UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016.

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to                   

Commission File Number: 001-35756

 

NEOGENOMICS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

74-2897368

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

12701 Commonwealth Drive, Suite 9, Fort Myers,

 

 

Florida

 

33913

(Address of principal executive offices)

 

(Zip Code)

 

(239) 768-0600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes     No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

 

Accelerated filer

 

 

 

 

 

Non-accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes     No  

As of November 2, 2016, the registrant had 78,512,921 shares of Common Stock, par value $0.001 per share outstanding.

 

 

 

 

1

 


 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (unaudited)

 

4

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

 

17

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

33

Item 4. Controls and Procedures

 

33

PART II OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

34

Item 1A. Risk Factors

 

34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

34

Item 3. Defaults Upon Senior Securities

 

34

Item 4. Mine Safety Disclosures

 

34

Item 5. Other Information

 

34

Item 6. Exhibits

 

35

SIGNATURES

 

36

 

 

2

 


FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q contains “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, 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”), which are subject to the “safe harbor” created by those sections.  These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, 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 Quarterly Report on Form 10-Q for the period ended June 30, 2016; as filed with the SEC on August 5, 2016.  

 

Forward looking statements include, but are not limited to, statements about:

 

 

Our ability to implement our business strategy;

 

Our ability to integrate acquired businesses, including our acquisition of Clarient, Inc. and costs related to such acquisitions;

 

Our ability to expand our operations and increase our market share;

 

Our ability to expand our service offerings by adding new testing capabilities;

 

The impact of internalization of testing by customers;

 

Our ability to compete with other diagnostic laboratories;

 

Our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure;

 

Our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs;

 

Our ability to meet our future capital requirements;

 

U.S. Food and Drug Administration proposed regulation of Laboratory Developed Tests;

 

Our ability to generate sufficient cash flow from our license agreement with Health Discovery Corporation to support its fair value;

 

Regulatory developments in the United States including increasing downward pressure on health care reimbursement;

 

The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels, including the application of the Protecting Access to Medicare Act;

 

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;

 

Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988; and

 

Failure to timely or accurately bill for our services.

Any forward-looking statement speaks only as of the date on which such statement is made, 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.

 

3

 


 

PART I — FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

NEOGENOMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

ASSETS

 

September 30, 2016

 

 

December 31, 2015

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

28,935

 

 

$

23,420

 

Accounts receivable (net of allowance for doubtful accounts of $11,056 and

   $4,759, respectively)

 

 

50,184

 

 

 

48,943

 

Inventories

 

 

5,952

 

 

 

5,108

 

Other current assets

 

 

7,488

 

 

 

4,889

 

Total current assets

 

 

92,559

 

 

 

82,360

 

Property and equipment (net of accumulated depreciation of $37,840 and

$26,534, respectively)

 

 

34,169

 

 

 

34,577

 

Intangible assets, net

 

 

82,346

 

 

 

87,800

 

Goodwill

 

 

146,179

 

 

 

146,421

 

Other assets

 

 

174

 

 

 

129

 

Total assets

 

$

355,427

 

 

$

351,287

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,984

 

 

$

12,464

 

Accrued compensation

 

 

11,382

 

 

 

6,217

 

Accrued expenses and other liabilities

 

 

4,380

 

 

 

7,374

 

Revolving credit facility, net

 

 

 

 

 

8,869

 

Short-term portion of capital leases

 

 

5,000

 

 

 

4,534

 

Short-term portion of loans

 

 

646

 

 

 

600

 

Total current liabilities

 

 

35,392

 

 

 

40,058

 

Long-term liabilities

 

 

 

 

 

 

 

 

Long-term portion of capital leases

 

 

5,513

 

 

 

5,040

 

Long-term portion of loans, net

 

 

52,194

 

 

 

52,336

 

Deferred income tax liability, net

 

 

16,236

 

 

 

15,741

 

Total long-term liabilities

 

 

73,943

 

 

 

73,117

 

Total liabilities

 

 

109,335

 

 

 

113,175

 

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; and 14,666,667 shares issued and outstanding, respectively)

 

 

45,302

 

 

 

28,602

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, (250,000,000 shares authorized; 78,494,022 and  75,820,307 shares issued and outstanding, respectively)

 

 

78

 

 

 

76

 

Additional paid-in capital

 

 

238,975

 

 

 

231,375

 

Accumulated deficit

 

 

(38,263

)

 

 

(21,941

)

Total stockholders’ equity

 

 

200,790

 

 

 

209,510

 

Total liabilities, redeemable convertible preferred stock and stockholders' equity

 

$

355,427

 

 

$

351,287

 

 

See notes to unaudited consolidated financial statements

4

 


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

NET REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical testing revenue

 

$

55,739

 

 

$

24,875

 

 

$

166,674

 

 

$

71,770

 

Pharma Services & research revenue

 

 

5,022

 

 

 

251

 

 

 

16,919

 

 

 

753

 

Total Revenue, net

 

 

60,761

 

 

 

25,126

 

 

 

183,593

 

 

 

72,523

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE

 

 

33,416

 

 

 

13,955

 

 

 

100,471

 

 

 

40,995

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

 

27,345

 

 

 

11,171

 

 

 

83,122

 

 

 

31,528

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

19,025

 

 

 

7,438

 

 

 

55,810

 

 

 

21,036

 

Research and development

 

 

967

 

 

 

871

 

 

 

3,719

 

 

 

2,342

 

Sales and marketing

 

 

5,958

 

 

 

2,748

 

 

 

18,084

 

 

 

8,569

 

Total Operating Expenses

 

 

25,950

 

 

 

11,057

 

 

 

77,613

 

 

 

31,947

 

INCOME (LOSS) FROM OPERATIONS

 

 

1,395

 

 

 

114

 

 

 

5,509

 

 

 

(419

)

Interest expense, net

 

 

1,468

 

 

 

239

 

 

 

4,509

 

 

 

623

 

Income (loss) before taxes

 

 

(73

)

 

 

(125

)

 

 

1,000

 

 

 

(1,042

)

Income tax expense (benefit)

 

 

(6

)

 

 

 

 

 

500

 

 

 

20

 

NET INCOME (LOSS)

 

 

(67

)

 

 

(125

)

 

 

500

 

 

 

(1,062

)

Deemed dividends on preferred stock

 

 

1,840

 

 

 

 

 

 

5,520

 

 

 

 

Amortization of preferred stock beneficial conversion feature

 

 

3,727

 

 

 

 

 

 

11,180

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(5,634

)

 

$

(125

)

 

$

(16,200

)

 

$

(1,062

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

(0.00

)

 

$

(0.21

)

 

$

(0.02

)

Diluted

 

$

(0.07

)

 

$

(0.00

)

 

$

(0.21

)

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

78,145

 

 

 

60,537

 

 

 

77,224

 

 

 

60,414

 

Diluted

 

 

78,145

 

 

 

60,537

 

 

 

77,224

 

 

 

60,414

 

 

 

See notes to unaudited consolidated financial statements.

 

 

5

 


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

2016

 

 

2015

 

Net income (loss)

 

$

500

 

 

$

(1,062

)

Adjustments to reconcile net income (loss) to net cash provided by

operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

11,550

 

 

 

4,971

 

Amortization of intangibles

 

 

5,454

 

 

 

283

 

Amortization of debt issue costs

 

 

532

 

 

 

-

 

Stock based compensation – options, restricted stock and warrants

 

 

4,024

 

 

 

1,907

 

Provision for bad debts

 

 

8,183

 

 

 

1,849

 

Changes in assets and liabilities, net of business acquisition:

 

 

 

 

 

 

 

 

(Increase) in accounts receivable, net of write-offs

 

 

(9,424

)

 

 

(2,930

)

(Increase) in inventories

 

 

(844

)

 

 

(351

)

(Increase) in prepaid expenses

 

 

(1,482

)

 

 

(409

)

(Increase) decrease in other current assets

 

 

(46

)

 

 

12

 

Increase in accounts payable and other liabilities

 

 

3,271

 

 

 

2

 

Net cash provided by operating activities

 

 

21,718

 

 

 

4,272

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(5,328

)

 

 

(1,682

)

Net cash used in investing activities

 

 

(5,328

)

 

 

(1,682

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repayment of revolving credit facility

 

 

(10,044

)

 

 

 

Repayment of term loan

 

 

(413

)

 

 

 

Repayment of capital lease obligations/loans

 

 

(3,874

)

 

 

(2,912

)

Proceeds from the exercise of options, warrants and

   ESPP shares, net of transaction expenses

 

 

3,456

 

 

 

599

 

Net cash used in financing activities

 

 

(10,875

)

 

 

(2,313

)

Net change in cash and cash equivalents

 

 

5,515

 

 

 

277

 

Cash and cash equivalent, beginning of period

 

 

23,420

 

 

 

33,689

 

Cash and cash equivalents, end of period

 

$

28,935

 

 

$

33,966

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

3,993

 

 

$

672

 

Income taxes paid

 

$

228

 

 

$

20

 

Supplemental disclosure of non-cash investing and financing information:

 

 

 

 

 

 

 

 

Equipment acquired under capital lease/loan obligations

 

$

4,907

 

 

$

4,377

 

Deemed dividends on preferred stock

 

$

5,520

 

 

$

-

 

Amortization of preferred stock beneficial conversion feature

 

$

11,180

 

 

$

-

 

 

See notes to unaudited consolidated financial statements.

 

 

6

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Note A – Nature of Business and Basis of Presentation

 

NeoGenomics, Inc., a Nevada corporation (the “Parent”), and its subsidiaries, NeoGenomics Laboratories, Inc., a Florida corporation (“NEO” or, “NeoGenomics Laboratories”), NeoGenomics Bioinformatics Inc., a Florida corporation, Path Labs LLC., a Delaware limited liability company (“PathLogic”) and Clarient Inc., a Delaware corporation, and its wholly owned subsidiary Clarient Diagnostic Services, Inc. (together, “Clarient”), (collectively referred to as “we”, “us”, “our”, “NeoGenomics”, or the “Company”), operates as a certified “high complexity” clinical laboratory in accordance with the federal government’s Clinical Laboratory Improvement Act, as amended (“CLIA”), and is dedicated to the delivery of clinical diagnostic services to pathologists, oncologists, urologists, hospitals, and other laboratories throughout the United States.

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with 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.

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these accompanying interim consolidated financial statements. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 15, 2016 and as amended and filed with the SEC on April 18, 2016.  Certain amounts in previously issued financial statements were reclassified to conform to the current presentation (see Note B).

The results of operations presented in this quarterly 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 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 segment that delivers testing services to hospitals, pathologists, oncologists, other clinicians, pharmaceutical companies and researchers, which represents 100% of the Company’s consolidated assets, net revenues and net loss for the three and nine months ended September 30, 2016 and 2015.  We have evaluated our segments based on how the Chief Operating Decision Maker (“CODM”), our Chief Executive Officer, reviews performance and makes decisions in managing the Company.  At September 30, 2016, all of our services were provided within the United States and all of our assets were located in the United States.

 

We have two primary types of customers, clinical and pharma.  Our clinical customers include community based pathology practices, oncology groups, hospitals and academic centers.  Our pharma customers include pharmaceutical companies to whom we provide testing and other services to support their studies and clinical trials.  We continue to assess the information available to the CODM since the close of the Clarient acquisition.  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 integrate the two companies 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.

 

Note B — Recently Adopted and Issued Accounting Guidance

 

Adopted

 

Effective January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes. The standard update was issued to simplify the presentation of deferred income taxes and required deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for fiscal years and interim periods within those fiscal years, beginning after December 31, 2016.  Earlier application is permitted as of the beginning of an interim or annual period.  The Company has early adopted this ASU and applied the amendments retrospectively to all deferred tax liabilities and assets presented.  The effect of the adoption on the Consolidated Balance Sheets for September 30, 2016 and December 31, 2015, was the offset of long term deferred tax liabilities by current deferred tax assets of $8,500,000 and $16,668,000, respectively.

7

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

Effective September 2015, the FASB issued ASU 2015-16, Business Combinations. The standard update was issued to simplify the accounting for measurement period adjustments.  The update requires that adjustments to provisional amounts identified during the measurement period be recognized in the period determined.  The effect of these adjustments on current earnings that would have been related to previously reported earnings is required to be disclosed.  ASU 2015-16 is effective for fiscal years and interim periods within those fiscal years, beginning after December 31, 2015.  The update should be applied prospectively to adjustments that occur after the effective date of this update.  The Company has adopted this ASU 2015-16 and it did not have a material effect on Company’s earnings for the period ended September 30, 2016. The Company has not finalized all valuations of the assets acquired and liabilities assumed in the Clarient acquisition at September 30, 2016.

 

Issued

 

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 early adoption permitted 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 is currently evaluating this update and has not yet determined the method it will use to implement the new standard or the effect this may have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The update requires organizations to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee 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 for periods beginning after December 15, 2018 and interim periods within those periods.  The Company is currently evaluating the impact the adoption of this update will have on its consolidated financial statements.  

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The update requires excess tax benefits and tax deficiencies to be recorded directly through earnings as a component of income tax expense. Under current GAAP, these differences are generally recorded in additional paid-in capital and thus have no impact on net income. The change will also impact the computation of diluted earnings per share, and the cash flows associated with those items will be classified as operating activities on the condensed statements of consolidated cash flows. Entities will be permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required under current GAAP, or recognized when they occur.  ASU 2016-09 is effective for periods beginning after December 15, 2016 and interim periods within those periods.  The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.  

 

Note C — Acquisitions

Clarient

On December 30, 2015 (the “Acquisition Date”), the Company acquired from GE Medical Holding AB (“GE Medical”), a subsidiary of General Electric Company (“GE”), all of the issued and outstanding shares of common stock of Clarient, Inc., a wholly owned subsidiary of GE Medical, for a purchase price consisting of (i) cash consideration of approximately $73.8 million, which includes an approximately $6.7 million estimated working capital adjustment and adjustments for estimated cash on hand and estimated indebtedness of Clarient on the Closing Date, (ii) 15,000,000 shares of NeoGenomics ’common stock, and (iii) 14,666,667 shares of NeoGenomics’ Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) pursuant to the Stock Purchase Agreement.

The cash consideration paid as part of the purchase price was funded through the following:

 

The Company paid approximately $10.7 million using cash on hand

 

Approximately $9.5 million, net of transaction costs was funded using a revolving credit facility

 

Approximately $53.6 million, net of transaction costs was funded using a term loan

On December 21, 2015 shareholders approved and on December 28, 2015, NeoGenomics filed with the Secretary of State of the State of Nevada amendments to its Articles of Incorporation to increase the authorized number of shares of common stock from

8

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

100.0 million shares to 250.0 million shares and to increase the authorized number of shares of preferred stock from 10.0 million shares to 50.0 million shares in order to fund the common and preferred stock portion of the purchase price, among other things.  

The Company issued 15,000,000 shares of common stock as partial consideration for the acquisition of Clarient.  The common stock includes restrictions imposed on the holder in the Investor Board Rights, Lockup and Standstill Agreement.  We estimated the fair value of the common stock consideration using inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumption in the fair value determination was a 15 percent discount due to lack of marketability of the common stock as a result of the restrictions imposed on the holder.  The Acquisition Date fair value of common stock transferred is calculated below ($ in thousands, except share and per share amounts):  

The Acquisition Date fair value of common stock transferred is calculated below ($ in thousands, except share and per share amounts):

 

Common Stock Valuation

 

Amount

 

Shares of common stock issued as consideration

 

 

15,000,000

 

Stock price per share on closing date

 

$

8.04

 

Value of common stock issued as consideration

 

$

120,600

 

Issue discount due to lack of marketability

 

$

(18,090

)

Fair value of common stock at December 30, 2015

 

$

102,510

 

The Company issued 14,666,667 shares of Series A Preferred Stock as consideration for the acquisition of Clarient.  The rights of the Series A Preferred Stock are described in Note F. We estimated the fair value of the Series A Preferred Stock consideration using significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The fair value of the Series A Preferred Stock at the Acquisition Date was $73.2 million or $4.99 per share.  This fair value was further reduced by the intrinsic value assigned to the beneficial conversion feature to arrive at a carrying amount of $28.6 million.  

On a fully diluted basis, assuming full conversion of the Series A Preferred Stock, GE Medical would own approximately 32% of NeoGenomics.  In addition, pursuant to the Investor Board Rights, Lockup and Standstill Agreement, NeoGenomics has appointed a director designated by GE Medical to its Board of Directors.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date.  The Company is in the process of obtaining information to measure the assets acquired and liabilities assumed; thus, the provisional measurements of current assets, property and equipment, intangible assets, goodwill, current liabilities, net deferred tax liabilities and long-term liabilities are subject to change.  

The preliminary acquisition fair values below are presented as of December 30, 2015 (in thousands):

 

 

 

December 30, 2015

(As Initially Reported)

 

 

Measurement

Period

Adjustments

 

 

December 30, 2015

(As Adjusted)

 

Current assets, including cash and cash equivalents of $890

 

$

31,978

 

 

$

-

 

 

$

31,978

 

Property and equipment

 

 

19,241

 

 

 

-

 

 

 

19,241

 

Identifiable intangible assets – customer relationships

 

 

84,000

 

 

 

-

 

 

 

84,000

 

Goodwill

 

 

143,493

 

 

 

(242

)

 

 

143,251

 

Total assets acquired

 

 

278,712

 

 

 

(242

)

 

 

278,470

 

Current liabilities

 

 

(12,631

)

 

 

242

 

 

 

(12,389

)

Deferred tax liability

 

 

(17,904

)

 

 

-

 

 

 

(17,904

)

Long-term liabilities

 

 

(103

)

 

 

-

 

 

 

(103

)

Net assets acquired

 

$

248,074

 

 

$

-

 

 

$

248,074

 

 

Of the $84.0 million of acquired intangible assets, $81.0 million was provisionally assigned to customer relationships which are being amortized over fifteen years and $3.0 million was provisionally assigned to trade names which are being amortized over two years.  

9

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

For the three and nine months ending September 30, 2016, we recorded approximately $1.7 million and $5.2 million of amortization expense respectively.  

Goodwill arising from the acquisition of Clarient includes revenue synergies as a result of our existing customers and Clarient’s customers having access to each other’s testing menus and capabilities and also from the new product lines which Clarient adds to the Company’s product portfolio.  None of the goodwill is expected to be deductible for income tax purposes.  

The provisional fair value of accounts receivable acquired was approximately $27.6 million as of the Acquisition Date.

The Company recognized acquisition related transaction costs of approximately $4.7 million during the year ended December 31, 2015.  These costs include due diligence, legal, consulting and other transaction related expenses associated with the acquisition of Clarient. These expenses were included in general and administrative expenses in our consolidated statements of operations for the year ended December 31, 2015.  The Company also incurred debt issuance costs of $3.3 million which are recorded as reductions in the carrying amount of the related liabilities and are being amortized over the term of the loans.

 

The following unaudited pro forma information (in thousands), has been provided for illustrative purposes and is not necessarily indicative of results that would have occurred had the acquisition of Clarient been in effect since January 1, 2014, nor is it necessarily indicative of future results.

 

 

Three Months Ended

September 30, 2015

 

 

Nine Months Ended

September 30, 2015

 

Revenue

 

$

52,647

 

 

$

160,993

 

Net (loss) attributable to common stockholders

 

 

(5,845

)

 

 

(55,403

)

(Loss) per share:

 

 

 

 

 

 

 

 

Basic

 

 

(0.08

)

 

 

(0.73

)

Diluted

 

 

(0.08

)

 

 

(0.73

)

 

The unaudited pro forma consolidated results for the three and nine months ended September 30, 2014 have been prepared by adjusting our historical results to include the acquisition of Clarient as if it occurred on January 1, 2014. These unaudited pro forma consolidated historical results were then adjusted for the following:

 

 

Removal of transaction expenses from the year ended December 31, 2015 and record them in the year ended September 31, 2014.

 

Adjustments to reflect amortization and depreciation expense associated with the acquired assets, partially offset by the elimination of the amortization and depreciation expense associated with Clarient’s historical assets.

 

Removal of costs associated with MultiOmyxTM, assets not acquired in the transaction, and to record royalty fees due to GE for continued use of the MultiOmyxTM product through a licensing agreement.

 

Removal of general and administrative expenses related to a Lab Services Agreement with the Saudi Arabian National Guard Health Affairs, as GE Medical has retained this agreement.

 

Record interest expense under the Credit Facilities and amortization of financing costs classified as interest expense.

 

Removal of royalty costs associated with the use of the GE brand as NeoGenomics will discontinue the use of the GE brand.

 

Accrue for dividends on the Series A Preferred stock and to amortize a portion of the beneficial conversion feature.

As noted above, the unaudited pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined Company for the periods presented or that may be achieved by the combined Company in the future.

 

10

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Note D — Goodwill and Intangible Assets

The Company has recorded goodwill of $146.2 million as of September 30, 2016.  The changes in the carrying amount of goodwill for the nine month period ended September 30, 2016 and for the year ended December 31, 2015 are as follows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Balance as of January 1

 

$

146,421

 

 

$

2,929

 

Goodwill acquired during the period

 

 

-

 

 

 

143,492

 

Adjustment to preliminary value of goodwill (Note C)

 

 

(242

)

 

 

-

 

Balance at end of period

 

$

146,179

 

 

$

146,421

 

Intangible assets as of September 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

 

 

September 30, 2016

 

 

 

Amortization

Period

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Trade Name

 

24 months

 

$

3,000

 

 

$

1,133

 

 

$

1,867

 

Customer Relationships

 

156 months

 

 

82,930

 

 

 

4,409

 

 

 

78,521

 

Support Vector Machine (SVM) technology

 

108 months

 

 

500

 

 

 

255

 

 

 

245

 

Laboratory developed test (LDT) technology

 

164 months

 

 

1,482

 

 

 

497

 

 

 

985

 

Flow Cytometry and Cytogenetics technology

 

202 months

 

 

1,000

 

 

 

272

 

 

 

728

 

Total

 

 

 

$

88,912

 

 

$

6,566

 

 

$

82,346

 

 

 

 

 

 

December 31, 2015

 

 

 

Amortization

Period

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Trade Name

 

24 months

 

$

3,000

 

 

$

8

 

 

$

2,992

 

Customer Relationships

 

156 months

 

 

82,930

 

 

 

247

 

 

 

82,683

 

Support Vector Machine (SVM) technology

 

108 months

 

 

500

 

 

 

213

 

 

 

287

 

Laboratory developed test (LDT) technology

 

164 months

 

 

1,482

 

 

 

416

 

 

 

1,066

 

Flow Cytometry and Cytogenetics technology

 

202 months

 

 

1,000

 

 

 

228

 

 

 

772

 

Total

 

 

 

$

88,912

 

 

$

1,112

 

 

$

87,800

 

 

We recorded approximately $1.8 million and $93,000 in straight-line amortization expense of intangible assets for the three months ended September 30, 2016 and 2015, respectively.  We recorded approximately $5.5 million and $283,000 in straight-line amortization expense of intangibles for the nine months ended September 30, 2016 and 2015, respectively.  The Company recorded amortization expense from customer relationships and trade names as a general and administrative expense.  We will continue to record the amortization of the Support Vector Machine (SVM) technology, the LDT technology and the Flow Cytometry and Cytogenetics technology intangible assets as a research and development expense until such time that we have products, services or cost savings directly attributable to these intangible assets that would require them to be recorded in cost of goods sold.

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of September 30, 2016 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2016

 

$

1,818

 

2017

 

 

7,264

 

2018

 

 

5,771

 

2019

 

 

5,771

 

2020

 

 

5,771

 

2021

 

 

5,726

 

Thereafter

 

 

50,225

 

Total

 

$

82,346

 

11

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

Note E — Debt

 

Term Loan

On December 30, 2015, the Company entered into a Term Loan and Guaranty Agreement (the “Term Loan”) for which AB Private Credit Investors LLC acts as the administrative agent and collateral agent.  The Term Loan provides for $55.0 million of borrowings.  On September 30, 2016, the Company had current outstanding borrowings of $550,000 and long-term outstanding borrowings of $52.1 million, net of unamortized debt issuance costs of $2.0 million.

The fair value of the Term Loan is estimated based on a valuation performed by an external consultant.  The inputs used in the fair value measurement include the present value of the term loan, current yield data using comparable companies and recently issued bonds with similar terms.  Consideration was also given to the potential for adjustments in the interest rate, mandatory and voluntary repayments and the events of default using a Monte Carlo simulation. These measurements are categorized as Level 3 inputs.  

 

The following table presents the carrying values and fair values of the Company’s Term Loan (in thousands):

 

 

 

September 30, 2016

 

 

December 31, 2015

 

 

 

Carrying Value

 

 

Fair Value

 

 

Carrying Value

 

 

Fair Value (1)

 

Term Loan

 

$

54,587

 

 

$

56,035

 

 

$

55,022

 

 

$

55,022

 

Total

 

$

54,587

 

 

$

56,035

 

 

$

55,022

 

 

$

55,022

 

 

(1) The Company entered in to the Term Loan on December 30, 2015, due to the short period of time the loan was outstanding carrying value approximates fair value at December 31, 2015.

The interest rate for borrowings under the Term Loan will be, at the Company’s election, (i) (A) a base rate equal to the greatest of 4%, the prime rate, the federal funds rate plus 0.5% and the one month LIBOR rate plus 1%, plus (B) an initial applicable margin of 6% , or (ii) the (A) LIBOR rate for interest periods from one to twelve months, plus (B) an initial applicable margin of 7%, with a minimum LIBOR of 1.00%. Interest on borrowings under the facility will be reduced to Base Rate plus 5.5% or LIBOR plus 6.50% upon the later of (i) NeoGenomics’ achieving maximum total leverage of less than 2.0 to 1.0 and (ii) January 1, 2017.

The Company and all of its present and future subsidiaries (other than NeoGenomics Laboratories) are guarantors under the Term Loan. The Term Loan contains the following financial covenants: (i) maintenance of a maximum total leverage ratio of 4.0 to 1.0 (stepping down over time to 3.25 to 1.0), and (ii) maintenance of a minimum consolidated fixed charge coverage ratio of 1.10 to 1.0 (stepping up over time to 1.25 to 1.0).   These covenants were effective beginning with the quarter ended March 31, 2016.  The Company was in compliance with all such financial covenants as of September 30, 2016.

The Term Loan also contains various affirmative and negative covenants, such as the delivery of financial statements, tax authority compliance, maintenance of property, limitations on additional debt, restriction of dividends and other standard clauses.

The Term Loan has a maturity of five years. In addition, the Term Loan provides for annual amortization payments in an amount equal to 1.0% of the original principal amount of the term loan, paid in quarterly installments, and mandatory prepayments with (i) proceeds of certain assets sales and recovery events, (ii) proceeds of certain debt issuances, (iii) proceeds of certain extraordinary receipts, as defined, (iv) a portion of certain tax refunds and insurance proceeds, and (v) a portion of excess cash flow as defined.

12

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

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%.

Maturities of Long-Term Debt

Maturities of long-term debt at September 30, 2016 are summarized as follows (in thousands):

 

Term Loan

 

 

Auto Loans

 

 

Total Long Term Debt

 

Remainder of 2016

$

137

 

 

$

24

 

 

$

161

 

2017

 

550

 

 

 

92

 

 

 

642

 

2018

 

550

 

 

 

69

 

 

 

619

 

2019

 

550

 

 

 

36

 

 

 

586

 

2020

 

52,800

 

 

 

5

 

 

 

52,805

 

 

 

54,587

 

 

 

226

 

 

 

54,813

 

Less: Current portion of long-term debt

 

(550

)

 

 

(96

)

 

 

(646

)

Less:  Debt issuance costs, net

 

(1,973

)

 

 

-

 

 

 

(1,973

)

Long-term debt, net

$

52,064

 

 

$

130

 

 

$

52,194

 

 

 

Short-Term Debt - Revolving Credit Facility

On December 30, 2015, the Company entered into a Credit Agreement (the “Revolving Credit Facility”) for which Wells Fargo Bank, N.A., acts as the administrative agent.  The Revolving Credit Facility provides for up to $25.0 million of revolving loans and a letter of credit subfacility for $1.0 million. Borrowings under the revolver and the letter of credit subfacility are limited to a borrowing base comprised of 85% of the expected net value of certain billed and unbilled accounts receivable less reserve amounts established by Wells Fargo Bank, N.A.

The carrying amount of the Revolving Credit Facility approximates fair value due to the short maturity and the variable market rates of interest that change with current prime and no change in counterparty credit risk and were classified as Level 2 of the fair value hierarchy.

The interest rate for borrowings under the Revolving Credit Facility is, at the Company’s election, (i) (A) a base rate equal to the greatest of the prime rate, the federal funds rate plus 0.5% and the three month LIBOR rate plus 1%, plus (B) an applicable margin ranging from 2.0% to 2.5%, or (ii) the (A) LIBOR rate plus (B) an applicable margin ranging from 3.0% to 3.5%. NeoGenomics will also pay 0.25% per year on any unused portion of the revolver.

NeoGenomics is a guarantor under the Revolving Credit Facility.  All of NeoGenomics’ present and future subsidiaries (including NeoGenomics Laboratories) are borrowers under the Revolving Credit Facility. The Revolving Credit Facility contains the following financial covenants: (i) maintenance of a maximum total leverage ratio (funded indebtedness (including the outstanding amounts under the Credit Facilities), plus capitalized lease obligations, divided by EBITDA) of not more than 4.0 to 1.0 (stepping down over time to 3.25 to 1.0), (ii) maintenance of a minimum consolidated fixed charge coverage ratio (EBITDA less capital expenditures not financed with debt or certain equity), divided by the sum of cash interest expense, scheduled payments and mandatory prepayments of principal on indebtedness, taxes and restricted payments) of at least 1.1 to 1.0 (stepping up over time to 1.25 to 1.0) and (iii) maintenance of a minimum cash velocity equal to or greater than 80%.  These covenants were effective beginning with the quarter ended March 31, 2016.  The Company was in compliance with all such financial covenants as of September 30, 2016.

The Revolving Credit Facility also contains various affirmative and negative covenants, such as the delivery of financial statements, tax authority compliance, maintenance of property, limitations on additional debt, restriction of dividends and other standard clauses.  The Company was in compliance with all such financial covenants as of September 30, 2016.

13

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

The Revolving Credit Facility has a maturity of five years, maturing on December 30, 2020. In addition, the Revolving Credit Facility provides for mandatory prepayment in the event that the borrowing base is less than the aggregate amount of the advances outstanding under the revolver and any letters of credit, which prepayment will be equal to the amount necessary to remedy the over-advance.

At September 30, 2016, the Company had no outstanding borrowings under the Revolving Credit Facility, nor under the letter of credit subfacility.  The related debt issuance costs of approximately $1.1 million have been reclassified into other current assets at September 30, 2016.  We will continue to show debt issuance costs as a reduction in the related liability to the extent that there is an outstanding balance on the Revolving Credit Facility in the future.  As of September 30, 2016, there is approximately $25 million in available credit under the Revolving Credit Facility to be drawn upon as needed.  

 

 

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, see Note C.  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 has a liquidation value of $100 million if the shares are redeemed prior to December 29, 2016.  The carrying amount of the Series A Preferred Stock at September 30, 2016 was $45.3 million as compared to the carrying amount at December 31, 2015 of $28.6 million.  The increase in the carrying amount is from the accrual of deemed dividends of approximately $5.5 million and the accretion of the beneficial conversion feature of approximately $11.2 million during the nine months ending September 30, 2016, of which both amounts 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 (listed below) of the instrument and their effect on the value to the Company.

 

Beneficial Conversion Feature

 

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 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 amounts recognized for the three and nine months ended September 30, 2016 was approximately $3.7 million and $11.2 million respectively.

 

Classification  

 

The Company classified the Series A Preferred Stock as temporary equity on the consolidated balance sheets due to certain change in control events that are outside the Company’s control, including deemed liquidation events described in the Series A Certificate of Designation.

 

Note G — Revenue Recognition and Contractual Adjustments

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.

14

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent, and revenues are recognized once the diagnostic services have been performed, and the results have been delivered to the ordering physician.  These diagnostic services are billed to various payers, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals.  The Company reports revenues from contracted payers, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules.  The Company reports revenues from non-contracted payers, including certain insurance companies and individuals, based on the amount expected to be collected.  The difference between the amount billed and the amount estimated to be collected from non-contracted payers is recorded as an allowance to arrive at the reported net revenues.  The expected revenues from non-contracted payers are based on the historical collection experience of each payer or payer group, as appropriate.  The Company records revenues from patient pay tests net of a large discount and as a result recognizes minimal revenue on those tests.  The Company regularly reviews its historical collection experience for non-contracted payers and adjusts its expected revenues for current and subsequent periods accordingly.

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 Ending September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Gross service revenues

 

$

114,902

 

 

$

57,192

 

 

$

376,857

 

 

$

167,525

 

Total contractual adjustments and discounts

 

 

(54,141

)

 

 

(32,066

)

 

 

(193,264

)

 

 

(95,002

)

Net revenues

 

$

60,761

 

 

$

25,126

 

 

$

183,593

 

 

$

72,523

 

 

Note H — Equity

A summary of the stock option activity under the Company’s plans for the nine months ended September 30, 2016 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Options outstanding at December 31, 2015

 

 

5,326,505

 

 

$

3.07

 

Options granted

 

 

2,542,527

 

 

 

7.10

 

Less:

 

 

 

 

 

 

 

 

Options exercised

 

 

2,395,015

 

 

 

1.61

 

Options canceled or expired

 

 

258,155

 

 

 

3.32

 

Options outstanding at September 30, 2016

 

 

5,215,862

 

 

 

5.67

 

Exercisable at September 30, 2016

 

 

1,162,128

 

 

 

3.74

 

Of the 5,215,862 outstanding options at September 30, 2016, 1,005,000 were variable accounted stock options issued to non-employees of the Company of which 117,500 options were vested and 887,500 options were unvested as of September 30, 2016.

The fair value of each stock option award granted during the nine months ended September 30, 2016 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:

 

 

Nine Months Ended

September  30, 2016

 

Expected term (in years)

 

1.0 - 4.5

 

Risk-free interest rate (%)

 

 

1.1%

 

Expected volatility (%)

 

46.5% - 56.7%

 

Dividend yield (%)

 

 

0.0%

 

Weighted average fair value/share at grant date

 

$

2.56

 

 

 As of September 30, 2016, there was approximately $8.2 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.5 years.  This includes $2.2 million in unrecognized expense related to the 887,500 shares of unvested variable accounted for stock options subject to fair value adjustment at the end of each reporting period based on changes in the Company’s stock price.

15

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Stock based compensation expense recognized for stock options and restricted stock and included in the consolidated statements of operations was allocated as follows (in thousands): 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development expense

 

$

187

 

 

$

161

 

 

$

550

 

 

$

339

 

General and administrative expense

 

 

1,499

 

 

 

667

 

 

 

3,484

 

 

 

1,395

 

Total stock based compensation expense

 

$

1,686

 

 

$

828

 

 

$

4,034

 

 

$

1,734

 

 

Stock based compensation recorded in research and development relates to unvested options and warrants granted to a non-employee.   

 

Common Stock Warrants

A summary of the warrant activity for the nine months ended September 30, 2016 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Warrants outstanding at December 31, 2015

 

 

650,000

 

 

$

1.48

 

Warrants granted

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

Warrants exercised

 

 

(200,000

)

 

 

1.50

 

Warrants canceled or expired

 

 

 

 

 

 

Warrants outstanding at September 30, 2016

 

 

450,000

 

 

 

1.50

 

Exercisable at September 30, 2016

 

 

450,000

 

 

 

1.50

 

 

During the three months ended September 30, 2016 and 2015, we recorded $0 and $58,000 of warrant compensation expense, respectively.  During the nine months ended September 30, 2016, we recorded warrant compensation gain of $10,075 and during the nine months ended September 30, 2015, we recorded $173,000 of warrant compensation expense, respectively.  Warrant expense for the periods presented is recorded in research and development as the expense related to unvested performance based warrants granted to a non-employee. As of September 30, 2016 all warrants are fully vested.

 

Note I — Commitments

During the three and nine months ended September 30, 2016, the Company entered into leases for approximately $2.4 million and $4.8 million respectively in laboratory and computer equipment. These leases have 36 month terms, a $1.00 buyout option at the end of the terms and interest rates of 1.4% and 13.7%.  The Company accounted for these lease agreements as capital leases.

 

Note J — Other Related Party Transaction

During each of the three month periods ended September 30, 2016 and 2015, Steven C. Jones, an officer, director and shareholder of the Company, earned approximately $66,000 for consulting work performed in connection with his duties as Executive Vice President of Finance.  During each of the nine months periods ended September 30, 2016 and 2015, Mr. Jones, earned approximately $197,000 for consulting work performed in connection with his duties as Executive Vice President of Finance.  Mr. Jones also received approximately $79,000 and $78,000 during the nine months ended September 30, 2016 and 2015, respectively as payment of his annual bonus compensation for the previous fiscal years.  

On April 20, 2016, the Company granted Mr. Jones 100,000 non-qualified stock options.  The options were granted at a price of $7.15 per share and had a weighted average fair market value of $3.06 per option.  The options vest ratably over the next three years.  We use variable accounting for these options and accordingly they are subject to fair value adjustment at the end of each reporting period based on changes in the Company’s stock price.  

 

END OF FINANCIAL STATEMENTS

 

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NEOGENOMICS, INC.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NeoGenomics, Inc., a Nevada corporation (referred to individually as the “Parent Company” or collectively with its subsidiaries as “NeoGenomics”, “we”, “us”, “our” or the “Company” in this Form 10-K) is the registrant for SEC reporting purposes. Our common stock is listed on the NASDAQ Capital Market under the symbol “NEO”.

Introduction

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements, and the notes thereto included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the introductory note to this quarterly report on Form 10-Q under the caption “Forward-Looking Statements”, which information is incorporated herein by reference.

Overview

We operate a network of cancer-focused genetic testing laboratories in the United States.  Our mission is to improve patient care through exceptional genetic and molecular testing services. Our vision is to become the World’s leading cancer testing and information company by delivering uncompromising quality, exceptional service and innovative solutions.

On December 30, 2015, we acquired Clarient, and its wholly owned subsidiary Clarient Diagnostic Services, Inc. from GE Medical, a subsidiary of General Electric Company, for approximately $249.5 million, consisting of (i) cash consideration of approximately $74.0 million, which included an approximately $6.7 million estimated working capital adjustment and adjustments for estimated cash on hand and estimated indebtedness of Clarient on the closing date, (ii) 15,000,000 shares of our common stock, and (iii) 14,666,667 shares of our Series A Preferred Stock (the “Acquisition”).  For additional information and risks associated with the acquisition, see "Risk Factors," contained in our Quarterly Report on Form 10-Q for the period ended June 30, 2016; as filed with the SEC on August 5, 2016.  

We believe the acquisition will allow us to broaden our offering of innovative cancer diagnostic tests to hospitals and physicians across the United States and to accelerate growth in the worldwide market for pharmaceutical clinical trials and research. The following discussion of our business includes the effects of the acquisition of Clarient.

As of September 30, 2016, the Company has laboratory locations in Ft. Myers and Tampa, Florida; Aliso Viejo, Fresno, Irvine, and West Sacramento, California; Houston, Texas and Nashville, Tennessee, and currently offers the following types of genetic and molecular testing services:

 

a)

Cytogenetics - the study of normal and abnormal chromosomes and their relationship to disease. It involves looking at the chromosome structure to identify changes from patterns seen in normal chromosomes. Cytogenetic studies are often utilized to answer diagnostic, prognostic and predictive questions in the treatment of hematological malignancies.

 

b)

Fluorescence In-Situ Hybridization (“FISH”) - a branch of cancer genetics that focuses on detecting and locating the presence or absence of specific DNA sequences and genes on chromosomes. FISH helps bridge abnormality detection between the chromosomal and DNA sequence levels. The technique uses fluorescent probes that bind to only those parts of the chromosome with which they show a high degree of sequence similarity. Fluorescence microscopy is used to visualize the fluorescent probes bound to the chromosomes. FISH can be used to help identify a number of gene alternations, such as amplification, deletions, and translocations.

 

c)

Flow cytometry - a rapid way to measure the characteristics of cell populations. Cells from peripheral blood, bone marrow aspirate, lymph nodes, and other areas are labeled with selective fluorescent antibodies and analyzed as they flow in a fluid stream through a beam of light. The properties measured in these antibodies include the relative size, relative granularity or internal complexity, and relative fluorescence intensity. These fluorescent antibodies bind to specific cell surface antigens and are used to identify malignant cell populations. Flow cytometry is typically performed in diagnosing a wide variety of leukemia and lymphoma neoplasms. Flow cytometry is also used to monitor patients through therapy to determine whether the disease burden is increasing or decreasing, otherwise known as minimal residual disease monitoring.

 

d)

Immunohistochemistry (“IHC”) and Digital Imaging – Refers to the process of localizing proteins in cells of a tissue section and relies on the principle of antibodies binding specifically to antigens in biological tissues. IHC is widely used

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

in the diagnosis of abnormal cells such as those found in cancerous tumors. Specific surface cytoplasmic or nuclear markers are characteristic of cellular events such as proliferation or cell death (apoptosis). IHC is also widely used to understand the distribution and localization of differentially expressed proteins.  Digital imaging allows clients to se