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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, 2019

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 incorporation or organization) (I.R.S. Employer 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 August 2, 2019, the registrant had 103,858,915 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 (“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.


3


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands, except share and per share amounts)
ASSETSJune 30, 2019December 31, 2018
Current assets
Cash and cash equivalents$167,436 $9,811 
Accounts receivable, net89,99176,919 
Inventories8,7338,650
Prepaid assets9,5537,727
Other current assets632561
Total current assets276,345 103,668 
Property and equipment (net of accumulated depreciation of $59,455 and $50,127, respectively)59,33460,888 
Operating lease right-of-use assets26,057— 
Intangible assets, net135,301140,029 
Goodwill196,298197,892 
Other assets3,3322,538 
Total assets$696,667 $505,015 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$16,326 $17,779 
Accrued compensation19,621 19,062 
Accrued expenses and other liabilities7,893 8,986 
Short-term portion of financing obligations5,825 6,298 
Short-term portion of operating leases3,428 — 
Short-term portion of term loan5,000 7,873 
Pharma contract liability1,069 927 
Total current liabilities59,162 60,925 
Long-term liabilities
Long-term portion of financing obligations4,782 5,250 
Long-term portion of operating leases24,179 — 
Long-term portion of term loans, net94,250 87,880 
Revolving credit facility 5,000 
Other long term liabilities4,443 3,060 
Deferred income tax liability, net20,117 22,457 
Total long-term liabilities147,771 123,647 
     Total liabilities206,933 184,572 
Stockholders' equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 103,834,212 and 94,465,440 shares issued and outstanding, respectively)104 94 
Additional paid-in capital543,484 372,186 
Accumulated other comprehensive loss(2,163)(579)
Accumulated deficit(51,691)(51,258)
     Total stockholders’ equity489,734 320,443 
     Total liabilities and stockholders' equity$696,667 $505,015 
See the accompanying notes to the unaudited consolidated financial statements.
4


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
 
 For the Three Months Ended June 30,For the Six Months Ended June 30,
 2019 2018 2019 2018
NET REVENUE  
Clinical Services$88,982 $59,540 $175,192 $116,511 
Pharma Services12,731 8,206 22,098 14,658 
Total Revenue101,713 67,746 197,290 131,169 
COST OF REVENUE52,747 37,216 101,209 73,336 
GROSS PROFIT48,966 30,530 96,081 57,833 
Operating expenses:
General and administrative29,577 20,983 61,719 38,050 
Research and development2,587 1,073 3,796 2,029 
Sales and marketing12,324 7,680 23,540 14,455 
Total operating expenses44,488 29,736 89,055 54,534 
INCOME FROM OPERATIONS4,478 794 7,026 3,299 
Interest expense, net1,304 1,407 3,130 2,892 
Other (income) expense (10)124 5,159 62 
Loss on extinguishment of debt1,018  1,018  
Income (loss) before taxes2,166 (737)(2,281)345 
Income tax expense (benefit)175 (357)(1,848)81 
NET INCOME (LOSS)1,991 (380)(433)264 
Deemed dividends on preferred stock and amortization of beneficial conversion feature 2,771  5,627 
Gain on redemption of preferred stock (9,075) (9,075)
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS$1,991 $5,924 $(433)$3,712 
INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic$0.02 $0.07 $0.00$0.05 
Diluted$0.02 $0.07 $0.00$0.04 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic98,297 81,017 96,734 80,789 
Diluted102,336 90,168 96,734 89,305 
See the accompanying notes to the unaudited consolidated financial statements.

5


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in thousands)

For the Three Months Ended June 30,For the Six Months Ended June 30,
2019 201820192018
NET INCOME (LOSS)$1,991 $(380)$(433)$264 
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 6  (22)
(Loss) gain on effective cash flow hedges(1,027)(266)(1,584)5 
Total other comprehensive loss(1,027)(260)(1,584)(17)
COMPREHENSIVE INCOME (LOSS)$964 $(640)$(2,017)$247 

See the accompanying notes to the unaudited consolidated financial statements.



6


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


Series A Redeemable Convertible Preferred StockCommon StockAdditional Paid-InAccumulated Other ComprehensiveAccumulated
SharesAmountShares AmountCapitalIncome (Loss)DeficitTotal
Balance, December 31, 2018 $ 94,465,440 $94 $372,186 $(579)$(51,258)$320,443 
Common stock issuance ESPP Plan— — 36,032 — 419 — — 419 
Stock issuance fees and expenses— — — — (66)— — (66)
Loss on effective cash flow hedge— — — — — (557)— (557)
Issuance of restricted stock, net of forfeitures— — 182,502 — — — — — 
Issuance of common stock for stock options— — 619,536 1 3,893 — — 3,894 
ESPP expense— — — — 119 — — 119 
Stock based compensation expense - options and restricted stock— — — — 2,020 — — 2,020 
Net loss— — — — — — (2,424)$(2,424)
Balance, March 31, 2019 $ 95,303,510 $95 $378,571 $(1,136)$(53,682)323,848 
Common stock issuance ESPP Plan— — 37,255 — 653 — — 653 
Stock issuance fees and expenses— — — — (211)— — (211)
Loss on effective cash flow hedge— — — — — (1,027)— (1,027)
Issuance of restricted stock, net of forfeitures— — (633)— — — — 
Working capital adjustment related to acquisition— — (99,524)(1,977)— — (1,977)
Issuance of common stock - Public Offering— — 8,050,000 8 160,766 — — 160,774 
Issuance of common stock for stock options— — 543,604 1 3,369 — — 3,370 
ESPP expense— — — — 162 — — 162 
Stock based compensation expense - options and restricted stock— — — — 2,151 — — 2,151 
Net income— — — — — — 1,991 1,991 
Balance, June 30, 2019 $ 103,834,212 $104 $543,484 $(2,163)$(51,691)$489,734 

See the accompanying notes to the unaudited consolidated financial statements.























7



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


Series A Redeemable Convertible Preferred StockCommon StockAdditional Paid-InAccumulated Other ComprehensiveAccumulated
SharesAmountShares AmountCapitalIncome (Loss)DeficitTotal
Balance, December 31, 20176,864,000 $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 and amortization of beneficial conversion feature— 2,856 — — — — (2,856)(2,856)
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 
Common stock issuance ESPP Plan— — 31,686 — 231 — — 231 
Redemption of Series A Preferred Stock(6,864,000)(50,096)— — — — — — 
Stock issuance fees and expenses— — — — (46)— — (46)
Foreign currency translation adjustments— — — — — 24 24 
Loss on effective cash flow hedge— — — — — (266)— (266)
Issuance of common stock for stock options— — 897,942 4,918 — — 4,918 
Deemed dividends on preferred stock and amortization of beneficial conversion feature— 5,550 — — (20,929)— (2,771)(23,700)
Gain on redemption of preferred stock9,075 — — — — 9,075 9,075 
ESPP expense— — — — 56 — — 56 
Stock based compensation expense - options and restricted stock— — — — 2,277 — — 2,277 
Adjustment for adoption of accounting standards— — — — (1,095)— 1,130 35 
Net loss— — — — — — (380)(380)
Balance, June 30, 2018 $ 81,498,081 $81 $217,451 $257 $(53,580)$164,209 

See the accompanying notes to the unaudited consolidated financial statements.

8


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands) 
 Six Months Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES2019 2018 
Net (loss) income $(433)$264 
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation10,352 7,444 
Loss on disposal of assets404 106 
Loss on debt extinguishment1,018  
Amortization of intangibles5,102 2,834 
Amortization of debt issue costs250 242 
Non-cash stock based compensation4,452 3,957 
Non-cash operating lease expenses2,218 — 
Changes in assets and liabilities, net:
Accounts receivable, net(13,178)(338)
Inventories(83)576 
Prepaid assets(383)(2,198)
Other current assets(1,897)(977)
Accounts payable, accrued and other liabilities(6,446)9,042 
Net cash provided by operating activities1,376 20,952 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(6,637)(8,943)
Acquisition working capital adjustment399  
Net cash used in investing activities(6,238)(8,943)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on revolving credit facility 10,000 
Repayment of revolving credit facility (5,000) 
Redemption of preferred stock (50,096)
Repayment of equipment and other loans(3,644)(3,014)
Proceeds from term loan 100,000 30,000 
Repayment of term loan(96,750)(7,275)
Payments of debt issue costs(954)(576)
Issuance of common stock, net8,061 5,588 
Proceeds from equity offering, net160,774  
Net cash provided by (used in) financing activities162,487 (15,373)
Effects of foreign exchange rate changes on cash and cash equivalents (22)
Net change in cash and cash equivalents157,625 (3,386)
Cash and cash equivalents, beginning of period9,811 12,821 
Cash and cash equivalents, end of period$167,436 $9,435 
Supplemental disclosure of cash flow information:
Cash paid for operating lease liabilities$1,863 $— 
Interest paid$3,178 $2,703 
Income taxes paid, net$235 $49 
Supplemental disclosure of non-cash investing and financing information:
Working capital adjustment related to acquisition$1,977 $ 
Equipment acquired under loan obligations$2,702 $3,733 
Property and equipment included in accounts payable$970 $1,276 
See the accompanying notes to the 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 the audited consolidated financial statements in the annual report as of December 31, 2018.
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, Segment Information, in the accompanying notes to the consolidated financial statements.

Note B – Recently Adopted and Issued Accounting Guidance
 
Adopted
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). Topic 842 supersedes the lease requirements in FASB ASC 840, Leases (Topic 840). Under Topic 842, lessees are required to recognize assets and liabilities on the balance sheet for most operating leases and provide enhanced disclosures.

The Company adopted Topic 842 effective January 1, 2019 using the modified retrospective method. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard. 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 upon adoption. The adoption did not materially impact the Company’s Consolidated Statements of Operations or Cash Flows. Refer to Note C, Leases, 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 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
10

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

implement the new standard in the first quarter of 2020 using a modified retrospective approach, 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.
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. Topic 350 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, which 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 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 10 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. 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.
Operating Leases
11

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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, 2019, 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 2019$2,894 
20204,589 
20214,679 
20224,107 
20234,075 
20244,097 
Thereafter12,705 
Total remaining lease payments37,146 
Less: imputed interest(9,539)
Total operating lease liabilities27,607 
Less: current portion(3,428)
Long-term operating lease liabilities$24,179 
Weighted-average remaining lease term (in years)8.4
Weighted-average discount rate6.6 %
The following summarizes additional supplemental data related to our operating leases (in thousands):

Three Months Ended
June 30, 2019
Six Months Ended
June 30, 2019
Operating lease costs$1,547 $3,094 
Six Months Ended
June 30, 2019
Right-of-use assets obtained in exchange for operating lease liabilities$18,563 

Lease contracts that have been executed but which have not yet commenced as of June 30, 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 were 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 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 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 Consolidated 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 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 (in thousands):

13

NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

June 30, 2019December 31, 2018
Current pharma contract assets (1)$139 $86 
Long-term pharma contract assets (2)541 268 
Total pharma contract assets$680 $354 
Current pharma capitalized commissions (1)$254 $271 
Long-term pharma capitalized commissions (2)840 650 
Total pharma capitalized commissions$1,094 $921 
Current pharma contract liabilities (3)$1,069 $927 
Long-term pharma contract liabilities (4)1,812 1,652 
Total pharma contract liabilities$2,881 $2,579 
(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.
(3) Current pharma contract liabilities are classified as "Current liabilities" on the Consolidated Balance Sheets.
(4) Long-term pharma contract liabilities are classified as "Other long-term liabilities" on the Consolidated Balance Sheets.
Pharma contract assets increased $0.3 million, or 92%, from December 31, 2018. Pharma contract liabilities increased $0.3 million, or 12%, from December 31, 2018 while capitalized commissions also increased by $0.2 million, or 19%. These increases are due to higher upfront fees driven by increases in the volume of Pharma contracts in process. Revenue recognized for the three and six months ended June 30, 2019 related to Pharma contract liability balances outstanding at the beginning of the period was $0.6 million and $1.9 million, respectively. Amortization of capitalized commissions for the three and six months ended June 30, 2019 was $0.4 million and $0.6 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 June 30,Six Months ended June 30,
2019 2018 2019 2018 
Clinical Services:
    Client direct billing$54,008 $40,847 $103,243 $79,561 
    Commercial Insurance20,894 8,981 41,802 18,922 
    Medicare and Medicaid13,719 9,024 29,581 17,201 
    Self-Pay361 688 566 827 
Total Clinical Services $88,982 $59,540 $175,192 $116,511 
Pharma Services:12,731 8,206 22,098 14,658 
Total Revenue$