UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

(Mark One)

R

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

For the quarterly period ended September 30, 2015.

or

£

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

For the transition period from            to                   

Commission File Number: 001-35756

 

NEOGENOMICS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

 

74-2897368

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

 

 

12701 Commonwealth Drive, Suite 9, Fort Myers,

 

 

Florida

 

33913

(Address of principal executive offices)

 

(Zip Code)

 

(239) 768-0600

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes  R   No  £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  R   No  £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer

o

 

Accelerated filer

R

 

 

 

 

 

Non-accelerated filer

o

(Do not check if a smaller reporting company)

Smaller reporting company

o

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

As of November 2, 2015, the registrant had 60,350,750 shares of Common Stock, par value $0.001 per share outstanding.

 

 

 


NEOGENOMICS, INC.

 

TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

 

 

Item 1. Financial Statements (unaudited)

 

4

Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations

 

14

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

29

Item 4. Controls and Procedures

 

30

PART II OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

31

Item 1A. Risk Factors

 

31

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

38

Item 3. Defaults Upon Senior Securities

 

38

Item 4. Mine Safety Disclosures

 

38

Item 5. Other Information

 

38

Item 6. Exhibits

 

39

SIGNATURES

 

40

 

 

 


NEOGENOMICS, INC.

 

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 (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) relating to NeoGenomics, Inc., a Nevada corporation and its subsidiaries, NeoGenomics Laboratories, Inc., a Florida corporation (“NEO”, “NeoGenomics Laboratories” or the “Subsidiary”) and Path Labs LLC, a Delaware limited liability company (“Path Logic”) (collectively referred to as “we”, “us”, “our”, “NeoGenomics”, or the “Company”), 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, 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 under “Risk Factors” and 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 March 3, 2015, and as amended and filed with the SEC on April 30, 2015.

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

·

Our ability to implement our business strategy;

·

The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels, including the application of the Protecting Access to Medicare Act.

·

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

·

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

·

Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988;

·

Food and Drug Administration proposed regulation of Laboratory Developed Tests;

·

Failure to timely or accurately bill for our services;

·

The impact of adoption of the ICD-10-CM code set;

·

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 integrate acquired businesses, including our proposed acquisition of Clarient, Inc. and costs related to such acquisitions;

·

The impact of internalization of testing by customers;

·

Our ability to 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 ability to generate sufficient cash flow from our license agreement with Health Discovery Corporation to support its fair value; and

·

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

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

 

3


 

PART I — FINANCIAL INFORMATION

 

 

ITEM 1. FINANCIAL STATEMENTS

 

NEOGENOMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(unaudited)

 

 

 

September 30, 2015

 

 

December 31, 2014

 

ASSETS

 

 

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,966

 

 

$

33,689

 

Accounts receivable (net of allowance for doubtful accounts of

   $4,479 and $4,180, respectively)

 

 

21,556

 

 

 

20,475

 

Inventories

 

 

2,967

 

 

 

2,616

 

Deferred income tax asset, net

 

 

821

 

 

 

821

 

Other current assets

 

 

1,547

 

 

 

1,141

 

Total current assets

 

 

60,857

 

 

 

58,742

 

PROPERTY AND EQUIPMENT (net of accumulated depreciation of

   $24,791 and $19,822, respectively)

 

 

15,898

 

 

 

15,082

 

INTANGIBLE ASSETS, NET

 

 

3,928

 

 

 

4,212

 

GOODWILL

 

 

2,929

 

 

 

2,929

 

OTHER ASSETS

 

 

129

 

 

 

141

 

TOTAL ASSETS

 

$

83,741

 

 

$

81,106

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,026

 

 

$

6,294

 

Accrued compensation

 

 

4,767

 

 

 

3,897

 

Accrued expenses and other liabilities

 

 

1,332

 

 

 

1,208

 

Short-term portion of equipment capital lease obligations

 

 

4,203

 

 

 

3,224

 

Total current liabilities

 

 

15,328

 

 

 

14,623

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Long-term portion of equipment capital lease obligations

 

 

5,743

 

 

 

5,257

 

Deferred income tax liability, net

 

 

821

 

 

 

821

 

Total long-term liabilities

 

 

6,564

 

 

 

6,078

 

TOTAL LIABILITIES

 

 

21,892

 

 

 

20,701

 

COMMITMENTS AND CONTINGENCIES (SEE NOTE G)

STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, (100,000,000 shares authorized;

   60,598,616 and 60,242,818 shares issued and outstanding, respectively)

 

 

61

 

 

 

60

 

Additional paid-in capital

 

 

82,256

 

 

 

79,751

 

Accumulated deficit

 

 

(20,468

)

 

 

(19,406

)

Total stockholders’ equity

 

 

61,849

 

 

 

60,405

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

83,741

 

 

$

81,106

 

See notes to unaudited consolidated financial statements.

 

4


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

 

 

For the Three Months Ended

September 30,

 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

NET REVENUE

 

$

25,126

 

 

$

23,217

 

 

$

72,523

 

 

$

62,070

 

COST OF REVENUE

 

 

13,955

 

 

 

12,923

 

 

 

40,995

 

 

 

32,826

 

GROSS MARGIN

 

 

11,171

 

 

 

10,294

 

 

 

31,528

 

 

 

29,244

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

7,438

 

 

 

6,370

 

 

 

21,036

 

 

 

17,295

 

Research and development

 

 

871

 

 

 

1,014

 

 

 

2,342

 

 

 

2,275

 

Sales and marketing

 

 

2,748

 

 

 

2,983

 

 

 

8,569

 

 

 

8,775

 

Total operating expenses

 

 

11,057

 

 

 

10,367

 

 

 

31,947

 

 

 

28,345

 

INCOME (LOSS) FROM OPERATIONS

 

 

114

 

 

 

(73

)

 

 

(419

)

 

 

899

 

INTEREST AND OTHER EXPENSE – NET

 

 

(239

)

 

 

(218

)

 

 

(623

)

 

 

(736

)

INCOME (LOSS) BEFORE INCOME TAXES

 

 

(125

)

 

 

(291

)

 

 

(1,042

)

 

 

163

 

INCOME TAXES

 

 

 

 

 

 

 

 

20

 

 

 

78

 

NET INCOME (LOSS)

 

$

(125

)

 

$

(291

)

 

$

(1,062

)

 

$

85

 

NET INCOME (LOSS) PER SHARE – Basic

 

$

(0.00

)

 

$

(0.01

)

 

$

(0.02

)

 

$

0.00

 

WEIGHTED AVERAGE NUMBER OF SHARES

   OUTSTANDING – Basic

 

 

60,537

 

 

 

54,444

 

 

 

60,414

 

 

 

51,272

 

NET INCOME (LOSS) PER SHARE – Diluted

 

$

(0.00

)

 

$

(0.01

)

 

$

(0.02

)

 

$

0.00

 

WEIGHTED AVERAGE NUMBER OF SHARES

   OUTSTANDING – Diluted

 

 

60,537

 

 

 

54,444

 

 

 

60,414

 

 

 

53,926

 

 

See notes to unaudited consolidated financial statements.

 

 

5


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Nine Months Ended

September 30,

 

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(1,062

)

 

$

85

 

Adjustments to reconcile net income (loss) to net cash provided by

   operating activities:

 

 

 

 

 

 

 

 

Bad debt expense

 

 

1,849

 

 

 

2,044

 

Amortization of intangibles

 

 

283

 

 

 

200

 

Depreciation and amortization of property and equipment

 

 

4,971

 

 

 

3,938

 

Amortization of debt issue costs

 

 

 

 

 

66

 

Stock based compensation – options and restricted stock

 

 

1,588

 

 

 

566

 

Stock based compensation – warrants

 

 

319

 

 

 

173

 

Changes in assets and liabilities, net:

 

 

 

 

 

 

 

 

Accounts receivable, net of write-offs

 

 

(2,930

)

 

 

12

 

Inventories

 

 

(351

)

 

 

(582

)

Other current assets

 

 

(409

)

 

 

93

 

Other assets

 

 

12

 

 

 

39

 

Accounts payable and other liabilities

 

 

2

 

 

 

1,830

 

NET CASH PROVIDED BY OPERATING ACTIVITIES

 

 

4,272

 

 

 

8,464

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Acquisition, net of cash

 

 

-

 

 

 

(5,829

)

Purchases of property and equipment

 

 

(1,682

)

 

 

(2,719

)

NET CASH USED IN INVESTING ACTIVITIES

 

 

(1,682

)

 

 

(8,548

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Payments on credit facility, net

 

 

 

 

 

(4,282

)

Repayment of capital lease obligations

 

 

(2,912

)

 

 

(2,632

)

Issuance of common stock for cash, net of transaction expense

 

 

 

 

 

34,430

 

Issuance of common stock for the exercise of options, warrants and ESPP shares

 

 

599

 

 

 

2,100

 

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

 

 

(2,313

)

 

 

29,616

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

 

277

 

 

 

29,532

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

33,689

 

 

 

4,834

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

33,966

 

 

$

34,366

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

 

Interest paid

 

 

672

 

 

 

770

 

Income taxes paid

 

 

20

 

 

 

170

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Equipment leased under capital lease obligations and equipment loans

 

 

4,377

 

 

 

4,824

 

 

See notes to unaudited consolidated financial statements.

 

 

 

 

6


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

NOTE A — NATURE OF BUSINESS AND BASIS OF PRESENTATION

NeoGenomics, Inc., a Nevada corporation (the “Parent”), and its subsidiaries, NeoGenomics Laboratories, Inc., a Florida corporation (“NEO”, “NeoGenomics Laboratories”) and Path Labs LLC., a Delaware limited liability company (“Path Logic”) (collectively referred to as “we”, “us”, “our”, “NeoGenomics”, or the “Company”), operates a network of anatomic pathology and certified “high complexity” clinical laboratories 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 throughout the United States.

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 interim consolidated financial statements include the accounts of the Parent and its subsidiaries. All intercompany transactions and balances have been eliminated in the accompanying interim 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. 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, 2014, filed with the Securities and Exchange Commission (the “SEC”) on March 3, 2015 and as amended and filed with the SEC on April 30, 2015.

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.

 

NOTE B — RECENTLY ISSUED ACCOUNTING GUIDANCE

Management has determined that there has been no recently issued accounting guidance that will have a material impact on the consolidated financial statements.

 

NOTE C — ACQUISITIONS

On July 8, 2014, NeoGenomics, Laboratories entered into a membership interest purchase agreement with Path Logic, and Path Labs Holdings, LLC, a Delaware limited liability company (“PL Holdings”), whereby the Company acquired all of the outstanding membership interests in Path Logic from PL Holdings for a purchase price (in thousands) of $5,908 (the “Acquisition”). NeoGenomics Laboratories paid the purchase price using cash on hand and borrowings on its revolving credit facility.

The following table summarizes the final amounts for the fair values of the assets acquired and liabilities assumed at the acquisition date (in thousands):

 

 

 

Fair Value

July 8, 2014

 

Current assets, including cash and cash equivalents

 

$

1,722

 

Property, plant and equipment

 

 

577

 

Identifiable intangible assets – customer relationships

 

 

1,930

 

Long term deposits

 

 

28

 

Goodwill

 

 

2,929

 

Total assets acquired

 

 

7,186

 

Current liabilities

 

 

(1,180

)

Long-term liabilities

 

 

(98

)

Net assets acquired

 

$

5,908

 

 

7


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

The above estimated fair values of assets acquired and liabilities assumed are based on the information that was available as of the acquisition date to estimate the fair value of assets acquired and liabilities assumed.  The measurement period adjustments were complete as of December 31, 2014.

Acquired intangible assets of $1.93 million consist of customer relationships which are being amortized over thirteen years.  We recorded approximately $37,000 and $111,000 of amortization expense for the three and nine months ended September 30, 2015, respectively.

The estimated amortization expense related to the acquired intangible assets for each of the five succeeding fiscal years and thereafter as of September 30, 2015 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2015

 

$

37

 

2016

 

 

148

 

2017

 

 

148

 

2018

 

 

148

 

2019

 

 

148

 

2020

 

 

148

 

Thereafter

 

 

970

 

Total

 

$

1,747

 

 

The goodwill arising from the Acquisition includes revenue synergies as a result of our existing customers and Path Logic’s customers having access to each other’s testing menus and capabilities.  It also arises from the new product lines which Path Logic has added to the Company’s product portfolio.  The total amount of goodwill which is expected to be deductible for tax purposes is approximately $3.7 million, which will be amortized on the Company’s tax returns over fifteen years.

 

The following unaudited pro forma information (in thousands) have been provided for illustrative purposes only and are not necessarily indicative of results that would have occurred had the Acquisition been in effect since January 1, 2013, nor are they necessarily indicative of future results.

 

 

 

Three Months Ended

September 30, 2014

 

 

Nine Months Ended

September 30, 2014

 

Revenue

 

$

23,405

 

 

$

67,289

 

Net income (loss)

 

 

(35

)

 

 

(450

)

Income (loss) per share

 

 

 

 

 

 

 

 

Basic

 

$

(0.00

)

 

$

(0.01

)

Diluted

 

$

(0.00

)

 

$

(0.01

)

The unaudited pro forma consolidated results above have been prepared by adjusting our historical results to include the Acquisition as if it occurred on January 1, 2013. These unaudited pro forma consolidated historical results were then adjusted for the following:

 

 

 

Adjustments to reflect the impact of $361,000 of transaction costs related to the 2014 acquisition as of January 1, 2013,

 

 

 

A net reduction in amortization expense due to decreased intangible assets recorded related to the acquisition,

 

 

 

a net reduction in interest expense as we did not acquire the existing debt from the acquisition, offset by our interest expense on net borrowings under capital leases and notes payable,

 

 

 

a net reduction in depreciation expense due to decreased fixed asset values recorded related to the acquisition,

 

 

 

a net reduction in general and administrative to remove the management fees from the private equity company and the Chief Executive Officer’s salary from the results,

 

8


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

 

a net reduction to adjust for the tax effect of the losses that were acquired which is based on an estimate of the

state income taxes and federal alternate minimum tax which would not be required based on the losses for all periods.

As noted above, the unaudited pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for the periods presented or that may be achieved by the combined company in the future.

 

NOTE D — GOODWILL AND INTANGIBLE ASSETS

The Company has recorded Goodwill of $2,929 as of September 30, 2015.  The changes in the carrying amount of goodwill for the nine month period ended September 30, 2015 and for the year ended December 31, 2014 are as follows (in thousands):

 

 

 

September 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Balance as of January 1

 

$

2,929

 

 

$

-

 

Goodwill acquired during the period

 

 

-

 

 

 

2,929

 

Balance at end of period

 

$

2,929

 

 

$

2,929

 

Intangible assets as of September 30, 2015 and December 31, 2014 consisted of the following (in thousands):

 

 

 

 

 

September 30, 2015

 

 

 

Amortization

Period

 

COST

 

 

Accumulated

Amortization

 

 

Net

 

Customer Relationships

 

156 months

 

$

1,930

 

 

$

183

 

 

$

1,747

 

Support Vector Machine (SVM) technology

 

108 months

 

 

500

 

 

 

199

 

 

 

301

 

Laboratory developed test (LDT) technology

 

164 months

 

 

1,482

 

 

 

389

 

 

 

1,093

 

Flow Cytometry and Cytogenetics technology

 

202 months

 

 

1,000

 

 

 

213

 

 

 

787

 

Total

 

 

 

$

4,912

 

 

$

984

 

 

$

3,928

 

 

 

 

 

 

December 31, 2014

 

 

 

Amortization

Period

 

COST

 

 

Accumulated

Amortization

 

 

Net

 

Customer Relationships

 

156 months

 

$

1,930

 

 

$

71

 

 

$

1,859

 

Support Vector Machine (SVM) technology

 

108 months

 

 

500

 

 

 

167

 

 

 

333

 

Laboratory developed test (LDT) technology

 

164 months

 

 

1,482

 

 

 

297

 

 

 

1,185

 

Flow Cytometry and Cytogenetics technology

 

202 months

 

 

1,000

 

 

 

165

 

 

 

835

 

Total

 

 

 

$

4,912

 

 

$

700

 

 

$

4,212

 

 

We recorded approximately $93,000 and $89,000 in straight-line amortization expense of intangibles in the three months ended September 30, 2015 and 2014, respectively. We recorded approximately $283,000 and $200,000 in straight-line amortization expense of intangibles in the nine months ended September 30, 2015 and 2014, respectively. The Company recorded amortization expense from customer relationships as a general and administrative expense.  We will continue to record the amortization of the Support Vector Machine (SVM) technology, the Laboratory developed tests (LDT) technology and the Flow Cytometry and Cytogenetics technology intangibles as a research and development expense until the such time that we have products, services or cost savings directly attributable to these intangible assets that would require recordation in cost of goods sold.

9


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of September 30, 2015 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2015

 

$

93

 

2016

 

 

372

 

2017

 

 

372

 

2018

 

 

372

 

2019

 

 

372

 

2020

 

 

372

 

Thereafter

 

 

1,975

 

Total

 

$

3,928

 

 

NOTE E — REVENUE RECOGNITION AND CONTRACTUAL ADJUSTMENTS

The Company recognizes revenues when (a) the price is fixed or determinable, (b) persuasive evidence of an arrangement exists, (c) the service is performed and (d) collectability of the resulting receivable is reasonably assured.

The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent, and revenues are recognized once the diagnostic services have been performed, and the results have been delivered to the ordering physician.  These diagnostic services are billed to various payers, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals.  The Company reports revenues from contracted payers, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules.  The Company reports revenues from non-contracted payers, including certain insurance companies and individuals, based on the amount expected to be collected.  The difference between the amount billed and the amount estimated to be collected from non-contracted payers is recorded as an allowance to arrive at the reported net revenues.  The expected revenues from non-contracted payers are based on the historical collection experience of each payer or payer group, as appropriate.  The Company records revenues from patient pay tests net of a large discount and as a result recognizes minimal revenue on those tests.  The Company regularly reviews its historical collection experience for non-contracted payers and adjusts its expected revenues for current and subsequent periods accordingly.

The table below shows the adjustments made to gross service revenues to arrive at net revenues (in thousands), the amount reported on our statements of operations.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Gross service revenues

 

$

57,192

 

 

$

60,660

 

 

$

167,525

 

 

$

159,665

 

Total contractual adjustments and discounts

 

 

(32,066

)

 

 

(37,443

)

 

 

(95,002

)

 

 

(97,595

)

Net revenues

 

$

25,126

 

 

$

23,217

 

 

$

72,523

 

 

$

62,070

 

 

 

NOTE F — EQUITY

Stock Options

On May 4, 2015, the board of directors of Parent (the “Board of Directors”) further amended the Amended and Restated Equity Incentive Plan dated as of April 16, 2013 (the “Plan”) to add an additional 2,500,000 shares to the maximum aggregate number of shares of Parent common stock reserved and available for issuance under the Plan, bringing the total available from the Plan to 9,500,000 shares.  This amendment was approved by the shareholders on June 12, 2015.

On May 4, 2015, the Compensation Committee of the Board of Directors granted 1,645,000 options to certain executives and key employees of the Company.  The options were granted at a price of $4.78 per share and had a weighted average fair market value of $1.80 per option for a total fair market value of $2,961,000.

10


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

A summary of the stock option activity under the Company’s plans for the nine months ended September 30, 2015 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Options outstanding at December 31, 2014

 

 

4,012,096

 

 

$

2.04

 

Options granted

 

 

1,756,000

 

 

 

4.80

 

Less:

 

 

 

 

 

 

 

 

Options exercised

 

 

289,125

 

 

 

1.61

 

Options canceled or expired

 

 

12,500

 

 

 

3.19

 

Options outstanding at September 30, 2015

 

 

5,466,471

 

 

 

2.95

 

Exercisable at September 30, 2015

 

 

2,686,247

 

 

$

1.52

 

 

As of September 30, 2015, there was approximately $3.2 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.5 years.

Stock based compensation expense recognized for stock options and restricted stock and included in the consolidated statements of operations was allocated as follows (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Research and development expense

 

$

161

 

 

$

200

 

 

$

339

 

 

$

269

 

General and administrative expense

 

 

667

 

 

 

120

 

 

 

1,395

 

 

 

297

 

Total stock based compensation expense

 

$

828

 

 

$

320

 

 

$

1,734

 

 

$

566

 

 

Stock based compensation recorded in research and development relates to unvested options granted to a non-employee in connection with the licensed technology from Health Discovery Corporation. 

 

Common Stock Warrants

A summary of the warrant activity for the nine months ended September 30, 2015 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Warrants outstanding at December 31, 2014

 

 

650,000

 

 

$

1.48

 

Warrants granted

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

Warrants exercised

 

 

 

 

 

 

Warrants canceled or expired

 

 

 

 

 

 

Warrants outstanding at September 30, 2015

 

 

650,000

 

 

$

1.48

 

Exercisable at September 30, 2015

 

 

530,000

 

 

$

1.49

 

 

During the three months ended September 30, 2015 and 2014, we recorded $58,000 and $137,000 of warrant compensation expense, respectively.  During the nine months ended September 30, 2015 and 2014, we recorded $173,000 and $172,000 of warrant compensation expense, respectively.  Warrant expense for the periods presented is recorded in research and development as the expense relates to unvested performance based warrants granted to a non-employee in connection with the licensed technology from Health Discovery Corporation.

11


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Restricted Stock Awards

On April 16, 2015 the Company granted four directors of Parent each 2,080 shares of restricted stock.  Such restricted stock will vest ratably over each of the next four quarters so long as the director still serves as a member of the Board of Directors.  The fair market value of each grant of restricted stock on the award date was deemed to be $10,025 or $4.82 per share, which was the closing price of Parent’s common stock on the day before the grant was approved by the compensation committee of the Board of Directors.

On June 16, 2015 the Company granted two newly elected directors of Parent each 1,560 shares of restricted stock.  Such restricted stock will vest ratably over each of the next three quarters so long as the director still serves as a member of the Board of Directors.  The fair market value of each grant of restricted stock on the award date was deemed to be $9,079 or $5.82 per share, which was the closing price of Parent’s common stock on the day before the grant was approved by the compensation committee of the Board of Directors.

 

 

NOTE G — COMMITMENTS

During the nine months ended September 30, 2015, the Company entered into agreements with Wells Fargo Equipment Finance to lease approximately $1.50 million of laboratory and computer equipment. One lease agreement for approximately $0.2 million includes a 36 month term with a $1.00 buyout option at the end of the term and an interest rate of 3.61%.  The other lease agreement for approximately $1.30 million includes a 60 month term with a $1.00 buyout option at the end of term and an interest rate of 4.08%.  The Company accounted for these lease agreements as capital leases.

During the nine months ended September 30, 2015, the Company entered into agreements with several vendors to lease approximately $2.8 million of laboratory equipment, computer equipment and computer software.  The leases have varying terms ranging from 34 to 60 months with $1.00 buyout options at the end of the terms and interest rates ranging between 4.00% and 13.5% with a weighted average interest rate of 5.47%.  The Company accounted for these lease agreements as capital lease obligations.

 

 

NOTE H — OTHER RELATED PARTY TRANSACTIONS

During the three months ended September 30, 2015 and 2014, Steven C. Jones, a director of Parent, earned approximately $66,000 and $67,000, respectively, for various consulting work performed in connection with his duties as Executive Vice President of Finance. During each of the nine months ended September 30, 2015 and 2014, Mr. Jones earned approximately $197,000 for various consulting work performed in connection with his duties as Executive Vice President of Finance. Mr. Jones also received $77,500 and $47,500 during the nine months ended September 30, 2015 and 2014, respectively as payment of his annual bonus compensation for the previous fiscal years.

On May 4, 2015 Parent granted Steven C. Jones 225,000 stock options to purchase shares of Parent common stock.  The options were granted at a price of $4.78 per share and had a weighted average fair market value of $1.80 per option.  The options vest ratably over the next three years.

 

NOTE I —SUBSEQUENT EVENTS

 

Acquisition

 

On October 20, 2015, Parent and NeoGenomics Laboratories Inc., entered into a Stock Purchase Agreement with GE Medical Holding AB (“GE Medical”), a subsidiary of General Electric Company pursuant to which Parent (through NeoGenomics Laboratories) proposes to acquire from GE Medical all of the issued and outstanding shares of common stock, par value $0.01 per share, of Clarient, Inc., a Delaware company (“Clarient”).  The purchase price consists of (i) $80.0 million in cash, (ii) 15.0 million shares of Parent’s common stockand (iii) 14,666,667 shares of the Parent’s Series A convertible preferred stock (‘the Series A Preferred Stock”).  The cash portion of the purchase price is subject to adjustment for changes in Clarient’s working capital as of the closing of the acquisition and certain indebtedness and other customary adjustments that may be determined at or after the closing.  The final determination of the allocation of the purchase price will be based on the fair values of assets and liabilities of Clarient as of the date the acquisition closes.  The closing of the acquisition is subject to, among other things, stockholder approval and the receipt of all required

12


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

authorizations, clearances, consents and governmental approvals.  Assuming receipt of the foregoing, we expect the acquisition to be completed near the end of 2015 or early 2016.      

 

On or prior to the closing of the acquisition, the Company expects to enter into two separate credit facilities with separate lenders.  The first is a revolving credit facility based on our accounts receivable which would provide for up to $25.0 million of availability of which we expect to use $10.0 million at closing to fund a portion of the cash consideration of the acquisition.  The second credit facility is a $55.0 million Term Loan that the Company would use to fund a portion of the cash consideration of the acquisition.  In the event the proposed acquisition is not closed, the Company will not enter into the $55.0 million term loan, however, the Company may still enter into the $25.0 million revolving credit facility of which would be used for operating liquidity and funding any future acquisitions.

 

The closing of the acquisition is subject to various closing conditions including, without limitation, the approval by Parent’s stockholders of the transaction, the issuance of the common stock and Series A Preferred Stock, and the increase in authorized common stock and preferred stock.

 

Covance Agreement

 

On October 28, 2015, NeoGenomics Laboratories amended the Strategic Alliance Agreement that it originally entered into with Covance Central Laboratory Services as of November 18, 2013.  As part of the amended agreement, the Company will receive $2 million during the fourth quarter of 2015.

 

2016 Medicare Physician Fee Schedule

 

On October 30, 2015, the, the Centers for Medicare and Medicaid Services (“CMS”) released a public display copy of the CY 2016 Physician Fee Schedule (“PFS”) Final Rule with Comment Period.   Comments on portions of the rule are being accepted by CMS through December 29, 2015, including comments on standard times for certain of the clinical labor tasks associated with pathology services and on recommended values for potentially mis-valued codes.  If the so called "Final Rule" passes without further changes, it will result in significantly increased reimbursement by CMS in 2016 for the main FISH CPT codes that we perform and bill.  There are reductions in certain other CPT codes that we frequently bill, including the main codes used for billing Flow Cytometry testing.  For the first nine months of 2015 we billed Medicare $5.1 million for FISH testing, and we believe that reimbursement for FISH from Medicare will increase by approximately 75% if the final rule is passed without further changes.  We also had billings for flow cytometry testing of $2.6 million to CMS for the first nine months of 2015, and we believe flow reimbursement will decline by approximately 18% if the final rule is passed without further changes.  The final 2016 PFS rule will not be issued until January 2016.  Significant rate changes by Medicare have historically influenced reimbursement rates set by commercial insurance payors.          

 

END OF FINANCIAL STATEMENTS

 

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NEOGENOMICS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NeoGenomics, Inc., a Nevada corporation (referred to collectively with its subsidiaries as “NeoGenomics”, “we”, “us”, “our” or the “Company” in this quarterly report on Form 10-Q) is the registrant for SEC reporting purposes.  Our common stock is listed on the NASDAQ Capital Market under the symbol “NEO.”

Introduction

The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements, and the notes thereto included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the introductory note to this quarterly report on Form 10-Q under the caption “Forward-Looking Statements”, which information is incorporated herein by reference.

Overview

We operate a network of cancer-focused genetic testing laboratories with a mission to improve patient care through exceptional genetic and molecular testing services.  Our vision is to become America’s premier cancer genetic testing laboratory by delivering uncompromising quality, exceptional service and innovative products and services.  The Company has laboratory locations in Ft. Myers and Tampa, Florida; Fresno, Irvine, and West Sacramento, California; and Nashville, Tennessee, and currently offers the following types of testing services:

 

a)

Cytogenetics - the study of normal and abnormal chromosomes and their relationship to disease. It involves looking at the chromosome structure to identify changes from patterns seen in normal chromosomes.  Cytogenetic studies are often utilized to answer diagnostic, prognostic and predictive questions in the treatment of hematological malignancies.

 

b)

Fluorescence In-Situ Hybridization (“FISH”) - a branch of cancer genetics that focuses on detecting and locating the presence or absence of specific DNA sequences and genes on chromosomes.  FISH helps bridge abnormality detection between the chromosomal and DNA sequence levels.  The technique uses fluorescent probes that bind to only those parts of the chromosome with which they show a high degree of sequence similarity. Fluorescence microscopy is used to visualize the fluorescent probes bound to the chromosomes.  FISH can be used to help identify a number of gene alternations, such as amplification, deletions, and translocations.

 

c)

Flow cytometry - a rapid way to measure the characteristics of cell populations. Cells from peripheral blood, bone marrow aspirate, lymph nodes, and other areas are labeled with selective fluorescent antibodies and analyzed as they flow in a fluid stream through a beam of light. The properties measured in these antibodies include the relative size, relative granularity or internal complexity, and relative fluorescence intensity. These fluorescent antibodies bind to specific cell surface antigens and are used to identify malignant cell populations. Flow cytometry is typically performed in diagnosing a wide variety of leukemia and lymphoma neoplasms.  Flow cytometry is also used to monitor patients through therapy to determine whether the disease burden is increasing or decreasing, otherwise known as minimal residual disease monitoring.

 

d)

Immunohistochemistry (“IHC”) - refers to the process of localizing proteins in cells of a tissue section and relies on the principle of antibodies binding specifically to antigens in biological tissues. IHC is widely used in the diagnosis of abnormal cells such as those found in cancerous tumors.  Specific surface cytoplasmic or nuclear markers are characteristic of cellular events such as proliferation or cell death (apoptosis).  IHC is also widely used to understand the distribution and localization of differentially expressed proteins.

 

e)

Molecular testing - a rapidly growing cancer diagnostic tool focusing on the analysis of DNA and RNA, as well as the structure and function of genes at the molecular level.  Molecular testing employs multiple technologies including DNA fragment length analysis, real-time polymerase chain reaction (“RT-PCR”) RNA analysis, bi-directional Sanger sequencing analysis, and Next-Generation sequencing (“NGS”).

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

 

 

f)

Pathology consultation services are when our pathologists review surgical samples on a consultative basis for our clients.  NeoGenomics is one of a few laboratories in the country with an electron microscopy lab which enables us to analyze complex renal cases.  We have expertise in Hematopathology, Dermatopathology, Nephropathology, Gastroenteology and Genitourinary (GI and GU) Pathology and in Women’s Health. 

The cancer testing services we offer to community-based pathologists are designed to be a natural extension of, and complementary to, the services that they perform within their own practices.  We believe our relationship as a non-competitive partner to community-based pathology practices and hospital pathology labs empowers them to expand their breadth of testing and provide a menu of services that matches or exceeds the level of service found in academic centers of excellence around the country.  Community-based pathology practices and hospital pathology labs may order certain testing services on a technical component only (“TC” or “tech-only”) basis, which allows them to participate in the diagnostic process by performing the professional component (“PC”) interpretation services without having to hire laboratory technologists or purchase the sophisticated equipment needed to perform the technical component of the tests.  We also support our pathology clients with interpretation and consultative services on difficult or complex cases and provide overflow interpretation services when requested by clients.

In areas where we do not provide services to community-based pathology practices and/or hospital pathology labs, we may directly serve oncology, dermatology, urology and other clinician practices that prefer to have a direct relationship with a laboratory for cancer-related genetic and molecular testing services.  We typically service these types of clients with a “global” service offering where we perform both the technical and professional components of the tests ordered.  However, in certain instances larger clinician practices have internalized pathology interpretation services, and our “tech-only” service offering allows these larger clinician practices to also participate in the diagnostic process by performing the PC interpretation services on TC testing performed by NeoGenomics.

2015 Focus Areas:  Grow, Innovate, Diversify and Get Lean

Grow

We plan to continue growing organically by providing high complexity, cancer-related laboratory testing services to hospitals, community-based pathology practices, and clinicians throughout the United States.  We currently perform analyses for hematopoietic cancers such as leukemia and lymphoma (blood and lymphoid tumors) and solid tumor cancers such as breast, lung, colon, and bladder cancer.  For hematopoietic cancers, we typically analyze bone marrow aspirate and peripheral blood specimens.  For solid tumor cancers, we typically analyze tissue samples or urine.

Our growth over the past several years has been due to several factors.  Our highly trained sales team has been successful in competing against other larger national laboratories with one of the broadest test menus in our industry.  Our sales team consists of many industry veterans who can talk to pathologists and oncologists about our complex testing and developments in the field of cancer testing.  Our tech-only testing option allows local pathologists to compete against the large national laboratories and helps our clients view us as more of a partner who is working with them, rather than against them by taking away work.  Our sales representatives often become trusted advisors to our clients who rely on them, and NeoGenomics, to keep up with the latest developments in the rapidly changing field of molecular genetics.  We have also been successful in expanding to new geographies where we did not previously have sales representation and this has helped us bring our service offerings to new clients.

Our growth has also been aided by strong client retention.  We believe our low client attrition is due to our strong service levels and culture of customer focus.  We work to have engaged employees who want to achieve the highest customer satisfaction possible.  Our TC-PC model results in clients viewing us as more of a partner than a vendor and this also helps in our retention of clients.  By retaining our existing customer base and bringing in a steady stream of new customers we have been able to organically grow our business.

We are keenly focused on innovation, and believe this has been a key factor in our growth.  Over the past three years, we have developed over 100 new molecular oncology tests, and panels, and believe we now have one of the most comprehensive oncology test menus of any laboratory in the world.  By launching new tests at a steady rate, our sales representatives are able to share cutting edge developments in molecular genetics with customers and prospective customers.  We believe clients are increasingly relying on us because we are an emerging leader in the molecular oncology field.  We have had several academic centers begin to refer specimens for testing.  These high profile reference

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NEOGENOMICS, INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

 

customers often result in other accounts referring testing as well.  New customers who begin using us because of our many new innovative test offerings often begin to refer large portions of their other testing, which has helped to sustain our growth.  We are increasingly being seen as a one-stop shop able to handle all of the oncology testing needs of our clients.

We will also look to grow our business through mergers or acquisitions if the right opportunities become available.  We are focused on strategic opportunities that would be complementary to our menu of services and would be accretive to our earnings and cash flow in the short to medium timeframe.  In 2014 we acquired Path Labs, LLC, doing business as (‘Path Logic”), a leading provider of specialized anatomic pathology services to hospitals and physicians primarily in Northern California.  Path Logic provides high-quality Anatomic Pathology services with significant expertise in the sub-specialties of renal pathology, dermatopathology, women’s health and gastrointestinal and genitourinary pathology.  On October 20, 2015 we entered into a Stock Purchase Agreement with GE Medical Holding AB (“GE Medical”), a subsidiary of General Electric Company pursuant to which we (through NeoGenomics Laboratories) propose to acquire from GE Medical all of the issued and outstanding shares of common stock of Clarient Inc., a Delaware Corporation (the “Transaction”).  We believe the transaction will enable NeoGenomics to broaden its offering of innovative cancer diagnostic tests to hospitals and physicians across the country, and to accelerate its growth in the fast-growing worldwide market for pharmaceutical clinical trials and research.  Complementary product offerings and expanded geographical reach of the combined company are expected to provide customers with substantial benefits and create a significantly larger and more diversified provider of precision oncology diagnostics.  

We believe Clarient’s outstanding pathology services and capabilities in the analysis of solid tumor cancers of the breast, colon and lung are highly complementary to NeoGenomics’ industry-leading molecular testing services and extensive expertise in testing for hematologic cancers.  We believe hospital, physician, and pharmaceutical industry clients will benefit from the combined company’s ability to offer a wider range of world-class tests, closer geographical access to services, and enhanced service capabilities.  The proposed acquisition will allow the combined company to further leverage its existing laboratory facilities and infrastructure to drive productivity improvements and lower operating costs.  See Note I to the financial statements.  The closing of the Transaction is subject to various closing conditions including, without limitation, the approval by Parent’s stockholders of the transaction, the issuance of the common stock and Series A Preferred Stock, and the increase in authorized common stock and preferred stock. See Note I to the financial statements.

Innovate

We are committed to being an innovative leader in oncology testing.  Our goal is to develop new assays to help physician clients better manage their patients and to enable them to practice evidence-based medicine tailored specifically for each of their patients.  During the nine months ended September 30, 2015, we introduced an additional 37 new tests.

We also recently launched twelve NEOLABtm liquid biopsy tests for hematological disease using next generation sequencing and other advanced molecular technologies.  These twelve new tests use cell-free circulating DNA and RNA found in blood plasma to identify molecular abnormalities in the bone marrow without the need for a bone marrow biopsy.

It is estimated that more than 600,000 bone marrow biopsies are performed annually in the U.S. to diagnose and monitor patients with various hematologic cancers.  However, bone marrow biopsies are a painful and uncomfortable procedure for patients, and can be associated with complications.  These new tests are designed to help patients by reducing the need for bone marrow biopsies, and to assist clinicians in their treatment of cancer patients.

The technology is based on the concept that hematologic cells release their DNA, RNA, and protein into circulation as the cells are immersed in blood.  The cell-free circulating DNA, RNA and protein are referred to as exosomes, microvesicles, apoptotic bodies or simply DNA- or RNA-protein complexes.  Our new tests use proprietary methods to extract these circulating nucleic acids and analyze them using next generation sequencing and advanced methods in order to evaluate molecular abnormalities present in hematological cancers.

Physicians can utilize the new liquid biopsy tests to: 1) Screen patients to determine if a bone marrow biopsy is necessary, especially when myelodysplastic syndrome or acute leukemia is suspected; 2) Monitor disease status, response to therapy and predict early relapse; and 3) Complete testing when a bone marrow sample is inadequate or is technically difficult to obtain.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

 

Our clients have been very receptive to our new molecular offerings and we believe that we have the most comprehensive clinical molecular test menu of any laboratory in the United States.  We are also seeing increasing interest in our molecular menu from several pharmaceutical firms.  We also introduced a number of NeoTYPETM profiles that combine multiple molecular tests into multi-gene tests targeting specific types of cancer to help pathologists and oncologists determine cancer subtypes on difficult cases. We use next generation sequencing (NGS) and bi-directional sanger sequencing analysis which we believe is superior to many of the molecular tests being offered by our competitors because we are able to detect mutations that other methods would not detect.  We also add other testing modalities to NGS such as FISH, IHC and Flow Cytometry which allow for a more comprehensive analysis of each case.

We are also working to develop a proprietary NeoLABTM (Liquid Alternative to Biopsy) Prostate cancer test that is performed on blood plasma and urine rather than on prostate tissue biopsies.  There are two goals for this test, a) to diagnose the presence of cancer in patients with BPH (benign prostatic hyperplasia) and b) to distinguish high-grade from low-grade cancer in patients with prostate cancer.  We completed a preliminary patient study in June 2013, and the results were published in March 2014 in the Genetic Testing and Molecular Biomarkers journal.  In addition, in February 2014, we completed a follow up study with additional patient samples which confirmed the published preliminary data from the first trial.  The results of this second study were presented at the Association of Clinical Oncologists (“ASCO”) meeting in 2014.  We are currently conducting a pivotal validation study that is targeting over 1,000 patients to further validate the efficacy of our NeoLABTM Prostate Test.  The NeoLABTM test is available as a Laboratory Developed Test (“LDT”), free of charge, to patients who want to participate in the ongoing validation on the condition that their treating physician must provide clinical utilization and follow-up data to us as part of the testing process.  Further validation work needs to be completed, however we continue to be encouraged about the potential for this new test.  We are planning an unrestricted commercial launch of the NeoLABTM prostate test in 2016.

In addition, over the last year we believe we have vastly improved our immunohistochemistry offering, developed a new digital imaging platform and launched several new FISH tests.  We expect these new tests to drive growth in the future.  We also expect to continue to make investments in R&D that will allow us to commercialize a number of new and innovative genetic tests as scientific and medical technological advances are made.

Diversify

Our third focus area in 2015 is to diversify our business.  We have focused on developing our clinical trials business and expanding our relationships with biopharmaceutical firms.  We have several ongoing clinical trials with numerous international pharmaceutical firms and we expect clinical trials testing to be a major component of our diversification strategy in the coming years.  Our extensive molecular testing menu has helped to attract interest from several leading pharmaceutical firms and it remains a strong selling point.  We have also done work for several leading academic centers related to clinical trials.  We believe that our ability to quickly develop new genetic tests for certain bio-markers makes us a good candidate to work with firms on development projects and trials.  In November of 2013, we announced a five-year contract with Covance Central Laboratories (“Covance”) to provide comprehensive anatomic pathology, histology and specialty testing laboratory services for clinical trials.  On October 28, 2015, the agreement with Covance was amended to enable us to enter into strategic relationships and offer our services to other central laboratories and contract research organizations. As part of the amended agreement, we will receive $2 million during the fourth quarter of 2015. The agreement will remain in effect through the original five-year term.  We expect to continue to work with Covance through the term of the contract, and already have several studies in-house and underway.  Developing the many customer relationships we have with pharmaceutical firms will remain a key focus area for NeoGenomics in the years to come.  

Get Lean

We are also focused on becoming more efficient and reducing our cost per test.  Our best practice teams work with our information technology teams to make improvements in efficiencies to our lab processes.  We are using information systems and technology to move us further along the path of being a “fully digital lab” that uses on-line ordering, bar coding, specimen tracking, and other tools to create a streamlined, seamless, and efficient lab.  Our laboratory teams are using lean principles and are increasing automation to lower our cost-per-test.  We’ve also been working with suppliers to lower supply costs and have changed vendors in some cases.  In addition, our laboratory department had incentive compensation linked to their success in reducing cost per test.  During the nine months ended September 30, 2015 we reduced our average cost of goods sold per test in our “Base Business” (excluding Path Logic) by 7.9% versus the

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(CONTINUED)

 

comparable periods in 2014 and we have identified several other areas in the laboratory where we believe we can drive further automation and efficiencies.

Competitive Strengths

Turnaround Times

We strive to provide industry leading turnaround times for test results to our clients nationwide.  By providing information to our clients in a rapid manner, physicians can begin treating their patients as soon as possible.  We believe our average 4-5 day turnaround time for our cytogenetics testing services, our average 3-4 day turnaround time for FISH testing services, our 5-7 day turnaround time for molecular testing and our average 1 day turnaround time for flow cytometry and pathology testing services are industry-leading benchmarks for national laboratories.  Our consistent timeliness of results is a competitive strength and a driver of additional testing requests by our referring physicians.  Rapid turnaround times allow for the performance of other adjunctive tests within an acceptable diagnosis window in order to augment or confirm results and more fully inform treatment options.  We believe that our fast turnaround times are a key differentiator versus other national laboratories, and our clients often cite them as a key factor in their relationship with us.

Medical Team

Our team of medical professionals and Ph.Ds. are specialists in the field of genetics, oncology and pathology.  Our medical team is led by our Chief Medical Officer, Dr. Maher Albitar, a renowned hematopathologist with extensive experience in molecular and genetic testing.  Prior to joining NeoGenomics, Dr. Albitar was Medical Director for Hematopathology and Oncology at the Quest Nichols Institute and Chief R&D Director for Hematopathology and Oncology for Quest Diagnostics.  He also served as Section Chief for Leukemia at the University of Texas M. D. Anderson Cancer Center and Medical Director of the MD Anderson Molecular laboratory, one of the first labs of its kind in the United States. In addition to Dr. Albitar, we employ 15 other full-time M.D.’s and Ph.D.’s in addition to part-time consultants for specific specialties.

Extensive Tech-Only Service Offerings

We currently have the most extensive menu of tech-only FISH services in the country. We also offer tech-only flow cytometry and immunohistochemistry testing services.  These types of testing services allow the professional interpretation component of a test to be performed and billed separately by our physician clients.  Our FISH, Flow Cytometry and other tech-only service offerings allow properly trained and credentialed community-based pathologists to extend their own practices by performing professional interpretations services, which allows them to better service the needs of their local clientele without the need to invest in the lab equipment and personnel required to perform the technical component of genetic and molecular testing.

Our tech-only services are designed to give pathologists the option to choose, on a case by case basis, whether they want to order just the technical information and images relating to a specific test so they can perform the professional interpretation, or order “global” services and receive a comprehensive test report which includes a NeoGenomics Pathologist’s interpretation of the test results.  Our clients appreciate the flexibility to access NeoGenomics’ medical staff for difficult or complex cases or when they are otherwise unavailable to perform professional interpretations.  We believe this innovative approach to serving the needs of pathology clients’ results in longer term, more committed client relationships that are more akin to strategic partnerships. Our extensive tech-only service offerings have differentiated us and allowed us to compete more effectively against larger, more entrenched competitors in our niche of the industry.

Global Service Offerings

We also offer a full set of global services to meet the needs of those clients who are not credentialed and trained in interpreting genetic tests and who are looking for specialists to interpret the testing results for them.  In our global service offerings, our lab performs the technical component of the tests and our M.D.s and Ph.Ds. provide the interpretation services.  Our professional staff is also available for post-test consultative services.  These clients rely on the expertise of our medical team to give them the answers they need in a timely manner to help inform their diagnoses and treatment decisions.  Many of our tech-only clients also rely on our medical team for difficult or challenging cases by ordering our global testing services on a case-by-case basis or our medical team can serve as a backup to support our clients who

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need help to satisfy the continued and demanding requirements of their practice.  Our reporting capabilities allow for all relevant case data from our global services to be captured in one summary report.  When providing global services, we perform both the technical and professional component of the test, which results in a higher reimbursement level.

Client Education Programs

We believe we have one of the most extensive client education programs in the genetic and molecular testing industry.  We train pathologists how to use and interpret genetic testing services so that they can better interpret technical data and render their diagnosis, which allows them to participate in our TC-PC program.  Our educational programs include an extensive library of on-demand training modules, online courses, and custom tailored on-site training programs that are designed to prepare clients to utilize our tech-only services.  We offer training and information on new cancer tests and the latest developments in the field of molecular genetic testing.  Each year, we also regularly sponsor seminars and webinars on emerging topics of interest in our field.  Our medical staff is involved in many aspects of our training programs.

Superior Testing Technologies and Instrumentation

We use some of the most advanced testing technologies and instrumentation in the laboratory industry. The use of next generation sequencing in our molecular testing allows us to detect multiple mutations which can be missed with single point mutation analysis.  Many laboratories rely on more limited molecular tests which only detect single elements on a gene.  Our automated FISH and Cytogenetics tools allow us to deliver the highest quality testing to our clients and our Flow Cytometry laboratory is one of only a few in the country using 10-color Flow Cytometry analysis technology on a technical-only basis.  We are one of only a few laboratories with an electron microscopy (EM) department for diagnosis in complex renal case analysis.

Laboratory Information System

We believe we have a state-of-the-art Laboratory Information System (“LIS”) that interconnects our locations and provides flexible reporting solutions to clients.  This system allows us to standardize testing and deliver uniform test results and images throughout our network, regardless of the location that any specific portion of a test is performed within our network.  This allows us to move specimens and image analysis work between locations to better balance our workload.  Our LIS also allows us to offer highly specialized and customizable reporting solutions to our tech-only clients.  For instance, our tech-only FISH and Flow Cytometry applications allow our community-based pathologist clients to tailor individual reports to their specifications and incorporate only the images they select and then issue and sign-out such reports using our system.  Our customized reporting solution also allows our clients to incorporate test results performed on ancillary tests not performed at NeoGenomics into summary report templates.  This FlexREPORTtm feature has been well-received by clients.

National Direct Sales Force

Our direct sales force has been trained extensively in cancer genetic testing and consultative selling skills to service the needs of clients.  Our sales representatives are organized into three regions (Northeast, Central and West) for the core NeoGenomics business, and one separate sales team for our Path Logic division.  These sales representatives all utilize our custom Customer Relationship Management System (“CRM”) to manage their territories, and we have integrated all of the important customer care functionality within our LIS into the CRM so that our sales representatives can stay informed of emerging issues and opportunities within their regions.  Our in-house customer care team is aligned with our field sales team to serve the needs of our clients by utilizing the same LIS and CRM.  Our field teams can see in real-time when a client calls the laboratory, the reason for the call, the resolution, and if face-to-face interaction is needed for follow-up.

Geographic Locations

Many high complexity laboratories within the cancer testing niche have frequently operated a core facility on either the West Coast or the East Coast of the United States to service the needs of their customers around the country.  We believe our clients and prospects desire to do business with a laboratory with national breadth and a local presence.  We have six facilities, three large laboratory locations in Fort Myers, Florida, West Sacramento, California and Irvine, California and three smaller laboratory locations in Fresno, California, Nashville, Tennessee and Tampa, Florida.  Our

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objective is to “operate one lab with multiple locations” in order to deliver standardized, high quality, test results.  We intend to continue to develop and open new laboratories and/or expand our current facilities as market situations dictate and business opportunities arise.

Scientific Pipeline

In the past few years our field has experienced a rapid increase in tests that are tied to specific “genomic pathways”.  These predictive tests are typically individualized for a small sub-set of patients with a specific subtype of cancer.  The therapeutic target in the genomic pathway is typically a small molecule found at the level of the cell surface, within the cytoplasm and/or within the nucleus.  These genomic pathways, known as the “Hallmarks of Cancer”, contain a target-rich environment for small-molecule “anti-therapies”.  These anti-therapies target specific mutations in the major cancer pathways such as the Proliferation Pathway, the Apoptotic Pathway, the Angiogenic Pathway, the Metastasis Pathway, and the Signaling Pathways and Anti-Signaling Pathways.

Seasonality

The majority of our testing volume is dependent on patients being treated by hematology/oncology professionals and other healthcare providers. Volume of testing generally declines during the vacation seasons, year-end holiday periods and other major holidays, particularly when those holidays fall during the middle of the week. In addition, the volume of testing tends to decline due to adverse weather conditions, such as heavy snow, excessively hot or cold spells or hurricanes, tornados in certain regions, consequently reducing revenues and cash flows in any affected period. Therefore, comparison of the results of successive periods may not accurately reflect trends for future periods.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of laboratory tests, and approximately one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our Annual Report on Form 10-K for the year ended December 31, 2014 as amended.

Deferred Taxes

We recorded a full valuation allowance against all of our deferred tax assets as of both September 30, 2015 and December 31, 2014.  This was done although we had pretax income in 2013 and 2014, due to the unsettled circumstances around reimbursement reductions in 2015 which includes further Medicare rate reductions and the fact that we believe that most commercial insurance companies followed Medicare’s reimbursement framework and reduced reimbursement for the effected Medicare CPT codes. We believe that our profitability for 2015 is not reasonably assured as evidenced by our loss position for the nine months ended September 30, 2015.  However, given our current earnings and anticipated future earnings, we believe there is a reasonable possibility that within the next twelve months, sufficient positive evidence may become available to allow us to reach a conclusion that a significant portion of the valuation allowance will no longer be needed.  Release of the valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded.  Subsequent periods would have a higher income tax expense should the Company in fact be profitable.  However the exact timing and amount of the valuation allowance are subject to change on the basis of the levels of profitability that we are able to actually achieve and the outlook for the Company.

 

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Proposed Acquisition of Clarient Business

On October 20, 2015, we entered into a Stock Purchase Agreement with GE Medical, pursuant to which we (through NeoGenomics Laboratories) propose to acquire from GE Medical all of the issued and outstanding shares of common stock of Clarient, a wholly owned subsidiary of GE Medical.  The purchase price consists of (i) $80.0 million in cash, (ii) 15.0 million shares of our common stock, and (iii) 14,666,667 shares of our Series A Preferred Stock.  The cash portion of the purchase price is subject to adjustment for changes in Clarient’s working capital as of the closing of the Transaction and certain indebtedness and other customary adjustments that may be determined at or after the closing.  The final determination of the allocation of the purchase price will be based on the fair values of assets and liabilities of Clarient as of the date the Transaction closes.  The closing of the Transaction is subject to, among other things, stockholder approval and the receipt of all required authorizations, clearances, consents and governmental approvals.  Assuming receipt of the foregoing, we expect the Transaction to be completed near the end of 2015 or early 2016.

For additional information regarding the Transaction, see our preliminary proxy statement filed with the SEC on October 23, 2015, and the definitive proxy statement to be filed thereafter.

Results of Operations for the Three and Nine Months Ended September 30, 2015 as Compared to the Three and Nine Months Ended September 30, 2014

In July 2014 NeoGenomics Laboratories purchased all of the membership interests of Path Logic from PL Holdings for a purchase price (in thousands) of $5,908, (see Note C to our financial statements for additional information).  For certain year-over-year comparability purposes we are discussing results since the acquisition without the effects of Path Logic so we may better explain the changes that occurred this year when compared to the prior year results.  Such results will be referred to as “Base Business”.

The following table presents the consolidated statements of operations as a percentage of revenue:

 

 

 

For the three months ended

September 30,

 

 

For the nine months ended

September 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net revenue

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Cost of revenue

 

 

55.5

%

 

 

55.7

%

 

 

56.5

%

 

 

52.9

%

Gross Profit

 

 

44.5

%

 

 

44.3

%

 

 

43.5

%

 

 

47.1

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

29.6

%

 

 

27.4

%

 

 

29.0

%

 

 

27.9

%

Research and development

 

 

3.5

%

 

 

4.4

%

 

 

3.2

%

 

 

3.7

%

Sales and marketing

 

 

10.9

%

 

 

12.8

%

 

 

11.8

%

 

 

14.1

%

Total operating expenses

 

 

44.0

%

 

 

44.6

%

 

 

44.0

%

 

 

45.7

%

Income (loss) from operations

 

 

0.5

%

 

 

(0.3

)%

 

 

(0.5

)%

 

 

1.4

%

Interest and other expense - net

 

 

(1.0

)%

 

 

(0.9

)%

 

 

(0.9

)%

 

 

(1.2

)%

Net income (loss) before income taxes

 

 

(0.5

)%

 

 

(1.2

)%

 

 

(1.4

)%

 

 

0.2

%

Income taxes

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.1

%

Net income (loss)

 

 

(0.5

)%

 

 

(1.2

)%

 

 

(1.4

)%

 

 

0.1

%

 

Revenue

Our consolidated revenue for the three and nine months ended September 30, 2015 was approximately $25.1 million and $72.5 million, respectively, compared to $23.2 million and $62.1 million for the three and nine months ended September 30, 2014, respectively.  The Path Logic acquisition accounted for revenues of $2.0 million and $6.3 million for the three and nine months ended September 30, 2015, respectively, compared to $2.4 million for the three and nine months ended September 30, 2014.  Growth in the Base Business, was approximately $2.3 million and $6.5 million for the three and nine months ended September 30, 2015, respectively.

The following table shows the revenue, requisition and test metrics for our Base Business for the three and nine months ended September 30, 2015 and 2014:

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For the three months ended September 30,

 

 

For the nine months ended September 30,

 

Base Business

 

2015

 

 

2014

 

 

% Change

 

 

2015

 

 

2014

 

 

% Change

 

Requisitions received (cases)

 

 

35,427

 

 

 

28,493

 

 

 

24.3

%

 

 

101,542

 

 

 

82,551

 

 

 

23.0

%

Number of tests performed

 

 

56,380

 

 

 

44,975

 

 

 

25.4

%

 

 

160,999

 

 

 

129,184

 

 

 

24.6

%

Average number of requisitions/tests

 

 

1.59

 

 

 

1.58

 

 

 

0.6

%

 

 

1.59

 

 

 

1.56

 

 

 

1.9

%

Total testing revenue (in thousands)

 

$

23,097

 

 

$

20,835

 

 

 

10.9

%

 

$

66,214

 

 

$

59,688

 

 

 

10.9

%

Average revenue per requisition

 

$

652

 

 

$

731

 

 

 

(10.8

%)

 

$

652

 

 

$

723

 

 

 

(9.8

%)

Average revenue per test

 

$

410

 

 

$

463

 

 

 

(11.4

%)

 

$

411

 

 

$

462

 

 

 

(11.0

%)

Total cost of revenue (in thousands)

 

$

12,257

 

 

$

11,172

 

 

 

9.7

%

 

$

35,798

 

 

$

31,075

 

 

 

15.2

%

Average cost per requisition

 

$

346

 

 

$

392

 

 

 

(11.7

%)

 

$

353

 

 

$

376

 

 

 

(6.1

%)

 

Our year-over-year revenue growth in our Base Business is the result of a broad based increase in the number of new clients resulting in a 25.4% increase in test volume for the three months ended September 30, 2015 compared to the same period in 2014 and a 24.6% increase in test volume for the nine months ended September 30, 2015 compared to the same period in 2014. We believe that the increase in new clients is a direct result of our efforts to innovate by developing one of the most comprehensive molecular testing menus in the industry.  Our leading molecular testing menu has also allowed us to up-sell many existing clients which is also helping to drive our growth.  Customers increasingly see us as a one-stop-shop able to handle all of their cancer testing needs.  We expanded our sales team during 2015 and we are seeing the benefit from that expansion as the sales team is performing well.  Our average revenue/test decrease of approximately 11.4% for the three months ended September 30, 2015 compared to the same period in 2014 and our revenue/test decrease of approximately 11.0% for the nine months ended September 30, 2015 compared to the same period in 2014 was primarily attributable to the reduction in payments from Medicare and commercial insurance plans on certain FISH and immunohistochemistry tests as a result of the 2015 Medicare physician fee schedule being reduced for certain CPT codes.  Many commercial insurance plans have used the reduced Medicare fees for FISH as a benchmark and have made similar reductions to the new FISH CPT Codes.

The following table shows the requisitions and revenue for Path Logic for the three and nine months ended September 30, 2015 ($ in thousands, except for requisitions):

 

 

For the three months ended September 30,

 

 

For the nine months ended September 30,

 

Path Logic

 

2015

 

 

2014

 

 

% Change

 

 

2015

 

 

2014

 

 

% Change

 

Requisitions received (cases)

 

 

15,713

 

 

 

19,623

 

 

 

(19.9

%)

 

 

49,413

 

 

 

19,623

 

 

 

151.8

%

Total testing revenue

 

$

2,029

 

 

$

2,382

 

 

 

(14.8

%)

 

$

6,309

 

 

$

2,382

 

 

 

164.9

%

Average revenue per requisition