Q3 2020 Interpace Biosciences Inc Earnings Call
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As a reminder, this conference call.
Is being recorded and will be available on the interface website at www <unk> interface dotcom during.
During this call the company will make forward looking statements. We caution you that any statement that is not a statement of historical fact is a forward looking statement.
This includes remarks about the Companys financial projections expectations plans beliefs and prospects. These statements are based on judgment and analysis as of the date of the conference call and are subject to numerous important risks and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
These risks and uncertainties associated with the forward looking statements made in this conference call are described in the Safe Harbor statement in today's earnings release, as well as interplay spire scientists public periodic filings, including the discussion in the risk factor section in our form 10-K filed with the FCC on April 22nd 2020.
And the forward looking statement section of our form 10-Q filed with the FTC on October 19th 2020 and bad.
Investors investors or potential investors should carefully read and consider these risks interface biased <unk> Sciences assumes no obligation to update these forward looking statements to reflect future events or actual outcomes and does not intend to do so.
In addition to the supplement the generally accepted accounting principle or GAAP numbers, we have provided non-GAAP information.
We believe that this non-GAAP information provides meaningful supplemental information and may be helpful. In assessing the company's performance.
Table reconciling the GAAP information to non-GAAP information is included in the company's earnings release, which is available on its website.
I'd now like to turn the conference call over to the President and CEO of interface Bio Sciences Ducs Dover.
Thank you Melissa and thank you all for joining us this morning.
With me on the call today is Fred Knechtel, our Chief Financial Officer, Brent I will focus on our second quarter and year to date financial progress and provide a general business update following that we will open the call for questions.
We have faced some significant challenges in the second quarter of this year and emerge stronger from successfully dealing with them.
I'm confident that our acquisition of the biopharm business with cancer genetics alcohol, our pharma services.
Not only supported our top line revenues during the quarter and year to date, but the record pharma services bookings for the quarter will be the basis of future strength and grow it.
Additionally, I'm pleased with the rebound from the pandemic of our diagnostic business.
Consolidation of facilities and cost controls will continue to benefit us as our volume increases.
Importantly, we continue to take measures intended to protect the health of our employees and continue to follow relevant CDC guidelines to minimize the risk of employee exposure to the corona of ours.
Well, we are still recovering from the impact of the pandemic overall, our business has recovered to pre coded levels.
In July 2020, we announced that our peer reviewed seminal validation study of Tai Genex and Thyramir was accepted for publication in a highly respected journal diagnostics Cytopathology and also accepted as a podium presentation, where the American society of Cytopathology.
Your old meeting on August seven this publication was released online.
Additionally, our continued progress in entering into agreements and contracts with new insurers focused principally on our thyroid assays is helping to improve our future reimbursement rates related to our clinical services.
Our continuing focus for the rest of 2020, well be responding to changing conditions, while proactively positioning ourselves for future growth and expansion by improving business processes and further integrating our service offerings.
We now expect third quarter net revenues will be in the range of $7.5 million to $7.8 million as compared to $5.4 million for the second quarter of this year.
I would like to now addressed our delay in filing our second quarter 10-Q, and issuing our second quarter earnings release.
As we disclosed in our 8-K filed on August 14th the company had received letters from certain employees, one of whom has left the company's employee concerning certain employment and billing and compliance matters. In response, our audit Committee conducted an independent investigation of this matter.
With the assistance of independent counsel another advisors.
Our audit committee concluded that the allegations were not substantiated and that there was no evidence of any illegal act.
This was disclosed in an 8-K filed on October 14th.
The successful conclusion of this investigation has allowed us to move forward and filed its second quarter 10-Q, we are.
We are glad to have this matter behind us.
Now I'd like to turn the call over to Fred to discuss in more detail our financial highlights for the quarter, Brett. Thank you Jack and good morning, everyone.
Year to date net revenue was $14.6 million up 19.3% from the same period in 2019, which did not include the pharma services business acquired early in Q3 of 2019 so.
Second quarter 2020, net revenue was $5.4 million down 13% from the 6.3 million in the second quarter of 2019.
Overall second quarter performance was impacted by lower than expected clinical service volume.
Which we experienced starting in mid March I believe resulted from a reduction in non essential testing procedures stemming from the COVID-19 pandemic.
Pharma services net revenue was less severely affected typically.
Typically our quarterly net revenue split has been approximately 60% related to clinical services at 40% pharma services.
In the second quarter of 2020, However, pharma services represented 55% of total net revenues.
Pharma services remained steady through the second quarter, thus demonstrating the benefit of having to diverse revenue streams, such as clinical and pharma services.
Please note that in the second quarter of 2019, 100% of our revenue was from our clinical services since our pharma services business. As previously noted was not acquired until early in the third quarter of 2019.
Our total business is recovering to pre covered levels with clinical services testing volume increasing steadily since the April though and if September was higher than pre cold at levels.
Pharma services business was impacted by the pandemic in the middle of the second quarter and the slowdown in activity is recovering at a slower rate than a clinical business.
Second quarter 2020, gross profit was $1.6 million and gross margin was 29% compared to $3.2 million gross profit and 52% gross margin in the second quarter of 2019.
Year over year gross margin decline is driven by the addition of the lower margin pharma services revenue in 2020, which is principally due to excess capacity, resulting from duplicate operating locations that are now in the process of being combined as well as lower volume than expense.
Good running through the labs.
Second quarter operating expense was $7.3 million $1.2 million lower than $8.5 million in the second quarter of 2019 and $2.2 million lower than 9.5 million in the fourth quarter of 2019.
Beginning in March 2020, and through the second quarter, we reduced lab costs as well as certain discretionary spending and not essential expenses.
We also reduced salaried employee wages by 10% to 15% starting in mid April.
Operating expenses year to date was $16.5 million as compared to $15.2 million in the prior year period, which excluded the pharma services operating costs.
Second quarter 2020, adjusted EBITDA, which included the addition of pharma services losses was negative $4.2 million.
$800000 lower than the second quarter of 2019 and.
Importantly, second quarter 2020, adjusted EBITDA remain neutral versus Q1, 2020, largely due to us driving lower costs.
Despite lower second quarter 2020 net revenue.
We used $6.7 million of cash from operating activities in the first six months of 2020 as compared to 7.8 million for the comparable period of 2019, a 1.1 million dollar improvement, primarily driven by lower cap working capital usage.
In 2020, we received the 650000 dollar grant from the Department of Health and human services related to COVID-19 virus and antibody testing and a $2.1 million cash advance for future Medicare billing reimbursement.
During the second quarter, we recorded the H.H.S. grant in its entirety tort qualified second quarter expenses and business losses.
As previously discussed to optimize our pharma services lab operations reduce operating costs, that's provide our customers with a more robust platform of services and products. We are consolidating our laboratories interest transitioning work from rather from New Jersey to our state of the art facility.
In Morrisville North Carolina.
The transaction is.
He is well underway.
Well, the remainder of 2020 activities, including transferring personnel, finishing building out.
Of our Brazil, North Carolina facility and validation of critical processes.
As of June Thirtyth 20.
2020, our cash balance was $15.1 million.
With $3.8 million of borrowings under revolving line of credit with SVB.
Due to delay in filing our 10-Q.
We are in default under this agreement and while the company has received a waiver of default from SVB and is now compliant with the terms of this loan agreement we are required to repay the balance of the borrowings previously outstanding and we currently do not have the ability to borrow additional funds under the revolving line of credit.
We are currently not in compliance with nasdaq's $2.5 million minimum stockholders equity listing requirement.
As you May recall, we raised approximately $47 million in preferred stock financing in 2019 and 2021.
However, due to certain terms in a financing agreement those funds are not currently determine to be permanent equity for accounting purposes.
And thus triggered the minimum stockholders deficiency with Nasdaq.
We are currently exploring options to meet the $2.5 million minimum stockholders listing requirement as soon as possible.
With that let me turn the call back over to Jack for his closing statements before we turn the call back over to the operator for QNX Jack Thanks Fred.
Let me say, we look forward to filing our third quarter 10-Q on a timely basis in November.
Additionally, let me repeat that we expect third quarter net revenue will be in the range of 7.5 million to $7.8 million were up we're very pleased with the rebound.
Now, let me turn the call back over to Melissa for Q and a.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad a car.
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One moment, please while we poll for questions.
Thank you.
First question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please proceed with your question.
Well hijacked conferred hurry you did are you.
Just fine so I'm just.
Few questions could you provide any further commentary on our overall more June.
Particularly for the balance of this year and into next year, perhaps or would you expect to rebound off the or the Q2 number into Q3 and what more times book work on going forward for sure.
<unk>.
Yeah, well, let me give kind of a more global look and then you know I'll ask Fred to to kind of chime in.
So.
What you're looking at Jeff from a margin point of view as a combination of a couple of things on the pharma side, especially and that is that we obviously have a somewhat duplicative facilities that we are consolidating.
With the impact of coated.
And the transition of some of our employees, we actually accelerated that transition we're in the middle of that right now.
Moving things to North Carolina, and I will be down there next week.
You can imagine that with a single facility instead of multiple facilities that right. There has a big potential impact on on our fixed overhead cost.
And we will have a big impact on margins as well.
The timeframe for us to get out of our Rutherford facility is mostly by the first quarter, but from an operational point of view by the end of the year we will.
We will have virtually everything transition so that's number one.
Number two is you know price increases and you know we've had a price increase with a with Iran. Amir and you may remember that we.
Have also indicated you know based upon communication, you know with no but to us that we likely will have a in an impact if you will on a price and margin you know sometime in the near future. So we have our fingers crossed on.
On that as well I think what we'll see longer term is that the the pharma gross profit.
We'll be approaching the diagnostic gross profit that historically you've seen.
In addition to that with the help of some of our investors and their focus on our facility and in Pittsburgh. Our diagnostic facility. We are continuing to reduced operating costs and as you can tell volume input is being driven across a a a lower.
Fixed cost base.
I don't want to give too much more insight into gross profit margins until we finish our budget planning process for 2021.
Which really we typically begin in November.
But I think we'll be seeing some nice improvements in gross profit you know in the transition.
Got it and then can you give us a little bit more color as far as the.
New York the footprint, you mentioned show or in.
The beginning of 2021, what that will look like relative to.
Relative to what it looks like true today as far as rather for transitioning and.
North Carolina, coming along in Pittsburgh or Big <unk>.
Yeah, maybe I mean, you talked about footprint in terms of relative size.
Yep.
Showed Asian footprint yeah.
Yeah. So it's interesting our facilities are I'd say targeted or right around 20000 square feet. I believe that referred is a little less than 20 like 17 or 18000, Pittsburgh is a little greater than 20 and then.
Morrisville, North Carolina is in the 25000 square foot range.
So effectively what we've done and for what we're doing with the pharma business, which is.
A series of.
Individual platforms.
That we basically utilize to benefit a pharma companies.
You know effectively consolidating that into one location, perhaps the best way to understand it is that cancer genetics had two facilities and two separate business lines. They had a diagnostic business at a pharma business and so the principal reason to consolidate these is that you know we have.
Wired only the pharma business, but we acquired all the all of the facilities since they were running both lines in this and in duplicate facilities not to mention the call.
Not to mention the fact that as you can imagine the cost of doing business in North Carolina.
Is is better than doing business in new Jersey for sure.
Okay, and then a couple more on any commentary on any throughput on Cobi testing from Q2 or do you expect in the back half of the year and then finally, a if you could talk about the mix of business.
For the back half of the year and its 2021 and flipping from the historic two or what it looks like your future. Thanks.
Yep we.
We have our surajit testing.
Up and running and we did that with really the help of a funding.
And.
Yes. It is operational we have not added a PCR component to that yet.
We have lots of opportunities to do that.
But we're sitting back and evaluating what's happening in the marketplace as it relates to testing and turnaround times et cetera.
And as we take a look at our business.
Initially we thought that you know being a.
Being able to provide cobot testing with our capabilities was very important and it still is.
But I'd also say that our business has recovered greater than we had originally thought or maybe feared and so we're in a bit of a catch up mode as it relates to to catching up with all the volume and processing that in an effective efficient way.
So on the Covance side, we've kind of held back on that Jeff and I don't see that significantly affecting revenue in either Q3 or Q4.
On what was the other question you asked.
On the.
So from a distance between the two so the mix.
Yeah. So.
So I think I stated the mix of business did change in the second quarter is diagnostics.
Revenue net revenue was down more dramatically than the farm and farm it was pretty steady.
And now that diagnostics is recovering back to pre co bid levels, we expect the mix of business to be back at our historical range of 60% diagnostics, 40% pharma going forward.
And both with a good growth opportunities going into 2021, so don't expect that mix to dramatically change in the future.
Great. Thanks for taking my questions.
Thanks, Jeff.
Thank you. Our next question comes from the line of Ben Haynor with Alliance Global. Please proceed with your question.
Good morning, gentlemen, thanks for taking my questions.
First for me, the 9 million Bucks in a new pharmacist pharma services agreements.
Just kind of hoping to get a sense of who you know where those are coming from are those new clients or those kind of you know phase transitions for existing clients are they do you know expansion within a you know, it's a new clinical programs into existing clients just trying to.
I get a sense of where those are materializing from.
I can't give you the specific breakdown ban, but I can tell you that you know we track what we call new logos very carefully.
And some of that growth is definitely coming from new clients.
When you look at our business development or our commercial team in pharma you May remember, what I had said earlier, which was that.
While we were going through the integration process, we were basically beefing up that group and so we're at full capacity now at least for the near term.
And we're seeing the impact of that.
Books, especially interesting are exciting is that we're seeing the average size of contracts increasing.
And we're seeing that we're doing more and more later stage.
[noise] work.
For that as well and I think that all bodes well for you know the the future growth of the whole pharma business and.
And by the way, we're seeing contracts initiated over a longer period of time, so I'd say that in some ways, we have less control over pharma revenue on a month to month basis, but the base and the growth potential you know these larger contracts is.
As exactly what we wanted to do.
Okay. So you're not seeing anything that is I mean, obviously, if certain clinical assets fail.
There's one probably not needing to do on those ones specifically in the future, but are the ones that do move along or do you stay with us.
Yeah, I'd say that if you if you first of all we track that very carefully as you might imagine.
And it's an important component. So we may be involved in a trial and you know the trial has problems or fails or whatever the case might be and we're not going to move forward, but that's why that those bookings in that backlog is so important to us because we know the pull through issues.
And so.
We have a pretty good tracking mechanism to know what we need to target in terms of bookings and backlog to get to our revenue target for the <unk> for the quarter and the year.
Okay.
Go ahead, sorry, well, well well things drop out, but we'll also have things drop in and you know they've been relatively balanced at least over the last year or so since we've owned the company.
Okay, great Yeah, I mean, it sounds like everything so.
You know going along pretty well there.
Hey, listen we're still in transition as we consolidate facilities.
Personnel issues, we're building out a limb system in North Carolina.
The the business that we do well similar to what we do on the diagnostic side. You know is a different customer base in client base and basically if you think of what we're doing on the pharma side is we're customizing assays every day and you know, it's kind of an exciting space.
The being especially with our you know capabilities in immuno oncology.
Sure. It makes a lot of sense. So then on the FCB loan agreement what needs to happen there and you know any color you can provide for the capacity to be reinstated there.
Yeah, and I'll I'll comment and I'll ask you know Fred to kind of weigh in as well. So yeah. So with SBB. It was a line of credit. It was you know based upon the cash balance that we had at the time.
So it was really kind of an incremental receivable line.
But it was secured by basically our liquid assets. So there was a quick ratio that we had to to me.
And right now as we are sitting here, we're not able to meet that quick ratio, but as soon as.
But as soon as we are were you know because we.
Because we have been able to you know not basically a default on the loan and we're in compliance under the loan.
Not only are we looking to.
To replace the the loan meaning the borrowing amount of about $4 million, but our goal is to really expand that loan as it relates to the receivable business of the pharma services, which to date has not been included in the borrowing base [noise].
Got it.
And we just updated we just signed an amended the joiner agreement to get the waiver and also add that pharma services assets into the borrowing base that they are which is positive and that helps with the quick ratio, but still out of compliance with it and we'll be working with SVB to take a look at that.
Financial covenants and hopefully reinstate our borrowing at some point, but obviously, that's not guaranteed and then so ben to and May not be totally clear, but you know related to the investigation. When we were notified of the investigation we.
Basically stop billing certain ask phase in our diagnostic or clinical business.
And we're basically waiting to make sure that we didn't have a problem. So only recently have we been able to you know.
Build those.
As a.
Those assets you know that we had basically a delayed for I guess, maybe three months, while the investigation was completed so there's pieces of what they are really falling into place.
Believe me, we're motivated and incentivized to get that back up and running.
And then on the other the delayed billing.
Are you worried that those delays will affect a collectability or do you expect that not to be different than historical.
Yeah, no not not at all we have you know under the under our contractual arrangement a week.
We basically have a 12 months to be able to bill. So it was not a it was more.
From a cautious point of view, we didn't want to build anything where there might be a you know a a problem or reversal and we knew we had 12 months to be able to build it and so we don't think we have any risk at all <unk> and from a timing perspective, a lot of the billings are for Medicare and the turnaround time for Medicare is pretty.
Mike its a couple of weeks to three weeks.
Sure. Okay. That's helpful and then lastly for me.
And I think just kind of touched on this but the ER in the release you say the decline in gross margin was principally due to lower margins associated with pharma services prior to the consolidation of facilities.
Once that consolidation that occurred.
Good reads.
Reads to me that you expect that to return to prior levels, if not a little bit better is that is that a fair read it.
Yeah, I would say at higher levels in combination of the variable costs that come out in some of the the lease cost specifically and then higher volume higher revenue.
We expect the margin to accrete overtime as as we go through this.
We still have to get through the the finalization of the transition of the assets.
Before we can start really seeing margins improve.
Got it all right well, that's all I had gentlemen, thanks, a lot for taking my questions. Okay, you bet expenses.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad at this time are.
Our next question comes from the line of each one with H.C. Wainwright. Please proceed with your question.
Thank you for taking my questions I'll check My first question is when you set the diagnostic business has returned to pre colgan levels.
That occurred in early third quarter or most recent weeks and if as we see now be caught you koby cases.
As a rebound.
In the fall winter season, do you expect an additional impact on.
The diagnostics business okay.
Okay.
Yeah, Yeah those are good questions.
Yeah. Those are good questions in terms of the rebound in the diagnostic business. It really was more of a of a v. it dropped off very quickly.
Mid March.
Right and then has been you know.
Rebounding in a very orderly a in a very orderly way through Q3 so.
You know into Q2 and through peak through Q3 on the pharma side you. What we were saying is that.
The the drop off if you will related to to Cove. It.
In the March April timeframe.
Was certainly not as precipitous as it was on the diagnostic side as a matter of fact, it was relatively stable, but there clearly was a decline beginning after sort of the April timeframe.
As bigger pharma companies were trying to deal with trials et cetera, and what we've seen is instead of a v. rebound, we're seeing what I'd say is more of a check Mark you know it dropped off but the recovery is slower and.
Again, we're still seeing the the the recovery on the on the pharma side.
You know keep in mind too that with the transition of the business from Rutherford, two North Carolina, and the build out et cetera going on.
That you know it it presents some specific challenges around you know the end.
The end of Q3 in the beginning of Q4, as we shut down certain trials and ramp them up in a in North Carolina, but I think we're on track for that.
Yeah, if I could just add.
So that the volume coming back in the diagnostics business.
Over pre covert level is really been for the last four weeks or so.
Yeah. If you look at third quarter versus first quarter third quarter is going to be a little bit lower but continuing to improve.
And as far as any anticipated covenant package is anybody's guess.
It's hard to tell where things are going but what we're seeing right now we're not seeing any drop off in volume it continues to improve and.
We measure it on a day by day basis, and we'll react accordingly.
Got it.
So your other question on your other question on the future.
And I don't know what you are seeing with other with other clients you know with co bid but.
I'd say that from a laboratory point of view, we know how to operate now in this new environment and that's always the biggest risk associated with whats happening next to you know customers managing it and I think that all of our customers.
I don't think our customers will go into a situation that they did before where they were.
Completely shut down and had to.
Had to deploy resources only to deal with Cove, It I see that mostly behind us, but we certainly can get hot spots around the country and those hot spots can certainly affect us in individual customer. So we're cautious about that but I think we've got a pretty well lift.
Got it.
Thank you. My second question is you mentioned that you are seeing a longer term.
For Pharma services, Inc.
All in all what is the current average timeframe to realize the revenue you know signed contracts to suggest an identity and what how do you expect the timeline to an extent with this longer contracts.
Yes, so typically now.
It's a mix of contracts that some deliver revenue in a month or two but on average it's about three years three year study and the study some of the newer studies that were adding can go as far as five years.
So that will extend the revenue stream and the contribution of the current contracts over a longer period of time, but the mix right now being more weighted to three years, that's going to be a gradual change in the revenue contributing from the backlog of contracts that we have signed so.
It will be a steady and as we add more contracts.
And we get a more based on the near term revenue should improve.
Improve.
At an increasing rate I would think through the next year or so.
Well, we'll see how that plays out.
Okay got it my last question is how do you plan to be compliant with Mastec must know climate again.
Yes, so we have not actually been notified by NASDAQ, but at least as of yesterday.
That were not in compliance.
And you need to as you typically as you know typically what happens is they give you 30 to 45 days to file a plan.
For regaining compliance and it's certainly our plan to file our plan in that period of time whatever were given.
As you might imagine.
Because of the delay in filing the second quarter, we knew when we did file we were not going to be in compliance. So we've been working on this for quite a while and hope to have a.
Hope to have a plan.
As soon as possible, but obviously, it's a big priority for us as well.
Okay got it thank you.
Huh.
Thank you, ladies and gentlemen that being my last question I would like to thank you on behalf of interplay spire scientists for joining the call today.
May now disconnect your line.