INTERPACE BIOSCIENCES, INC. The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K/A. This discussion and analysis includes certain forward-looking statements that involve risks, uncertainties and assumptions. You should review the Risk Factors section of this Form 10-K/A for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by such forward-looking statements. See Cautionary Note Regarding Forward-Looking Information at the beginning of this Form 10-K/A.
Company 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, which we acquired in
During fiscal 2019, we acquired the BioPharma Business of Cancer Genetics in
As of
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Clinical services
Our clinical services provide clinically useful molecular diagnostic tests, bioinformatics and pathology services for evaluating cancer risk by leveraging the latest technology in personalized medicine for improved patient diagnosis and management. We develop and commercialize genomic tests and related first line assays principally focused on early detection of patients with indeterminate biopsies and at high risk of cancer using the latest technology to help personalized medicine and improve patient diagnosis and management. Our tests and services provide mutational analysis of genomic material contained in suspicious cysts, nodules and lesions with the goal of better informing treatment decisions in patients at risk of thyroid, pancreatic, and other cancers. The laboratory developed molecular diagnostic tests we offer are designed to enable healthcare providers to better assess cancer risk, helping to avoid unnecessary surgical treatment in patients at low risk. We currently have four commercialized molecular diagnostic tests in the marketplace: PancraGEN®, which is a pancreatic cyst and pancreaticobiliary solid lesion genomic test that helps physicians better assess risk of pancreaticobiliary cancers using our proprietary PathFinderTG® platform? ThyGeNEXT®, which is an expanded oncogenic mutation panel that helps identify malignant thyroid nodules? ThyraMIR®, which assesses thyroid nodules for risk of malignancy utilizing a proprietary microRNA gene expression assay; and RespriDx®, which is a genomic test that helps physicians differentiate metastatic or recurrent lung cancer from the presence of newly formed primary lung cancer and which also utilizes our PathFinderTG® platform to compare the genomic fingerprint of two or more sites of lung cancer. BarreGEN®, an esophageal cancer risk classifier for Barrett's Esophagus that also utilizes our PathFinder TG® platform, is currently in a Clinical Evaluation Program or "CEP" whereby we gather information from physicians using BarreGEN® to assist us in positioning our product for full launch, partnering and potentially supporting reimbursement with payers.
Our mission is to provide personalized medicine through genomics-based
diagnostics and innovation to advance patient care based on rigorous science.
Our laboratories are licensed pursuant to federal law under CLIA and are
accredited by CAP and
We leverage our laboratories to develop and commercialize our assays and products. We aim to provide physicians and patients with diagnostic options for detecting genomic and other molecular alterations that are associated with gastrointestinal, endocrine, and lung cancers. Our customers consist primarily of physicians, hospitals and clinics.
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The global molecular diagnostics market is estimated to be approximately
We believe that the molecular diagnostics market offers significant growth and strong patient value given the substantial opportunity it affords to lower healthcare costs by helping to reduce unnecessary surgeries and ensuring the appropriate frequency of monitoring. We are keenly focused on growing our test volumes, securing additional insurance coverage and reimbursement, maintaining and growing our current reimbursement and supporting revenue growth for our molecular diagnostic tests, introducing related first line product and service extensions, as well as expanding our business by developing and promoting synergistic products in our markets. We also believe that BarreGEN® is a potentially significant pipeline product, and we are providing necessary resources to accelerate our development process. Further, we believe BarreGEN® is synergistic with our capabilities in the gastrointestinal market, which is one of the sectors in which we operate.
Pharma services
Our pharma services provide pharmacogenomics testing, genotyping, biorepository and other specialized services to the pharmaceutical and biotech industries. Laboratory and testing services are performed for participants in the pharmaceutical and biotech industries engaged in clinical trials and focuses on providing these clients with oncology specific and non-oncology genetic testing services for phase I-IV clinical trials along with critical support of ancillary services. These services include: biorepository, clinical trial logistics, clinical trial design, bioinformatics analysis, customized assay development, DNA and RNA extraction and purification, genotyping, gene expression and biomarker analyses. We also seek to apply our expertise in laboratory developed tests to assist in developing and commercializing drug-specific companion diagnostics. We have established business relationships with key instrument manufacturers to support their platforms in the market, and to drive acceptance among biopharmaceutical sponsors developing innovative immuno-oncology therapies.
Molecular- and biomarker-based testing services have been altering the clinical trials landscape by providing biotech and pharmaceutical companies with information about trial subjects' genetic profiles that may be able to inform researchers whether or not a subject will benefit from the trial drug or will experience adverse effects. Streamlined subject selection and stratification, and tailored therapies selected to maximally benefit each group of subjects may increase the number of trials that result in approved therapies and make conducting clinical trials more efficient and less costly for biotech and pharmaceutical companies. In 2019, 48 new drugs were approved by the FDA, and nearly a quarter of these drugs were oncology-focused, highlighting the potential value of incorporating genomic information into oncology clinical trial design.
In addition to the tests and services provided to our pharma customers, we custom develop Next Generation Sequencing (NGS) panels for our customers focused on pharmacogenomics and oncology.
We also utilize our laboratories to provide clinical trial services to the
pharmaceutical and biotech industries to improve the efficiency and economic
viability of clinical trials. Our clinical trials services leverage our
knowledge of clinical oncology and molecular diagnostics and our laboratories'
fully integrated capabilities. We believe our laboratories are one of a few with
the capability to combine somatic and germline mutational analyses in clinical
trials. The laboratories operate through CLIA certificated and CAP accredited
laboratories located in
Our laboratories possess capabilities in histology, immunohistochemistry (IHC), flow cytometry, cytogenetics and fluorescent in-situ hybridization (FISH), as well as sophisticated molecular analysis techniques, including next generation sequencing. This allows for comprehensive customized testing within one lab enterprise, with our CAP-accredited biorepository laboratory serving as a central hub for specimen tracking. Using this approach, we are able to support demanding clinical trial protocols requiring multiple assays and techniques aimed at capturing data on multiple biomarkers. Our suite of available testing platforms allows for highly customized clinical trial design which is supported by our dedicated group of development scientists and technical personnel.
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We also provide genetic testing for drug metabolism to aid biotech and pharmaceutical companies identify subjects' likely responses to treatment, allowing these companies to conduct more efficient and safer clinical trials. We believe pharmacogenomics drug metabolism testing helps deliver the promise of personalized medicine by enabling researchers to tailor therapies in development to differences in patients' genomic profiles.
Recent Notices of Nasdaq Listing Compliance
On
DESCRIPTION OF REPORTING SEGMENTS
We operate under one segment which is the business of developing and selling diagnostic clinical and pharma services.
CRITICAL ACCOUNTING POLICIES
We prepare our consolidated financial statements in accordance with
Revenue and Cost of Revenue
The Company's revenue is primarily generated from the performance of its proprietary molecular diagnostic tests for its clinical customers and its DNA-based testing services in support of clinical trials for its pharma services customers. The Company's performance obligation is fulfilled upon completion, review and release of test results and subsequent billing to the third-party payer, hospital or service provider, or biopharma companies.
Revenue Recognition ASC 606 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. 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.
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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.
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 9, Leases.
Long-Lived Assets, including Finite-Lived Intangible Assets
We review the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary. We recorded no asset impairment charges in 2019 or 2018.
Contingencies
In the normal course of business, we are subject to various contingencies. Contingencies are recorded in the consolidated financial statements when it is probable that a liability will be incurred and the amount of the loss can be reasonably estimated, or otherwise disclosed, in accordance with ASC 450, Contingencies. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In the event we determine that a loss is not probable, but is reasonably possible, and it becomes possible to develop what we believe to be a reasonable range of possible loss, then we will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, we will, when applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. We are currently a party to legal proceedings that are incidental to our business. As required, we have accrued our estimate of the probable costs for the resolution of these claims. These estimates are developed in consultation with outside counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. Predicting the outcome of claims and litigation, and estimating related costs and exposures, involves substantial uncertainties that could cause actual costs to vary materially from estimates.
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Income Taxes
Income taxes are based on income for financial reporting purposes calculated using our expected annual effective rate and reflect a current tax liability or asset for the estimated taxes payable or recoverable on the current year tax return and expected annual changes in deferred taxes.
We account for income taxes using the asset and liability method. This method requires recognition of deferred tax assets and liabilities for expected future tax consequences of temporary differences that currently exist between tax bases and financial reporting bases of our assets and liabilities based on enacted tax laws and rates. Deferred tax expense (benefit) is the result of changes in the deferred tax asset and liability. A valuation allowance is established, when necessary, to reduce the deferred income tax assets when it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We operate in multiple tax jurisdictions and provide taxes in each jurisdiction
where we conduct business and are subject to taxation. The breadth of our
operations and the complexity of the various tax laws require assessments of
uncertainties and judgments in estimating the ultimate taxes we will pay. The
final taxes paid are dependent upon many factors, including negotiations with
taxing authorities in various jurisdictions, outcomes of tax litigation and
resolution of proposed assessments arising from federal and state audits. We
have established estimated liabilities for uncertain federal and state income
tax positions. Uncertain tax positions are recognized in the financial
statements when it is more likely than not (for example, a likelihood of more
than fifty percent) that a position taken or expected to be taken in a tax
return would be sustained upon examination by tax authorities that have full
knowledge of all relevant information. A recognized tax position is then
measured as the largest amount of benefit that is greater than fifty percent
likely to be realized upon ultimate settlement. We adjust our accruals for
unrecognized tax benefits as facts and circumstances change, such as the
progress of a tax audit. We believe that any potential audit adjustments will
not have a material adverse effect on our financial condition or liquidity.
However, any adjustments made may be material to our consolidated results of
operations or cash flows for a reporting period. Penalties and interest, if
incurred, would be recorded as a component of current income tax expense.
Management plans to commence filing tax clearance certificates in states and
related tax jurisdictions in which
Significant judgment is also required in evaluating the need for and magnitude
of appropriate valuation allowances against deferred tax assets. We currently
have significant deferred tax assets resulting from net operating loss
carryforwards and deductible temporary differences. The realization of these
assets is dependent on generating future taxable income. We perform an analysis
quarterly to determine whether the expected future income will more likely than
not be sufficient to realize the deferred tax assets. Our recent operating
results and projections of future income weighed heavily in our overall
assessment. The existing and forecasted levels of pretax earnings for financial
reporting purposes are not sufficient to generate future taxable income and
realize our deferred tax assets and, as a result, we established a full federal
and state valuation allowance for the net deferred tax assets at
Stock Compensation Costs
The compensation cost associated with the granting of stock-based awards is based on the grant date fair value of the stock award. We recognize the compensation cost, net of estimated forfeitures, over the shorter of the vesting period or the period from the grant date to the date when retirement eligibility is achieved. Forfeitures are initially estimated based on historical information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period-to-period.
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We primarily use the Black-Scholes option pricing model to determine the fair value of stock options and stock-based stock appreciation rights (SARs). The determination of the fair value of stock-based payment awards is made on the date of grant and is affected by our stock price as well as assumptions made regarding a number of complex and subjective variables. These assumptions include: our expected stock price volatility over the term of the awards; actual and projected employee stock option exercise behaviors; the risk-free interest rate; and expected dividend yield.
Changes in the valuation assumptions could result in a significant change to the cost of an individual award. However, the total cost of an award is also a function of the number of awards granted, and as result, we have the ability to manage the cost and value of our equity awards by adjusting the number of awards granted.
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Fiscal 2019 Overview
Fiscal 2019 was a transformative year for us as we continued to grow our
underlying business, added capabilities to service a new group of customers
through the acquisition of the
In 2018, we decided to transition our billings and collections activities to
another vendor effective
We are working closely with our new billing and collections vendor and believe we have enhanced the overall process, added resources, better aligned resources and have common goals and objectives. We are developing improvement initiatives to increase billing accuracy and timing, reduce the number of denials, and improve the processing time of denials.
Potential 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 extent to which the COVID-19 pandemic impacts our operations will 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 is 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 adversely impact our results of
operations, cash flows and financial condition for the first and second quarters
of fiscal 2020 and possibly beyond. Our fiscal 2020 first quarter revenue has
been impacted by lower than expected clinical service volume throughout
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.
Currently volume of testing in our clinical services labs has slowed, as noted
above, and we believe we have taken the necessary actions to support the lower
volume. Our pharma services customers have indicated that there could be a
slowdown in clinical trials but thus far volume has not suffered. 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. To
date, we have not lost any of our customer base and we are not aware of any
customers with potential bankruptcy or payment issues. 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
The Company's leadership team is monitoring the situation on a daily basis and has 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.
As of
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CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth the selected statements of operations data ($ in thousands) as a percentage of revenue for the periods indicated. The trends illustrated in this table may not be indicative of future operating results.
As Restated
Years Ended December 31,
2019 2019 2018 2018
Revenue, net $ 24,220 100.0 % $ 21,896 100.0 %
Cost of revenue 15,888 65.6 % 10,197 46.6 %
Gross profit 8,332 34.4 % 11,699 53.4 %
Operating expenses:
Sales and marketing 11,116 45.9 % 8,421 38.5 %
Research and development 2,810 11.6 % 2,124 9.7 %
General and administrative 14,363 59.3 % 8,676 39.6 %
Acquisition related expense 2,534 10.5 % - 0.0 %
Acquisition related amortization
expense 3,989 16.5 % 3,589 16.4 %
Change in fair value of contingent
consideration (44 ) -0.2 % 1,522 7.0 %
Total operating expenses 34,768 143.6 % 24,332 111.1 %
Operating loss (26,436 ) -109.1 % (12,633 ) -57.7 %
Accretion expense (440 ) -1.8 % (331 ) -1.5 %
Other income (expense), net 196 0.8 % 263 1.2 %
Loss from continuing operations before
tax (26,680 ) -110.2 % (12,701 ) -58.0 %
Benefit (provision) for income taxes (28 ) -0.1 % 18 0.1 %
Loss from continuing operations (26,652 ) -110.0 % (12,719 ) -58.1 %
(Loss) income from discontinued
operations, net of tax (88 ) -0.4 % 16 0.1 %
Net loss $ (26,740 ) -110.4 % $ (12,703 ) -58.0 %
Revenue, net
Consolidated revenue for the year ended
Cost of revenue
Consolidated cost of revenue for the year ended
Gross Profit
Consolidated gross profit for the year ended
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Sales and marketing expense
Sales and marketing expense was
Research and development
Research and development expense reflects clinical and research costs for
supplies, laboratory tests and evaluations, scientific and administrative staff
involved in clinical research, statistical research and product development
related to new tests, products and programs. Research and development expense
was
General and administrative
General and administrative expense for the year ended
Acquisition related expense
During the year ended
Acquisition related amortization expense
During the years ended
Change in fair value of contingent consideration
During the year ended
Operating loss
There were operating losses from continuing operations of
(Benefit) provision for income taxes
We had an income tax benefit of
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(Loss) income from discontinued operations, before tax
We had a loss from discontinued operations of
Non-GAAP Financial Measures
In addition to
In this 10-K, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted EBITDA is a metric used by management to measure cash flow of the ongoing business. Adjusted EBITDA is defined as income or loss from continuing operations, plus depreciation and amortization, acquisition related expenses, transition expenses, non-cash stock based compensation, interest and taxes, and other non-cash expenses including asset impairment costs, bad debt expense, loss on extinguishment of debt, goodwill impairment and change in fair value of contingent consideration, and warrant liability. The table below includes a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP financial measure.
GAAP to Non-GAAP Reconciliation (Unaudited)
($ in thousands)
As Restated
Year Ended
December 31,
2019 2018
Loss from continuing operations (GAAP Basis) $ (26,652 ) $ (12,719 )
Acquisition related expense 2,534 -
Transaction expenses 836 -
Depreciation and amortization 4,524 3,801
Stock-based compensation 1,535 2,270
Bad debt expense 499 -
Taxes (28 ) 18
Accretion expense 440 331
Mark to market on warrant liability (279 ) (112 )
Change in fair value of contingent consideration (44 ) 1,522
Non-GAAP Adjusted EBITDA $ (16,635 ) $ (4,889 )
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LIQUIDITY AND CAPITAL RESOURCES
For the fiscal year ended
During the year ended
For the year ended
For the year ended
In
As of
In
During
As of
We do not expect to generate positive cash flows from operations for the year
ending
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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.
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