(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
or
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| Nevada | 74-2897368 | ||||||||||
(State or other jurisdiction of |
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incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| Fort Myers, | ||||||||||
| Florida | 33912 | ||||||||||
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(Address of principal executive offices) | (Zip Code) | ||||||||||
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common stock ($0.001 par value) | NEO | The Nasdaq Stock Market LLC | ||||||||||||
| Large accelerated filer |
| Accelerated filer |
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Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |||||||||||||
Emerging Growth Company | ☐ | |||||||||||||||
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 data) 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 $ - the United Kingdom. Consolidated Financial Statements. 2023. Level 3 fair value measurements. 2023 (in thousands): 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 41734 343738“forward-looking statements” and information within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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.forward-looking statements. These forward-looking statements include, but aregenerally can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intends,” “may,” “plan,” “potential,” “project,” “will,” “would,” and similar expressions, although not limited to,all forward-looking statements concerning ourcontain these identifying words. These forward-looking statements address various matters, including the Company’s 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 SECSecurities and Exchange Commission (the “SEC”) on March 14, 2017. Forward lookingFebruary 20, 2024, and in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.include, but are not limited to, statements about:Our ability to implement our business strategy;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 developmentsincluded in the United States including downward pressurethis Quarterly Report on health care reimbursement;Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”);Food and Drug Administration 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 integrate future acquisitions and costs related to such acquisitions;The impact of internalization of testing by customers;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 requirements.Any forward-looking statement speaksForm 10-Q speak only as of the date on which such statement is made,of this report, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.ACA The Patient Protection and Affordable Care Act ACLA American Clinical Laboratory Association AKS Anti-Kickback Statute CAP College of American Pathologists CDx Companion Diagnostic CLIA Clinical Laboratory Improvement Amendments of 1988 CMS Centers for Medicare and Medicaid Services CRO Contract research organizations DHS Designated health services FCA The federal False Claims Act FDA U.S. Federal Drug Administration FISH Fluorescence In-Situ Hybridization GAAP U.S generally accepted accounting principles GDPR The European Union’s General Data Protection Regulation HIPAA The Health Insurance Portability and Accountability Act of 1996 IHC Immunohistochemistry LDT Laboratory developed tests LIMS Laboratory Information Management System MolDx Molecular Diagnostic Services Program MRD Minimal residual disease NGS Next-generation sequencing OIG The Office of Inspector General of the Department of Health and Human Services PCR Polymerase chain reaction PHI Protected health information FINANCIALFINANCIAL INFORMATIONand per share amounts)(unaudited)December 31, 2023 ASSETS Current assets Cash and cash equivalents $ 331,914 $ 342,488 Marketable securities, at fair value 52,916 72,715 Accounts receivable, net 140,279 131,227 Inventories 20,320 24,156 Prepaid assets 19,155 17,987 Other current assets 9,312 8,239 Total current assets 573,896 596,812 Property and equipment (net of accumulated depreciation of $167,584 and $158,211, respectively) 87,865 92,012 Operating lease right-of-use assets 86,578 91,769 Intangible assets, net 364,764 373,128 Goodwill 522,766 522,766 Other assets 4,470 4,742 Total non-current assets 1,066,443 1,084,417 Total assets $ 1,640,339 $ 1,681,229 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 18,336 $ 20,334 Accrued compensation 34,609 53,161 Accrued expenses and other liabilities 18,134 15,069 Current portion of operating lease liabilities 4,487 5,610 Contract liabilities 1,144 2,130 Total current liabilities 76,710 96,304 Long-term liabilities Convertible senior notes, net 538,923 538,198 Operating lease liabilities 64,773 67,871 Deferred income tax liabilities, net 23,490 24,285 Other long-term liabilities 13,033 13,034 Total long-term liabilities 640,219 643,388 Total liabilities $ 716,929 $ 739,692 Commitments and contingencies (Note 11) Stockholders’ equity Common stock, $0.001 par value, (250,000,000 shares authorized; 127,434,786 and 127,369,142 shares issued and outstanding, respectively) $ 127 $ 127 Additional paid-in capital 1,198,729 1,190,139 Accumulated other comprehensive loss (1,330) (1,674) Accumulated deficit (274,116) (247,055) Total stockholders’ equity $ 923,410 $ 941,537 Total liabilities and stockholders’ equity $ 1,640,339 $ 1,681,229 consolidated financial statementsConsolidated Financial Statements.amounts) Three Months Ended March 31, 2024 2023 NET REVENUE Clinical Services $ 134,535 $ 114,869 Advanced Diagnostics 21,705 22,351 Total net revenue 156,240 137,220 COST OF REVENUE 90,771 82,406 GROSS PROFIT 65,469 54,814 Operating expenses: General and administrative 65,797 61,549 Research and development 7,620 7,395 Sales and marketing 20,221 16,259 Restructuring charges 2,398 4,684 Total operating expenses 96,036 89,887 LOSS FROM OPERATIONS (30,567) (35,073) Interest income (4,834) (3,224) Interest expense 1,685 1,757 Other expense (income), net 263 114 Loss before taxes (27,681) (33,720) Income tax benefit (620) (2,925) NET LOSS $ (27,061) $ (30,795) NET LOSS PER SHARE Basic $ (0.21) $ (0.25) Diluted $ (0.21) $ (0.25) WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 126,111 125,026 Diluted 126,111 125,026 consolidated financial statements.Consolidated Financial Statements.Three Months Ended March 31, 2024 2023 NET LOSS $ (27,061) $ (30,795) OTHER COMPREHENSIVE GAIN: Net unrealized gain on marketable securities, net of tax 344 1,065 Total other comprehensive gain, net of tax 344 1,065 COMPREHENSIVE LOSS $ (26,717) $ (29,730) Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Shares Amount Balance, December 31, 2023 127,369,142 $ 127 $ 1,190,139 $ (1,674) $ (247,055) $ 941,537 Issuance of common stock for ESPP 70,278 — 917 — — 917 Issuance of restricted stock, net of forfeitures (17,398) — (199) — — (199) Issuance of common stock for stock options 12,764 — 102 — — 102 Stock issuance fees and expenses — — (4) — — (4) Stock-based compensation expense — — 7,774 — — 7,774 Net unrealized gain on marketable securities, net of tax — — — 344 — 344 Net loss — — — — (27,061) (27,061) Balance, March 31, 2024 127,434,786 $ 127 $ 1,198,729 $ (1,330) $ (274,116) $ 923,410 Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Accumulated Deficit Total Shares Amount Balance, December 31, 2022 126,913,992 $ 127 $ 1,160,882 $ (3,899) $ (159,087) $ 998,023 Issuance of common stock for ESPP 96,733 — 811 — — 811 Issuance of restricted stock, net of forfeitures 114,738 — (147) — — (147) Issuance of common stock for stock options 75,028 — 751 — — 751 Stock issuance fees and expenses — — (4) — — (4) Stock-based compensation expense — — 4,758 — — 4,758 Net unrealized gain on marketable securities, net of tax — — — 1,065 — 1,065 Net loss — — — — (30,795) (30,795) Balance, March 31, 2023 127,200,491 $ 127 $ 1,167,051 $ (2,834) $ (189,882) $ 974,462 Three Months Ended March 31, 2024 2023 CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (27,061) $ (30,795) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 9,905 9,048 Amortization of intangibles 8,362 8,783 Non-cash stock-based compensation 7,774 4,758 Non-cash operating lease expense 2,401 2,330 Amortization of convertible debt discount 678 669 Amortization of debt issue costs 47 46 Impairment of assets 145 923 Other adjustments (57) (31) Changes in assets and liabilities, net Accounts receivable, net (9,052) 870 Inventories 3,836 (200) Prepaid and other assets (1,976) (1,187) Operating lease liabilities (1,432) (1,722) Deferred income tax liabilities, net (795) (3,035) Accrued compensation (18,552) (7,250) Accounts payable and other liabilities (138) 4,101 Net cash used in operating activities (25,915) (12,692) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of marketable securities — (6,756) Proceeds from maturities of marketable securities 20,110 40,425 Purchases of property and equipment (5,585) (9,927) Net cash provided by investing activities 14,525 23,742 CASH FLOWS FROM FINANCING ACTIVITIES Repayment of equipment financing obligations — (32) Issuance of common stock, net 816 1,411 Net cash provided by financing activities 816 1,379 Net change in cash and cash equivalents (10,574) 12,429 Cash and cash equivalents, beginning of period 342,488 263,180 Cash and cash equivalents, end of period $ 331,914 $ 275,609 Supplemental disclosure of cash flow information: Interest paid $ 431 $ 432 Income taxes paid, net $ 89 $ — Supplemental disclosure of non-cash investing and financing information: Purchases of property and equipment included in accounts payable $ 831 $ 1,174 consolidated financial statements.6A –1. Nature of the Business and Basis of Presentation“Parent”“Company,” or “NeoGenomics”), and its subsidiaries NeoGenomics Laboratories, Inc.,provide a Florida corporation (“NEO” or, “NeoGenomics Laboratories”), NeoGenomics Bioinformatics Inc.,wide range of oncology diagnostic testing and consultative services which includes technical laboratory services and professional interpretation of laboratory test results by licensed physicians who specialize in pathology and oncology. The Company operates 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”, or the “Company”), operates as a certified “high complexity” clinical laboratorynetwork of cancer-focused testing laboratories 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. consolidated financial statementsConsolidated Financial Statements are unaudited and have been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These accompanying 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.consolidated financial statementsConsolidated Financial Statements and accompanying notes have been condensed or omitted in these accompanying interim consolidated financial statements.Consolidated Financial Statements and footnotes. Accordingly, the accompanying interim consolidated financial statementsunaudited Consolidated Financial Statements included herein should be read in conjunction with the audited consolidated financial statementsConsolidated Financial Statements and accompanying notes included in the Company’s annual reportAnnual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 14, 2017. quarterly reportQuarterly Report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statementsConsolidated Financial Statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.We have one reportable operating segmentdelivers testing servicesaffect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to hospitals, pathologists, oncologists, other clinicians,the Consolidated Financial Statements. Actual results and researchers, which represents 100%outcomes may differ from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these Consolidated Financial Statements include, but are not limited, to those related to revenues, accounts receivable and related allowances, contingencies, useful lives and recovery of long-term assets and intangible assets, income taxes and valuation allowances, stock-based compensation, impairment analysis of goodwill, and restructuring reserves. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected on the Consolidated Financial Statements prospectively from the date of the Company’s consolidated assets, net revenueschange in estimate.net income (loss)Marketing Expensesand nine months ended September 30, 2017March 31, 2024 and 2016. We have evaluated our segments based2023.howthe Company’s restructuring activities, please refer to Note 8. Restructuring.(“CODM”), our Chief Executive Officer, reviews performance(CODM) and makes decisionsincluded in managing the Company. At September 30, 2017, we provided services within the United Stateseach reported measure of segment profit or loss and Europerequires disclosure of other segment items by reportable segment and had assets located within the United States and Europe.We have two primary typesa description 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, discrete 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.Note B – Recently Adopted and Issued Accounting GuidanceAdoptedIn January 2017, the FASB issuedits composition. ASU No. 2017-01, Business Combinations. This standard clarifies the definition of a business and provides 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 adopt the requirement to present cash flows related to 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 issued 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 update2023-07 is effective forannual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-12 to have a material effect on its consolidated financial statements.In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation. This standard provides guidance related to the scope of stock option modification accounting, to reduce diversity in practice and reduce cost and complexity regarding existing guidance. This update is effective for annual periods beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-09 to have a material effect on its consolidated financial statements.In January 2017 the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss 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. The Company does not expect the adoption of ASU 2017-04 to have a material effect on its consolidated financial statements. In August 2016, the FASB issued “ASU” 2016-15, Statement of Cash Flows – Classification of Certain Cash Receipts and Cash Payments. This standard clarifies how specific cash receipts and cash payments are 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 assets2023 and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a8NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnauditedlessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective forinterim periods within fiscal years beginning after December 15, 2018 and interim2024, with early adoption permitted. ASU 2023-07 should be applied retrospectively to all prior periods within those periods. The adoption of this ASU will resultpresented in an increase on the balance sheet for lease liabilities and right-of-use assets.financial statements. The Company is currently evaluating the quantitativeplanned adoption date and the impact that adopting ASU 2016-02 will have on 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 on its annual disclosures.impact our Pharma Services revenue, specificallytransfer a liability (an exit price) in the timingprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of revenue recognitionobservable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.our long term researchidentical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.clinical trials contracts. ManyLiabilities that are Measured at Fair Value on a Recurring BasisMarch 31, 2024 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Financial Assets: Short-term marketable securities: U.S. Treasury securities $ 7,490 $ — $ (13) $ 7,477 Agency bonds 2,471 — (45) 2,426 Municipal bonds 12,658 — (518) 12,140 Asset-backed securities 3,119 — (5) 3,114 Corporate bonds 28,322 — (563) 27,759 Total $ 54,060 $ — $ (1,144) $ 52,916 December 31, 2023 (in thousands) Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Financial Assets: Short-term marketable securities: U.S. Treasury securities $ 15,437 $ — $ (64) $ 15,373 Yankee bonds 2,601 — (13) 2,588 Agency bonds 6,056 — (56) 6,000 Municipal bonds 12,694 — (597) 12,097 Asset-backed securities 4,971 — (37) 4,934 Corporate bonds 32,442 — (719) 31,723 Total $ 74,201 $ — $ (1,486) $ 72,715 March 31, 2024 (in thousands) One Year or Less Over One Year Through Five Years Over Five Years Total Financial Assets: Marketable Securities: U.S. Treasury securities $ 7,477 $ — $ — $ 7,477 Agency bonds 2,426 — — 2,426 Municipal bonds 6,417 5,723 — 12,140 Asset-backed securities 3,114 — — 3,114 Corporate bonds 22,026 5,733 — 27,759 Total $ 41,460 $ 11,456 $ — $ 52,916 December 31, 2023 (in thousands) One Year or Less Over One Year Through Five Years Over Five Years Total Financial Assets: Marketable Securities: U.S. Treasury securities $ 15,373 $ — $ — $ 15,373 Yankee bonds 2,588 — — 2,588 Agency bonds 6,000 — — 6,000 Municipal bonds 3,528 8,569 — 12,097 Asset-backed securities 4,934 — — 4,934 Corporate bonds 23,062 8,661 — 31,723 Total $ 55,485 $ 17,230 $ — $ 72,715 March 31, 2024 (in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Cash equivalents: Money market funds $ 324,772 $ — $ — $ 324,772 Marketable securities: U.S. Treasury securities 7,477 — — 7,477 Agency bonds 2,426 — — 2,426 Municipal bonds 12,140 — — 12,140 Asset-backed securities — 3,114 — 3,114 Corporate bonds — 27,759 — 27,759 Total $ 346,815 $ 30,873 $ — $ 377,688 December 31, 2023 (in thousands) Level 1 Level 2 Level 3 Total Financial Assets: Cash equivalents: Money market funds $ 334,762 $ — $ — $ 334,762 Marketable securities: U.S. Treasury securities 15,373 — — 15,373 Yankee bonds 2,588 — — 2,588 Agency bonds 6,000 — — 6,000 Municipal bonds 12,097 — — 12,097 Asset-backed securities — 4,934 — 4,934 Corporate bonds — 31,723 — 31,723 Total $ 370,820 $ 36,657 $ — $ 407,477 contracts have distinct terms which need to be evaluated separately, therefore, weassets using primarily unobservable inputs and, as such, these 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 surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Company continues to assess the full impact the adoption of this standard will have on our financial statements.C –4. Goodwill and Intangible AssetsGoodwill asSeptember 30, 2017goodwill by segment at March 31, 2024 and December 31, 2016 was $147.0 million. There were no changes in the carrying amount of goodwill during these periods.March 31, 2024 December 31, 2023 Clinical Services $ 458,782 $ 458,782 Advanced Diagnostics 63,984 63,984 Total $ 522,766 $ 522,766 as of September 30, 2017 and December 31, 2016 consisted of the following (in thousands): March 31, 2024 Amortization
Period (years)Cost Accumulated
AmortizationNet Customer Relationships 7 - 15 $ 143,101 $ 68,007 $ 75,094 Developed Technology 10 - 15 310,226 59,768 250,458 Marketing Assets 4 549 411 138 Trademarks 15 31,473 5,846 25,627 Trade Name 2.5 2,584 2,584 — Trademark - Indefinite lived — 13,447 — 13,447 Total $ 501,380 $ 136,616 $ 364,764 December 31, 2023 Amortization
Period (years)Cost Accumulated
AmortizationNet Customer Relationships 7 - 15 $ 143,101 $ 65,534 $ 77,567 Developed Technology 10 - 15 310,226 54,438 255,788 Marketing Assets 4 549 376 173 Trademarks 15 31,473 5,321 26,152 Trade Name 2.5 2,584 2,583 1 Trademark - Indefinite lived — 13,447 — 13,447 Total $ 501,380 $ 128,252 $ 373,128 On August 31, 2017, theThe 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. We recorded approximately $1.7 and $1.8 million in straight-linerecords amortization expense within cost of intangible assetsrevenue and general and administrative expense on the Consolidated Statement of Operations. The following table summarizes the amortization expense for the three month periodmonths ended September 30, 2017March 31, 2024 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. The Company recorded amortization expense from customer relationships and trade names as a general and administrative expense. 9NEOGENOMICS, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSUnaudited
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Amortization of intangibles included in cost of revenue | $ | 4,910 | $ | 4,853 | ||||||||||
| Amortization of intangibles included in general and administrative expenses | 3,452 | 3,930 | ||||||||||||
| Total amortization of intangibles | $ | 8,362 | $ | 8,783 | ||||||||||
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 |
|
| Remainder of 2024 | $ | 25,085 | |||
| 2025 | 33,343 | ||||
| 2026 | 33,308 | ||||
| 2027 | 32,758 | ||||
| 2028 | 32,758 | ||||
| Thereafter | 194,065 | ||||
| Total | $ | 351,317 | |||
|
| 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 |
|
2023. Based on the terms of the 2028 Convertible Notes, the holders could not have converted all or a portion of their 2028 Convertible Notes in the first quarter of 2024. The carryinglast reported sales price of the Company’s common stock was not greater
Term Loan
On December 22, 2016, the Company entered into a Credit Agreement with Regions Bank as administrative agent and collateral agent. The Credit Agreement provided for a $75.02028 Convertible Notes includes $0.2 million, term loan facility (the “Term Loan Facility”). The Credit Agreement also provides incremental facility capacity of $50 million, subject to certain conditions. On September 30, 2017 and December 31, 2016, the Company had current outstanding borrowings under the Term Loan of approximately $3.8$0.4 million and long-term outstanding borrowings$8,500 for the contractual coupon interest, the amortization of approximately $67.5 millionthe debt discount and $70.1 million, netthe amortization of unamortizedthe debt issuance costs, respectively, for the three months ended March 31, 2024. The interest expense recognized on the 2028 Convertible Notes includes $0.2 million, $0.4 million and $8,500 for the contractual coupon interest, the amortization of $939,000the debt discount and $1.1 million, respectively. Thethe amortization of the debt issuance costs, were recorded as a reduction inrespectively, for the carrying amountthree months ended March 31, 2023. The effective interest rate on the 2028 Convertible Notes is 0.70%, which includes the interest on the 2028 Convertible Notes and amortization of the related liabilitydebt discount and are being amortized over the life of the loan.
debt issuance costs. The Term Loan Facility bears2028 Convertible Notes bear interest at a rate of 0.25% per annum, payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021.
at least 20 of the last 30 consecutive trading days of the quarter ended March 31, 2024. Based on the terms of the 2025 Convertible Notes, the holders cannot convert all or a portion of their 2025 Convertible Notes in the second quarter of 2024. The Term Loan Facility and amounts borrowed undervalue of the Revolving Credit Facility are secured2025 Convertible Notes, if-converted, does not exceed the principal amount based on a first priority basis by a securityclosing stock price of $15.72 on March 28, 2024.
10
Unaudited
into certain restrictive agreements; make investments, loans
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Cost of revenue | $ | 395 | $ | — | ||||||||||
| General and administrative | 6,663 | 4,758 | ||||||||||||
| Research and development | 171 | — | ||||||||||||
| Sales and marketing | 545 | — | ||||||||||||
| Total stock-based compensation | $ | 7,774 | $ | 4,758 | ||||||||||
| Number of Shares | Weighted Average Exercise Price | |||||||||||||
| Outstanding at December 31, 2023 | 4,381,099 | $ | 15.87 | |||||||||||
| Granted | 634,134 | $ | 16.39 | |||||||||||
| Exercised | (12,764) | $ | 7.97 | |||||||||||
| Forfeited | (30,382) | $ | 19.79 | |||||||||||
| Outstanding at March 31, 2024 | 4,972,087 | $ | 19.97 | |||||||||||
| Exercisable at March 31, 2024 | 1,241,392 | $ | 19.97 | |||||||||||
| Three Months Ended March 31, 2024 | |||||
| Expected term (in years) | 5.5 - 6.5 | ||||
| Risk-free interest rate (%) | 3.8% - 4.2% | ||||
| Expected volatility (%) | 55.6% - 62.8% | ||||
| Dividend yield (%) | — | ||||
| Weighted average grant date fair value per share | $9.77 | ||||
The Term Loan Facility hasunrecognized stock-based compensation expense related to stock options that will be recognized over a maturity dateweighted-average period of December 21, 2021. The Credit Agreement requires NeoGenomics Laboratories to mandatorily prepayapproximately 1.7 years.
| Number of Restricted Shares | Weighted Average Grant Date Fair Value | |||||||||||||
| Nonvested at December 31, 2023 | 1,961,919 | $ | 13.83 | |||||||||||
| Granted | 378,996 | $ | 16.40 | |||||||||||
| Vested | (47,338) | $ | 11.89 | |||||||||||
| Forfeited | (9,008) | $ | 13.85 | |||||||||||
| Nonvested at March 31, 2024 | 2,284,569 | $ | 14.29 | |||||||||||
Auto Loans
The 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 Leases
The 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.
Revolving Credit Facility
On December 22, 2016, the Company entered into a Credit Agreement with Regions Bank as administrative agent and collateral agent. The Credit Agreement provided for a $75.0 million revolving credit facility (the “Revolving Facility”). On September 30, 2017, and December 31, 2016, the Company had outstanding borrowings of approximately $24.5 million and $21.8 million, net of unamortized debt issuance costs of $939,000 and $1.1 million, respectively.
The Revolving Credit Facility includes a $10 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, 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 Facility bears interest at a rate per annum equal to an applicable margin plus, at NeoGenomics Laboratories’ option, either (1) the Adjusted LIBOR rate for the relevant interest period, (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% for Adjusted LIBOR loans and 1.25% to 2.50% for base rate loans, in each case based on NeoGenomics Laboratories’ 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.
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 December 31, 2017, 50% of excess cash flow (minus certain specified other payments),179,333 PSUs subject to a step down to 0%market condition with an aggregate grant date fair value of excess cash flow if NeoGenomics Laboratories’ consolidated leverage ratio is no greater than 2.75:1.0approximately $3.0 million and (iv) 100% of net
11
Unaudited
cash proceeds from issuances
Maturities of Long-Term Debt
Maturities of long-term debt at September 30, 2017 are summarizedthree months ended March 31, 2024 is as follows (in thousands):
| 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 |
|
Note E – Derivative Instruments and Hedging Activities
Cash Flow Hedges
In December of 2016, the Company entered into an interest rate swap agreement to reduce our exposure to interest rate fluctuations on our variable rate debt obligations. This derivative financial instrument is accounted for at fair value as a cash flow hedge which effectively modifies our exposure to interest rate risk by converting a portion of our 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.
Under this agreement, we receive a variable rate of interest based on LIBOR, and we pay a fixed rate of interest at 1.59%. The interest rate swap agreement was effective as of December 30, 2016 and a termination date of 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.
| Number of Stock Units | Weighted Average Grant Date Fair Value | |||||||||||||
| Nonvested at December 31, 2023 | 305,105 | $ | 21.83 | |||||||||||
| Granted | 358,666 | $ | 17.64 | |||||||||||
| Vested | — | $ | — | |||||||||||
| Forfeited | — | $ | — | |||||||||||
| Nonvested at March 31, 2024 | 663,771 | $ | 19.56 | |||||||||||
12
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Note F – Class A Redeemable Convertible Preferred Stock
On December 30, 2015, NeoGenomics issued 14,666,667 shares of its Series A Preferred stock as part of the consideration for the acquisition of Clarient. The Series A Preferred Stock has 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 ($7.50 minus the liquidation discount of 9.0909%). At September 30, 2017, 6,600,000 shares of Series A Preferred Stock were outstanding.
The carrying amount of the Series A Preferred Stock at September 30, 2017 was $30.1 million as compared to the carrying amount at December 31, 2016 of $22.9 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 millionmarket condition during the ninethree 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.
Issue Discount
The Company recorded the Series A Preferred Stock at a fair value of approximately $73.2 million or $4.99 per share on the date of issuance. The difference between the fair value of $73.2 million and the liquidation value of $110 million represents a discount of $36.8 million from the initial face value as a result of assessing the impact the rights and features of the instrument and their effect on the value to the Company. After the partial redemption, the Series A Preferred stock has 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 represents a discount of approximately $16.6 million.
Beneficial Conversion Features
The fair value of the common stock into which the Series A Preferred Stock is convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the date of issuance and after redemption by approximately $44.7 and $20.1 million, respectively, resulting in a beneficial conversion feature. The Company will recognize the beneficial conversion feature as non-cash, deemed dividend to the holder of Series A Preferred Stock over the first three years the Series A Preferred Stock is outstanding, as the date the stock first becomes convertible is 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.
In addition to the beneficial conversion feature (“BCF”) recorded at the original issue date, we recorded additional BCF discounts for payment-in-kind shares accrued for quarters ended March 31, 2017, June 30, 2017 and September 30, 2017, as dividends. After the early redemption, the face 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, 20172024 was approximately $201,240 and $603,720 respectively.
13
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
Each share of Series A Preferred Stock issued and outstandingestimated as of the tenth anniversarygrant date using a Monte Carlo simulation with the following assumptions:
| Three Months Ended March 31, 2024 | ||||||||
| Expected term (in years) | 3.0 | |||||||
| Risk-free interest rate (%) | 4.5% | |||||||
| Expected volatility (%) | 72.2% | |||||||
| Dividend yield (%) | — | |||||||
| Weighted average grant date fair value per share | $18.82 | |||||||
Classification
(2) Advanced Diagnostics. The Company classified the Series A Preferred Stock as temporary equity on the consolidated balance sheets dueClinical Services segment provides various clinical testing services to certain changecommunity-based pathology practices, oncology practices, hospital pathology labs, reference labs, and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. The Advanced Diagnostics segment supports pharmaceutical firms in control events that are outside the Company’s control, including deemed liquidation events described in the Series A Certificate of Designation.
Note G –their drug development programs by providing testing services and data analytics for clinical trials and research.
The 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 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.
|
| 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 |
|
Note H – Equity
A summaryamortization period of the stock option activity underassets that would otherwise have been recognized is one year or less. Contract assets and capitalized commissions are included in other current assets and other assets on the Company’s plansConsolidated Balance Sheets.
| March 31, 2024 | December 31, 2023 | ||||||||||
Current contract assets (1) | $ | 236 | $ | 37 | |||||||
Long-term contract assets (2) | — | — | |||||||||
| Total contract assets | $ | 236 | $ | 37 | |||||||
Current capitalized commissions (1) | $ | 810 | $ | 935 | |||||||
Long-term capitalized commissions (2) | 98 | 53 | |||||||||
| Total capitalized commissions | $ | 908 | $ | 988 | |||||||
| Current contract liabilities | $ | 1,144 | $ | 2,130 | |||||||
Long-term contract liabilities (3) | — | — | |||||||||
| Total contract liabilities | $ | 1,144 | $ | 2,130 | |||||||
|
| 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 |
|
14
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Clinical Services: | ||||||||||||||
| Client direct billing | $ | 90,483 | $ | 76,823 | ||||||||||
| Commercial Insurance | 23,604 | 21,355 | ||||||||||||
| Medicare and Medicaid | 20,369 | 16,587 | ||||||||||||
| Self-Pay | 79 | 104 | ||||||||||||
| Total Clinical Services | $ | 134,535 | $ | 114,869 | ||||||||||
| Advanced Diagnostics | 21,705 | 22,351 | ||||||||||||
| Total Revenue | $ | 156,240 | $ | 137,220 | ||||||||||
| Severance and Other Employee Costs | Facility Footprint Optimization | Consulting and Other Costs | Total | ||||||||||||||||||||
| Balance as of December 31, 2023 | $ | 687 | $ | 1,389 | $ | 537 | $ | 2,613 | |||||||||||||||
| Restructuring charges incurred | 697 | 964 | 747 | 2,408 | |||||||||||||||||||
| Impairment of facility related assets | — | (10) | — | (10) | |||||||||||||||||||
Cash payments and other adjustments (1) | (771) | (1,796) | (1,125) | (3,692) | |||||||||||||||||||
| Balance as of March 31, 2024 | $ | 613 | $ | 547 | $ | 159 | $ | 1,319 | |||||||||||||||
| Current liabilities | $ | 1,319 | |||||||||||||||||||||
| Long-term liabilities | — | ||||||||||||||||||||||
| $ | 1,319 | ||||||||||||||||||||||
approximately $3.8 million. The fair valueCompany estimates these additional restructuring charges to be comprised of each stock option award granted during the nine months ended September 30, 2017 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:
|
| 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 |
|
As of September 30, 2017, there was approximately $6.5$1.1 million in severance and other employee costs, $2.5 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average periodFacility Footprint Optimization costs, and $0.2 million of approximately 1.3 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 atconsulting and other costs.
Stock based compensation expense recognized for stock options and restricted stock and includedU.S. operations are in a three-year cumulative loss position. Management determined that sufficient objectively verifiable positive evidence does not exist to overcome the consolidated statements of operations was allocated as follows (in thousands):
|
| 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 |
|
Stock based compensation recorded in research and development relates to unvested options granted to a non-employee.
Common Stock Warrants
A summarynegative evidence of the warrant activityCompany’s U.S. cumulative loss position. Accordingly, the Company’s estimated annual effective tax rate applied to the Company’s pre-tax loss for the six months ended September 30, 2017 is as follows:
|
| 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 |
|
| — |
|
|
| — |
|
During both the three months ended September 30, 2017March 31, 2024, includes the unfavorable impact of a partial valuation allowance against the majority of the Company’s forecasted U.S. net operating loss and 2016, we recorded $0tax credit carryforwards.
15
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited
On August 31, 2017, we issued 450,000 shares of restricted common stock to Ascend Genomics as purchase consideration foron 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.
Employee Stock Purchase Plan
We offer an employee stock purchase plan (“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 15% of the fairaverage market value of the Company’s common stock. As a resultThe potential dilution from conversion of this change, we have recordedthe 2028 Convertible Notes and 2025 Convertible Notes is accounted for using the if-converted method, which requires that all of the shares of the Company’s common stock based compensation expense related toissuable upon conversion of the ESPP for2028 Convertible Notes and the quarter ended September 30, 2017.
During2025 Convertible Notes will be included in the three months ended September 30, 2017calculation of diluted EPS assuming conversion of the 2028 Convertible Notes and 2016, employees purchased 23,664 and 26,092 shares, respectively under the ESPP. The expense recorded for these periods was $41,907 and $0, respectively. During the nine months ended September 30, 2017 and 2016, employees purchased 74,756 and 75,623 shares, respectively under the ESPP. The expense recorded for these periods was $41,907 and $0.
Note I – Commitments
During the three and nine months ended September 30, 2017, the Company entered into leases of approximately $683,000 and $3.2 million in laboratory and computer equipment, respectively. These leases have 36 month terms, a $1.00 buyout option2025 Convertible Notes at the endbeginning of the terms and interest rates rangingreporting period (or at time of issuance, if later).
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| NET LOSS | $ | (27,061) | $ | (30,795) | ||||||||||
| Basic weighted average shares outstanding | 126,111 | 125,026 | ||||||||||||
| Diluted weighted average shares outstanding | 126,111 | 125,026 | ||||||||||||
| Basic net loss per share | $ | (0.21) | $ | (0.25) | ||||||||||
| Diluted net loss per share | $ | (0.21) | $ | (0.25) | ||||||||||
During the nine months ended September 30, 2017,calculation of diluted net loss per share because their effect would be anti-dilutive (in thousands):
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Stock options | 557 | 13 | ||||||||||||
| Restricted stock awards | 1,031 | 942 | ||||||||||||
| 2025 Convertible Notes | 5,538 | 5,538 | ||||||||||||
| 2028 Convertible Notes | 5,215 | 5,215 | ||||||||||||
Note J – Other Related Party Transaction
During each of the three and nine month periods ended September 30, 2017 and 2016, Steven C. Jones was an officer, director and shareholder of the Company. In connection with his duties as Executive Vice President, Mr. Jones earned approximately $46,000 and $66,000diluted EPS for the three months ended September 30, 2017March 31, 2024 as the contingency had not been satisfied.
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 $0CODM.
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Net revenues: | ||||||||||||||
| Clinical Services | $ | 134,535 | $ | 114,869 | ||||||||||
| Advanced Diagnostics | 21,705 | 22,351 | ||||||||||||
| Total revenue | 156,240 | 137,220 | ||||||||||||
| Cost of revenue: | ||||||||||||||
Clinical Services(1) | 76,844 | 67,292 | ||||||||||||
Advanced Diagnostics(2) | 13,927 | 15,114 | ||||||||||||
| Total cost of revenue | 90,771 | 82,406 | ||||||||||||
| Gross Profit: | ||||||||||||||
| Clinical Services | 57,691 | 47,577 | ||||||||||||
| Advanced Diagnostics | 7,778 | 7,237 | ||||||||||||
| Total gross profit | 65,469 | 54,814 | ||||||||||||
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 STATEMENTS
16
|
|
|
|
|
|
|
|
|
|
|
|
17
NEOGENOMICS, INC.
Segment
Pharma Services 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 we provide overflow interpretation services when requested by clients.
trials and research;
2017
Over the past several years, NeoGenomics has experienced rapid growth including organic growth from offering new testsfocus for 2024 is to existing customers, growth from gaining market share from our competitors,sustain a purpose driven culture that maintains excellence in service and growth from acquisitions.performance while growing through innovation. We expect the following initiatives to allow us to continue on our path to grow our business in 2017 and are focused on several initiatives to continue to build our Company to bebecome one of the World’sworld’s leading cancer testing and information company.
Develop our High Performancecompanies:
We are building our high performance culture by empowering our employees
Inspire and “Own” Quality
Since 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 practices
18
throughout our organization. Maintaining quality laboratory operations and service is enabling us
We have a variety of initiatives designed to further enhance our company-wide quality program, provide training on the importance of quality, reinforce our quality principals, and recognize individuals and teams for providing quality service. By promoting and reinforcing quality principles,competitive strengths discussed below, we believe we can strengthenthat our core processes. Oursuperior testing technologies and instrumentation, laboratory information system, client education programs and domestic and international presence also differentiate NeoGenomics from its competitors.
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 areas and will allow for further automation 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.
We have renovated our Aliso Viejo, CA laboratory and 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 Growth
Our plans for 2017 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. 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, and clinicians throughout the United States.
Our growth has also been aided by strong client retention. We believe our client retention success is due to our strong service levels, our tech-only service offerings, 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 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.
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 executing and developing our brand we will achieve growth in new and existing markets.
We also look for opportunities to grow our business through mergers and/or acquisitions. We 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 to
19
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
broaden 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 Strategy
We 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.
Competitive Strengths
Turnaround Times
We strive to provide industry leading turnaround times for test results to our clients nationwide.nationwide in the Clinical Services segment. By providing information to our clients in a rapidtimely manner, physicians can begin treating their patients as soon as possible. We believe our average 4-5 day turnaround
20
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
time 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 timelinessTimeliness of results by our Clinical Services segment is a competitive strength and a driver of additional testing requests by our referring physicians. Rapid turnaroundTurnaround 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 times are a key differentiator versus other national laboratories,time on testing and our clients often cite them as aproject milestones are key factorfactors in their relationship with us.
World-class Medical and Scientific Team
Our team of medical professionals and Ph.Ds. are specialists in the field of genetics, oncology and pathology. As of September 30, 2017, we employed, or are contracted with, approximately 28 full-time M.D.s and Ph.Ds. The addition of Clarient’s pathology team has added increased depth to our medical team, and has enhanced our ability to service a wider range of specialties.
Extensive Tech-OnlyAdvanced Diagnostics 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 justonly the technical information and images relating to a specific testcomponent of testing so they can perform the professional interpretation, or order “global” services and receive a comprehensive test report which includes a NeoGenomics 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. We believe this innovative approach to serving the needs of pathology clients’ results in longer term, more committed client relationships that are, in effect, strategic partnerships. Our extensive tech-only service offerings have differentiated us and allowed us to compete more effectively against larger, more entrenched competitors in our niche of the industry.
Global Service Offerings
Client Education Programs
We 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.
21
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Superior Testing Technologies and Instrumentation
We 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 System
We 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.
whole genome sequencing.
Geographic Locations
Many high complexity laboratories within the cancer testing niche have frequently operated a core facility Our sales force educates clients on either the West Coast or the East Coast of the United States to service the needs ofnew test offerings and their customers around the country. We believeproper utilization, and 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 inrepresentatives are often seen as trusted advisors by 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 Pipeline
In 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.
22
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Please see the section captioned Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016; as filed with the SEC on March 14, 2017 for a detailed description of our business.
Results of Operations for the Three and Nine Months Ended September 30, 2017 as Compared to the Three and Nine Months Ended September 30, 2016
The following table presents the consolidated statements of operations as a percentage of revenue:
|
| 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 | % |
The following table presents consolidated net revenue by type for the periods indicated ($ in thousands):
|
| 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 | % |
Revenue
Clinical testing revenue increased for both the three and nine month periods ending September 30, 2017 as compared to the same periods in 2016. Testing volumes also increased in our clinical genetic testing business by approximately 16.6% and 16.0% for the three and nine month periods ended September 30, 2017, respectively. The increases in revenue and volume were due to strong growth in molecular and histology testing as well as growth in immuno-histochemistry tests due to demand for the PD-L1 test as a result 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 related
23
activities, which was a distraction
Pharma Services revenue increased approximately 37%contract. Our volumes are often based on how quickly sponsors can get patient enrollees for their trials and 7%seasonality can impact how quickly patients are enrolled. Many of our long-term contracts contain specific performance obligations where the testing is performed on a specific schedule. In addition, this results in backlog that can be significant and highly dependent on pharmaceutical clinical trial enrollment.
Revenue was also impacted due to an error that we identified during an internal analysis in the third quarter of 2017. The error impactednet 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 understatementperiods presented are as follows:
| Three Months Ended March 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Net revenue | 100.0 | % | 100.0 | % | ||||||||||
Cost of revenue(1) | 58.1 | % | 60.1 | % | ||||||||||
| Gross profit | 41.9 | % | 39.9 | % | ||||||||||
| Operating expenses: | ||||||||||||||
| General and administrative | 42.1 | % | 44.9 | % | ||||||||||
| Research and development | 4.9 | % | 5.4 | % | ||||||||||
| Sales and marketing | 12.9 | % | 11.8 | % | ||||||||||
| Restructuring charges | 1.5 | % | 3.4 | % | ||||||||||
| Total operating expenses | 61.4 | % | 65.5 | % | ||||||||||
| Loss from operations | (19.5) | % | (25.6) | % | ||||||||||
| Interest income | (3.1) | % | (2.3) | % | ||||||||||
| Interest expense | 1.1 | % | 1.2 | % | ||||||||||
| Other expense (income), net | 0.2 | % | 0.1 | % | ||||||||||
| Loss before taxes | (17.7) | % | (24.6) | % | ||||||||||
| Income tax benefit | (0.4) | % | (2.2) | % | ||||||||||
| Net loss | (17.3) | % | (22.4) | % | ||||||||||
The following table shows clinical genetic testing revenue, cost of revenue, requisitions received and tests performed for the three and nine months ended September 30, 2017 and 2016. This data excludes tests performed for Pharma customers and tests performed by Path Logic, which was sold on August 1, 2017. Testing revenue and cost of revenue are presented in thousands below:
| 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 | %) |
We continue to realize growth in our clinical testing revenue which we believe is the direct result of our efforts to innovate by developing and maintaining one of the most comprehensive cancer testing menus in the industry. Our broad test menu enables our sales teams to identify opportunities for increasing revenues from existing clients and allows us to gain market share from competitors. New immuno-histochemistry tests such 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.
Average revenue per test decreased for both the three months ended March 31, 2024 and nine month2023 includes $4.9 million of amortization of acquired intangible assets. Cost of revenue for the three months ended March 31, 2024 also includes $0.4 million of non-cash stock-based compensation. There were no such amounts recorded for the three months ended March 31, 2023.
These decreases to our average revenue per test were offset by our higher volumes and reductions in cost per test. The cost per test reductions were partially a result of the change in test mix, specifically the higher mix of lower cost histology tests. In addition, we continue to have success in reducing costs in the laboratory as synergies are being realized from the consolidation of our Irvine and Aliso Viejo, California laboratories. We have also seen a reduction in send-out costs, as our extensive menu makes it rare for us to need to send a test to another laboratory.
24
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||||
| Net revenue: | ||||||||||||||||||||||||||
| Clinical Services | $ | 134,535 | $ | 114,869 | $ | 19,666 | 17.1 | % | ||||||||||||||||||
| Advanced Diagnostics | 21,705 | 22,351 | (646) | (2.9) | % | |||||||||||||||||||||
| Total revenue | $ | 156,240 | $ | 137,220 | $ | 19,020 | 13.9 | % | ||||||||||||||||||
tested, and amortization for acquired intangible assets.
| Three Months Ended March 31, | ||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | % Change | |||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||
Clinical Services(2) | $ | 76,844 | $ | 67,292 | 14.2 | % | ||||||||||||||
Advanced Diagnostics(3) | 13,927 | 15,114 | (7.9) | % | ||||||||||||||||
| Total cost of revenue | $ | 90,771 | $ | 82,406 | 10.2 | % | ||||||||||||||
| Cost of revenue as a % of revenue | 58.1 | % | 60.1 | % | ||||||||||||||||
| Gross profit: | ||||||||||||||||||||
| Clinical Services | $ | 57,691 | $ | 47,577 | 21.3 | % | ||||||||||||||
| Advanced Diagnostics | 7,778 | 7,237 | 7.5 | % | ||||||||||||||||
| Total gross profit | $ | 65,469 | $ | 54,814 | 19.4 | % | ||||||||||||||
| Gross profit margin | 41.9 | % | 39.9 | % | ||||||||||||||||
|
| 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 | % |
|
|
|
|
Gross profit margin increased slightly for both the three and nine months ended September 30, 2017, as compared to the same period last year. These increases were achieved despite the reduction in our 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, 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 $0.6 million for the three and nine months ended September 30, 2017, respectively.
supplies expense.
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||
($ 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 | % |
|
|
|
|
The increase in our general and administrative expenses for the three and nine months 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 when compared to the same period in 2016. Bad debt as a percentage of revenue was 7.9%, which was higher than last year’s rate of 4.5%. Bad debt expense for the nine months ended September 30, 2017 increased by approximately $4.8 million when compared to the same period in 2016. Bad debt as a percentage of revenue was 6.8%, which was higher than last year’s rate of 4.5%. The increases in bad debt for both periods are primarily related to changes in payer dynamics including pre authorization denials as well as increased denials for next generation sequencing tests and disease specific multi-gene panels. In addition, there was an impact from the integration of Clarient into our billing system, which began in July of 2016. Clarient had higher bad debt rates than did NeoGenomics’ legacy business. Billings of the legacy Clarient billing system have now been either fully collected or written off. The performance of our billing team was also impacted by the integration which ultimately contributed to certain receivables not being collected and increased bad debt expense.
25
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||||
| General and administrative | $ | 65,797 | $ | 61,549 | $ | 4,248 | 6.9 | % | ||||||||||||||||||
| As a % of revenue | 42.1 | % | 44.9 | % | ||||||||||||||||||||||
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$1.8 million increase in stock based compensation which has increased from $3.5and benefit costs. These increases were partially offset by a decrease of $1.1 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 grantstechnology and restricted stock awards.
We expect our general and administrative expenses to increase as we add personnel 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 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,equipment costs, and a decline$0.5 million decrease in our stock price will reduce this expense. However, we anticipate that general and administrative expenses as a percentage of consolidated revenue will drop over the coming years as we continue to grow.
credit card fees.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||||
| Research and development | $ | 7,620 | $ | 7,395 | $ | 225 | 3.0 | % | ||||||||||||||||||
| As a % of revenue | 4.9 | % | 5.4 | % | ||||||||||||||||||||||
|
| 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 | % |
|
|
|
|
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 $3.2 million. The increase in stock based compensation recorded in G&A expense is attributable to non-employee stock options which are subject to variable accounting and the increase in our stock price during the third quarter of 2017.
We expect our research and development expenses to fluctuate in future quarters because of increases or decreases in our stock price and the corresponding stock based compensation expense for non-employee stock options. Increases in our stock price result in additional expense and decreases in our stock price can result in recovery of previously recorded expense. professional fees.
26
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
($ in thousands) |
| 2017 |
|
| 2016 |
|
| $ Change |
|
| 2017 |
|
| 2016 |
|
| $ Change |
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||
Sales and marketing |
| $ | 6,577 |
|
| $ | 5,958 |
|
| $ | 619 |
|
| $ | 18,466 |
|
| $ | 18,084 |
|
| $ | 382 |
| Sales and marketing | $ | 20,221 | $ | $ | 16,259 | $ | $ | 3,962 | 24.4 | 24.4 | % | |||||||||||||||||||||||||||
As a % of revenue |
|
| 10.4 | % |
|
| 9.8 | % |
|
|
|
|
|
| 9.7 | % |
|
| 9.9 | % |
|
|
|
| |||||||||||||||||||||||||||||||||||||||
Interest Expense, net
Interest expense, net is comprisedincentive compensation plans.
| Three Months Ended March 31, | |||||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||
| Restructuring charges | $ | 2,398 | $ | 4,684 | $ | (2,286) | (48.8) | % | |||||||||||||||
| As a % of revenue | 1.5 | % | 3.4 | % | |||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||
| Interest income | $ | (4,834) | $ | (3,224) | $ | (1,610) | 49.9 | % | |||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||
| ($ in thousands) | 2024 | 2023 | $ Change | % Change | |||||||||||||||||||
| Interest expense | $ | 1,685 | $ | 1,757 | $ | (72) | (4.1) | % | |||||||||||||||
Consolidated Financial Statements.
Loss Per Share
|
| 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 | ) | |||||||||||||||||||||||||||
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||||
| NET LOSS | |||||||||||||||||||||||||||||||||||||||||||
Basic weighted average shares outstanding |
|
| 79,617 |
|
|
| 78,145 |
|
|
| 79,208 |
|
|
| 77,224 |
| |||||||||||||||||||||||||||
Effect of potentially dilutive securities |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |||||||||||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||||||||||||||||||||||
| Basic weighted average shares outstanding | |||||||||||||||||||||||||||||||||||||||||||
Diluted weighted average shares outstanding |
|
| 79,617 |
|
|
| 78,145 |
|
|
| 79,208 |
|
|
| 77,224 |
| |||||||||||||||||||||||||||
| Basic net loss per share | |||||||||||||||||||||||||||||||||||||||||||
| Basic net loss per share | |||||||||||||||||||||||||||||||||||||||||||
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 | ) | |||||||||||||||||||||||||||
The Company’s
27
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Non – GAAP EBITDA
We define “EBITDA”Non-GAAP Measures
Non – GAAP Adjusted EBITDA
We define “Adjusted EBITDA” as net income from continuing operations before: (i) interesttax (benefit) or expense, (ii) tax expense, (iii)(iv) depreciation and amortization expense, (iv)(v) non-cash stock-based compensation expense, and, if applicable in a reporting period, (v) acquisition-related transaction expenses(vi) restructuring charges, and (vii) other significant non-recurring or non-operating (income) or expenses.
Basis for Non-GAAP Adjustments
Our 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.
28
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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 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 analyses that are consistent with financial models developed by independent research analysts.
EBITDA and Adjusted EBITDA (as defined by us) are not measurements under GAAP and may differ from non-GAAP measures used by other companies. We believe there are limitations inherent in non-GAAP financial measures such as EBITDA and Adjusted EBITDA because they exclude a variety of charges and credits that are required to be included in a GAAP presentation, and do not therefore present the full measure of NeoGenomics recorded costs against its net revenue. Accordingly, we encourage investors to consider both non-GAAP results together with GAAP results in analyzing our financial performance.
The following is a reconciliation of GAAP net income (loss)loss to Non-GAAP EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2017:
|
| 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 |
|
| Three Months Ended March 31, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Net loss (GAAP) | $ | (27,061) | $ | (30,795) | ||||||||||
| Adjustments to net loss: | ||||||||||||||
| Interest income | (4,834) | (3,224) | ||||||||||||
| Interest expense | 1,685 | 1,757 | ||||||||||||
| Income tax benefit | (620) | (2,925) | ||||||||||||
| Depreciation | 9,905 | 9,048 | ||||||||||||
| Amortization of intangibles | 8,362 | 8,783 | ||||||||||||
| EBITDA (non-GAAP) | $ | (12,563) | $ | (17,356) | ||||||||||
| Further adjustments to EBITDA: | ||||||||||||||
| Non-cash stock-based compensation expense | 7,774 | 4,758 | ||||||||||||
| Restructuring charges | 2,398 | 4,684 | ||||||||||||
Other significant (income) expenses, net(4) | 5,883 | 798 | ||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | 3,492 | $ | (7,116) | ||||||||||
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 $0.6 million for
Trade Accounts Receivableother non-recurring items. For the three months ended March 31, 2023, other significant (income) expenses, net, includes CEO transition costs, fees related to a regulatory matter, and Allowance for Doubtful Accounts
Accounts receivable are reported net of an allowance for doubtful accounts, which is estimated based on the aging of accounts receivable with each payer category and the historical data on bad debts in these aging categories. In addition, the allowance is adjusted periodically for other relevant factors, including regularly assessing the state of our billing operations in order to identify issues which may impact the collectability of receivables or allowance estimates. Revisions to the allowance are recorded as an adjustment to bad debt expense within general and administrative expenses. After appropriate collection efforts have been exhausted, specific receivables deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance.
29
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables present the Company’s gross outstanding accounts receivable ($ in thousands) by payer group at September 30, 2017 and December 31, 2016:
AGING OF RECEIVABLES BY PAYER GROUP
September 30, 2017
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% |
|
AGING OF RECEIVABLES BY PAYER GROUP
December 31, 2016
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% |
|
The 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:
|
| 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 |
|
|
|
|
| ||
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 compared 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 years which resulted in a higher balance in accounts receivable and the allowance as of December 2016. The decreases are also due to changes in the timing 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.
30
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
bank debt borrowings.
|
| 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 |
|
(1) Defined as current assets less current liabilities.
Cash Flows from Operating Activities
During 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 Activities
During 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 Activities
During 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.
31
| Three Months Ended March 31, | ||||||||||||||
| (in thousands) | 2024 | 2023 | ||||||||||||
| Net cash (used in) provided by: | ||||||||||||||
| Operating activities | $ | (25,915) | $ | (12,692) | ||||||||||
| Investing activities | 14,525 | $ | 23,742 | |||||||||||
| Financing activities | 816 | $ | 1,379 | |||||||||||
| Net change in cash and cash equivalents | (10,574) | 12,429 | ||||||||||||
| Cash and cash equivalents, beginning of period | $ | 342,488 | $ | 263,180 | ||||||||||
| Cash and cash equivalents, end of period | $ | 331,914 | $ | 275,609 | ||||||||||
Working Capital (5), end of period | $ | 497,186 | $ | 498,390 | ||||||||||
period.
Our Series A Preferred Stock has certain restrictions that will result in the Company havingplanned costs to dedicate fifty percent of the net proceeds from any future equity raise,operate our business, including amounts required 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.
fund working capital and capital expenditures, continued research and development efforts, and potential strategic acquisitions and investments.
financing.
and Estimates
While many operational aspects Our management routinely makes judgments and estimates about the effects of matters that are inherently uncertain. Please refer to our business 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 describedas disclosed in
32
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consulting Agreements
During each of the three and nine month periods ended September 30, 2017 and 2016, Steven C. Jones was an officer, director and shareholder of the Company. In connection with his duties as Executive Vice President, Mr. Jones earned approximately $46,000 and $66,000 for the three months ended September 30, 2017 and 2016, respectively. In addition, 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. Mr. Jones also received approximately $85,000 and $79,000 during the nine months ended September 30, 2017 and 2016, respectively, as payment of his annual bonus compensation for the previous fiscal years. In addition, as compensation for his services on the Board, 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 for the three months ended September 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 to March 31, 2018.
Off-balance Sheet Arrangements
We do not use special purpose entities or other off-balance sheet financing techniques that we believe have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital resources.
33
NEOGENOMICS, INC.
Changes in Internal Control over Financial Reporting 31.2 32.1 NEOGENOMICS, INC. By: /s/ Title: Director and Chief Executive Officer Chief Financial OfficerMarket risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and other relevant market rate or price changes. risk associated withrisks, including changes in the LIBOR interest raterates and foreign currency exchange rates.regularly evaluatecarry the 2025 Convertible Notes and 2028 Convertible Notes at face value less unamortized debt discount and debt issuance costs on our balance sheet, and we present the fair value for required disclosure purposes only.suchadverse shifts in interest rates, we invest in short-term securities with short maturities. If a 1% change in interest rates were to have occurred on March 31, 2024, this change would not have had a material effect on the fair value of our investment portfolio as of that date. Due to the short holding period of our investments, we do not believe that we have a material financial market risk exposure and do not expect our operating results or cash flows to be materially affected by a sudden change in market interest rates. While we believe our marketable securities do not contain excessive risk, we cannot provide absolute assurance that in the future our investments will not be subject to adverse changes in market value.may electexpenses denominated in foreign currencies (primarily British Pounds), expose us to minimize thisthe risk throughof fluctuations in foreign currency exchange rates against the use of interest rate swap agreements. For further details regarding our significant accounting policies relating to derivative instruments and hedging activities, see Note B to our Consolidated Financial Statements included in our Annual Report on Form 10-K.U.S. dollar. We do not have any material foreign operations or foreign sales and thus have limited exposure tohedge foreign currency exchange rate risk.risks and do not currently believe that these risks are significant.thisthat 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 unbillablethree monthsquarter ended September 30, 2017March 31, 2024 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.We do not believe any currentFor further information on legal proceedings, are materialplease refer to our business. No material proceedings were terminated duringNote 11. Commitments and Contingencies, in the quarter ended September 30, 2017.notes to the unaudited Consolidated Financial Statements.There have been no material changes in ourfrom those set forthdescribed in Part I, Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K for the for the year ended December 31, 2017;2023, as filed with the SEC on March 14, 2017. February 20, 2024, as well as the other information set forth in this Quarterly Report on Form 10-Q.Period of Repurchase Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs January 1, 2024 - January 31, 2024 7,460 $ 16.16 — — February 1, 2024 - February 29, 2024 3,930 $ 14.62 — — March 1, 2024 - March 31, 2024 1,355 $ 15.63 — — Total 12,745 — — Not applicableapplicableapplicable.NoneEXHIBITNO.Exhibit Number DESCRIPTIONLocation 31.110.1* Incorporated by reference to the Company’s Current Report on Form 8-K as filed with the SEC on February 23, 2024. 10.2* Provided herewith. 10.3* Provided herewith. 31.1 Provided herewith. Provided herewith. Provided herewith. 101.INS XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document) Provided herewith. 101101.SCH The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash FlowsXBRL Taxonomy Extension Schema DocumentProvided herewith. 101.CAL XBRL Taxonomy Extension Calculation Linkbase Document Provided herewith. 101.DEF XBRL Taxonomy Extension Definition Linkbase Document Provided herewith. 101.LAB XBRL Taxonomy Extension Labels Linkbase Document Provided herewith. 101.PRE XBRL Taxonomy Extension Presentation Linkbase Document Provided herewith. 104 Cover Page Interactive File (formatted as inline XBRL and (iv) related notescontained within Exhibit 101)Provided herewith. * Denotes a management contract or compensatory plan or arrangement. 37NEOGENOMICS, INC.Date: November 13, 2017April 30, 2024DouglasChristopher M. VanOortName: Name:DouglasChristopher M. VanOortBy: /s/ Jeffrey S. Sherman By:/s/ George CardozaName:George CardozaTitle:38