Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Interpace Diagnostics Group, Inc.Financial_Report.xls
EX-10.2 - EXHIBIT 10.2 - Interpace Diagnostics Group, Inc.exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - Interpace Diagnostics Group, Inc.exhibit101collaborationagr.htm
EX-32.2 - EXHIBIT 32.2 - Interpace Diagnostics Group, Inc.ex3222015q110q.htm
EX-31.2 - EXHIBIT 31.2 - Interpace Diagnostics Group, Inc.ex3122015q110q.htm
EX-32.1 - EXHIBIT 32.1 - Interpace Diagnostics Group, Inc.ex3212015q110q.htm
EX-31.1 - EXHIBIT 31.1 - Interpace Diagnostics Group, Inc.ex3112015q110q.htm

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 ______________________________________________________
FORM 10-Q
 ______________________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______________ to _______________
 
Commission File Number: 0-24249
 
PDI, Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
 
22-2919486
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
Morris Corporate Center 1, Building A
300 Interpace Parkway, Parsippany, NJ 07054
(Address of principal executive offices and zip code)
 
(800) 242-7494
(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 o
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 o
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,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
Large accelerated filer   o
Accelerated filer   o
Non-accelerated filer  o
Smaller reporting company  x
 
 
(Do not check if a  smaller
reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o    No x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 
 
Class
Shares Outstanding
May 7, 2015
Common stock, $0.01 par value
16,198,587

 



PDI, Inc.
Form 10-Q for Period Ended March 31, 2015
TABLE OF CONTENTS

 
 
Page No.
 
PART I - FINANCIAL INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets
at March 31, 2015 and December 31, 2014 (unaudited)
 
 
 
 
 
 
Condensed Consolidated Statements of Comprehensive Loss for the three-month periods ended March 31, 2015 and 2014 (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
 
Item 3.
 
 
 
 
 
Item 4.
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 
 
 
 
Item 1.
 
 
 
 
 
Item 1A.
 
 
 
 
 
Item 5.
Other Information
 
 
 
 
 
Item 6.
 
 
 
 
 
 

2




PDI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share data)

 
March 31,
2015
 
December 31, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
17,004

 
$
23,111

Short-term investments
108

 
107

Accounts receivable, net
13,386

 
8,505

Unbilled costs and accrued profits on contracts in progress
5,498

 
5,918

Other current assets
7,066

 
7,225

Total current assets
43,062

 
44,866

Property and equipment, net
3,323

 
3,184

Goodwill
15,545

 
15,545

Other intangible assets, net
46,434

 
47,304

Other long-term assets
4,248

 
5,007

Total assets
$
112,612

 
$
115,906

 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
3,034

 
$
4,308

Unearned contract revenue
10,896

 
6,752

Accrued salary and bonus
8,736

 
7,696

Other accrued expenses
11,332

 
14,822

Total current liabilities
33,998

 
33,578

Contingent consideration
25,909

 
25,909

Long-term debt, net of debt discount
27,349

 
27,154

Other long-term liabilities
8,732

 
9,143

Total liabilities
95,988

 
95,784

 
 
 
 
Commitments and contingencies (Note 7)


 


 
 
 
 
Stockholders’ equity:
 

 
 

Preferred stock, $.01 par value; 5,000,000 shares authorized, no shares issued and outstanding

 

Common stock, $.01 par value; 40,000,000 shares authorized


 


17,418,569 and 16,558,140 shares issued, respectively;
 

 
 

16,204,762 and 15,361,133 shares outstanding, respectively
174

 
165

Additional paid-in capital
134,558

 
134,171

Accumulated deficit
(103,764
)
 
(99,896
)
Accumulated other comprehensive income
16

 
16

Treasury stock, at cost (1,213,807 and 1,197,007 shares, respectively)
(14,360
)
 
(14,334
)
Total stockholders' equity
16,624

 
20,122

Total liabilities and stockholders' equity
$
112,612

 
$
115,906


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

3


PDI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited, in thousands, except for per share data)

 
Three Months Ended
 
March 31,
 
2015
 
2014
 
 
 
 
Revenue, net
 
 
 
Commercial Services
$
36,202

 
$
31,832

Interpace Diagnostics
2,117

 

Total revenue, net
38,319

 
31,832

Cost of revenue
 
 
 
Commercial Services
29,100

 
26,493

Interpace Diagnostics
1,574

 
219

Total cost of revenue
30,674

 
26,712

Gross profit
7,645

 
5,120

Sales and marketing
2,226

 

Research and development
232

 

General and administrative
7,199

 
5,534

Acquisition related amortization expense
870

 

Total operating expenses
10,527

 
5,534

Operating loss
(2,882
)
 
(414
)
Interest expense
(848
)
 

Other expense, net
(86
)
 
(17
)
Loss from continuing operations before income tax
(3,816
)
 
(431
)
(Benefit) provision for income tax
(73
)
 
66

Loss from continuing operations
(3,743
)
 
(497
)
Loss from discontinued operations, net of tax
(125
)
 
(1,115
)
Net loss
$
(3,868
)
 
$
(1,612
)
 
 
 
 
Other comprehensive income (loss):
 
 
 
Unrealized holding gain (loss) on available-for-sale securities, net

 

Comprehensive loss
$
(3,868
)
 
$
(1,612
)
 
 
 
 
Basic and diluted loss per share of common stock from:
 

 
 

Continuing operations
$
(0.25
)
 
$
(0.03
)
Discontinued operations
(0.01
)
 
(0.08
)
Net loss per basic and diluted share of common stock
$
(0.26
)
 
$
(0.11
)
 
 
 
 
Weighted average number of common shares and common share equivalents outstanding:
 

 
 

Basic
15,037

 
14,760

Diluted
15,037

 
14,760






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

4


PDI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)

 
Three Months Ended
 
March 31,
 
2015
 
2014
Cash Flows From Operating Activities
 
 
 
Net loss
$
(3,868
)
 
$
(1,612
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation and amortization
1,195

 
457

Realignment accrual accretion
35

 
35

Interest accretion
261

 

Bad debt expense
96

 

Gain on sale of discontinued operations
(285
)
 

Stock-based compensation
396

 
690

Other changes in assets and liabilities:
 

 
 
Increase in accounts receivable
(5,229
)
 
(6,049
)
Decrease in unbilled costs
420

 
2,424

(Increase) decrease in other current assets
(438
)
 
32

Decrease in other long-term assets
2,156

 
140

(Decrease) increase in accounts payable
(1,274
)
 
143

Increase (decrease) in unearned contract revenue
4,144

 
(594
)
Increase (decrease) in accrued salaries and bonus
1,040

 
(2,480
)
(Decrease) increase in other accrued expenses
(4,602
)
 
835

Increase (decrease) in long-term liabilities
336

 
(484
)
Net cash used in operating activities
(5,617
)
 
(6,463
)
 
 
 
 
Cash Flows From Investing Activities
 

 
 

Purchase of property and equipment
(464
)
 
(514
)
Loan to privately held non-controlled entity

 
(569
)
Net cash used in investing activities
(464
)
 
(1,083
)
 
 
 
 
Cash Flows From Financing Activities
 

 
 

Cash paid for repurchase of restricted shares
(26
)
 
(215
)
Net cash used in financing activities
(26
)
 
(215
)
 
 
 
 
Net decrease in cash and cash equivalents
(6,107
)
 
(7,761
)
Cash and cash equivalents – beginning
23,111

 
45,639

Cash and cash equivalents – ending
$
17,004

 
$
37,878

Cash paid for interest
$
818

 
$





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



5


PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Tabular information in thousands, except per share amounts)
 

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 PDI, Inc. and its subsidiaries (the Company or PDI) and related notes as included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 as filed with the Securities and Exchange Commission (SEC) on March 5, 2015.  The interim financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (GAAP) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  The interim financial statements include all normal recurring adjustments that, in the judgment of management, are necessary for a fair presentation of such interim financial statements.  All significant intercompany balances and transactions have been eliminated in consolidation.  Operating results for the three-month period ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015.

2.
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.
Reclassifications
Certain operating expenses within compensation expense and other sales, general and administrative expense in the period ended March 31, 2014 have been reclassified to conform to the current period presentation.
Sales and marketing expenses primarily include personnel and related costs for the promotion of the Company's Diagnostic tests.   Research and development expenses primarily include personnel and related costs for research and development related to new and existing tests.   The Company did not incur these costs in the period ended March 31, 2014. 

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-month periods ended March 31, 2015 and 2014 is as follows:
 
Three Months Ended
 
March 31,
 
2015
 
2014
Basic weighted average number of common shares
15,037

 
14,760

Dilutive effect of stock-based awards

 

Diluted weighted average number of common shares
15,037

 
14,760

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:

6

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)


 
Three Months Ended
 
March 31,
 
2015
 
2014
Options
25
 
43
Stock-settled stock appreciation rights (SARs)
1,066
 
1,238
Restricted stock/units
1,632
 
754
Market contingent SARs
188
 
188
 
2,911
 
2,223
Goodwill and 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. 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 goodwill and 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 goodwill.
The Company tests goodwill and indefinite lived intangible assets for impairment at least annually (as of December 31) and whenever events or circumstances change that indicate impairment may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate of the pharmaceutical industry; unanticipated competition; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and our consolidated financial results. At March 31, 2015, no indicators of impairment were identified. 
Receivables and Allowance for Doubtful Accounts
Commercial Services segment: Trade accounts receivable are recorded at the invoiced amount and do not bear interest.  Management reviews a customer’s credit history before extending credit.  The Company records a provision for estimated losses based upon the inability of its customers to make required payments using historical experience and periodically adjusts these provisions to reflect actual experience.  Additionally, the Company will establish a specific allowance for doubtful accounts when it becomes aware of a specific customer’s inability or unwillingness to meet its financial obligations (e.g., bankruptcy filing).  There was no allowance for doubtful accounts as of March 31, 2015.
Interpace Diagnostics segment: 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.
Proprietary tests billed to commercial insurance carriers or governmental programs that do not have a contract in place for its proprietary tests may or may not be covered by the 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 records a

7

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

provision for estimated losses based upon estimates and historical experience and periodically adjusts these provisions to reflect actual experience. There was a $0.1 million allowance for doubtful accounts as of March 31, 2015.

3.
INVESTMENTS IN MARKETABLE SECURITIES
Available-for-sale securities are carried at fair value with the unrealized holding gains or losses, net of tax, included as a component of accumulated other comprehensive income (loss) in stockholders’ equity. Realized gains and losses on available-for-sale securities are computed based upon specific identification and included in other expense, net in the condensed consolidated statements of comprehensive loss.  Declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other expense, net in the condensed consolidated statements of comprehensive loss and the cost basis of the security is reduced. The fair values for marketable equity securities are based on quoted market prices.  Held-to-maturity investments are stated at amortized cost which approximates fair value.  Interest income is accrued as earned.  Realized gains and losses on held-to-maturity investments are computed based upon specific identification and included in other expense, net in the condensed consolidated statement of comprehensive loss.  The Company does not have any investments classified as trading.
Available-for-sale securities consist of assets in a rabbi trust associated with the Company’s deferred compensation plan.  As of both March 31, 2015 and December 31, 2014, the carrying value of available-for-sale securities was approximately $108,000 and is included in short-term investments.  Available-for-sale securities as of both March 31, 2015 and December 31, 2014 consisted of approximately $60,000 in mutual funds and approximately $48,000 in money market accounts.
The Company’s other marketable securities consist of investment grade debt instruments such as obligations of U.S. Treasury and U.S. Federal Government agencies.  These investments are categorized as held-to-maturity since the Company’s management has the ability and intent to hold these securities to maturity.  The Company’s held-to-maturity investments are carried at amortized cost which approximates fair value and are maintained in separate accounts to support the Company’s letters of credit.  The Company had standby letters of credit of approximately $1.4 million as of both March 31, 2015 and December 31, 2014, as collateral for its existing insurance policies and facility leases.
At March 31, 2015 and December 31, 2014, held-to-maturity investments included the following:
 
 
 
Maturing
 
 
 
Maturing
 
March 31,
2015
 
within
1 year
 
after 1 year
through
3 years
 
December 31,
2014
 
within
1 year
 
after 1 year
through
3 years
Cash/money accounts
$
82

 
$
82

 
$

 
$
204

 
$
204

 
$

US Treasury securities
1,283

 
105

 
1,178

 
1,070

 
105

 
965

Government agency securities
221

 
129

 
92

 
317

 
225

 
92

Total
$
1,586

 
$
316

 
$
1,270

 
$
1,591

 
$
534

 
$
1,057

At March 31, 2015 and December 31, 2014, held-to-maturity investments were recorded in the following accounts: 
 
March 31,
2015
 
December 31,
2014
Other current assets
$
316

 
$
534

Other long-term assets
1,270

 
1,057

Total
$
1,586

 
$
1,591


4.
GOODWILL
Goodwill recorded as of March 31, 2015 and December 31, 2014 of $15.5 million is attributable to the 2014 acquisition of RedPath. A rollforward of the carrying value of goodwill from January 1, 2015 to March 31, 2015 is as follows:

8

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

 
2015
 
January 1,
Additions
Adjustments
Impairments
March 31,
RedPath
$
15,545




$
15,545

Other Intangible Assets
The net carrying value of the identifiable intangible assets as of March 31, 2015 is as follows: 
 
 
 
As of March 31, 2015
 
Life
 
Carrying
Accumulated
 
 
(Years)
 
Amount
Amortization
Net
Diagnostic assets:
 
 
 
 
 
Asuragen acquisition:
 
 
 
 
 
   Thyroid
9
 
$
8,519

$

$
8,519

   Pancreas
7
 
2,882

257

2,625

   Biobank
4
 
1,575

246

1,329

RedPath acquisition:
 
 
 
 
 
Pancreas test
7
 
16,141

961

15,180

Barrett's test
9
 
18,351


18,351

Total
 
 
$
47,468

$
1,464

$
46,004

Diagnostic lab:
 
 
 
 
 
CLIA Lab
2.3
 
$
609

$
179

$
430


Amortization expense was $0.9 million for the three-month period ended March 31, 2015. There was no amortization expense for the quarter ended March 31, 2014. Amortization of the thyroid and Barrett's diagnostic assets will begin upon launch of the products. Estimated amortization expense for the next five years is as follows:
2015
2016
2017
2018
2019
$
5,102

$
6,358

$
6,097

$
5,949

$
5,703


5.
FACILITIES REALIGNMENT
The following table presents a rollforward of the Company’s restructuring reserve from December 31, 2014 to March 31, 2015, of which approximately $0.5 million is included in other accrued expenses and $0.1 million is included in long-term liabilities as of March 31, 2015. The Company recognizes accretion expense in Other expense, net in the Condensed Consolidated Statement of Comprehensive Loss. 
 
Commercial
Services
 
Discontinued Operations
 
Total
Balance as of December 31, 2014
$
560

 
$
207

 
$
767

Accretion
28

 
7

 
35

Adjustments

 

 

Payments
(170
)
 
(46
)
 
(216
)
Balance as of March 31, 2015
$
418

 
$
168

 
$
586


6.
FAIR VALUE MEASUREMENTS

9

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

The Company's financial assets and liabilities reflected at fair value in the consolidated financial statements include: cash and cash equivalents; short-term investments; accounts receivable; other current assets; accounts payable; and contingent consideration. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and/or the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated, or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based upon observable inputs used in the valuation techniques, the Company is required to provide information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values into three broad levels as follows:
Level 1:
Valuations for assets and liabilities traded in active markets from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2:
Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
Level 3:
Valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The valuation methodologies used for the Company's financial instruments measured on a recurring basis at fair value, including the general classification of such instruments pursuant to the valuation hierarchy, is set forth in the tables below.
 
As of March 31, 2015
 
Fair Value Measurements
 
Carrying
 
Fair
 
As of March 31, 2015
 
Amount
 
Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents:

 
 
 
 
 
 
 
 
       Cash
$
12,229

 
$
12,229

 
$
12,229

 
$

 
$

       Money Market Funds
4,775

 
4,775

 
4,775

 

 

Total
$
17,004

 
$
17,004

 
$
17,004

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
Money Market Funds
$
48

 
$
48

 
$
48

 
$

 
$

Mutual Funds
60

 
60

 
60

 

 

U.S. Treasury securities
1,283

 
1,283

 
1,283

 

 

Government agency securities
221

 
221

 
221

 

 

Total
$
1,612

 
$
1,612

 
$
1,612

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
Contingent consideration:
 
 
 
 
 
 
 
 
 
Asuragen
$
4,476

 
$
4,476

 
$

 
$

 
$
4,476

RedPath
22,066

 
22,066

 

 

 
22,066

 
$
26,542

 
$
26,542

 
$

 
$

 
$
26,542

 
The fair value of cash and cash equivalents and marketable securities is valued using market prices in active markets (level 1). As of March 31, 2015, 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).

10

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)


In connection with the acquisition of the Acquired Property from Asuragen and acquisition of RedPath, the Company recorded $4.5 million and $22.1 million of contingent cash consideration related to deferred payments and 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 no change in the fair value of the contingent consideration during the period ended March 31, 2015.

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 are measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment charge is recognized.

7.
COMMITMENTS AND CONTINGENCIES
Letters of Credit
As of March 31, 2015, the Company had outstanding letters of credit of $1.4 million as required by its existing insurance policies and facility leases.  These letters of credit are supported by investments in held-to-maturity securities.  See Note 3, Investments in Marketable Securities, for additional detail regarding investments in marketable securities.
Litigation
Due to the nature of the businesses in which the Company is engaged, such as product detailing and in the past, the distribution of products, 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 distributes. 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, including pharmaceuticals. The Company seeks to reduce its potential liability under its service agreements through measures such as contractual indemnification provisions with customers (the scope of which may vary from customer to customer, and the performance of which is not secured) and insurance. The Company could, however, also be held liable for errors and omissions of its employees in connection with the services it performs that are outside the scope of any indemnity or insurance policy. The Company could be materially adversely affected if it were required to pay damages or incur defense costs in connection with a claim that is outside the scope of an indemnification agreement; if the indemnity, although applicable, is not performed in accordance with its terms; or if the Company’s liability exceeds the amount of applicable insurance or indemnity.

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

In connection with the October 31, 2014 acquisition of RedPath the Company assumed a liability for a January 2013 settlement agreement entered into by the former owners of RedPath with the DOJ. Under the terms of the Settlement Agreement, the Company is obligated to make payments to the DOJ for the calendar years ended December 31, 2014 through 2017 up to a maximum of $3.0 million.

11

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)


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 three-month period ended March 31, 2015, the Company paid $0.3 million and has $2.8 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 $0.5 million is included in other accrued expenses and $2.3 million is included in other long-term liabilities.

Prolias Technologies, Inc. v. PDI, Inc.
 
On April 8, 2015, Prolias Technologies, Inc. ("Prolias") filed a complaint (the "Complaint") against the Company with the Superior Court of New Jersey (Morris County) in a matter entitled Prolias Technologies, Inc. v. PDI, Inc. (Docket No. MRS-L-899-15).  In the Complaint, Prolias alleges that it and the Company entered into an August 19, 2013 Collaboration Agreement and a First Amendment thereto (collectively the "Agreement"), whereby Prolias and the Company agreed to work in good faith to commercialize a diagnostic test known as "Thymira."  Thymira is a minimally invasive diagnostic test that is being developed to detect thyroid cancer.
 
Prolias alleges in the Complaint that the Company wrongfully terminated the Agreement, breached obligations owed to it 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.
 
The Company was served with the Complaint on April 15, 2015 and its deadline to respond to the Complaint is May 20, 2015.  The Company denies that it is liable to Prolias for any of the claims asserted in the Complaint and it intends to vigorously defend itself.


8.
ACCRUED EXPENSES AND LONG-TERM LIABILITIES
Other accrued expenses consisted of the following as of March 31, 2015 and December 31, 2014:
 
March 31, 2015
 
December 31, 2014
Accrued pass-through costs
$
2,476

 
$
1,043

Facilities realignment accrual
520

 
517

Self-insurance accruals
524

 
463

Indemnification liability
875

 
875

Contingent consideration
633

 
633

Acquisition related costs
200

 
1,225

Liabilities held-for-sale

 
2,820

Rent payable
563

 
348

DOJ settlement
500

 
500

Accrued interest
323

 
465

All others
4,718

 
5,933

 
$
11,332

 
$
14,822


Long-term liabilities consisted of the following as of March 31, 2015 and December 31, 2014:

12

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

 
March 31, 2015
 
December 31, 2014
Rent payable
$
305

 
$
209

Uncertain tax positions
3,307

 
3,267

Deferred tax liability
2,526

 
2,525

DOJ settlement (indemnified by RedPath)
2,250

 
2,500

Liabilities held-for-sale

 
329

Other
344

 
313

 
$
8,732

 
$
9,143


9.
STOCK-BASED COMPENSATION
In February 2015, under the terms of the stockholder-approved PDI, Inc. 2004 Stock Award Incentive Plan (the 2004 Plan), the Compensation and Management Development Committee of the Board (the Compensation Committee) approved grants of restricted stock to certain executive officers and members of senior management of the Company. The full Board approved the portion of these grants made to the Company’s Chief Executive Officer.  As part of the Company's 2014 long-term incentive plan, these grants aggregated 444,364 shares of restricted stock issued with a weighted average grant date fair value of $1.73 per share.
The grant date fair values of SARs awards are determined using a Black-Scholes pricing model.  Assumptions utilized in the model are evaluated and revised, as necessary, to reflect market conditions and experience. The following table provides the weighted average assumptions used in determining the fair value of the non-market based SARs awards granted during the three-month period ended March 31, 2015
 
Three Months Ended
 
March 31,
 
2015
 
2014
Risk-free interest rate
0.97%
 
0.69%
Expected life
3.5 years
 
3.5 years
Expected volatility
52.03%
 
48.01%
Dividend yield
—%
 
—%
In February 2014, the Company’s chief executive officer was granted 188,165 market contingent SARs.  The market contingent SARs have an exercise price of $5.10, a five year term to expiration, and a weighted-average fair value of $1.87.  The fair value estimate of the market contingent SARs was calculated using a Monte Carlo Simulation model.  The market contingent SARs are subject to a time-based vesting schedule, but will not vest unless and until certain additional, market-based conditions are satisfied: (1) with respect to the initial 36,496 market contingent SARs, which vest on a time-based schedule on the first anniversary of the date of grant, the closing price of the Company’s common stock is at least $7.65 per share for the average of 60 consecutive trading days anytime within five years from the grant date; (2) with respect to the next 64,460 market contingent SARs, which vest on a time-based schedule on the second anniversary of the date of grant, the closing price of the Company’s common stock is at least $10.20 per share for the average of 60 consecutive trading days anytime within five years from the grant date; and (3) with respect to the final 87,209 market contingent SARs, which vest on a time-based schedule on the third anniversary of the date of grant, the closing price of the Company’s common stock is at least $15.30 per share for the average of 60 consecutive trading days anytime within five years from the grant date.  These stock prices represent premiums in excess of at least 50% of the closing stock price of the Company’s common stock on the date of grant.
The Company recognized $0.4 million and $0.7 million of stock-based compensation expense during each of the three-month periods ended March 31, 2015 and 2014, respectively.
10.
INCOME TAXES

13

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

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-month periods ended March 31, 2015 and 2014
 
Three Months Ended
 
March 31,
 
2015

2014
(Benefit) provision for income tax
$
(73
)
 
$
66

Effective income tax rate
1.9
%
 
(15.3
)%
Income tax benefit for the quarter ended March 31, 2015 was primarily due to a loss at one of the Company's operating subsidiaries for which it is able to benefit the net operating losses, offset by minimum state and local taxes and gross margin taxes at various subsidiaries. Income tax expense for the quarter ended March 31, 2014 was primarily due to state and local taxes as the Company and its subsidiaries file separate income tax returns in numerous state and local jurisdictions.
11.
SEGMENT INFORMATION
The accounting policies of the segments are described in Note 1 of the Company’s audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2014.  Corporate charges are allocated to each of the reporting segments on the basis of total salary expense. Corporate charges include corporate headquarters costs and certain depreciation expenses. Certain corporate capital expenditures have not been allocated from the Commercial Services segment to the other reporting segments since it is impracticable to do so.
 
Commercial
Services
 
Interpace
Diagnostics
 
Consolidated
Three months ended March 31, 2015:
 
 
 
 
 
Revenue, net
$
36,202

 
$
2,117

 
$
38,319

Operating income (loss)
$
1,463

 
$
(4,345
)
 
$
(2,882
)
Capital expenditures
$
6

 
$
458

 
$
464

Depreciation and amortization expense
$
251

 
$
944

 
$
1,195

 
 
 
 
 
 
Three months ended March 31, 2014:
 
 
 

 
 

Revenue, net
$
31,832

 
$

 
$
31,832

Operating income (loss)
$
466

 
$
(880
)
 
$
(414
)
Capital expenditures
$
514

 
$

 
$
514

Depreciation and amortization expense
$
235

 
$
1

 
$
236


12.
DISCONTINUED OPERATIONS
On December 31, 2014 the Company classified Group DCA as held-for-sale and wrote the assets of the business down to their fair values as the assets have become impaired. On February 27, 2015, the Company entered into an agreement (the Haymarket Agreement) to sell certain assets and liabilities of Group DCA to Haymarket Media, Inc. (Haymarket) in exchange for future services and potential future royalty payments.

14

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)


The assets transferred under the Haymarket Agreement are customer facing contracts and agreements, and the related supporting records. The liabilities transferred are obligations to complete services under the aforementioned contracts and agreements. In exchange, the Company will receive: 

1. services performed by Haymarket, valued at approximately $0.8 million; and
2. a 15% royalty on contracts signed over the period from March 1, 2015 through February 28, 2018 relating to the clients, contracts and opportunities transferred to Haymarket under the agreement, valued at $0.1 million.

As of December 31, 2014, the Company incurred a non-cash charge of approximately $1.9 million. This non-cash charge included the write-down of goodwill and the accounts receivable of Group DCA, which is partially offset by the value of services performed by Haymarket and the fair value of future royalties, and included the write-off of assets of $0.7 million. During the quarter ended March 31, 2015, the Company closed the transaction with Haymarket, reviewed its previous assumptions and recorded a non-cash adjustment of $0.3 million. The operations and related exit costs of Group DCA are shown as discontinued operations in all periods presented.

On December 29, 2011 the Company entered into an agreement to sell certain assets of our Pharmakon business unit to Informed Medical Communications, Inc. (“Informed”) in exchange for potential future royalty payments and an ownership interest in Informed. In the fourth quarter of 2012, the Company wrote-off all of the assets related to the sale of Pharmakon to Informed as it believes that these assets have become impaired. On July 19, 2010, the Board approved closing the TVG business unit. The Company notified employees and issued a press release announcing this decision on July 20, 2010. The Consolidated Statements of Comprehensive Loss reflect the presentation of Group DCA, Pharmakon, and TVG as discontinued operations in all periods presented.

The table below presents the significant components of Group DCA's, Pharmakon's and TVG’s results included in Loss from Discontinued Operations, Net of Tax in the consolidated statements of comprehensive loss for the quarters ended March 31, 2015 and 2014.

 
Three Months Ended
 
March 31,
 
2015

2014
Revenue, net
$
260

 
$
988

Loss from discontinued operations, before income tax
(124
)
 
(1,114
)
Provision for income tax
1

 
1

Loss from discontinued operations, net of tax
$
(125
)
 
$
(1,115
)
The major classes of assets and liabilities included in the Condensed Consolidated Balance Sheets for Group DCA, TVG, and Pharmakon as of March 31, 2015 and December 31, 2014 are as follows:
 
March 31,
2015
 
December 31,
2014
Current assets
$
1,495

 
$
613

Non-current assets
418

 
1,445

Total assets
$
1,913

 
$
2,058

Current liabilities
$
1,856

 
$
2,820

Non-current liabilities
250

 
329

Total liabilities
$
2,106

 
$
3,149


15

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

13.
INVESTMENT IN PRIVATELY HELD NON-CONTROLLED ENTITY AND OTHER ARRANGEMENTS
In August 2013, PDI entered into phase one of a collaboration agreement with a privately held molecular diagnostics company, Prolias Technologies, Inc., (the Diagnostics Company) to commercialize its fully-developed, molecular diagnostic tests. Under the terms of phase one of the collaboration agreement, PDI paid an initial fee of $1.5 million and had the ability to enter the second phase of the collaboration agreement in the form of a call option to purchase the outstanding common stock of the Diagnostics Company. The Company also had the option to contribute an additional $0.5 million for mutually agreed upon activities in furtherance of collaboration efforts. If PDI purchased the outstanding common stock of the Diagnostics Company, in addition to the option price based on the achievement of milestones, beginning in 2015, PDI would have paid a royalty of 7.0% on annual net revenue up to $50.0 million with escalating royalty percentages for higher annual net revenue capped at 11.0% for annual net revenue in excess of $100.0 million. In the fourth quarter of 2014, the Company identified events that have had an adverse effect on the fair value of this cost-method investment and impaired the initial investment of $1.5 million.

Through June 30, 2014, the Company loaned the Diagnostics Company approximately $0.7 million bearing a 4.0% interest rate. As of December 31, 2014, the loan balance was $0.6 million. PDI recorded the loan receivable within Other current assets in the Condensed Consolidated Balance Sheets. In the fourth quarter of 2014, the Company fully reserved for the loan, recording a charge of approximately $0.6 million. On March 30, 2015, the Company terminated the collaboration agreement between the parties.

Other Arrangements

In October 2013, the Company entered into phase one of a collaboration agreement to commercialize CardioPredict™, a molecular diagnostic test developed by Transgenomic, in the United States. Under the terms of the collaboration agreement, PDI was responsible for all U.S.-based marketing and promotion of CardioPredict™, while Transgenomic would be responsible for processing CardioPredict™ in its state-of-the-art CLIA lab and all customer support. Both parties were responsible for their respective expenses. Subsequently, the Company determined that it would not enter into the second phase of the collaboration agreement with Transgenomic and notified Transgenomic of its decision to terminate the collaboration agreement effective June 30, 2014.

PDI's costs related to both of these agreements are expensed in the Company's Interpace Diagnostics segment and reflected in Cost of sales or General and administrative expenses in the Consolidated Statement of Comprehensive Loss, depending upon the underlying nature of the expenses incurred.


16

PDI, Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Tabular information in thousands, except per share amounts)

14.    LONG-TERM DEBT

On October 31, 2014, the Company and its wholly-owned subsidiary, Interpace, entered into an Agreement to acquire RedPath. In connection with the Transaction, the Company entered into a Note, dated October 31, 2014.

The Note is $11.0 million, interest-free and will be paid in eight equal consecutive quarterly installments beginning October 1, 2016. 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 $7.4 million. During the quarter ended March 31, 2015 and the year ended December 31, 2014, the Company accreted approximately $0.2 million and $0.1 million into interest expense, respectively, using the effective interest method. As of March 31, 2015, the balance of the Note is approximately $7.7 million and the unamortized discount is $3.3 million.

In addition, the Company entered into the Credit Agreement with the Agent and the Lenders in connection with the Transaction in the aggregate principal amount of $20.0 million (the Loan). The maturity date of the loan is October 31, 2020. The Loan bears interest at the greater of (a) three month LIBOR and (b) 1.0%, plus a margin of 12.5%, payable in cash quarterly in arrears, beginning on February 17, 2015. The interest rate will be increased by 3.0% in the event of a default under the Credit Agreement. Beginning in January 2017, the Company will be required to make principal payments on the Loan. Beginning in January 2017 and ending on October 31, 2020, subject to a $250,000 per quarter cap, the Lenders will be entitled to receive quarterly revenue based payments from the Company equal to 1.25x of revenue derived from net sales of molecular diagnostics products (the Synthetic Royalty). The Company received net proceeds of approximately $19.6 million following payment of certain fees and expenses in connection with the Credit Agreement.

The Company paid approximately $0.1 million of certain out-of-pocket costs and expenses incurred by the Lenders and the Agent and a $0.3 million origination fee, both of which are being accreted as interest expense over the life of the loan using the effective interest method. The Company is also obligated to pay a $0.8 million exit fee which the Company is also accreting to interest expense over the life of the Loan. During the quarter ended March 31, 2015, the Company accreted approximately $0.2 million into interest expense and recorded the liability within Long-term debt, net of debt discount in the condensed consolidated balance sheet. If the Company prepays the Loan, the Company is obligated to pay a prepayment fee equal to: 6.0% of the Loan if the Loan is prepaid on or after October 31, 2015 but prior to October 31, 2016; 5.0% of the Loan if the Loan is prepaid on or after October 31, 2016 but prior to October 31, 2017; and 2.0% if the Loan is prepaid on or after October 31, 2017 but prior to October 31, 2018. In addition the Company will also pay a prepayment premium applicable to the Synthetic Royalty equal to (i)(1) 1.25% multiplied by (2) the lesser of (A) $80.0 million and (B) the aggregate revenue on net sales of molecular diagnostics products for the four most recently-completed fiscal quarters, multiplied by (ii) the number of days remaining until October 31, 2020, divided by (iii) 360. The Company must also make a mandatory prepayment in connection with the disposition of certain of the Company’s assets. As of March 31, 2015 the balance of the Loan, net of unamortized debt discount, was $19.7 million.

The obligations of the Company under the Credit Agreement are guaranteed by the Company and its Subsidiaries in favor of the Agent for the benefit of the Lenders. The Credit Agreement contains customary representations and warranties in favor of the Agent and the Lenders and certain covenants, including among other things, financial covenants relating to liquidity and revenue targets. As of March 31, 2015, the Company is in compliance with these covenants.

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

 
2015
 
2016
 
2017
 
2018
 
2019
Subordinated note
$

 
$
1,375

 
$
4,125

 
$
4,125

 
$
1,375

Loan

 

 
2,534

 
5,000

 
5,000

 
$

 
$
1,375

 
$
6,659

 
$
9,125

 
$
6,375


In addition, the Company recorded approximately $0.3 million of legal costs in connection with the Credit Facility and capitalized them as deferred financing costs within Other long-term assets in the condensed consolidated balance sheet. These deferred financing costs are being amortized to interest expense using the effective interest method over the term of the Credit Facility.

17

PDI, Inc.


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING STATEMENTS
 This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act).  Statements that are not historical facts, including statements about our plans, objectives, beliefs and expectations, are forward-looking statements.  Forward-looking statements include statements preceded by, followed by or that include the words “believes,” “expects,” “anticipates,” “plans,” “estimates,” “intends,” “projects,” “should,” “may,” “will” or similar words and expressions.  These forward-looking statements are contained throughout this Form 10-Q.
Forward-looking statements are only predictions and are not guarantees of future performance.  These statements are based on current expectations and assumptions involving judgments about, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control.  These predictions are also affected by known and unknown risks, uncertainties and other factors that may cause our actual results to be materially different from those expressed or implied by any forward-looking statement.  Many of these factors are beyond our ability to control or predict.  Such factors include, but are not limited to, the following:

our ability to profitably grow our Interpace Diagnostics segment, including our ability to successfully compete in the market;
our ability to successfully negotiate contracts in our Commercial Services segment with reasonable margins and favorable payment terms;
our ability to obtain broad adoption of and reimbursement for our molecular diagnostic tests in a changing reimbursement environment;
the demand for our molecular diagnostic tests from physicians and patients;
whether we are able to successfully utilize our operating experience from our Commercial Services segment to sell our molecular diagnostic tests;
our dependence on third parties for the supply of some of the materials used in our molecular diagnostic tests;
our plans to develop, acquire and commercialize our existing and planned molecular diagnostic tests, as applicable;
the effect current and future laws, licensing requirements and regulation have on our Commercial Services and Interpace Diagnostics segments;
our exposure to environmental liability as a result of our Interpace Diagnostics segment;
the susceptibility of our information systems to security breaches, loss of data and other disruptions;
our compliance with our license agreements and our ability to protect and defend our intellectual property rights;
product liability claims against us;
our involvement in current and future litigation against us;
our billing practices and our ability to collect on claims for the sale of our molecular diagnostic tests and Interpace Diagnostics;
in our Commercial Services segment, early termination of a significant services contract, the loss of one or more of our significant customers or a material reduction in service revenues from such customers;
our customer concentration risk in our Commercial Services segment in light of continued consolidation within the pharmaceutical industry and our current business development opportunities;
our ability to meet performance goals in incentive-based arrangements with customers in our Commercial Services segment;
our ability to attract and retain qualified sales representatives and other key employees and management personnel;
changes in outsourcing trends or a reduction in promotional and sales expenditures in the pharmaceutical, biotechnology and healthcare industries;
competition in the industries in which we operate or expect to operate;
our ability to obtain additional funds in order to implement our business models and strategies;
our ability to satisfy our debt, royalty and milestone obligations and comply with our debt covenants;
our ability to successfully identify, complete and integrate any future acquisitions or successfully complete and integrate our Interpace Diagnostics segment and the effects of any such items on our revenues, profitability and ongoing business;
failure of third-party service providers to perform their obligations to us;
the results of any future impairment testing for goodwill and other intangible assets;
the effect our largest stockholder may have on us; and

18

PDI, Inc.

volatility of our stock price and fluctuations in our quarterly and annual revenues and earnings.

Please see Part I – Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2014, as well as other documents we file with the United States Securities and Exchange Commission (SEC) from time-to-time, for other important factors that could cause our actual results to differ materially from our current expectations as expressed in the forward-looking statements discussed in this Form 10-Q.  Because of these and other risks, uncertainties and assumptions, you should not place undue reliance on these forward-looking statements. In addition, these statements speak only as of the date of the report in which they are set forth and, except as may be required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
OVERVIEW
We are a leading healthcare commercialization company providing go-to-market strategy and execution to established and emerging pharmaceutical, biotechnology, diagnostics and healthcare companies in the United States through our Commercial Services segment, and developing and commercializing molecular diagnostic tests through our Interpace Diagnostics segment.

Our Commercial Services segment is focused on providing outsourced pharmaceutical, biotechnology, medical device and diagnostic sales teams to our customers. Through this business, we offer a range of complementary sales support services designed to achieve our customers’ strategic and financial objectives. Our customers in this business include pharmaceutical, biotechnology, diagnostics and healthcare companies. In this business, we also provide integrated multi-channel message delivery.

Our Interpace Diagnostics segment is focused on developing and commercializing molecular diagnostic tests, leveraging the latest technology and personalized medicine for better patient diagnosis and management. Through our Interpace Diagnostics segment, we aim to provide physicians and patients with diagnostic options for detecting genetic and other molecular alterations that are associated with gastrointestinal and endocrine cancers. Customers in our Interpace Diagnostics segment consist primarily of physicians, hospitals and clinics.
 
We provide pharmaceutical, biotechnology, diagnostics and healthcare companies with full-service outsourced product commercialization and promotion solutions through our Commercial Services segment.  Our Commercial Services segment offers customers a range of standard and customizable options for their products throughout their entire lifecycles, from development to commercialization.  We have over 25 years of experience in the services business that allows us to provide services that are innovative, flexible and designed to drive our customers’ profits and respond to a continually changing market.  Over the course of our operating history, we have designed and successfully implemented commercialization programs for many large pharmaceutical companies, a variety of emerging and specialty pharmaceutical and biotechnology companies and diagnostic and other healthcare service providers.  Our services provide a vital link between our customers and the medical community through the communication of product information to physicians and other healthcare professionals for use in the care of their patients.

We are also developing and commercializing molecular diagnostic tests to detect genetic and other molecular alterations that are associated with gastrointestinal and endocrine cancers through our Interpace Diagnostics segment. As a result of our 2014 acquisitions of RedPath Integrated Pathology, Inc. (RedPath) and certain assets from Asuragen, Inc. (Asuragen) our Interpace Diagnostics segment offers PancraGen™ (formerly known as PathFinderTG® Pancreas), a diagnostic test designed for determining risk of malignancy in pancreatic cysts, and ThyGenX™, a next-generation sequencing test designed to assist physicians in distinguishing between benign and malignant genotypes in indeterminate thyroid nodules. We are also excited about the April 2015 launch of ThyraMIR™, our second thyroid nodule cancer test, which is a micro RNA-based highly sensitive “rule out” thyroid cancer complementary test. The combination of ThyGenX™ and ThyraMIR™ should establish us as a strong competitor in the thyroid cancer test space.

In addition, we have three diagnostic tests in late stage development that are designed to detect genetic and other molecular alterations that are associated with gastrointestinal cancers.

DESCRIPTION OF REPORTING SEGMENTS
For the quarter ended March 31, 2015, the operating segments or service offerings included in our reporting segments are as follows:
Commercial Services reporting segment, consists of the following service offerings:

19

PDI, Inc.

Personal Promotion, through our:
Dedicated Sales Teams; and
Established Relationship Team.
Medical and Clinical Services; and
Full product commercialization.
Interpace Diagnostics reporting segment, which consists of the following operating segments:
Gastrointestinal; and
Endocrinology.

Selected financial information for each of these segments is contained in Note 11, Segment Information, to these interim financial statements and in the discussion under the caption Consolidated Results of Operations.
Commercial Services

Nature of Contracts by Segment
Revenue, net (revenue) under Commercialization Services contracts is generally based on the number of sales representatives utilized or the number of physician details made and, when applicable, the full commercial operations services provided.  If contracts include full commercial operations services, we have determined that there are two units of accounting in these arrangements: the sales team providing product detailing services; and the commercial operations providing full supply chain management, operations, marketing, compliance, and regulatory/medical management services.  Revenue is generally recognized on a straight-line basis over the contract period or as the physician details are performed. A portion of revenues earned under certain contracts may be risk-based. The risk-based metrics may be based on activity metrics such as call activity, turnover, or other agreed upon measures, or on contractually defined percentages of prescriptions written.  Revenue from risk-based metrics is recognized in the period which the metrics have been attained and when we are reasonably assured that payment will be made. Many of our product detailing contracts also allow for additional periodic incentive fees to be earned if certain activities have occurred or client specific sales performance benchmarks have been attained. Revenue from incentive fees is recognized in the period earned when the performance benchmarks have been attained and when we are reasonably assured that payment will be made.  Many contracts also stipulate penalties if agreed upon performance benchmarks have not been met.  Revenue is recognized net of any potential penalties until the performance criteria relating to the penalties have been achieved.  Commission based revenue is recognized when performance is completed. 
 
Our Commercial Services contracts are generally for terms of one to three years and may be renewed or extended.  The majority of these contracts, however, are terminable by the customer without cause upon 30 days' to 180 days’ prior written notice.  Certain contracts include provisions mandating that such notice may not be provided prior to a pre-determined future date and also provide for termination payments if the customer terminates the agreement without cause.  Typically, however, the total compensation provided by minimum service periods (otherwise referred to as minimum purchase obligations) and termination payments within any individual agreement will not fully offset the revenue we would have earned from fully executing the contract or the costs we may incur as a result of its early termination.

We maintain continuing relationships with our Commercial Services customers which may lead to multiple ongoing contracts between us and one customer. In situations where we enter into multiple contracts with one customer at or near the same time, we evaluate the various factors involved in negotiating the arrangements in order to determine if the contracts were negotiated as a package and should be accounted for as a single agreement.
  
Cost of services consists primarily of the costs associated with executing product detailing programs, performance based contracts or other sales and marketing services identified in the contract and includes personnel costs and other direct costs, as well as the initial direct costs associated with staffing a product detailing program. Personnel costs, which constitute the largest portion of cost of services, include all labor related costs, such as salaries, bonuses, fringe benefits and payroll taxes for the sales representatives, sales managers and professional staff that are directly responsible for executing a particular program. Other direct costs include, but are not limited to, facility rental fees, travel expenses, sample expenses and other promotional expenses.

Initial direct program costs are the costs associated with initiating a product detailing program, such as recruiting and hiring and certain other direct incremental costs, excluding pass through costs that are billed to customers. Other direct costs include, but are not limited to, facility rental fees, travel expenses, sample expenses and other promotional expenses.

20

PDI, Inc.

 
Reimbursable out-of-pocket expenses include those relating to travel and other similar costs, for which we are reimbursed at cost by our customers.  Reimbursements received for out-of-pocket expenses incurred are characterized as revenue and an identical amount is included as cost of services in the consolidated statements of comprehensive loss. 
 
Training costs include the costs of training the sales representatives and managers on a particular product detailing program so that they are qualified to properly perform the services specified in the related contract.  For the majority of our contracts, training costs are reimbursable out-of-pocket expenses.
 
Interpace Diagnostics

Interpace Diagnostics revenue is generated using our proprietary tests. Our performance obligation is fulfilled upon the completion, review and release of test results. In conjunction with fulfilling these services, we bill the third-party payor or hospital. We recognize Interpace Diagnostics revenue related to billings for Medicare, Medicare Advantage, and hospitals on an accrual basis, net of contractual adjustment, when a contract is in place, a reliable pattern of collectability exists and collectability is reasonably assured. Contractual adjustments represent the difference between the list prices and the reimbursement rate set by Medicare and Medicare Advantage, the contractual rate or the amounts agreed to with hospitals.

Until a contract has been negotiated with a commercial insurance carrier or governmental program, the services may or may not be covered by these entities existing reimbursement policies. In addition, we do not enter into direct agreements with patients that commit them to pay any portion of the cost of the tests in the event that insurance declines to reimburse us. In the absence of an agreement with the patient or other clearly enforceable legal right to demand payment, the related revenue is only recognized upon the earlier of payment notification or cash receipt. Accordingly, we recognize revenue from commercial insurance carriers and governmental programs without contracts, when payment is received.

Persuasive evidence of an arrangement exists and delivery is deemed to have occurred upon completion, review, and release of the test results at which time we will bill the third-party payor or hospital. The assessment of the fixed or determinable nature of the fees charged for diagnostic testing performed, and the collectability of those fees, requires significant judgment by our management. Our management believes that these two criteria have been met when there is contracted reimbursement coverage or a predictable pattern of collectability with individual third-party payors or hospitals and accordingly, recognizes revenue upon delivery of the test results. In the absence of contracted reimbursement coverage or a predictable pattern of collectability, we believe that the fee is fixed or determinable and collectability is reasonably assured only upon request of third-party payor notification of payment or when cash is received, and we recognize revenue at that time.

Cost of services consists primarily of the costs associated with operating our laboratories and other costs directly related to our tests. Personnel costs, which constitute the largest portion of cost of services, include all labor related costs, such as salaries, bonuses, fringe benefits and payroll taxes for laboratory personnel. Other direct costs include, but are not limited to, laboratory supplies, certain consulting expenses, and facility expenses.

CONSOLIDATED RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain statements of operations data as a percentage of revenue, net. The trends illustrated in this table may not be indicative of future results.

21

PDI, Inc.

 
Three Months Ended
 
March 31,
 
2015
 
2014
Revenue, net
 
 
 
Commercial Services
94.5
 %
 
100.0
 %
Interpace Diagnostics
5.5
 %
 
 %
Total revenue, net
100.0
 %
 
100.0
 %
Cost of revenue
 
 
 
Commercial Services
80.4
 %
 
83.2
 %
Interpace Diagnostics
74.4
 %
 
 %
Total cost of revenue
80.0
 %
 
83.9
 %
Gross profit
20.0
 %
 
16.1
 %
Sales and marketing expense
5.8
 %
 
 %
Research and development expense
0.6
 %
 
 %
General and administrative expense
18.8
 %
 
17.4
 %
Acquisition related amortization expense
2.3
 %
 
 %
Total operating expenses
27.5
 %
 
17.4
 %
Operating loss
(7.5
)%
 
(1.3
)%
Interest expense
(2.2
)%
 
 %
Other expense, net
(0.2
)%
 
(0.1
)%
Loss income from continuing operations before income tax
(10.0
)%
 
(1.4
)%
(Benefit) provision for income tax
(0.2
)%
 
0.2
 %
Loss from continuing operations
(9.8
)%
 
(1.6
)%
Loss from discontinued operations, net of tax
(0.3
)%
 
(3.5
)%
Net loss
(10.1
)%
 
(5.1
)%

Results of Continuing Operations for the Quarter Ended March 31, 2015 Compared to the Quarter Ended March 31, 2014
Overview
We currently operate in two reporting segments: Commercial Services and Interpace Diagnostics. In the first quarter of 2015, the revenue, net (revenue) increase in our Commercial Services segment drove an increase in gross profit relative to the first quarter of 2014. As anticipated, we incurred a loss within the quarter around our Interpace Diagnostics segment due to the ramping up of this business.

Our Commercial Services revenue and profitability depend to a great extent on our relationships with a limited number of large pharmaceutical companies.  Our two largest customers in 2014 accounted for approximately 47.4% and 22.3%, respectively, of our revenue.  We believe that we will continue to experience a high degree of customer concentration and that the loss or a significant reduction of business from any of our major customers, or a decrease in demand for our services, could have a material adverse effect on our business, financial condition and results of operations.

 Revenue, net (in thousands)
Three Months Ended
 
 
 
 
 
March 31,
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Commercial Services
$
36,202

 
$
31,832

 
$
4,370

 
13.7
%
Interpace Diagnostics
2,117

 

 
2,117

 
%
Total
$
38,319

 
$
31,832

 
$
6,487

 
20.4
%

22

PDI, Inc.

Consolidated revenue for the quarter ended March 31, 2015 increased by $6.5 million, or 20.4%, to $38.3 million, compared to the quarter ended March 31, 2014. The increase was primarily a result of the start of a large Established Relationship Team (ERT) contract in the fourth quarter of 2014 in our Commercial Services segment and sales of PancraGen in our Diagnostic Services segment.
Revenue in our Commercial Services segment for the quarter ended March 31, 2015 increased by $4.4 million, or 13.7%, to $36.2 million, compared to the quarter ended March 31, 2014. This increase was primarily due to the start of the ERT contract mentioned above.
Revenue in our Interpace Diagnostic segment for the quarter ended March 31, 2015 was $2.1 million.  This revenue was attributable to our 2014 acquisitions and sales of PancraGen. There was no revenue for this segment in the first quarter of 2014.
Cost of revenue (in thousands)
Three Months Ended
 
 
 
 
 
March 31,
 
 
 
 
 
2015
 
2014
 
Change ($)
 
Change (%)
Commercial Services
$
29,100

 
$
26,493

 
$
2,607

 
9.8
%
Interpace Diagnostics
1,574

 
219

 
1,355

 
618.7
%
Total
$
30,674

 
$
26,712

 
$
3,962

 
14.8
%

Consolidated cost of revenue for the quarter ended March 31, 2015 increased by $4.0 million, or 14.8%, to $30.7 million, compared to the quarter ended March 31, 2014. The increase in cost of revenue is directly attributable to the increase in revenues in both of our segments.
Cost of revenue in our Commercial Services segment for the quarter ended March 31, 2015 increased by $2.6 million, or 9.8%, to $29.1 million, compared to the quarter ended March 31, 2014. The increase in Commercial Services cost of revenue is due to the additional headcount associated with the increase in revenue discussed above.
Cost of revenue in our Interpace Diagnostic segment for the quarter ended March 31, 2015 was $1.6 million, compared to the quarter ended March 31, 2014 of $0.2 million. The cost of revenue increase was attributable to the acquisitions we made in the third and fourth quarters of 2014.
Gross profit (in thousands)
 
 
 
 
 
 
Three Months Ended
 
Commercial
 
% of
 
Interpace
 
% of
 
 
 
% of
March 31,
 
Services
 
Sales
 
Diagnostics
 
Sales
 
Total
 
Sales
2015
 
$
7,102

 
19.6
%
 
$
543

 
25.6
%
 
$
7,645

 
20.0
%
2014
 
5,339

 
16.8
%
 
(219
)
 
%
 
5,120

 
16.1
%
Change
 
$
1,763

 
 

 
$
762

 
 

 
$
2,525

 
 


Consolidated gross profit for the quarter ended March 31, 2015 increased by $2.5 million, or 49.3%, to $7.6 million, compared to the quarter ended March 31, 2014. The change in consolidated gross profit was primarily attributable to the increase in revenue in both segments.
The gross profit percentage in our Commercial Services segment for the quarter ended March 31, 2015 increased to 19.6%, from 16.8% in the quarter ended March 31, 2014. This increase was primarily due to slightly higher margins within our Dedicated Sales Teams and an increase in revenue and gross profit from our ERT.
The gross profit percentage in our Interpace Diagnostics segment for the quarter ended March 31, 2015 was 25.6%.


23

PDI, Inc.

Sales and marketing expense (in thousands)
 
 
 
 
 
 
 
 
Three Months Ended
 
Commercial
 
% of
 
Interpace
 
% of
 
 
 
% of
March 31,
 
Services
 
Sales
 
Diagnostics
 
Sales
 
Total
 
Sales
2015
 
$

 
%
 
$
2,226

 
105.1
%
 
$
2,226

 
5.8
%
2014
 

 
%
 

 
%
 

 
%
Change
 
$

 
 

 
$
2,226

 
 

 
$
2,226

 
 

 
Sales and marketing expense in our Interpace Diagnostic segment for the quarter ended March 31, 2015 was $2.2 million. As a percentage of segment revenue, sales and marketing expense was 105.1% for the quarter ended March 31, 2015, due to the ramping up of the business. We did not have sales and marketing expenses in the first quarter of 2014.
Research and development expenses (in thousands)
 
 
 
Three Months Ended
 
Commercial
 
% of
 
Interpace
 
% of
 
 
 
% of
March 31,
 
Services
 
Sales
 
Diagnostics
 
Sales
 
Total
 
Sales
2015
 
$

 
%
 
$
232

 
11.0
%
 
$
232

 
0.6
%
2014
 

 
%
 

 
%
 

 
%
Change
 
$

 
 

 
$
232

 
 

 
$
232

 
 


Research and development expenses in our Interpace Diagnostics segment for the quarter ended March 31, 2015 was $0.2 million compared. As a percentage of revenue, research and development expenses were 11.0% for the quarter ended March 31, 2015. There were no research and development expenses in the first quarter of 2014.
General and administrative expenses (in thousands)
 
 
 
Three Months Ended
 
Commercial
 
% of
 
Interpace
 
% of
 
 
 
% of
March 31,
 
Services
 
Sales
 
Diagnostics
 
Sales
 
Total
 
Sales
2015
 
$
5,639

 
15.6
%
 
$
1,560

 
73.7
%
 
$
7,199

 
18.8
%
2014
 
4,873

 
15.3
%
 
661

 
%
 
5,534

 
17.4
%
Change
 
$
766

 
 

 
$
899

 
 

 
$
1,665

 
 


Consolidated general and administrative expenses for the quarter ended March 31, 2015 increased by $1.7 million compared to the quarter ended March 31, 2014. This is primarily attributable to our third and fourth quarter 2014 acquisitions and an increase in employee compensation costs. General and administrative expenses as a percentage of segment revenue were 18.8% for the quarter ended March 31, 2015 and 17.4% for the quarter ended March 31, 2014.
General and administrative expenses in our Commercial Services segment for the quarter ended March 31, 2015 increased by $0.8 million compared to the quarter ended March 31, 2014. This is primarily attributable to an increase in employee compensation costs of $0.6 million. General and administrative expenses as a percentage of segment revenue were 15.6%. General and administrative expenses for the quarter ended March 31, 2014 were $4.9 million and 15.3% as a percentage of segment revenue.
General and administrative expenses in our Interpace Diagnostics segment for the quarter ended March 31, 2015 increased by $0.9 million compared to the quarter ended March 31, 2014. This is primarily attributable to our acquisitions in the third and fourth quarters of 2014. General and administrative expenses as a percentage of revenue were 73.7% due to the ramping up of the business. General and administrative expenses for the quarter ended March 31, 2014 were $0.7 million.

24

PDI, Inc.

Acquisition related amortization expense (in thousands)
 
 
 
Three Months Ended
 
Commercial
 
% of
 
Interpace
 
% of
 
 
 
% of
March 31,
 
Services
 
Sales
 
Diagnostics
 
Sales
 
Total
 
Sales
2015
 
$

 
%
 
$
870

 
41.1
%
 
$
870

 
2.3
%
2014
 

 
%
 

 
%
 

 
%
Change
 
$

 
 

 
$
870

 
 

 
$
870

 
 


Acquisition related amortization expense in our Interpace Diagnostics segment for the quarter ended March 31, 2015 was $0.9 million. There was no amortization expense for the quarter ended March 31, 2014.
Operating loss
We had consolidated operating losses of $2.9 million and $0.4 million for the quarters ended March 31, 2015 and 2014, respectively.  The increase in operating loss was primarily due to the start-up costs and investments made in our Interpace Diagnostics segment, partially offset by improved performance in our Commercial Services segment.
(Benefit) provision for income tax
We had an income tax benefit of approximately $0.1 million for the quarter ended March 31, 2015 and income tax expense of approximately $0.1 million for the quarter ended March 31, 2014. Income tax benefit for the quarter ended March 31, 2015 was primarily due to a loss at one of our operating subsidiaries for which we are able to benefit the net operating losses, offset by minimum state and local taxes and gross margin taxes at various subsidiaries. Income tax expense for the quarter ended March 31, 2014 was primarily due to state and local taxes as we and our subsidiaries file separate income tax returns in numerous state and local jurisdictions.

LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2015, we had cash and cash equivalents and short-term investments of approximately $17.1 million and working capital of $9.1 million, compared to cash and cash equivalents and short-term investments of approximately $23.2 million and working capital of approximately $11.3 million at December 31, 2014.  As of March 31, 2015 we had outstanding commercial debt of $20.0 million and subordinated notes payable of $11.0 million with a net present value of $7.7 million.
For the three-month period ended March 31, 2015, net cash used in operating activities was $5.6 million, compared to net cash used in operations of $6.5 million for the three-month period ended March 31, 2014.  The primary component of cash used in operating activities during the three-month period ended March 31, 2015 was the net loss of $3.9 million and the increase in accounts receivable. The main component of cash used in operating activities during the three-month period ended March 31, 2014 was an increase in accounts receivable of $6.0 million.
As of March 31, 2015 and December 31, 2014, we had $5.5 million and $5.9 million of unbilled costs and accrued profits on contracts in progress, respectively.  When services are performed in advance of billing, the value of such services is recorded as unbilled costs and accrued profits on contracts in progress.  Normally all unbilled costs and accrued profits are earned and billed within 12 months from the end of the respective period.  As of March 31, 2015 and December 31, 2014, we had $10.9 million and $6.8 million of unearned contract revenue, respectively.  When we bill clients for services before they have been completed, billed amounts are recorded as unearned contract revenue and are recorded as income when earned.
For the three-month period ended March 31, 2015, we had net cash used in investing activities of $0.5 million related to capital expenditures. For the three-month period ended March 31, 2014, there was $1.1 million of cash used in investing activities including $0.5 million of capital expenditures and $0.6 million in a loan made to a diagnostic company. All capital expenditures were funded out of available cash.
For the three-month periods ended March 31, 2015 and March 31, 2014, net cash used in financing activities consisted of shares of our stock that were delivered to us and included in treasury stock for the payment of taxes resulting from the vesting of restricted stock. During the period ended March 31, 2015 we made $0.8 million in interest payments on our financing arrangement.
Going Forward 
In 2014 we differentiated ourselves by acting on our strategy of adding more predictable, higher growth, higher margin business that could reduce the natural volatility of our current core business. With our acquisitions of RedPath and certain assets from Asuragen, we executed on our strategic intent of becoming a leading commercialization company for the molecular diagnostics industry. We will expand commercialization of our Interpace Diagnostics as we progress 2015.

25

PDI, Inc.

In addition, we will continue to focus on the flawless execution of our Commercial Services contracts in order to consistently deliver desired results. We recognize that our relationships with customers are dependent upon the quality of our performance and our ability to reach and engage their target audiences in a positive and meaningful manner. Through our core outsourced promotional services expertise, we will continue to provide innovative and flexible service offerings designed to drive our customers’ businesses forward and successfully respond to a continually changing market. We have, and will continue to, evolve our promotional capabilities for many large pharmaceutical companies, a variety of emerging and specialty pharmaceutical and biotechnology companies as well as diagnostic and other healthcare service providers.
We will continue to be diligent with our cash, supplemented by additional financings, if necessary, to continue our strategy of commercializing our molecular diagnostic tests. We will focus on non-dilutive financing opportunities through collaborations and licensing and, if necessary, through equity offerings and debt financing. We will continue to manage resources efficiently, and add both internal and external resources, if necessary, to execute upon our strategy.
Our primary sources of liquidity are cash generated from our operations and available cash and cash equivalents. These sources of liquidity are needed to fund our working capital requirements, contractual obligations and estimated capital expenditures of approximately $1.5 million in 2015. We expect our working capital requirements to increase as a result of growing our molecular diagnostics business.
Considering the information provided above, we anticipate 2015 operations will result in a loss and 2015 cash flows will be negative. We believe that we have adequate cash resources to execute our strategy for our next 12 months. We are constantly evaluating strategies to provide the resources that will allow us to execute our strategic plan. We may require alternative forms of financing to achieve our strategic plan. There are many risks associated with executing our strategy. Failure to meet our financing requirements, if and when needed, would have an adverse effect on our operations or could restrict our growth, limit the development of our businesses, and hinder our ability to fulfill existing or future obligations.


26

PDI, Inc.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk
PDI is a smaller reporting company as defined by the disclosure requirements in Regulation S-K of the SEC and therefore not required to provide this information.

Item 4.  Controls and Procedures
Evaluation of disclosure controls and procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, management is required to apply its judgment in evaluating the benefits of possible disclosure controls and procedures relative to their costs to implement and maintain.
Based on our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal controls
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. 

27

PDI, Inc.

PART II.  OTHER INFORMATION
Item 1.  Legal Proceedings
Prolias Technologies, Inc. v. PDI, Inc.
 
On April 8, 2015, Prolias Technologies, Inc. ("Prolias") filed a complaint (the "Complaint") against the Company with the Superior Court of New Jersey (Morris County) in a matter entitled Prolias Technologies, Inc. v. PDI, Inc. (Docket No. MRS-L-899-15).  In the Complaint, Prolias alleges that it and the Company entered into an August 19, 2013 Collaboration Agreement and a First Amendment thereto (collectively the "Agreement"), whereby Prolias and the Company agreed to work in good faith to commercialize a diagnostic test known as "Thymira."  Thymira is a minimally invasive diagnostic test that is being developed to detect thyroid cancer.
 
Prolias alleges in the Complaint that the Company wrongfully terminated the Agreement, breached obligations owed to it 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.
 
The Company was served with the Complaint on April 15, 2015 and its deadline to respond to the Complaint is May 20, 2015.  The Company denies that it is liable to Prolias for any of the claims asserted in the Complaint and it intends to vigorously defend itself.

Item 1A. Risk Factors
There have been no material changes to the risk factors discussed in Part I, “Item 1A. Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2014 (Form 10-K). You should carefully consider the risks described in our Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or results of operations. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.

28

PDI, Inc.

Item 5. Other Information

None.

Item 6.  Exhibits
Exhibit No.
 
Description
 
 
 
10.1
 
Collaboration Agreement, dated August 19, 2013, by and between Prolias Technologies Inc., a Delaware corporation and the Company, filed herewith.
 
 
 
10.2
 
Severance Agreement and General Release, dated February 27, 2015, by and between the Company and Jeffrey E. Smith, filed herewith.
 
 
 
31.1
 
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
 
31.2
 
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
 
32.1
 
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
 
32.2
 
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
 
101
 
The following financial information from this Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2015 formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to Condensed Consolidated Financial Statements.
 

 

29

PDI, Inc.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:
May 12, 2015
PDI, Inc.
 
 
 
(Registrant)
 
 
 
 
 
 
 
/s/ Nancy S. Lurker
 
 
 
Nancy S. Lurker
 
 
 
Chief Executive Officer
 
 
 
 
 
 
 
/s/ Graham G. Miao
 
 
 
Graham G. Miao
 
 
 
Chief Financial Officer
 

30