are recorded within cost of revenue
and general and administrative expenses. With respect to the Rutherford lease, in March 2020 the Company delivered a notice of
early termination which would terminate the lease in March 2021.
The
table below reconciles the cash flows to the lease liabilities recorded on the Company’s Condensed Consolidated Balance
Sheet as of March 31, 2020:
|
|
Operating
Leases
|
|
Financing
Leases
|
2020
|
|
|
1,189
|
|
|
|
170
|
|
2021
|
|
|
878
|
|
|
|
120
|
|
2022
|
|
|
660
|
|
|
|
13
|
|
2023
|
|
|
250
|
|
|
|
-
|
|
Total minimum lease payments
|
|
|
2,977
|
|
|
|
303
|
|
Less: amount
of lease payments representing effects of discounting
|
|
|
342
|
|
|
|
58
|
|
Present value of future minimum lease
payments
|
|
|
2,635
|
|
|
|
245
|
|
Less: current
obligations under leases
|
|
|
1,251
|
|
|
|
160
|
|
Long-term lease
obligations
|
|
$
|
1,384
|
|
|
$
|
85
|
|
As
of March 31, 2020, 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 were as follows:
|
|
|
|
|
Less
than
|
|
|
1
to 3
|
|
|
3
to 5
|
|
|
After
|
|
|
|
Total
|
|
|
1
Year
|
|
|
Years
|
|
|
Years
|
|
|
5
Years
|
|
Operating
lease obligations
|
|
$
|
2,977
|
|
|
$
|
1,189
|
|
|
$
|
1,538
|
|
|
$
|
250
|
|
|
$
|
-
|
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
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 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 and recent increases in litigation related to healthcare products.
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.
9.
|
ACCRUED
EXPENSES AND LONG-TERM LIABILITIES
|
Other
accrued expenses consisted of the following as of March 31, 2020 and December 31, 2019:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued royalties
|
|
$
|
2,101
|
|
|
$
|
1,934
|
|
Contingent consideration
|
|
|
602
|
|
|
|
502
|
|
Operating lease liability
|
|
|
1,251
|
|
|
|
1,321
|
|
Financing lease liability
|
|
|
160
|
|
|
|
184
|
|
Deferred revenue
|
|
|
354
|
|
|
|
457
|
|
Payable to CGI
|
|
|
888
|
|
|
|
888
|
|
Accrued sales and marketing - diagnostics
|
|
|
167
|
|
|
|
197
|
|
Accrued lab costs - diagnostics
|
|
|
104
|
|
|
|
163
|
|
Accrued professional fees
|
|
|
1,064
|
|
|
|
1,399
|
|
Taxes payable
|
|
|
327
|
|
|
|
403
|
|
Unclaimed property
|
|
|
565
|
|
|
|
565
|
|
All others
|
|
|
1,056
|
|
|
|
1,366
|
|
Total
other accrued expenses
|
|
$
|
8,639
|
|
|
$
|
9,379
|
|
Long-term
liabilities consisted of the following as of March 31, 2020 and December 31, 2019:
|
|
March
31, 2020
|
|
December
31, 2019
|
|
|
(unaudited)
|
|
|
Warrant liability
|
|
$
|
55
|
|
|
$
|
82
|
|
Uncertain tax positions
|
|
|
4,146
|
|
|
|
4,081
|
|
Deferred revenue
|
|
|
258
|
|
|
|
269
|
|
Other
|
|
|
104
|
|
|
|
141
|
|
Total
other long-term liabilities
|
|
$
|
4,563
|
|
|
$
|
4,573
|
|
10.
|
STOCK-BASED
COMPENSATION
|
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
following table provides the weighted average assumptions used in determining the fair value of the stock option awards granted
during the three month periods ended March 31, 2020 and 2019.
|
|
March
31, 2020
|
|
March
31, 2019
|
|
|
(unaudited)
|
Risk-free interest rate
|
|
|
1.51
|
%
|
|
|
2.51
|
%
|
Expected life
|
|
|
6.0
years
|
|
|
|
6.0
years
|
|
Expected volatility
|
|
|
128.87
|
%
|
|
|
127.81
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
The
Company recognized approximately $0.4 million and $0.5 million of stock-based compensation expense during the three-month periods
ended March 31, 2020 and 2019, respectively.
Generally,
accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate
for the full year. The authoritative guidance for accounting for income taxes allows use of the discrete method when it provides
a better estimate of income tax expense. Due to the Company’s valuation allowance position, it is the Company’s position
that the discrete method provides a more accurate estimate of income tax expense and therefore income tax expense for the current
quarter has been presented using the discrete method. As the year progresses, the Company refines its estimate based on the facts
and circumstances by each tax jurisdiction. The following table summarizes income tax expense on loss from continuing operations
and the effective tax rate for the three-month periods ended March 31, 2020 and 2019:
|
|
Three Months Ended
|
|
|
March
31,
|
|
|
2020
|
|
2019
|
|
|
(unaudited)
|
|
|
|
|
|
Provision for income tax
|
|
$
|
15
|
|
|
$
|
5
|
|
Effective income tax rate
|
|
|
(0.2
|
%)
|
|
|
(0.1
|
%)
|
Income
tax expense for the three-month periods ended March 31, 2020 and 2019 was primarily due to minimum state and local taxes.
The
Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in March 2020. The CARES Act includes
several U.S. income tax provisions related to, among other things, net operating loss carrybacks, alternative minimum tax credits,
modifications to the net interest deduction limitations, and technical amendments regarding the income tax depreciation of qualified
improvement property placed in service after December 31, 2017. The CARES Act is not expected to have a material impact on the
Company’s financial results.
We
operate under one segment which is the business of developing and selling diagnostic clinical and pharma services.
13.
|
DISCONTINUED
OPERATIONS
|
The
components of liabilities classified as discontinued operations relate to Commercial Services and consist of the following as
of March 31, 2020 and December 31, 2019:
|
|
March
31, 2020
|
|
December
31, 2019
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
766
|
|
|
|
766
|
|
Current liabilities
from discontinued operations
|
|
|
766
|
|
|
|
766
|
|
Total
liabilities
|
|
$
|
766
|
|
|
$
|
766
|
|
On
November 13, 2018 the Company, Interpace Diagnostics Corporation, and Interpace Diagnostics, LLC entered into a Loan and Security
Agreement (the “SVB Loan Agreement”) with SVB, which provides for up to $4.0 million of debt financing consisted of
a term loan of up to $850,000 and a revolving line of credit based on its outstanding accounts receivable (the “Revolving
Line”) of up to $3.75 million. The ability to use the term loan portion of the SVB Loan Agreement expired in 2019.
The
amount that may be borrowed under the Revolving Line is the lower of (i) $3.75 million or (ii) 80% of the Company’s eligible
accounts receivable (as adjusted by SVB). Revolving Line outstanding amounts incur interest at a rate per annum equal to the Wall
Street Journal Prime Rate plus 0.5%. The Company is also required to pay an unused Revolving Line facility fee monthly in arrears
in an amount equal to 0.35% per annum of the average unused but available portion of the Revolving Line. The Revolving Line has
a maturity date three years from the effective date, or November 13, 2021.
As
of March 31, 2020, the Company had drawn $1.2 million of the available funds with the Revolving Line and had $2.55 million of
remaining availability. As of December 31, 2019, we were in violation of a financial covenant for which we received a waiver from
SVB on March 19, 2020. The Company currently is in compliance with all covenants.
As
of June 17, 2020, the Company has maximized its borrowing under its line of credit facility and therefore has no further
availability on its credit facility; however, we are in the process of seeking to expand availability under the credit facility
on terms similar to existing terms, but there can be no assurance that such credit line extension will be granted or that it will
be granted on commercially reasonable and acceptable terms
15.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
Supplemental
Disclosures of Non Cash Activities
(in
thousands)
|
|
Three Months Ended
|
|
|
|
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
Operating
|
|
|
|
|
|
|
Adoption of ASC 842 - right of use asset
|
|
$
|
-
|
|
|
$
|
2,449
|
|
Adoption of ASC 842 - operating lease liability
|
|
$
|
-
|
|
|
$
|
(2,536
|
)
|
Taxes accrued for repurchase of restricted shares
|
|
$
|
-
|
|
|
$
|
32
|
|
Financing
|
|
|
|
|
|
|
|
|
Accrued Financing costs
|
|
$
|
314
|
|
|
$
|
53
|
|
Preferred Stock Deemed Dividend
|
|
$
|
3,033
|
|
|
$
|
-
|
|
Preferred
Stock Issuance
Securities
Purchase and Exchange Agreement
On
January 10, 2020, the Company entered into a Securities Purchase and Exchange Agreement (the “Securities Purchase and Exchange
Agreement”) with 1315 Capital II, L.P., (“1315 Capital”), and Ampersand 2018 Limited Partnership (“Ampersand”
and, together with 1315 Capital, the “Investors”) pursuant to which the Company agreed to sell to the Investors an
aggregate of $20.0 million in Series B convertible preferred stock of the Company, par value $0.01 per share (the “Series
B Preferred Stock”), at an issuance price per share of $1,000. 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 as compared
to a conversion price of $8.00 on the Series A Preferred Stock, but did not include certain rights applicable to the Series A
Preferred Stock, including a six-percent (6%) dividend, and a conversion price adjustment for any failure by the Company to achieve
a revenue target of $34.0 million in 2020 related to its diagnostics business or a weighted-average anti-dilution adjustment.
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.
A
convertible financial instrument includes a beneficial conversion feature if its conversion price is lower than the Company’s
stock price at the commitment date. The Company determined that the sale of the Series B Preferred resulted in a beneficial conversion
feature with an intrinsic value of $2.2 million, which the Company recorded as a reduction to additional paid-in capital upon
the sale of the Series B Preferred stock. The Company calculated the intrinsic value of the beneficial conversion feature as the
difference between the estimated fair value of the common stock on January 15, 2020 of $6.79 per share and the effective conversion
price per share of $6.00 multiplied by the number of shares of common stock issuable upon conversion. The Company fully amortized
the beneficial conversion feature during the three months ended March 31, 2020 in accordance with GAAP. The beneficial conversion
feature resulted in an increase in the loss attributable to common shareholders for the three months ended March 31, 2020 in the
Condensed Consolidated Statement of Operations, as it represents a deemed dividend to the preferred shareholders.
ATM
program
On
September 20, 2019, the Company entered into an Equity Distribution Agreement (the “Agreement”) with Oppenheimer &
Co. Inc., as sales agent (the “Agent”), pursuant to which the Company may, from time to time, issue and sell shares
of its Common Stock, at an aggregate offering price of up to $4.8 million (the “Shares”) through the Agent. Under
the terms of the Agreement, the Agent may sell the Shares at market prices by any method that is deemed to be an “at the
market offering” as defined in Rule 415 under the Securities Act of 1933, as amended.
Subject
to the terms and conditions of the Agreement, the Agent will use its commercially reasonable efforts to sell the Shares from time
to time, based upon the Company’s instructions. The Company has no obligation to sell any of the Shares, and may at any
time suspend sales under the Agreement or terminate the Agreement in accordance with its terms. The Company has provided the Agent
with customary indemnification rights, and the Agent will be entitled to a fixed commission of 3.0% of the aggregate gross proceeds
from the Shares sold. The Agreement contains customary representations and warranties, and the Company is required to deliver
customary closing documents and certificates in connection with sales of the Shares. As of March 31, 2020, approximately 178,000
shares have been sold for net proceeds to the Company of approximately $0.7 million.
As
a result of the January 15, 2020 Securities Purchase and Exchange Agreement, additional Shares may no longer be sold under the
ATM arrangement without a majority approval by the holders of the Series B Preferred Stock in accordance with the Amended and
Restated Investor Rights Agreement entered into on that date.
Warrants
outstanding and warrant activity for the three-months ended March 31, 2020 are as follows:
Description
|
|
Classification
|
|
Exercise
Price
|
|
Expiration
Date
|
|
Warrants
Issued
|
|
Warrants
Exercised
|
|
Warrants
Cancelled/ Expired
|
|
Balance
December 31,
2019
|
|
Balance
March 31,
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Warrants, issued January 25, 2017
|
|
Equity
|
|
$
|
46.90
|
|
|
June 2022
|
|
|
85,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
85,500
|
|
|
|
85,500
|
|
RedPath Warrants, issued March 22, 2017
|
|
Equity
|
|
$
|
46.90
|
|
|
September 2022
|
|
|
10,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000
|
|
|
|
10,000
|
|
Underwriters Warrants, issued June 21, 2017
|
|
Liability
|
|
$
|
13.20
|
|
|
December 2022
|
|
|
57,500
|
|
|
|
-
|
|
|
|
(4,000
|
)
|
|
|
53,500
|
|
|
|
53,500
|
|
Base & Overallotment
Warrants, issued June 21, 2017
|
|
Equity
|
|
$
|
12.50
|
|
|
June 2022
|
|
|
1,437,500
|
|
|
|
(567,286
|
)
|
|
|
-
|
|
|
|
870,214
|
|
|
|
870,214
|
|
Vendor Warrants, issued August 6, 2017
|
|
Equity
|
|
$
|
12.50
|
|
|
August 2020
|
|
|
15,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,000
|
|
|
|
15,000
|
|
Warrants issued October 12, 2017
|
|
Equity
|
|
$
|
18.00
|
|
|
April 2022
|
|
|
320,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
320,000
|
|
|
|
320,000
|
|
Underwriters Warrants,
issued January 25, 2019
|
|
Equity
|
|
$
|
9.40
|
|
|
January
2022
|
|
|
65,434
|
|
|
|
-
|
|
|
|
-
|
|
|
|
65,434
|
|
|
|
65,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990,934
|
|
|
|
(567,286
|
)
|
|
|
(4,000
|
)
|
|
|
1,419,648
|
|
|
|
1,419,648
|
|
18.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
Standards
not yet effective
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles
in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying
and amending existing guidance. The amendment is effective for annual periods beginning after December 15, 2020. We do
not expect that the requirements of ASU 2017-04 will have a material impact on our consolidated financial statements.
Federal
Stimulus Programs in Connection with Coronavirus Pandemic
As
of May 1, 2020, we received $2.1 million in advances under the Centers for Medicare & Medicaid Services (CMS) accelerated
and advance payment program, as well as a $0.65 million grant from the Department of Health and Human Services (HSS). The CMS
advance will be offset against future Medicare billings of the Company, and the HSS grant is subject to certain conditions regarding
its use, including developing coronavirus and serology tests. These grants and advances require certain certifications by the
Company and impose specific limitations on the use of the proceeds. Based on these restrictions and limitations, the Company is
treating the $0.65 million HSS grant as restricted cash until we have clarity on how the funds can be utilized by the Company
based on the specific requirements of the HSS. Furthermore, although the Company initially explored the possibility of requesting
a loan under the Small Business Administration Paycheck Protection Program, we elected not to complete an application because
we are not certain we meet certain criteria of the program.
During
April and early May 2020, the Company made payments totaling $888,000 to CGI for funds withheld from the Excess Consideration
Note to satisfy certain adjustments and indemnification obligations under the Asset Purchase Agreement. The funds used to satisfy
this obligation were not included in cash and cash equivalents as of December 31, 2019 and March 31, 2020. These funds and the
related liability were included in Other Current Assets and Other Accrued Expenses, respectively, as of those period ends, and
the settlement of the liability had no net impact on the Company’s operating cash flow or liquidity.
Amendment
to Morrisville, North Carolina lease
On
June 3, 2020, Interpace Pharma Solutions, Inc. (“IPS”), a wholly-owned subsidiary of the Company, entered into an
agreement with Southport Business Park Limited Partnership (“the Landlord”) to amend its Morrisville, North Carolina
lease effective June 1, 2020 (the “Amendment”). This lease was originally entered into on June 12, 2004 by the Landlord
and Cancer Genetics, Inc., the Company’s predecessor-in-interest (the “Original Lease”) and was assigned to
the Company on July 15, 2019 (the “Lease Assignment”). The Original Lease together with all amendments, as assigned
by the Lease Assignment constitutes the “Lease.” The Company re-affirmed its Guaranty of Lease, dated July 15, 2019,
in the Amendment, guaranteeing the obligations of IPS under the Lease.
The
Amendment provides for an extension of the term of the Lease, which consists of approximately 24,906 square feet utilized by IPS
as laboratory and office space to provide its pharma solutions services. The terms of the Lease were set to expire on May 31,
2020. Pursuant to the Amendment, the term of the Lease was extended for ten additional years, commencing on June 1, 2020 and continuing
until May 31, 2030 (the “Term”). The minimum rent per rentable square foot pursuant to the Amendment is $14.10 from
June 1, 2020 to May 31, 2021, with annual increases of 3%. The minimum rent during the first year under the Amendment is $351,174.60,
which is subject to a rent abatement consisting of six months of rent forgiveness totaling $175,587, provided there is no outstanding
uncured event of default (as defined in the Lease). The Company shall continue to pay to Landlord additional rent, representing
the Company’s proportionate share of any direct expenses, as stipulated in the Lease.
Pursuant
to the Amendment, the Company has two options to extend the Term for a period of five years each (the “Extended Terms”).
Minimum rent during the Extended Terms, if such options are exercised by the Company, is subject to certain “market value”
adjustments as provided for in the Amendment. Also pursuant to the Amendment, the Company has the irrevocable right to terminate
the Lease on November 30, 2025, as well as on November 30, 2027, providing certain timely notification is given to Landlord, specified
events occur (such as a merger or sale of the Company’s business), and specified termination payments are made to Landlord.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-Q (Form 10-Q) contains “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Exchange Act. Statements
that are not historical facts, including statements about our plans, objectives, beliefs and expectations, are forward-looking
statements. Forward-looking statements include statements preceded by, followed by or that include the words “believes,”
“expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,”
“should,” “could,” “may,” “will” or similar words and expressions. These forward-looking
statements are contained throughout this Form 10-Q.
Forward-looking
statements are only predictions and are not guarantees of future performance. These statements are based on current expectations
and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business
decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. These predictions
are also affected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially
different from those expressed or implied by any forward-looking statement. Many of these factors are beyond our ability to control
or predict. Our actual results could differ materially from the results contemplated by these forward-looking statements due to
a number of factors. Such factors include, but are not limited to, the following:
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adverse
impact of Coronavirus (COVID-19) pandemic due to the slowdown in demand for our clinical services and pharma services, a reduction
in samples received and testing volume and delayed third party collections and other factors;
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we
have a history of operating losses, and our clinical services and pharma services have generated limited revenue;
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we
expect to incur net losses for the foreseeable future and may never achieve or sustain profitability;
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our
limited operating history and the limited revenue generated from our business thus far and fluctuating quarterly and annual
revenue and operating results, including as a result of how we recognize revenue;
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we
depend on sales and reimbursements from our clinical services for more than 50% of our revenue, and we will need to generate
sufficient revenue from these and other products and/or solutions that we develop or require to grow our business;
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we
rely on third parties to process and transmit claims to payers for our clinical services, and any delay, data loss, or other
disruption in processing or transmitting could have an adverse effect on our revenue and financial condition;
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our
ability to utilize our commercial and operating experience to sell our clinical and pharma services;
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our
ability to compete successfully in the markets our clinical services and pharma services operate in;
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our
ability to obtain, retain and increase sufficient levels of third party reimbursement for our molecular diagnostic tests in
a changing and challenging reimbursement environment, including our current dependence on a concentrated number of third-party
payers and the lack of timeliness of their payments, and the potential failure of such payments to ever occur;
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our
billing practices and those of our third-party billing providers to effectively bill and collect on claims for the sale of
our tests;
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our
revenue recognition is based in part on our estimates for future collections and such estimates may prove to be incorrect;
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a
deterioration in the collectability of our accounts receivable could have a material adverse effect on our business, financial
condition and results of operations;
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our
inability to finance our business on acceptable terms in the future may limit our ability to grow our business, develop and
commercialize products and services, develop and commercialize new molecular diagnostic solutions and technologies and expand
our pharma services;
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our
ability to comply with financial covenants under our current line of credit facility and comply with our debt obligations
and our ability to expand our working capital borrowing base to provide sufficient working capital financing during growth
periods;
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we
have issued convertible preferred stock and may issue additional convertible preferred stock in the future, and the terms
of our preferred stock may dilute our common stock;
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two
private equity firms and their affiliates control, on an as-converted basis, 66% of our fully diluted outstanding shares of
common stock through their holdings of Series B Convertible Preferred Stock, par value $0.01 per share (“Series B Preferred
Stock”), and this concentration of ownership along with having authority for designation rights for a majority of our
directors will have a substantial influence on our decisions;
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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;
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we
depend on a few payers for a significant portion of our revenue for our clinical services, and if one or more significant
payers stops providing reimbursement or decreases the amount of reimbursement for our tests, our revenue could decline;
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if
payers do not provide reimbursement, rescind or modify their reimbursement policies or delay payments for clinical services,
our commercial success could be compromised;
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developing
new tests and related services and solutions includes a lengthy and complex process with uncertain results;
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the
effect of potential adverse findings resulting from regulatory audits of our billing and payment practices and the impact
such results could have on our clinical services;
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the
demand for our molecular diagnostic tests from physicians and patients;
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our
products and services continuing to perform as expected;
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claims
against us for inaccurate results from our molecular diagnostic tests;
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our
obligations to make royalty and milestone payments to our licensors;
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our
ability to obtain data and samples to perform sufficient clinical studies to successfully publish data demonstrating the clinical
relevance and value of our molecular diagnostic tests, including to support sufficient levels of third party reimbursement;
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our
dependence on third parties for the supply of some of the materials used in our molecular diagnostic tests and pharma services;
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our
ability to scale our operations or delays or reagent and supply shortages for our tests and services;
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our
ability to develop or acquire tests, services or solutions;
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the
ability of our clinical services to enter into additional clinical study collaborations with highly regarded institutions;
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the
effect current and future laws, licensing requirements and regulation have on our business including the changing U.S. Food
and Drug Administration environment as it relates to molecular diagnostics and pharma services and laboratory developed tests
(LDT’s);
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changes
in governmental regulations mandating price controls and limitations on patient access to our products and services;
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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;
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legislation
reforming the U.S. healthcare system;
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a
failure to comply with Federal and State laws and regulations pertaining to our payment practices;
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our
ability 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;
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compliance
with numerous statutes and regulations pertaining to our business;
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the
effect of The Eliminating Kickbacks in Recovery Act of 2018 as it potentially impacts our ability to incentivize our sales
personnel appropriately;
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our
ability to realize all of the anticipated benefits of the acquisition of our pharma services or those benefits, if any, taking
longer to realize than expected;
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if
pharmaceutical and biotech companies, universities and contract research organizations performing clinical trials decide not
to use our tests and services, we may be unable to generate sufficient revenue to sustain our pharma services;
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if
we fail to perform our pharma services in accordance with contractual and regulatory requirements, and ethical considerations,
we could be subject to significant costs or liability;
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our
ability to compete in the markets our clinical services operate in;
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our
ability to attract and retain key employees and management personnel;
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our
reliance on our sales and marketing forces for future business growth and our ability to continue to expand our sales and
marketing forces;
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our
limited experience in marketing and selling our products;
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the
ability of our molecular diagnostic tests to compete successfully with physicians and members of the medical community who
use traditional methods to diagnose gastrointestinal and endocrine cancers, competitors offering broader product lines outside
of the molecular diagnostic testing market and having greater brand recognition than we do, and companies with greater financial
resources;
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our
ability to license rights to use technologies in order to commercialize new products and services;
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our
involvement in future litigation against us or our ability to collect on judgements found in our favor;
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the
effect of acts of nature, seasonal results and adverse weather conditions, hurricanes and floods, on our business and our
suppliers;
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our use of hazardous
materials;
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the susceptibility
of our information systems to security breaches, loss of data and other disruptions;
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catastrophic loss
of our laboratories;
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our ability to obtain
and maintain sufficient qualified laboratory space to meet our processing needs for all of our business as well as our ability
to pass regulatory inspections and continue to be Clinical Laboratory Improvement Amendments (“CLIA”) and the
College of American Pathologists (“CAP”) certified or accredited;
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compliance with
the U.S. Foreign Corrupt Practices Act and anti-bribery laws;
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our ability to respond
to rapid scientific changes in the areas in which we operate;
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our compliance with
our license agreements and our ability to protect and defend our intellectual property rights;
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patent infringement
claims against us;
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changes in U.S.
and global patent law;
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tax reform legislation;
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stock dilution;
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changes in financial
accounting standards or practices;
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exposure to international
law, regulations and risk as a result of international expansion;
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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 debts or cause us to incur significant expense;
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the impact of contingent
liabilities on our financial condition;
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the results of any
future impairment testing for intangible assets as required under U.S. generally accepted accounting principles (“GAAP”);
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our ability to maintain
and implement effective internal controls over financial reporting especially as we are consolidating operations;
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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;
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the impact of future
issuances of debt, common and preferred shares on stockholders’ interest and stock price;
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our ability to report
financial results on a timely and accurate basis;
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our ability to manage
our growth or unexpected declines;
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the
potential that the temporary equity classification of our preferred stock and other matters may trigger a Nasdaq compliance
default in the second or third quarter of 2020 for failure to meet minimum stockholder equity requirements which could result
in a delisting of our common stock from Nasdaq leading to a possible reduced stock price; potential difficulty in raising
additional capital or debt as well as loss of exemptions from various state securities laws which could hamper action plans
to remediate such a Nasdaq compliance default;
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uncertainty
regarding the regulatory obligations related to our receipt of $650,000 funding for COVID testing;
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our
ability to rebuild our cost structure in anticipation of volume growth that does not happen as planned;
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the
potential impact on customers currently in clinical trials in our Rutherford, NJ lab that we are now relocating to North Carolina
which may require revalidation in the new site;
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the
impact of increased costs building expanded laboratory capabilities in North Carolina in anticipation of the move from Rutherford,
NJ and the potential loss of customers related to the move;
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our
ability to efficiently execute and complete the planned laboratory move from Rutherford, NJ to North Carolina on a timely
basis within our forecasted costs;
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the
risk of loss of personnel that are uniquely qualified to perform the breadth of specialty testing and lab applications necessary
for developing customized assays in our pharma solutions business; and
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the
risk related to our sales reps fully reengaging with customers after reducing physical visits by our commercial team during
the pandemic.
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Please
see Part I – Item 1A – “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2019 filed
with the SEC on April 22, 2020, as amended on May 29, 2020, as well as other documents we file with the SEC from time-to-time,
for other important factors that could cause our actual results to differ materially from our current expectations as expressed
in the forward-looking statements discussed in this Form 10-Q. Because of these and other risks, uncertainties and assumptions,
you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date
of the report in which they are set forth and, except as may be required by law, we undertake no obligation to revise or update
publicly any forward-looking statements for any reason.
OVERVIEW
We
are an emerging leader in enabling precision medicine principally in oncology by offering specialized services along the therapeutic
value chain from early diagnosis and prognostic planning to targeted therapeutic applications through our clinical services and
pharma services. Through our clinical services, we enable physicians to personalize the clinical management of each individual
patient by providing genomic information to better diagnose, monitor and inform cancer treatment. Our clinical services provide
clinically useful molecular diagnostic tests, bioinformatics and pathology services for evaluating risk of cancer by leveraging
the latest technology in personalized medicine for improved patient diagnosis and management. Through our pharma services, we
develop, commercialize and provide molecular- and biomarker-based tests and services and provide companies with customized solutions
for patient stratification and treatment selection through an extensive suite of molecular and biomarker-based testing services,
DNA- and RNA- extraction and customized assay development and trial design consultation. Our pharma services provide pharmacogenomics
testing, genotyping, biorepository and other specialized services to the pharmaceutical and biotech industries and advances personalized
medicine by partnering with pharmaceutical, academic and technology leaders to effectively integrate pharmacogenomics into drug
development and clinical trial programs with the goals of delivering safer, more effective drugs to market more quickly, and improving
patient care.
During
fiscal 2019, in connection with the acquisition of our pharma services, we raised $27 million with Ampersand, a diagnostic laboratory
private equity investor. This was followed by raising an additional $20 million in early 2020 led by 1315 Capital, another sophisticated
private equity investor. We believe that the combination of our clinical services and acquired pharma services uniquely positions
us for growth and expansion in the fast-growing biopharma sector where we can provide our unique diagnostic capabilities to a
broad customer base.
Impact
of COVID-19 pandemic
We
have taken what we believe are all necessary precautions to safeguard our employees from the Coronavirus (COVID-19) pandemic.
We are following CDC guidance and local restrictions. All employees who do not work in a lab have been on a telecommunication
work arrangement. Our employees in the lab are wearing what we believe is appropriate protective gear. There can be no assurance
that key employees will not become ill or that we will able to continue to operate our labs. We have furloughed a number of employees
as a result of reductions in customer demand and we have closed our administrative offices. Our labs require in-person staffing
and as of the date of this report, we have been able to successfully operate our labs though a combination of social distancing,
managing lab scheduling and protective equipment. Our management, finance staff and sales personnel have generally been
able to successfully work remotely. As of June 15, 2020 we began allowing general and administrative staff to return to their
respective offices on a limited basis.
The
extent to which the COVID-19 pandemic impacts our operations continues to depend on future developments, which are highly
uncertain and cannot be predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken
to contain or treat the coronavirus outbreak. In particular, the continued spread of the coronavirus globally has adversely
affecting global economies and financial markets resulting in an economic downturn which could materially and adversely impact
our operations including, without limitation, the functioning of our laboratories, the availability of supplies including reagents,
the progress and data collection of our pharma services, customer demand and travel and employee health and availability.
We
believe that the COVID-19 pandemic will also adversely impact our results of operations, cash flows and financial condition
for the second quarter of fiscal 2020 and possibly beyond. Our fiscal 2020 first quarter revenue was impacted by lower than expected
clinical service volume throughout March 2020, which we believe has resulted from the temporary reduction in non-essential testing
procedures in connection with the COVID-19 pandemic. Further, we did reduce overall costs to match the lower volumes in the
labs.
However,
as of the date of this Report, our overall business is still down approximately 30% from our run rate before the pandemic. We
have continued to add resources to support the increased volume consistent with the changing environment. However, as we rebuild
our cost structure to support the improved volume, there is risk that the anticipated volume growth will not materialize as planned
and we will be required to adjust accordingly.
To
optimize the pharma services lab operations we are transitioning lab work from Rutherford, NJ to our facility in Morrisville,
NC. We will be investing several million dollars to facilitate the move, transfer personnel, build out facilities and validate
processes over the next several months. We believe this investment and transition will result in reduced operating costs in the
future: however, there is no guarantee we will be as successful with the move or the benefits expected thereof as we currently
plan.
All
of our labs are currently operating and we believe we are appropriately staffed for the volume of work. At this time, we do not
anticipate any lab closures beyond temporary work stoppages from time to time to clean and disinfect the labs. Lab supplies including
reagents have been secured to mitigate any potential supply chain issues for the foreseeable future and we are not observing any
shortages due to supply chain issues. Our third party clinical services billing and collections company has taken steps to continue
operations remotely. There have been indications that payer processing may slow down but so far there has been little or no material
impact to our collections.
As
of May 2020, we are in the process of launching a new product line of antibody testing for the COVID-19 virus. Validation is
complete; we have acquired acceptable kits and reference samples and are now offering this testing to our employees and customers.
The serological, or antibody, test measures the amount of antibodies present in the blood. In response to an infection, such
as COVID-19, the body develops an overall immune response to fight the infection. One component of the immune system’s response
is the development of antibodies that attach to the virus and help eliminate it. Antibody tests detect the body’s immune
response to the infection caused by the virus rather than detecting the virus itself. The FDA has issued guidance allowing companies
to market serological tests that have been validated following notification to FDA. Validated antibody tests offered under the
policy should, among other things, include in test reports language explaining that negative results do not rule out COVID-19
infection and that follow-up testing with a molecular diagnostic should be considered to rule out infection. There is no guarantee
that we will be successful in realizing revenue or benefit from these efforts.
Additional
Reimbursement Coverage During 2020
Reimbursement
progress is key for any molecular diagnostic company. We have been successful to date in expanding the reimbursement of our products
in 2020. Specifically, the most significant progress we have made regarding payers to date in 2020 is as follows:
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In
February 2020, we announced an increase in Medicare reimbursement for our ThyraMIR® test from $1,800 to $3,000,
retroactive to January 1, 2020, reflecting a re-evaluation of the technical and clinical performance of the test relative
to other molecular tests in the market and their respective prices.
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In
March 2020, we announced we had entered into a contract with Blue Cross Blue Shield of Massachusetts making ThyGeNEXT®
and ThyraMIR® tests covered in-network services for their more than 3 million members in Massachusetts
and across New England.
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In
March 2020, we announced we had entered into a contract with CareFirst Blue Cross Blue Shield, making ThyGeNEXT® and ThyraMIR®
tests covered in-network services for their more than 3.3 million members in Maryland, Washington, D.C., and Northern Virginia.
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In
March 2020, we announced we had entered into a contract with Premera Blue Cross, making ThyGeNEXT® and ThyraMIR® tests
covered in-network services for their more than 2 million members in Washington State and Alaska.
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In
April 2020, we executed an agreement with Avalon Healthcare Solutions (Avalon), a laboratory benefit manager representing
numerous health plans. Our agreement with Avalon offers us in-network status to approximately 5.8 million lives covered by
the following health plans: Blue Cross Blue Shield North Carolina, South Carolina, Kansas City and Vermont, and Capital Blue
Cross of Central Pennsylvania.
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In
April 2020, we executed a contract with Blue Cross of Idaho making ThyGeNEXT® and ThyraMIR® tests covered in-network
services for their more than 576 thousand members.
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In May 2020, we executed a contract with Blue
Cross Blue Shield of Wyoming.
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Revenue
Recognition
Clinical
services derive its revenues from the performance of its 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. Under Accounting Standards Codification 606, 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.
For
our pharma services customers, performance obligations are satisfied at a point in time as the Company processes samples delivered
by the customer. Project level activities, including study setup and project management, are satisfied over the life of the contract.
Revenues are recognized at a point in time when the test results or other deliverables are reported to the customer.
Deferred
Revenue
For
our pharma services, project level fee revenue is recognized as deferred revenue and recorded at fair value. It represents payments
received in advance of services rendered and is recognized ratably over the life of the contract.
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.
CONDENSED
CONSOLIDATED RESULTS OF OPERATIONS
The
following table sets forth, for the periods indicated, certain statements of operations data. The trends illustrated in this table
may not be indicative of future results.
Condensed
Consolidated Results of Continuing Operations for the Quarter Ended March 31, 2020 Compared to the Quarter Ended March 31, 2019
(unaudited, in thousands)
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Three
Months Ended March 31,
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2020
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2020
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2019
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2019
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|
|
|
|
|
|
|
|
Revenue,
net
|
|
$
|
9,200
|
|
|
|
100.0
|
%
|
|
$
|
6,010
|
|
|
|
100.0
|
%
|
Cost
of revenue
|
|
|
6,113
|
|
|
|
66.4
|
%
|
|
|
2,622
|
|
|
|
43.6
|
%
|
Gross
profit
|
|
|
3,087
|
|
|
|
33.6
|
%
|
|
|
3,388
|
|
|
|
56.4
|
%
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and marketing
|
|
|
2,481
|
|
|
|
27.0
|
%
|
|
|
2,411
|
|
|
|
40.1
|
%
|
Research
and development
|
|
|
809
|
|
|
|
8.8
|
%
|
|
|
528
|
|
|
|
8.8
|
%
|
General
and administrative
|
|
|
4,887
|
|
|
|
53.1
|
%
|
|
|
2,912
|
|
|
|
48.5
|
%
|
Acquisition
related amortization expense
|
|
|
1,031
|
|
|
|
11.2
|
%
|
|
|
813
|
|
|
|
13.5
|
%
|
Total
operating expenses
|
|
|
9,208
|
|
|
|
100.1
|
%
|
|
|
6,664
|
|
|
|
110.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(6,121
|
)
|
|
|
-66.5
|
%
|
|
|
(3,276
|
)
|
|
|
-54.5
|
%
|
Interest
accretion
|
|
|
(109
|
)
|
|
|
-1.2
|
%
|
|
|
(129
|
)
|
|
|
-2.1
|
%
|
Other
income (expense), net
|
|
|
47
|
|
|
|
0.5
|
%
|
|
|
48
|
|
|
|
0.8
|
%
|
Loss
from continuing operations before tax
|
|
|
(6,183
|
)
|
|
|
-67.2
|
%
|
|
|
(3,357
|
)
|
|
|
-55.9
|
%
|
Provision
for income taxes
|
|
|
15
|
|
|
|
0.2
|
%
|
|
|
5
|
|
|
|
0.1
|
%
|
Loss
from continuing operations
|
|
|
(6,198
|
)
|
|
|
-67.4
|
%
|
|
|
(3,362
|
)
|
|
|
-55.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations, net of tax
|
|
|
(65
|
)
|
|
|
-0.7
|
%
|
|
|
(57
|
)
|
|
|
-0.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,263
|
)
|
|
|
-68.1
|
%
|
|
$
|
(3,419
|
)
|
|
|
-56.9
|
%
|
Revenue,
net
Consolidated
revenue, net for the three months ended March 31, 2020 increased by $3.2 million, or 53%, to $9.2 million, compared to $6.0 million
for the three months ended March 31, 2019. This increase was principally attributable to our acquisition of our pharma services
business in 2019. Our first quarter revenue was impacted by lower than expected clinical service volume throughout March 2020,
which we believe has resulted from the temporary reduction in non-essential testing procedures in connection with the COVID-19
pandemic.
Cost
of revenue
Consolidated
cost of revenue for the three months ended March 31, 2020 was $6.1 million, as compared to $2.6 million for the three months
ended March 31, 2019. As a percentage of revenue, cost of revenue increased to 66% for the three months ended March 31,
2020 as compared to 44% in the comparable same period in 2019. This increase as a percentage of revenue can be primarily attributed
to the lower margins associated with pharma services.
Gross
profit
Consolidated
gross profit was approximately $3.1 million for the three months ended March 31, 2020 and $3.4 million for the three months
ended March 31, 2019. The gross profit percentage decreased from 56% in the first quarter of 2019 to 34% for the first
quarter of 2020. This decrease can be attributed to the lower margins associated with pharma services mentioned above and the
reduction in net revenue from clinical services.
Sales
and marketing expense
Sales
and marketing expense was $2.5 million for the three months ended March 31, 2020, or 27% as a percentage of net revenue. For the
three months ended March 31, 2019, sales and marketing expense was $2.4 million, or 40% as a percentage of net revenue. The increase
in sales and marketing expense primarily reflects the addition of sales and marketing costs associated with pharma services.
Research
and development
Research
and development expense was $0.8 million for the three months ended March 31, 2020 and $0.5 million for the three months ended
March 31, 2019. The increase was primarily attributable to costs associated with the acquired pharma services. As a percentage
of revenue, research and development expense stayed the same at approximately 9% in both periods.
General
and administrative
General
and administrative expense for the three months ended March 31, 2020 was $4.9 million as compared to $2.9 million for the
three months ended March 31, 2019. The increase was primarily attributable to costs associated with the acquired pharma services.
Acquisition
related amortization expense
During
the three months ended March 31, 2020 and March 31, 2019, we recorded amortization expense of $1.0 million and $0.8 million, respectively,
which is related to intangible assets associated with prior acquisitions. The increase is related to our acquisition of our pharma
services in 2019 and the associated intangible assets.
Operating
loss
Operating
loss from continuing operations was $6.1 million for the three months ended March 31, 2020 as compared to $3.3 million
for the three months ended March 31, 2019. The increase can be attributed to the operating loss associated with our pharma services
as well as the reduced revenue and gross profit in our clinical services.
Provision
for income taxes
Income
tax expense was approximately $15,000 for the three months ended March 31, 2020 and $5,000 for the three months ended March 31,
2019. Income tax expense for both periods was primarily driven by minimum state and local taxes.
Loss
from discontinued operations, net of tax
We
had a loss from discontinued operations of approximately $0.1 million for both the three months ended March 31, 2020 and March
31, 2019.
LIQUIDITY
AND CAPITAL RESOURCES
For
the three months ended March 31, 2020, we had an operating loss of $6.1 million. As of March 31, 2020, we had cash and
cash equivalents of $13.4 million, total current assets of $28.1 million and current liabilities of $15.7 million. Currently,
the Company has no further availability on its credit facility, but is in the process of completing an agreement with SVB
to expand the credit facility. No assurance can be given that such an expansion agreement will be entered into.
During
the three months ended March 31, 2020, net cash used in operating activities was $7.1 million. The main component of cash used
in operating activities was our net loss of $6.3 million. During the three months ended March 31, 2019, net cash used in
operating activities was $3.0 million, all of which was used in continuing operations. The main component of cash used in operating
activities during the three months ended March 31, 2019 was the net loss of $3.4 million.
For
the three months ended March 31, 2020, there was cash provided from financing activities of $18.2 million, $19.5 million which
resulted from the issuance of Preferred Stock in January 2020, $0.4 million from sales of common stock, and was partially offset
by $1.8 million in a net repayment of funds under our revolving line of credit with SVB. For the three months ended March 31,
2019, there was cash provided from financing activities of $6.0 million which resulted from the issuance of common stock in our
underwritten public offering completed in January 2019.
In
September 2019, we entered into the Equity Distribution Agreement (the “Agreement”) with Oppenheimer & Co. Inc.,
as sales agent (the “Agent”), pursuant to which we may, from time to time, issue and sell shares of our common stock
in an aggregate offering price of up to $4.8 million through the Agent. See Note 16, Equity of the notes to the financial
statements for more details. In January 2020, 80,341 shares (as adjusted for the reverse stock split) of common stock were sold
for net proceeds of approximately $0.4 million.
As
of March 31, 2020, the Company had drawn $1.2 million of the $3.75 million of available funds under its Revolving Line with SVB.
As of June 17, 2020, we had no funds available on the Revolving Line because we were fully drawn.
In
January 2020, we sold 20,000 preferred shares to investors, led by 1315 Capital, for net proceeds of approximately $19.5 million;
see Note 16, Equity of the footnotes to the financial statements for more detail.
As
of June 17, 2020, we received $2.1 million in advances under the Centers for Medicare & Medicaid Services (CMS) accelerated
and advance payment program, as well as a $0.65 million grant from the Department of Health and Human Services (HSS). The CMS
advance will be offset against future Medicare billings of the Company, and the HSS grant is subject to certain conditions regarding
its use, including developing coronavirus and serology tests. These grants and advances require certain certifications by the
Company and impose specific limitations on the use of the proceeds. Based on these restrictions and limitations, the Company is
treating the $0.65 million HSS grant as restricted cash until we have clarity on how the funds can be utilized by the Company
based on the specific requirements of the HSS. Furthermore, although the Company initially explored the possibility of requesting
a loan under the Small Business Administration Paycheck Protection Program, we elected not to complete an application because
we are not certain we meet certain criteria of the program.
During
April and early May 2020, the Company made payments totaling $888,000 to CGI for funds withheld from the Excess Consideration
Note to satisfy certain adjustments and indemnification obligations under the Asset Purchase Agreement. The funds used to satisfy
this obligation were not included in cash and cash equivalents as of December 31, 2019 and March 31, 2020. These funds and the
related liability were included in Other Assets and Other Current Liabilities, respectively, as of those period ends, and the
settlement of the liability had no net impact on the Company’s operating cash flow or liquidity.
We
do not expect to generate positive cash flows from operations for the year ending December 31, 2020. We intend to meet our ongoing
capital needs by using our available cash, proceeds under the Securities Purchase and Exchange Agreement, additional borrowings
under the Line of Credit as well as increasing our line of credit limit as a result of the additional accounts receivable acquired
in July 2019 as part of our acquisition of pharma services (which requires a modification to the bank agreement and approval by
SVB which cannot be assured, revenue growth and margin improvement, collecting accounts receivable, containing costs as
well as exploring other financing options. Our planned capital expenditures over the next twelve months currently includes several
million dollars to be utilized in consolidating our laboratories, which includes equipment purchases, calibration
and testing costs, moving and other related costs, and leasehold improvements. Management believes that the Company has sufficient
cash on hand and available to sustain operations through at least June 30, 2021. However, in the event the Company is
unable to maintain its Nasdaq listing for its common stock due to a failure to meet minimum stockholder equity requirements due
to the classification of its preferred stock as temporary equity, the Company’s ability to raise additional capital may
be adversely impacted. Therefore, there is no guarantee that additional capital can be raised to fund our future operations.
Inflation
We
do not believe that inflation had a significant impact on our results of operations for the periods presented. On an ongoing basis,
we attempt to minimize any effects of inflation on our operating results by controlling operating costs and whenever possible,
seeking to insure that billing rates reflect increases in costs due to inflation.
Off-Balance
Sheet Arrangements
None.