On October 31, 2014, the Company and its subsidiary, Interpace LLC, entered into an agreement to acquire RedPath (the “Transaction”). In connection with the Transaction, the Company entered into an $11.0 million, interest-free note (“RedPath Note”) payable in eight equal consecutive quarterly installments beginning October 1, 2016.

The obligations of the Company under the RedPath Note were guaranteed by the Company and its subsidiaries pursuant to a Guarantee and Collateral Agreement (the “Subordinated Guarantee”) in favor of the RedPath 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 RedPath Equityholder Representative. Based on the Company’s incremental borrowing rate under its Credit Agreement, the fair value of the RedPath Note at the date of issuance was $7.5 million. During the quarters ended March 31, 2017 and 2016, the Company accreted approximately $0.2 million and $0.2 million into interest expense, respectively, for each period. At December 31, 2016, the fair value balance of the $9.3 million Note was approximately $7.9 million and the unamortized discount was $1.4 million.

Debt Exchange for RedPath Note

On March 23, 2017, the Company entered into the Exchange Agreement with the Investor. Prior to the Company entering into the Exchange Agreement, the Investor acquired the $9.3 million face value RedPath Note for $8.9 million. The RedPath Equityholder Representative assigned all of its rights, title and interest in the RedPath Note to the Investor, including, but not limited to, its security interest in all of the assets of the Company and the assets of the Company’s subsidiaries.

Pursuant to the Exchange Agreement, the Company and the Investor agreed to exchange the RedPath Note for (i) a senior secured convertible note in the aggregate principal amount of $5.3 million (the “Exchanged Convertible Note”), which is convertible into shares of the Company’s common stock, in accordance with its terms, and (ii) a senior secured non-convertible note with an aggregate principal amount of $3.55 million (the “Exchanged Non-Convertible Note” and collectively, the “Exchanged Notes”), for a combined aggregate principal amount of $8.87 million. The Exchanged Notes ranked senior to all of the Company’s outstanding and future indebtedness, other than the indebtedness in favor of the Company’s credit line lender and were secured by a perfected security interest in all of the existing and future assets of the Company and those of the Company’s subsidiaries. Upon the reduction of 55% of the aggregate principal amount of each of the Exchanged Notes, the Investor agreed to release its security interest in its entirety. In conjunction with the extinguishment of the RedPath note, the Company recorded a fair value loss of $0.8 million.

The Exchanged Notes were scheduled to mature at 125% of the face value on the fifteenth month anniversary of the closing date, or June 22, 2018, and bore interest quarterly at one and one hundredth percent (1.01%) per annum (as could be adjusted from time to time). Under the terms of the Exchanged Notes, the Company has the right to require a redemption of a portion (not less than $500,000) or all of the applicable Exchanged Notes prior to their maturity at a price equal to 115% of the principal amount of the Exchanged Notes within the first 180 days of issuance, 120% of the principal amount of the Exchanged Notes between 180 and 270 days of issuance, and 125% of the principal amount of the Exchanged Notes after 270 days of issuance. A mandatory redemption could be required by the Investor in connection with the occurrence of an event of default or change of control. In each event, the redemption price would be subject to a premium on parity, and the Exchanged Convertible Note redemption could be subject to a premium on parity if certain unfavorable conditions existed.

The Exchanged Convertible Note was convertible into shares of the Company’s common stock. The Investor could elect to convert all or a portion of the Exchanged Convertible Note and all accrued and unpaid interest with respect to such portion, if any, into shares of common stock at a fixed conversion price of $2.44. In the event the Company sought and obtained stockholder approval to issue shares of common stock in connection with the conversion of the Exchanged Convertible Note (which determination shall be at the Company’s sole discretion) from and after the date of the Exchange Agreement, the Exchanged Convertible Note could alternatively be converted (“Alternative Conversion”) by the Investor at the greater of (i) $0.40 and (ii) lowest of (x) the applicable conversion price as in effect on the applicable conversion date of the applicable Alternative Conversion, and (y) 88% of the lowest volume-weighted average price of the common stock during the 10 consecutive trading day period ending and including the date of delivery of the applicable conversion notice. If the volume-weighted average price of the common stock exceeded 135% of the Fixed Conversion Price, or $3.29, for five consecutive trading days and no equity conditions failure then exists, the Company has the option to convert the Exchanged Convertible Note into shares of common stock at the Fixed Conversion Price. The Company could not effect the conversion of any portion of the Exchanged Convertible Note, and the Investor could not have the right to convert any portion of the Exchanged Convertible Note, to the extent that after giving effect to such conversion, the Investor together with any other persons whose beneficial ownership of the Company’s common stock could be aggregated with the Investor’s collectively would be in excess of 9.99% of the shares of common stock outstanding immediately after giving effect to such conversion. Additionally, any such conversion would be null and void and treated as if never made. As of March 30, 2017, the Investor had converted approximately 80% of the Exchanged Convertible Note to common stock, converting $4.22 million of the Exchanged Convertible Note into 1,730,534 shares of common stock. In connection with the conversion of the Exchanged Convertible Note, the Company recorded a loss of $0.8 million.

Upon the conversion of the Exchanged Convertible Note, the Company is required to pay conversion fees of 6.5% on all amounts converted. These costs are directly related to the issuance of the Company’s shares, and as a result are recorded against equity. As of March 31, 2017, the Company incurred total conversion fees of $137,205.

In connection with the Exchanged Convertible Note and the Senior Secured Convertible Note (as described below), the Company determined there to be an embedded conversion option feature. Accordingly, the embedded conversion option contained in the Exchange Convertible Note was accounted for as a derivative liability at the date of issuance, and shall be adjusted to fair value through earnings at each reporting date. The fair value of the embedded conversion option derivative was determined using the Black- Scholes Option Pricing Model. On the initial measurement date, the fair value of the embedded conversion option derivative of $208,427 was recorded as a derivative liability and was allocated as a debt discount to the Exchanged Convertible Note. At each conversion date, subsequent to the issuance of the Exchanged Convertible Note, the embedded conversion option derivative liability would be revalued, with any changes to its fair value being recorded to earnings. At March 31, 2017, the Company also revalued the embedded conversion option derivative liability resulting in a loss from the change in fair value. In connection with these revaluations, the Company recorded derivative losses of approximately $42,000 for the period ended March 31, 2017. The derivative liability as of March 31, 2017 was approximately $0.05 million and is included in other long-term liabilities in the condensed consolidated balance sheet.

The Company incurred $459,195 of debt issuance costs, for investment banking, legal and placement fee services in connection with the Exchange Agreement. These costs are treated as a debt discount and will be amortized to interest expense over the term of the Exchanged Notes. On April 18, 2017, the Company entered into an amendment and exchange agreement (the Agreement”), with the Investor. Pursuant to the Agreement, the Company and the Investor agreed to exchange $3.55 million of the Company’s Exchanged Non-Convertible Note, dated March 23, 2017, for $3.55 million of the Company’s senior secured convertible note, dated April 18, 2017 (“the Senior Secured Convertible Note”). The Senior Secured Convertible Note is identical in all material respects to the Company’s Exchanged Convertible Note dated March 23, 2017, except for the initial conversion price and requiring stockholder approval to adjust the Conversion Price (as defined in the Senior Secured Convertible Note) or the right to substitute the Variable Price (as defined in the Senior Secured Convertible Note) for the Conversion Price, which provisions have been waived by the Investor with respect to the March Note. The initial conversion price of the Senior Secured Convertible Note is $2.20. The Investor has fully converted both convertible notes into 3.8 million shares of the Company’s common stock. The security interest has been terminated and the liens will be released upon proper termination filings. The exchange of the Exchanged Non-Convertible Note for the Senior Secured Convertible Note was made in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

Maxim Group LLC (“Maxim”) acted as agent in connection with the exchange of the Exchanged Non-Convertible Note for the Senior Secured Convertible Note. Maxim was paid a cash fee of $0.6 million representing 6.5% of the balance of the $8.87 million Exchanged Notes.