NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
(unaudited)
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, Interpace Diagnostics Lab,
Inc. 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. 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 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 (“Group DCA”); InServe Support Solutions (“Pharmakon”); and TVG, Inc.
(“TVG”, dissolved December 31, 2014) and its Commercial Services Organization (“CSO”) business unit which
was sold on December 22, 2015. All significant intercompany balances and transactions have been eliminated in consolidation. Results
of operations, cash flows and comprehensive income for the three and nine-month periods ended September 30, 2017 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2017.
The
accompanying condensed consolidated financial statements have been prepared on a basis that assumes that the Company will continue
as a going concern, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities
and commitments in the normal course of business. As of September 30, 2017, the Company had cash and cash equivalents of $11.7
million, net accounts receivable of $2.8 million, total current assets of $15.8 million and total current liabilities of $8.3
million. For the nine months ended September 30, 2017, the Company had a net loss of $7.2 million and cash used in operating activities
was $12.9 million.
During
the nine months ended September 30, 2017, the Company closed on four equity offerings raising gross proceeds of $27.9 million.
The details are as follows:
|
●
|
On
January 6, 2017, the Company completed a registered direct public offering (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 (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
(the “Concurrent Warrants”), to the same investors participating in the Third
Registered Direct Offering, (or the “Private Placement”).
The Concurrent Warrants and the shares of its common stock issuable upon the exercise
of the Concurrent 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 Concurrent 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 Concurrent Warrant. The 855,000 unregistered
Concurrent Warrants also have an exercise price of $4.69 and have a five-year term. The
Third Registered Direct Offering and the Private Placement together resulted in gross
proceeds to the Company of approximately $4.0 million. The Company used approximately
$1.0 million of the proceeds to satisfy the severance obligations due to five former
senior executives.
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
|
●
|
On
February 8, 2017, the Company completed an underwritten, confidentially marketed public offering (“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, including the over-allotment.
|
|
|
|
|
●
|
On
June 21, 2017, pursuant to its S-1 filing of its preliminary prospectus to register shares on May 22, 2017, as amended thereafter,
the Company completed a public offering (the “Offering”) for 9,900,000 shares of common stock together with an
equal number of common warrants (the “Base Warrants”), to purchase shares of its common stock (and the shares
of common stock that are issuable from time to time upon exercise of the common warrants) for $1.10 per share. Each Base Warrant
upon exercise at a price of $1.25 will result in the issuance of one share of common stock to the holder. A public trading
market for the Base Warrants was established on July 5, 2017 on the OTC market under the trading symbol IDGGW. As part of
the Offering, which closed on June 21, 2017, the related underwriters purchased the full over-allotment of 1,875,000 Base
Warrants available to them for the specified $.01 per warrant. 2,600,000 of Pre-Funded Warrants were also sold at the specified
$1.09 per warrant. The combined gross proceeds of the Offering totaled $13.7 million with approximately $12.3 million of net
funds available to the Company after deducting underwriting discounts and other stock issuance expenses. As of July 7, 2017
all of the 2,600,000 Pre-Funded Warrants were exercised for the $.01 per warrant exercise price and all 2,600,000 common shares
related to the warrants have been issued. On July 31, the Company and the underwriters closed on the exercise of the underwriters’
over-allotment option to purchase an additional 875,000 shares of common stock at a price of $1.09 per share for gross proceeds
of $0.960 million.
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
|
●
|
During
September 2017 the Company received approximately $0.9 million from the exercise of 747,800
Base Warrants issued as part of the Offering.
|
Subsequent
to September 2017 the Company received approximately $6.2 million from the exercise of Base
Warrants
issued as part of the Offering, as follows:
|
●
|
During
October 2017 the Company received approximately $1.2 million from the exercise of approximately 925,000 Base Warrants.
|
|
|
|
|
●
|
On
October 12, 2017 the Company entered into an agreement with certain holders of Base Warrants to exercise 4 million Base
Warrants at the exercise price of $1.25 in exchange for 3.2 million additional private placement warrants with an exercise
price of $1.80, resulting in gross proceeds to the Company of $5.0 million. The new warrants may not be exercised for six
months from the issue date and expire in five and one-half years from their issuance date.
|
As
part of our acquisition of RedPath Integrated Pathology, Inc., we issued a non-negotiable subordinated secured, non-interest bearing,
promissory note, dated as of October 31, 2014, with an aggregate principal amount of $10.7 million outstanding (the “RedPath
Note”). In December 2016 we repaid $1.33 million in principal of the RedPath Note resulting in an outstanding balance of
$9.34 million. The RedPath Note was subsequently acquired by a single institutional investor (the “Investor”) for
$8.87 million on March 22, 2017. Also on that date we and the Investor exchanged the RedPath Note for a senior secured convertible
note in the aggregate principal amount of $5.32 million and a senior secured non-convertible note in the aggregate principal amount
of $3.55 million. On April 18, 2017, we and the Investor exchanged the senior secured non-convertible note for $3.55 million of
our senior secured convertible note. Between March 23, 2017 and April 18, 2017, the senior secured convertible notes were converted
in full for 3,795,429 shares of our common stock. We no longer have any outstanding secured debt, and any security interests and
liens related to our former secured debt have been fully settled.
The
Company entered into a Credit Agreement with SCM Specialty Finance Opportunities Fund, L.P. (the “Credit Agreement”)
on September 28, 2016 for $1.2 million. 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 September 30, 2017 the Company is renegotiating terms of the Credit Agreement and has not borrowed any
funds under the Credit Agreement.
While
the Company has significantly increased its cash balance and has eliminated its long term indebtedness, the Company does not expect
to generate positive cash flows from operations for the year ending December 31, 2017. The Company intends to meet its capital
needs by revenue growth, containing costs, entering into strategic alliances as well as exploring other options, including the
possibility of raising additional debt or equity capital as necessary. There is, however, no assurance the Company will be successful
in meeting its capital requirements prior to becoming cash flow positive.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
3.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Accounting
Estimates
The
preparation of condensed 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, useful lives and impairments of long-lived assets 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.
Revenue
Recognition
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, endocrine and lung cancers, which
are principally focused on early detection of patients at high risk of cancer. Customers in the Company’s molecular diagnostics
business consist primarily of physicians, hospitals and clinics. Under current GAAP, we recognize revenue from services rendered
when the following four revenue recognition criteria are met: persuasive evidence of an arrangement or contract exists; services
have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured. The Company’s
services are generally considered rendered upon completion of the test and review and release of the test results, at which time
the Company bills the third-party payer or hospital. We recognize revenue on an accrual basis when we are able to make a reasonable
estimate of reimbursement at the time delivery is complete. In the first period in which revenue is accrued for a particular payer
or test, there generally is a one-time increase in revenue. Until we have contracts with payers or can reasonably estimate the
amount that will ultimately be received, we recognize the related revenue on the cash basis. Because the timing and amount of
cash payments received from payers as well as one-time increases in revenue from newly accrued payers are difficult to predict,
we expect that our revenue may fluctuate significantly in any given quarter.
The
Company currently recognizes revenue and accounts receivable related to billings for Medicare and Medicare Advantage, on an accrual
basis, net of contractual adjustment, as well as for hospitals (direct-bill clients), 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.
Specifically
by test, PancraGEN® revenues have been recorded on the accrual basis in each of these categories since its acquisition in
2014. ThyGenX
®
has been recorded on an accrual basis since its Medicare approval in 2015 in two of the payer categories,
Medicare and Medicare Advantage, and ThyraMIR®, a newer test, approved for Medicare in 2016, has been moved from cash basis
to accrual basis in the same categories as ThyGenX, Medicare and Medicare Advantage in 2017, effective in the current quarter.
As of September 30, 2017 there are no revenues for the Company’s lung assay called RespriDX™.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
The
Company also provides services by way of commercial insurance carriers or governmental programs that may or may not have a contract
or coverage in place for its proprietary tests. As contracts and coverage progress for payers in these categories, the Company
will evaluate their collection history to determine the appropriate time to begin to recognized specific payers on the accrual
basis as well. Currently, all are recognized on the cash basis. 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; however, the Company does offer patients that do not have adequate insurance
coverage the opportunity to pay cash for our services at a reduced rate.
Accounts
Receivable
The
Company recognizes Accounts Receivable as revenue is accrued, based upon its criteria for revenue recognition. The Company also
records an Allowance for Doubtful Accounts based on the collection history for its accrual basis payer. For non-paying roster
accounts, balances are generally written off after twelve months. Medicare and Medicare Advantage accounts are currently written
off after eighteen months to allow for the appeal process, which in some cases requires several appeals prior to collection.
Other
Current Assets
Other
current assets consisted of the following as of September 30, 2017 and December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Indemnification
assets
|
|
$
|
875
|
|
|
$
|
875
|
|
Other
receivables
|
|
|
247
|
|
|
|
325
|
|
Other
|
|
|
145
|
|
|
|
215
|
|
|
|
$
|
1,267
|
|
|
$
|
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 condensed consolidated statements of comprehensive 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.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
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 (Loss) Income per Share
A
reconciliation of the number of shares of common stock used in the calculation of basic and diluted (loss) income per share for
the three- and nine-month periods ended September 30, 2017 and 2016 is as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Basic
weighted average number of common shares
|
|
|
22,028
|
|
|
|
1,816
|
|
|
|
12,022
|
|
|
|
1,803
|
|
Potential
dilutive effect of stock-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted
weighted average number of common shares
|
|
|
22,028
|
|
|
|
1,816
|
|
|
|
12,022
|
|
|
|
1,803
|
|
The
following outstanding stock-based awards were excluded from the computation of the effect of dilutive securities on (loss) income
per share for the following periods because they would have been anti-dilutive:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
1,496
|
|
|
|
-
|
|
|
|
1,496
|
|
|
|
-
|
|
Stock-settled
stock appreciation rights (SARs)
|
|
|
84
|
|
|
|
103
|
|
|
|
84
|
|
|
|
103
|
|
Restricted
stock and restricted stock units (RSUs)
|
|
|
68
|
|
|
|
115
|
|
|
|
68
|
|
|
|
115
|
|
Warrants
|
|
|
15,267
|
|
|
|
-
|
|
|
|
15,267
|
|
|
|
-
|
|
|
|
|
16,915
|
|
|
|
218
|
|
|
|
16,915
|
|
|
|
218
|
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
4.
|
OTHER
INTANGIBLE ASSETS
|
The
net carrying value of the identifiable intangible assets as of September 30, 2017 and December 31, 2016 are as follows:
|
|
|
|
|
As
of September 30, 2017
|
|
|
As
of December 31, 2016
|
|
|
|
Life
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Value
|
|
|
Value
|
|
Diagnostic
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thyroid
|
|
|
9
|
|
|
$
|
8,519
|
|
|
$
|
8,519
|
|
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
|
|
|
|
|
|
$
|
(9,701
|
)
|
|
$
|
(7,262
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Carrying Value
|
|
|
|
|
|
$
|
33,919
|
|
|
$
|
36,358
|
|
Amortization
expense was approximately $0.8 million and $1.0 million for the three-month periods ended September 30, 2017 and 2016, respectively,
and approximately $2.4 million and $2.9 million for the nine-month periods ended September 30, 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
|
|
$
|
3,252
|
|
$
|
3,252
|
|
|
$
|
5,292
|
|
|
$
|
5,292
|
|
|
$
|
4,908
|
|
5.
|
FAIR
VALUE MEASUREMENTS
|
The
Company's financial assets and liabilities reflected at fair value in the condensed consolidated financial statements include:
cash and cash equivalents; 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:
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
|
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
which incorporate unobservable inputs that reflect management 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 assets and liabilities 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 September 30, 2017
|
|
|
Fair
Value Measurements
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
As
of September 30, 2017
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
11,703
|
|
|
$
|
11,703
|
|
|
$
|
11,703
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
$
|
11,703
|
|
|
$
|
11,703
|
|
|
$
|
11,703
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent
consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
|
|
$
|
1,407
|
|
|
$
|
1,407
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,407
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
liability
|
|
|
733
|
|
|
|
733
|
|
|
|
-
|
|
|
|
-
|
|
|
|
733
|
|
|
|
$
|
2,140
|
|
|
$
|
2,140
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,140
|
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
|
|
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
|
|
Cash and cash equivalents
are valued using market prices in active markets (level 1). As of September 30, 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, the 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
Loss.
On
March 23, 2017, in connection with the Company entering into the Exchange Agreement, related to the RedPath Note (See Note 2,
Liquidity
and Note 12,
Long-Term Debt
) 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 were recorded in Interest Expense. Between March 23, 2017 and April 18, 2017, the Investor had fully converted
all outstanding debt, and as a result there are no liabilities remaining subsequent to April 18, 2017.
On
June 21, 2017, the Company closed on an Offering (See Note 2,
Liquidity
), issuing both Pre-Funded Warrants and Underwriters
Warrants to purchase 2,600,000 shares and 575,000 shares of the Company’s common stock, respectively. Both the Pre-Funded
and Underwriters Warrants include a cash settlement feature in the event of certain circumstances. Accordingly, both the Pre-Funded
and Underwriters Warrants are classified as liabilities, and were fair valued using the Black Scholes Option-Pricing Model, the
inputs for which include exercise price of the respective warrants, 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. Changes to the fair value of the warrant liabilities were recorded to Other (loss) income, net. The Pre-Funded
Warrants were fully exercised as of September 30, 2017 and therefore the Company has no remaining liability associated with those
warrants.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
A
roll forward of the carrying value of the contingent consideration, embedded conversion option and warrant liabilities from December
31, 2016 to September 30, 2017 is as follows:
|
|
December
31, 2016
|
|
|
Initial
Liability
|
|
|
Payments
|
|
|
Accretion
|
|
|
Cancellation
of Obligation/
Conversions Exercises
|
|
|
Mark
to Market
|
|
|
September
30, 2017
|
|
Contingent
consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen
|
|
$
|
1,545
|
|
|
|
|
|
|
$
|
(260
|
)
|
|
$
|
122
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,407
|
|
Redpath
|
|
|
5,969
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,969
|
)
|
|
|
-
|
|
|
|
-
|
|
Embedded
conversion option
|
|
|
-
|
|
|
|
208
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(269
|
)
|
|
|
61
|
|
|
|
-
|
|
Pre-Funded
Warrants
|
|
|
-
|
|
|
|
2,247
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,337
|
)
|
|
|
90
|
|
|
|
-
|
|
Underwriters
Warrants
|
|
|
-
|
|
|
|
422
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
311
|
|
|
|
733
|
|
|
|
$
|
7,514
|
|
|
$
|
2,877
|
|
|
$
|
(260
|
)
|
|
$
|
122
|
|
|
$
|
(8,575
|
)
|
|
$
|
462
|
|
|
$
|
2,140
|
|
The
Company’s non-financial instruments, which primarily consist of intangible assets and property and equipment, are not required
to be measured at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis whenever events
or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for indefinite-lived
intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at
fair value, considering market participant assumptions.
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 CSO business, 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.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
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 September 30, 2017, the Company's accrual for litigation and threatened litigation
was not material to the condensed consolidated financial statements.
In
connection with the October 31, 2014 acquisition of RedPath, the Company assumed a liability for the settlement agreement (the
“Settlement Agreement”) entered into by the former owners of RedPath with the Department of Justice (“DOJ”).
Under the terms of the Settlement Agreement, the Company is obligated to make payments to the DOJ for the calendar years ended
December 31, 2014 through 2017, up to a cumulative maximum amount of $3.0 million.
Payments
are due on March 31st following the calendar year in which the revenue milestones are achieved. In May 2017, the Company renegotiated
payment terms with the DOJ related to a $0.5 million payment due associated with performance in fiscal 2016. The negotiations
resulted in an agreement that the Company pay $83,335 on July 3, 2017, and $83,333 for the five remaining months of 2017. The
Company made payments of approximately $0.3 million in the three months ended September 30, 2017. For the nine months ended September
30, 2017, the Company has accrued $0.5 million for the remainder of these payments and its estimate of the potential liability
for 2017, based upon the terms of the Settlement Agreement.
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) (the “Court”) in a matter entitled Prolias Technologies,
Inc. v. PDI, Inc. (Docket No. MRS-L-899-15). In the Complaint, Prolias alleged 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.” 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.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
On
March 9, 2017, the Court 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 April 3, 2017, the final judgment against Prolias was recorded as a statewide lien. No assurance,
however, can be given that the Company will ever be able to recover on the judgment against Prolias.
Severance
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 is classified 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 in the first quarter of 2017. 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 Loss and $0.5 million
was recorded in discontinued operations. The Company has no severance obligations as of September 30, 2017.
Parsippany
Lease
Our
corporate headquarters are located in Parsippany, New Jersey where we had been leasing approximately 23,000 square feet on an
operating lease scheduled to run through June 2017. On May 24, 2017 the Company entered into a new lease with its Parsippany landlord.
The lease is for a space of approximately 5,900 square feet and is for a period of sixty-three months commencing July 1, 2017
at an initial monthly obligation of approximately $13,000 per month subject to annual increases of fifty cents per square foot.
The initial year of the lease has a two-month rent abatement period. The lease has an early termination date of June 30, 2020
at the option of the Company, provided at least 12 months’ notice is given in advance.
Pittsburgh
Lease
On
September 26, 2017 the Company renewed its lease for its Pittsburgh laboratory for an additional three months. The lease is for
20,000 square feet of laboratory and office space and now ends on June 30, 2018. The lease obligation remains at $32,500 per month
for the full term of the lease.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
7.
|
ACCRUED
EXPENSES AND LONG-TERM LIABILITIES
|
Other
accrued expenses consisted of the following as of September 30, 2017 and December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Accrued
royalties
|
|
$
|
931
|
|
|
$
|
711
|
|
Indemnification
liability
|
|
|
875
|
|
|
|
875
|
|
Contingent
consideration
|
|
|
250
|
|
|
|
260
|
|
Rent
payable
|
|
|
18
|
|
|
|
110
|
|
DOJ
settlement
|
|
|
542
|
|
|
|
80
|
|
Accrued
professional fees
|
|
|
687
|
|
|
|
1,746
|
|
Taxes
payable
|
|
|
389
|
|
|
|
526
|
|
Unclaimed
property
|
|
|
565
|
|
|
|
565
|
|
Directors' Fees
|
|
|
41
|
|
|
|
40
|
|
Research related liabilities
|
|
|
388
|
|
|
|
496
|
|
All
others
|
|
|
1,074
|
|
|
|
1,363
|
|
|
|
$
|
5,331
|
|
|
$
|
6,236
|
|
Other
long-term liabilities consisted of the following as of September 30, 2017 and December 31, 2016:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Uncertain
tax positions
|
|
$
|
3,733
|
|
|
$
|
3,594
|
|
DOJ
settlement (indemnified by RedPath)
|
|
|
-
|
|
|
|
250
|
|
Warrant
liability
|
|
|
733
|
|
|
|
-
|
|
Other
|
|
|
88
|
|
|
|
-
|
|
|
|
$
|
4,554
|
|
|
$
|
3,844
|
|
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 authorized an additional 245,000 shares for new awards and also included the remaining shares available under the prior Amended
and Restated Plan. On September 14, 2017, the Company stockholders approved an amendment to the Amended and Restated Plan to increase
the maximum number of shares available for sale thereunder by 3,700,000 shares, of which 184,647 shares represented stockholders’
approval of contingent awards. 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 (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.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
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
(subject generally to the executive’s or board member’s, as applicable, continued service with the Company) which
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 nine month period ended September 30, 2017. There were no options granted during the nine month period ended September
30, 2016.
|
|
Nine
Months Ended
|
|
|
|
September
30, 2017
|
|
Risk-free
interest rate
|
|
|
1.85
|
%
|
Expected
life
|
|
|
4.93
|
|
Expected
volatility
|
|
|
141.73
|
%
|
Dividend
yield
|
|
|
-
|
|
The
Company recognized approximately $0.3 million and $0.02 million of stock-based compensation expense during the three month periods
ended September 30, 2017 and 2016, respectively, and approximately $0.5 million and $0.1 million during the nine month periods
ended September 30, 2017 and 2016, respectively.
In
2017, the Company inadvertently granted 184,647 share options to six employees in excess of the number available for grant under
the Amended and Restated Plan. These grants were cancelled and replaced with the new awards that were contingent upon stockholder
approval which was received in September 2017. The replacement option grants were made on May 10, 2017, with a strike price of
$2.46 and will vest in equal monthly installments over one year subject generally to the continued service of the grantees.
In
September 2017, subsequent to approval by shareholders, the Company granted 945,000 stock options to members of senior management.
These options have an exercise price of a $1.45 and vest in equal monthly installments over one year. Also in September 2017,
the Company granted 43,000 stock options to members of the Board of Directors with an exercise price of $1.48.
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 the income tax (benefit) provision on the loss from
continuing operations and the effective tax rate for the three- and nine-month periods ended September 30, 2017 and 2016:
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
(Benefit)
provision for income tax
|
|
$
|
(42
|
)
|
|
$
|
173
|
|
|
$
|
(340
|
)
|
|
$
|
(54
|
)
|
Effective
income tax rate
|
|
|
1.2
|
%
|
|
|
2.5
|
%
|
|
|
4.2
|
%
|
|
|
0.4
|
%
|
Income
tax (benefit) provision for the three- and nine-month periods ended September 30, 2017 and 2016 was primarily due to an allocation
of tax expense between continuing and discontinued operations.
Since
December 22, 2015, the Company reports its operations as one segment, molecular diagnostics. The Company’s 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, endocrine and lung 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 within Income
(Loss) from Discontinued Operations, Net of Tax in the condensed consolidated statements of comprehensive loss for the
three- and nine-months ended September 30, 2017 and 2016.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
|
|
Three
Months Ending September 30,
|
|
|
Nine
Months Ending September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenue,
net
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,644
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from discontinued operations
|
|
|
167
|
|
|
|
(414
|
)
|
|
|
1,081
|
|
|
|
(1,006
|
)
|
Gain
on sale of assets
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,326
|
|
Income
(loss) from discontinued operations, before tax
|
|
|
167
|
|
|
|
(414
|
)
|
|
|
1,081
|
|
|
|
320
|
|
Income
tax expense (benefit)
|
|
|
96
|
|
|
|
(117
|
)
|
|
|
509
|
|
|
|
219
|
|
Income
(loss) from discontinued operations, net of tax
|
|
$
|
71
|
|
|
$
|
(297
|
)
|
|
$
|
572
|
|
|
$
|
101
|
|
The
assets and liabilities classified as discontinued operations relate to the CSO, Group DCA, and TVG businesses and their composition
are in the accompanying balance sheets as follows:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
|
|
CSO
|
|
|
DCA/TVG
|
|
|
Total
|
|
|
CSO
|
|
|
DCA/TVG
|
|
|
Total
|
|
Other
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Current
assets from discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
14
|
|
|
|
14
|
|
Total
assets
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
14
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
304
|
|
|
$
|
-
|
|
|
$
|
304
|
|
|
$
|
890
|
|
|
$
|
-
|
|
|
$
|
890
|
|
Accrued
salary and bonus
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,272
|
|
|
|
-
|
|
|
|
1,272
|
|
Other
|
|
|
979
|
|
|
|
-
|
|
|
|
979
|
|
|
|
1,966
|
|
|
|
-
|
|
|
|
1,966
|
|
Current
liabilities from discontinued operations
|
|
|
1,283
|
|
|
|
-
|
|
|
|
1,283
|
|
|
|
4,128
|
|
|
|
-
|
|
|
|
4,128
|
|
Total
liabilities
|
|
$
|
1,283
|
|
|
$
|
-
|
|
|
$
|
1,283
|
|
|
$
|
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 a note payable (the “RedPath Note”) requiring 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 three months ended September 30, 2017 and 2016, the Company accreted zero and approximately $0.2
million in interest expense, respectively. During the nine months ended September 30, 2017 and 2016, the Company accreted approximately
$0.2 million and $0.6 million into interest expense, respectively. At December 31, 2016, the fair value balance of the $9.3 million
RedPath Note was approximately $7.9 million and the unamortized discount was $1.4 million. As of June 30, 2017, the Note was fully
converted into the Company’s common stock (see below).
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular
information in thousands, except per share amounts)
(unaudited)
Debt
Exchange for RedPath Note
On
December 23, 2016 we repaid $1.33 million in principal of the RedPath Note resulting in an outstanding balance of $9.34 million.
The balance of the RedPath Note was subsequently acquired by the Investor, for $8.87 million on March 22, 2017. Also on that date
we and the Investor exchanged the RedPath Note for a senior secured convertible note (the “Exchanged Convertible Note”)
in the aggregate principal amount of $5.32 million and a senior secured non-convertible note in the aggregate principal amount
of $3.55 million. On April 18, 2017, we and the Investor exchanged the senior secured non-convertible note for $3.55 million of
our senior secured convertible note (the “Senior Secured Convertible Note”). Between March 23, 2017 and April 18,
2017, the senior secured convertible notes were converted in full for 3,795,429 shares of our common stock. We no longer have
any outstanding secured debt, and any security interests and liens related to our former secured debt have been fully released.
In
connection with the conversion of the Exchanged Convertible Note, the Company recorded a loss of $4.3 million. Maxim Group LLC
(“Maxim”) acted as agent in connection with the exchanges into the Exchanged Convertible Note and the Senior Secured
Convertible Note. Maxim was paid a cash fee of $0.6 million representing 6.5% of the balance of the $8.85 million exchanged RedPath
Note. These costs are directly related to the issuance of the Company’s shares, and as a result are recorded against equity.
In
connection with the Exchanged Convertible Note and the Senior Secured Convertible Note, 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, and accordingly. In connection with these revaluations, the Company recorded derivative losses of zero and approximately
$0.1 million for the three and nine-month periods ended September 30, 2017. The value of the derivative liability as of September
30, 2017 was zero
. The Company incurred $0.5 million of debt issuance costs, for investment banking, legal and placement
fee services in connection with the Exchange Agreement. These costs were treated as a debt discount and amortized to interest
expense over the term of the Exchanged Notes. In connection with the conversion of the Senior Secured Convertible Note on April
18, 2017, the Company recorded a loss of $2.3 million.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular information in thousands, except per share amounts)
(unaudited)
13.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
The
following table represents cash flows used in the Company’s discontinued operations for the nine months ended September
30, 2017 and 2016:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2017
|
|
|
2016
|
|
Net
cash used in operating activities of discontinued operations
|
|
$
|
(2,259
|
)
|
|
$
|
(1,486
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities of discontinued operations
|
|
$
|
-
|
|
|
$
|
-
|
|
Supplemental
Disclosures of Non Cash Financing Activities
(in thousands)
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Write-off of the RedPath Note
|
|
$
|
(8,098
|
)
|
|
$
|
-
|
|
Issuance of the Exchange Notes
|
|
$
|
11,375
|
|
|
$
|
-
|
|
Non-cash equity conversion costs
|
|
$
|
(173
|
)
|
|
$
|
-
|
|
Debt issuance costs
|
|
$
|
(511
|
)
|
|
$
|
-
|
|
Warrants issued through Termination Agreement (See Note 14,
Equity
)
|
|
$
|
193
|
|
|
$
|
-
|
|
Shares issued in debt exchange
|
|
$
|
11,643
|
|
|
$
|
-
|
|
Professional fees paid by a third party
|
|
$
|
685
|
|
|
$
|
-
|
|
Public
Equity Offerings
During
the nine months ended September 30, 2017, the Company closed on four separate equity offerings raising gross proceeds of $27.9
million. The details are as follows:
|
●
|
On
January 6, 2017, the Company completed 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 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 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,
Commitments and Contingencies
. The fair value of these warrants issued
was determined using the Black-Scholes Option Pricing Model and amounted to $1.67
million. 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:
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular information in thousands, except per share amounts)
(unaudited)
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 a 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 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 of RedPath, the Company agreed
to issue to the RedPath Equityholder Representative 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 $0.19 million. 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
|
%
|
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular information in thousands, except per share amounts)
(unaudited)
As
part of our acquisition of RedPath Integrated Pathology, Inc., we issued the RedPath Note. In December 2016 we repaid $1.33 million
in principal of the RedPath Note resulting in an outstanding balance of $9.34 million. The RedPath Note was subsequently acquired
by the Investor for $8.87 million on March 22, 2017. Also on that date we and the investor exchanged the RedPath Note for a senior
secured convertible note in the aggregate principal amount of $5.32 million and a senior secured non-convertible note in the aggregate
principal amount of $3.55 million. On April 18, 2017, we and the Investor exchanged the senior secured non-convertible note for
$3.55 million of our senior secured convertible note. Between March 23, 2017 and April 18, 2017, the senior secured convertible
notes were converted in full for 3,795,429 shares of our common stock. We no longer have any outstanding secured debt, and any
security interests and liens related to our former secured debt have been or will be released and/or terminated upon the completion
of applicable filings.
On
June 16, 2017, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Maxim as the
representative of several underwriters (the “Underwriters”) named therein with respect to the issuance and sale of
an aggregate of (i) 9,900,000 shares (“Firm Shares”) of the Company’s common stock, (ii) Base Warrants to purchase
12,500,000 shares of common stock at an exercise price equal to $1.25 per share, and (iii) Pre-Funded Warrants to purchase 2,600,000
shares of Common Stock at an exercise price equal to $0.01 per share in the Offering pursuant to the Underwriting Agreement. Each
Firm Share and accompanying Base Warrant was sold for a combined effective price of $1.10, and each Pre-Funded Warrant and accompanying
Base Warrant was sold for a combined effective price of $1.09. The Underwriters were entitled to receive an underwriting discount
equal to 7.5% of the offer price of the aggregate number of Firm Shares and Pre-Funded Warrants sold in the Offering and Over-Allotment
and reasonable out-of-pocket expenses of $0.1 million. The Company also granted the Underwriters a 45-day option to purchase up
to an additional 1,875,000 Firm Shares and/or 1,875,000 Base Warrants to cover over-allotments, if any (the “Over-Allotment”).
Additionally, the Company agreed to issue to the Underwriters warrants (the “Underwriter Warrant”) to purchase a number
of Firm Shares of common stock equal to an aggregate of 4% of the total number of shares of Common Stock and Pre-Funded Warrants
sold in the Offering.
The
Company offered to each purchaser whose purchase of shares of common stock in this Offering would otherwise result in the
purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding common
stock immediately following the consummation of this Offering, the opportunity to purchase, if the purchaser so chooses,
pre-funded warrants, in lieu of shares of common stock that would otherwise result in the purchaser’s beneficial ownership
exceeding 4.99% of our outstanding common stock. Subject to limited exceptions, a holder of pre-funded warrants could not have
the right to exercise any portion of its pre-funded warrants if the holder, together with its affiliates, would beneficially own
in excess of 4.99% (or, at the election of the holder, 9.99%) of the number of shares of common stock outstanding immediately
after giving effect to such exercise. Each pre-funded warrant was exercisable for one share of our common stock. The Offering
also related to the shares of common stock issuable upon exercise of any pre-funded warrants sold in the Offering.
Each pre-funded warrant was sold together with a common warrant with the same terms as the common warrant described above. The
common warrants were exercisable immediately and will expire five years after the date of issuance, or June 22, 2022. The shares
of common stock and pre-funded warrants could only be purchased with the accompanying common warrants, but were issued separately,
and were immediately separable upon issuance.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular information in thousands, except per share amounts)
(unaudited)
On
June 21, 2017, the Company successfully closed its Offering, See Note 2,
Liquidity
. A public trading market for the Base
Warrants was established on July 5, 2017 on the OTC market under the trading symbol IDGGW. As part of the offering the Underwriters
purchased the full over-allotment of 1,875,000 Base Warrants available to them for the specified $.01 per warrant, which are not
exercisable for six months after the Offering. The full 2,600,000 of Pre-Funded Warrants were also sold on at the price
of $1.09 per warrant. The combined gross proceeds of the Offering totaled $13.7 million with approximately $12.3 million of net
funds available to the Company after deducting underwriting discounts and other stock issuance expenses.
In
summary, the Company issued 9,900,000 shares of Common Stock as well as Base Warrants, Overallotment Warrants, Pre-Funded Warrants
and Underwriters Warrants to purchase 12,500,000, 1,875,000, 2,600,000 and 575,000 shares of the Company’s Common Stock,
respectively. The Pre-Funded and Underwriters Warrants are classified as liabilities because in certain circumstances they could
require cash settlement. The Base and Overallotment Warrants do not contain such provisions. As a result, the Company is not required
to revalue the Base and Overallotment warrants at each reporting date. The Base Warrants are traded on the OTC market, however,
trading volume has been insufficient to determine fair value. The fair value of the Base and Overallotment Warrants was determined
using the Black-Scholes Option Pricing Model and amounted to $5.3 million and $0.8 million, respectively.
The
following table sets forth the assumptions used in the Black-Scholes Option Pricing Model to estimate the fair value of the Base
Warrants and Overallotment Warrants upon issuance:
Market
Price
|
|
$
|
0.87
|
|
Exercise
Price
|
|
$
|
1.25
|
|
Risk-free
interest rate
|
|
|
1.75
|
%
|
Expected
volatility
|
|
|
134.21
|
%
|
Expected
life in years
|
|
|
5.0
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
As
of July 7, 2017, all of the 2,600,000 Pre-Funded Warrants were exercised for $.01 per warrant exercise price and all 2,600,000
common shares related to the warrants have been issued. On July 31, the Underwriters exercised their right to purchase 875,000
Firm Shares for $0.960 million net of $0.072 million in underwriter discounts, or $0.882 million.
On
July 5, 2017, the Company entered into an agreement for investor relations services. In consideration for these services, the
Company paid $0.2 million in cash and agreed to issue a warrant expiring in August 2020, exercisable into 150,000 shares
of Common Stock with an exercise price of $1.25.
INTERPACE
DIAGNOSTICS GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Tabular information in thousands, except per share amounts)
(unaudited)
The
warrant issuance is considered a share-based payment award issued to a nonemployee in exchange for services and falls within the
scope of ASC 505-50. The fair value of the warrant was determined to be $0.2 million and was fully expensed during the quarter
ended September 30, 2017.
The
following table sets forth the assumptions used in the Black-Scholes Option Pricing Model to estimate the fair value of the share-
based warrant upon issuance:
Market
Price
|
|
$
|
1.62
|
|
Exercise
Price
|
|
$
|
1.25
|
|
Risk-free
interest rate
|
|
|
1.66
|
%
|
Expected
volatility
|
|
|
172.29
|
%
|
Expected
life in years
|
|
|
3.1
|
|
Expected
dividend yield
|
|
|
0.00
|
%
|
Warrants
outstanding and warrant activity for the nine months ended September 30, 2017 are as follows:
Description
|
|
Classification
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Balance
December
31, 2016
|
|
|
Warrants
Issued
|
|
|
Warrants
Exercised
|
|
|
Warrants
Cancelled/ Expired
|
|
|
Balance
September
30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-Funded
Warrants, issued June 21, 2017
|
|
Liability
|
|
$
|
0.01
|
|
|
None
|
|
|
-
|
|
|
|
2,600,000
|
|
|
|
(2,600,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Underwriters
Warrants, issued June 21, 2017
|
|
Liability
|
|
$
|
1.32
|
|
|
December
2022
|
|
|
-
|
|
|
|
575,000
|
|
|
|
-
|
|
|
|
(40,000
|
)
|
|
|
535,000
|
|
Private
Placement Warrants, issued January 25, 2017
|
|
Equity
|
|
$
|
4.69
|
|
|
June
2022
|
|
|
-
|
|
|
|
855,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
855,000
|
|
RedPath
Warrants, issued March 22, 2017
|
|
Equity
|
|
$
|
4.69
|
|
|
September
2022
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Base
& Overallotment Warrants, issued June 21, 2017
|
|
Equity
|
|
$
|
1.25
|
|
|
June
2022
|
|
|
-
|
|
|
|
14,375,000
|
|
|
|
(747,800
|
)
|
|
|
-
|
|
|
|
13,627,200
|
|
Vendor
Warrants, issued August 6, 2017
|
|
Equity
|
|
$
|
1.25
|
|
|
August
2020
|
|
|
-
|
|
|
|
150,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
18,655,000
|
|
|
|
(3,347,800
|
)
|
|
|
(40,000
|
)
|
|
|
15,267,200
|
|
16.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
|
In
March 2016, the Financial Accounting Standards Board (”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)
(unaudited)
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets
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 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606).” The standard, including
subsequently issued amendments, will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective.
The key focus of the new standard is 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. To achieve this key focus, there is a five-step approach outlined in the standard. Entities are permitted to apply
the new standard under the full retrospective method, subject to certain practical expedients, or the modified retrospective method
that requires the application of the guidance only to contracts that are uncompleted on the date of initial application. The Company
will adopt the new revenue standard and subsequently issued amendments as of January 1, 2018 using the modified retrospective
method.
The
Company has formed an implementation team, which includes internal accounting resources and a third party consulting firm, to
oversee the adoption of the new standard. The implementation team is performing a detailed review of the Company’s contracts
and revenue streams to identify potential differences in accounting as a result of the new standard. The Company continues to
assess the impact on its existing revenue accounting policies, newly required financial statement disclosures, and is executing
on the project plan. The Company has not yet determined the impact from the adoption of the new standard on either its financial
position or results of operations.
17.
|
OTHER
SUBSEQUENT EVENTS
|
Warrant
Exercise Agreement
On
October 12, 2017, the Company entered into warrant exercise agreements (each a “Warrant Exercise Agreement”) with
certain holders (collectively, the “Warrant Holders” and each, a “Warrant Holder”) of the Company’s
warrants (the “Warrants”) issued in June 2017. Pursuant to the Warrant Exercise Agreement, the Warrant Holders agreed
to exercise Warrants for an aggregate of 4,000,000 shares of common stock, at the Warrant exercise price of $1.25 per share. The
Warrants were issued pursuant to that certain warrant agency agreement, dated as of June 21, 2017 (the “Warrant Agency Agreement”),
by and between the Company and American Stock Transfer & Trust Company, as warrant agent (the “Warrant Agent”).
In connection with the exercises, the Company agreed to issue additional warrants to the Warrant Holders for the number of shares
of Common Stock that is equal to eighty percent (or 3,200,000 warrants) of the number of shares exercised by such Warrant
Holder (the “Additional Warrant Shares”), at an exercise price of $1.80 per share
.
INTERPACE
DIAGNOSTICS GROUP, INC.