neo-20200930

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 September 30, 2020


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35756

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)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock ($0.001 par value)

NEO

The Nasdaq Stock Market LLC

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

Accelerated filer

☐

Non-accelerated filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No S

As of October 27, 2020, the registrant had 111,029,644 shares of Common Stock, par value $0.001 per share outstanding.

TABLE OF CONTENTS


PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)						5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						34
Item 3. Quantitative and Qualitative Disclosures About Market Risk						46
Item 4. Controls and Procedures						46
PART II OTHER INFORMATION
Item 1. Legal Proceedings						47
Item 1A. Risk Factors						47
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						47
Item 3. Defaults Upon Senior Securities						47
Item 4. Mine Safety Disclosures						47
Item 5. Other Information						48
Item 6. Exhibits						49
SIGNATURES						50

FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q contains “forward-looking statements” and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, changing reimbursement levels from government payers and private insurers, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2020.

Forward-looking statements include, but are not limited to, statements about:

•Our ability to respond to rapid scientific change;

•The risk of liability in conducting clinical trials and the sufficiency of our insurance to cover such claims;

•Our ability to implement our business strategy;

•The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels;

•The application, to our business and the services we provide, of existing laws, rules and regulations, including without limitation, Medicare laws, anti-kickback laws, Health Insurance Portability and Accountability Act of 1996 regulations, state medical privacy laws, international privacy laws, federal and state false claims laws and corporate practice of medicine laws;

•Regulatory developments in the United States including downward pressure on health care reimbursement;

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

•Food and Drug Administration, or FDA regulation of Laboratory Developed Tests (“LDTs”);

•Failure to timely or accurately bill for our services;

•Our ability to expand our operations and increase our market share;

•Our ability to expand our service offerings by adding new testing capabilities;

•Our ability to meet our future capital requirements;

•Our ability to manage our indebtedness;

•Our ability to manage the quality of our investment portfolio;

•Our expectations regarding the conversion of our outstanding 1.25% Convertible Senior Notes due May 2025 (the “Convertible Notes”) in the aggregate principal amount of $201.3 million and our ability to make debt service payments under the Convertible Notes if such Convertible Notes are not converted;

•Our ability to protect our intellectual property from infringement;

•The anticipated impact to our business operations, customer demand and supply chain due to the recent global pandemic of a novel strain of the coronavirus (“COVID-19”);

•Our ability to integrate future acquisitions and costs related to such acquisitions;

•The effects of seasonality on our business;

•Our ability to maintain service levels and compete with other diagnostic laboratories;

•Our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs;

•Our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure;

•Our handling, storage and disposal of biological and hazardous materials;

•The accuracy of our estimates regarding reimbursement, expenses, future revenues and capital requirements;

•Our ability to manage expenses and risks associated with international operations, including anti-corruption and trade sanction laws and other regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions;

•Our ability to have sufficient cash to pay our obligations under our 1.25% Convertible Senior Notes due May 2025; and

•The dilutive impact of the conversion of our 1.25% Convertible Senior Notes due May 2025.

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEOGENOMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share amounts)


	September 30, 2020 (unaudited)		December 31, 2019
ASSETS
Current assets
Cash and cash equivalents	$	233,233	$	173,016

Marketable securities, at fair value	50,375		—
Accounts receivable, net	103,697		94,242
Inventories	20,643		14,405
Prepaid assets	10,459		6,327
Other current assets	3,968		2,748
Total current assets	422,375		290,738
Property and equipment (net of accumulated depreciation of $85,987 and $68,809, respectively)	85,449		64,188
Operating lease right-of-use assets	45,856		26,492

Intangible assets, net	123,353		126,640
Goodwill	210,833		198,601
Restricted cash, non-current	32,003		—
Prepaid lease asset	10,142		—
Investment in non-consolidated affiliate	25,600		—
Other assets	3,817		2,847
Total assets	$	959,428	$	709,506
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	17,735	$	19,568
Accrued compensation	26,083		21,365
Accrued expenses and other liabilities	8,677		7,548
Short-term portion of financing obligations	3,700		5,432
Short-term portion of operating leases	4,701		3,381

Short-term portion of term loan	—		5,000
Pharma contract liability	3,716		1,610
Total current liabilities	64,612		63,904
Long-term liabilities
Convertible senior notes, net	166,440		—
Long-term portion of financing obligations	1,399		3,199
Long-term portion of operating leases	43,123		24,034

Long-term portion of term loan, net	—		91,829
Other long-term liabilities	3,937		3,566
Deferred income tax liability, net	13,554		15,566
Total long-term liabilities	228,453		138,194
Total liabilities	293,065		202,098
Stockholders' equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 111,010,418 and 104,781,236 shares issued and outstanding, respectively)	111		105
Additional paid-in capital	688,832		520,278
Accumulated other comprehensive loss	22		(1,618)
Accumulated deficit	(22,602)		(11,357)
Total stockholders’ equity	666,363		507,408
Total liabilities and stockholders' equity	$	959,428	$	709,506

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
NET REVENUE:
Clinical Services	$	108,733	$	92,565	$	275,599	$	267,757
Pharma Services	16,711		12,107		42,852		34,205
Total revenue	125,444		104,672		318,451		301,962

COST OF REVENUE	71,379		53,840		190,011		155,049

GROSS PROFIT	54,065		50,832		128,440		146,913
Operating expenses:
General and administrative	36,128		33,054		107,085		94,773
Research and development	1,964		2,611		6,129		6,407
Sales and marketing	11,304		11,508		34,757		35,048
Total operating expenses	49,396		47,173		147,971		136,228
INCOME (LOSS) FROM OPERATIONS	4,669		3,659		(19,531)		10,685
Interest expense, net	2,458		203		4,825		3,333
Other (income) expense, net	(11)		(35)		(7,639)		5,124
Loss on extinguishment of debt	—		—		1,400		1,018
Loss on termination of cash flow hedge	—		—		3,506		—
Income (loss) before taxes	2,222		3,491		(21,623)		1,210
Income tax (benefit) expense	(335)		1,348		(10,378)		(500)
NET INCOME (LOSS)	$	2,557	$	2,143	$	(11,245)	$	1,710

Adjustment to the numerator for convertible notes in diluted EPS (1)
NET INCOME (LOSS)	$	2,557	$	2,143	$	(11,245)	$	1,710
Convertible note accretion, amortization, and interest, net of tax	1,975		—		—		—
NET INCOME (LOSS) USED IN DILUTED EPS	$	4,532	$	2,143	$	(11,245)	$	1,710

NET INCOME (LOSS) PER SHARE
Basic	$	0.02	$	0.02	$	(0.10)	$	0.02
Diluted	$	0.04	$	0.02	$	(0.10)	$	0.02

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	110,461		103,899		107,605		99,149
Diluted	119,191		107,880		107,605		102,766

(1) This adjustment compensates for the effects of the if-converted impact of convertible notes in adjusted net income. Since an entity using the if-converted method assumes that a convertible debt instrument was converted into common shares at the beginning of the reporting period, the numerator is adjusted to reverse any recognized interest expense (including any amortization of discounts).

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
NET INCOME (LOSS)	$	2,557	$	2,143	$	(11,245)	$	1,710

OTHER COMPREHENSIVE (LOSS) INCOME:

Unrealized loss on marketable securities, net	(21)		—		(21)		—
Loss on effective cash flow hedges	—		(217)		(1,000)		(1,801)
Cash flow hedge termination reclassified to earnings	—		—		2,661		—
Total other comprehensive (loss) income, net of tax	(21)		(217)		1,640		(1,801)
COMPREHENSIVE INCOME (LOSS)	$	2,536	$	1,926	$	(9,605)	$	(91)

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share amounts)


	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
		Shares			Amount
Balance, December 31, 2019		104,781,236	$	105		$	520,278	$	(1,618)	$	(11,357)	$	507,408
Common stock issuance ESPP Plan		34,330	—			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 forfeitures		76,618	—			(212)		—		—		(212)


Issuance of common stock for stock options		503,873	—			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, 2020		105,396,057	$	105		$	525,929	$	(2,656)	$	(18,335)	$	505,043
Common stock issuance ESPP Plan		41,058	—			928		—		—		928
Stock issuance fees and expenses		—	—			(209)		—		—		(209)

Gain on effective cash flow hedge		—	—			—		38		—		38
Cash flow hedge termination reclassified to earnings		—	—			—		2,661		—		2,661
Issuance of restricted stock, net of forfeitures		24,786	—			(824)		—		—		(824)

Issuance of common stock - public offering, net of underwriting discounts		4,751,500	5			127,288		—		—		127,293
Issuance of common stock for stock options		183,443	—			2,014		—		—		2,014
ESPP expense		—	—			211		—		—		211
Stock-based compensation expense - options and restricted stock		—	—			2,424		—		—		2,424
Equity component of convertible note issuance		—	—			30,912		—		—		30,912
Tax liability related to convertible note issuance		—	—			(9,330)		—		—		(9,330)
Convertible note debt issuance costs		—	—			(108)		—		—		(108)
Net loss		—	—			—		—		(6,824)		(6,824)
Balance, June 30, 2020		110,396,844	$	110		$	679,235	$	43	$	(25,159)	$	654,229
Common stock issuance ESPP Plan		29,853	—			808		—		—		808
Stock issuance fees and expenses		—	—			(29)		—		—		(29)

Unrealized loss on securities, net		—	—			—		(21)		—		(21)
Issuance of restricted stock, net of forfeitures		(1,124)	—			(237)		—		—		(237)
Issuance of common stock for stock options		584,845	1			4,845		—		—		4,846
ESPP expense		—	—			222		—		—		222
Stock-based compensation expense - options and restricted stock		—	—			2,494		—		—		2,494
Adjustment to tax liability related to convertible note issuance		—	—			1,524		—		—		1,524
Convertible note debt issuance costs		—	—			(30)		—		—		(30)
Net income		—	—			—		—		2,557		2,557
Balance, September 30, 2020		111,010,418	$	111		$	688,832	$	22	$	(22,602)	$	666,363

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share amounts)


	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)		Accumulated Deficit		Total
		Shares			Amount
Balance, December 31, 2018		94,465,440	$	94		$	340,291	$	(579)	$	(19,363)	$	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		$	346,676	$	(1,136)	$	(21,787)	$	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		$	511,589	$	(2,163)	$	(19,796)	$	489,734
Common stock issuance ESPP Plan		28,672	—			564		—		—		564
Stock issuance fees and expenses		—	—			23		—		—		23
Loss on effective cash flow hedge		—	—			—		(217)		—		(217)
Issuance of restricted stock, net of forfeitures		(6,070)	—			(688)		—		—		(688)
Issuance of common stock for stock options		289,081	—			2,173		—		—		2,173
ESPP expense		—	—			144		—		—		144
Stock based compensation expense - options and restricted stock		—	—			3,131		—		—		3,131
Net income		—	—			—		—		2,143		2,143
Balance, September 30, 2019		104,145,895	$	104		$	516,936	$	(2,380)	$	(17,653)	$	497,007

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(11,245)	$	1,710
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	18,705		15,200
Loss on disposal of assets	371		451
Loss on debt extinguishment	1,400		1,018
Loss on termination of cash flow hedge	3,506		—
Amortization of intangibles	7,387		7,482
Amortization of debt issue costs	138		323
Amortization of convertible debt discount	2,705		—
Non-cash stock-based compensation	7,536		7,727
Non-cash operating lease expense	6,365		3,224

Changes in assets and liabilities, net
Accounts receivable, net	(9,455)		(14,219)
Inventories	(5,704)		(3,982)
Prepaid and other assets	(4,189)		(1,013)
Prepaid lease asset	(10,142)		—
Other current assets	(2,568)		(381)
Accounts payable, accrued and other liabilities	(9,335)		2,470
Net cash (used in) provided by operating activities	(4,525)		20,010
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities	(53,396)		—
Proceeds from sale of marketable securities	3,000		—
Purchases of property and equipment	(17,591)		(13,953)
Business acquisition	(37,000)		—
Investment in non-consolidated affiliate	(25,600)		—
Acquisition working capital adjustment	—		399
Net cash used in investing activities	(130,587)		(13,554)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of revolving credit facility	—		(5,000)
Repayment of equipment financing obligations	(4,331)		(5,481)
Proceeds from term loan	—		100,000
Repayment of term loan	(97,540)		(96,750)
Cash flow hedge termination	(3,317)		—
Payments of debt issuance costs	—		(1,051)
Issuance of common stock, net	10,761		10,132

Proceeds from issuance of convertible debt, net of issuance costs	194,466		—

Proceeds from equity offering, net of issuance costs	127,293		160,774
Net cash provided by financing activities	227,332		162,624

Net change in cash, cash equivalents and restricted cash	92,220		169,080
Cash, cash equivalents and restricted cash, beginning of period	173,016		9,811
Cash, cash equivalents and restricted cash, end of period	$	265,236	$	178,891

See the accompanying notes to the unaudited consolidated financial statements.


	Nine Months Ended September 30,
	2020		2019
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents	$	233,233	$	178,891

Restricted cash, non-current	32,003		—
Total cash, cash equivalents and restricted cash	$	265,236	$	178,891

Supplemental disclosure of cash flow information:
Interest paid	$	1,638	$	4,295
Income taxes paid, net	$	209	$	316
Supplemental disclosure of non-cash investing and financing information:
Working capital adjustment related to acquisition	$	—	$	1,977
Equipment acquired under financing obligations	$	428	$	3,665
Property and equipment included in accounts payable	$	3,521	$	810

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Nature of the Business, Basis of Presentation and Significant Accounting Policies

Nature of the Business

NeoGenomics, Inc., a Nevada corporation, and its subsidiaries (the “Parent”, “Company”, or “NeoGenomics”), operates as a certified, high complexity clinical laboratory in accordance with the federal government’s Clinical Laboratory Improvement Act, as amended (“CLIA”), and is dedicated to the delivery of clinical diagnostic services to pathologists, oncologists, urologists, hospitals, and other laboratories as well as providing clinical trial services to pharmaceutical firms.

Basis of Presentation

The accompanying interim consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. All intercompany transactions and balances have been eliminated in the accompanying consolidated financial statements.

Unaudited Interim Financial Information

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these accompanying interim consolidated financial statements and footnotes. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2019.

The results of operations presented in this quarterly report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited consolidated financial statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.

Principles of Consolidation

The Company reports its activities in two operating segments; the Clinical Services Segment and the Pharma Services Segment. These reportable segments deliver testing services to hospitals, pathologists, oncologists, clinicians, pharmaceutical firms and researchers and represents 100% of the Company’s consolidated assets, net revenues and net income for each period presented. For further financial information about these segments see Note 15. Segment Information, in the accompanying notes to the consolidated financial statements.

The Company determines whether investments in affiliates are a Variable Interest Entity (“VIE”) at the start of each new venture and when a reconsideration event has occurred. A reporting entity must consolidate a VIE if that reporting entity has a variable interest (or combination of variable interests) and is determined to be the primary beneficiary. The primary beneficiary has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company accounts for its equity investments that are under 20% of the total equity outstanding and for which the Company does not have significant influence by applying the cost method. Investments that are under 20% of the total equity outstanding and for which the entity does have significant influence are accounted for using the equity method unless a scope exception is applicable. Investments in which the Company holds a non-controlling interest and are between 20-50% equity are accounted for using the equity method. For any equity investments in which the Company holds over 50% of the outstanding stock, or for investments in which the Company controls the investee, the Company consolidates those entities into their consolidated financial statements.

Marketable Securities

The Company classifies all securities as available-for-sale, including those with maturity dates beyond 12 months, and therefore these securities are classified within current assets on the consolidated balance sheets as they are available to support current operational liquidity needs

Marketable securities are carried at fair value, with the unrealized holding gains and losses, net of income taxes, reflected in accumulated other comprehensive income until realized. We evaluate our marketable securities for other-than-temporary impairment on a quarterly basis. Unrealized losses are charged against net earnings when a decline in fair value is determined to be other-than-temporary. We review several factors to determine whether a loss is other-than-temporary, such as the length and extent of the fair value decline, the financial condition and near-term prospects of the issuer and whether we have the intent to sell or will more likely than not be required to sell before the securities' anticipated recovery. Regardless of our intent to sell a security, we perform additional analysis on all securities with unrealized losses to evaluate losses associated with the

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

creditworthiness of the security. Credit losses are identified where we do not expect to receive cash flows sufficient to recover the amortized cost basis of a security.

For the purposes of computing realized and unrealized gains and losses, cost and fair value are determined on a specific identification basis.

Income Taxes

We compute income taxes in accordance with FASB ASC Topic 740, Income Taxes, under which deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. During the quarter the Company performed an analysis of its historical research and development expenses and determined that federal and state research and development tax credits for the tax years 2016 – 2019 are available. The Company recorded a tax benefit of $1.9 million as a tax benefit in the reporting period for the expected realizable amount of such credits.

COVID-19 Pandemic

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified and the disease has since spread across the world, including the United States. In March 2020, the World Health Organization declared the outbreak of COVID-19 a pandemic. The outbreak of the pandemic is materially adversely affecting the Company’s employees, patients, communities and business operations, as well as the United States (“U.S.”) economy and financial markets. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, the Company’s results of operations, financial condition and cash flows are likely to continue to be materially adversely affected, particularly if the pandemic persists for a significant amount of time.

Coronavirus Aid, Relief, and Economic Security Act

The Federal government passed legislation and the President of the United States signed into law on March 27, 2020, known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). On April 10, 2020, the U.S Department of Health & Human Services (“HHS”) announced that Medicare-enrolled providers would receive a portion of a direct deposit disbursement totaling $50 billion. The $50 billion is part of a $100 billion Public Health and Emergency Fund created by the CARES Act. Payments made under the CARES Act are intended to reimburse healthcare providers for health care related expenses or lost revenues attributable to COVID-19 and are not required to be repaid provided that recipients attest to and comply with certain terms and conditions, including limitations on balance billing for COVID-19 patients. In the absence of specific guidance to account for government grants under GAAP, the Company accounts for such grants in accordance with international accounting standards for government grants. Such amounts are recognized when there is reasonable assurance that the Company will (1) comply with the conditions associated with the grant and (2) receive the grant.

During the nine months ended September 30, 2020, the Company recognized $7.9 million in grant income related to the CARES Act. This amount was recorded during the second quarter of 2020. No such amounts were recorded in the third quarter of 2020. CARES Act grant income is classified in “Other (income) expense, net”, on the Consolidated Statements of Operations. There was no grant income recognized for the three and nine month periods ended September 30, 2019.

The CARES Act also permits the deferral of payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020, with 50% of the deferred amount due on December 31, 2021 and the remaining 50% due on December 31, 2022. As of September 30, 2020, the accrued deferred social security taxes related to the CARES Act were $2.9 million. This amount was recorded in “Other long-term liabilities” on the Consolidated Balance Sheets. There were no such amounts recorded on the Consolidated Balance Sheets as of December 31, 2019.

Additionally, the CARES Act included an Employee Retention Tax Credit (“ERTC”) provision designed to encourage employers to keep employees on their payroll. The ERTC is a refundable tax credit against certain payroll taxes paid by employers for eligible wages paid between March 13, 2020 and December 31, 2020 that meet the requirements of the ERTC provision. During the nine months ended September 30, 2020, the Company recognized $1.1 million under the ERTC. This amount was recorded during the third quarter of 2020.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 accordingly as other assets, current and non-current 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 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. 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 $32 million as of September 30, 2020 is included in cash and cash equivalents when reconciling the beginning and ending balances in the Consolidated Statements of Cash Flows. Please refer to Note 4. Leases, for additional information regarding the use of restricted cash. There were no restricted cash balances in any reportable period prior to January 2020.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“Topic 326”): Measurement of Credit Losses on Financial Instruments, as modified by subsequently issued ASUs 2018-19 (issued November 2018), 2019-04 (issued April 2019), 2019-05 (issued May 2019), 2019-11 (issued November 2019), 2020-02 (issued February 2020) and 2020-03 (issued March 2020). Topic 326 modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The standard was effective January 1, 2020 and requires the use of forward-looking expected credit loss models based on historical experience, current economic conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. It also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The standard required a modified retrospective approach with a cumulative effect adjustment to retained earnings. The Company adopted and applied the standard as of January 1, 2020. Based on management’s analysis, Topic 326 is applicable to the Company’s trade receivables as well as contract assets recognized within the Pharma Services segment. An assessment was performed on historical trends, current economic conditions, supportable forecasts, and customer and credit risks. The adoption of Topic 326 did not result in a material impact on the Company's Consolidated Financial Statements.

Accounting Pronouncements Pending Adoption

In August 2020, the FASB issued ASU No. 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) - Accounting For Convertible Instruments and Contracts in an Entity’s Own Equity. ASU 2020-06 simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. These changes will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that was bifurcated according to previously existing rules. In addition, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The new guidance is effective for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating when it will adopt this pronouncement and the impact that this new guidance will have on its Consolidated Financial Statements.

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

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

transition from the London Inter-bank Offered Rate (“LIBOR”) or other reference rates to alternative reference rates. The guidance is effective upon issuance and can be applied through December 31, 2022. The Company does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (“Topic 321”), Investments-Equity Method and Joint Ventures (“Topic 323”) and Derivatives and Hedging (“Topic 815”) (ASU 2020-01). ASU 2020-01 clarifies the interaction of the accounting for equity securities under Topic 321, the accounting for the equity method investments in Topic 323 and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of the provisions of this standard on its Consolidated Financial Statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes: Simplifying the Accounting for Income Taxes (“Topic 740”), which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740 and clarifies certain other aspects of the current guidance to promote consistency among reporting entities. The new standard is effective for fiscal years beginning after December 15, 2020 on a prospective basis and early adoption is permitted. The Company will adopt this pronouncement on January 1, 2021 and is currently evaluating the impact of the provisions of this standard on its Consolidated Financial Statements.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 3. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.

Level 1: Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.

Level 2: Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.

Level 3: Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.

Assets and Liabilities that are Measured at Fair Value on a Recurring Basis

The Company measures certain financial assets at fair value on a recurring basis, including its marketable securities and certain cash equivalents. The Company considers all securities available-for-sale, including those with maturity dates beyond 12 months, and therefore these securities are classified within current assets on the consolidated balance sheets as they are available to support current operational liquidity needs. The money market accounts are valued based on quoted market prices in active markets. The marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party pricing entities, except for U.S. Treasury securities which are valued based on quoted market prices in active markets.

The following table sets forth the amortized cost, gross unrealized gains, gross unrealized losses and fair values of the Company's marketable securities accounted for as available-for-sale securities as of September 30, 2020. There were no such amounts as of December 31, 2019.


	September 30, 2020
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Financial Assets:

U.S. Treasury securities	$	18,412	$	1	$	(7)	$	18,406

Commercial paper	13,734		—		—		13,734
Asset-backed securities	9,927		1		(7)		9,921
Corporate bonds	8,323		2		(11)		8,314
Total	$	50,396	$	4	$	(25)	$	50,375

The Company had $0.1 million of accrued interest receivable at September 30, 2020 included in other assets on its Consolidated Balance Sheets related to its marketable securities. There were no realized gains or losses on marketable securities for the three and nine months ended September 30, 2020 and 2019.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The following table sets forth the fair value of available-for-sale marketable securities by contractual maturity at September 30, 2020. There were no such amounts at December 31, 2019.


	September 30, 2020
(in thousands)	One Year or Less		Over One Year Through Five Years		Over Five Years		Total
Financial Assets:
Marketable Securities:
U.S. Treasury securities	$	3,033	$	15,373	$	—	$	18,406

Commercial paper	13,734		—		—		13,734
Asset-backed securities	—		9,921		—		9,921
Corporate bonds	2,657		5,657		—		8,314
Total	$	19,424	$	30,951	$	—	$	50,375

The following table sets forth the Company's cash equivalents and marketable securities accounted for as available-for-sale securities that were measured at fair value on a recurring basis based on the fair value hierarchy as of September 30, 2020. As of December 31, 2019, the Company had only money market fund cash equivalents (Level 1) in the amount of $163.8 million.


	September 30, 2020
(in thousands)	Level 1		Level 2		Level 3		Total
Financial Assets:
Cash equivalents:
Money market funds	$	213,624	$	—	$	—	$	213,624
Commercial paper	$	—	$	4,749	$	—	$	4,749
Marketable securities:
U.S. Treasury securities	$	18,406	$	—	$	—	$	18,406

Commercial paper	$	—	$	13,734	$	—	$	13,734
Asset-backed securities	$	—	$	9,921	$	—	$	9,921
Corporate bonds	$	—	$	8,314	$	—	$	8,314
Total	$	232,030	$	36,718	$	—	$	268,748

There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 for the three and nine months ended September 30, 2020 and 2019.

Assets and Liabilities that are Measured at Fair Value on a Nonrecurring Basis

The carrying value of cash and cash equivalents, accounts receivable, net, accounts payable, accrued expenses and other liabilities, and other current assets and liabilities, including our prior revolving credit facility are considered reasonable estimates of their respective fair values at September 30, 2020 and December 31, 2019 due to their short-term nature.

We also measure certain non-financial assets at fair value on a nonrecurring basis, primarily intangible assets, goodwill, and long-lived assets in connection with periodic evaluations for potential impairment. We estimate the fair value of these assets using primarily unobservable inputs and, as such, these are considered Level 3 fair value measurements.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 4. Leases

The Company leases corporate offices and laboratory space throughout the world, all of which are classified as operating leases expiring at various dates and generally have terms ranging from 1 to 15 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

Some of the Company’s real estate lease agreements include options to either renew or early terminate the lease. Leases with renewal options allow the Company to extend the lease term typically between 1 and 5 years. When it is reasonably certain that the Company will exercise an option to renew or terminate a lease, these options are considered in determining the classification and measurement of the lease.

Lease liabilities are recorded based on the present value of the future lease payments over the lease term and assessed as of the commencement date. Incentives received from landlords, such as reimbursements for tenant improvements and rent abatement periods, effectively reduce the total lease payments owed for leases.

Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-components). Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease liabilities to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any actual costs in excess of such amounts are expensed as incurred as variable lease cost.

The Company utilizes its incremental borrowing rate by lease term in order to calculate the present value of its 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 September 30, 2020, the maturities of our operating lease liabilities and a reconciliation to the present value of lease liabilities were as follows (in thousands):


			Remaining Lease Payments
Remainder of 2020			$