Quarterly report pursuant to Section 13 or 15(d)

Acquisition

v3.19.3
Acquisition
9 Months Ended
Sep. 30, 2019
Business Combinations [Abstract]  
Acquisition

2. ACQUISITION

 

On July 15, 2019, the Company entered into an Asset Purchase Agreement (“APA”) to acquire certain assets and assumed certain liabilities relating to Cancer Genetics, Inc.’s (“CGI”) BioPharma services business (“BioPharma”) for $23.5 million less certain closing adjustments of $1.98 million (the “Base Purchase Price”). At the closing the Company used the proceeds from an initial tranche of preferred stock financing and paid $13.8 million. Additionally, the Company issued a subordinated seller note to CGI in the amount of $7,692,300.

 

The BioPharma business (presently known as Interpace Pharma Solutions, Inc. or “Pharma Solutions”) provides pharmaceutical and biotech companies and non-profit entities performing clinical trials with lab testing services for patient stratification and treatment selection through an extensive suite of molecular and biomarker-based testing services, DNA- and RNA- extraction and customized assay development and trial design consultation.

 

The Base Purchase Price is subject to two additional adjustments following the closing: for the finalized net worth (assets less liabilities) of BioPharma as of June 30, 2019 (the “NWA”), subject to a cap of $775,000, and for certain older accounts receivable, in the aggregate amount of approximately $830,000, still uncollected as of December 31, 2019 (the “ARA”). Any amounts due to the Company under the NWA were to be set off against the Excess Consideration Note (see Note 19, Subsequent Events, for description), and any amounts due to the Company under the ARA were to be either set off against the Excess Consideration Note or, if it is no longer outstanding, satisfied through an AR Holdback (as defined in the Asset Purchase Agreement) mechanism, in each case as further set forth in the Asset Purchase Agreement.

 

The transaction is being accounted for using the acquisition method of accounting for business combinations in accordance with GAAP. Under this method, the total consideration transferred to consummate the acquisition is being allocated to the identifiable tangible and intangible assets acquired and liabilities assumed based on their respective fair values as of the closing date of the acquisition. The acquisition method of accounting requires extensive use of estimates and judgments to allocate the consideration transferred to the identifiable tangible and intangible assets acquired and liabilities assumed.

 

In connection with the transaction, the Company has preliminarily recorded $8.3 million of goodwill and $7.3 million of finite lived intangible assets. Finite lived intangible assets have a combined weighted-average amortization period of 8.4 years, which consists of ten years for tradenames and eight years for customer relationships. Goodwill results largely from a trained workforce in place and expected synergies from new lines of business. Goodwill recorded in conjunction with the acquisition is deductible for income tax purposes. See Note 5, Goodwill and Other Intangible Assets, for more information. Business transaction expenses of approximately $2.5 million incurred in connection with the acquisition was expensed as incurred.

 

The reconciliation of consideration given for BioPharma to the preliminary allocation of the purchase price of assets and liabilities acquired based on their relative fair values is as follows:

 

Cash           $ 13,829  
Subordinated note payable             6,822  
Total consideration           $ 20,651  
                 
Assets acquired                
Accounts receivable           $ 3,731  
Accrued revenue             289  
Lab supplies             877  
Prepaid expenses             266  
Property and equipment             6,412  
Operating lease assets             2,187  
Acquired identifiable intangible assets:                
Trademarks and trade name     1,600          
Customer relationships     5,700          
Total acquired identifiable intangible assets             7,300  
Goodwill             8,273  
Total assets acquired             29,335  
                 
Liabilities assumed                
Accounts payable             (4,535 )
Accrued liabilities             (435 )
Deferred revenue             (1,076 )
Operating lease liabilities             (2,187 )
Finance lease liabilities             (451 )
Total liabilities assumed             (8,684 )
Net assets acquired           $ 20,651  

 

The estimated fair values of assets acquired and liabilities assumed are considered preliminary and are based on the most recent information available. The provisional measurements of fair value set forth above are subject to change. We expect to finalize the valuation as soon as practicable, but no later than one-year from the acquisition date.

 

The following unaudited pro forma consolidated revenues for the three and nine months ended September 30, 2019 and 2018 assume that the Company had acquired the BioPharma business as of January 1, 2018. The pro forma revenues include estimates and assumptions which management believes are reasonable. However, pro forma revenues are not necessarily indicative of the revenues that would have occurred if the acquisition had been consummated as of the date indicated, nor are they necessarily indicative of future revenues.

 

    Three Months Ended September 30, 2019     Nine Months Ended September 30, 2019     Three Months Ended September 30, 2018     Nine Months Ended September 30, 2018  
Revenue   $ 8,010     $ 27,648     $ 9,741     $ 27,551  

 

The BioPharma business had not historically been accounted for as a separate entity, subsidiary or division of CGI. In addition, stand-alone financial statements related to BioPharma have not been prepared previously as CGI’s financial system was not designed to provide complete financial information of BioPharma. Therefore, the Company was not able to estimate the pro forma impact to net loss or the net loss per share of BioPharma (presently called Interpace Pharma Solutions) for the three and nine months ended September 30, 2019 and 2018.