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| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
March 31, 2019
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
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Nevada | 74-2897368 | |||||||
| (State or other jurisdiction of | (I.R.S. Employer | |||||||
incorporation or organization) | Identification No.) | |||||||
12701 Commonwealth Drive, Suite 9, Fort Myers, | ||||||||
Florida | 33913 | |||||||
(Address of principal executive offices) | (Zip Code) | |||||||
| Large accelerated filer |
| Accelerated filer |
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Non-accelerated filer | ☐ |
| Smaller Reporting Company | ☐ | ||||||||||
Emerging Growth Company | ☐ | |||||||||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common stock ($0.001 par value) | NEO | NASDAQ | ||||||||||||
•Our ability to respond to rapid scientific change; •The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels; •The application, to our business and the services we provide, of existing laws, rules and regulations, including without limitation, Medicare laws, anti-kickback laws, Health Insurance Portability and Accountability Act of 1996 regulations, state medical privacy laws, federal and state false claims laws and corporate practice of medicine laws; •Regulatory developments in the United States including downward pressure on health care reimbursement; •Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”); •Food and Drug Administration, or FDA regulation of Laboratory Developed Tests (“LDTs”); •Failure to timely or accurately bill for our services; •Our ability to expand our operations and increase our market share; •Our ability to expand our service offerings by adding new testing capabilities; •Our ability to meet our future capital requirements; •Our ability to manage our indebtedness; •The •Our ability to maintain service levels and compete with other diagnostic laboratories; •Our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs; •Our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure; •The accuracy of our estimates regarding reimbursement, expenses, future revenues and capital ASSETS September 30, 2017 December 31, 2016 Current assets Cash and cash equivalents $ 12,211 $ 12,525 Accounts receivable (net of allowance for doubtful accounts of $10,937 and $13,699, respectively) 62,723 55,512 Inventories 6,088 6,253 Other current assets 4,725 4,535 Total current assets 85,747 78,825 Property and equipment (net of accumulated depreciation of $37,496 and $27,102, respectively) 34,549 34,036 Intangible assets, net 76,330 77,064 Goodwill 147,019 147,019 Other assets 250 174 Total assets $ 343,895 $ 337,118 LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 14,823 $ 16,782 Accrued compensation 11,805 8,351 Accrued expenses and other liabilities 5,000 4,247 Short-term portion of capital leases 4,687 4,891 Short-term portion of loans 3,799 3,842 Total current liabilities 40,114 38,113 Long-term liabilities Long-term portion of capital leases 4,583 5,378 Long-term portion of loans, net 67,531 70,259 Revolving credit facility, net 24,461 21,799 Deferred income tax liability, net 7,548 14,973 Total long-term liabilities 104,123 112,409 Total liabilities 144,237 150,522 Commitments and contingencies - see Note I Redeemable convertible preferred stock Series A Redeemable Convertible Preferred Stock, $0.001 par value, (50,000,000 shares authorized; 6,600,000 shares issued and outstanding) 30,125 22,873 Stockholders' equity Common stock, $0.001 par value, (250,000,000 shares authorized; 80,346,946 and 78,571,158 shares issued and outstanding, respectively) 80 79 Additional paid-in capital 229,006 216,104 Accumulated deficit (59,553 ) (52,460 ) Total stockholders’ equity 169,533 163,723 Total liabilities, redeemable convertible preferred stock and stockholders' equity $ 343,895 $ 337,118 CASH FLOWS thousands) For the Three Months Ended September 30, For the Nine Months Ended September 30, 2017 2016 2017 2016 NET REVENUE Clinical testing $ 56,186 $ 55,739 $ 172,668 $ 166,674 Pharma Services 6,866 5,022 18,150 16,919 Total Revenue 63,052 60,761 190,818 183,593 COST OF REVENUE 34,242 33,416 103,634 100,471 GROSS PROFIT 28,810 27,345 87,184 83,122 Operating expenses: General and administrative 23,267 19,025 66,743 55,810 Research and development 1,270 967 3,080 3,719 Sales and marketing 6,577 5,958 18,466 18,084 Loss on sale of Path Logic 1,058 — 1,058 — Total operating expenses 32,172 25,950 89,347 77,613 INCOME (LOSS) FROM OPERATIONS (3,362 ) 1,395 (2,163 ) 5,509 Interest expense, net 1,398 1,468 4,173 4,509 Income (loss) before taxes (4,760 ) (73 ) (6,336 ) 1,000 Income tax (benefit) expense 340 (6 ) (539 ) 500 NET INCOME (LOSS) (5,100 ) (67 ) (5,797 ) 500 Deemed dividends on preferred stock 912 1,840 2,734 5,520 Amortization of preferred stock beneficial conversion feature 1,739 3,727 5,122 11,180 NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (7,751 ) $ (5,634 ) $ (13,653 ) $ (16,200 ) NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS Basic $ (0.10 ) $ (0.07 ) $ (0.17 ) $ (0.21 ) Diluted $ (0.10 ) $ (0.07 ) $ (0.17 ) $ (0.21 ) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 79,617 78,145 79,208 77,224 Diluted 79,617 78,145 79,208 77,224 For the Nine Months Ended September 30, CASH FLOWS FROM OPERATING ACTIVITIES 2017 2016 Net income (loss) $ (5,797 ) $ 500 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 11,739 11,550 Amortization of intangibles 5,201 5,454 Amortization of debt issue costs 330 532 Loss on sale of Path Logic 1,058 - Stock based compensation – options, restricted stock and warrants 5,812 4,024 Provision for bad debts 13,026 8,183 Changes in assets and liabilities, net: (Increase) in accounts receivable, net of write-offs (20,916 ) (9,424 ) (Increase) in inventories (37 ) (844 ) (Increase) in prepaid expenses (406 ) (1,482 ) (Increase) in other current assets (98 ) (46 ) Increase in accounts payable and other liabilities 2,366 3,271 Net cash provided by operating activities 12,278 21,718 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (10,167 ) (5,328 ) Net cash used in investing activities (10,167 ) (5,328 ) CASH FLOWS FROM FINANCING ACTIVITIES Advances from revolving credit facility, net 2,496 — Repayment to revolving credit facility — (10,044 ) Repayment of capital lease obligations/loans (4,126 ) (3,874 ) Repayment on term loan, net (2,816 ) (413 ) Proceeds from the exercise of options, warrants and ESPP shares, net of transaction expenses 2,218 3,456 Payments of equity issue costs (197 ) — Net cash (used in) financing activities (2,425 ) (10,875 ) Net change in cash and cash equivalents (314 ) 5,515 Cash and cash equivalent, beginning of period 12,525 23,420 Cash and cash equivalents, end of period $ 12,211 $ 28,935 Supplemental disclosure of cash flow information: Interest paid $ 3,879 $ 3,993 Income taxes paid $ 272 $ 228 Supplemental disclosure of non-cash investing and financing information: Equipment acquired under capital lease/loan obligations $ 3,240 $ 4,907 Deemed dividends on preferred stock $ 2,734 $ 5,520 Amortization of preferred stock beneficial conversion feature $ 5,122 $ 11,180 Purchase of customer list through issuance of restricted stock $ 4,466 $ - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS as well as providing clinical trial services to pharmaceutical firms. annual report these segments, see Note Genoptix and a reduction in interest expense during the three months ended March 31, 2018 as we did not acquire the existing debt. Refer to Note E September 30, 2017 Amortization Period Cost Accumulated Amortization Net Trade Name 24 months $ 3,000 $ 2,633 $ 367 Customer Relationships 156 - 180 months 85,437 9,502 75,935 Non-Compete Agreement 24 months 29 1 28 Total $ 88,466 $ 12,136 $ 76,330 December 31, 2016 Amortization Period Cost Accumulated Amortization Net Trade Name 24 months $ 3,000 $ 1,508 $ 1,492 Customer Relationships 156 - 180 months $ 81,000 $ 5,428 $ 75,572 Total $ 84,000 $ 6,936 $ 77,064 Remainder of 2017 $ 1,796 2018 5,710 2019 5,706 2020 5,696 2021 5,695 2022 5,695 Thereafter 46,032 Total $ 76,330 September 30, 2017 December 31, 2016 Term Loan Facility $ 72,188 $ 75,000 Revolving Credit Facility 25,399 22,900 Auto Loans 82 202 Capital leases 9,270 10,269 Total Debt 106,939 108,371 Less: Debt issuance costs (1,878 ) (2,202 ) Less: Current portion of long-term debt (8,486 ) (8,733 ) Total Long-Term Debt, net $ 96,575 $ 97,436 into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it March 31, 2019. March 31, 2019. cash proceeds from issuances of permitted equity securities by NeoGenomics Term Loan and Revolving Credit Facility Capital Lease Obligations Auto Loans Total Long-Term Debt Remainder of 2017 $ 938 $ 1,397 $ 12 $ 2,347 2018 3,750 4,677 49 8,476 2019 5,625 3,112 21 8,758 2020 5,625 617 - 6,242 2021 81,649 - - 81,649 97,587 9,803 82 107,472 Less: Interest on capital leases - (533 ) - (533 ) 97,587 9,270 82 106,939 Less: Current portion of long-term debt (3,750 ) (4,687 ) (49 ) (8,486 ) Less: Debt issuance costs (1,878 ) - - (1,878 ) Long-term debt, net $ 91,959 $ 4,583 $ 33 $ 96,575 In addition to the Designation Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 Gross service revenues $ 85,429 $ 114,902 $ 263,229 $ 376,857 Total contractual adjustments and discounts (22,377 ) (54,141 ) (72,411 ) (193,264 ) Net revenues $ 63,052 $ 60,761 $ 190,818 $ 183,593 Number of Weighted average shares exercise price Options outstanding at December 31, 2016 5,136,110 $ 5.76 Options granted 2,070,498 7.56 Less: Options exercised 503,320 3.73 Options canceled or expired 210,347 5.80 Options outstanding at September 30, 2017 6,492,941 6.47 Exercisable at September 30, 2017 2,137,259 5.47 Nine Months Ended September 30, 2017 Expected term (in years) 3.0 - 4.5 Risk-free interest rate (%) 1.5% Expected volatility (%) 43.5% - 53.0% Dividend yield (%) 0.0% Weighted average fair value/share at grant date $ 2.24 Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 2017 2016 Research and development expense $ 531 $ 187 $ 858 $ 550 General and administrative expense 2,229 1,499 4,954 3,484 Total stock based compensation expense $ 2,760 $ 1,686 $ 5,812 $ 4,034 Number of Weighted average shares exercise price Warrants outstanding at December 31, 2016 450,000 $ 1.49 Warrants granted — — Less: Warrants exercised 450,000 1.49 Warrants canceled or expired — — Warrants outstanding at September 30, 2017 — — Exercisable at September 30, 2017 — — follows: During the three months ended this matter for the quarter ended March 31, 2019. The clinical cancer testing services we offer to community-based pathologists are designed to be a natural extension of, and complementary to, the services that they perform within their own practices. We believe our relationship as a non-competitive partner to community-based pathology practices, hospital pathology labs and academic centers empowers them to expand their Community-based pathology practices and hospital pathology labs may order certain testing services on a technical component only (“TC” or “tech-only”) basis, which allows them to participate in the diagnostic process by performing the professional component (“PC”) interpretation services without having to hire laboratory technologists or purchase the sophisticated equipment needed to perform the technical component of the tests. We also support our pathology clients with interpretation and consultative services using our own specialized team of pathologists for difficult or complex cases and provide overflow interpretation services when requested by clients. Segment improving efficiency in operations. find solutions. reduce cost per test. We time frame. the Pharma Services segment. Our tech-only services are designed to give pathologists the option to choose, on a case by case basis, whether they want to order just the technical information and images relating to a specific test so they can perform the professional interpretation, or order “global” services and receive a comprehensive test report which includes a NeoGenomics tests and our M.D.s and Ph.Ds. provide the service of interpreting the results of those tests. Our professional staff is also available for post-test consultative services. Clients using our global service offering rely on the expertise of our medical team to give them the answers they need in a timely manner to help inform their diagnoses and treatment decisions. March 31, 2018 Three Months Ended September 30 Nine Months Ended September 30 2017 2016 2017 2016 Net revenue 100.0 % 100.0 % 100.0 % 100.0 % Cost of revenue 54.3 % 55.0 % 54.3 % 54.7 % Gross Profit 45.7 % 45.0 % 45.7 % 45.3 % Operating expenses: General and administrative 36.9 % 31.3 % 35.0 % 30.4 % Research and development 2.0 % 1.6 % 1.6 % 2.0 % Sales and marketing 10.4 % 9.8 % 9.7 % 9.9 % Loss on sale of Path Logic 1.7 % — 0.6 % — Total operating expenses 51.0 % 42.7 % 46.9 % 42.3 % Income (loss) from operations (5.3 )% 2.3 % (1.2 )% 3.0 % Interest expense, net 2.2 % 2.4 % 2.2 % 2.5 % Net income (loss) before income taxes (7.5 )% (0.1 )% (3.4 )% 0.5 % Income tax (benefit) expense 0.5 % 0.0 % (0.3 )% 0.3 % Net income (loss) (8.0 )% (0.1 )% (3.1 )% 0.2 % Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 $ Change % Change 2017 2016 $ Change % Change Clinical testing $ 56,186 $ 55,739 $ 447 1 % $ 172,668 $ 166,674 $ 5,994 4 % Pharma Services 6,866 5,022 1,844 37 % 18,150 16,919 1,231 7 % Total Revenue $ 63,052 $ 60,761 $ 2,291 4 % $ 190,818 $ 183,593 $ 7,225 4 % accounts. Three Months Ended September 30, Nine Months Ended September 30, 2017 2016 % Change 2017 2016 % Change Requisitions received (cases) 98,031 90,297 8.6 % 291,806 269,916 8.1 % Number of tests performed 163,289 140,089 16.6 % 482,476 415,815 16.0 % Average number of tests/requisition 1.67 1.55 7.4 % 1.65 1.54 7.3 % Total clinical genetic testing revenue $ 55,772 $ 53,887 3.5 % $ 168,999 $ 160,886 5.0 % Average revenue/requisition $ 568 $ 597 (4.7 %) $ 579 $ 596 (2.8 %) Average revenue/test $ 342 $ 385 (11.2 %) $ 350 $ 387 (9.5 %) Cost of revenue $ 29,652 $ 28,578 3.8 % $ 87,889 $ 85,499 2.8 % Average cost/requisition $ 302 $ 316 (4.4 %) $ 301 $ 317 (4.9 %) Average cost/test $ 181 $ 204 (11.0 %) $ 182 $ 206 (11.4 %) well as attract new clients looking for a one-stop shop. Three Months Ended September 30, Nine Months Ended September 30, Consolidated 2017 2016 $ Change 2017 2016 $ Change Cost of revenue $ 34,242 $ 33,416 $ 826 $ 103,634 $ 100,471 $ 3,163 Cost of revenue as a % of revenue 54.3 % 55.0 % 54.3 % 54.7 % Gross Profit $ 28,810 $ 27,345 $ 1,465 $ 87,184 $ 83,122 $ 4,062 Gross Profit Margin 45.7 % 45.0 % 45.7 % 45.3 % Genoptix. efficiencies. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2017 2016 $ Change 2017 2016 $ Change General and administrative $ 23,267 $ 19,025 $ 4,242 $ 66,743 $ 55,810 $ 10,933 As a % of revenue 36.9 % 31.3 % 35.0 % 30.4 % costs. Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2017 2016 $ Change 2017 2016 $ Change Research and development $ 1,270 $ 967 $ 303 $ 3,080 $ 3,719 $ (639 ) As a % of revenue 2.0 % 1.6 % 1.6 % 2.0 % Three Months Ended September 30, Nine Months Ended September 30, ($ in thousands) 2017 2016 $ Change 2017 2016 $ Change Sales and marketing $ 6,577 $ 5,958 $ 619 $ 18,466 $ 18,084 $ 382 As a % of revenue 10.4 % 9.8 % 9.7 % 9.9 % increase. revolving credit facility. Three Months Ended September 30 , Nine Months Ended September 30 , (in thousands, except per share amounts) 2017 2016 2017 2016 Net loss available to common shareholders $ (7,751 ) $ (5,634 ) $ (13,653 ) $ (16,200 ) Basic weighted average shares outstanding 79,617 78,145 79,208 77,224 Effect of potentially dilutive securities — — — — Diluted weighted average shares outstanding 79,617 78,145 79,208 77,224 Basic net loss per share $ (0.10 ) $ (0.07 ) $ (0.17 ) $ (0.21 ) Diluted net loss per share $ (0.10 ) $ (0.07 ) $ (0.17 ) $ (0.21 ) We believe that EBITDA and Adjusted EBITDA provide more consistent measures of operating performance between entities and across reporting periods by excluding cash and non-cash items For the Three Months Ended September 30, For the Nine Months Ended September 30, (in thousands) 2017 2016 2017 2016 Net income (loss) (GAAP) $ (5,100 ) $ (67 ) $ (5,797 ) $ 500 Adjustments to net income (loss): Interest expense, net 1,398 1,468 4,173 4,509 Income tax expense (benefit) 340 (6 ) (539 ) 500 Amortization of intangibles 1,751 1,818 5,201 5,454 Depreciation 3,833 4,222 11,739 11,550 EBITDA 2,222 7,435 14,777 22,513 Further Adjustments to EBITDA: Non-cash stock based compensation 2,760 1,686 5,812 4,024 Loss on sale of business 1,058 - 1,058 - Facility moving expenses 5 - 620 - Adjusted EBITDA (non-GAAP), as originally reported 6,045 9,121 22,267 26,537 Impact of accounting error 2,430 - 551 - Adjusted EBITDA (non-GAAP), as corrected $ 8,475 $ 9,121 $ 22,818 $ 26,537 Payer Group 0-30 % 31-60 % 61-90 % 91-120 % >120 % Total % Client AR - Pharma $ 5,708 8% $ 1,367 2% $ 217 0% $ 249 0% $ 373 1% $ 7,914 11% Client AR - Clinical 12,850 17% 8,797 12% 3,146 4% 2,268 3% 4,105 6% 31,166 42% Total Client AR 18,558 10,164 3,363 2,517 4,478 39,080 Commercial Insurance 1,045 1% 1,815 3% 1,410 2% 1,493 2% 10,359 14% 16,122 22% Medicaid 113 0% 289 1% 212 0% 278 0% 961 1% 1,853 2% Medicare 898 1% 1,354 2% 900 1% 971 1% 5,615 8% 9,738 13% Private Pay - 0% - 0% - 0% - 0% - 0% - 0% Unbilled Revenue 6,110 9% 248 0% 34 0% 28 0% 447 1% 6,867 9% Total $ 26,724 36% $ 13,870 20% $ 5,919 7% $ 5,287 6% $ 21,860 31% $ 73,660 100% Payer Group 0-30 % 31-60 % 61-90 % 91-120 % >120 % Total % Client AR - Pharma $ 2,752 4% $ 629 1% $ 305 0% $ 1,191 2% $ 421 1% $ 5,298 8% Client AR - Clinical 10,023 15% 5,891 8% 3,226 5% 1,678 2% 4,808 7% 25,626 37% Total Client AR $ 12,775 $ 6,520 $ 3,531 $ 2,869 $ 5,229 $ 30,924 Commercial Insurance 913 1% 1,947 3% 2,045 3% 1,824 3% 11,325 16% 18,054 26% Medicaid 88 0% 203 0% 198 0% 180 0% 301 1% 970 1% Medicare 840 1% 1,300 2% 779 1% 601 1% 3,167 5% 6,687 10% Private Pay 16 0% 7 0% 10 0% 10 0% (4 ) 0% 39 0% Unbilled Revenue 10,066 15% 1,250 2% 654 1% 225 0% 342 0% 12,537 18% Total $ 24,698 36% $ 11,227 16% $ 7,217 10% $ 5,709 8% $ 20,360 30% $ 69,211 100% September 30, 2017 December 31, 2016 $ Change Allowance for doubtful accounts $ 10,937 $ 13,699 $ (2,762 ) Allowance as a % of gross accounts receivable 14.8 % 19.8 % Days Sales Outstanding 91 84 Company towards fulfilling its obligations under the contract. Nine Months Ended September 30, 2017 2016 Net cash provided by (used in): Operating activities $ 12,278 $ 21,718 Investing activities (10,167 ) (5,328 ) Financing activities (2,425 ) (10,875 ) Net change in cash and cash equivalents (314 ) 5,515 Cash and cash equivalents, beginning of period $ 12,525 $ 23,420 Cash and cash equivalents, end of period $ 12,211 $ 28,935 Working Capital (1), end of period $ 45,633 $ 57,167 2018, except for the adoption of new accounting standards, including the new standard related to Changes in Internal Control over Financial Reporting DESCRIPTION 31.2 32.1 101 The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended Name: Douglas M. VanOort Title: Chief Executive Officer By: /s/ Name: Title: Chief Financial Officer41734 343636363636363738(theor the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (theor the “Exchange Act”) relating to NeoGenomics, Inc., a Nevada corporation and its subsidiaries, NeoGenomics Laboratories, Inc., a Florida corporation (“NEO”, “NeoGenomics Laboratories”), NeoGenomics Bioinformatics Inc., a Florida corporation, and Clarient, Inc., a Delaware corporation and its wholly owned subsidiary, Clarient Diagnostic Services, Inc. (together “Clarient”) (collectively referred to as “we”, “us”, “our”, “NeoGenomics”, or the “Company”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, changing reimbursement levels from government payers and private insurers, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth under “Risk Factors” and in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission “SEC” on February 26, 2019 and as amended and filed with the SEC on March 14, 2017. Forward lookingMay 8, 2019.impacteffects of internalization of testing by customers;requirements.FINANCIALFINANCIAL INFORMATIONASSETS March 31, 2019 December 31, 2018 Current assets Cash and cash equivalents $ 13,195 $ 9,811 Accounts receivable, net Accounts receivable, net 82,585 76,919 Inventories 9,670 8,650 Prepaid assets Prepaid assets 7,504 7,727 Other current assets 2,991 561 Total current assets 115,945 103,668 Property and equipment (net of accumulated depreciation and amortization of $54,512 and $50,127, respectively) Property and equipment (net of accumulated depreciation and amortization of $54,512 and $50,127, respectively) 60,696 60,888 Operating lease right-of-use assets Operating lease right-of-use assets 19,734 — Intangible assets, net 137,844 140,029 Goodwill 196,298 197,892 Other assets 2,826 2,538 Total assets $ 533,343 $ 505,015 LIABILITIES AND STOCKHOLDERS’ EQUITY LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable 16,514 17,779 Accrued compensation 18,851 19,062 Accrued expenses and other current liabilities Accrued expenses and other current liabilities 18,327 8,986 Current portion of finance leases and obligations Current portion of finance leases and obligations 6,501 6,298 Current portion of operating lease liabilities Current portion of operating lease liabilities 3,620 — Current portion of loans Current portion of loans 7,873 7,873 Pharma contract liability Pharma contract liability 1,017 927 Total current liabilities 72,703 60,925 Long-term liabilities Long-term portion of finance leases and obligations Long-term portion of finance leases and obligations 5,253 5,250 Long-term portion of operating lease liabilities Long-term portion of operating lease liabilities 16,648 — Long-term portion of loans, net 85,995 87,880 Revolving credit facility Revolving credit facility 5,000 5,000 Other long term liabilities Other long term liabilities 3,740 3,060 Deferred income tax liability, net 20,156 22,457 Total long-term liabilities 136,792 123,647 Total liabilities 209,495 184,572 Commitments and contingencies - see Note L Commitments and contingencies - see Note L Stockholders' equity Common stock, $0.001 par value, (250,000,000 shares authorized; 95,303,510 and 94,465,440 shares issued and outstanding, respectively) Common stock, $0.001 par value, (250,000,000 shares authorized; 95,303,510 and 94,465,440 shares issued and outstanding, respectively) 95 94 Additional paid-in capital 378,571 372,186 Accumulated other comprehensive income (loss) Accumulated other comprehensive income (loss) (1,136) (579) Accumulated deficit (53,682) (51,258) Total stockholders’ equity 323,848 320,443 Total liabilities and stockholders' equity Total liabilities and stockholders' equity $ 533,343 $ 505,015 Three Months Ended March 31, 2019 2018 NET REVENUE Clinical Services $ 86,210 $ 56,971 Pharma Services 9,367 6,452 Total Revenue 95,577 63,423 COST OF REVENUE 48,462 36,120 GROSS PROFIT 47,115 27,303 Operating expenses: General and administrative 32,142 17,067 Research and development 1,209 956 Sales and marketing 11,216 6,775 Total operating expenses 44,567 24,798 INCOME FROM OPERATIONS 2,548 2,505 Interest expense, net 1,826 1,486 Other expense (income) 5,169 (63) Income (loss) before taxes (4,447) 1,082 Income tax (benefit) expense (2,023) 438 NET INCOME (LOSS) (2,424) 644 Deemed dividends on preferred stock — 1,003 Amortization of preferred stock beneficial conversion feature — 1,853 NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,424) $ (2,212) INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS Basic $ (0.03) $ (0.03) Diluted $ (0.03) $ (0.03) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING: Basic 94,740 80,507 Diluted 94,740 80,507 For the Three Months Ended March 31, 2019 2018 NET INCOME (LOSS) $ (2,424) $ 644 OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustments — (124) (Loss) gain on effective cash flow hedges (557) 623 Total other comprehensive (loss) income (557) 499 COMPREHENSIVE INCOME (LOSS) $ (2,981) $ 1,143 Series A Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Accumulated Other Comprehensive Accumulated Shares Amount Shares Amount Capital Income (Loss) Deficit Total Balance, January 1, 2018 6,864,000 $ 32,615 80,462,574 $ 80 $ 230,030 $ 274 $ (58,422) $ 171,962 Common stock issuance ESPP Plan — — 38,620 — 267 — — 267 Stock issuance fees and expenses — — — — (97) — — (97) Foreign currency translation adjustments — — — — — (45) — (45) Gain on effective cash flow hedge — — — — — 270 — 270 Issuance of common stock for stock options — — 67,259 1 215 — — 216 Deemed dividends on preferred stock — 1,003 — — — — (1,003) (1,003) Amortization of beneficial conversion feature — 1,853 — — — — (1,853) (1,853) ESPP expense — — — — 54 — — 54 Stock based compensation expense - options and restricted stock — — — — 1,570 — — 1,570 Net income — — — — — — 644 $ 644 Balance, March 31, 2018 6,864,000 $ 35,471 80,568,453 $ 81 $ 232,039 $ 499 $ (60,634) 171,985 Balance, December 31, 2018 — $ — 94,465,440 $ 94 $ 372,186 $ (579) $ (51,258) $ 320,443 Common stock issuance ESPP Plan — — 36,032 — 419 — — 419 Stock issuance fees and expenses — — — — (66) — — (66) Loss on effective cash flow hedge — — — — — (557) — (557) Issuance of restricted stock — — 182,502 — — — — — Issuance of common stock for stock options — — 619,536 1 3,893 — — 3,894 ESPP expense — — — — 119 — — 119 Stock based compensation expense - options and restricted stock — — — — 2,020 — — 2,020 Net loss — — — — — — (2,424) (2,424) Balance, March 31, 2019 — $ — 95,303,510 $ 95 $ 378,571 $ (1,136) $ (53,682) $ 323,848 OPERATIONSthousands, except per share amounts) Three Months Ended March 31, CASH FLOWS FROM OPERATING ACTIVITIES 2019 2018 Net (loss) income $ (2,424) $ 644 Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Depreciation 5,271 3,633 Amortization of intangibles 2,559 1,413 Amortization of debt issue costs 150 113 Loss (gain) on disposal of assets 156 (7) Non-cash stock based compensation 2,139 1,624 Non-cash operating lease expenses 1,141 — Changes in assets and liabilities, net: Accounts receivable, net (5,795) 2,299 Inventories (1,019) (41) Prepaid expenses (250) (1,990) Other current assets (265) (158) Accounts payable, accrued and other liabilities 4,434 6,782 Net cash provided by operating activities 6,097 14,312 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of property and equipment (3,196) (4,666) Net cash used in investing activities (3,196) (4,666) CASH FLOWS FROM FINANCING ACTIVITIES Repayment of equipment and other loans (1,797) (1,394) Repayment of term loan (1,968) (6,338) Issuance of common stock, net 4,248 483 Net cash provided by (used in) financing activities 483 (7,249) Effects of foreign exchange rate changes on cash and cash equivalents — (45) Net change in cash and cash equivalents 3,384 2,352 Cash and cash equivalents, beginning of period 9,811 12,821 Cash and cash equivalents, end of period $ 13,195 $ 15,173 Supplemental disclosure of cash flow information: Interest paid $ 1,696 $ 1,396 Income taxes paid, net $ 8 $ 7 Supplemental disclosure of non-cash investing and financing information: Equipment acquired under loan obligations $ 2,003 $ 3,355 Property and equipment included in accounts payable $ 1,175 $ 660 statements.statementsCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands)(unaudited)See notes to unaudited consolidated financial statements.6NEOGENOMICS, INC.(the “Parent”), and its subsidiaries NeoGenomics Laboratories, Inc.(the “Parent”, a Florida corporation (“NEO” or, “NeoGenomics Laboratories”), NeoGenomics Bioinformatics Inc., a Florida corporation, Path Labs LLC., a Delaware limited liability company (“PathLogic”) and Clarient Inc., a Delaware corporation, and its wholly owned subsidiary Clarient Diagnostic Services, Inc. (together, “Clarient”), (collectively referred to as “we”, “us”, “our”, “NeoGenomics”“Company”, or the “Company”“NeoGenomics”), operates as a certified “high complexity”high complexity clinical laboratory in accordance with the federal government’s Clinical Laboratory Improvement Act, as amended (“CLIA”), and is dedicated to the delivery of clinical diagnostic services to pathologists, oncologists, urologists, hospitals, and other laboratories throughout the United States and Europe. interim consolidated financial statements include the accounts of the Parent and its subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying interim consolidated financial statements.statements.statements and footnotes. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with2018. The year-end consolidated balance sheet informationhas been derived from our audited consolidated financial statements in the SEC on March 14, 2017. We have oneoperating segment that deliverssegments deliver testing services to hospitals, pathologists, oncologists, other clinicians, pharmaceutical firms and researchers which representsand represent 100% of the Company’s consolidated assets, net revenues and net income (loss) for the three and nine months ended September 30, 2017 and 2016. We have evaluated our segments based on how the Chief Operating Decision Maker (“CODM”), our Chief Executive Officer, reviews performance and makes decisions in managing the Company. At September 30, 2017, we provided services within the United States and Europe and had assets located within the United States and Europe.We have two primary types of customers, clinical and pharma. Our clinical customers include community based pathology practices, oncology groups, hospitals and academic centers. Our pharma customers include pharmaceutical companies to whom we provide testing and other services to support their studies and clinical trials. As we grow, we continue to assess the information available to the CODM. Currently, discreteeach period presented. For further financial information is not available to the CODM about the separate financial performance of our clinical and our pharma customers. As we continue to grow and focus separately on the two customer types we will routinely assess the information available and reviewed by the CODM and determine if we meet the criteria for having separate segments.Correction of Immaterial Accounting ErrorThe Company performed an internal analysis in the third quarter of 2017 which identified an immaterial error in the revenue reported in our Form 10-K for the year ended December 31, 2016, Form 10-Q for the quarter ended March 31, 2017 and Form 10-Q for the three and six months ended June 30, 2017. We have concluded that the error identified was not material to any prior annual or interim periods. We assessed the extent of this error and it was corrected in the third quarter of 2017, resulting in a reduction of revenue, and thus a corresponding reduction in accounts receivable of $2.4 million and $0.6 million for the three and nine months ended September 30, 2017, respectively. See Item 4. Controls and Procedures for additional details regarding this error.No. 2017-01, Business Combinations2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard clarifies the definition of a business and providesnew guidance on when transactions should be accounted for as acquisitions of assets and when they should be accounted for as acquisitions of businesses. The Company early adopted this standard on July 1, 2017 and applied this guidance to the customer list7NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnauditedthat was acquired on August 1, 2017. The customer list acquired was not determined to meet the definition of a business under this standard and was therefore determined to be an asset acquisition. In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The standard update required excess tax benefits and tax deficiencies to be recorded directly through earnings as a component of income tax expense. Under previous GAAP, these differences were generally recorded in additional paid-in capital and thus had no impact on net income. The change impacted the computation of diluted earnings per share, and the cash flows associated with those items are now classified as operating activities on the condensed statements of consolidated cash flows. Entities were permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures could be estimated, as required under previous GAAP, or recognized when they occur. The Company adopted this ASU on January 1, 2017 using the transition method prescribed for each applicable provision:Based on the implementation guidance, previously unrecognized excess tax benefits should be on a modified retrospective basis beginning in the period the guidance is adopted. Accordingly, the Company recorded an increase in deferred tax assets and an offsetting cumulative-effect adjustment to retained earnings of $6.6 million as of January 1, 2017 for excess tax benefits not previously recognized.Based on the implementation guidance, all excess tax benefits and tax deficiencies related to share based compensation will be reported in net income (loss) on a prospective basis. For the nine months ended September 30, 2017, no income (loss) was reported. The Company has elected to retrospectively adopteliminates the requirement to present cash flows relatedcalculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess tax benefits as cash flows from operating activities. This adoption had no effect on cash flows for the nine months ended September 30, 2017.The Company has elected to recognize forfeitures in compensation cost as they occur.IssuedIn August 2017 the FASB issuedof a reporting unit’s carrying amount over its fair value. ASU 2017-12, Derivatives and Hedging. This standard refines hedge accounting to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This update2017-14 is effective for annual periodspublic business entities for fiscal years beginning after December 15, 2018 and2019, including interim periods within those annual periods. Earlyfiscal years, and early adoption is permitted. The Company does not expect the impact of the adoption of ASU 2017-12the standard to have a material effectimpact on its consolidated financial statements.May 2017,August 2018, the FASB issued ASU 2017-09, Compensation2018-13, Fair Value Measurement: Disclosure Framework – Stock Compensation. This standard provides guidance relatedChanges to the scopeDisclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of stock option modification accounting,and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to reduce diversitydisclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in practiceunrealized gains and reduce cost and complexity regarding existing guidance.losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2017.2019, and interim periods within those periods, and early adoption is permitted. Certain provisions of the ASU must be adopted retrospectively, while others must be adopted prospectively. The Company does not expect the impact of the adoption of the standard to have a material impact on its consolidated financial statements.does not expectis in the process of assessing the impact of the adoption of ASU 2017-09 to have a material effectthe standard on its consolidated financial statements.In January 2017statements as well as whether to early adopt the FASB issued ASU No. 2017-04, Intangiblesnew standard.GoodwillLeasesOther: Simplifyingequipment throughout the Test for Goodwill Impairment. This standard eliminates Step 2world, nearly all of which are classified as operating leases expiring at various dates. The Company determines if an arrangement qualifies as a lease at lease inception. Leases with an initial term of 12 months or less are not recorded in the balance sheet. Operating lease liabilities are recorded based on the present value of the goodwill impairment test. Instead,future lease payments over the lease term, assessed as of the commencement date. The Company’s real estate leases, which are comprised primarily of office and laboratory space, represent the vast majority of our operating lease liabilities and generally have a lease term between 1 and 10 years. The remaining leases consist primarily of machinery and equipment used in the lab and office equipment, each with various lease terms. The vast majority of the Company's leases are comprised of fixed lease payments. Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-components). Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any actual costs in excess of such amounts are expensed as incurred as variable lease cost.entity should performimplicit borrowing rate, and as such, the Company utilizes its annual or interim goodwill impairment testincremental borrowing rate by comparinglease term in order to calculate the fairpresent value of our future lease payments. The discount rate represents a reporting unitrisk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with its carrying amount. An entity should recognize an impairment chargethe lease term. On January 1, 2019, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date. For new or renewed leases starting in 2019, the discount rate is determined using available data at lease commencement and based on the lease term.Year Ended December 31, Operating Leases 2019 (excluding the three months ended March 31, 2019) $ 4,043 2020 2,833 2021 2,811 2022 2,121 2023 2,032 2024 1,993 Thereafter 12,377 Total future minimum lease payments 28,210 Less imputed interest (7,942) Total present value of future minimum lease payments $ 20,268 Three Months Ended March 31, 2019: (in thousands) Operating cash flows from operating leases $ 1,257 Right-of-use assets obtained in exchange for operating lease liabilities $ 11,169 As of March 31, 2019: Weighted Average Remaining Lease Term (years) 9.11 Weighted Average Discount Rate 6.4 % Years ending December 31, 2019 $ 5,247 2020 2,798 2021 1,082 2022 453 2023 92 Thereafter — Total minimum lease payments $ 9,672 carrying amount exceedssole deliverable is a final report that is sent to sponsors at the reporting unit’s fair value; however,completion of contracted activities. For these contracts, revenue is recognized at a point in time upon delivery of the lossfinal report to the sponsor. Any contracts that contain multiple performance obligations and include both units-of-service and point in time deliverables are accounted for as separate performance obligations and revenue is recognized should not exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual and interim periods beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017.as previously disclosed. The Company does not expectnegotiates billing schedules and payment terms on a contract-by-contract basis. While the adoption of ASU 2017-04 to havecontract terms generally provide for payments based on a material effect on its consolidated financial statements. In August 2016,unit-of-service arrangement, the FASB issued “ASU” 2016-15, Statement of Cash Flows – Classification of Certain Cash Receiptsbilling schedules, payment terms and Cash Payments. This standard clarifies how specific cash receipts andrelated cash payments may not align with the performance of services and, as such, may not correspond to revenue recognized in any given period.classified and presented in the statement of cash flows. This update is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-15 to have a material effect on its consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, Leases. The updaterequires organizations to recognize lease assets and leasedeferred as contract liabilities on the balance sheetsheet. The associated revenue is recognized and the contract liability is reduced as the contracted services are subsequently performed. Contract assets are established for those leasesrevenue that has been recognized but not yet billed. These contract assets are reduced once the customer is invoiced and a corresponding account receivable is recorded. Additionally, certain costs to obtain contracts, primarily for sales commissions, are capitalized when incurred and are amortized over the term of the contract. Amounts capitalized for contracts with an initial contract term of twelve months or less are classified as operating leases under previous GAAP. ASU 2016-02 requires that a8lessee should recognize a liabilityMarch 31, 2019 December 31, 2018 Current pharma contract asset $ 192 $ 86 Long-term pharma contract asset 417 268 Total pharma contract asset $ 609 $ 354 Current pharma capitalized commissions $ 310 $ 271 Long-term pharma capitalized commissions 766 650 Total pharma capitalized commissions $ 1,076 $ 921 Current pharma contract liability $ 1,017 $ 927 Long-term pharma contract liability 1,935 1,652 Total pharma contract liability $ 2,952 $ 2,579 make lease payments (the lease liability) and a right-of-use asset representing its right to usehigher upfront fees driven by increases in the underlying assetvolume of Pharma contracts in process. Revenue recognized for the lease term onthree months ended March 31, 2019 and March 31, 2018 related to Pharma contract liability balances outstanding at the balance sheet. ASU 2016-02 is effectivebeginning of the period was $1.3 million and $0.9 million, respectively. Amortization of capitalized commissions for periods beginning after December 15,the three months ended March 31, 2019 and March 31, 2018 were $0.2 million and interim periods within those periods. The adoption$0.1 million, respectively.this ASU will result in an increase on the balance sheet for lease liabilities and right-of-use assets. Revenueis currently evaluating the quantitative impact that adopting ASU 2016-02 will have onconsidered various factors for both its consolidated financial statements.In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers. This standard update calls for a number of revisions in the revenue recognition rules. In August 2015, the FASB deferred the effective date of this ASU to the first quarter of 2018, with optional early adoption beginning in the first quarter of 2017. The ASU can be applied using a full retrospective method or a modified retrospective method of adoption. The Company expects to adopt this ASU in the first quarter of 2018 using a full retrospective method of adoption. We anticipate the adoption of this standard to impact ourClinical Services and Pharma Services revenue, specifically the timingsegments in determining appropriate levels of homogeneous data for its disaggregation of revenue, recognition for our long term research and clinical trials contracts. Many of these contracts have distinct terms which need to be evaluated separately, therefore, we are still in the process of contract review in order to determine the quantitative impact this standard will have on our Pharma Services revenue. We also expect this standard to impact our Clinical testing revenue. Under the new standard, substantially all of our bad debt expense which has historically been presented as part of selling, general and administrative expenses will be considered an implicit price concession and will be reported as a reduction in revenue. We also anticipate enhanced financial statement disclosures surroundingincluding the nature, amount, timing and uncertainty of revenue and cash flows. For Clinical Services, the categories identified align with our type of customer due to similarities of billing method, level of reimbursement and timing of cash receipts at this level. Unbilled amounts are accrued and allocated to payor categories based on historical experience. In future periods, actual billings by payor category may differ from accrued amounts. Pharma Services revenue was not further disaggregated as substantially all of our revenue relates to contracts with large pharmaceutical and biotech customers as well as other CROs for which the nature, timing and uncertainty of revenue and cash flows is similar and primarily driven by individual contract terms.Three Months Ended March 31, 2019 2018 Clinical Services: Client direct billing $ 49,756 $ 38,530 Commercial Insurance 20,433 10,326 Medicare and Medicaid 15,793 8,084 Self-Pay 228 31 Total Clinical Services $ 86,210 $ 56,971 Pharma Services: 9,367 6,452 Total Revenue $ 95,577 $ 63,423 Common Stock Valuation Amount Shares of common stock issued as consideration 1,000,000 Stock price per share on closing date $ 13.94 Value of common stock issued as consideration $ 13,940 Issue discount due to lack of marketability $ (697) Fair value of common stock at December 10, 2018 $ 13,243 December 10, 2018
(As Initially Reported)Measurement Period Adjustments December 10, 2018
(As Adjusted)Current assets $ 22,172 $ 2,257 $ 24,429 Property and equipment 21,029 (428) 20,601 Identifiable intangible assets 71,792 374 72,166 Goodwill 50,873 (1,593) 49,280 Long-term assets 170 — 170 Total assets acquired $ 166,036 $ 610 $ 166,646 Current liabilities (10,769) (892) (11,661) (15,265) 282 (14,983) Net assets acquired $ 140,002 $ — $ 140,002 contracts with customers.the acquisition of Genoptix includes revenue synergies as a result of our existing customers and Genoptix’ customers having access to each other’s testing menus and capabilities and also from the new product lines which Genoptix adds to the Company’s product portfolio, including the use of COMPASS and CHART trademarks. None of theCompany continuesprovisional fair value of accounts receivable acquired is approximately $16.6 million, net of a $1.5 million fair value adjustment.Three Months Ended March 31, 2018 Revenue $ 87,703 Net (loss) $ (420) Net (loss) available to common shareholders $ (3,275) assessinclude the full impactacquisition of Genoptix as if it occurred on January 1, 2017. These unaudited pro forma consolidated historical results were then adjusted for certain items, primarily related to: a net increase in amortization expense during the adoptionthree months ended March 31, 2018 due to higher intangible assets recorded related to the acquisition of this standard will have on our financial statements.CF – Goodwill and Intangible AssetsSeptember 30, 2017March 31, 2019 and December 31, 20162018 was $147.0$196.3 million and $197.9 million, respectively. In 2019, we recorded measurement period adjustments of $1.6 million. There were no changes in the carrying amount of goodwill during these periods.September 30, 2017March 31, 2019 and December 31, 20162018 consisted of the following (in thousands): March 31, 2019 Amortization
PeriodCost Accumulated
AmortizationNet Trade Name 12-24 months $ 3,675 $ 3,211 $ 464 Non-Compete Agreement Non-Compete Agreement 24 months 27 21 6 Customer Relationships 180 months 142,000 19,185 122,815 Trade Name - Indefinite-lived Trade Name - Indefinite-lived — 14,559 — 14,559 Total $ 160,261 $ 22,417 $ 137,844 On August 31, 2017, the Company acquired a customer list from Ascend Genomics in exchange for 450,000 shares of restricted stock, see Note H – Equity. This customer relationship was recorded at fair value and is being amortized over 15 years. As part of the transaction, Ascend Genomics signed a non-compete agreement which was also recorded as an intangible asset and is being amortized over 2 years. December 31, 2018 Amortization
PeriodCost Accumulated
AmortizationNet Trade Name 12-24 months $ 3,675 $ 3,042 $ 633 Non-Compete Agreement 24 months 27 18 $ 9 Customer Relationships 180 months 141,626 16,798 $ 124,828 Trade Name - Indefinite-lived — 14,559 — 14,559 Total $ 159,887 $ 19,858 $ 140,029 $1.7$2.6 million and $1.8$1.4 million in straight-line amortization expense of intangible assets for the three month periods ended September 30, 2017March 31, 2019 and 2016, respectively. We recorded approximately $5.2 million and $5.5 million in straight-line amortization expense of intangible assets for the nine month period ended September 30, 2017 and 2016, respectively.2018, respectively. The Company recordedrecords amortization expense from customer relationships and trade names as a general and administrative expense. 9September 30, 2017March 31, 2019 is as follows (in thousands):Remainder of 2019 $ 7,549 2020 9,467 2021 9,467 2022 9,467 2023 9,467 Thereafter 77,868 Total $ 123,285 DG – DebtSeptember 30, 2017March 31, 2019 and December 31, 20162018 (in thousands): March 31, 2019 December 31, 2018 Term Loan Facility $ 94,782 $ 96,750 Revolving Credit Facility 5,000 5,000 Other finance obligations Other finance obligations 11,754 11,548 Total Debt $ 111,536 $ 113,298 Less: Debt issuance costs (914) (997) Less: Current portion of long-term debt and other finance obligations Less: Current portion of long-term debt and other finance obligations (14,374) (14,171) Total Long-Term Debt, net $ 96,248 $ 98,130 capital leasefinance obligations and term debt approximates its fair value based on the current market conditions for similar instruments. Credit Agreementcredit agreement with Regions Bank (the “Credit Agreement”) as administrative agent and collateral agent. The Credit Agreement provided for a $75.0$75 million term loan facility (the “Term Loan Facility”) and a $75 million revolving credit facility (the “Revolving Credit Facility”). The On June 21, 2018, the Company entered into an amendment to the Credit Agreement also provides incremental facility capacity(the “Amendment”) which provided for an additional term loan in the amount of $50$30 million, subject to certain conditions. for which revised terms are included below.September 30, 2017March 31, 2019 and December 31, 2016,2018, the Company had current outstanding borrowings under the Term Loan Facility, as amended, of approximately $3.8$7.9 million, and long-term outstanding borrowings of approximately $67.5$86.0 million and $70.1$87.9 million, net of unamortized debt issuance costs of $939,000 $0.9 million and $1.1 $1.0 million, respectively. The debt issuancese costs were recorded as a reduction in the carrying amount of the related liability and are being amortized over the life of the loan.NeoGenomics Laboratories’NeoGenomics’ option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the Credit Agreement, (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus 0.5% per annum and (c) the one month LIBOR rate plus 1% per annum, or (3) a combination of (1) and (2). The applicable margin will range from 2.25% to 3.50%4.00% for LIBOR loans and 1.25% to 2.50%3.00% for base rate loans, in each case based on NeoGenomics Laboratories’NeoGenomics’ consolidated leverage ratio (as defined in the Credit Agreement)Agreement and revised in the Amendment). Interest on borrowings under the Revolving Credit Facility is payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of Adjusted LIBOR loans. The Company entered into an interest rate swap agreementagreements to hedge against changes in the variable rate offor a portion of this debt.both the Term Loan Facility and the Amendment. See Note E-DerivativeH-Derivative Instruments and Hedging Activities for more information on this instrument.NeoGenomics Laboratories and the Guarantors.NeoGenomics. The Term Loan Facility contains various affirmative and negative covenants including ability to incur liens and encumbrances; make certain restricted payments, including paying dividends on its equity securities or payments to redeem, repurchase or retire its equity securities; enter10NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnaudited commencing with the quarter ending March 31, 2017.. The Company was in compliance with all requiredfinancial covenants as of September 30, 2017.hasand Amendment have a maturity date of December 21,22, 2021. The Credit Agreement requires NeoGenomics Laboratories to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt, (iii) beginning with the fiscal year ending endedDecember 31, 2017, 50%2018, 75% of consolidated excess cash flow (as defined), subject to a step down to 0% of excess cash flow if NeoGenomics Laboratories’NeoGenomics’ consolidated leverage ratio is no greater than or equal to 3.25:1.0 or 50% of consolidated excess cash flow (as defined) if NeoGenomics’ consolidated leverage ratio is less than or equal to 3.25:1.0 but greater than or equal to 2.75:1.0 and (iv) 100% of net cash proceeds from issuances of permitted equity securities by NeoGenomics Laboratories made in order to cure a failure to comply with the financial covenants. NeoGenomics Laboratories is permitted to voluntarily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility at any time without penalty.Auto LoansThe Company has auto loans with various financial institutions. The auto loan terms range from 36-60 months and carry interest rates from 0.0% to 5.2%.Capital LeasesThe Company has entered into capital leases to purchase laboratory and office equipment. These leases expire at various dates through 2020 and the weighted average interest rate under such leases was approximately 4.81% at September 30, 2017. Most of these leases contain bargain purchase options that allow us to purchase the leased property for a minimal amount upon the expiration of the lease term. The remaining leases have purchase options at fair market value. Property and equipment acquired under capital lease agreements are pledged as collateral to secure the performance of the future minimum lease payments.On December 22, 2016,Company entered into a Credit Agreement with Regions Bank as administrative agent and collateral agent. The Credit Agreement provided for a $75.0fourth quarter of 2018, $5.0 million was drawn from the revolving credit facility, (the “Revolving Facility”). On September 30, 2017, and December 31, 2016, the Company hadresulting in outstanding borrowings of approximately $24.5$5.0 million as of December 31, 2018 and $21.8 million, net of unamortized debt issuance costs of $939,000 and $1.1 million, respectively.$10$10.0 million swingline sublimit, with swingline loans bearing interest at the alternate base rate plus the applicable margin. Any principal outstanding under the Revolving Credit Facility is due and payable on December 21,22, 2021 or such earlier date as the obligations under the Credit Agreement become due and payable pursuant to the terms of the Credit Agreement. The Revolving Credit Facility bears interest at a rate per annum equal to an applicable margin plus, at NeoGenomics Laboratories’NeoGenomics’ option, either (1)the Adjusted LIBOR rate for the relevant interest period, as defined within the Credit Agreement (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus 0.5% per annum and (c) the one month LIBOR rate plus 1% per annum, or (3) a combination of (1) and (2). The applicable margin will range from 2.25% to 3.50%4.00% for Adjusted LIBOR loans and 1.25% to 2.50%3.00% for base rate loans, in each case based on NeoGenomics Laboratories’NeoGenomics’ consolidated leverage ratio. Interest on the outstanding principal of the Term Loan Facility will be payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of LIBOR loans. Laboratories to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt, (iii) beginning with the fiscal year endingended December 31, 2017, 50%2018, 75% of consolidated excess cash flow (minus certain specified other payments), subject to a step down to 0% of excess cash flow(as defined) if NeoGenomics Laboratories’NeoGenomics’ consolidated leverage ratio is no greater than or equal to 3.25:1.0 or 50% of consolidated excess cash flow (as defined) if NeoGenomics’ consolidated leverage ratio is less than or equal to 3.25:1.0 but greater than or equal to 2.75:1.0 and (iv) 100% of net11NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnaudited Laboratories made in order to cure a failure to comply with the financial covenants. NeoGenomics Laboratories is permitted to voluntarily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility at any time without penalty, subject to customary “breakage” costs with respect to prepayments of Adjusted LIBOR rate loans made on a day other than the last day of any applicable interest period.September 30, 2017March 31, 2019 are summarized as follows (in thousands): Term Loan and Revolving Credit Facility Finance Obligations Total Long-Term Debt Remainder of 2019 Remainder of 2019 $ 5,905 $ 5,077 $ 10,982 2020 7,873 4,729 12,602 2021 86,004 1,888 87,892 2022 2022 — 60 60 99,782 11,754 111,536 Less: Current portion of long-term debt (7,873) (6,501) (14,374) Less: Debt issuance costs (914) — (914) Long-term debt, net $ 90,995 $ 5,253 $ 96,248 EH – Derivative Instruments and Hedging ActivitiesCash Flow Hedgesan interest rate swap agreementagreements to reduce ourthe Company's exposure to interest rate fluctuations on ourthe Company's variable rate debt obligations. ThisThese derivative financial instrument isinstruments are accounted for at fair value as a cash flow hedge hedges, which effectively modifies ourthe Company's exposure to interest rate risk by converting a portion of ourits floating rate debt to a fixed rate obligation, thus reducing the impact of interest rate changes on future interest expense.We account for derivatives in accordance with FASB ASC Topic 815, see Note B-Summary of Significant Accounting Policies in Annual Report on Form 10-K for more information on our accounting policy related to derivative instruments and hedging activities. this agreement,these agreements, we receive a variable rate of interest based on LIBOR and we pay a fixed rate of interest at 1.59%. interest. The following table summarizes the interest rate swap agreement was effective asagreements.December 2016 Hedge June 2018 Hedge Notional Amount $50 million $20 million (1) Effective Date December 30, 2016 June 29, 2018 Index One month LIBOR One month LIBOR Maturity December 31, 2019 December 31, 2021 Fixed Rate 1.59 % 2.98 % 30, 2016 and a termination date ofhedge on December 31, 2019.As of September 30, 2017 and December 31, 2016, the total notional amount of the Company’s interest rate swaps were $50 million.swapswaps will be included in other long term assets or liabilities, when applicable. As of September 30, 2017March 31, 2019 and December 31, 2016,2018, the fair value of the interest rate swap was not considered to be significant due toderivative financial instruments included in other long-term assets were $0.3 million and $0.5 million, respectively. As of March 31, 2019 and December 31, 2018, the change in LIBOR over that time period outstanding, therefore, no amount is included on the balance sheet for this instrument. As the specific terms and notional amountsfair value of the derivative financial instrument match those of the fixed-rate debt being hedged, the derivative instruments included in other long-term liabilities were $1.3 million and $0.9 million, respectively. Fair value adjustments are assumedrecorded as an adjustment to be perfectly effective hedges and accordingly, there is no impact to the Company's consolidated statements of operations. Gainsaccumulated other comprehensive earnings, except that any gains and losses on thisineffectiveness of the interest rate swap agreement willwould be recorded in accumulatedas an adjustment to other comprehensive income andexpense (income), net. Fair value adjustments will be reclassified to interest expense in the period during which the hedged transaction affects earnings. At September 30, 2017earnings, whether upon termination or maturity. Hedge effectiveness is assessed quarterly. The Company determined that the interest rate swaps are highly effective and, December 31, 2016,thus, there wasis no impact to the Company's consolidated statements of operations. Upon termination of the interest rate swap agreement, we will reclassify gains or losses on derivative instruments from accumulated other comprehensive income (AOCI)(“AOCI”) to earnings. If the swap were terminated, based on interest rates in effect at March 31, 2019, we estimate that we would reclassify approximately $1.0 million from AOCI to earnings during the next twelve months as it was determined that there wasthe anticipated cash flows occur. Amounts reclassified for gains or losses on derivative instruments during the first quarter of 2019 were not a significant change to record. The fair value of this instrument will be evaluated on a quarterly basis and adjusted as necessary. 12FI – Class A Redeemable Convertible Preferred StockNeoGenomicsthe Company issued 14,666,667 shares of its Series A Redeemable Convertible Preferred stockStock ("Series A Preferred Stock") as part of the consideration for the acquisition of Clarient. The Series A Preferred Stock hashad a face value of $7.50 per share for a total liquidation value of $110 million. During the first year, the Series A Preferred Stock had a liquidation value of $100 million if the shares were redeemed prior to December 29, 2016. On December 22, 2016, the Company redeemed 8,066,667 shares of the Series A Preferred Stock for $55.0 million in cash. The redemption amount per share equaled $6.8181825$6.82 ($7.50 minus the liquidation discount of 9.0909%9.09%). At September 30,In December 2017, 6,600,000the Company issued 264,000 additional shares of preferred stock as a paid-in-kind dividend, resulting in a balance of 6,864,000 shares of Series A Preferred Stock outstanding at March 31, 2018. Series A Preferred Stock at September 30, 2017 was $30.1beneficial conversion feature originally recorded with the redeemed shares of $21.3 million, as compared to the carrying amount at December 31, 2016 of $22.9total consideration being paid, in this case the $50.1 million. The increase in the carrying amount is due to the accrual of deemed dividends of approximately $2.7 million, the accretion of the beneficial conversion feature of approximately $5.1 million during the nine months ending September 30, 2017 and the additional BCF discounts for payment-in-kind shares accrued during the nine months ending September 30, 2017 of $0.6 million. Both the deemed dividends and the accretion of the beneficial conversion feature are recorded as distributions to the holders of the Series A Preferred Stock on the income statement with the corresponding entry recorded as an increase to the carrying value of the Series A Preferred Stock.as a result of assessingrepresenting the impact the rights and features of the instrument and their effecthad on the value to the Company. After the partial redemption, the Series A Preferred stock hashad a fair value of approximately $32.9 million, or $4.99 per share. The difference between the fair value of $32.9 million and the liquidation value of $49.5 million representsrepresented a discount of approximately $16.6 million. iswas convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the date of issuance and after the partial redemption in December of 2016 by approximately $44.7 and $20.1 million, respectively, resulting in a beneficial conversion feature. The Company will recognizerecognized the beneficial conversion feature as non-cash, deemed dividenddividends to the holder of Series A Preferred Stock over the first three years the Series A Preferred Stock iswas outstanding, as the date the stock first becomes convertible iswas three years from the issue date. The amount recognized for the three and nine months ended September 30, 2017 was approximately $1.7 million and $5.1 million, respectively. beneficial conversion feature (“BCF”)quartersthe quarter ended March 31, 2017, June 30, 2017 and September 30, 2017,2018 as dividends. After the earlyface value of the remaining Series A Preferred Stock is $49.5 million. We will issue 264,000 additional shares ($49.5 million * 4.0%) / $7.50) of Series A Preferred Stock as payment-in-kind dividends for the year ending December 31, 2017, the first year dividends are payable. The additional 264,000 shares will be discounted and amortized to the income statement over the remaining period up to the earliest conversion date, which is three years from the original issue date. The additional BCF discount recorded for the three and nine months ended September 30, 2017 was approximately $201,240 and $603,720 respectively. 13NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnauditedEach share of Series A Preferred Stock issued and outstanding as of the tenth anniversary of the original issue date will automatically convert into fully paid and non-assessable shares of common stock.Classification The Company classified the Series A Preferred Stock as temporary equity on the consolidated balance sheets due to certain change in control events that are outside the Company’s control, including deemed liquidation events described in the Series A Certificate of Designation.G – Revenue Recognition and Contractual AdjustmentsThe Company recognizes revenues when (a) the price is fixed or determinable, (b) persuasive evidence of an arrangement exists, (c) the service is performed and (d) collectability of the resulting receivable is reasonably assured. The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent, and revenues are recognized once the diagnostic services have been performed, and the results have been delivered to the ordering physician. These diagnostic services are billed to various payers, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals. The Company reports revenues from contracted payers, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules. The Company reports revenues from non-contracted payers, including certain insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and the amount estimated to be collected from non-contracted payers is recorded as an allowance to arrive at the reported net revenues. The expected revenues from non-contracted payers are based on the historical collection experience of each payer or payer group, as appropriate. The Company records revenues from patient pay tests net of a large discount and as a result recognizes minimal revenue on those tests. The Company regularly reviews its historical collection experience for non-contracted payers and adjusts its expected revenues for current and subsequent periods accordingly. On January 1, 2017, we had a significant reduction in our patient fee schedule that primarily impacts the amount billed to uninsured patients.The table below shows the adjustments made to gross service revenues to arrive at net revenues (in thousands), the amount reported on our statements of operations.Note HJ – EquitySeptember 30, 2017March 31, 2019 is as follows:14NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnauditedOf the 6,492,941 outstanding options at September 30, 2017, 1,240,834 were variable accounted stock options issued to non-employees of the Company of which 445,833 options were vested and 795,001 options were unvested as of September 30, 2017.Number of
SharesWeighted Average Exercise Price Options outstanding at December 31, 2018 6,839,417 $ 7.63 Options granted 688,084 $ 19.12 Less: Options exercised 635,257 $ 6.23 Options canceled or expired 2,500 $ 8.04 Options outstanding at March 31, 2019 6,889,744 $ 8.84 Exercisable at Exercisable at March 31, 2019 2,584,373 $ 6.84 ninethree months ended September 30, 2017March 31, 2019 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:Three Months Ended
March 31, 2019Expected term (in years) 3.0 - 4.5 Risk-free interest rate (%) 2.5% Expected volatility (%) 38.9% - 44.0% Dividend yield (%) — Weighted average fair value/share at grant date $5.64 September 30, 2017,March 31, 2019, there was approximately $6.5$7.5 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.31.4 years. This includes approximately $1.9 million in unrecognized expense related to the 795,001 shares of unvested variable accounted for stock options subject to fair value adjustment at the end of each reporting period based on changes in the Company’s stock price.Stock based compensation expense recognized for stock options and restricted stock and included in the consolidated statements of operations was allocated as follows (in thousands): Stock based compensation recorded in research and development relates to unvested options granted to a non-employee. Common Stock Warrantswarrantrestricted stock activity forunder the six months ended September 30, 2017 is as follows:During bothCompany’s plans for the three months ended September 30, 2017 and 2016, we recorded $0 of warrant compensation expense. During the nine months ended September 30, 2017, we recorded $0 of warrant compensation expense and during the nine months ended September 30, 2016 we recorded a warrant compensation gain of approximately $10,000, respectively. Warrant expense (gain) for the periods presentedMarch 31, 2019 is recorded in research and development as the expense is related to unvested performance based warrants that were granted to a non-employee. As of September 30, 2017, there were no outstanding warrants. 15NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnauditedOn August 31, 2017, we issued 450,000 shares of restricted common stock to Ascend Genomics as purchase consideration for the customer list acquired. The customer list was recorded as an intangible asset, see Note C – Goodwill and Intangible Assets. As a condition of the purchase, Ascend is prohibited from trading the shares for a period of six months from the closing date. Number of Restricted
SharesWeighted Average Grant Date Fair Value Nonvested at December 31, 2018 282,508 $ 9.01 Granted 182,502 $ 19.20 Vested — $ — Nonvested at March 31, 2019 465,010 $ 13.01 employee stock purchase plan (“ESPP”)ESPP through which eligible employees may purchase shares of our common stock at a discount. On May 25, 2017, the Company amended the ESPP, increasing the discount from 5% to of 15% of the fair market value of the Company’s common stock. As a result of this change, we have recorded stock based compensation expense related to the ESPP for the quarter ended September 30, 2017. September 30, 2017March 31, 2019 and 2016,2018, employees purchased 23,66436,154 and 26,092theseeach of periods was $41,907approximately $0.1 million.$0, respectively. Duringapplies that to its ordinary quarterly earnings. The effect of changes in enacted tax laws or rates and excess tax benefits and tax deficiencies related to future stock option exercises are recognized in the nineinterim period in which the change occurs. In addition, the effect of significant, unusual, or infrequent items are recognized in the interim period in which the event occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.September 30, 2017March 31, 2019, relates primarily to pre-tax loss incurred for the period including the Health Discovery Corporation litigation (see Note L) for which the income tax benefit is recognized within the quarter. The Company’s effective tax rate of 45.5% for the three months ended March 31, 2019, differs from the federal statutory rate of 21% primarily due to permanent differences from stock compensation and 2016, employees purchased 74,756losses in foreign jurisdictions with no associated tax benefit.75,623 shares, respectivelyContingenciesESPP. MLA, the parties were required to submit such matters in dispute under the MLA to binding arbitration. An arbitration hearing took place in December 2018, where the Company vigorously defended its legal rights and remedies pertaining to this licensing dispute. On April 25, 2019, the American Arbitration Association’s Panel of Arbitrators (the “Panel”) issued their ruling (the “Final Award”) which, in pertinent part, terminated the MLA, awarded $1.5 million to HDC in connection with the claims SmartFlow infringes a valid patent and internal use by NeoGenomics was subject to milestone and royalty payments, and awarded $5.1 million to HDC with respect to the claim of lack of development and commercialization of SVM-CYTO. All other claims by HDC were denied. NeoGenomics’ request for a declaratory judgment was denied and its counterclaims were denied.expenseCompany is currently evaluating its options in connection with the Panel ruling; however, the Company recorded an accrual of $4.9 million, net of tax, for these periods was $41,907 and $0.IM – CommitmentsDuring the three and nine months ended September 30, 2017,Related Party Transactionsleases of approximately $683,000an amended and $3.2 million in laboratory and computer equipment, respectively. These leases have 36 month terms, a $1.00 buyout option at the end of the terms and interest rates ranging from 0.0% to 19.5%. The Company accounted for these lease agreements as capital leases.During the nine months ended September 30, 2017, the Company entered into a construction contract for the expansion of our laboratory in Houston, Texas. The contract is for approximately $5.0 million, which the Company intends to finance through a capital leaserestated consulting agreement with a 36 month term and a $1.00 buyout option. The interest rate under this lease will vary based on the timing of the construction payments. We anticipate this project to be complete in the first quarter of 2018. Note J – Other Related Party TransactionDuring each of the three and nine month periods ended September 30, 2017 and 2016, Steven C. Jones, was ana director, officer director and shareholder of the Company. InCompany whereby Mr. Jones would provide consulting services to the Company in the capacity of Executive Vice President. The Amended and Restated Consulting Agreement has an initial term of November 4, 2016 through April 30, 2020, which automatically renews for additional one year periods unless either party provides notice of termination at least three months prior to the expiration of the initial term or any renewal term. On May 6, 2019, the Company and Mr. Jones entered into a letter agreement to modify certain provisions of the consulting agreement (the “Letter Agreement”) which modifications included, by mutual agreement of the parties, the following: automatic expiration of the consulting agreement on April 30, 2020 unless the parties mutually agree to renew it in writing; a description of consulting services to be provided to the Company (the “Services”) with a target of up to 15 hours per month of working time and attention to the Company; a fixed monthly cash consulting fee in the amount of $5,000 per month for the provision of Services; and continuation of health insurance coverage at the levels currently in effect.approximately $46,000$12,500 and $66,000 for the three months ended September 30, 2017 and 2016, respectively. In addition,$12,500, respectively, as compensation for his services on the Board, Mr. Jones earned approximately $13,000 and $0 for the three months ended September 30, 2017 and 2016, respectively. During the nine months ended September 30, 2017 and 2016, Mr. Jones earned approximately $164,000 and $197,000, respectively in connection with his duties as Executive Vice President.Board. Mr. Jones also received approximately $85,000$58,000 and $79,000$32,000 during the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively, as payment of his annual bonus compensation for the previous fiscal years. In addition, as compensation for his services on theThe Company did not grant stock or restricted stock to any of its Board members, including Mr. Jones, earned $25,500 and $0 for the nine months ended September 30, 2017 and 2016, respectively.During each of the three and nine month periods ending September 30, 2017 and 2016, Kevin Johnson was a director and shareholder of the Company. In May of 2017, the Company engaged Mr. Johnson to provide services as a consultant. This engagement ended in June of 2017. In connection with his role as a consultant, Mr. Johnson earned approximately $0 and $0 forduring the three months ended September 30, 2017March 31, 2019 or March 31, 2018.2016, respectively. In addition,Pharma Services. Our Clinical Services segment provides various clinical testing services to community-based pathology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government, and patients. Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research.compensation for his services onthat information is not used by the Board, Mr. Johnson earned approximately $14,000 and $15,000,CODM. monthsmonth periods ended September 30, 2017 and 2016, respectively and approximately $44,000 and $45,000 for the nine months ended September 30, 2017 and 2016, respectively.On May 25, 2017, the Company granted stock options and restricted stock to each of its board members as part of its annual board compensation process. Mr. Jones and Mr. Johnson were each granted 10,000 stock options and 8,667 shares of restricted stock for their Board services. The options were granted at a price of $7.27 per share and had a weighted average fair market value of $2.38 per option. The options vest ratably over the next three years. The restricted stock has a weighted average fair value of $7.27 per share and vests ratably on the last day of each calendar quarter up to March 31, 2018.END OF FINANCIAL STATEMENTS16Three Months Ended March 31, 2019 2018 Net revenues: Clinical Services $ 86,210 $ 56,971 Pharma Services 9,367 6,452 Total Revenue $ 95,577 $ 63,423 Cost of revenue: Clinical Services $ 42,651 $ 31,042 Pharma Services 5,811 5,078 Total Cost of Revenue $ 48,462 $ 36,120 Gross Profit: Clinical Services $ 43,559 $ 25,929 Pharma Services 3,556 1,374 Total Gross Profit $ 47,115 $ 27,303 Operating expenses: General and administrative $ 32,142 $ 17,067 Research and development 1,209 956 Sales and marketing 11,216 6,775 Total operating expenses 44,567 24,798 Income from Operations 2,548 2,505 Interest expense, net 1,826 1,486 Other expense (income) 5,169 (63) (Loss) income before taxes (4,447) 1,082 Income tax (benefit) expense (2,023) 438 Net (Loss) Income $ (2,424) $ 644 10-K)10-Q) is the registrant for SEC reporting purposes. Our common stock is listed on the NASDAQ Capital Market under the symbol “NEO”.genetic testing laboratories in the United States. States,Europe and Asia. Our mission is to improve patient care through exceptional genetic and molecularcancer-focused testing services. Our vision is to become the World’s leading cancer testing and information company by delivering uncompromising quality, exceptional service and innovative solutions.September 30, 2017,March 31, 2019, the Company had laboratory locations in Ft. Myers and Tampa, Florida; Atlanta, Georgia; Aliso Viejo, Carlsbad and Fresno, CA; TampaCalifornia; Houston, Texas; Nashville, Tennessee; Rolle, Switzerland and Fort Myers, FL; Houston, TX and Nashville, TN. Singapore. The Company currently offers the following types of genetictesting services:services:
- a rapidly growing field which includes a broad range of laboratory techniques utilized in cancer testing. Most molecular techniques rely on the analysis of DNA and/or RNA, as well as the structure and function of genes at the molecular level. Molecular testing technologies include: DNA fragment length analysis; polymerase chain reaction (PCR) analysis; reverse transcriptase polymerase chain reaction (RT-PCR) analysis, real-time (or quantitative) polymerase chain reaction (pPCR) analysis; bi-directional Sanger sequencing analysis;and Next-Generation Sequencing (NGS) analysis.a)Cytogenetics - the study of normal and abnormal chromosomes and their relationship to disease. It involves looking at the chromosome structure to identify changes from patterns seen in normal chromosomes. Cytogenetic studies are often utilized to answer diagnostic, prognostic and predictive questions in the treatment of hematological malignancies.
f.Morphologic analysis – refers to the process of analyzing cells under the microscope by a pathologist, usually for the purpose of diagnosis. Morphologic analysis may be performed on a wide variety of samples, such as peripheral blood, bone marrow, lymph node, and other sites such as lung, breast, etc. The services provided at NeoGenomics may include primary diagnosis, in which a sample is received for processing and our pathologists provide the initial diagnosis; or may include secondary consultations, in which slides and/or tissue blocks are received from an outside institution for second opinion. In the latter setting, the expert pathologists at NeoGenomics assist our client pathologists on their most difficult and complex cases.b)Fluorescence In-Situ Hybridization (“FISH”) - a branch of cancer genetics that focuses on detecting and locating the presence or absence of specific DNA sequences and genes on chromosomes. FISH helps bridge abnormality detection between the chromosomal and DNA sequence levels. The technique uses fluorescent probes that bind to only those parts of the chromosome with which they show a high degree of sequence similarity. Fluorescence microscopy is used to visualize the fluorescent probes bound to the chromosomes. FISH can be used to help identify a number of gene alternations, such as amplification, deletions, and translocations.
Clinical Services Segmentc)Flow cytometry - a rapid way to measure the characteristics of cell populations. Cells from peripheral blood, bone marrow aspirate, lymph nodes, and other areas are labeled with selective fluorescent antibodies and analyzed as they flow in a fluid stream through a beam of light. The properties measured in these antibodies include the relative size, relative granularity or internal complexity, and relative fluorescence intensity. These fluorescent antibodies bind to specific cell surface antigens and are used to identify malignant cell populations. Flow cytometry is typically performed in diagnosing a wide variety of leukemia and lymphoma neoplasms. Flow cytometry is also used to monitor patients through therapy to determine whether the disease burden is increasing or decreasing, otherwise known as minimal residual disease monitoring.d)Immunohistochemistry (“IHC”) and Digital Imaging – Refers to the process of localizing proteins in cells of a tissue section and relies on the principle of antibodies binding specifically to antigens in biological tissues. IHC is widely used in the diagnosis of abnormal cells such as those found in cancerous tumors. Specific surface cytoplasmic or nuclear markers are characteristic of cellular events such as proliferation or cell death (apoptosis). IHC is also widely used to understand the distribution and localization of differentially expressed proteins. Digital imaging allows clients to see and utilize scanned slides and perform quantitative analysis for certain stains. Scanned slides are received online in real time and can be previewed often a full day before the glass slides can be shipped back to clients.e)Molecular testing - a rapidly growing cancer testing methodology that focuses on the analysis of DNA and RNA, as well as the structure and function of genes at the molecular level. Molecular testing employs multiple technologies including DNA fragment length analysis, real-time polymerase chain reaction (“RT-PCR”) RNA analysis, bi-directional Sanger sequencing analysis, and Next-Generation Sequencing (“NGS”).f)Pathology consultation - services provided to clients whereby our pathologists review surgical samples on a consultative basis. NeoGenomics pathologists are some of the foremost experts on pathology in the country, and are used as experts on difficult and challenging cases.17NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSClinical Cancer Testing Servicesand Clinical Trialsdivisionsegment supports pharmaceutical firms in their drug development programs by supporting various clinical trials.trials and research. This portion of our business often involves working with the pharmaceutical firms (sponsors) on study design as well as performing the required testing. Our medical team often advises the sponsor and works closely with them as specimens are received from the enrolled sites. We also work on developing tests that will be used as part of a companion diagnostic to determine patients’ response to a particular drug. As studies unfold, our clinical trials team reports the data and often provide key analysis and insights back to the sponsors.and Clinical Trials groupsegment provides comprehensive testing services in support of our pharmaceutical clients’ oncology programs from discovery to commercialization. In biomarker discovery, our aim is to help our customers discover the right content. We help our customers develop a biomarker hypothesis by recommending an optimal platform for molecular screening and backing our discovery tools with the informatics to capture meaningful data. In other pre and non-clinical work, we can use our platforms to characterize markers of interest. Moving from discovery to development, we help our customers refine their biomarker strategy and, if applicable, develop a companion diagnostic pathway using the optimal technology for large-scale clinical trial testing. and Clinical Trials team provides significant technical expertise, working closely with our customers to support each stage of clinical trial development. Each trial we support comes with rapid turnaround time, dedicated project management and quality assurance oversight. We have experience in supporting submissions to the Federal Food and Drug Administration (“FDA”) for companion diagnostics. Our Pharma Services strategy is focused on helping bring more effective oncology treatments to market through providing world class laboratory services in oncology to key pharmaceutical companies in the industry.2017Develop High Performance Culture, Inspire & “Own” Quality, Accelerate Growth and Advance Our Strategyseveral years, NeoGenomics has experienced rapidyear, we have grown our business organically as well as through the acquisition of Genoptix in December of 2018. We have continued to expand internationally with the opening of a laboratory in Singapore. Our plans for 2019 include initiatives to drive profitable growth including organic growth from offering new tests to existing customers, growth from gaining market share from our competitors,while successfully integrating Genoptix and growth from acquisitions.maintaining exceptional service levels. We expect to continue to grow our business in 2017 and are focused on severalthese initiatives to continue to buildposition our Company to be the World’sworld’s leading cancer testing and information company.Develop our High PerformanceWe are building our high performance culture by empowering our employees and investing in their growth. We are providing skill based training, education, and mentoring our supervisors and managers to allow them to grow within the Company. We communicated career opportunities and performance objectives and hold each employee accountable for their own development. Teamwork highly encouraged through the use of team performance incentive plans as well as other meaningful recognition and rewards. To cultivate teamwork we are committed to improving communication by providing better tools for today’s connected society. Our organization uses weekly employee surveys and takes actions based on the feedback from those surveys. We believe that a culture of motivated and engaged employees provideswill deliver superior service to our clientsclients. We are focused on continuing to strengthen our culture by actively seeking feedback and their patients battling cancer.ideas from employees on ways to innovate and grow ourhavewill foster employee retention targets thatengagement through collaborative forums, frequent team dialogue and programs to reward teams for exceptional performance.set each year,necessary to ensure the success of our Company.wehow they contribute to the Company’s overall objectives. We believe our employee retention rate is above average for the laboratory industry. Recruitingindustry and retainingcontinuing to strengthen our culture will enable us to continually recruit and retain talented employees is critical inemployees.fast moving field of cancer diagnostics. Inspire and “Own” QualitySince the acquisition of Clarient, Inc. and its wholly owned subsidiary Clarient Diagnostic Services, Inc. (together “Clarient”) we’ve focused on combining the very best of both NeoGenomics and Clarient testing menus and services. We’ve had functional teams work through every part of the business to ensure that we were able to maintain our high level of quality and create best practices18NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSthroughout our organization. Maintaininghighest quality laboratory operations and service is enablinglevels has enabled us to retain existing clientsconsistently grow our business. We are continuously looking for ways to improve quality and, in integrating Genoptix and NeoGenomics, we will identify best practices and implement changes to streamline processes across the organization. We are keenly focused on increasing automation and looking for solutions that will maintain quality while adding new ones. haveplan to continue to grow a varietyculture of initiatives designedquality through company-wide leadership, coaching and employee engagement initiatives. Through training, we aim to further enhanceempower our company-wide quality program, provide training onemployees to understand the importance of quality reinforce ourand how to ensure quality principals,in their respective function. We will implement initiatives to significantly improve the Corrective and recognize individuals and teams for providing quality service. By promoting and reinforcing quality principles, we believe we can strengthen our core processes. Our focus on continuous improvement, first time quality and the work of our best-practice teams will enable usPreventative Actions (“CAPA”) process to continue reducing our cost per test as we have steadily over the past several years.In 2016, we began work on our next generation Laboratory Information System (“LIS”) and our information technology team is working to complete the LIS for certain key areas of our Pharma Services division in 2017. We believe the new LIS will help to drive improvements in several laboratory areasensure FDA readiness and will allow for further automationchallenge employees to identify quality issues and operational efficiencies. The new LIS will also meet the stringent requirements of our Pharma Services clients and will enable these clients the ability to track each step through the laboratory process. On June 30, 2017, we began using this new system in certain areas of our Pharma Services business and we will continue to roll it out. Once all of the Pharma Services testing is on the new LIS, we intend to begin using it in our Clinical Testing division.renovatedbeen successful in retaining clients while also gaining market share. As we integrate Genoptix, our Aliso Viejo, CA laboratorygoal is to ensure that we maintain the highest quality operation.are currently working on the expansion of our Houston, TX facility which we expect to complete by the end of the first quarter of 2018. We completed the consolidation of our Irvine Lab facility into the Aliso Viejo Lab facility, and we fully vacated the Irvine facility on April 30, 2017. We have also completed the sale of PathLogic on August 1, 2017 and therefore no longer have a laboratory in West Sacramento, CA. We expect these changes in our business to result in additional capacity, economies of scale and operating efficiencies.Accelerate Profitable Growth20172019 include many initiatives to continue our strong organic growth by gaining market share, introducing new tests, and expanding our Pharma business. Through the acquisition of Clarient we have significantly expanded our Pharma Services business, and plan to develop it further by creating an international presence and incorporating new technologies. Also, as a result of the Clarient acquisition, we have expanded our sales team and now offer our services in geographic areas where we did not previously have sales representation. We believe our highly trained sales team has been successful in competing against other laboratories because of our exceptional service levels, and because we have one of the broadest and most comprehensive test menus in our industry. Our broad menu of molecular and immunohistochemistry testing has helped make us a “one stop shop” for many clients who like the fact that all of their testing can be sent to one laboratory.We currently perform comprehensive analyses for hematopoietic cancers such as leukemia and lymphoma (blood and lymphoid tumors) as well as solid tumors such as breast, lung, colon, and bladder cancers. Our sales team is experienced with the scientific complexity and medical necessity of our testing services, and understands the needs of our client pathologists and oncologists.drive profitable growth. We will continue to pursue market share gains by providing high complexity, cancer-related laboratory testing services to hospitals, community-based pathology practices, academic centers, clinicians, and clinicians throughoutpharmaceutical companies.United States. Our growth has also been aided by strongcustomer experience. We intend to accomplish this through the development and launch of innovative assays, informatics products and companion diagnostics as well as enhancements to our educational programs. We expect this to result in increased product and process understanding, increased ability to gain market share as well as enabling us to maintain our high levels of client retention.believewill work to maintain our client retention success is due to our strong service levels, our tech-only service offerings,broad and a culture of customer focus in which our engaged employees seek to deliver highest customer satisfaction possible. Our strong service levels are reinforced by a disciplined management process with a system of detailed measures and metrics to ensure committed turnaround times and customer service. Our broadinnovative test menu of molecular, immunohistochemistry, and immunohistochemistryother testing, which has helped make us a “one stop shop” for many clients who like the factvalue that all of their testing can be sent to one laboratory.In early 2017, we re-branded and created a new logo. We intend to implement strategic marketing plans to further develop our brand and build brand awareness. We have re-designed our trade show booth incorporating our new logo and plan to improve new test launches by using social media to improve brand awareness. We believe by executingsuccessfully integrating Genoptix and developing our brand weNeoGenomics' operations will achieve growth in newallow us to increase efficiency and existing markets.alsowill continue to look for growth opportunities to grow our business through mergers and/or acquisitions. Weacquisitions and are focused on strategic opportunities that would be complementary to our menu of services and would increase our earnings and cash flow in the short to medium timeframe. In late 2015 we acquired Clarient which specialized in advanced oncology diagnostic services, this acquisition has enabled NeoGenomics to19NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSbroaden its offering of innovative cancer diagnostic tests to hospitals and physicians across the country, and to accelerate its growth in the fast-growing worldwide market for pharmaceutical clinical trials and research. Complementary product offerings and expanded geographical reach of the combined Company will provide customers with substantial benefits and create a significantly larger and more diversified provider of precision oncology diagnostics. The Clarient transaction is a good example of the type of acquisition opportunity we will consider in the future.Advance Our StrategyWe are committed to being an innovative leader and believe this has been and will be a key factor in our growth. We plan to accomplish this goal through strategic actions designed to: 1) advance the technology we use in our laboratories, 2) evaluate, develop and deploy new products and services, and 3) evaluate and experiment with value-based payment models in collaboration with oncology groups and other health care providers.Our broad and innovative testing menu allows us to serve community-based pathologists and clinicians as well as pharmaceutical customers and nationally recognized academic centers. Over the past year, we have developed approximately 50 new molecular oncology tests and disease-specific panels, and we believe we have one of the most comprehensive oncology test menus of any laboratory in the world. By launching new medically significant and necessary tests at a steady rate, we are able to provide cutting-edge developments in molecular genetics with clients and their patients and are developing our reputation as a leader in the field of molecular oncology. In many cases, customers who begin using us because of our new innovative test offerings also begin to refer portions of their other testing. Our comprehensive test offering allows us to be a one-stop shop for all of the oncology testing needs of our clients. Pharmaceutical firms are also attracted to our laboratory based on extensive test menu, and based on our knowledgeable research and development team as well as our ability to offer tests at the forefront of medical developments. We continue to pursue opportunities to offer “liquid biopsy” testing, particularly for hematological diseases. We have launched twelve NEOLABTM liquid biopsy tests for hematological disease using next generation sequencing and other advanced molecular technologies. Liquid Biopsy testing uses cell-free circulating DNA and RNA found in blood plasma to identify molecular abnormalities in the bone marrow without the need for a bone marrow biopsy. The technology is based on the concept that hematologic cells release their DNA, RNA, and protein into circulation as the cells are immersed in blood. The cell-free circulating DNA, RNA and protein are referred to as exosomes, microvesicles, apoptotic bodies or simply DNA- or RNA-protein complexes. Our new tests use proprietary methods to extract these circulating nucleic acids and analyze them using next generation sequencing and advanced methods in order to evaluate molecular abnormalities present in hematological cancers. We also continue to develop new testing approaches by combining the capabilities of a variety of testing technologies. Our NeoTYPETM multimodality testing is somewhat unique in the industry and combines immunohistochemistry testing, molecular testing, and FISH testing into disease-specific panels that are very effective and efficient for improving patient care. We introduced a number of NeoTYPETM molecular panels that combine multiple molecular tests into multi-gene panels targeting specific types of cancer to help pathologists and oncologists determine cancer subtypes on difficult cases. Managed care payers have expressed interest in the more targeted panels as a more cost effective alternative to ordering large whole genome panels that include genes that have never been tied to a particular type of cancer.Our NeoLAB (Liquid Biopsy) Prostate cancer test which is performed on blood plasma and urine rather than on prostate tissue biopsies is currently available as a Laboratory Developed Test and we have received clinical orders for it. There are two goals for this test: 1) to diagnose the presence of cancer in patients and 2) to distinguish high-grade from low-grade cancer in patients with prostate cancer. We are working to gain reimbursement for this test which we believe could significantly increase the acceptance and the number of test orders we receive for this important test.nationwide.nationwide, both in the Clinical Services and Pharma Services segments. By providing information to our clients in a rapid manner, physicians can begin treating their patients as soon as possible. We believe our average 4-5 day turnaround20NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONStime for our cytogenetics testing services, our average 3-4 day turnaround time for FISH testing services, our 5-7 day turnaround time for molecular testing and our average 1 day turnaround time for flow cytometry and pathology testing services are industry-leading benchmarks for national laboratories. Our consistent timeliness of results in our Clinical Services segment is a competitive strength and a driver of additional testing requests by our referring physicians. Rapid turnaround times allow for the performance of other adjunctive tests within an acceptable diagnosis window in order to augment or confirm results and more fully inform treatment options. WeAdditionally, we believe that our fastrapid turnaround timestime on testing and our project milestones are a key differentiator versus other national laboratories, and our clients often cite them as a key factor in their relationship with us.September 30, 2017,March 31, 2019, we employed, or are contracted with, approximately 28100 full-time M.D.sMDs and Ph.Ds. The addition of Clarient’s pathology team has added increased depthPhDs. We have many nationally and world-renowned pathologists on staff, which is a key differentiator from many smaller laboratories. Our clinical customers look to our staff and their expertise and they often call our medical team on challenging cases. For our Pharma Services segment, many sponsors work with our medical team on their study design and has enhanced our abilityon the interpretation of results from the studies. Our medical team is a key differentiator as we have a depth of medical expertise that many other laboratories cannot offer to service a wider range of specialties. Extensive Tech-OnlyPharmaceutical companies.Our FISH, flow cytometry and other tech-only service offerings allow properly trained and credentialed community-based pathologists to extend their own practices by performing professional interpretations services, which allows them to better service the needs of their local clientele without the need to invest in the lab equipment and personnel required to perform the technical component of genetic and molecular testing.Pathologist’spathologist’s interpretation of the test results. Our clients appreciate the flexibility to access NeoGenomics’ medical staff for difficult or complex cases or when they are otherwise unavailable to perform professional interpretations.believe this innovative approachoffer a comprehensive suite of technical and interpretation services, to servingmeet the needs of those clients who are not credentialed and trained in interpreting genetic tests and who require pathology clients’specialists to interpret the testing results in longer term, more committed client relationships that are, in effect, strategic partnerships. Our extensive tech-onlyfor them. In our global service offerings, have differentiated us and allowed us to compete more effectively against larger, more entrenched competitors in our nichelab performs the technical component of the industry.Client Education ProgramsWe believe we have one of the most extensive client education programs in the genetic and molecular testing industry. We train pathologists how to use and interpret genetic testing services so that they can better interpret technical data and render their diagnosis.Our educational programs include an extensive library of on-demand training modules, online courses, webinars and custom tailored on-site training programs that are designed to prepare clients to utilize our tech-only services. We offer training and information on new cancer tests and the latest developments in the field of molecular genetic testing. Each year, we also regularly sponsor seminars and webinars on emerging topics of interest in our field. Our medical staff is involved in many aspects of our training programs.21NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSSuperior Testing Technologies and InstrumentationWe use some of the most advanced testing technologies and instrumentation in the laboratory industry. The use of next generation sequencing in our molecular testing allows us to detect multiple mutations and our proprietary techniques allow us to achieve high sensitivity in our next generation sequencing testing. In addition, we use high sensitivity Sanger sequencing, RNA and DNA quantification, SNP/Cytogenetic arrays, Fragment Length analysis, and other molecular testing technologies. Our automated FISH and Cytogenetics tools allow us to deliver the highest quality testing to our clients and our flow cytometry laboratory uses 10-color flow cytometry analysis technology on a technical-only basis. NeoGenomics is continually testing new laboratory equipment in order to remain at the forefront of new developments in the testing field.Laboratory Information SystemWe believe we have a state-of-the-art LIS that interconnects our locations and provides flexible reporting solutions to clients. This system allows us to standardize testing and deliver uniform test results and images throughout our network, regardless of the location that any specific portion of a test is performed within our network. This allows us to move specimens and image analysis work between locations to better balance our workload. Our LIS also allows us to offer highly specialized and customizable reporting solutions to our tech-only clients. For instance, our tech-only FISH and flow cytometry applications allow our community-based pathologist clients to tailor individual reports to their specifications and incorporate only the images they select and then issue and sign-out such reports using our system. Our customized reporting solution also allows our clients to incorporate test results performed on ancillary tests not performed at NeoGenomics into summary report templates. This FlexREPORT feature has been well-received by clients.five regions (Northeast, Southeast, North Central, South Central and West), and we have a separate sales team for ourten regions. Our Pharma Services division.segment has a dedicated team of business development specialists who are experienced in working with pharma sponsors and helping them with the testing needs of their research and development projects as well as Phase 1-3 studies. These sales representatives utilize our custom Customer Relationship Management System (“CRM”) to manage their territories, and we have integrated all of the important customer care functionality within our LIS into the CRM so that our sales representatives can stay informed of emerging issues and opportunities within their regions. Our in-house customer care team is aligned with our field sales team to serve the needs of our clients by utilizing the same LIS and CRM. Our field teams can see in real-time when a client calls the laboratory, the reason for the call, the resolution, and if face-to-face interaction is needed for follow-up.Geographic LocationsMany high complexity laboratories within the cancer testing niche have frequently operated a core facility on either the West Coast or the East Coast of the United States to service the needs of their customers around the country. We believe our clients and prospects desire to do business with a laboratory with national breadth and a local presence. We have six facilities including three large laboratory locations in Fort Myers, Florida, Aliso Viejo, California and Houston Texas. We also have three smaller laboratory locations in Fresno, California, Nashville, Tennessee and Tampa, Florida. Our objective is to “operate one lab with multiple locations” in order to deliver standardized, high quality, test results. We have completed renovations in our Aliso Viejo facility and have successfully transitioned all Irvine employees and tests into the much larger Aliso Viejo laboratory during late March 2017. We are also working to expand our Houston, Texas facility in order to increase capacity and plan to complete this expansion by the end of the first quarter of 2018. In addition, our new lab in Geneva, Switzerland is fully operational with a grand opening planned for early November of 2017. We intend to continue to develop and open new laboratories and/or expand our current facilities as market situations dictate and business opportunities arise.Scientific PipelineIn the past few years our field has experienced a rapid increase in tests that are tied to specific genomic pathways. These predictive tests are typically individualized for a small sub-set of patients with a specific subtype of cancer. The therapeutic target in the genomic pathway is typically a small molecule found at the level of the cell surface, within the cytoplasm and/or within the nucleus. These genomic pathways, known as the “Hallmarks of Cancer”, contain a target-rich environment for small-molecule anti-therapies. These anti-therapies target specific mutations in the major cancer pathways such as the Proliferation Pathway, the Apoptotic Pathway, the Angiogenic Pathway, the Metastasis Pathway, and the Signaling Pathways and Anti-Signaling Pathways.22NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS During the third quarter of 2017, Hurricane Harvey forced the closure of our Houston laboratory for three days and Hurricane Irma forced the closure of our Fort Myers facility for five days. Therefore, comparison of the results of successive periods may not accurately reflect trends for future periods.2016; 2018, as filed with the SEC on March 14, 2017 February26, 2019 and as amended and filed with the SEC on May 8, 2019, for a detailed description of our business.and Nine Months Ended September 30, 2017March 31, 2019 as Compared to the Three and Nine Months Ended September 30, 2016 Three Months Ended March 31, 2019 2018 Net revenue 100.0 % 100.0 % Cost of revenue 50.7 % 57.0 % Gross Profit 49.3 % 43.0 % Operating expenses: General and administrative 33.6 % 26.9 % Research and development 1.3 % 1.5 % Sales and marketing 11.7 % 10.7 % Total operating expenses 46.6 % 39.1 % Income from operations Income from operations 2.7 % 3.9 % Interest expense, net 1.9 % 2.3 % Other expense Other expense 5.4 % (0.1) % Income (loss) before income taxes Income (loss) before income taxes (4.7) % 1.7 % Income tax expense (benefit) Income tax expense (benefit) (2.1) % 0.7 % Net income (loss) (2.5) % 1.0 % by type for the periodstest type indicated ($ in thousands): Three Months Ended March 31, 2019 2018 $ Change % Change Clinical Services Clinical Services $ 86,210 $ 56,971 $ 29,239 51.3 % Pharma Services 9,367 6,452 2,915 45.2 % Total Revenue $ 95,577 $ 63,423 $ 32,154 50.7 % testingServices revenue increased for both the three and nine month periodsperiod ending September 30, 2017 asMarch 31, 2019 increased $29.2 million, compared to the same periodsperiod in 2016.2018. Testing volumes also increased in our clinical genetic testing business by approximately 16.6% and 16.0% 31.1%for the three and nine month periods ended September 30, 2017, respectively.period ending March 31, 2019 compared to the same period in 2018. The increases in revenue and volume were due to strongprimarily reflect the acquisition of Genoptix, organic volume growth, in molecular and histology testing as well as growth in immuno-histochemistry tests duethe benefit of reimbursement initiatives. We continue to demand fornegotiate managed care and group purchasing contracts to increase our in-network coverage, which should improve reimbursement rates and facilitate the PD-L1 test as a resultaddition of the FDA approving Pembrolizumab (Keytruda) in October 2016 as first-line treatment for PD-L1 positive non-small cell lung cancer. We have also seen accelerating growth in flow cytometry and FISH. While revenues and volumes increased quarter over quarter and year over year, we believe the impact of hurricanes Harvey and Irma depressed our revenues by approximately $1.0 million and volumes by approximately 1.5% during the third quarter of 2017. Our sales team has largely finished integration related23NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSactivities, which was a distraction from their efforts to sell new business. We believe the team can now be re-focused on growth and selling the benefits of the combined company. increased approximately 37% and 7% for the three and nine month periods ended September 30, 2017 asperiod ended March 31, 2019 increased $2.9 million, compared to the same periodsperiod in 2016.2018. In addition, our backlog of signed contracts has continued to grow from $46.5$98.9 million as of December 31, 2018 to $100.8 million as of June 30, 2017March 31, 2019. The expansion of our Pharma facility in Houston, Texas, provides additional capacity to $58.0 million as of September 30, 2017.manage this backlog. We expect this backlog to result in higher revenues in future quarters.seeachieve accelerating revenue growth in our Pharma Services divisionsegment due to our international presence. In addition to our laboratory in Rolle, Switzerland, we announced a global strategic partnership with Pharmaceutical Product Development, LLC (“PPD”) in 2018, and continued our international expansion into Geneva, Switzerland. This facility will be operationalincluding the opening of a laboratory in the fourth quarter of 2017 and already has a backlog of approximately $1.5 million. Revenue was also impacted due to an error that we identified during an internal analysis in the third quarter of 2017. The error impacted revenue reported in our Form 10-K for the year ended December 31, 2016, Form 10-Q for the quarter ended March 31, 2017 and Form 10-Q for the quarter ended June 30, 2017. Specifically, we determined that certain unbillable tests were inadvertently included in the revenue accrual recorded for these periods. The Company assessed the extent of this error and it was corrected in the third quarter of 2017, resulting in an understatement of revenue of $2.4 million and $0.6 million for the three and nine months ended September 30, 2017, respectively. See Item 4. Controls and Procedures for additional details regarding this error.clinical genetic testingClinical Services revenue, cost of revenue, requisitions received and tests performed for the three and nine months ended September 30, 2017March 31, 2019 and 2016.2018. This data excludes tests performed for Pharma customers and tests performed by Path Logic, which was sold on August 1, 2017. .Three Months Ended March 31, 2019 2018 % Change Requisitions received (cases) 155,963 105,229 48.2 % Number of tests performed 234,317 178,794 31.1 % Avg. number of tests/requisition Avg. number of tests/requisition 1.50 1.70 (11.6) % Total clinical services testing revenue Total clinical services testing revenue $ 86,210 $ 56,971 51.3 % Average revenue/requisition $ 553 $ 541 2.1 % Average revenue/test $ 368 $ 319 15.5 % Cost of revenue $ 42,651 $ 31,042 37.4 % Average cost/requisition $ 273 $ 295 (7.3) % Average cost/test $ 182 $ 174 4.8 % competitors. New immuno-histochemistry tests suchcompetitors as Micro Satellite Instability, DNA Mismatch Repair, PD1 and PD-L1 have continued to show solid growth and have increased our volume and revenue growth in the third quarter. We believe the field of immuno-therapy will continue to show substantial growth in coming years and our ability to offer multi-modality testing in one lab will allow us to capitalize on this increased demand. decreasedincreased 15.5% for both the three and nine month periods periodended September 30, 2017 asMarch 31, 2019, compared to the corresponding periodsperiod in 2018. These changes reflect the previous year. These decreases are primarily due toacquisition of Genoptix as well as the change in test mix, specifically the increase in PD-L1 testing which has a lower average unit price (“AUP”) thanpositive impact of our overall Company AUP. The 19% Medicare cut in Flow Cytometryinternal reimbursement as a result of the 2017 Medicare Physician Fee Schedule also contributed to the lower revenue per test.These decreases to our average revenue per test wereinitiatives, partially offset by our higher volumeschanges in Medicare reimbursement and reductions in cost per test. The cost per test reductions were partially a result of the change in test mix, specifically the higher mix of lower cost histology tests. In addition, we continue to have success in reducing costs in the laboratory as synergies are being realized from the consolidation of our Irvine and Aliso Viejo, California laboratories. We have also seen a reduction in send-out costs, as our extensive menu makes it rare for us to need to send a test to another laboratory. 24NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, 2019 2018 % Change Cost of revenue: Clinical Services $ 42,651 $ 31,042 37.4 % Pharma Services 5,811 5,078 14.4 % Total Cost of Revenue $ 48,462 $ 36,120 34.2 % Cost of revenue as a % of revenue 50.7 % 57.0 % Gross Profit: Clinical Services $ 43,559 $ 25,929 68.0 % Pharma Services 3,556 1,374 158.8 % Total Gross Profit $ 47,115 $ 27,303 72.6 % Gross Profit Margin 49.3 % 43.0 % and nine months ended September 30, 2017March 31, 2019 when compared to the same periodsperiod in 20162018 while cost of revenue as a percentage of revenue decreased slightly year-over-year. These increases in cost of revenue are largely due to the increase in our testing volumes and additional costs incurred with the consolidation acquisition of our two largest testing facilities in southern California, specifically increased overtime and associated costs. slightly for both the three and nine months ended September 30, 2017, asMarch 31, 2019, compared to the same period last year. These increases were achieved despitein 2018. Gross margin improvement reflects the reduction in ourimpact of volume growth, higher revenue per test, over these time periods. We were able to increase gross profit margin due to our laboratories processing the increased test volumes more efficiently. We had only limited staffing increases in the laboratory to handle the increased volumes,productivity gains, and our laboratory teams have been extremely focused on reducing their cost per test across all departments. As a result of the correction of the aforementioned error in the third quarter of 2017, gross profit was understated by $2.4 million and $0.6 million for the three and nine months ended September 30, 2017, respectively.benefits, and stock based compensation expense)benefits) for our billing, finance, human resources, information technology and other administrative personnel.personnel as well as stock-based compensation. We also allocate professional services, facilities expense, IT infrastructure costs, bad debt expense, depreciation, amortization and other administrative-related costs to general and administrative expenses.periodsperiods presented are as follows: Three Months Ended March 31, ($ in thousands) 2019 2018 $ Change % Change General and administrative $ 32,142 $ 17,067 $ 15,075 88.3 % As a % of revenue 33.6 % 26.9 % The increase in our generaland nine monthsmonth period ended September 30, 2017 compared to the same periods in 2016 was largely due to increased expenses in the following areas: bad debt, professional fees and personnel fees (including stock based compensation). Bad debt expense for the three months ended September 30, 2017 increased by approximately $2.3 million whenMarch 31, 20192016. Bad debt2018. The increase reflects the acquisition of Genoptix as a percentage of revenue was 7.9%, which waswell as higher than last year’s rate of 4.5%. Bad debt expense for the nine months ended September 30, 2017 increased by approximately $4.8 million when comparedpayroll and payroll related expenses due to the same period in 2016. Bad debt as a percentage of revenue was 6.8%, which was higher than last year’s rate of 4.5%. The increases in bad debt for both periods are primarilyheadcount. Additionally, these expenses include approximately $1.3 million in acquisition and integration related to changes in payer dynamics including pre authorization denials as well as increased denials for next generation sequencing tests and disease specific multi-gene panels. In addition, there was an impact from the integration of Clarient into our billing system, which began in July of 2016. Clarient had higher bad debt rates than did NeoGenomics’ legacy business. Billings of the legacy Clarient billing system have now been either fully collected or written off. The performance of our billing team was also impacted by the integration which ultimately contributed to certain receivables not being collected and increased bad debt expense.25NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSProfessional fees increased by approximately $616,000 for the three months ended September 30, 2017 and $1.4 million for the nine months ended September 30, 2017 when compared to the same periods in 2016, primarily due to fees in 2017 related to the Pharma Services facility in Geneva, Switzerland opening in November of 2017 and an increase in legal reserves for the three months ended September 30, 2017 related to a lawsuit brought against Clarient.Payroll expenses increased for the three and nine months ended September 30, 2017 when compared to the same periods in 2016. This increase is partially due to additional staff hired for certain functions such as billing, IT and accounts payable that were performed by outside vendors or by General Electric in early 2016 under the Clarient “Transition Services Agreement”. We have also seen an increase in stock based compensation which has increased from $3.5 million for the nine months ended September 30, 2016, to $5.0 million for the nine months ended September 30, 2017. This increase is due to the increase in NeoGenomics stock price as well as increase in stock option grants and restricted stock awards.personnelemployee and equity-related compensation expenses, increase our billing and collections activities; incur additional expenses associated with the expansion of our facilities and backup systems; incur additional bad debt expense as sales increase, and as we continue to expand our physical and technological infrastructure to support our anticipated growth. A significant portion of our stock based compensation is for non-employee options which are subject to variable accounting, and our expenses will fluctuate based on the performance of our common stock. A rise in the price of our stock will increase our stock compensation expense, and a decline in our stock price will reduce this expense. However, we anticipate that general and administrative expenses as a percentage of consolidated revenue will drop over the coming years as we continue to grow. Three Months Ended March 31, ($ in thousands) 2019 2018 $ Change % Change Research and development $ 1,209 $ 956 $ 253 26.4 % As a % of revenue 1.3 % 1.5 % expense increasedexpenses increased $0.3 million for the three months ended September 30, 2017 asMarch 31, 2019, compared to the same period in 2016.2018. This increase is attributable to non-employee stock options which are subject to variable accountingincrease reflects the acquisition of Genoptix as well as investments in personnel and the increase in our stock price during the third quarter of 2017. Excluding stock based compensation expense of approximately $531,000 and $187,000 for the three months ended September 30, 2017 and 2016, research and development expense was approximately $739,000 and $780,000. This decrease is largely due to a decrease in amortization expense for the Health Discovery Corporation license agreements which were being amortized as intangible assets, but were fully impaired in the fourth quarter of 2016.Research and development expense decreased for the nine months ended September 30, 2017 as compared to the same period in 2016. This decrease is partially attributable to the reduction in the balance of unvested options outstanding in 2017 as compared to 2016 in addition to the decrease in amortization expense for the Health Discovery Corporation license agreements. Excluding stock based compensation expense of approximately $858,000 and $550,000 for the nine months ended September 30, 2017 and 2016, research and development expense was approximately $2.2 million and $3.2 million. The increase in stock based compensation recorded in G&A expense is attributable to non-employee stock options which are subject to variable accounting and the increase in our stock price during the third quarter of 2017.We expect our research and development expenses to fluctuate in future quarters because of increases or decreases in our stock price and the corresponding stock based compensation expense for non-employee stock options. Increases in our stock price result in additional expense and decreases in our stock price can result in recovery of previously recorded expense. assay development.over timein future quarters as we continue to invest in innovation projects and bringing new tests to market.26NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Three Months Ended March 31, ($ in thousands) 2019 2018 $ Change % Change Sales and marketing $ 11,216 $ 6,775 $ 4,441 65.5 % As a % of revenue 11.7 % 10.7 % both the three and nine months ended September 30, 2017 as March 31, 2019, compared to the same period in 2016.2018. This increase is primarily attributable toreflects the acquisition of Genoptix as well as higher commissions due to our increase in revenues.revenues,the expansion of our sales team and continued investment in marketing. We expect higher commissions expense in the coming quarters as the sales representatives’ focus oncontinue generating new business and increasing revenue. In addition, we have increased our investment in marketing related activities in 2017 including trade shows and on-line marketing.with a focus on oncology office sales. We expect our sales and marketing expenses over the long term to increase as our test volumes increase, but to remain stable as a percentage of our overall sales. Interest net is comprised of interest incurred on our term debt, revolving credit facility and our capital leaseother financing obligations offset by the interest income we earn on cash deposits. InterestNet interest expense net decreased in bothfor the three and nine month periodsmonths ending September 30, 2017March 31, 2019 increased 22.9%, or $0.3 million, compared to the same periodsperiod in 2016. The decreases2018.These increases reflect changes in interest expense, net of $70,000 forrates as well as the three month period and $336,000 for the nine month period reflect the significantly lower borrowing rate in the Loan Agreementadditional $30 million term loan entered into in Decemberthe second quarter of 2016. Due to these lower interest rates, while total borrowings have been higher in 2017 compared to 2016,2018. We expect our interest expense has been lower. In addition, we have entered into a swap agreement to hedge a significant portionfluctuate based on timing of the interestadvances and payments on our term loan, however part of that loan is not hedged and will continue to fluctuate as the LIBOR rates change. Net Incomeand nine months ended September 30, 2017:March 31, 2019 and 2018 (in thousands, except per share amounts): Three Months Ended March 31, 2019 2018 NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,424) $ (2,212) Basic weighted average shares outstanding 94,740 80,507 Effect of potentially dilutive securities — — Diluted weighted average shares outstanding 94,740 80,507 Basic net loss per share $ (0.03) $ (0.03) Diluted net loss per share $ (0.03) $ (0.03) non-GAAPNon-GAAP Financial Measures(GAAP)(“GAAP”) and using certain non-GAAP financial measures. Management believes that presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of27NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSnon-GAAPNon-GAAP measuresNon – Non – We define “Adjusted(iv) non-cash stock-based compensation expense, and if applicable in a reporting period, (v) acquisition-related transaction expenses, (vi) non-cash impairments of intangible assets, (vii) debt financing costs, (viii) and other significant non-recurring or non-operating (income) or expenses.Basis for Non-GAAP AdjustmentsOur basis for excluding certain expenses from GAAP financial measures, are outlined below:Interest expense – The capital structure of companies significantly affects the amount of interest expense incurred. This expense can vary significantly between periods and between companies. In order to compare performance between periods and companies that have different capital structures and thus different levels of interest obligations, NeoGenomics excludes this expense.Income tax expense (benefit) –The tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and the provision for income taxes can vary considerably among companies. In order to compare performance between companies, NeoGenomics excludes this expense (benefit).Depreciation expense – Companies utilize assets with different useful lives and use different methods of both acquiring and depreciating these assets. These differences can result in considerable variability in the costs of productive assets and the depreciation and amortization expense among companies. In order to compare performance between companies, NeoGenomics excludes this expense.Amortization expense – The intangible assets that give rise to this amortization expense relate to acquisitions, and the amounts allocated to such intangible assets and the terms of amortization vary by acquisition and type of asset. NeoGenomics excludes these items to provide a consistent basis for comparing operating results across reporting periods, pre and post-acquisition. Stock-based compensation expenses – Although stock-based compensation is an important aspect of the compensation paid to NeoGenomics employees and consultants, the related expense is substantially driven by changes in the Company’s stock price in any given quarter, which can fluctuate significantly from quarter to quarter and result in large positive or negative impacts to total operating expenses. The variable accounting treatment causing expense to be driven by changes in quarterly stock price is required because many of the Company’s full-time physicians reside in California and are classified as consultants rather than employees due to state regulations. GAAP provides that variable stock based compensation treatment be applied for consultants but not for employees. Without adjusting for these non-cash expenses, the Company believes it would be difficult to compare financial results from operations across reporting periods on a consistent basis. Loss on sale of business - The impact of disposals of assets or businesses have been excluded as these losses represent infrequent transactions that impact the comparability between operating periods. We believe the adjustment of these losses supplements the GAAP information by providing a measure that may be used to assess the sustainability of our operating performance.28NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONStwo facilities in March of 2017. Equipment had to be moved and re-validated in the new location. There was also significant overtime and investment of resources to coordinate the move project. Our Irvine, California lease terminated on April 30, 2017 and we also incurred costs in cleaning out and restoring that facility to its original state. We are adjusting for these costs in Adjusted EBITDA as the move was the direct result of the Clarient acquisition and will not be an annually recurring item. Without adjusting for these expenses, the Company believes it would be difficult to compare financial results from operations across reporting periods on a consistent basis. of expense that can vary significantly between companies.In addition, adjusted EBITDA is a metric that is used by our lenders in the calculation of our debt covenants. Adjusted EBITDA also assists investors in performing analysesanalysis that areis consistent with financial models developed by independent research analysts. and nine months ended September 30, 2017:March 31, 2019:As discussed above and in Item 4, revenue recognized from the fourth quarter of 2016 through the second quarter of 2017 was impacted due to an error relating to revenue accrued for unbilled tests. We assessed the extent of this error and it was corrected in the third quarter of 2017, resulting in a reduction of revenue, and thus a corresponding reduction in Adjusted EBITDA of $2.4 million and $0.6 million for the three and nine months ended September 30, 2017, respectively. See Item 4. Controls and Procedures for additional details regarding this error.Trade Accounts Receivable and Allowance for Doubtful AccountsAccounts receivable are reported net of an allowance for doubtful accounts, which is estimated based on the aging of accounts receivable with each payer category and the historical data on bad debts in these aging categories. In addition, the allowance is adjusted periodically for other relevant factors, including regularly assessing the state of our billing operations in order to identify issues which may impact the collectability of receivables or allowance estimates. Revisions to the allowance are recorded as an adjustment to bad debt expense within general and administrative expenses. After appropriate collection efforts have been exhausted, specific receivables deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance.29Three Months Ended March 31, 2019 2019 2018 Net Income (Loss) (GAAP) $ (2,424) $ 644 Adjustments to Net Income: Interest expense, net 1,826 1,486 Income tax (benefit) expense (2,023) 438 Amortization of intangibles 2,559 1,413 Depreciation 5,271 3,633 EBITDA $ 5,209 $ 7,614 Further Adjustments to EBITDA: Acquisition and integration related expenses 1,266 — Other significant non-recurring expense 5,145 — Non-cash, stock-based compensation 2,139 1,624 Adjusted EBITDA (non-GAAP) $ 13,759 $ 9,238 Company’s gross outstanding accounts receivable ($ in thousands) by payer group at September 30, 2017 and December 31, 2016:AGING OF RECEIVABLES BY PAYER GROUPSeptember 30, 2017AGING OF RECEIVABLES BY PAYER GROUPDecember 31, 2016The following table represents the balance in allowance for doubtful accounts (in thousands) and that allowance as a percentage of gross accounts receivable at September 30, 2017 and December 31, 2016: The allowance for doubtful accounts as well as the allowance as a percentage of gross accounts receivable has decreased for the period ended September 30, 2017 as comparedamount expected to the period ended December 31, 2016. In December of 2016, due to the Clarient acquisition and integrated related activities; NeoGenomics did not perform a year-end write off of uncollectible receivables as had been done in previous yearsbe collected, which resulted in a higher balance in accounts receivableconsiders implicit price concessions. Implicit price concessions represent differences between amounts billed and the allowance asestimated consideration the Company expects to receive based on negotiated discounts, historical collection experience and other anticipated adjustments, including anticipated payer denials.December 2016. The decreases are also due to changes inunits completed, which aligns with the timingprogress of when items are written off and decisions to accelerate certain write-offs in 2017. In 2017, our mix of client billed accounts receivable has increased substantially which tends to lower our allowance as a percentage of gross receivables since client billed accounts receivable have historically had a lower percentage of bad debt than commercial insurance. Days Sales Outstanding (“DSO”) has increased from 84 days at December 31, 2016 to 91 days as of September 30, 2017. The increase in DSO was partially attributable to an increase in client billed accounts receivable during the third quarter of 2017. Additionally Pharma Services DSO’s were 93 days on December 31, 2016 compared to 104 days on September 30, 2017. 30NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSthoroughfrom operations, public and private sales of equity securities, borrowings against our accounts receivables balances and privatebank debt.ninethree months ended September 30, 2017March 31, 2019 and 20162018 as well as the period endedbalances of cash and cash equivalents and working capital (in thousands). Three Months Ended
March 31, 2019 2018 Net cash provided by (used in): Operating activities $ 6,097 $ 14,312 Investing activities (3,196) (4,666) Financing activities 483 (7,249) Effects of foreign exchange rate changes on cash and cash equivalents — (45) Net change in cash and cash equivalents 3,384 2,352 Cash and cash equivalents, beginning of period $ 9,811 $ 12,821 Cash and cash equivalents, end of period $ 13,195 $ 15,173 $ 43,242 $ 44,468 Cash Flows from Operating ActivitiesDuring the nine months ended September 30, 2017, cash flows from operating activities was $12.3 million, a $9.4 million decrease compared to the same period in 2016. The decrease was primarily due to an $11.5 million increase in our accounts receivable partially offset by increases in accrued expenses. Our receivables have increased over this period due to growth as well as our higher DSO. We have experienced reimbursement delays due to changes in payer dynamics for Medicare and insurance companies, specifically the increase in these payers requiring pre-authorization and the additional time it may take to get the required authorizations. We have enhanced procedures in our labs to identify requisitions that require pre-authorizations and also educate our clients in order to secure pre-authorizations before the samples arrive in our lab.Cash Flows from Investing ActivitiesDuring the nine months ended September 30, 2017, cash used in investing activities increased by approximately $4.8 million compared to the same period in 2016. This increase was due to equipment purchases and building improvements, which were necessary to support our continued growth and efficiency. Specifically, we have remodeled and upgraded our laboratory facilities in Aliso Viejo, California, expanded our Houston, Texas facility, invested in additional laboratory equipment to accommodate our growth and update existing equipment that was acquired with the purchase of Clarient. Our Geneva laboratory was substantially finished at the end of the third quarter of 2017 and we have made significant investments in this laboratory facility. We have also invested in a new trade show booth as well as upgrades to our IT security environment and our next generation Laboratory Information System (LIS). Cash Flows from Financing ActivitiesDuring the nine months ended September 30, 2017, cash flows from financing activities decreased by approximately $8.5 million compared to the same period in 2016, primarily due to a $10.0 million repayment on our 2016 revolving credit facility in the first quarter of 2016. The decrease also reflects $5.0 million in advances on our revolving credit facility during the first quarter of 2017, partially offset by a $2.5 million repayment on our revolving credit facility during the third quarter of 2017. The 2016 revolving credit facility was originally used to finance the acquisition of Clarient.Cash flows from financing activities also include cash received for the issuance of our common stock upon exercise of stock options as well as cash received to purchase shares of our common stock through the Employee Stock Purchase Plan. These sources of cash were offset in 2017 as we made three quarterly repayments of $0.9 million each on our Term Loan as well as payments for various capital lease obligations in both 2016 and 2017. We will continue to have quarterly term loan repayments of $0.9 million in the fourth quarter of 2017 and throughout 2018. 31During December of 2016, we new senior secured credit facility inin December 2016, which was subsequently amended in June 2018 to include additional loan capacity. In order to reduce our exposure to interest rate fluctuations on this floating rate debt obligation, we also entered into an interest rate swap agreement.agreements. For more information on thisthese hedging instrument,instruments, see Note EH to Consolidated Financial Statements herein. The interest rate swap agreement effectively converts a portion of our floating rate debt to a fixed obligation, thus reducing the impact of interest rate changes on future interest expense. We believe this strategy will enhance our ability to manage cash flow within our Company.$12.2$13.2 million in cash and cash equivalents as of September 30, 2017.March 31, 2019. In addition, we have a revolving credit facilityRevolving Facility which provides for up to $75 million in borrowing capacity of which $5 million is outstanding at September 30, 2017, basedMarch 31, 2019. Based on our level of adjustedAdjusted EBITDA and the balance drawn, approximately $9.3$70 million was available.was available at that same date. We believe that the cash on hand, available credit lines and positive cash flows generated from operations will provide adequate resources to meet our operating commitments and interest payments for at least the next 12 months from the issuance of these financial statements.Our Series A Preferred Stock has certain restrictions that will result in the Company having to dedicate fifty percent of the net proceeds from any future equity raise, to redeeming shares of the Series A Preferred Stock until such time as all of the shares of Series A Preferred Stock have been redeemed. In addition, our Credit Agreement contains certain provisions beginning with the Annual Compliance Certificate for the fiscal year ended December 31, 2017 (to be filed no later than March 31, 2018), that would require a portion of the excess cash flow (as defined) to be repaid to our lenders. The debt repayment would be required five business days after the filing of our Annual Compliance Certificate.keep up with the growth in our testing volumes, althoughmaintain growth; however, the actual amount and timing of such capital expenditures will ultimately be determined by the volume of our business. We currently anticipate that our capital expenditures for the year endedending December 31, 20172019 will be in the range of $16.0$16 million to $18.5$20 million. During the ninethree months ended September 30, 2017,March 31, 2019, we purchased approximately $10.2$5.2 million of capital equipment, software and leasehold improvements and an additional $3.2of which $2.0 million was acquired through capital lease obligations. We have in the past funded and plan to continue funding these capital expenditures with capital lease financing arrangements, cash, and through bank loan facilities, if necessary.While many operational aspects ofbusiness are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of laboratory tests, and approximately one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of ourcritical accounting policies involve significant estimates and judgments. These accounting policies have been describedfrom those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016.32NEOGENOMICS, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSConsulting AgreementsDuring each ofthreeCompany entered into an amended and nine month periods ended September 30, 2017 and 2016,restated consulting agreement with Steven C. Jones, was ana director, officer director and shareholder of the Company. InCompany whereby Mr. Jones would provide consulting services to the Company in the capacity of Executive Vice President. The Amended and Restated Consulting Agreement has an initial term of November 4, 2016 through April 30, 2020, which automatically renews for additional one year periods unless either party provides notice of termination at least three months prior to the expiration of the initial term or any renewal term. On May 6, 2019, the Company and Mr. Jones entered into a letter agreement to modify certain provisions of the consulting agreement (the “Letter Agreement”) which modifications included, by mutual agreement of the parties, the following: automatic expiration of the consulting agreement on April 30, 2020 unless the parties mutually agree to renew it in writing; a description of consulting services to be provided to the Company (the “Services”) with a target of up to 15 hours per month of working time and attention to the Company; a fixed monthly cash consulting fee in the amount of $5,000 per month for the provision of Services; and continuation of health insurance coverage at the levels currently in effect.approximately $46,000$12,500 and $66,000 for the three months ended September 30, 2017 and 2016, respectively. In addition,$12,500, respectively, as compensation for his services on the Board, Mr. Jones earned approximately $13,000 and $0 for the three months ended September 30, 2017 and 2016, respectively. During the nine months ended September 30, 2017 and 2016, Mr. Jones earned approximately $164,000 and $197,000, respectively in connection with his duties as Executive Vice President. Board. Mr. Jones also received approximately $85,000$58,000 and $79,000$32,000 during the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively, as payment of his annual bonus compensation for the previous fiscal years. In addition, as compensation for his services on theThe Company did not grant stock options or restricted stock to any of its Board members, including Mr. Jones, earned $25,000 and $0 for the nine months ended September 30, 2017 and 2016, respectively.During each of the three and nine month periods ending September 30, 2017 and 2016, Kevin Johnson was a director and shareholder of the Company. In May of 2017, the Company engaged Mr. Johnson to provide services as a consultant, this engagement ended in June of 2017. In connection with his role as a consultant, Mr. Johnson earned approximately $0 and $0 forduSeptember 30, 2017 and 2016, respectively. In addition, as compensation for his services on the Board, Mr. Johnson earned approximately $14,000 and $15,000, for the three months ended September 30, 2017 and 2016, respectively and approximately $44,000 and $45,000 for the nine months ended September 30, 2017 and 2016, respectively.On May 25, 2017, the Company granted stock options and restricted stock to each of its board members as part of its annual board compensation process. Mr. Jones and Mr. Johnson were each granted 10,000 stock options and 8,667 shares of restricted stock for their Board services. The options were granted at a price of $7.27 per share and had a weighted average fair market value of $2.38 per option. The options vest ratably over the next three years. The restricted stock has a weighted average fair value of $7.27 per share and vests ratably on the last day of each calendar quarter up toMarch 31, 2019 or March 31, 2018.33thisthat evaluation, weour principal executive officer and principal financial officer concluded that our disclosure controls and procedures were not effective at a reasonable assurance level as a result of a control deficiency that has been identified as a material weakness in our internal control over financial reporting. This material weakness in our internal control over financial reporting and our remediation activities are described below.Material Weakness in Internal Control over Financial ReportingDuring an internal analysis conducted in the third quarter of 2017, we identified an error in the revenue reported in our Form 10-K for the year ended December 31, 2016, Form 10-Q for the quarter ended March 31, 2017 and Form 10-Q for the quarter ended June 30, 2017. Specifically, we determined that certain unbillable tests were inadvertently included in the revenue accrual recorded for the periods beginning in the fourth quarter of 2016 through the second quarter of 2017. These unbillable tests were worked through our laboratory, however we were unable to produce a final result on the sample. The tests were reported back to the ordering physician as Quantity Not Sufficient (“QNS”) or Test Not Performed (“TNP”). Although we incur costs attempting to test these QNS and TNP samples, and often attempt to get a result more than once, we cannot bill payors for any tests in which a full result is not reported. As a result of the inclusion of these unbillable tests in the monthly revenue accrual, revenue was overstated. This error was corrected in the third quarter of 2017.We have a policy of writing off any unbilled tests greater than six months old and many of these tests were written off via this process. We assessed the extent of the error on each reported period. As a result of the error, the net impact to revenue reported in the 10-K for the year ended December 31, 2016 has been determined to be immaterial. The net impact of the error in the first quarter of 2017, resulted in an overstatement of revenue by approximately $1.7 million. The net impact of the error in the second quarter of 2017, resulted in an overstatement of revenue by approximately $0.2 million. As a result of the cumulative misstatement through the second quarter of 2017, we recorded a correcting entry in the amount of $1.3 million at the end of the third quarter of 2017. This correction, in addition to approximately $1.1 million in revenues that were reversed earlier in the quarter through the automatic six month write off process, resulted in a reduction of revenueperiod covered by $2.4 million for the third quarter of 2017. The management review control that should have detected this error was determined to be ineffective. Management has concluded that this deficiency constitutes a material weakness in our internal control over financial reporting. Nonetheless, we have concluded that this material weakness does not require a restatement or change in our consolidated financial statements for any prior annual or interim period. We have taken certain remediation steps to address the material weakness referenced above, and to improve our internal control over financial reporting as described below.We have filled the open position of Vice President and Principal Accounting Officer and we are providing additional resources to our finance team by actively recruiting for a Corporate Controller.34NEOGENOMICS, INC.
report.•We are re-designing and implementing effective review and approval controls over the accurate recording, presentation, and disclosure of revenueWe have reviewed, identified and corrected errors in the recognition of revenueWe have established steps in our monthly closing process to improve our internal control over financial reporting. These steps include:a.monthly review of revenue reports by the Director of Billing to ensure that all unbilled tests outstanding for 60 days or greater are appropriate for accrual and will ultimately be billed outb.monthly review of revenue reports by the Assistant Controller to ensure that revenue is not being accrued for tests that based on laboratory results are determined to be unbillableSeptember 30, 2017March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.However, as noted above, we will be implementing changes to our internal control over financial reporting to address the material weakness described above.35business. We do not believe any current legal proceedings are material to our business. No material proceedings were terminated during the quarter ended September 30, 2017.business, see Note L.2017;2018; as filed with the SEC on March 14, 2017. February26, 2019 and as amended and filed with the SEC on May 8, 2019.36EXHIBITNO.DESCRIPTION31.1
NO.10.1 10.2 10.3 31.1 September 30, 2017March 31, 2019, formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Comprehensive Income (Loss) and (iv)(v) related notes37NEOGENOMICS, INC.Date: November 13, 2017NEOGENOMICS, INC.Date: May 8, 2019 NEOGENOMICS, INC. By:By: /s/ Douglas M. VanOort George CardozaGeorge Cardoza38