Operator: Greetings, and welcome to the Interpace Biosciences Second Quarter Financial and Business Results Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded and will be available on the Interpace website at www.interpace.com. 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 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 earnings release as well as Interpace Biosciences' public periodic filings, including the discussion in the Risk Factors section in our Form 10-K filed with the SEC on April 22, 2020, and the forward-looking statements section of our Form 10-Q filed with the SEC on October 19, 2020. Investors or potential investors should carefully read and consider these risks. Interpace Biosciences 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. A 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 Interpace Biosciences, Jack Stover.

Jack Stover: 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.

Fred and 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 have emerged stronger from successfully dealing with them. I am confident that our acquisition of the biopharma business of Cancer Genetics, now called 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 growth. Additionally, I am 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 coronavirus. While we are still recovering from the impact of the pandemic, overall, our business has recovered to pre-COVID levels. In July 2020, we announced that our peer-reviewed seminal validation study of ThyGeNEXT and ThyraMIR was accepted for publication in the highly respected journal, Diagnostic Cytopathology, and also accepted as a podium presentation for the American Society of Cytopathology Annual Meeting. On August 7, 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 will 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 address 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 14, the company had received letters from certain employees, one of whom has left the company's employ, 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 and other advisers. 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 14. The successful conclusion of this investigation has allowed us to move forward and file this second quarter 10-Q. 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. Fred?

Fred Knechtel: Thank you, Jack, and good morning, everyone. Our 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. 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 and believe resulted from a reduction in nonessential testing procedures stemming from the COVID-19 pandemic.

Pharma services net revenue was less severely affected. Typically, our quarterly net revenue split has been approximately 60% related to clinical services and 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 2 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-COVID levels with clinical services testing volume increasing steadily since the April low and in September was higher than pre-COVID 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 our 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 expected 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 nonessential expenses. We also reduced salaried employee wages by 10% to 15% starting in mid-April. Operating expense 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, $800,000 lower than the second quarter of 2019. Importantly, second quarter 2020 adjusted EBITDA remained neutral versus Q1 2020, largely due to us driving lower cost despite lower second quarter 2020 net revenue.

We used $6.7 million of cash from operating activities in the first 6 months of 2020 as compared to $7.8 million for the comparable period of 2019, a $1.1 million improvement, primarily driven by lower working capital usage. In 2020, we received a $650,000 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 HHS grant in its entirety toward qualified second quarter expenses and business losses. As previously discussed, to optimize our pharma services lab operations, reduce operating costs and to provide our customers with a more robust platform of services and products, we are consolidating our laboratories and transitioning work from Rutherford, New Jersey to our state-of-the-art facility in Morrisville, North Carolina. The transaction is well underway for the remainder of 2020 activities, including transferring personnel, finishing building out of our Morrisville, North Carolina facility and validation of critical processes.

As of June 30, 2020, our cash balance was $15.1 million with $3.8 million of borrowings under revolving line of credit with SVB. Due to the 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 2020.

However, due to certain terms in the financing agreement, those funds are not currently determined to be permanent equity for accounting purposes and thus trigger 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 Q&A. Jack?

Jack Stover: 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. We're very pleased with the rebound. Now let me turn the call back over to Melissa for Q&A.

Operator: [Operator Instructions] Our first question comes from the line of Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen: Jack and Fred, so sticking with a few questions.

Could you provide any further commentary on overall margins, particularly for the balance of this year and into next year perhaps? Do you -- would you expect to rebound off the Q2 number into Q3? And what might that look like going forward versus what we're estimating?

Jack Stover: Let me give kind of a more global look, and then I'll ask Fred to kind of chime in. So what you're looking at, Jeff, from a margin point of view is a combination of a couple of things on the pharma side especially, and that is that we obviously have somewhat duplicate facilities that we are consolidating. With the impact of COVID and the transition of some of our employees, we actually accelerated that transition. We're in the middle of it 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 our fixed overhead cost and will have a big impact on margins as well.

The time frame 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 have virtually everything transitioned. So that's number one. Number 2 is price increases. And we've had a price increase with ThyraMIR.

And you may remember that we have also indicated, based upon communication with Novitas, that we likely will have an impact, if you will, on price and margin sometime in the near future. So we have our fingers crossed on that as well. I think what we'll see longer term is that the pharma gross profit will 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 in Pittsburgh, our diagnostic facility, we are continuing to reduce operating costs. And as you can tell, volume input is being driven across 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 in the transition.

Jeffrey Cohen: Got it. And then can you give us a little bit more color as far as the footprint you mentioned? So in the beginning of 2021, what that will look like relative to what it looks like today as far as Rutherford transitioning and North Carolina coming online and Pittsburgh being the same?

Jack Stover: Yes. Maybe when you talk about footprint in terms of relative size?

Jeffrey Cohen: Yes. Facilities and footprint, yes.

Jack Stover: Yes. So it's interesting. Our facilities are, I'd say, targeted right around 20,000 square feet. I believe that Rutherford is a little less than 20,000, like 17,000 or 18,000. Pittsburgh is a little greater than 20,000.

And then Morrisville, North Carolina is in the 25,000 square foot range. So effectively, what we've done or what we're doing with the pharma business which is a series of individual platforms that we basically utilize to benefit pharma companies, effectively consolidating that into one location. Perhaps the best way to understand it is that Cancer Genetics had 2 facilities and 2 separate business lines. They had a diagnostic business and a pharma business. And so the principal reason to consolidate these is that we acquired only the pharma business, but we acquired all of the facilities since they were running both lines in the same -- in duplicate facilities, not to mention the fact that, as you can imagine, the cost of doing business in North Carolina is better than doing business in New Jersey, for sure.

Jeffrey Cohen: Okay. And then a couple more. Any commentary on any throughput on COVID testing from Q2? And do you expect any in the back half of the year?
And then finally, if you could talk about the mix of business for the back half of the year and into 2021, kind of flipping from the historic to what you looked like in Q2.

Jack Stover: Yes. We have our serology testing up and running, and we did that with really the help of funding, and 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 being able to provide COVID 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 catch-up mode as it relates to catching up with all the volume and processing that in an effective, efficient way. So on the COVID 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?

Jeffrey Cohen: On the balance of business between the 2 sites and the mix?

Fred Knechtel: Yes. So I think I stated the mix of business did change in the second quarter's diagnostics revenue. Net revenue was down more dramatically than the pharma, and the pharma was pretty steady. And now that diagnostics is recovering back to pre-COVID levels, we expect the mix of business to be back at our historical range of 60% diagnostics, 40% pharma going forward, and both with good growth opportunities going into 2021.

So don't expect that mix to dramatically change in the future.

Operator: Our next question comes from the line of Ben Haynor with Alliance Global.

Benjamin Haynor: First for me, the $9 million in new pharma services agreements, just kind of hoping to get a sense of where those are coming from. Are those new clients? Are those kind of phased transitions for existing clients? Are they expansion within -- to new clinical programs and existing clients? Just trying to get a sense of where those are materializing from.

Jack Stover: I can't give you the specific breakdown, Ben, but I can tell you that 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. What's especially interesting or 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 work as well. And I think that all bodes well for the future growth of the whole pharma business. 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 of these larger contracts is exactly what we wanted to do.

Benjamin Haynor: Okay. So you're not seeing anything -- obviously, if certain clinical assets fail, there's probably not anything to do on those ones, specifically in the future, but the ones that do move along, you stay with them.

Jack Stover: Yes. I'd say that 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 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 and 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 quarter and the year.

Benjamin Haynor: Okay.

Go ahead. Sorry.

Jack Stover: We'll have things drop out, but we'll also have things drop in. And they've been relatively balanced, at least over the last year or so since we've owned the company.

Benjamin Haynor: Okay.

Great. Yes. I mean, it sounds like everything is going along pretty well there.

Jack Stover: Yes. And hey, listen, we're still in transition as we consolidate facilities, personnel issues.

We're building out a limb system in North Carolina. The business that we do, while similar to what we do on the diagnostic side, is a different customer base and client base. And basically, if you think of what we're doing on the pharma side is we're customizing assays every day. And it's kind of an exciting space to be in, especially with our capabilities in immuno-oncology.

Benjamin Haynor: Sure.

That makes a lot of sense. So then on the SVB loan agreement, what needs to happen there? Any color you can provide for the capacity to be reinstated there?

Jack Stover: Yes. I'll comment, and I'll ask Fred to kind of weigh in as well. So yes, so with SVB, it was a line of credit. It was 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 meet. And right now, as we are sitting here, we're not able to meet that quick ratio. But as soon as we are, we're -- because we have been able to not basically default on the loan and we're in compliance under the loan, not only are we looking to replace 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.

Benjamin Haynor: Got it.

Fred Knechtel: And we just updated -- we just signed -- amended the joinder agreement to get the waiver and also add the pharma services assets into the borrowing base, the AR, 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 the financial covenants and hopefully reinstate our borrowing at some point, but obviously, that's not guaranteed.

Jack Stover: And so, Ben, to -- and it may not be totally clear, but related to the investigation, when we were notified of the investigation, we basically stopped billing certain assays 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 bill those assays that we had basically delayed for, I guess, maybe 3 months while the investigation was completing. So there's pieces, I would say, that are really falling into place. Believe me, we're motivated and incentivized to get that back up and running.

Benjamin Haynor: And then on the delayed billing, are you worried that those delays will affect collectibility? Or do you expect that not to be different than historical?

Jack Stover: Yes, no, not at all. We have -- under the -- under our contractual arrangement, we basically have 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 bill anything where there might be a problem or a reversal. And we knew we had 12 months to be able to bill it. And so we don't think we have any risk at all.

Fred Knechtel: And from a timing perspective, a lot of the billings are for Medicare. And the turnaround time for Medicare is pretty quick.

It's a couple of weeks, 2, 3 weeks.

Benjamin Haynor: Sure. Okay. That's helpful. And then lastly for me, and I think Jeff kind of touched on this, but the -- 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 has occurred, it reads to me that you expect that to return to prior levels, if not a little bit better. Is that a fair reading?

Fred Knechtel: Yes. I would say, at higher levels, in combination of the variable costs that come out and some of the lease costs specifically and then higher volume, higher revenue, we expect the margins to accrete over time as we go through it. But we still have to get through the finalization of the transition of the assets before we can start really seeing the margins improve.

Operator: [Operator Instructions] Our next question comes from the line of Yi Chen with H.C.

Wainwright.

Yi Chen: Jack, my first question is, when you said the diagnostic business has returned to pre-COVID levels, did that occur in early third quarter or in most recent weeks? And if -- as we see now, the new COVID cases has rebound in the fall/winter season, do you expect an additional impact on the diagnostics business again?

Jack Stover: Yes. Those are good questions. In terms of the rebound in the diagnostic business, it really was more of a V. It dropped off very quickly in mid-March, right, and then has been rebounding in a very orderly way through Q3, so into Q2 and through Q3.

On the pharma side, Yi, what we were saying is that the drop-off, if you will, related to COVID in the March, April time frame 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 time frame 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 checkmark. It dropped off, but the recovery is slower. And again, we're still seeing the recovery on the pharma side.

Keep in mind, too, that with the transition of the business from Rutherford to North Carolina and the build-out, et cetera, going on, that it presents some specific challenges around the end of Q3 and the beginning of Q4 as we shut down certain trials and ramp them up in North Carolina, but I think we're on track for that.

Fred Knechtel: Yes, if I could just add, Yi. So the volume coming back in the diagnostics business over pre-COVID levels has really been for the last 4 weeks or so.

Jack Stover: That's right.

Fred Knechtel: Yes.

If you look at third quarter versus first quarter, the third quarter is going to be a little bit lower but continuing to improve. And as far as any anticipated COVID impact, it's anybody's guess, right? 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.

Yi Chen: Got it. Go ahead.

Jack Stover: So your other question on the future -- and I don't know what you're seeing with other clients with COVID, 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 what's happening next to 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 deploy resources only to deal with COVID.

I see that mostly behind us, but we certainly can get hotspots around the country, and those hotspots can certainly affect us in individual customers. So we're cautious about that, but I think we've got it pretty well licked.

Yi Chen: Got it. My second question is, you mentioned that you are seeing longer-term contracts for pharma services. Can you comment on what is the current average time frame to realize the revenues, signing the contracts such as the $9 million? And what -- how do you expect the time line to extend this longer contracts?

Fred Knechtel: Yes.

So typically, there's a mix of contracts that some deliver revenue in a month or 2, but on average, it's about 3 years, 3-year study. And the study -- some of the newer studies that we're adding can go as far as 5 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 3 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 steady.

And as we add more contracts and we get a more base on the near term, the revenue should improve at an increasing rate, I would think, through the next year or so, but we'll see how that plays out.

Yi Chen: Okay. Got it. My last question is, how soon do you plan to be compliant with the NASDAQ listing requirement again?

Jack Stover: Yes. So we have not actually been notified by NASDAQ, at least as of yesterday, that we're not in compliance.

And Yi, 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 we're 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 plan as soon as possible, but obviously, it's a big priority for us as well.

Operator: Ladies and gentlemen, with that being our last question, I would like to thank you on behalf of Interpace Biosciences for joining the call today.

You may now disconnect your lines.