NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
The
accompanying unaudited interim condensed consolidated financial statements and related notes (the interim financial statements)
should be read in conjunction with the consolidated financial statements of Interpace Diagnostics Group, Inc. (the Company or
Interpace), and its wholly-owned subsidiaries, Interpace Diagnostics Corporation and Interpace Diagnostics, LLC, and related notes
as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities
and Exchange Commission (SEC) on March 31, 2017, as amended on April 28, 2017. The condensed interim financial statements of the
Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for interim
financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for complete financial statements. The condensed interim financial statements include
all normal recurring adjustments that, in the judgment of management, are necessary for a fair presentation of such interim financial
statements. Discontinued operations include the Company’s wholly owned subsidiaries: Group DCA, LLC, or Group DCA; InServe
Support Solutions (Pharmakon); and TVG, Inc. (TVG, dissolved December 31, 2014) and its Commercial Services (CSO) business unit
which was sold on December 22, 2015. All significant intercompany balances and transactions have been eliminated in consolidation.
Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected
for the year ending December 31, 2017.
The
accompanying consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a
going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. As of March 31, 2017, the Company had cash and cash equivalents of $7.1 million,
net accounts receivable of $2.3 million, current assets of $10.7 million and current liabilities of $13.0 million. For
the quarter ended March 31, 2017, the Company had net income of $2.4 million and cash used in operating activities was
$4.1 million.
On
December 22, 2016, the Company completed a registered direct public offering, which resulted in gross proceeds to the Company
of approximately $1.9 million, (net proceeds of $1.7 million after expenses) of which approximately $1.33 million was used to
repay secured debt.
In
2017, the Company closed on three equity offerings raising gross proceeds of $12.2 million. The details are as follows:
|
●
|
On
January 6, 2017, the Company completed a registered direct public offering, or the Second Registered Direct Offering, to sell
630,000 shares of its common stock at a price of $6.81 per share to certain institutional investors which resulted in gross
proceeds to the Company of approximately $4.2 million.
|
|
|
|
|
●
|
On
January 25, 2017, the Company completed a registered direct public offering, or the Third Registered Direct Offering, to sell
855,000 shares of its common stock and a concurrent private placement of warrants to purchase 855,000 shares of its common
stock, or the Warrants, to the same investors participating in the Third Registered Direct Offering, or (the Private Placement).
The Warrants and the shares of the Company’s common stock issuable upon the exercise of the Warrants were not registered
under the Securities Act and were sold pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and
Rule 506(b) of Regulation D promulgated thereunder. The shares of common stock sold in the Third Registered Direct Offering
and the Warrants issued in the concurrent Private Placement were issued separately but sold together at a combined purchase
price of $4.69 per share of common stock and accompanying Warrant. The Third Registered Direct Offering and the Private Placement
together resulted in gross proceeds to the Company of approximately $4 million. The Company also used approximately $1.0 million
to satisfy the obligations due to five former senior executives. See Note 6- Severance.
|
|
●
|
On
February 8, 2017, the Company completed an underwritten, confidentially marketed public offering, or the CMPO, to sell 1,200,000
shares of its common stock at a price of $3.00 per share. In addition, the Company granted the underwriters an option to purchase
up to an additional 9% of the total number of shares of common stock sold by the Company in the CMPO, solely for the purpose
of covering over-allotments, if any. The underwriters exercised the over-allotment option in full. The CMPO resulted in gross
proceeds to the Company of approximately $3.9 million.
|
On
March 23, 2017, the Company entered into an exchange agreement (the “Exchange Agreement”), with an institutional investor
(the “Investor”). Prior to the Company entering into the Exchange Agreement, the Investor acquired that certain Non-Negotiable
Subordinated Secured Promissory Note, dated as of October 31, 2014, as amended (the “RedPath Note”), issued by the
Company and the Company’s subsidiary, Interpace, LLC, in favor of RedPath Equityholder Representative, LLC (the “RedPath
Equityholder Representative”) on behalf of the former equityholders of RedPath. The RedPath Note, which was entered into
in connection with the Company’s acquisition of RedPath Integrated Pathology, Inc. in October 2014, had an aggregate principal
amount of $9.34 million outstanding and was acquired by the Investor for $8.87 million. The RedPath Equityholder Representative
assigned all of its rights, title and interest in the RedPath Note to the Investor, including, but not limited to, its security
interest in all of the assets of the Company and the assets of the Company’s subsidiaries.
Pursuant
to the Exchange Agreement, the Company and the Investor agreed to exchange the RedPath Note for (i) a senior secured convertible
note in the aggregate principal amount of $5.32 million (the “Exchanged Convertible Note”), which was convertible
into shares of the Company’s common stock, in accordance with its terms, and (ii) a senior secured non-convertible note
with an aggregate principal amount of $3.55 million (the “Exchanged Non-Convertible Note” and collectively, the “Exchanged
Notes”), for a combined aggregate principal amount of $8.87 million.
As
of March 30, 2017, the Investor had converted approximately 80% of the Exchanged Convertible Note to common stock, converting
$4.2 million of the Exchanged Convertible Note into approximately 1.7 million shares of common stock. On April 18, 2017
the Company and the Investor agreed to exchange the Exchanged Non-Converttible Note for a new convertible note in the same principal
amount of $3.55 million. The investor then converted the new convertible note into approximately 1.6 million shares of
the Company’s Common Stock at $2.20 per share. As a result of the note exchanges and subsequent conversions, the RedPath
note was deemed paid in full. Accordingly, the security interest has been terminated and the liens will be released upon
proper termination filings.
The
Company entered into a Credit Agreement with SCM Specialty Finance Opportunities Fund, L.P. on September 28, 2016.
The
Credit Agreement contains customary representations and warranties in favor of the Lender and certain covenants, including, among
other things, financial covenants relating to loan turnover rates, liquidity and revenue targets. As of March 31, 2017 the Company
had not borrowed any funds under the Credit Agreement.
While
the Company has made significant reductions in indebtedness, the Company is not yet cash flow positive from operations. Accordingly,
due to the Company’s operating deficit and obligations the Company may require additional capital to meet its obligations.
There is no guarantee that additional capital can be raised to fund operations and obligations in 2017 and beyond, if needed.
The Company intends to meet its capital needs by driving revenue growth, containing costs, entering into strategic alliances as
well as exploring other options, including the possibility of raising additional equity capital. These liquidity factors, among
others, have raised substantial doubts about our ability to continue as a going concern.
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting
Estimates
The
preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting period. Management’s estimates
are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed
to be reasonable under the circumstances. Significant estimates include best estimate of selling price in multiple element arrangements,
valuation allowances related to deferred income taxes, self-insurance loss accruals, allowances for doubtful accounts and notes,
income tax accruals, acquisition accounting, asset impairments and facilities realignment accruals. The Company periodically reviews
these matters and reflects changes in estimates as appropriate. Actual results could materially differ from those estimates.
Receivables
and Allowance for Doubtful Accounts
The
Company’s accounts receivable are generated using its proprietary tests. The Company’s services are fulfilled upon
completion of the test, review and release of the test results. In conjunction with fulfilling these services, the Company bills
the third-party payor or hospital. The Company recognizes accounts receivable related to billings for Medicare, Medicare Advantage,
and hospitals (direct-bill clients) on an accrual basis, net of contractual adjustment, when collectability is reasonably assured.
Contractual adjustments represent the difference between the list prices and the reimbursement rate set by Medicare and Medicare
Advantage, or the amounts billed to hospitals. The Company records an Allowance for Doubtful accounts based on the collection
history for PancraGen® hospital roster billings (direct bill clients) and for Medicare Advantage billings for PancraGen®
and ThyGenix®. Since Medicare has fixed reimbursement rates, there may be little or no Allowance for Doubtful Accounts associated
with Medicare. For non-paying roster accounts, balances may be written off to bad debt after twelve months. Medicare Advantage
accounts may be written off to bad debt after several appeals, which in some cases may take longer than twelve months.
The
Company provides services to commercial insurance carriers or governmental programs that do not have a contract in place for its
proprietary tests, which may or may not be covered by these entities existing reimbursement policies. In addition, the Company
does not enter into direct agreements with patients that commit them to pay any portion of the cost of the tests in the event
that their commercial insurance carrier or governmental program does not pay the Company for its services. In the absence of an
agreement with the patient, or other clearly enforceable legal right to demand payment from commercial insurance carriers or governmental
agencies, no accounts receivable is recognized. The Company does not record an Allowance for Doubtful Accounts for the commercial
insurance or governmental programs since the revenue is recorded mainly on a cash basis.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
Other
Current Assets
Other
current assets consisted of the following as of March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Indemnification assets
|
|
$
|
875
|
|
|
$
|
875
|
|
Other receivables
|
|
|
361
|
|
|
|
325
|
|
Other
|
|
|
32
|
|
|
|
215
|
|
|
|
$
|
1.268
|
|
|
$
|
1,415
|
|
Long-Lived
Assets, including Finite-Lived Intangible Assets
Finite-lived
intangible assets are stated at cost less accumulated amortization. Amortization of finite-lived acquired intangible assets is
recognized on a straight-line basis, using the estimated useful lives of the assets of approximately two years to nine years in
acquisition related amortization expense in the consolidated statements of comprehensive income (loss).
The
Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows
is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to
its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected
cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates
are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss
is deemed to be necessary.
Discontinued
Operations
The
Company accounts for business dispositions and its businesses held for sale in accordance with ASC 205-20, Discontinued Operations.
ASC 205-20 requires the results of operations of business dispositions to be segregated from continuing operations and reflected
as discontinued operations in current and prior periods. See Note 11,
Discontinued Operations
for further information.
Basic
and Diluted Net Income (Loss) per Share
A
reconciliation of the number of shares of common stock used in the calculation of basic and diluted income (loss) per share for
the three-month periods ended March 31, 2017 and 2016 is as follows:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Basic weighted average number of common shares
|
|
|
4,294
|
|
|
|
1,776
|
|
Potential dilutive effect of stock-based awards
|
|
|
90
|
|
|
|
-
|
|
Diluted weighted average number of common shares
|
|
|
4,384
|
|
|
|
1,776
|
|
As
a result of the Company’s debt exchanges discussed in Note 12, Long-Term Debt, the Company issued an additional 2.1 million shares
of common stock in April 2017.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
The
following outstanding stock-based awards were excluded from the computation of the effect of dilutive securities on income (loss)
per share for the following periods because they would have been anti-dilutive:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
-
|
|
|
|
-
|
|
Stock-settled stock appreciation rights (SARs)
|
|
|
85
|
|
|
|
131
|
|
Restricted stock and restricted stock units (RSUs)
|
|
|
-
|
|
|
|
102
|
|
Warrants
|
|
|
955
|
|
|
|
-
|
|
|
|
|
1,040
|
|
|
|
233
|
|
4.
|
OTHER
INTANGIBLE ASSETS
|
The
net carrying value of the identifiable intangible assets as of March 31, 2017 and December 31, 2016 are as
follows:
|
|
|
|
|
As of March 31, 2017
|
|
|
As of December 31, 2016
|
|
|
|
Life
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amount
|
|
Diagnostic assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thyroid
|
|
|
9
|
|
|
$
|
8,519
|
|
|
$
|
8,519
|
|
Pancreas
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Biobank
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
RedPath acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pancreas test
|
|
|
7
|
|
|
|
16,141
|
|
|
|
16,141
|
|
Barrett’s test
|
|
|
9
|
|
|
|
18,351
|
|
|
|
18,351
|
|
Total
|
|
|
|
|
|
$
|
43,011
|
|
|
$
|
43,011
|
|
Diagnostic lab:
|
|
|
|
|
|
|
|
|
|
|
|
|
CLIA Lab
|
|
|
2.3
|
|
|
$
|
609
|
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
$
|
(8,075
|
)
|
|
$
|
(7,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Carrying Value
|
|
|
|
|
|
$
|
35,545
|
|
|
$
|
36,358
|
|
Amortization
expense was approximately $0.8 million and $1.0 million for the three-month periods ended March 31, 2017 and 2016, respectively.
Amortization of our diagnostic assets begins upon launch of the product. Estimated amortization expense for the next five years
is as follows, based on current assumptions of future product launches:
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
$
|
4,272
|
|
|
$
|
5,292
|
|
|
$
|
5,292
|
|
|
$
|
5,292
|
|
|
$
|
4,908
|
|
5.
|
FAIR
VALUE MEASUREMENTS
|
The
Company’s financial assets and liabilities reflected at fair value in the consolidated financial statements include: cash
and cash equivalents; short-term investments; accounts receivable; other current assets; accounts payable; and contingent consideration.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income
and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would
use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation
technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes
valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable
inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy.
The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels
as follows:
|
Level
1:
|
Valuations
for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving
identical assets or liabilities.
|
|
|
|
|
Level
2:
|
Valuations
for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing
services for identical or similar assets or liabilities.
|
|
|
|
|
Level
3:
|
Valuations
incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
|
In
instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy,
the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input
that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular
input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
The valuation methodologies used for the Company’s financial instruments measured on a recurring basis at fair value, including
the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below:
|
|
As of March 31, 2017
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
As of March 31, 2017
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,126
|
|
|
$
|
7,126
|
|
|
$
|
7,126
|
|
|
$
|
-
|
#
|
|
$
|
-
|
|
|
|
$
|
7,126
|
|
|
$
|
7,126
|
|
|
$
|
7,126
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
|
|
$
|
1,561
|
|
|
$
|
1,561
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,561
|
|
Derivative liability:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded conversion derivative
|
|
$
|
51
|
|
|
$
|
51
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
51
|
|
|
|
$
|
1,612
|
|
|
$
|
1,612
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,612
|
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
|
|
As of December 31, 2016
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
As of December 31, 2016
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
602
|
|
|
$
|
602
|
|
|
$
|
602
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
602
|
|
|
$
|
602
|
|
|
$
|
602
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
|
|
$
|
1,545
|
|
|
$
|
1,545
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,545
|
|
RedPath
|
|
|
5,969
|
|
|
|
5,969
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,969
|
|
|
|
$
|
7,514
|
|
|
$
|
7,514
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,514
|
|
The
fair value of cash and cash equivalents and marketable securities is valued using market prices in active markets (level 1). As
of March 31, 2017, the Company did not have any marketable securities in less active markets (level 2) or without observable market
values that would require a high level of judgment to determine fair value (level 3).
In
connection with the acquisition of certain assets from Asuragen and the acquisition of RedPath, the Company recorded contingent
consideration related to contingent payments and other revenue based payments. The Company determined the fair value of the contingent
consideration based on a probability-weighted income approach derived from revenue estimates. The fair value measurement is based
on significant inputs not observable in the market and thus represents a Level 3 measurement. On March 22, 2017, the Company entered
into a Termination Agreement with the RedPath Equityholder Representative. Under the terms of the Termination Agreement, RedPath
Equityholder Representative agreed to terminate all royalty and milestone rights under the contingent consideration agreement.
As a result the Company reversed approximately $6.0 million in Redpath contingent consideration liabilities in the first quarter
of 2017, of which $5.8 million was a reversal within operating expenses in the Condensed Consolidated Statement of Comprehensive Income (Loss).
On
March 23, 2017, in connection with the Company entering into the Exchange Agreement, related to the RedPath note (See Note 12)
with the Investor, an embedded conversion option derivative liability was recorded due to a certain embedded conversion feature.
The embedded conversion option is considered a liability and valued using the Black-Scholes Option-Pricing Model, the inputs for
which include exercise price of the conversion feature, market price of the underlying common shares, expected term, volatility
based on the Company’s historical market price, and the risk-free rate corresponding to the expected term of the Exchange
Agreement. Any changes to the estimated fair value of this liability are recorded in Interest Expense.
A
roll forward of the carrying value of the contingent consideration and also the embedded conversion option from continuing operations
from January 1, 2017 to March 31, 2017 is as follows:
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellation
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
|
|
|
|
|
|
|
|
|
of Obligation/
|
|
|
Mark to
|
|
|
|
|
|
|
January 1,
|
|
|
Liability
|
|
|
Payments
|
|
|
Accretion
|
|
|
Conversions
|
|
|
Market
|
|
|
March 31,
|
|
Asuragen
|
|
$
|
1,545
|
|
|
|
|
|
|
$
|
(25
|
)
|
|
$
|
41
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,561
|
|
Redpath
|
|
|
5,969
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,969
|
)
|
|
|
-
|
|
|
|
-
|
|
Embedded conversion option
|
|
|
-
|
|
|
|
208
|
|
|
|
-
|
|
|
|
|
|
|
|
(199
|
)
|
|
|
42
|
|
|
|
51
|
|
|
|
$
|
7,514
|
|
|
$
|
208
|
|
|
$
|
(25
|
)
|
|
$
|
41
|
|
|
$
|
(6,168
|
)
|
|
$
|
42
|
|
|
$
|
1,612
|
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
The
following table sets forth the assumptions used in the Black-Scholes Option Pricing Model to estimate the fair value of the embedded
conversion option derivative liability as of March 31, 2017:
|
|
March 31, 2017
|
|
|
|
|
|
Market Price
|
|
$
|
2.63
|
|
Exercise Price
|
|
$
|
2.44
|
|
Risk-free interest rate
|
|
|
0.99
|
%
|
Expected volatility
|
|
|
234.05
|
%
|
Expected life in years
|
|
|
1.25
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
The
Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due
to the short-term nature of these financial instruments.
Certain
of the Company’s non-financial assets, such as other intangible assets, are measured at fair value when there is an indicator
of impairment and recorded at fair value only when an impairment charge is recognized.
6.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
Due
to the nature of the businesses in which the Company is engaged it is subject to certain risks. Such risks include, among others,
risk of liability for personal injury or death to persons using products the Company promotes or commercializes. There can be
no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company’s business
activities and recent increases in litigation related to healthcare products. As part of the closeout of its Contract Sales Organization
(CSO), the Company seeks to reduce its potential liability under its service agreements through measures such as contractual indemnification
provisions with customers (the scope of which may vary from customer to customer, and the performance of which is not secured)
and insurance. The Company could, however, also be held liable for errors and omissions of its employees in connection with the
services it performs that are outside the scope of any indemnity or insurance policy. The Company could be materially adversely
affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an
indemnification agreement; if the indemnity, although applicable, is not performed in accordance with its terms; or if the Company’s
liability exceeds the amount of applicable insurance or indemnity.
The
Company routinely assesses its litigation and threatened litigation as to the probability of ultimately incurring a liability,
and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can
be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to
whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably
possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company
will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable
possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the
period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is
immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated,
disclose that an estimate cannot be made. As of March 31, 2017, the Company’s accrual for litigation and threatened litigation
was not material to the consolidated financial statements.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
In
connection with the October 31, 2014 acquisition of RedPath, the Company assumed a liability for the Settlement Agreement entered
into by the former owners of RedPath with the DOJ. Under the terms of the Settlement Agreement, the Company is obligated to make
payments to the Department of Justice (DOJ) for the calendar years ended December 31, 2014 through 2017, up to a maximum of $3.0
million.
Payments
are due March 31st following the calendar year that the revenue milestones are achieved. In May 2016, the Company renegotiated
payment terms with the DOJ related to a $250,000 payment associated with performance in fiscal 2014 that resulted in an agreement
that the Company pay $85,000 on July 31, 2016, $85,000 on October 31, 2016 and $80,000 on February 28, 2017. For the quarter ended
March 31, 2017, the Company has accrued $625,000 related to the Settlement Agreement based on its estimate of the potential liability.
Prolias
Technologies, Inc. v. PDI, Inc.
On
April 8, 2015, Prolias Technologies, Inc.(“Prolias”) filed a complaint (the “Complaint”) against the Company
with the Superior Court of New Jersey (Morris County) in a matter entitled Prolias Technologies, Inc. v. PDI, Inc. (Docket No.
MRS-L-899-15). In the Complaint, Prolias alleges that it and the Company entered into an August 19, 2013 Collaboration Agreement
and a First Amendment thereto (collectively, the “Agreement”) whereby Prolias and the Company agreed to work in good
faith to commercialize a diagnostic test known as “Thymira.” Thymira is a minimally invasive diagnostic test that
is being developed to detect thyroid cancer. Prolias alleges in the Complaint that the Company wrongfully terminated the Agreement,
breached obligations owed to it and committed torts. After various motions on October 13, 2016, the Company filed an application
to enter final judgment and taxing of costs against Prolias. The Company requested that the Court enter final judgment against
Prolias and for the Company in the amount of $621,236, plus ten percent interest continuing to accrue on the principal balance
of $500,000 unless and until paid, attorneys’ fees and costs of $390,769, and a declaratory judgment that Prolias is deemed
to have executed and delivered to the Company a promissory note in the amount of $1,000,000 under Article 10.2(a) of the Collaboration
Agreement. On November 17, 2016, the Court denied the Company’s application without prejudice and with leave to refile.
On
February 16, 2017, the Company refiled its application for final judgment, and on March 9, 2017, the Superior Court of New Jersey
entered a final judgment in the Company’s favor against Prolias for the sum of $636,053 plus ten percent interest continuing
to accrue on the principal balance of $500,000 (per diem $136.99) unless and until paid. Final judgment was also entered in the
Company’s favor, and against Prolias, declaring Prolias is deemed to have executed and delivered to the Company a promissory
note in the amount of $1,000,000 and Prolias is obligated to repay the Company the principal amount and all interest in accordance
with the terms of the promissory note and Article 10.2(a) of the Collaboration Agreement by and between Prolias and the Company.
On March 17, 2017, the Company requested that the final judgment against Prolias be recorded as a statewide lien. No assurance
can be given that the Company will be able to recover on the judgment against Prolias.
Swann
v. Akorn, Inc., and Interpace Diagnostics Group, Inc.
On
May 27, 2016, Michael J. Swann, one of the Company’s former employees, filed a complaint against the Company in the Court
of Common Pleas of the Fifth Judicial Circuit in South Carolina in a matter entitled Michael J. Swann v. Akorn, Inc.(“Akorn”),
and Interpace Diagnostic Group Inc. (Civil Action No. 2016-CP-40-03362). In the complaint, Mr. Swann alleges, among other things,
that he was discriminated against and wrongfully terminated as a member of a sales force marketing pharmaceutical products of
Akorn, because of an illness suffered by Mr. Swann. Mr. Swann alleges that he was discriminated against in violation of the Americans
with Disabilities Act/Americans with Disabilities Act Amendments Act and the Family Medical Leave Act and seeks damages for back
pay, reinstatement, front pay, compensatory and punitive damages in an amount not less than $300,000, attorney’s fees and
costs. The Company denies that it is liable to Mr. Swann for any of the claims asserted and intends to vigorously defend itself
against those claims. On May 10, 2017 the Company received a settlement letter and paid the plaintiff $3,000.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
Severance
In
2015, in connection with the sale of the majority of the CSO business and the implementation of a broad-based program to maximize
efficiencies and cut costs, the Company reduced headcount and incurred severance obligations to terminated employees that amounted
to approximately $3.7 million.
During
the first quarter ended March 31, 2016 the Company recorded additional severance obligations as it continued to right-size the
organization and wind down its CSO business. The Company recorded obligations of $1.1 million, $0.5 million of which was recorded
in continuing operations.
The severance liability as
of December 31, 2016 was approximately $3.1 million, of which $2.2 million resides in continuing operations and $0.9 million is
in discontinued operations. In January 2017, five former executives agreed to a settlement of their severance obligations agreeing
to 35% of the total amount due them. These remaining obligations were paid out in February 2017 in payments totaling approximately
$1.0 million. As a result of the settlement, the Company recorded a reversal of expense of approximately $2.0 million. Within
continuing operations, $1.5 million of expense was reversed and was recorded in general and administrative expenses in the Condensed
Consolidated Statements of Comprehensive Income (Loss) and $0.5 million was recorded in discontinued operations. The Company
has no currently payable severance obligations as of March 31, 2017.
7.
|
ACCRUED
EXPENSES AND LONG-TERM LIABILITIES
|
Other
accrued expenses consisted of the following as of March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Accrued royalties
|
|
$
|
863
|
|
|
$
|
711
|
|
Indemnification liability
|
|
|
875
|
|
|
|
875
|
|
Contingent consideration
|
|
|
235
|
|
|
|
260
|
|
Rent payable
|
|
|
57
|
|
|
|
110
|
|
DOJ settlement
|
|
|
625
|
|
|
|
80
|
|
Accrued professional fees
|
|
|
1,567
|
|
|
|
1,746
|
|
Taxes payable
|
|
|
467
|
|
|
|
526
|
|
Unclaimed property
|
|
|
565
|
|
|
|
565
|
|
All others
|
|
|
1,282
|
|
|
|
1,363
|
|
|
|
$
|
6,536
|
|
|
$
|
6,236
|
|
Long-term
liabilities consisted of the following as of March 31, 2017 and December 31, 2016:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Uncertain tax positions
|
|
$
|
3,641
|
|
|
$
|
3,594
|
|
DOJ settlement (indemnified by RedPath)
|
|
|
-
|
|
|
|
250
|
|
Derivative liability
|
|
|
51
|
|
|
|
-
|
|
|
|
$
|
3,692
|
|
|
$
|
3,844
|
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
8.
|
STOCK-BASED
COMPENSATION
|
Stock
Incentive Plan
In
2015, the board of directors (the Board) and stockholders approved the Company’s Amended and Restated 2004 Stock Award and
Incentive Plan, or the Amended and Restated Plan. The Amended and Restated Plan amends the Company’s pre-existing Amended
and Restated 2004 Stock Award and Incentive Plan, which had replaced the 1998 Stock Option Plan, or the 1998 Plan, and the 2000
Omnibus Incentive Compensation Plan, or the 2000 Plan. The Amended and Restated Plan authorized an additional 2,450,000 shares
for new awards and combined the remaining shares available under the original Amended and Restated Plan. Eligible participants
under the Amended and Restated Plan include officers and other employees of the Company, members of the Board and outside consultants,
as specified under the Amended and Restated Plan and designated by the Compensation and Management Development Committee of the
Board, or the Compensation Committee. Unless earlier terminated by action of the Board, the Amended and Restated Plan will remain
in effect until such time as no stock remains available for delivery under the Amended and Restated Plan and the Company has no
further rights or obligations under the Amended and Restated Plan with respect to outstanding awards thereunder.
Historically,
stock options have been granted with an exercise price equal to the market value of the common stock on the date of grant, expire
10 years from the date they are granted, and generally vested over a two-year period for members of the Board of Directors and
a three-year period for employees. Upon exercise, new shares can be issued by the Company. The Company granted stock options in
2016, which vest monthly over a one-year period. SARs are generally granted with a grant price equal to the market value of the
common stock on the date of grant, vest one-third each year on the anniversary of the date of grant and expire five years from
the date of grant. The restricted shares and restricted stock units (RSU’s) granted to employees historically have had a
three year cliff vesting period and are subject to accelerated vesting and forfeiture under certain circumstances. Restricted
shares and restricted stock units granted to board members generally have had a three year graded vesting period and are subject
to accelerated vesting and forfeiture under certain circumstances.
In
March of 2017, the Company’s Chief Executive Officer, Chief Financial Officer and members of The Board were granted incentive
stock options to purchase an aggregate of 172,077 shares of common stock with a weighted average exercise price of $2.13 per share
and, subject generally to the executive’s or board member’s, as applicable, continued service with the Company, vest
in equal monthly installments over a period of one year.
The
following table provides the weighted average assumptions used in determining the fair value of the stock option awards granted
during the three month period ended March 31, 2017. There were no options granted during the three month period ended March
31, 2016.
|
|
Three
Months Ended
March 31. 2017
|
|
Risk-free interest rate
|
|
|
1.96
|
%
|
Expected life
|
|
|
4.91
|
|
Expected volatility
|
|
|
138.71
|
%
|
Dividend yield
|
|
|
-
|
|
The
Company recognized approximately $0.1 million and $0.1 million of stock-based compensation expense during each of the three month
periods ended March 31, 2017 and 2016, respectively.
Generally,
accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate
for the full year. The authoritative guidance for accounting for income taxes allows use of the discrete method when it provides
a better estimate of income tax expense. Due to the Company’s valuation allowance position, it is the Company’s position
that the discrete method provides a more accurate estimate of income tax expense and therefore income tax expense for the current
quarter has been presented using the discrete method. As the year progresses, the Company refines its estimate based on the facts
and circumstances by each tax jurisdiction. The following table summarizes income tax expense on income (loss) from
continuing operations and the effective tax rate for the three-month periods ended March 31, 2017 and 2016:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Provision from income tax
|
|
$
|
3
|
|
|
$
|
9
|
|
Effective income tax rate
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Income
tax expense for the three-month periods ended March 31, 2017 and 2016 was primarily due to minimum state and local taxes.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
Upon
the divestiture of its CSO business on December 22, 2015. the Company has one reporting segment: molecular diagnostics. The Company
realigned its reporting segments due to the integration of RedPath and acquiring certain assets from Asuragen, to reflect the
Company’s current and going forward business strategy. The Company’s current reporting segment structure is reflective
of the way the Company’s management views the business, makes operating decisions and assesses performance. This structure
allows investors to better understand Company performance, better assess prospects for future cash flows, and make more informed
decisions about the Company.
The
Company’s molecular diagnostics business focuses on developing and commercializing molecular diagnostic tests, leveraging
the latest technology and personalized medicine for better patient diagnosis and management. Through the Company’s molecular
diagnostics business, the Company aims to provide physicians and patients with diagnostic options for detecting genetic and other
molecular alterations that are associated with gastrointestinal and endocrine cancers, which are principally focused on early
detection of patients at high risk of cancer. Customers in the Company’s molecular diagnostics segment consist primarily
of physicians, hospitals and clinics. The service offerings throughout the segment have similar long-term average gross margins,
contract terms, types of customers and regulatory environments. They are promoted through one centrally managed marketing group
and the chief operating decision maker views their results on a combined basis.
11.
|
DISCONTINUED
OPERATIONS
|
The
table below presents the significant components of CSO, Group DCA’s, Pharmakon’s and TVG’s results included
Income (Loss) from Discontinued Operations, Net of Tax in the consolidated statements of comprehensive income (loss)
for the three-months ended March 31, 2017 and 2016.
|
|
Three Months Ending March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenue, net
|
|
$
|
-
|
|
|
$
|
1,644
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, before tax
|
|
|
610
|
|
|
|
(735
|
)
|
Income tax expense
|
|
|
54
|
|
|
|
45
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
556
|
|
|
$
|
(780
|
)
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
The
assets and liabilities classified as discontinued operations relate to CSO, Group DCA, Pharmakon, and TVG. As of March 31, 2017
and December 31, 2016, these assets and liabilities are in the accompanying balance sheets as follows:
|
|
For the Three Months Ended
|
|
|
For the Year Ended
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
|
CSO
|
|
|
DCA/TVG
|
|
|
Total
|
|
|
CSO
|
|
|
DCA/TVG
|
|
|
Total
|
|
Accounts receivable. net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Unbilled receivable. net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
Current assets from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
Property and equipment. net
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Long-term assets from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
868
|
|
|
$
|
-
|
|
|
$
|
868
|
|
|
$
|
890
|
|
|
$
|
-
|
|
|
$
|
890
|
|
Accrued salary and bonus
|
|
|
51
|
|
|
|
-
|
|
|
|
51
|
|
|
|
1.272
|
|
|
|
-
|
|
|
|
1.272
|
|
Other
|
|
|
1,827
|
|
|
|
-
|
|
|
|
1,827
|
|
|
|
1,966
|
|
|
|
-
|
|
|
|
1,966
|
|
Current liabilities from discontinued operations
|
|
|
2,746
|
|
|
|
-
|
|
|
|
2,746
|
|
|
|
4,128
|
|
|
|
-
|
|
|
|
4,128
|
|
Total liabilities
|
|
$
|
2,746
|
|
|
$
|
-
|
|
|
$
|
2,746
|
|
|
$
|
4,128
|
|
|
$
|
-
|
|
|
$
|
4,128
|
|
On
October 31, 2014, the Company and its subsidiary, Interpace LLC, entered into an agreement to acquire RedPath (the “Transaction”).
In connection with the Transaction, the Company entered into an $11.0 million, interest-free note (“RedPath Note”)
payable in eight equal consecutive quarterly installments beginning October 1, 2016.
The
obligations of the Company under the RedPath Note were guaranteed by the Company and its subsidiaries pursuant to a Guarantee
and Collateral Agreement (the “Subordinated Guarantee”) in favor of the RedPath Equityholder Representative. Pursuant
to the Subordinated Guarantee, the Company and its subsidiaries also granted a security interest in substantially all of their
assets, including intellectual property, to secure their obligations to the RedPath Equityholder Representative. Based on the
Company’s incremental borrowing rate under its Credit Agreement, the fair value of the RedPath Note at the date of issuance
was $7.5 million. During the quarters ended March 31, 2017 and 2016, the Company accreted approximately $0.2 million and $0.2
million into interest expense, respectively, for each period. At December 31, 2016, the fair value balance of the $9.3 million
Note was approximately $7.9 million and the unamortized discount was $1.4 million.
Debt
Exchange for RedPath Note
On
March 23, 2017, the Company entered into the Exchange Agreement with the Investor. Prior to the Company entering into the Exchange
Agreement, the Investor acquired the $9.3 million face value RedPath Note for $8.9 million. The RedPath Equityholder Representative
assigned all of its rights, title and interest in the RedPath Note to the Investor, including, but not limited to, its security
interest in all of the assets of the Company and the assets of the Company’s subsidiaries.
Pursuant
to the Exchange Agreement, the Company and the Investor agreed to exchange the RedPath Note for (i) a senior secured convertible
note in the aggregate principal amount of $5.3 million (the “Exchanged Convertible Note”), which is convertible into
shares of the Company’s common stock, in accordance with its terms, and (ii) a senior secured non-convertible note with
an aggregate principal amount of $3.55 million (the “Exchanged Non-Convertible Note” and collectively, the
“Exchanged Notes”), for a combined aggregate principal amount of $8.87 million. The Exchanged Notes ranked
senior to all of the Company’s outstanding and future indebtedness, other than the indebtedness in favor of the Company’s
credit line lender and were secured by a perfected security interest in all of the existing and future assets of the Company and
those of the Company’s subsidiaries. Upon the reduction of 55% of the aggregate principal amount of each of the Exchanged
Notes, the Investor agreed to release its security interest in its entirety. In conjunction with the extinguishment of the
RedPath note, the Company recorded a fair value loss of $0.8 million.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
The
Exchanged Notes were scheduled to mature at 125% of the face value on the fifteenth month anniversary of the closing date, or
June 22, 2018, and bore interest quarterly at one and one hundredth percent (1.01%) per annum (as could be adjusted from time
to time). Under the terms of the Exchanged Notes, the Company has the right to require a redemption of a portion (not less than
$500,000) or all of the applicable Exchanged Notes prior to their maturity at a price equal to 115% of the principal amount of
the Exchanged Notes within the first 180 days of issuance, 120% of the principal amount of the Exchanged Notes between 180 and
270 days of issuance, and 125% of the principal amount of the Exchanged Notes after 270 days of issuance. A mandatory redemption
could be required by the Investor in connection with the occurrence of an event of default or change of control. In each event,
the redemption price would be subject to a premium on parity, and the Exchanged Convertible Note redemption could be subject to
a premium on parity if certain unfavorable conditions existed.
The
Exchanged Convertible Note was convertible into shares of the Company’s common stock. The Investor could elect to convert
all or a portion of the Exchanged Convertible Note and all accrued and unpaid interest with respect to such portion, if any, into
shares of common stock at a fixed conversion price of $2.44. In the event the Company sought and obtained stockholder approval
to issue shares of common stock in connection with the conversion of the Exchanged Convertible Note (which determination shall
be at the Company’s sole discretion) from and after the date of the Exchange Agreement, the Exchanged Convertible Note could
alternatively be converted (“Alternative Conversion”) by the Investor at the greater of (i) $0.40 and (ii) lowest
of (x) the applicable conversion price as in effect on the applicable conversion date of the applicable Alternative Conversion,
and (y) 88% of the lowest volume-weighted average price of the common stock during the 10 consecutive trading day period ending
and including the date of delivery of the applicable conversion notice. If the volume-weighted average price of the common stock
exceeded 135% of the Fixed Conversion Price, or $3.29, for five consecutive trading days and no equity conditions failure then
exists, the Company has the option to convert the Exchanged Convertible Note into shares of common stock at the Fixed Conversion
Price. The Company could not effect the conversion of any portion of the Exchanged Convertible Note, and the Investor could not
have the right to convert any portion of the Exchanged Convertible Note, to the extent that after giving effect to such conversion,
the Investor together with any other persons whose beneficial ownership of the Company’s common stock could be aggregated
with the Investor’s collectively would be in excess of 9.99% of the shares of common stock outstanding immediately after
giving effect to such conversion. Additionally, any such conversion would be null and void and treated as if never made. As of
March 30, 2017, the Investor had converted approximately 80% of the Exchanged Convertible Note to common stock, converting $4.22
million of the Exchanged Convertible Note into 1,730,534 shares of common stock. In connection with the conversion of the Exchanged
Convertible Note, the Company recorded a loss of $0.8 million.
Upon
the conversion of the Exchanged Convertible Note, the Company is required to pay conversion fees of 6.5% on all amounts
converted. These costs are directly related to the issuance of the Company’s shares, and as a result are recorded
against equity. As of March 31, 2017, the Company incurred total conversion fees of $137,205.
In
connection with the Exchanged Convertible Note and the Senior Secured Convertible Note (as described below), the Company
determined there to be an embedded conversion option feature. Accordingly, the embedded conversion option contained in the Exchange
Convertible Note was accounted for as a derivative liability at the date of issuance, and shall be adjusted to fair value through
earnings at each reporting date. The fair value of the embedded conversion option derivative was determined using the Black- Scholes
Option Pricing Model. On the initial measurement date, the fair value of the embedded conversion option derivative of $208,427
was recorded as a derivative liability and was allocated as a debt discount to the Exchanged Convertible Note. At each conversion
date, subsequent to the issuance of the Exchanged Convertible Note, the embedded conversion option derivative liability would
be revalued, with any changes to its fair value being recorded to earnings. At March 31, 2017, the Company also revalued the embedded
conversion option derivative liability resulting in a loss from the change in fair value. In connection with these revaluations,
the Company recorded derivative losses of approximately $42,000 for the period ended March 31, 2017. The derivative liability
as of March 31, 2017 was approximately $0.05 million and is included in other long-term liabilities in the condensed consolidated
balance sheet.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
The Company incurred $459,195 of
debt issuance costs, for investment banking, legal and placement fee services in connection with the Exchange Agreement. These
costs are treated as a debt discount and will be amortized to interest expense over the term of the Exchanged Notes. On April
18, 2017, the Company entered into an amendment and exchange agreement (the Agreement”), with the Investor. Pursuant to
the Agreement, the Company and the Investor agreed to exchange $3.55 million of the Company’s Exchanged Non-Convertible
Note, dated March 23, 2017, for $3.55 million of the Company’s senior secured convertible note, dated April 18, 2017 (“the
Senior Secured Convertible Note”). The Senior Secured Convertible Note is identical in all material respects to the Company’s
Exchanged Convertible Note dated March 23, 2017, except for the initial conversion price and requiring stockholder approval to
adjust the Conversion Price (as defined in the Senior Secured Convertible Note) or the right to substitute the Variable Price
(as defined in the Senior Secured Convertible Note) for the Conversion Price, which provisions have been waived by the Investor
with respect to the March Note. The initial conversion price of the Senior Secured Convertible Note is $2.20. The Investor has
fully converted both convertible notes into 3.8 million shares of the Company’s common stock. The security interest
has been terminated and the liens will be released upon proper termination filings. The exchange of the Exchanged Non-Convertible
Note for the Senior Secured Convertible Note was made in reliance upon the exemption from registration provided by Section 4(a)(2)
of the Securities Act of 1933, as amended.
Maxim
Group LLC (“Maxim”) acted as agent in connection with the exchange of the Exchanged Non-Convertible Note for
the Senior Secured Convertible Note. Maxim was paid a cash fee of $0.6 million representing 6.5% of the balance of the $8.87 million
Exchanged Notes.
13.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
The
following table represents cash flows (used in) provided by the Company’s discontinued operations for the three months ended
March 31, 2017 and 2016:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities of discontinued operations
|
|
$
|
(758
|
)
|
|
$
|
(2.171
|
)
|
Net cash (used in) provided by investing activities of discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
Supplemental Disclosures of Non Cash
Financing Activities
(in thousands)
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Write-off of the RedPath Note
|
|
$
|
(8,098
|
)
|
|
$
|
-
|
|
Issuance of the Exchange Notes
|
|
$
|
11,375
|
|
|
$
|
-
|
|
Non-cash equity conversion costs
|
|
$
|
(137
|
)
|
|
$
|
-
|
|
Debt issuance costs
|
|
$
|
(459
|
)
|
|
$
|
-
|
|
Warrants issued through Termination Agreement*
|
|
$
|
193
|
|
|
$
|
-
|
|
Conversion of shares in debt exchange
|
|
$
|
4,222
|
|
|
$
|
-
|
|
* See Note 14, Equity for more
details
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
In
2017, the Company closed on three equity offerings raising gross proceeds of $12.2 million. The details are as follows:
|
●
|
On
January 6, 2017, the Company completed a registered direct public offering, or the Second Registered Direct Offering, to sell
630,000 shares of its common stock at a price of $6.81 per share to certain institutional investors, which resulted in gross
proceeds to the Company of approximately $4.2 million.
|
|
|
|
|
●
|
On
January 25, 2017, the Company completed a registered direct public offering, or the Third Registered Direct Offering, to sell
855,000 shares of its common stock and a concurrent private placement of warrants to purchase 855,000 shares of its common
stock, or the Warrants, to the same investors participating in the Third Registered Direct Offering, (the Private Placement).
The Warrants and the shares of the Company’s common stock issuable upon the exercise of the Warrants were not registered
under the Securities Act and were sold pursuant to the exemption provided in Section 4(a)(2) under the Securities Act and
Rule 506(b) of Regulation D promulgated thereunder. The shares of common stock sold in the Third Registered Direct Offering
and the Warrants issued in the concurrent Private Placement were issued separately but sold together at a combined purchase
price of $4.69 per share of common stock and accompanying Warrant. The Third Registered Direct Offering and the Private Placement
together resulted in gross proceeds to the Company of approximately $4 million. The Company also used approximately $1.0 million
to satisfy the obligations due to five former senior executives. See Note 6- Severance. The fair value of these warrants issued
was determined using the Black-Scholes Option Pricing Model and amounted to $1,668,290. The warrants do not include
any cash settlement provisions and accordingly are not liability classified. As a result, the Company is not required to revalue
the warrants at each reporting date. The following table sets forth the assumptions used in the Black-Scholes Option Pricing
Model to estimate the fair value of the warrants upon issuance:
|
|
Market Price
|
|
$
|
4.33
|
|
|
|
|
|
|
Exercise Price
|
|
$
|
4.69
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.95
|
%
|
|
|
|
|
|
Expected volatility
|
|
|
124.02
|
%
|
|
|
|
|
|
Expected life in years
|
|
|
5.0
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
●
|
On
February 8, 2017, the Company completed an underwritten, confidentially marketed public offering, or the CMPO, to sell 1,200,000
shares of our common stock at a price of $3.00 per share. In addition, we granted the underwriters an option to purchase up
to an additional 9% of the total number of shares of common stock sold by us in the CMPO, solely for the purpose of covering
over-allotments, if any. The underwriters exercised the over-allotment option in full. The CMPO resulted in gross proceeds
to us of approximately $3.9 million.
|
On
March 23, 2017, the Company entered into the Exchange Agreement with the Investor. Prior to the Company entering into the Exchange
Agreement, the Investor acquired that certain Non-Negotiable Subordinated Secured Promissory Note, dated as of October 31, 2014,
as amended (the “RedPath Note”), issued by the Company and the Company’s subsidiary, Interpace, LLC, in favor
of RedPath Equityholder Representative, LLC (the “RedPath Equityholder Representative”) on behalf of the former equityholders
of RedPath. The RedPath Note, which was entered into in connection with the Company’s acquisition of RedPath Integrated
Pathology, Inc., in October 2014, had an aggregate principal amount of $9.34 million outstanding and was acquired by the
Investor for $8.87 million. The RedPath Equityholder Representative assigned all of its rights, title and interest in the RedPath
Note to the Investor, including, but not limited to, its security interest in all of the assets of the Company and the assets
of the Company’s subsidiaries.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
Pursuant
to the Exchange Agreement, the Company and the Investor agreed to exchange the RedPath Note for (i) a senior secured convertible
note in the aggregate principal amount of $5.32 million (the “Exchanged Convertible Note”), which was convertible
into shares of the Company’s common stock, in accordance with its terms, and (ii) a senior secured non-convertible note
with an aggregate principal amount of $3.55 million (the “Exchanged Non-Convertible Note” and collectively, the “Exchanged
Notes”), for a combined aggregate principal amount of $8.87 million. The Exchanged Notes ranked senior to all of the Company’s
outstanding and future indebtedness, other than the indebtedness in favor of the Company’s credit line lender and were secured
by a perfected security interest in all of the existing and future assets of the Company and those of the Company’s subsidiaries.
Upon the reduction of 55% of the aggregate principal amount of each of the Exchanged Notes, the Investor would release its security
interest in its entirety.
The
Exchanged Notes matured at 125% of the face value on the fifteenth month anniversary of the closing date, or June 22, 2018, and
bore interest quarterly at one and one hundredth percent (1.01%) per annum (as may be adjusted from time to time). As of March
30, 2017, the Investor had converted approximately 80% of the Exchanged Convertible Note to common stock, converting $4.2 million
of the Exchanged Convertible Note into 1,730,534 shares of common stock. On April 18, 2017 the Company and the Investor agreed
to exchange the Exchanged Non-Convertible Note for a new convertible note in the same principal amount of $3.55 million. The Investor
then converted the new convertible note into 1.61 million shares of the Company’s Common Stock at $2.20 per share. Accordingly,
the security interest has been terminated and the liens will be released upon proper termination filings.
On,
March 22, 2017, the Company entered into a Termination Agreement with the RedPath Equityholder Representative. Under the terms
of the Termination Agreement, RedPath Equityholder Representative agreed to terminate all royalty and milestone rights under the
contingent consideration agreement. In exchange for terminating the royalty and milestone right entered into with RedPath, the
Company agreed to issue 5 year warrants to acquire an aggregate of 100,000 shares of the Company’s common stock at a fixed
price of $4.69 per share. The fair value of the warrants issued was determined using the Black-Scholes Option Pricing Model and
amounted to $193,037. The warrants do not include any cash settlement provisions and accordingly are not liability classified.
As a result, the Company is not required to revalue the warrants at each reporting date. The following table sets forth the assumptions
used in the Black-Scholes Option Pricing Model to estimate the fair value of the warrants upon issuance:
Market Price
|
|
$
|
2.37
|
|
Exercise Price
|
|
$
|
4.69
|
|
Risk-free interest rate
|
|
|
1.95
|
%
|
Expected volatility
|
|
|
125.58
|
%
|
Expected life in years
|
|
|
5.5
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
15.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting, which is intended to simplify
the accounting and reporting for employee share-based payment transactions. The pronouncement is effective for interim and annual
periods beginning after December 31, 2016 with early adoption permitted. The adoption of the guidance in ASU No. 2016-09 in the
first quarter of 2017 did not have a material impact on the Company’s consolidated financial statements.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular
information in thousands, except per share amounts)
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets
(e.g., through “leases”) to recognize assets and liabilities for the rights and obligations created by the leases
on the balance sheet. A lessee will be required to recognize assets and liabilities for leases with terms that exceed twelve months.
The standard will also require disclosures to help investors and financial statement users better understand the amount, timing
and uncertainty of cash flows arising from leases. The disclosures include qualitative and quantitative requirements, providing
additional information about the amounts recorded in the financial statements. The guidance is effective for annual periods beginning
after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company is currently
evaluating the impact of this standard on its consolidated financial position and results of operations.
In
May 2016, the FASB issued ASU 2016-12, “Revenue from Contract with Customers - Narrow-Scope Improvements and Practical Expedients”.
In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers - Identifying Performance Obligations
and Licensing”. In March 2016, the FASB issued ASU 2016-08, “Revenue from Contract with Customers - Principal versus
Agent Considerations (Reporting Revenue Gross versus Net)”. In August 2015, the FASB issued ASU 2015-14 deferring the effective
date to annual and interim periods. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”.
The core principle of these ASUs are that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. The amendments in ASU 2016-12 affect only the narrow aspects of the guidance, such as assessing the collectability
criterion and accounting for contracts that do not meet the criterion, presentation of sales and other similar taxes collected
from customers, non-cash consideration, and contract modifications at transition. ASU 2016-10 clarifies two aspects of the guidance:
identifying performance obligations and the licensing implementation. The intention of ASU 2016-08 is to improve the operability
and understandability of the implementation guidance on principal versus agent considerations. ASU 2015-14 defers the effective
date to annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted, but not earlier
than the original effective date of annual and interim periods beginning on or after December 15, 2016, for public entities. ASU
2014-09 is a comprehensive new revenue recognition model for revenue from contract with customers. The Company is evaluating the
potential impact of the new guidance and will adopt these ASUs when effective.
16.
|
OTHER
SUBSEQUENT EVENTS
|
Brookwood
MC Investors, LLC & MCII v, PDI, Inc.
On
March 30, 2017, the Company received a tenancy summons and verified complaint for nonpayment of its Parsippany, New Jersey office
rent. The complaint alleged amounts owing of $203,734 covering unpaid base rent of $54,075 from January through March 2017, as
well as late charges, attorney’s fees, and the redeposit of a security deposit of $136,975. The plaintiff landlord sought
judgement for possession of the premises. A hearing in the Superior Court of New Jersey, Morris County-Special Civil part, took
place on April 21, 2017. The Company subsequently entered into a settlement agreement with the plaintiff landlord on May 9,
2017 whereas the landlord applied the security deposit against the unpaid rent and the Company agreed to a payment plan of $25,000
per month beginning in April 2017 and through September 2017 when the balance of amounts are payable in full, for the remainder
of its lease which expires June 30, 2017. The first payment was made on April 28, 2017.
Nasdaq
Correspondence
On
April 10, 2017, the Company received written notice from the Listing Qualifications department (the “Staff”) of The
NASDAQ Capital Market (“Nasdaq”) notifying the Company that based on its Form 10-K for the fiscal year ended December
31, 2016, evidencing stockholder’s equity of $6.5 million, the Staff has determined that the Company complies with Nasdaq
Listing Rule 5550(b)(1) and that the matter, previously disclosed by the Company, has been closed.
Debt
Exchange
On
April 18, 2017, the Company entered into the Agreement, with the Investor exchanging a non-convertible note for a new convertible
note for the same amount. See Note 12, Long-Term Debt for details.
INTERPACE
DIAGNOSTICS GROUP, INC.