NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Nature
of Business
Interpace
Biosciences, Inc. (“Interpace” or the “Company”) enables personalized medicine, offering specialized services
along the therapeutic value chain from early diagnosis and prognostic planning to targeted therapeutic applications and pharma
services. The Company provides molecular diagnostics, bioinformatics and pathology services for evaluation of risk of cancer by
leveraging the latest technology in personalized medicine for improved patient diagnosis and management. The Company also provides
pharmacogenomics testing, genotyping, biorepository and other specialized services to the pharmaceutical and biotech industries.
The Company advances personalized medicine by partnering with pharmaceutical, academic, and technology leaders to effectively
integrate pharmacogenomics into their drug development and clinical trial programs.
Impact
of COVID-19 pandemic
We
have taken what we believe are necessary precautions to safeguard our employees from the Coronavirus (COVID-19) pandemic. We continue
to follow the Centers for Disease Control and Prevention’s (“CDC”) guidance and the recommendations and restrictions
provided by state and local authorities. The majority of our employees who do not work in a lab setting are currently able to
successfully work remotely. While a number of employees were furloughed most have returned to work. Our labs require in-person
staffing and we have been able to continue to operate our labs, minimizing infection risk to lab staff through a combination of
social distancing and appropriate protective equipment. There can be no assurance, however, that key employees will not become
ill or that we will able to continue to operate our labs successfully.
The
continuing impact that the COVID-19 pandemic will have on our operations, including duration, severity and scope, remains highly
uncertain and cannot be fully predicted at this time. Accordingly, we believe that the COVID-19 pandemic could continue to adversely
impact our results of operations, cash flows and financial condition in the future.
As
our business operations continue to be impacted by the pandemic, we continue to monitor the situation and the guidance that is
being provided by relevant federal, state and local public health authorities. We may take additional actions based upon their
recommendations. However, it is possible that we may have to make further adjustments to our operating plans in reaction to developments
that are beyond our control.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
While
we do not anticipate any lab closures at this time beyond periodic, temporary work stoppages to clean and disinfect the labs,
this could change in the future based upon conditions caused by the pandemic. Further, while we have acquired additional inventories
of lab supplies, including reagents, it is possible that we could experience supply chain shortages if the pandemic continues
for a prolonged period and if one or more suppliers is unable to continue to provide us with supplies. For the foreseeable future,
however, we do not anticipate supply chain shortages of critical supplies.
We
have developed and will continue to update our contingency plans in order to mitigate pandemic-related, adverse financial impacts
upon our business.
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 the Company and its wholly-owned subsidiaries (Interpace
Diagnostics Lab Inc., Interpace Diagnostics Corporation, Interpace Pharma Solutions, 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, 2019, as filed with
the Securities & Exchange Commission (“SEC”) on April 22, 2020 and amended on May 29, 2020 and January 19,
2021 (the “Form 10-K”).
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, InServe Support Solutions; and TVG, Inc.
and its Commercial Services business unit which was sold on December 22, 2015. All significant intercompany balances and
transactions have been eliminated in consolidation. Operating results for the nine-month period ended September 30, 2020 are
not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020. All information
related to common stock, stock options, restricted stock units, warrants and earnings per share have been retroactively
adjusted to give effect to the reverse stock split (1 for 10) that occurred in January 2020.
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. Accordingly, the accompanying consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or amounts of liabilities that might
result from the outcome of this uncertainty.
As
of September 30, 2020, the Company had cash and cash equivalents of $5.3 million, net accounts receivable of $8.5 million,
total current assets of $17.6 million and total current liabilities of $15.6 million. For the nine month period
ended September 30, 2020, the Company had a net loss of $18.3 million and cash used in operating activities was $12.4 million.
As of January 15, 2021 we had approximately $6.1 million of cash on hand, net of restricted cash. During
the second and third quarters of fiscal 2020 the Company experienced slower collections due to the pandemic and in September 2020,
we repaid approximately $3.4 million to Silicon Valley Bank (“SVB”) under our former secured revolving line
of credit facility (the “Revolver”), which was part of our Loan and Security Agreement with SVB dated November
13, 2018, as amended March 18, 2019 (as so amended, the “SVB Loan Agreement”). On January 5, 2021, the Company terminated
the SVB Loan Agreement. See Note 14, Revolver and Note 19, Subsequent Events.
The
Revolver had a limit of up to $4.0 million, available for working capital purposes, and an original maturity date of November
13, 2021. Prior to the termination, the borrowing limit of the Revolver was (a) the lower of: (i) $4.0 million and (ii) 80% of
the Company’s eligible accounts receivable (as adjusted by SVB), reduced by (b) (i) any outstanding advances under the Revolver,
of which there are none as of September 30, 2020; (ii) the Landlord Letter of Credit, in the maximum amount of $1 million; and
(iii) any outstanding term loans, of which there was none due to repayment in 2019.
As
of July 31, 2020, the Company was in violation of a financial covenant under the SVB Loan Agreement. Additionally, due to the
untimely filing of our second quarter Form 10-Q with the SEC, the Company was in default under the SVB Loan Agreement. During
September 2020, the Company paid down the outstanding Revolver balance of $3.4 million in full and transferred $0.35 million into
a restricted cash money market account with SVB to serve as collateral for the Company’s letters of credit supporting its
leased facilities. Prior to September 2020, the collateral for the letters of credit was accounted for as a reduction in the availability
under the Revolver. As of September 30, 2020 there was no balance outstanding on the Revolver. SVB agreed to forebear from exercising
its rights and remedies with respect to the default on October 19, 2020.
During
October 2020, the Company further amended the SVB Loan Agreement (the “Second Amendment”), adding the Company’s
subsidiary, Interpace Pharma Solutions, Inc. (“IPS”) as a borrower thereunder and granting SVB a continuing lien upon
and security interest in all of the assets of IPS (See Note 19, Subsequent Events).
Under
the terms of the SVB Loan Agreement, the Company had covenants to maintain at all times an Adjusted Quick Ratio of at least 1.15
to 1.0. SVB waived the Company’s failure to comply with such requirement for the months ended July 31, 2020 and August 31,
2020 and agreed to forebear financial covenant testing while the Revolver was not drawn. With respect to any principal amount
that was outstanding under the Revolver, the Second Amendment increased the floating per annum rate of interest to the greater
of (A) one percent (1.0%) above the Prime Rate (as defined in the SVB Loan Agreement) and (B) four and one-quarter of one percent
(4.25%). Prior to the Second Amendment, such interest accrued at a rate equal to one-half of one percent (0.50%) above the Prime
Rate.
The
Company had been in compliance with the terms of the SVB Loan Agreement through the date of termination of
the SVB Loan Agreement.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
In
September 2019, we entered into the Equity Distribution Agreement (the “Equity Distribution Agreement”) with Oppenheimer
& Co. Inc., as sales agent (the “Agent”), pursuant to which we may, from time to time, issue and sell shares of
our common stock with an aggregate offering price of up to $3.7 million through the Agent (the “ATM arrangement”).
During the nine months ended September 30, 2020, approximately 178,000 shares of common stock were sold for net proceeds of approximately
$0.7 million. As a result of the preferred shares transaction mentioned below, additional shares may no longer be sold under the
ATM arrangement without a majority approval by the holders of the preferred shares. In addition, if our common stock is delisted
by The Nasdaq Stock Market LLC (“Nasdaq”) due to our failure to meet minimum stockholders’ equity requirements,
we may no longer be eligible to sell under the Equity Distribution Agreement.
In
January 2020, we sold 20,000 Series B preferred shares to investors, led by 1315 Capital II, L.P. (“1315 Capital”),
for net proceeds of approximately $19.2 million. See Note 16, Equity, for more detail.
See
Note 1, Overview, regarding the potential adverse impact of the COVID-19 pandemic on our results of operations, cash flows
and financial condition for the third quarter of fiscal 2020 and possibly beyond.
During
April 2020, the Company applied for various federal stimulus grants and advances made available under Title 1 of the Coronavirus
Aid, Relief, and Economic Security (CARES) Act (the “CARES Act”). As of September 30, 2020, we received $2.1 million
in advances under the Centers for Medicare & Medicaid Services (“CMS”) accelerated and advance payment program,
as well as a $0.65 million grant from the Department of Health and Human Services (“HHS”). The CMS advance will be
offset against future Medicare billings of the Company, and we applied the HHS grant in its entirety towards qualified second
quarter expenses. These expenses related to lab equipment and supplies purchased to prevent, prepare for, and respond to coronavirus,
including development of coronavirus and serology tests, as well as expenses that would have been covered by revenue lost to coronavirus
during the second quarter. CMS will begin to utilize the $2.1 million advanced payment against cash payments beginning in the
second quarter of 2021.
During
April and early May 2020, the Company made payments totaling $888,000 to Cancer Genetics Inc. (“CGI”) for funds withheld
from the Excess Consideration Note to satisfy certain adjustments and indemnification obligations under the Secured Creditor Asset
Purchase Agreement dated July 15, 2019 in connection with the acquisition of the biopharma business of CGI.
On
January 7, 2021, the Company entered into a $3 million loan through a secured promissory note with Ampersand 2018 Limited Partnership
(“Ampersand”) and a $2 million loan through a secured promissory note with 1315 Capital, its Series B shareholders.
Both loans are secured by substantially all of the Company’s assets. See Note 19, Subsequent Events.
The
Company’s cash and cash equivalents balance is decreasing and we will not generate positive cash flows from operations
for the year ending December 31, 2020. We intend to meet our ongoing capital needs by using our available cash, including the
loans from Ampersand and 1315 Capital, as well as revenue growth and margin improvement; collection of accounts receivable;
containment of costs; and the potential use of other financing options.
The
Company has and may continue to delay, scale-back, or eliminate certain of its activities and other aspects of its operations
until such time as the Company is successful in securing additional funding. The Company is exploring various dilutive and non-dilutive
sources of funding, including equity and debt financings, strategic alliances,
business development and other sources. In the event the Company’s Common Stock is delisted from Nasdaq due to its failure
to meet minimum stockholders’ equity requirements, the Company’s ability to raise additional capital may be materially
adversely impacted. In addition, the Company’s inability to use Form S-3 after it files its Form 10-K for the fiscal year
ended December 31, 2020 may have an adverse impact on our ability to raise additional capital. The future success of the Company
is dependent upon its ability to obtain additional funding. There can be no assurance, however, that the Company will be successful
in obtaining such funding in sufficient amounts, on terms acceptable to the Company, or at all. As of the date of this Report,
the Company currently anticipates that current cash and cash equivalents will be sufficient to meet its anticipated cash requirements
through the end of the second quarter. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
4.
|
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 accounting for valuation allowances related to deferred
income taxes, contingent consideration, allowances for doubtful accounts, revenue recognition, unrecognized tax benefits, and
asset impairments involving other intangible assets. The Company periodically reviews these matters and reflects changes in estimates
in earnings as appropriate. Actual results could materially differ from those estimates.
Revenue
Recognition
Our
clinical services derive its revenues from the performance of its proprietary assays or tests. The Company’s performance
obligation is fulfilled upon the completion, review and release of test results to the customer. The Company subsequently bills
third-party payers or direct-bill payers for the tests performed. Under Accounting Standards Codification 606, revenue is recognized
based on the estimated transaction price or NRV, which is determined based on historical collection rates by each payer category
for each proprietary test offered by the Company. To the extent the transaction price includes variable consideration, for all
third party and direct-bill payers and proprietary tests, the Company estimates the amount of variable consideration that should
be included in the transaction price using the expected value method based on historical experience.
For
our clinical services, we regularly review the ultimate amounts received from the third-party and direct-bill payers and related
estimated reimbursement rates and adjust the NRV’s and related contractual allowances accordingly. If actual collections
and related NRV’s vary significantly from our estimates, we will adjust the estimates of contractual allowances, which affects
net revenue in the period such variances become known.
For
our pharma services, project level activities, including study setup and project management, are satisfied over the life of the
contract while performance-related obligations are satisfied at a point in time as the Company processes samples delivered by
the customer. Revenues are recognized at a point in time when the test results or other deliverables are reported to the customer.
Deferred
Revenue
For
our pharma services, project level fee revenue is recognized as deferred revenue and recorded at fair value. It represents payments
received in advance of services rendered and is recognized ratably over the life of the contract.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Financing
and Payment
For
non-Medicare claims, our payment terms vary by payer category. Payment terms for direct-payers in our clinical services are typically
thirty days and in our pharma services, up to sixty days. Commercial third-party-payers are required to respond to a claim within
a time period established by their respective state regulations, generally between thirty to sixty days. However, payment for
commercial third-party claims may be subject to a denial and appeal process, which could take up to two years in some instances
where multiple appeals are submitted. The Company generally appeals all denials from commercial third-party payers.
Costs
to Obtain or Fulfill a Customer Contract
Sales
commissions are expensed in the period in which they have been earned. These costs are recorded in sales and marketing expense
in the condensed consolidated statements of operations.
Accounts
Receivable
The
Company’s accounts receivables represent unconditional rights to consideration and are generated using its clinical services
and pharma services. The Company’s clinical 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 payer or direct-bill payer. Contractual
adjustments represent the difference between the list prices and the reimbursement rates set by third-party payers, including
Medicare, commercial payers, and amounts billed to direct-bill payers. Specific accounts may be written off after several appeals,
which in some cases may take longer than twelve months. Pharma services represent, primarily, the performance of laboratory tests
in support of clinical trials for pharma services customers. The Company bills these services directly to the customer.
Leases
The
Company determines if an arrangement contains a lease in whole or in part at the inception of the contract. Right-of-use (“ROU”)
assets represent the Company’s right to use an underlying asset for the lease term while lease liabilities represent our
obligation to make lease payments arising from the lease. All leases with terms greater than twelve months result in the recognition
of a ROU asset and a liability at the lease commencement date based on the present value of the lease payments over the lease
term. Unless a lease provides all of the information required to determine the implicit interest rate, we use our incremental
borrowing rate based on the information available at the commencement date in determining the present value of the lease payments.
We use the implicit interest rate in the lease when readily determinable.
Our
lease terms include all non-cancelable periods and may include options to extend (or to not terminate) the lease when it is reasonably
certain that we will exercise that option. Leases with terms of twelve months or less at the commencement date are expensed on
a straight-line basis over the lease term and do not result in the recognition of an asset or liability. See Note 7, Leases.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Other
Current Assets
Other
current assets consisted of the following as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Lab supply inventory
|
|
|
2,423
|
|
|
|
1,825
|
|
Prepaid expenses
|
|
|
489
|
|
|
|
971
|
|
Funds in escrow
|
|
|
-
|
|
|
|
888
|
|
Letter of credit
|
|
|
350
|
|
|
|
-
|
|
Due from CGI
|
|
|
525
|
|
|
|
92
|
|
Other
|
|
|
74
|
|
|
|
75
|
|
Total other current assets
|
|
$
|
3,861
|
|
|
$
|
3,851
|
|
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 ten years in
acquisition-related amortization expense in the condensed consolidated statements of operations.
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.
Basic
and Diluted Net Loss per Share
A
reconciliation of the number of shares of common stock, par value $0.01 per share, used in the calculation of basic and diluted
loss per share for the three- and nine-month periods ended September 30, 2020 and 2019 is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Basic weighted average number of common shares
|
|
|
4,038
|
|
|
|
3,820
|
|
|
|
4,025
|
|
|
|
3,717
|
|
Potential dilutive effect of stock-based awards
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average number of common shares
|
|
|
4,038
|
|
|
|
3,820
|
|
|
|
4,025
|
|
|
|
3,717
|
|
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
The
Company’s Series B Preferred Stock, on an as converted basis of 7,833,334 shares for the three- and nine-months ended September
30, 2020, and the following outstanding stock-based awards and warrants, were excluded from the computation of the effect of dilutive
securities on loss per share for the following periods as they would have been anti-dilutive (rounded to thousands):
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
Options
|
|
|
878
|
|
|
|
394
|
|
|
|
878
|
|
|
|
394
|
|
Stock-settled stock appreciation rights (SARs)
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
2
|
|
Restricted stock units (RSUs)
|
|
|
28
|
|
|
|
54
|
|
|
|
28
|
|
|
|
54
|
|
Warrants
|
|
|
1,405
|
|
|
|
1,420
|
|
|
|
1,405
|
|
|
|
1,420
|
|
|
|
|
2,311
|
|
|
|
1,870
|
|
|
|
2,311
|
|
|
|
1,870
|
|
5.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
Goodwill
is attributable to the acquisition of our pharma services in July 2019. The carrying value of the intangible assets acquired was
$15.6 million, with goodwill of approximately $8.3 million and identifiable intangible assets of approximately $7.3 million. The
goodwill balance at September 30, 2020 was $8.4 million. The net carrying value of the identifiable intangible assets from all
acquisitions as of September 30, 2020 and December 31, 2019 are as follows:
|
|
|
|
|
As
of September
30,
2020
|
|
|
As
of December
31,
2019
|
|
|
|
Life
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
(Years)
|
|
|
Amount
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Thyroid
|
|
|
9
|
|
|
$
|
8,519
|
|
|
$
|
8,519
|
|
RedPath acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pancreas test
|
|
|
7
|
|
|
|
16,141
|
|
|
|
16,141
|
|
Barrett’s test
|
|
|
9
|
|
|
|
6,719
|
|
|
|
6,719
|
|
BioPharma acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
10
|
|
|
|
1,600
|
|
|
|
1,600
|
|
Customer relationships
|
|
|
8
|
|
|
|
5,700
|
|
|
|
5,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLIA Lab
|
|
|
2.3
|
|
|
$
|
609
|
|
|
$
|
609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
$
|
39,288
|
|
|
$
|
39,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Amortization
|
|
|
|
|
|
$
|
(26,784
|
)
|
|
$
|
(23,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Carrying Value
|
|
|
|
|
|
$
|
12,504
|
|
|
$
|
15,849
|
|
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Amortization
expense was approximately $1.1 million for both the three-month periods ended September 30, 2020 and 2019, respectively,
and approximately $3.3 million and $2.9 million for the nine-month periods ended September 30, 2020 and 2019, respectively.
Estimated amortization expense for the next five years is as follows:
2020
|
|
|
2021
|
|
|
2022
|
|
|
2023
|
|
|
2024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,871
|
|
|
$
|
4,078
|
|
|
$
|
2,156
|
|
|
$
|
1,745
|
|
|
$
|
873
|
|
The
following table displays a roll forward of the carrying amount of goodwill from December 31, 2019 to September 30, 2020:
|
|
Carrying
|
|
|
|
Amount
|
|
Balance as of December 31, 2019
|
|
$
|
8,433
|
|
Adjustments
|
|
|
-
|
|
Balance as of September 30, 2020
|
|
$
|
8,433
|
|
6.
|
FAIR
VALUE MEASUREMENTS
|
Cash
and cash equivalents, accounts receivable and accounts payable approximate fair value due to their relative short-term nature.
The Company’s financial liabilities reflected at fair value in the condensed consolidated financial statements include contingent
consideration and warrant liability. 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.
|
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
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 September 30, 2020
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
As of September 30, 2020
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen (1)
|
|
$
|
2,806
|
|
|
$
|
2,806
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,806
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability (2)
|
|
|
20
|
|
|
|
20
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20
|
|
|
|
$
|
2,826
|
|
|
$
|
2,826
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,826
|
|
|
|
As of December 31, 2019
|
|
|
Fair Value Measurements
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
As of December 31, 2019
|
|
|
|
Amount
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asuragen (1)
|
|
$
|
2,893
|
|
|
$
|
2,893
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,893
|
|
Other long-term liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability (2)
|
|
|
82
|
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
82
|
|
|
|
$
|
2,975
|
|
|
$
|
2,975
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,975
|
|
(1)(2)
See Note 9, Accrued Expenses and Long-Term Liabilities
In
connection with the acquisition of certain assets from Asuragen, Inc., 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.
A
roll forward of the carrying value of the Contingent Consideration Liability and the 2017 Underwriters’ Warrants to September
30, 2020 is as follows:
Certain
of the Company’s non-financial assets, such as other intangible assets and goodwill, are measured at fair value on a nonrecurring
basis when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.
|
|
|
|
|
|
|
|
|
|
|
Cancellation of Obligation/
|
|
|
Adjustment to Fair Value/
|
|
|
|
|
|
|
December 31, 2019
|
|
|
Payments
|
|
|
Accretion
|
|
|
Conversions Exercises
|
|
|
Mark to Market
|
|
|
September 30, 2020
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Asuragen
|
|
$
|
2,893
|
|
|
$
|
(501
|
)
|
|
$
|
414
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
2,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriters Warrants
|
|
|
82
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(62
|
)
|
|
|
20
|
|
|
|
$
|
2,975
|
|
|
$
|
(501
|
)
|
|
$
|
414
|
|
|
$
|
-
|
|
|
$
|
(62
|
)
|
|
$
|
2,826
|
|
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Finance
lease assets are included in fixed assets, net of accumulated depreciation.
The
table below presents the lease-related assets and liabilities recorded in the Condensed Consolidated Balance Sheet:
|
|
Classification on the Balance Sheet
|
|
September 30, 2020
|
|
|
|
|
|
(unaudited)
|
|
Assets
|
|
|
|
|
|
Financing lease assets
|
|
Property and equipment, net
|
|
$
|
470
|
|
Operating lease assets
|
|
Operating lease right of use assets
|
|
|
4,758
|
|
Total lease assets
|
|
|
|
$
|
5,228
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Financing lease liabilities
|
|
Other accrued expenses
|
|
$
|
134
|
|
Operating lease liabilities
|
|
Other accrued expenses
|
|
|
1,110
|
|
Total current lease liabilities
|
|
|
|
$
|
1,244
|
|
Noncurrent
|
|
|
|
|
|
|
Financing lease liabilities
|
|
Other long-term liabilities
|
|
|
33
|
|
Operating lease liabilities
|
|
Operating lease liabilities, net of current portion
|
|
|
3,746
|
|
Total long-term lease liabilities
|
|
|
|
|
3,779
|
|
Total lease liabilities
|
|
|
|
$
|
5,023
|
|
The
weighted average remaining lease term for the Company’s operating leases was 7.1 years as of September 30, 2020 and the
weighted average discount rate for those leases was 6.0%. The Company’s operating lease expenses are recorded within “Cost
of revenue” and “General and administrative expenses.” With respect to the Rutherford lease, in March 2020 the
Company delivered a notice of early termination which would terminate the lease in March 2021. As a result of entering
into an early termination of the Rutherford lease the Company’s operating lease assets and liabilities decreased by approximately
$0.5 million.
In
June 2020, the Company entered into an amendment of its North Carolina lease extending it for an additional ten years, commencing
on June 1, 2020 and continuing until May 31, 2030. The minimum rent per rentable square foot pursuant to the amendment is $14.10
from June 1, 2020 to May 31, 2021, with annual increases of 3%. Pursuant to the amendment, the Company has two options to extend
the term for a period of five years each. Also pursuant to the amendment, the Company has the irrevocable right to terminate the
lease on November 30, 2025, as well as on November 30, 2027. As a result of entering into an amendment of the North Carolina
lease the Company’s operating lease assets and liabilities increased by approximately $2.8 million.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
The
table below reconciles the cash flows to the lease liabilities recorded on the Company’s Condensed Consolidated Balance
Sheet as of September 30, 2020:
|
|
Operating Leases
|
|
|
Financing Leases
|
|
2020
|
|
|
365
|
|
|
|
49
|
|
2021
|
|
|
1,235
|
|
|
|
120
|
|
2022
|
|
|
1,028
|
|
|
|
13
|
|
2023
|
|
|
629
|
|
|
|
-
|
|
2024-2030
|
|
|
2,717
|
|
|
|
|
|
Total minimum lease payments
|
|
|
5,974
|
|
|
|
182
|
|
Less: amount of lease payments representing effects of discounting
|
|
|
1,118
|
|
|
|
13
|
|
Present value of future minimum lease payments
|
|
|
4,856
|
|
|
|
169
|
|
Less: current obligations under leases
|
|
|
1,110
|
|
|
|
134
|
|
Long-term lease obligations
|
|
$
|
3,746
|
|
|
$
|
35
|
|
As
of September 30, 2020, contractual obligations with terms exceeding one year and estimated minimum future rental payments required
by non-cancelable operating leases with initial or remaining lease terms exceeding one year were as follows:
|
|
|
|
|
Less than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Operating lease obligations
|
|
$
|
5,974
|
|
|
$
|
365
|
|
|
$
|
2,263
|
|
|
$
|
1,020
|
|
|
$
|
2,326
|
|
Total
|
|
$
|
5,974
|
|
|
$
|
365
|
|
|
$
|
2,263
|
|
|
$
|
1,020
|
|
|
$
|
2,326
|
|
8.
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
From
time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of
business. When the Company is aware of a claim or potential claim, it assesses the likelihood of any loss or exposure. If it is
probable that a loss will result and the amount of the loss can be reasonably estimated, the Company will record a liability for
the loss. In addition to the estimated loss, the recorded liability includes probable and estimable legal costs associated with
the claim or potential claim. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters
may arise from time to time that may harm the Company’s business. There is no pending litigation involving the Company at
this time.
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 that 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. There is also the risk of employment related litigation and other litigation in the ordinary course of business.
The
Company could 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
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
9.
|
ACCRUED
EXPENSES AND LONG-TERM LIABILITIES
|
Other
accrued expenses consisted of the following as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Accrued royalties
|
|
$
|
2,487
|
|
|
$
|
1,934
|
|
Contingent consideration
|
|
|
676
|
|
|
|
502
|
|
Upfront Medicare payment
|
|
|
2,066
|
|
|
|
-
|
|
Operating lease liability
|
|
|
1,110
|
|
|
|
1,321
|
|
Financing lease liability
|
|
|
134
|
|
|
|
184
|
|
Deferred revenue
|
|
|
69
|
|
|
|
457
|
|
Payable to CGI
|
|
|
-
|
|
|
|
888
|
|
Accrued sales and marketing - diagnostics
|
|
|
111
|
|
|
|
197
|
|
Accrued lab costs - diagnostics
|
|
|
150
|
|
|
|
163
|
|
Accrued professional fees
|
|
|
1,090
|
|
|
|
1,399
|
|
Taxes payable
|
|
|
301
|
|
|
|
403
|
|
Unclaimed property
|
|
|
565
|
|
|
|
565
|
|
All others
|
|
|
1,372
|
|
|
|
1,463
|
|
Total other accrued expenses
|
|
$
|
10,131
|
|
|
$
|
9,476
|
|
Long-term
liabilities consisted of the following as of September 30, 2020 and December 31, 2019:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
Warrant liability
|
|
$
|
20
|
|
|
$
|
82
|
|
Uncertain tax positions
|
|
|
4,293
|
|
|
|
4,081
|
|
Deferred revenue
|
|
|
140
|
|
|
|
269
|
|
Other
|
|
|
33
|
|
|
|
141
|
|
Total other long-term liabilities
|
|
$
|
4,486
|
|
|
$
|
4,573
|
|
10.
|
STOCK-BASED
COMPENSATION
|
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 vest over a one to three-year period for employees and members of the Board.
Upon exercise, new shares will be issued by the Company. The restricted shares and restricted stock units (“RSUs”)
granted to Board members and employees generally have a three-year graded vesting period and are subject to accelerated vesting
and forfeiture under certain circumstances. In the second quarter of 2020, the Company issued performance-based options, which
requires the Company to assess the likelihood of achieving certain performance milestones on a quarterly basis; approximately
$0.3 million in stock compensation expense is expected to be incurred over the amortization period for these options.
The
following table provides the weighted average assumptions used in determining the fair value of the stock option awards granted
during the nine month periods ended September 30, 2020 and 2019.
|
|
September 30, 2020
|
|
|
September 30, 2019
|
|
|
|
(unaudited)
|
|
Risk-free interest rate
|
|
|
0.79
|
%
|
|
|
2.51
|
%
|
Expected term
|
|
|
6.59 years
|
|
|
|
6.0 years
|
|
Expected volatility
|
|
|
122.24
|
%
|
|
|
127.81
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
-
|
|
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
The
Company recognized approximately $0.6 million and $0.3 million of stock-based compensation expense during the three-month
periods ended September 30, 2020 and 2019, respectively, and approximately $1.4 million and $1.2 million for the nine-month periods
ended September 30, 2020 and 2019, 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 loss from continuing operations
and the effective tax rate for the three- and nine-month periods ended September 30, 2020 and 2019:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income tax
|
|
$
|
14
|
|
|
$
|
9
|
|
|
$
|
43
|
|
|
$
|
19
|
|
Effective income tax rate
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Income
tax expense for both the three- and nine-month periods ended September 30, 2020 and 2019 was primarily due to minimum state and
local taxes.
The
CARES Act was enacted in March 2020. The CARES Act includes several U.S. income tax provisions related to, among other things,
net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest deduction limitations, and technical
amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017.
The CARES Act is not expected to have a material impact on the Company’s financial results.
We
operate under one segment which is the business of developing and selling clinical and pharma services.
13.
|
DISCONTINUED
OPERATIONS
|
The
components of liabilities classified as discontinued operations consist of the following as of September 30, 2020 and December
31, 2019:
|
|
September 30, 2020
|
|
|
December 31, 2019
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
766
|
|
|
|
766
|
|
Current liabilities from discontinued operations
|
|
|
766
|
|
|
|
766
|
|
Total liabilities
|
|
$
|
766
|
|
|
$
|
766
|
|
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
The
table below presents the significant components of CSO, Group DCA’s, Pharmakon’s and TVG’s results included within loss
from discontinued operations, net of tax in the condensed consolidated statements of operations for the three- and nine-months
ended September 30, 2020 and 2019.
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Income from discontinued operations, before tax
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
122
|
|
Income tax expense
|
|
|
65
|
|
|
|
58
|
|
|
|
194
|
|
|
|
173
|
|
Loss from discontinued operations, net of tax
|
|
$
|
(65
|
)
|
|
$
|
(58
|
)
|
|
$
|
(194
|
)
|
|
$
|
(51
|
)
|
On
November 13, 2018, the Company, Interpace Diagnostics Corporation, and Interpace Diagnostics, LLC entered into the SVB Loan Agreement,
which provided for up to $4.0 million of debt financing consisting of a term loan of up to $850,000 and the Revolver based
on its outstanding accounts receivable of up to $3.75 million. The ability to use the term loan portion of the SVB Loan Agreement
expired in 2019 and the Company terminated the SVB Loan Agreement on January 5, 2021. See Note 19, Subsequent Events.
As
a result of the Second Amendment, the borrowing limit of the Revolver prior to termination on January 5, 2021 was (a) the
lower of: (i) $4.0 million and (ii) 80% of the Company’s eligible accounts receivable (as adjusted by SVB), reduced by (b)
(i) any outstanding advances under the Revolver, of which there were none as of September 30, 2020 and through the date of termination;
(ii) the Landlord Letter of Credit, in the maximum amount of $1 million; and (iii) any outstanding term loans, of which there
were none due to repayment in 2019. The Revolver had
an original maturity date three years from the effective date, or November 13, 2021.
As
of July 31, 2020, the Company was in violation of a financial covenant under its SVB Loan Agreement. Additionally, due to the
untimely filing of our second quarter Form 10-Q with the SEC, the Company was in default under the SVB Loan Agreement. During
September 2020, the Company paid down the outstanding Revolver balance of $3.4 million in full and transferred $0.35 million into
a restricted cash money market account with SVB to serve as collateral for the Company’s letters of credit supporting its
leased facilities. Prior to September 2020, the collateral for the letters of credit was accounted for as a reduction in the availability
under the Revolver. As of September 30, 2020 there was no balance outstanding on the Revolver. SVB agreed to forebear from exercising
its rights and remedies with respect to the default on October 19, 2020.
During
October 2020, the Company entered into the Second Amendment with SVB, adding the Company’s subsidiary, IPS as a borrower
thereunder and granting SVB a continuing lien upon and security interest in all of the assets of IPS (See Note 19, Subsequent
Events).
Under the terms of the SVB
Loan Agreement, the Company was required to maintain at all times an Adjusted Quick Ratio of at least 1.15 to 1.0. SVB waived
the Company’s failure to comply with such requirement for the months ended July 31, 2020 and August 31, 2020 and agreed
to forebear financial covenant testing while the Revolver was not drawn. With respect to any principal amount that was outstanding
under the Revolver, the Second Amendment increased the floating per annum rate of interest to the greater of (A) one percent (1.0%)
above the Prime Rate (as defined in the SVB Loan Agreement) and (B) four and one-quarter of one percent (4.25%). Prior to the
Second Amendment, such interest accrued at a rate equal to one-half of one percent (0.50%) above the Prime Rate.
The
Company had been in compliance with the terms of the SVB Loan Agreement through the date of termination of
the SVB Loan Agreement.
15.
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
The
following table represents cash flows used in the Company’s discontinued operations for the nine months ended September
30, 2020 and 2019:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
Net
cash used in operating activities of discontinued operations
|
|
$
|
-
|
|
|
$
|
(30
|
)
|
INTERPACE BIOSCIENCES,
INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Supplemental
Disclosures of Non Cash Activities
(in
thousands)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(unaudited)
|
|
Operating
|
|
|
|
|
|
|
Adoption of ASC 842 - right
of use asset
|
|
$
|
-
|
|
|
$
|
2,449
|
|
Adoption of ASC 842 - operating lease
liability
|
|
$
|
-
|
|
|
$
|
2,536
|
|
Prepaid stock grants issued to vendors
|
|
$
|
-
|
|
|
$
|
72
|
|
Taxes accrued for repurchase of restricted
shares
|
|
$
|
49
|
|
|
$
|
-
|
|
Investing
|
|
|
|
|
|
|
|
|
Preferred Stock Deemed Dividend
|
|
$
|
3,033
|
|
|
$
|
-
|
|
Excess consideration note
|
|
$
|
-
|
|
|
$
|
6,822
|
|
Preferred
Stock Issuance: Securities Purchase and Exchange Agreement
On
January 10, 2020, the Company entered into a Securities Purchase and Exchange Agreement (the “Securities Purchase and Exchange
Agreement”) with 1315 Capital and Ampersand 2018 Limited Partnership (“Ampersand” and, together with 1315 Capital,
the “Investors”) pursuant to which the Company agreed to sell to the Investors an aggregate of $20.0 million in Series
B Preferred Stock of the Company, at an issuance price per share of $1,000. Pursuant to the Securities Purchase and Exchange Agreement,
1315 Capital agreed to purchase 19,000 shares of Series B Preferred Stock at an aggregate purchase price of $19.0 million and
Ampersand agreed to purchase 1,000 shares of Series B Preferred Stock at an aggregate purchase price of $1.0 million.
In
addition, the Company agreed to exchange $27.0 million of the Company’s existing Series A convertible preferred stock, par
value $0.01 per share, held by Ampersand (the “Series A Preferred Stock”), represented by 270 shares of Series A Preferred
Stock with a stated value of $100,000 per share, which represents all of the Company’s issued and outstanding Series A Preferred
Stock, for 27,000 newly issued shares of Series B Preferred Stock (such shares of Series B Preferred Stock, the “Exchange
Shares” and such transaction, the “Exchange”). Following the Exchange, no shares of Series A Preferred Stock
remained designated, authorized, issued or outstanding. The Series B Preferred Stock has a conversion price of $6.00 as compared
to a conversion price of $8.00 on the Series A Preferred Stock, but did not include certain rights applicable to the Series A
Preferred Stock, including a six-percent (6%) dividend and a conversion price adjustment for any failure by the Company to achieve
a revenue target of $34.0 million in 2020 related to its clinical services or a weighted-average anti-dilution adjustment. Under
the terms of the Securities Purchase and Exchange Agreement, Ampersand also agreed to waive all dividends and weighted-average
anti-dilution adjustments accrued to date on the Series A Preferred Stock.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
A
convertible financial instrument includes a beneficial conversion feature if its conversion price is lower than the Company’s
stock price at the commitment date. The Company determined that the sale of the Series B Preferred resulted in a beneficial conversion
feature with an intrinsic value of $2.2 million, which the Company recorded as a reduction to additional paid-in capital upon
the sale of the Series B Preferred stock. The Company calculated the intrinsic value of the beneficial conversion feature as the
difference between the estimated fair value of the Common Stock on January 15, 2020 of $6.79 per share and the effective conversion
price per share of $6.00 multiplied by the number of shares of common stock issuable upon conversion. The Company fully amortized
the beneficial conversion feature during the three months ended March 31, 2020 in accordance with GAAP. The beneficial conversion
feature resulted in an increase in the loss attributable to common shareholders for the three months ended March 31, 2020 in the
Condensed Consolidated Statement of Operations, as it represented a deemed dividend to the preferred shareholders.
In
April 2020, the Company entered into support agreements with each of the Series B Investors, pursuant to which Ampersand and 1315
Capital, respectively, consented to, and agreed to vote (by proxy or otherwise), all shares of Series B Preferred Stock registered
in its name or beneficially owned by it and/or over which it exercises voting control as of the date of the Support Agreement
and any other shares of Series B Preferred Stock legally or beneficially held or acquired by such Series B Investor after the
date of the Support Agreement or over which it exercises voting control, in favor of any Fundamental Action desired to be taken
by the Company as determined by the Board. For purposes of each Support Agreement, “Fundamental Action” means any
action proposed to be taken by the Company and set forth in Section 4(d)(i), 4(d)(ii), 4(d)(v), 4(d)(vi), 4(d)(viii) or 4(d)(ix)
of the Certificate of Designation of Series B Preferred Stock or Section 8.5.1.1, 8.5.1.2, 8.5.1.5, 8.5.1.6, 8.5.1.8 or 8.5.1.9
of the Amended and Restated Investor Rights Agreement. The support agreement between the Company and Ampersand was terminated
by mutual agreement on July 9, 2020; however, the support agreement entered into with 1315 Capital remains in effect.
ATM
arrangement
On
September 20, 2019, the Company entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc., as Agent, pursuant
to which the Company may, from time to time, issue and sell shares of its Common Stock, at an aggregate offering price of up to
$4.8 million (the “Shares”) through the Agent. Under the terms of the Equity Distribution Agreement, the Agent may
sell the Shares at market prices by any method that is deemed to be an “at the market offering” as defined in Rule
415 under the Securities Act of 1933, as amended (the “Securities Act”).
Subject
to the terms and conditions of the Equity Distribution Agreement, the Agent will use its commercially reasonable efforts to sell
the Shares from time to time, based upon the Company’s instructions. The Company has no obligation to sell any of the Shares
and may, at any time, suspend sales under the Equity Distribution Agreement or terminate the Equity Distribution Agreement in
accordance with its terms. The Company has provided the Agent with customary indemnification rights, and the Agent will be entitled
to a fixed commission of 3.0% of the aggregate gross proceeds from the Shares sold. The Equity Distribution Agreement contains
customary representations and warranties and the Company is required to deliver customary closing documents and certificates in
connection with sales of the Shares. As of September 30, 2020, approximately 178,000 shares have been sold for net proceeds to
the Company of approximately $0.7 million.
As
a result of the January 10, 2020 Securities Purchase and Exchange Agreement, additional Shares may no longer be sold under the
ATM arrangement without a majority approval by the holders of the Series B Preferred Stock in accordance with the Amended and
Restated Investor Rights Agreement entered into on that date. In addition, if our common stock is delisted by Nasdaq due to our
failure to meet minimum stockholders’ equity requirements, we may no longer be eligible to sell under the Equity Distribution
Agreement as well. See Note 19, Subsequent Events. Further,
upon the filing of our Form 10-K for the year ended December 31, 2020, we will no longer remain eligible to use Form S-3 and therefore
we will lose our ability to sell Shares under the Equity Distribution Agreement.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Warrants
outstanding and warrant activity for the three- and nine-months ended September 30, 2020 are as follows:
Description
|
|
Classification
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
Warrants
Issued
|
|
|
Balance
December 31, 2019
|
|
|
Warrants
Cancelled/Expired
|
|
|
Balance
September 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
Placement Warrants, issued January 25, 2017
|
|
Equity
|
|
$
|
46.90
|
|
|
June 2022
|
|
|
85,500
|
|
|
|
85,500
|
|
|
|
|
|
|
|
85,500
|
|
RedPath Warrants, issued March 22, 2017
|
|
Equity
|
|
$
|
46.90
|
|
|
September 2022
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
|
|
|
|
10,000
|
|
Underwriters Warrants, issued June 21, 2017
|
|
Liability
|
|
$
|
13.20
|
|
|
December 2022
|
|
|
57,500
|
|
|
|
53,500
|
|
|
|
|
|
|
|
53,500
|
|
Base & Overallotment
Warrants, issued June 21, 2017
|
|
Equity
|
|
$
|
12.50
|
|
|
June 2022
|
|
|
1,437,500
|
|
|
|
870,214
|
|
|
|
|
|
|
|
870,214
|
|
Vendor Warrants, issued August 6, 2017
|
|
Equity
|
|
$
|
12.50
|
|
|
August 2020
|
|
|
15,000
|
|
|
|
15,000
|
|
|
|
(15,000
|
)
|
|
|
-
|
|
Warrants issued October 12, 2017
|
|
Equity
|
|
$
|
18.00
|
|
|
April 2022
|
|
|
320,000
|
|
|
|
320,000
|
|
|
|
|
|
|
|
320,000
|
|
Underwriters Warrants,
issued January 25, 2019
|
|
Equity
|
|
$
|
9.40
|
|
|
January 2022
|
|
|
65,434
|
|
|
|
65,434
|
|
|
|
|
|
|
|
65,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,990,934
|
|
|
|
1,419,648
|
|
|
|
(15,000
|
)
|
|
|
1,404,648
|
|
18.
|
RECENT
ACCOUNTING PRONOUNCEMENTS
Recently
Adopted Accounting Guidance
In
August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud
Computing Arrangement That Is a Service Contract, which changes the accounting for implementation costs incurred in
a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation
costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop
or obtain internal-use software. The implementation costs should be presented accordingly as other assets, current and
non-current on the balance sheet and expensed over the term of the hosting arrangement. The Company adopted this pronouncement
on January 1, 2020 and the impact was not material to the Company’s Consolidated Financial Statements.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure
Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements.
Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However,
public companies are required to disclose the range and weighted average of significant unobservable inputs used to develop
Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income.
The Company adopted this pronouncement on January 1, 2020 and the impact was not material to the Company’s Consolidated
Financial Statements.
Accounting
Pronouncements Pending Adoption
|
Standards
not yet effective
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles
in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying
and amending existing guidance. The amendment is effective for annual periods beginning after December 15, 2020. We do not expect
that the requirements of ASU 2017-04 will have a material impact on our consolidated financial statements.
INTERPACE
BIOSCIENCES, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular
information in thousands, except per share amounts)
Change in Officers
On
November 23, 2020, in connection with his retirement, Jack E. Stover announced his decision to resign as President, Chief Executive
Officer, and member of the Board of Directors of the Company, effective December 1, 2020. On that same date, the Board appointed
Mr. Thomas W. Burnell as the Company’s successor President and Chief Executive Officer and nominated and elected him as
a member of the Board, in each case effective December 1, 2020.
In
connection with the appointment as President and Chief Executive Officer, the Company entered into an employment agreement with
Mr. Burnell who will serve as Chief Executive Officer of the Company for a term of three years, with automatic extension for one
year renewal periods unless either the Company or Mr. Burnell elects not to renew at least 60 days prior to the end of the then-current
term. The Company agreed to pay to him a base salary of $425,000 annually during the initial term, with potential for increase
after the first year of employment in the sole discretion of the Company’s Compensation and Management Development Committee.
He is also eligible to receive additional annual incentive compensation with an annual target of up to 50% of the base salary.
He was also awarded 100,000 RSUs which vest in equal installments over three years and 125,000 performance based RSUs which are
eligible to vest on the day following a 30 calendar day period in which, for each trading day of such period, a share of Common
Stock has a closing per share price of at least $11.34
In
connection with Mr. Stover’s resignation, the Company entered into a Separation and Consulting Agreement and General Release.
The Stover Separation and Consulting Agreement supersedes the Stover Amended and Restated Employment Agreement. Under the terms
of the Stover Separation and Consulting Agreement, the Company agrees to provide to Mr. Stover, upon fulfilment of certain conditions
such as compliance with the Restrictive Covenants (as discussed below): (i) cash payments equal to $477,405, payable in equal
installments over twelve months in accordance with the Company’s standard payroll practices; (ii) full acceleration of any
non-qualified options and RSUs that are outstanding as of December 31, 2020 and that would have time-vested prior to December
31, 2022; (iii) a lump sum payment of $286,443, payable on the Company’s first payroll period of January 2022; and (iv)
a fully vested nonqualified stock option to purchase 43,750 shares of Common Stock with a per-share exercise price of $6.00, exercisable
until the tenth anniversary of the grant date and governed by the terms of the Plan and the Company’s form of Stock Option
Grant Notice and Stock Option Agreement thereunder
Financial
Restatements
On January 19, 2021, the Company filed amended consolidated financial
statements for the years ended December 31, 2019 and the quarters ended March 31, 2020 and June 30, 2020 with the SEC. As such,
the consolidated financial statements contained in the Company’s Annual Reports on Form 10-K for the years ended December
31, 2014, 2015, 2016, 2017, 2018, and 2019, as well as the consolidated financial statements contained in the Quarterly Reports
on Form 10-Q for the each quarterly period within those fiscal years as well as the quarterly periods ended March 31, 2020 and
June 30, 2020, should no longer be relied upon. The impact of the restated financials is reflected in the consolidated financial
statements issued herein. See our Explanatory Note in the beginning of this Form 10-Q for a summary of the financial impact.
Untimely
SEC Filing and Nasdaq Notification of Compliance
The
Company was unable to timely file its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020. On August 18,
2020, the Company was notified by Nasdaq that it was in non-compliance with Listing Rule 5250(c)(1), which requires the timely
filing of periodic financial statements. On October 21, 2020, the Company received confirmation from Nasdaq that it regained compliance
with the listing rule following the filing of the 10-Q for the period ended June 30, 2020 on October 19, 2020.
On November 17, 2020, the Company
filed Form 12b-25 with the SEC, which stated that the Company was unable to file timely its Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 2020 due to the evaluation of its Barrett’s intangible asset for impairment and
possible prior period adjustments to amortization expense. The Company could not complete its analysis by the SEC filing deadline.
On November 18, 2020, the Company was notified by Nasdaq that it is in non-compliance with Listing Rule 5250(c)(1), which requires
the timely filing of periodic financial statements. The Company was provided 60 days to submit its plan to show compliance with
the filing requirement. Upon the filing of this Form 10-Q with the SEC, the Company believes it will have remedied the Nasdaq
non-compliance issue due to the untimely filing.
Nasdaq
Minimum Stockholders’ Equity Requirement
On
October 21, 2020, the Company received notice from Nasdaq indicating that the Company was not in compliance with the minimum stockholders’
equity requirement for continued listing on The Nasdaq Capital Market, under Nasdaq Listing Rule 5550(b)(1), because the Company’s
stockholders’ equity of approximately $1.7 million as reported in the 10-Q for the period ended June 30, 2020 was
below the required minimum of $2.5 million. Due to the asset impairment and additional amortization expense reflected in the
Company’s amended Form 10-K and Form 10-Q’s, the Company’s stockholders’ equity balance at September 30,
2020 was approximately ($21.8) million. The decrease in the Company’s stockholders’ equity resulting from the impairment
and additional amortization expense will make it more difficult for the Company to comply with Nasdaq minimum stockholders’
equity requirements.
The
Company was granted 45 calendar days, or through December 7, 2020, to submit to Nasdaq a plan to regain compliance with the listing
requirement. If Nasdaq accepts the Company’s plan, Nasdaq may grant an extension of up to 180 calendar days from October
21, 2020, or through Tuesday, April 20, 2021, to regain compliance. If Nasdaq does not accept the Company’s plan, the Company
will have the right to request a hearing before an independent Nasdaq Hearings Panel. A hearing request would stay any suspension
or delisting action pending the conclusion of the hearings process.
A
plan was filed with Nasdaq in December 2020. However, there can
be no assurance that Nasdaq will accept the Company’s plan or that the Company will be able to regain compliance or maintain
compliance with any other Nasdaq requirement in the future.
Second
Amendment and Termination of SVB Loan Agreement
On
October 19, 2020, the Company entered into the Second Amendment, which amended the SVB Loan Agreement.
Under
the terms of the Second Amendment, IPS joined the SVB Loan Agreement as a borrower and granted SVB a continuing lien upon and
security interest in all of the assets of IPS. Additionally, SVB waived certain existing or potential defaults under the SVB Loan
Agreement, including the Company’s failure to meet certain financial covenants (specifically, the adjusted quick ratio requirement)
for the months ended July 31, 2020 and August 31, 2020 and the Company’s reporting requirements under the SVB Loan Agreement.
SVB agreed to forebear from exercising its rights and remedies in connection with the Company’s reporting requirements until
the earlier to occur of (a) the occurrence of any event of default (as defined in the SVB Loan Agreement) other than any arising
due to the Company’s reporting requirements which were waived by SVB, or (b) December 31, 2020.
The
Second Amendment also modified the SVB Loan Agreement to, among other things, a) exclude compliance by the Company with
the adjusted quick ratio covenant requirement for the month of October 2020 as well as any month thereafter prior to the Funding
Date of the first Advance (in each case, as defined in the SVB Loan Agreement), if any, b) require delivery of certain insurance
policy endorsements which have been provided by the Company, c) increase the maximum aggregate amount utilized for the issuance
of the Letter of Credit by SVB in favor of the Company’s landlord for its Pittsburgh, Pennsylvania laboratory facility from
$250,000 to $1,000,000, and d) increase the floating annual rate of interest on any principal amount outstanding under the Revolver
to the greater of (A) one percent (1.0%) above the Prime Rate (as defined in the SVB Loan Agreement) and (B) four and one-quarter
of one percent (4.25%). Prior to the Second Amendment, such interest accrued at a rate equal to one-half of one percent (0.50%)
above the Prime Rate.
The
Second Amendment provided that any future Credit Extension (as defined in the SVB Loan Agreement) by SVB to the Company
will be made in SVB’s sole and absolute discretion. The Company agreed to reimburse SVB for all out-of-pocket reasonable
and documented legal fees and expenses incurred in connection with the Second Amendment.
On January 5, 2021, the Company
terminated the SVB Loan Agreement in accordance with the terms of the agreement. In connection with the termination, SVB waived
its right to any termination fees and released its security interest in the assets of the Company.
Secured
Promissory Notes
On January 7, 2021, the Company
entered into promissory notes with Ampersand, in the amount of $3 million, and 1315 Capital, in the amount of $2 million, respectively
(together, the “Notes”) and a related security agreement (the “Security Agreement”).
Ampersand holds 28,000 shares
of the Company’s Series B Convertible Preferred Stock, which are convertible from time to time into an aggregate of 4,666,666
shares of our Common Stock, and 1315 Capital holds 19,000 shares of the Company Series B Convertible Preferred Stock, which are
convertible from time to time into an aggregate of 3,166,668 shares of our Common Stock. On an as-converted basis, such shares
would represent approximately 39.3% and 26.7% of our fully-diluted shares of Common Stock, respectively. In addition, pursuant
to the terms of the Series B Convertible Preferred Stock certificate of designation and an amended and restated investor rights
agreement among the Company and Ampersand and 1315 Capital, they each have the right to (1) approve certain of our actions, including
our borrowing of money and (2) designate two directors to our Board of Directors. As a result, the Company considers the Notes
and Security Agreement to be a related party transaction.
The rate of interest on the Notes
is equal to eight percent (8.0%) per annum and their maturity date is the earlier of (a) June 30, 2021 and (b) the date on which
all amounts become due upon the occurrence of any event of default as defined in the Notes. No interest payments are due on the
Notes until their maturity date. All payments on the Notes are pari passu.
In connection with the Security
Agreement, the Notes are secured by a first priority lien and security interest on substantially all of the assets of the Company.
Additionally, if a change of control of the Company occurs (as defined in the Notes) the Company is required to make a prepayment
of the Notes in an amount equal to the unpaid principal amount, all accrued and unpaid interest, and all other amounts payable
under the Notes out of the net cash proceeds received by the Company from the consummation of the transactions related to such
change of control. The Company may prepay the Notes in whole or in part at any time or from time to time without penalty or premium
by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. No prepaid amount
may be re-borrowed.
The Notes contain certain negative
covenants which prevent the Company from issuing any debt securities pursuant to which the Company issues shares, warrants or
any other convertible security in the same transaction or a series of related transactions, except that Company may incur or enter
into any capitalized and operating leases in the ordinary course of business consistent with past practice, or borrowed money
or funded debt in an amount not to exceed $4.5 million (the “Debt Threshold”) that is subordinated to the Notes on
terms acceptable to Ampersand and 1315 Capital; provided, that if the aggregate consolidated revenue recognized by the Company
as reported on Form 10-K as filed with the SEC for any fiscal year ending after January 10, 2020 exceeds $45 million dollars,
the Debt Threshold for the following fiscal year shall increase to an amount equal to: (x) ten percent (10%); multiplied by (y)
the consolidated revenue as reported by the Company on Form 10-K as filed with the SEC for the previous fiscal year.
INTERPACE
BIOSCIENCES, INC