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 June 30, 2017

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

Emerging Growth Company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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 August 3, 2017, the registrant had 79,388,014 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, 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 Annual Report on Form 10-K as filed with the SEC on March 14, 2017.  

 

Forward looking statements 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 developments in the United States including downward pressure on health care reimbursement;

Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”);

Food and Drug Administration 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 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

 

June 30, 2017

 

 

December 31, 2016

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

10,932

 

 

$

12,525

 

Accounts receivable (net of allowance for doubtful accounts of $11,629 and

   $13,699, respectively)

 

 

61,750

 

 

 

55,512

 

Inventories

 

 

5,457

 

 

 

6,253

 

Other current assets

 

 

5,218

 

 

 

4,535

 

Total current assets

 

 

83,357

 

 

 

78,825

 

Property and equipment (net of accumulated depreciation of $34,604 and

$27,102, respectively)

 

 

35,588

 

 

 

34,036

 

Intangible assets, net

 

 

73,614

 

 

 

77,064

 

Goodwill

 

 

147,019

 

 

 

147,019

 

Other assets

 

 

302

 

 

 

174

 

Total assets

 

$

339,880

 

 

$

337,118

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,594

 

 

$

16,782

 

Accrued compensation

 

 

7,782

 

 

 

8,351

 

Accrued expenses and other liabilities

 

 

3,186

 

 

 

4,247

 

Short-term portion of capital leases

 

 

4,812

 

 

 

4,891

 

Short-term portion of loans

 

 

3,830

 

 

 

3,842

 

Total current liabilities

 

 

35,204

 

 

 

38,113

 

Long-term liabilities

 

 

 

 

 

 

 

 

Long-term portion of capital leases

 

 

5,307

 

 

 

5,378

 

Long-term portion of loans, net

 

 

68,454

 

 

 

70,259

 

Revolving credit facility, net

 

 

26,906

 

 

 

21,799

 

Deferred income tax liability, net

 

 

7,435

 

 

 

14,973

 

Total long-term liabilities

 

 

108,102

 

 

 

112,409

 

Total liabilities

 

 

143,306

 

 

 

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)

 

 

27,676

 

 

 

22,873

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, (250,000,000 shares authorized; 79,340,374 and 78,571,158 shares issued and outstanding, respectively)

 

 

79

 

 

 

79

 

Additional paid-in capital

 

 

220,622

 

 

 

216,104

 

Accumulated deficit

 

 

(51,803

)

 

 

(52,460

)

Total stockholders’ equity

 

 

168,898

 

 

 

163,723

 

Total liabilities, redeemable convertible preferred stock and stockholders' equity

 

$

339,880

 

 

$

337,118

 

 

See notes to unaudited consolidated financial statements

4

 


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

NET REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical testing

 

$

59,791

 

 

$

56,316

 

 

$

116,482

 

 

$

110,936

 

Pharma Services

 

 

6,299

 

 

 

6,813

 

 

 

11,285

 

 

 

11,896

 

Total Revenue

 

 

66,090

 

 

 

63,129

 

 

 

127,767

 

 

 

122,832

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE

 

 

34,912

 

 

 

34,524

 

 

 

69,393

 

 

 

67,055

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

 

31,178

 

 

 

28,605

 

 

 

58,374

 

 

 

55,777

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

22,675

 

 

 

18,779

 

 

 

43,476

 

 

 

36,785

 

Research and development

 

 

947

 

 

 

1,306

 

 

 

1,809

 

 

 

2,752

 

Sales and marketing

 

 

6,242

 

 

 

6,327

 

 

 

11,890

 

 

 

12,127

 

Total operating expenses

 

 

29,864

 

 

 

26,412

 

 

 

57,175

 

 

 

51,664

 

INCOME FROM OPERATIONS

 

 

1,314

 

 

 

2,193

 

 

 

1,199

 

 

 

4,113

 

Interest expense, net

 

 

1,411

 

 

 

1,448

 

 

 

2,775

 

 

 

3,040

 

Income (loss) before taxes

 

 

(97

)

 

 

745

 

 

 

(1,576

)

 

 

1,073

 

Income tax (benefit) expense

 

 

(54

)

 

 

332

 

 

 

(879

)

 

 

505

 

NET INCOME (LOSS)

 

 

(43

)

 

 

413

 

 

 

(697

)

 

 

568

 

Deemed dividends on preferred stock

 

 

929

 

 

 

1,840

 

 

 

1,822

 

 

 

3,680

 

Amortization of preferred stock beneficial conversion feature

 

 

1,710

 

 

 

3,727

 

 

 

3,383

 

 

 

7,453

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(2,682

)

 

$

(5,154

)

 

$

(5,902

)

 

$

(10,565

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.03

)

 

$

(0.07

)

 

$

(0.07

)

 

$

(0.14

)

Diluted

 

$

(0.03

)

 

$

(0.07

)

 

$

(0.07

)

 

$

(0.14

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

79,413

 

 

 

77,448

 

 

 

79,075

 

 

 

76,758

 

Diluted

 

 

79,413

 

 

 

77,448

 

 

 

79,075

 

 

 

76,758

 

 

 

See notes to unaudited consolidated financial statements.

 

 

5

 


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

2017

 

 

2016

 

Net income (loss)

 

$

(697

)

 

$

568

 

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

operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

7,906

 

 

 

7,329

 

Amortization of intangibles

 

 

3,450

 

 

 

3,636

 

Amortization of debt issue costs

 

 

219

 

 

 

358

 

Stock based compensation – options, restricted stock and warrants

 

 

3,052

 

 

 

2,337

 

Provision for bad debts

 

 

8,027

 

 

 

5,434

 

Changes in assets and liabilities, net:

 

 

 

 

 

 

 

 

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

 

 

(14,265

)

 

 

(10,004

)

(Increase) decrease in inventories

 

 

796

 

 

 

(437

)

(Increase) in prepaid expenses

 

 

(720

)

 

 

(602

)

(Increase) in other current assets

 

 

(129

)

 

 

 

Increase (decrease) in accounts payable and other liabilities

 

 

(2,797

)

 

 

3,476

 

Net cash provided by operating activities

 

 

4,842

 

 

 

12,095

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(7,864

)

 

 

(3,425

)

Net cash used in investing activities

 

 

(7,864

)

 

 

(3,425

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Advances from revolving credit facility, net

 

 

4,997

 

 

 

 

Repayment to revolving credit facility

 

 

 

 

 

(10,044

)

Repayment of capital lease obligations/loans

 

 

(2,754

)

 

 

(2,611

)

Repayment on term loan, net

 

 

(1,878

)

 

 

 

Proceeds from the exercise of options, warrants and ESPP shares, net of transaction expenses

 

 

1,176

 

 

 

2,351

 

Payments of equity issue costs

 

 

(112

)

 

 

 

Net cash provided by (used in) financing activities

 

 

1,429

 

 

 

(10,304

)

Net change in cash and cash equivalents

 

 

(1,593

)

 

 

(1,634

)

Cash and cash equivalent, beginning of period

 

 

12,525

 

 

 

23,420

 

Cash and cash equivalents, end of period

 

$

10,932

 

 

$

21,786

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,573

 

 

$

2,691

 

Income taxes paid

 

$

102

 

 

$

222

 

Supplemental disclosure of non-cash investing and financing information:

 

 

 

 

 

 

 

 

Equipment acquired under capital lease/loan obligations

 

$

2,557

 

 

$

2,585

 

Deemed dividends on preferred stock

 

$

1,822

 

 

$

3,680

 

Amortization of preferred stock beneficial conversion feature

 

$

3,383

 

 

$

7,453

 

 

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.  On August 1, 2017, the Company completed the sale of its equity interests in Path Logic, see Note K – Subsequent Events.

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, 2016, filed with the SEC on March 14, 2017.  

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, and researchers, which represents 100% of the Company’s consolidated assets, net revenues and net income (loss) for the three and six months ended June 30, 2017 and 2016.  We have evaluated our segments based on how the Chief Operating Decision Maker (“CODM”), our Chief Executive Officer, reviews performance and makes decisions in managing the Company.  At June 30, 2017, 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.  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.

 

Note B – Recently Adopted and Issued Accounting Guidance

 

Adopted

 

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.  

 

7

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

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 six months ended June 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 six months ended June 30, 2017.

 

The Company has elected to recognize forfeitures in compensation cost as they occur.

 

Issued

 

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 this guidance to have a material effect on its consolidated financial statements.

 

In January 2017, the FASB issued 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.  This update is effective for periods beginning after December 15, 2017.  Early adoption is permitted.  The Company does not expect the adoption of this guidance 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 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 adoption of this ASU will result in an increase on the balance sheet for lease liabilities and right to use assets.  The Company is currently evaluating the quantitative 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 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 expects to adopt this ASU in the first quarter of 2018 using a full retrospective method of adoption.  We anticipate enhanced financial statement disclosures surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.  In addition, we expect the standard to impact gross profit as a portion of our bad debt expense will be considered an implicit price concession and will be reported as a reduction in net

8

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

revenue, versus part of selling, general and administrative expenses.  The Company is currently performing a detailed contract review in order to determine the quantitative impact of this standard.

 

Note C – Goodwill and Intangible Assets

Goodwill as of June 30, 2017 and December 31, 2016 was $147.0 million.  There were no changes in the carrying amount of goodwill during these periods.

 

Intangible assets as of June 30, 2017 and December 31, 2016 consisted of the following (in thousands):

 

 

 

 

 

June 30, 2017

 

 

 

Amortization

Period

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Trade Name

 

24 months

 

$

3,000

 

 

$

2,258

 

 

$

742

 

Customer Relationships

 

156 - 180 months

 

 

81,000

 

 

 

8,128

 

 

 

72,872

 

Total

 

 

 

$

84,000

 

 

$

10,386

 

 

$

73,614

 

 

 

 

 

 

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

 

 

We recorded approximately $1.7 and $1.6 million in straight-line amortization expense of intangible assets for the three month period ended June 30, 2017 and 2016, respectively.  We recorded approximately $3.5 million and $3.6 million in straight-line amortization expense of intangible assets for the six month period ended June 30, 2017 and 2016, respectively. The Company recorded amortization expense from customer relationships and trade names as a general and administrative expense.  

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of June 30, 2017 is as follows (in thousands):

 

Remainder of 2017

 

$

3,442

 

2018

 

 

5,400

 

2019

 

 

5,400

 

2020

 

 

5,400

 

2021

 

 

5,400

 

Thereafter

 

 

48,572

 

Total

 

$

73,614

 

 

Note D – Debt

 

The following table summarizes the long term debt at June 30, 2017 and December 31, 2016 (in thousands):

 

 

June 30, 2017

 

 

December 31, 2016

 

Term Loan Facility

 

$

73,125

 

 

$

75,000

 

Revolving Credit Facility

 

 

27,900

 

 

 

22,900

 

Auto Loans

 

 

154

 

 

 

202

 

Capital leases

 

 

10,119

 

 

 

10,269

 

Total Debt

 

 

111,298

 

 

 

108,371

 

Less:  Debt issuance costs

 

 

(1,989

)

 

 

(2,202

)

Less:  Current portion of long-term debt

 

 

(8,642

)

 

 

(8,733

)

Total Long-Term Debt, net

 

$

100,667

 

 

$

97,436

 

9

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

The carrying value of the Company’s long-term capital lease obligations and term debt approximates its fair value based on the current market conditions for similar instruments. 

 

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 $75.0 million term loan facility (the “Term Loan Facility”).  The Credit Agreement also provides incremental facility capacity of $50 million, subject to certain conditions.  On June 30, 2017 and December 31, 2016, the Company had current outstanding borrowings under the Term Loan of approximately $3.8 million and long-term outstanding borrowings of approximately $68.4 million and $70.1 million, net of unamortized debt issuance costs of $994,000 and $1.1 million, respectively.  The debt issuance costs were recorded as a reduction in the carrying amount of the related liability and are being amortized over the life of the loan.

The Term Loan 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 LIBOR loans and 1.25% to 2.50% for base rate loans, in each case based on NeoGenomics Laboratories’ consolidated leverage ratio (as defined in the Credit Agreement). Interest on borrowings under the Revolving Credit Facility is payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of Adjusted LIBOR loans.  The Company entered into an interest rate swap agreement to hedge against changes in the variable rate of a portion of this debt.  See Note E-Derivative Instruments and Hedging Activities for more information on this instrument.

 

The Term Loan Facility and amounts borrowed under the Revolving Credit Facility are secured on a first priority basis by a security interest in substantially all of the tangible and intangible assets of NeoGenomics Laboratories and the Guarantors.  The Term Loan Facility contains various affirmative and negative covenants including ability to incur liens and encumbrances; make certain restricted payments, including paying dividends on its equity securities or payments to redeem, repurchase or retire its equity securities; enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it conducts.  In addition, the Company must meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter commencing with the quarter ending March 31, 2017.  The Company was in compliance with all required covenants as of June 30, 2017.

 

The Term Loan Facility has a maturity date of December 21, 2021.  The Credit Agreement requires NeoGenomics Laboratories to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt, (iii) beginning with the fiscal year ending December 31, 2017, 50% of excess cash flow (as defined), subject to a step down to 0% of excess cash flow if NeoGenomics Laboratories’ consolidated leverage ratio is no greater than 2.75:1.0 and (iv) 100% of net cash proceeds from issuances of permitted equity securities by NeoGenomics Laboratories made in order to cure a failure to comply with the financial covenants. NeoGenomics Laboratories is permitted to voluntarily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility at any time without penalty.

Auto 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 5.64% at June 30, 2017. Most of these

10

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

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 June 30, 2017, and December 31, 2016, the Company had outstanding borrowings of approximately $26.9 million and $21.8 million, net of unamortized debt issuance costs of $995,000 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), subject to a step down to 0% of excess cash flow if NeoGenomics Laboratories’ consolidated leverage ratio is no greater than 2.75:1.0 and (iv) 100% of net cash proceeds from issuances of permitted equity securities by NeoGenomics Laboratories made in order to cure a failure to comply with the financial covenants. NeoGenomics Laboratories is permitted to voluntarily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility at any time without penalty, subject to customary “breakage” costs with respect to prepayments of Adjusted LIBOR rate loans made on a day other than the last day of any applicable interest period.

Maturities of Long-Term Debt

Maturities of long-term debt at June 30, 2017 are summarized as follows (in thousands):

 

Term Loan and Revolving Credit Facility

 

 

Capital Lease Obligations

 

 

Auto Loans

 

 

Total Long-Term Debt

 

Remainder of 2017

$

1,875

 

 

$

2,836

 

 

$

45

 

 

$

4,756

 

2018

 

3,750

 

 

 

4,533

 

 

 

69

 

 

 

8,352

 

2019

 

5,625

 

 

 

2,968

 

 

 

35

 

 

 

8,628

 

2020

 

5,625

 

 

 

454

 

 

 

5

 

 

 

6,084

 

2021

 

84,150

 

 

 

-

 

 

 

-

 

 

 

84,150

 

 

 

101,025

 

 

 

10,791

 

 

 

154

 

 

 

111,970

 

Less: Interest on capital leases

 

-

 

 

 

(672

)

 

 

-

 

 

 

(672

)

 

 

101,025

 

 

 

10,119

 

 

 

154

 

 

 

111,298

 

Less:  Current portion of long-term debt

 

(3,750

)

 

 

(4,812

)

 

 

(80

)

 

 

(8,642

)

Less:  Debt issuance costs

 

(1,989

)

 

 

-

 

 

 

-

 

 

 

(1,989

)

Long-term debt, net

$

95,286

 

 

$

5,307

 

 

$

74

 

 

$

100,667

 

 

11

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

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 June 30, 2017 and December 31, 2016, the total notional amount of the Company’s interest rate swaps were $50 million.

 

The fair value of the interest rate swap will be included in other long term assets or liabilities, when applicable.  As of June 30, 2017 and December 31, 2016, the fair value of the interest rate swap was not considered to be significant due to the change in LIBOR over that time period outstanding, therefore, no amount is included on the balance sheet for this instrument.  As the specific terms and notional amounts of the derivative financial instrument match those of the fixed-rate debt being hedged, the derivative instruments are assumed to be perfectly effective hedges and accordingly, there is no impact to the Company's consolidated statements of operations. Gains and losses on this interest rate swap agreement will be recorded in accumulated other comprehensive income and will be reclassified to interest expense in the period during which the hedged transaction affects earnings.  At June 30, 2017 and December 31, 2016, there was no impact to accumulated other comprehensive income (AOCI) as it was determined that there was not a significant change to record.  The fair value of this instrument will be evaluated on a quarterly basis and adjusted as necessary.    

 

 

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 June 30, 2017, 6,600,000 shares of Series A Preferred Stock were outstanding.  

 

The carrying amount of the Series A Preferred Stock at June 30, 2017 was $27.7 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 $1.8 million, the accretion of the beneficial conversion feature of approximately $3.4 million during the six months ending June 30, 2017 and the additional BCF discounts for payment-in-kind shares accrued during the six months ending June 30, 2017 of $0.4 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 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.  

 

 

12

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

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 six months ended June 30, 2017 was approximately $1.7 million and $3.4 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 and June 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 six months ended June 30, 2017 was approximately $201,240 and $402,480, respectively.  

 

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.

 

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. The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent, and revenues are recognized once the diagnostic services have been performed, and the results have been delivered to the ordering physician.  These diagnostic services are billed to various payers, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals.  The Company reports revenues from contracted payers, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules.  The Company reports revenues from non-contracted payers, including certain insurance companies and individuals, based on the amount expected to be collected.  The difference between the amount billed and the amount estimated to be collected from non-contracted payers is recorded as an allowance to arrive at the reported net revenues.  The expected revenues from non-contracted payers are based on the historical collection experience of each payer or payer group, as appropriate.  The Company records revenues from patient pay tests net of a large discount and as a result recognizes minimal revenue on those tests.  The Company regularly reviews its historical collection experience for non-contracted payers and adjusts its expected revenues for current and subsequent periods accordingly.  On January 1, 2017, we had a significant reduction in our patient fee schedule that primarily impacts the amount billed to uninsured patients.

The table below shows the adjustments made to gross service revenues to arrive at net revenues (in thousands), the amount reported on our statements of operations.

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Gross service revenues

 

$

93,862

 

 

$

129,235

 

 

$

177,800

 

 

$

261,955

 

Total contractual adjustments and discounts

 

 

(27,772

)

 

 

(66,106

)

 

 

(50,033

)

 

 

(139,123

)

Net revenues

 

$

66,090

 

 

$

63,129

 

 

$

127,767

 

 

$

122,832

 

 

13

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Note H Equity

A summary of the stock option activity under the Company’s plans for the three months ended June 30, 2017 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Options outstanding at December 31, 2016

 

 

5,136,110

 

 

$

5.76

 

Options granted

 

 

1,993,998

 

 

 

7.54

 

Less:

 

 

 

 

 

 

 

 

Options exercised

 

 

329,819

 

 

 

3.14

 

Options canceled or expired

 

 

53,265

 

 

 

2.34

 

Options outstanding at June 30, 2017

 

 

6,747,024

 

 

 

6.44

 

Exercisable at June 30, 2017

 

 

2,195,147

 

 

 

5.33

 

Of the 6,747,024 outstanding options at June 30, 2017, 1,240,834 were variable accounted stock options issued to non-employees of the Company of which 453,333 options were vested and 787,501 options were unvested as of June 30, 2017.

The fair value of each stock option award granted during the six months ended June 30, 2017 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:

 

 

Six Months Ended

June 30, 2017

 

Expected term (in years)

 

3.0 - 4.0

 

Risk-free interest rate (%)

 

 

1.3%

 

Expected volatility (%)

 

47.6% - 53.0%

 

Dividend yield (%)

 

 

0.0%

 

Weighted average fair value/share at grant date

 

$

2.23

 

 

 As of June 30, 2017, there was approximately $7.7 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.3 years.  This includes approximately $1.6 million in unrecognized expense related to the 787,501 shares of unvested variable accounted for stock options subject to fair value adjustment at the end of each reporting period based on changes in the Company’s stock price.

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

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Research and development expense

 

$

285

 

 

$

372

 

 

$

327

 

 

$

363

 

General and administrative expense

 

 

1,637

 

 

 

1,188

 

 

 

2,725

 

 

 

1,985

 

Total stock based compensation expense

 

$

1,922

 

 

$

1,560

 

 

$

3,052

 

 

$

2,348

 

 

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

 

14

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Common Stock Warrants

A summary of the warrant activity for the six months ended June 30, 2017 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Warrants outstanding at December 31, 2016

 

 

450,000

 

 

$

1.50

 

Warrants granted

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

Warrants exercised

 

 

450,000

 

 

 

1.50

 

Warrants canceled or expired

 

 

 

 

 

 

Warrants outstanding at June 30, 2017

 

 

 

 

 

 

Exercisable at June 30, 2017

 

 

 

 

 

 

 

 

 

 

 During the three months ended June 30, 2017 and 2016, we recorded $0 and $74,000 of warrant compensation expense, respectively.  During the six months ended June 30, 2017, we recorded $0 of warrant compensation expense and during the six months ended June 30, 2016 we recorded a warrant compensation gain of $10,000, respectively.  Warrant expense (gain) for the periods presented is recorded in research and development as the expense is related to unvested performance based warrants that were granted to a non-employee.  As of June 30, 2017, there were no outstanding warrants, in addition all warrants were fully vested for both the three and six months ended June 30, 2017.

 

Note I – Commitments

During the three and six months ended June 30, 2017, the Company entered into leases of approximately $782,000 and $2.6 million in laboratory and computer equipment, respectively. These leases have 36 month terms, a $1.00 buyout option at the end of the terms and interest rates ranging from 5.0% to 6.2%.  The Company accounted for these lease agreements as capital leases.

During the six months ended June 30, 2017, the Company entered into a construction contract for the expansion of our laboratory in Houston, Texas.  The contract is for approximately $5.0 million, which the Company intends to finance through a capital lease with a 36 month term and a $1.00 buyout option.  The interest rate under this lease will vary based on the timing of the construction payments.  We anticipate this project to be complete in the first quarter of 2018.  

 

15

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

Note J – Other Related Party Transaction

During each of the three and six month periods ended June 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 $52,000 and $66,000 for the three months ended June 30, 2017 and 2016, respectively.  In addition, as compensation for his services on the Board, Mr. Jones earned $12,500 and $0 for the three months ended June 30, 2017 and 2016, respectively.  During the six months ended June 30, 2017 and 2016, Mr. Jones earned approximately $118,000 and $132,000, respectively in connection with his duties as Executive Vice President.  Mr. Jones also received approximately $85,000 and $79,000 during the six months ended June 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 $12,500 and $0 for the six months ended June 30, 2017 and 2016, respectively.

During each of the three and six month periods ending June 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.  In connection with his role as a consultant, Mr. Johnson earned approximately $88,000 and $0 for the three months ended June 30, 2017 and 2016, respectively.  In addition, as compensation for his services on the Board, Mr. Johnson earned $15,000 for each of the three months ended June 30, 2017 and 2016 and $30,000 for each of the six months ended June 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.

 

Note K – Subsequent Events

 

At the Board Meeting in July of 2017, it was determined that Path logic met the classification as held for sale.  On August 1, 2017, the Company completed the sale of its equity interests in PathLogic, our laboratory located in West Sacramento, California.  The Company anticipates recording a loss on the sale of approximately $1.25 to $1.5 million in the third quarter of 2017.  PathLogic had sales of $3.3 million and $3.9 million for the periods ended June 30, 2017 and 2016, respectively.  PathLogic had full year 2016 revenue of $7.3 million.  PathLogic had operating losses of $1.6 million and $1.4 million for the periods ended June 30, 2017 and 2016, respectively.  Path-Logic had a full year 2016 operating loss of $3.1 million.  

 

END OF FINANCIAL STATEMENTS

 

16

 


NEOGENOMICS, INC.

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

 

NeoGenomics, Inc., a Nevada corporation (referred to 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.

As of June 30, 2017, the Company had laboratory locations in Aliso Viejo, Fresno and West Sacramento, CA; Tampa and Fort Myers, FL; Houston, TX and Nashville, TN, though on August 1, 2017, the Company completed the sale of PathLogic, its laboratory located in West Sacramento, California. The Company 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 in the diagnosis of abnormal cells such as those found in cancerous tumors. Specific surface cytoplasmic or nuclear markers are characteristic of cellular events such as proliferation or cell death (apoptosis). IHC is also widely used to understand the distribution and localization of differentially expressed proteins.  Digital imaging allows clients to see and utilize scanned slides and perform quantitative analysis for certain stains.  Scanned slides are received online in real time and can be previewed often a full day before the glass slides can be shipped back to clients.

 

e)

Molecular testing - a rapidly growing cancer testing methodology that focuses on the analysis of DNA and RNA, as well as the structure and function of genes at the molecular level. Molecular testing employs multiple technologies including DNA fragment length analysis, real-time polymerase chain reaction (“RT-PCR”) RNA analysis, bi-directional Sanger sequencing analysis, and Next-Generation Sequencing (“NGS”).

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f)

Pathology consultation - services provided to clients whereby our pathologists review surgical samples on a consultative basis. NeoGenomics pathologists are some of the foremost experts on pathology in the country, and are used as experts on difficult and challenging cases.

Clinical Cancer Testing Services

The cancer testing services we offer to community-based pathologists are designed to be a natural extension of, and complementary to, the services that they perform within their own practices. We believe our relationship as a non-competitive partner to community-based pathology practices, hospital pathology labs and academic centers empowers them to expand their breadth of testing and provide a menu of services that matches or exceeds the level of service found in any center of excellence around the world.

Pharma Services and Clinical Trials

Our Pharma Services division supports pharmaceutical firms in their drug development programs by supporting various clinical trials.  This portion of our business often involves working with the pharmaceutical firms (sponsors) on study design as well as performing the required testing.  Our medical team often advises the sponsor and works closely with them as specimens are received from the enrolled sites.  We also work on developing tests that will be used as part of a companion diagnostic to determine patients’ response to a particular drug.  As studies unfold, our clinical trials team reports the data and often provide key analysis and insights back to the sponsors.

Our Pharma Services and Clinical Trials group provides comprehensive testing services in support of our pharmaceutical clients’ oncology programs from discovery to commercialization.  In biomarker discovery, our aim is to help our customers discover the right content.  We help our customers develop a biomarker hypothesis by recommending an optimal platform for molecular screening and backing our discovery tools with the informatics to capture meaningful data.  In other pre and non-clinical work, we can use our platforms to characterize markers of interest.   Moving from discovery to development, we help our customers refine their biomarker strategy and, if applicable, develop a companion diagnostic pathway using the optimal technology for large-scale clinical trial testing.

Whether serving as the single contract research organization or partnering with one, our Pharma Services and Clinical Trials team provides significant technical expertise working closely with our customers to support each stage of clinical trial development.  Each trial we support comes with rapid turnaround time, dedicated project management and quality assurance oversight. We have experience in supporting submissions to the Federal Drug Administration for companion diagnostics.  Our Pharma Services strategy is focused on helping bring more effective oncology treatments to market through providing world class laboratory services in oncology to key pharmaceutical companies in the industry.

2017 Focus Areas: Develop High Performance Culture, Inspire & “Own” Quality, Accelerate Growth and Advance Our Strategy

Over the past several years, NeoGenomics has experienced rapid growth including organic growth from offering new tests to existing customers, growth from gaining market share from our competitors, and growth from acquisitions.  We expect to continue to grow our business in 2017 and are focused on several initiatives to continue to build our company to be the World’s leading cancer testing and information company.

Develop our High Performance Culture  

We are building our high performance culture by empowering our employees and investing in their growth.  We are providing skill based training, education, and mentoring our supervisors and managers to allow them to grow within the Company.  We communicated career opportunities and performance objectives and hold each employee accountable for their own development.  Teamwork is highly encouraged through the use of team performance incentive plans as well as other meaningful recognition and rewards.  To cultivate teamwork we are committed to improving communication by providing better tools for today’s connected society.  Our organization uses weekly employee surveys and takes actions based on the feedback from those surveys.  We believe that a culture of engaged employees provides superior service to our clients and their patients battling cancer.  We have employee retention targets that are set each year, and we believe our employee retention rate is above average for the laboratory industry.  Recruiting and retaining talented employees is critical in the fast moving field of cancer diagnostics.  

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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 throughout our organization.  Maintaining quality laboratory operations and service is enabling us to retain existing clients while adding new ones.  

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, we believe we can strengthen our core processes.  Our focus on continuous improvement, first time quality and the work of our best-practice teams will enable us to continue reducing our cost per test as we have steadily over the past several years.

In 2016, we began work on our next generation Laboratory Information System, or LIS and our information technology team is working to complete this LIS system for certain key areas in 2017.  We believe the new LIS system will help to drive improvements in efficiencies in several laboratory areas and will allow for further automation and operational efficiencies.  It will also enable our Pharma Services clients the ability to track each step through the laboratory process.  On June 30, 2017, we began to use this new system in or Pharma Services business.

 

We have renovated our Aliso Viejo, CA laboratory and in March of 2017, 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 expect to achieve significant economies of scale and operating efficiencies from this move.

Accelerate Profitable Growth

Our plans for 2017 include many initiatives to continue our strong organic growth by gaining market share, introducing new tests, and by 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

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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.

We continue to develop our NeoLAB (Liquid Biopsy) Prostate cancer test that is performed on blood plasma and urine rather than on prostate tissue biopsies.  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.  

Competitive Strengths

Turnaround Times

We strive to provide industry leading turnaround times for test results to our clients nationwide.  By providing information to our clients in a rapid manner, physicians can begin treating their patients as soon as possible.  We believe our average 4-5 day turnaround 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

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benchmarks for national laboratories.  Our consistent timeliness of results is a competitive strength and a driver of additional testing requests by our referring physicians.  Rapid turnaround times allow for the performance of other adjunctive tests within an acceptable diagnosis window in order to augment or confirm results and more fully inform treatment options.  We believe that our fast turnaround times are a key differentiator versus other national laboratories, and our clients often cite them as a key factor 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 June 30, 2017, we employed, or are contracted with, approximately 35 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-Only Service Offerings

We currently have the most extensive menu of “tech-only” FISH services in the country as well as extensive and advanced “tech-only” flow cytometry and IHC testing services.  These types of testing services allow the professional interpretation component of a test to be performed and billed separately by our physician clients.  Our FISH, flow cytometry and other tech-only service offerings allow properly trained and credentialed community-based pathologists to extend their own practices by performing professional interpretations services, which allows them to better service the needs of their local clientele without the need to invest in the lab equipment and personnel required to perform the technical component of genetic and molecular testing.

Our tech-only services are designed to give pathologists the option to choose, on a case by case basis, whether they want to order just the technical information and images relating to a specific test so they can perform the professional interpretation, or order “global” services and receive a comprehensive test report which includes a NeoGenomics Pathologist’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

We offer a comprehensive suite of technical and interpretation services, to meet the needs of those clients who are not credentialed and trained in interpreting genetic tests and who require pathology specialists to interpret the testing results for them. In our global service offerings, our lab performs the technical component of the tests and our M.D.s and Ph.Ds. provide the service of interpreting the results of those tests. Our professional staff is also available for post-test consultative services. Clients using our global service offering rely on the expertise of our medical team to give them the answers they need in a timely manner to help inform their diagnoses and treatment decisions. Many of our tech-only clients also rely on our medical team for difficult or challenging cases by ordering our global testing services on a case-by-case basis or our medical team can serve as a backup to support our clients who need help to satisfy the continued and demanding requirements of their practice. Our reporting capabilities allow for all relevant case data from our global services to be captured in one summary report. When providing global services, NeoGenomics bills for both the technical and professional component of the test, which results in a higher reimbursement level.

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.

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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.

National Direct Sales Force

Our direct sales force has been trained extensively in cancer genetic testing and consultative selling skills to service the needs of clients.  Our sales team for the clinical cancer testing services is organized into five regions (Northeast, Southeast, North Central, South Central and West), and we have a separate sales team for our Pharma Services division.  These sales representatives utilize our custom Customer Relationship Management System (“CRM”) to manage their territories, and we have integrated all of the important customer care functionality within our LIS into the CRM so that our sales representatives can stay informed of emerging issues and opportunities within their regions.  Our in-house customer care team is aligned with our field sales team to serve the needs of our clients by utilizing the same LIS and CRM.  Our field teams can see in real-time when a client calls the laboratory, the reason for the call, the resolution, and if face-to-face interaction is needed for follow-up.

Geographic Locations

Many high complexity laboratories within the cancer testing niche have frequently operated a core facility on either the West Coast or the East Coast of the United States to service the needs of their customers around the country. We believe our clients and prospects desire to do business with a laboratory with national breadth and a local presence. We have six facilities including three large laboratory locations in Fort Myers, Florida, Aliso Viejo, California and Houston Texas.  We also have three smaller laboratory locations in Fresno, California, Nashville, Tennessee and Tampa, Florida. Our objective is to “operate one lab with multiple locations” in order to deliver standardized, high quality, test results. We have recently completed renovations in our Aliso Viejo facility and have successfully transitioned all Irvine employees and tests into the much larger Aliso Viejo laboratory during late March 2017.  We have begun work with authorities in Switzerland regarding our planned opening of a laboratory near Geneva during the second half of 2017.  This laboratory will support our Pharma Services division and will enable us to compete for clinical trials business in Europe as well as for studies that have components in both the United States and in Europe.  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.

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Seasonality

The majority of our testing volume is dependent on patients being treated by hematology/oncology professionals and other healthcare providers. The volume of our testing services generally declines modestly during the summer vacation season, year-end holiday periods and other major holidays, particularly when those holidays fall during the middle of the week. In addition, the volume of our testing tends to decline due to extreme adverse weather conditions, such as excessively hot or cold spells, heavy snow, hurricanes or tornados in certain regions, consequently reducing revenues and cash flows in any affected period. Therefore, comparison of the results of successive periods may not accurately reflect trends for future periods.

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 Six Months Ended June 30, 2017 as Compared to the Three and Six Months Ended June 30, 2016

The following table presents the consolidated statements of operations as a percentage of revenue:

 

 

Three Months Ended June 30

 

 

Six Months Ended June 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

 

52.8

%

 

 

54.7

%

 

 

54.3

%

 

 

54.6

%

Gross Profit

 

 

47.2

%

 

 

45.3

%

 

 

45.7

%

 

 

45.4

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

34.3

%

 

 

29.7

%

 

 

34.0

%

 

 

29.9

%

Research and development

 

 

1.4

%

 

 

2.1

%

 

 

1.4

%

 

 

2.2

%

Sales and marketing

 

 

9.4

%

 

 

10.0

%

 

 

9.3

%

 

 

9.9

%

Total operating expenses

 

 

45.1

%

 

 

41.8

%

 

 

44.7