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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 March 31, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to                   
Commission File Number: 001-35756
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  S No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  S   No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
S
Accelerated 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  S
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)NEOThe Nasdaq Stock Market LLC

As of April 24, 2020, the registrant had 105,335,242 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 28, 2020.

Forward-looking statements include, but are not limited to, statements about:
Our ability to respond to rapid scientific change;
The risk of liability in conducting clinical trials and the sufficiency of our insurance to cover such claims;
Our ability to implement our business strategy;
The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels;
The application, to our business and the services we provide, of existing laws, rules and regulations, including without limitation, Medicare laws, anti-kickback laws, Health Insurance Portability and Accountability Act of 1996 regulations, state medical privacy laws, international privacy laws, federal and state false claims laws and corporate practice of medicine laws;
Regulatory developments in the United States including downward pressure on health care reimbursement;
Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”);
Food and Drug Administration, or FDA regulation of Laboratory Developed Tests (“LDTs”);
Failure to timely or accurately bill for our services;
Our ability to expand our operations and increase our market share;
Our ability to expand our service offerings by adding new testing capabilities;
Our ability to meet our future capital requirements;
Our ability to manage our indebtedness;
Our ability to protect our intellectual property from infringement;
The anticipated impact to our business operations, customer demand and supply chain due to the recent global pandemic of a novel strain of the coronavirus (COVID-19);
Our ability to integrate future acquisitions and costs related to such acquisitions;
The effects of seasonality on our business;
Our ability to maintain service levels and compete with other diagnostic laboratories;
Our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs;
Our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure;
Our handling, storage and disposal of biological and hazardous materials;
The accuracy of our estimates regarding reimbursement, expenses, future revenues and capital requirements 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.
3


Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.


4


PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
March 31, 2020 (unaudited)December 31, 2019
ASSETS
Current assets
Cash and cash equivalents$86,254  $173,016  
Accounts receivable, net99,97294,242
Inventories20,28614,405
Prepaid assets6,8846,327
Other current assets2,0462,748
Total current assets215,442290,738
Property and equipment (net of accumulated depreciation of $74,441 and $68,809, respectively)
83,39264,188  
Operating lease right-of-use assets49,08426,492  
Intangible assets, net128,289126,640  
Goodwill210,833198,601  
Restricted cash, non-current38,738  
Prepaid lease asset3,316  
Other assets3,1532,847  
Total assets$732,247  $709,506  
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable$20,453  $19,568  
Accrued compensation20,810  21,365  
Accrued expenses and other liabilities8,966  7,548  
Short-term portion of financing obligations4,941  5,432  
Short-term portion of operating leases4,505  3,381  
Short-term portion of term loan5,000  5,000  
Pharma contract liability2,974  1,610  
Total current liabilities67,649  63,904  
Long-term liabilities
Long-term portion of financing obligations2,428  3,199  
Long-term portion of operating leases45,910  24,034  
Long-term portion of term loan, net90,605  91,829  
Other long term liabilities4,235  3,566  
Deferred income tax liability, net16,377  15,566  
Total long-term liabilities159,555  138,194  
     Total liabilities227,204  202,098  
Stockholders' equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 105,396,057 and 104,781,236 shares issued and outstanding, respectively)
105  105  
Additional paid-in capital525,929  520,278  
Accumulated other comprehensive loss(2,656) (1,618) 
Accumulated deficit(18,335) (11,357) 
     Total stockholders’ equity505,043  507,408  
     Total liabilities and stockholders' equity$732,247  $709,506  
See the accompanying notes to the unaudited consolidated financial statements.
5


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 Three Months Ended March 31,
 20202019
NET REVENUE:  
Clinical Services$92,982  $86,210  
Pharma Services13,048  9,367  
Total revenue106,030  95,577  
COST OF REVENUE59,661  48,462  
GROSS PROFIT46,369  47,115  
Operating expenses:
General and administrative36,344  32,142  
Research and development2,060  1,209  
Sales and marketing13,258  11,216  
Total operating expenses51,662  44,567  
(LOSS) INCOME FROM OPERATIONS(5,293) 2,548  
Interest expense, net819  1,826  
Other (income) expense(223) 5,169  
Loss before taxes(5,889) (4,447) 
Income tax expense (benefit)1,089  (2,023) 
NET LOSS$(6,978) $(2,424) 
NET LOSS PER SHARE
Basic$(0.07) $(0.03) 
Diluted$(0.07) $(0.03) 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic104,484  94,740  
Diluted104,484  94,740  
See the accompanying notes to the unaudited consolidated financial statements.

6


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

Three Months Ended March 31,
20202019
NET LOSS$(6,978) $(2,424) 
OTHER COMPREHENSIVE LOSS:
Loss on effective cash flow hedges(1,038) (557) 
Total other comprehensive loss(1,038) (557) 
COMPREHENSIVE LOSS$(8,016) $(2,981) 

See the accompanying notes to the unaudited consolidated financial statements.


7



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


Common StockAdditional Paid-In CapitalAccumulated Other Comprehensive LossAccumulated DeficitTotal
Shares Amount
Balance, December 31, 201894,465,440  $94  $340,291  $(579) $(19,363) $320,443  
Common stock issuance ESPP Plan36,032  —  419  —  —  419  
Stock issuance fees and expenses—  —  (66) —  —  (66) 
Loss on effective cash flow hedge—  —  —  (557) —  (557) 
Issuance of restricted stock, net of forfeitures182,502  —  —  —  —  —  
Issuance of common stock for stock options619,536  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, 201995,303,510  $95  $346,676  $(1,136) $(21,787) $323,848  
Balance, December 31, 2019104,781,236  $105  $520,278  $(1,618) $(11,357) $507,408  
Common stock issuance ESPP Plan34,330  —  796  —  —  796  
Stock issuance fees and expenses—  —  (15) —  —  (15) 
Loss on effective cash flow hedge—  —  —  (1,038) —  (1,038) 
Issuance of restricted stock, net of forfeitures76,618  —  (212) —  —  (212) 
Issuance of common stock for stock options503,873  —  2,897  —  —  2,897  
ESPP expense—  —  194  —  —  194  
Stock based compensation expense - options and restricted stock—  —  1,991  —  —  1,991  
Net loss—  —  —  —  (6,978) (6,978) 
Balance, March 31, 2020105,396,057  $105  $525,929  $(2,656) $(18,335) $505,043  

See the accompanying notes to the unaudited consolidated financial statements.
8


NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) 
(unaudited) 
 Three Months Ended March 31,
20202019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss$(6,978) $(2,424) 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation6,240  5,271  
Loss on disposal of assets17  156  
Amortization of intangibles2,452  2,559  
Amortization of debt issue costs70  150  
Non-cash stock-based compensation2,186  2,139  
Non-cash operating lease expense2,021  1,141  
Changes in assets and liabilities, net
Accounts receivable, net(5,722) (5,795) 
Inventories(5,348) (1,019) 
Prepaid assets270  (250) 
Prepaid lease asset(3,316)   
Other current assets(16) (265) 
Accounts payable, accrued and other liabilities1,191  4,434  
Net cash (used in) provided by operating activities(6,933) 6,097  
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment(4,708) (3,196) 
Business acquisition(37,000)   
Net cash used in investing activities(41,708) (3,196) 
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of equipment financing obligations(1,598) (1,797) 
Repayment of term loan(1,250) (1,968) 
Issuance of common stock, net3,465  4,248  
Net cash provided by financing activities617  483  
Net change in cash, cash equivalents and restricted cash(48,024) 3,384  
Cash, cash equivalents and restricted cash, beginning of period173,016  9,811  
Cash, cash equivalents and restricted cash, end of period$124,992  $13,195  
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents$86,254  $13,195  
Restricted cash, non-current38,738    
Total cash, cash equivalents and restricted cash$124,992  $13,195  
Supplemental disclosure of cash flow information:
Interest paid$1,136  $1,696  
Income taxes paid, net$2  $8  
Supplemental disclosure of non-cash investing and financing information:
Equipment acquired under financing obligations$  $2,003  
Property and equipment included in accounts payable$1,844  $1,175  
See the accompanying notes to the unaudited consolidated financial statements.
9

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



Note 1. 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, 2019.
The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.
 
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 for each period presented. For further financial information about these segments, see Note 11. Segment Information, in the accompanying notes to the consolidated financial statements.

Note 2. Recently Adopted and Issued Accounting Guidance
 
Recently Adopted Accounting Guidance
In August 2018, the FASB issued ASU No. 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 Company adopted this pronouncement on January 1, 2020 and the impact was not material to the Company's Consolidated Financial Statements.
In August 2018, the FASB also issued ASU No. 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 are 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. Certain provisions of the ASU must be adopted retrospectively, while others must be adopted prospectively. The Company adopted this pronouncement on January 1, 2020 and the impact was not material to the Company's Consolidated Financial Statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and restricted cash. ASU 2016-08 was effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, using a retrospective transition method to each period presented. As a result, restricted cash of approximately $38.7 million as of March 31, 2020 is included with cash and cash equivalents when reconciling the beginning and ending balances in the Consolidated Statements of Cash Flows. Please refer to Note 3. Leases, for
10

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

additional information regarding the use of restricted cash. There were no restricted cash balances in any reportable period prior to January 2020.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments, as modified by subsequently issued ASUs 2018-19 (issued November 2018), 2019-04 (issued April 2019), 2019-05 (issued May 2019), 2019-11 (issued November 2019), 2020-02 (issued February 2020) and 2020-03 (issued March 2020). Topic 326 modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The standard was effective January 1, 2020 and requires the use of forward-looking expected credit loss models based on historical experience, current economic conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. It also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The standard required a modified retrospective approach with a cumulative effect adjustment to retained earnings. The Company adopted and applied the standard as of January 1, 2020. Based on management’s analysis, Topic 326 is applicable to the Company’s trade receivables as well as contract assets recognized within the Pharma Services segment. An assessment was performed on historical trends, current economic conditions, supportable forecasts, and customer and credit risks. The adoption of Topic 326 did not result in a material impact on the Company's Consolidated Financial Statements.
Accounting Pronouncements Pending Adoption
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides for temporary optional expedients and exceptions to the current guidance on certain contract modifications and hedging relationships to ease the burdens related to the expected market transition from the London Inter-bank Offered Rate (LIBOR) or other reference rates to alternative reference rates. The guidance is effective upon issuance and can be applied through December 31, 2022. The Company is currently evaluating the impact of this standard on the Company’s Consolidated Financial Statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (“Topic 321”), Investments-Equity Method and Joint Ventures (“Topic 323”) and Derivatives and Hedging (“Topic 815”) (ASU 2020-01). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for the equity method investments in Topic 323 and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this standard on the Company’s Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“Topic 740”), which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain other aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. The Company is currently evaluating the impact of the provisions of this standard on the Company’s Consolidated Financial Statements.

Note 3. Leases
The Company leases corporate offices and laboratory space throughout the world, all of which are classified as operating leases expiring at various dates and generally have terms ranging from 1 to 15 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Some of the Company’s real estate lease agreements include options to either renew or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When it is reasonably certain that the Company will exercise an option to renew or terminate a lease, these options are considered in determining the classification and measurement of the lease.
Lease liabilities are recorded based on the present value of the future lease payments over the lease term and assessed as of the commencement date. Incentives received from landlords, such as reimbursements for tenant improvements and rent abatement periods, effectively reduce the total lease payments owed for leases.
Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-components). Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any actual costs in excess of such amounts are expensed as incurred as variable lease cost.
11

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

The Company utilizes its incremental borrowing rate by lease term in order to calculate the present value of our future lease payments. The discount rate represents a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. The discount rate is determined using the incremental borrowing rate at lease commencement and based on the lease term.
Operating Leases
Operating lease costs include an immaterial amount of variable lease cost, and are recorded in cost of revenue and general and administrative expenses, depending on the nature of the leased asset. Aside from variable lease costs, operating lease costs represent fixed lease payments recognized on a straight-line basis over the lease term.
As of March 31, 2020, the maturities of our operating lease liabilities and a reconciliation to the present value of lease liabilities were as follows (in thousands):

Remaining Lease Payments
Remainder of 2020$4,850  
20217,486  
20225,358  
20235,253  
20245,309  
Thereafter37,340  
Total remaining lease payments65,596  
Less: imputed interest(15,181) 
Total operating lease liabilities50,415  
Less: current portion(4,505) 
Long-term operating lease liabilities$45,910  
Weighted-average remaining lease term (in years)12.1
Weighted-average discount rate4.4 %
The following summarizes additional supplemental data related to our operating leases (in thousands):

Three Months Ended
March 31, 2020
Operating lease costs$2,105  
Three Months Ended
March 31, 2020
Right-of-use assets obtained in exchange for operating lease liabilities$24,071  
Cash paid for operating leases$1,553  
Lease contracts that have been executed but have not yet commenced are excluded from the tables above. As of March 31, 2020, the Company has entered into $33.8 million of contractually binding minimum lease payments for leases executed but not yet commenced. This amount relates to the lease of the laboratory and headquarters facility in Fort Myers, Florida that is expected to commence in 2021. In addition to the minimum lease payments, the Company will pay approximately $25.0 million relating to the construction of the underlying assets and approximately $17.0 million in leasehold improvements. These amounts were placed into separate construction disbursement escrow accounts and are initially classified as restricted cash, non-current, on the Consolidated Balance Sheets. Disbursements to the landlord will take place from time to time to pay for the costs of the Landlord’s work. These disbursements will be classified as a prepaid lease asset or leasehold improvements, as appropriate, until the lease commences. Upon lease commencement, the prepaid lease asset will be included in the calculation of the right-of-use asset and the leasehold improvements will be placed in service. Construction of the infrastructure of this facility commenced in the first quarter of 2020. The Company is not expected to control the underlying assets during the construction period and therefore is not considered the owner of the underlying assets for accounting purposes.

12

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

Note 4. Revenue Recognition and Contractual Adjustments
The Company has two operating segments for which it recognizes revenue; Clinical Services and Pharma Services. The Clinical Services segment provides various clinical testing services to community-based pathology practices, oncology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. The Pharma Services segment supports pharmaceutical firms in their drug development programs by providing testing services and data analytics for clinical trials and research.
Clinical Services Revenue
The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent. The performance obligation is satisfied and revenues are recognized once the diagnostic services have been performed and the results have been delivered to the ordering physician. These diagnostic services are billed to various payers, including client direct billing, commercial insurance, Medicare and other government payers, and patients. Revenue is recorded for all payers based on the amount expected to be collected, which considers implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive based on negotiated discounts, historical collection experience and other anticipated adjustments, including anticipated payer denials. Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing for commercial insurance, Medicare and other governmental and self-pay payers and within 60 to 90 days of billing for client payers.
Pharma Services Revenue
The Company’s Pharma Services segment generally enters into contracts with pharmaceutical customers as well as other Contract Research Organizations (“CROs”) to provide research and clinical trial services ranging in duration from one month to several years. The Company records revenue on a unit-of-service basis based on number of units completed and the total expected contract value. The total expected contract value is estimated based on historical experience of total contracted units compared to realized units as well as known factors on a specific contract-by-contract basis. Certain contracts include upfront fees, final settlement amounts or billing milestones that may not align with the completion of performance obligations. The value of these upfront fees or final settlement amounts is usually recognized over time based on the number of units completed, which aligns with the progress of the Company towards fulfilling its obligations under the contract.
The Company also enters into other contracts, such as validation studies, for which the sole deliverable is a final report that is sent to sponsors at the completion of contracted activities. For these contracts, revenue is recognized at a point in time upon delivery of the final report to the sponsor. Any contracts that contain multiple performance obligations and include both units-of-service and point-in-time deliverables are accounted for as separate performance obligations and revenue is recognized as previously disclosed. The Company negotiates billing schedules and payment terms on a contract-by-contract basis. While the contract terms generally provide for payments based on a unit-of-service arrangement, the billing schedules, payment terms and related cash payments may not align with the performance of services and, as such, may not correspond to revenue recognized in any given period.
Amounts collected in advance of services being provided are deferred as contract liabilities on the Consolidated Balance Sheets. The associated revenue is recognized and the contract liability is reduced as the contracted services are subsequently performed. Contract assets are established for revenue that has been recognized but not yet billed. These contract assets are reduced once the customer is invoiced and a corresponding receivable is recorded. Additionally, certain costs to obtain contracts, primarily for sales commissions, are capitalized when incurred and are amortized over the term of the contract. Amounts capitalized for contracts with an initial contract term of twelve months or less are classified as current assets. All others are classified as non-current assets.
Most contracts are terminable by the customer, either immediately or according to advance notice terms specified within the contracts. All contracts require payment of fees to the Company for services rendered through the date of termination and may require payment for subsequent services necessary to conclude the study or close out the contract.

The following table summarizes the values of contract assets, capitalized commissions and contract liabilities as of March 31, 2020 and December 31, 2019 (in thousands):

13

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

March 31, 2020December 31, 2019
Current pharma contract assets (1)
$1,127  $1,000  
Long-term pharma contract assets (2)
199  153  
Total pharma contract assets$1,326  $1,153  
Current pharma capitalized commissions (1)
$141  $133  
Long-term pharma capitalized commissions (2)
761  798  
Total pharma capitalized commissions$902  $931  
Current pharma contract liabilities$2,974  $1,610  
Long-term pharma contract liabilities (3)
526  1,171  
Total pharma contract liabilities$3,500  $2,781  
(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) Long-term pharma contract liabilities are classified as “Other long-term liabilities” on the Consolidated Balance Sheets.
Pharma contract assets increased $0.2 million, or 15%, from December 31, 2019 to March 31, 2020. Pharma contract liabilities increased $0.7 million, or 26%, during the same period, while capitalized commissions decreased slightly by $29 thousand, or 3%. Revenue recognized for the three months ended March 31, 2020 and March 31, 2019 related to Pharma contract liability balances outstanding at the beginning of the period was $1.2 million and $1.3 million, respectively. Amortization of capitalized commissions for both three-month periods ended March 31, 2020 and March 31, 2019 was $0.2 million.
Disaggregation of Revenue
The Company considered various factors for both its Clinical Services and Pharma Services segments in determining appropriate levels of homogeneous data for its disaggregation of revenue, including the nature, amount, timing and uncertainty of revenue and cash flows. For Clinical Services, the categories identified align with our type of customer due to similarities of billing method, level of reimbursement and timing of cash receipts. Unbilled amounts are accrued and allocated to payor categories based on historical experience. In future periods, actual billings by payor category may differ from accrued amounts. Pharma Services revenue was not further disaggregated as substantially all of our revenue relates to contracts with large pharmaceutical and biotech customers as well as other CROs for which the nature, timing and uncertainty of revenue and cash flows is similar and primarily driven by individual contract terms.
The following table details the disaggregation of revenue for both the Clinical and Pharma Services Segments (in thousands):
Three Months Ended March 31,
20202019
Clinical Services:
    Client direct billing$54,292  $49,756  
    Commercial Insurance21,993  20,433  
    Medicare and Medicaid16,483  15,793  
    Self-Pay214  228  
Total Clinical Services $92,982  $86,210  
Pharma Services:13,048  9,367  
Total Revenue$106,030  $95,577  

Note 5. Acquisition
14

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

On January 10, 2020 (the “Acquisition Date”), the Company acquired the Oncology Division assets of Human Longevity, Inc. (“HLI - Oncology”) for a purchase price consisting of cash consideration of $37.0 million. Acquisition and integration costs related to HLI - Oncology were approximately $1.3 million for the three months ended March 31, 2020 and are reported as general and administrative expenses in the Company's Consolidated Statements of Operations.
HLI - Oncology performs Next Generation Sequencing for pharmaceutical customers. The acquisition of HLI - Oncology adds whole exome and whole genome sequencing capabilities to the Company's current Pharma Services offerings. Revenue related to HLI - Oncology is reported in the Pharma Services segment. The acquisition included assets, primarily consisting of lab equipment, inventory, maintenance agreements for acquired equipment, backlog contracts with HLI - Oncology's customers, as well as HLI - Oncology’s molecular workforce that is experienced with Next Generation Sequencing.
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date (in thousands):

January 10, 2020
Inventory$534  
Prepaid assets185  
Property and equipment16,839  
Internally developed software3,110  
Customer relationships (1)
4,100  
Long-term assets346  
Goodwill (2)
12,232  
Total assets acquired$37,346  
Long-term liabilities(346) 
Net assets acquired$37,000  
(1) Acquired intangible assets consisted of customer relationships which are amortized over seven years.
(2) The goodwill arising from the acquisition of HLI - Oncology is the amount the Company paid in excess of the fair value of the net assets acquired was primarily for (i) the expected future cash flows derived from the existing business capabilities and infrastructure, (ii) expanding the Company's scientific expertise as a leading provider of Pharma Services and Next Generational Sequencing and (iii) an enhanced Pharma Services menu including germline, whole exome and whole genome sequencing. All of the goodwill resulting from the acquisition of HLI - Oncology is expected to be deductible for income tax purposes.
The above purchase price and purchase price allocation are preliminary and subject to future revision as the acquired assets and liabilities assumed are dependent upon the finalization of the related valuations. The fair values assigned to assets acquired and liabilities assumed for HLI - Oncology are based upon management's best estimates and assumptions as of the reporting date, and are considered preliminary.
Note 6. Goodwill and Intangible Assets
Goodwill as of March 31, 2020 and December 31, 2019 was $210.8 million and $198.6 million, respectively.
Intangible assets consisted of the following as of (in thousands): 
  March 31, 2020
 Amortization
Period
CostAccumulated
Amortization
Net
Customer Relationships
84-180 months
143,371  28,529  114,842  
Trade Name - Indefinite-lived—  13,447  —  13,447  
Total $156,818  $28,529  $128,289  
 
15

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

  December 31, 2019
 Amortization
Period
CostAccumulated
Amortization
Net
Trade Name
12-24 months
$3,679  $3,679  $  
Non-Compete Agreement24 months27  27    
Customer Relationships
180 months
139,271  26,078  113,193  
Trade Name - Indefinite-lived—  13,447  —  13,447  
Total$156,424  $29,784  $126,640  
 
The Company recorded amortization expense of intangible assets of approximately $2.5 million and $2.6 million for the three months ended March 31, 2020 and 2019, respectively. The Company records amortization expense as a general and administrative expense.
The estimated amortization expense related to amortizable intangible assets for each of the four succeeding fiscal years and thereafter as of March 31, 2020 is as follows (in thousands):
 
Remainder of 2020$7,403  
20219,870  
20229,870  
20239,870  
20249,870  
Thereafter67,959  
Total$114,842  
 
Note 7. Debt
 
The following table summarizes the long term debt, net at March 31, 2020 and December 31, 2019 (in thousands):
 March 31, 2020December 31, 2019
Term loan$96,250  $97,500  
Financing obligations7,369  8,631  
Total debt$103,619  $106,131  
Less:  Debt issuance costs(645) (671) 
Less:  Current portion of long-term debt and financing obligations(9,941) (10,432) 
Total long-term debt, net$93,033  $95,028  
 
The carrying value of the Company’s term loan and financing obligations approximates fair value based on the current market conditions for similar instruments. 
16

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

Senior Secured Credit Agreement
On June 27, 2019 (the “Closing Date”), the Company entered into a new senior secured credit agreement (the “New Credit Agreement”) with PNC Bank National Association (“PNC”), as administrative agent, and the lenders party thereto. The New Credit Agreement provides for a $100.0 million revolving credit facility (the “Revolving Credit Facility”), a $100.0 million term loan facility (the “Term Loan Facility”), and a $50.0 million delayed draw term loan which has an availability period beginning on the Closing Date and ending on December 27, 2020 (the “Delayed Draw Term Loan”). 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 the Company.
Borrowings under the New Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the agreement (2) an alternate base rate determined by reference to the greatest of (a) the federal funds rate for the relevant interest period plus 0.5% per annum, (b) the prime lending rate of PNC and (c) the daily LIBOR rate plus 1% per annum, or (3) a combination of (1) and (2). The applicable margin will range from 1.25% to 2.25% for LIBOR loans and 0.25% to 1.25% for base rate loans, in each case based on NeoGenomics’ Consolidated Leverage Ratio (as defined in the New Credit Agreement). Interest on borrowings under the New Credit Agreement 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 LIBOR loans. The Company has previously entered into an interest rate swap agreements to hedge against changes in the variable rate for a portion of our long term debt. See Note 8. Derivative Instruments and Hedging Activities, for more information on these instruments.
The Revolving Credit Facility includes a $10.0 million swing loan sublimit, with swing 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 June 27, 2024 or such earlier date as the obligations under the New Credit Agreement become due and payable pursuant to the terms of the New Credit Agreement. No amounts were outstanding under Revolving Credit Facility as of March 31, 2020.
Principal payments on the Term Loan Facility are due on the last day of each fiscal quarter with an annual principal amortization of 5% in the first year, 5% in the second year, 7.5% in the third year, 7.5% in the fourth year, and 10% in each year thereafter, with the remainder due upon maturity on June 27, 2024 or such earlier date as the obligations under the New Credit Agreement become due and payable pursuant to the terms of the New Credit Agreement.
On March 31, 2020, the Company had current outstanding borrowings under the Term Loan Facility of approximately $5.0 million, and long-term outstanding borrowings of approximately $90.6 million, net of unamortized debt issuance costs of $0.6 million. 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.
In addition to paying interest on outstanding principal under the New Credit Agreement, the Company will be required to pay a commitment fee in respect of the unutilized portion of the commitments under the Revolving Credit Facility and the Delayed Draw Term Loan. The commitment fee rate ranges from 0.15% to 0.35% depending on NeoGenomics’ Consolidated Leverage Ratio. The Company will also pay customary letter of credit and agency fees.
The Term Loan Facility contains various covenants including entering into certain indebtedness; ability to incur liens and encumbrances; make certain restricted payments, including paying dividends on its equity securities or payments to redeem, repurchase or retire its equity securities; enter into certain burdensome agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into certain sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it conducts. In addition, the Company must meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter.
The Term Loan Facility requires the Company 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, and (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt.
Financing Obligations
The Company has entered into loans with various banks to finance the purchase of laboratory equipment, office equipment and leasehold improvements. These loans mature at various dates through 2022 and the weighted average interest rate under such loans was approximately 4.82% as of March 31, 2020 and 4.64% as of December 31, 2019.
17

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

Maturities of Long-Term Debt
Maturities of long-term debt as of March 31, 2020 are summarized as follows (in thousands):
 Term LoanFinancing ObligationsTotal Long-Term Debt
Remainder of 2020$3,750  $3,893  $7,643  
20216,250  2,732  8,982  
20227,500  744  8,244  
20238,750    8,750  
202470,000    70,000  
Total Debt96,250  7,369  103,619  
Less:  Current portion of long-term debt(5,000) (4,941) (9,941) 
Less:  Debt issuance costs(645) —  (645) 
Long-term debt, net$90,605  $2,428  $93,033  

Note 8. Derivative Instruments and Hedging Activities

In June of 2018, the Company entered into an interest rate swap agreement to reduce the Companys exposure to interest rate fluctuations on the Companys variable rate debt obligations. This derivative financial instrument is accounted for at fair value as a cash flow hedge, 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 the hedging agreement, the Company receives 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.
June 2018 Hedge
Notional Amount$70 million
Effective DateJune 29, 2018
IndexOne month LIBOR
MaturityDecember 31, 2021
Fixed Rate2.98 %

The fair value of the interest rate swap is included in other assets or liabilities, when applicable. As of March 31, 2020 and December 31, 2019, the fair value of the derivative financial instruments included in other long-term assets was $0 for both periods. As of March 31, 2020 and December 31, 2019, the fair value of the derivative financial instruments included in other long-term liabilities were $3.3 million and $2.0 million, respectively. Fair value adjustments are recorded as an adjustment to AOCI, 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 swap is highly effective and, thus, there is no impact to the Company’s Consolidated Statements of Operations from changes in fair value. Upon maturity or termination, gains or losses, if any, on this derivative instrument will be reclassified from AOCI to earnings. There were no amounts reclassified for gains or losses on derivative instruments during the first quarter of 2020.
Note 9. Stock Based Compensation
The Company recorded approximately $2.2 million and $2.1 million in stock based compensation expense for the three months ended March 31, 2020 and 2019, respectively.
A summary of the stock option activity under the Company’s plans for the three months ended March 31, 2020 is as follows:
 
18

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

Number of
Shares
Weighted Average Exercise Price
Options outstanding at December 31, 20195,318,759  $9.97  
Options granted571,316  $28.36  
Less:
Options exercised504,127  $7.58  
Options canceled or expired51,210  $14.61  
Options outstanding at March 31, 20205,334,738  $12.14  
Exercisable at March 31, 20202,535,621  $8.35  
The fair value of each stock option award granted during the three months ended March 31, 2020 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:
 Three Months Ended
March 31, 2020
Expected term (in years)
4.0 - 5.5
Risk-free interest rate (%)0.9%
Expected volatility (%)
39.9% - 44.5%
Dividend yield (%)
Weighted average fair value/share at grant date$8.90
 
As of March 31, 2020, there was approximately $8.2 million of unrecognized stock based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.54 years.

A summary of the restricted stock activity under the Company’s plans for the three months ended March 31, 2020 is as follows:
 
Number of Restricted
Shares
Weighted Average Grant Date Fair Value
Nonvested at December 31, 2019335,298  $15.75  
Granted88,736  $28.36  
Vested(37,674) $19.29  
Forfeited(4,585) $19.66  
Nonvested at March 31, 2020381,775  $18.29  

As of March 31, 2020, there was approximately $4.4 million of unrecognized stock based compensation expense related to restricted stock that will be recognized over a weighted-average period of approximately 1.29 years.

Employee Stock Purchase Plan (ESPP)

The Company offers an ESPP through which eligible employees may purchase shares of our common stock at a discount of 15% of the fair market value of the Company’s common stock. 

During the three months ended March 31, 2020 and 2019, employees purchased 34,330 and 36,154 shares, respectively under the ESPP. The expense recorded for these periods was approximately $0.2 million and $0.1 million, respectively.
Note 10. Related Party Transactions

On November 4, 2016, the Company entered into an amended and restated consulting agreement (the “Amended and Restated Consulting Agreement”) with Steven C. Jones, a director, officer and shareholder of the Company whereby Mr. Jones would provide consulting services to the Company in the capacity of Executive Vice President. The Amended and Restated Consulting Agreement has an initial term of November 4, 2016 through April 30, 2020, which automatically renews for additional one year periods unless either party provides notice of termination at least three months prior to the expiration of the initial term or any renewal term. On May 6, 2019, the Company and Mr. Jones entered into a letter agreement to modify certain provisions of the Amended and Restated Consulting Agreement which modifications included, by mutual agreement of the parties, the following: automatic expiration of the Amended and Restated Consulting Agreement on April 30, 2020 unless the parties mutually agree
19

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

to renew it in writing; a description of consulting services to be provided to the Company (the “Services”) with a target of up to 15 hours per month of working time and attention to the Company; a fixed monthly cash consulting fee in the amount of $5,000 per month for the provision of the Services; and continuation of health insurance coverage at the levels currently in effect. In addition, Mr. Jones relinquished the title of Executive Vice President effective as of April 4, 2019.
During the three months ended March 31, 2020 and 2019, Mr. Jones earned approximately $15,750 and $38,000, respectively, for consulting work performed and for reimbursement of related expenses. During the three months ended March 31, 2020 and 2019, Mr. Jones earned approximately $13,125 and $12,500, respectively, as compensation for his services on the Board. Mr. Jones also received approximately $0 and $58,000 during the three months ended March 31, 2020 and 2019, respectively, as payment of his annual bonus compensation for the previous fiscal years. The Company did not grant stock or restricted stock to any of its Board members, including Mr. Jones, during the three months ended March 31, 2020 or March 31, 2019.
20

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

Note 11. Segment Information
The Company has two operating segments for which it recognizes revenue; Clinical Services and Pharma Services. Our Clinical Services segment provides various clinical testing services to community-based pathology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research.

The financial information reviewed by the Chief Operating Decision Maker (“CODM”) includes revenues, cost of revenue and gross margin for each of the Company’s operating segments. Assets are not presented at the segment level as that information is not used by the CODM.

The following table summarizes the segment information (in thousands):

Three Months Ended March 31,
20202019
Net revenues:
Clinical Services$92,982