IDXG 10-Q Quarterly Report March 31, 2014

INTERPACE BIOSCIENCES, INC.

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10-Q 1 a2014q110q.htm 10-Q 2014 Q1 10Q

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, 2014



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 2, 2014
Common stock, $0.01 par value	15,322,318

PDI, Inc.

Form 10-Q for Period Ended March 31, 2014

TABLE OF CONTENTS



		Page No.
	PART I - FINANCIAL INFORMATION

Item 1.	Unaudited Interim Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets at March 31, 2014 and December 31, 2013 (unaudited)	3

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month periods ended March 31, 2014 and 2013 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 201 4 and 2013 (unaudited)	5

	Notes to Unaudited Interim Condensed Consolidated Financial Statements	6

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25

Item 4.	Controls and Procedures	25


	PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	26

Item 1A.	Risk Factors	26

Item 5.	Other Information	26

Item 6.	Exhibits	27

Signatures		28

PDI, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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



	March 31, 2014			December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	37,878		$	45,639
Short-term investments	103			103
Accounts receivable, net	8,471			2,422
Unbilled costs and accrued profits on contracts in progress	5,558			7,982
Other current assets	6,999			6,563
Total current assets	59,009			62,709
Property and equipment, net	2,846			2,789
Goodwill	2,523			2,523
Other long-term assets	1,004			1,043
Total assets	$	65,382		$	69,064

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	2,493		$	2,350
Unearned contract revenue	8,785			9,379
Accrued salary and bonus	7,163			9,643
Other accrued expenses	10,863			10,028
Total current liabilities	29,304			31,400
Long-term liabilities	4,736			5,185
Total liabilities	34,040			36,585

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
16,512,332 and 16,316,169 shares issued, respectively;
15,322,318 and 15,169,898 shares outstanding, respectively	165			163
Additional paid-in capital	130,917			130,229
Accumulated deficit	(85,435		)	(83,823		)
Accumulated other comprehensive income	16			16
Treasury stock, at cost (1,190,014 and 1,146,271 shares, respectively)	(14,321		)	(14,106		)
Total stockholders' equity	31,342			32,479
Total liabilities and stockholders' equity	$	65,382		$	69,064

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

PDI, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

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



	Three Months Ended
	March 31,
	2014			2013

Revenue, net	$	32,778		$	42,923
Cost of services	27,669			34,450
Gross profit	5,109			8,473

Compensation expense	3,541			4,155
Other selling, general and administrative expenses	3,065			2,065
Total operating expenses	6,606			6,220
Operating (loss) income	(1,497		)	2,253
Other expense, net	(17		)	(9		)
(Loss) income from continuing operations before income tax	(1,514		)	2,244
Provision for income tax	66			64
(Loss) income from continuing operations	(1,580		)	2,180
Loss from discontinued operations, net of tax	(32		)	(54		)
Net (loss) income	$	(1,612	)	$	2,126

Other comprehensive income (loss):
Unrealized holding gain (loss) on available-for-sale securities, net	—			—
Comprehensive income (loss)	$	(1,612	)	$	2,126

Basic (loss) income per share of common stock from:
Continuing operations	$	(0.11	)	$	0.15
Discontinued operations	—			(0.01		)
Net (loss) income per basic share of common stock	$	(0.11	)	$	0.14

Diluted (loss) income per share of common stock from:
Continuing operations	$	(0.11	)	$	0.14
Discontinued operations	—			—
Net (loss) income per diluted share of common stock	$	(0.11	)	$	0.14

Weighted average number of common shares and common share equivalents outstanding:
Basic	14,760			14,983
Diluted	14,760			15,074

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

PDI, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited, in thousands)



	Three Months Ended
	March 31,
	2014			2013
Cash Flows From Operating Activities
Net (loss) income	$	(1,612	)	$	2,126
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization	457			288
Realignment accrual accretion	35			35
Stock-based compensation	690			351
Other changes in assets and liabilities:
(Increase) decrease in accounts receivable	(6,049		)	1,140
Decrease (increase) in unbilled costs	2,424			(5,113		)
Decrease in other current assets	32			330
Decrease in other long-term assets	140			—
Increase in accounts payable	143			690
Decrease in unearned contract revenue	(594		)	(626		)
(Decrease) increase in accrued salaries and bonus	(2,480		)	1,143
Increase in other accrued expenses	835			1,128
Decrease in long-term liabilities	(484		)	(270		)
Net cash (used in) provided by operating activities	(6,463		)	1,222

Cash Flows From Investing Activities
Purchase of property and equipment	(514		)	(445		)
Loan to Diagnostics Company	(569		)	—
Net cash used in investing activities	(1,083		)	(445		)

Cash Flows From Financing Activities
Cash paid for repurchase of restricted shares	(215		)	(227		)
Net cash used in financing activities	(215		)	(227		)

Net (decrease) increase in cash and cash equivalents	(7,761		)	550
Cash and cash equivalents – beginning	45,639			52,783
Cash and cash equivalents – ending	$	37,878		$	53,333

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

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, 2013 as filed with the Securities and Exchange Commission (SEC) on March 6, 2014. 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 .


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.

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) income per share for the three-month periods ended March 31, 2014 and 2013 is as follows:



	Three Months Ended
	March 31,
	2014	2013
Basic weighted average number of common shares	14,760	14,983
Dilutive effect of stock-based awards	—	91
Diluted weighted average number of common shares	14,760	15,074

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:

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)



	Three Months Ended
	March 31,
	2014	2013
Options	43	50
Stock-settled stock appreciation rights (SARs)	1,238	314
Restricted stock/units	754	91
Market contingent SARs	188	280
	2,223	735

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, 2014 , no indicators of impairment were identified.


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 income (expense), net in the consolidated statement of operations. Declines in value judged to be other-than-temporary on available-for-sale securities are recorded in other income (expense), net in the consolidated statement of operations 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 income (expense), net in the condensed consolidated statement of comprehensive (loss) income. 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, 2014 and December 31, 2013 , the carrying value of available-for-sale securities was approximately $ 103,000 and is included in short-term investments. Available-for-sale securities as of both March 31, 2014 and December 31, 2013 consisted of approximately $55,000 in mutual funds and approximately $48,000 in money market accounts.

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

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 $ 2.0 million as of both March 31, 2014 and December 31, 2013 , as collateral for its existing insurance policies and facility leases.

At March 31, 2014 and December 31, 2013 , held-to-maturity investments included the following:



			Maturing						Maturing
	March 31, 2014		within 1 year		after 1 year through 3 years		December 31, 2013		within 1 year		after 1 year through 3 years
Cash/money accounts	$	135	$	135	$	—	$	116	$	116	$	—
US Treasury securities	1,477		636		841		1,730		1,360		370
Government agency securities	623		476		147		382		382		—
Total	$	2,235	$	1,247	$	988	$	2,228	$	1,858	$	370

At March 31, 2014 and December 31, 2013 , held-to-maturity investments were recorded in the following accounts:



	March 31, 2014		December 31, 2013
Other current assets	$	1,247	$	1,858
Other long-term assets	988		370
Total	$	2,235	$	2,228


4.	GOODWILL

Goodwill recorded as of March 31, 2014 is attributable to the 2010 acquisition of Group DCA. As of March 31, 2014 and December 31, 2013 , the carrying amount of goodwill for Group DCA was $ 2.5 million.


5.	FACILITIES REALIGNMENT

The following table presents a rollforward of the Company’s restructuring reserve from December 31, 2013 to March 31, 2014 , of which approximately $ 1.1 million is included in other accrued expenses and $ 0.6 million is included in long-term liabilities as of March 31, 2014 . The Company recognizes accretion expense in Other expense, net in the Condensed Consolidated Statement of Comprehensive (Loss) Income.



	Sales Services			Marketing Services			Discontinued Operations			Total
Balance as of December 31, 2013	$	1,125		$	458		$	379		$	1,962
Accretion	27			—			8			35
Adjustments	—			(16		)	—			(16		)
Payments	(168		)	(36		)	(53		)	(257		)
Balance as of March 31, 2014	$	984		$	406		$	334		$	1,724


6.	FAIR VALUE MEASUREMENTS

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

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

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, 2014				Fair Value Measurements
	Carrying		Fair		As of March 31, 2014
	Amount		Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Cash	$	8,557	$	8,557	$	8,557	$	—	$	—
Money Market Funds	29,321		29,321		29,321		—		—
Total	$	37,878	$	37,878	$	37,878	$	—	$	—

Marketable securities:
Money Market Funds	$	48	$	48	$	48	$	—	$	—
Mutual Funds	55		55		55		—		—
U.S. Treasury securities	1,477		1,477		1,477		—		—
Government agency securities	623		623		623		—		—
Total	$	2,203	$	2,203	$	2,203	$	—	$	—

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, 2014 , 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) .

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.


7.	COMMITMENTS AND CONTINGENCIES

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

Letters of Credit

As of March 31, 2014 , the Company had outstanding letters of credit of $ 2.0 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, 2014, the Company's accrual for litigation and threatened litigation was not material to the consolidated financial statements.


8.	ACCRUED EXPENSES AND LONG-TERM LIABILITIES

Other accrued expenses consisted of the following as of March 31, 2014 and December 31, 2013 :



	March 31, 2014		December 31, 2013
Accrued pass-through costs	$	2,397	$	2,089
Accrued reorganization expense	1,124		997
Self insurance accruals	496		1,020
Indemnification liability	875		875
All others	5,971		5,047
	$	10,863	$	10,028

Long-term liabilities consisted of the following as of March 31, 2014 and December 31, 2013 :

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)



	March 31, 2014		December 31, 2013
Rent payable	$	846	$	969
Uncertain tax positions	3,148		3,109
Restructuring	600		965
Other	142		142
	$	4,736	$	5,185


9.	STOCK-BASED COMPENSATION

In February 2014, 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 2013 long-term incentive plan, these grants aggregated 173,990 shares of restricted stock issued with a weighted average grant date fair value of $ 5.12 per share and 489,846 SARs with a weighted average grant date fair value of $ 1.82 .

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, 2014 :



		Three Months Ended
		March 31, 2014
Risk-free interest rate		0.69%
Expected life		3.5 years
Expected volatility		48.01%
Dividend yield		—%

The Company did not issue any SARs during the three months ended March 31, 2013. 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 $0.7 million and $0.4 million of stock-based compensation expense during each of the three-month periods ended March 31, 2014 and 2013 , respectively.


10.	INCOME TAXES

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 expense on (loss) income from continuing operations and the effective tax rate for the three-month periods ended March 31, 2014 and 2013 :



	Three Months Ended
	March 31,
	2014			2013
Provision for income tax	$	66		$	64
Effective income tax rate	(4.4		)%	2.9		%

Income tax expense for each of the three-month periods ended March 31, 2014 and 2013 was primarily due to state taxes.


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, 2013 . 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 Sales Services segment to the other reporting segments since it is impracticable to do so.



	Sales Services		Marketing Services			Product Commercialization Services			Consolidated
Three months ended March 31, 2014:
Revenue	$	28,795	$	1,003		$	2,980		$	32,778
Operating income (loss)	$	50	$	(1,323	)	$	(224	)	$	(1,497	)
Capital expenditures	$	514	$	—		$	—		$	514
Depreciation expense	$	207	$	229		$	21		$	457

Three months ended March 31, 2013:
Revenue	$	38,225	$	1,541		$	3,157		$	42,923
Operating income (loss)	$	2,364	$	(683	)	$	572		$	2,253
Capital expenditures	$	169	$	276		$	—		$	445
Depreciation expense	$	234	$	51		$	3		$	288


12.	DISCONTINUED OPERATIONS

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 (Income) reflect the presentation of Pharmakon and TVG as discontinued operations in all periods presented.

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)

The table below presents the significant components of Pharmakon's and TVG’s results included in Loss from discontinued operations in the Condensed Consolidated Statements of Comprehensive Income (Loss) for the three-month periods ended March 31, 2014 and 2013 .



	Three Months Ended
	March 31,
	2014			2013
Revenue, net	$	—		$	—
Loss from discontinued operations, before income tax	(31		)	(53		)
Provision for income tax	1			1
Loss from discontinued operations, net of tax	$	(32	)	$	(54	)

The major classes of assets and liabilities included in the Condensed Consolidated Balance Sheets for TVG and Pharmakon as of March 31, 2014 and December 31, 2013 are as follows:



	March 31, 2014		December 31, 2013
Current assets	$	—	$	—
Non-current assets	150		150
Total assets	$	150	$	150
Current liabilities	$	424	$	405
Non-current liabilities	540		619
Total liabilities	$	964	$	1,024

PDI, Inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Tabular information in thousands, except per share amounts)


13.	INVESTMENT IN 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 (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 has 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. PDI has recorded the initial fee as an investment in a non-controlled entity within Other current assets in the Consolidated Balance Sheets in accordance with ASC 325-20 Investments Other - Cost Method Investments.

The Company also has the option to contribute an additional $0.5 million for mutually agreed upon activities in furtherance of collaboration efforts. The option price is dependent on the achievement of certain milestones during the collaboration period (the period up to the exercise of the purchase option or termination of the collaboration agreement) and could be up to $6.0 million if all milestones are achieved at their maximum levels. PDI can terminate the collaboration agreement if all milestones are not achieved by August 2014 and would receive a $1.0 million termination fee, leaving the Company with a maximum exposure of $0.5 million plus amounts contributed in furtherance of collaboration efforts.

If all milestones are achieved by August 2014 and PDI has not exercised its option, the Diagnostics Company can require PDI to exercise the option to purchase its outstanding common stock or terminate the collaboration agreement and pay PDI a termination fee of approximately $2.0 million . If PDI purchases 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 pay a royalty of 7% on annual net revenue up to $50.0 million with escalating royalty percentages for higher annual net revenue capped at 11% for annual net revenue in excess of $100.0 million .

During the period ended March 31, 2014, PDI loaned the Diagnostics Company approximately $0.6 million for the acquisition of a CLIA approved lab bearing a 4% interest rate. This loan is secured by the lab and the assets of the lab and is payable to PDI at the sooner of: May 31, 2015; the expiration or termination of the collaboration agreement between the parties; the acquisition of the Diagnostics Company by PDI; or default by the Diagnostics Company. PDI has recorded the loan receivable within Other current assets in the Consolidated Balance Sheets.

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 strategic collaboration agreement, PDI will be responsible for all U.S.-based marketing and promotion of CardioPredict™, while Transgenomic will be responsible for processing CardioPredict™ in its state-of-the-art CLIA lab and all customer support. Both parties will pay their respective expenses and will split profit on a formula basis. If the Company moves to the second phase of the collaboration agreement, PDI may provide Transgenomic with funding support of up to $3.0 million , principally to finance working capital requirements for the product. Through March 31, 2014, the Company has not provided any funding to Transgenomic.

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

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

PDI, Inc.

beyond our control. These statements 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:


•	Changes in outsourcing trends or a reduction in promotional, marketing and sales expenditures in the pharmaceutical, biotechnology and healthcare industries;


•	Our customer concentration risk in light of co ntinued consolidation within the pharmaceutical industry and our current business development opportunities;


•	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 ability to obtain additional funds in order to implement our business model and strategy;


•	Our ability to successfully identify, complete and integrate any future acquisitions or successfully complete and integrate our diagnostic commercialization opportunities and the effects of any such items on our revenues, profitability and ongoing business;


•	Our ability to meet performance goals in incentive-based arrangements with customers;


•	Our ability to successfully negotiate contracts with reasonable margins and favorable payment terms;


•	Competition in our industry;


•	Our ability to attract and retain qualified sales representatives and other key employees and management personnel;


•	Product liability claims against us;


•	Failure of third-party service providers to perform their obligations to us;


•	Volatility of our stock price and fluctuations in our quarterly and annual revenues and earnings;


•	Failure of, or significant interruption to, the operation of our information technology and communication systems; and


•	The results of any future impairment testing for goodwill and other intangible assets.

Please see Part I – Item 1A – “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013 , 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 provider of outsourced commercial services to established and emerging pharmaceutical, biotechnology and healthcare companies in the United States. We are a leading provider of outsourced sales teams that target healthcare providers, offering a range of complementary sales support services designed to achieve our customers' strategic and financial product objectives. In addition to outsourced sales teams, we also provide other promotional services including clinical educator services, digital communications, teledetailing and through our Interpace BioPharma business unit, we provide pharmaceutical, biotechnology, medical device and diagnostics clients with full-service product commercialization solutions. Combined, our services offer customers a range of both personal and non-personal promotional options for the commercialization of their products throughout their lifecycles, from development through maturity. We provide innovative and flexible service offerings designed to drive our customers' businesses forward and successfully respond to a continually changing market. 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 provide these services through three reporting segments: Sales Services; Marketing Services; and Product Commercialization Services. These segments are described in detail under the caption Description of Reporting Segments below.

Our business depends in large part on demand from the pharmaceutical, biotechnology and healthcare industries for outsourced promotional services. In recent years, this demand has been impacted by certain industry-wide factors affecting pharmaceutical,

PDI, Inc.

biotechnology and healthcare companies, including, among other things, pressures on pricing and access, successful challenges to intellectual property rights (including the introduction of competitive generic products), a strict regulatory environment, decreased pipeline productivity and a slow-down in the rate of approval of new products by the United States Food and Drug Administration (FDA). Additionally, a number of pharmaceutical companies have made changes to their commercial models by reducing the internal number of sales representatives. A significant portion of our revenue is derived from our sales force arrangements with large pharmaceutical companies, and we have therefore benefited from cost control measures implemented by these companies and their resultant increased reliance on outsourced promotional services. However, we are also experiencing fluctuations in revenue due to certain clients renewing with a smaller salesforce and the expiration of certain other contracts due to the timing of new business and the variable nature of our business. We believe that we will continue to experience a high degree of customer concentration and this trend may continue as a result of the continuing consolidation within the pharmaceutical industry.

With our proven record of outsourced promotional services expertise, we took action in 2013 on our stated strategy of searching for product in-licensing, acquisition and partnering opportunities that could add more predictable, higher growth, higher margin business that can reduce the natural volatility of our current core businesses, and at the same time leverage the breadth of our installed infrastructure and strength of our core commercialization capabilities. Through our Interpace Diagnostics entity, we have recently announced a strategy focused on becoming a leading commercialization company for the molecular diagnostics industry via in-licensing, acquiring or partnering. The molecular diagnostics industry is highly fragmented with numerous strong science-based companies that have developed clinically important tests which are ready or near ready for market. A vast majority of these companies have very limited experience bringing a test to market and many of them do not have the capital to build an infrastructure to effectively commercialize their test. Due to their complexity, most molecular diagnostic tests require a specialized go-to-market strategy, which includes messaging to physicians and potentially patients, similar to launching of a new drug in the pharmaceutical market. Developing and delivering these kinds of messages, fully leveraging our extensive commercial infrastructure in an impactful, innovative and ROI centric manner is one of our strengths. Given our proven core sales and marketing and full commercialization capabilities, we believe this is a natural extension for us and the strength of these core capabilities, our installed infrastructure and the ability to gain synergies significantly mitigates the risks associated with this strategy.

In October 2013, we 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 strategic collaboration agreement, we will be responsible for all U.S.-based marketing and promotion of CardioPredict™, while Transgenomic will be responsible for processing CardioPredict™ in its state-of-the-art CLIA lab and all customer support. Both parties will pay their respective expenses and will split profit on a formula basis. If we enter into phase two of the collaboration agreement, we may provide Transgenomic with funding support of up to $3.0 million, principally to finance working capital requirements.

In August 2013, we entered into phase one of a collaboration agreement with a privately held molecular diagnostics company (the Diagnostics Company) to commercialize their molecular diagnostic tests. The initial test to be commercialized is fully developed. Under the terms of the collaboration agreement, we paid an initial fee of $1.5 million and have received an option to purchase the outstanding common stock of the Diagnostics Company. The option price is dependent on the achievement of certain milestones during the collaboration period (the period up to the exercise of the purchase option or termination of the collaboration agreement) and could be up to $6 million if all milestones are achieved at their maximum levels and we enter into phase two of the collaboration agreement. We can terminate the collaboration agreement if all milestones are not achieved by August 2014 and would receive a $1.0 million termination fee. If all milestones are achieved by August 2014 and we have not exercised our option, the Diagnostics Company can require us to exercise the option to purchase the outstanding stock of the Diagnostics Company or terminate the collaboration agreement and pay us a termination fee of approximately $2.0 million. If we purchase the Diagnostics Company, in addition to the option price based on the achievement of milestones, beginning in 2015, we would pay a royalty of 7% on annual net revenue up to $50 million with escalating royalty percentages for higher annual net revenue capped at 11% for annual net revenue in excess of $100 million.

While we recognize that there is currently significant volatility in the markets in which we provide services, we believe there are opportunities for growth in our Sales Services, Marketing Services and Product Commercialization Services businesses. These businesses provide our customers with the flexibility to successfully respond to a constantly changing market and a means of controlling costs through promotional outsourcing partnerships. In particular, we believe that the significant reduction in the number of pharmaceutical sales representatives within the industry during the past few years is placing increasing demands on our customers' product portfolios and therefore we expect the market share penetration of outsourced sales organizations to increase in order to address these needs. We have recently intensified our focus on strengthening all aspects of the core outsourced pharmaceutical sales teams business that we believe will most favorably position PDI as the leading outsourced promotional services organization in the United States. In addition, we continue to diligently evaluate the risks and rewards of opportunities

PDI, Inc.

within our PC Services segment as they arise, while enhancing future value-added service offerings, as well as continue to evaluate acquisitions that will enhance our current service offerings and provide new business opportunities.

DESCRIPTION OF REPORTING SEGMENTS

For the quarter ended March 31, 2014 , our three reporting segments were as follows:

▪ Sales Services, which consists of the following business units:


•	Dedicated Sales Teams;


•	Established Relationship Teams; and


•	EngageCE.

▪ Marketing Services, which consists of the following business units:


•	Group DCA; and


•	Voice.

▪ Product Commercialization Services (PC Services) which consists of efforts related to our collaboration agreements through Interpace Diagnostics and the following business unit:


•	Interpace BioPharma.

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.

Nature of Contracts by Segment

Sales Services

Contracts within our Sales Services reporting segment consist primarily of detailing agreements and are nearly all fee-for-service arrangements. The term of these contracts is typically between one and three years. On occasion, certain contracts have terms that are modestly shorter or longer due to the seasonal nature of the products or at the request of the customer. All agreements, whether or not specifically provided for by terms within the contract, may be renewed or extended upon mutual agreement of the parties. Renewed or extended contracts may include revised terms for provisions such as pricing, penalties, incentives and performance metrics.

The majority of our Sales Services contracts are terminable by the customer without cause upon 30 days’ to 180 days’ prior written notice. Additionally, 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. The loss or termination of multiple Sales Services contracts could have a material adverse effect on our financial condition, results of operations and cash flow.

Our Sales Services contracts generally include standard mutual representations and warranties as well as mutual confidentiality and indemnification provisions, including product liability indemnification for our protection. Some of our contracts also include exclusivity provisions limiting our ability to promote competing products during the contract service period unless consent has been provided by the customer, and may also require the personnel we utilize to be dedicated exclusively to promoting the customer’s product for the term of the contract.

Some of our contracts, including contracts with significant customers of ours, may contain performance benchmarks requiring adherence to certain call plan metrics, such as a minimum amount of detailing activity to certain physician targets. Our failure to meet these benchmarks may result in specific financial penalties for us such as a reduction in our program management fee on our dedicated sales agreements, or a discount on the fee we are permitted to charge per detail on our established relationships agreements. Conversely, these same agreements generally include risk-based metrics which allow for incentive payments that can be earned if our promotional activities generate results that meet or exceed agreed-upon performance targets.

PDI, Inc.

All of our contracts provide for certain reimbursable out-of-pocket expenses such as travel, meals and entertainment or product sample distribution costs, for which we are reimbursed at cost by our customers. Certain contracts may also provide for reimbursement of other types of expenses depending upon the type of services we are providing to the customer.

Marketing Services

Our Marketing Services reporting segment is comprised of our Group DCA and Voice business units. Our Group DCA business unit enters into contracts and performs services with our major clients that fall under the scope of a master service agreement(s) (MSAs) or statements of work (SOWs) and typically have a term of one to three years. These MSAs, and in certain instances, SOWs, include standard representations and warranties, as well as confidentiality and indemnification obligations, and are generally terminable by the customer or us, without cause or prior written notice, for any reason. If terminated, the customer is responsible for work completed to date, plus the cost of any nonrefundable commitments we made on their behalf. There is significant customer concentration within our Group DCA business unit.

Our Voice business unit enters into contracts and performs services with our clients that generally take the form of MSAs and typically have a term of three months to one year.

PC Services

Our PC Services segment currently consists of our Interpace BioPharma business unit and our two collaboration agreements entered into in connection with our strategy of becoming a leading commercialization company for the molecular diagnostics industry.

In August 2011, Interpace BioPharma announced a two and one-half year fee-for-service arrangement with a pharmaceutical company. This contract includes standard representations and warranties, as well as mutual confidentiality and indemnification obligations for our protection, and is terminable by the customer without cause upon 180 days prior written notice after the first anniversary of the contract effective date. This contract includes incentive payments that can be earned if our promotional activities generate results that meet or exceed agreed-upon performance targets. In addition, this contract provides for certain reimbursable out-of-pocket expenses such as travel, meals and entertainment and product sample distribution costs, for which we are reimbursed at cost by our customer.

Due to the success of the program and to allow our customer to begin their long-term plan of building their own capabilities in the United States, this customer advised us that they wished to internalize selected commercialization activities as of October 1, 2012 and at the same time, extend other activities 6 months past the original December 31, 2013 contract expiration date to June 30, 2014. The modified and extended contract resulted in an estimated 10% to 15% net overall reduction of the original $55 million contract; however, the contract is no longer terminable by the customer without cause. We anticipate the contract will terminate on the June 30, 2014 contract expiration date. During the quarter ended March 31, 2014, this one customer accounted for all of the revenue in our PC Services segment.

We entered into two separate collaboration agreements to commercialize molecular diagnostic tests in 2013. Under the terms of our October 2013 strategic collaboration agreement with Transgenomic, we will be responsible for all U.S.-based marketing and promotion of CardioPredict™. We will bear the cost of our expenses only and will split profit on a formula basis. In addition, we may provide Transgenomic with funding support of up to $3.0 million principally to finance working capital requirements for the product. Under the terms of our August 2013 collaboration agreement with a privately held molecular diagnostics company (the Diagnostics Company), if we enter into the second phase of collaboration arrangement, we will be responsible for the full commercialization of their molecular diagnostic tests. Under the terms of the collaboration agreement, we paid an initial fee of $1.5 million and have 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 option price is dependent on the achievement of certain milestones during the collaboration period (the period up to the exercise of the purchase option or termination of the collaboration agreement) and could be up to $6 million if all milestones are achieved at their maximum levels. We can terminate the collaboration agreement if all milestones are not achieved by August 2014 and would receive a $1.0 million termination fee. If all milestones are achieved by August 2014 and we have not exercised our option, the Diagnostics Company can require us to exercise the option to purchase the outstanding stock of the Diagnostics Company or terminate the collaboration agreement and pay us a termination fee of approximately $2.0 million. If we purchase the Diagnostics Company, in addition to the option price based on the achievement of milestones, beginning in 2015, we would pay a royalty of 7% on annual net revenue up to $50 million with escalating royalty percentages for higher annual net revenue capped at 11% for annual net revenue in excess of $100 million.

PDI, Inc.

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.



	Three Months Ended
	March 31,
	2014		2013
Revenue, net	100.0	%	100.0	%
Cost of services	84.4	%	80.3	%
Gross profit	15.6	%	19.7	%

Compensation expense	10.8	%	9.7	%
Other selling, general and administrative expenses	9.4	%	4.8	%
Total operating expenses	20.2	%	14.5	%
Operating (loss) income	(4.6	)%	5.2	%

Other expense, net	(0.1	)%	—	%
(Loss) income from continuing operations before income tax	(4.6	)%	5.2	%
Provision for income tax	0.2	%	0.1	%
(Loss) income from continuing operations	(4.8	)%	5.1	%

Results of Continuing Operations for the Quarter Ended March 31, 2014 Compared to the Quarter Ended March 31, 2013

Overview

We operate in three business segments: Sales Services; Marketing Services; and PC Services. We are in the pursuit of adding more predictable, higher growth, higher margin business that will eliminate natural volatility of our current core businesses, and at the same time leverage the breadth of our installed infrastructure and the strength of our core commercialization capabilities through our recently announced strategy to become a leading commercialization company for the molecular diagnostics industry via in-licensing, acquiring or partnering through our Interpace Diagnostics entity. The molecular diagnostics industry is highly fragmented with numerous strong science-based companies that have developed clinically important tests which are ready or near ready for market. A vast majority of these companies have very limited experience bringing a test to market and many of them do not have the capital to build an infrastructure to effectively commercialize their test. Due to their complexity, most molecular diagnostic tests require a specialized go-to-market strategy, which includes messaging to physicians and potentially patients, similar to launching of a new drug in the pharmaceutical market. Developing and delivering these kinds of messages, fully leveraging our extensive commercial infrastructure in an impactful, innovative and ROI centric manner is one of our strengths. Given our proven core sales and marketing and full commercialization capabilities, we believe that this is a natural extension for us and the strength of our core capabilities, installed infrastructure and the ability to gain synergies significantly mitigates the risks associated with this strategy.



Revenue, net (in thousands)	Three Months Ended
	March 31,
	2014		2013		Change ($)			Change (%)
Sales Services	$	28,795	$	38,225	$	(9,430	)	(24.7	)%
Marketing Services	1,003		1,541		(538		)	(34.9	)%
PC Services	2,980		3,157		(177		)	(5.6	)%
Total	$	32,778	$	42,923	$	(10,145	)	(23.6	)%

PDI, Inc.

Consolidated revenue, net (revenue) for the quarter ended March 31, 2014 decreased by $ 10.1 million, or 23.6% , to $ 32.8 million, compared to the quarter ended March 31, 2013 . The decrease was primarily a result of the expiration or reduction of contracts being executed in our Sales Services segment in 2014 exceeded the contracts entered.

Revenue in our Sales Services segment for the quarter ended March 31, 2014 decreased by $ 9.4 million, or 24.7% , to $ 28.8 million, compared to the quarter ended March 31, 2013 . The decrease in Sales Services revenue, as mentioned above, was primarily due to the expiration or reduction of contracts being executed in 2014 exceeded the contract entered into.

Revenue in our Marketing Services segment for the quarter ended March 31, 2014 decreased $ 0.5 million , or 34.9% , to $ 1.0 million, compared to the quarter ended March 31, 2013 . This decrease was primarily due to a decline in revenue at our Group DCA business unit as a result of fewer contract signings.

Revenue in our PC Services segment for the quarter ended March 31, 2014 was $ 3.0 million, slightly lower than the first quarter of 2013.



Cost of services (in thousands)	Three Months Ended
	March 31,
	2014		2013		Change ($)			Change (%)
Sales Services	$	24,052	$	30,906	$	(6,854	)	(22.2	)%
Marketing Services	1,171		1,157		14			1.2	%
PC Services	2,446		2,387		59			2.5	%
Total	$	27,669	$	34,450	$	(6,781	)	(19.7	)%

Consolidated cost of services for the quarter ended March 31, 2014 decreased by $ 6.8 million, or 19.7% , to $ 27.7 million, compared to the quarter ended March 31, 2013 . This decrease was due to the expiration or reduction of contracts within our Sales Services segment being executed in 2014.

Cost of services in our Sales Services segment for the quarter ended March 31, 2014 decreased by $ 6.9 million, or 22.2% , to $ 24.1 million, compared to the quarter ended March 31, 2013 . This decrease was directly attributable to the decrease in revenue discussed above.

Cost of services in our Marketing Services segment for the quarter ended March 31, 2014 remained essentially flat at $ 1.2 million, compared to the quarter ended March 31, 2013 .

Cost of services in our PC Services segment for the quarter ended March 31, 2014 increased $0.1 million , or 2.5% , to $2.4 million , compared to the quarter ended March 31, 2013 .



Gross profit (in thousands)
Three Months Ended	Sales			% of		Marketing			% of		PC			% of					% of
March 31,	Services			Sales		Services			Sales		Services			Sales		Total			Sales
2014	$	4,743		16.5	%	$	(168	)	(16.7	)%	$	534		17.9	%	$	5,109		15.6	%
2013	7,319			19.1	%	384			24.9	%	770			24.4	%	8,473			19.7	%
Change	$	(2,576	)			$	(552	)			$	(236	)			$	(3,364	)

Consolidated gross profit for the quarter ended March 31, 2014 decreased by $ 3.4 million, or 39.7% , to $ 5.1 million, compared to the quarter ended March 31, 2013 . The change in consolidated gross profit was primarily attributable to the decrease in revenue in our Sales Services segment and margin pressures from competitive pricing pressures.

The gross profit percentage in our Sales Services segment for the quarter ended March 31, 2014 decreased to 16.5% , from 19.1% in the quarter ended March 31, 2013 . This decrease was primarily due to new business being won with lower profit margins from competitive pricing pressures.

The gross profit percentage in our Marketing Services segment for the quarter ended March 31, 2014 decreased to a negative 16.7% , from 24.9% in the quarter ended March 31, 2013 . This decrease was primarily due to the impact of certain fixed costs over a lower revenue base and the business unit not being able to reduce its cost structure in proportion with the decline in revenue due to the announced launch of its new product, PD One™.

PDI, Inc.

The gross profit percentage in our PC Services segment for the quarter ended March 31, 2014 decreased to 17.9% , from 24.4% in the quarter ended March 31, 2013 . The decrease in gross profit percentage was primarily due to the expenses related to a collaboration agreement for our molecular diagnostic strategy in Interpace Diagnostics.



Compensation expense (in thousands)
Three Months Ended	Sales			% of		Marketing			% of		PC		% of					% of
March 31,	Services			Sales		Services			Sales		Services		Sales		Total			Sales
2014	$	2,930		10.2	%	$	456		45.5	%	$	155	5.2	%	$	3,541		10.8	%
2013	3,389			8.9	%	652			42.3	%	114		3.6	%	4,155			9.7	%
Change	$	(459	)			$	(196	)			$	41			$	(614	)

Consolidated compensation expense for the quarter ended March 31, 2014 decreased by $ 0.6 million, to $ 3.5 million, as compared to the quarter ended March 31, 2013 . As a percentage of consolidated revenue, consolidated compensation expense increased to 10.8% for the quarter ended March 31, 2014 , from 9.7% for the quarter ended March 31, 2013 , due primarily to the decrease in quarter-over-quarter revenue.

Compensation expense in our Sales Services segment for the quarter ended March 31, 2014 decreased $0.5 million , or 13.5% , to $2.9 million compared to the quarter ended March 31, 2013 . As a percentage of segment revenue, compensation expense increased 1.3% , to 10.2% for the quarter ended March 31, 2014 , from 8.9% for the quarter ended March 31, 2013 , due to the decrease in Sales Services segment revenue.

Compensation expense in our Marketing Services segment for the quarter ended March 31, 2014 decreased by $ 0.2 million, to $ 0.5 million, compared to the quarter ended March 31, 2013 . As a percentage of segment revenue, compensation expense increased 3.2% , to 45.5% for the quarter ended March 31, 2014 , from 42.3% for the quarter ended March 31, 2013 . The increase in segment compensation expense as a percentage of segment revenue was a result of the decrease in revenue within the segment more than offsetting the decrease in compensation costs.

Compensation expense in our PC Services segment for both periods is primarily attributable to the allocated costs of corporate support activities in each of the respective periods.



Other selling, general and administrative expenses (in thousands)
Three Months Ended	Sales		% of		Marketing		% of		PC		% of				% of
March 31,	Services		Sales		Services		Sales		Services		Sales		Total		Sales
2014	$	1,763	6.1	%	$	699	69.7	%	$	603	20.2	%	$	3,065	9.4	%
2013	1,566		4.1	%	415		26.9	%	84		2.7	%	2,065		4.8	%
Change	$	197			$	284			$	519			$	1,000

Consolidated other selling, general and administrative expenses for the quarter ended March 31, 2014 increased by $ 1.0 million, to $ 3.1 million, compared to the quarter ended March 31, 2013 . The increase was driven by $0.6 million in costs related to collaboration agreement efforts for molecular diagnostic tests and $0.3 million of costs to early terminate the Group DCA facility lease. As a percentage of consolidated revenue, consolidated other selling, general and administrative expenses increased to 9.4% for the quarter ended March 31, 2014 , from 4.8% in the quarter ended March 31, 2013 , due to the increase in consolidated other selling, general and administrative expenses and the decrease in revenue discussed above.

Other selling, general and administrative expenses in our Sales Services segment for the quarter ended March 31, 2014 increased slightly, by $ 0.2 million, to $ 1.8 million, compared to the quarter ended March 31, 2013 , primarily due to the increase in allocated corporate costs. As a percentage of segment revenue, other selling, general and administrative expenses increased 2.0% , to 6.1% for the quarter ended March 31, 2014 , from 4.1% in the quarter ended March 31, 2013 , primarily due to the decrease in segment revenue.

Other selling, general and administrative expenses in our Marketing Services segment for the quarter ended March 31, 2014 increased by $ 0.3 million compared to the quarter ended March 31, 2013 . Other selling, general and administrative expenses as a percentage of revenue increased 42.8% , to 69.7% for the quarter ended March 31, 2014 , from 26.9% in the quarter ended March 31, 2013 due to the increase in other selling, general and administrative costs and the segment decrease in revenue.

Other selling, general and administrative expense in our PC Services segment for the quarter ended March 31, 2014 of $ 0.6 million represents the costs related to collaboration agreement efforts for molecular diagnostic tests and the allocated cost of

PDI, Inc.

corporate support activities. Other selling, general and administrative expense for the quarter ended March 31, 2013 of $ 0.1 million represents the allocated cost of corporate support activities during that period.

Operating (loss) income

We had an operating loss of $ 1.5 million and operating income of $2.3 million for the quarters ended March 31, 2014 and 2013 , respectively. The decrease in operating income was primarily due to the decrease in revenue and gross profit within our Sales Services segment and the costs related to collaboration efforts for molecular diagnostic tests.

Provision for income tax

We had income tax expense of approximately $ 0.1 million for each of the quarters ended March 31, 2014 and March 31, 2013 . Income tax expense for the quarters ended March 31, 2014 and March 31, 2013 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, 2014 , we had cash and cash equivalents and short-term investments of approximately $ 38.0 million and working capital of $ 29.7 million , compared to cash and cash equivalents and short-term investments of approximately $ 45.7 million and working capital of approximately $ 31.3 million at December 31, 2013 . As of March 31, 2014 , we had no commercial debt.

For the three-month period ended March 31, 2014 , net cash used in operating activities was $ 6.5 million, compared to net cash provided by operations of $ 1.2 million for the three-month period ended March 31, 2013 . The main components of cash used in operating activities during the three-month period ended March 31, 2014 were a net loss of $1.6 million and an increase in accounts receivable of $6.0 million due to the timing of certain payments from customers. The main components of cash provided by operating activities during the three-month period ended March 31, 2013 were net income of $2.1 million, a decrease in accounts receivable of $1.1 million and an increase in current liabilities of $2.3 million, partially offset by an increase in unbilled costs of $5.1 million.

As of March 31, 2014 and December 31, 2013 , we had $5.6 million and $ 8.0 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, 2014 and December 31, 2013 , we had $ 8.8 million and $ 9.4 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, 2014 , we had net cash used in investing activities of $1.1 million compared to $0.4 million of cash used in investing activities during the three-month period ended March 31, 2013 , both related to capital expenditures. All capital expenditures were funded out of available cash.

For the three-month periods ended March 31, 2014 and March 31, 2013 , 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.

Going Forward

We anticipate 2014 to be a year during which we continue to differentiate ourselves as we build off of our strategy to add more predictable, higher growth, higher margin business that could reduce the natural volatility of our current core business. Last year we announced our strategic focus on becoming a leading commercialization company for the molecular diagnostics industry via in-licensing, acquiring or partnering. The molecular diagnostics industry is highly fragmented with numerous strong science-based companies that have developed clinically important tests which are ready or near ready for market. A vast majority of these companies have very limited experience bringing a test to market and many of them do not have the capital to build an infrastructure to effectively commercialize their test. Due to their complexity, most molecular diagnostic tests require a specialized go-to-market strategy, which includes messaging to physicians, and potentially patients, similar to launching of a new drug in the pharmaceutical market. Developing and delivering these kinds of messages, fully leveraging our extensive commercial infrastructure in an impactful, innovative and ROI centric manner is one of our strengths. Given our proven core sales and marketing and full commercialization capabilities, we believe this is a natural extension for us and the strength of these core capabilities, our installed infrastructure and the ability to gain synergies significantly mitigates the risks associated with this strategy.

PDI, Inc.

In 2014 we will continue to focus on the flawless execution of our customers’ programs 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 must 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 multi-channel promotional capabilities for many large pharmaceutical companies, a variety of emerging and specialty pharmaceutical and biotechnology companies as well as nutritional, diagnostic and other healthcare service providers.

Our primary strategic focus in 2014 is to determine the viability of the two significant opportunities to commercialize innovative molecular diagnostics tests, in Interpace Diagnostics, that we announced in the second half of 2013. In 2014, we will determine whether or not we will move into the second phase of either collaboration agreement. Our determination of moving forward with either of these collaboration agreements is dependent upon, among other things, commercial responsiveness to promotional efforts and the achievement of certain contractual milestones. We will also continue to evaluate other commercialization opportunities in the molecular diagnostics tests in 2014. We are actively seeking opportunities of this kind, and see the potential to complete at least two additional opportunities during 2014 and multiple deals over the longer term.

We will continue to be diligent with but are prepared to use a portion of our cash, supplemented by additional financings, if necessary, to continue this strategy as these two existing molecular diagnostic opportunities will require additional resources in 2014 and future opportunities may require up-front investment. We have begun, and will continue, to refocus resources internally and add both internal and external resources to move this strategy forward.

Our other strategic focus is the active promotion and marketing of our recently launched Group DCA business unit product offering, PD One™. PD One™ is a proprietary technology platform aimed at expanding relationships between pharmaceutical and life science companies and health care providers. The subscription-based platform enables clients to extend personal and brand interactions with physicians through a secure, professional networking platform that features direct messaging and dynamic content. The new platform complements PDI's award-winning companion site, Medical Bag.com , a content-rich, multi-functional digital environment that receives more than 50,000 visits by medical professionals each month. This offering utilizes the Group DCA database of approximately 400,000 physicians, can be leveraged by our entire organization and will require ongoing support and enhancements.

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 $2.0 million in 2014. We expect our working capital requirements to increase as a result of new customer contracts generally providing for longer than historical payment terms.

Considering the information provided above, we anticipate 2014 operations will result in a loss and 2014 cash flows will be negative. While we believe that our existing cash balances and expected cash flows generated from operations will be sufficient to meet our operating requirements beyond the next 12 months, we may require alternative forms of financing to achieve our strategic plan of product in-licensing, acquisitions or partnering.

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.

PDI, Inc.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

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, 2013 (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.

PDI, Inc.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit No.		Description


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, 2014 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.

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 8, 2014	PDI, Inc.
		(Registrant)

		/s/ Nancy S. Lurker
		Nancy S. Lurker
		Chief Executive Officer

		/s/ Jeffrey Smith
		Jeffrey Smith
		Chief Financial Officer

TABLE OF CONTENTS

Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 5. Other Information Item 6. Exhibits

IDXG 10-Q Quarter ended March 31, 2014