| Class A Redeemable Convertible Preferred Stock | Note H – Class A Redeemable Convertible Preferred Stock On December 30, 2015, (Original Issue Date), the Company issued 14,666,667 shares of its Series A Redeemable Convertible Preferred stock (“Series A Preferred Stock”) as part of the consideration given to acquire all of the outstanding stock of Clarient Inc. (see Note D). The Series A Preferred Stock has a face value of $7.50 per share for a total liquidation value of $110 million. The Company recorded the Series A Preferred Stock on the Original Issue Date at fair value of approximately $73.2 million or $4.99 per share, net of the $36.8 million discount to the liquidation value. The $36.8 million discount relates to the rights and features (listed below) of the Series A Preferred Stock. Additionally, the fair value of the common stock into which the Series A Preferred Stock was convertible at the Original Issue Date exceeded the allocated purchase price fair value of the Series A Preferred Stock by approximately $44.7 million on the date of issuance, resulting in a beneficial conversion feature (“BCF”). The Original Issue Date fair value of $73.2 million was further reduced by $44.7 million allocated to the value of the BCF, resulting in a carrying value on Original Issue Date of $28.5 million. The Series A Preferred Stock will accrue dividends at an increasing rate as described in “ —Dividends” The Company classified the Series A Preferred Stock as temporary equity on the consolidated balance sheets due to certain change in control events that are outside the company’s control, including deemed liquidation events described in in “ —Liquidation, Dissolution or Winding-up; Liquidation Preference” 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 December 31, 2016, following the redemption, 6,600,000 shares of Series A Preferred Stock were outstanding. The shares of Series A Preferred Stock have the following rights and features: Rank The Series A Preferred Stock ranks senior to all other classes and series of our capital stock, including our common stock and other series of preferred stock (collectively, “Junior Stock”) that we may issue in the future, including with respect to dividend and other distribution rights or rights upon a liquidation event as defined. Voting Rights Each holder of Series A Preferred Stock has such number of votes for each share of Series A Preferred Stock held of record by such holder on an as-converted (into common stock) basis, on each matter upon which holders of common stock have the right to vote and will vote together with the holders of common stock (and any other class or series which may be similarly entitled to vote) as one class on all matters upon which holders of common stock have the right to vote, and not as a separate class or series other than as set forth below. In addition to any other vote of our stockholders required under applicable law, if any shares of Series A Preferred Stock remain outstanding at any point in time, the affirmative vote or written consent of the holders of at least a majority of the then issued and outstanding shares of Series A Preferred Stock, voting together as a single class, will be required for us to effect any corporate action (whether taken by amendment, merger, consolidation or otherwise) to:
•
increase or decrease the authorized number of shares of Series A Preferred Stock;
•
create or authorize the creation of or issue any equity security, including any security convertible into or exchangeable for any equity security, of any other class or series having rights, preferences or privileges ranking on parity with or senior to or prior to the Series A Preferred Stock;
•
change the powers, designations, preferences, limitations, restrictions, voting or other rights of the Series A Preferred Stock set forth in the Certificate of Designations;
•
alter or amend any provision of our Articles of Incorporation or Bylaws in a manner adverse to the rights of the Series A Preferred Stock set forth in the Certificate of Designations;
•
redeem, repurchase or otherwise acquire any Junior Stock, except for repurchases of Junior Stock held by our employees, independent contractors, consultants or medical doctors upon termination of their employment or services pursuant to employment agreements, consulting agreements or settlement agreements providing for such repurchase;
•
issue any additional shares of Series A Preferred Stock, except as required pursuant to the terms of the Certificate of Designations;
•
effect an exchange, reclassification or cancellation of all or part of the Series A Preferred Stock; or
•
change the Series A Preferred Stock into the same or a different number of shares, with or without par value, of the same or another class. Dividends Commencing on the one year anniversary of the first date on which shares of Series A Preferred Stock are issued (the “Original Issue Date”) and ending on the date on which the Series A Preferred Stock automatically converts as described in “ —Automatic Conversion
For the Period:
PIK Dividend Rate
Commencing on the Original Issue Date and ending on the 1 st
0.0
%
Commencing on the day after the 1 st th
4.0
%
Commencing on the day after the 4 th th
5.0
%
Commencing on the day after the 5 th th
6.0
%
Commencing on the day after the 6 th th
7.0
%
Commencing on the day after the 7 th th
8.0
%
Commencing on the day after the 8 th th
9.0
%
Commencing on the day after the 9 th
10.0
% The PIK Dividends are cumulative and accrue whether or not they have been earned or declared and whether or not there are profits, surplus or other funds of NeoGenomics legally available for the payment of PIK Dividends. On December 31 of each year, beginning on the first anniversary of the Original Issue Date and ending on the date on which the Series A Preferred Stock automatically converts as described in “— Automatic Conversion If, on account of an increase in the Liquidation Preference of a share of Series A Preferred Stock pursuant to the preceding paragraph, any holder of Series A Preferred Stock would be prohibited by any applicable law, rule or regulation from holding its Series A Preferred Stock or converting all of its Series A Preferred Stock at the then effective conversion price, without receiving the consent of any governmental authority that has not been obtained at such time, then the Liquidation Preference will not be increased, and such PIK Dividend will be paid in cash in lieu of such increase in the Liquidation Preference. If the condition set forth above ceases to exist prior to the date of an optional conversion or the date of the automatic conversion of the Series A Preferred Stock, the Liquidation Preference will be increased to such Liquidation Preference that would then be in effect as if such condition had not existed. Had none of the 14,666,667 shares of Series A Preferred Stock been redeemed prior to automatic conversion into our common stock on the tenth anniversary of closing, we would have been required to issue an additional 10,775,454 shares of Series A Preferred Stock as PIK Dividends. If the remaining 6,600,000 shares of Series A Preferred Stock remains outstanding until the automatic conversion date we will be required to issue an additional 4,848,955 shares of Series A Preferred Stock as PIK Dividends prior to the automatic conversion. Liquidation, Dissolution or Winding-up; Liquidation Preference To the extent not prohibited by applicable law, upon the occurrence of any Liquidation Event, each holder of Series A Preferred Stock will be entitled to receive, prior and in preference to any distribution of any of the assets or funds of NeoGenomics to the holders of shares of Junior Stock out of the assets of NeoGenomics legally available therefor, whether such assets are capital, surplus or earnings, an amount, payable in cash, equal to $7.50 plus all declared and unpaid dividends thereon, including all accrued and unpaid PIK Dividends regardless of whether there has been any payment-in-kind with respect thereto and after giving effect to the second paragraph under “ —Dividends . A Deemed Liquidation Event includes any of the following: (a) the acquisition by any person other than a holder of Series A Preferred Stock or an affiliate thereof of 50% or more of our voting securities; (b) any consolidation or merger of NeoGenomics with or into any other corporation or other entity or person, or any other corporate reorganization, in which our stockholders immediately prior to such consolidation, merger or reorganization, own less than 50% of our voting power immediately after such consolidation, merger or reorganization; and (c) any sale, lease, license, transfer or other disposition of all or substantially all of the assets, technology or intellectual property of NeoGenomics, other than non-exclusive licenses granted in the ordinary course of our business. Automatic Conversion Each share of Series A Preferred Stock issued and outstanding as of the tenth anniversary of the Original Issue Date will automatically convert into fully paid and non-assessable shares of common stock. The number of shares of common stock to which a holder of Series Preferred Stock will be entitled upon conversion will be equal to the quotient of the then effective Liquidation Preference, divided by the then effective conversion price. The conversion price will be equal to $7.50, multiplied by the conversion rate, which will initially be equal to 1.0, but is subject to anti-dilution adjustments that may occur prior to the date of the automatic conversion. Optional Conversion by Holder At any time, from and after the third anniversary of the Original Issue Date, to the extent the VWAP of our common stock equals or exceeds $8.00 per share, as adjusted for any stock dividends, combinations, splits, recapitalizations and similar events with respect to shares of our common stock, for 30 consecutive trading days, any holder, upon written notice, will have the right to convert any or all shares of Series A Preferred Stock it owns into fully paid and non-assessable shares of common stock. The number of shares of common stock to which a holder of Series Preferred Stock will be entitled upon conversion will be equal to the quotient of the then effective Liquidation Preference, divided by the then effective conversion price, and the date upon which we receive the holder’s notice of conversion will be the effective date of any optional conversion. For purposes of the foregoing, “VWAP” means, as of any applicable date of determination, the volume weighted average per share price of shares of our common stock on the applicable trading day on the principal national securities exchange on which our common stock is listed or admitted to trading. Conversion Rate and Conversion Price The conversion price for the Series A Preferred Stock is $7.50 per share, multiplied by the then effective conversion rate. The conversion rate in effect for conversion of each share of Series A Preferred Stock into common stock is initially be 1.0, subject to adjustments for stock splits, reclassifications and certain distributions and as described under “— Reorganizations, Mergers and Consolidations No Fractional Shares We are not required to issue or cause to be issued fractional shares of common stock pursuant to any provision of the Certificate of Designations. If any fraction of a share of common stock would be issuable pursuant to the Certificate of Designations, the number of shares of common stock to be issued will be rounded up to the nearest whole share. Reorganizations, Mergers and Consolidations In case of any consolidation or merger of NeoGenomics with any other entity (other than a wholly owned subsidiary of NeoGenomics), or in case of any sale or transfer of all or substantially all of our assets, or in case of any share exchange pursuant to which all of the outstanding shares of common stock are converted into other securities or property of NeoGenomics, we will, prior to or at the time of such transaction, make appropriate provision or cause appropriate provision to be made so that holders of each share of Series A Preferred Stock then outstanding will have the right thereafter to convert such shares of Series A Preferred Stock into the kind and amount of shares of stock and other securities and property receivable upon such consolidation, merger, sale, transfer or share exchange by a holder of the number of shares of common stock into which such share of Series A Preferred Stock could have been converted immediately prior to the effective date of such consolidation, merger, sale, transfer or share exchange. If in connection with any such consolidation, merger, sale, transfer or share exchange, each holder of shares of common stock is entitled to elect to receive either securities, cash or other assets upon completion of such transaction, we will provide or cause to be provided to each holder of Series A Preferred Stock the right to elect the securities, cash or other assets into which the Series A Preferred Stock held by such holder will be convertible after consummation of any such transaction on the same terms and subject to the same conditions applicable to holders of the common stock. Prohibitions on Transfers No sale, exchange, delivery, assignment, transfer, disposal, encumbrance, pledge or hypothecation, whether voluntary, involuntary, by operation of law, or resulting from death, disability or otherwise may be made by a holder of any shares of Series A Preferred Stock without our express written consent, except that a holder may transfer shares of Series A Preferred Stock to an affiliate of such holder upon written notice to us. Amendments; Modifications No provision of the Certificate of Designations may be amended, except in a written instrument signed by NeoGenomics and holders of at least a majority of the shares of Series A Preferred Stock then outstanding. Redemption at the Option of the Company At any time, and from time to time, we may redeem for cash all, or any portion of, the outstanding Series A Preferred Stock at a price per share equal to the then effective Liquidation Preference, provided the aggregate amount redeemed at such time is not less than (a) from the Original Issue Date until the fourth anniversary thereof, $10.0 million and (b) thereafter, $5.0 million, and in each case only in $1.0 million increments above such amounts. The amount payable by us in the event of a redemption during the period from the Original Issue Date until the fourth anniversary thereof will be discounted as set forth below under “— Redemption Discounts Redemption at the Option of the Holder upon Future Capital Raise For so long as any shares of Series A Preferred Stock remain outstanding, in the event that we issue any other class or series of equity or common stock equivalents or any unsecured debt securities for cash consideration, we are required to apply at least 50% of the net cash proceeds from any such issuance to redeem shares of Series A Preferred Stock for cash at a redemption price per share equal to the then effective Liquidation Preference. Cash proceeds received by us in connection with the exercise of options, warrants or similar securities that we issued to our employees, directors independent contractors, consultants or medical doctors as compensation will not be applied to the redemption of shares of Series A Preferred Stock. The amount payable by us in the event of a redemption during the period from the Original Issue Date until the fourth anniversary thereof will be discounted as set forth below under “— Redemption Discounts Redemption Discounts Commencing on the Original Issue Date and ending on the fourth anniversary thereof, in the event that any shares of Series A Preferred Stock are redeemed, the amount payable by us for each share being redeemed will be reduced by an amount determined by multiplying the discount rate listed below for the period in which the redemption is consummated by the then effective Liquidation Preference before such discount is applied.
For the Period:
Discount
Commencing on the Original Issue Date and ending on the 1 st
9.0909
%
Commencing on the day after the 1 st nd
6.8182
%
Commencing on the day after the 2 nd rd
4.5455
%
Commencing on the day after the 3 rd th
2.2727
% From and after the fourth anniversary of the Original Issue Date, no reduction will be made for any amount payable in connection with a redemption. The 10 year liquidation value of the Series A Preferred Stock is as follows (in thousands except share amounts): The fair value of the Series A Preferred Stock originally issued was being accreted to the ten year liquidation value of $190.8 million using an effective interest rate of approximately 10.06% as follows (in thousands):
Anniversary of Closing Date - Original Issuance on 14,666,667 shares
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Carrying Value
$
73,200
$
80,560
$
88,661
$
97,576
$
107,387
$
118,185
$
130,069
$
143,147
$
157,541
$
173,382
Deemed Dividends
7,360
8,101
8,915
9,811
10,798
11,884
13,078
14,394
15,841
17,434
$
80,560
$
88,661
$
97,576
$
107,387
$
118,185
$
130,069
$
143,147
$
157,541
$
173,382
$
190,816
After redemption, the fair value of the remaining Series A Preferred Stock will be accreted to the ten year liquidation value of $85.9 million using an effective interest rate of approximately 10.06% as follows (in thousands):
Anniversary of Closing Date - Post Redemption on 6,600,000 shares remaining
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Fair Value
$
32,940
$
36,252
$
39,897
$
43,909
$
48,324
$
53,183
$
58,531
$
64,416
$
70,893
$
78,021
Deemed Dividends
3,312
3,645
4,012
4,415
4,859
5,348
5,885
6,477
7,128
7,846
$
36,252
$
39,897
$
43,909
$
48,324
$
53,183
$
58,531
$
64,416
$
70,893
$
78,021
$
85,867
The fair value of the common stock into which the Series A Preferred Stock was convertible at the date of issuance exceeded the allocated purchase price fair value of the Series A Preferred Stock by approximately $44.7 million on the date of issuance, resulting in a beneficial conversion feature. The calculation of the Beneficial Conversion Feature at the Original Issue Date is as follows (in thousands except share and per share amounts):
Issue date fair value
$
73,200
Common shares the stock converts into
14,666,667
Common shares the stock coverts into
14,666,667
Excess fair value of stock over conversion price
$
3.05
Effective conversion price
$
4.99
Value of beneficial conversion feature
$
44,720
Stock price on issue date
$
8.04
Fair Value
$
73,200
Effective conversion price
$
4.99
Value of Beneficial Conversion Feature
$
(44,720
)
Excess fair value over conversion price
$
3.05
Carrying Value
$
28,480
After the redemption of 8,066,667 shares of the Series A Preferred Stock, the remaining BCF allocated to the 6,600,000 shares outstanding is approximately $20.1 million (6,660,000 * $3.05). Since the Series A Preferred Stock first becomes convertible three years from the Original Issuance Date the Company is recognizing the BCF as non-cash deemed dividends of approximately $6.7 million per year in each of the first three years the Series A Preferred Stock is outstanding. In addition to the BCF recorded at the Original Issue Date, we will be required to record additional BCF discounts upon the issuance of PIK shares issued quarterly, as dividends, starting after the first year from the Original Issue Date. After the early redemption, the face value of the remaining Series A Preferred Stock is $49.5 million and will receive 264,000 ($49.5 million * 4.0%) / $7.50) additional shares of Series A Preferred Stock for the first year dividends are payable. Using the same calculations as the table above, the additional 264,000 shares will be discounted by a BCF of approximately $0.8 million, which will be 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 following table details the amounts recorded for the components of the Series A Preferred stock separately for the shares redeemed and for the shares remaining after redemption:
Reconciliation of amounts recorded
Original Issue Date
Redeemed Shares
Shares Remaining
Income Statement Impact
Shares of Series A Preferred Stock
14,666,667
8,066,667
6,600,000
Face (conversion) value
$
110,000
$
60,500
$
49,500
$
-
Issue discount
(36,800
)
(20,240
)
(16,560
)
-
Beneficial conversion feature
(44,720
)
(24,596
)
(20,124
)
-
Carrying value at Original Issue Date
28,480
15,664
12,816
-
Deemed dividends expense recorded
7,360
4,048
3,312
7,360
Amortization expense of BCF
14,988
8,244
6,745
14,988
Carrying value pre-redemption
$
50,828
$
27,956
$
22,873
$
22,348
Accelerate discount expense on redeemed shares
18,973
-
18,973
Remove deemed dividends not payable on redeemed shares
(2,781
)
-
(2,781
)
Remove BCF not realized by holder
(8,244
)
-
(8,244
)
Add original amount of BCF back to Series A Preferred Stock from APIC
24,596
-
-
Record cash paid at redemption of $55.0 million
(60,500
)
-
(5,500
)
Carrying value after redemption at December 31, 2016
-
22,873
-
Cumulative impact on income statement
24,796
Amounts from deemed dividends and discounts
18,051
Amounts from BCF
6,745
To calculate any gain or loss realized on the redemption of the Series A Preferred Stock, the Company took the carrying value of the shares of Series A Preferred Stock before the redemption and added the amount of the beneficial conversion feature originally recorded with the redeemed shares and compared that total to the consideration being paid, in this case the $55 million. The following table summarizes the calculation of the net loss realized upon the redemption of the 8,066,667 shares of Series A Preferred Stock which agrees with the cumulative impact on the income statement in the table above.
Calculation of loss on redemption
Carrying value pre-redemption on shares redeemed
$
27,956
Value of original BCF on redeemed shares
24,596
52,552
Cash paid to redeem shares
55,000
Loss on redemption of Series A Preferred Stock
(2,448
)
Income statement expense pre-redemption
22,348
Plus: Loss on redemption of Series A Preferred Stock
2,448
Cumulative income statement impact as of December 31, 2016
$
24,796 |
