10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on July 31, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended June 30, 2020
| 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
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
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 S No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes S No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
S |
Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | 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 S
As of July 28, 2020, the registrant had 110,430,630 shares of Common Stock, par value $0.001 per share outstanding.
TABLE OF CONTENTS
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, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, changing reimbursement levels from government payers and private insurers, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020.
Forward-looking statements include, but are not limited to, statements about:
•Our ability to respond to rapid scientific change;
•The risk of liability in conducting clinical trials and the sufficiency of our insurance to cover such claims;
•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, international privacy laws, federal and state false claims laws and corporate practice of medicine laws;
•Regulatory developments in the United States including downward pressure on health care reimbursement;
•Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”);
•Food and Drug Administration, or FDA regulation of Laboratory Developed Tests (“LDTs”);
•Failure to timely or accurately bill for our services;
•Our ability to expand our operations and increase our market share;
•Our ability to expand our service offerings by adding new testing capabilities;
•Our ability to meet our future capital requirements;
•Our ability to manage our indebtedness;
•Our expectations regarding the conversion of our outstanding 1.25% Convertible Senior Notes due May 2025 (the “Convertible Notes”) in the aggregate principal amount of $201.3 million and our ability to make debt service payments under the Convertible Notes if such Convertible Notes are not converted;
•Our ability to protect our intellectual property from infringement;
•The anticipated impact to our business operations, customer demand and supply chain due to the recent global pandemic of a novel strain of the coronavirus (“COVID-19”);
•Our ability to integrate future acquisitions and costs related to such acquisitions;
•The effects of seasonality on our business;
•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;
•Our handling, storage and disposal of biological and hazardous materials;
•The accuracy of our estimates regarding reimbursement, expenses, future revenues and capital requirements;
3
•Our ability to manage expenses and risks associated with international operations, including anti-corruption and trade sanction laws and other regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions;
•Our ability to have sufficient cash to pay our obligations under our 1.25% Convertible Senior Notes due May 2025; and
•The dilutive impact of the conversion of our 1.25% Convertible Senior Notes due May 2025.
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.
4
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
| June 30, 2020 (unaudited) | December 31, 2019 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories | ||||||||||||||
| Prepaid assets | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
Property and equipment (net of accumulated depreciation of $ |
||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Restricted cash, non-current | ||||||||||||||
| Prepaid lease asset | ||||||||||||||
| Investment in non-consolidated affiliate | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued compensation | ||||||||||||||
| Accrued expenses and other liabilities | ||||||||||||||
| Short-term portion of financing obligations | ||||||||||||||
| Short-term portion of operating leases | ||||||||||||||
| Short-term portion of term loan | ||||||||||||||
| Pharma contract liability | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term liabilities | ||||||||||||||
| Convertible senior notes, net | ||||||||||||||
| Long-term portion of financing obligations | ||||||||||||||
| Long-term portion of operating leases | ||||||||||||||
| Long-term portion of term loan, net | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Deferred income tax liability, net | ||||||||||||||
| Total long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders' equity | ||||||||||||||
Common stock, $ |
||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated other comprehensive loss | ( |
|||||||||||||
| Accumulated deficit | ( |
( |
||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
5
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| NET REVENUE: | |||||||||||||||||||||||
| Clinical Services | $ | $ | $ | $ | |||||||||||||||||||
| Pharma Services | |||||||||||||||||||||||
| Total revenue | |||||||||||||||||||||||
| COST OF REVENUE | |||||||||||||||||||||||
| GROSS PROFIT | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Sales and marketing | |||||||||||||||||||||||
| Total operating expenses | |||||||||||||||||||||||
| (LOSS) INCOME FROM OPERATIONS | ( |
( |
|||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Other (income) expense, net | ( |
( |
( |
||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Loss on termination of cash flow hedge | |||||||||||||||||||||||
| (Loss) income before taxes | ( |
( |
( |
||||||||||||||||||||
| Income tax (benefit) expense | ( |
( |
( |
||||||||||||||||||||
| NET (LOSS) INCOME | $ | ( |
$ | $ | ( |
$ | ( |
||||||||||||||||
| NET (LOSS) INCOME PER SHARE | |||||||||||||||||||||||
| Basic | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||
| Diluted | $ | ( |
$ | $ | ( |
$ | |||||||||||||||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
6
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in thousands)
(unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| NET (LOSS) INCOME | $ | ( |
$ | $ | ( |
$ | ( |
|||||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME: | ||||||||||||||||||||||||||
| Gain (loss) on effective cash flow hedges | ( |
( |
( |
|||||||||||||||||||||||
| Cash flow hedge termination reclassified to earnings | ||||||||||||||||||||||||||
| Total other comprehensive income (loss), net of tax | ( |
( |
||||||||||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( |
$ | $ | ( |
$ | ( |
|||||||||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
7
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except share amounts)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2019 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Common stock issuance ESPP Plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
| Loss on effective cash flow hedge | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | ( |
— | — | ( |
||||||||||||||||||||||||||||||
| Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
| ESPP expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
| Balance, March 31, 2020 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Common stock issuance ESPP Plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
| Gain on effective cash flow hedge | — | — | — | — | |||||||||||||||||||||||||||||||
| Cash flow hedge termination reclassified to earnings | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | ( |
— | — | ( |
||||||||||||||||||||||||||||||
| Issuance of common stock - public offering, net of underwriting discounts | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
| ESPP expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Equity component of convertible note issuance | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax liability related to convertible note issuance | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
| Balance, June 30, 2020 | $ | $ | $ | $ | ( |
$ | |||||||||||||||||||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
8
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited, in thousands, except share amounts)
| Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive Loss | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||
| Shares | Amount | ||||||||||||||||||||||||||||||||||
| Balance, December 31, 2018 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Common stock issuance ESPP Plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
| Loss on effective cash flow hedge | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||||
| Issuance of common stock for stock options | — | — | |||||||||||||||||||||||||||||||||
| ESPP expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
| Balance, March 31, 2019 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
| Common stock issuance ESPP Plan | — | — | — | ||||||||||||||||||||||||||||||||
| Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
| Loss on effective cash flow hedge | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeitures | ( |
— | — | — | — | — | |||||||||||||||||||||||||||||
| Working capital adjustment related to acquisition | ( |
— | ( |
— | — | ( |
|||||||||||||||||||||||||||||
| Issuance of common stock - public offering | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock for stock options | — | — | |||||||||||||||||||||||||||||||||
| ESPP expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance, June 30, 2019 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
9
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended June 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
| Net loss | $ | ( |
$ | ( |
||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
| Depreciation | ||||||||||||||
| Loss on disposal of assets | ||||||||||||||
| Loss on debt extinguishment | ||||||||||||||
| Loss on termination of cash flow hedge | ||||||||||||||
| Amortization of intangibles | ||||||||||||||
| Amortization of debt issue costs | ||||||||||||||
| Amortization of convertible debt discount | ||||||||||||||
| Non-cash stock-based compensation | ||||||||||||||
| Non-cash operating lease expense | ||||||||||||||
| Changes in assets and liabilities, net | ||||||||||||||
| Accounts receivable, net | ( |
|||||||||||||
| Inventories | ( |
( |
||||||||||||
| Prepaid and other assets | ( |
( |
||||||||||||
| Prepaid lease asset | ( |
|||||||||||||
| Other current assets | ( |
( |
||||||||||||
| Accounts payable, accrued and other liabilities | ( |
( |
||||||||||||
| Net cash (used in) provided by operating activities | ( |
|||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
| Purchases of property and equipment | ( |
( |
||||||||||||
| Business acquisition | ( |
|||||||||||||
| Acquisition working capital adjustment | ||||||||||||||
| Investment in non-consolidated affiliate | ( |
|||||||||||||
| Net cash used in investing activities | ( |
( |
||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
| Repayment of revolving credit facility | ( |
|||||||||||||
| Repayment of equipment financing obligations | ( |
( |
||||||||||||
| Proceeds from term loan | ||||||||||||||
| Repayment of term loan | ( |
( |
||||||||||||
| Cash flow hedge termination | ( |
|||||||||||||
| Payments of debt issuance costs | ( |
|||||||||||||
| Issuance of common stock, net | ||||||||||||||
| Proceeds from issuance of convertible debt, net of issuance costs | ||||||||||||||
| Proceeds from equity offering, net of issuance costs | ||||||||||||||
| Net cash provided by financing activities | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | ||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | ||||||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | $ | ||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
10
| Six Months Ended June 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Restricted cash, non-current | ||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | ||||||||||||
| Supplemental disclosure of cash flow information: | ||||||||||||||
| Interest paid | $ | $ | ||||||||||||
| Income taxes paid, net | $ | $ | ||||||||||||
| Supplemental disclosure of non-cash investing and financing information: | ||||||||||||||
| Working capital adjustment related to acquisition | $ | $ | ||||||||||||
| Equipment acquired under financing obligations | $ | $ | ||||||||||||
| Property and equipment included in accounts payable | $ | $ | ||||||||||||
See the accompanying notes to the unaudited consolidated financial statements.
11
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Nature of the Business, Basis of Presentation and Significant Accounting Policies
Nature of the Business
NeoGenomics, Inc., a Nevada corporation, and its subsidiaries (the “Parent”, “Company”, or “NeoGenomics”), 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 as well as providing clinical trial services to pharmaceutical firms.
Basis of Presentation
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. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.
Unaudited Interim Financial Information
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 and footnotes. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.
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.
Principles of Consolidation
The Company reports its activities in two operating segments; the Clinical Services Segment and the Pharma Services Segment. These reportable segments deliver testing services to hospitals, pathologists, oncologists, clinicians, pharmaceutical firms and researchers and represents 100 % of the Company’s consolidated assets, net revenues and net income for each period presented. For further financial information about these segments see Note 14. Segment Information, in the accompanying notes to the consolidated financial statements.
The Company determines whether investments in affiliates are a Variable Interest Entity (“VIE”) at the start of each new venture and when a reconsideration event has occurred. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company accounts for its investments that are under 20% of the total equity outstanding and for which the Company does not have significant influence by applying the cost method. Investments that are under 20% of the total equity outstanding and for which the entity does have significant influence are accounted for using the equity method unless a scope exception is applicable. Investments in which the Company holds a non-controlling interest and are between 20-50% equity are accounted for using the equity method. For any investments in which the Company holds over 50% of the outstanding stock, or for investments in which the Company controls the investee, the Company consolidates those entities into their consolidated financial statements.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) was identified and the disease has since spread across the world, including the United States. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak of the pandemic is materially adversely affecting the Company’s employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, the Company’s results of operations, financial condition and cash flows are likely to continue to be materially adversely affected, particularly if the pandemic persists for a significant amount of time.
Coronavirus Aid, Relief, and Economic Security Act
12
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Federal government passed legislation and the President of the United States signed into law on March 27, 2020, known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On April 10, 2020, the U.S Department of Health & Human Services (“HHS”) announced that Medicare-enrolled providers would receive a portion of a direct deposit disbursement totaling $50 billion. The $50 billion is part of a $100 billion Public Health and Emergency Fund created by the CARES Act and payments made are intended to reimburse healthcare providers for health care related expenses or lost revenues attributable to COVID-19 and are not required to be repaid provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing for COVID-19 patients. In the absence of specific guidance to account for government grants under GAAP, the Company accounts for such grants in accordance with international accounting standards for government grants. Such amounts are recognized when there is reasonable assurance that the Company will (1) comply with the conditions associated with the grant and (2) receive the grant.
For the three and six month periods ended June 30, 2020, the Company recognized $7.9 no
Additionally, the CARES Act permits the deferral of payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due December 31, 2021 and the remaining 50% due December 31, 2022. As of June 30, 2020, the accrued deferred social security taxes related to the CARES Act were $2.1 million. This amount was recorded in “Other long-term liabilities” on the Consolidated Balance Sheets. There were no such amounts recorded on the Consolidated Balance Sheets as of December 31, 2019.
Note 2. Recently Adopted and Issued Accounting Guidance
Recently Adopted Accounting Guidance
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (“Topic 230”): Restricted Cash. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and restricted cash. ASU 2016-08 was effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, using a retrospective transition method to each period presented. As a result, restricted cash of approximately $36 million as of June 30, 2020 is included in cash and cash equivalents when reconciling the beginning and ending balances in the Consolidated Statements of Cash Flows. Please refer to Note 3. Leases, for additional information regarding the use of restricted cash. There were no restricted cash balances in any reportable period prior to January 2020.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments, as modified by subsequently issued ASUs 2018-19 (issued November 2018), 2019-04 (issued April 2019), 2019-05 (issued May 2019), 2019-11 (issued November 2019), 2020-02 (issued February 2020) and 2020-03 (issued March 2020). Topic 326 modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The standard was effective January 1, 2020 and requires the use of forward-looking expected credit loss models based on historical experience, current economic conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. It also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The standard required a modified retrospective approach with a cumulative effect adjustment to retained earnings. The Company adopted and applied the standard as of January 1, 2020. Based on management’s analysis, Topic 326 is applicable to the Company’s trade receivables as well as contract assets recognized within the Pharma Services segment. An assessment was performed on historical trends, current economic conditions, supportable forecasts, and customer and credit risks. The adoption of Topic 326 did not result in a material impact on the Company's Consolidated Financial Statements.
Accounting Pronouncements Pending Adoption
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides for temporary optional expedients and exceptions to the current guidance on certain contract modifications and hedging relationships to ease the burdens related to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) or other reference rates to alternative reference rates. The guidance is effective upon issuance and can be applied through December 31, 2022. The Company does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (“Topic 321”), Investments-Equity Method and Joint Ventures (“Topic 323”) and Derivatives and Hedging (“Topic 815”) (ASU 2020-01). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for the equity method investments in Topic 323 and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for fiscal
13
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“Topic 740”), which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain other aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of the provisions of this standard on the Company’s Consolidated Financial Statements.
Note 3. Leases
The Company leases corporate offices and laboratory space throughout the world, all of which are classified as operating leases expiring at various dates and generally have terms ranging from 1 to 15 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Some of the Company’s real estate lease agreements include options to either renew or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When it is reasonably certain that the Company will exercise an option to renew or terminate a lease, these options are considered in determining the classification and measurement of the lease.
Lease liabilities are recorded based on the present value of the future lease payments over the lease term and assessed as of the commencement date. Incentives received from landlords, such as reimbursements for tenant improvements and rent abatement periods, effectively reduce the total lease payments owed for leases.
Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-components). Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any actual costs in excess of such amounts are expensed as incurred as variable lease cost.
The Company utilizes its incremental borrowing rate by lease term in order to calculate the present value of our future lease payments. The discount rate represents a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. The discount rate is determined using the incremental borrowing rate at lease commencement and based on the lease term.
Operating Leases
Operating lease costs include an immaterial amount of variable lease cost, and are recorded in cost of revenue and general and administrative expenses, depending on the nature of the leased asset. Aside from variable lease costs, operating lease costs represent fixed lease payments recognized on a straight-line basis over the lease term.
As of June 30, 2020, the maturities of our operating lease liabilities and a reconciliation to the present value of lease liabilities were as follows (in thousands):
| Remaining Lease Payments | |||||
| Remainder of 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
| Total remaining lease payments | |||||
| Less: imputed interest | ( |
||||
| Total operating lease liabilities | |||||
| Less: current portion | ( |
||||
| Long-term operating lease liabilities | $ | ||||
| Weighted-average remaining lease term (in years) | |||||
| Weighted-average discount rate | % | ||||
14
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following summarizes additional supplemental data related to our operating leases (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Operating lease costs | $ | $ | $ | $ | ||||||||||||||||||||||
| Six Months Ended June 30, | ||||||||||||||
| 2020 | 2019 | |||||||||||||
| Right-of-use assets obtained in exchange for operating lease liabilities | $ | $ | ||||||||||||
| Cash paid for operating leases | $ | $ | ||||||||||||
Note 4. Revenue Recognition and Contractual Adjustments
The Company has two operating segments for which it recognizes revenue; Clinical Services and Pharma Services. The Clinical Services segment provides various clinical testing services to community-based pathology practices, oncology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. The Pharma Services segment supports pharmaceutical firms in their drug development programs by providing testing services and data analytics for clinical trials and research.
Clinical Services Revenue
The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent. The performance obligation is satisfied 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 client direct billing, commercial insurance, Medicare and other government payers, and patients. Revenue is recorded for all payers based on the amount expected to be collected, which considers implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive based on negotiated discounts, historical collection experience and other anticipated adjustments, including anticipated payer denials. Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing for commercial insurance, Medicare and other governmental and self-pay payers and within 60 to 90 days of billing for client payers.
Pharma Services Revenue
The Company’s Pharma Services segment generally enters into contracts with pharmaceutical customers as well as other Contract Research Organizations (“CROs”) to provide research and clinical trial services ranging in duration from one month to several years. The Company records revenue on a unit-of-service basis based on number of units completed and the total expected contract value. The total expected contract value is estimated based on historical experience of total contracted units compared to realized units as well as known factors on a specific contract-by-contract basis. Certain contracts include upfront fees, final settlement amounts or billing milestones that may not align with the completion of performance obligations. The value of these upfront fees or final settlement amounts is usually recognized over time based on the number of units completed, which aligns with the progress of the Company towards fulfilling its obligations under the contract.
The Company also enters into other contracts, such as validation studies, for which the sole deliverable is a final report that is sent to sponsors at the completion of contracted activities. For these contracts, revenue is recognized at a point in time upon delivery of the final report to the sponsor. Any contracts that contain multiple performance obligations and include both units-
15
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
of-service and point-in-time deliverables are accounted for as separate performance obligations and revenue is recognized as previously disclosed. The Company negotiates billing schedules and payment terms on a contract-by-contract basis. While the contract terms generally provide for payments based on a unit-of-service arrangement, the billing schedules, payment terms and related cash payments may not align with the performance of services and, as such, may not correspond to revenue recognized in any given period.
Amounts collected in advance of services being provided are deferred as contract liabilities on the Consolidated Balance Sheets. The associated revenue is recognized and the contract liability is reduced as the contracted services are subsequently performed. Contract assets are established for revenue that has been recognized but not yet billed. These contract assets are reduced once the customer is invoiced and a corresponding receivable is recorded. Additionally, certain costs to obtain contracts, primarily for sales commissions, are capitalized when incurred and are amortized over the term of the contract. Amounts capitalized for contracts with an initial contract term of twelve months or less are classified as current assets. All others are classified as non-current assets.
Most contracts are terminable by the customer, either immediately or according to advance notice terms specified within the contracts. All contracts require payment of fees to the Company for services rendered through the date of termination and may require payment for subsequent services necessary to conclude the study or close out the contract.
The following table summarizes the values of contract assets, capitalized commissions and contract liabilities as of June 30, 2020 and December 31, 2019 (in thousands):
| June 30, 2020 | December 31, 2019 | ||||||||||
Current pharma contract assets (1)
|
$ | $ | |||||||||
Long-term pharma contract assets (2)
|
|||||||||||
| Total pharma contract assets | $ | $ | |||||||||
Current pharma capitalized commissions (1)
|
$ | $ | |||||||||
Long-term pharma capitalized commissions (2)
|
|||||||||||
| Total pharma capitalized commissions | $ | $ | |||||||||
| Current pharma contract liabilities | $ | $ | |||||||||
Long-term pharma contract liabilities (3)
|
|||||||||||
| Total pharma contract liabilities | $ | $ | |||||||||
(1) Current pharma contract assets and Current pharma capitalized commissions are classified as “Other current assets” on the Consolidated Balance Sheets.
(2) Long-term pharma contract assets and Long-term pharma capitalized commissions are classified as “Other assets” on the Consolidated Balance Sheets.
Pharma contract assets increased $0.3 million, or 28 %, from December 31, 2019 to June 30, 2020. Pharma contract liabilities increased $1.4 million, or 51 %, during the same period, while capitalized commissions increased slightly. Revenue recognized for the three and six months ended June 30, 2020 related to Pharma contract liability balances outstanding at the beginning of the period was $0.4 million and $1.6 million, respectively. Amortization of capitalized commissions for both three and six months ended June 30, 2020 was $0.1 million and $0.3 million, respectively.
Disaggregation of Revenue
The Company considered various factors for both its Clinical Services and Pharma Services segments in determining appropriate levels of homogeneous data for its disaggregation of revenue, including the nature, amount, timing and uncertainty of revenue and cash flows. For Clinical Services, the categories identified align with our type of customer due to similarities of billing method, level of reimbursement and timing of cash receipts. Unbilled amounts are accrued and allocated to payor categories based on historical experience. In future periods, actual billings by payor category may differ from accrued amounts. Pharma Services revenue was not further disaggregated as substantially all of our revenue relates to contracts with large pharmaceutical and biotech customers as well as other CROs for which the nature, timing and uncertainty of revenue and cash flows is similar and primarily driven by individual contract terms.
16
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table details the disaggregation of revenue for both the Clinical and Pharma Services Segments (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Clinical Services: | ||||||||||||||||||||||||||
| Client direct billing | $ | $ | $ | $ | ||||||||||||||||||||||
| Commercial Insurance | ||||||||||||||||||||||||||
| Medicare and Medicaid | ||||||||||||||||||||||||||
| Self-Pay | ( |
|||||||||||||||||||||||||
| Total Clinical Services | $ | $ | $ | $ | ||||||||||||||||||||||
| Pharma Services: | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Note 5. Acquisition
On January 10, 2020 (the “Acquisition Date”), the Company acquired the Oncology Division assets of Human Longevity, Inc. (“HLI - Oncology”) for a purchase price consisting of cash consideration of $37 million. Acquisition and integration costs related to HLI - Oncology were approximately $0.1 million and $1.4 million for the three and six months ended June 30, 2020, respectively, and are reported as general and administrative expenses in the Company's Consolidated Statements of Operations.
HLI - Oncology performs Next-Generation Sequencing for pharmaceutical customers. The acquisition of HLI - Oncology adds whole exome and whole genome sequencing capabilities to the Company's current Pharma Services offerings. Revenue related to HLI - Oncology is reported in the Pharma Services segment. The acquisition included assets, primarily consisting of lab equipment, inventory, maintenance agreements for acquired equipment, backlog contracts with HLI - Oncology's customers, as well as HLI - Oncology’s molecular workforce that is experienced with Next-Generation Sequencing.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date (in thousands):
| January 10, 2020 | ||||||||
| Inventory | $ | |||||||
| Prepaid assets | ||||||||
| Property and equipment | ||||||||
| Internally developed software | ||||||||
Customer relationships (1)
|
||||||||
| Long-term assets | ||||||||
Goodwill (2)
|
||||||||
| Total assets acquired | $ | |||||||
| Long-term liabilities | ( |
|||||||
| Net assets acquired | $ | |||||||
(1) Acquired intangible assets consisted of customer relationships which are amortized over seven years .
(2) The goodwill arising from the acquisition of HLI - Oncology is the amount the Company paid in excess of the fair value of the net assets acquired and was primarily for (i) the expected future cash flows derived from the existing business capabilities and infrastructure, (ii) expanding the Company's scientific expertise as a leading provider of Pharma Services and Next-Generation Sequencing and (iii) an enhanced Pharma Services menu including germline, whole exome and whole genome sequencing. All of the goodwill resulting from the acquisition of HLI - Oncology is expected to be deductible for income tax purposes.
The above purchase price and purchase price allocation are preliminary and subject to future revision as the acquired assets and liabilities assumed are dependent upon the finalization of the related valuations. The fair values assigned to assets acquired and liabilities assumed for HLI - Oncology are based upon management's best estimates and assumptions as of the reporting date, and are considered preliminary.
17
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 6. Goodwill and Intangible Assets
Goodwill as of June 30, 2020 and December 31, 2019 was $210.8 million and $198.6 million, respectively.
Intangible assets consisted of the following as of (in thousands):
| June 30, 2020 | ||||||||||||||||||||||||||
| Amortization Period |
Cost | Accumulated Amortization |
Net | |||||||||||||||||||||||
| Customer Relationships | ||||||||||||||||||||||||||
| Trade Name - Indefinite-lived | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
| December 31, 2019 | ||||||||||||||||||||||||||
| Amortization Period |
Cost | Accumulated Amortization |
Net | |||||||||||||||||||||||
| Trade Name | $ | $ | $ | |||||||||||||||||||||||
| Non-Compete Agreement | ||||||||||||||||||||||||||
| Customer Relationships | ||||||||||||||||||||||||||
| Trade Name - Indefinite-lived | — | — | ||||||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||||||||
The Company recorded approximately $2.5 4.9 million and $5.1 million for the six months ended June 30, 2020 and 2019, respectively. The Company records amortization expense as a general and administrative expense.
The estimated amortization expense related to amortizable intangible assets for each of the four succeeding fiscal years and thereafter as of June 30, 2020 is as follows (in thousands):
| Remainder of 2020 | $ | ||||
| 2021 | |||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| Thereafter | |||||
| Total | $ | ||||
Note 7. Debt
18
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| June 30, 2020 | December 31, 2019 | |||||||||||||
| 1.25% Senior Convertible Notes due 2025 | ||||||||||||||
| Principal | $ | $ | ||||||||||||
| Unamortized debt discount | ( |
|||||||||||||
| Unamortized debt issuance costs | ( |
|||||||||||||
| Total 1.25% Senior Convertible Notes due 2025 | ||||||||||||||
| Term loan | ||||||||||||||
| Principal | $ | $ | ||||||||||||
| Unamortized debt issuance costs | ( |
|||||||||||||
| Total term loan | ||||||||||||||
| Financing obligations | ||||||||||||||
| Total debt | $ | $ | ||||||||||||
| Less: Current portion of long-term debt | ( |
|||||||||||||
| Less: Current portion of financing obligations | ( |
( |
||||||||||||
| Total long-term debt, net | $ | $ | ||||||||||||
The carrying value of the Company’s term loan and financing obligations approximates fair value based on the current market conditions for similar instruments.
1.25% Convertible Senior Notes
On May 4, 2020 (the “Closing Date”), the Company completed the sale of $201.3 million of Convertible Senior Notes with a stated interest rate of 1.25 % and a maturity date of May 1, 2025 (the “Convertible Notes”), unless earlier converted, redeemed, or repurchased. The Convertible Notes were issued at a discounted price of 97 % of their principal amount. The total net proceeds from the issuance of the Convertible Notes and exercise of the Over-allotment Option was approximately $194.4 million, which includes approximately $6.9 million of discounts, commissions and offering expenses paid by the Company. On May 4, 2020, the Company entered into an Indenture (the “Indenture”), with U.S. Bank National Association, as trustee (the “Trustee”), governing the Convertible Notes.
Prior to February 1, 2025, noteholders may convert their Convertible Notes at their option, only in the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2020 (and only during such calendar quarter), if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 % of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of Convertible Notes for each trading day of the measurement period was less than 98 % of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; (3) if the Company calls any or all of the notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events. On or after February 1, 2025 until the close of business on the business day immediately preceding the maturity date, noteholders may convert their Convertible Notes at any time, regardless of the foregoing circumstances.
Upon conversion, the Company will pay or deliver, as applicable, cash, shares of common stock or a combination of cash and shares of common stock, at its election. The initial conversion rate for the Convertible Notes is 27.5198 shares of common stock per $1,000 in principal amounts of Convertible Note, equivalent to an initial conversion price of approximately $36.34 per share of common stock. The conversion rate is subject to adjustment as described in the Indenture. In addition, following certain corporate events that occur prior to the maturity date as described in the Indenture, the Company will pay a make-whole premium by increasing the conversion rate for a holder who elects to convert its Convertible Notes in connection with such a corporate event in certain circumstances. For purposes of calculating earnings per share, if the average market price of the Company's common stock exceeds the applicable conversion price during the periods reported, shares contingently issuable under the Convertible Notes will have a dilutive effect to the common stock. Since the conversion price of $36.34 exceeded the Company's closing common stock price of $30.98 at the end of the period, the if-converted value did not exceed the principal amount of the Convertible Notes at June 30, 2020.
The Company may not redeem the Convertible Notes prior to May 6, 2023. The Company may redeem for cash all or any portion of the Convertible Notes, at its option, on or after May 6, 2023 if the last reported sale price of its common stock has
19
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date of notice by the Company of redemption at a redemption price equal to 100% of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for the Convertible Notes.
If an event involving bankruptcy, insolvency or reorganization events with respect to the Company occurs, then the principal amount of, and all accrued and unpaid interest on, all of the Convertible Notes then outstanding will immediately become due and payable. If any other default event occurs and is continuing, then noteholders of at least 25 % of the aggregate principal amount of the Convertible Notes then outstanding, by notice to the Company, may declare the principal amount of, and all accrued and unpaid interest on, all of the Convertible Notes then outstanding to become due and payable immediately. If the Company undergoes a “fundamental change” as defined in the Indenture, then noteholders may require the Company to repurchase their Convertible Notes at a cash repurchase price equal to the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date.
The Convertible Notes are the Company’s senior, unsecured obligations and will be equal in right of payment with its existing and future senior, unsecured indebtedness, senior in right of payment to its existing and future indebtedness that is expressly subordinated to the Convertible Notes and effectively junior to its existing and future secured indebtedness, to the extent of the value of the collateral securing that indebtedness. The Convertible Notes will be structurally subordinated to all existing and future indebtedness and other liabilities, including trade payables, of its subsidiaries.
The interest expense recognized on the Convertible Notes includes $0.4 0.9 19,100 5.5 %, which includes the interest on the Convertible Notes and amortization of the debt discount and debt issuance costs. Interest on the Convertible Notes began accruing upon issuance and is payable semi-annually.
The Convertible Notes are accounted for as separate liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The allocation was performed in a manner that reflected the Company’s non-convertible debt borrowing rate for similar debt. The equity component of the Convertible Notes was recognized as a debt discount and represents the difference between the proceeds from the issuance of the Convertible Notes and the fair value of the liability of the Convertible Notes on the date of issuance. At the Closing Date, the equity component representing the conversion option was determined to be $21.6 million, net of tax, and was initially recorded by deducting the carrying value of the liability component from the initial proceeds from the Convertible Notes. The excess of the principal amount of the Convertible Notes over the carrying amount of the liability component represents a debt discount that is amortized to interest expense over the term of the Convertible Notes under the effective interest rate method. The equity component is not re-measured as long as it continues to meet the conditions for equity classification.
20
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Prior Senior Secured Credit Agreement
On May 4, 2020, the Company terminated its Senior Secured Credit Agreement (the “Prior Senior Secured Credit Agreement”) and used $96.3 million of the net proceeds from the Convertible Notes to repay all outstanding amounts owed thereunder.
On June 27, 2019 (the “Prior Closing Date”), the Company entered into the Prior Senior Secured Credit Agreement with PNC Bank National Association (“PNC”), as administrative agent, and the lenders party thereto. The Prior Senior Secured Credit Agreement provided for a $100.0 million revolving credit facility (the “Prior Revolving Credit Facility”), a $100.0 million term loan facility (the “Prior Term Loan Facility”), and a $50.0 million delayed draw term loan (the “Prior Delayed Draw Term Loan”).
Borrowings under the Prior Senior Secured Credit Agreement bore interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the agreement (2) an alternate base rate determined by reference to the greatest of (a) the federal funds rate for the relevant interest period plus 0.5 % per annum, (b) the prime lending rate of PNC and (c) the daily LIBOR rate plus 1 % per annum, or (3) a combination of (1) and (2). The applicable margin ranged from 1.25 % to 2.25 % for LIBOR loans and 0.25 % to 1.25 % for base rate loans, in each case based on NeoGenomics’ Consolidated Leverage Ratio (as defined in the New Credit Agreement). Interest on borrowings under the New Credit Agreement was 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 Company had previously entered into an interest rate swap agreements to hedge against changes in the variable rate for a portion of our long term debt. See Note 8. Derivative Instruments and Hedging Activities, for more information on these instruments.
The Prior Revolving Credit Facility included a $10.0 million swing loan sublimit, with swing loans that bore interest at the alternate base rate plus the applicable margin. Any principal outstanding under the Prior Revolving Credit Facility was due and payable on June 27, 2024 or such earlier date as the obligations under the Prior Senior Secured Credit Agreement became due and payable pursuant to the terms of the Prior Senior Secured Credit Agreement. No amounts were outstanding under the Prior Revolving Credit Facility as of December 31, 2019.
Principal payments on the Prior Term Loan Facility were due on the last day of each fiscal quarter with an annual principal amortization of 5 % in the first year, 5 % in the second year, 7.5 % in the third year, 7.5 % in the fourth year, and 10 % in each year thereafter, with the remainder due upon maturity on June 27, 2024 or such earlier date as the obligations under the Prior Senior Secured Credit Agreement become due and payable pursuant to the terms of the Prior Senior Secured Credit Agreement.
On December 31, 2019, the Company had current outstanding borrowings under the Prior Term Loan Facility of approximately $5.0 million, and long-term outstanding borrowings of approximately $91.8 million, net of unamortized debt issuance costs of $0.7 million. In association with the early termination of the debt, the Company incurred a loss on the extinguishment of debt of $1.4 million.
In addition to paying interest on outstanding principal under the Prior Senior Secured Credit Agreement, the Company was required to pay a commitment fee in respect of the unutilized portion of the commitments under the Prior Revolving Credit Facility and the Prior Delayed Draw Term Loan. The commitment fee rate ranged from 0.15 % to 0.35 % depending on NeoGenomics’ Consolidated Leverage Ratio. The Company also paid customary letter of credit and agency fees.
The Prior Term Loan Facility contained various covenants including entering into certain indebtedness; 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 burdensome agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into certain sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it conducts. In addition, the Company was required to meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter.
The Prior Term Loan Facility required the Company to mandatorily prepay the Prior Term Loan Facility and amounts borrowed under the Prior Revolving Credit Facility with (i) 100 % of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, and (ii) 100 % of net cash proceeds from certain issuances or incurrences of additional debt.
Financing Obligations
The Company has entered into loans with various banks to finance the purchase of laboratory equipment, office equipment and leasehold improvements. These loans mature at various dates through 2022 and the weighted average interest rate under such loans was approximately 4.91 % as of June 30, 2020 and 4.64 % as of December 31, 2019.
21
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Maturities of Long-Term Debt
Maturities of long-term debt as of June 30, 2020 are summarized as follows (in thousands):
| 1.25% Convertible Senior Notes | Financing Obligations | Total Long-Term Debt | ||||||||||||||||||
| Remainder of 2020 | $ | $ | $ | |||||||||||||||||
| 2021 | ||||||||||||||||||||
| 2022 | ||||||||||||||||||||
| 2023 | ||||||||||||||||||||
| 2024 | ||||||||||||||||||||
| 2025 | ||||||||||||||||||||
| Total Debt | ||||||||||||||||||||
| Less: Current portion of long-term debt | ( |
( |
||||||||||||||||||
| Less: Debt issuance costs | ( |
— | ( |
|||||||||||||||||
| Long-term debt, net | $ | $ | $ | |||||||||||||||||
22
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 8. Derivative Instruments and Hedging Activities
As of June 30, 2020, the Company did not have any outstanding interest rate swap agreements. In June of 2018, the Company entered into an interest rate swap agreement to reduce the Company’s exposure to interest rate fluctuations on the Company’s variable rate debt obligations. This derivative financial instrument was accounted for at fair value as a cash flow hedge to effectively modify the Company’s exposure to interest rate risk by converting a portion of its prior floating rate debt to a fixed rate obligation, thus reducing the impact of interest rate changes on interest expense.
Under the swap agreement, the Company received a variable rate of interest based on LIBOR and paid a fixed rate of interest. The following table summarizes the previous interest rate swap agreement.
| June 2018 Hedge | |||||||||||
| Notional Amount | $ | million | |||||||||
| Effective Date | June 29, 2018 | ||||||||||
| Index | One month LIBOR | ||||||||||
| Maturity | December 31, 2021 | ||||||||||
| Fixed Rate | % | ||||||||||
As discussed in Note 7, concurrently with the closing of the Convertible Notes, the proceeds from this transaction were used to pay off all amounts outstanding under our Prior Senior Secured Credit Agreement, after which the Company had no outstanding debt with variable rate interest. On May 1, 2020, the remaining obligation to make any further payments under the swap agreement was terminated. As a result of the termination, the company paid a termination fee of $3.3 million, which is included within Loss on Termination of Cash Flow Hedge in the Consolidated Statements of Operations.
As of December 31, 2019, the fair value of the derivative financial instruments included in other long-term liabilities was approximately $2.0 million. Fair value adjustments were historically recorded as an adjustment to Accumulated Other Comprehensive Income (“AOCI”), except that any gains and losses on ineffectiveness of the interest rate swap were recorded as an adjustment to “Other (income) expense, net”. In the second quarter of 2020, upon termination of the interest rate swap, the accumulated losses of $2.7 million, net of tax, related to the interest rate swap were reclassified from AOCI to Loss on Termination of Cash Flow Hedge in the Consolidated Statements of Operations.
Note 9. Equity
Underwritten Public Equity Offering
On April 29, 2020, the Company entered into an underwriting agreement relating to the issuance and sale of 4,400,000 shares of the Company’s common stock, $0.001 par value per share (the “Common Stock Offering”). The price to the public in this offering was $28.50 per share and the Company sold the shares to the Underwriters at the public offering price, less underwriting discounts and commission of $1.71 per share. Under the terms of the underwriting agreement, the Company also granted the Underwriters a 30 -day option to purchase up to 660,000 additional shares of Common Stock at the public offering price, less underwriting discounts and commissions. The net proceeds to the Company from the Common Stock Offering were approximately $117.9 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company of approximately $7.5 million.
On May 29, 2020, the Underwriters partially exercised their option and on June 3, 2020, purchased an additional 351,500 shares. The net proceeds related to the option exercise were approximately $9.4 million, after deducting underwriting commissions of approximately $0.6 million.
23
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 10. Stock-Based Compensation
The Company recorded approximately $2.6 million and $2.3 million in stock-based compensation expense for the three months ended June 30, 2020 and 2019, respectively, and approximately $4.8 million and $4.5 million in stock-based compensation expense for the six month periods ended June 30, 2020 and 2019, respectively.
A summary of the stock option activity under the Company’s plans for the six months ended June 30, 2020 is as follows:
| Number of Shares |
Weighted Average Exercise Price | |||||||||||||
| Options outstanding at December 31, 2019 | $ | |||||||||||||
| Options granted | $ | |||||||||||||
| Less: | ||||||||||||||
| Options exercised | $ | |||||||||||||
| Options forfeited | $ | |||||||||||||
| Options outstanding at June 30, 2020 | $ | |||||||||||||
| Exercisable at June 30, 2020 | $ | |||||||||||||
The fair value of each stock option award granted during the six months ended June 30, 2020 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:
| Six Months Ended June 30, 2020 |
|||||
| Expected term (in years) | |||||
| Risk-free interest rate (%) | |||||
| Expected volatility (%) | |||||
| Dividend yield (%) | |||||
| Weighted average fair value/share at grant date | $ |
||||
As of June 30, 2020, there was approximately $8.8 million of unrecognized stock-based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.46 years.
A summary of the restricted stock activity under the Company’s plans for the six months ended June 30, 2020 is as follows:
| Number of Restricted Shares |
Weighted Average Grant Date Fair Value | |||||||||||||
| Nonvested at December 31, 2019 | $ | |||||||||||||
| Granted | $ | |||||||||||||
| Vested | ( |
$ | ||||||||||||
| Forfeited | ( |
$ | ||||||||||||
| Nonvested at June 30, 2020 | $ | |||||||||||||
As of June 30, 2020, there was approximately $5.0 million of unrecognized stock-based compensation expense related to restricted stock that will be recognized over a weighted-average period of approximately 1.48 years.
Employee Stock Purchase Plan (“ESPP”)
The Company offers an ESPP through which eligible employees may purchase shares of our common stock at a discount of 15 % of the fair market value of the Company’s common stock.
24
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 11. Net (Loss) Income Per Share
We present both basic earnings per share (“EPS”) and diluted EPS. Basic EPS excludes potential dilution and is computed by dividing “Net income (loss)” by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock awards were exercised and if our Convertible Notes were converted. The potential dilution from stock awards is accounted for using the treasury stock method based on the average market value of our common stock. The potential dilution from conversion of the Convertible Notes is accounted for using the if-converted method, which requires that all of the shares of our common stock issuable upon conversion of the Convertible Notes will be included in the calculation of diluted EPS assuming conversion of the Convertible Notes at the beginning of the reporting period (or at time of issuance, if later).
The following table shows the calculations for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share amounts).
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Numerator (both basic and diluted) | ||||||||||||||||||||||||||
| Net (loss) income | $ | ( |
$ | $ | ( |
$ | ( |
|||||||||||||||||||
| Denominator | ||||||||||||||||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||||||||||||
| Dilutive effect of stock options | ||||||||||||||||||||||||||
| Dilutive effect of restricted stock awards | ||||||||||||||||||||||||||
| Dilutive effect of Convertible Notes | ||||||||||||||||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||||||||||||
| Basic net (loss) income per share | $ | ( |
$ | $ | ( |
$ | ||||||||||||||||||||
| Diluted net (loss) income per share | $ | ( |
$ | $ | ( |
$ | ||||||||||||||||||||
The following potential dilutive shares were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive for the three and six months ended June 30, 2020 and 2019:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Stock options | ||||||||||||||||||||||||||
| Restricted stock awards | ||||||||||||||||||||||||||
| Convertible Notes | ||||||||||||||||||||||||||
25
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 12. Related Party Transactions
On May 22, 2020, the Company formed a strategic alliance with Inivata Limited, a company incorporated in England and Wales (“Inivata”), and entered into a Strategic Alliance Agreement and Laboratory Services Agreement whereas Inivata will render and perform certain laboratory testing which the Company will make available to customers. The terms and conditions of the Laboratory Services Agreement are consistent with those that would be negotiated between willing parties on an arm's length basis. Related party transactions related to Inivata for the second quarter were immaterial.
In addition, the Company and Inivata entered into a line of credit agreement in the amount of $15 million (the “Line of Credit”). The Line of Credit will be available to be drawn by Inivata beginning on January 1, 2021 and has a maturity date of December 1, 2025. The Line of Credit bears interest at 0 % per annum and the unpaid principal balance is payable on January 1, 2026. The Line of Credit is subject to evaluation for current expected credit losses. The impact of such losses were determined to be immaterial for the three and six months ended June 30, 2020.
For further details on the investment made in Inivata, please refer to Note 13. Investment in Non-Consolidated Affiliate.
26
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 13. Investment in Non-Consolidated Affiliate
In addition to the Laboratory Services Agreement and Line of Credit, as discussed in Note 12. Related Party Transactions, the Company also entered into an Investment Agreement with Inivata (the “Investment Agreement”), pursuant to which the Company acquired Series C1 Preference Shares (the “Preference Shares”) for $25 million in cash (the “Investment”) resulting in a minority interest in Inivata’s outstanding equity and an Option Deed which provides the Company with an option to purchase Inivata (the “Purchase Option”). The Investment will be made in two equal installments, with the initial installment made in May 2020 and the second installment expected to occur in August 2020.
Inivata is a VIE and the Company's investment is under 20% of the total equity outstanding. The Company does not control Inivata, but does have significant influence over Inivata. However, because the Preference Shares were determined to not be in-substance common stock, and because the Preference Shares and the Purchase Option do not have readily determinable fair values, the Company has elected to measure the Preference Shares and the Purchase Option at cost, minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. There were no such events and the Company determined no adjustments to the carrying amounts of the Preference Shares and the Purchase Option were necessary at June 30, 2020.
Upon acquisition, the Investment was allocated between the Preference Shares and the Purchase Option based on the relative fair value of each and is recorded, along with associated transaction costs, as “Investment in non-consolidated affiliate” on the Consolidated Balance Sheets. At June 30, 2020, the carrying amount of the investment in non-consolidated affiliate is $13.1 million. The value is comprised of $9.6 million in Preference Shares, a $2.9 million Purchase Option and $0.6 million of associated transaction costs.
27
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 14. Segment Information
The Company has two operating segments for which it recognizes revenue; Clinical Services and Pharma Services. Our Clinical Services segment provides various clinical testing services to community-based pathology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research.
The financial information reviewed by the Chief Operating Decision Maker (“CODM”) includes revenues, cost of revenue and gross margin for each of the Company’s operating segments. Assets are not presented at the segment level as that information is not used by the CODM.
The following table summarizes the segment information (in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||||
| Clinical Services | $ | $ | $ | $ | ||||||||||||||||||||||
| Pharma Services | ||||||||||||||||||||||||||
| Total revenue | ||||||||||||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||||||||
| Clinical Services | ||||||||||||||||||||||||||
| Pharma Services | ||||||||||||||||||||||||||
| Total cost of revenue | ||||||||||||||||||||||||||
| Gross Profit: | ||||||||||||||||||||||||||
| Clinical Services | ||||||||||||||||||||||||||
| Pharma Services | ||||||||||||||||||||||||||
| Total gross profit | ||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| General and administrative | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| Sales and marketing | ||||||||||||||||||||||||||
| Total operating expenses | ||||||||||||||||||||||||||
| (Loss) income from operations | ( |
( |
||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||
| Other (income) expense, net | ( |
( |
( |
|||||||||||||||||||||||
| Loss on extinguishment of debt | ||||||||||||||||||||||||||
| Loss on termination of cash flow hedge | ||||||||||||||||||||||||||
| (Loss) income before taxes | ( |
( |
( |
|||||||||||||||||||||||
| Income tax (benefit) expense | ( |
( |
( |
|||||||||||||||||||||||
| Net (loss) income | $ | ( |
$ | $ | ( |
$ | ( |
|||||||||||||||||||
28
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-Q) 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.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus (“COVID-19”) was identified and the disease has since spread across the world, including the United States. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak of the pandemic is materially adversely affecting the Company’s employees, patients, communities and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, the Company’s results of operations, financial condition and cash flows are likely to continue to be materially adversely affected, particularly if the pandemic persists for a significant amount of time.
The impact from the COVID-19 pandemic and the related disruptions have had a material adverse impact on our results of operations, volume growth rates and clinical test volumes in the first half of 2020. Clinical test volume, excluding COVID-19 Polymerase Chain Reaction (“PCR”) tests, was down approximately 18% in the second quarter and approximately 6% in the first half of 2020. Demand may continue to decrease to historically low levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Such events may result in business disruption, reduced revenues and number of tests, any of which could materially affect our business, financial condition, and results of operations.
We have implemented significant actions to protect our employees and maintain a safe environment while maintaining a continuity of critical oncology testing for cancer patients. Among other actions, we have de-densified our laboratories and facilities, adjusted laboratory shifts, restricted visitors to facilities, restricted employee travel, implemented an Emergency Paid Time Off policy, provided remote work-environment training and support, and managed its supply chains. Importantly, all main laboratory facilities have remained open and there has been an uninterrupted continuity of high-quality testing services for clients. The Company's top priority remains the health and safety of employees and continued quality and service for all clients with a focus on patient care. We are positioned to recover from the effects of the COVID-19 pandemic. The addition of COVID-19 PCR testing capabilities and our broad test menu enables our sales teams to identify opportunities for increasing revenues.
For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q, and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020.
Overview
We operate a network of cancer-focused testing laboratories in the United States, Europe and Asia. Our mission is to improve patient care through exceptional cancer-focused testing services. Our vision is to become the World’s leading cancer testing and information company by delivering uncompromising quality, exceptional service and innovative solutions.
As of June 30, 2020, the Company had laboratory locations in Fort Myers and Tampa, Florida; Aliso Viejo, Carlsbad, Fresno and San Diego, California; Houston, Texas; Atlanta, Georgia; Nashville, Tennessee; Rolle, Switzerland and Singapore. The Company currently offers the following types of testing services:
a.Cytogenetics (“karyotype analysis”) – the study of normal and abnormal chromosomes and their relationship to disease. Cytogenetics involves analyzing the chromosome structure to identify changes from patterns seen
29
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in normal chromosomes. Cytogenetic studies are often performed to provide diagnostic, prognostic and occasionally predictive information for patients with hematological malignancies.
b.Fluorescence In-Situ Hybridization (“FISH”) – a molecular cytogenetic technique that focuses on detecting and localizing the presence or absence of specific DNA sequences and genes on chromosomes. 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 numerous types of gene alterations, including amplifications, deletions, and translocations.
c.Flow cytometry – a technique utilized to measure the characteristics of cell populations. Typically performed on liquid samples such as peripheral blood and bone marrow aspirate, it may also be performed on solid tissue samples such as lymph nodes following additional processing steps. Cells 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 cellular antigens and are used to identify abnormal and/or malignant cell populations. Flow cytometry is typically utilized in diagnosing a wide variety of hematopoietic and lymphoid neoplasms. Flow cytometry is also used to monitor patients during the course of therapy to identify extremely low levels of residual malignant cells, known as minimal residual disease (MRD) monitoring.
d.Immunohistochemistry (IHC) and Digital Imaging – the process of localizing cellular proteins in tissue sections and relies on the principle of antigen-antibody binding. IHC is widely used in the diagnosis of abnormal cells such as those found in cancer. Specific surface membrane, cytoplasmic, or nuclear markers may be identified. IHC is also widely used to understand the distribution and localization of differentially expressed proteins. Digital imaging allows clients to visualize scanned slides, and also 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 field which includes a broad range of laboratory techniques utilized in cancer testing. Most molecular techniques rely on the analysis of DNA and/or RNA, as well as the structure and function of genes at the molecular level. Molecular testing technologies include: liquid biopsy tests for advanced non-small cell lung cancer, all solid tumor types (pan-cancer), and certain breast cancer cases; DNA fragment length analysis; polymerase chain reaction (PCR) analysis; reverse transcriptase polymerase chain reaction (RT-PCR) analysis, real-time (or quantitative) polymerase chain reaction (qPCR) analysis; bi-directional Sanger sequencing analysis; and next-generation sequencing (NGS) analysis.
f.Morphologic analysis – the process of analyzing cells under the microscope by a pathologist, usually for the purpose of diagnosis. Morphologic analysis may be performed on a wide variety of samples, such as peripheral blood, bone marrow, lymph node, and from other sites such as lung, breast, etc. The services provided at NeoGenomics may include primary diagnosis, in which a sample is received for processing and our pathologists provide the initial diagnosis; or may include secondary consultations, in which slides and/or tissue blocks are received from an outside institution for second opinion. In the latter setting, the expert pathologists at NeoGenomics assist our client pathologists on their most difficult and complex cases.
Clinical Services Segment
The clinical cancer testing services we offer to community-based pathologists are designed to be a natural extension of, and complementary to, the services that they perform within their own practices. We believe our relationship as a non-competitive partner to community-based pathology practices, hospital pathology labs and academic centers empowers them to expand their 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. Community-based pathology practices and hospital pathology labs may order certain testing services on a technical component only (“TC” or “tech-only”) basis, which allows them to participate in the diagnostic process by performing the professional component (“PC”) interpretation services without having to hire laboratory technologists or purchase the sophisticated equipment needed to perform the technical component of the tests. We also support our pathology clients with interpretation and consultative services using our own specialized team of pathologists for difficult or complex cases and provide overflow interpretation services when requested by clients.
NeoGenomics is a leading provider of Molecular and next-generation sequencing (“NGS”) testing. These tests are interpreted by NeoGenomics’ team of Molecular experts and are often ordered in conjunction with other testing modalities. NGS panels are one of our fastest growing testing areas and clients can often receive a significant amount of biomarker information from very
30
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
limited samples. These comprehensive panels can allow for faster treatment decisions for patients as compared to a series of single-gene molecular tests being ordered sequentially. NeoGenomics has one of the broadest Molecular menus in the industry and our targeted NeoTYPE panels include genes relevant to a particular cancer type, as well as other complementary tests such as immunohistochemistry and FISH. This comprehensive menu means that NeoGenomics can be a “one-stop shop” for our clients who can get all of their oncology testing needs satisfied by our laboratory. This is attractive to our clients as patient samples do not need to be split and then managed across several laboratories. NeoGenomics expects our Molecular laboratory and NGS capabilities to be a key growth driver in the coming years.
In addition, we directly serve oncology, dermatology and other clinician practices that prefer to have a direct relationship with a laboratory for cancer-related genetic testing services. We typically service these types of clients with a comprehensive service offering where we perform both the technical and professional components of the tests ordered. In certain instances, larger clinician practices have begun to internalize pathology interpretation services, and our tech-only service offering allows these larger clinician practices to also participate in the diagnostic process by performing the PC interpretation services on TC testing performed by NeoGenomics. In these instances, NeoGenomics will typically provide all of the more complex, molecular testing services.
Pharma Services Segment
Our Pharma Services revenue consists of three revenue streams:
•Clinical trials and research;
•Validation laboratory services; and
•Informatics
Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research. This portion of our business often involves working with the pharmaceutical firms (sponsors) on study design as well as performing the required testing. Our medical team often advises the sponsor and works closely with them as specimens are received from the enrolled sites. We also work on developing tests that will be used as part of a companion diagnostic to determine patients’ response to a particular drug. As studies unfold, our clinical trials team reports the data and often provides key analysis and insights back to the sponsors.
Our Pharma Services segment 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 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 (“FDA”) for companion diagnostics. Our Pharma Services strategy is focused on helping bring more effective oncology treatments to market through providing world-class laboratory services in oncology to key pharmaceutical companies in the industry.
We believe that NeoGenomics is uniquely positioned to service Pharma sponsors across the full continuum of the drug development process. Our Pharma Services team can work with them during the basic research and development phase as compounds come out of translational research departments as well as work with clients from Phase 1 clinical trials through Phases II and III as the sponsors work to prove the efficacy of their drugs. The laboratory biomarker tests that are developed during this process may become companion diagnostic, or CDx tests, that will be used on patients to determine if they could respond to a certain therapy. NeoGenomics is able to offer these CDx tests to the market immediately after FDA approval as part of our Day 1 readiness program. This ability helps to speed the commercialization of their drug and enables Pharma sponsors to reach patients through NeoGenomics broad distribution channel in the Clinical Services segment.
We are building informatics and data-related tools to leverage our unique market position and oncology expertise to help our stakeholders solve real-world problems such as identifying patients for clinical trials or providing clinical decision support tools for physicians and providers.
2020 Focus Areas:
We are committed to improving patient care while being an innovative leader in our industry. Over the past two years we have grown our business organically as well as through the acquisition of Genesis Acquisition Holding Corp (“Genesis”), and its
31
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
wholly owned subsidiary, Genoptix, Inc. (“Genoptix”, and collectively with its subsidiaries and Genesis, referred to herein as “Genoptix”) in December of 2018, as well as the acquisition of the Oncology Division assets of Human Longevity, Inc. (“HLI - Oncology”) in January of 2020. Our focus for 2020 includes initiatives to drive profitable growth while pursuing innovation and maintaining exceptional service levels. We expect these initiatives to allow the Company to continue becoming one of the world’s leading cancer testing and information company.
Strengthen Our World-Class Culture
Enhancing our culture to closely align with the values of our Company is a key priority. We will invest in the development of our people by creating mentoring, coaching and training opportunities to enhance and capitalize on the talent within our Company. We believe these initiatives will foster a culture of accountability and empowerment. We also believe these initiatives are necessary to ensure the success of our Company.
We actively promote the health and well-being of our employees. We recognize that health goes beyond greater health benefits and preventative care and includes the quality of the physical work environment and programs that encourage social responsibility and community engagement.
Additionally, inclusive communication is a key element in our high performance culture. Effective communication facilitates collaboration and enhances our employees’ understanding of their contributions to the Company’s overall objectives. We will foster employee engagement through collaborative forums, frequent team dialogue and recognition programs to reward teams for exceptional performance. Our employee retention rate is above average for our industry and continuing to strengthen our culture will enable us to recruit and retain world-class talent.
Continue to Provide Uncompromising Quality and Exceptional Service
Maintaining the highest quality laboratory operations and service levels has enabled us to consistently grow our business. We are continuously looking for ways to improve quality and implement best practices to streamline processes. We are focused on increasing automation with solutions that will maintain quality while improving efficiency in operations.
We will continue to grow a culture of quality through our leadership, coaching and employee training initiatives. We aim to empower our employees to deliver high-quality results in their respective function. We will implement initiatives to measure and improve turnaround times while maintaining a culture of quality, which we expect will continue to meet or exceed our customers' expectations.
Pursue Innovation and Growth
Our plans for 2020 include initiatives to continue to drive profitable growth and innovate. We will continue to pursue market share gains by providing high complexity, cancer-related laboratory testing services to hospitals, community-based pathology and oncology practices, academic centers, clinicians, and pharmaceutical companies. Additionally, we will focus on continued reimbursement effectiveness through improving coverage, streamlining processes and providing clients more efficient, automated ordering methods, which we believe will continue to fuel our growth and market share.
Our laboratory and informatics teams will continue focus on new assays and product offerings, including continued progress towards liquid biopsy, minimal residual disease (“MRD”) and other high-quality tests. We expect this to result in increased market share as well as enabling us to maintain our high levels of client retention.
Our broad and innovative test menu of molecular, including NGS, immunohistochemistry, and other testing has helped make us a “one-stop shop” for many clients who value that all of their testing can be sent to one laboratory. We will continue to look for growth opportunities through mergers and/or acquisitions and are focused on strategic opportunities that would be complementary to our menu of services and would increase our earnings and cash flow in the short to medium time frame. We are also focused on investing in business development and informatics capabilities to partner with our key stakeholders, including patients, providers, payers and pharmaceutical companies to provide solutions to current or near-term problems that they face.
Competitive Strengths
In addition to the competitive strengths discussed below, the Company believes that its superior testing technologies and instrumentation, laboratory information system, client education programs and broad domestic and growing international presence also differentiates NeoGenomics from its competitors.
Turnaround Times
We strive to provide industry leading turnaround times for test results to our clients nationwide, both in the Clinical Services and Pharma Services segments. By providing information to our clients in a rapid manner, physicians can begin treating their patients as soon as possible. Our consistent timeliness of results by our Clinical Services segment is a competitive strength and
32
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
a driver of additional testing requests by 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. Additionally, we believe that our rapid turnaround time on testing and our project milestones are a key differentiator in our Pharma Services segment.
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, 2020, we employed or contracted with over 120 M.D.s and Ph.Ds. We have many nationally and world-renowned pathologists on staff, which is a key differentiator from many smaller laboratories. Our clinical customers look to our staff and their expertise and they often call our medical team on challenging cases. For our Pharma Services segment, many sponsors work with our medical team on their study design and on the interpretation of results from the studies. Our medical team is a key differentiator as we have a depth of medical expertise that many other laboratories cannot offer to Pharmaceutical companies.
Innovative Service Offerings
We believe 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 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 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 their testing results. 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.
We believe we have one of the broadest Molecular and Next-Generation Sequencing test menus in the world. Clients have the ability to order single gene molecular tests, targeted NeoTYPE panels that include the relevant actionable genes for a particular cancer type as well as large NGS panels. Our Pharma Services Division offers a full range of sequencing testing including whole exome sequencing. Our menu enables us to be a true “one-stop shop” for our clients as we can meet all of their oncology testing needs.
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. Our Pharma Services segment has a dedicated team of business development specialists who are experienced in working with pharma sponsors and helping them with the testing needs of their research and development projects as well as Phase I, II and III studies. These sales representatives utilize our custom Customer Relationship Management System (“CRM”) to manage their territories, and we have integrated all of the important customer care functionality within our Laboratory Information Services (“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. Our sales force educates clients on new test offerings and their proper utilization and our representatives are often seen as trusted advisors by our clients.
Seasonality
The majority of our clinical 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 tornadoes in certain regions, consequently reducing revenues and cash flows in any affected period.
In our Pharma Services segment, we enter into both short term and long term contracts, ranging from one month to several years. While the volume of this testing is not as directly affected by seasonality as described above, the testing volume does
33
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
vary based on the terms of the contract. Our volumes are often based on how quickly sponsors can get patient enrollees for their trials and seasonality can impact how quickly they can get patients enrolled. Many of our long term contracts contain specific performance obligations where the testing is performed on a specific schedule. This results in revenue that is not consistent among periods. In addition, this results in backlog that can be significant.
Results of Operations for the Three and Six Months Ended June 30, 2020 as Compared to the Three and Six Months Ended June 30, 2019
The following table presents the Consolidated Statements of Operations as a percentage of revenue:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||
| Net revenue | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||
| Cost of revenue | 67.8 | % | 51.9 | % | 61.5 | % | 51.3 | % | ||||||||||||||||||
| Gross Profit | 32.2 | % | 48.1 | % | 38.5 | % | 48.7 | % | ||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||
| General and administrative | 39.8 | % | 29.1 | % | 36.7 | % | 31.3 | % | ||||||||||||||||||
| Research and development | 2.4 | % | 2.5 | % | 2.2 | % | 1.9 | % | ||||||||||||||||||
| Sales and marketing | 11.7 | % | 12.1 | % | 12.2 | % | 11.9 | % | ||||||||||||||||||
| Total operating expenses | 53.9 | % | 43.7 | % | 51.1 | % | 45.1 | % | ||||||||||||||||||
| (Loss) income from operations | (21.7) | % | 4.4 | % | (12.6) | % | 3.6 | % | ||||||||||||||||||
| Interest expense, net | 1.8 | % | 1.3 | % | 1.2 | % | 1.6 | % | ||||||||||||||||||
| Other (income) expense | (8.5) | % | — | % | (4.0) | % | 2.6 | % | ||||||||||||||||||
| Loss on extinguishment of debt | 1.6 | % | 1.0 | % | 0.7 | % | 0.5 | % | ||||||||||||||||||
| Loss on termination of cash flow hedge | 4.0 | % | — | % | 1.8 | % | — | % | ||||||||||||||||||
| (Loss) income before taxes | (20.6) | % | 2.1 | % | (12.3) | % | (1.1) | % | ||||||||||||||||||
| Income tax (benefit) expense | (12.8) | % | 0.1 | % | (5.2) | % | (0.9) | % | ||||||||||||||||||
| Net (loss) income | (7.8) | % | 2.0 | % | (7.1) | % | (0.2) | % | ||||||||||||||||||
Clinical and Pharma Services revenue for the periods presented are as follows ($ in thousands):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | |||||||||||||||||||||||||||||||||||||||||||
| Net revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Clinical Services | $ | 73,884 | $ | 88,982 | $ | (15,098) | (17.0) | % | $ | 166,866 | $ | 175,192 | $ | (8,326) | (4.8) | % | ||||||||||||||||||||||||||||||||||
| Pharma Services | 13,093 | 12,731 | 362 | 2.8 | % | 26,141 | 22,098 | 4,043 | 18.3 | % | ||||||||||||||||||||||||||||||||||||||||
| Total Revenue | $ | 86,977 | $ | 101,713 | $ | (14,736) | (14.5) | % | $ | 193,007 | $ | 197,290 | $ | (4,283) | (2.2) | % | ||||||||||||||||||||||||||||||||||
Revenue
Clinical Services revenue for the three and six month period ending June 30, 2020 decreased $15.1 million and $8.3 million when compared to the same period in 2019. Testing volumes also decreased in our clinical testing business by approximately 18.2% and 6.1% and for the three and six month period ending June 30, 2020 compared to the same period in 2019, excluding COVID-19 PCR tests. The decreases in revenue and volume was a result of a decline in overall Clinical Services testing volume related to the COVID-19 pandemic. We are positioned to recover from the effects of the COVID-19 pandemic. The addition of COVID-19 PCR testing capabilities and our broad test menu enables our sales teams to identify opportunities for increasing revenues.
Pharma Services revenue for the three and six month period ended June 30, 2020 increased $0.4 million and $4.0 million compared to the same period in 2019, primarily due to the impact of the acquisition of HLI - Oncology. This growth was partially offset by an overall decrease in revenue due to the COVID-19 pandemic. In addition, our backlog of signed contracts
34
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
has continued to grow from $130.3 million as of December 31, 2019 to $172.9 million as of June 30, 2020. We expect this backlog to result in higher revenues in future quarters.
The following table shows Clinical Services revenue, cost of revenue, requisitions received and tests performed for the three and six months ended June 30, 2020 and 2019.
Testing revenue and cost of revenue are presented in thousands below:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | % Change | 2020 | 2019 | % Change | |||||||||||||||||||||||||||||||||
Clinical Services: (1)
|
||||||||||||||||||||||||||||||||||||||
| Requisitions (cases) received | 114,413 | 144,983 | (21.1) | % | 258,732 | 282,094 | (8.3) | % | ||||||||||||||||||||||||||||||
| Number of tests performed | 204,844 | 250,330 | (18.2) | % | 455,220 | 484,647 | (6.1) | % | ||||||||||||||||||||||||||||||
| Average number of tests/requisitions | 1.79 | 1.73 | 3.5 | % | 1.76 | 1.72 | 2.3 | % | ||||||||||||||||||||||||||||||
| Clinical testing revenue | $ | 71,921 | $ | 88,982 | (19.2) | % | $ | 164,903 | $ | 175,192 | (5.9) | % | ||||||||||||||||||||||||||
| Average revenue/requisition | $ | 629 | $ | 614 | 2.4 | % | $ | 637 | $ | 621 | 2.6 | % | ||||||||||||||||||||||||||
| Average revenue/test | $ | 351 | $ | 355 | (1.1) | % | $ | 362 | $ | 361 | 0.3 | % | ||||||||||||||||||||||||||
| Cost of revenue | $ | 47,320 | $ | 46,380 | 2.0 | % | $ | 96,244 | $ | 89,031 | 8.1 | % | ||||||||||||||||||||||||||
| Average cost/requisition | $ | 414 | $ | 320 | 29.4 | % | $ | 372 | $ | 316 | 17.7 | % | ||||||||||||||||||||||||||
| Average cost/test | $ | 231 | $ | 185 | 24.9 | % | $ | 211 | $ | 184 | 14.7 | % | ||||||||||||||||||||||||||
(1) Clinical tests exclude requisitions, tests, revenue and costs of revenue for Pharma Services and COVID-19 PCR tests.
Average revenue per test was approximately flat for the three and six months ended June 30, 2020 compared to the corresponding period in 2019.
Cost of Revenue and Gross Profit
Average cost per test increased 24.9% and 14.7% for the three and six month period ended June 30, 2020, compared to the corresponding period in 2019, reflecting a volume reduction due to the COVID-19 pandemic and the fixed nature of many of our laboratory costs. In addition, the Company did not reduce its workforce due to temporary declines in volume related to the COVID-19 pandemic.
Cost of revenue includes payroll and payroll related costs for performing tests, maintenance and depreciation of laboratory equipment, rent for laboratory facilities, laboratory reagents, probes and supplies, and delivery and courier costs relating to the transportation of specimens to be tested.
The consolidated cost of revenue and gross profit metrics are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | % Change | 2020 | 2019 | % Change | ||||||||||||||||||||||||||||||||
| Cost of revenue: | ||||||||||||||||||||||||||||||||||||||
| Clinical Services | $ | 48,757 | $ | 46,380 | 5.1 | % | $ | 97,680 | $ | 89,031 | 9.7 | % | ||||||||||||||||||||||||||
| Pharma Services | 10,214 | 6,367 | 60.4 | % | 20,952 | 12,178 | 72.0 | % | ||||||||||||||||||||||||||||||
| Total cost of revenue | $ | 58,971 | $ | 52,747 | 11.8 | % | $ | 118,632 | $ | 101,209 | 17.2 | % | ||||||||||||||||||||||||||
| Cost of revenue as a % of revenue | 67.8 | % | 51.9 | % | 61.5 | % | 51.3 | % | ||||||||||||||||||||||||||||||
| Gross profit: | ||||||||||||||||||||||||||||||||||||||
| Clinical Services | $ | 25,127 | $ | 42,602 | (41.0) | % | $ | 69,186 | $ | 86,161 | (19.7) | % | ||||||||||||||||||||||||||
| Pharma Services | 2,879 | 6,364 | (54.8) | % | 5,189 | 9,920 | (47.7) | % | ||||||||||||||||||||||||||||||
| Total gross profit | $ | 28,006 | $ | 48,966 | (42.8) | % | $ | 74,375 | $ | 96,081 | (22.6) | % | ||||||||||||||||||||||||||
| Gross profit margin | 32.2 | % | 48.1 | % | 38.5 | % | 48.7 | % | ||||||||||||||||||||||||||||||
35
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Consolidated cost of revenue in dollars increased for the three and six months ended June 30, 2020 when compared to the same period in 2019. Cost of revenue as a percentage of revenue also increased year-over-year. These increases in cost of revenue are largely due to an increase in payroll related costs.
Gross profit margin decreased for the three and six months ended June 30, 2020, compared to the same period in 2019, primarily due to the timing of Pharma Services revenue, higher costs due to the integration of Genoptix and HLI - Oncology and additional testing capacity which was unused due to the impact of the COVID-19 pandemic.
General and Administrative Expenses
General and administrative expenses consist of payroll and payroll related costs for our billing, finance, human resources, information technology and other administrative personnel as well as stock-based compensation. We also allocate professional services, facilities expense, IT infrastructure costs, depreciation, amortization and other administrative-related costs to general and administrative expenses.
Consolidated general and administrative expenses are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| General and administrative | $ | 34,613 | $ | 29,577 | $ | 5,036 | 17.0 | % | $ | 70,957 | $ | 61,719 | $ | 9,238 | 15.0 | % | ||||||||||||||||||||||||||||||||||
| As a % of revenue | 39.8 | % | 29.1 | % | 36.7 | % | 31.3 | % | ||||||||||||||||||||||||||||||||||||||||||
General and administrative expenses increased $5.0 million and $9.2 million for the three and six months ended June 30, 2020, compared to the same period in 2019. The increase reflects acquisition costs and incremental expenses related to the acquisition of HLI - Oncology as well as higher payroll and payroll related costs due to increases in personnel to support our near and long-term growth. Acquisition and integration costs related to HLI - Oncology were approximately $0.1 million and $1.4 million for the three and six months ended June 30, 2020.
We expect our general and administrative expenses to increase in total but decrease as a percentage of revenue as we add employee and compensation expenses, incur additional expenses associated with the expansion of our facilities, and continue to expand our physical and technological infrastructure to support our anticipated growth.
Research and Development Expenses
Research and development expenses relate to costs of developing new proprietary and non-proprietary genetic tests, including payroll and payroll related costs, maintenance of laboratory equipment, laboratory supplies (reagents), and outside consultants and experts assisting our research and development team.
Consolidated research and development expenses for the periods presented are as follows:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 2,105 | $ | 2,587 | $ | (482) | (18.6) | % | $ | 4,165 | $ | 3,796 | $ | 369 | 9.7 | % | ||||||||||||||||||||||||||||||||||
| As a % of revenue | 2.4 | % | 2.5 | % | 2.2 | % | 1.9 | % | ||||||||||||||||||||||||||||||||||||||||||
Research and development expenses decreased $0.5 million for the three months ended June 30, 2020 due the timing of project expenses. There was an increase of $0.4 million for the six months ended June 30, 2020 compared to the same period in 2019. This was driven by investments in new test development, particularly in COVID-19 PCR test development, our Next-Generation Sequencing and FDA initiatives.
We anticipate research and development expenditures will increase in future quarters as we invest in innovation projects and bringing new tests to market.
Sales and Marketing Expenses
Sales and marketing expenses are primarily attributable to employee-related costs including sales management, sales representatives, sales and marketing consultants and marketing and customer service personnel.
Consolidated sales and marketing expenses for the periods presented are as follows:
36
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||
| ($ in thousands) | 2020 | 2019 | $ Change | % Change | 2020 | 2019 | $ Change | % Change | ||||||||||||||||||||||||||||||||||||||||||
| Sales and marketing | $10,195 | $ | 12,324 | $ | (2,129) | (17.3) | % | $ | 23,453 | $ | 23,540 | $ | (87) | (0.4) | % | |||||||||||||||||||||||||||||||||||
| As a % of revenue | 11.7 | % | 12.1 | % | 12.2 | % | 11.9 | % | ||||||||||||||||||||||||||||||||||||||||||
Sales and marketing expenses decreased $2.1 million and $0.1 million, respectively, for the three and six months ended June 30, 2020, when compared to the same period in 2019. This decrease primarily reflects lower commissions paid in addition to a decrease in travel and tradeshow expenses as all travel was halted due to the COVID-19 pandemic. We expect higher commissions expense in the coming years as the sales representatives continue generating new business with a focus on oncology office sales. We expect our sales and marketing expenses over the long term to align with changes in revenue.
Interest Expense, net
Net interest expense is comprised of interest incurred on our term loan, revolving credit facility and our other financing obligations offset by the interest income we earn on cash balances. Net interest expense for the three and six months ending June 30, 2020 increased 18.7%, or $0.2 million and decreased $0.8 million, or 24.4%, respectively, compared to the same period in 2019. This six-month decrease is due to the extinguishment of our Prior Senior Secured Credit Facility.
Other (income) expense, net
For the three and six months ended June 30, 2020, other (income) expense, net, was income of $7.4 million and $7.6 million, respectively. This income primarily relates to the recognition of $7.9 million in grant income related to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) Public Health and Emergency Fund. The Public Health and Emergency Fund created by the CARES Act and payments made are intended to reimburse healthcare providers for health care related expenses or lost revenues attributable to COVID-19 and are not required to be repaid provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing for COVID-19 patients. The stimulus payments were issued to partially offset losses in consolidated revenue due to the impact of the COVID-19 pandemic. For the three and six months ended June 30, 2019, the Company reported income of $0 and expense of $5.2 million, respectively, primarily related to a litigation settlement.
(Loss) Income Per Share
The following table provides consolidated net (loss) income available to common stockholders for each period along with the computation of basic and diluted net (loss) income per share for the three and six months ended June 30, 2020 and 2019 (in thousands, except per share amounts):
| Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||
| Net (loss) income available to common shareholders | $ | (6,824) | $ | 1,991 | $ | (13,802) | $ | (433) | |||||||||||||||
| Basic weighted average shares outstanding | 107,887 | 98,297 | 106,209 | 96,734 | |||||||||||||||||||
| Diluted weighted average shares outstanding | 107,887 | 102,336 | 106,209 | 96,734 | |||||||||||||||||||
| Basic net (loss) income per share | $ | (0.06) | $ | 0.02 | $ | (0.13) | $ | 0.00 | |||||||||||||||
| Diluted net (loss) income per share | $ | (0.06) | $ | 0.02 | $ | (0.13) | $ | 0.00 | |||||||||||||||
Non-GAAP Measures
Use of Non-GAAP Financial Measures
The Company’s financial results and financial guidance are provided in accordance with GAAP and using certain non-GAAP financial measures. Management believes that the presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of the Company’s core operating results and comparison of core operating results across reporting periods. Management also uses non-GAAP financial measures for financial and operational decision making, planning and forecasting purposes and to manage the Company’s business. Management believes that these non-GAAP financial measures enable investors to evaluate the Company’s operating results and future prospects in the same manner as management. The non-GAAP financial measures do not replace the presentation of GAAP financial results and should only be used as a supplement to, and not as a substitute for, the Company’s financial results presented in accordance with GAAP. There are limitations inherent in non-GAAP financial measures because they exclude charges and credits that are required to be included in a GAAP presentation, and do not present the full measure of the
37
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company’s recorded costs against its net revenue. In addition, the Company’s definition of the non-GAAP financial measures below may differ from non-GAAP measures used by other companies.
Definitions of Non-GAAP Measures
Non-GAAP Adjusted EBITDA
“Adjusted EBITDA” is defined by NeoGenomics as net income from continuing operations before: (i) interest expense, (ii) tax expense, (iii) depreciation and amortization expense, (iv) non-cash stock-based compensation expense, and, if applicable in a reporting period, (v) acquisition and integration related expenses, (vi) non-cash impairments of intangible assets, (vii) and other significant non-recurring or non-operating (income) or expenses, including any debt financing costs.
The following is a reconciliation of GAAP net (loss) income to Non-GAAP EBITDA and Adjusted EBITDA for the three and six months ended June 30, 2020:
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
| (in thousands) | 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||
| Net (loss) income (GAAP) | $ | (6,824) | $ | 1,991 | $ | (13,802) | $ | (433) | ||||||||||||||||||
| Adjustments to net (loss) income: | ||||||||||||||||||||||||||
| Interest expense, net | 1,548 | 1,304 | 2,367 | 3,130 | ||||||||||||||||||||||
| Income tax (benefit) expense | (11,132) | 175 | (10,043) | (1,848) | ||||||||||||||||||||||
| Amortization of intangibles | 2,467 | 2,543 | 4,919 | 5,102 | ||||||||||||||||||||||
| Depreciation | 5,937 | 5,081 | 12,177 | 10,352 | ||||||||||||||||||||||
| EBITDA (non-GAAP) | $ | (8,004) | $ | 11,094 | $ | (4,382) | $ | 16,303 | ||||||||||||||||||
| Further adjustments to EBITDA: | ||||||||||||||||||||||||||
| Acquisition and integration related expenses | 110 | 512 | 1,406 | 1,778 | ||||||||||||||||||||||
Other significant non-recurring income and expenses (1)
|
(1,965) | 1,018 | (1,996) | 6,163 | ||||||||||||||||||||||
| Non-cash stock-based compensation expense | 2,635 | 2,313 | 4,821 | 4,452 | ||||||||||||||||||||||
| Adjusted EBITDA (non-GAAP) | $ | (7,224) | $ | 14,937 | $ | (151) | $ | 28,696 | ||||||||||||||||||
(1) Other significant non-recurring income and expenses includes reimbursements received related to the CARES Act, cash flow hedge termination fees, debt retirement fees and other non-recurring items.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash generated from operations, public and private sales of equity securities, and bank debt borrowings.
The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the six months ended June 30, 2020 and 2019 as well balances of cash and cash equivalents and working capital:
| Six Months Ended June 30, | ||||||||||||||
| (in thousands) | 2020 | 2019 | ||||||||||||
| Net cash (used in) provided by: | ||||||||||||||
| Operating activities | $ | (5,051) | $ | 1,376 | ||||||||||
| Investing activities | (59,871) | (6,238) | ||||||||||||
| Financing activities | 223,217 | 162,487 | ||||||||||||
| Net change in cash, cash equivalents and restricted cash | 158,295 | 157,625 | ||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | $ | 173,016 | $ | 9,811 | ||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 331,311 | $ | 167,436 | ||||||||||
Working Capital (1), end of period
|
$ | 357,300 | $ | 217,183 | ||||||||||
(1) Defined as current assets less current liabilities.
Cash Flows from Operating Activities
38
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the six months ended June 30, 2020, cash flows used in operating activities were $5.1 million, a $6.4 million increase compared to the same period in 2019, consisting of a net loss of $13.8 million and the cash flow impact of net increases in cash used for operating assets and liabilities of $23.4 million. Included in the net loss of $13.8 million was grant income of $7.9 million related to the CARES Act. This increase in the use of cash was primarily driven by increases in inventory, prepaid assets, funds distributed for the construction of the new headquarters facility, as well as a decrease in accounts payable. The increase in cash used in operating activities was partially offset by net working capital adjustments to the net loss of $32.2 million. Receivables have decreased year-over-year due to decreases in revenue as well as timing of cash receipts. Inventory increased due to higher spend on materials to mitigate the risk of potential supply chain disruptions resulting from the COVID-19 pandemic. As of June 30, 2020, we have paid $6.1 million related to the construction of the new headquarters facility from the restricted cash escrow account.
Cash Flows from Investing Activities
During the six months ended June 30, 2020, cash used in investing activities was $59.9 million, an increase of approximately $53.6 million compared to the same period in 2019. This was primarily due to the acquisition of the Oncology Division of HLI, the investment made in Inivata, as well as cash used for capital expenditures.
Cash Flows from Financing Activities
During the six months ended June 30, 2020, cash provided by financing activities was $223.2 million compared to $162.5 million in the same period in 2019. Cash provided by financing activities during the six months ended June 30, 2020 consisted of convertible debt proceeds of $194.4 million, net of deferred finance charges, proceeds from the equity offering of $127.3 million and $5.5 million for the net issuance of common stock. This activity was primarily offset by the use of cash in the amounts of $100.6 million for the net repayment of the term loan and other financing obligations and $3.3 million in cash flow hedge terminations fees.
Liquidity Outlook
On May 4, 2020, the Company completed the sale of $175.0 million of 1.25% Convertible Senior Notes due May 2025 (the “Convertible Notes”). And on May 19, 2020, the Underwriters of the Convertible Notes exercised their option to purchase an additional $26.3 million aggregate principal amount of the Convertible Notes (the “Over-allotment Option”) on the same terms and conditions, solely to cover over-allotments with respect to the Convertible Notes offering. The total net proceeds from the issuance of the Convertible Notes and the total exercise of the Over-allotment Option was approximately $194.4 million, which includes approximately $6.9 million of discounts, commissions and offering expenses paid by the Company. For further details regarding the Convertible Notes, please refer to Note 7. Debt, in the accompanying notes to the consolidated financial statements.
In addition, in April 2020, the Company entered into an underwriting agreement relating to the issuance and sale of 4,400,000 shares of the Company’s common stock (“Common Stock Offering”), $0.001 par value per share. The price to the public in this offering was $28.50 per share and the Company agreed to sell the shares to the Underwriters at the public offering price, less underwriting discounts and commission of $1.71 per share. Under the terms of the underwriting agreement, the Company also granted the Underwriters a 30-day option to purchase up to 660,000 additional shares of Common Stock at the public offering price, less underwriting discounts and commissions. In June 2020, closing took place on a partial exercise of the Underwriters’ option and the Company issued the Underwriters an additional 351,500 shares. The proceeds from the Common Stock Offering and partial exercise of the Underwriters’ option were approximately $127.3 million, net of underwriting commissions of approximately $8.1 million.
The Company used $96.3 million of the net proceeds from the offering of the Convertible Notes and the Common Stock Offering to repay all outstanding amounts, including principal, accrued interest and fees, under its Prior Senior Secured Credit Agreement with PNC Bank National Association and intends to use the remainder for general corporate purposes and may use a portion of the net proceeds to acquire or invest in complementary businesses and technologies.
We had approximately $295.3 million in unrestricted cash and cash equivalents as of June 30, 2020. We believe that the cash on hand and cash collections will provide adequate resources to meet our operating commitments and interest payments for at least the next 12 months from the issuance of these financial statements.
Capital Expenditures
We currently forecast capital expenditures in order to execute on our business plan and maintain growth; however, the actual amount and timing of such capital expenditures will ultimately be determined by the volume of business. We currently anticipate that our cash payments for capital expenditures for the year ending December 31, 2020 will be in the range of $25 million to $30 million. During the six months ended June 30, 2020, we purchased, with cash approximately $9.7 million of
39
NEOGENOMICS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
capital equipment, software and leasehold improvements. We have historically funded and plan to continue funding these capital expenditures with financing obligations, cash, and through bank loan facilities, if necessary.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
There have been no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019, except for the adoption of new accounting standards.
Off-balance Sheet Arrangements
On May 22, 2020, in conjunction with the Investment Agreement, the Company and Inivata entered into a five-year, line of credit agreement in the amount of $15.0 million. The amounts borrowed under the line of credit are contractually limited to the working capital purposes of Inivata, but not towards acquisitions of companies, businesses or undertakings. This line of credit has an availability period beginning on January 1, 2021 and ends one month prior to the final repayment date of January 1, 2026. The line of credit bears interest at 0% per annum and interest and unpaid principal balance is payable on the final repayment date. As of June 30, 2020, the Company believes it has sufficient funds to support the line of credit. Please refer to Note 13. Investment in Non-Consolidated Affiliate, in the accompanying notes to the consolidated financial statements, for additional information on our non-consolidated affiliate.
40
NEOGENOMICS, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and other relevant market rate or price changes. We regularly evaluate our exposure to such changes and may elect to minimize this risk through the use of interest rate swap agreements. For further details regarding our significant accounting policies relating to derivative instruments and hedging activities, see Note B to our Consolidated Financial Statements included in our Annual Report on Form 10-K. We do not have any material foreign operations or foreign sales and thus have limited exposure to foreign currency exchange rate risk.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by SEC Rule 15d-15, our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the six months ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
NEOGENOMICS, INC.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None for the quarterly period ended June 30, 2020 .
ITEM 1A. RISK FACTORS
The following risk factors are in addition to the risks described in the Company’s Form 10-K under Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K for the for the year ended December 31, 2019, as filed with the SEC on February 28, 2020, and in Part II, Item 1A. included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 as filed with the SEC on April 29, 2020. The effects of the events and circumstances described in the following risk factors may heighten the risks contained in the Company’s Form 10-K.
Additional Risk Factors Related to Indebtedness
In April 2020, we issued $201.3 million aggregate principal amount of 1.25% Convertible Senior Notes due May 2025 (the “Convertible Notes”).
Servicing our Convertible Notes will require a significant amount of cash. We may not have sufficient cash flow from our business to pay our obligations under the notes.
Our ability to make scheduled payments of the principal of, to pay interest on, or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our indebtedness and make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Our ability to refinance the Convertible Notes will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
We may not have the ability to raise the funds necessary to settle conversions of the notes in cash or to repurchase the notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the notes.
Holders of the notes have the right to require us to repurchase their notes upon the occurrence of a fundamental change at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest, if any. In addition, upon conversion of the notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of notes surrendered therefor or notes being converted. In addition, our ability to repurchase the notes or to pay cash upon conversions of the notes may be limited by law, by regulatory authority or by agreements governing our future indebtedness. Our failure to repurchase notes at a time when the repurchase is required by the indenture or to pay any cash payable on future conversions of the notes as required by the indenture would constitute a default under the indenture. A default under the indenture or the occurrence of the fundamental change may also lead to a default under agreements governing our future indebtedness. If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the notes or make cash payments upon conversions thereof.
The conditional conversion feature of the Convertible Notes, when triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature of the Convertible Notes is triggered, holders of the Convertible Notes will be entitled to convert their Convertible Notes at any time during specified periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required to settle a portion or all of our conversion obligation in cash, which could adversely affect our liquidity.
In addition, even if holders of the Convertible Notes do not elect to convert their Convertible Notes, we could be required under applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than long-term liability, which would result in a material reduction of our net working capital.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, could have a material effect on our reported financial results.
42
The accounting method for reflecting the Convertible Notes on our balance sheet, accruing interest expense for the Convertible Notes and reflecting the underlying shares of our common stock in our reported diluted earnings per share may adversely affect our reported earnings and financial condition.
We expect that, under applicable accounting principles, the initial liability carrying amount of the Convertible Notes will be the fair value of a similar debt instrument that does not have a conversion feature, valued using our cost of capital for unconvertible debt. We will reflect the difference between the net proceeds from the sale of the Convertible Notes and the initial carrying amount as a debt discount for accounting purposes, which is amortized into interest expense over the term of the Convertible Notes. As a result of this amortization, the interest expense to be recognized for the Convertible Notes for accounting purposes will be greater than the cash interest payments we will pay on the Convertible Notes, which results in lower reported net income. The lower reported income resulting from this accounting treatment could depress the trading price of our common stock and the Convertible Notes.
In addition, under certain circumstances we may be eligible to use the treasury stock method to reflect the shares underlying the Convertible Notes in our diluted earnings per share. Under this method, if the conversion value of the Convertible Notes exceeds their principal amount for a reporting period, then we will calculate our diluted earnings per share assuming that all the Convertible Notes were converted and that we issued shares of our common stock to settle the excess. However, if reflecting the Convertible Notes in diluted earnings per share in this manner is anti-dilutive, or if the conversion value of the Convertible Notes does not exceed their principal amount for a reporting period, then the shares underlying the Convertible Notes will not be reflected in our diluted earnings per share. In addition, if accounting standards change in the future and we are not permitted to use the treasury stock method, then our diluted earnings per share may decline. For example, in July 2019, the Financial Accounting Standards Board published an exposure draft proposing to amend these accounting standards to eliminate the treasury stock method for convertible instruments and instead require application of the “if-converted” method. Under that method, if it is adopted, diluted earnings per share would generally be calculated assuming that all the Convertible Notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the if-converted method may reduce our reported diluted earnings per share.
Furthermore, if any of the conditions to the convertibility of the Convertible Notes is satisfied, then we may be required under applicable accounting standards to reclassify the liability carrying value of the Convertible Notes as a current, rather than a long-term, liability. This reclassification could be required even if no noteholders convert their Convertible Notes and could materially reduce our reported working capital.
Conversion of the Convertible Notes will dilute the ownership interest of existing stockholders, including holders who had previously converted their Convertible Notes, or may otherwise depress the price of our common stock.
The conversion of some or all of the Convertible Notes will dilute the ownership interests of existing stockholders to the extent we deliver shares of our common stock upon such conversion. The Convertible Notes are currently convertible and may from time to time in the future be convertible at the option of their holders prior to their scheduled terms under certain circumstances. Any sales in the public market of the common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Convertible Notes may encourage short selling by market participants because the conversion of the Convertible Notes could be used to satisfy short positions, or anticipated conversion of the Convertible Notes into shares of our common stock could depress the price of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None for the quarterly period ended June 30, 2020 .
Issuer Purchases of Equity Securities
The following table sets forth information concerning our purchases of common stock for the periods indicated:
43
| Period of Repurchase |
Total Number of Shares Purchased(1)
|
Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||||||||||||
| April 1, 2020 - April 30, 2020 | 43 | $ | 28.41 | — | — | ||||||||||||||||||
| May 1, 2020 - May 31, 2020 | 29,278 | 28.14 | — | — | |||||||||||||||||||
| June 1, 2020 - June 30, 2020 | — | — | — | — | |||||||||||||||||||
| Total | 29,321 | $ | 28.14 | — | — | ||||||||||||||||||
(1) The Company’s Equity Incentive Plan, as amended on May 25, 2017, allows participants to surrender already-owned shares having a fair market value equal to the required withholding tax related to the vesting of restricted stock. Pursuant to a share withholding election made by participants in connection with the vesting of such awards, all of which were outside of a publicly-announced repurchase plan, we acquired from such participants the shares noted in the table above to satisfy tax withholding obligations related to the vesting of their restricted stock. The average prices listed in the above table are averages of the fair market prices at which we valued shares withheld for purposes of calculating the number of shares to be withheld.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
44
NEOGENOMICS, INC.
ITEM 6. EXHIBITS
| EXHIBIT NO. |
DESCRIPTION | |||||||
| 10.1 | ||||||||
| 10.2 | ||||||||
| 10.3 | ||||||||
| 10.4 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 101 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Comprehensive Income (Loss) and (v) related notes | |||||||
| 104 | The cover page of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, formatted in iXBRL (included within Exhibit 101 attachments) |
|||||||
45
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: July 31, 2020 | NEOGENOMICS, INC. | |||||||||||||
| By: | /s/ Douglas M. VanOort | |||||||||||||
| Name: | Douglas M. VanOort | |||||||||||||
| Title: | Chairman and Chief Executive Officer | |||||||||||||
| By: | /s/ Kathryn B. McKenzie | |||||||||||||
| Name: | Kathryn B. McKenzie | |||||||||||||
| Title: | Chief Financial Officer | |||||||||||||
46