Company
Overview
We
are 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.
Customer
Category |
|
Types
of Customers |
|
Nature
of Services |
Clinical
services |
|
●
Hospitals
● Physicians
● Cancer Centers
● Clinics |
|
Clinical
services provide information on diagnosis, prognosis and predicting treatment outcomes of cancers to guide patient management. |
|
|
●
Commercial laboratories |
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|
|
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●
Pathology groups |
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|
Our
clinical services’ customers consist primarily of physicians, hospitals, cancer centers, commercial laboratories, pathology groups
and clinics. Our largest customer for ThyGeNEXT® and ThyraMIR®v2 products in 2022 was Laboratory Corporation
of America® or LabCorp. Our revenue channels include reimbursement by Medicare, Medicare Advantage, Medicaid, and direct
client billings (for example, hospitals and clinics), and commercial payers such as Blue Cross Blue Shield, Aetna, Cigna, United Healthcare
and others.
Strategic
Disposition of Pharma Business
On
August 31, 2022, Interpace Biosciences, Inc. (“Interpace” or the “Company”) and Interpace Pharma Solutions, Inc.
(the “Subsidiary) entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Flagship Biosciences, Inc.
(the “Purchaser”) pursuant to which the Purchaser agreed to (i) acquire substantially all of the assets of the Subsidiary
used in Subsidiary’s business of complex molecular analysis for the early diagnosis and treatment of cancer and supporting the
development of targeted therapeutics (the “Business”) and (ii) assume and pay certain liabilities related to the purchased
assets as set forth in the Purchase Agreement (collectively, the “Transaction”). The Transaction closed on August 31, 2022.
As
consideration for the Transaction, under the Purchase Agreement, the Company received a total purchase price of approximately $6.2
million after working capital and other adjustments ($0.5 million of which was deposited into escrow), subject to the assumption by the Purchaser of certain specified liabilities. In
addition, subject to the terms and conditions set forth in the Purchase Agreement, Purchaser was obligated to pay the Company an
earnout of up to $2.0 million based on revenue for the period beginning September 1, 2021 and ending August 31, 2022. The Company
received an earnout payment of approximately $1.0 million in September 2022 which is the fully settled amount and there will be no
further earnout payments in the future.
The
Purchase Agreement includes a one-year commitment of the Company not to compete with the Business, recruit or hire any former employees
of the Subsidiary who accept employment with the Purchaser in connection with the Transaction, or divert or attempt to divert from Purchaser
any business to be performed from any of the contracts or agreements with customers as set forth in the Purchase Agreement. The Purchase
Agreement also contains customary representations and warranties, post-closing covenants and mutual indemnification obligations for,
among other things, any inaccuracy or breach of any representation or warranty and any breach or non-fulfillment of any covenant.
In
connection with the Transaction, on August 31, 2022, the Company, the Subsidiary and the Purchaser entered into a Shared Services Agreement
(the “Shared Services Agreement”) pursuant to which Interpace agreed to provide, or cause its affiliates to provide, to the
Purchaser certain services set forth in the Shared Services Agreement on a transitional basis and subject to the terms and conditions
set forth in the Shared Services Agreement (the “Services”). As consideration for the Services provided by the Company, the
Purchaser is paying the Company the amounts specified for each Service as set forth in the Shared Services Agreement. The Company’s
obligations to provide the Services will terminate with respect to each Service as set forth in the Shared Services Agreement.
The
Purchaser is identified as a related party of the Company and is an affiliate of both Ampersand 2018 Limited Partnership (“Ampersand”),
a private equity investor in the Company, and BroadOak Fund V, L.P. (“BroadOak”), a secured lender to the Company. Ampersand
and BroadOak have each provided equity financing to the Purchaser, collectively own a majority of the Purchaser’s outstanding equity
securities and are represented on its Board of Directors.
The
Company is using the remaining net proceeds of the Transaction to fund its future business activities and for general working capital
purposes. As a result of the sale, the gain on sale and all operations from the Subsidiary have been classified as discontinued operations
for all periods presented.
Continuing
Impact of 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. At this time, the Biden Administration does not plan to
renew the COVID-19 national and public health emergencies when they expire on May 11, which has been extended every 90 days since they
were established in 2020. This decision, therefore, appears to represent a de-escalation in the way the government treats the pandemic,
as well as a perception that most people have either been vaccinated or have recovered from a COVID-19 infection (or both), Despite this
anticipated change in policy, COVID-19 is still with us and as the virus continues to reproduce and mutate, the Administration’s
policy may need be adjusted. In any event, it is likely that we will still need 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
February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is
highly unpredictable, this war has led, and could continue to lead, to significant market and other disruptions, including instability
in financial markets, supply chain interruptions, political and social instability, and increases in cyberattacks, intellectual property
theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business.
We
have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any
resulting government reactions, are rapidly developing and beyond our control. The extent and duration of the war, sanctions, and resulting
market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an
unknown period of time. Any of the above-mentioned factors could materially adversely affect our business, financial condition, and results
of operations. Any such disruptions may also magnify the impact of other risks described in this Annual Report on Form 10-K.
Market
Overview
Global
Molecular Diagnostic Market
The
global molecular diagnostics market is estimated to be $23.2 billion (USD) in 2022 and is expected to grow to $30.2 billion (USD) by
2027 with a Compound Annual Growth rate or CAGR of 5.4% between 2022 and 2027, according to Markets and Markets’s Molecular Diagnostics
Market report (Report Code: MD 2521, published May 2022).
The
global esoteric testing market is projected to reach 36.3 billion (USD) by 2026, growing at a CAGR of 11.6% from 2022 to 2026 (Markets
and Markets, Esoteric Testing Market report published June 2021, Report Code: MD 5930). We believe that the specialty molecular diagnostics
market offers significant growth and strong patient value given the substantial opportunity it affords to lower healthcare costs by helping
to reduce unnecessary surgeries and ensuring the appropriate frequency of monitoring. We are keenly focused on growing our test volumes;
securing additional insurance coverage and reimbursement; maintaining and growing our current reimbursement; supporting revenue growth
for our molecular diagnostic tests; introducing related first-line product and service extensions; and expanding our business by developing
and promoting synergistic products in our markets. We also believe that BarreGEN® is a potentially significant pipeline
product, and we are continuing to provide necessary resources to support the development process.
United
States Clinical Oncology Market
Despite
many advances in the treatment of cancer, it remains one of the greatest areas of unmet medical need According to estimates from the
International Agency for Research on Cancer (IARC), by 2040 it is expected that there will be 16.3 million cancer deaths worldwide simply
due to the growth and aging of the global population. Within the United States, cancer is the second most common cause of death, exceeded
only by heart disease. In 2022, it is expected that there will be 1.9 million new cancer cases and almost 610,000 cancer-related deaths,
or about 1,670 deaths each day. In the United States, while pancreatic cancer represents only about 3% of all new cancer cases, it is
the third leading cause of cancer death. The incidence, deaths and economic loss caused by cancer are staggering. Cancer-attributed medical
care costs in the United States are substantial and projected to increase dramatically by 2030 to an estimated $246 billion (USD). The
following table taken from Common Cancer Types, originally published by the National Cancer Institute (Updated: May 10, 2022) shows estimated
new cases and deaths in 2022 in the United States for selected major cancer types:
Cancer
Type |
|
Estimated
New Cases |
|
Estimated
Deaths |
Bladder |
|
81,180 |
|
17,100 |
Breast
(Female – Male) |
|
287,858
– 2,710 |
|
43,250
– 530 |
Colon
and Rectal (Combined) |
|
151,030 |
|
52,580 |
Kidney
(Renal Cell and Renal Pelvis) |
|
79,000 |
|
13,920 |
Leukemia
(All Type) |
|
60,650 |
|
24,000 |
Liver
and Intrahepatic Bile Duct |
|
41,260 |
|
30,520 |
Lung
(Including Bronchus) |
|
236,740 |
|
130,180 |
Melanoma |
|
99,780 |
|
7,650 |
Non-Hodgkin’s
Lymphoma |
|
80,470 |
|
20,250 |
Pancreatic |
|
62,210 |
|
49,830 |
Prostate |
|
268,490 |
|
34,500 |
Thyroid |
|
43,800 |
|
2,230 |
Our
Strategy
Our
primary goal is to become a leader in providing high quality and dependable personalized medicine with exceptional growth. Our strategy
is to grow our business both organically as well as by selective partnering, which could potentially include licensing, acquisitions
or mergers, to generate positive returns for our shareholders and driving towards cash flow break-even. We expect to not only continue
to further develop our existing gastrointestinal and endocrine assays but to also expand our presence in other markets where we have
expertise and access. Our existing customer base and broad-based capabilities provide us a unique window not only into our current customers’
needs but also permit us to anticipate their future needs.
The
key tactics to achieve our goals include:
|
● |
Expanding
our existing commercial products, especially PancraGEN®, ThyGeNEXT® and ThyraMIR®, focusing
on personalized medicine and early intervention related to cancer risk; |
|
|
|
|
● |
Accelerating
the clinical development and commercialization of BarreGEN®, our esophageal cancer risk classifier for Barrett’s
Esophagus, working with our recently developed Key Opinion Leaders (“KOL’s”) and expanding clinical studies to
seek key reimbursement support while seeking partners to collaborate with us; |
|
|
|
|
● |
Implementation
of automation and focus on improved operating efficiencies in the clinical laboratories to provide consistent superior quality testing
and reporting at reduced costs; |
|
● |
Broadening
coverage and reimbursement for our clinical tests including: |
|
○ |
Initiating
and expanding studies to demonstrate that our tests are effective; |
|
|
|
|
○ |
Meeting
standards necessary to be consistent with leading clinical guidelines; |
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|
○ |
Executing
by our internal managed care team; |
|
|
|
|
○ |
Collaborating
with KOL’s; and |
|
|
|
|
○ |
Establishing
payer relationship and in-network contracts serving our diagnostic customers. |
|
● |
Developing
and commercializing other related first-line clinical assays and expanding our service offerings such as PanDNA®,
a DNA only version of PancraGEN®, and markers for aggressive thyroid cancer; |
|
|
|
|
● |
Expanding
our commercial sales staff rationally, while supporting our products with high quality data and studies; |
|
|
|
|
● |
Exploring
partnering opportunities to acquire new technologies; and |
|
|
|
|
● |
Expanding
our bioinformatics data collected (currently from over 60,000 patients), utilizing registries to improve our assays and leveraging
our data with potential collaborators. |
Our
Service Offerings
Our
business is based on demand for molecular- and biomarker-based characterization of cancers from one main sector: clinical services for
physicians, hospitals and clinics.
Clinicians
and oncologists in cancer centers and hospitals seek molecular-based testing since these methods often produce higher value and more
accurate cancer diagnostic information than traditional analytical methods. Our proprietary and unique disease-focused or esoteric tests
aim to provide actionable information that can guide patient management decisions, potentially resulting in decreased costs.
We
continue to pursue the strategy of trying to demonstrate increased value and efficacy with payers who wish to contain costs and academic
collaborators seeking to develop new insights and treatments.
We
aim to provide physicians and patients with diagnostic options for detecting genomic and other molecular alterations that are associated
with gastrointestinal, endocrine, and lung cancers. Our clinical services’ customers consist primarily of physicians, hospitals
and clinics.
Clinical
services
Our
clinical services business commercializes clinically useful molecular diagnostic tests and molecular pathology services. We commercialize
genomic tests and related first-line assays principally focused on risk-stratification of cancer using the latest technology to help
personalize medicine and improve patient diagnosis and management. Our tests and services provide mutational analysis of genomic material
contained in suspicious cysts, nodules, and lesions with the goal of better informing surgery or surveillance treatment decisions in
patients suspected of thyroid, pancreatic, and other cancers. The molecular diagnostic tests we offer enable healthcare providers to
stratify cancer risk, helping to avoid unnecessary surgical treatment in patients at low risk, while also helping to identify patients
that would benefit from surgical intervention.
Our
mission is to assist healthcare providers in the diagnosis, triage, and treatment of patients through advanced diagnostics. Our laboratory
is licensed pursuant to federal law under Clinical Laboratory Improvement Amendments of 1988 (“CLIA”) and are accredited
by College of American Pathologists (“CAP”) and our products are approved by New York State. We are leveraging our laboratory
to refine and commercialize our assays and products. We aim to provide physicians and patients with diagnostic options for detecting
genomic and other molecular alterations that are associated with gastrointestinal, endocrine, and other cancers. Our customers consist
primarily of physicians, hospitals, and clinics.
We
currently have five commercialized molecular diagnostic tests in the marketplace: PancraGEN®, a pancreatic cyst and
pancreaticobiliary solid lesion genomic test that helps physicians better risk-stratify pancreaticobiliary cancers using our
proprietary PathFinderTG® platform and full integration of clinical factors; PanDNA®, an
alternate reporting option of the PathFinderTG platform, that provides physicians the “molecular only” information
provided within PancraGEN; ThyGeNEXT®, an expanded oncogenic mutation panel that helps “rule-in” and
“rule-out” malignancy in thyroid nodules; ThyraMIR®, used in combination with
ThyGeNEXT®, which further stratifies thyroid nodules for malignancy risk utilizing a proprietary microRNA gene
expression assay; and RespriDx® a genomic test that also utilizes our PathFinderTG® platform, to help
physicians differentiate metastatic or recurrent lung cancer from the presence of newly formed primary lung cancer.
Gastrointestinal
Cancer Products
Our
current diagnostic assay, PancraGEN®, is a reporting option of our proprietary PathFinderTG® platform.
This platform is designed to use advanced clinical algorithms to accurately risk-stratify patients suspected of having pancreatic cancer
by assessing panels of DNA abnormalities in patients who have pancreaticobiliary lesions (cysts or solid masses). PanDNA®
is a “molecular only” reporting option of PathFinderTG® and is used by physicians who prefer to perform their
own integration of first-line testing results to stratify pancreatic cancer risk.
Based
on the American Cancer Society Cancer 2023 Cancer Facts and Figures, pancreatic cancer is the third leading cause of cancer deaths in
the U.S. (estimated) with an average five-year survival rate of 12%. PancraGEN® and PanDNA® are designed
to determine the risk of malignancy in pancreatic cysts and pancreaticobiliary solid lesions, which have potential for developing into
cancer. We believe that PancraGEN® is the leader in the market for integrated molecular diagnostic tests for determining
risk of pancreaticobiliary malignancy. We currently estimate that the immediate addressable market for PancraGEN® is approximately
124,000 indeterminate pancreaticobiliary lesions annually or approximately $200 million annually based on the current size of the patient
population and reimbursement rates. To date, PancraGEN® testing has been used in more than 64,000 clinical cases. The
National Pancreatic Cyst Registry study published in Endoscopy in 2015 demonstrated that PancraGEN® more accurately
determined the malignancy potential of pancreatic cysts than international consensus 2012 imaging criteria, helping to ensure that surgery
is reserved for the most appropriate patients. This is important because pancreatic surgery is high-risk surgery with over 40% postoperative
morbidity rates and 0%–15% postoperative mortality rates. (Ahola, et al, March 2020, doi.org/10.1177/1457496919900411) When
molecular analysis is not performed, the vast majority of all pancreatic cyst surgeries are performed on cystic lesions that do not harbor
malignancy.
The
American Gastroenterological Association 2015 Guidelines have cautioned that many pancreatic surgeries have been performed unnecessarily
for lesions that will not progress to invasive adenocarcinoma. In addition, the 2016 guidelines published by the American Society of
Gastroenterology Endoscopy (ASGE) in Gastrointestinal Endoscopy included a specific recommendation for use of molecular testing in specific
circumstances where other types of testing and analysis have not provided sufficient data on which to determine the best course of action
for patient treatment. Accordingly, we believe that PancraGEN® provides a highly reliable diagnostic and prognostic option
that can accurately stratify cancer risk in circumstances where risk of cancer is otherwise uncertain.
Endocrine
Cancer Products
We
currently market and sell a combination testing platform that can inform cancer risk in indeterminate thyroid nodules—those that
are not clearly malignant or benign by cytology. ThyGeNEXT® is a next generation DNA and RNA sequencing oncogene and mRNA
fusion panel. The markers within the ThyGeNEXT® oncogene panel provide clinical utility by informing diagnosis, prognosis,
and targeted treatment guidance aligned to FDA-approved therapies for RET, NTRK, and other markers found within the panel. ThyGeNEXT®
works with our second endocrine cancer diagnostic test, ThyraMIR®v2, an assay that measures the relative expression
of eleven distinct microRNAs. The combined analysis of the ThyGeNEXT® and ThyraMIR®v2 test results provides
highly accurate “rule-in” and “rule-out” malignancy risk guidance.
We
estimate the total market for our endocrine (thyroid) cancer assays is approximately $221 million (USD) annually based on the current
size of the patient population, estimated numbers of indeterminate biopsies and reimbursement rates. The mutational analysis provided
by ThyGeNEXT® can help inform treatment alone when strong driver BRAF V600E-like mutations are found. However,
reflex to ThyraMIR®v2 occurs approximately 85% of the time to provide a greater understanding of malignancy risk and is
especially helpful when weaker drivers of malignancy, such as RAS-like mutations, are found.
Endocrinologists,
ear, nose and throat (“ENT”), and other specialists evaluate thyroid nodules for possible cancer by collecting cells through
Fine Needle Aspiration (“FNA”) that are then analyzed by cytopathologists to determine whether or not a thyroid nodule is
cancerous. It is estimated that approximately 25% or well over 100,000 biopsies analyzed annually yield indeterminate results, meaning
they cannot be diagnosed as definitely being malignant or benign by cytopathology alone. In the past, guidelines recommended that some
patients with indeterminate cytopathology results undergo surgery to remove all or part of their thyroid to obtain an accurate diagnosis
by looking directly at the thyroid tissue. According to a study published by Wang, et al. in 2011, in approximately 77% of these cases,
the thyroid nodule proved to be benign. Current practice and guidelines, such as those from the National Comprehensive Cancer Network
(“NCCN”) and American Thyroid Association (“ATA”), support use of molecular analysis for nodules with indeterminate
cytology results as this testing can prove beneficial to further characterize these lesions and help support optimal patient management.
Lung
Cancer Product—RespriDx® Test and Metastatic versus Primary Platform
RespriDx®
compares the mutational fingerprint of two or more sites of cancer to determine whether the neoplastic deposits are representative
of a recurrence (metastasis) of lung cancer or a new primary or independent tumor. The test, which currently provides only nominal revenues,
defines the presence or absence of cancer in atypical cytology by comparing the mutational profile with that of known previous cancer.
RespriDx® assists in determining the most appropriate course of treatment, whether chemotherapy, surgery, or other modalities.
CLIA
Certified and CAP Accredited Laboratory
Our
testing is performed in our state of the art CLIA certified College of American Pathologists (“CAP”) accredited laboratory
in Pittsburgh, Pennsylvania. CLIA is a federal law regulating clinical laboratories that perform testing on specimens derived from humans
for the purpose of providing information for the diagnosis, prevention or treatment of disease. Clinical laboratories must be certified
under CLIA in order to perform testing on human specimens, unless they fall within an exception to CLIA certification, such as research
laboratories that test human specimens but do not report patient-specific results for the diagnosis, prevention or treatment of any disease
or impairment of, or the assessment of the health of individual patients. CLIA certification is also required to be eligible to bill
Federal and State healthcare programs, as well as many private third-party payers, for diagnostic testing and services. In addition,
proprietary tests must also be recognized as part of an accredited program under CLIA so that they can be offered in a CLIA-certified
laboratory. CLIA is intended to ensure the quality and reliability of clinical laboratories in the United States by mandating specific
standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management,
quality control, quality assurance and inspections. For renewal of CLIA certification, clinical laboratories are subject to survey and
inspection every two years. Moreover, CLIA inspectors may make random inspections of clinical laboratories outside of the renewal process.
Sales
and Marketing
Our
sales and marketing efforts consist of both direct and indirect sales channels with the efforts focused in the United States. We also
have collaborative arrangements with other laboratory services companies.
Our
commercialization efforts for our clinical services are currently focused on endocrine (thyroid), gastroenterologic (pancreatic) and
lung cancers. Communication of our marketing messaging and value propositions is accomplished through multiple channels, including two
field-based commercial sales teams of approximately 32 representatives and managers. In addition, we employ medical science liaisons
(MSLs)—therapeutic specialists with advanced scientific training to aid in communicating complex scientific and medical information
to leading physicians. Other channels of communication include print, digital advertising, social media, a web presence, peer-reviewed
publications, and trade show exhibits. We believe that our molecular diagnostic tests provide value to payers, physicians, and patients
by improving patient care and lowering healthcare costs through avoidance of unnecessary surgeries, reducing the morbidity associated
with unnecessary surgeries for patients, and providing better diagnostic and prognostic insights to physicians. We support the value
propositions of our tests through rigorous science that supports the analytical and clinical validity as well as clinical utility of
our tests. We believe our repository of bioinformatics data accumulated from our testing is a valuable tool in developing and refining
our analytics while also potentially being an even more valuable tool in the future.
We
also communicate to payers, integrated delivery systems and hospital systems about our molecular diagnostic tests’ value through
highly trained professionals who are experienced in reimbursement and business-to-business selling and through face-to-face meetings,
phone calls, digital communications and advisory boards. We develop health economic analyses and budget impact models and incorporate
these along with our clinical validation studies, and clinical utility studies to demonstrate our molecular diagnostic tests’ value
to this distinct and important constituency.
Competition
We
compete on the basis of factors such as reputation, scientific expertise, service quality, management experience, performance record,
customer satisfaction, accessibility, flexibility, ability to respond to specific customer needs, integration skills, and product portfolio
and price. Increased competition and/or a decrease in demand for our clinical and pharma services may also lead to other forms of competition.
We believe that our business has a variety of competitive advantages that allow us to compete successfully in the marketplace. While
we believe we compete effectively with respect to each of these factors, certain competitors of ours are substantially larger than us
and have greater capital, personnel and other resources than we have. Many of our competitors also offer broader product lines outside
of the molecular diagnostic testing market, and many have greater brand recognition than we do. Moreover, our competitors may make rapid
technological developments that may result in our technologies and products becoming obsolete before we recover the expenses incurred
to develop them or before they generate significant revenue. Increased competition may lead to pricing pressures and competitive practices
that could have a material adverse effect on our market share and our ability to attract new business opportunities as well as our business,
financial condition and results of operations.
We
also compete with physicians and the medical community who use traditional methods to diagnose gastrointestinal and endocrine cancers.
In many cases, practice guidelines in the United States have recommended therapies, surveillance or surgery to determine if a patient’s
condition is malignant or benign. As a result, we believe that we will need to continue to educate physicians and the medical community
on the value and benefits of our molecular diagnostic tests in order to change clinical practices and continue to support the use of
molecular diagnostic tests in clinical guidelines.
Specifically,
in regard to our thyroid diagnostic tests, Veracyte, Inc., or Veracyte, has a molecular thyroid nodule cancer diagnostic test (Afirma)
that is the current market leader and competes with our ThyGeNEXT® and ThyraMir®v2 tests. Quest Diagnostics
Incorporated, or Quest, currently offers a diagnostic test similar to the earlier version of our ThyGeNEXT® test and announced
an agreement to distribute the Afirma test in partnership with Veracyte. CBLPath, Inc., or CBL, offers ThyroSeq®, a diagnostic
test that analyzes genetic alterations using next-generation sequencing. In addition, other thyroid based endocrine competitors include
Accelerate Diagnostics, Inc., or other companies we are not aware of.
We
are currently not aware of any direct competitors to PancraGEN® that integrate clinical, imaging, cytology, and molecular
information to stratify patients’ risk for malignancy and inform physicians on the best course of action, i.e., surgery or surveillance
and surveillance interval length. The University of Pittsburgh Medical Center now offers PancreaSeq®, a Next Generation
Sequencing “gene only” panel that focuses on the analysis of mutations in oncogenes and tumor suppressor genes, most of which
may help establish the type of pancreatic cyst present and some of which may help establish the presence of malignancy. Some of these
related genomic regions are included in PancraGEN®. This laboratory test however does not integrate any additional information
to fully characterize a patient’s risk for pancreatic cancer. Importantly, there has been no long-term clinical validation or utility
studies completed on any gene panel for pancreatic cyst fluid other than that associated with PancraGEN®. PancraGEN®
has been validated in multiple studies and peer reviewed publications and has been used in over 45,000 patients. Additionally,
we validated and launched a DNA only version of PancraGEN®, known as PanDNA®.
It
is also possible that we face future competition from other laboratory-developed tests (LDT’s), developed by commercial laboratories
such as Quest and other diagnostic companies developing new tests or technologies. Furthermore, we may be subject to competition as a
result of new, unforeseen technologies that may be developed by our competitors in the gastrointestinal and endocrine cancer molecular
diagnostic tests space.
We
are aware of companies that are in the process of developing assays and LDTs for Barrett’s esophagus, such as Cernostics Inc. In
addition, NeoGenomics Laboratories, Inc., or NeoGenomics, is marketing a Barrett’s assay, so it appears likely that this space
will also be more competitive in the future.
Research
and Development
We
conduct our research and development activities at our CLIA-certified and CAP-accredited laboratory in Pittsburgh, Pennsylvania. Our
research and development efforts primarily focus on providing data and analyses necessary to support and improve our existing products
on the market. Additionally, our research and development activities provide product line extension of our existing products as well
as new product opportunities utilizing our proprietary platforms and extensive bioinformatics repositories and data bases.
Also,
we use reagents for cross site validations and validations of new assays to be used in clinical trials. We may enter into collaborative
relationships with research and academic institutions for the development of additional or enhanced tests to further increase the depth
and breadth of our test offerings. Where appropriate, we may also enter into licensing agreements with our collaborative partners to
both license intellectual property for use in our test panels as well as licensing such intellectual property out.
Our
research and development costs are primarily clinical costs and were approximately $0.7 million and $1.5 million in 2022 and 2021, respectively.
We
continue to generate and publish clinical evidence related to our key products, including ThyGeNEXT® and ThyraMIR®v2
and PancraGEN® as well as our pipeline product, BarreGEN®.
Clinical
Evidence
|
● |
The
first manuscript reporting the clinical performance of ThyGeNEXT® and ThyraMIR® tests was accepted
in July 2020 in the Diagnostic Cytopathology (Lupo M et al. Diagnostic Cytopathology. 2020; DOI: 10.10001/dc.24564.) |
Intellectual
Property
Patents,
trademarks and other proprietary rights are important to us. We generate our own intellectual property portfolio and hold numerous patents
and patent applications covering our existing and future products and technologies. As of December 31, 2022, we owned seven issued United
States Patents. The U.S. patents are directed to, amongst other things, methods of measuring carcinoembryonic antigen in a biological
sample; methods for treating subject with a high risk of disease progression from Barrett’s metaplasia to esophageal adenocarcinoma;
and methods of treating a subject identified with a papillary thyroid carcinoma. As of December 31, 2022, we owned three issued patents
outside of the United States, one each in Australia, Japan, and Israel. As of December 31, 2022, we owned two pending patent applications
in the United States. Provided all maintenance fees and annuities are paid, our issued United States patents expire from 2031 through
2034, our foreign patents expire in 2031, and our pending patent applications, if issued, are expected to expire between 2027 and 2038,
absent any disclaimers, adjustments or extensions. Our patents are directed to certain of the technologies relating to detecting, diagnosing,
and classifying thyroid tumors, pancreatic cysts and other forms of gastrointestinal disorders, such as Barrett’s esophagus.
In
addition to our own molecular diagnostic test development efforts, we are currently using, and intend to use in the future, certain tests
and biomarkers that have been developed by third parties or by us in collaboration with third parties. While a significant amount of
intellectual property in the field of molecular diagnostic tests is already in the public domain, ThyraMIR®v2, ThyGeNEXT®,
and some of the future tests developed by us, or by third parties on our behalf for use in our tests, may require, that we license the
right to use certain intellectual property from third parties and pay customary royalties or make one time payments.
On
August 13, 2014, we consummated an agreement to acquire certain fully developed thyroid and other tests in development for thyroid cancer,
associated intellectual property and a biobank with more than 5,000 patient tissue samples pursuant to an asset purchase agreement, or
the Asuragen Asset Purchase Agreement. We paid $8.0 million at closing and paid an additional $0.5 million to Asuragen for certain integral
transition service obligations set forth in a transition services agreement, entered into concurrently with the Asuragen Asset Purchase
Agreement. We also entered into two license agreements with Asuragen (the Asuragen License Agreement and the CPRIT License Agreement)
relating to our ability to sell the fully developed diagnostic tests and other tests in development for thyroid cancer. Under the Asuragen
License Agreement, we owed a $500,000 milestone payment, all of which was paid in installments throughout 2016 and paid in full as of
January 13, 2017. We are further obligated to pay royalties on the future net sales of tests based on the miRInform®
pancreas platform, if developed, on the future net sales of tests based on the miRInform® thyroid platform
(i.e., ThyGeNEXT®) and potentially on certain other thyroid diagnostics tests.
In
October 2014, we acquired RedPath Integrated Pathology Inc. (RedPath) which included its pancreatic and gastrointestinal assets. Additionally,
we have a broad and growing trademark portfolio. We have secured trademark registrations for the marks AccuCEA® (or TM),
PancraGEN®, PanDNA®, BarreGEN® and miRInform® in the United States,
and miRInform® with the World Intellectual Property Organization.
We
rely on a combination of trade secrets and proprietary processes to protect our intellectual property. We enter into non-disclosure agreements
with certain vendors and suppliers to attempt to ensure the confidentiality of our intellectual property. We also enter into non-disclosure
agreements with our customers. In addition, we require that all our employees sign confidentiality and intellectual property assignment
agreements.
Raw
Material and Suppliers
We
procure reagents, equipment and other materials that we use to perform our tests from sole suppliers. We also purchase components used
in our collection kits from sole-source suppliers. Some of these items are unique to these suppliers and vendors. Our most significant
suppliers for reagents and supplies include Thermo Fisher Scientific Inc., Illumina, Inc., Qiagen N.V., and F. Hoffmann-La Roche AG.
While we have developed alternate sourcing strategies for most of these materials and vendors, we cannot be certain whether these strategies
will be effective or the alternative sources will be available when we need them. If these suppliers can no longer provide us with the
materials we need to perform the tests and for our collection kits, if the materials do not meet our quality specifications or are otherwise
unusable, if we cannot obtain acceptable substitute materials, or if we elect to change suppliers, an interruption in test processing
could occur, we may not be able to deliver patient reports and we may incur higher one-time switching costs. Any such interruption may
significantly affect our future revenue, cause us to incur higher costs, and harm our customer relationships and reputation. In addition,
in order to mitigate these risks, we maintain inventories of these supplies at higher levels than would be the case if multiple sources
of supply were available. If our test volume decreases or we switch suppliers, we may hold excess lab supplies with expiration dates
that occur before use which would adversely affect our losses and cash flow position. As we introduce any new test, we may experience
supply issues as we ramp test volume.
Government
Regulations and Industry Guidelines
The
healthcare industry, and thus our business, is subject to extensive Federal, State, local and foreign regulation. Both Federal and State
governmental agencies continue to subject the healthcare industry to intense regulatory scrutiny, including heightened civil and criminal
enforcement efforts. We believe that we have structured our business operations and relationships with our customers to comply with applicable
legal requirements. However, it is possible that governmental entities or other third parties could interpret these laws differently
and assert otherwise. We discuss below the statutes and regulations that are most relevant to our business and most frequently cited
in enforcement actions.
Regulations
over Our Clinical Laboratory
The
conduct and provision of our services are regulated under the CLIA. CLIA requires us to maintain Federal certification. CLIA imposes
requirements relating to test processes, personnel qualifications, facilities and equipment, recordkeeping, quality assurance and participation
in proficiency testing. CLIA compliance and certification are also a condition for participation by clinical laboratories in the Medicare
Program and for eligibility to bill for services provided to governmental healthcare program beneficiaries. As a condition of CLIA certification,
our laboratory is subject to survey and inspection every other year, in addition to being subject to additional random inspections.
The biennial survey is typically conducted by a State agency, or, if the laboratory is accredited, a CMS-approved accreditation organization.
Potential sanctions for failure to meet these certification, accreditation and licensure requirements include suspension, revocation
or limitation of a laboratory’s CLIA certification, accreditation or license, which is necessary to conduct business, cancellation
or suspension of the laboratory’s ability to receive Medicare or Medicaid reimbursement, as well as imposition of plans to correct
deficiencies, injunctive actions and civil monetary and criminal penalties. The loss or suspension of a CLIA certification, imposition
of a fine or other penalties, or future changes in the CLIA law or regulations (or interpretation of the law or regulations) could harm
our business.
In
addition to CLIA requirements, we participate in the accreditation program of the College of American Pathologists (“CAP”).
Under CMS requirements, accreditation by CAP is sufficient to satisfy the requirements of CLIA. Failure to maintain CAP accreditation
could have a material adverse effect on the sales of our tests and the results of our operations.
In
addition to CLIA certification, we are required to hold state licenses in certain states. Some state licensing requirements differ from
federal regulation and may impose additional or different requirements. CLIA does not preempt state laws that are more stringent. If
we were to lose our CLIA certification, CAP Accreditation, or required state licenses for our laboratory, whether as a result of revocation,
suspension or limitation, we would no longer be able to provide our services, which would have a material adverse effect on our business,
financial condition and results of operations.
Our
laboratory is also subject to licensing and regulation under Federal, State and local laws relating to hazard communication and employee
right-to-know regulations, and the safety and health of laboratory employees. Additionally, our laboratory is subject to applicable Federal
and State laws and regulations and licensing requirements relating to the handling, storage and disposal of hazardous waste and laboratory
specimens, including the regulations of the Environmental Protection Agency, the Department of Transportation, and the National Fire
Protection Agency. The regulations of the United States Department of Transportation, Public Health Service and Postal Service apply
to the surface and air transportation of laboratory specimens. Typically, we use outside vendors who are contractually obligated to comply
with applicable laws and regulations to dispose of hazardous waste. These vendors are licensed or otherwise qualified to handle and dispose
of such waste.
In
addition to its comprehensive regulation of safety in the workplace, the United States Occupational Safety and Health Administration
has established extensive requirements relating to workplace safety for healthcare employers whose workers may be exposed to blood-borne
pathogens such as HIV and the hepatitis B virus, by preventing or minimizing any exposure through needle stick or similar penetrating
injuries. Although we believe that we are currently in compliance in all material respects with such Federal, State and local laws, failure
to comply with such laws could subject us to denial of the right to conduct business, fines, criminal penalties and other enforcement
actions.
Potential
U.S. Food and Drug Administration Regulation of Laboratory Developed Tests (“LDTs”)
While
subject to oversight by CMS through its enforcement of CLIA, the FDA has claimed regulatory authority over all laboratories that produce
LDTs, a type of in vitro diagnostic test that is designed, manufactured and used within a single laboratory. The FDA has regulatory responsibility
over, among other areas, instruments, test kits, reagents and other devices used in clinical laboratories to perform diagnostic testing
in the United States.
Historically,
the FDA has exercised enforcement discretion over most LDTs. However, in July 2014, the FDA issued two draft guidance documents: “Framework
for Regulatory Oversight of Laboratory Developed Tests,” which provided an overview of how the FDA would regulate LDTs through
a risk-based framework, and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests,” which described
how FDA would implement a proposed notification process applicable to LDT manufacturers, including adverse event reporting.
On
January 13, 2017, the FDA released a discussion paper on LDTs which outlined a substantially-revised approach for regulating LDTs. According
to the 2017 discussion paper, previously marketed LDTs would not be expected to comply with most or all FDA oversight requirements (grandfathering),
except for adverse event and malfunction reporting. In addition, certain new and significantly modified LDTs would not be expected to
comply with pre-market review unless the agency determines certain tests could lead to patient harm. Since many LDTs currently on the
market would be grandfathered in, pre-market review of new and significantly modified LDTs could be phased-in over a four-year period,
as opposed to the nine years proposed in the Framework for Regulatory Oversight draft guidance. In addition, tests introduced after the
effective date, but before their phase-in date, could continue to be offered during pre-market review.
The
discussion paper notes that FDA will focus on analytical and clinical validity as the basis for marketing authorization. The FDA anticipates
laboratories that already conduct proper validation should not be expected to experience new costs for validating their tests to support
marketing authorization and laboratories that conduct appropriate evaluations would not have to collect additional data to demonstrate
analytical validity for FDA clearance or approval. The evidence of the analytical and clinical validity of all LDTs would be made publicly
available. Laboratories developing LDTs would be encouraged to submit prospective change protocols in their pre-market submission that
outline specific types of anticipated changes, the procedures that will be followed to implement them and the criteria that will be met
prior to implementation.
Despite
the regulatory approaches proposed over the past decade, FDA continues to exercise enforcement discretion over most LDTs. If FDA ceases
to exercise enforcement discretion over LDTs, failure to comply with applicable requirements could result in warning letters, civil monetary
penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations,
and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.
Regulatory
and legislative proposals have been introduced alongside FDA’s regulatory proposals. In March 2017, members of Congress posted
a discussion draft of “The Diagnostics Accuracy and Innovation Act” (DAIA). The discussion draft included language that,
if enacted, would have established a new regulatory framework for the oversight of in vitro clinical tests (“IVCTs”) which
include LDTs. In March 2020, members of Congress introduced “The Verifying Accurate, Leading-edge IVCT Development (VALID) Act.”
This bill was re-introduced in substantially similar forms over the years, and, most recently in December 2022, as part of the as part
of the Food and Drug Omnibus Reform Act of 2022 (“FDORA”). Under the most recent version of the VALID Act, a risk-based
approach would be used to regulate IVCTs while grandfathering many existing IVCTs. Each test will be classified as high-risk, moderate-risk,
or low-risk. Pre-market review will be required for high-risk tests. To market a high-risk IVCT, reasonable assurance of analytical and
clinical validity for the intended use must be established. Under VALID, a precertification process would be established which will allow
a laboratory to establish that the facilities, methods, and controls used in the development of certain IVCTs meet quality system requirements.
If pre-certified, IVCTs falling within the scope of a certification order will not be subject to pre-market review. The new regulatory
framework will include quality control and post-market reporting requirements. The FDA will have the authority to withdraw from the market
IVCTs if it is reasonable possible that such tests will cause serious adverse health consequences (among other criteria). Failure to
comply with applicable regulatory requirements can result in enforcement action by the FDA, such as fines, product suspensions, warning
letters, recalls, injunctions and other civil and criminal sanctions.
While
the VALID Act was not ultimately included in the version of FDORA that was incorporated into the Consolidated Appropriations Act, 2023,
it may be re-introduced in the future. In the absence of legislative action, some have speculated that the FDA may attempt to regulate
LDTs on their own (e.g., via notice and comment rulemaking), which is likely to continue to be met with resistance by certain sections
of industry. We cannot predict if this (or any other bill) will be enacted in its current (or any other) form and cannot quantify the
effect of such proposals on our business.
Healthcare,
Fraud, Abuse and Anti-Kickback Laws
The
Anti-Kickback Statute makes it a felony for a person or entity, including a laboratory, to knowingly and willfully offer, pay, solicit
or receive remuneration, directly or indirectly, in order to induce business that is reimbursable under any Federal healthcare program.
A violation of the Anti-Kickback Statute may result in imprisonment of up to five years and fines of up to $250,000 for each offense
in the case of individuals and $500,000 for each offense in the case of organizations. Convictions under the Anti-Kickback Statute result
in mandatory exclusion from federal healthcare programs for a minimum of five years. In addition, HHS has the authority to impose civil
assessments and fines and to exclude healthcare providers and others engaged in prohibited activities from Medicare, Medicaid and other
federal healthcare programs. Actions, which violate the Anti-Kickback Statute, also incur liability under the Federal False Claims Act,
discussed in more detail below, which prohibits knowingly presenting, or causing to be presented, a false or fraudulent claim for payment
to the U.S. Government.
Although
the Anti-Kickback Statute applies only to federal healthcare programs, a number of states have passed statutes substantially similar
to the Anti-Kickback Statute, which prohibits similar conduct toward all other health plans and third-party payers. Federal and state
law enforcement authorities scrutinize arrangements between healthcare providers and potential referral sources to ensure that the arrangements
are not designed as a mechanism to induce patient care referrals or induce the purchase or prescribing of particular products or services.
The law enforcement authorities, the courts and Congress have also demonstrated a willingness to look behind the formalities of a transaction
to determine the underlying purpose of payments between healthcare providers and actual or potential referral sources. Generally, courts
have taken a broad interpretation of the scope of the Anti-Kickback Statute, holding that the statute may be violated if merely one purpose
of a payment arrangement is to induce referrals or purchases.
In
addition to the Anti-Kickback Statute, the U.S. enacted the Eliminating Kickbacks in Recovery Act of 2018, or EKRA, as part of the Substance
Use-Disorder Prevention that Promotes Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act). EKRA is an all-payer
anti-kickback law that makes it a criminal offense to pay any remuneration to induce referrals to, or in exchange for, patients using
the services of a recovery home, a substance use clinical treatment facility, or laboratory. Although it appears that EKRA was intended
to reach patient brokering and similar arrangements to induce patronage of substance use recovery and treatment, the language in EKRA
is broadly written. The term “laboratory” is defined broadly and without reference to any connection to substance use disorder
treatment. EKRA is a criminal statute and violations can result in fines of up to $200,000, up to 10 years in prison, or both, per violation.
As drafted, EKRA does not clearly protect incentive compensation to sales employees, a practice that is common in the industry. The government
has not issued or proposed regulations or other guidance interpreting EKRA.
Several
other healthcare fraud and abuse laws could have an effect on our business. For example, provisions of the Social Security Act permit
Medicare and Medicaid to exclude an entity that charges the federal healthcare programs substantially in excess of its usual charges
for its services. The terms “usual charge” and “substantially in excess” are ambiguous and subject to varying
interpretations. Further, the Federal False Claims Act, discussed in more detail below, prohibits a person from knowingly submitting
a claim, making a false record or statement in order to secure payment or retaining an overpayment by the federal government. In addition
to actions initiated by the government itself, the statute authorizes actions to be brought on behalf of the federal government by a
private party having knowledge of the alleged fraud. Because the complaint is initially filed under seal, the action may be pending for
some time before the defendant is even aware of the action. If the government is ultimately successful in obtaining redress in the matter
or if the plaintiff succeeds in obtaining redress without the government’s involvement, then the plaintiff will receive a percentage
of the recovery. Penalties under the federal False Claims Act can include up to three times the damages sustained by the federal program
and up to about $12,000 and $26,000 per claim (these per-claim penalties are adjusted for inflation from time to time). Further, numerous
states have enacted state false claims acts that apply to state government programs. Finally, the Social Security Act includes its own
provisions that prohibit the filing of false claims or submitting false statements in order to obtain payment. Violation of these provisions
may result in fines, imprisonment or both, and possible exclusion from Medicare or Medicaid programs.
We
are also subject to the federal physician self-referral prohibitions, commonly known as the Stark Law, and state equivalents. These restrictions
generally prohibit us from billing a patient or Medicare for any diagnostic services when the physician ordering the service, or any
member of such physician’s immediate family, has an investment interest in or compensation arrangement with us, unless the arrangement
meets an exception to the prohibition. The government has also claimed in FCA litigation that the Stark Law applies to Medicaid claims.
Some states have also enacted state Stark Law equivalents that can apply to that state’s Medicaid plan and/or commercial payors.
Persons
or entities found to violate the Stark Law are required to refund any payments received pursuant to a referral prohibited by these laws
to the patient, or the Medicare program, as applicable. Sanctions for a violation of the Stark Law include the following:
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denial
of payment for the services provided in violation of the prohibition; |
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refunds
of amounts collected by an entity in violation of the Stark Law; |
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a
civil penalty of up to $27,750 for each service arising out of the prohibited referral; |
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possible
exclusion from federal healthcare programs, including Medicare and Medicaid; and |
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a
civil penalty of up to $185,009 against parties that enter into a scheme to circumvent the Stark Law’s prohibition. |
These
penalty amounts are adjusted each year for inflation. The Stark Law prohibitions apply regardless of the reasons for the financial relationship
and the referral. No finding of intent to violate the Stark Law is required for a violation. In addition, violations of the Stark Law
may also serve as the basis for liability under the Federal False Claims Act.
Additionally,
the Federal Civil Monetary Penalties Law prohibits, among other things, the offering or transfer of remuneration to a Medicare or state
healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection of a particular
provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an exception applies.
We
do retain healthcare practitioners as key opinion leaders providing consultation in various aspects of the business. These arrangements
as any arrangement that includes compensation to a healthcare provider may trigger Federal or State anti-kickback and Stark Law liability.
Our arrangements with healthcare providers are designed to meet available safe harbors and exceptions provided in the anti-kickback laws
and Stark laws, respectively. There is no guarantee that the government will find that these arrangements are designed properly or that
they do not trigger liability. Under existing laws, all arrangements must have a legitimate purpose and compensation must be fair market
value. These terms require some subjective analysis and there is limited available case law or guidance for the application of these
laws to the CLIA Laboratory industry. Safe harbors in the anti-kickback laws do not necessarily equate to exceptions in the Stark Law;
and there is no guarantee that the government will not have issue with the relationships between the laboratories and the healthcare
providers.
HIPAA,
Fraud and Privacy Regulations
The
Federal government’s efforts to combat fraud in the healthcare setting were consolidated and strengthened under Public Law 104-191,
the Health Insurance Portability and Accountability Act of 1996, or HIPAA. HIPAA aimed to combat fraud committed against all health plans,
both public and private by, among other things creating two new Federal offenses: healthcare fraud (18 U.S. Code § 1347) and false
statements relating to healthcare matters (18 U.S. Code § 1035). These provisions prohibit: (1) the knowing and willful execution,
or attempted execution, of a scheme or artifice (a) to defraud any healthcare benefit program (including private payers), or (b) to obtain,
by means of false or fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody
or control of, any healthcare benefit program, in connection with the delivery of or payment for healthcare benefits, items, or services;
and (2) the knowing and willful (a) falsification, concealment or covering up of a material fact by any trick, scheme or device, or (b)
making of any materially false, fictitious or fraudulent statement or representation, or making or using any materially false writing
or document knowing the same to contain any materially false, fictitious, or fraudulent statement or entry, in connection with the delivery
of or payment for healthcare benefits, items or services. A violation of these provisions is a felony and may result in fines, imprisonment
and/or exclusion from government-sponsored programs.
HIPAA,
along with the Health Information Technology for Economic and Clinical Health Act (HITECH) and the various regulations promulgated thereunder,
also establish uniform standards governing the conduct of certain electronic healthcare transactions and the security and privacy of
individually identifiable health information maintained or transmitted by certain healthcare providers, health plans and healthcare clearinghouses,
which are referred to as “covered entities,” as well as individuals or entities to the extent they perform health care operations
functions as a “business associate” for or on behalf of a covered entity. The regulations promulgated under HIPAA governing
covered entities and business associates include the following subparts: “Privacy of Individually Identifiable Health Information”,
which establishes conditions for the permissible use and disclosure of certain individually identifiable health information by covered
entities and establishes certain rights of individuals who are the subject of such information (45 C.F.R. §§ 164.500, et seq.);
“Administrative Requirements”, which establishes electronic standards for common healthcare transactions, such as claims
information, plan eligibility, payment information and the use of electronic signatures (45 C.F.R. §§ 162.100, et seq.); “Security
Standards for the Protection of Electronic Protected Health Information”, which requires covered entities and their business associates
to implement and maintain certain security measures to safeguard certain electronic health information (45 C.F.R. §§ 164.302,
et seq.); and “Breach Notification”, which requires covered entities and their business associates to provide certain notifications
to affected individuals, HHS and relevant media outlets following a breach of unsecured protected health information (PHI) (45 C.F.R.
§§ 164.400, et seq.). As a covered entity, and also in our capacity as a business associate to certain of our customers, we
are subject to these standards. We may also be liable for violations of HIPAA by any individual or entity, which may include a business
associate that is acting as our agent under the federal common law of agency. While the government intended this legislation to reduce
administrative expenses and burdens for the healthcare industry, our compliance with certain provisions of these standards entails significant
costs for us and requires us to follow specific policies and procedures when we use and disclose individually identifiable health information.
If we are found to be in violation of HIPAA, HITECH, or their respective implementing regulations, we may be subject to potentially significant
penalties, including civil and criminal penalties, damages and fines, and may incur damage to our reputation. Such enforcement actions
could have an adverse effect on our business.
In
addition to Federal regulations issued under HIPAA and HITECH, many States and foreign jurisdictions have enacted privacy and security
statutes or regulations that, in some cases, are more stringent than those issued under HIPAA. In those cases, it may be necessary to
modify our planned operations and procedures to comply with the more stringent laws as HIPAA and HITECH do not supersede State laws to
the extent such State laws are broader in scope, impose more stringent requirements for individually identifiable health information,
or give individuals more rights with respect to their individually identifiable health information. If we fail to comply with applicable
State or foreign laws, rules, or regulations, we could be subject to additional sanctions or other liabilities under those laws, rules,
and regulations.
Federal
and State Consumer Protection Laws
The
Federal Trade Commission, or FTC, is an independent U.S. law enforcement agency charged with protecting consumers and enhancing competition
across broad sectors of the economy. In 2022, the FTC has said that it will be evaluating new data privacy regulations, which, if adopted,
could impact our operations. The FTC’s authority with respect to data privacy and security comes from Section 5 of the FTC Act.
The FTC uses its broad grant of authority to regulate data privacy and security, using its powers to investigate and bring lawsuits.
Where appropriate, the FTC can seek a variety of remedies, such as but not limited to requiring the implementation of comprehensive privacy
and security programs, biennial assessments by independent experts, monetary redress to consumers, and provision of robust notice and
choice mechanisms to consumers.
In
addition to the FTC Act, many U.S. states have unfair and deceptive acts and practices statutes, known as UDAP statutes, that are substantively
similar to the FTC Act and have been applied in the privacy and data security context. These UDAP statutes vary in substance and strength
from state to state. Many have broad prohibitions against unfair and deceptive acts and practices. These statutes generally allow for
private rights of action, and are enforced by the states’ Attorneys General.
California,
Virginia, and Colorado have adopted comprehensive consumer privacy laws that are in effect or will take effect within the next 12 to
18 months, and regulate how certain for-profit businesses collect, use, and disclose the personal information of consumers who reside
in those respective states. Among other things, these laws confer to their consumers the right to: receive notice of information collection
and use practices; access, delete, correct, or transfer personal information and opt out of the “sale” of their personal
information. These laws also require companies to adopt reasonable measures to safeguard the personal information that we collect and
regulate categories of “sensitive” data such as information associated with minors, citizenship, and other personal data
for which these state laws have designated special protection. These laws do not, however, apply to personal information that constitutes
PHI under HIPAA, HIPAA-regulated entities to the extent that the entity maintains patient information in the same manner as PHI, and
de-identified data as defined under HIPAA. As a result, we do not or likely will not have compliance obligations with respect to most
testing and patient information we collect and process. However, we are required to comply with these consumer privacy laws insofar as
we collect other categories of California, Virginia and Colorado consumers’ personal information. These laws are generally enforced
by the respective state Attorney General. California’s law also includes a private right of action for certain data breaches.
Dozens
of other states in the United States are currently considering similar, consumer data privacy laws, which could impact our operations
if enacted.
Healthcare
Reform
The
United States and many foreign jurisdictions have enacted or proposed legislative and regulatory changes affecting the healthcare system.
The United States government, state legislatures and foreign governments also have shown significant interest in implementing cost-containment
programs to limit the growth of government-paid healthcare costs, including price controls, restrictions on reimbursement and requirements
for substitution of generic products for branded prescription drugs.
In
March 2010, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA (also known as the Affordable Care
Act), as amended by the Health Care and Education Reconciliation Act, a sweeping law intended to broaden access to health insurance and
coverage for patients, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency
requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry, coordinate and promote
research on comparative clinical effectiveness of different technologies and procedures, and impose additional health policy reforms.
PPACA, as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorous coverage
criteria, new payment methodologies and in additional downward pressure on pricing and implemented changes which significantly affect
the pharmaceutical, medical device and clinical laboratory industries. There have been legislative and administrative actions to make
changes to PPACA, including repeal and replacement of certain provisions.
The
PPACA has also been subject to challenges in the courts; however, the U.S. Supreme Court upheld the law in 2021.
Further
changes to the PPACA remain possible, although the Biden Administration has signaled that it plans to build on the Affordable Care Act
and expand the number of people who are eligible for subsidies under it. President Biden has used executive orders to undo changes to
the PPACA made by the Trump administration and indicated he would advocate for legislation to build on the PPACA. It is unknown what
form any such changes or any law would take, and how or whether it may affect our business in the future. We expect that changes or additions
to the PPACA, the Medicare and Medicaid programs, and changes stemming from other healthcare reform measures, especially with regard
to healthcare access, financing or other legislation in individual states, could have a material adverse effect on the healthcare industry.
We
expect that additional federal, state and foreign healthcare reform measures will be adopted in the future, any of which could limit
the amounts that federal and state governments will pay for healthcare products and services, which could result in limited coverage
and reimbursement and reduced demand for our products, once approved, or additional pricing pressures.
Third
Party Coverage and Reimbursement for our Clinical Services
Our
customers’ bills are paid by many different payer groups. The majority of reimbursement dollars for traditional laboratory services
are provided by traditional commercial insurance products, most notably preferred provider organizations, or PPOs, and other managed
care plans, as well as government healthcare programs, such as Medicare and Medicaid. PPOs, HMOs and other managed care plans typically
contract with a limited number of laboratories and then designate the laboratory or laboratories to be used for tests ordered by participating
physicians. We are currently an out-of-network provider with most payers, which means we do not have a contract with payers to pay a
specific rate for our tests. We did previously announce a new national agreement with Aetna through which the Company is now an in-network
provider for Aetna’s members. We are subject to applicable state laws regarding who should be billed, how they should be billed,
how business should be conducted, and how patient obligations regarding cost sharing should be handled. In addition, if we become an
“in-network” provider for certain payers in the future, we will also be subject to the terms of contracts (which could include
reduced reimbursement rates) and may be subject to discipline, breach of contract actions, non-renewal or other contractually provided
remedies for non-compliance with the contract’s requirements and/or applicable laws.
We
generally bill third-party payers and individual patients for testing services on a test-by-test basis. Third-party payers include
Medicare, private insurance companies, institutional direct clients and Medicaid, each of which has different billing requirements.
Medicare reimbursement programs are complex and often ambiguous, and are continuously being evaluated and modified by CMS. Our
ability to receive timely reimbursements from third-party payers is dependent on our ability to submit accurate and complete billing
statements, and/or correct and complete missing and incorrect billing information. Missing and incorrect information on
reimbursement submissions slows down the billing process and increases the aging of accounts receivable. We must bill Medicare
directly for tests performed for Medicare patients and must accept Medicare’s fee schedule for the covered tests as payment in
full. State Medicaid programs are generally prohibited from paying more than the Medicare fee schedule. Through February 2021, we
were contracted with XIFIN, Inc. (“XIFIN”), a healthcare billing services management company, to work with our in-house
staff and help manage our third-party billing. In early March 2021, we expanded our relationship with XIFIN to deploy XIFIN’s
revenue cycle management solution enterprise-wide to support all of our diagnostics testing services. During January 2022, the
Company became aware that CMS issued a new billing policy whereby CMS would no longer reimburse for the use of the Company’s
ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for the same
beneficiary on the same date of service. In February 2022, the Company announced that this billing policy determination by CMS had
been changed retroactively to January 1, 2022. As a result, the Company will continue billing for both tests according to its LCD as
originally set by Novitas. Effective January 1, 2023, the gapfill price for ThyGeNEXT® was set at $1,266.07.
Some
billing arrangements require us to bill multiple payers, and there are several other factors that complicate billing (e.g., disparity
in coverage and information requirements among various payers; and incomplete or inaccurate billing information provided by ordering
physicians). Since 2018 several private payers implemented pre-authorization requirements for molecular and genetic testing, including
Anthem Blue Cross Blue Shield and United Healthcare, as well as various lab benefit companies such as American Imaging Management, Inc.,
or AIM, and Beacon Lab Benefits Solutions, or Beacon. In addition, more commercial payers are contracting with and delegating risk for
lab services costs to lab benefits management companies (e.g. eviCore healthcare, AIM, and Beacon). This requires us to go through their
technology assessment process to secure coverage and obtain a contract as an in-network lab provider for our services. We incur additional
costs as a result of our participation in Medicare and Medicaid programs because diagnostic testing services are subject to complex,
stringent and frequently ambiguous federal and state laws and regulations, including those relating to coverage, billing and reimbursement.
Additionally, auditing for compliance with applicable laws and regulations as well as internal compliance policies and procedures adds
further cost and complexity to the billing process. Further, our billing systems require significant technology investment and, as a
result of marketplace demands, we need to continually invest in our billing systems. Changes in laws and regulations could further complicate
our billing and increase our billing expense. CMS establishes procedures and continuously evaluates and implements changes to the reimbursement
process and requirements for coverage.
As
an integral part of our billing compliance program, we investigate reported failures or suspected failures to comply with federal and
state healthcare reimbursement requirements. Any Medicare or Medicaid overpayments are reimbursed by us. As a result of these efforts,
we have periodically identified and reported overpayments, reimbursed the payers for overpayments and taken appropriate corrective action.
Historically,
due to the nature of our business, we have performed requested testing and have reported test results regardless of collectability or
form of reimbursement. We submit claims for reimbursement on a best efforts basis including the use of a third-party revenue cycle management
firm. If at times the billing information is incorrect or incomplete, we subsequently attempt to contact the healthcare provider or patient
to obtain any missing information and to rectify incorrect billing information. Missing or incorrect information on requisitions complicates
and slows down the billing process and may also impact revenue recognition. The increased use of electronic ordering reduces the incidence
of missing or incorrect information, and we are seeking to electronically integrate with more and more payers and clients.
There
are a number of factors that influence coverage and reimbursement for molecular diagnostic tests. In the United States, the American
Medical Association assigns specific CPT codes, which are necessary for reimbursement of molecular diagnostic tests. Once the CPT code
is established, CMS establishes reimbursement payment levels and coverage rules under Medicare, and private payers establish rates and
coverage rules independently. However, the availability of a CPT code is not a guarantee of coverage or adequate reimbursement levels,
and the revenues generated from our tests will depend, in part, on the extent to which third-party payers provide coverage and establish
adequate reimbursement levels.
United
States and other government regulations governing coverage and reimbursement for molecular diagnostic testing may affect, directly or
indirectly, the design of our tests and the potential market for their use. The availability of third-party reimbursement for our tests
and services may be limited or uncertain. Third-party payers may deny coverage if they determine that the tests or service has not received
appropriate FDA or other government regulatory clearances, is not used in accordance with cost-effective treatment methods as determined
by the payer, or is deemed by the third-party payer to be experimental, unnecessary or inappropriate. Furthermore, third-party payers,
including Federal and State healthcare programs, government authorities, private managed care providers, private health insurers and
other organizations, frequently challenge the prices, medical necessity, and cost-effectiveness of healthcare products and services,
including laboratory tests. Such payers may limit coverage of our tests to specific, limited circumstances, may not provide coverage
at all, or may not provide adequate reimbursement rates, if covered. Further, one payer’s determination to provide coverage does
not assure that other payers will also provide coverage for the test. Adequate third-party reimbursement may not be available to enable
us to maintain price levels sufficient to maintain our revenue and growth. Coverage policies and third-party reimbursement rates may
change at any time.
Government
payers, such as Medicare and Medicaid, have taken steps and are expected to continue to take steps to control the cost, utilization and
delivery of healthcare services, including clinical test services. For example, Medicare has adopted policies under which it does not
pay for many commonly ordered clinical tests unless the ordering physician has provided an appropriate diagnosis code supporting the
medical necessity of the test. Physicians are required by law to provide diagnostic information when they order clinical tests for Medicare
and Medicaid patients.
Currently,
Medicare does not require the beneficiary to pay a co-payment for diagnostic information services reimbursed under the Clinical Laboratory
Fee Schedule. Certain Medicaid programs require Medicaid recipients to pay co-payment amounts for diagnostic information services.
The
Medicare Part B program contains fee schedule payment methodologies for clinical testing services performed for covered patients, including
a national ceiling on the amount that carriers could pay under their local Medicare clinical testing fee schedules. Historically, the
Medicare Clinical Laboratory Fee Schedule, or CLFS, has been subject to local variations in pricing. In April 2014, President Obama signed
the Protecting Access to Medicare Act of 2014, or PAMA, which included a substantial new payment system for clinical laboratory tests
under the CLFS. Under PAMA, CLFS rates are based upon the weighted median of private payor rates reported for each type of laboratory
test. PAMA requires laboratories that receive a majority of their Medicare revenue from payments made under the CLFS and the Physician
Fee Schedule, and at least $12,500 in CLFS revenue during the six month data collection period to report private payor data collected
from such 6-month period (January 1 through June 30 in the applicable year) to CMS between January 1 through March 31 of the following
year. CMS posted the first new Medicare CLFS rates (based on weighted median private payer rates) in November 2017 and the new rates
became effective on January 1, 2018. CMS published final rules implementing these changes in 2016 and 2018. The result of the PAMA calculations
was an increase in our reimbursement rate for ThyGenX® of approximately 40% for our Medicare volume. However, on July
26, 2018, we received a coding update from CMS, which changed the billable procedure code (CPT) for ThyGeNEXT®. This code
change resulted in a reduction of the fee schedule for payments to us. We have recently presented clinical data to CMS adding additional
markers to the panel that we run that increase our gene families above 50. If approved, reimbursement for the new panel will exceed the
previously approved rate. There can be no assurances that our request will be successful and that the rate will be escalated.
The
Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended by the Protecting Medicare and American Farmers from Sequester
Cuts Act, revised payment reductions and the data reporting schedule for approved Clinical Diagnostic Laboratory Tests (“CDLTs”)
that are not ADLTs. Under these laws, the next data reporting period is January 1, 2023 through March 31, 2023, and will be based upon
the data collected during the January 1, 2019 to June 30, 2019 period. Any reductions to payment rates resulting from the new methodology
are limited to 10% per test per year in each of the years 2018 through 2020 and to 15% per test per year in each of the years 2023 through
2025. Payments will not be reduced for 2021 or 2022 for CDLTs.
Under
the revised Medicare Clinical Laboratory Fee Schedule, reimbursement for clinical laboratory testing was reduced for most tests in 2018,
2019, and 2020. PAMA calls for further revisions of the Medicare Clinical Laboratory Fee Schedule for years after 2021, based on future
surveys of market rates.
Penalties
for violations of laws relating to billing government healthcare programs and for violations of federal and state fraud and abuse laws
include: (1) exclusion from participation in Medicare/Medicaid programs; (2) asset forfeitures; (3) civil and criminal fines and penalties;
and (4) the loss of various licenses, certificates and authorizations necessary to operate our business. Civil monetary penalties for
a wide range of violations may be assessed on a per violation basis. A parallel civil remedy under the federal False Claims Act provides
for penalties on a per violation basis, plus damages of up to three times the amount claimed.
Historically,
most Medicare and Medicaid beneficiaries were covered under the traditional Medicare and Medicaid programs administered by the federal
government. Reimbursement from traditional Medicare and Medicaid programs represented approximately 45% of our consolidated net revenues
during 2022. Over the last several years, the federal government has continued to expand its contracts with private health insurance
plans for Medicare beneficiaries and has encouraged such beneficiaries to switch from the traditional programs to the private programs,
called “Medicare Advantage” programs. There has been growth of health insurance providers offering Medicare Advantage programs
and of beneficiary enrollment in these programs. Commercial health plans that might not cover one or all of our tests for their commercially
insured members are required to follow the Novitas LCD coverage policy for their Medicare Advantage members. To the extent we maintain
the LCD coverage policies with Novitas for our products, any shift of members from traditional Medicare to Medicare Advantage plans doesn’t
represent a risk of lost revenue. In recent years, in an effort to control costs, states also have mandated that Medicaid beneficiaries
enroll in private managed care arrangements.
The
current position of our laboratory is that it does not meet the definition of an “Applicable Manufacturer” under the “Sunshine
Act” section of PPACA and therefore is not subject to the disclosure or tax requirements contained in PPACA. However, as new regulations
are implemented and diagnostic tests reclassified, this may change and the laboratory business may be subject to PPACA as are other companies.
There is no guarantee that our interpretation of the law is now or will be in the future consistent with government guidance and interpretation.
In
December 2019, our Medicare Administrative Contractor (MAC) issued a new draft local coverage determination (LCD) for our ThyGeNEXT®
test, representing an increase of approximately $2,400 per assay over previous reimbursement coverage. This increase in reimbursement
rates reflects the expansion of the ThyGeNEXT® panel to aid in identifying the appropriate patients for surgery. Final
approval is expected during the first half of 2020. Additionally, in February 2020, the CMS modified the reimbursement for ThyraMIR®
retroactively to January 1, 2020. This determination increases the Medicare reimbursement for ThyraMIR® from approximately
$1,800 to $3,000 reflecting a re-evaluation of the technical and clinical performance of the test relative to other molecular tests in
the market and their respective prices.
In
January 2022, the Company announced that CMS issued a new billing policy whereby CMS will no longer reimburse for the use of the Company’s
ThyGeNEXT® and ThyraMIR® tests when billed together by the same provider/supplier for the same beneficiary
on the same date of service. On February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued
a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and
ThyraMIR® (0018U) tests has been retroactively reversed to January 1, 2022. CMS is currently reimbursing the Company for
one of its two thyroid tests, and has agreed to retroactively reimburse for the second test once they have completed their internal administrative
adjustments. We have been notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 will be completed
beginning July 1, 2022. As of the date of this filing, the Company has no remaining outstanding collections regarding this matter and is fully
up to date with CMS. Effective January 1, 2023, the gapfill price for ThyGeNEXT® was set at $1,266.07.
Reporting
Segments
We
operate under one segment which is the business of developing and selling diagnostic clinical services.
Employees
As
of February 28, 2023, we had approximately 94 full time employees and 94 total employees. We are not party to a collective bargaining
agreement with any labor union.
Corporate
Information
We
were originally incorporated in New Jersey in 1986 and began commercial operations as PDI, Inc., a contract sales organization or CSO
in 1987. In connection with PDI, Inc.’s initial public offering, it reincorporated in Delaware in 1998. In 2015 the CSO business
and assets were sold, and we operated our molecular diagnostics business as Interpace Diagnostics Group, Inc. (IDXG). We conduct our
business through our wholly-owned subsidiaries, Interpace Diagnostics, LLC, which was formed in Delaware in 2013 and Interpace Diagnostics
Corporation (formerly known as RedPath Integrated Pathology, Inc.), which was formed in Delaware in 2007, On November 12, 2019, we changed
the name of Interpace Diagnostics Group, Inc. to Interpace Biosciences, Inc. Our executive offices are located at Morris Corporate Center
1, Building C, 300 Interpace Parkway, Parsippany, New Jersey 07054. Our telephone number is (855) 776-6419.
Business
Development
Series
B Investment by 1315 Capital and Ampersand
On
January 10, 2020, we entered into a Securities Purchase and Exchange Agreement (the “Securities Purchase and Exchange Agreement”)
with 1315 Capital II, L.P., a Delaware limited partnership (“1315 Capital”), and Ampersand (together with 1315 Capital, the
“Investors”) pursuant to which we sold to the Investors, in a private placement pursuant to Regulation D and Section 4(a)(2)
under the Securities Act, an aggregate of $20,000,000 in Series B Preferred Stock, at an issuance price per share of $1,000. Pursuant
to the Securities Purchase and Exchange Agreement, 1315 Capital purchased 19,000 shares of Series B Preferred Stock at an aggregate purchase
price of $19,000,000 and Ampersand purchased 1,000 shares of Series B Preferred Stock at an aggregate purchase price of $1,000,000.
In
addition, we exchanged $27,000,000 of the Company’s existing Series A Preferred Stock held by Ampersand, represented by 270 shares
of Series A Preferred Stock, which represented all of the Company’s issued and outstanding Series A Preferred Stock, for 27,000
newly created shares of Series B Preferred Stock (such shares of Series B Preferred Stock, the “Exchange Shares” and such
transaction, the “Exchange”). Following the Exchange, no shares of Series A Preferred Stock remain designated, authorized,
issued or outstanding. Under the terms of the Securities Purchase and Exchange Agreement, Ampersand also agreed to waive all dividends
and weighted-average anti-dilution adjustments accrued to date on the Series A Preferred Stock.
For
so long as each of Ampersand and 1315 Capital holds at least sixty percent (60%) of the Series B Preferred Stock issued to it on January
15, 2020, such Investor will be entitled to elect two directors to the Board, provided that one of the directors qualifies as an “independent
director” under Rule 5605(a)(2) of the listing rules of the Nasdaq Stock Market (or any successor rule or similar rule promulgated
by another exchange on which the Company’s securities are then listed or designated) (“Independent Director”). However,
if at any time such Investor holds less than sixty percent (60%), but at least forty percent (40%), of the Series B Preferred Stock issued
to them on January 15, 2020, such Investor would only be entitled to elect one director to the Board. Any director elected pursuant to
the terms of the Certificate of Designation may be removed without cause by, and only by, the affirmative vote of the holders of Series
B Preferred Stock. A vacancy in any directorship filled by the holders of Series B Preferred Stock may be filled only by vote or written
consent in lieu of a meeting of such holders of Series B Preferred Stock or by any remaining director or directors elected by such holders
of Series B Preferred Stock.
The
Certificate of Designation of Preferences, Rights and Limitations of Series B Convertible Preferred Stock (the “Certificate of
Designation”) provides that each share of Series B Preferred Stock is convertible, at any time and from time to time, at the option
of the holder into a number of shares of our common stock equal to dividing the amount equal to the greater of the stated value of $1,000
of such Series B Preferred Stock, plus any dividends declared but unpaid thereon, or such amount per share as would have been payable
had each such share been converted into our common stock immediately prior to a liquidation, by six dollars ($6.00) (subject to adjustment in the event of any stock dividend,
stock split, combination, or other similar recapitalization affecting such shares). The aggregate number of shares of our common stock
that may be issued through conversion of the currently outstanding Series B Preferred Stock is 7,833,334
shares (subject to appropriate adjustment in the event of any stock dividend, stock
split, combination or other similar recapitalization affecting such shares). On any matter presented to our stockholders for their action
or consideration at any meeting of stockholders of the Company (or by written consent of stockholders in lieu of meeting), each holder
of outstanding shares of Series B Preferred Stock will be entitled to cast the number of votes equal to the number of whole shares of
our common stock into which the shares of Series B Preferred Stock held by such holder are convertible as of the record date for determining
stockholders entitled to vote on such matter. Except as provided by law or by the Certificate of Designation, holders of Series B Preferred
Stock will vote together with the holders of common stock as a single class and on an as-converted to common stock basis.
The
Series B Preferred Stock entitles the holders thereof to certain protective provisions. In particular, for so long as any shares of Series
B Preferred Stock are outstanding, the written consent of the holders of at least seventy five percent (75%) of the then outstanding
shares of Series B Preferred Stock (voting as a single class) is required for us to amend, waive, alter or repeal the preferences, rights,
privileges or powers of the holders of the Series B Preferred Stock, amend, alter or repeal any provision of the Certificate of Designation
in a manner adverse to the holders of the Series B Preferred Stock, authorize, create or issue any equity securities senior to or pari
passu with the Series B Preferred Stock, or increase or decrease the number of directors constituting the Board. Moreover, for so long
as thirty percent (30%) of the Series B Preferred Stock outstanding as of January 15, 2020 remains outstanding (subject to appropriate
adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization affecting such shares, including
the Reverse Stock Split effected in January 2020), the written consent of the holders representing at least seventy-five percent (75%)
of the of the outstanding shares of Series B Preferred Stock (voting as a single class) is required for us to: (A) authorize, create
or issue any debt securities for borrowed money or funded debt (1) pursuant to which we issue shares, warrants or any other convertible
security, or (2) in excess of $4,500,000 initially, with such amount to be increased in connection with an aggregate consolidated revenue
milestone, but excluding certain specified permitted transactions; (B) merge with or acquire all or substantially all of the assets of
one or more other companies or entities with a value in excess of $20,000,000, to be increased in connection with an aggregate consolidated
revenue milestone; (C) materially change our business; (D) consummate any Liquidation (as defined in the Certificate of Designation);
(E) transfer material intellectual property rights other than in the ordinary course of business; (F) declare or pay any cash dividend
or make any cash distribution on any of our equity interests other than the Series B Preferred Stock; (G) repurchase or redeem any shares
of our capital stock, except for the redemption of the Series B Preferred Stock pursuant to the terms of the Certificate of Designation,
or repurchases of our common stock under agreements previously approved by the Board with employees, consultants, advisors or others
who performed services for us in connection with the cessation of such employment or service; (H) incur any additional individual debt,
indebtedness for borrowed money or other additional liabilities pursuant to we issue shares, warrants or any other convertible security,
or incur any individual debt, indebtedness for borrowed money or other liabilities pursuant to which we do not issue shares, warrants
or any other convertible security exceeding, in each case, $4,500,000 initially, with such amount to be increased in connection with
an aggregate consolidated revenue milestone, but excluding certain specified permitted transactions; (I) change any of our accounting
methods, except for those changes required by GAAP or applicable regulatory agencies or authorities; or (J) conduct a public offering
of common stock registered with the SEC, including any at-the-market offering of our common stock.
The
holders of our Series B Preferred Stock have preferential rights with respect to distributions upon a liquidation or sale of the Company,
including certain business combinations or sales of assets deemed to be a liquidation. Accordingly, no distributions upon liquidation
may be made to the holders of common stock until the holders of the Series B Preferred Stock have been paid their liquidation preference.
As a result, it is possible that, on a liquidation event (including a sale of the Company) and depending on the price thereof, all amounts
available for the holders of equity of the Company would be paid to the holders of Series B Preferred Stock, and that the holders of
common stock would not receive any payment.
During
April 2020, the Company applied for various federal stimulus loans, grants and advances made available under Title 1 of the Coronavirus
Aid, Relief, and Economic Security (CARES) Act, including a loan request under the Small Business Administration (SBA) Paycheck Protection
Program (PPP). In connection with the Company’s application for the PPP loan, both Ampersand and 1315 Capital consented to, and
agreed to vote their shares of Series B Preferred Stock in favor of any “Fundamental Action” taken by the Company as determined
by the Company’s Board of Directors. “Fundamental Actions” include the Company’s ability to a) authorize, create
or issue any debt securities for borrowed money or funded debt; b) merge with or acquire all or substantially all of the assets of one
or more other companies or entities with a value in excess of $20 million; c) transfer, by sale, exclusive license or otherwise, material
intellectual property rights of the Company or any of its direct or indirect subsidiaries, other than those accomplished in the ordinary
course of business; d) declare or pay any cash dividend or make any cash distribution on any equity interests of the Company other than
the Series B Shares; e) incur any additional individual debt, indebtedness for borrowed money or other additional liabilities; and f)
change any accounting methods or practices of the Company, except for those changes required by GAAP or applicable regulatory agencies
or authorities. Subsequently, the Company and Ampersand agreed that Ampersand no longer was required to vote its shares of Series B Preferred
Stock in favor of any “Fundamental Action” taken by the Company as determined by the Company’s Board of Directors.
Available
Information
We
maintain an internet website at www.interpace.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to those reports are available free of charge through the “Investor Relations” portion of our website,
as soon as reasonably practicable after they are filed with the SEC. The content contained in, or that can be accessed through, our website
is not incorporated into this Form 10-K.
In
addition to the other information provided in this Annual Report on Form 10-K, including our financial statements and the related notes
in Part II - Item 8, you should carefully consider the following factors in evaluating our business, operations and financial condition.
Additional risks and uncertainties not presently known to us, which we currently deem immaterial or that are similar to those faced by
other companies in our industry or businesses in general, such as competitive conditions, may also impair our business operations. The
occurrence of any of the following risks could have a material adverse effect on our business, financial condition, results of operations
or cash flows.
Summary
of Risk Factors
Our
business is subject to numerous risks and uncertainties, discussed in more detail in the following section. These risks include, among
others, the following key risks:
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We
face substantial risks due to our operating history of net losses, negative working capital and insufficient cash flows, and lack
of liquidity to pay our current obligations and if we are unable to continue our business, our shares may have little or no value. |
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Our
results of operations have been adversely affected and, in the future, could be materially adversely impacted by the COVID-19 virus. |
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The
war between Russia and Ukraine could materially adversely affect our business, results of operations, and financial condition. |
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We
have a history of operating losses, and our clinical services have generated limited revenue. We may continue to incur net losses
for the foreseeable future and may never achieve or sustain profitability. |
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Adverse developments affecting financial institutions, companies in the
financial services industry or the financial services industry generally, including those we do business with, could adversely affect
our operations and liquidity. |
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We
depend on sales and reimbursements from our clinical services for all of our revenue, and we will need to generate sufficient revenue
from these and other products and/or solutions that we develop or acquire to grow our business. |
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We
rely on third-parties to process and transmit claims to payers for our clinical services, and any delay in processing or transmitting
could have an adverse effect on our revenue and financial condition. |
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Due
to how we recognize revenue, our quarterly revenue and operating results are likely to fluctuate. |
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A
deterioration in the collectability of our accounts receivable could have a material adverse effect on our business, financial condition
and results of operations. |
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If
we are unable to timely repay our outstanding obligations, our secured lenders will have the right to foreclose on our assets. |
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Two
private equity firms and their affiliates’ control, on an as-converted basis, an aggregate of 64.5% of our outstanding shares
of common stock through their holdings of our Series B Preferred Stock, which has a liquidation preference in the event of a sale
of the Company, 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. |
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Billing
for our clinical services tests is complex, and we must dedicate substantial time and resources to the billing process to be paid
for our clinical services tests. |
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We
depend on a few payers for a significant portion of our revenue for our clinical services, and if one or more significant payers,
including CMS, stops providing reimbursement or decreases the amount of reimbursement for our tests, or if we are unable to successfully
negotiate additional reimbursement contracts for our clinical services tests, our revenue could decline and our commercial success
could be compromised. |
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We
may experience a reduction in revenue if physicians or patients decide not to order our clinical services tests. |
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Our
profitability will be impaired by our obligations to make royalty and milestone payments to our licensors for our clinical services
tests. |
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We
rely on sole suppliers for some of the materials used in our tests and services, and we may not be able to find replacements or transition
to alternative suppliers in a timely manner. |
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If
the FDA changes its enforcement policy as to LDTs or disagrees with our position that our clinical services tests are LDTs covered
by the FDA’s current enforcement discretion policy, we could be subject to a number of enforcement actions, any of which could
have a material adverse effect on our clinical services and/or incur substantial costs and delays associated with trying to obtain
pre-market clearance or approval and comply with applicable post-market requirements. |
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The
loss of members of our senior management team or our inability to attract and retain key personnel could adversely affect our business. |
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If
we are unable to compete successfully in the markets our clinical services operate in, we may be unable to increase or sustain our
revenue or achieve profitability. |
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If
we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform our tests
or experience disruptions to our business. |
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Legislation
reforming the U.S. healthcare system may have a material adverse effect on our financial condition and operations. |
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A
failure to comply with federal and state laws and regulations pertaining to our payment practices could result in substantial penalties. |
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If
we do not increase our revenues and successfully manage the size of our operations, our business, financial condition and results
of operations could be materially and adversely affected. |
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The
delisting of our common stock from Nasdaq and subsequent trading on OTCQX® has adversely affected our common stock
and business and financial condition. |
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The
risks associated with penny stock classification could affect the marketability of the Company’s common stock and stockholders
could find it difficult to sell their shares. |
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If
we are unable to maintain and implement effective internal controls over financial reporting, investors may lose confidence in the
accuracy and completeness of our reported financial information and the market price of our common stock may be negatively affected. |
Risks
Related to our Business
We
face substantial risks due to our operating history of net losses, negative working capital and insufficient cash flows, and lack of
liquidity to pay our current obligations and if we are unable to continue our business, our shares may have little or no value.
Our
ability to become a profitable operating company is dependent upon our ability to generate revenues and/or obtain financing adequate
to support our cost structure.
For
the fiscal year ended December 31, 2022, we had an operating loss from continuing operations of $3.6 million. As of December 31,
2022, we had cash and cash equivalents of $4.8 million and current liabilities of $14.3 million. The Company must fund its operating
deficit until a sustainable level of revenue is achieved. We may need to attempt to raise additional equity capital by selling
shares of common stock or other dilutive or non-dilutive means, if necessary. However, investing in our securities may be an
unattractive investment for potential investors. These factors, among others, may make it difficult to raise any additional
capital.
Our
results of operations have been adversely affected and, in the future, could be materially adversely impacted by the COVID-19 virus.
The
continuing impact that the COVID-19 virus will have on our operations, including duration, severity and scope, remains highly uncertain
and cannot be fully predicted at this time. Such impact is a function of the scope of any new virus mutations and outbreaks, the nature
of government public health guidelines and the public’s adherence to those guidelines, the rate of individuals becoming fully vaccinated,
the public’s adherence to guidelines to receive booster shots, the success of business and economic recovery as the pandemic recedes,
unemployment levels, the extent to which new shutdowns may be needed and the impact of any further government economic relief on the
U.S. economy. The coronavirus may continue to spread globally, adversely affecting global economies and financial markets, has and may
materially and adversely impact our operations including, without limitation, the functioning of our laboratory, the availability of
supplies including reagents, demand for our services and travel, customer demand and employee health and availability. 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
virus could continue to adversely impact our results of operations, cash flows and financial condition in the future. At this time, the
Biden Administration does not plan to renew the COVID-19 national and public health emergencies when they expire on May 11, which has
been extended every 90 days since they were established in 2020. This decision, therefore, appears to represent a de-escalation in the
way the government treats the pandemic, as well as a perception that most people have either been vaccinated or have recovered from a
COVID-19 infection (or both), Despite this anticipated change in policy, COVID-19 is still with us and as the virus continues to reproduce
and mutate, the Administration’s policy may need be adjusted. In any event, it is likely that we will still need to make adjustments
to our operating plans in reaction to developments that are beyond our control.
The
war between Russia and Ukraine could materially adversely affect our business, results of operations, and financial condition.
In
February 2022, Russian military forces invaded Ukraine, and although the length, impact, and outcome of the ongoing war in Ukraine is
highly unpredictable, this war has led, and could continue to lead, to significant market and other disruptions, including instability
in financial markets, supply chain interruptions, political and social instability, and increases in cyberattacks, intellectual property
theft, and espionage. We are actively monitoring the situation in Ukraine and assessing its impact on our business.
We
have no way to predict the progress or outcome of the war in Ukraine or its impacts in Ukraine, Russia, or Belarus as the war, and any
resulting government reactions, are rapidly developing and beyond our control. The extent and duration of the war, sanctions, and resulting
market disruptions could be significant and could potentially have a substantial impact on the global economy and our business for an
unknown period of time. Any of the above-mentioned factors could materially adversely affect our business, financial condition, and results
of operations. Any such disruptions may also magnify the impact of other risks described in this “Risk Factors” section and
elsewhere in this Annual Report on Form 10-K.
Adverse
developments affecting financial institutions, companies in the financial services industry or the financial services industry generally,
including those we do business with, could adversely affect our operations and liquidity.
Actual
events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other
companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of
these kinds, have in the past and may in the future lead to market-wide liquidity problems. For example, on March 10, 2023, Silicon Valley
Bank was closed by the California Department of Financial Protection and Innovation, which appointed the Federal Deposit Insurance Corporation,
or the FDIC, as receiver.
Our
access to our cash and cash equivalents and our ability to access bank financing in amounts adequate to finance our operations could
be significantly impaired by the financial institutions with which we have arrangements directly facing liquidity constraints or failures.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing
terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit
and liquidity sources, thereby making it more difficult for us to acquire or take down financing on acceptable terms or at all. Any material
decline in available funding or our ability to access our cash and cash equivalents or our ability to access bank financing could adversely
impact our ability to meet our operating expenses and result in breaches of our contractual obligations which could have material adverse
impacts on our operations and liquidity.
We
have a history of operating losses, and our clinical services have generated limited revenue. We may continue to incur net losses for
the foreseeable future and may never achieve or sustain profitability.
Although
we expect our revenue to grow in the future, there can be no assurance that we will achieve revenue sufficient to offset expenses. Over
the next several years, we expect to continue to devote resources to increase adoption of, and reimbursement for, our clinical services
tests and assays and to use our bioinformatics data to develop and enhance our clinical services products and services, and (ii) develop
and acquire additional products and services. However, our business may never achieve or sustain profitability, and our failure to achieve
and sustain profitability in the future could have a material adverse effect on our business, financial condition and results of operations,
as well as cause the market price of our common stock to decline.
Our
quarterly and annual revenues and operating results may vary which may cause the price of our common stock to fluctuate.
Our
quarterly and annual operating results may vary as a result of a number of factors, including:
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uncertainty
of cash collections which could impact or affect net realizable values of sales of our tests and services; |
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inability
of our laboratory to perform tests; |
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progress
or lack of progress in developing and commercializing tests and services; |
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favorable
or unfavorable decisions about our tests or services or reimbursement rates from government regulators, insurances companies, customers,
or other third party payers; |
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the
commencement, delay, cancellation or completion of sales and marketing programs; |
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timing
and amount of expenses for implementing new programs and accuracy of estimates of resources required for ongoing programs; |
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adoption
of and coverage and reimbursement for our tests; |
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changes
in our relationships with key collaborators, suppliers, customers and third parties; |
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fluctuations
in net revenue due to changes in the valuation of our patient accounts; |
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periodic
stock-based compensation and awards; |
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mark
to market fluctuations in the valuation of our warrant liabilities; |
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changes
in valuation for contingent consideration related to acquired assets; |
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fluctuations
in R&D, business development and spending for clinical trials; |
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timing
and integration of any acquisitions; and |
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changes
in regulations related to diagnostics, pharmaceutical, biotechnology and healthcare companies. |
We
believe that quarterly, and in certain instances annual, comparisons of our financial results are not necessarily meaningful and should
not be relied upon as an indication of future performance. Fluctuations in quarterly and annual results could materially and adversely
affect the market price of our common stock in a manner unrelated to our long-term operating performance.
We
depend on sales and reimbursements from our clinical services for all of our revenue, and we will need to generate sufficient revenue
from these and other products and/or solutions that we develop or acquire to grow our business.
All
of our revenue is derived from our clinical services business. We have molecular diagnostics tests and complimentary service extensions
that are in development, but there can be no assurance that we will be able to successfully commercialize or sufficiently increase revenues
from those tests. If we are unable to increase sales of our molecular diagnostic tests, expand reimbursement for these tests, or successfully
develop and commercialize other molecular diagnostic tests, our revenue and our ability to achieve and sustain profitability would be
impaired, and this could have a material adverse effect on our business, financial condition and results of operations, and the market
price of our common stock could decline.
We
rely on third-parties to process and transmit claims to payers for our clinical services, and any delay in processing or transmitting
could have an adverse effect on our revenue and financial condition.
We
rely on third-parties to provide overall processing of claims and to transmit actual claims to payers based on specific payer billing
formats. If claims for our clinical services are not submitted to payers on a timely basis, or if we are again required to switch to
a different third-party processor to handle claim submissions, we may experience delays in our ability to process claims and receive
payment from payers, which could have a material adverse effect on our business, financial condition and results of operations.
Due
to how we recognize revenue, our quarterly revenue and operating results are likely to fluctuate.
We
adopted Financial Accounting Standards Board (“FASB”) ASC 606 2014-09, “Revenue from Contracts with Customers (Topic
606)” (or “ASC 606”) effective January 1, 2018. As of this date, all revenue is recognized on the accrual basis, based
upon actual collection histories for tests and services and respective payers or payer groups. Due to this change in accounting and the
estimations required under ASC 606, our quarterly revenue and operating results are likely to fluctuate. As we recognize revenue from
payers under ASC 606, we may subsequently determine that certain judgments underlying estimated reimbursement change, or that the estimates
we used at the time we accrued such revenue vary materially from the actual reimbursements subsequently realized, and our financial results
could be negatively impacted in future quarters.
As
a result, comparing our operating results on a period-to-period basis may be difficult due to fluctuations resulting from the estimation
process under ASC 606 and such comparisons may not be meaningful. You should not rely on our past results as an indication of our future
performance. In addition, these fluctuations in revenue may make it difficult in the near term for us, research analysts and investors
to accurately forecast our revenue and operating results. If our revenue or operating results fall below consensus expectations, the
price of our common stock would likely decline.
A
deterioration in the collectability of our accounts receivable could have a material adverse effect on our business, financial condition
and results of operations.
Collection
of accounts receivable from third-party payers and clients is critical to our operating performance. Our primary collection risks are
(i) the risk of overestimating our net revenue at the time of billing, which may result in us receiving less than the recorded receivable,
(ii) the risk of non-payment as a result of denied claims, (iii) in certain states, the risk that clients will fail to remit insurance
payments to us when the commercial insurance company pays out-of-network claims directly to the client and (iv) resource and capacity
constraints that may prevent us from handling the volume of billing and collection issues in a timely manner. Additionally, our ability
to hire and retain experienced personnel affects our ability to bill and collect accounts in a timely manner. We routinely review accounts
receivable balances in conjunction with these factors and other economic conditions that might ultimately affect the collectability of
the client accounts and factor them into our estimation of collectability as warranted. Significant changes in business operations, payer
mix or economic conditions, including changes resulting from legislation or other health reform efforts (including to repeal or significantly
change the Affordable Care Act), could affect our collection of accounts receivable, cash flows and results of operations. In addition,
increased client concentration in states that permit commercial insurance companies to pay out-of-network claims directly to the client
instead of the provider, could adversely affect our collection of receivables. Unexpected changes in reimbursement rates by third-party
payers could have a material adverse effect on our business, financial condition and results of operations.
Our
business is substantially dependent on third-party reimbursement. Any change in the overall health care reimbursement system may adversely
impact our business.
Our
revenues are substantially dependent on third-party reimbursement. We are paid directly by private insurers and governmental agencies,
often on a fixed fee basis. If the average fees allowable by private insurers or governmental agencies were reduced, the negative impact
on revenues could have a material effect on our business, financial condition, results of operations and cash flows. Also, if amounts
owed to us by payors are reduced or not paid on a timely basis, we may be required to increase our concessions and/or decrease our revenues.
Changes to the health care reimbursement system that favor other technologies or treatment regimens and reduce our reimbursements may
adversely affect our ability to market our services profitably. Overall, such dependency and potential changes could materially and adversely
affect our business, financial condition, results of operations and cash flows.
Our
inability to finance our business on acceptable terms in the future may limit our ability to develop and commercialize products and services
and grow our business.
Our
business is not currently operating on a cash flow breakeven or positive basis, and as a result, we may need to finance our business
in the future through collaborations, equity offerings, debt financings, licensing arrangements or other dilutive or non-dilutive means.
On January 7, 2021, we entered into promissory notes (“Notes”) with our two private equity investors in the aggregate amount
of $5 million with a maturity date of June 30, 2021 which were secured by all of our assets. In October 2021, the Company entered into
a $7.5 million revolving credit facility with Comerica Bank (“Comerica”). In addition, also in October 2021, the Company
entered into an $8.0 million term loan with BroadOak Fund V, L.P. (“BroadOak”), the proceeds of which were used to repay
in full at their maturity the Notes extended by our two private equity investors. The BroadOak loan agreement contains affirmative and
negative restrictive covenants, including restrictions on certain mergers, acquisitions, investments and encumbrances which could adversely
affect our ability to conduct our business. The BroadOak loan agreement also contains customary events of default. The Comerica 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. In May 2022, the Company issued
a Convertible Note to BroadOak, pursuant to which BroadOak funded a term loan in the aggregate principal amount of $2 million. In August
2022, the Convertible Note was converted into a subordinated term loan and was added to the outstanding BroadOak loan balance discussed
above.
We
will need additional funding to repay the Comerica and BroadOak borrowings, which have maturity dates of September 2023 and October 2024,
respectively, as well as to continue operations. Additional funding may not be available to us on acceptable terms, or at all. If we
seek to raise funds by issuing additional equity securities, dilution to our stockholders could result. Any public offering of equity
securities must be approved by the holders of our Series B Preferred Stock who are our private equity investors. In addition, we are
currently ineligible to use a Form S-3 shelf registration statement. If we are unable to timely repay the Comerica and BroadOak borrowings
when due, Comerica and BroadOak will have the right to foreclose on our assets (BroadOak being subordinated to Comerica). The incurrence
of additional indebtedness or the issuance of certain equity securities could result in increased fixed payment obligations and could
also result in restrictive covenants, such as limitations on our ability to incur additional debt or issue additional equity, limitations
on our ability to acquire or license intellectual property rights, limitations on our ability to enter into mergers or acquisition of
assets, and other operating restrictions that could adversely affect our ability to conduct our business.
If
we are unable to timely repay our outstanding obligations, our secured lenders will have the right to foreclose on our assets.
In
October 2021, the Company entered into a $7.5 million revolving credit facility with Comerica and an $8.0 million term loan with BroadOak,
which are secured by all of our assets and have maturity dates of September 2023 and October 2024, respectively. In May 2022, the Company
issued a Convertible Note to BroadOak, pursuant to which BroadOak funded a term loan in the aggregate principal amount of $2 million.
In August 2022, the Convertible Note was converted into a subordinated term loan and was added to the outstanding BroadOak loan balance
discussed above. We will need additional funding to repay these outstanding obligations as well as to continue operations. Additional
funding may not be available to us on acceptable terms, or at all. If we are unable to timely repay these outstanding obligations, our
secured lenders will have the right to foreclose on substantially all of our assets.
Risks
Related to our Preferred Stock
We
have issued and may issue additional preferred stock in the future, and the terms of the preferred stock may reduce the value of our
common stock.
We
are authorized to issue up to five million shares of preferred stock in one or more series. Our Board may determine the terms of future
preferred stock offerings without further action by our stockholders. If we issue additional preferred stock, it could affect stockholder
rights or reduce the market value of our outstanding common stock. In particular, specific rights granted to future holders of preferred
stock may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, sinking fund provisions,
and restrictions on our ability to merge with or sell our assets to a third party. We have designated, issued and sold an aggregate of
47,000 outstanding shares of Series B Preferred Stock.
Two
private equity firms and their affiliate’s control, on an as-converted basis, an aggregate of 64.5% of our outstanding shares of
common stock through their holdings of our Series B Preferred Stock, and this concentration of ownership along with their authority for
designation rights for a majority of our directors and their right to approve certain of our actions has a substantial influence on our
decisions.
Ampersand
holds 28,000 shares of our Series B Preferred Stock and 1315 Capital holds 19,000 shares of our Series B Preferred Stock. Accordingly,
on an as converted basis, Ampersand and its affiliates beneficially own 38.4% of the Company’s outstanding common stock of 4,311,414
shares and 1315 Capital and its affiliates beneficially own 26.1%. The conversion and sale by such holders of one or more large blocks
of our common stock could have a negative impact on the market price of our common stock.
These
stockholders, acting together, have control over the outcome of matters submitted to our stockholders for approval, including the election
of directors and any merger, consolidation or sale of all or substantially all of our assets. Holders of Series B Preferred Stock were
granted director designation rights over a majority of our Board. Accordingly, these stockholders, acting together, have significant
influence over our management and affairs. This concentration of ownership might harm the market price of our common stock by delaying,
deterring or preventing a change in control, making some transactions more difficult or impossible to complete without the support of
these shareholders, regardless of the impact of this transaction on our other shareholders. Such ownership interests could effectively
deter a third party from making an offer to buy us, which might involve a premium over our current stock price or other benefits for
our stockholders, or otherwise prevent changes in the control or management. For example, this concentration of ownership may have the
effect of impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer
from making a tender offer or otherwise attempting to obtain control of us.
The
holders of our Series B Preferred Stock have preferential rights that may be adverse to holders of our common stock.
The
holders of our Series B Preferred Stock have preferential rights with respect to distributions upon a liquidation or sale of the Company,
including certain business combinations or sales of assets deemed to be a liquidation. Accordingly, no distributions upon liquidation
may be made to the holders of common stock until the holders of the Series B Preferred Stock have been paid their liquidation preference.
As a result, it is possible that, on a liquidation event (including a sale of the Company) and depending on the price thereof, all amounts
available for the holders of equity of the Company would be paid to the holders of Series B Preferred Stock, and that the holders of
common stock would not receive any payment. In addition, the holders of Series B Preferred Stock have the right to approve certain actions
of the Company.
In
April 2020, 1315 Capital consented to, and agreed to vote (by proxy or otherwise) their Series B Preferred Stock in favor of any “Fundamental
Action” taken by the Company as determined by the Company’s Board of Directors. “Fundamental Actions” include
the Company’s ability to a) authorize, create or issue any debt securities for borrowed money or funded debt; b) merge with or
acquire all or substantially all of the assets of one or more other companies or entities with a value in excess of $20 million; c) transfer,
by sale, exclusive license or otherwise, material intellectual property rights of the Company or any of its direct or indirect subsidiaries,
other than those accomplished in the ordinary course of business; d) declare or pay any cash dividend or make any cash distribution on
any equity interests of the Company other than the Series B Shares; e) incur any additional individual debt, indebtedness for borrowed
money or other additional liabilities; and f) change any accounting methods or practices of the Company, except for those changes required
by GAAP or applicable regulatory agencies or authorities.
Risks
Related to our Clinical Services
Billing
for our clinical services tests is complex, and we must dedicate substantial time and resources to the billing process to be paid for
our clinical services tests.
Billing
for clinical services is complex, time consuming and expensive. Depending on the billing arrangement and applicable law, we bill various
payers, including Medicare, insurance companies and patients, all of which have different billing requirements. To the extent laws or
contracts require us to bill patient co-payments or co-insurance; we must also comply with these requirements. We may also face increased
risk in our collection efforts, including write-offs of doubtful accounts and long collection cycles, which could have a material adverse
effect on our clinical services, results of operations and financial condition. Among others, the following factors make the billing
process complex:
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differences
between the list price for our molecular diagnostic tests and the reimbursement rates of payers; |
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compliance
with complex federal and state regulations related to billing Medicare; |
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changes
in billing policy reimbursement by CMS; |
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disputes
among payers as to which party is responsible for payment; |
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differences
in coverage among payers and the effect of patient co-payments or co-insurance; |
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differences
in information and billing requirements among payers; |
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incorrect
or missing billing information; |
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the
resources required to manage the billing and claims appeals process including those of our billing service providers; |
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our
inability to bill timely and accurate requisitions and process denials efficiently may result in delayed collections and reduced
reimbursement rates; and |
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overall performance and effectiveness of our billing service providers. |
As
we grow and introduce new clinical services tests and other services, we will likely need to add new codes to our billing process as
well as our financial reporting systems. Failure or delays in effecting these changes in external billing and internal systems and processes
could negatively affect our revenue and cash flow from our clinical services. Additionally, our billing activities require us to implement
compliance procedures and oversight, train and monitor our employees or contractors, challenge coverage and payment denials, assist patients
in appealing claims, and undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance
policies and procedures. Payers also conduct external audits to evaluate payments, which add further complexity to the billing process.
These billing complexities, and the related uncertainty in obtaining payment for our diagnostic solutions, could negatively affect our
revenue and cash flow, our ability to achieve profitability, and the consistency and comparability of our results of operations.
We
depend on a few payers for a significant portion of our revenue for our clinical services, and if one or more significant payers, including
CMS, stops providing reimbursement or decreases the amount of reimbursement for our tests, or if we are unable to successfully negotiate
additional reimbursement contracts for our clinical services tests, our revenue could decline and our commercial success could be compromised.
Revenue
for clinical services tests performed on patients covered by Medicare was approximately 45% of our revenue for the fiscal year ended
December 31, 2022. The percentage of our revenue derived from significant payers for our clinical services tests is expected to fluctuate
from period to period as our revenue increases, as additional payers provide reimbursement for such tests, and in the event that one
or more payers were to stop reimbursing for our clinical services tests or change their reimbursement amounts.
In
January 2022, the Company announced that CMS issued a new billing policy whereby CMS will no longer reimburse for the use of the Company’s
ThyGeNEXT® and ThyraMIR®v2 tests when billed together by the same provider/supplier for the same beneficiary
on the same date of service. On February 28, 2022, the Company announced that the National Correct Coding Initiative (NCCI) program issued
a response on behalf of CMS stating that the January 2022 billing policy reimbursement change for ThyGeNEXT® (0245U) and
ThyraMIR®v2 (0018U) tests has been retroactively reversed to January 1, 2022. CMS is currently reimbursing the Company
for one of its two thyroid tests, and has agreed to retroactively reimburse for the second test once they have completed their internal
administrative adjustments. We have been notified by CMS/NCCI that processing of claims for dates of service after January 1, 2022 will
be completed beginning July 1, 2022. As of the date of this filing the Company has no remaining outstanding collections regarding
this matter and is fully up to date with CMS. Effective January 1, 2023, the gapfill price for ThyGeNEXT® was set at
$1,266.07.
Novitas
has been and is the current regional MAC that handles claims processing for Medicare services with jurisdiction for PancraGEN®,
ThyGeNEXT®, ThyraMIR®v2, and RespriDx®. On a five-year rotational basis, Medicare requests
bids for its regional MAC services. Any future changes in the MAC processing or coding for Medicare claims for our molecular diagnostic
tests could result in a change in the coverage or reimbursement rates for such molecular diagnostic tests, or the loss of coverage. If
Novitas restricts coverage for PancraGEN®, our liquidity could be negatively impacted beginning in Fiscal 2023.
Our
PancraGEN®, ThyraMIR®v2 and ThyGeNEXT® tests are reimbursed by Medicare based on applicable
CPT codes. RespriDx® is currently only covered by the Medicare Advantage program and our BarreGEN® assay
is not reimbursed at all. Any future reductions from the current reimbursement rates for our clinical services tests would have a material
adverse effect on business and results of operations.
Although
we have entered into contracts with certain third-party payers which establish allowable rates of reimbursement for our clinical services
tests, payers may suspend or discontinue reimbursement at any time, may require or increase co-payments from patients, or may reduce
the reimbursement rates paid to us. Any such actions could have a negative effect on our revenue for our clinical services tests.
If
payers do not provide reimbursement, rescind or modify their reimbursement policies or delay payments for clinical services, or if we
are unable to successfully negotiate additional reimbursement contracts for our clinical services tests, our commercial success could
be compromised.
Physicians
may generally not order our clinical services tests unless payers reimburse a substantial portion of the test price. There is uncertainty
concerning third-party reimbursement of any test incorporating new molecular diagnostic technology. Reimbursement by a payer may depend
on a number of factors, including a payer’s determination that tests such as our molecular diagnostic tests are: (a) not experimental
or investigational; (b) pre-authorized and appropriate for the patient; (c) cost-effective; (d) supported by peer-reviewed publications;
and (e) included in clinical practice guidelines. Since each payer generally makes its own decision as to whether to establish a policy
or enter into a contract to reimburse our clinical services tests, seeking these approvals is a time-consuming and costly process. Although
we have contracted rates of reimbursement with certain payers, which establishes allowable rates of reimbursement for our PancraGEN®,
ThyGeNEXT®, ThyraMIR®v2 and RespriDx® assays, payers may suspend or discontinue reimbursement
at any time, may require or increase co-payments from patients, may impose pre-authorization requirements or may reduce the reimbursement
rates paid to us. Any such actions could have a negative effect on our revenue for our clinical services tests.
We
have contracted rates of reimbursement with select payers for PancraGEN®, ThyGeNEXT® and ThyraMIR®v2
and to a limited extent, RespriDx®. Without a contracted rate for reimbursement, claims may be denied upon submission,
and we may need to appeal the claims. The appeals process is time consuming and expensive, and may not result in payment. We expect to
continue to focus resources on increasing adoption of and coverage and reimbursement for our molecular diagnostic tests. We cannot, however,
predict whether, under what circumstances, or at what payment levels payers will reimburse us for our molecular diagnostic tests, if
at all. In addition to our current commercial products on the market and in our pipeline, the launch of any new molecular diagnostic
tests in the future may require that we expend substantial time and resources in order to obtain and retain reimbursement. Also, payer
consolidation can create uncertainty as to whether coverage and contracts with existing payers will even remain in effect. Finally, commercial
payers may tie their allowable rates to Medicare rates, and should Medicare reduce their rates, we may be negatively impacted. If we
fail to establish broad adoption of and reimbursement for our assays, or if we are unable to maintain existing reimbursement from payers,
our ability to generate revenue for our clinical services tests could be harmed and this could have a material adverse effect on our
business, financial condition and results of operations.
We
may experience a reduction in revenue if physicians decide not to order our clinical services tests.
If
we are unable to create or maintain sufficient demand for our clinical services tests or if we are unable to expand our product offerings,
we may not become profitable. To generate demand, we will need to continue to educate physicians and the medical community on the value
and benefits of our clinical services tests in order to change clinical practices through clinical trials, published papers, presentations
at scientific conferences and one-on-one education by our commercial sales force, which are costly and time-consuming. In addition, our
ability to obtain and maintain adequate reimbursement from third-party payers for our clinical services tests will be critical to generating
revenue.
In
many cases, practice guidelines in the United States have recommended therapies or surgery to determine if a patient’s condition
is malignant or benign. Accordingly, physicians may be reluctant to order a diagnostic test that may suggest surgery is unnecessary.
In addition, our assays are performed at our laboratory rather than by a pathologist in a local laboratory, so pathologists may be
reluctant to support our tests. Moreover, guidelines for the diagnosis and treatment of thyroid nodules may change to recommend another
type of treatment protocol, and these changes may result in medical practitioners deciding not to use our molecular diagnostic tests.
These facts may make physicians reluctant to use our assays, which could limit our ability to generate revenue from our clinical services
tests and achieve profitability, which could have a material adverse effect on our business, financial condition and results of operations.
We
may experience a reduction in revenue if patients decide not to use our clinical services tests.
Some
patients may decide not to use our clinical services tests due to price, all or part of which may be payable directly by the patient
if the patient’s insurer denies reimbursement in full or in part. Many insurers seek to shift more of the cost of healthcare to
patients in the form of higher deductibles, co-payments, or premiums. In addition, the economic environment in the United States may
result in the loss of healthcare coverage. Implementation of provisions of PPACA provided coverage for patients, particularly in the
individual market, who were previously either uninsured or faced high premiums. However, premiums for many of the plans participating
in the exchanges established as part of this legislation have increased and some health plans have chosen to drop out of these networks
in specific markets or the program altogether. In 2018, Congress passed legislation revising certain provisions of PPACA and federal
agencies also have issued final rules to repeal or revise regulations governing the implementation of certain provisions of PPACA which
may negatively impact our revenues. Overall, the scope and timing of any further legislation, judicial action or federal regulations
to limit, revise, or replace PPACA or regulations governing its implementation is uncertain, but if enacted could have a significant
impact on the U.S. healthcare system and our revenues. These events may result in an increase of uninsured patients, increases in premiums,
and reductions in coverage for some patients. Patients may therefore delay or forego medical checkups or treatment due to their inability
to pay for our clinical services tests, which could have a negative effect on our revenues. We do have a Patient Assistance Program that
allows eligible patients to apply for assistance in covering a portion of their out of pocket obligation or all costs for claims denied
as non-covered for our clinical services tests if they meet the criteria for participation.
If
our clinical services tests do not perform as expected, we may not be able to achieve widespread market adoption among physicians, which
would cause our operating results, reputation, and business to suffer.
Our
success depends in part on the market’s confidence that we can provide reliable, high-quality molecular information products. There
is no guarantee that the accuracy and reproducibility we have demonstrated to date will continue, particularly for clinical samples,
as our test volume increases. We believe that our customers are likely to be particularly sensitive to product defects and errors, including
if our products fail to detect genomic alterations with high accuracy from clinical specimens or if we fail to list, or inaccurately
include, certain treatment options and available clinical trials in our product reports. As a result, the failure of our products to
perform as expected would significantly impair our operating results and our reputation. We may be subject to legal claims arising from
any defects or errors in our clinical services tests.
Our
profitability will be impaired by our obligations to make royalty and milestone payments to our licensors for our clinical services tests.
In
connection with our acquisition of certain assets of Asuragen in 2014, we currently license certain patents and know-how from Asuragen
relating to (i) miRInform® thyroid and pancreas cancer diagnostic tests and other tests in development for thyroid
cancer (the “Asuragen License Agreement”), and (ii) the sale of diagnostic devices and the performance of certain services
relating to thyroid cancer (the “CPRIT License Agreement”). Pursuant to the Asuragen License Agreement and the CPRIT License
Agreement, we are obligated to make certain royalty and milestone payments to Asuragen and the Cancer Prevention & Research Institute
of Texas, or CPRIT. Under the Asuragen License Agreement, we are obligated to pay royalties on the future net sales of tests utilizing
the miRInform® thyroid platform (i.e., ThyGeNEXT®), potentially on certain other thyroid diagnostics
tests and potentially on other tests in development for thyroid cancer. A similar obligation exists if we elect to launch any molecular
tests utilizing the miRInform® pancreas platform. We are also required by the CPRIT License Agreement with Asuragen
to make certain related royalty payments to CPRIT.
When
performing the ThyraMIR®v2 test, we use products supplied by Exiqon A/S (now a part of Qiagen), subject to a license agreement
with Exiqon A/S. The license agreement obligates us to pay royalties on the future net sales of our assays that utilize licensed patents
and know-how obtained from Exiqon A/S. Our profitability will be impaired by our obligations to make royalty payments to our licensors.
Although we believe, under such circumstances, that the increase in revenue will exceed the corresponding royalty payments, our obligations
to our licensors could have a material adverse effect on our business, financial condition and results of operations if we are unable
to manage our operating costs and expenses at profitable levels.
If
we breach certain agreements with Asuragen, it could have a material adverse effect on our sales and commercialization efforts for our
thyroid cancer diagnostic tests as well as any potential tests in development for thyroid cancer utilizing their technology and the sale
of diagnostic devices and the performance of certain services relating to thyroid cancer.
Under
the CPRIT License Agreement, we are obligated to pay 5% of net sales on sales of certain diagnostic devices and the performance of services
relating to thyroid cancer that incorporate technology developed and funded under an agreement between Asuragen and the Cancer Prevention
and Research Institute of Texas, subject to a maximum deduction of 3.5% for royalties paid to third parties. Both of the Asuragen License
Agreement and the CPRIT License Agreement continue until terminated by (i) mutual agreement of the parties or (ii) either party in the
event of a material breach of the respective agreement by the other party.
If
we materially breach or fail to perform any provision under the CPRIT License Agreement, Asuragen will have the right to terminate our
license from CPRIT, and upon the effective date of such termination, our right to practice the licensed technology would end. To the
extent such licensed technology rights relate to our molecular diagnostic tests currently on the market, we would expect to exercise
all rights and remedies available to us, including attempting to cure any breach by us, and otherwise seek to preserve our rights under
the technology licensed to us, but we may not be able to do so in a timely manner, at an acceptable cost to us or at all. Any uncured,
material breach under these license agreements could result in our loss of rights to practice the technology licensed to us under these
license agreements, and to the extent such rights and other technology relate to our molecular diagnostic tests currently on the market,
it could have a material adverse effect on our sales and commercialization efforts for NGS-based thyroid and pancreatic cancer molecular
diagnostic tests and other tests in development for thyroid cancer, and the sale of molecular diagnostic tests and the performance of
certain services relating to thyroid cancer.
Under
the agreement, neither party will be held responsible for a default or breach for failure or delay in performing its obligations when
such failure or delay is caused by or results from events beyond reasonable control of the non-performing party, including fires, floods,
earthquakes, hurricanes, embargoes, shortages, epidemics or pandemics, quarantines war, acts of war, etc.
Clinical
utility studies are important in demonstrating to both customers and payers a molecular diagnostic test’s clinical relevance and
value. If we are unable to identify collaborators willing to work with us to conduct clinical utility studies, or the results of those
studies do not demonstrate that a molecular diagnostic test provides clinically meaningful information and value, commercial adoption
of such test may be slow, which would negatively impact our business.
Clinical
utility studies show when and how to use a molecular diagnostic clinical test and describe the particular clinical situations or settings
in which it can be applied and the expected results. Clinical utility studies also show the impact of the molecular diagnostic test results
on patient care and management. Clinical utility studies are typically performed with collaborating oncologists or other physicians at
medical centers and hospitals, analogous to a clinical trial, and generally result in peer-reviewed publications. Sales and marketing
representatives use these publications to demonstrate to customers how to use a molecular diagnostic clinical test, as well as why they
should use it. These publications are also used with payers to obtain coverage for a molecular diagnostic test, helping to assure there
is appropriate reimbursement. We will need to conduct additional studies for our molecular diagnostic tests and other diagnostic tests
we plan to introduce, to increase the market adoption and obtain coverage and adequate reimbursement. Should we not be able to perform
these studies, should the costs or length of time required for these studies exceed their value, or should their results not provide
clinically meaningful data and value for oncologists and other physicians, adoption of our molecular diagnostic tests could be impaired,
and we may not be able to obtain coverage and adequate reimbursement for them.
We
rely on sole suppliers for some of the materials used in our tests and services, and we may not be able to find replacements or transition
to alternative suppliers in a timely manner.
We
rely on sole suppliers for certain materials that we use to perform our tests and services for our endocrine cancer
diagnostic tests. We also purchase reagents used in our tests and services from sole-source
suppliers. While we have developed alternate sourcing strategies for these materials and vendors, we cannot be certain whether these
strategies will be effective or the alternative sources will be available in a timely manner. If these suppliers can no longer provide
us with the materials we need to perform our tests and services, if the materials do not meet our quality specifications, or if we cannot
obtain acceptable substitute materials, an interruption in test processing and services could occur. Any such interruption may directly
impact our revenue and cause us to incur higher costs. In particular, the continued spread of the coronavirus globally could materially
and adversely impact our operations including without limitation our supply chain, which may have a material and adverse effect on our
business, financial condition and results of operations.
We
may experience problems in scaling our operations, or delays or reagent and supply shortages for our tests and services that could limit
the growth of our revenue.
If
we encounter difficulties in scaling our operations as a result of, among other things, quality control and quality assurance issues
and availability of reagents and raw material supplies, we will likely experience reduced sales of our tests and services, increased
repair or re-engineering costs, and defects and increased expenses due to switching to alternate suppliers, any of which would reduce
our revenues and gross margins. Although we attempt to match our capabilities to estimates of marketplace demand, to the extent demand
materially varies from our estimates, we may experience constraints in our operations and delivery capacity, which could adversely impact
revenue in a given fiscal period. Should our need for raw materials and reagents used in our tests and services fluctuate, we could incur
additional costs associated with either expediting or postponing delivery of those materials or reagents.
If
we are unable to support demand for our tests and services, or any of our future tests, services or solutions, our business could suffer.
As
demand for our tests and services grow, we will also need to continue to scale up our testing capacity and processing technology, expand
customer service, billing and systems processes and enhance our internal quality assurance program. We will also need additional certified
laboratory scientists and other scientific and technical personnel to process higher volumes of our tests and services. We cannot assure
you that increases in scale, related improvements and quality assurance will be implemented successfully or that appropriate personnel
will be available. Failure to implement necessary procedures, transition to new processes or hire the necessary personnel could result
in higher costs of processing tests or inability to meet demand. There can be no assurance that we will be able to perform our testing
and services on a timely basis at a level consistent with demand, or that our efforts to scale our operations will not negatively affect
the quality of test results. If we encounter difficulty meeting market demand or quality standards, our reputation could be harmed and
our future prospects and our business could suffer, causing a material adverse effect on our business, financial condition and results
of operations.
Developing
new tests and related services and solutions involves a lengthy and complex process, and we may not be able to commercialize on a timely
basis, or at all, other tests, assays, services and solutions under development.
Developing
new tests, services and solutions will require us to devote considerable resources to research and development, which we may not be in
a position to do. We may face challenges obtaining sufficient numbers of samples to validate a newly acquired or developed test or service.
In order to develop and commercialize new tests and services, we need to:
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Typically,
few research and development projects result in commercial products, and success in early clinical studies often is not replicated in
later studies. At any point, we may abandon development of a test, service or solutions or we may be required to expend considerable
resources repeating clinical studies, which would adversely affect the timing for generating revenue from such test, service or solution.
If a clinical validation study fails to demonstrate the prospectively defined endpoints of the study or if we fail to sufficiently demonstrate
analytical validity, we might choose to abandon the development of the test, service or solution which could harm our business. In addition,
competitors may develop and commercialize new competing tests, services and solutions faster than us or at a lower cost, which could
have a material adverse effect on our business, financial condition and results of operations.
If
we are unable to develop or acquire tests, services and solutions to keep pace with rapid technological, medical and scientific change,
our operating results and competitive position in the market could be affected.
Recently,
there have been numerous advances in technologies relating to diagnostics, particularly diagnostics that are based on genomic information.
These advances require us to continuously develop our technology and to work to develop new solutions to keep pace with evolving standards
of care. Our services could become obsolete unless we continually innovate and expand our product offerings to include new clinical applications.
If we are unable to develop or acquire new tests, services and solutions or to demonstrate the applicability of our tests and services
for other diseases, our sales could decline and our competitive position could be harmed.
If
we cannot enter into new clinical study collaborations, our product development and subsequent commercialization could be delayed.
In
the past, we have entered into clinical study collaborations related to our tests and services, and our success in the future depends
in part on our ability to enter into additional collaborations with highly regarded institutions. This can be difficult due to internal
and external constraints placed on these organizations. Some organizations may limit the number of collaborations they have with any
one company so as to not be perceived as biased or conflicted. Organizations may also have insufficient administrative and related infrastructure
to enable collaboration with many companies at once, which can extend the time it takes to develop, negotiate and implement a collaboration.
Moreover, it may take longer to obtain the samples we need which could delay our trials, publications, and product launches and reimbursement.
Additionally, organizations often insist on retaining the rights to publish the clinical data resulting from the collaboration. The publication
of clinical data in peer-reviewed journals is a crucial step in commercializing and obtaining reimbursement for our diagnostic tests,
and our inability to control when and if results are published may delay or limit our ability to derive sufficient revenue from them.
If
the FDA changes its enforcement policy as to LDTs or disagrees with our position that our clinical services tests are LDTs covered by
the FDA’s current enforcement discretion policy, we could be subject to a number of enforcement actions, any of which could have
a material adverse effect on our clinical services and/or incur substantial costs and delays associated with trying to obtain pre-market
clearance or approval and comply with applicable post-market requirements.
Clinical
laboratory tests like our clinical services tests are regulated under CLIA as well as by applicable state laws and may also be subject
to FDA regulation, depending on how the test is classified. For example, the FDA regulates in vitro diagnostic tests (also called
in vitro devices or “IVDs”), specimen collection kits, analyte specific reagents (ASRs), and instruments used in conducting
diagnostic testing. Most tests offered as LDTs are currently subject to enforcement discretion by the FDA. LDTs are defined by FDA as
IVDs that are intended for clinical use and are designed, manufactured, and used within a single CLIA-certified, high-complexity clinical
laboratory.
Given
the history of attempts by FDA and Congress to regulate LDTs over the past decade, there is substantial uncertainty concerning whether
FDA’s enforcement discretion policy will continue.
If
we are required to submit applications to FDA for our currently-marketed clinical tests, we may be required to conduct additional studies,
which may be time-consuming and costly and could result in our currently-marketed tests being withdrawn from the market. Continued compliance
with the FDA’s regulations would increase the cost of conducting our clinical services, and subject us to heightened regulation
by the FDA and penalties for failure to comply with these requirements. Failure to comply with applicable regulatory requirements can
result in enforcement action by the FDA, such as warning letters, civil monetary penalties, injunctions, criminal prosecution, recall
or seizure, operating restrictions, partial suspension or total shutdown of operations, and denial of or challenges to applications for
clearance or approval, as well as significant adverse publicity. Any other regulatory or legislative proposals that would increase general
FDA oversight of clinical laboratories or LDTs could negatively impact our business if additional requirements are imposed. We are monitoring
developments and anticipate that our clinical services products will be able to comply with requirements that are ultimately imposed
by the FDA. In the meantime, we maintain our CLIA accreditation and state licenses, which permit the use of LDTs for diagnostics purposes.
Similarly,
notwithstanding any change in existing enforcement policies, if the FDA determines that any of our clinical services tests are IVDs,
rather than LDTs and, accordingly, seeks to enforce the applicable medical device regulations against us, we could be subject to a wide
range of penalties and would likely be prohibited from continuing to offer the applicable tests in interstate commerce until we have
obtained FDA approval or clearance through the Premarket Approval (PMA) process or the 510(k) process, respectively, as applicable. Additionally,
we could be subject to enforcement for noncompliance with the FDA’s regulations on marketing and promotional communications, manufacturing,
quality and safety standards, labeling, storage, registration and listing, recordkeeping, adverse event reporting, and any other regulations
applicable to IVDs. Any adverse enforcement action against us may have a material adverse effect on our clinical services and results
of operations.
If
we are sued for product liability or errors and omissions liability related to our tests and services, we could face substantial liabilities
that exceed our resources.
The
marketing, sale and use of our tests and services could lead to product liability claims if someone were to allege that the test or service
failed to perform as it was designed. We may also be subject to liability for errors in the results we provide to physicians or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. A product liability or errors and omissions liability
claim could result in substantial damages and be costly and time consuming for us to defend. Although we maintain product liability and
errors and omissions insurance, we cannot be certain that our insurance would fully protect us from the financial impact of defending
against these types of claims or any judgments, fines or settlement costs arising out of such claims. Any product liability or errors
and omissions liability claim brought against us, with or without merit, could increase our insurance rates or prevent us from securing
insurance coverage in the future. Additionally, any product liability lawsuit could cause injury to our reputation or cause us to suspend
sales of our products and solutions. The occurrence of any of these events could have a material adverse effect on our business, financial
condition and results of operations.
Our
failure to comply with fraud and abuse laws or payer regulations could result in our being excluded from participation in Medicare, Medicaid,
or other governmental payer programs, subject to fines, penalties, and repayment obligations, decrease our revenues and adversely affect
our results of operations and financial condition for our clinical services.
The
Medicare program is administered by CMS, which, like the states that administer their respective state Medicaid programs, imposes extensive
and detailed requirements on diagnostic services providers, including, but not limited to, rules that govern how we structure our relationships
with physicians, how and when we submit reimbursement claims and how we provide our specialized diagnostic services. In addition, federal
and state laws prohibit fraudulent billing and provide for the recovery of overpayments. In particular, if we fail to comply with federal
and state documentation, coding and billing rules, we could be subject to liability under the federal False Claims Act, including criminal
and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs. The False Claims Act prohibits individuals
and companies from knowingly submitting false claims for payments to, or improperly retaining overpayments from, the government. Private
payers also have complex documentation, coding, and billing rules, and can bring civil actions against laboratories. Our failure to comply
with applicable Medicare, Medicaid and other third party payer rules could result in liability under the False Claims Act, our inability
to participate in a governmental payer program, recoupment or returning funds already paid to us, civil monetary penalties, criminal
penalties and/or limitations on the operational function of our laboratory, all of which could adversely affect our results of operations
and financial condition.
Risks
Related to our Operations
The
loss of members of our senior management team or our inability to attract and retain key personnel could adversely affect our business.
As
a small company with less than 100 employees, the success of our business depends largely on the skills, experience and performance of
members of our senior management team, including our chief executive officer, and others in key management positions. In September 2022
our chief financial officer entered into a Severance and Consulting Agreement and General Release whereby he would continue to act as
the principal financial officer for up to six (6) months from the date of date of termination. The efforts of these persons will be critical
to us as we continue to grow our clinical services and develop and/or acquire additional molecular diagnostic tests. If we were to lose
one or more of these key employees, we may experience difficulties in competing effectively, developing our technologies and implementing
our business strategy. In addition, our commercial laboratory operations depend on our ability to attract and retain highly skilled scientists,
including licensed clinical laboratory scientists. We may not be able to attract or retain qualified scientists and technicians in the
future due to the competition for qualified personnel, and we may have to pay higher salaries to attract and retain qualified personnel.
We may also be at a disadvantage in recruiting and retaining key personnel as our small size, limited resources, and limited liquidity
may be viewed as providing a less stable environment, with fewer opportunities than would be the case at one of our larger competitors.
If we are not able to attract and retain the necessary personnel to accomplish our business objectives, we may experience constraints
that could adversely affect our ability to support our clinical laboratory and commercialization.
If
we lose the support of key opinion leaders or KOL’s, it may limit our revenue growth from our tests or services and our ability
to achieve profitability.
We
have established relationships with leading oncology opinion leaders at premier cancer institutions and oncology networks. If these key
opinion leaders determine that our existing products and services or other products and services that we develop are not clinically effective,
that alternative technologies are more effective, or if they elect to use internally developed products, we would encounter significant
difficulty validating our testing platform, driving adoption, or establishing our tests as a standard of care, which would limit our
revenue growth and our ability to achieve profitability.
We
have limited experience in marketing and selling our products, and if we are unable to expand our direct sales and marketing force to
adequately address our customer’s needs, our business may be adversely affected.
Although
we have been selling commercial products since 2014, genomic diagnostics is a relatively new area of science, and we continue to focus
and refine our efforts to sell, market and receive reimbursement for our clinical service products and to leverage our bioinformatics
data. We may not be able to market, sell, or distribute our existing products or services or other products or services we may develop
effectively enough to support our planned growth.
Our
future sales will depend in large part on our ability to develop, and substantially expand, our sales force and to increase the scope
of our marketing efforts. Our target market of physicians is a large and diverse market. As a result, we believe it is necessary to develop
a sales force that includes sales representatives with specific technical backgrounds. We will also need to attract and develop marketing
personnel with industry expertise. Competition for such employees is intense. We may not be able to attract and retain personnel or be
able to build an efficient and effective sales and marketing force, which could negatively impact sales and market acceptance of our
products and services and limit our revenue growth and potential profitability.
Our
expected future growth will impose significant added responsibilities on members of management, including the need to identify, recruit,
maintain, and integrate additional employees. Our future financial performance and our ability to commercialize our products and leverage
our data and to compete effectively will depend in part on our ability to manage this potential future growth effectively, without compromising
quality.
If
our sales force is less successful than anticipated, our business expansion plans could suffer and our ability to generate revenues could
be diminished. In addition, we have limited history selling our clinical services tests on a direct basis, and leveraging our bioinformatics
data and our limited history makes forecasting difficult.
If
our sales force is not successful, or new additions to our sales team fail to gain traction among our customers, we may not be able to
increase market awareness and sales of our molecular diagnostic tests. If we fail to establish our clinical services tests in the marketplace,
it could have a negative effect on our ability to sell subsequent products or services and hinder the desired expansion of our business.
We have growing, however limited, historical experience forecasting the direct sales of our clinical services products. Our ability to
produce product quantities that meet customer demand is dependent upon our ability to forecast accurately and plan production accordingly.
If
we are unable to compete successfully in the markets our clinical services operate in, we may be unable to increase or sustain our revenue
or achieve profitability.
We
compete with physicians and the medical community who use traditional methods to diagnose gastrointestinal, endocrine and lung cancers
and to conduct clinical trials. In many cases, practice guidelines in the United States have recommended non-molecular testing like cytology
or diagnostic surgery to determine if a patient’s condition is malignant or benign. As a result, we believe that we will need to
continue to educate physicians and the medical community on the value and benefits of our clinical services tests in order to impact
clinical practices. In addition, we face competition from other companies that offer diagnostic tests. Specifically, in regard to our
thyroid diagnostic tests, Veracyte, Inc. (“Veracyte”) has thyroid nodule cancer diagnostic tests which are currently on the
market that compete with our ThyGeNEXT® and ThyraMIR®v2 tests. Quest Diagnostics Inc. currently offers
Veracyte’s tests via a co-marketing agreement, and CBLPath, Inc. is offering a diagnostic test performed via the University of
Pittsburgh Medical Center (UPMC) that analyzes genetic alterations using next-generation sequencing mutation panel for pancreatic cysts.
While we do not believe we currently have significant direct competition for PancraGEN® in the gastrointestinal market,
technology such as a next-generation sequencing mutation panel could in the future lead to increased competition.
It
is also possible that we face future competition from laboratory developed tests, or LDTs, developed by commercial laboratories such
as Quest and/or other diagnostic companies developing new molecular diagnostic tests or technologies. Furthermore, we may be subject
to competition as a result of the new, unforeseen technologies that can be developed by our competitors in the gastrointestinal and endocrine
cancer molecular diagnostic testing space. To compete successfully, we must be able to demonstrate, among other things, that our test
results are accurate and cost effective, and we must secure a meaningful level of reimbursement for our tests. Since our clinical services
began in 2014, many of our potential competitors have stronger brand recognition and greater financial capabilities than we do. Others
may develop a test with a lower price than ours that could be viewed by physicians and payers as functionally equivalent to our molecular
diagnostic tests or offer a test at prices designed to promote market penetration, which could force us to lower the price of our clinical
services tests and affect our ability to achieve and maintain profitability. If we are unable to compete successfully against current
and future competitors, we may be unable to increase market acceptance of our clinical services tests and overall sales, which could
prevent us from increasing our revenue or achieving profitability and cause the market price of our common stock to decline. As we add
new clinical services tests and other products and services, we will likely face many of these same competitive risks that we do currently.
If
we cannot license rights to use third-party technologies on reasonable terms, we may not be able to commercialize new products or services
in the future.
In
the future, we may license third-party technology to develop or commercialize new products or offer new services. In return for the use
of a third-party’s technology, we may agree to pay the licensor royalties based on sales of our solutions. Royalties are a component
of cost of revenue and affect the margins on our solutions. We may also need to negotiate licenses to patents and patent applications
after introducing a commercial product. Our business may suffer if we are unable to enter into the necessary licenses on acceptable terms,
or at all, if any necessary licenses are subsequently terminated, if the licensors fail to abide by the terms of the license or fail
to prevent infringement by third parties, or if the licensed patents or other rights are found to be invalid or unenforceable.
Unfavorable
results of legal proceedings could have a material adverse effect on our business, financial condition and results of operations.
We
are subject to various legal proceedings and claims that arise in or outside the ordinary course of business. The results of legal proceedings
cannot be predicted with certainty. Regardless of merit, litigation may be both time-consuming and disruptive to our operations and cause
significant expense and diversion of management attention. If we do not prevail in the legal proceedings, we may be faced with significant
monetary damages or injunctive relief against us that could have a material adverse effect on our business, financial condition and results
of operations.
If
a catastrophe strikes our laboratory or if it becomes inoperable for any other reason, we will be unable to perform our testing and our
business will be harmed.
The
laboratory and equipment we use to perform our tests and services would be costly to replace and could require substantial lead time
to replace and qualify for use if they became inoperable. Our facilities may be harmed or rendered inoperable by natural or man-made
disasters, including earthquakes, flooding, power outages, and health epidemics or pandemics, including the outbreak of Coronavirus (COVID-19),
which may render it difficult or impossible for us to perform our testing or services for some period of time or to receive and store
samples. The inability to perform our tests or services for even a short period of time, including due to disruption in staffing, supplies,
distribution, or transport or temporary closures related to an outbreak of disease such as COVID-19, may result in the loss of customers
or harm our reputation, and we may be unable to regain those customers in the future. Although we maintain insurance for damage to our
property and the disruption of our business, this insurance may not be sufficient to cover all of our potential losses and may not continue
to be available to us on acceptable terms, if at all. In addition, COVID-19 has materially and adversely impacted our operations particularly
during portions of 2020. Further continued spread of COVID-19 globally and resulting travel and other restrictions that may be imposed
or reimposed could negatively impact our ability to obtain raw materials needed for manufacture of our clinical services testing, our
ability to provide testing to patients, our financial condition and our results of operations. The extent to which COVID-19 and global
efforts to contain its spread will impact our operations will depend on future developments, which are highly uncertain and cannot be
predicted at this time, and include the duration, severity and scope of the outbreak and the actions taken to contain or treat the COVID-19
outbreak. At this time, the Biden Administration does not plan to renew the COVID-19 national and public health emergencies when they
expire on May 11, which has been extended every 90 days since they were established in 2020. This decision, therefore, appears to represent
a de-escalation in the way the government treats the pandemic, as well as a perception that most people have either been vaccinated or
have recovered from a COVID-19 infection (or both), Despite this anticipated change in policy, COVID-19 is still with us and as the virus
continues to reproduce and mutate, the Administration’s policy may need be adjusted. In any event, it is likely that we will still
need to make adjustments to our operating plans in reaction to developments that are beyond our control.
If
we use hazardous materials in a manner that causes contamination or injury, we could be liable for resulting damages.
We
are subject to federal, state and local laws, rules and regulations governing the use, discharge, storage, handling and disposal of biological
material, chemicals and waste. We cannot eliminate the risk of accidental contamination or injury to employees or third parties from
the use, storage, handling or disposal of these materials. In the event of contamination or injury, we could be held liable for any resulting
damages, remediation costs and any related penalties or fines, and any liability could exceed our resources or any applicable insurance
coverage we may have. The cost of compliance with these laws and regulations may become significant, and our failure to comply may result
in substantial fines or other consequences, and either could have a significant impact on our operating results.
Security
breaches, loss of data and other disruptions to us or our third-party service providers could compromise sensitive information related
to our business or prevent us from accessing critical information and expose us to liability, which could adversely affect our business
and our reputation.
Our
business requires that we and our third-party service providers collect and store sensitive data, including PHI, personally identifiable
information such as genetic information or credit card information about patients or other individuals, and our proprietary business
and financial information. We must comply with the HIPAA and HITECH privacy, security, and breach notification regulations with respect
to PHI in our capacity as a covered entity and business associate, and with consumer protection and consumer privacy laws that apply
to our processing of this sensitive data, which may increase our operational costs. Furthermore, the privacy, security, and breach notification
regulations implemented under HIPAA and HITECH as well as other federal and state consumer protection and consumer privacy laws and regulations
that may apply to us provide for significant fines and other penalties, including potential civil and criminal fines and penalties, for
non-compliance. We face a number of risks relative to our protection of, and our service providers’ protection of, this critical
information, other personally identifiable information, and our proprietary business and financial information, including loss of access,
fraudulent modifications, inappropriate disclosure and inappropriate access, as well as risks associated with our ability to identify
and audit such events. The secure processing, storage, maintenance and transmission of this critical information is vital to our operations
and business strategy, and we devote significant resources to protecting such information. Although we take measures to protect sensitive
information from unauthorized access or disclosure, our information technology and infrastructure may be vulnerable to attacks by hackers
or viruses or otherwise breached due to employee error, malfeasance or other activities. If such event would occur and cause interruptions
in our operations, our networks would be compromised and the information we store on those networks could be accessed by unauthorized
parties, publicly disclosed, modified without our knowledge, lost or stolen. In 2017, we discovered malware installed on certain servers.
After an internal investigation, we do not believe that any PHI or other sensitive data on the affected servers was accessed or compromised.
We removed the malware, and enhanced our cybersecurity procedures.
Additionally,
we engage third-party contractors who, insofar as they are our business associates, are contractually and legally obligated to safeguard
and maintain the confidentiality of any PHI that they create, receive, maintain, transmit, use, or disclose on our behalf. Unauthorized
persons may be able to gain access to PHI stored by such third-party contractors, including in their computer networks. Any wrongful
use or disclosure of PHI by us or our third-party contractors, including disclosure due to data theft or unauthorized access to our or
our third-party contractors’ computer networks, could subject us to fines or penalties that could adversely affect our business
and results of operations. Although HIPAA and HITECH and their implementing regulations do not expressly provide for a private right
of damages, they permit state attorneys general to bring civil actions and obtain damages on behalf of state residents for violations,
and enjoin further violations, of the privacy and security regulations implemented under HIPAA. We also could incur damages under state
laws to private parties for the wrongful use or disclosure of confidential health information or other private personal information by
us or our third-party contractors. Unauthorized access, loss, modification or dissemination could disrupt our operations, including our
ability to process tests, provide test results, bill payers or patients, process claims, provide customer assistance services, conduct
research and development activities, collect, process and prepare company financial information, provide information about our solution
and other patient and physician education and outreach efforts through our website, or manage the administrative aspects of our business
and damage our reputation, any of which could adversely affect our business. In addition, the interpretation and application of consumer,
health-related or other data protection laws in the United States are often uncertain, contradictory and in flux, particularly as more
states enact comprehensive consumer privacy laws. It is possible that these various laws may be interpreted and applied in a manner that
is inconsistent with our practices. Complying with these various laws could cause us to incur substantial costs or require us to change
our business practices, systems and compliance procedures in a manner adverse to our business.
We
may need to increase the size of our organization, and we may experience difficulties in managing this growth.
We
are a small company with less than 100 employees. We may increase the number of employees in the future depending on the progress and
growth of our business. Future growth will impose significant added responsibilities on members of management, including the need to
identify, attract, retain, motivate and integrate additional employees with the necessary skills to support the growing complexities
of our business. Rapid and significant growth may place strain on our administrative, financial and operational infrastructure. Our future
financial performance and our ability to sell or promote our existing tests and services and develop and commercialize new tests and
services and to compete effectively will depend, in part, on our ability to manage any future growth effectively. To that end, we must
be able to:
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additional management, administrative, manufacturing and regulatory personnel; |
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We
may not be able to accomplish these tasks, and our failure to accomplish any of them could harm our financial results. We may need to
reduce the size of our organization in order to become profitable and we may experience difficulties in managing these reductions.
Risks
Related to Regulation within our Markets
If
we fail to comply with federal, state and foreign laboratory licensing requirements, we could lose the ability to perform our tests or
experience disruptions to our business.
We
are subject to CLIA regulations, a Federal law that regulates clinical laboratories that perform testing on specimens derived from humans
for the purpose of providing information for the diagnosis, prevention or treatment of any disease, or impairment of, or the assessment
of the health of, human beings. CLIA regulations mandate specific personnel qualifications, facilities administration, quality systems,
inspections and proficiency testing. CLIA certification is also required in order for us to be eligible to bill federal and state healthcare
programs, as well as many private third-party payers, for our molecular diagnostic tests. To renew these certifications, we are subject
to survey and inspection every two years. Moreover, CLIA inspectors may make random inspections of our clinical reference laboratory.
We are also required to maintain State licenses to conduct testing in our Pittsburgh, Pennsylvania laboratory. Pennsylvania law requires
that we maintain a license, and establish standards for the day-to-day operation of our clinical reference laboratory in Pittsburgh,
Pennsylvania. In addition, our Pittsburgh laboratory is required to be licensed by certain states, including California, Maryland, New
York and Rhode Island. New York law requires us to obtain test-specific approval before offering our tests as LDT. California, Maryland,
New York and Rhode Island laws also mandate proficiency testing for laboratories licensed under the laws of each respective State regardless
of whether such laboratories are located in California, Maryland, New York or Rhode Island. If we were unable to obtain or maintain our
CLIA certificate for our laboratory, whether as a result of revocation, suspension or limitation, we would no longer be able to perform
our current clinical services, which could have a material adverse effect on our business, financial condition and results of operations.
If we were to lose our licenses issued by States where we are required to hold licenses, if such licenses expired or were not renewed,
or if we failed to obtain and maintain a State license that we are required to hold, we may be subject to significant fines, penalties
and liability, and may be forced to cease testing (if Pennsylvania) or cease testing specimens from those States (if California, New
York, Maryland, or Rhode Island), which could have a material adverse effect on our business, financial condition and results of operations.
New molecular diagnostic tests we may develop may be subject to new requirements by governmental bodies, including state governments,
and we may not be able to offer our new molecular diagnostic tests in such jurisdictions until such requirements are met.
Legislation
reforming the U.S. healthcare system may have a material adverse effect on our financial condition and operations.
PPACA
made changes that significantly affected the pharmaceutical, medical device and clinical laboratory industries. For example, PPACA includes
coordination and promotion of research on comparative clinical effectiveness of different technologies and procedures, initiatives to
revise Medicare payment methodologies, such as bundling of payments across the continuum of care by providers and physicians, and initiatives
to promote quality indicators in payment methodologies. PPACA also includes significant new fraud and abuse measures, including required
disclosures of financial arrangements with physicians, lower thresholds for violations and increasing potential penalties for such violations.
The effect of PPACA and any potential changes that may be necessitated by the legislation is uncertain, any of which may potentially
affect our business.
Our
current position is that we do not meet the definition of an “Applicable Manufacturer” under the Physician Payments Sunshine
Act of the PPACA and are therefore not subject to the disclosure or tax requirements contained in PPACA. If the government were to reach
a different conclusion, our failure to disclose could result in significant monetary penalties and potential claims from certain third
parties.
PPACA,
as well as other healthcare reform measures that have been and may be adopted in the future, may result in more rigorous coverage criteria,
new payment methodologies and in additional downward pressure on the price that we receive for any approved product or service, and could
seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs may result in a similar
reduction in payments from private payers. The implementation of cost containment measures or other healthcare reforms may compromise
our ability to generate revenue, attain profitability or commercialize our products. At the same time, there have been significant ongoing
efforts to repeal, revise, or replace PPACA; however, the U.S. Supreme Court upheld the law in 2021.
President
Biden has used executive orders to undo certain changes to the PPACA made by the Trump administration and has indicated it will advocate
for legislation to build on the PPACA. It is unknown what form any such changes or any law would take, and how or whether it may affect
our business in the future. We expect that changes or additions to the PPACA, the Medicare and Medicaid programs, and changes stemming
from other healthcare reform measures, especially with regard to healthcare access, financing or other legislation in individual states,
could have a material adverse effect on the healthcare industry.
For
example, Medicare payment rates have been – and in the future, will continue to be, to varying extents, subject to sequestration.
Reductions resulting from the Congressional sequester are applied to total claim payments made; however, they do not currently result
in a rebasing of the negotiated or established Medicare or Medicaid reimbursement rates.
State
legislation on reimbursement applies to Medicaid reimbursement and Managed Medicaid reimbursement rates within that state. Some states
have passed or proposed legislation that would revise reimbursement methodology for clinical laboratory payment rates under those Medicaid
programs.
In
April 2014, President Obama signed the Protecting Access to Medicare Act, or PAMA, which included a substantial new payment system for
clinical laboratory tests under the CLFS. Under PAMA, CLFS payment rates are based upon the weighted median of private payor rates for
each type of laboratory test. To calculate these rates, PAMA requires CLIA-certified laboratories that receive a majority of their Medicare
revenue from payments made under the CLFS and the Physician Fee Schedule, and receive at least $12,500 in CLFS revenue, within the 6-month
reporting period, to report private payor rates and volumes for their tests with specific CPT codes based on final payments made during
a 6-month period of data collection (from January 1 through June 30 of the applicable year). For most laboratory tests, the CLFS is updated
every three years, but rates are updated annually for Advanced Diagnostic Laboratory Tests, or ADLTs. The first private payor rate-based
CLFS was based on data collected from January 1 through June 30, 2016, and, following an initial, one-year delay became effective on
January 1, 2018. CMS published final rules implementing these changes in 2016 and 2018.
Under
the revised Medicare Clinical Laboratory Fee Schedule, reimbursement for clinical laboratory testing was reduced for most tests in 2018,
2019, and 2020. PAMA (as revised) calls for further revisions of the Medicare Clinical Laboratory Fee Schedule for years after 2022,
based on future surveys of market rates. Further reductions in reimbursement may result from such revisions.
The
Coronavirus Aid, Relief, and Economic Security (CARES) Act, as amended by the Protecting Medicare and American Farmers from Sequester
Cuts Act, revised payment reductions and the data reporting schedule for CDLTs that are not ADLTs. Under these laws, the next data reporting
period is January 1, 2023 through March 31, 2023, and will be based upon the data collected during the January 1, 2019 to June 30, 2019
period. Any reductions to payment rates resulting from the new methodology are limited to 10% per test per year in each of the years
2018 through 2020 and to 15% per test per year in each of the years 2023 through 2025. Payments will not be reduced for 2021 or 2022
for CDLTs.
We
cannot predict whether future healthcare initiatives will be implemented at the federal or state level or in countries outside of the
United States in which we may do business, or the effect any future legislation or regulation will have on us. There is additional uncertainty
in light of the current Presidential administration. The taxes imposed by federal legislation, cost reduction measures and the expansion
in the role of the U.S. government in the healthcare industry may result in decreased revenue, lower reimbursement by payers for our
tests or reduced medical procedure volumes, all of which may adversely affect our business, financial condition and results of operations.
Complying
with numerous statutes and regulations pertaining to our services is an expensive and time-consuming process, and any failure to comply
could result in substantial penalties.
We
are subject to regulation by both the federal government and the governments of the states in which we conduct our operations. The federal
and state laws which may apply to us include, but are not limited to:
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Food, Drug and Cosmetic Act, as supplemented by various other statutes; |
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CLIA
and state licensing requirements; |
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and promotion laws; |
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Medicare
and Medicaid billing and payment regulations applicable to clinical laboratories; |
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The
Eliminating Kickbacks in Recovery Act of 2018 (EKRA), which prohibits the solicitation, receipt, payment or offer of any remuneration
(including any kickback, bribe, or rebate) directly or indirectly, overtly or covertly, in cash or in kind, in return for referring
a patient or patronage to a recovery home, clinical treatment facility, or laboratory for services covered by both government and
private payers; |
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The
Federal Anti-Kickback Statute (and state equivalents), which prohibits knowingly and willfully offering, paying, soliciting, or receiving
remuneration, directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging
for, or recommending of an item or service that is reimbursable, in whole or in part, by a federal healthcare program; |
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The
Federal physician self-referral law, commonly referred to as the “Stark Law,” (and state equivalents), which prohibits
a physician from making a referral for certain designated health services covered by the Medicare program, including laboratory and
pathology services, if the physician or an immediate family member has a financial relationship with the entity providing the designated
health services, unless the financial relationship falls within an applicable exception to the prohibition; |
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HIPAA,
which established comprehensive federal standards with respect to the privacy and security of PHI and requirements for the use of
certain standardized electronic transactions, and amendments made in 2013 to HIPAA under the Health Information Technology for Economic
and Clinical Health Act, which strengthen and expand HIPAA privacy and security compliance requirements, increase penalties for violators,
extend enforcement authority to state attorneys general, and impose requirements for breach notification; |
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The
FTC Act and various state consumer privacy laws, which require regulated entities to take reasonable steps to safeguard the personal
information of consumers, minimize its use and provide consumers with certain rights as to their personal data such as the right
to correct or delete their personal information; |
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The
Federal Civil Monetary Penalties Law, which prohibits, among other things, the offering or transfer of remuneration to a Medicare
or state healthcare program beneficiary if the person knows or should know it is likely to influence the beneficiary’s selection
of a particular provider, practitioner, or supplier of services reimbursable by Medicare or a state healthcare program, unless an
exception applies; |
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The
Federal False Claims Act (and state equivalents), which imposes liability on any person or entity that, among other things, knowingly
presents, or causes to be presented, a false or fraudulent claim for payment to the federal government; |
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The
federal transparency requirements under the PPACA, including the provisions commonly referred to as the Physician Payments Sunshine
Act, which requires certain manufacturers of drugs, devices, biologics and medical supplies that are reimbursable under Medicare,
Medicaid or Children’s Health Insurance Program to report annually to CMS information related to payments and other transfers
of value to physicians and teaching hospitals, and ownership and investment interests held by physicians and their immediate family
members; |
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Other
federal and state fraud and abuse laws, prohibitions on self-referral and kickbacks, fee-splitting restrictions, prohibitions on
the provision of products at no or discounted cost to induce physician or patient adoption, and false claims acts, transparency,
reporting, and disclosure requirements, which may extend to services reimbursable by any third-party payer, including private insurers; |
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The
prohibition on reassignment of Medicare claims, which, subject to certain exceptions, precludes the reassignment of Medicare claims
to any other party; |
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The
Protecting Access to Medicare Act of 2014, which requires us to report private payer rates and test volumes for specific CPT codes
on a triennial basis and imposes penalties for failures to report, omissions, or misrepresentations; |
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The
rules regarding billing for diagnostic tests reimbursable by the Medicare program, which prohibit a physician or other supplier from
marking up the price of the technical component or professional component of a diagnostic test ordered by the physician or other
supplier and supervised or performed by a physician who does not “share a practice” with the billing physician or supplier;
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State
laws that prohibit other specified practices related to billing such as billing physicians for testing that they order, waiving coinsurance,
co-payments, deductibles, and other amounts owed by patients, and billing a State Medicaid program at a price that is higher than
what is charged to other payers. |
In
recent years U.S. Attorneys’ Offices have increased scrutiny of the healthcare industry, as have Congress, the Department of Justice,
the Department of Health and Human Services’ Office of the Inspector General and the Department of Defense. These bodies have all
issued subpoenas and other requests for information to conduct investigations of, and commenced civil and criminal litigation against,
healthcare companies based on financial arrangements with health care providers, regulatory compliance, product promotional practices
and documentation, and coding and billing practices. Whistleblowers have filed numerous qui tam lawsuits against healthcare companies
under the federal and state False Claims Acts in recent years, in part because the whistleblower can receive a portion of the government’s
recovery under such suits.
The
growth of our business may increase the potential of violating these laws, regulations or our internal policies and procedures. The risk
of our being found in violation of these or other laws and regulations is further increased by the fact that many have not been fully
interpreted by the regulatory authorities or the courts, and their provisions are open to a variety of interpretations. Violations of
federal or state regulations may incur investigation or enforcement action by the FDA, Department of Justice, State agencies, or other
legal authorities, and may result in substantial civil, criminal, or other sanctions. Any action brought against us for violation of
these or other laws or regulations, even if we successfully defend against it, could cause us to incur significant legal expenses and
divert our management’s attention from the operation of our business. If our operations are found to be in violation of any of
these laws and regulations, we may be subject to civil and criminal penalties, damages and fines, we could be required to refund payments
received by us, we could face possible exclusion from Medicare, Medicaid and other federal or state healthcare programs and we could
even be required to cease our operations. Any of the foregoing consequences could have a material adverse effect on our business, financial
condition and results of operations.
A
failure to comply with federal and state laws and regulations pertaining to our payment practices could result in substantial penalties.
We
retain healthcare practitioners as key opinion leaders providing consultation in various aspects of our business, maintain a sales force,
and contract for marketing services. These arrangements, like any arrangement that includes compensation to a healthcare provider or
potential referral source, may trigger federal or state anti-kickback, Stark Law liability, and False Claims Act liability. There are
no guarantees that the federal or state governments will find that these arrangements are designed properly or that they do not trigger
liability under federal and state laws. Under existing laws, all arrangements must be commercially reasonable and compensation must be
fair market value. These terms require some subjective analysis. Safe harbors in the anti-kickback laws do not necessarily equate to
exceptions in the Stark Law, and there is no guarantee that the government will agree with our payment practices with respect to the
relationships between our laboratory and the healthcare providers, sales force members, or other parties. A failure to comply with
Federal and State laws and regulations pertaining to our payment practices could result in substantial penalties and adversely affect
our business, financial condition and results of operations.
In
addition, federal law prohibits any entity from offering or transferring to a Medicare or Medicaid beneficiary any remuneration that
the entity knows or should know is likely to influence the beneficiary’s selection of a particular provider, practitioner or supplier
of Medicare or Medicaid payable items or services, including waivers of copayments and deductible amounts (or any part thereof) and transfers
of items or services for free or for other than fair market value. Entities found in violation may be liable for civil monetary penalties
of up to $10,000 for each wrongful act. Further, federal and state anti-kickback statutes or similar laws may be implicated by arrangements
with patients to waive, reduce, or limit copays or other payment amounts, such as our Patient Assistance Program. Third-party payers,
including commercial payers and government payers, may prohibit, limit, or restrict certain financial arrangements with patients. Violation
of these laws or payment policies could result in significant fines, penalties, liability, recoupment, and exclusion from Medicare and
Medicaid, which could have a material adverse effect on our business, results of operations, financial condition and cash flows.
In
2018, the U.S. enacted the Eliminating Kickbacks in Recovery Act, or EKRA, as part of the Substance Use-Disorder Prevention that Promotes
Opioid Recovery and Treatment for Patients and Communities Act (SUPPORT Act). EKRA is an all-payer anti-kickback law that makes it a
criminal offense to pay any remuneration to induce referrals to, or in exchange for, patients using the services of a recovery home,
a substance use clinical treatment facility, or laboratory. Although it appears that EKRA was intended to reach patient brokering and
similar arrangements to induce patronage of substance use recovery and treatment, the language in EKRA is broadly written. The term “laboratory”
is defined broadly and without reference to any connection to substance use disorder treatment. EKRA is a criminal statute and violations
can result in fines of up to $200,000, up to 10 years in prison, or both, per violation. As drafted, EKRA prohibits incentive compensation
to sales employees, a practice that is common in the industry.
Our
business activities may be subject to the Foreign Corrupt Practices Act, or FCPA, and similar anti-bribery and anti-corruption laws.
Our
business activities may be subject to the FCPA and similar anti-bribery or anti-corruption laws, regulations or rules of other countries
in which we operate, including the U.K. Bribery Act. The FCPA generally prohibits offering, promising, giving, or authorizing others
to give anything of value, either directly or indirectly, to a non-U.S. government official in order to influence official action, or
otherwise obtain or retain business. The FCPA also requires public companies to make and keep books and records that accurately and fairly
reflect the transactions of the corporation and to devise and maintain an adequate system of internal accounting controls. Our business
is heavily regulated and therefore involves significant interaction with public officials, potentially including officials of non-U.S.
governments. Additionally, in many other countries, the health care providers who prescribe pharmaceuticals are employed by their government,
and the purchasers of pharmaceuticals are government entities; therefore, our dealings with these prescribers and purchasers are subject
to regulation under the FCPA. Recently, the SEC and Department of Justice have increased their FCPA enforcement activities with respect
to pharmaceutical companies. There is no certainty that all of our employees, agents, contractors, or collaborators, or those of our
affiliates, will comply with all applicable laws and regulations, particularly given the high level of complexity of these laws. Violations
of these laws and regulations could result in fines, criminal sanctions against us, our officers, or our employees, the closing down
of our facilities, requirements to obtain export licenses, cessation of business activities in sanctioned countries, implementation of
compliance programs, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to
offer our products in one or more countries and could materially damage our reputation, our brand, our international expansion efforts,
our ability to attract and retain employees, and our business, prospects, operating results, and financial condition.
Changes
in governmental regulation could negatively impact our business operations and increase our costs.
The
pharmaceutical, biotechnology and healthcare industries are subject to a high degree of governmental regulation. Significant changes
in these regulations affecting our business could result in the imposition of additional restrictions on our business, additional costs
to us in providing our tests or services to our customers or otherwise negatively impact our business operations. Changes in governmental
regulations mandating price controls and limitations on patient access to our products could also reduce, eliminate or otherwise negatively
impact our sales. Additional changes may be forthcoming in light of the current Presidential administration.
Risks
Relating To Our Intellectual Property
If
we are unable to protect our intellectual property effectively, our business would be harmed.
We
rely on patent protection as well as trademark, trade secret and other intellectual property rights protection and contractual restrictions
to protect our proprietary technology. If we fail to protect our intellectual property, third parties may be able to compete more effectively
against us and we may incur substantial litigation costs in our attempts to recover or restrict use of our intellectual property. While
we apply for patents covering our products and technologies and uses thereof, we may fail to apply for patents on important products
and technologies in a timely fashion or at all, or we may fail to apply for patents in relevant jurisdictions. Others could seek to design
around our current or future patented technologies. We may not be successful in defending any challenges made against our patents or
patent applications. On January 16, 2018, we were notified that an Opposition had been filed against EP patent #2772550 alleging that
the patent is invalid. On February 25, 2019, the European Patent Office Opposition Division issued a decision revoking the patent on
grounds that the claims were not supported by a valid basis. On April 25, 2019, we filed a Notice of Appeal challenging the European
Patent Office Opposition Division and we are waiting for the appeal to be decided. Any successful third-party challenge to our patents
could result in the unenforceability or invalidity of such patents and increased competition to our business. The outcome of patent litigation,
such as oppositions or post-grant reviews can be uncertain and any attempt by us to enforce our patent rights against others may not
be successful, or, if successful, may take substantial time and result in substantial cost, and may divert our efforts and attention
from other aspects of our business.
Monitoring
unauthorized disclosure is difficult, and we do not know whether the steps we have taken to prevent such disclosure are, or will be,
adequate. If we were to enforce a claim that a third-party had illegally obtained and was using our trade secrets, it would be expensive
and time consuming, and the outcome would be unpredictable. Further, competitors could willfully infringe our intellectual property rights,
design around our protected technology or develop their own competitive technologies that arguably fall outside of our intellectual property
rights. Others may independently develop similar or alternative products and technologies or replicate any of our products and technologies.
If our intellectual property does not adequately protect us against competitors’ products and methods, our competitive position
could be adversely affected, as could our business and the results of our operations. To the extent our intellectual property offers
inadequate protection, or is found to be invalid or unenforceable, we would be exposed to a greater risk of competition. If our intellectual
property does not provide adequate coverage of our competitors’ products, our competitive position could be adversely affected,
as could our overall business. Both the patent application process and the process of managing patent disputes can be time consuming
and expensive.
Changes
in U.S. patent law could diminish the value of patents in general, thereby impairing our ability to protect our molecular diagnostic
tests.
As
is the case with other companies operating in our industry, our success is somewhat dependent on intellectual property, particularly
on obtaining and enforcing patents. Obtaining and enforcing patents of molecular diagnostics tests, like our molecular diagnostic tests
in our PancraGEN® and miRInform® platforms (including ThyGeNEXT®), involves both
technological and legal complexity, and is therefore costly, time-consuming and inherently uncertain. From time-to-time the U.S. Supreme
Court, other Federal courts, the U.S. Congress or the United States Patent and Trademark Office, or the USPTO, may change the standards
of patentability and any such changes could have a negative impact on our business. For instance, on October 30, 2008, the Court of Appeals
for the Federal Circuit issued a decision that methods or processes cannot be patented unless they are tied to a machine or involve a
physical transformation.
The
U.S. Supreme Court later reversed that decision in Bilski v. Kappos, finding that the “machine-or-transformation”
test is not the only test for determining patent eligibility. The Court, however, declined to specify how and when processes are patentable.
On March 30, 2012, in the case Mayo Collaborative Services v. Prometheus Laboratories, Inc., the U.S. Supreme Court reversed the
Federal Circuit’s application of Bilski and invalidated a patent focused on a process for identifying a proper dosage for an existing
therapeutic because the patent claim embodied a law of nature. On July 3, 2012, the USPTO released a memorandum entitled “2012
Interim Procedure for Subject Matter Eligibility Analysis of Process Claims Involving Laws of Nature,” with guidelines for determining
patentability of diagnostic or other processes in line with the Mayo decision. On June 13, 2013, in Association for Molecular Pathology
v. Myriad Genetics, the Supreme Court held that a naturally occurring DNA segment is a product of nature and not patent eligible
merely because it has been isolated. The Supreme Court did not address the patentability of any innovative method claims involving the
manipulation of isolated genes. On March 4, 2014, the USPTO released a memorandum entitled “2014 Procedure for Subject Matter Eligibility
Analysis Of Claims Reciting Or Involving Laws Of Nature/Natural Principles, Natural Phenomena, And/Or Natural Products.” This memorandum
provides guidelines for the USPTO’s new examination procedure for subject matter eligibility under 35 U.S.C. § 101 for claims
embracing natural products or natural principles.
On
June 12, 2015, the Federal Circuit issued a decision in Ariosa v. Sequenom holding that a method for detecting a paternally inherited
nucleic acid of fetal origin performed on a maternal serum or plasma sample from a pregnant female were unpatentable as directed to a
naturally occurring phenomenon. On July 30, 2015, the USPTO released a Federal Register Notice entitled, “July 2015 Update on Subject
Matter Eligibility,” This Notice updated the USPTO guidelines for the USPTO’s procedure for subject matter eligibility under
35 U.S.C. § 101 for claims embracing natural products or natural principles phenomenon. On May 4, 2016, the USPTO released life
science examples that were intended to be used in conjunction with the USPTO guidance on subject matter eligibility. Although the guidelines
and examples do not have the force of law, patent examiners have been instructed to follow them. On February 6, 2019, the Federal Circuit
for Court of Appeals issued a decision in Athena Diagnostics, Inc. v. Mayo Collaborative Servs., LLC, which relied on the decisions
from Mayo and Ariosa, to find a claim directed to a method for diagnosing neurotransmission or developmental disorders related to muscle
specific tyrosine kinase not eligible for patenting under 35 U.S.C. § 101. What constitutes a law of nature and a sufficient inventive
concept continues to remain uncertain, and it is possible that certain aspects of diagnostic tests will continue to be considered natural
laws and, therefore, ineligible for patent protection.
Some
aspects of our technology involve processes that may be subject to this evolving standard and we cannot guarantee that any of our pending
or issued claims will be patentable or upheld as valid as a result of such evolving standards. In addition, patents we own or license
that issued before these recent cases may be subject to challenge in court or before the USPTO in view of these current legal standards.
Accordingly, the evolving interpretation and application of patent laws in the United States governing the eligibility of diagnostics
for patent protection may adversely affect our ability to obtain patents and may facilitate third-party challenges to any owned and licensed
patents. Changes in either the patent laws or in interpretations and application of patent laws may also diminish the value of our existing
intellectual property or intellectual property that we continue to develop. We cannot predict the breadth of claims that may be allowed
or enforceable in our patents or in third-party patents.
We
may be involved in litigation related to intellectual property, which could be time-intensive and costly and may adversely affect our
business, operating results or financial condition.
We
may receive notices of claims of direct or indirect infringement or misappropriation or misuse of other parties’ proprietary rights
from time to time and some of these claims may lead to litigation. We cannot assume that we will prevail in such actions, or that other
actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks
or other rights, or the validity of our patents, trademarks or other rights, will not be asserted or prosecuted against us. We might
not have been the first to make the inventions covered by each of our pending patent applications and we might not have been the first
to file patent applications for these inventions. No assurance can be given that other patent applications will not have priority over
our patent applications. If third parties bring these proceedings against our patents, we could incur significant costs and experience
management distraction. Litigation may be necessary for us to enforce our patents and proprietary rights or to determine the scope, coverage
and validity of the proprietary rights of others. Defending any litigation, and particularly patent litigation, is expensive and time-consuming,
and the outcome of any litigation or other proceeding is inherently uncertain and might not be favorable to us. It is also possible that
we might not be able to obtain licenses to technology that we require on acceptable terms or at all. In addition, if we resort to legal
proceedings to enforce our intellectual property rights or to determine the validity, scope and coverage of the intellectual property
or other proprietary rights of others, the proceedings could be burdensome and expensive, even if we were to prevail. Any litigation
that may be necessary in the future could result in substantial costs and diversion of resources and could have a material adverse effect
on our business, financial condition and operating results.
In
the event of a successful claim of infringement against us, we may be required to pay damages and ongoing royalties, and obtain one or
more licenses from third parties, or be prohibited from selling our products. We may not be able to obtain these licenses on acceptable
terms, if at all. We could incur substantial costs related to royalty payments for licenses obtained from third parties, which could
negatively affect our financial results. In addition, our agreements with some of our customers, suppliers or other entities with whom
we do business require us to defend or indemnify these parties to the extent they become involved in infringement claims, including the
types of claims described above. If we are required or agree to defend or indemnify third parties in connection with any infringement
claims, we could incur significant costs and expenses that could have a material adverse effect on our business, financial condition,
and results of operations.
Other
Risks Related to our Business
Our
ability to use our net operating loss carryforwards may be limited and may result in increased future tax liability to us.
We
have incurred net losses since 2015 and may never achieve or sustain profitability. As of the fiscal year ended December 31, 2022, we
had U.S. federal and state net operating losses, or NOLs, of approximately $127.2 million and $59.5 million respectively. Subject to
the final two sentences of this paragraph, the federal and state NOL carryforwards will begin to expire, if not utilized, beginning in
2028 for certain states. These NOL carryforwards could expire unused and be unavailable to offset future income tax liabilities. Under
current federal income tax law, federal NOLs incurred in tax years beginning after December 31, 2017 may be carried forward indefinitely,
but the deductibility of such federal NOLs is limited to 80% of Federal taxable income.
To
the extent that we continue to generate taxable losses, unused losses will carry forward to offset future taxable income, if any. We
may be limited in the portion of NOL and tax credit carryforwards that we can use in the future to offset taxable income for U.S. federal
and state income tax purposes. Sections 382 and 383 of Internal Revenue Code of 1986, or the Code, limit the use of NOLs and tax credits
after a cumulative change in corporate ownership of more than 50% occurs within a three-year period. The limitation could prevent us
from using some or all of our NOLs and tax credits, as it places a formula limit of how much of our NOL and tax credit carryforwards
we would be permitted to use in a tax year. The amount of the annual limitation, if any, will be determined based on the value of our
company immediately prior to an ownership change. During the periods 2017 through 2019, the company experienced greater than 50% changes
in ownership and as a result, NOLs attributable to the pre-ownership change are subject to a substantial annual limitation under Section
382 of the Code due to the ownership changes. The Company has adjusted their NOL carryforwards to address the impact of the Section 382
ownership changes. Federal Net Operating Losses of $71.2 million are subject to annual limitation as of the ownership changes for ownership
changes. The remaining $56.0 million of NOLs incurred post July 15, 2019 are not subject to any annual limitation and can be carried
forward indefinitely. Subsequent ownership changes may further affect the limitation in future years. In the event we have undergone
or will undergo an ownership change under Section 382 of the Code, if we earn net taxable income, our ability to use our pre-change NOL
carryforwards to offset U.S. federal taxable income may become subject to these limitations, which could potentially result in increased
future tax liability to us.
Comprehensive
tax reform could adversely affect our business and financial condition.
New
income, sales and use or other tax laws or regulations could be enacted at any time, which could adversely affect our business operations
and financial performance. Further, existing tax laws and regulations could be interpreted, modified or applied adversely to us. These
events could require us to pay additional taxes on a prospective or retroactive basis, as well as penalties, interest and other costs
for past amounts deemed to be due. New laws, or laws that are changed, modified or newly interpreted or applied, also could increase
our compliance, operating and other costs, as well as the costs of our products. For example, the Tax Cuts and Jobs Act of 2017 enacted
many significant changes to the U.S. tax laws, some of which were further modified by the Coronavirus Aid, Relief, and Economic Security
Act, and may be modified in the future by the current or a future presidential administration. In addition, it is uncertain if and to
what extent various states will conform to current federal law, or any newly enacted federal tax legislation. Changes in corporate tax
rates, the realization of net operating losses, and other deferred tax assets relating to our operations, the taxation of foreign earnings,
and the deductibility of expenses could have a material impact on the value of our deferred tax assets and could increase our future
tax expense.
If
we do not increase our revenues and successfully manage the size of our operations, our business, financial condition and results of
operations could be materially and adversely affected.
The
majority of our operating expenses are personnel-related costs such as employee compensation and benefits, reagents and disposable supplies
as well as the cost of infrastructure to support our operations, including facility space and equipment. We continuously review our personnel
to determine whether we are fully utilizing their services. If we believe we are not in a position to fully utilize our personnel, we
may make reductions to our workforce. If we are unable to achieve revenue growth in the future or fail to adjust our cost infrastructure
to the appropriate level to support our revenues, our business, financial condition and results of operations could be materially and
adversely affected.
We
may acquire businesses or assets or make investments in other companies or testing, service or solution technologies that could harm
our operating results, dilute our stockholders’ ownership, increase our debt or cause us to incur significant expense.
As
part of our strategy, we may pursue acquisitions of synergistic businesses or other related assets. If we make any further acquisitions,
we may not be able to integrate these acquisitions successfully into our existing business, and we could assume unknown or contingent
liabilities. Any future acquisition by us also could result in significant write-offs or the incurrence of debt and contingent liabilities,
any of which could harm our operating results and financial condition. Integration of an acquired company or business will also likely
require management resources that otherwise would be available for ongoing development of our existing business. We may not identify
or complete these transactions in a timely manner, on a cost-effective basis, or at all, and we may not realize the anticipated benefits
of any acquisition. To finance any acquisitions or investments, we may choose to issue shares of our common stock as consideration, which
would dilute the ownership of our stockholders. If the price of our common stock is low or volatile, we may not be able to acquire other
companies for stock. Alternatively, it may be necessary for us to raise additional funds for these activities through public or private
financings. Additional funds may not be available on terms that are favorable to us, or at all. If these funds are raised through the
sale of equity or convertible debt securities, dilution to our stockholders could result. The holders of our Series B Preferred Stock
have the right to approve any public offering. Consummating an acquisition poses a number of risks including:
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we
may not be able to accurately estimate the financial impact of an acquisition on our overall business; |
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an
acquisition may require us to incur debt or other obligations, incur large and immediate write-offs, issue capital stock potentially
dilutive to our stockholders or spend significant cash, or may negatively affect our operating results and financial condition; |
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if
we spend significant funds or incur additional debt or other obligations, our ability to obtain financing for working capital or
other purposes could decline; |
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worse
than expected performance of an acquired business may result in the impairment of intangible assets; |
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we
may be unable to realize the anticipated benefits and synergies from acquisitions as a result of inherent risks and uncertainties,
including difficulties integrating acquired businesses or retaining key personnel, partners, customers or other key relationships,
and risks that acquired entities may not operate profitably or that acquisitions may not result in improved operating performance; |
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we
may fail to successfully manage relationships with customers, distributors and suppliers; |
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our
customers may not accept new molecular diagnostic tests; |
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we
may fail to effectively coordinate sales and marketing efforts of our acquired businesses; |
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we
may fail to combine product offerings and product lines of our acquired businesses timely and efficiently; |
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an
acquisition may involve unexpected costs or liabilities, including as a result of pending and future shareholder lawsuits relating
to acquisitions or exercise by stockholders of their statutory appraisal rights, or the effects of purchase accounting may be different
from our expectations; |
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an
acquisition may involve significant contingent payments that may adversely affect our future liquidity or capital resources; |
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accounting
for contingent payments requires significant judgment and changes to the assumptions used in determining the fair value of our contingent
payments could lead to significant volatility in earnings; |
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acquisitions
and subsequent integration of these companies may disrupt our business and distract our management from other responsibilities; and |
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the
costs of an unsuccessful acquisition may adversely affect our financial performance. |
Additional
risks of integration of an acquired business include:
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differing
information technology, internal control, financial reporting and record-keeping systems; |
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differences
in accounting policies and procedures; |
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unanticipated
additional transaction and integration-related costs; |
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facilities
or operations of acquired businesses in remote locations and the inherent risks of operating in unfamiliar legal and regulatory environments;
and |
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new
products, including the risk that any underlying intellectual property associated with such products may not have been adequately
protected or that such products may infringe on the proprietary rights of others. |
If
our information technology or communications systems fail or we experience a significant interruption in their operation, our reputation,
business and results of operations could be materially and adversely affected.
The
efficient operation of our business is dependent on our information technology and communications systems. Increasingly, we are also
dependent upon our ability to electronically interface with our customers. The failure of these systems to operate as anticipated could
disrupt our business and result in decreased revenue and increased overhead costs. In addition, we do not have complete redundancy for
all of our systems and our disaster recovery planning cannot account for all eventualities. Our information technology and communications
systems, including the information technology systems and services that are maintained by third party vendors, are vulnerable to damage
or interruption from natural disasters, fire, terrorist attacks, epidemics, pandemics including COVID-19, malicious attacks by computer
viruses or hackers, power loss, failure of computer systems, Internet, telecommunications or data networks. In 2017, we discovered malware
installed on certain clinical services servers. We do not believe that any data on the affected servers was accessed or compromised.
We removed the malware, and enhanced our cybersecurity procedures. Additionally, our services are largely dependent on our partially
internally developed and partially purchased Laboratory Information Management Systems or LIMS, which is our automated basis of managing
operations and storing data and customer information. If these systems or services become unavailable or suffer a security breach, or
are uneconomical or impossible to update and modify, we may expend significant resources to address these problems, and our reputation,
business and results of operations could be materially and adversely affected.
Risks
Related To Our Common Stock Price
The
price and trading volume of our common stock may be highly volatile and could be further affected by events not within our control, and
an investment in our common stock could suffer a decline in value.
During
2022, our common stock traded at a low of $0.51 and a high of $8.69. During 2021, our common stock traded at a low of $2.98 and a high
of $10.51. Volatility in our stock price or trading volume may be in response to various factors, some of which may be beyond our control.
In addition to the other factors discussed or incorporated by reference herein, factors that may cause fluctuations in our stock price
or trading volume, include, among others:
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general
volatility in the trading markets; |
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the
impact of the delisting of our common stock from Nasdaq and listing on the OTCQX; |
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adverse
research and development results; |
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significant
fluctuations in our quarterly operating results; |
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significant
changes in our cash and cash equivalent reserves; |
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our
liquidity and ability to obtain additional capital, including the market’s reaction to any announced capital-raising transactions; |
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market
assessments of any announced strategic transaction, including the likelihood that it would be completed and the timing for completion; |
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potential
negative market reaction to the terms or volume of any issuance of shares of our common stock, preferred stock or other securities
to new investors, pursuant to strategic or capital-raising transactions or to employees, directors or other service providers; |
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sales
of substantial amounts of our common stock, or the perception that substantial amounts of our common stock may be sold, by stockholders
in the public market; |
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announcements
regarding our business or the business of our competitors; |
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announcements
regarding our equity offerings; |
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strategic
actions by us or our competitors, such as acquisitions or restructurings; |
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industry
and/or regulatory developments; |
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changes
in revenue mix; |
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changes
in revenue and revenue growth rates for us and for the industries in which we operate; |
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changes
in accounting standards, policies, guidance, interpretations or principles; |
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statements
or changes in opinions, ratings or earnings estimates made, or the failure to make, by brokerage firms or industry analysts relating
to the markets in which we operate or expect to operate; and |
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general
market and economic conditions. |
The
issuance of additional shares of our common stock in any future offerings could be dilutive to stockholders.
The
issuance of additional shares of our common stock in any future offerings could be dilutive to stockholders. In order to raise additional
capital, such securities may be at prices that are not the same as the price per share in previous offerings. We cannot assure investors
that we will be able to sell shares or other securities in any other offering at a price per share that is equal to or greater than the
price per share paid by investors in previous offerings, and investors purchasing shares or other securities in the future could have
rights superior to existing stockholders. Moreover, to the extent that we issue options or warrants to purchase, or securities convertible
into or exchangeable for, shares of our common stock in the future (including our Series B Preferred Stock), and those options, warrants
or other securities are exercised, converted or exchanged, stockholders may experience further dilution.
The
delisting of our common stock from Nasdaq and subsequent trading on OTCQX® has adversely affected our common stock and
business and financial condition.
On
February 25, 2020, our common stock was delisted from the Nasdaq Capital Market (“Nasdaq”) and commenced trading on the OTCQX®
Best Market tier of the OTC Markets Group Inc. (the “OTCQX”), an electronic quotation service operated by OTC Markets
Group Inc.
Trading
in stock quoted on the OTCQX is often thin, volatile, and characterized by wide fluctuations in trading prices, due to many factors that
may have little to do with the issuer’s operations, results or business prospects. The availability of buyers and sellers represented
by this volatility could lead to a market price for our Common Stock that is unrelated to operating performance. Moreover, the OTCQX
is not a stock exchange, and trading of securities quoted on the OTCQX is often more volatile than the trading of securities listed on
a stock exchange like Nasdaq or the New York Stock Exchange. The OTCQX quotation system may provide less liquidity than Nasdaq.
Prices
for securities traded solely on the OTCQX quotation system may be difficult to obtain, and holders of our common stock may be unable
to resell their shares at or near their original acquisition price or at any price. Further, our delisting from Nasdaq and commencement
of trading on the OTCQX has and may continue to have negative implications, including an adverse effect on the price of our common stock,
increased volatility in our common stock, the loss of federal preemption of state securities laws, greater difficulty in raising capital
through the public or private sale of equity securities, deterring broker-dealers from making a market in or otherwise seeking or generating
interest in our common stock, a loss of current or future coverage by certain sell-side analysts, deterring certain institutions and
persons from investing in our securities at all and a loss of confidence of our customers, collaborators, vendors, suppliers and employees,
which could harm our business and future prospects.
On
January 5, 2023, we received notice from the OTCQX indicating that the Company’s market capitalization has been below the
required $5 million for 30 consecutive calendar days preceding the date of such notice, and that the Company no longer meets the
standards for continued qualification for the OTCQX U.S. tier under the OTCQX Rules for U.S. Companies section 3.2.b.2. The Company
has been provided 180 calendar days from the date of such notice, or until July 3, 2023, to maintain a market capitalization of $5
million for ten consecutive trading days. If the Company cannot meet this requirement, its common stock will be removed from the
OTCQX. In such event, the Company may be eligible for the OTCQB market.
The
risks associated with penny stock classification could affect the marketability of the Company’s common stock and stockholders
could find it difficult to sell their shares.
If
the Company’s shares of Common Stock do not maintain a trading price of $5.00 or more per share, the Company’s common stock
will be subject to “penny stock” rules as defined in Exchange Act Rule 3a51-1. The SEC adopted rules that regulate broker-dealer
practices in connection with transactions in penny stocks. Transaction costs associated with purchases and sales of penny stocks are
likely to be higher than those for other securities. Penny stocks generally are equity securities with a price of less than $5.00.
The
penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a
standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock
market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation
of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock
held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must
be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before
or with the customer’s confirmation.
In
addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from such rules; the broker-dealer
must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s
written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in
the secondary market for the Company’s common stock and stockholders may find it more difficult to sell their shares.
Risks
Relating to Being a Public Company
We
will continue to incur increased costs and demands on management as a result of compliance with laws and regulations applicable to public
companies, which could harm our operating results.
As
a public company, we are incurring significant legal, accounting and other expenses. In addition to being required to comply with certain
requirements of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act), we are required to comply with certain requirements of the Dodd
Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, including
the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect
that compliance with these requirements will continue to increase our legal and financial compliance costs and will make some activities
more time consuming and costly. In addition, we expect that our management and other personnel will continue to need to divert attention
from operational and other business matters to devote substantial time to these public company requirements.
For
example, in 2020, our Audit Committee conducted an independent investigation in accordance with Section 10A of the Exchange Act into
complaints of certain employment and billing and compliance matters and concluded that the allegations made in the complaints were unsubstantiated
and that there was no evidence of any illegal acts. The completion of the investigation caused us to be late in filing our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2020.
We
also spent considerable management time in connection with our restatement of previously issued financial statements contained in our
Annual Reports on Form 10-K for the years ended December 31, 2014 through 2019 as well as the financial statements contained in the Quarterly
Reports on Form 10-Q for each quarterly period within those fiscal years as well as the quarterly periods ended March 31, 2020 and June
30, 2020. This was due to evaluating and recording an impairment charge and amortization expense relating to our BarreGen asset, as disclosed
in Item 9A of our Report on Form 10-K for the fiscal year 2021.
Further,
the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure
controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial
reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section
404 of the Sarbanes-Oxley Act. In addition, if we lose our status as a “smaller reporting company,” we will be required to
have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting.
Our compliance with Section 404 of the Sarbanes-Oxley Act, as applicable, requires us to incur substantial accounting expense and expend
significant management efforts. We currently do not have an internal audit group, and we will need to continue to hire additional accounting
and financial staff with appropriate public company experience and technical accounting knowledge. If we or our independent registered
public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses,
the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities,
which would require additional financial and management resources.
If
we are unable to maintain and implement effective internal controls over financial reporting, investors may lose confidence in the accuracy
and completeness of our reported financial information and the market price of our common stock may be negatively affected.
As
a public company, we are required to maintain internal control over financial reporting and to report any material weaknesses in such
internal control. Section 404 of the Sarbanes-Oxley Act of 2002 requires that we evaluate and determine the effectiveness of our internal
control over financial reporting and provide a management report on our internal controls on an annual basis. If we have material weaknesses
in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially
misstated. We will need to maintain and enhance these processes and controls as we grow, and we will require additional management and
staff resources to do so. Additionally, even if we conclude our internal controls are effective for a given period, we may in the future
identify one or more material weaknesses in our internal controls, in which case our management will be unable to conclude that our internal
control over financial reporting is effective. Even if our management concludes that our internal control over financial reporting is
effective, our independent registered public accounting firm may conclude that there are material weaknesses with respect to our internal
controls or the level at which our internal controls are documented, designed, implemented or reviewed.
If
we are unable to conclude that our internal control over financial reporting is effective, investors could lose confidence in the accuracy
and completeness of our financial disclosures, which could cause the price of our common stock to decline. Irrespective of compliance
with Section 404, any failure of our internal control over financial reporting could have a material adverse effect on our reported operating
results and harm our reputation. Internal control deficiencies could also result in a restatement of our financial results.
Risks
Relating to Our Corporate Structure and Our Common Stock
We
have a substantial number of authorized shares of common and preferred stock available for future issuance that could cause dilution
of our stockholders’ interest, adversely impact the rights of holders of our common stock and cause our stock price to decline.
We
have a total of 100,000,000 shares of common stock and 5,000,000 shares of preferred stock authorized for issuance. As of December 31,
2022, we had 95,632,170 shares of common stock and 4,953,000 shares of preferred stock available for issuance. As of December 31, 2022,
we have reserved 776,849 shares of our common stock for issuance under our 2019 Equity Incentive Plan and 1,000,007 shares of our common
stock for issuance under our Employee Stock Purchase Plan and 1,672,746 additional shares available for future grants of awards under
our 2019 Equity Incentive Plan. As of December 31, 2022, the aggregate number of shares of common stock that may be issued through conversion
of all of the outstanding Series B Preferred Stock is 7,833,334. Provided that we have a sufficient number of unreserved authorized capital
stock available, we may seek financing that could result in the issuance of additional shares of our capital stock and/or rights to acquire
additional shares of our capital stock. We may also make acquisitions that result in issuances of additional shares of our capital stock.
Those additional issuances of capital stock could result in substantial dilution of our existing stockholders. Furthermore, the book
value per share of our common stock may be reduced. This reduction would occur if the exercise price of any issued warrants, the conversion
price of any convertible notes or the conversion ratio of any issued preferred stock is lower than the book value per share of our common
stock at the time of such exercise or conversion. Additionally, new investors in any subsequent issuances of our securities could gain
rights, preferences and privileges senior to those of holders of common stock.
The
addition of a substantial number of shares of our common stock into the market or the registration of any of our other securities under
the Securities Act may significantly and negatively affect the prevailing market price for our common stock. The future sales of shares
of our common stock issuable upon the exercise of outstanding warrants and options may have a depressive effect on the market price of
our common stock, as such warrants and options would be more likely to be exercised at a time when the price of our common stock is greater
than the exercise price.
We
have anti-takeover defenses that could delay or prevent an acquisition and could adversely affect the price of our common stock.
Our
certificate of incorporation, as amended, and amended and restated bylaws include provisions, such as providing for three classes of
directors, which may make it more difficult to remove our directors and management and may adversely affect the price of our common stock.
In addition, our certificate of incorporation, as amended, authorizes the issuance of “blank check” preferred stock, which
allows our Board to create one or more classes of preferred stock with rights and preferences greater than those afforded to the holders
of our common stock without separate shareholder approval. This provision could have the effect of delaying, deterring or preventing
a future takeover or a change in control, unless the takeover or change in control is approved by our Board. We are also subject to laws
that may have a similar effect. For example, Section 203 of the General Corporation Law of the State of Delaware prohibits us from engaging
in a business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder
unless certain conditions are met. As a result of the foregoing, it will be difficult for another company to acquire us and, therefore,
could limit the price that possible investors might be willing to pay in the future for shares of our common stock. In addition, the
rights of our common stockholders are subject to, and may be adversely affected by, the rights of holders of our Series B Preferred Stock
as well as any class or series of preferred stock that may be issued in the future and by the rights of holders of warrants currently
outstanding or issued in the future.
We
have not declared any cash dividends on our common stock and do not intend to declare or pay any cash dividends in the foreseeable future.
Future earnings, if any, will be used to finance the future operation and growth of our business. As a result, capital appreciation,
if any, will be your sole source of gain.
We
have never paid cash dividends on our common stock. We do not currently anticipate paying cash dividends on our common stock in the foreseeable
future and we may not have sufficient funds legally available to pay dividends. We are prohibited from paying dividends on our common
stock without the approval of the holders of the Series B Preferred Stock for so long as 30% of the Series B Preferred Stock outstanding
as of January 15, 2020 remains outstanding. We presently intend to retain all earnings for our operations. As a result, capital appreciation,
if any, of our common stock will be an investor’s sole source of gain for the foreseeable future.
If
securities or industry analysts issue an adverse opinion regarding our stock or do not publish research or reports about our company,
our stock price and trading volume could decline.
The
trading market for our common stock will depend in part on the research and reports that equity research analysts publish about us, our
business and our competitors. We do not control these analysts or the content and opinions or financial models included in their reports.
Securities analysts may elect not to provide research coverage of our company, and such lack of research coverage may adversely affect
the market price of our common stock. The price of our common stock could also decline if one or more equity research analysts downgrade
our common stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business. If one
or more equity research analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our
stock price to decline.
We
may be subject to securities litigation, which is expensive and could divert our management’s attention.
The
market price of our securities may be volatile, and in the past companies that have experienced volatility in the market price of their
securities have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities
litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which
could seriously harm our business.
The
indemnification rights provided to our directors, officers and employees may result in substantial expenditures by us and may discourage
lawsuits against its directors, officers, and employees.
Our
certificate of incorporation, as amended, contains provisions permitting us to enter into indemnification agreements with our directors,
officers, and employees. The foregoing indemnification obligations could result in us incurring substantial expenditures to cover the
cost of settlement or damage awards against directors and officers, which we may be unable to recoup. These provisions and resultant
costs may also discourage us from bringing a lawsuit against our directors and officers for breaches of their fiduciary duties and may
similarly discourage the filing of derivative litigation by our stockholders against our directors and officers even though such actions,
if successful, might otherwise benefit us and our stockholders.