INTERPACE BIOSCIENCES, INC. - Quarter Report: 2016 June (Form 10-Q)

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Table Of Contents

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Table Of Contents

		June 30,				December 31,
		2016				2015
		(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,039			$	8,310
Short-term investments			-				106
Accounts receivable, net			2,950				2,806
Other current assets			3,023				2,569
Current assets from discontinued operations			627				5,374
Total current assets			9,639				19,165
Property and equipment, net			1,190				1,460
Other intangible assets, net			41,553				43,492
Other long-term assets			1,128				3,255
Non-current assets from discontinued operations			-				340
Total assets		$	53,510			$	67,712
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	1,259			$	1,560
Accrued salary and bonus			2,902				2,424
Other accrued expenses			6,047				5,961
Current portion of long-term debt, net of debt discount			3,755				1,164
Current liabilities from discontinued operations			5,246				12,264
Total current liabilities			19,209				23,373
Contingent consideration			18,540				17,890
Long-term debt, net of debt discount			5,055				7,233
Other long-term liabilities			4,713				6,178
Total liabilities			47,517				54,674
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding			-				-
Common stock, $.01 par value; 100,000,000 shares authorized; 18,705,214 shares issued; 18,162,671 and 17,662,671 shares outstanding, respectively			187				187
Additional paid-in capital			125,821				132,522
Accumulated deficit			(118,372	)			(111,252	)
Accumulated other comprehensive income			-				13
Treasury stock, at cost (542,543 and 1,042,543 shares, respectively)			(1,643	)			(8,432	)
Total stockholders' equity			5,993				13,038
Total liabilities and stockholders' equity		$	53,510			$	67,712

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		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2016				2015				2016				2015
Revenue, net		$	3,612			$	2,253			$	6,647			$	4,370
Cost of revenue (excluding amortization of $970 and $986 for the three months and $1,939 and $1,839 for the six months, respectively)			1,842				1,851				3,020				3,425
Gross profit			1,770				402				3,627				945
Operating expenses:
Sales and marketing			1,322				3,285				2,904				5,511
Research and development			357				414				680				646
General and administrative			2,015				3,430				4,797				6,411
Acquisition related amortization expense			970				986				1,939				1,839
Total operating expenses			4,664				8,115				10,320				14,407
Operating loss			(2,894	)			(7,713	)			(6,693	)			(13,462	)
Interest expense			(858	)			(884	)			(1,062	)			(1,732	)
Other income (expense), net			3				(69	)			10				(155	)
Loss from continuing operations before tax			(3,749	)			(8,666	)			(7,745	)			(15,349	)
Benefit from income taxes			(236	)			(177	)			(227	)			(250	)
Loss from continuing operations			(3,513	)			(8,489	)			(7,518	)			(15,099	)
Income from discontinued operations, net of tax			1,179				1,511				398				4,253
Net loss		$	(2,334	)		$	(6,978	)		$	(7,120	)		$	(10,846	)
Net Loss and Comprehensive Loss		$	(2,334	)		$	(6,978	)		$	(7,120	)		$	(10,846	)
Basic and diluted loss per share of common stock:
From continuing operations		$	(0.19	)		$	(0.56	)		$	(0.42	)		$	(1.00	)
From discontinued operations			0.06				0.10				0.02				0.28
Net loss per basic and diluted share of common stock		$	(0.13	)		$	(0.46	)		$	(0.40	)		$	(0.72	)
Weighted average number of common shares and common share equivalents outstanding:
Basic			18,163				15,204				17,962				15,121
Diluted			18,163				15,204				17,962				15,121

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		Six Months Ended
		June 30,
		2016				2015
Cash Flows From Operating Activities
Net loss		$	(7,120	)		$	(10,846	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			2,390				2,499
Realignment accrual accretion			23				70
Interest accretion			1,062				546
Provision for bad debt			169				172
Gain on sale of discontinued operations			-				(217	)
Stock-based compensation			88				1,054
Other (gains), losses and expenses, net			(4	)			-
Other changes in assets and liabilities:
Decrease (increase) in accounts receivable			4,755				(3,843	)
Decrease (increase) in unbilled receivable			16				(310	)
Increase in other current assets			(141	)			(205	)
Decrease in other long-term assets			627				2,482
(Decrease) increase in accounts payable			(1,070	)			42
(Decrease) increase in unearned contract revenue			(11	)			2,154
(Decrease) increase in accrued salaries and bonus			(633	)			3,309
Decrease in accrued liabilities			(4,957	)			(5,984	)
(Decrease) increase in long-term liabilities			(465	)			937
Net cash used in operating activities			(5,271	)			(8,140	)
Cash Flows From Investing Activities
Purchase of property and equipment			-				(542	)
Net cash used in investing activities			-				(542	)
Cash Flows From Financing Activities
Cash paid for repurchase of restricted shares			-				(32	)
Net cash used in financing activities			-				(32	)
Net increase (decrease) in cash and cash equivalents			(5,271	)			(8,714	)
Cash and cash equivalents – beginning			8,310				23,111
Cash and cash equivalents – ending		$	3,039			$	14,397
Cash paid for interest		$	-			$	1,470

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Table Of Contents

1.	BASIS OF PRESENTATION

 

The accompanying unaudited interim condensed consolidated financial statements and related notes (the interim financial statements) should be read in conjunction with the consolidated financial statements of Interpace Diagnostics Group, Inc. (the Company or Interpace), and its wholly-owned subsidiaries, Interpace Diagnostics Corporation and Interpace Diagnostics, LLC, and related notes as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, as filed with the U.S. Securities and Exchange Commission (SEC) on March 30, 2016, as amended on April 29, 2016 and June 14, 2016.  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.  All significant intercompany balances and transactions have been eliminated in consolidation.  Discontinued operations include the Company's wholly owned subsidiaries: Group DCA, LLC, or Group DCA; InServe Support Solutions (Pharmakon); and TVG, Inc. (TVG, dissolved December 31, 2014) and its Commercial Services (CSO) business unit. All significant intercompany balances and transactions have been eliminated in consolidation. Operating results for the three- and six-month periods ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

 

2.	LIQUIDITY AND MANAGEMENT'S PLANS

 

 

For the six months ended June 30, 2016, the Company incurred a net loss of $6.5 million and cash used in operating activities was $5.3 million.  The Company did not raise any capital or incur any additional debt during the first six months of 2016. The Company anticipates operating losses to continue for the foreseeable future due to, among other things, costs related to ramping up its commercial operations, further developing its products and product candidates, right sizing and reorganizing its administrative organization and winding down activities and managing obligations related to its discontinued operations. The accompanying condensed, consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern and that contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of June 30, 2016, the Company had cash and cash equivalents of $3.0 million, net accounts receivable of $3.0 million, current assets of $9.6 million and current liabilities of $19.2 million.

 

 

As a result of the sale of substantially all of its CSO business in December 2015, which generated net cash proceeds of $26.8 million (of which $21.6 million was used to repay long-term debt and fees), the Company focused its resources and strategic initiatives on its molecular diagnostics business. As with many companies in a similar stage, sufficient capital is required before achieving profitability. Accordingly, the Company will require additional capital in 2016 and beyond and, in order to obtain such capital and fund its operations, may be required to restructure all or a portion of its obligations related to the sale of its CSO business. There is, however, no guarantee that additional capital will or can be raised or that adequate restructuring will be accomplished that are sufficient to fund the Company's operations in 2016 and beyond or that the terms of such additional capital, if available, will be acceptable to the Company. Accordingly, the Company is exploring various dilutive and non-dilutive sources of funding, including equity and debt financings, strategic alliances and alternatives, business development and other sources. Additionally, the Company intends to help meet its capital needs by driving revenue growth of its commercial molecular diagnostic tests, closely managing cash and further streamlining operations. If, however, the Company is unsuccessful in obtaining capital and executing its plans for the business to continue operations, when needed, including the restructuring of its debt and other liabilities, then it may be forced to seek protection under the U.S. Bankruptcy Code, or be forced into liquidation or substantially alter or restructure its business operations. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

During the first six months of 2016, the Company commenced negotiations with certain of its creditors and former sales representatives and executives to restructure its current and long-term obligations incurred prior to the sale of the majority of its CSO business in December 2015. The proposed restructuring by the Company includes reducing or extending the term of certain of its obligations, and/or converting a portion to equity. The Company believes that this proposed restructuring, if achieved will not only improve its liquidity, but also provide the flexibility for future funding. No assurance can be given that the negotiations to restructure the Company’s debt and obligations will be successful. The success of such negotiations is also likely dependent on the Company’s success in seeking financing.

 

 

At June 30, 2016, the Company had the following debt obligations which the Company plans to include in the proposed debt restructuring:

 

 

	1.	Restructuring future payments and conditions related to the $10.7 million note payable to the former RedPath shareholders.
	2.	Restructuring severance obligations to former executives ($3.2 million, including taxes).
	3.	Restructuring obligations due to former sales representatives under the CSO incentive plan (up to $1 million including taxes). To date, 310 former sales representatives have accepted the Company’s offer to pay out approximately $0.6 million in equal installments over eight months.

 

There is no guarantee that the Company will be successful in restructuring its outstanding debt.

 

A summary of the Company’s most significant contractual obligations over the next 12 months are as follows:

 

 

3.	SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Estimates

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities reported and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Management's estimates are based on historical experience, facts and circumstances available at the time, and various other assumptions that are believed to be reasonable under the circumstances.  Significant estimates include best estimate of selling price in multiple element arrangements, valuation allowances related to deferred income taxes, self-insurance loss accruals, allowances for doubtful accounts and notes, income tax accruals, acquisition accounting, asset impairments and facilities realignment accruals.  The Company periodically reviews these matters and reflects changes in estimates as appropriate.  Actual results could materially differ from those estimates.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

Reclassifications

 

The Commercial Services business in the three- and six-month periods ended June 30, 2015 has been reclassified to discontinued operations to conform to the current period presentation.

 

 

Receivables and Allowance for Doubtful Accounts

 

The Company’s accounts receivable are generated using its proprietary tests. The Company’s services are fulfilled upon completion of the test, review and release of the test results. In conjunction with fulfilling these services, the Company bills the third-party payor or hospital. The Company recognizes accounts receivable related to billings for Medicare, Medicare Advantage, and hospitals on an accrual basis, net of contractual adjustment, when collectability is reasonably assured. Contractual adjustments represent the difference between the list prices and the reimbursement rate set by Medicare and Medicare Advantage, or the amounts billed to hospitals. The Company records an Allowance for Doubtful accounts for PancraGen® hospital roster billings based on the collection history of this payor. Since Medicare and Medicare Advantage have fixed reimbursement rates, there is no Allowance for Doubtful Accounts associated with these payors.

 

The Company provides services to commercial insurance carriers or governmental programs that do not have a contract in place for its proprietary tests which may or may not be covered by these entities existing reimbursement policies. In addition, the Company does not enter into direct agreements with patients that commit them to pay any portion of the cost of the tests in the event that their commercial insurance carrier or governmental program does not pay the Company for its services. In the absence of an agreement with the patient, or other clearly enforceable legal right to demand payment from commercial insurance carriers or governmental agencies, no accounts receivable is recognized. The Company does not record an Allowance for Doubtful Accounts for the commercial insurance or governmental programs since the revenue is recorded mainly on a cash basis.

 

 

Other Current Assets

 

Other current assets consisted of the following as of June 30, 2016 and December 31, 2015:

 

 

 

Other Intangible Assets

 

The Company allocates the cost of acquired companies to the identifiable tangible and intangible assets acquired and liabilities assumed, with the remaining amount classified as goodwill, if any. Since the entities the Company has acquired do not have significant tangible assets, a significant portion of the purchase price has been allocated to intangible assets and goodwill. The identification and valuation of these intangible assets and the determination of the estimated useful lives at the time of acquisition, as well as the completion of impairment tests, require significant management judgments and estimates. These estimates are made based on, among other factors, consultations with an accredited independent valuation consultant, reviews of projected future operating results and business plans, economic projections, anticipated highest and best use of future cash flows and the market participant cost of capital. The use of alternative estimates and assumptions could increase or decrease the estimated fair value of other intangible assets, and potentially result in a different impact to the Company's results of operations. Further, changes in business strategy and/or market conditions may significantly impact these judgments thereby impacting the fair value of these assets, which could result in an impairment of the intangible assets.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

Discontinued Operations

 

The Company accounts for business dispositions and its businesses held for sale in accordance with ASC 205-20, Discontinued Operations. ASC 205-20 requires the results of operations of business dispositions to be segregated from continuing operations and reflected as discontinued operations in current and prior periods. See Note 11, Discontinued Operations for further information.

 

 

Basic and Diluted Net Loss per Share

 

A reconciliation of the number of shares of common stock used in the calculation of basic and diluted loss per share for the three- and six-month-periods ended June 30, 2016 and 2015 is as follows:

 

 

 

The following outstanding stock-based awards were excluded from the computation of the effect of dilutive securities on loss per share for the following periods because they would have been anti-dilutive:

 

 

 

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4.	OTHER INTANGIBLE ASSETS

 

 

The net carrying value of the identifiable intangible assets as of June 30, 2016 is as follows: 

 

 

 

 

Amortization expense was approximately $1.0 million for the three-month periods ended June 30, 2016 and 2015, respectively, and $1.9 million and $1.8 million for the six-month periods ended June 30, 2016 and 2015, 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:

  

 

5.	FAIR VALUE MEASUREMENTS

 

The Company's financial assets and liabilities reflected at fair value in the consolidated financial statements include: cash and cash equivalents; short-term investments; accounts receivable; other current assets; accounts payable; and contingent consideration. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:

 

Level 1:

Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.

 

Level 2:

Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.

 

Level 3:

Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(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:

 

 

 

The fair value of cash and cash equivalents and marketable securities is valued using market prices in active markets (level 1). As of June 30, 2016, 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 assets from Asuragen and the acquisition of RedPath, the Company recorded $4.6 million and $13.9 million of contingent cash consideration related to contingent payments and other revenue based payments, respectively. 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.  There was an increase in the fair value of the contingent consideration of approximately $0.4 million during the period ended June 30, 2016 as resulting from the accretion of interest over time and amounting to $0.7 million, partially offset by the Company making payments of $0.3 million in the second quarter of 2016.

 

The Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term nature of these financial instruments.  There is no fair value ascribed to the letters of credit as management does not expect any material losses to result from these instruments because performance is not expected to be required.

 

Certain of the Company's non-financial assets, such as other intangible assets and goodwill, are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

 

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6.	COMMITMENTS AND CONTINGENCIES

 

Letters of Credit

 

As of June 30, 2016, the Company had $0.5 million in letters of credit outstanding as required by its existing insurance policies and its facility leases. These letters of credit are collateralized by certain investments.

 

Contingency

 

In connection with the acquisition of RedPath on October 31, 2014, the Company and its wholly-owned subsidiary, Interpace Diagnostics, LLC (Interpace), entered into a Contingent Consideration Agreement with RedPath Equityholder Representative, LLC (the Equityholder Representative). Pursuant to the Contingent Consideration Agreement, the Company agreed to issue to the equityholders of RedPath 500,000 shares of the Company’s common stock, par value $0.01 (Common Stock), upon acceptance for publication of a specified article related to PathFinderTG® for the management of Barrett’s esophagus. The pending issuance of Common Stock was recorded as Additional paid-in capital in the Company's consolidated balance sheet as of December 31, 2014. On April 13, 2015, this milestone was reached upon acceptance for publication of new data supporting the use of BarreGen™ for predicting risk of progression from Barrett’s esophagus to esophageal cancer. On June 16, 2015, the 500,000 shares were issued from Treasury stock decreasing the balance in treasury stock by approximately $6.1 million, with a corresponding decrease in Additional paid-in capital of $6.1 million. In March 2016, 500,000 additional shares of Common Stock were issued from Treasury stock, as a result of the acceleration of the Common Stock Milestone, as defined in the Contingent Consideration Agreement, resulting from the change of control in connection with the sale of its CSO business in December 2015, decreasing the balance in treasury stock by approximately $6.8 million, with a corresponding decrease in Additional paid-in capital of $6.8 million.

 

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 operations, the Company seeks to reduce its potential liability under its service agreements through measures such as contractual indemnification provisions with customers (the scope of which may vary from customer to customer, and the performance of which is not secured) and insurance. The Company could, however, also be held liable for errors and omissions of its employees in connection with the services it performs that are outside the scope of any indemnity or insurance policy. The Company could be materially adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; if the indemnity, although applicable, is not performed in accordance with its terms; or if the Company’s liability exceeds the amount of applicable insurance or indemnity.

 

The Company routinely assesses its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. As of December 31, 2015, the Company's accrual for litigation and threatened litigation was not material to the consolidated financial statements.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

In connection with the October 31, 2014 acquisition of RedPath, the Company assumed a liability for a January 2013 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 maximum of $3.0 million.

 

Payments are due March 31st following the calendar year that the revenue milestones are achieved. The Company has been indemnified by the former owners of RedPath for $2.5 million of the obligation and has recorded an indemnification asset of that amount within other non-current assets. During the six months ended June 30, 2016, the Company has $1.8 million recorded as its best estimate of the amount that remains to be paid under the Settlement Agreement based on its estimate of future revenues, of which $0.8 million is included in other accrued expenses and $1.0 million is included in other long-term liabilities.

 

 

Prolias Technologies, Inc. v. PDI, Inc.

 

On April 8, 2015, Prolias Technologies, Inc., or Prolias, filed a complaint (the Complaint) against the Company with the Superior Court of New Jersey (Morris County) in a matter entitled Prolias Technologies, Inc. v. PDI, Inc. (Docket No. MRS-L-899-15).  In the Complaint, Prolias alleges that it and the Company entered into an August 19, 2013 Collaboration Agreement and a First Amendment thereto, collectively the Agreement, whereby Prolias and the Company agreed to work in good faith to commercialize a diagnostic test known as "Thymira."  Thymira is a minimally invasive diagnostic test that is being developed to detect thyroid cancer.

 

Prolias alleges in the Complaint that the Company wrongfully terminated the Agreement, breached obligations owed to it under the Agreement and committed torts by (i) failing to effectively and timely validate Thymira, (ii) purchasing a competitor of Prolias and working to commercialize the competitive product at the expense of Thymira, and (iii) interfering with a license agreement that Prolias had with Cornell University related to a license for Thymira. Prolias asserts claims against the Company for breach of contract, breach of the covenant of good faith and fair dealing, intentional interference with contract and breach of fiduciary duty and seeks to recover unspecified compensatory damages, punitive damages, interest and costs of suit.

 

On June 3, 2015, the Company filed an Answer and Counterclaim in response to the Complaint. In the Answer, the Company denied liability for the claims being asserted in the Complaint. In the Counterclaim, the Company asserted claims against Prolias for breaches of the Agreement and for a declaratory judgment. The Company seeks damages from Prolias in excess of $500,000 plus interest and attorney’s fees and costs, together with a declaration compelling Prolias to execute and deliver to the Company a promissory note in the amount of One Million Five Hundred Thousand Dollars ($1,500,000.00) to evidence Prolias’ obligation to repay the Company for amounts that were advanced.

 

After the Answer and Counterclaim were filed, the Company and Prolias exchanged paper discovery.  In early December 2015, Prolias replaced its counsel with new counsel.  Thereafter, on December 18, 2015, Prolias filed an Order to Show Cause and Temporary Restraining Order (TRO) that sought to (a) enjoin the Company from selling the assets that comprise its CSO business to Publicist Healthcare Communications Group and (b) disqualify the Company's counsel from representing it in the litigation.

 

On December 21, 2015, the Court held a hearing on Prolias's application to temporarily enjoin the sale of the CSO business. Following the hearing the Court denied Prolias's application for a TRO and set a hearing date on the motions to disqualify counsel and to obtain an injunction.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

On February 4, 2016, the Court heard argument on Prolias's motions to disqualify the Company’s counsel and to obtain an injunction with respect to the CSO sale. Following the hearing, the Court entered orders denying the motion to disqualify and denying the motion for an injunction.

 

On February 24, 2016, Prolias filed a motion before the New Jersey Appellate Division for leave to appeal on an interlocutory basis the order denying the motion to disqualify.  The Company filed its opposition to the motion on March 7, 2016.  While the motion for leave to appeal was pending, on March 29, 2016, counsel for Prolias filed for permission to withdraw as counsel, citing nonpayment of its bills.

 

On April 7, 2016, the Company conditionally opposed the motion to withdraw pending prompt appointment of new counsel for Prolias. On April 19, 2016, the Court denied the motion without prejudice. On April 27, 2016, Prolias’ counsel renewed its motion to withdraw. On May 12, 2016, while the motion to withdraw was pending, the Court entered an Order granting the motion for leave to appeal and then proceeded to affirm the Court’s order denying the motion to disqualify.

 

On May 27, 2016, the Court entered an Order granting Prolias’s counsel leave to withdraw as counsel for Prolias. In this same Order, the Court required Prolias to retain new counsel by June 27, 2016, and in the absence of the retention of new counsel, the Order enabled the Company to file an appropriate motion to dismiss Prolias’s Complaint.

 

On July 6, 2016, the Company filed a motion to dismiss Prolias’s complaint on the basis that Prolias had failed to retain new counsel to represent it. Prolias filed no opposition to the motion. The parties are now waiting on the Court’s ruling on the motion to dismiss.

  

The Company denies that it is liable to Prolias for any of the claims asserted in the Complaint and it intends to (a) vigorously defend itself against those claims and (b) pursue all claims asserted in the Counterclaim.

 

Swann v. Akorn, Inc., and Interpace Diagnostics Group, Inc.

 

On May 27, 2016, Michael J. Swann, one of our former employees, filed a complaint against us in the Court of Common Pleas of the Fifth Judicial Circuit in South Carolina in a matter entitled Michael J. Swann v. Akorn, Inc., and Interpace Diagnostic Group Inc. (Civil Action No. 2016-CP-40-03362). In the complaint, Mr. Swann alleges, among other things, that he was discriminated against and wrongfully terminated as a member of a sales force marketing pharmaceutical products of Akorn, Inc., because of an illness suffered by Mr. Swann. Mr. Swann alleges that he was discriminated against in violation of the Americans with Disabilities Act/Americans with Disabilities Act Amendments Act and the Family Medical Leave Act and seeks damages for back pay, reinstatement, front pay, compensatory and punitive damages in an amount not less than $300,000, attorney’s fees and costs. We deny that we are liable to Mr. Swann for any of the claims asserted and intend to vigorously defend ourselves against those claims.

 

Severance

 

In 2015, in connection with the sale of the sale of the majority of the CSO business and the implementation of a broad-based program to maximize efficiencies and cut costs, the Company reduced headcount and incurred severance obligations to terminated employees that amounted to approximately $3.7 million.

 

During the first quarter ended March 31, 2016 the Company recorded additional severance obligations as it continued to right-size the organization and wind down its CSO business. The Company recorded obligations of $1.1 million, $0.5 million of which was recorded in continuing operations. The current severance liability as of June 30, 2016 is $3.3 million, of which $2.3 million resides in continuing operations and $1.0 million is in discontinued operations.

 

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7.	ACCRUED EXPENSES AND LONG-TERM LIABILITIES

 

Other accrued expenses consisted of the following as of June 30, 2016 and December 31, 2015:

  

 

 

Long-term liabilities consisted of the following as of June 30, 2016 and December 31, 2015:

  

 

8.	STOCK-BASED COMPENSATION

 

Stock Incentive Plan

 

In 2015, the board of directors (the Board) and stockholders approved the Company’s Amended and Restated 2004 Stock Award and Incentive Plan, or the Amended and Restated Plan. The Amended and Restated Plan amends the Company’s pre-existing Amended and Restated 2004 Stock Award and Incentive Plan, which had replaced the 1998 Stock Option Plan, or the 1998 Plan, and the 2000 Omnibus Incentive Compensation Plan, or the 2000 Plan.  The Amended and Restated Plan authorized an additional 2,450,000 shares for new awards and combined the remaining shares available under the original Amended and Restated Plan.  Eligible participants under the Amended and Restated Plan include officers and other employees of the Company, members of the Board and outside consultants, as specified under the Amended and Restated Plan and designated by the Compensation and Management Development Committee of the Board, or the Compensation Committee.  Unless earlier terminated by action of the Board, the Amended and Restated Plan will remain in effect until such time as no stock remains available for delivery under the Amended and Restated Plan and the Company has no further rights or obligations under the Amended and Restated Plan with respect to outstanding awards thereunder. 

 

SARs are generally granted with a grant price equal to the market value of the common stock on the date of grant, vest one-third each year on the anniversary of the date of grant and expire five years from the date of grant.  The restricted shares and restricted stock units (RSU’s) granted to employees historically have had a three year cliff vesting period and are subject to accelerated vesting and forfeiture under certain circumstances. Restricted shares and restricted stock units granted to board members generally have a three year graded vesting period and are subject to accelerated vesting and forfeiture under certain circumstances.

 

In February 2016, certain employees and members of the Company’s Board were granted approximately 1.3 million RSU’s at a weighted average grant price of $0.25. These shares vest one-third each year on the anniversary of the date of grant.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

 

The following table provides the weighted average assumptions used in determining the fair value of the non-market based SARs awards granted during the six month periods ended June 30, 2016 and June 30, 2015: 

  

 

The Company recognized approximately $0.02 million and $0.5 million of stock-based compensation expense during each of the three month periods ended June 30, 2016 and 2015, respectively, and $0.1 million and $0.7 million during each of the six month periods ended June 30, 2016 and 2015, respectively.

 

9.	INCOME TAXES

 

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 (benefit) expense on loss from continuing operations and the effective tax rate for the three- and six-month periods ended June 30, 2016 and 2015: 

 

 

Income tax benefit for the three- and six-month periods ended June 30, 2016 was primarily due to the reclassification of CSO as discontinued operations and the tax adjustments associated with that reclass. Income tax benefit for the three- and six-month periods ended June 30, 2015 was primarily due to net operating losses, partially offset by minimum state and local taxes.

 

10.	SEGMENT INFORMATION

 

Effective December 31, 2015, the Company has one reporting segment: the Company's molecular diagnostics business, after the divestiture of its Commercial Services business on December 22, 2015. The Company realigned its reporting segments due to the integration of RedPath and acquiring certain assets from Asuragen, to reflect the Company's current and going forward business strategy. The Company's current reporting segment structure is reflective of the way the Company's management views the business, makes operating decisions and assesses performance. This structure allows investors to better understand Company performance, better assess prospects for future cash flows, and make more informed decisions about the Company.

 

 

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts) 

 

The Company's molecular diagnostics business focuses on developing and commercializing molecular diagnostic tests, leveraging the latest technology and personalized medicine for better patient diagnosis and management. Through the Company's molecular diagnostics business, the Company aims to provide physicians and patients with diagnostic options for detecting genetic and other molecular alterations that are associated with gastrointestinal and endocrine cancers, which are principally focused on early detection of high potential progressors to 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 Commercial Services (CSO), Group DCA's, Pharmakon's and TVG’s results included in Income from Discontinued Operations, Net of Tax in the consolidated statements of comprehensive loss for the three- and six-months ended June 30, 2016 and 2015.

 

 

 

 

The assets and liabilities classified as discontinued operations relate to Commercial Services, Group DCA, Pharmakon, and TVG. As of June 30, 2016 and December 31, 2015, these assets and liabilities are in the accompanying balance sheets as follows:

 

 

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12.	LONG-TERM DEBT

 

On October 31, 2014, the Company and Interpace, entered into an agreement to acquire RedPath (the Transaction). In connection with the Transaction, the Company entered into a note with former RedPath Equityholders, dated October 31, 2014 (the Note).

 

The Note is $11.0 million, interest-free and payable in eight equal consecutive quarterly installments beginning October 1, 2016. In the second quarter of 2015, the final working capital adjustment was made, reducing the balance of the Note to approximately $10.7 million. In December 2015, pursuant to the sale of substantially all of the CSO business, the Note was amended so that the CSO sales proceeds would not have to be applied against the Note payable balance.

 

The interest rate will be 5.0% in the event of a default under the Note. The obligations of the Company under the Note are guaranteed by the Company and its Subsidiaries pursuant to the Subordinated Guarantee in favor of the 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 Equityholder Representative. Based on the Company's incremental borrowing rate under its Credit Agreement, the fair value of the Note at the date of issuance was $7.5 million. During the quarters ended June 30, 2016 and 2015, the Company accreted approximately $0.2 million into interest expense, respectively, for each period. During the six months ended June 30, 2016 and 2015, the Company accreted approximately $0.4 million into interest expense, respectively, for each period. As of June 30, 2016, the balance of the Note is approximately $8.8 million and the unamortized discount is $1.9 million.

 

Principal payments due related to the long-term debt over next three years are as follows:

 

 

 

The Company is currently in negotiations with the former RedPath equityholders to restructure the terms of the Note. No assurance can be given that such negotiations will be successful.

 

The Company currently has an indemnification asset and liability of $1.5 million relating to the DOJ settlement with the former owners of RedPath that was recorded with the acquisition of RedPath. As the Company makes payments to the DOJ, it may reduce the balance owed on the note by the same amount.

 

In addition, the Company entered into the Credit Agreement with SWK Funding LLC (the Agent) and the lenders party thereto in connection with the Transaction in the aggregate principal amount of $20.0 million (the Loan). The maturity date of the Loan was October 31, 2020. The Company received net proceeds of approximately $19.6 million following payment of certain fees and expenses in connection with the Credit Agreement.

 

Upon the sale of substantially all of the CSO business on December 22, 2015, the Company was obligated to use a portion of the net proceeds from the transaction to pay the balance of the outstanding loan in the aggregate principal amount of $20.0 million, an exit fee and expenses of approximately $1.6 million. In connection with the termination of the Credit Agreement, the Guarantee and Collateral Agreement, dated October 31, 2014, by the Company and certain of its subsidiaries in favor of the Agent was also terminated on December 22, 2015.

 

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13.	SUPPLEMENTAL CASH FLOW INFORMATION

 

 

The following table represents cash flows (used in) provided by the Company's discontinued operations for the six months ended June 30, 2016 and 2015:

 

 

14.	RECENT ACCOUNTING PRONOUNCEMENTS

 

 

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance permits the use of either a retrospective or cumulative effect transition method. In July 2015, the FASB approved a one-year deferral of the effective date of the guidance to interim and annual periods beginning on or after December 15, 2017. Early adoption is permitted but not before the original effective date of December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on the Company’s consolidated financial position, results of operations and related disclosures.

 

In August 2014, the FASB issued guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company is evaluating the potential impact of the new guidance on its quarterly reporting process and its consolidated financial position, results of operations and related disclosures.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which when effective will require organizations that lease assets (e.g., through "leases") to recognize assets and liabilities for the rights and obligations created by the leases on 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 March 2016, the FASB issued guidance which clarifies the implementation guidance on principal versus agent considerations in the revenue recognition standard issued in May 2014. The new standard clarifies how an entity should identify the unit of accounting (i.e. the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The effective date and transition requirements are the same as the effective date and transition requirements in the May 2014 revenue standard (Accounting Standards Codification 606). The Company is currently assessing the adoption methodology and the impact the adoption of these ASUs will have on its consolidated financial position, results of operations and related disclosures.

 

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