UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31,September 30, 2017

OR

For the transition period from _______________ to _______________

Commission File Number: 000-24249

Interpace Diagnostics Group, Inc.

(Exact name of registrant as specified in its charter)

Morris Corporate Center 1, Building AC

300 Interpace Parkway, Parsippany, NJ 07054

(Address of principal executive offices and zip code)

(844) 405-9655(855) 776-6419

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

INTERPACE DIAGNOSTICS GROUP, INC.

FORM 10-Q FOR PERIOD ENDED MARCH 31,SEPTEMBER 30, 2017

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION 

Item 1. Unaudited Interim Condensed Consolidated Financial Statements

INTERPACE DIAGNOSTICS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.statements

INTERPACE DIAGNOSTICS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)LOSS

(unaudited, in thousands, except for per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.statements

INTERPACE DIAGNOSTICS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS'STOCKHOLDERS’ EQUITY

(unaudited, in thousands)

The accompanying notes are an integral part of these consolidated financial statements

INTERPACE DIAGNOSTICS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.statements

INTERPACE DIAGNOSTICS GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Tabular information in thousands, except per share amounts)

(unaudited)

The accompanying unaudited interim condensed consolidated financial statements and related notes (the interim financial statements)“Interim Financial Statements”) should be read in conjunction with the consolidated financial statements of Interpace Diagnostics Group, Inc. (the Company“Company” or Interpace)“Interpace”), and its wholly-owned subsidiaries, Interpace Diagnostics Corporation, Interpace Diagnostics Lab, Inc. and Interpace Diagnostics, LLC, and related notes as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission (SEC)(“SEC”) on March 31, 2017, as amended on April 28, 2017. The condensed interim financial statementsInterim Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP)(“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 statementsInterim 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 ownedwholly-owned subsidiaries: Group DCA, LLC or (“Group DCA;DCA”); InServe Support Solutions (Pharmakon)(“Pharmakon”); and TVG, Inc. (TVG,(“TVG”, dissolved December 31, 2014) and its Commercial Services (CSO)Organization (“CSO”) business unit which was sold on December 22, 2015. All significant intercompany balances and transactions have been eliminated in consolidation. Operating resultsResults of operations, cash flows and comprehensive income for the three-month periodthree and nine-month periods ended March 31,September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The accompanying condensed consolidated financial statements have been prepared on a basis that assumes that the Company will continue as a going concern, and thatwhich contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. As of March 31,September 30, 2017, the Company had cash and cash equivalents of $7.1$11.7 million, net accounts receivable of $2.3$2.8 million, total current assets of $10.7$15.8 million and total current liabilities of $13.0$8.3 million. For the quarternine months ended March 31,September 30, 2017, the Company had a net incomeloss of $2.4$7.2 million and cash used in operating activities was $4.1$12.9 million.

On December 22, 2016,During the Company completed a registered direct public offering, which resulted in gross proceeds to the Company of approximately $1.9 million, (net proceeds of $1.7 million after expenses) of which approximately $1.33 million was used to repay secured debt.

Innine months ended September 30, 2017, the Company closed on threefour equity offerings raising gross proceeds of $12.2$27.9 million. The details are as follows:

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited) 

On March 23,

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

Subsequent to September 2017 the Company entered into an exchange agreement (the “Exchange Agreement”)received approximately $6.2 million from the exercise of BaseWarrants issued as part of the Offering, as follows:

As part of our acquisition of RedPath Integrated Pathology, Inc., with an institutional investor (the “Investor”). Prior to the Company entering into the Exchange Agreement, the Investor acquired that certain Non-Negotiable Subordinated Secured Promissory Note,we issued a non-negotiable subordinated secured, non-interest bearing, promissory note, dated as of October 31, 2014, as amended (the “RedPath Note”), issued by the Company and the Company’s subsidiary, Interpace, LLC, in favor of RedPath Equityholder Representative, LLC (the “RedPath Equityholder Representative”) on behalf of the former equityholders of RedPath. The RedPath Note, which was entered into in connection with the Company’s acquisition of RedPath Integrated Pathology, Inc. in October 2014, had an aggregate principal amount of $9.34$10.7 million outstanding and was acquired by(the “RedPath Note”). In December 2016 we repaid $1.33 million in principal of the Investor for $8.87RedPath Note resulting in an outstanding balance of $9.34 million. The RedPath Equityholder Representative assigned all of its rights, titleNote was subsequently acquired by a single institutional investor (the “Investor”) for $8.87 million on March 22, 2017. Also on that date we and interest inthe Investor exchanged the RedPath Note to the Investor, including, but not limited to, its security interest in all of the assets of the Company and the assets of the Company’s subsidiaries.

Pursuant to the Exchange Agreement, the Company and the Investor agreed to exchange the RedPath Note for (i) a senior secured convertible note in the aggregate principal amount of $5.32 million (the “Exchanged Convertible Note”), which was convertible into shares of the Company’s common stock, in accordance with its terms, and (ii) a senior secured non-convertible note with anin the aggregate principal amount of $3.55 million (the “Exchanged Non-Convertible Note” and collectively, the “Exchanged Notes”), for a combined aggregate principal amount of $8.87 million.

As of March 30, 2017, the Investor had converted approximately 80% of the Exchanged Convertible Note to common stock, converting $4.2 million of the Exchanged Convertible Note into approximately 1.7 million shares of common stock. On April 18, 2017, the Companywe and the Investor agreed to exchangeexchanged the Exchanged Non-Converttible Notesenior secured non-convertible note for a new$3.55 million of our senior secured convertible notenote. Between March 23, 2017 and April 18, 2017, the senior secured convertible notes were converted in the same principal amount of $3.55 million. The investor then converted the new convertible note into approximately 1.6 millionfull for 3,795,429 shares of the Company’s Common Stock at $2.20 per share. As a result of the note exchangesour common stock. We no longer have any outstanding secured debt, and subsequent conversions, the RedPath note was deemed paid in full. Accordingly, theany security interest hasinterests and liens related to our former secured debt have been terminated and the liens will be released upon proper termination filings.fully settled.

The Company entered into a Credit Agreement with SCM Specialty Finance Opportunities Fund, L.P. (the “Credit Agreement”) on September 28, 2016.

2016 for $1.2 million. The Credit Agreement contains customary representations and warranties in favor of the Lender and certain covenants, including, among other things, financial covenants relating to loan turnover rates, liquidity and revenue targets. As of March 31,September 30, 2017 the Company hadis renegotiating terms of the Credit Agreement and has not borrowed any funds under the Credit Agreement.

While the Company has made significant reductions insignificantly increased its cash balance and has eliminated its long term indebtedness, the Company isdoes not yetexpect to generate positive cash flow positiveflows from operations. Accordingly, due tooperations for the Company’s operating deficit and obligations the Company may require additional capital to meet its obligations. There is no guarantee that additional capital can be raised to fund operations and obligations in 2017 and beyond, if needed.year ending December 31, 2017. The Company intends to meet its capital needs by driving revenue growth, containing costs, entering into strategic alliances as well as exploring other options, including the possibility of raising additional debt or equity capital. These liquidity factors, among others, have raised substantial doubts about our abilitycapital as necessary. There is, however, no assurance the Company will be successful in meeting its capital requirements prior to continue as a going concern.becoming cash flow positive.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

Accounting Estimates

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

Receivables and Allowance for Doubtful AccountsRevenue Recognition

TheThrough the Company’s accounts receivablemolecular diagnostics business, the Company aims to provide physicians and patients with diagnostic options for detecting genetic and other molecular alterations that are generated using its proprietary tests.associated with gastrointestinal, endocrine and lung cancers, which are principally focused on early detection of patients at high risk of cancer. Customers in the Company’s molecular diagnostics business consist primarily of physicians, hospitals and clinics. Under current GAAP, we recognize revenue from services rendered when the following four revenue recognition criteria are met: persuasive evidence of an arrangement or contract exists; services have been rendered; the selling price is fixed or determinable; and collectability is reasonably assured. The Company’s services are fulfilledgenerally considered rendered upon completion of the test and review and release of the test results. In conjunction with fulfilling these services,results, at which time the Company bills the third-party payorpayer or hospital. We recognize revenue on an accrual basis when we are able to make a reasonable estimate of reimbursement at the time delivery is complete. In the first period in which revenue is accrued for a particular payer or test, there generally is a one-time increase in revenue. Until we have contracts with payers or can reasonably estimate the amount that will ultimately be received, we recognize the related revenue on the cash basis. Because the timing and amount of cash payments received from payers as well as one-time increases in revenue from newly accrued payers are difficult to predict, we expect that our revenue may fluctuate significantly in any given quarter.

The Company currently recognizes revenue and accounts receivable related to billings for Medicare and Medicare Advantage, and hospitals (direct-bill clients) on an accrual basis, net of contractual adjustment, as well as for hospitals (direct-bill clients), when collectability is reasonably assured. Contractual adjustments represent the difference between the list prices and the reimbursement rate set by Medicare and Medicare Advantage, or the amounts billed to hospitals. The Company records an Allowance for Doubtful accounts based

Specifically by test, PancraGEN® revenues have been recorded on the collection history for PancraGen® hospital roster billings (direct bill clients)accrual basis in each of these categories since its acquisition in 2014. ThyGenX^® has been recorded on an accrual basis since its Medicare approval in 2015 in two of the payer categories, Medicare and Medicare Advantage, and ThyraMIR®, a newer test, approved for Medicare Advantage billings for PancraGen®in 2016, has been moved from cash basis to accrual basis in the same categories as ThyGenX, Medicare and ThyGenix®. Since Medicare has fixed reimbursement rates, there may be little or no Allowance for Doubtful Accounts associated with Medicare. For non-paying roster accounts, balances may be written off to bad debt after twelve months. Medicare Advantage accounts may be written off to bad debt after several appeals, which in some cases may take longer than twelve months.2017, effective in the current quarter. As of September 30, 2017 there are no revenues for the Company’s lung assay called RespriDX™.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

The Company also provides services toby way of commercial insurance carriers or governmental programs that domay or may not have a contract or coverage in place for its proprietary tests, which may or may not be covered bytests. As contracts and coverage progress for payers in these entities existing reimbursement policies. In addition,categories, the Company will evaluate their collection history to determine the appropriate time to begin to recognized specific payers on the accrual basis as well. Currently, all are recognized on the cash basis. The Company does not enter into direct agreements with patients that commit them to pay any portion of the cost of the tests in the event that their commercial insurance carrier or governmental program does not pay the Company for its services. Inservices; however, the absence of an agreement withCompany does offer patients that do not have adequate insurance coverage the patient, or other clearly enforceable legal rightopportunity to demand payment from commercial insurance carriers or governmental agencies, no accounts receivable is recognized. pay cash for our services at a reduced rate.

Accounts Receivable

The Company does not recordrecognizes Accounts Receivable as revenue is accrued, based upon its criteria for revenue recognition. The Company also records an Allowance for Doubtful Accounts based on the collection history for its accrual basis payer. For non-paying roster accounts, balances are generally written off after twelve months. Medicare and Medicare Advantage accounts are currently written off after eighteen months to allow for the commercial insurance or governmental programs since the revenue is recorded mainly on a cash basis.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular informationappeal process, which in thousands, except per share amounts)some cases requires several appeals prior to collection.

Other Current Assets

Other current assets consisted of the following as of March 31,September 30, 2017 and December 31, 2016:

Long-Lived Assets, including Finite-Lived Intangible Assets

Finite-lived intangible assets are stated at cost less accumulated amortization. Amortization of finite-lived acquired intangible assets is recognized on a straight-line basis, using the estimated useful lives of the assets of approximately two years to nine years in acquisition related amortization expense in the condensed consolidated statements of comprehensive income (loss).loss.

The Company reviews the recoverability of long-lived assets and finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized by reducing the recorded value of the asset to its fair value measured by future discounted cash flows. This analysis requires estimates of the amount and timing of projected cash flows and, where applicable, judgments associated with, among other factors, the appropriate discount rate. Such estimates are critical in determining whether any impairment charge should be recorded and the amount of such charge if an impairment loss is deemed to be necessary.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

Discontinued Operations

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

Basic and Diluted Net(Loss) Income (Loss) per Share

A reconciliation of the number of shares of common stock used in the calculation of basic and diluted (loss) income (loss) per share for the three-monththree- and nine-month periods ended March 31,September 30, 2017 and 2016 is as follows:

As a result of the Company’s debt exchanges discussed in Note 12, Long-Term Debt, the Company issued an additional 2.1 million shares of common stock in April 2017.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

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

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

The net carrying value of the identifiable intangible assets as of March 31,September 30, 2017 and December 31, 2016 are as follows:

Amortization expense was approximately $0.8 million and $1.0 million for the three-month periods ended March 31,September 30, 2017 and 2016, respectively, and approximately $2.4 million and $2.9 million for the nine-month periods ended September 30, 2017 and 2016, respectively. Amortization of our diagnostic assets begins upon launch of the product. Estimated amortization expense for the next five years is as follows, based on current assumptions of future product launches:

The Company’sCompany's financial assets and liabilities reflected at fair value in the condensed 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:

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

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 instrumentsassets and liabilities measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below:

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

The fair value of cashCash and cash equivalents and marketable securities isare valued using market prices in active markets (level 1). As of March 31,September 30, 2017, the Company did not have any marketable securities in less active markets (level 2) or without observable market values that would require a high level of judgment to determine fair value (level 3).

In connection with the acquisition of certain assets from Asuragen and the acquisition of RedPath, the Company recorded contingent consideration related to contingent payments and other revenue based payments. The Company determined the fair value of the contingent consideration based on a probability-weighted income approach derived from revenue estimates. The fair value measurement is based on significant inputs not observable in the market and thus represents a Level 3 measurement. On March 22, 2017, the Company entered into a Termination Agreement with the RedPath Equityholder Representative. Under the terms of the Termination Agreement, the RedPath Equityholder Representative agreed to terminate all royalty and milestone rights under the contingent consideration agreement. As a result the Company reversed approximately $6.0 million in Redpath contingent consideration liabilities in the first quarter of 2017, of which $5.8 million was a reversal within operating expenses in the Condensed Consolidated Statement of Comprehensive Income (Loss).Loss.

On March 23, 2017, in connection with the Company entering into the Exchange Agreement, related to the RedPath noteNote (See Note 12)2,Liquidity and Note 12,Long-Term Debt) with the Investor, an embedded conversion option derivative liability was recorded due to a certain embedded conversion feature. The embedded conversion option is considered a liability and valued using the Black-Scholes Option-Pricing Model, the inputs for which include exercise price of the conversion feature, market price of the underlying common shares, expected term, volatility based on the Company’s historical market price, and the risk-free rate corresponding to the expected term of the Exchange Agreement. Any changes to the estimated fair value of this liability arewere recorded in Interest Expense. Between March 23, 2017 and April 18, 2017, the Investor had fully converted all outstanding debt, and as a result there are no liabilities remaining subsequent to April 18, 2017.

A roll forwardOn June 21, 2017, the Company closed on an Offering (See Note 2,Liquidity), issuing both Pre-Funded Warrants and Underwriters Warrants to purchase 2,600,000 shares and 575,000 shares of the carryingCompany’s common stock, respectively. Both the Pre-Funded and Underwriters Warrants include a cash settlement feature in the event of certain circumstances. Accordingly, both the Pre-Funded and Underwriters Warrants are classified as liabilities, and were fair valued using the Black Scholes Option-Pricing Model, the inputs for which include exercise price of the respective warrants, market price of the underlying common shares, expected term, volatility based on the Company’s historical market price, and the risk-free rate corresponding to the expected term of the Exchange Agreement. Changes to the fair value of the contingent considerationwarrant liabilities were recorded to Other (loss) income, net. The Pre-Funded Warrants were fully exercised as of September 30, 2017 and alsotherefore the embedded conversion option from continuing operations from January 1, 2017 to March 31, 2017 is as follows:

Company has no remaining liability associated with those warrants.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

The following table sets forth

A roll forward of the assumptions used in the Black-Scholes Option Pricing Model to estimate the faircarrying value of the contingent consideration, embedded conversion option derivative liabilityand warrant liabilities from December 31, 2016 to September 30, 2017 is as of March 31, 2017:follows:

The Company considers carrying amounts of accounts receivable, accounts payable and accrued expenses to approximate fair value due to the short-term nature of these financial instruments.

Certain of the Company’s non-financial assets, such as otherinstruments, which primarily consist of intangible assets and property and equipment, are not required to be measured at fair value when there is an indicator ofon a recurring basis and are reported at carrying value. However, on a periodic basis whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written-down to and recorded at fair value, only when an impairment charge is recognized.considering market participant assumptions.

Litigation

Due to the nature of the businesses in which the Company is engaged it is subject to certain risks. Such risks include, among others, risk of liability for personal injury or death to persons using products the Company promotes or commercializes. There can be no assurance that substantial claims or liabilities will not arise in the future due to the nature of the Company’s business activities and recent increases in litigation related to healthcare products. As part of the closeout of its Contract Sales Organization (CSO),CSO business, the Company seeks to reduce its potential liability under its service agreements through measures such as contractual indemnification provisions with customers (the scope of which may vary from customer to customer, and the performance of which is not secured) and insurance. The Company could, however, also be held liable for errors and omissions of its employees in connection with the services it performs that are outside the scope of any indemnity or insurance policy. The Company could be materially adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; if the indemnity, although applicable, is not performed in accordance with its terms; or if the Company’s liability exceeds the amount of applicable insurance or indemnity.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

The Company routinely assesses its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable. The Company accrues for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Significant judgment is required in both the determination of probability and the determination as to whether a loss is reasonably estimable. In addition, in the event the Company determines that a loss is not probable, but is reasonably possible, and it becomes possible to develop what the Company believes to be a reasonable range of possible loss, then the Company will include disclosures related to such matter as appropriate and in compliance with ASC 450. To the extent there is a reasonable possibility that the losses could exceed the amounts already accrued, the Company will, as applicable, adjust the accrual in the period the determination is made, disclose an estimate of the additional loss or range of loss, indicate that the estimate is immaterial with respect to its financial statements as a whole or, if the amount of such adjustment cannot be reasonably estimated, disclose that an estimate cannot be made. As of March 31,September 30, 2017, the Company’sCompany's accrual for litigation and threatened litigation was not material to the condensed consolidated financial statements.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

In connection with the October 31, 2014 acquisition of RedPath, the Company assumed a liability for the Settlement Agreementsettlement agreement (the “Settlement Agreement”) entered into by the former owners of RedPath with the DOJ.Department of Justice (“DOJ”). Under the terms of the Settlement Agreement, the Company is obligated to make payments to the Department of Justice (DOJ)DOJ for the calendar years ended December 31, 2014 through 2017, up to a cumulative maximum amount of $3.0 million.

Payments are due on March 31st following the calendar year thatin which the revenue milestones are achieved. In May 2016,2017, the Company renegotiated payment terms with the DOJ related to a $250,000$0.5 million payment due associated with performance in fiscal 2014 that2016. The negotiations resulted in an agreement that the Company pay $85,000$83,335 on July 31, 2016, $85,000 on October 31, 20163, 2017, and $80,000 on February 28,$83,333 for the five remaining months of 2017. The Company made payments of approximately $0.3 million in the three months ended September 30, 2017. For the quarternine months ended March 31,September 30, 2017, the Company has accrued $625,000 related to$0.5 million for the Settlement Agreement based onremainder of these payments and its estimate of the potential liability.liability for 2017, based upon the terms of the Settlement Agreement.

Prolias Technologies, Inc. v. PDI, Inc.

On April 8, 2015, Prolias Technologies, Inc.(“Prolias”) filed a complaint (the “Complaint”) against the Company with the Superior Court of New Jersey (Morris County) (the “Court”) in a matter entitled Prolias Technologies, Inc. v. PDI, Inc. (Docket No. MRS-L-899-15). In the Complaint, Prolias allegesalleged that it and the Company entered into an August 19, 2013 Collaboration Agreement and a First Amendment thereto (collectively, the “Agreement”) whereby Prolias and the Company agreed to work in good faith to commercialize a diagnostic test known as “Thymira.” Thymira is a minimally invasive diagnostic test that is being developed to detect thyroid cancer. Prolias alleges in the Complaint that the Company wrongfully terminated the Agreement, breached obligations owed to it and committed torts. After various motions on October 13, 2016, the Company filed an application to enter final judgment and taxing of costs against Prolias. The Company requested that the Court enter final judgment against Prolias and for the CompanyCompany.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in the amount of $621,236, plus ten percent interest continuing to accrue on the principal balance of $500,000 unless and until paid, attorneys’ fees and costs of $390,769, and a declaratory judgment that Prolias is deemed to have executed and delivered to the Company a promissory note in the amount of $1,000,000 under Article 10.2(a) of the Collaboration Agreement. On November 17, 2016, the Court denied the Company’s application without prejudice and with leave to refile.thousands, except per share amounts)

(unaudited)

On February 16, 2017, the Company refiled its application for final judgment, and on March 9, 2017, the Superior Court of New Jersey entered a final judgment in the Company’s favor against Prolias for the sum of $636,053 plus ten percent interest continuing to accrue on the principal balance of $500,000 (per diem $136.99) unless and until paid. Final judgment was also entered in the Company’s favor, and against Prolias, declaring Prolias is deemed to have executed and delivered to the Company a promissory note in the amount of $1,000,000 and Prolias is obligated to repay the Company the principal amount and all interest in accordance with the terms of the promissory note and Article 10.2(a) of the Collaboration Agreement by and between Prolias and the Company. On March 17,April 3, 2017, the Company requested that the final judgment against Prolias bewas recorded as a statewide lien. No assurance, however, can be given that the Company will ever be able to recover on the judgment against Prolias.

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

On May 27, 2016, Michael J. Swann, one of the Company’s former employees, filed a complaint against the Company in the Court of Common Pleas of the Fifth Judicial Circuit in South Carolina in a matter entitled Michael J. Swann v. Akorn, Inc.(“Akorn”), and Interpace Diagnostic Group Inc. (Civil Action No. 2016-CP-40-03362). In the complaint, Mr. Swann alleges, among other things, that he was discriminated against and wrongfully terminated as a member of a sales force marketing pharmaceutical products of Akorn, because of an illness suffered by Mr. Swann. Mr. Swann alleges that he was discriminated against in violation of the Americans with Disabilities Act/Americans with Disabilities Act Amendments Act and the Family Medical Leave Act and seeks damages for back pay, reinstatement, front pay, compensatory and punitive damages in an amount not less than $300,000, attorney’s fees and costs. The Company denies that it is liable to Mr. Swann for any of the claims asserted and intends to vigorously defend itself against those claims. On May 10, 2017 the Company received a settlement letter and paid the plaintiff $3,000.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

Severance

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

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

The severance liability as of December 31, 2016 was approximately $3.1 million, of which $2.2 million residesis classified in continuing operations and $0.9 million is in discontinued operations. In January 2017, five former executives agreed to a settlement of their severance obligations agreeing to 35% of the total amount due them. These remaining obligations were paid out in February 2017 in payments totaling approximately $1.0 million. As a result of the settlement, the Company recorded a reversal of expense of approximately $2.0 million.million in the first quarter of 2017. Within continuing operations, $1.5 million of expense was reversed and was recorded in general and administrative expenses in the Condensed Consolidated Statements of Comprehensive Income (Loss)Loss and $0.5 million was recorded in discontinued operations. The Company has no currently payable severance obligations as of March 31,September 30, 2017.

Parsippany Lease

Our corporate headquarters are located in Parsippany, New Jersey where we had been leasing approximately 23,000 square feet on an operating lease scheduled to run through June 2017. On May 24, 2017 the Company entered into a new lease with its Parsippany landlord. The lease is for a space of approximately 5,900 square feet and is for a period of sixty-three months commencing July 1, 2017 at an initial monthly obligation of approximately $13,000 per month subject to annual increases of fifty cents per square foot. The initial year of the lease has a two-month rent abatement period. The lease has an early termination date of June 30, 2020 at the option of the Company, provided at least 12 months’ notice is given in advance.

Pittsburgh Lease

On September 26, 2017 the Company renewed its lease for its Pittsburgh laboratory for an additional three months. The lease is for 20,000 square feet of laboratory and office space and now ends on June 30, 2018. The lease obligation remains at $32,500 per month for the full term of the lease.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

Other accrued expenses consisted of the following as of March 31,September 30, 2017 and December 31, 2016:

Long-term

Other long-term liabilities consisted of the following as of March 31,September 30, 2017 and December 31, 2016:

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

Stock Incentive Plan

In 2015, the board of directors (the Board)“Board”) and stockholders approved the Company’s Amended and Restated 2004 Stock Award and Incentive Plan, or(or the Amended“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.Plan”). The Amended and Restated Plan authorized an additional 2,450,000245,000 shares for new awards and combinedalso included the remaining shares available under the originalprior Amended and Restated Plan. On September 14, 2017, the Company stockholders approved an amendment to the Amended and Restated Plan to increase the maximum number of shares available for sale thereunder by 3,700,000 shares, of which 184,647 shares represented stockholders’ approval of contingent awards. Eligible participants under the Amended and Restated Plan include officers and other employees of the Company, members of the Board and outside consultants, as specified under the Amended and Restated Plan and designated by the Compensation and Management Development Committee of the Board or the Compensation Committee.(the “Compensation Committee”).  Unless earlier terminated by action of the Board, the Amended and Restated Plan will remain in effect until such time as no stock remains available for delivery under the Amended and Restated Plan and the Company has no further rights or obligations under the Amended and Restated Plan with respect to outstanding awards thereunder.

Historically, stock options have been granted with an exercise price equal to the market value of the common stock on the date of grant, expire 10 years from the date they are granted, and generally vested over a two-year period for members of the Board of Directors and a three-year period for employees. Upon exercise, new shares can be issued by the Company. The Company granted stock options

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

(Tabular information in 2016, which vest monthly over a one-year period. SARs are generally granted with a grant price equal to the market value of the common stock on the date of grant, vest one-third each year on the anniversary of the date of grant and expire five years from the date of grant. The restricted shares and restricted stock units (RSU’s) granted to employees historically have had a three year cliff vesting period and are subject to accelerated vesting and forfeiture under certain circumstances. Restricted shares and restricted stock units granted to board members generally have had a three year graded vesting period and are subject to accelerated vesting and forfeiture under certain circumstances.thousands, except per share amounts)

(unaudited)

In March of 2017, the Company’s Chief Executive Officer, Chief Financial Officer and members of Thethe Board were granted incentive stock options to purchase an aggregate of 172,077 shares of common stock with a weighted average exercise price of $2.13 per share and, subject(subject generally to the executive’s or board member’s, as applicable, continued service with the Company,Company) which vest in equal monthly installments over a period of one year.

The following table provides the weighted average assumptions used in determining the fair value of the stock option awards granted during the threenine month period ended March 31,September 30, 2017. There were no options granted during the threenine month period ended March 31,September 30, 2016.

The Company recognized approximately $0.1$0.3 million and $0.1$0.02 million of stock-based compensation expense during each of the three month periods ended March 31,September 30, 2017 and 2016, respectively, and approximately $0.5 million and $0.1 million during the nine month periods ended September 30, 2017 and 2016, respectively.

In 2017, the Company inadvertently granted 184,647 share options to six employees in excess of the number available for grant under the Amended and Restated Plan. These grants were cancelled and replaced with the new awards that were contingent upon stockholder approval which was received in September 2017. The replacement option grants were made on May 10, 2017, with a strike price of $2.46 and will vest in equal monthly installments over one year subject generally to the continued service of the grantees.

In September 2017, subsequent to approval by shareholders, the Company granted 945,000 stock options to members of senior management. These options have an exercise price of a $1.45 and vest in equal monthly installments over one year. Also in September 2017, the Company granted 43,000 stock options to members of the Board of Directors with an exercise price of $1.48.

Generally, accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year. The authoritative guidance for accounting for income taxes allows use of the discrete method when it provides a better estimate of income tax expense. Due to the Company’s valuation allowance position, it is the Company’s position that the discrete method provides a more accurate estimate of income tax expense and therefore income tax expense for the current quarter has been presented using the discrete method. As the year progresses, the Company refines its estimate based on the facts and circumstances by each tax jurisdiction. The following table summarizes the income tax expense(benefit) provision on income (loss)the loss from continuing operations and the effective tax rate for the three-monththree- and nine-month periods ended March 31,September 30, 2017 and 2016:

Income tax expense for the three-month periods ended March 31, 2017 and 2016 was primarily due to minimum state and local taxes.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

Income tax (benefit) provision for the three- and nine-month periods ended September 30, 2017 and 2016 was primarily due to an allocation of tax expense between continuing and discontinued operations.

Upon the divestiture of its CSO business onSince December 22, 2015.2015, the Company hasreports its operations as one reporting segment:segment, molecular diagnostics. The Company realigned its reporting segments due to the integration of RedPath and acquiring certain assets from Asuragen, to reflect the Company’s current and going forward business strategy. The Company’s current reporting segment structure is reflective of the way the Company’s management views the business, makes operating decisions and assesses performance. This structure allows investors to better understand Company performance, better assess prospects for future cash flows, and make more informed decisions about the Company.

The Company’s molecular diagnostics business focuses on developing and commercializing molecular diagnostic tests, leveraging the latest technology and personalized medicine for better patient diagnosis and management. Through the Company’s molecular diagnostics business, the Company aims to provide physicians and patients with diagnostic options for detecting genetic and other molecular alterations that are associated with gastrointestinal, endocrine and endocrinelung cancers, which are principally focused on early detection of patients at high risk of cancer. Customers in the Company’s molecular diagnostics segment consist primarily of physicians, hospitals and clinics. The service offerings throughout the segment have similar long-term average gross margins, contract terms, types of customers and regulatory environments. They are promoted through one centrally managed marketing group and the chief operating decision maker views their results on a combined basis.

The table below presents the significant components of CSO, Group DCA’s, Pharmakon’sDCA's, Pharmakon's and TVG’s results included within Income (Loss) from Discontinued Operations, Net of Tax in the condensed consolidated statements of comprehensive income (loss)loss for the three-monthsthree- and nine-months ended March 31,September 30, 2017 and 2016.

INTERPACE DIAGNOSTICS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(continued)

(Tabular information in thousands, except per share amounts)

(unaudited)

The assets and liabilities classified as discontinued operations relate to the CSO, Group DCA, Pharmakon, and TVG. As of March 31, 2017TVG businesses and December 31, 2016, these assets and liabilitiestheir composition are in the accompanying balance sheets as follows: