Interpace Diagnostics Group, Inc.(IDXG) - 2024 Q4 - Annual Report

Explanatory Note Restatement of Financial Statements The company restated 2023 and 2024 financial statements due to incorrect royalty accruals, identifying a material weakness in internal controls - The company determined it should not have been accruing royalty expense for certain agreements, leading to a reversal of accruals from 2016-2023[11] - Previously issued financial statements for the year ended December 31, 2023, and quarterly reports for 2023 and 2024, are no longer reliable and have been restated in this Form 10-K[12][14] - A material weakness in internal control over financial reporting was identified, attributed to a lack of communication between the accounting and science teams regarding the technology used in revenue-generating products (ThyraMIR and ThyGeNEXT)[13] - The company does not plan to amend previously filed Annual or Quarterly reports for the affected periods; this Form 10-K supersedes that information[16] PART I Business Interpace Biosciences offers specialized molecular diagnostic and pathology services for cancer risk assessment via five commercialized genomic tests Company and Market Overview The company offers esoteric molecular diagnostic tests for cancer risk, operating in a global market projected for substantial growth - The company provides molecular diagnostic testing and pathology services to aid in cancer risk evaluation for patients with indeterminate biopsies[24] - The global esoteric molecular diagnostics market is expected to grow at a CAGR of 8.5% from 2023 to 2029, reaching $48.3 billion[27] - In 2024, Laboratory Corporation of America (LabCorp) was the largest customer for the company's ThyGeNEXT and ThyraMIRv2 products[25] Our Service Offerings The company commercializes five molecular diagnostic tests for cancer risk stratification, performed in its accredited laboratory - The company has five commercialized molecular diagnostic tests: PancraGEN, PanDNA, ThyGeNEXT, ThyraMIRv2, and RespriDx[39] - The addressable market for PancraGEN is estimated at approximately $200 million annually, and for endocrine (thyroid) cancer assays, it is about $300 million annually[41][46] - All testing is performed in the company's CLIA-certified and CAP-accredited laboratory in Pittsburgh, Pennsylvania[50] Competition The company faces competition from established diagnostic firms, with its PancraGEN test having fewer direct integrated competitors - In the thyroid diagnostic market, key competitors include Veracyte (Afirma), Quest Diagnostics, and Sonic (ThyroSeq)[56] - The company is not aware of any direct competitors to PancraGEN that fully integrate clinical, imaging, cytology, and molecular data, although the University of Pittsburgh Medical Center offers a competitive gene sequencing panel (PancreaSeq)[57] Government Regulations and Industry Guidelines The company faces extensive regulation and significant revenue risk from a pending Medicare non-coverage decision for PancraGEN - The FDA published a final rule on April 29, 2024, to phase out enforcement discretion for many LDTs over a four-year period, which could subject the company's tests to additional, costly regulatory requirements[76] - Reimbursement from Medicare and Medicare Advantage programs constituted approximately 53% of consolidated net revenues in 2024[118] - A new LCD from Novitas established non-coverage for the PancraGEN test. Implementation has been delayed to April 24, 2025, but if it takes effect, it could negatively impact the company's liquidity[123] Business Development The company exchanged Series B for Series C Preferred Stock with investors, lowering the conversion price and reducing investor protections - The company exchanged all 47,000 shares of Series B Preferred Stock for 47,000 shares of new Series C Preferred Stock with investors Ampersand and 1315 Capital[127] - The new Series C Preferred Stock has a conversion price of $2.02 per share, significantly lower than the Series B's $6.00 price, and removes certain investor protections like liquidation preference and director designation rights[128][132] Risk Factors The company faces substantial risks from CMS reliance, PancraGEN non-coverage, concentrated ownership, FDA LDT regulation, and internal control weaknesses - A significant risk is the dependence on CMS reimbursement, particularly for the PancraGEN test, which faces non-coverage under a new LCD, potentially impacting liquidity[142][149] - Two private equity firms, Ampersand and 1315 Capital, control an aggregate of 84% of the company's outstanding common stock on an as-converted basis through their Series C Preferred Stock holdings[142][167] - The FDA's final rule to regulate LDTs could impose substantial costs and delays for obtaining pre-market clearance for the company's tests[142][187][188] - The restatement of prior financial statements and the identification of a material weakness in internal controls as of December 31, 2024, pose risks to investor confidence and company reputation[145][274] - The company's common stock was delisted from Nasdaq and now trades on the OTCQX, which has adversely affected liquidity and stock price[145][259] Cybersecurity The company maintains a cybersecurity risk management program overseen by its IT team and Board, with no material incidents reported - The company maintains processes to assess, identify, and manage cybersecurity risks, overseen by a dedicated IT team and the Board's Compliance Committee[283][285] - The Vice President of Information Technology, with over 15 years of experience, leads the cybersecurity efforts[286] - No cybersecurity incidents have materially affected the company in the last fiscal year, but ongoing risks are acknowledged[284] Properties The company's corporate headquarters are in Parsippany, NJ, and its main diagnostic laboratory is in Pittsburgh, PA - Corporate headquarters are in Parsippany, NJ on a month-to-month lease[287] - The diagnostic laboratory is a 21,400 sq. ft. facility in Pittsburgh, PA, with a lease running through June 30, 2028[287] PART II Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock was delisted from Nasdaq and now trades on OTCQX, with a recent unregistered preferred stock exchange - The company's common stock was delisted from Nasdaq and now trades on the OTCQX under the symbol "IDXG"[291] - The company received a notice of non-compliance from OTCQX in December 2023 for its market capitalization falling below $5 million, but regained compliance in March 2024[292] - An unregistered exchange of 47,000 shares of Series B Preferred Stock for new Series C Preferred Stock occurred on October 10, 2024[296][297] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2024, revenue increased 17% to $46.9 million, but liquidity is uncertain due to a pending Medicare non-coverage decision for PancraGEN Consolidated Results of Operations For FY2024, net revenue increased 17% to $46.9 million, driving a 104% increase in operating income to $8.1 million Consolidated Results of Operations (Years Ended December 31) | Metric | 2024 | 2023 (as restated) | % Change | | :--- | :--- | :--- | :--- | | Revenue, net | $46.9 million | $40.0 million | 17% | | Gross Profit | $29.9 million | $25.1 million | 19% | | Operating Income | $8.1 million | $4.0 million | 104% | | Net Income | $6.7 million | $2.0 million | 243% | - The increase in net revenue was largely driven by increased test volumes compared to the prior year[335] Non-GAAP Financial Measures Adjusted EBITDA, a key non-GAAP measure, increased 56% to $8.7 million in 2024, reflecting improved operational performance Reconciliation of Adjusted EBITDA (Unaudited, in thousands) | | Years Ended December 31, | | :--- | :--- | :--- | | | 2024 | 2023 (as restated) | | Income from continuing operations (GAAP Basis) | $6,946 | $2,264 | | Depreciation and amortization | 300 | 1,026 | | Stock-based compensation | 291 | 630 | | Tax expense | 4 | 17 | | Interest accretion expense | 34 | 112 | | Financing interest and related costs | 625 | 896 | | Interest income | (48) | (53) | | Change in fair value of note payable | 547 | 678 | | Change in fair value of contingent consideration | - | 7 | | Adjusted EBITDA | $8,699 | $5,577 | Liquidity and Capital Resources As of December 31, 2024, the company had $1.5 million in cash, with liquidity facing significant risk from potential Medicare non-coverage for PancraGEN - As of December 31, 2024, the company had $1.5 million in cash and cash equivalents and current liabilities of $10.6 million[355] - The maturity date of the BroadOak term loan, with a balance of $4.4 million at year-end, was extended to December 31, 2025[352][354] - Net cash provided by operating activities was $4.6 million in 2024, compared to $3.8 million in 2023[356] - A significant liquidity risk remains due to the potential non-coverage of the PancraGEN test by Medicare, with a final decision delayed until April 24, 2025[361][364][366] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were ineffective as of December 31, 2024, due to a material weakness - Management concluded that disclosure controls and procedures were not effective as of December 31, 2024[372] - A material weakness in internal control over financial reporting was identified related to an incorrect royalty accrual, stemming from a lack of communication between the science and accounting teams[372] - A remediation plan is being implemented, including updated procedures for reviewing significant agreements with outside experts and establishing quarterly meetings between management and the science team[373] - Management also concluded that internal control over financial reporting was not effective as of December 31, 2024[375] PART IV Financial Statements and Exhibits This section presents the company's consolidated financial statements for 2024 and 2023, including notes on the significant restatement and liquidity risks Note 2. Restatement of Previously Issued Consolidated Financial Statements The company restated 2023 and 2024 financial statements due to incorrect royalty expense accruals, reducing accumulated deficit by $6.1 million - Financial statements were restated due to the incorrect accrual of royalty expenses and adjustments to revenue recognition timing[445][447] Impact of Restatement on 2023 Consolidated Statement of Operations (in thousands) | Account | As Previously Reported | Restatement Amount | As Restated | | :--- | :--- | :--- | :--- | | Revenue, net | $40,214 | $(178) | $40,036 | | Cost of revenue | $16,310 | $(1,330) | $14,980 | | Gross profit | $23,904 | $1,152 | $25,056 | | Operating income | $2,804 | $1,152 | $3,956 | | Net income | $802 | $1,152 | $1,954 | Impact of Restatement on Dec 31, 2023 Consolidated Balance Sheet (in thousands) | Account | As Previously Reported | Restatement Amount | As Restated | | :--- | :--- | :--- | :--- | | Total current liabilities | $17,474 | $(6,038) | $11,436 | | Total liabilities | $28,157 | $(6,038) | $22,119 | | Accumulated deficit | $(248,215) | $6,133 | $(242,082) | | Total stockholders' deficit | $(61,672) | $6,133 | $(55,539) |