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

Officer
Analysts: Jason McCarthy – Maxim Group David Veitch – Morgan Stanley Pierre Goovaerts – BioMedware Suraj Singh –

RedChip
Operator: Good afternoon, everyone. Thank you for joining us for the Interpace Diagnostics Conference Call to review the company's financial results and operations for the second quarter and year-to-date ended June 30, 2017, as well as recent developments. The news release detailing our results was issued and will be available on Interpace's website on www.interpacediagnostics.com. I would also like to remind everyone that today's call is being recorded. 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 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 news release as well as Interpace's public periodic filings with the SEC, including the discussion in the Risk Factors section in our Form 10-K for the year ended December 31, 2016, which was filed with the SEC on March 31, 2017 and the amendment on Form 10-K/A filed on April 27, 2017, the company's quarterly report on Form 10-Q for the quarter ended March 31, 2017, filed with SEC on May 12, 2017, and the company's quarterly report Form 10-Q for the quarter ended June 30, 2017, filed with the SEC on August 10, 2017. Because of these and other risks, uncertainties and assumptions, undue reliance should not be placed on these forward-looking statements.

In addition, these statements speak only as of the date of the press release. And except as maybe required by law, the company undertakes no obligation to revise or update publicly any forward-looking statements for any reason. In addition to the supplement, the GAAP numbers, we have provided non-GAAP information. We believe that these 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 also available on our website.

Now I would like to turn the call over to Jack Stover, President and Chief Executive Officer of Interpace Diagnostics.

Jack Stover: Thank you, Jessica, and good afternoon, everyone. Thank you for joining us today for a review of our second quarter and year-to-date results for the period ended June 30, 2017. With me today is Jim Early, our Chief Financial Officer. I will begin the call with an update on our progress to date.

We will then review our financial performance. 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 tests and pathology services to evaluate the risk of cancer by leveraging the latest technology in personalized medicine for better informed clinical decisions and improved patient management. As a brief reminder, we currently have three commercial diagnostic tests on the market.

ThyGenX is our next-generation sequencing test for cancer assessment of thyroid nodules that improves preoperative diagnostic accuracy by providing physicians with greater confidence to ruling cancer for indetermined 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 2 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 2 tests allows 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.

PancraGEN is the first and only U.S. commercially available molecular test for evaluation of pancreatic cysts and assessment of risk of concomitant or subsequent cancer. Under the current standard of care, too many patients are ending up in 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 surgery, potentially resulting in substantial cost savings to the health care system and improved patient outcomes. 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 as well as important clinical information.

Barrett's esophagus, as you may know, is a rapidly growing diagnosis that affects over 3 million people in the U.S. and, over time, can progress to esophageal cancer. BarreGEN helps physicians differentiate between patients at high risk of progression from those at low 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 second quarter. The second quarter and year-to-date was transformative for Interpace, as importantly, we continued to improve our balance sheet, providing us a solid base to leverage our commercial resources and build on the success of our franchise in the future. Our cash position is now in excess of $14 million, resulting principally from $13.7 million raised in a public offering of our common stock in June and over $22 million we raised year-to-date. Additionally, we converted over $9 million of long-term debt since the end of December 2016 to common stock and, at the same time, we were able to eliminate related contingent royalty and milestone obligations that resulted in a net benefit of approximately $1.5 million in the 6 months ended June 30, 2017. Accordingly, total assets grew by approximately $12 million, while at the same time, total liabilities were reduced by over $17 million, a 51% improvement when compared to year-end 2016.

Additionally, total stockholders equity grew by over $29 million since year-end 2016 to over $36 million as of June 30. In addition to all our financial and balance sheet restructuring, we were also able to continue to grow net revenues. Year-to-date, our net revenues grew approximately 10% from the same period of 2016, and our net revenues for the second quarter of 2017 were 7% greater than our net revenues for the same period of 2016 and 11% greater than our net revenues for the first quarter of 2017. Net cash used in operations year-to-date in 2017 amounted to $8.7 million as compared to $5.3 million for the same period of 2016, principally due to in excess of $3 million of expenditures related to a combination of discontinued operations, transaction fees and the remainder of payment obligation held over from our CSO business sold in 2015 that today provides us little or no value. – : With that, I would like to turn the call over to Jim Early, our CFO, to discuss in more detail the financial highlights for the second quarter and year-to-date.

Jim?

Jim Early: Thanks you, Jack, and good afternoon to everyone. Today, I would like to focus on the key elements in our financial statements. Our net revenue year-to-date was $7.3 million compared to $6.6 million in the prior year, an 11% increase. Net revenue for the second quarter of 2017 was $3.9 million, a 7% increase over the comparable period of the prior year as well as 11% increase over the prior quarter. The principal reason for our net revenue growth was our endocrine or thyroid franchise both in units and reimbursement improvement.

However, we are also seeing growth in our gastrointestinal or pancreas tests now as well. As you may know, much of our net revenue, like many of our competitors, is still accounted for on a cash basis in accordance with GAAP while we are developing a track record with payers and further expanding reimbursement. Therefore, as you might realize and as it is well known in the industry that at times it is difficult to project revenues because of this timing differential of cash and accrual basis revenues. Our gross profit year-to-date and for the second quarter in 2017 was, as a percentage, 50% and 51% of net revenue as compared to 55% and 49%, respectively, in the prior year-to-date and for the second quarter. Principal reason for the reduction in gross profit to date was due to the timing of reagent costs that were charged to cost of sales in prior periods.

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– : Accordingly, our adjusted EBITDA for the 6-month period ended June 30, 2017, as compared to the same period of 2016 was $3.6 million negative as compared to negative $4.2 million due principally to the reduction in the loss from continuing operations in 2017 while our adjusted EBITDA for the quarter ended June 30, 2017, and for the comparable quarter of 2016 was negative $2.5 million as compared to negative $1.8 million due principally to the increase in loss from continuing operations for the second quarter of 2017. Total assets since year-end increased almost $12 million since year-end 2016 with our capital raises, while total liabilities were reduced by almost $18 million through conversions of debt to equity, elimination of contingent consideration and the repayment of obligations and negotiated settlements. In conjunction with these reductions of debt and capital raises, our stockholders' equity rose by $29.8 million to $36.3 million at June 30. Our cash position was also enhanced at the end of the quarter and amounted to $14.3 million due principally to the net proceeds of $12.3 million raised during the quarter. With that, let me turn the call back to Jack.

Jack Stover: Thanks, Jim. Couple of additional things for our listeners to consider. We believe we have several potential items that could be strong value drivers over the near term. Although, obviously, we can't guarantee that any of these occur. But a couple of the key potential drivers that we're focused on are

as follows: We announced the launch of PanDNA, a potentially important new product extension to attract sophisticated users with strong pathology to expand our pancreas franchise.

We also recently announced the TERT, T-E-R-T, marker of aggressiveness to provide more critical insight to the users of our thyroid assay. We believe we are one of the only companies offering this benefit. Further, we expanded our sales force, especially to take advantage of our approval in New York state of our thyroid assay late in 2016. We further expanded our PancraGEN assay to focus on a related addressable market of solid lesions of the pancreas and bile duct. We are developing our next version of ThyGenX.

We also anticipate reporting results of multiple new clinical utility studies for PancraGEN and our thyroid assays in 2017 and early 2018. We are working on renewing and expanding our very important Lab Corp agreement to market our thyroid assays. And lastly, we are focusing on strategic partnering of BarreGEN, our Barrett's esophagus assay to accelerate our progress into this potentially large market opportunity. I will now turn the call back to the operator for Q&A.

Operator: Thanks Jack.

[Operator Instructions] We'll go first to Jason McCarthy with Maxim Group.

Jason McCarthy: Hi guys, thanks for taking the questions, and congratulations on a good quarter. My first question is on the thyroid assay and the TERT marker. I know you announced in July that you've added it to the assay. What impact is that going to have on physician adoption? What I'm really asking is, how does the TERT biomarker further differentiate the assay from other assays that are available in the space? And is there a significant change in predictive value having this marker in there?

Jack Stover: Jason, thanks.

Thanks for joining the call. Yes. We're very excited about adding the TERT biomarker to our thyroid assay. Mechanically, as we look at it, what we believe we're 's able to do is truly differentiate ourselves from our competitors. Many of our competitors have a microRNA-only evaluation or classifier.

In our case, by adding this biomarker and understanding how aggressive these potential tumors are, we're really very much moving upstream in providing physicians and patients much more information than our competitors can at this point in time.

Jason McCarthy: Okay, great. And if we could just jump over to BarreGEN. I know you're in discussions for, I guess, a larger commercial partner. But in the meantime, how committed is Interpace to marketing BarreGEN and in terms of committing resources now and for the next several quarters? And is there a possibility that you do continue to launch BarreGEN yourself, like the thyroid assay, which we believe will ultimately be a significant driver for the company?

Jack Stover:
– : But importantly, there are probably three or four additional products that we can utilize our BarreGEN assay ourselves in $100 million to $200 million to $300 million market components of that larger market.

So we're able to do both. We're able to hopefully be able to partner BarreGEN with a much larger commercial company and, at the same time, be able to move forward with it in terms of developing products on our own, very much like the ThyGenX and ThyraMIR assay. And that's why we're so excited about it.

Jason McCarthy: Okay, great. And one last question, Jack.

Could you walk us through what you see as the next significant catalyst for the company between now and the end of the year?

Jack Stover: Yes. We have a number of significant catalysts, Jason. I'd say that, certainly and importantly, additional reimbursement for us is critical. And what I mean by that is that it's not a onetime activity. As we gain reimbursement, we're able to dramatically improve the basis of our revenues, sometimes based upon even the same unit but also potentially increasing units.

So that's number one. Number two is being able to move forward with the BarreGEN assay. And we're hopeful of being able to further develop that. We have a clinical experience program that we are in the process of launching and gathering additional data that we think will be very important as well. And from our other piece is if you take a look at the activities and the successes we've had at the end of 2016, like our New York state approval and like some of the other reimbursement experiences and improvements we've had, we expect to see that begin to be realized even more so in the second half of 2017.

Jason McCarthy: Okay. Great Jack, thanks for taking the questions.

Jack Stover: Thank you, Jason.

Operator: [Operator Instructions] We'll take our next question from Mohammed Abdul Amar who is a Private Investor [ph].

Unidentified Analyst: Hello, good afternoon everyone.

I just have a couple of questions. The first question is about the Annual Stockholder Meeting. I've been trying to find out when it's going to be? Would you please let us know about that?

Jack Stover: Yes. Mohammed, we expect to be able to file our proxy by the end of next week. We're targeting sometime around the middle of September for the shareholder meeting.

Unidentified Analyst: Okay. The second question is with still over 250 million people covered under all kind of different insurance carriers, why the physicians are still not ordering the tests as we hope to?

Jack Stover: So why we have coverage on a broad basis? It's also an awareness issue. Certainly, on the awareness side, in 2016, we had cut back a fair amount of our marketing activity. We've begun to expand it as we brought on new sales reps, et cetera. Molecular is a relatively new technology for a lot of physicians.

And in addition to that, guidelines are critically important. And as the combination of awareness improves and the guidelines continue to improve and even in terms of us being able to present our results compared to our competitors, we believe we'll have more than ample ramp-up. The way we look at it is we believe the thyroid business is roughly a $350 million market. And if you look at the competitors and the people in that space currently, I'd say there's probably less than $100 million of current revenue, most of which, I believe, is a function of lack of awareness.

Unidentified Analyst: Okay.

Just the last question about, there's any potential for national coverage for Blue Cross and Blue Shield?

Jack Stover: I'm sorry, can you say that again?

Unidentified Analyst: The potential for national coverage for all the Blue Cross and Blue Shield claims?

Jack Stover: Yes. There's certainly the potential for that. There's an extensive process with Blue Cross and Blue Shield. We've been working with them. They provide direction and input in terms of data and information they're looking for, and it's a continuous process.

Unidentified Analyst: And I hope the company would try to launch sales initiatives as they did last year with the cost reduction initiative. The stockholder I know would appreciate that. Thank you so much.

Jack Stover: Thank you.

Operator: We'll take our next question from David Veitch with Morgan Stanley.

John Veitch:
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Jack Stover: Sure, David. Yes, thanks for joining the call. When we talk about expanded lab partner, I think in the context of what you're referring to is really around our Barrett's esophagus or BarreGEN assay. And what we're talking about there is that we are looking for a commercial partner that has the resources to help us fund additional studies and additional development work around our product. The product's been developed and is in the marketplace, in the hands of physicians.

We just need to broaden the awareness and to really assess the overall impact. But in addition to that, the other lab opportunity that we're focused on and we've been working with has been with Lab Corp, one of the largest labs in the United States and actually worldwide. We have an exclusive arrangement with them for our thyroid assay. And in the last year or so, we basically had a 1-year agreement or arrangement, whereby we were evaluating each other and working together. I can say that we're pleased with that arrangement and we're certainly hopeful and looking forward to that arrangement not only being extended, but also growing.

John Veitch: Okay. The second thing, when you all talk about your sensitivity and your specificity, those are pretty good numbers. From what I know from the industry, if you can get above 90% in sensitivity and above 70% in specificity, you kind of hit a home run. Can you comment on that?

Jack Stover: Yes, sure. Listen, we completely agree with you.

And you know our largest competitor in the thyroid space. We believe that our results are better than theirs, and we've been able to prove it and document it in clinical trials.

John Veitch: And one more question. You've got $14.3 million in cash. Tell us what your plans are.

That's what's holding your stock down.

Jack Stover: Yes. I'm not sure what you mean by that, but you talked about our plan for cash in terms of the future?

John Veitch: Yes, sir. How are you going to invest that cash?

Jack Stover: Sure. So let me talk about kind of our cash position and how that rolls out.

So the good news is that we've been able to raise a fair amount of cash in the last 6 to 9 months. At $14 million in cash and a burn rate for us of around $500,000 to $600,000 per month, the first and most important thing is it provides us a sufficient amount of runway, a sufficient amount of runway to be able to develop and further utilize our commercial resources. So that's number one. Number two is because of the awareness, if you will, of Interpace, the success we've had and the liquidity that we've had overall, we certainly are seeing a lot of opportunities to be able to partner with other companies and technologies and products. And remember, our play is that we are a vertically integrated commercial company.

And so we happen to be in the molecular diagnostic space. We happen to be talking to GI docs and endo docs, but we have a tremendous propensity and opportunity to be able to sell other products through that distribution channel. Our customers are really some of the most complex physicians in the space. So if we're able to be successful with them, we believe we can be successful up and down that channel. And as you know, endo and GI are a big focus of ours.

And I would tell you that, on a daily basis, we are looking at opportunities. Our goal is not to go out and be able to write checks to be able to acquire assets. We think we have enough to offer with just our commercial channels currently.

John Veitch: Okay. Thank you.

Operator: [Operator Instructions] We'll go next to Pierre Goovaerts with BioMedware.

Pierre Goovaerts: Hi Jack, it’s very nice to talk to you finally, as you know I'm a private investor, and I have invested substantial amount of money in your company. And I'm one of the investors who was kind of hit by the recent dilution and offering that happened in June. And it was a substantial dilution by 100%, and the price of the offering was quite low compared to what it was. I mean, it was a big drop of 40% overnight.

I'm still not clear about why it happened that way. – :

Jack Stover: Yes, thanks for the question. Yes, you're right. The offering we did was dilutive. It was done at market.

Our expectation was that we priced this with the help of our bankers, Maxim Securities, at the current market. Our feeling was that in terms of being able to raise cash and, I'd say, some of the uncertainty in the micro-cap marketplace was that we had seen a number of other companies that either had trouble or had much more dilutive or much more expensive offerings. – :

Pierre Goovaerts:
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Jack Stover: Well, I think what I can say is that we are – focused on or thinking about raising money. And that's probably a good thing because we raised the capital when we could, and we're well positioned in terms of how we look at the future. Again, it doesn't mean that we wouldn't raise money in the future based upon improved market conditions, et cetera.

But from our point of view, we're not at risk. And from our point of view, we're satisfied with our cash balance that we currently have.

Pierre Goovaerts: Okay. Thank you.

Operator: And we'll take a question from Suraj Singh with RedChip.

Suraj Singh: Hi Jack congratulations on the earnings release.

Jack Stover: Thanks Suraj. Nice to hear from you.

Suraj Singh: I have a quick question for the esophageal cancer. What progress have you guys made on that topic?

Jack Stover: On the esophageal cancer with Barrett's?

Suraj Singh: Yes, that's correct.

Jack Stover:
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Suraj Singh:
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Jack Stover: Yes. Suraj, the revenue growth rate is always a challenge for us, primarily because of the revenue recognition activity where somewhere between 40% and 60% of our revenues are on a cash basis versus an accrual basis. So what we are able to track and what we do keep close track of is units in terms of our laboratories. And in fact, as we evaluated our commercial success on an interim basis, it's very much based upon units. The better our reimbursement, the better our revenues are.

The more units we have, the better the chance we have for reimbursement and for growth in revenues. We haven't given any guidance on revenues. From an operating point of view, I can only say that we're really pleased with how we're progressing and we're optimistic about the second half of the year as compared to the first half of the year.

Operator: And that does conclude today's question-and-answer session. Jack, do you have any closing remarks?

Jack Stover: Jessica, thank you.

Yes, I did want to say that and really a response to Suraj as well, we're very pleased with our second quarter and year-to-date results, but we're not satisfied. We believe we can do better. Our balance sheet and equity improvements, including the capital raise that we've done, has put us in a much stronger financial position and should allow us to take advantage of all the opportunities that we have and that are developing. One thing to remember is that we are, and I said this before, first and foremost, a fully integrated commercial company, and we believe that sets us apart from most of our competitors. We hope to have many exciting developments over the next few months, and look forward to updating you on our progress.

And thank you all for joining us on the call today and especially for your continued support.

Operator: This concludes today's call. Thank you for your participation. You may now disconnect.