Change in Officers

On November 23, 2020, in connection with his retirement, Jack E. Stover announced his decision to resign as President, Chief Executive Officer, and member of the Board of Directors of the Company, effective December 1, 2020. On that same date, the Board appointed Mr. Thomas W. Burnell as the Company’s successor President and Chief Executive Officer and nominated and elected him as a member of the Board, in each case effective December 1, 2020.

In connection with the appointment as President and Chief Executive Officer, the Company entered into an employment agreement with Mr. Burnell who will serve as Chief Executive Officer of the Company for a term of three years, with automatic extension for one year renewal periods unless either the Company or Mr. Burnell elects not to renew at least 60 days prior to the end of the then-current term. The Company agreed to pay to him a base salary of $425,000 annually during the initial term, with potential for increase after the first year of employment in the sole discretion of the Company’s Compensation and Management Development Committee. He is also eligible to receive additional annual incentive compensation with an annual target of up to 50% of the base salary. He was also awarded 100,000 RSUs which vest in equal installments over three years and 125,000 performance based RSUs which are eligible to vest on the day following a 30 calendar day period in which, for each trading day of such period, a share of Common Stock has a closing per share price of at least $11.34

In connection with Mr. Stover’s resignation, the Company entered into a Separation and Consulting Agreement and General Release. The Stover Separation and Consulting Agreement supersedes the Stover Amended and Restated Employment Agreement. Under the terms of the Stover Separation and Consulting Agreement, the Company agrees to provide to Mr. Stover, upon fulfilment of certain conditions such as compliance with the Restrictive Covenants (as discussed below): (i) cash payments equal to $477,405, payable in equal installments over twelve months in accordance with the Company’s standard payroll practices; (ii) full acceleration of any non-qualified options and RSUs that are outstanding as of December 31, 2020 and that would have time-vested prior to December 31, 2022; (iii) a lump sum payment of $286,443, payable on the Company’s first payroll period of January 2022; and (iv) a fully vested nonqualified stock option to purchase 43,750 shares of Common Stock with a per-share exercise price of $6.00, exercisable until the tenth anniversary of the grant date and governed by the terms of the Plan and the Company’s form of Stock Option Grant Notice and Stock Option Agreement thereunder

Financial Restatements

On January 19, 2021, the Company filed amended consolidated financial statements for the years ended December 31, 2019 and the quarters ended March 31, 2020 and June 30, 2020 with the SEC. As such, the consolidated financial statements contained in the Company’s Annual Reports on Form 10-K for the years ended December 31, 2014, 2015, 2016, 2017, 2018, and 2019, as well as the consolidated financial statements contained in the Quarterly Reports on Form 10-Q for the each quarterly period within those fiscal years as well as the quarterly periods ended March 31, 2020 and June 30, 2020, should no longer be relied upon. The impact of the restated financials is reflected in the consolidated financial statements issued herein. See our Explanatory Note in the beginning of this Form 10-Q for a summary of the financial impact.

Untimely SEC Filing and Nasdaq Notification of Compliance

The Company was unable to timely file its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2020. On August 18, 2020, the Company was notified by Nasdaq that it was in non-compliance with Listing Rule 5250(c)(1), which requires the timely filing of periodic financial statements. On October 21, 2020, the Company received confirmation from Nasdaq that it regained compliance with the listing rule following the filing of the 10-Q for the period ended June 30, 2020 on October 19, 2020.

On November 17, 2020, the Company filed Form 12b-25 with the SEC, which stated that the Company was unable to file timely its Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 due to the evaluation of its Barrett’s intangible asset for impairment and possible prior period adjustments to amortization expense. The Company could not complete its analysis by the SEC filing deadline. On November 18, 2020, the Company was notified by Nasdaq that it is in non-compliance with Listing Rule 5250(c)(1), which requires the timely filing of periodic financial statements. The Company was provided 60 days to submit its plan to show compliance with the filing requirement. Upon the filing of this Form 10-Q with the SEC, the Company believes it will have remedied the Nasdaq non-compliance issue due to the untimely filing.

Nasdaq Minimum Stockholders’ Equity Requirement

On October 21, 2020, the Company received notice from Nasdaq indicating that the Company was not in compliance with the minimum stockholders’ equity requirement for continued listing on The Nasdaq Capital Market, under Nasdaq Listing Rule 5550(b)(1), because the Company’s stockholders’ equity of approximately $1.7 million as reported in the 10-Q for the period ended June 30, 2020 was below the required minimum of $2.5 million. Due to the asset impairment and additional amortization expense reflected in the Company’s amended Form 10-K and Form 10-Q’s, the Company’s stockholders’ equity balance at September 30, 2020 was approximately ($21.8) million. The decrease in the Company’s stockholders’ equity resulting from the impairment and additional amortization expense will make it more difficult for the Company to comply with Nasdaq minimum stockholders’ equity requirements.

The Company was granted 45 calendar days, or through December 7, 2020, to submit to Nasdaq a plan to regain compliance with the listing requirement. If Nasdaq accepts the Company’s plan, Nasdaq may grant an extension of up to 180 calendar days from October 21, 2020, or through Tuesday, April 20, 2021, to regain compliance. If Nasdaq does not accept the Company’s plan, the Company will have the right to request a hearing before an independent Nasdaq Hearings Panel. A hearing request would stay any suspension or delisting action pending the conclusion of the hearings process.

A plan was filed with Nasdaq in December 2020. However, there can be no assurance that Nasdaq will accept the Company’s plan or that the Company will be able to regain compliance or maintain compliance with any other Nasdaq requirement in the future.

Second Amendment and Termination of SVB Loan Agreement

On October 19, 2020, the Company entered into the Second Amendment, which amended the SVB Loan Agreement.

Under the terms of the Second Amendment, IPS joined the SVB Loan Agreement as a borrower and granted SVB a continuing lien upon and security interest in all of the assets of IPS. Additionally, SVB waived certain existing or potential defaults under the SVB Loan Agreement, including the Company’s failure to meet certain financial covenants (specifically, the adjusted quick ratio requirement) for the months ended July 31, 2020 and August 31, 2020 and the Company’s reporting requirements under the SVB Loan Agreement. SVB agreed to forebear from exercising its rights and remedies in connection with the Company’s reporting requirements until the earlier to occur of (a) the occurrence of any event of default (as defined in the SVB Loan Agreement) other than any arising due to the Company’s reporting requirements which were waived by SVB, or (b) December 31, 2020.

The Second Amendment also modified the SVB Loan Agreement to, among other things, a) exclude compliance by the Company with the adjusted quick ratio covenant requirement for the month of October 2020 as well as any month thereafter prior to the Funding Date of the first Advance (in each case, as defined in the SVB Loan Agreement), if any, b) require delivery of certain insurance policy endorsements which have been provided by the Company, c) increase the maximum aggregate amount utilized for the issuance of the Letter of Credit by SVB in favor of the Company’s landlord for its Pittsburgh, Pennsylvania laboratory facility from $250,000 to $1,000,000, and d) increase the floating annual rate of interest on any principal amount outstanding under the Revolver to the greater of (A) one percent (1.0%) above the Prime Rate (as defined in the SVB Loan Agreement) and (B) four and one-quarter of one percent (4.25%). Prior to the Second Amendment, such interest accrued at a rate equal to one-half of one percent (0.50%) above the Prime Rate.

The Second Amendment provided that any future Credit Extension (as defined in the SVB Loan Agreement) by SVB to the Company will be made in SVB’s sole and absolute discretion. The Company agreed to reimburse SVB for all out-of-pocket reasonable and documented legal fees and expenses incurred in connection with the Second Amendment.

On January 5, 2021, the Company terminated the SVB Loan Agreement in accordance with the terms of the agreement. In connection with the termination, SVB waived its right to any termination fees and released its security interest in the assets of the Company. 

Secured Promissory Notes 

On January 7, 2021, the Company entered into promissory notes with Ampersand, in the amount of $3 million, and 1315 Capital, in the amount of $2 million, respectively (together, the “Notes”) and a related security agreement (the “Security Agreement”).

Ampersand holds 28,000 shares of the Company’s Series B Convertible Preferred Stock, which are convertible from time to time into an aggregate of 4,666,666 shares of our Common Stock, and 1315 Capital holds 19,000 shares of the Company Series B Convertible Preferred Stock, which are convertible from time to time into an aggregate of 3,166,668 shares of our Common Stock. On an as-converted basis, such shares would represent approximately 39.3% and 26.7% of our fully-diluted shares of Common Stock, respectively. In addition, pursuant to the terms of the Series B Convertible Preferred Stock certificate of designation and an amended and restated investor rights agreement among the Company and Ampersand and 1315 Capital, they each have the right to (1) approve certain of our actions, including our borrowing of money and (2) designate two directors to our Board of Directors. As a result, the Company considers the Notes and Security Agreement to be a related party transaction.

The rate of interest on the Notes is equal to eight percent (8.0%) per annum and their maturity date is the earlier of (a) June 30, 2021 and (b) the date on which all amounts become due upon the occurrence of any event of default as defined in the Notes. No interest payments are due on the Notes until their maturity date. All payments on the Notes are pari passu.

In connection with the Security Agreement, the Notes are secured by a first priority lien and security interest on substantially all of the assets of the Company. Additionally, if a change of control of the Company occurs (as defined in the Notes) the Company is required to make a prepayment of the Notes in an amount equal to the unpaid principal amount, all accrued and unpaid interest, and all other amounts payable under the Notes out of the net cash proceeds received by the Company from the consummation of the transactions related to such change of control. The Company may prepay the Notes in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. No prepaid amount may be re-borrowed.

The Notes contain certain negative covenants which prevent the Company from issuing any debt securities pursuant to which the Company issues shares, warrants or any other convertible security in the same transaction or a series of related transactions, except that Company may incur or enter into any capitalized and operating leases in the ordinary course of business consistent with past practice, or borrowed money or funded debt in an amount not to exceed $4.5 million (the “Debt Threshold”) that is subordinated to the Notes on terms acceptable to Ampersand and 1315 Capital; provided, that if the aggregate consolidated revenue recognized by the Company as reported on Form 10-K as filed with the SEC for any fiscal year ending after January 10, 2020 exceeds $45 million dollars, the Debt Threshold for the following fiscal year shall increase to an amount equal to: (x) ten percent (10%); multiplied by (y) the consolidated revenue as reported by the Company on Form 10-K as filed with the SEC for the previous fiscal year.