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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
  
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019 
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to                   
Commission File Number: 001-35756
NEOGENOMICS, INC.
(Exact name of registrant as specified in its charter) 
Nevada 74-2897368
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
   
12701 Commonwealth Drive, Suite 9, Fort Myers,  
Florida 33913 
(Address of principal executive offices) (Zip Code)
 
(239) 768-0600
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes     No  ☐
Indicate by check mark whether the registrant has submitted electronically 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     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.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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   
Securities registered pursuant to Section 12(b) of the Act:





Title of each classTrading SymbolName of each exchange on which registered
Common stock ($0.001 par value)NEONASDAQ

As of May 3, 2019, the registrant had 95,341,186 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 “SEC” on February 26, 2019 and as amended and filed with the SEC on May 8, 2019.

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, 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;
The impact of internalization of testing by customers;
Our ability to manage our indebtedness;
Our ability to protect our intellectual property from infringement;
Our ability to successfully integrate Genoptix into NeoGenomics including consolidating systems and facilities;
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; and
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.
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 and per share amounts)
(unaudited)
ASSETSMarch 31, 2019December 31, 2018
Current assets  
Cash and cash equivalents$13,195 $9,811 
Accounts receivable, net82,585 76,919 
Inventories9,670 8,650 
Prepaid assets7,504 7,727 
Other current assets2,991 561 
Total current assets
115,945 103,668 
Property and equipment (net of accumulated depreciation and amortization of $54,512 and $50,127, respectively)60,696 60,888 
Operating lease right-of-use assets19,734 — 
Intangible assets, net137,844 140,029 
Goodwill196,298 197,892 
Other assets2,826 2,538 
Total assets
$533,343 $505,015 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable16,514 17,779 
Accrued compensation18,851 19,062 
Accrued expenses and other current liabilities18,327 8,986 
Current portion of finance leases and obligations6,501 6,298 
Current portion of operating lease liabilities3,620 — 
Current portion of loans7,873 7,873 
Pharma contract liability1,017 927 
Total current liabilities
72,703 60,925 
Long-term liabilities
Long-term portion of finance leases and obligations5,253 5,250 
Long-term portion of operating lease liabilities16,648 — 
Long-term portion of loans, net85,995 87,880 
Revolving credit facility5,000 5,000 
Other long term liabilities3,740 3,060 
Deferred income tax liability, net20,156 22,457 
Total long-term liabilities
136,792 123,647 
Total liabilities
209,495 184,572 
Commitments and contingencies - see Note L
Stockholders' equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 95,303,510 and 94,465,440 shares issued and outstanding, respectively)95 94 
Additional paid-in capital378,571 372,186 
Accumulated other comprehensive income (loss)(1,136)(579)
Accumulated deficit(53,682)(51,258)
Total stockholders’ equity
323,848 320,443 
Total liabilities and stockholders' equity$533,343 $505,015 
 See notes to unaudited consolidated financial statements. 
5


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 Three Months Ended March 31,
 2019 2018
NET REVENUE  
Clinical Services$86,210 $56,971 
Pharma Services9,367 6,452 
Total Revenue95,577 63,423 
COST OF REVENUE48,462 36,120 
GROSS PROFIT47,115 27,303 
Operating expenses:
General and administrative32,142 17,067 
Research and development1,209 956 
Sales and marketing11,216 6,775 
Total operating expenses44,567 24,798 
INCOME FROM OPERATIONS2,548 2,505 
Interest expense, net1,826 1,486 
Other expense (income)5,169 (63)
Income (loss) before taxes(4,447)1,082 
Income tax (benefit) expense(2,023)438 
NET INCOME (LOSS)(2,424)644 
Deemed dividends on preferred stock 1,003 
Amortization of preferred stock beneficial conversion feature 1,853 
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS$(2,424)$(2,212)
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic$(0.03)$(0.03)
Diluted$(0.03)$(0.03)
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic94,740 80,507 
Diluted94,740 80,507 
See notes to unaudited consolidated financial statements.

6


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the Three Months Ended March 31,
2019 2018
NET INCOME (LOSS)$(2,424)$644 
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments (124)
(Loss) gain on effective cash flow hedges(557)623 
Total other comprehensive (loss) income(557)499 
COMPREHENSIVE INCOME (LOSS)$(2,981)$1,143 

See notes to unaudited consolidated financial statements.



7


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)

Series A Redeemable Convertible Preferred StockCommon StockAdditional Paid-InAccumulated Other ComprehensiveAccumulated
SharesAmountShares AmountCapitalIncome (Loss)DeficitTotal
Balance, January 1, 20186,864,000 $32,615 80,462,574 $80 $230,030 $274 $(58,422)$171,962 
Common stock issuance ESPP Plan— — 38,620 — 267 — — 267 
Stock issuance fees and expenses— — — — (97)— — (97)
Foreign currency translation adjustments— — — — — (45)— (45)
Gain on effective cash flow hedge— — — — — 270 — 270 
Issuance of common stock for stock options— — 67,259 1 215 — — 216 
Deemed dividends on preferred stock— 1,003 — — — — (1,003)(1,003)
Amortization of beneficial conversion feature— 1,853 — — — — (1,853)(1,853)
ESPP expense— — — — 54 — — 54 
Stock based compensation expense - options and restricted stock— — — — 1,570 — — 1,570 
Net income— — — — — — 644 $644 
Balance, March 31, 20186,864,000 $35,471 80,568,453 $81 $232,039 $499 $(60,634)171,985 
Balance, December 31, 2018 $ 94,465,440 $94 $372,186 $(579)$(51,258)$320,443 
Common stock issuance ESPP Plan— — 36,032 — 419 — — 419 
Stock issuance fees and expenses— — — — (66)— — (66)
Loss on effective cash flow hedge— — — — — (557)(557)
Issuance of restricted stock— — 182,502 — — — — — 
Issuance of common stock for stock options— — 619,536 1 3,893 — — 3,894 
ESPP expense— — — — 119 — — 119 
Stock based compensation expense - options and restricted stock— — — — 2,020 — — 2,020 
Net loss— — — — — — (2,424)(2,424)
Balance, March 31, 2019 $ 95,303,510 $95 $378,571 $(1,136)$(53,682)$323,848 

See notes to unaudited consolidated financial statements

8


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES2019 2018 
Net (loss) income $(2,424)$644 
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation5,271 3,633 
Amortization of intangibles2,559 1,413 
Amortization of debt issue costs150 113 
Loss (gain) on disposal of assets156 (7)
Non-cash stock based compensation2,139 1,624 
Non-cash operating lease expenses1,141 — 
Changes in assets and liabilities, net:
Accounts receivable, net(5,795)2,299 
Inventories(1,019)(41)
Prepaid expenses(250)(1,990)
Other current assets(265)(158)
Accounts payable, accrued and other liabilities4,434 6,782 
Net cash provided by operating activities6,097 14,312 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(3,196)(4,666)
Net cash used in investing activities(3,196)(4,666)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of equipment and other loans(1,797)(1,394)
Repayment of term loan (1,968)(6,338)
Issuance of common stock, net4,248 483 
Net cash provided by (used in) financing activities483 (7,249)
Effects of foreign exchange rate changes on cash and cash equivalents (45)
Net change in cash and cash equivalents3,384 2,352 
Cash and cash equivalents, beginning of period9,811 12,821 
Cash and cash equivalents, end of period$13,195 $15,173 
Supplemental disclosure of cash flow information:
Interest paid$1,696 $1,396 
Income taxes paid, net $8 $7 
Supplemental disclosure of non-cash investing and financing information:
Equipment acquired under loan obligations$2,003 $3,355 
Property and equipment included in accounts payable$1,175 $660 
 See notes to unaudited consolidated financial statements

9

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note A – Nature of Business and Basis of Presentation
 
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.
The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. These accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.
Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these accompanying interim consolidated financial statements 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, 2018.  The year-end consolidated balance sheet information has been derived from our audited consolidated financial statements in the annual report as of December 31, 2018, but does not include all the disclosures required by accounting principles.
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.
 
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 represent 100% of the Company’s consolidated assets, net revenues and net income (loss) for each period presented. For further financial information about these segments, see Note N.

Note B – Recently Adopted and Issued Accounting Guidance
 
Adopted
Effective January 1, 2019, the Company adopted the new lease accounting standard using the modified retrospective method and using the optional transition method to apply the new lease accounting standard prospectively as of January 1, 2019, rather than as of the earliest period presented. Therefore, the adoption of the new lease accounting standard did not change our previous reported financial statements. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard. This allowed the Company to carry forward the historical lease classification and not reassess whether a contract is or contains a lease, or determination of initial direct costs.  Adoption of this standard resulted in the recording of net operating lease right-of-use (“ROU”) assets of $9.7 million and corresponding operating lease liabilities of $10.1 million. We elected the practical expedient that allows lessees to treat the lease and non-lease components of leases as a single lease component. Additionally, we elected the hindsight practical expedient to determine the reasonably certain lease terms for existing leases. The adoption did not materially impact the Company’s Consolidated Statements of Operations or Cash Flows. Refer to Note C herein for further details regarding the impact of the adoption of Topic 842 and other information related to the Company's lease portfolio.

Issued
In June 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based on historical experience, current 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. This new standard 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 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. The Company plans to implement the new standard in the first quarter of 2020, and is in the process of reviewing its credit loss models to assess the impact of the adoption of the standard on its consolidated financial statements.
10

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. ASU 2017-14 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company does not expect the impact of the adoption of the standard to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. Certain provisions of the ASU must be adopted retrospectively, while others must be adopted prospectively. The Company does not expect the impact of the adoption of the standard to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, or ASU 2018-15, that changes the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs should be presented as a prepaid asset on the balance sheet and expensed over the term of the hosting arrangement. The standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is in the process of assessing the impact of the adoption of the standard on its consolidated financial statements as well as whether to early adopt the new standard.
Note C – Leases
The Company is a lessee of corporate office, laboratory space, and equipment throughout the world, nearly all of which are classified as operating leases expiring at various dates. The Company determines if an arrangement qualifies as a lease at lease inception. Leases with an initial term of 12 months or less are not recorded in the balance sheet. Operating lease liabilities are recorded based on the present value of the future lease payments over the lease term, assessed as of the commencement date. The Company’s real estate leases, which are comprised primarily of office and laboratory space, represent the vast majority of our operating lease liabilities and generally have a lease term between 1 and 10 years. The remaining leases consist primarily of machinery and equipment used in the lab and office equipment, each with various lease terms. The vast majority of the Company's leases are comprised of fixed lease payments. 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.
Substantially all of our operating lease agreements do not specify an implicit borrowing rate, and as such, 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. On January 1, 2019, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date. For new or renewed leases starting in 2019, the discount rate is determined using available data at lease commencement and based on the lease term.
Some of the Company's lease agreements, primarily related to real estate, include options for the Company to either renew (extend) or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. Renewal options are reviewed at lease commencement to determine if such options are reasonably certain of being exercised, which could impact the lease term. When determining if a renewal option is reasonably certain of being exercised, the Company considers several factors, including but not limited to, the significance of leasehold improvements incurred on the property, whether the asset is difficult to replace, or specific characteristics unique to the particular lease that would make it reasonably certain that we would exercise such option. In most cases, the Company has concluded that renewal and early termination options are not reasonably certain of being exercised by the Company (and thus not included in our ROU asset and lease liability) unless there is an economic, financial or business reason to do so.
11

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Operating Leases
For the three months ended March 31, 2019, total operating lease cost was $1.5 million, which includes an immaterial amount of variable lease cost, and is recorded in cost of revenue and general and administrative expenses, depending on the nature of the leased asset. Other than variable lease cost, operating lease cost is recognized on a straight-line basis over the lease term. The following summarizes: (i) the future minimum undiscounted lease payments under non-cancelable leases for the remainder of 2019 as well as each of the next five years and thereafter, incorporating the practical expedient to account for lease and non-lease components as a single lease component for our existing real estate leases, and (ii) a reconciliation of the undiscounted lease payments to the present value of the lease liabilities recognized as of March 31, 2019 (in thousands):

Year Ended December 31,Operating Leases
2019 (excluding the three months ended March 31, 2019)$4,043 
20202,833 
20212,811 
20222,121 
20232,032 
20241,993 
Thereafter12,377 
Total future minimum lease payments28,210 
Less imputed interest(7,942)
Total present value of future minimum lease payments$20,268 
The following summarizes additional supplemental data related to our operating leases:

Three Months Ended March 31, 2019: (in thousands)
Operating cash flows from operating leases$1,257 
Right-of-use assets obtained in exchange for operating lease liabilities$11,169 
As of March 31, 2019:
Weighted Average Remaining Lease Term (years)9.11
Weighted Average Discount Rate6.4 %

Lease contracts that we have executed but which have not yet commenced as of March 31, 2019 are excluded from the tables above.
As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year would have been as follows (in thousands):
Years ending December 31,
2019$5,247 
20202,798 
20211,082 
2022453 
202392 
Thereafter 
Total minimum lease payments$9,672 

12

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note D – Revenue Recognition and Contractual Adjustments
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 providing testing services 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 Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals. 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 and biotech 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-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 balance sheet. 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 account 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 and 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 March 31, 2019 and December 31, 2018 (in thousands):
13

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

March 31, 2019December 31, 2018
Current pharma contract asset$192 $86 
Long-term pharma contract asset417 268 
Total pharma contract asset$609 $354 
Current pharma capitalized commissions$310 $271 
Long-term pharma capitalized commissions766 650 
Total pharma capitalized commissions$1,076 $921 
Current pharma contract liability$1,017 $927 
Long-term pharma contract liability1,935 1,652 
Total pharma contract liability$2,952 $2,579 
Pharma contract assets increased $0.3 million, or 72%, from December 31, 2018. Pharma contract liabilities increased $0.4 million, or 14%, from December 31, 2018 while capitalized commissions also increased by $0.2 million, or 17%. These increases are due to higher upfront fees driven by increases in the volume of Pharma contracts in process. Revenue recognized for the three months ended March 31, 2019 and March 31, 2018 related to Pharma contract liability balances outstanding at the beginning of the period was $1.3 million and $0.9 million, respectively. Amortization of capitalized commissions for the three months ended March 31, 2019 and March 31, 2018 were $0.2 million and $0.1 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 at this level. 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.
The following table details the disaggregation of revenue for both the Clinical and Pharma Services Segments (in thousands):
Three Months Ended March 31,
2019 2018 
Clinical Services:
Client direct billing$49,756 $38,530 
Commercial Insurance20,433 10,326 
Medicare and Medicaid15,793 8,084 
Self-Pay228 31 
Total Clinical Services $86,210 $56,971 
Pharma Services:9,367 6,452 
Total Revenue$95,577 $63,423 

Note E – Acquisition
On December 10, 2018 (“the Acquisition Date”), the Company acquired all of the issued and outstanding shares of common stock of Genesis Acquisition Holding Corp (“Genesis”), and its wholly owned subsidiary, Genoptix, Inc. (“Genoptix”, and collectively with its subsidiaries and Genesis, referred to herein as "Genoptix"), for a purchase price consisting of (i) cash consideration of approximately $127.0 million, which included approximately $2.0 million in estimated working capital adjustments and adjustments for estimated cash on hand of Genoptix on the Closing Date and (ii) 1.0 million shares of NeoGenomics’ common stock pursuant to an Agreement and Plan of Merger dated October 23, 2018 (the “Merger Agreement”). 
14

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Cartesian Medical Group, Inc. (“Cartesian”) is a California professional corporation that provided hematopathology and other pathology services to Genoptix as an independent contractor. Cartesian was consolidated into Genoptix as a variable interest entity. Subsequent to December 31, 2018, the professional services agreement between Genoptix and Cartesian was terminated and the Company entered into separate medical services agreements with the entities owned by the physicians who were previously employees of Cartesian. The termination of the agreement with Cartesian did not have any impact on the Company's consolidated financial statements.
The Company issued approximately 1.0 million shares of common stock as consideration for the acquisition of Genoptix. This common stock was issued as uncertificated shares, which carries a minimum six-month holding period before they may be sold to the public. We estimated the fair value of the common stock consideration using inputs not observable in the market and thus represents a Level 3 measurement. The key assumption in the fair value determination was a 5 percent discount due to lack of marketability of the common stock as a result of the restrictions imposed on the holder. The acquisition date fair value of common stock transferred is calculated below (in thousands, except share and per share amounts):
Common Stock ValuationAmount
Shares of common stock issued as consideration1,000,000 
Stock price per share on closing date$13.94 
Value of common stock issued as consideration$13,940 
Issue discount due to lack of marketability$(697)
Fair value of common stock at December 10, 2018$13,243 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of December 10, 2018 and measurement period adjustments recorded during the first quarter of 2019. For the quarter ended March 31, 2019, the Company recorded a $2.4 million working capital adjustment to the original cash consideration, as defined within the Merger Agreement, of which $0.4 million is payable in cash and the remainder is payable as a return of shares. Additionally, certain other measurement period adjustments were recorded related to property and equipment and accounts receivable during the first quarter of 2019. The Company is in the process completing its valuation of certain assets and liabilities, primarily related to accounts receivable and accounts payable assumed; thus, the provisional measurements of current assets and current liabilities are subject to change.

December 10, 2018
(As Initially Reported)
Measurement Period AdjustmentsDecember 10, 2018
(As Adjusted)
Current assets$22,172 $2,257 $24,429 
Property and equipment21,029 (428)20,601 
Identifiable intangible assets71,792 374 72,166 
Goodwill50,873 (1,593)49,280 
Long-term assets170  170 
Total assets acquired$166,036 $610 $166,646 
Current liabilities(10,769)(892)(11,661)
Long-term liabilities (1)
(15,265)282 (14,983)
Net assets acquired$140,002 $$140,002 

(1) Includes $14.7 million and $14.5 million as initially reported and as adjusted, respectively, in deferred tax liabilities associated with tangible and intangible assets acquired.
Of the $72.2 million of acquired intangible assets, $56.9 million was provisionally assigned to customer relationships which are being amortized over fifteen years, $0.7 million was provisionally assigned to the Genoptix trade name which is being amortized over one year, and $14.6 million was provisionally assigned to trade marks which are assigned as indefinite-lived assets.
The goodwill arising from the acquisition of Genoptix includes revenue synergies as a result of our existing customers and Genoptix’ customers having access to each other’s testing menus and capabilities and also from the new product lines which Genoptix adds to the Company’s product portfolio, including the use of COMPASS and CHART trademarks. None of the
15

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

goodwill is expected to be deductible for income tax purposes. The provisional fair value of accounts receivable acquired is approximately $16.6 million, net of a $1.5 million fair value adjustment.

The following unaudited pro forma information (in thousands) have been provided for illustrative purposes only and are not necessarily indicative of results that would have occurred had the acquisition of Genoptix been in effect since January 1, 2017, nor are they necessarily indicative of future results.

Three Months Ended March 31, 2018
Revenue
$87,703 
Net (loss)
$(420)
Net (loss) available to common shareholders
$(3,275)

The unaudited pro forma consolidated results have been prepared by adjusting our historical results to include the acquisition of Genoptix as if it occurred on January 1, 2017. These unaudited pro forma consolidated historical results were then adjusted for certain items, primarily related to: a net increase in amortization expense during the three months ended March 31, 2018 due to higher intangible assets recorded related to the acquisition of Genoptix and a reduction in interest expense during the three months ended March 31, 2018 as we did not acquire the existing debt.

Note F – Goodwill and Intangible Assets
Goodwill as of March 31, 2019 and December 31, 2018 was $196.3 million and $197.9 million, respectively.  In 2019, we recorded measurement period adjustments of $1.6 million. Refer to Note E herein for further detail.
Intangible assets as of March 31, 2019 and December 31, 2018 consisted of the following (in thousands): 
  March 31, 2019
 Amortization
Period
CostAccumulated
Amortization
Net
Trade Name12-24 months$3,675 $3,211 $464 
Non-Compete Agreement24 months27 21 6 
Customer Relationships180 months142,000 19,185 122,815 
Trade Name - Indefinite-lived— 14,559 — 14,559 
Total $160,261 $22,417 $137,844 
 
  December 31, 2018
 Amortization
Period
CostAccumulated
Amortization
Net
Trade Name12-24 months$3,675 $3,042 $633 
Non-Compete Agreement24 months27 18 $9 
Customer Relationships180 months141,626 16,798 $124,828 
Trade Name - Indefinite-lived— 14,559 — 14,559 
Total$159,887 $19,858 $140,029 
 
We recorded approximately $2.6 million and $1.4 million in straight-line amortization expense of intangible assets for the three month periods ended March 31, 2019 and 2018, respectively.  The Company records amortization expense as a general and administrative expense.  
16

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of March 31, 2019 is as follows (in thousands):
 
Remainder of 2019 $7,549 
2020 9,467 
2021 9,467 
2022 9,467 
2023 9,467 
Thereafter77,868 
Total$123,285 
 
Note G – Debt
 
The following table summarizes the long term debt at March 31, 2019 and December 31, 2018 (in thousands):
 March 31, 2019December 31, 2018
Term Loan Facility$94,782 $96,750 
Revolving Credit Facility5,000 5,000 
Other finance obligations11,754 11,548 
Total Debt$111,536 $113,298 
Less:  Debt issuance costs(914)(997)
Less:  Current portion of long-term debt and other finance obligations(14,374)(14,171)
Total Long-Term Debt, net$96,248 $98,130 
 
The carrying value of the Company’s long-term finance obligations and term debt approximates its fair value based on the current market conditions for similar instruments. 
Term Loan
On December 22, 2016, the Company entered into a credit agreement with Regions Bank (the “Credit Agreement”) as administrative agent and collateral agent.  The Credit Agreement provided for a $75 million term loan facility (the “Term Loan Facility”) and a $75 million revolving credit facility (the “Revolving Credit Facility”). On June 21, 2018, the Company entered into an amendment to the Credit Agreement (the “Amendment”) which provided for an additional term loan in the amount of $30 million, for which revised terms are included below.
On March 31, 2019 and December 31, 2018, the Company had current outstanding borrowings under the Term Loan Facility, as amended, of approximately $7.9 million, and long-term outstanding borrowings of approximately $86.0 million and $87.9 million, net of unamortized debt issuance costs of $0.9 million and $1.0 million, respectively.  These costs were recorded as a reduction in the carrying amount of the related liability and are being amortized over the life of the loan.
The Term Loan Facility bears interest at a rate per annum equal to an applicable margin plus, at NeoGenomics’ option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the Credit Agreement, (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus 0.5% per annum and (c) the one month LIBOR rate plus 1% per annum, or (3) a combination of (1) and (2). The applicable margin will range from 2.25% to 4.00% for LIBOR loans and 1.25% to 3.00% for base rate loans, in each case based on NeoGenomics’ consolidated leverage ratio (as defined in the Credit Agreement and revised in the Amendment). Interest on borrowings is payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of Adjusted LIBOR loans.  The Company entered into interest rate swap agreements to hedge against changes in the variable rate for a portion of both the Term Loan Facility and the Amendment.  See Note H-Derivative Instruments and Hedging Activities for more information on these instruments.
The Term Loan Facility and amounts borrowed under the Revolving Credit Facility are secured on a first priority basis by a security interest in substantially all of the tangible and intangible assets of NeoGenomics.  The Term Loan Facility contains various affirmative and negative covenants including ability to incur liens and encumbrances; make certain restricted payments, including paying dividends on its equity securities or payments to redeem, repurchase or retire its equity securities; enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it
17

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

conducts.  In addition, the Company must meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter The Company was in compliance with all financial covenants as of March 31, 2019. 
The Term Loan Facility and Amendment have a maturity date of December 22, 2021.  The Credit Agreement requires NeoGenomics to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt, (iii) beginning with the fiscal year ended December 31, 2018, 75% of consolidated excess cash flow (as defined) if NeoGenomics’ consolidated leverage ratio is greater than or equal to 3.25:1.0 or 50% of consolidated excess cash flow (as defined) if NeoGenomics’ consolidated leverage ratio is less than or equal to 3.25:1.0 but greater than or equal to 2.75:1.0 and (iv) 100% of net cash proceeds from issuances of permitted equity securities by NeoGenomics made in order to cure a failure to comply with the financial covenants. NeoGenomics is permitted to voluntarily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility at any time without penalty.
 
Revolving Credit Facility
During the fourth quarter of 2018, $5.0 million was drawn from the revolving credit facility, resulting in outstanding borrowings of $5.0 million as of December 31, 2018 and March 31, 2019.
 
The Revolving Credit Facility includes a $10.0 million swingline sublimit, with swingline loans bearing interest at the alternate base rate plus the applicable margin. Any principal outstanding under the Revolving Credit Facility is due and payable on December 22, 2021 or such earlier date as the obligations under the Credit Agreement become due and payable pursuant to the terms of the Credit Agreement.  The Revolving Credit Facility bears interest at a rate per annum equal to an applicable margin plus, at NeoGenomics’ option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the Credit Agreement (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus 0.5% per annum and (c) the one month LIBOR rate plus 1% per annum, or (3) a combination of (1) and (2). The applicable margin will range from 2.25% to 4.00% for Adjusted LIBOR loans and 1.25% to 3.00% for base rate loans, in each case based on NeoGenomics’ consolidated leverage ratio. Interest on the outstanding principal of the Term Loan Facility will be payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of LIBOR loans.
The Credit Agreement, as amended, requires NeoGenomics to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt, (iii) beginning with the fiscal year ended December 31, 2018, 75% of consolidated excess cash flow (as defined) if NeoGenomics’ consolidated leverage ratio is greater than or equal to 3.25:1.0 or 50% of consolidated excess cash flow (as defined) if NeoGenomics’ consolidated leverage ratio is less than or equal to 3.25:1.0 but greater than or equal to 2.75:1.0 and (iv) 100% of net cash proceeds from issuances of permitted equity securities by NeoGenomics made in order to cure a failure to comply with the financial covenants. NeoGenomics is permitted to voluntarily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility at any time without penalty, subject to customary “breakage” costs with respect to prepayments of Adjusted LIBOR rate loans made on a day other than the last day of any applicable interest period.
Other Finance 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 2021 and the weighted average interest rate under such loans was approximately 4.82% at March 31, 2019 and 4.56% at December 31, 2018.
18

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Maturities of Long-Term Debt
Maturities of long-term debt at March 31, 2019 are summarized as follows (in thousands):
 Term Loan and Revolving Credit FacilityFinance ObligationsTotal Long-Term Debt
Remainder of 2019 $5,905 $5,077 $10,982 
2020 7,873 4,729 12,602 
2021 86,004 1,888 87,892 
2022  60 60 
 99,782 11,754 111,536 
Less:  Current portion of long-term debt(7,873)(6,501)(14,374)
Less:  Debt issuance costs(914)— (914)
Long-term debt, net$90,995 $5,253 $96,248 

19

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note H – Derivative Instruments and Hedging Activities

In December of 2016 and June of 2018, the Company entered into interest rate swap agreements to reduce the Company's exposure to interest rate fluctuations on the Company's variable rate debt obligations.  These derivative financial instruments are accounted for at fair value as cash flow hedges, which effectively modifies the Company's exposure to interest rate risk by converting a portion of its floating rate debt to a fixed rate obligation, thus reducing the impact of interest rate changes on future interest expense.
 
Under these agreements, we receive a variable rate of interest based on LIBOR and we pay a fixed rate of interest. The following table summarizes the interest rate swap agreements.
December 2016 HedgeJune 2018 Hedge
Notional Amount$50 million $20 million (1) 
Effective DateDecember 30, 2016June 29, 2018
IndexOne month LIBOROne month LIBOR
MaturityDecember 31, 2019December 31, 2021
Fixed Rate1.59 %2.98 %

(1) The notional amount increases to $70 million upon maturity of December 2016 hedge on December 31, 2019.

The fair value of the interest rate swaps will be included in other long term assets or liabilities, when applicable.  As of March 31, 2019 and December 31, 2018, the fair value of the derivative financial instruments included in other long-term assets were $0.3 million and $0.5 million, respectively. As of March 31, 2019 and December 31, 2018, the fair value of the derivative financial instruments included in other long-term liabilities were $1.3 million and $0.9 million, respectively. Fair value adjustments are recorded as an adjustment to accumulated other comprehensive earnings, except that any gains and losses on ineffectiveness of the interest rate swap would be recorded as an adjustment to other expense (income), net. Fair value adjustments will be reclassified to interest expense in the period during which the hedged transaction affects earnings, whether upon termination or maturity. Hedge effectiveness is assessed quarterly. The Company determined that the interest rate swaps are highly effective and, thus, there is no impact to the Company's consolidated statements of operations. Upon termination of the interest rate swap agreement, we will reclassify gains or losses on derivative instruments from accumulated other comprehensive income (“AOCI”) to earnings. If the swap were terminated, based on interest rates in effect at March 31, 2019, we estimate that we would reclassify approximately $1.0 million from AOCI to earnings during the next twelve months as the anticipated cash flows occur. Amounts reclassified for gains or losses on derivative instruments during the first quarter of 2019 were not material. 

20

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note I – Class A Redeemable Convertible Preferred Stock
 
On December 30, 2015, the Company issued 14,666,667 shares of its Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") as part of the consideration for the acquisition of Clarient.  The Series A Preferred Stock had a face value of $7.50 per share for a total liquidation value of $110 million.  On December 22, 2016, the Company redeemed 8,066,667 shares of the Series A Preferred Stock for $55.0 million in cash.  The redemption amount per share equaled $6.82 ($7.50 minus the liquidation discount of 9.09%).  In December 2017, the Company issued 264,000 additional shares of preferred stock as a paid-in-kind dividend, resulting in a balance of 6,864,000 shares of Series A Preferred Stock outstanding at  March 31, 2018.  

On June 25, 2018, the Company redeemed the remaining outstanding preferred stock for an aggregate redemption amount of $50.1 million, prior to consideration of any transaction related expenses. The shares were redeemed at $7.30 per share, representing the applicable 4.55% redemption discount on the original liquidation preference plus an additional $0.14 per share in respect of accrued and unpaid dividends for 2018. Following the redemption, no shares of preferred stock remain outstanding. 

The gain or loss was calculated as the carrying value of the shares of preferred stock before the redemption of $37.8 million plus the amount of the beneficial conversion feature originally recorded with the redeemed shares of $21.3 million, as compared to the total consideration being paid, in this case the $50.1 million.

Issue Discount
 
The Company recorded the Series A Preferred Stock at a fair value of approximately $73.2 million, or $4.99 per share, on the date of issuance.  The difference between the fair value of $73.2 million and the liquidation value of $110 million represents a discount of $36.8 million from the initial face value representing the impact the rights and features of the instrument had on the value to the Company.  After the partial redemption, the Series A Preferred stock had a fair value of approximately $32.9 million, or $4.99 per share.  The difference between the fair value of $32.9 million and the liquidation value of $49.5 million represented a discount of approximately $16.6 million.  
 
Beneficial Conversion Features (“BCF”)
 
The fair value of the common stock into which the Series A Preferred Stock was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the date of issuance and after the partial redemption in December of 2016 by approximately $44.7 and $20.1 million, respectively, resulting in a beneficial conversion feature.  The Company recognized the beneficial conversion feature as non-cash, deemed dividends to the holder of Series A Preferred Stock over the first three years the Series A Preferred Stock was outstanding, as the date the stock first becomes convertible was three years from the issue date.  In addition to the BCF recorded at the original issue date, we recorded additional BCF discounts for payment-in-kind shares accrued for the quarter ended March 31, 2018 as dividends.  
 
Classification
 
Prior to redemption, the Company classified the Preferred Stock as temporary equity on the consolidated balance sheets due to certain change in control events that are outside the Company’s control, including deemed liquidation events described in the Series A Certificate of Designation.  
21

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited

Note J – Equity
We recorded approximately $2.1 million and $1.6 million in stock based compensation expense for the three month periods ended March 31, 2019 and 2018, respectively.
A summary of the stock option activity under the Company’s plans for the three months ended March 31, 2019 is as follows:
 
Number of
Shares
Weighted Average Exercise Price
Options outstanding at December 31, 20186,839,417 $7.63 
Options granted688,084 $19.12 
Less:
Options exercised635,257 $6.23 
Options canceled or expired2,500 $8.04 
Options outstanding at March 31, 20196,889,744 $8.84 
Exercisable at Exercisable at March 31, 20192,584,373 $6.84 
The fair value of each stock option award granted during the three months ended March 31, 2019 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:
 Three Months Ended
March 31, 2019
Expected term (in years)3.0 - 4.5
Risk-free interest rate (%)2.5 
Expected volatility (%)38.9% - 44.0%
Dividend yield (%)  
Weighted average fair value/share at grant date$5.64 
 
As of March 31, 2019, there was approximately $7.5 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.4 years.  

A summary of the restricted stock activity under the Company’s plans for the three months ended March 31, 2019 is as follows:
 
Number of Restricted
Shares
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2018282,508 $9.01 
Granted182,502 $