NOTES
TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Tabular
information in thousands, except per share amounts)
Nature
of Business
Interpace
Biosciences, Inc. (“Interpace” or the “Company”) is a company that provides molecular diagnostics,
bioinformatics and pathology services for evaluation of risk of cancer by leveraging the latest technology in personalized medicine
for improved patient diagnosis and management. 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.
COVID-19
pandemic
There
continues to be widespread impact from the COVID-19 pandemic. Beginning in the first quarter of 2021, there has been a trend in many
parts of the world of increasing availability and administration of vaccines against COVID-19, as well as an easing of restrictions on
social, business, travel and government activities and functions. On the other hand, infection rates and regulations continue to fluctuate
in various regions and there are ongoing global impacts resulting from the pandemic, including challenges and increases in costs for
logistics and supply chains. We have also previously been affected by temporary laboratory closures, employment and compensation adjustments
and impediments to administrative activities. The level and nature of the disruption caused by COVID-19 is unpredictable, may be cyclical
and long-lasting and may vary from location to location.
In
addition, we have experienced and are experiencing varying levels of inflation resulting in part from various supply chain disruptions,
increased shipping and transportation costs, increased raw material and labor costs and other disruptions caused by the COVID-19 pandemic
and general global economic conditions.
The
continuing impact that the COVID-19 pandemic will have on our operations, including duration, severity and scope, remains highly uncertain
and cannot be fully predicted at this time. While we believe we have generally recovered from the adverse impact that the COVID-19 pandemic
had on our business during 2020, we believe that the COVID-19 pandemic could continue to adversely impact our results of operations,
cash flows and financial condition in the future.
We
continue to monitor the COVID-19 pandemic and the guidance that is being provided by relevant federal, state and local public health
authorities and may take additional actions based upon their recommendations. It is possible that we may have to make adjustments to
our operating plans in reaction to developments that are beyond our control.
The
accompanying unaudited interim condensed consolidated financial statements and related notes (the “Interim Financial Statements”)
should be read in conjunction with the consolidated financial statements of the Company and its wholly-owned subsidiaries (Interpace
Diagnostics Lab Inc., Interpace Diagnostics Corporation, and Interpace Diagnostics, LLC), and related notes as included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the Securities & Exchange Commission (“SEC”)
on March 31, 2022 and as amended on April 29, 2022.
The
Interim Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United
States (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. The Interim Financial Statements
include all normal recurring adjustments that, in the judgment of management, are necessary for a fair presentation of such interim financial
statements. Discontinued operations include the Company’s wholly owned subsidiaries: Group DCA, LLC, InServe Support Solutions;
and TVG, Inc., its Commercial Services business unit which was sold on December 22, 2015 and its Interpace Pharma Solutions business
(“Pharma Solutions”) which was sold on August 31, 2022. All significant intercompany balances and transactions have been
eliminated in consolidation. Operating results for the nine-month period ended September 30, 2022 are not necessarily indicative of the
results that may be expected for the fiscal year ending December 31, 2022.
The
accompanying consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern
and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in
the normal course of business. Accordingly, the accompanying consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or amounts of liabilities that might result from the outcome of this
uncertainty.
In
October 2021, the Company entered into a $7.5 million revolving credit facility with Comerica Incorporated (“Comerica”)(the
“Comerica Loan Agreement”). See Note 18, Revolving Line of Credit, for more details. Also in October 2021, the Company
entered into an $8.0 million term loan with BroadOak Fund V, L.P. (“BroadOak”)(the “BroadOak Term Loan”), the
proceeds of which were used to repay in full at their maturity the existing secured promissory note with Ampersand Capital Partners (“Ampersand”)
(the “Ampersand Note”) and 1315 Capital II, L.P (“1315 Capital”)(the “1315 Capital Note”). In May
2022, the Company entered into a Subordinated Convertible Promissory Note agreement with BroadOak for an additional $2.0 million (the
“Convertible Note”), which was converted into a subordinated term loan and was added to the outstanding BroadOak Term Loan
balance. See Note 14, Notes Payable, for more details.
In
January 2022, the Company’s registration statement for a rights offering filed with the Securities and Exchange Commission (SEC)
became effective; however, the rights offering was subsequently terminated later in January 2022 when the Company announced that the
Centers for Medicare & Medicaid Services, or CMS, issued a new billing policy whereby CMS will no longer reimburse for the use of
the Company’s ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for
the same beneficiary on the same date of service. However, on February 28, 2022, the Company announced that the National Correct Coding
Initiative (NCCI) program issued a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT®
(0245U) and ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. In May 2022, the Company
was notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 would be completed beginning July 1, 2022.
However, on June 9, 2022, the Company was notified that Novitas re-priced ThyGeNEXT® (0245U) from $2,919 to $806.59 retroactively
effective to January 1, 2022. On July 20, 2022 the Clinical Diagnostic Laboratory Tests (CDLT) Advisory Panel affirmed a gapfill price
for ThyGeNEXT® of $806.59. As a result of the ThyGeNEXT® pricing change, the Company reduced its net realizable
value, or NRV rates, for ThyGeNEXT® Medicare billing to reflect the $806.59 pricing for tests performed during the second
quarter of 2022. In addition, in order to reflect the retroactive pricing change to January 1, 2022, the Company recorded an NRV adjustment
of $0.7 million during the second quarter of 2022 to reduce revenue recorded during the first quarter of 2022. During July 2022, the
Company began implementing cost-savings initiatives including a reduction in headcount and incidental expenses and a freeze on all non-essential
travel and hiring.
On
August 31, 2022, the Company closed on the sale of its Pharma Solutions business for a total purchase price of $7,000,000 ($500,000 of
which has been deposited into escrow), subject to a potential post-closing working capital adjustment, In addition, we received the earnout
payment of $1,043,000. See Note 4,
Discontinued
Operations.
For
the nine months ended September 30, 2022, we had an operating loss from continuing operations of $3.7 million. As of September 30,
2022, we had cash and cash equivalents of $6.3 million, total current assets of $12.7 million and current liabilities of $14.8
million. As of November 4, 2022, we had approximately $6.6 million of cash on hand, excluding restricted cash.
We
will not generate positive cash flows from operations for the year ending December 31, 2022. We intend to meet our ongoing capital needs
by using our available cash and availability under the Comerica Loan Agreement, as well as through targeted margin improvement; collection
of accounts receivable; containment of costs; and the potential use of other financing options and other strategic alternatives. However,
if we are unable to meet the financial covenants under the Comerica Loan Agreement, the revolving line of credit and notes payable will
become due and payable immediately.
We
continue to explore various strategic alternatives, dilutive and non-dilutive sources of funding, including equity and debt financings,
strategic alliances, business development and other sources in order to provide additional liquidity. With the delisting of our common
stock from Nasdaq in February 2021, our ability to raise additional capital on terms acceptable to us has been adversely impacted. There
can be no assurance that we will be successful in obtaining such funding on terms acceptable to us.
Our
consolidated financial statements assume we will continue as a going concern. Our ability to continue as a going concern depends on having
working capital for vendor payments, meeting short-term obligations on other accrued liabilities, and amongst other requirements, making
interest payments on our debt obligations. Without positive operating margins and sufficient working capital and the ability to meet
our debt obligations, our business will be jeopardized and we may not be able to continue in our current structure, if at all. Under
these circumstances, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital,
cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations.
With the proceeds received from the sale of the Pharma Solutions business, as well as the expected improvement in future operating cash
flows associated with the disposition, as of the date of this filing, the Company anticipates that current cash and cash equivalents,
available eligible borrowings on its Comerica Loan Agreement and forecasted cash receipts will be sufficient to meet its anticipated
cash requirements through the next twelve months.
Further,
along with many laboratories, we may be affected by the Proposed Local Coverage Determination (“LCD”) DL39365, which was
posted on June 9, 2022 and is currently under consideration by our local Medicare Administrative Contractor, Novitas Solutions, Inc.
If finalized, this Proposed LCD, which governs “Genetic Testing for Oncology,” could impact the existing LCD for one of our
molecular tests, PancraGEN®. If Novitas restricts coverage for PancraGEN®, our liquidity could be negatively
impacted beginning in Fiscal 2023.
The
Company anticipates that current cash and cash equivalents and forecasted cash receipts would still be sufficient to meet its anticipated
cash requirements through the next twelve months, from the date of this filing.
4. |
DISCONTINUED OPERATIONS |
On
August 31, 2022, the Company and Interpace Pharma Solutions, Inc. (the “Subsidiary”, and together with the Company as used
in this Note 4, “Interpace”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Flagship
Biosciences, Inc. (the “Purchaser”) pursuant to which the Purchaser agreed to (i) acquire substantially all of the assets
of the Subsidiary used in Subsidiary’s business of complex molecular analysis for the early diagnosis and treatment of cancer and
supporting the development of targeted therapeutics (the “Business”) and (ii) assume and pay certain liabilities related
to the purchased assets as set forth in the Purchase Agreement (collectively, the “Transaction”). The Transaction closed
on August 31, 2022.
As
consideration for the Transaction, under the Purchase Agreement, Interpace received a total purchase price of approximately $7.0
million ($0.5 million of which has been deposited into escrow), subject to a potential post-closing working capital adjustment, and
the assumption by the Purchaser of certain specified liabilities. In addition, subject to the terms and conditions set forth in the
Purchase Agreement, Purchaser will pay the Subsidiary an earnout of up to $2.0 million based on revenue for the period beginning
September 1, 2021 and ending August 31, 2022. The Company received an earnout payment of approximately $1.0 million in September
2022 which is the fully settled amount and there will be no further earnout payments in the future.
The
Purchase Agreement includes a one-year commitment of Interpace not to compete with the Business, recruit or hire any former employees
of the Subsidiary who accept employment with the Purchaser in connection with the Transaction, or divert or attempt to divert from Purchaser
any business to be performed from any of the contracts or agreements with customers as set forth in the Purchase Agreement. The Purchase
Agreement also contains customary representations and warranties, post-closing covenants and mutual indemnification obligations for,
among other things, any inaccuracy or breach of any representation or warranty and any breach or non-fulfillment of any covenant.
In
connection with the Transaction, on August 31, 2022, Interpace and Purchaser entered into a Shared Services Agreement (the “Shared
Services Agreement”) pursuant to which Interpace agreed to provide, or cause its affiliates to provide, to the Purchaser certain
services set forth in the Shared Services Agreement on a transitional basis and subject to the terms and conditions set forth in the
Shared Services Agreement (the “Services”). As consideration for the Services provided by Interpace, Purchaser will pay Interpace
the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s obligations to provide the
Services will terminate with respect to each Service as set forth in the Shared Services Agreement.
The
Purchaser is identified as a related party as an affiliate of Ampersand and an affiliate of BroadOak have each provided equity financing
to the Purchaser, collectively own a majority of the Purchaser’s outstanding equity securities and are represented on its Board
of Directors.
The
Company intends to use the remaining net proceeds to fund its future business activities and for general working capital purposes. As
a result of the sale, the gain on sale and all operations from Interpace Pharma Solutions have been classified as discontinued operations
for all periods presented.
A
reconciliation of the accounting for the Company’s Pharma Solutions business is as follows:
SCHEDULE
OF SALE OF BUSINESS
| |
Gain on Sale | |
| |
| |
Purchase price | |
$ | 7,000 | |
Earnout received | |
| 1,043 | |
Working capital adjustment, net | |
| (656 | ) |
Less: transaction costs | |
| (307 | ) |
Total net consideration | |
$ | 7,080 | |
Assets and liabilities disposed of, net (1) | |
| (7,080 | ) |
Gain on sale | |
$ | - | |
(1) |
includes goodwill and intangible assets written down prior to the Transaction. The goodwill
write-down was approximately $8.4 million and the write-down of intangible assets was approximately
$3.8 million. |
The
components of liabilities classified as discontinued operations consist of the following as of September 30, 2022 and December 31, 2021:
SCHEDULE
OF COMPONENTS OF LIABILITIES AND REVENUE CLASSIFIED AS DISCONTINUED OPERATIONS
| |
September 30, 2022 | | |
December 31, 2021 | |
Accounts receivable, net | |
$ | - | | |
$ | 1,486 | |
Other | |
| 28 | | |
| 1,607 | |
Current assets of discontinued operations | |
| 28 | | |
| 3,093 | |
Property and equipment, net | |
| - | | |
| 6,032 | |
Other intangible assets, net | |
| - | | |
| 5,155 | |
Goodwill | |
| - | | |
| 8,433 | |
Other | |
| - | | |
| 2,767 | |
Long-term assets of discontinued operations | |
| - | | |
| 22,387 | |
Total assets | |
$ | 28 | | |
$ | 25,480 | |
| |
| | | |
| | |
Accounts payable | |
| - | | |
| 1,320 | |
Accrued salary and bonus | |
| 92 | | |
| 335 | |
Other (1) | |
| 766 | | |
| 1,502 | |
Current liabilities of discontinued operations | |
| 858 | | |
| 3,157 | |
Operating lease liabilities, net of current portion | |
| - | | |
| 2,634 | |
Other | |
| - | | |
| 71 | |
Long-term liabilities of discontinued operations | |
| - | | |
| 2,705 | |
Total liabilities | |
$ | 858 | | |
$ | 5,862 | |
(1) | Includes
$766 of liabilities related to the former Commercial Services business unit. |
The
table below presents the significant components of its former Pharma Solutions business unit’s results included within loss
from discontinued operations, net of tax in the condensed consolidated statements of operations for the three-and nine-months ended September
30, 2022 and 2021.
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three
Months Ended | | |
Nine
Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(unaudited) | | |
(unaudited) | |
Revenue,
net | |
$ | 1,267 | | |
$ | 1,415 | | |
$ | 5,678 | | |
$ | 6,455 | |
| |
| | | |
| | | |
| | | |
| | |
Loss
from discontinued operations | |
| (13,012 | ) | |
| (2,180 | ) | |
| (15,888 | ) | |
| (5,744 | ) |
Gain
(loss) on sale of Pharma Solutions | |
| - | | |
| - | | |
| - | | |
| - | |
Income
tax (benefit) expense | |
| (58 | ) | |
| 62 | | |
| 48 | | |
| 175 | |
Loss
from discontinued operations, net of tax | |
$ | (12,954 | ) | |
$ | (2,242 | ) | |
$ | (15,936 | ) | |
$ | (5,919 | ) |
| |
| | | |
| | | |
| | | |
| | |
The
income tax benefit for the three months ended September 30, 2022 pertained to the reversal of a credit as a result of the Pharma Solutions
sale. The income tax expense for both the three months ended September 30, 2021 and the nine months ended September 30, 2022 and 2021
pertained to interest accrued on uncertain tax position liabilities.
Cash
used from discontinued operations, operating activities, for the nine months ended September 30, 2022 was approximately $2.8
million. There was cash provided by discontinued operations, investing activities, for the nine months ended September 30, 2022 of
$7.3 million which pertained to the net proceeds received from the Pharma Solutions sale. Cash used from discontinued operations,
operating activities, for the nine months ended September 30, 2021 was approximately $3.9 million. There was cash used from
discontinued operations, investing activities, for the nine months ended September 30, 2021 of $0.1 million.
5. |
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES |
Accounting
Estimates
The
preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates are based on historical
experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the
circumstances. Significant estimates include accounting for valuation allowances related to deferred income taxes, contingent consideration,
allowances for 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
We
derive our revenues from the performance of proprietary assays or tests. The Company’s performance obligation is fulfilled upon
the completion, review and release of test results to the customer. The Company subsequently bills third-party payers or direct-bill
payers for the tests performed. Under Accounting Standards Codification 606, revenue is recognized based on the estimated transaction
price or net realizable value, which is determined based on historical collection rates by each payer category for each proprietary test
offered by the Company. To the extent the transaction price includes variable consideration, for all third party and direct-bill payers
and proprietary tests, the Company estimates the amount of variable consideration that should be included in the transaction price using
the expected value method based on historical experience.
We
regularly review the ultimate amounts received from the third-party and direct-bill payers and related estimated reimbursement rates
and adjust the NRV’s and related contractual allowances accordingly. If actual collections and related NRV’s vary significantly
from our estimates, we will adjust the estimates of contractual allowances, which affects net revenue in the period such variances become
known. The Company recorded an NRV adjustment of $0.7 million as a reduction of revenue during the second quarter of 2022 to record the
impact on revenue recorded during the first quarter of 2022. See Note 3, Going Concern, for more details.
For
our pharma services, project level activities, including study setup and project management, are satisfied over the life of the contract
while performance-related obligations are satisfied at a point in time as the Company processes samples delivered by the customer. Revenues
are recognized at a point in time when the test results or other deliverables are reported to the customer.
Financing
and Payment
For
non-Medicare claims, our payment terms vary by payer category. Payment terms for direct-payers in our clinical services are typically
thirty days and in our pharma services, up to sixty days. Commercial third-party-payers are required to respond to a claim within a time
period established by their respective state regulations, generally between thirty to sixty days. However, payment for commercial third-party
claims may be subject to a denial and appeal process, which could take up to two years in some instances where multiple appeals are submitted.
The Company generally appeals all denials from commercial third-party payers. We bill Medicare directly for tests performed for Medicare
patients and must accept Medicare’s fee schedule for the covered tests as payment in full.
Costs
to Obtain or Fulfill a Customer Contract
Sales
commissions are expensed in the period in which they have been earned. These costs are recorded in sales and marketing expense in the
condensed consolidated statements of operations.
Accounts
Receivable
The
Company’s accounts receivable 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.
Leases
The
Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”)
assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent our obligation
to make lease payments arising from the lease. All leases with terms greater than twelve months result in the recognition of a ROU asset
and a liability at the lease commencement date based on the present value of the lease payments over the lease term. Unless a lease provides
all of the information required to determine the implicit interest rate, we use our incremental borrowing rate based on the information
available at the commencement date in determining the present value of the lease payments. We use the implicit interest rate in the lease
when readily determinable.
Our
lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably
certain that we will exercise that option. Leases with terms of twelve months or less at the commencement date are expensed on a straight-line
basis over the lease term and do not result in the recognition of an asset or liability. See Note 8, Leases.
Other
Current Assets
Other
current assets consisted of the following as of September 30, 2022 and December 31, 2021:
SCHEDULE OF OTHER CURRENT ASSETS
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| (unaudited) | | |
| | |
Lab supply inventory | |
$ | 1,246 | | |
$ | 825 | |
Prepaid expenses | |
| 226 | | |
| 584 | |
Other | |
| 138 | | |
| 70 | |
Total other current assets | |
$ | 1,610 | | |
$ | 1,479 | |
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, used in the calculation of basic and diluted loss
per share for the three- and nine-month periods ended September 30, 2022 and 2021 is as follows:
SCHEDULE OF BASIC AND DILUTED NET LOSS PER SHARE
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months | | |
Nine Months Ended | |
| |
Ended September 30, | | |
Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(unaudited) | | |
| | |
(unaudited) | | |
| |
Basic weighted average number of common shares | |
| 4,242 | | |
| 4,165 | | |
| 4,227 | | |
| 4,119 | |
Potential dilutive effect of stock-based awards | |
| - | | |
| - | | |
| - | | |
| - | |
Diluted weighted average number of common shares | |
| 4,242 | | |
| 4,165 | | |
| 4,227 | | |
| 4,119 | |
The
Company’s Series B Convertible Preferred Stock, on an as converted basis into common stock of 7,833,334 shares for the three- and
nine-months ended September 30, 2022, 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):
SCHEDULE OF ANTI-DILUTIVE SECURITIES EXCLUDED FROM COMPUTATION OF EARNINGS PER SHARE
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months | | |
Nine Months Ended | |
| |
Ended September 30, | | |
Ended September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(unaudited) | | |
(unaudited) | |
Options | |
| 578 | | |
| 684 | | |
| 578 | | |
| 684 | |
Restricted stock units (RSUs) | |
| 340 | | |
| 366 | | |
| 340 | | |
| 366 | |
Warrants | |
| 54 | | |
| 1,405 | | |
| 54 | | |
| 1,405 | |
Antidilutive
securities excluded from computation of earnings per share | |
| 972 | | |
| 2,455 | | |
| 972 | | |
| 2,455 | |
6. |
GOODWILL AND OTHER INTANGIBLE
ASSETS |
Goodwill
was attributable to the acquisition of our Pharma Solutions business in July 2019. The original 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 recorded upon acquisition. With the sale of Pharma Solutions, the goodwill balance at September 30, 2022 was written down to zero
as well as the intangible assets associated with the original acquisition. The net carrying value of the identifiable intangible
assets from all acquisitions within continuing operations as of September 30, 2022 and December 31, 2021 are as follows:
SCHEDULE OF IDENTIFIABLE INTANGIBLE ASSETS CARRYING VALUE
| |
| | |
As of September 30, 2022 | | |
As of December 31, 2021 | |
| |
Life | | |
Carrying | | |
Carrying | |
| |
(Years) | | |
Amount | | |
Amount | |
| |
| | | |
| (unaudited) | | |
| | |
Asuragen acquisition: | |
| | | |
| | | |
| | |
Thyroid | |
| 9 | | |
$ | 8,519 | | |
$ | 8,519 | |
RedPath acquisition: | |
| | | |
| | | |
| | |
Pancreas test | |
| 7 | | |
| 16,141 | | |
| 16,141 | |
Barrett’s test | |
| 9 | | |
| 6,682 | | |
| 6,682 | |
| |
| | | |
| | | |
| | |
CLIA Lab | |
| 2.3 | | |
| 609 | | |
| 609 | |
| |
| | | |
| | | |
| | |
Total | |
| | | |
$ | 31,951 | | |
$ | 31,951 | |
| |
| | | |
| | | |
| | |
Accumulated Amortization | |
| | | |
| (30,772 | ) | |
| (29,819 | ) |
| |
| | | |
| | | |
| | |
Net Carrying Value | |
| | | |
$ | 1,179 | | |
$ | 2,132 | |
Amortization
expense from continuing operations was approximately $0.3 million and $0.9 million for the three-month periods ended September 30,
2022 and 2021, and $1.0 million and $2.7 million for the nine-month periods ended September 30, 2022 and 2021, respectively.
Estimated future amortization expense for the remainder of 2022 and thereafter is as follows:
SCHEDULE OF FUTURE ESTIMATED AMORTIZATION EXPENSE
2022 | | |
2023 | | |
2024 | | |
2025 | | |
2026 | | |
Total | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
$ | 318 | | |
$ | 861 | | |
$ | - | | |
$ | - | | |
$ | - | | |
$ | 1,179 | |
The
following table displays a roll forward of the carrying amount of goodwill from December 31, 2021 to September 30, 2022:
SCHEDULE OF GOODWILL CARRYING VALUE
| |
Carrying | |
| |
Amount | |
Balance as of December 31, 2021 | |
$ | 8,433 | |
Impairment from sale of Pharma Solutions Business | |
| (8,433 | ) |
Balance as of September 30, 2022 | |
$ | - | |
7. |
FAIR VALUE MEASUREMENTS |
Cash
and cash equivalents, accounts receivable and accounts payable approximate fair value due to their relative short-term nature. The Company’s
financial liabilities reflected at fair value in the condensed consolidated financial statements include contingent consideration, warrant
liability and note payable. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including
market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants
would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation
techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used
in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy
ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
|
Level
1: |
Valuations
for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical
assets or liabilities. |
|
Level
2: |
Valuations
for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services
for identical or similar assets or liabilities. |
|
|
|
|
Level
3: |
Valuations
incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. |
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:
SCHEDULE OF FINANCIAL INSTRUMENT MEASURED ON RECURRING BASIS
| |
As of September 30, 2022 | | |
Fair Value Measurements | |
| |
Carrying | | |
Fair | | |
As of September 30, 2022 | |
| |
Amount | | |
Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| |
| | |
| | |
(unaudited) | | |
| | |
| |
Liabilities: | |
| | |
| | |
| | |
| | |
| |
Contingent consideration: | |
| | | |
| | | |
| | | |
| | | |
| | |
Asuragen (1) | |
$ | 1,141 | | |
$ | 1,141 | | |
$ | - | | |
$ | - | | |
$ | 1,141 | |
Other accrued expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrant liability (2) | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | |
Note payable: | |
| | | |
| | | |
| | | |
| | | |
| | |
BroadOak loan | |
| 9,988 | | |
| 9,988 | | |
| - | | |
| - | | |
| 9,988 | |
| |
$ | 11,129 | | |
$ | 11,129 | | |
$ | - | | |
$ | - | | |
$ | 11,129 | |
(1)(2) |
See
Note 10, Accrued Expenses and Long-Term Liabilities |
(1) |
See
Note 10, Accrued Expenses and Long-Term Liabilities |
(2) |
See
Note 10, Accrued Expenses and Long-Term Liabilities |
| |
As of December 31, 2021 | | |
Fair Value Measurements | |
| |
Carrying | | |
Fair | | |
As of December 31, 2021 | |
| |
Amount | | |
Value | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
Liabilities: | |
| | |
| | |
| | |
| | |
| |
Contingent consideration: | |
| | | |
| | | |
| | | |
| | | |
| | |
Asuragen (1) | |
$ | 1,871 | | |
$ | 1,871 | | |
$ | - | | |
$ | - | | |
$ | 1,871 | |
Other accrued expenses: | |
| | | |
| | | |
| | | |
| | | |
| | |
Warrant liability (2) | |
| 71 | | |
| 71 | | |
| - | | |
| - | | |
| 71 | |
Note payable: | |
| | | |
| | | |
| | | |
| | | |
| | |
BroadOak loan | |
| 7,942 | | |
| 7,942 | | |
| - | | |
| - | | |
| 7,942 | |
| |
$ | 9,884 | | |
$ | 9,884 | | |
$ | - | | |
$ | - | | |
$ | 9,884 | |
(1)(2) |
See
Note 10, Accrued Expenses and Long-Term Liabilities |
(1) |
See
Note 9, Accrued Expenses and Long-Term Liabilities |
(2) |
See
Note 9, Accrued Expenses and Long-Term Liabilities |
In
connection with the acquisition of certain assets from Asuragen, Inc., the Company recorded contingent consideration related to contingent
payments and other revenue-based payments. The Company determined the fair value of the contingent consideration based on a probability-weighted
income approach derived from revenue estimates. The fair value measurement is based on significant inputs not observable in the market
and thus represents a Level 3 measurement.
In
connection with the BroadOak loan, the Company records the loan at fair value. The fair value of the loan is determined by a probability-weighted
approach regarding the loan’s change in control feature. See Note 14, Notes Payable, for more details. The fair value measurement
is based on the estimated probability of a change in control and thus represents a Level 3 measurement.
A
roll forward of the carrying value of the Contingent Consideration Liability, 2017 Underwriters’ Warrants and BroadOak loans to
September 30, 2022 is as follows:
SCHEDULE OF FAIR VALUE, ASSETS MEASURED ON RECURRING BASIS, UNOBSERVABLE INPUT RECONCILIATION
| |
December
31, 2021 | | |
Issued | | |
Reclassified | | |
Earned | | |
Accretion/Interest
Accrued | | |
Adjustment to
Fair Value/ Mark
to Market | | |
September
30, 2022 | |
| |
(unaudited) | |
Asuragen | |
$ | 1,871 | | |
$ | - | | |
$ | - | | |
$ | (542 | ) | |
$ | 123 | | |
$ | (311 | ) | |
$ | 1,141 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Underwriters
Warrants | |
| 71 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (71 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BroadOak
loans | |
| 7,942 | | |
| - | | |
| 2,000 | | |
| - | | |
| - | | |
| 46 | | |
| 9,988 | |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
BroadOak
Convertible Note | |
| - | | |
| 2,000 | | |
| (2,000 | ) | |
| - | | |
| - | | |
| - | | |
| - | |
| |
$ | 9,884 | | |
$ | 2,000 | | |
$ | - | | |
$ | (542 | ) | |
$ | 123 | | |
$ | (336 | ) | |
$ | 11,129 | |
Certain
of the Company’s non-financial assets, such as other intangible assets, are measured at fair value on a nonrecurring basis when
there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.
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:
SCHEDULE OF FINANCING AND OPERATING LEASES
| |
Classification on the Balance Sheet | |
September 30, 2022 | |
| |
| |
| (unaudited)
| |
Assets | |
| |
| | |
Financing lease assets | |
Property and equipment, net | |
$ | - | |
Operating lease assets | |
Operating lease right of use assets | |
| 867 | |
Total lease assets | |
| |
$ | 867 | |
| |
| |
| | |
Liabilities | |
| |
| | |
Current | |
| |
| | |
Financing lease liabilities | |
Other accrued expenses | |
$ | - | |
Operating lease liabilities | |
Other accrued expenses | |
| 668 | |
Total current lease liabilities | |
| |
$ | 668 | |
Noncurrent | |
| |
| | |
Financing lease liabilities | |
Other long-term liabilities | |
| - | |
Operating lease liabilities | |
Operating lease liabilities, net of current portion | |
| 184 | |
Total long-term lease liabilities | |
| |
| 184 | |
Total lease liabilities | |
| |
$ | 852 | |
The
weighted average remaining lease term for the Company’s operating leases was 1.3 years as of September 30, 2022 and the weighted
average discount rate for those leases was 7.7%. The Company’s operating lease expenses are recorded within “Cost of revenue”
and “General and administrative expenses.”
The
table below reconciles the cash flows to the lease liabilities recorded on the Company’s Condensed Consolidated Balance Sheet as
of September 30, 2022:
SCHEDULE OF MATURITIES OF OPERATING LEASE LIABILITIES
| |
Operating Leases | |
2022 | |
$ | 208 | |
2023 | |
| 557 | |
2024 | |
| 125 | |
Total minimum lease payments | |
| 890 | |
Less: amount of lease payments representing effects of discounting | |
| 38 | |
Present value of future minimum lease payments | |
| 852 | |
Less: current obligations under leases | |
| 668 | |
Long-term lease obligations | |
$ | 184 | |
On
October 31, 2022, the Company entered into a fourth lease amendment with its Pittsburgh laboratory landlord. See Note 20, Subsequent
Events, for more detail.
9. |
COMMITMENTS
AND CONTINGENCIES |
Litigation
From
time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is probable that a
loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for the loss. In addition
to the estimated loss, the recorded liability includes probable and estimable legal costs associated with the claim or potential claim.
Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may
harm the Company’s business. There is no pending litigation involving the Company at this time.
Due
to the nature of the businesses in which the Company is engaged, it is subject to certain risks. Such risks include, among others, risk
of liability for personal injury or death to persons using products or services that the Company promotes or commercializes. There can
be no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company’s business
activities. There is also the risk of employment related litigation and other litigation in the ordinary course of business.
The
Company could also be held liable for errors and omissions of its employees in connection with the services it performs that are outside
the scope of any indemnity or insurance policy. The Company could be materially adversely affected if it were required to pay damages
or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; if the indemnity, although
applicable, is not performed in accordance with its terms; or if the Company’s liability exceeds the amount of applicable insurance
or indemnity.
10. |
ACCRUED
EXPENSES AND LONG-TERM LIABILITIES |
Other
accrued expenses consisted of the following as of September 30, 2022 and December 31, 2021:
SCHEDULE OF OTHER ACCRUED EXPENSES
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
| (unaudited) | | |
| | |
Accrued royalties | |
$ | 4,675 | | |
$ | 3,890 | |
Contingent consideration | |
| 509 | | |
| 488 | |
Operating lease liability | |
| 668 | | |
| 762 | |
Interest payable | |
| 122 | | |
| 120 | |
Warrant liability | |
| - | | |
| 71 | |
Accrued sales and marketing - diagnostics | |
| 47 | | |
| 47 | |
Accrued lab costs - diagnostics | |
| 136 | | |
| 228 | |
Accrued professional fees | |
| 699 | | |
| 932 | |
Taxes payable | |
| 85 | | |
| 222 | |
Unclaimed property | |
| 565 | | |
| 565 | |
All others | |
| 869 | | |
| 1,137 | |
Total other accrued expenses | |
$ | 8,375 | | |
$ | 8,462 | |
Long-term
liabilities consisted of the following as of September 30, 2022 and December 31, 2021:
SCHEDULE OF LONG TERM LIABILITIES
| |
September 30, 2022 | | |
December 31, 2021 | |
| |
(unaudited) | | |
| |
Uncertain tax positions | |
$ | 4,736 | | |
$ | 4,577 | |
Other | |
| - | | |
| - | |
Total other long-term liabilities | |
$ | 4,736 | | |
$ | 4,577 | |
11. |
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, with expiration
10 years from the date they are granted, and generally vest 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
Board members and employees 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 nine-month periods ended September 30, 2022 and 2021.
SCHEDULE OF STOCK OPTIONS, VALUATION ASSUMPTIONS
| |
September 30, 2022 | | |
September 30, 2021 | |
| |
(unaudited) | |
Risk-free interest rate | |
| 1.76 | % | |
| 0.78 | % |
Expected life | |
| 6.0 years | | |
| 6.0 years | |
Expected volatility | |
| 129.93 | % | |
| 134.79 | % |
Dividend yield | |
| - | | |
| - | |
During
March 2021, the Company granted 312,500 stock options with an exercise price of $6.00 and 152,500 RSUs. The market value of the Company’s
common stock was $5.00 at the grant date of these awards. The Company recognized approximately $0.5 million and $0.4 million of stock-based
compensation expense within continuing operations during the three-month periods ended September 30, 2022 and 2021, respectively and
approximately $1.1 million and $1.1 million of stock-based compensation expense during the nine-month periods ended September 30, 2022
and 2021, respectively. The following table has a breakout of stock-based compensation expense from continuing operations by line item.
SCHEDULE OF SHARE-BASED COMPENSATION ARRANGEMENTS BY SHARE-BASED PAYMENT AWARD
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30 | | |
September 30 | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(unaudited) | | |
(unaudited) | |
Cost of revenue | |
$ | 19 | | |
$ | 52 | | |
$ | 67 | | |
$ | 220 | |
Sales and marketing | |
| 42 | | |
| 76 | | |
| 128 | | |
| 201 | |
Research and development | |
| - | | |
| 24 | | |
| - | | |
| 83 | |
General and administrative* | |
| 440 | | |
| 276 | | |
| 915 | | |
| 635 | |
Total stock compensation expense | |
$ | 501 | | |
$ | 428 | | |
$ | 1,110 | | |
$ | 1,139 | |
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- and nine-month periods ended September 30, 2022 and 2021:
SCHEDULE OF EFFECTIVE INCOME TAX RATE
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
Three Months Ended | | |
Nine Months Ended | |
| |
September 30 | | |
September 30 | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
(unaudited) | | |
(unaudited) | |
| |
| | |
| | |
| | |
| |
Provision (benefit) for income tax | |
$ | (11 | ) | |
$ | (714 | ) | |
$ | 24 | | |
$ | (684 | ) |
Effective income tax rate | |
| 0.9 | % | |
| 35.1 | % | |
| (0.5 | )% | |
| 11.4 | % |
Income
tax benefit for the three months ended September 30, 2022 was primarily due to the reversal of certain credits as a result of the
Pharma Solutions sale and income tax expense for the nine-month period ended September 30, 2022 was primarily due to minimum state
and local taxes. The income tax benefit for both the three- and nine-month periods ended September 30, 2021 was due to the
Company’s participation in the State of New Jersey’s Technology Business Tax Certificate Transfer Program (the
“Program”) sponsored by The New Jersey Economic Development Authority. The Program enables approved biotechnology
companies with unused net operating losses (“NOLs”) and unused research and development credits to sell these benefits
for at least 80%
of the value of the tax benefits to unaffiliated, profitable corporate taxpayers in the State of New Jersey. The Program is
administered by The New Jersey Economic Development Authority and the New Jersey Department of the Treasury’s Division of
Taxation. In July 2021, the Company completed the sale of NOLs totaling approximately $0.7
million.
We
operate under one segment which is the business of developing and selling clinical services.
BroadOak
Loan
On
October 29, 2021, the Company and its subsidiaries entered into the BroadOak Loan Agreement, providing for a term loan in the aggregate
principal amount of $8,000,000 (the “Term Loan”). Funding of the Term Loan took place on November 1, 2021. The Term Loan
matures upon the earlier of (i) October 31, 2024 or (ii) the occurrence of a change in control, and bears interest at the rate of 9%
per annum. The Term Loan is secured by a security interest in substantially all of the Company’s and its subsidiaries’ assets
and is subordinate to the Company’s $7,500,000 revolving credit facility with Comerica Bank. See Note 18, Revolving Line of
Credit. The Term Loan had an origination fee of 3% of the Term Loan amount, and a terminal payment equal to (i) 15% of the original
principal amount of the Term Loan if the change of control occurs on or prior to the first anniversary of the funding of the Term Loan,
(ii) 20% of the original principal amount of the Term Loan if the change of control occurs after the first anniversary but on or prior
to the second anniversary of the funding of the Term Loan and (iii) 30% of the original principal amount of the Term Loan if the change
of control occurs after the second anniversary of the funding of the Term Loan, or if the Term Loan is repaid on its maturity date.
The
BroadOak Loan Agreement contains affirmative and negative restrictive covenants that are applicable from and after the date of the Term
Loan advance. These restrictive covenants, which include restrictions on certain mergers, acquisitions, investments, encumbrances, etc.,
could adversely affect our ability to conduct our business. The BroadOak Loan Agreement also contains customary events of default.
In
connection with the BroadOak Loan Agreement, the Company and its subsidiaries entered into that certain First Amendment to Loan and Security
Agreement and Consent with Comerica, dated as of November 1, 2021 (the “Comerica Amendment”), pursuant to which Comerica
consented to the Company’s and its subsidiaries’ entry into the BroadOak Loan Agreement, and amended that certain Loan and
Security Agreement among Comerica, the Company and its subsidiaries (the “Comerica Loan Agreement”) to, among other things,
permit the indebtedness, liens and encumbrances contemplated by the BroadOak Loan Agreement.
As
a condition for BroadOak to extend the Term Loan to the Company and its subsidiaries, the Company’s existing creditor, Comerica,
and BroadOak entered into that certain Subordination and Intercreditor Agreement, dated as of November 1, 2021, pursuant to which BroadOak
agreed to subordinate all of the indebtedness and obligations of the Company and its subsidiaries owing to BroadOak to all of the indebtedness
and obligations of the Company and its subsidiaries owing to Comerica (the “Intercreditor Agreement”). BroadOak further agreed
to subordinate all of its respective security interests in assets or property of the Company and its subsidiaries to Comerica’s
security interests in such assets or property. The Intercreditor Agreement provides that it is solely for the benefit of BroadOak and
Comerica and is not for the benefit of the Company or any of its subsidiaries.
The
Company concluded that the Note met the definition of a “recognized financial liability” which is an acceptable financial
instrument eligible for the fair value option under ASC 825-10-15-4, and did not meet the definition of any of the financial instruments
listed within ASC 825-10-15-5 that are not eligible for the fair value option. The Note is not convertible and does not have any component
recorded to shareholders’ equity. Accordingly, the Company elected the fair value option for the Note.
BroadOak
Convertible Note
On
May 5, 2022, the Company issued the Convertible Note to BroadOak, pursuant to which BroadOak funded a term loan in the aggregate principal
amount of $2 million (the “Convertible Debt”). The Company is using the proceeds of the Convertible Debt for general corporate
purposes and working capital.
The
Convertible Note was to be converted into shares of common stock of the Company in connection with, and upon the consummation of, a private
placement transaction pursuant to which the Company would issue common stock to certain investors, and such conversion would be subject
to the same terms and conditions (including purchase price per share) applicable to the purchase of common stock of the Company by such
investors. Since the private placement transaction was not consummated by August 5, 2022 (the “Maturity Date”), the Convertible
Note was converted into an additional term loan advance under the Company’s existing BroadOak Loan Agreement on the Maturity Date
and was thereafter subject to the terms of the definitive financing agreements for the BroadOak Loan Agreement until repaid in accordance
with the terms thereof. The Convertible Debt bears interest at a fixed rate of interest equal to 9.0% per annum and is unsecured. There
are no scheduled amortization payments prior to the Maturity Date. The Convertible Note contains customary representations and warranties
and customary events of default. On August 5, 2022, the Convertible Note was converted into a subordinated term loan and was added to
the outstanding BroadOak Loan balance discussed above.
In
connection with the issuance of the Convertible Note, on May 5, 2022, the Company and its subsidiaries entered into a) a consent letter
(the “Comerica Consent”) with Comerica, pursuant to which Comerica consented to the issuance of the Convertible Note, the
incurrence of the Convertible Debt and the conversion of the Convertible Debt into common stock of the Company or an additional term
loan advance under the BroadOak Loan Agreement in accordance with the terms of the Convertible Note, and b) a First Amendment to Loan
and Security Agreement and Consent (the “BroadOak Amendment”) with BroadOak, pursuant to which, among other things, BroadOak
consented to the issuance of the Convertible Note, the incurrence of the Convertible Debt and the conversion of the Convertible Debt
into common stock of the Company or an additional term loan advance under the BroadOak Loan Agreement in accordance with the terms of
the Convertible Note.
The
Convertible Debt is subordinated in right of payment to all of the indebtedness and obligations of the Company owing to Comerica under
the Company’s existing senior secured credit facility with Comerica. In connection with the issuance of the Convertible Note, on
May 5, 2022, the Company, BroadOak and Comerica entered into a First Amendment to Subordination and Intercreditor Agreement (the “Intercreditor
Amendment”), pursuant to which, among other things, BroadOak agreed that the Convertible Debt is subordinated to all of the indebtedness
and obligations of the Company owing to Comerica on the same terms and conditions applicable to the indebtedness and obligations of the
Company under the BroadOak Loan Agreement.
Related
Party Secured Promissory Note
On
January 7, 2021, the Company entered into secured promissory notes in the amount of $3 million and $2 million with Ampersand and 1315
Capital, respectively. On May 10, 2021, the Company amended the Ampersand Note to increase the principal amount to $4.5 million and amended
the 1315 Capital Note to increase the principal amount to $3.0 million. The maturity dates of the Notes were the earlier of (a) June
30, 2021 and (b) the date on which all amounts become due upon the occurrence of any event of default as defined in the Notes. On June
24, 2021, the Company and Ampersand amended the Ampersand Note to change its maturity date to the earlier of (a) August 31, 2021 and
(b) the date on which all amounts become due upon the occurrence of any event of default as defined in the Ampersand Note. On June 25,
2021, the Company and 1315 Capital amended the 1315 Capital Note to change its maturity date in a similar manner. On August 31, 2021,
the Company and Ampersand amended the Ampersand Note to change its maturity date to the earlier of (a) September 30, 2021 and (b) the
date on which all amounts become due upon the occurrence of any event of default as defined in the Ampersand Note. On August 31, 2021,
the Company and 1315 Capital amended the 1315 Capital Note to change its maturity date in a similar manner.
On
September 29, 2021, the Company and Ampersand amended the Ampersand Note to change its maturity date to the earlier of (a) October 31,
2021 and (b) the date on which all amounts become due upon the occurrence of any event of default as defined in the Ampersand Note. On
September 29, 2021, the Company and 1315 Capital amended the 1315 Capital Note to change its maturity date in a similar manner. The Company
used the proceeds of the BroadOak Term Loan discussed above to repay in full at their maturity all outstanding indebtedness under the
promissory notes with Ampersand, dated January 7, 2021 and as last amended on September 29, 2021, in the amount of $4.5 million, and
1315 Capital, dated January 7, 2021 and as last amended on September 29, 2021, in the amount of $3 million, respectively.
15.
|
SUPPLEMENTAL
CASH FLOW INFORMATION |
Supplemental
Disclosures of Non Cash Activities
(in
thousands)
SUPPLEMENTAL CASH FLOW INFORMATION
| |
2022 | | |
2021 | |
| |
Nine Months Ended | |
| |
September
30, | |
| |
2022 | | |
2021 | |
| |
| |
Taxes
accrued for treasury stock purchased | |
$ | 66 | | |
$ | - | |
| |
| | | |
| | |
Investment
in DiamiR | |
$ | - | | |
$ | 248 | |
Purchase
of property and equipment included in accounts payable | |
$ | 108 | | |
$ | - | |
Transaction
costs from the sale of Pharma Solutions included in accounts payable
| |
$ | 137 | | |
$ | - | |
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 and Ampersand (collectively, the “Investors”) pursuant to which the Company agreed to
sell to the Investors an aggregate of $20.0 million in Series B Preferred Stock of the Company, at an issuance price per share of $1,000.
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.
In
April 2020, the Company entered into support agreements with each of the Series B Investors, pursuant to which Ampersand and 1315 Capital,
respectively, consented to, and agreed to vote (by proxy or otherwise), all shares of Series B Preferred Stock registered in its name
or beneficially owned by it and/or over which it exercises voting control as of the date of the Support Agreement and any other shares
of Series B Preferred Stock legally or beneficially held or acquired by such Series B Investor after the date of the Support Agreement
or over which it exercises voting control, in favor of any Fundamental Action desired to be taken by the Company as determined by the
Board. For purposes of each Support Agreement, “Fundamental Action” means any action proposed to be taken by the Company
and set forth in Section 4(d)(i), 4(d)(ii), 4(d)(v), 4(d)(vi), 4(d)(viii) or 4(d)(ix) of the Certificate of Designation of Series B Preferred
Stock or Section 8.5.1.1, 8.5.1.2, 8.5.1.5, 8.5.1.6, 8.5.1.8 or 8.5.1.9 of the Amended and Restated Investor Rights Agreement. The support
agreement between the Company and Ampersand was terminated by mutual agreement on July 9, 2020; however, the support agreement entered
into with 1315 Capital remains in effect. During October 2021, Ampersand and 1315 Capital provided consent to the Company to enter into
the Comerica Loan Agreement and the BroadOak Term Loan.
As
of September 30, 2022 and December 31, 2021, there were 47,000 Series B issued and outstanding shares of preferred stock, respectively.
Warrants
outstanding and warrant activity for the nine-months ended September 30, 2022 are as follows:
SCHEDULE OF WARRANTS OUTSTANDING AND WARRANTS ACTIVITY
Description | |
Classification | |
Exercise
Price | | |
Expiration Date | |
Warrants
Issued | | |
Balance
December 31, 2021 | | |
Warrants
Exercised | | |
Warrants
Cancelled/ Expired | | |
Balance
September 30, 2022 | |
| |
| |
| | |
| |
| | |
| | |
| | |
| | |
| |
Private Placement Warrants, issued January 25,
2017 | |
Equity | |
$ | 46.90 | | |
June
2022 | |
| 85,500 | | |
| 85,500 | | |
| - | | |
| (85,500 | ) | |
| - | |
RedPathWarrants, 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 | | |
| 53,500 | | |
| - | | |
| - | | |
| 53,500 | |
Base & Overallotment Warrants, issued June 21, 2017 | |
Equity | |
$ | 12.50 | | |
June
2022 | |
| 1,437,500 | | |
| 870,214 | | |
| (9 | ) | |
| (870,205 | ) | |
| - | |
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 | ) | |
| - | |
| |
| |
| | | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
| |
| |
| | | |
| |
| 1,975,934 | | |
| 1,404,648 | | |
| (9 | ) | |
| (1,351,139 | ) | |
| 53,500 | |
As
of September 30, 2022, the weighted average exercise price of the outstanding warrants is $13.20 and the weighted average remaining contractual
life is approximately 0.2 years.
18. |
REVOLVING
LINE OF CREDIT |
On
October 13, 2021, the Company and its subsidiaries entered into the Comerica Loan Agreement with Comerica, providing for a revolving
credit facility of up to $7,500,000 (the “Credit Facility”). The Company may use the proceeds of the Credit Facility for
working capital and other general corporate purposes.
The
amount that may be borrowed under the Credit Facility is the lower of (i) the revolving limit of $7,500,000 (the “Revolving Line”)
and (ii) 80% of the Company’s eligible accounts receivable plus an applicable non-formula amount consisting of $2,000,000 of additional
availability at close not based upon the Company’s eligible accounts receivable, with such additional availability reducing by
$250,000 per quarter beginning with the quarter ending June 30, 2022. Borrowings on the Credit Facility are limited to $5,000,000 until
80% of the Company’s and its subsidiaries’ customers are paying into a collection account or segregated governmental account
with Comerica. The Revolving Line can also include, at the Company’s option, credit card services with a sublimit of $300,000.
Borrowings on the Revolving Line are subject to an interest rate equal to prime plus 0.50%, with prime being the greater of (x) Comerica’s
stated prime rate or (y) the sum of (A) the daily adjusting LIBOR rate plus (B) 2.5% per annum. The Company is also required to pay an
unused facility fee quarterly in arrears in an amount equal to 0.25% per annum on the average unused but available portion of the Revolving
Line for such quarter.
The
Credit Facility matures on September 30, 2023, and is secured by a first priority lien on substantially all of the assets of the Company
and its subsidiaries. As of September 30, 2022, the balance of the revolving line was $2.5 million.
The
Comerica Loan Agreement contains affirmative and negative restrictive covenants that are applicable whether or not any amounts are outstanding
under the Comerica Loan Agreement. These restrictive covenants, which include restrictions on certain mergers, acquisitions, investments,
encumbrances, etc., could adversely affect our ability to conduct our business. The Comerica Loan Agreement also contains financial covenants
requiring specified minimum liquidity and minimum revenue thresholds, which the Company was in compliance with as of September 30, 2022,
and also contains customary events of default. In April 2022, Comerica waived certain covenants specifically relating to the Company
receiving financial statements with a going concern comment or qualification. In April 2022 and August 2022, Comerica waived certain
covenants specifically relating to failure to maintain bank accounts outside of Comerica in an aggregate amount not to exceed $0.5 million
during the transition period. Additionally, in August 2022, Comerica waived certain covenants relating to failure to segregate collections
made from government account debtors from collections made from all other account debtors and customers.
As
a condition for Comerica to extend the Credit Facility to the Company and its subsidiaries, the Company’s existing creditors, Ampersand
and 1315 Capital (the “Existing Creditors”), entered into that certain Subordination Agreement, dated as of October 13, 2021,
pursuant to which each Existing Creditor agreed to subordinate all of the indebtedness and obligations of the Company and its subsidiaries
owing to such Existing Creditor to all of the indebtedness and obligations of the Company and its subsidiaries owing to Comerica (the
“Subordination Agreement”). Each Existing Creditor further agreed to subordinate all of its respective security interests
in assets or property of the Company and its subsidiaries to Comerica’s security interests in such assets or property. The Subordination
Agreement provides that it is solely for the benefit of Comerica and each of the Existing Creditors and is not for the benefit of the
Company or any of its subsidiaries.
19. |
RECENT
ACCOUNTING STANDARDS |
Accounting
Pronouncements Pending Adoption
In
February 2020, the FASB issued ASU 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) - Amendments to SEC
Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 119 and Update to SEC Section on Effective Date Related to Accounting Standards
Update No. 2016-02, Leases (Topic 842) which amends the effective date of the original pronouncement for smaller reporting companies.
ASU 2016-13 and its amendments will be effective for the Company for interim and annual periods in fiscal years beginning after December
15, 2022. The Company believes the adoption will modify the way the Company analyzes financial instruments, but it does not anticipate
a material impact on results of operations. The Company is in the process of determining the effects adoption will have on its consolidated
financial statements.
In
August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging
– Contracts in Entity’s Own Equity (Subtopic 815 – 40), (“ASU 2020-06”). ASU 2020-06 simplifies the accounting
for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on
an entity’s own equity. The ASU 2020-06 amendments are effective for fiscal years beginning after December 15, 2023, and interim
periods within those fiscal years. Early adoption is permitted. The Company does not expect this will have any impact on its consolidated
financial statements.
Extension
of Pittsburgh Lease
On
October 31, 2022, the Company entered into a fourth amendment (the “Amendment”) to its existing Pittsburgh laboratory lease
(the “Lease”) for 20,000 leasable square feet of space located at 2515 Liberty Avenue, Pittsburgh, Pennsylvania with Saddle
Lane Realty, LLC (the “Landlord”) to exercise the Company’s first option and right to extend the term of the Lease
to June 30, 2028. The Lease was entered into on March 31, 2017, and was previously amended on September 26, 2017, March 15, 2018 and
February 22, 2019. Total minimum rent payments during this extended term equal $550,000 per year. In addition, the Amendment contains
a conditional tenant rent credit clause whereby if the Company completes certain tenant renovations on or before July 31, 2024 and such
renovations exceed $250,000, the Landlord will provide a tenant improvement allowance equal to $200,000 to be credited against rent in
twenty-four monthly installments of $8,333 commencing on the month following the date the Company provides evidence of such tenant improvements.
The Amendment also grants the Company a right of first refusal under certain circumstances to an additional 4,632 leasable square feet
of space.
INTERPACE
BIOSCIENCES, INC