FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q contains "forward-looking statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Statements that are not historical facts,
including statements about our plans, objectives, beliefs and expectations, are
forward-looking statements. Forward-looking statements include statements
preceded by, followed by or that include the words "believes," "expects,"
"anticipates," "plans," "estimates," "intends," "projects," "should," "could,"
"may," "will" or similar words and expressions. These forward-looking statements
are contained throughout this Form 10-Q.
Forward-looking statements are only predictions and are not guarantees of future
performance. These statements are based on current expectations and assumptions
involving judgments about, among other things, future economic, competitive and
market conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control. These
predictions are also affected by known and unknown risks, uncertainties and
other factors that may cause our actual results to be materially different from
those expressed or implied by any forward-looking statement. Many of these
factors are beyond our ability to control or predict. Our actual results could
differ materially from the results contemplated by these forward-looking
statements due to a number of factors. Such factors include, but are not limited
to, the following:
? the effect of the Coronavirus (COVID-19) pandemic which has materially and
adversely affected our business and financial results, particularly during
portions of 2020, due to the slowdown in demand for our clinical services, a
reduction in samples received and testing volume and delayed third party
collections and other factors and which may continue to have an adverse effect
on our future business;
? our expectations of future revenues, expenditures, capital or other funding
requirements;
? our ability to continue to perform, bill and receive reimbursement for our
PancraGEN molecular test under the existing LCD, given that such LCD is
currently under review by Novitas, the Company's Medicare administrative
contractor;
? our secured lenders have the right to foreclose on substantially all of our
assets if we are unable to timely repay our outstanding obligations;
? our dependence on sales and reimbursements from our clinical services for all
of our revenue; the ability to continue to generate sufficient revenue from
these and other products and/or solutions that we develop in the future is
important for our ability to meet our financial and other targets;
? our revenue recognition is based, in part, on our estimates for future
collections which may prove to be incorrect with the changes in reimbursement
rates for ThyGeNEXT® by Medicare causing us to revise our NRV's which will
reduce revenues in future periods;
? our ability to finance our business on acceptable terms in the future, which
may limit the ability to grow our business, develop and commercialize products
and services, develop and commercialize new molecular clinical service
solutions and technologies;
? our obligations to make royalty and milestone payments to our licensors;
? our dependence on third parties for the supply of some of the materials used
in our clinical services tests;
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? the potential adverse impact of current and future laws, licensing
requirements and governmental regulations upon our business operations,
including but not limited to the evolving U.S. regulatory environment related
to laboratory developed tests ("LDTs"), pricing of our tests and services and
patient access limitations;
? our reliance on our sales and marketing activities for future business growth
and our ability to continue to expand our sales and marketing activities;
? our being subject to the controlling interests of our two private equity
investors who control, on an as-converted basis, an aggregate of 65% of our
outstanding shares of common stock through their holdings of our Series B
Preferred Stock, and this concentration of ownership along with their
authority for designation rights for a majority of our directors and their
right to approve certain of our actions has a substantial influence on our
decisions;
? our ability to implement our business strategy; and
? the potential impact of existing and future contingent liabilities on our
financial condition.
Please see Part I - Item 1A - "Risk Factors" in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2021 filed with the SEC on March 31,
2022, as well as other documents we file with the SEC from time-to-time, for
other important factors that could cause our actual results to differ materially
from our current expectations as expressed in the forward-looking statements
discussed in this Form 10-Q. Because of these and other risks, uncertainties and
assumptions, you should not place undue reliance on these forward-looking
statements. In addition, these statements speak only as of the date of the
report in which they are set forth and, except as may be required by law, we
undertake no obligation to revise or update publicly any forward-looking
statements for any reason.
OVERVIEW
We are a fully integrated commercial company that provides molecular
diagnostics, bioinformatics and pathology services for evaluation of risk of
cancer by leveraging the latest technology in personalized medicine for improved
patient diagnosis and management. We develop and commercialize genomic tests and
related first line assays principally focused on early detection of patients
with indeterminate biopsies and at high risk of cancer using the latest
technology.
Impact of Our Reliance on CMS and Novitas
In January 2022, CMS stated they would no longer reimburse for the use of the
Company's ThyGeNEXT® and ThyraMIR® tests when billed together by the same
provider/supplier for the same beneficiary on the same date of service. However,
on February 28, 2022, the Company announced that the National Correct Coding
Initiative (NCCI) program issued a response on behalf of CMS stating that the
January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and
ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. In
May 2022, the Company was notified by CMS/NCCI that processing of claims for
dates of service after January 1, 2022 would be completed beginning July 1,
2022. However, on June 9, 2022, the Company was notified that Novitas re-priced
ThyGeNEXT® (0245U) from $2,919 to $806.59 retroactively effective to January 1,
2022. On July 20, 2022 the Clinical Diagnostic Laboratory Tests (CDLT) Advisory
Panel affirmed a gapfill price of $806.59. As a result of the ThyGeNEXT® pricing
change, the Company reduced its NRV rates for ThyGeNEXT® Medicare billing to
reflect the $806.59 pricing for tests performed during the second quarter of
2022. In addition, in order to reflect the retroactive pricing change to January
1, 2022, the Company recorded an NRV adjustment of $0.7 million during the
second quarter of 2022 to reduce revenue recorded during the first quarter of
2022. The Company estimates the ThyGeNEXT® pricing change will negatively impact
Fiscal 2022 revenue by approximately $5.0 million. 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.
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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.
Impact of 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.
Impact of the ongoing military conflict between Russia and Ukraine.
In late February 2022, Russia invaded Ukraine, significantly amplifying already
existing geopolitical tensions among Russia and other countries in the region
and in the west, including the U.S. Russia's invasion, the responses of
countries and political bodies to Russia's actions, the larger overarching
tensions, and Ukraine's military response and the potential for wider conflict
have resulted in financial market volatility and capital markets disruption,
potentially increasing in magnitude, and could have severe adverse effects on
regional and global economic markets and international relations. The extent and
duration of the military action, sanctions and resulting market disruptions,
including inflation, are impossible to predict, but could be substantial.
Following Russia's actions, various countries, including the U.S., Canada and
the United Kingdom, as well as the European Union, issued broad-ranging economic
sanctions against Russia. Such sanctions included, among other things, a
prohibition on doing business with certain Russian companies, officials and
oligarchs; a commitment by certain countries and the European Union to remove
selected Russian banks from the Society for Worldwide Interbank Financial
Telecommunications (SWIFT) electronic banking network that connects banks
globally; a ban on Russian oil and gas imports to the U.S.; and restrictive
measures to prevent the Russian Central Bank from undermining the impact of the
sanctions. The current sanctions (and potential further sanctions in response to
continued Russian military activity) and other actions may have adverse effects
on regional and global economic markets and lead to instability and lack of
liquidity in capital markets, potentially making it more difficult for us to
obtain additional funds and increasing the volatility of our stock price. Any of
the abovementioned factors could affect our business, prospects, financial
condition, and operating results.
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We are also monitoring other macro-economic and geopolitical developments such
as inflation and cybersecurity risks so that the Company can be prepared to
react to new developments as they arise.
Revenue Recognition
Clinical services derive revenues from the performance of proprietary assays or
tests. Our performance obligation is fulfilled upon completion, review and
release of test results to the customer, at which time we bill third-party
payers or direct-bill payers for the tests performed. Under Accounting Standards
Codification 606, revenue is recognized based upon 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. To
the extent that the transaction price includes variable consideration, for all
third party and direct-bill payers and proprietary tests, we estimate the amount
of variable consideration that should be included in the transaction price using
the expected value method based on historical experience.
The ultimate amounts received from the third-party and direct-bill payers and
related estimated reimbursement rates are regularly reviewed and we 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 affects net revenue in the period such variances
become known.
Cost of Revenue
Cost of revenue consists primarily of the costs associated with operating our
laboratory and other costs directly related to our tests. Personnel costs, which
constitute the largest portion of cost of services, include all labor-related
costs, such as salaries, bonuses, fringe benefits and payroll taxes for
laboratory personnel. Other direct costs include, but are not limited to,
laboratory supplies, certain consulting expenses, royalty expenses, and facility
expenses.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of
operations data. The trends illustrated in this table may not be indicative of
future results.
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Consolidated Results of Continuing Operations for the Quarter Ended September
30, 2022 Compared to the Quarter Ended September 30, 2021 (in thousands)
Three Months Ended September 30,
2022 2022 2021 2021
% to % to
revenue revenue
Revenue, net $ 8,189 100.0 % $ 8,057 100.0 %
Cost of revenue 3,457 42.2 % 3,620 44.9 %
Gross profit 4,732 57.8 % 4,437 55.1 %
Operating expenses:
Sales and marketing 2,236 27.3 % 2,244 27.9 %
Research and development 191 2.3 % 322 4.0 %
General and administrative 2,767 33.8 % 2,566 31.8 %
Transition expense - 0.0 % 236 2.9 %
Acquisition related
amortization expense 318 3.9 % 894 11.1 %
Total operating expenses 5,512 67.3 % 6,262 77.7 %
Operating loss (780 ) -9.5 % (1,825 ) -22.7 %
Interest accretion expense (38 ) -0.5 % (106 ) -1.3 %
Related party interest - 0.0 % (151 ) -1.9 %
Note payable interest (230 ) -2.8 % - 0.0 %
Other (expense) income, net (217 ) -2.6 % 49 0.6 %
Loss from continuing
operations before tax (1,265 ) -15.4 % (2,033 ) -25.2 %
Benefit for income taxes (11 ) -0.1 % (714 ) -8.9 %
Loss from continuing
operations (1,254 ) -15.3 % (1,319 ) -16.4 %
Loss from discontinued
operations, net of tax (12,954 ) -158.2 % (2,242 ) -27.8 %
Net loss $ (14,208 ) -173.5 % $ (3,561 ) -44.2 %
Revenue, net
Revenue, net for the three months ended September 30, 2022 increased by $0.1
million, or 2%, to $8.2 million, compared to $8.1 million for the three months
ended September 30, 2021.
Cost of revenue
Cost of revenue for the three months ended September 30, 2022 was $3.5 million,
as compared to $3.6 million for the three months ended September 30, 2021. As a
percentage of revenue, cost of revenue was approximately 42% for the three
months ended September 30, 2022 and 45% for the three months ended September 30,
2021, the percentage decrease was due to the small decrease in costs for the
quarter.
Gross profit
Gross profit was approximately $4.7 million for the three months ended September
30, 2022 and $4.4 million for the three months ended September 30, 2021. The
gross profit percentage was approximately 58% for the three months ended
September 30, 3022 and 55% for the three months ended September 30, 2021.
Sales and marketing expense
Sales and marketing expense was approximately $2.2 million for both the three
months ended September 30, 2022 and the three months ended September 30, 2021.
As a percentage of revenue, sales and marketing expense decreased to 27% from
28% in the comparable prior year period due to the increase in revenue.
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Research and development
Research and development expense was $0.2 million for the three months ended
September 30, 2022 and $0.3 million for the three months ended September 30,
2021. As a percentage of revenue, research and development expense decreased to
2% from 4% in the comparable prior year period.
General and administrative
General and administrative expense was approximately $2.8 million for the three
months ended September 30, 2022 and $2.6 million for the three months ended
September 30, 2021. The increase can be primarily attributed to an increase in
employee compensation costs.
Transition expense
Transition expense was approximately $0.2 million for the three months ended
September 30, 2021. In 2021, these expenses were related to one-time corporate
expenses.
Acquisition amortization expense
During the three months ended September 30, 2022 and September 30, 2021, we
recorded amortization expense of approximately $0.3 million and $0.9 million,
respectively, which is related to intangible assets associated with prior
acquisitions.
Operating loss
Operating loss from continuing operations was $0.8 million for the three months
ended September 30, 2022 as compared to $1.8 million for the three months ended
September 30, 2021. The lower operating loss from continuing operations was
primarily attributable to the reduction in operating expenses.
Benefit for income taxes
The income tax benefit was approximately $11,000 for the three months ended
September 30, 2022 and $0.7 million for the three months ended September 30,
2021. 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. Income tax benefit for the three months ended September 30, 2021
primarily pertained to the Company's sale of net operating losses ("NOLs") of
approximately $0.7 million under the State of New Jersey's Technology Business
Tax Certificate Transfer Program.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $13.0 million for
the three months ended September 30, 2022 and a loss from discontinued
operations of approximately $2.2 million for the three months ended September
30, 2021. The loss from discontinued operations for the three months ended
September 30, 2022 included the impairment of Pharma Solutions assets.
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Consolidated Results of Continuing Operations for the Nine Months Ended
September 30, 2022 Compared to the Nine Months Ended September 30, 2021 (in
thousands)
Nine Months Ended September 30,
2022 2022 2021 2021
% to % to
revenue revenue
Revenue, net $ 23,506 100.0 % $ 24,006 100.0 %
Cost of revenue 10,286 43.8 % 10,205 42.5 %
Gross profit 13,220 56.2 % 13,801 57.5 %
Operating expenses:
Sales and marketing 6,987 29.7 % 6,931 28.9 %
Research and development 626 2.7 % 1,178 4.9 %
General and administrative 8,636 36.7 % 7,389 30.8 %
Transition expense - 0.0 % 897 3.7 %
Gain on DiamiR transaction - 0.0 % (235 ) -1.0 %
Acquisition related
amortization expense 953 4.1 % 2,682 11.2 %
Change in fair value of
contingent consideration (311 ) -1.3 % (57 ) -0.2 %
Total operating expenses 16,891 71.9 % 18,785 78.3 %
Operating loss (3,671 ) -15.6 % (4,984 ) -20.8 %
Interest accretion expense (123 ) -0.5 % (375 ) -1.6 %
Related party interest - 0.0 % (372 ) -1.5 %
Note payable interest (620 ) -2.6 % - 0.0 %
Other (expense) income, net (20 ) -0.1 % (248 ) -1.0 %
Loss from continuing
operations before tax (4,434 ) -18.9 % (5,979 ) -24.9 %
Provision (benefit) for
income taxes 24 0.1 % (684 ) -2.8 %
Loss from continuing
operations (4,458 ) -19.0 % (5,295 ) -22.1 %
Loss from discontinued
operations, net of tax (15,936 ) -67.8 % (5,919 ) -24.7 %
Net loss $ (20,394 ) -86.8 % $ (11,214 ) -46.7 %
Revenue, net
Revenue, net for the nine months ended September 30, 2022 decreased by $0.5
million, or 2%, to $23.5 million, compared to $24.0 million for the nine months
ended September 30, 2021. The decrease in net revenue was largely driven by the
NRV adjustment related to the Medicare pricing change on ThyGeNEXT® discussed
previously.
Cost of revenue
Cost of revenue for the nine months ended September 30, 2022 was $10.3 million,
as compared to $10.2 million for the nine months ended September 30, 2021. As a
percentage of revenue, cost of revenue was approximately 44% for the nine months
ended September 30, 2022 and 43% for the nine months ended September 30, 2021.
The percentage increase was due to the small decrease in revenue discussed
above.
Gross profit
Gross profit was approximately $13.2 million for the nine months ended September
30, 2022 and $13.8 million for the nine months ended September 30, 2021. The
gross profit percentage was approximately 56% for the nine months ended
September 30, 3022 and 58% for the nine months ended September 30, 2021. The
decrease was a result of the NRV pricing adjustment discussed above.
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Sales and marketing expense
Sales and marketing expense was approximately $7.0 million for the nine months
ended September 30, 2022 and $6.9 million for the nine months ended September
30, 2021. As a percentage of revenue, sales and marketing expense increased to
30% from 29% in the comparable prior year period primarily due to the decrease
in revenue.
Research and development
Research and development expense was $0.6 million for the nine months ended
September 30, 2022 and $1.2 million for the nine months ended September 30,
2021. As a percentage of revenue, research and development expense decreased to
3% from 5% in the comparable prior year period.
General and administrative
General and administrative expense was approximately $8.6 million for the nine
months ended September 30, 2022 and $7.4 million for the nine months ended
September 30, 2021. The increase can be primarily attributed to an increase in
employee compensation costs and an increase in professional fees.
Transition expense
Transition expense was approximately $0.9 million for the nine months ended
September 30, 2021. In 2021, these expenses were related to one-time legal
expenses and employee severance costs.
Acquisition amortization expense
During the nine months ended September 30, 2022 and September 30, 2021, we
recorded amortization expense of approximately $1.0 million and $2.7 million,
respectively, which is related to intangible assets associated with prior
acquisitions.
Change in fair value of contingent consideration
During the nine months ended September 30 2022, there was a $0.3 million
decrease in the contingent consideration liability and a $0.1 million decrease
for the nine months ended September 30, 2021.
Operating loss
Operating loss from continuing operations was $3.7 million for the nine months
ended September 30, 2022 as compared to $5.0 million for the nine months ended
September 30, 2021. The lower operating loss was primarily attributable to the
decrease in amortization expense discussed above.
Provision (benefit) for income taxes
Income tax expense was approximately $24,000 for the nine months ended September
30, 2022 which was primarily driven by minimum state and local taxes. The income
tax benefit of $0.7 million for the nine months ended September 30, 2021 was
related to the sale of the NOLs discussed above in the three-months section.
Loss from discontinued operations, net of tax
We had a loss from discontinued operations of approximately $15.9 million for
the nine months ended September 30, 2022 and a loss from discontinued operations
of approximately $5.9 million for the nine months ended September 30, 2021. The
loss for the nine months ended September 30, 2022 was primarily attributed to
the impairment of goodwill and intangible assets associated with the Pharma
Solutions business.
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Non-GAAP Financial Measures
In addition to the United States generally accepted accounting principles, or
GAAP, results provided throughout this document, we have provided certain
non-GAAP financial measures to help evaluate the results of our performance. We
believe that these non-GAAP financial measures, when presented in conjunction
with comparable GAAP financial measures, are useful to both management and
investors in analyzing our ongoing business and operating performance. We
believe that providing the non-GAAP information to investors, in addition to the
GAAP presentation, allows investors to view our financial results in the way
that management views financial results.
In this 10-Q, we discuss Adjusted EBITDA, a non-GAAP financial measure. Adjusted
EBITDA is a metric used by management to measure cash flow of the ongoing
business. Adjusted EBITDA is defined as income or loss from continuing
operations, plus depreciation and amortization, acquisition related expenses,
transition expenses, non-cash stock based compensation, interest and taxes, and
other non-cash expenses including asset impairment costs, bad debt expense, loss
on extinguishment of debt, goodwill impairment and change in fair value of
contingent consideration, and warrant liability. The table below includes a
reconciliation of this non-GAAP financial measure to the most directly
comparable GAAP financial measure.
Reconciliation of Adjusted EBITDA (Unaudited)
($ in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Loss from continuing
operations (GAAP Basis) $ (1,254 ) $ (1,319 ) $ (4,458 ) $ (5,295 )
Transition expenses - 236 - 897
Depreciation and
amortization 353 967 1,076 2,911
Stock-based compensation 501 428 1,110 1,139
Tax (benefit) expense (11 ) (714 ) 24 (684 )
Interest accretion expense 38 106 123 375
Financing interest and
related costs 230 174 620 482
Gain on DiamiR transaction - - - (235 )
Mark to market on warrant
liability (3 ) (71 ) (71 ) 137
Change in fair value of note
payable 206 - 46 -
Change in fair value of
contingent consideration - - (311 ) (57 )
Adjusted EBITDA $ 60 $ (193 ) $ (1,841 ) $ (330 )
LIQUIDITY AND CAPITAL RESOURCES
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.
In October 2021, we entered into the Comerica Loan Agreement with Comerica,
providing for a revolving credit facility of up to $7,500,000 (the "Credit
Facility"). The Company is using the proceeds of the Credit Facility for working
capital and other general corporate purposes.
The amount that 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. See Note 18, Revolving
Line of Credit, for more details. Comerica has a first priority security
interest in substantially all of the Company's and its subsidiaries' assets.
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In addition, also in October 2021, the Company entered into the BroadOak Loan
Agreement with BroadOak, 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. The Term Loan
has an origination fee of 3% of the Term Loan amount, and a terminal payment
equal to (i) 15% of the original principal amount of the Term Loan if the change
of control occurs on or prior to the first anniversary of the funding of the
Term Loan, (ii) 20% of the original principal amount of the Term Loan if the
change of control occurs after the first anniversary but on or prior to the
second anniversary of the funding of the Term Loan and (iii) 30% of the original
principal amount of the Term Loan if the change of control occurs after the
second anniversary of the funding of the Term Loan, or if the Term Loan is
repaid on its maturity date. Upon receipt of the term loan, the proceeds were
used to repay in full at their maturity the notes extended by Ampersand and 1315
Capital discussed above. See Note 14, Notes Payable, for more details. In May
2022, the Company issued a Convertible Note to BroadOak, pursuant to which
BroadOak funded a term loan in the aggregate principal amount of $2.0 million.
See Note 14, Notes Payable, for more details. The Company is using the proceeds
of the Convertible Debt for general corporate purposes and working capital.
The BroadOak Loan Agreement contains affirmative and negative restrictive
covenants, including restrictions on certain mergers, acquisitions, investments
and encumbrances which could adversely affect our ability to conduct our
business. The BroadOak Loan Agreement also contains customary events of default.
The Comerica Loan Agreement contains affirmative and negative restrictive
covenants that are applicable whether or not any amounts are outstanding under
the Comerica loan agreement. These restrictive covenants, which include
restrictions on certain mergers, acquisitions, investments, encumbrances, etc.,
could adversely affect our ability to conduct our business. The Comerica Loan
Agreement also contains financial covenants requiring specified minimum
liquidity and minimum revenue thresholds and also contains customary events of
default. However, if we are unable to meet the financial covenants under the
Comerica Loan Agreement, the revolving line of credit and notes payable will
become due and payable immediately.
In January 2022, the Company's registration statement for a rights offering
filed with the Securities and Exchange Commission (SEC) became effective;
however, the rights offering was subsequently terminated later in January 2022
when the Company announced that the Centers for Medicare & Medicaid Services, or
CMS, issued a new billing policy whereby CMS will no longer reimburse for the
use of the Company's ThyGeNEXT® and ThyraMIR® tests when billed together by the
same provider/supplier for the same beneficiary on the same date of service. On
February 28, 2022, the Company announced that the National Correct Coding
Initiative (NCCI) program issued a response on behalf of CMS stating that the
January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and
ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. In
May 2022, the Company was notified by CMS/NCCI that processing of claims for
dates of service after January 1, 2022 would be completed beginning July 1,
2022. However, on June 9, 2022, the Company was notified that Novitas re-priced
ThyGeNEXT® (0245U) from $2,919 to $806.59 retroactively effective to January 1,
2022. On July 20, 2022 the Clinical Diagnostic Laboratory Tests (CDLT) Advisory
Panel affirmed a gapfill price for ThyGeNEXT® of $806.59. As a result of the
ThyGeNEXT® pricing change, the Company reduced its net realizable value, or NRV
rates for ThyGeNEXT® Medicare billing to reflect the $806.59 pricing for tests
performed during the second quarter of 2022. In addition, in order to reflect
the retroactive pricing change to January 1, 2022, the Company recorded an NRV
adjustment of $0.7 million during the second quarter of 2022 to reduce revenue
recorded during the first quarter of 2022. 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, net of
restricted cash, and current liabilities of $14.8 million. As of November 4,
2022, we had approximately $6.6 million of cash on hand, net of restricted cash.
During the nine months ended September 30, 2022, net cash used in operating
activities was $7.4 million. The main component of cash used in operating
activities was our net loss of $20.4 million, partially offset by depreciation
and amortization expense of $2.2 million and non-cash impairment charges of
$12.3 million. During the nine months ended September 30, 2021, net cash used in
operating activities was $7.5 million. The main component of cash used in
operating activities was our net loss of $11.2 million which was partially
offset by non-cash expenses of $6.2 million.
35
During the nine months ended September 30, 2022, net cash provided from
investing activities was $7.3 million, which primarily pertained to the net
proceeds received from the sale of our Pharma Solutions business unit. During
the nine months ended September 30, 2021, net cash used in investing activities
was $0.2 million
For the nine months ended September 30, 2022, cash provided from financing
activities was $3.1 million, of which $1.0 million was from the drawdown on the
Revolving Line and $2.0 million was the Convertible Debt agreement entered into
with BroadOak. See Note 14, Notes Payable, for more details. For the nine months
ended September 30, 2021, cash provided from financing activities was $7.7
million, of which $7.4 million were the net proceeds from the Company's secured
promissory notes with Ampersand and 1315. See Note 14, Notes Payable, for more
details.
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.
The Company continues to explore various strategic alternatives, dilutive and
non-dilutive sources of funding, including equity and debt financings, strategic
alliances, business development and other sources in order to provide additional
liquidity. With the Company's delisting of its common stock from Nasdaq in
February 2021, its ability to raise additional capital on terms acceptable to
the Company has been adversely impacted. There can be no assurance that the
Company will be successful in obtaining such funding on terms acceptable to the
Company.
Further, along with many laboratories, we may be affected by the Proposed 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.
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 t
and forecasted cash receipts would still be sufficient to meet its anticipated
cash requirements through the next twelve months.
Inflation
We do not believe that inflation had a significant impact on our results of
operations for the periods presented. However, inflation and supply chain
disruptions, whether caused by restrictions or slowdowns in shipping or
logistics, increases in demand for certain goods used in our operations, or
otherwise, could impact our operations in the near term.
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Critical Accounting Estimates
See Note 5, Summary of Significant Accounting Policies and Note 19, Recent
Accounting Standards to the Interim Financial Statements included elsewhere in
this Quarterly Report on Form 10-Q for information regarding newly adopted and
recent accounting pronouncements. See also Note 1, Nature of Business and
Significant Accounting Policies to our financial statements included in our
Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion
of our critical accounting policies. There have been no material changes to such
critical accounting policies. We believe our most critical accounting policies
include accounting for contingent consideration, revenue recognition, intangible
and long-lived assets, research and development expenses and stock-based
compensation expense.
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