neo-10q_20160630.htm

 

 

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 June 30, 2016.

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 August 3, 2016, the registrant had 77,893,305 shares of Common Stock, par value $0.001 per share outstanding.

 

 

 

 

1

 


 

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

 

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

34

Item 4. Controls and Procedures

 

34

PART II OTHER INFORMATION

 

 

Item 1. Legal Proceedings

 

35

Item 1A. Risk Factors

 

35

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

 

54

Item 3. Defaults Upon Senior Securities

 

54

Item 4. Mine Safety Disclosures

 

54

Item 5. Other Information

 

54

Item 6. Exhibits

 

55

SIGNATURES

 

56

 

 

2

 


 

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”), NeoGenomics Bioinformatics Inc., a Florida corporation, Path Labs LLC, a Delaware limited liability company (“PathLogic”) and Clarient, Inc., a Delaware corporation and its wholly owned subsidiary, Clarient Diagnostic Services, Inc. (together “Clarient”) (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 in “Risk Factors” beginning on page 35.

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

 

Our ability to implement our business strategy;

 

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

 

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

 

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

 

The impact of internalization of testing by customers;

 

Our ability to compete with other diagnostic laboratories;

 

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

 

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

 

Our ability to meet our future capital requirements;

 

U.S. Food and Drug Administration proposed regulation of Laboratory Developed Tests;

 

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

 

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

 

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;

 

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

 

Failure to timely or accurately bill for our services.

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)

 

 

 

 

 

 

 

 

 

ASSETS

 

June 30, 2016

 

 

December 31, 2015

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

21,786

 

 

$

23,420

 

Accounts receivable (net of allowance for doubtful accounts of $9,197 and

   $4,759, respectively)

 

 

53,513

 

 

 

48,943

 

Inventories

 

 

5,545

 

 

 

5,108

 

Other current assets

 

 

6,665

 

 

 

4,889

 

Total current assets

 

 

87,509

 

 

 

82,360

 

Property and equipment (net of accumulated depreciation of $33,858 and

$26,534, respectively)

 

 

33,575

 

 

 

34,577

 

Intangible assets, net

 

 

84,164

 

 

 

87,800

 

Goodwill

 

 

146,179

 

 

 

146,421

 

Other assets

 

 

129

 

 

 

129

 

Total assets

 

$

351,556

 

 

$

351,287

 

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

13,435

 

 

$

12,464

 

Accrued compensation

 

 

8,577

 

 

 

6,217

 

Accrued expenses and other liabilities

 

 

7,604

 

 

 

7,374

 

Revolving credit facility, net

 

 

 

 

 

8,869

 

Short-term portion of capital leases

 

 

4,691

 

 

 

4,534

 

Short-term portion of loans

 

 

646

 

 

 

600

 

Total current liabilities

 

 

34,953

 

 

 

40,058

 

Long-term liabilities

 

 

 

 

 

 

 

 

Long-term portion of capital leases

 

 

4,748

 

 

 

5,040

 

Long-term portion of loans, net

 

 

52,238

 

 

 

52,336

 

Deferred income tax liability, net

 

 

16,249

 

 

 

15,741

 

Total long-term liabilities

 

 

73,235

 

 

 

73,117

 

Total liabilities

 

 

108,188

 

 

 

113,175

 

Commitments and contingencies - see Note I

 

 

 

 

 

 

 

 

Redeemable convertible preferred stock

 

 

 

 

 

 

 

 

Series A Redeemable Convertible Preferred Stock, $0.001 par value, (50,000,000 shares authorized; and 14,666,667 shares issued and outstanding, respectively)

 

 

39,735

 

 

 

28,602

 

Stockholders' equity

 

 

 

 

 

 

 

 

Common stock, $0.001 par value, (250,000,000 shares authorized; 77,882,016 and  75,820,307 shares issued and outstanding, respectively)

 

 

78

 

 

 

76

 

Additional paid-in capital

 

 

236,183

 

 

 

231,375

 

Accumulated deficit

 

 

(32,628

)

 

 

(21,941

)

Total stockholders’ equity

 

 

203,633

 

 

 

209,510

 

Total liabilities, redeemable convertible preferred stock and stockholders' equity

 

$

351,556

 

 

$

351,287

 

 

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

June 30,

 

 

For the Six Months Ended

June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

NET REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Clinical testing revenue

 

$

56,316

 

 

$

24,055

 

 

$

110,936

 

 

$

46,894

 

BioPharma & research revenue

 

 

6,813

 

 

 

315

 

 

 

11,896

 

 

 

502

 

Total Revenue, net

 

 

63,129

 

 

 

24,370

 

 

 

122,832

 

 

 

47,396

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF REVENUE

 

 

34,524

 

 

 

13,557

 

 

 

67,055

 

 

 

27,040

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

GROSS MARGIN

 

 

28,605

 

 

 

10,813

 

 

 

55,777

 

 

 

20,356

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

 

18,779

 

 

 

7,075

 

 

 

36,785

 

 

 

13,598

 

Research and development

 

 

1,306

 

 

 

803

 

 

 

2,752

 

 

 

1,471

 

Sales and marketing

 

 

6,327

 

 

 

2,907

 

 

 

12,127

 

 

 

5,821

 

Total Operating Expenses

 

 

26,412

 

 

 

10,785

 

 

 

51,664

 

 

 

20,890

 

INCOME (LOSS) FROM OPERATIONS

 

 

2,193

 

 

 

28

 

 

 

4,113

 

 

 

(534

)

Interest expense, net

 

 

1,448

 

 

 

189

 

 

 

3,040

 

 

 

384

 

Income (loss) before taxes

 

 

745

 

 

 

(161

)

 

 

1,073

 

 

 

(918

)

Income tax expense

 

 

332

 

 

 

15

 

 

 

505

 

 

 

19

 

NET INCOME (LOSS)

 

 

413

 

 

 

(176

)

 

 

568

 

 

 

(937

)

Deemed dividends on preferred stock

 

 

1,840

 

 

 

 

 

 

3,680

 

 

 

 

Amortization of preferred stock beneficial conversion feature

 

 

3,727

 

 

 

 

 

 

7,453

 

 

 

 

NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

$

(5,154

)

 

$

(176

)

 

$

(10,565

)

 

$

(937

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.07

)

 

$

(0.00

)

 

$

(0.14

)

 

$

(0.02

)

Diluted

 

$

(0.07

)

 

$

(0.00

)

 

$

(0.14

)

 

$

(0.02

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

77,448

 

 

 

60,425

 

 

 

76,758

 

 

 

60,352

 

Diluted

 

 

77,448

 

 

 

60,425

 

 

 

76,758

 

 

 

60,352

 

 

 

See notes to unaudited consolidated financial statements.

 

 

5

 


 

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended June 30,

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

2016

 

 

2015

 

Net income (loss)

 

$

568

 

 

$

(937

)

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

operating activities, net of business acquisition:

 

 

 

 

 

 

 

 

Depreciation

 

 

7,329

 

 

 

3,249

 

Amortization of intangibles

 

 

3,636

 

 

 

190

 

Amortization of debt issue costs

 

 

358

 

 

 

-

 

Stock based compensation – options, restricted stock and warrants

 

 

2,337

 

 

 

1,020

 

Provision for bad debts

 

 

5,434

 

 

 

1,303

 

Changes in assets and liabilities, net of business acquisition:

 

 

 

 

 

 

 

 

(Increase) in accounts receivable, net of write-offs

 

 

(10,004

)

 

 

(1,958

)

(Increase) in inventories

 

 

(437

)

 

 

(800

)

(Increase) in prepaid expenses

 

 

(602

)

 

 

-

 

(Increase) in other current assets

 

 

 

 

 

(129

)

Increase (Decrease) in accounts payable and other liabilities

 

 

3,476

 

 

 

(41

)

Net cash provided by operating activities

 

 

12,095

 

 

 

1,897

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(3,425

)

 

 

(1,180

)

Net cash used in investing activities

 

 

(3,425

)

 

 

(1,180

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Repayment of revolving credit facility

 

 

(10,044

)

 

 

 

Repayment of capital lease obligations/loans

 

 

(2,611

)

 

 

(1,833

)

Proceeds from the exercise of options, warrants and

   ESPP shares, net of transaction expenses

 

 

2,351

 

 

 

379

 

Net cash used in financing activities

 

 

(10,304

)

 

 

(1,454

)

Net change in cash and cash equivalents

 

 

(1,634

)

 

 

(737

)

Cash and cash equivalent, beginning of period

 

 

23,420

 

 

 

33,689

 

Cash and cash equivalents, end of period

 

$

21,786

 

 

$

32,952

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Interest paid

 

$

2,691

 

 

$

417

 

Income taxes paid

 

$

222

 

 

$

20

 

Supplemental disclosure of non-cash investing and financing information:

 

 

 

 

 

 

 

 

Equipment acquired under capital lease/loan obligations

 

$

2,585

 

 

$

3,400

 

Deemed dividends on preferred stock

 

$

3,680

 

 

$

-

 

Amortization of preferred stock beneficial conversion feature

 

$

7,453

 

 

$

-

 

 

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” or, “NeoGenomics Laboratories”), NeoGenomics Bioinformatics Inc., a Florida corporation, Path Labs LLC., a Delaware limited liability company (“PathLogic”) and Clarient Inc., a Delaware corporation, and its wholly owned subsidiary Clarient Diagnostic Services, Inc. (together, “Clarient”), (collectively referred to as “we”, “us”, “our”, “NeoGenomics”, or the “Company”), 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 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, 2015, filed with the SEC on March 15, 2016 and as amended and filed with the SEC on April 18, 2016.  Certain amounts in previously issued financial statements were reclassified to conform to the current presentation (see Note B).

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.

We have one reportable operating segment that delivers testing services to hospitals, pathologists, oncologists, other clinicians and researchers and represents 100% of the Company’s consolidated assets, net revenues and net loss for the three and six months ended June 30, 2016 and 2015.  We have evaluated our segments based on how the Chief Operating Decision Maker (“CODM”), our Chief Executive Officer, reviews performance and makes decisions in managing the Company.  At June 30, 2016, all of our services were provided within the United States and all of our assets were located in the United States.  

We have two primary types of customers, clinical and biopharma.  Our clinical customers include community based pathology practices, oncology groups, hospitals and academic centers.  Our biopharma customers include pharmaceutical companies to whom we provide testing to support their studies and clinical trials.  We continue to assess the information available to the CODM since the close of the Clarient acquisition.  Currently, discrete financial information is not available to the CODM about the separate financial performance of our clinical and our biopharma customers.  As we continue to integrate the two companies and focus separately on the two customer types we will routinely assess the information available and reviewed by the CODM and determine if we meet the criteria for having separate reporting units.

 

 

Note B — Recently Adopted and Issued Accounting Guidance

 

Adopted

 

Effective January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, Income Taxes. The standard update was issued to simplify the presentation of deferred income taxes and required deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. ASU 2015-17 is effective for fiscal years and interim periods within those fiscal years, beginning after December 31, 2016.  Earlier application is permitted as of the beginning of an interim or annual period.  The Company has early adopted this ASU and applied the amendments retrospectively to all deferred tax liabilities and assets presented.  The effect of the adoption on the Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, was the offset of long term deferred tax liabilities by current deferred tax assets of $8,500,000 and $16,668,000, respectively.

7

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

 

Effective September 2015, the FASB issued ASU 2015-16, Business Combinations. The standard update was issued to simplify the accounting for measurement period adjustments.  The update requires that adjustments to provisional amounts identified during the measurement period be recognized in the period determined.  The effect of these adjustments on current earnings that would have been related to previously reported earnings is required to be disclosed.  ASU 2015-16 is effective for fiscal years and interim periods within those fiscal years, beginning after December 31, 2015.  The update should be applied prospectively to adjustments that occur after the effective date of this update.  The Company has adopted this ASU 2015-16 and it did not have a material effect on Company’s earnings for the period ended June 30, 2016. The Company has not finalized all valuations of the assets acquired and liabilities assumed in the Clarient acquisition at June 30, 2016.

 

Issued

 

In May 2014, the FASB issued ASU 2014-09, Revenues from Contracts with Customers. This standard update calls for a number of revisions in the revenue recognition rules. In August 2015, the FASB deferred the effective date of this ASU to the first quarter of 2018, with early adoption permitted beginning in the first quarter of 2017.  The ASU can be applied using a full retrospective method or a modified retrospective method of adoption.  The Company is currently evaluating this update and has not yet determined the date that it will adopt this standard, the method it will use to implement the new standard or the effect this may have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases. The update requires organizations to recognize lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for periods beginning after December 15, 2018 and interim periods within those periods.  The Company is currently evaluating the impact the adoption of this update will have on its consolidated financial statements.  

 

In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. The update requires excess tax benefits and tax deficiencies to be recorded directly through earnings as a component of income tax expense. Under current GAAP, these differences are generally recorded in additional paid-in capital and thus have no impact on net income. The change will also impact the computation of diluted earnings per share, and the cash flows associated with those items will be classified as operating activities on the condensed statements of consolidated cash flows. Entities will be permitted to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required under current GAAP, or recognized when they occur.  ASU 2016-09 is effective for periods beginning after December 15, 2016 and interim periods within those periods.  The Company is currently evaluating the impact the adoption of this standard will have on its consolidated financial statements.  

 

Note C — Acquisitions

Clarient

On December 30, 2015 (“the acquisition date”), the Company acquired from GE Medical Holding AB (“GE Medical”), a subsidiary of General Electric Company (“GE”), all of the issued and outstanding shares of common stock of Clarient, Inc., a wholly owned subsidiary of GE Medical, for a purchase price consisting of (i) cash consideration of approximately $73.8 million, which includes an approximately $6.7 million estimated working capital adjustment and adjustments for estimated cash on hand and estimated indebtedness of Clarient on the Closing Date, (ii) 15,000,000 shares of NeoGenomics ’common stock, and (iii) 14,666,667 shares of NeoGenomics’ Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) pursuant to the Stock Purchase Agreement.

The cash consideration paid as part of the purchase price was funded through the following:

 

·

The Company paid approximately $10.7 million using cash on hand

 

·

Approximately $9.5 million, net of transaction costs was funded using a revolving credit facility

 

·

Approximately $53.6 million, net of transaction costs was funded using a term loan

8

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

On December 21, 2015 shareholders approved and on December 28, 2015, NeoGenomics filed with the Secretary of State of the State of Nevada amendments to its Articles of Incorporation to increase the authorized number of shares of common stock from 100.0 million shares to 250.0 million shares and to increase the authorized number of shares of preferred stock from 10.0 million shares to 50.0 million shares in order to fund the common and preferred stock portion of the purchase price, among other things.  

The Company issued 15,000,000 shares of common stock as consideration for the acquisition of Clarient.  The common stock includes restrictions imposed on the holder in the Investor Board Rights, Lockup and Standstill Agreement.  We estimated the fair value of the common stock consideration using inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The key assumption in the fair value determination was a 15 percent discount due to lack of marketability of the common stock as a result of the restrictions imposed on the holder.  The acquisition date fair value of common stock transferred is calculated below ($ in thousands, except share and per share amounts):  

 

Common Stock Valuation

 

Amount

 

Shares of common stock issued as consideration

 

 

15,000,000

 

Stock price per share on closing date

 

$

8.04

 

Value of common stock issued as consideration

 

$

120,600

 

Issue discount due to lack of marketability

 

$

(18,090

)

Fair value of common stock at December 30, 2015

 

$

102,510

 

The Company issued 14,666,667 shares of Series A Preferred Stock as consideration for the acquisition of Clarient.  The rights of the Series A Preferred Stock are described in Note F. We estimated the fair value of the Series A Preferred Stock consideration using significant inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820. The fair value of the Series A Preferred Stock at the acquisition date was $73.2 million or $4.99 per share.  This fair value was further reduced by the intrinsic value assigned to the beneficial conversion feature to arrive at a carrying amount of $28.6 million.  

On a fully diluted basis, assuming full conversion of the Series A Preferred Stock, GE Medical would own approximately 32% of NeoGenomics.  In addition, pursuant to the Investor Board Rights, Lockup and Standstill Agreement, NeoGenomics has appointed a director designated by GE Medical to its Board of Directors.

 

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the acquisition date of December 30, 2015.  The Company is in the process obtaining input from third-party valuations of its tangible and intangible assets and other information necessary to measure the remaining assets acquired and liabilities assumed; thus, the provisional measurements of current assets, property and equipment, intangible assets, goodwill, current liabilities, net deferred tax liabilities and long-term liabilities are subject to change.  

The preliminary acquisition fair values below are presented as of December 30, 2015 (in thousands):

 

 

 

December 30, 2015

(As Initially Reported)

 

 

Measurement

Period

Adjustments

 

 

December 30, 2015

(As Adjusted)

 

Current assets, including cash and cash equivalents of $890

 

$

31,978

 

 

$

-

 

 

$

31,978

 

Property and equipment

 

 

19,241

 

 

 

-

 

 

 

19,241

 

Identifiable intangible assets – customer relationships

 

 

84,000

 

 

 

-

 

 

 

84,000

 

Goodwill

 

 

143,493

 

 

 

(242

)

 

 

143,251

 

Total assets acquired

 

 

278,712

 

 

 

(242

)

 

 

278,470

 

Current liabilities

 

 

(12,631

)

 

 

242

 

 

 

(12,389

)

Deferred tax liability

 

 

(17,904

)

 

 

-

 

 

 

(17,904

)

Long-term liabilities

 

 

(103

)

 

 

-

 

 

 

(103

)

Net assets acquired

 

$

248,074

 

 

$

-

 

 

$

248,074

 

 

9

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Of the $84.0 million of acquired intangible assets, $81.0 million was provisionally assigned to customer relationships which are being amortized over fifteen years and $3.0 million was provisionally assigned to trade names which are being amortized over two years.  For the three and six months ending June 30, 2016, we recorded approximately $1.5 million and $3.5 million of amortization expense respectively.  

Goodwill arising from the acquisition of Clarient includes revenue synergies as a result of our existing customers and Clarient’s customers having access to each other’s testing menus and capabilities and also from the new product lines which Clarient adds to the Company’s product portfolio.  None of the goodwill is expected to be deductible for income tax purposes.  

The provisional fair value of accounts receivable acquired was approximately $27.6 million as of the date of acquisition.

The Company recognized acquisition related transaction costs of approximately $4.7 million during the year ended December 31, 2015.  These costs include due diligence, legal, consulting and other transaction related expenses associated with the acquisition of Clarient. These expenses were included in general and administrative expenses in our consolidated statements of operations for the year ended December 31, 2015.  The Company also incurred debt issuance costs of $3.3 million which are recorded as reductions in the carrying amount of the related liabilities and are being amortized over the term of the loans.

 

The following unaudited pro forma information (in thousands), has been provided for illustrative purposes and is not necessarily indicative of results that would have occurred had the acquisition of Clarient been in effect since January 1, 2014, nor is it necessarily indicative of future results.

 

 

Three Months Ended

June 30, 2015

 

 

Six Months Ended

June 30, 2015

 

Revenue

 

$

54,030

 

 

$

108,346

 

Net (loss) attributable to common stockholders

 

 

(4,032

)

 

 

(49,558

)

(Loss) per share:

 

 

 

 

 

 

 

 

Basic

 

 

(0.05

)

 

 

(0.66

)

Diluted

 

 

(0.05

)

 

 

(0.66

)

 

The unaudited pro forma consolidated results for the three and six months ended June 30, 2015 have been prepared by adjusting our historical results to include the acquisition of Clarient as if it occurred on January 1, 2014. These unaudited pro forma consolidated historical results were then adjusted for the following:

 

 

·

Remove transaction expenses from the year ended December 31, 2015 and record them in the year ended December 31, 2014.

 

·

Adjustments to reflect amortization and depreciation expense associated with the acquired assets, partially offset by the elimination of the amortization and depreciation expense associated with Clarient’s historical assets.

 

·

Removal of costs associated with MultiOmyx, assets not acquired in the transaction, and to record royalty fees due to GE for continued use of the MultiOmyx product through a licensing agreement.

 

·

Remove general and administrative expenses related to a Lab Services Agreement with the Saudi Arabian National Guard Health Affairs, as GE Medical has retained this agreement.

 

·

Record interest expense under the Credit Facilities and amortization of financing costs classified as interest expense.

 

·

Remove royalty costs associated with the use of the GE brand as NeoGenomics will discontinue the use of the GE brand.

 

·

Accrue for dividends on the Series A Preferred stock and to amortize a portion of the beneficial conversion feature.

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.

 

10

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Note D — Goodwill and Intangible Assets

The Company has recorded Goodwill of $146.2 million as of June 30, 2016.  The changes in the carrying amount of goodwill for the six month period ended June 30, 2016 and for the year ended December 31, 2015 are as follows (in thousands):

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Balance as of January 1

 

$

146,421

 

 

$

2,929

 

Goodwill acquired during the period

 

 

-

 

 

 

143,492

 

Adjustment to preliminary value of goodwill (Note C)

 

 

(242

)

 

 

-

 

Balance at end of period

 

$

146,179

 

 

$

146,421

 

 

Intangible assets as of June 30, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

 

 

 

June 30, 2016

 

 

 

Amortization

Period

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Trade Name

 

24 months

 

$

3,000

 

 

$

758

 

 

$

2,242

 

Customer Relationships

 

156 months

 

 

82,930

 

 

 

3,022

 

 

 

79,908

 

Support Vector Machine (SVM) technology

 

108 months

 

 

500

 

 

 

241

 

 

 

259

 

Laboratory developed test (LDT) technology

 

164 months

 

 

1,482

 

 

 

470

 

 

 

1,012

 

Flow Cytometry and Cytogenetics technology

 

202 months

 

 

1,000

 

 

 

257

 

 

 

743

 

Total

 

 

 

$

88,912

 

 

$

4,748

 

 

$

84,164

 

 

 

 

 

 

December 31, 2015

 

 

 

Amortization

Period

 

Cost

 

 

Accumulated

Amortization

 

 

Net

 

Trade Name

 

24 months

 

$

3,000

 

 

$

8

 

 

$

2,992

 

Customer Relationships

 

156 months

 

 

82,930

 

 

 

247

 

 

 

82,683

 

Support Vector Machine (SVM) technology

 

108 months

 

 

500

 

 

 

213

 

 

 

287

 

Laboratory developed test (LDT) technology

 

164 months

 

 

1,482

 

 

 

416

 

 

 

1,066

 

Flow Cytometry and Cytogenetics technology

 

202 months

 

 

1,000

 

 

 

228

 

 

 

772

 

Total

 

 

 

$

88,912

 

 

$

1,112

 

 

$

87,800

 

 

We recorded approximately $1.6 million and $97,000 in straight-line amortization expense of intangible assets for the three months ended June 30, 2016 and 2015, respectively.  We recorded approximately $3.6 million and $190,000 in straight-line amortization expense of intangibles for the six months ended June 30, 2016 and 2015, respectively.  The Company recorded amortization expense from customer relationships and trade names as a general and administrative expense.  We will continue to record the amortization of the Support Vector Machine (SVM) technology, the LDT technology and the Flow Cytometry and Cytogenetics technology intangible assets as a research and development expense until 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.

11

 


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 June 30, 2016 is as follows (in thousands):

 

Year Ending December 31,

 

 

 

 

Remainder of 2016

 

$

3,636

 

2017

 

 

7,264

 

2018

 

 

5,771

 

2019

 

 

5,771

 

2020

 

 

5,771

 

2021

 

 

5,726

 

Thereafter

 

 

50,225

 

Total

 

$

84,164

 

 

Note E — Debt

 

Term Loan

On December 30, 2015, the Company entered into a Term Loan and Guaranty Agreement (the “Term Loan Facility”) for which AB Private Credit Investors LLC acts as the administrative agent and collateral agent.  The agreement provides for $55.0 million of borrowings.  On June 30, 2016, the Company had current outstanding borrowings of $550,000 and long-term outstanding borrowings of $52.1 million, net of unamortized debt issuance costs of $2.1 million.

 

The fair value of the Term Loan Facility is estimated by discounting the future cash flow using the Company’s current borrowing rates for similar types and maturities of debt, except for floating-rate notes for which the carrying amounts were considered a reasonable estimate of fair value.

The interest rate for borrowings under the Term Loan Facility will be, at the Company’s election, (i) (A) a base rate equal to the greatest of 4%, the prime rate, the federal funds rate plus 0.5% and the one month LIBOR rate plus 1%, plus (B) an initial applicable margin of 6% , or (ii) the (A) LIBOR rate for interest periods from one to twelve months, plus (B) an initial applicable margin of 7%, with a minimum LIBOR of 1.00%. Interest on borrowings under the facility will be reduced to Base Rate plus 5.5% or LIBOR plus 6.50% upon the later of (i) NeoGenomics’ achieving maximum total leverage of less than 2.0 to 1.0 and (ii) January 1, 2017.

The Company and all of its present and future subsidiaries (other than NeoGenomics Laboratories) are guarantors under the Term Loan Facility. The Term Loan Facility contains the following financial covenants: (i) maintenance of a maximum total leverage ratio of 4.0 to 1.0 (stepping down over time to 3.25 to 1.0), and (ii) maintenance of a minimum consolidated fixed charge coverage ratio of 1.10 to 1.0 (stepping up over time to 1.25 to 1.0).   These covenants were effective beginning with the quarter ended March 31, 2016.  The Company was in compliance with all such financial covenants as of June 30, 2016.

The Term Loan Facility also contains various affirmative and negative covenants, such as the delivery of financial statements, tax authority compliance, maintenance of property, limitations on additional debt, restriction of dividends and other standard clauses.

The Term Loan Facility has a maturity of five years. In addition, the Term Loan Facility provides for annual amortization payments in an amount equal to 1.0% of the original principal amount of the term loan, paid in quarterly installments, and mandatory prepayments with (i) proceeds of certain assets sales and recovery events, (ii) proceeds of certain debt issuances, (iii) proceeds of certain extraordinary receipts, as defined, (iv) a portion of certain tax refunds and insurance proceeds, and (v) a portion of excess cash flow as defined.

12

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Auto Loans

The Company has auto loans with various financial institutions. The auto loan terms range from 36-60 months and carry interest rates from 0.0% to 5.2%.

Maturities of Long-Term Debt

Maturities of long-term debt at June 30, 2016 are summarized as follows (in thousands):

 

Term Loan

 

 

Auto Loans

 

 

Total Long Term Debt

 

Remainder of 2016

$

275

 

 

$

36

 

 

$

311

 

2017

 

550

 

 

 

94

 

 

 

644

 

2018

 

550

 

 

 

70

 

 

 

620

 

2019

 

550

 

 

 

41

 

 

 

591

 

2020

 

52,799

 

 

 

7

 

 

 

52,806

 

 

 

54,724

 

 

 

248

 

 

 

54,972

 

Less: Current portion of long-term debt

 

(550

)

 

 

(96

)

 

 

(646

)

Less:  Debt issuance costs, net

 

(2,088

)

 

 

-

 

 

 

(2,088

)

Long-term debt, net

$

52,086

 

 

$

152

 

 

$

52,238

 

 

 

Short-Term Debt - Revolving Credit Facility

On December 30, 2015, the Company entered into a Credit Agreement (the “Revolving Credit Facility”) for which Wells Fargo Bank, N.A., acts as the administrative agent.  The Revolving Credit Facility provides for up to $25.0 million of revolving loans and a letter of credit subfacility for $1.0 million. Borrowings under the revolver and the letter of credit subfacility are limited to a borrowing base comprised of 85% of the expected net value of certain billed and unbilled accounts receivable less reserve amounts established by Wells Fargo Bank, N.A.

The carrying amount of the Revolving Credit Facility approximates fair value due to the short maturity and the variable market rates of interest that change with current prime and no change in counterparty credit risk and were classified as Level 2 of the fair value hierarchy.

The interest rate for borrowings under the Revolving Credit Facility is, at the Company’s election, (i) (A) a base rate equal to the greatest of the prime rate, the federal funds rate plus 0.5% and the three month LIBOR rate plus 1%, plus (B) an applicable margin ranging from 2.0% to 2.5%, or (ii) the (A) LIBOR rate plus (B) an applicable margin ranging from 3.0% to 3.5%. NeoGenomics will also pay 0.25% per year on any unused portion of the revolver.

NeoGenomics is a guarantor under the Revolving Credit Facility.  All of NeoGenomics’ present and future subsidiaries (including NeoGenomics Laboratories) are borrowers under the Revolving Credit Facility. The Revolving Credit Facility contains the following financial covenants: (i) maintenance of a maximum total leverage ratio (funded indebtedness (including the outstanding amounts under the Credit Facilities), plus capitalized lease obligations, divided by EBITDA) of not more than 4.0 to 1.0 (stepping down over time to 3.25 to 1.0), (ii) maintenance of a minimum consolidated fixed charge coverage ratio (EBITDA less capital expenditures not financed with debt or certain equity), divided by the sum of cash interest expense, scheduled payments and mandatory prepayments of principal on indebtedness, taxes and restricted payments) of at least 1.1 to 1.0 (stepping up over time to 1.25 to 1.0) and (iii) maintenance of a minimum cash velocity equal to or greater than 80%.  These covenants were effective beginning with the quarter ended March 31, 2016.  The Company was in compliance with all such financial covenants as of June 30, 2016.

The Revolving Credit Facility also contains various affirmative and negative covenants, such as the delivery of financial statements, tax authority compliance, maintenance of property, limitations on additional debt, restriction of dividends and other standard clauses.  The Company was in compliance with all such financial covenants as of June 30, 2016.

13

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

The Revolving Credit Facility has a maturity of five years, maturing on December 30, 2020. In addition, the Revolving Credit Facility provides for mandatory prepayment in the event that the borrowing base is less than the aggregate amount of the advances outstanding under the revolver and any letters of credit, which prepayment will be equal to the amount necessary to remedy the over-advance.

At June 30, 2016, the Company had no outstanding borrowings under the Revolving Credit Facility, nor under the letter of credit subfacility.  The related debt issuance costs of approximately $1.1 million have been reclassified into other current assets at June 30, 2016.  We will continue to show debt issuance costs as a reduction in the related liability to the extent that there is an outstanding balance on the Revolving Credit Facility in the future.  As of June 30, 2016, there is approximately $25 million in available credit under the Revolving Credit Facility to be drawn upon as needed.  

 

 

Note F — Class A Redeemable Convertible Preferred Stock

 

On December 30, 2015, NeoGenomics issued 14,666,667 shares of its Series A Preferred stock as part of the consideration for the acquisition of Clarient, see Note C.  The Series A Preferred Stock has a face value of $7.50 per share for a total liquidation value of $110 million.  During the first year, the Series A Preferred Stock has a liquidation value of $100 million if the shares are redeemed prior to December 29, 2016.  The carrying amount of the Series A Preferred Stock at June 30, 2016 was $39.7 million as compared to the carrying amount at December 31, 2015 of $28.6 million.  The increase in the carrying amount is from the accrual of deemed dividends of approximately $3.7 million and the accretion of the beneficial conversion feature of approximately $7.5 million during the six months ending June 30, 2016, of which both amounts are recorded as distributions to the holders of the Series A Preferred Stock on the income statement with the corresponding entry recorded as an increase to the carrying value of the Series A Preferred Stock.

 

Issue Discount

 

The Company recorded the Series A Preferred Stock at a fair value of approximately $73.2 million or $4.99 per share on the date of issuance.  The difference between the fair value of $73.2 million and the liquidation value of $110 million represents a discount of $36.8 million from the initial face value as a result of assessing the impact the rights and features (listed below) of the instrument and their effect on the value to the Company.

 

Beneficial Conversion Feature

 

The fair value of the common stock into which the Series A Preferred Stock was convertible at the date of issuance exceeded the allocated purchase price fair value of the Series A Preferred Stock by approximately $44.7 million on the date of issuance, resulting in a beneficial conversion feature. The Company will recognize the beneficial conversion feature as non-cash, deemed dividend to the holder of Series A Preferred Stock over the first three years the Series A Preferred Stock is outstanding, as the date the stock first becomes convertible is three years from the issue date.  The amounts recognized for the three and six months ended June 30, 2016 was approximately $3.7 million and $7.5 million respectively.

 

Classification  

 

The Company classified the Series A Preferred Stock as temporary equity on the consolidated balance sheets due to certain change in control events that are outside the Company’s control, including deemed liquidation events described in the Series A Certificate of Designation.

 

 

Note G — 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.

14

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

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 June 30,

 

 

Six Months Ending June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Gross service revenues

 

$

129,235

 

 

$

56,702

 

 

$

261,955

 

 

$

110,333

 

Total contractual adjustments and discounts

 

 

(66,106

)

 

 

(32,332

)

 

 

(139,123

)

 

 

(62,937

)

Net revenues

 

$

63,129

 

 

$

24,370

 

 

$

122,832

 

 

$

47,396

 

 

 

Note H — Equity

A summary of the stock option activity under the Company’s plans for the six months ended June 30, 2016 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Options outstanding at December 31, 2015

 

 

5,326,505

 

 

$

3.07

 

Options granted

 

 

2,372,527

 

 

 

6.77

 

Less:

 

 

 

 

 

 

 

 

Options exercised

 

 

2,003,597

 

 

 

0.92

 

Options canceled or expired

 

 

258,155

 

 

 

4.68

 

Options outstanding at June 30, 2016

 

 

5,437,280

 

 

 

4.17

 

Exercisable at June 30, 2016

 

 

1,512,503

 

 

 

2.32

 

Of the 5,437,280 outstanding options at June 30, 2016, 1,375,000 were variable accounted stock options issued to non-employees of the Company of which 485,000 options were vested and 890,000 options were unvested as of June 30, 2016.

The fair value of each stock option award granted during the six months ended June 30, 2016 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:

 

 

Six Months Ended

June 30, 2016

 

Expected term (in years)

 

2.8 – 4.5

 

Risk-free interest rate (%)

 

 

1.1%

 

Expected volatility (%)

 

 

55%

 

Dividend yield (%)

 

 

0.0%

 

Weighted average fair value/share at grant date

 

$

2.57

 

 

 

As of June 30, 2016, there was approximately $7.4 million of unrecognized share based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.4 years.  This includes $2.4 million in unrecognized

15

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

expense related to the 890,000 shares of unvested variable accounted for stock options subject to fair value adjustment at the end of each reporting period based on changes in the Company’s stock price.

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 June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Research and development expense

 

$

372

 

 

$

123

 

 

$

363

 

 

$

178

 

General and administrative expense

 

 

1,188

 

 

 

385

 

 

 

1,985

 

 

 

635

 

Total stock based compensation expense

 

$

1,560

 

 

$

508

 

 

$

2,348

 

 

$

813

 

 

Stock based compensation recorded in research and development relates to unvested options and warrants granted to a non-employee.   

 

Common Stock Warrants

A summary of the warrant activity for the six months ended June 30, 2016 is as follows:

 

 

 

Number of

 

 

Weighted average

 

 

 

shares

 

 

exercise price

 

Warrants outstanding at December 31, 2015

 

 

650,000

 

 

$

1.48

 

Warrants granted

 

 

 

 

 

 

Less:

 

 

 

 

 

 

 

 

Warrants exercised

 

 

 

 

 

 

Warrants canceled or expired

 

 

 

 

 

 

Warrants outstanding at June 30, 2016

 

 

650,000

 

 

 

1.48

 

Exercisable at June 30, 2016

 

 

650,000

 

 

 

1.48

 

 

During the three months ended June 30, 2016 and 2015, we recorded $74,000 and $111,000 of warrant compensation expense, respectively.  During the six months ended June 30, 2016, we recorded warrant compensation gain of $10,000 and during the six months ended June 30, 2015, we recorded $207,000 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. As of June 30, 2016 all warrants are fully vested.

 

Note I — Commitments

During the three and six months ended June 30, 2016, the Company entered into leases for approximately $2.2 million and $2.4 million respectively in laboratory and computer equipment. These leases have 36 month terms, a $1.00 buyout option at the end of the terms and interest rates of 1.4% and 13.7%.  The Company accounted for these lease agreements as capital leases.

 

Note J — Other Related Party Transaction

During the three months ended June 30, 2016 and 2015, Steven C. Jones, an officer, director and shareholder of the Company, earned approximately $66,000 and $65,000, respectively, for consulting work performed in connection with his duties as Executive Vice President of Finance.  During the six months ended June 30, 2016 and 2015, Mr. Jones,  earned approximately $132,000 and $130,000, respectively, for consulting work performed in connection with his duties as Executive Vice President of Finance.  Mr. Jones also received approximately $79,000 and $78,000 during the six months ended June 30, 2016 and 2015, respectively as payment of his annual bonus compensation for the previous fiscal years.  

On April 20, 2016, the Company granted Mr. Jones 100,000 stock options.  The options were granted at a price of $7.15 per share and had a weighted average fair market value of $3.06 per option.  The options vest ratably over the next three years.

 

16

 


NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Unaudited

 

Note K —Subsequent Events

In July 2016, the Company entered into a $1.8 million capital lease for the purchase of hardware and software components to upgrade the storage infrastructure at all locations.  This capital lease has a 36 month term and an interest rate of 4.8%.  Monthly payments under this lease began on August 1, 2016 in the amount of approximately $53,000.

 

END OF FINANCIAL STATEMENTS

 

 

 

 

 

 

 

 

 

 

 

 

 

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

NeoGenomics, Inc., a Nevada corporation (referred to individually as the “Parent Company” or collectively with its subsidiaries as “NeoGenomics”, “we”, “us”, “our” or the “Company” in this Form 10-K) 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 in the United States.  Our mission is to improve patient care through exceptional genetic and molecular testing services. Our vision is to become the World’s leading cancer testing and information company by delivering uncompromising quality, exceptional service and innovative solutions.

On December 30, 2015, we acquired Clarient, and its wholly owned subsidiary Clarient Diagnostic Services, Inc. from GE Medical, a subsidiary of General Electric Company, for approximately $249.5 million, consisting of (i) cash consideration of approximately $74.0 million, which included an approximately $6.7 million estimated working capital adjustment and adjustments for estimated cash on hand and estimated indebtedness of Clarient on the closing date, (ii) 15,000,000 shares of our common stock, and (iii) 14,666,667 shares of our Series A Preferred Stock (the “Acquisition”).  For additional information and risks associated with the acquisition, see "Risk Factors," which appears in Item 1A of the Form 10-K which was filed with the SEC on March 15, 2016 and as amended and filed with the SEC on April 18, 2016.

We believe the acquisition will allow us to broaden our offering of innovative cancer diagnostic tests to hospitals and physicians across the United States and to accelerate growth in the worldwide market for pharmaceutical clinical trials and research. The following discussion of our business includes the effects of the acquisition of Clarient.

As of June 30, 2016, the Company has laboratory locations in Ft. Myers and Tampa, Florida; Aliso Viejo, Fresno, Irvine, and West Sacramento, California; Houston, Texas and Nashville, Tennessee, and currently offers the following types of genetic and molecular 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”) and Digital Imaging – 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

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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.  Digital imaging allows clients to see and utilize scanned slides and perform quantitative analysis for certain stains.  Scanned slides are received online in real time and can be previewed often a full day before the glass slides can be shipped back to clients.

 

e)

Molecular testing - a rapidly growing cancer testing methodology that focuses 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”).

 

f)

Pathology consultation - services provided to clients whereby our pathologists review surgical samples on a consultative basis. NeoGenomics is one of a few laboratories in the country with an electron microscopy lab which enables us to analyze complex renal cases.

 

g)

BioPharma Services and Clinical Trials – services supporting pharmaceutical firms in their drug development programs by supporting various clinical trials and other research initiatives.  This growing portion of our business often involves working with the pharmaceutical firms (sponsors) on study design as well as performing the required testing.  Our medical team often advises the investigators and works closely with the researchers as specimens are received from the enrolled sites.  We have also worked on developing tests that will be used as part of a companion diagnostic to determine patients’ response to a particular drug.  When studies are completed, our clinical trials team will report the data and often provide key analysis and insights back to the sponsors.

Our BioPharma Services and Clinical Trials group provides comprehensive testing services in support of our pharmaceutical clients’ oncology programs from discovery to commercialization.  In biomarker discovery, our aim is to help our customers discover the right content.  We help our customers develop a biomarker hypothesis by recommending an optimal platform for molecular screening and backing our discovery tools with the informatics to capture meaningful data.  In other pre and non-clinical work, we can use our research and testing platforms to characterize markers of interest.   Moving from discovery to development, we help our customers refine their biomarker strategy and, if applicable, develop a companion diagnostic pathway using the optimal technology for large-scale clinical trial testing.

After assay design and validation, we provide laboratory services for large scale clinical trial testing. Whether serving as the single contract research organization (“CRO”) or partnering one, our BioPharma Services and Clinical Trials team provides significant technical expertise and works closely with our customers to support each stage of clinical trial development.  Each trial we support comes with rapid turnaround time, dedicated project management and Quality Assurance oversight. We have experience in supporting FDA submissions for companion diagnostics and our pharma services activities are backed by our large clinical laboratory in Aliso Viejo, CA.  Our BioPharma Services and Clinical Trials business is supported by full-time sales associates.  Our goal remains focused on helping bring more effective oncology treatments to market through providing world class laboratory services in oncology.

Multiomyx™ - is a hyperplexed immunofluorescence assay technology that has similar staining characteristics as standard immunohistochemical stains, and has the significant advantage that up to 60 multiple proteins can be interrogated from a single FFPE section. Direct comparison of multiple biomarkers is made on the same cell, enabling routine co-expression analysis and identification of cells requiring multiple biomarkers staining. In addition to protein analysis, MultiOmyx is able to integrate genomic data utilizing FISH and NGS on the same sample to generate multiomic phenotypes.   Currently, we are only offering MultiomyxTM services to our BioPharma and research clients.  

The clinical 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, hospital pathology labs and academic centers empowers them to expand their breadth of testing and provides a menu of services that we believe matches or exceeds the level of service found in any center of excellence around the world. 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

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consultative services using our own specialized pathologists for 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 comprehensive service offering where we perform both the technical and professional components of the tests ordered. However, in certain instances larger clinician practices have begun to internalize 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.

2016 Focus Areas: Drive a “One Company Culture, Integrate, Grow and Innovate

In the past several years, NeoGenomics has experienced rapid growth, substantially all of which has been organic. In December 2015, NeoGenomics completed its acquisition of Clarient from GE Medical.  As a result, we expect to more than double in revenue in 2016, and we have focused on several initiatives to continue to build our company to be the World’s leading cancer testing and information company.

Create a “One Company” Culture

We believe our acquisition of Clarient in 2015 presents us with a unique opportunity to create a unified corporate culture that supports our vision, values, and strategic objectives.  We believe that by engaging our people, we will be able to retain them and motivate them to meet and exceed the expectations of our clients.  Excellent teamwork is required as we implement best practices across our expanded testing disciplines and consolidate operations and facilities.  

To create a climate of strong teamwork, we constantly communicate company values as well as developments in our business.  We invest substantially in training our employees and are working to become a “Best Place to Work” company.  We conduct surveys and take action based on feedback from employees designed to make our Company a better place for people to work.  We also work to develop and implement performance-based incentive plans for every employee at the company as a tool to reinforce our desired behaviors and organizational culture.  Creating a single organizational culture based on values and high performance is a critical initiative and key part of our 2016 plan.  

Integrate for Success

Combining the best of NeoGenomics’ and Clarient’s testing menus and services is one of our main objectives for 2016.  There was overlap in many of our test offerings, and differences between operating processes and procedures.  As a result, we are rapidly working to develop a single test menu, a single Laboratory Information System (“LIS”), a single billing process, a single brand, and a unified service offering.  

Our medical and operating teams are working to develop and implement plans to ensure that we are offering the best tests for our clients.  Our information technology teams are working to combine the best features from each LIS.  Numerous laboratory functional teams are reviewing and revising processes and procedures to select the highest quality and lowest-cost testing platforms.  Our sales teams have been combined to form one national team so that each account has one point of contact.  In billing, we intend to combine our separate operations using common policies and procedures in each billing location, and will integrate all operations using a common billing information system.  While we expect significant synergies from the combination of our two laboratories, we are also focused on retaining all our clients, and our goal is to ensure that we maintain the highest quality service throughout the integration process.  

We believe successfully integrating Clarient’s and NeoGenomics’ operations will also allow us to become more efficient and to reduce our cost per test. Our best practice teams are working with our information technology teams to make improvements in efficiencies to our lab processes, including a wide-scale adoption of on-line ordering, bar coding, specimen tracking, and other tools to create a streamlined, seamless, and efficient lab.  

In addition, we are working to implement plans to consolidate our Irvine Lab facility into our Aliso Viejo Lab facility, and to further streamline the design and operation of this consolidated laboratory.  Historically, improvements in our processes and procedures have

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had a dramatic impact on our cost structure and have allowed us to absorb reductions in average revenue per test with minimal impact to gross margin.   For example, during the years ended December 31, 2015 and 2014, we reduced our average cost of goods sold per test in our legacy NeoGenomics business, which we define to exclude the PathLogic and Clarient businesses by 8.6% and 4.7%, respectively, versus the comparable periods in 2014 and 2013, and we have identified several other areas in the laboratory where we believe we can drive further automation and efficiencies.

 

Drive Profitable Growth

Our plans for the remainder of 2016 include initiatives to continue our strong organic growth performance.  We will continue to pursue market share gains by providing high complexity, cancer-related laboratory testing services to hospitals, community-based pathology practices, and clinicians throughout the United States.  We currently perform comprehensive analyses for hematopoietic cancers such as leukemia and lymphoma (blood and lymphoid tumors) as well as solid tumors such as breast, lung, colon, and bladder cancers.  For hematopoietic cancers, we typically analyze bone marrow aspirate and peripheral blood specimens.  For solid tumors cancers, we typically analyze tissue samples or urine.

Our growth over the past several years has been significantly influenced by our sales team performance.  Our highly trained sales team has been successful in competing against other laboratories because we have one of the broadest and most comprehensive test menus in our industry.  Our sales team is experienced with the scientific complexity and medical necessity of our testing services, and understands the needs of our client pathologists and oncologists. 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.  We believe the strength of our sales team, comprehensive test menu, and our reputation for high quality services, positions us to further drive growth throughout 2016.