Executives: Jack Stover – President and Chief Executive Officer Jim Early – Chief Financial

Officer
Analysts: Roshni Mahadeo – Rodman & Renshaw Jeff Mcney – Qm Group LLC David Veitch – Morgan Stanley Suraj Singh – RedChip Companies Jeevan – Private

Investor
Operator: Good day and welcome to the Interpace Diagnostics First Quarter 2017 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Jack Stover, President and CEO. Please go ahead.

Jack Stover: Thank you, Ashley.

And thank you all for joining us today. The new release detailing our results was issued this morning and will be available on Interpace’s website at www.interpacediagnostics.com. Before we get started, during the course of this conference 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 Company’s 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 actually results to differ materially from those described in the forward-looking statements. These risks and uncertainties associated with forward-looking statements made in this conference call are all described in the Safe Harbor statement in today’s news release as well as Interpace’s public periodic filings with the SEC, including the discussion in the Risk Factor section in our Form 10-K for the year ended December 31, 2016, which was filed in March. Investors or potential investors should read these risks. Interpace assumes no obligation to update these forward-looking statements to reflect future events or actual outcome and does not intend to do so. In addition, to supplement the GAAP numbers, we have provided non-GAAP information, we believe that this non-GAAP numbers provide meaningful supplemental information and are helpful in assessing our historical and future performance.

A table reconciling the GAAP information to non-GAAP information is included in the Company’s earnings release, which is available on our website. With me today is Jim Early, our Chief Financial Officer. And I’ll begin the call with an update on our progress, both for the quarter and year-to-date. We will then review our financial performance for the quarter as compared to the prior year. Following that, we will open the call for your questions.

As I typically do let me remind you of our overall mission, we are a fully integrated commercial company that provides molecular and diagnostic test and pathology services to evaluate the risk of cancer by leveraging the latest technology and personalized medicine for better-informed clinical decisions and improved patient management. As a remainder, we currently have three significant diagnostic tests commercialized on the market. Starting with PancraGEN, which is the first and only U.S. commercially available molecular test for evaluation of pancreatic cyst and assessments of risk of concomitant or subsequent cancer. Under the current standard of care, too many patients are ending up on the operating table despite actually having benign outcomes.

PancraGEN has the specificity required in a molecular diagnostic test to avoid many of those unnecessary, risky and costly surgeries, potentially resulting in substantial cost savings to the healthcare system and improve patient outcomes. ThyGenX is our next-generation sequencing test for cancer risk assessment of thyroid nodules that improves preoperative diagnostic accuracy by providing physicians with greater confidence to ruling cancer or indeterminate thyroid nodules. In April of 2015, we launched ThyraMIR, which is the first microRNA gene expression classifier for thyroid nodule identification. When ThyraMIR is used in combination with ThyGenX, the two tests have both high sensitivity and specificity that corresponds to clinically actionable negative predictive value of 94% to rule out benign nodules and a positive predictive value of 74% to rule in benign nodules. The combination of these two tests allow physicians the ability to more accurately identify and rule out thyroid cancer with a single testing service, providing what we believe is a superior solution.

We estimate that we now currently have over 250 million lives covered for reimbursement for ThyGenX and ThyraMIR. Our fourth test, BarreGEN for Barrett’s esophagus, is currently being soft-launched with key opinion leaders as we gather data on this assay that will assist us in seeking favorable reimbursement. Barrett’s esophagus is a rapidly growing diagnosis that affects over 3 million people in the United States and over time, can progress to esophageal cancer. BarreGEN helps physicians differentiate between patients at high risk of progression from those at lower risk of progression, prior to the onset of cancer and well before observable changes in the cells. We believe that BarreGEN can be a significant opportunity for us to seek development and commercial partners for in the U.S.

and abroad. Now back to the first quarter. We continue to make good progress in the first quarter of 2017 net revenues grew over 14% from the same quarter of 2016 and over 11% from the fourth quarter. We raised over $14 million in equity since late December and converted all of our secured debt amounting to $9.3 million to common stock by the end of April further strengthening our balance sheet. Overall for the quarter, we added over $18 million to our stockholders equity and are now well positioned.

In addition to converting our secured debt, we also were successful in terminating future potential royalties and milestones related to assets we acquired from RedPath in 2014, which resulted in a reduction of $5.8 million of contingent consideration included in operating income during the quarter. Exclusive of the reduction in the fair value of contingent consideration for the quarter, the operating loss would have been $2.1 million, as compared to $3.8 million for the first quarter of 2016. Net cash used in operations for the first quarter of 2017 amounted to $4.1 million, but also included approximately $2.5 million of cash spend related to discontinued operations, severance costs, excess lease space and other contractual obligations previously entered into prior to the sale of our contract sales organization in 2015. That frankly provides little or no value to us today. At the end of the quarter, we had $7.1 million of cash on hand.

Importantly, we announced that UnitedHealthcare is the largest health plan in the United States and has agreed to cover Interpace’s ThyraMIR test for all of United’s members nationwide. Interpace’s ThyGenX and ThyraMIR thyroid assays are now covered for approximately 250 million patients nationwide. We also expanded our presence and distribution, both in Israel with Best Med Opinion Ltd and in Canada, to Dr. Payne of Montreal, Quebec. Further the European Patent Office granted a patent for the underlying technology of ThyraMIR or microRNA classifier.

Overall, a very nice quarter for us with significant progress. With that, I would like to turn the call over to Jim Early, our CFO to discuss the financial highlights for the first quarter. Jim?

Jim Early: Thank you, Jack, and good afternoon, everyone. Today, I would like to focus on some key elements in our financial statements, some you heard from Jack and others that will continue to develop here. Net revenue for the first quarter of 2017 was $3.5 million, a 14% increase over the comparable period of the prior year as well as an 11% increase over the prior quarter.

The principal reason for revenue growth was our thyroid franchise, both in units and reimbursement improvement. As you may know, much of our revenue, in accordance with GAAP, is accounted for on a cash basis, while we are expanding reimbursement. Our gross profit for the first quarter of 2017 was 49% of net revenue as compared to 61% in the prior year first quarter. The principal reason for the reduction in gross profit was due to reagent costs that were charged to cost of sales in prior periods. In total sales and marketing, research and development, and general and administrative costs, the total of these were $2.97 million during the quarter as compared to $4.7 million in the prior year quarter, a reduction of $1.73 million or 37% as the company continue to manage discretionary spending effectively.

Our headcount is currently 63, as compared to 58 at year end. We incurred a change in the fair value of contingent consideration as Jack mentioned of $5.8 million during the first quarter, which was related to the benefit of terminating the royalty and milestone obligations associated with the purchase of RedPath in 2014. Additionally, we incurred a non-cash loss on the extinguishment of debt, a secured debt, of $1.55 million accounted for as a charge to earnings during the first quarter for conversion of our secured notes for equity at below our estimated value of the note, as previously determined under GAAP for accounting purposes. Accordingly, net income for the first quarter was approximately positive $2.4 million, including the fair value gain for loss items just mentioned and disclosed in our 10-Q, as compared to a net loss for the prior year’s first quarter of $4.8 million. We are, however, not cash flow positive from operation.

In an effort to demonstrate to you how management and our Board of Directors evaluates the company’s performance, we reconcile and present income or loss from continuing operations to adjusted EBITDA, or non-cash charges, such as depreciation and amortization, asset impairment, loss on extinguishment, goodwill impairment and the change in fair value of contingent consideration. Accordingly, our adjusted EBITDA for the three month period ended March 31, 2017, and 2016 was negative $1.1 million for 2017 and $2.6 million negative for 2016, demonstrating, continuing, operating improvement. Total assets since year-end increased over $5 million with our capital raises and total liabilities were reduced by approximately $30 million through conversion of debt-to-equity, elimination of contingent consideration and the repayment of obligations and negotiated settlements. In conjunction with these reductions to debt, our stockholders equity rose by over $18 million since year end to $24.6 million. Our cash position was also enhanced at the end of the quarter and amounted to $7.0 million, due principally to the proceeds of approximately $12 million raised during the quarter, net of transaction expenses and cash burn.

With that, let me turn the call back to Jack.

Jack Stover: Thanks, Jim. A couple of additional things for our listeners and investors to consider. We believe we have several potential items that could be value drivers over the next year or so. Although, obviously, we can’t guarantee that any of these or all of these will occur.

They include, potentially getting on contract with both UnitedHealthcare and Aetna, expanding our sales force, which is already currently underway, developing our next version of ThyGenX, reporting the results of new clinical utility studies for both PancraGEN and our thyroid assays, renewing and potentially expanding our Lab Corp relationship and strategic partnering for a BarreGEN assay. Ashley, I’ll turn the call back to you for Q&A.

Operator: Thank you. [Operator Instructions] We’ll take our first question from Yi Chen from Rodman & Renshaw. Please go ahead.

Roshni Mahadeo: Hi, this is Roshni on behalf of Yi. Thanks for taking my question. Are there any differences in the coverage determination between the agreement with Aetna, UnitedHealthcare and the Philadelphia System? And are patients under those plans currently being reimbursed for their Interpace test?

Jack Stover: Yes. Let me answer those in pieces. The United and the Aetna relationship or arrangement is very similar.

And so, basically the way we look at it is, at about 80% of the patients that are covered by those plans will be reimbursed by either Aetna or United. That’s different than the Philadelphia plan which is obviously a much smaller plan and much more of a local plan. But that local plan in Philadelphia, which we haven’t named yet is effectively the same type of coverage. The next step in the process is in fact looking to get on contract, but many times companies like us in the reimbursement area will decide not to go on contract if they are satisfied with the reimbursement rate and the percentage of patients covered by those plans that are already receiving reimbursement. So it’s a negotiated process.

Roshni Mahadeo: Okay. And what revenue growth do you expect in 2017 from the new agreement bond on a combined basis? And how much of an increase do you expect in sales and marketing expenses for the rest of the year?

Jack Stover: Sure. Those are good questions. We don’t provide guidance on revenue or costs for the ensuing periods, whether it’s by quarter or by year. But I can give you a little bit of a color about that process.

So first of all, when you take a look at our selling activity, we are adding about 10% of our cost to adding new sales reps to expand our territories. So that’s number one. Number two is, on the marketing side, we’ve been very careful and cautious about how we market and we’ll continue to be careful and cautious about that, but generally speaking, our marketing cost will increase not dramatically, but marginally. In terms of the revenue growth, again, because of the difficulty where we currently are in terms of revenue recognition and that effectively somewhere between 40% to 60% of our revenue was either cash-based or accrual-based and it’s about managing our way through units and converting those units from being in the lab to being molecular assays. We really don’t give that individual guidance in terms of what we expect in terms of revenue growth, at least, not at this time.

Roshni Mahadeo: Okay. Got it. Thank you.

Operator: [Operator Instructions] And we’ll take our next question from Jeff Mcney with Qm Group LLC. Please go ahead.

Jeff Mcney: Hello, guys. Great improvement in the quarter and process. Just wanted to know, whether or not there was any color you could shine on the patent maybe that was issued? I heard some lines about that, wasn’t too sure that was accurate or not U.S. patent, I guess, maybe dated May 9?

Jack Stover: Yes. Were you talking about the U.S.

patent or are you talking about the international patent that we’re referred to?

Jeff Mcney: No, no. U.S. patent. No, I think about the EU patent. I think that happened on the call last time.

I was just curious whether or not it was accurate?

Jack Stover: Yes. The answer is yes, it was accurate.

Jeff Mcney: Okay, right. Thank you, okay.

Operator: And we’ll take our next question from David Veitch with Morgan Stanley.

David Veitch: Good evening, gentlemen, again great quarter. In reviewing your 54 Page 10-Q, I just had a couple of very basic questions. Is it true that you have basically 8.788 million shares outstanding? Is that a good number?

Jack Stover: Yes. I think that’s what – I don’t have the Q in front of me, but that is the number that we have in the Q, I believe.

David Veitch: Okay.

And with the market cap for book value of $24 million and your company’s book value is $2.80 a share, is that fair to say?

Jack Stover: Our book value is – well, I think it’s a market…

David Veitch: Turnover’s equity.

Jack Stover: I think multiplying the number of shares outstanding times today’s market price, that’s the current market cap, that’s right, not book value.

David Veitch: No, no. I’m talking this, total shareholder equity of $24.569 million.

Jack Stover: That’s right.

Divided by the number shares outstanding.

David Veitch: Right. Divided by number of shares outstanding, gives you a $2.70 figure. Is that fair?

Jack Stover: Right. I think so.

I haven’t done the math, but I trust you.

David Veitch: All right. It just seems awfully cheap. The other thing that just amazes me in my many, many decades in this business, where is all the volume coming from?

Jack Stover: What do you mean in terms of the shares? The trading of the activity?

David Veitch: Yes. 7 million shares today, for example or these high-frequency traders and trying to make a penny here and there or where do you think, it’s coming from?

Jack Stover: Well, we certainly track on a top scale general activity in terms of the stock.

And yes, we do have traders, I’m sure we have program traders. We certainly have retail traders, but we also have a relatively large group of institutional investors as well that follow us. If you go back to the November-December timeframe when we initiated our reimbursement with Aetna that was the first big expansion in terms of volume. And then since that time, our expansion or volume has continued to be very strong. So we’re very happy with that for a company that has roughly 8 million or 9 million shares outstanding.

Your comment on the book value versus the market value, it’s an interesting question in comparison and the question is or the comment is, is the stock cheap compared to book value and certainly, on the pure calculation, the answer is yes. But remember to that, the assets – the majority of the assets that we have are intangible assets, and the majority of those assets are really a function of the present value of the future estimated growth and expansion of the products that we acquired. And so a large portion of our asset base is, in fact, intangible assets. So there may be a discount from that as people are looking at market cap. The way that we tend to look at our market valuation in comparison to our competitors is as a percentage or a multiple of revenues.

And as we know, many companies in this space trade at around 2.5 to maybe 3 times revenues – net revenues, some as low as 2 times revenue.

David Veitch: So what is your multiple?

Jim Early: Yes. Ours has been on the low side of that, that’s for sure. If you look at $30 million or so in revenue, for 2016 times 2.5, that gets us about $30 million.

David Veitch: Okay.

You mentioned that one of the value drivers looking forward very well may be a partner with BarreGEN, is there any timeline on that?

Jack Stover: It’s a big product opportunity and the kinds of companies that we’re talking to are large companies as well, and those arrangements if we’re successful in executing them do take time.

David Veitch: Like, this year?

Jack Stover: Well, we hope that we can get an acceptable transaction done this year, but we can’t obviously guarantee that.

David Veitch: Well, your company has obviously achieved two milestones in getting rid of your future royalty payments as well as doing your debt conversion, and I really commend you for that, because those were company making transactions. And I think that this shows the imagination ingenuity, well, on investing part. Looking forward, what is your – do you have a – your next presentation are you going to be continuing to speak before conferences and private equity groups or what’s your game plan as far as investor relations goals?

Jack Stover: Sure, it’s an interesting comment because of the debt overhang that we had, we were – the perception around us was that it was going to be an obligation that was going to be very difficult to settle.

And in fact, when we entered into the agreement to be able to trade out some of that debt for equity, we thought it could take over a year to get that done. And in fact we did it in about a month. So we are very pleased with that. And then you’re right, it is a major accomplishment. But actually also reflecting back on the valuation issue, I think much of our valuation has been impacted by the debt obligations that we had and the lack of clarity about how we were going to exit from those.

So this conference call and this first quarter is really the first announcement that we’ve had, that not only is the debt gone, not only are the royalties and the milestones gone, but also the liens. We’ve had liens against all of our assets, all of that’s been washed away. So that’s a good step. The next steps is, speaking at conferences and we have been very active in speaking at conferences already. We spoke recently and we have plan to speak at multiple conferences for the rest of the year and to really expand our outreach, because now we are certainly a more credible and more marketable company than we have been in the past.

David Veitch: The warrants that you were sold did they have a strike price of $4.69 that the – one of the investors took on this recent secondary?

Jack Stover: The answer is yes. It was $4.69.

David Veitch: And those are similar 5 year warrants?

Jack Stover: They were.

David Veitch: Okay. I think that’s all my question.

And thank you for your time.

Jack Stover: Yes. Thank you for your compliments, Dave.

Operator: And we’ll take our next question from [indiscernible] with DSL. Please go ahead.

Unidentified Analyst: My question, it was already asked. Thank you.

Operator: And we will take our last question from Suraj Singh with RedChip Companies. Please go ahead. Caller your line is open, if you can unmute yourself.

Suraj Singh: Congratulations, Jack, on your 1Q 2017 results. A lot of questions were answered, but I just have one question, are you planning to raise the money or you have enough cash balances for your continued operations?

Jack Stover: Yes. We have about $7 million on hand at the end of the first quarter. In terms of raising additional capital, we focus on that based upon our needs, on an ongoing basis and depending upon the market situation as to whether there is an opportunity to raise capital or not. And so at this time, we really don’t make a commitment to it one way or the other.

Suraj Singh: Thank you, Jack.

Operator: And we will take our last question from Jeevan with Private Investor. Jeevan: Yes, hello. My question is this, does your science allow for the determination of cancer and other organs, such as kidneys?

Jack Stover: Yes, good question. And the answer is that it does.

And we do, in fact, and have, in fact, expanded our platform into other organs. We have our hands full currently with our current products, but as far as licensing technology out to third parties and expanding our assays into different areas, the answer is definitely yes. One of the areas of focus for us has been the liver, as an example. The kinds of organs that we’re focused on and the kinds of cancers that we’re focused on are typically – and again, we’re really a precancer not an oncology company, we focus on indeterminate assays. So in areas of biopsies where there is a large proportion of those biopsies that come back indeterminate we’re able to use our existing technology, especially our oncogene technology and our next-gen sequencing to really be able to drill down and give a more accurate viewpoint of the potential for migration to malignancy.

Jeevan: Well, thank you very much. Very interested in the kidney approach, it’s such a terrible thing to experience.

Jack Stover: Yes. We know it is. Yes, thank you.

Operator: And it seems we have no further questions. I’d like to turn the conference back over to Mr. Stover for any additional or closing remarks.

Jack Stover: Thanks, Ashley, and thank all of you for participation and for great questions. The first quarter of 2017 was certainly a good start to the year and once again transformational for Interpace.

We hope that many more exciting developments over the next months and look forward to updating you on our progress. And again, thank you all for joining us in the call today and your continued support. Thanks, Ashley.

Operator: Thank you. Once again that does conclude today’s presentation.

We thank you all for your participation. And you may now disconnect.