UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020


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

For the transition period from to

Commission File Number: 001-35756

NEOGENOMICS, INC.

(Exact name of registrant as specified in its charter)

Nevada

74-2897368

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

12701 Commonwealth Drive,

Suite 9,

Fort Myers,

Florida

33913

(Address of principal executive offices)

(Zip Code)

(239) 768-0600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑S No ☐

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

Large accelerated filer

☑S

Accelerated filer

☐

Non-accelerated filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

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

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock ($0.001 par value)

NEO

~~NASDAQ~~The Nasdaq Stock Market LLC

As of ~~November 8, 2019,~~April 24, 2020, the registrant had ~~104,407,597~~105,335,242 shares of Common Stock, par value $0.001 per share outstanding.

TABLE OF CONTENTS

FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q contains “forward-looking statements” and information within the meaning of Section 27A of the Securities Act of 1933, as amended, or the “Securities Act”, and Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”, which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, changing reimbursement levels from government payers and private insurers, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission “SEC” on February ~~26, 2019 and as amended and filed with the SEC on May 8, 2019.~~28, 2020.

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

•Our ability to respond to rapid scientific change;

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

•Our ability to implement our business strategy;

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

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

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

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

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

•Failure to timely or accurately bill for our services;

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

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

•Our ability to meet our future capital requirements;

•~~The impact of internalization of testing by customers;~~

•Our ability to manage our indebtedness;

•Our ability to protect our intellectual property from infringement;

•~~Our ability~~The anticipated impact to ~~successfully integrate Genoptix into NeoGenomics including consolidating systems~~our business operations, customer demand and ~~facilities;~~supply chain due to the recent global pandemic of a novel strain of the coronavirus (COVID-19);

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

•The effects of seasonality on our business;

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

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

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

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

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

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

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

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEOGENOMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share ~~and per share~~ amounts)


							March 31, 2020 (unaudited)		December 31, 2019
ASSETS	ASSETS	September 30, 2019 (unaudited)		December 31, 2018		ASSETS
Current assets	Current assets					Current assets
Cash and cash equivalents	Cash and cash equivalents	$	178,891	$	9,811	Cash and cash equivalents	$	86,254	$	173,016

Accounts receivable, net	Accounts receivable, net	91,133		76,919		Accounts receivable, net	99,972		94,242
Inventories	Inventories	12,632		8,650		Inventories	20,286		14,405
Prepaid assets	Prepaid assets	8,742		7,727		Prepaid assets	6,884		6,327
Other current assets	Other current assets	603		561		Other current assets	2,046		2,748
Total current assets	Total current assets	292,001		103,668		Total current assets	215,442		290,738
Property and equipment (net of accumulated depreciation of $64,165 and $50,127, respectively)		62,488		60,888
Property and equipment (net of accumulated depreciation of $74,441 and $68,809, respectively)						Property and equipment (net of accumulated depreciation of $74,441 and $68,809, respectively)	83,392		64,188
Operating lease right-of-use assets	Operating lease right-of-use assets	25,797		—		Operating lease right-of-use assets	49,084		26,492

Intangible assets, net	Intangible assets, net	129,084		140,029		Intangible assets, net	128,289		126,640
Goodwill	Goodwill	198,571		197,892		Goodwill	210,833		198,601
Restricted cash, non-current						Restricted cash, non-current	38,738		—
Prepaid lease asset						Prepaid lease asset	3,316		—
Other assets	Other assets	3,214		2,538		Other assets	3,153		2,847
Total assets	Total assets	$	711,155	$	505,015	Total assets	$	732,247	$	709,506
LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY					LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities	Current liabilities					Current liabilities
Accounts payable	Accounts payable	$	17,995	$	17,779	Accounts payable	$	20,453	$	19,568
Accrued compensation	Accrued compensation	26,298		19,062		Accrued compensation	20,810		21,365
Accrued expenses and other liabilities	Accrued expenses and other liabilities	7,900		8,986		Accrued expenses and other liabilities	8,966		7,548
Short-term portion of financing obligations	Short-term portion of financing obligations	5,750		6,298		Short-term portion of financing obligations	4,941		5,432
Short-term portion of operating leases	Short-term portion of operating leases	3,527		—		Short-term portion of operating leases	4,505		3,381

Short-term portion of term loan	Short-term portion of term loan	6,250		7,873		Short-term portion of term loan	5,000		5,000
Pharma contract liability	Pharma contract liability	1,187		927		Pharma contract liability	2,974		1,610
Total current liabilities	Total current liabilities	68,907		60,925		Total current liabilities	67,649		63,904
Long-term liabilities	Long-term liabilities					Long-term liabilities
Long-term portion of financing obligations	Long-term portion of financing obligations	3,982		5,250		Long-term portion of financing obligations	2,428		3,199
Long-term portion of operating leases	Long-term portion of operating leases	23,870		—		Long-term portion of operating leases	45,910		24,034

Long-term portion of term loan, net	Long-term portion of term loan, net	93,027		87,880		Long-term portion of term loan, net	90,605		91,829
Revolving credit facility		—		5,000
Other long term liabilities	Other long term liabilities	4,674		3,060		Other long term liabilities	4,235		3,566
Deferred income tax liability, net	Deferred income tax liability, net	19,688		22,457		Deferred income tax liability, net	16,377		15,566
Total long-term liabilities	Total long-term liabilities	145,241		123,647		Total long-term liabilities	159,555		138,194
Total liabilities	Total liabilities	214,148		184,572		Total liabilities	227,204		202,098
Stockholders' equity	Stockholders' equity					Stockholders' equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 104,145,895 and 94,465,440 shares issued and outstanding, respectively)		104		94
Common stock, $0.001 par value, (250,000,000 shares authorized; 105,396,057 and 104,781,236 shares issued and outstanding, respectively)						Common stock, $0.001 par value, (250,000,000 shares authorized; 105,396,057 and 104,781,236 shares issued and outstanding, respectively)	105		105
Additional paid-in capital	Additional paid-in capital	516,936		340,291		Additional paid-in capital	525,929		520,278
Accumulated other comprehensive loss	Accumulated other comprehensive loss	(2,380)		(579)		Accumulated other comprehensive loss	(2,656)		(1,618)
Accumulated deficit	Accumulated deficit	(17,653)		(19,363)		Accumulated deficit	(18,335)		(11,357)
Total stockholders’ equity	Total stockholders’ equity	497,007		320,443		Total stockholders’ equity	505,043		507,408
Total liabilities and stockholders' equity	Total liabilities and stockholders' equity	$	711,155	$	505,015	Total liabilities and stockholders' equity	$	732,247	$	709,506

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(~~unaudited,~~ in thousands, except per share amounts)

(unaudited)


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
NET REVENUE:	NET REVENUE:									NET REVENUE:
Clinical Services	Clinical Services	$	92,565	$	59,449	$	267,757	$	175,960	Clinical Services	$	92,982	$	86,210
Pharma Services	Pharma Services	12,107		9,647		34,205		24,306		Pharma Services	13,048		9,367
Total revenue	Total revenue	104,672		69,096		301,962		200,266		Total revenue	106,030		95,577

COST OF REVENUE	COST OF REVENUE	53,840		36,775		155,049		110,111		COST OF REVENUE	59,661		48,462

GROSS PROFIT	GROSS PROFIT	50,832		32,321		146,913		90,155		GROSS PROFIT	46,369		47,115
Operating expenses:	Operating expenses:									Operating expenses:
General and administrative	General and administrative	33,054		21,055		94,773		59,106		General and administrative	36,344		32,142
Research and development	Research and development	2,611		446		6,407		2,475		Research and development	2,060		1,209
Sales and marketing	Sales and marketing	11,508		6,900		35,048		21,355		Sales and marketing	13,258		11,216
Total operating expenses	Total operating expenses	47,173		28,401		136,228		82,936		Total operating expenses	51,662		44,567
INCOME FROM OPERATIONS		3,659		3,920		10,685		7,219
(LOSS) INCOME FROM OPERATIONS										(LOSS) INCOME FROM OPERATIONS	(5,293)		2,548
Interest expense, net	Interest expense, net	203		1,873		3,333		4,766		Interest expense, net	819		1,826
Other (income) expense	Other (income) expense	(35)		(30)		5,124		31		Other (income) expense	(223)		5,169
Loss on extinguishment of debt		—		—		1,018		—
Income before taxes		3,491		2,077		1,210		2,422
Loss before taxes										Loss before taxes	(5,889)		(4,447)
Income tax expense (benefit)	Income tax expense (benefit)	1,348		54		(500)		135		Income tax expense (benefit)	1,089		(2,023)
NET INCOME		2,143		2,023		1,710		2,287
Deemed dividends on preferred stock and amortization of beneficial conversion feature		—		—		—		5,627
Gain on redemption of preferred stock		—		—		—		(9,075)
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	2,143	$	2,023	$	1,710	$	5,735
NET LOSS										NET LOSS	$	(6,978)	$	(2,424)

INCOME PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
NET LOSS PER SHARE										NET LOSS PER SHARE
Basic	Basic	$	0.02	$	0.02	$	0.02	$	0.07	Basic	$	(0.07)	$	(0.03)
Diluted	Diluted	$	0.02	$	0.02	$	0.02	$	0.06	Diluted	$	(0.07)	$	(0.03)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING	WEIGHTED AVERAGE COMMON SHARES OUTSTANDING									WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	Basic	103,899		87,253		99,149		87,381		Basic	104,484		94,740
Diluted	Diluted	107,880		90,899		102,766		89,925		Diluted	104,484		94,740

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE ~~INCOME~~LOSS

(~~unaudited,~~ in thousands)

(unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
NET INCOME $ 2,143 $ 2,023 $ 1,710 $ 2,287
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments — (13) — (36)
(Loss) gain on effective cash flow hedges (217) 292 (1,801) 298
Total other comprehensive (loss) income (217) 279 (1,801) 262
COMPREHENSIVE INCOME (LOSS) $ 1,926 $ 2,302 $ (91) $ 2,549


	Three Months Ended March 31,
	2020		2019
NET LOSS	$	(6,978)	$	(2,424)

OTHER COMPREHENSIVE LOSS:

Loss on effective cash flow hedges	(1,038)		(557)
Total other comprehensive loss	(1,038)		(557)
COMPREHENSIVE LOSS	$	(8,016)	$	(2,981)

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF ~~REDEEMABLE PREFERRED STOCK AND~~ STOCKHOLDERS' EQUITY

(unaudited, in thousands, except share amounts)


		Series A Redeemable Convertible Preferred Stock				Common Stock						Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit	Total				Common Stock						Additional Paid-In Capital		Accumulated Other Comprehensive Loss	Accumulated Deficit	Total
		Shares	Amount		Shares	Amount																Shares		Amount
Balance, December 31, 2018	Balance, December 31, 2018	—	$	—	94,465,440	$	94	$	340,291	$	(579)	$	(19,363)	$	320,443	Balance, December 31, 2018			94,465,440	$	94	$	340,291	$	(579)	$	(19,363)	$	320,443
Common stock issuance ESPP Plan	Common stock issuance ESPP Plan	—	—		36,032	—		419		—		—		419		Common stock issuance ESPP Plan			36,032	—		419		—		—		419
Stock issuance fees and expenses	Stock issuance fees and expenses	—	—		—	—		(66)		—		—		(66)		Stock issuance fees and expenses			—	—		(66)		—		—		(66)

Loss on effective cash flow hedge	Loss on effective cash flow hedge	—	—		—	—		—		(557)		—		(557)		Loss on effective cash flow hedge			—	—		—		(557)		—		(557)
Issuance of restricted stock, net of forfeitures	Issuance of restricted stock, net of forfeitures	—	—		182,502	—		—		—		—		—		Issuance of restricted stock, net of forfeitures			182,502	—		—		—		—		—
Issuance of common stock for stock options	Issuance of common stock for stock options	—	—		619,536	1		3,893		—		—		3,894		Issuance of common stock for stock options			619,536	1		3,893		—		—		3,894

ESPP expense	ESPP expense	—	—		—	—		119		—		—		119		ESPP expense			—	—		119		—		—		119
Stock based compensation expense - options and restricted stock	Stock based compensation expense - options and restricted stock	—	—		—	—		2,020		—		—		2,020		Stock based compensation expense - options and restricted stock			—	—		2,020		—		—		2,020
Net loss	Net loss	—	—		—	—		—		—		(2,424)		(2,424)		Net loss			—	—		—		—		(2,424)		(2,424)
Balance, March 31, 2019	Balance, March 31, 2019	—	$	—	95,303,510	$	95	$	346,676	$	(1,136)	$	(21,787)	$	323,848	Balance, March 31, 2019			95,303,510	$	95	$	346,676	$	(1,136)	$	(21,787)	$	323,848
Common stock issuance ESPP Plan		—	—		37,255	—		653		—		—		653
Stock issuance fees and expenses		—	—		—	—		(211)		—		—		(211)

Loss on effective cash flow hedge		—	—		—	—		—		(1,027)		—		(1,027)
Issuance of restricted stock, net of forfeitures		—	—		(633)	—		—		—		—		—
Working capital adjustment related to acquisition		—	—		(99,524)	—		(1,977)		—		—		(1,977)
Issuance of common stock - Public Offering		—	—		8,050,000	8		160,766		—		—		160,774
Issuance of common stock for stock options		—	—		543,604	1		3,369		—		—		3,370
ESPP expense		—	—		—	—		162		—		—		162
Stock based compensation expense - options and restricted stock		—	—		—	—		2,151		—		—		2,151
Net income		—	—		—	—		—		—		1,991		1,991
Balance, June 30, 2019		—	$	—	103,834,212	$	104	$	511,589	$	(2,163)	$	(19,796)	$	489,734
Balance, December 31, 2019																Balance, December 31, 2019			104,781,236	$	105	$	520,278	$	(1,618)	$	(11,357)	$	507,408
Common stock issuance ESPP Plan	Common stock issuance ESPP Plan	—	—		28,672	—		564		—		—		564		Common stock issuance ESPP Plan			34,330	—		796		—		—		796
Stock issuance fees and expenses	Stock issuance fees and expenses	—	—		—	—		23		—		—		23		Stock issuance fees and expenses			—	—		(15)		—		—		(15)

Loss on effective cash flow hedge	Loss on effective cash flow hedge	—	—		—	—		—		(217)		—		(217)		Loss on effective cash flow hedge			—	—		—		(1,038)		—		(1,038)
Issuance of restricted stock, net of forfeitures	Issuance of restricted stock, net of forfeitures	—	—		(6,070)	—		(688)		—		—		(688)		Issuance of restricted stock, net of forfeitures			76,618	—		(212)		—		—		(212)

Issuance of common stock for stock options	Issuance of common stock for stock options	—	—		289,081	—		2,173		—		—		2,173		Issuance of common stock for stock options			503,873	—		2,897		—		—		2,897

ESPP expense	ESPP expense	—	—		—	—		144		—		—		144		ESPP expense			—	—		194		—		—		194
Stock based compensation expense - options and restricted stock	Stock based compensation expense - options and restricted stock	—	—		—	—		3,131		—		—		3,131		Stock based compensation expense - options and restricted stock			—	—		1,991		—		—		1,991
Net income		—	—		—	—		—		—		2,143		2,143
Balance, September 30, 2019		—	$	—	104,145,895	$	104	$	516,936	$	(2,380)	$	(17,653)	$	497,007
Net loss																Net loss			—	—		—		—		(6,978)		(6,978)
Balance, March 31, 2020																Balance, March 31, 2020			105,396,057	$	105	$	525,929	$	(2,656)	$	(18,335)	$	505,043

See the accompanying notes to the unaudited consolidated financial statements.

~~NEOGENOMICS, INC.~~

~~CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY~~

~~(unaudited, in thousands, except share amounts)~~

Series A Redeemable Convertible Preferred Stock Common Stock Additional Paid-In Capital Accumulated Other Comprehensive Income Accumulated Deficit Total
Shares Amount Shares Amount
Balance, December 31, 2017 6,864,000 $ 32,615 80,462,574 $ 80 $ 194,687 $ 274 $ (23,079) $ 171,962
Common stock issuance ESPP Plan — — 38,620 — 267 — — 267
Stock issuance fees and expenses — — — — (97) — — (97)
Foreign currency translation adjustments — — — — — (45) — (45)
Gain on effective cash flow hedge — — — — — 270 — 270
Issuance of common stock for stock options — — 67,259 1 215 — — 216
Deemed dividends on preferred stock and amortization of beneficial conversion feature — 2,856 — — (2,856) — — (2,856)
ESPP expense — — — — 54 — — 54
Stock based compensation expense - options and restricted stock — — — — 1,570 — — 1,570
Net income — — — — — — 644 644
Balance, March 31, 2018 6,864,000 $ 35,471 80,568,453 $ 81 $ 193,840 $ 499 $ (22,435) $ 171,985
Common stock issuance ESPP Plan — — 31,686 — 231 — — 231
Redemption of Series A Preferred Stock (6,864,000) (37,823) — — (21,348) — — (21,348)
Stock issuance fees and expenses — — — — (46) — — (46)
Foreign currency translation adjustments — — — — — 24 — 24
Loss on effective cash flow hedge — — — — — (266) — (266)
Issuance of common stock for stock options — — 897,942 — 4,918 — — 4,918
Deemed dividends on preferred stock and amortization of beneficial conversion feature — 2,352 — — (2,352) — — (2,352)
Gain on redemption of preferred stock — — — 9,075 — — 9,075
ESPP expense — — — — 56 — — 56
Stock based compensation expense - options and restricted stock — — — — 2,277 — — 2,277
Adjustment for adoption of accounting standards — — — — (1,095) — 1,130 35
Net loss — — — — — — (380) (380)
Balance, June 30, 2018 — $ — 81,498,081 $ 81 $ 185,556 $ 257 $ (21,685) $ 164,209
Common stock issuance ESPP Plan — — 16,689 — 267 — — 267
Stock issuance fees and expenses — — — — (163) — — (163)
Foreign currency translation adjustments — — — — — (13) — (13)
Loss on effective cash flow hedge — — — — — 292 — 292
Issuance of restricted stock, net of forfeitures — — 62,182 — (297) — — (297)
Issuance of common stock - Public Offering — — 11,270,000 11 135,060 — — 135,071
Issuance of common stock for stock options — — 133,831 1 978 — — 979
ESPP expense — — — — 56 — — 56
Stock based compensation expense - options and restricted stock — — — — 1,135 — — 1,135
Net income — — — — — — 2,023 2,023
Balance, September 30, 2018 — $ — 92,980,783 $ 93 $ 322,592 $ 536 $ (19,662) $ 303,559

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

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(~~unaudited,~~ in thousands)

Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 2019 2018
Net income $ 1,710 $ 2,287
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation 15,200 11,477
Loss on disposal of assets 451 278
Loss on debt extinguishment 1,018 —
Amortization of intangibles 7,482 4,255
Amortization of debt issue costs 323 392
Non-cash stock based compensation 7,727 5,148
Non-cash operating lease expense 3,224 —
Changes in assets and liabilities, net
Accounts receivable, net (14,219) (2,267)
Inventories (3,982) 644
Prepaid assets (1,013) (559)
Other current assets (381) (1,749)
Accounts payable, accrued and other liabilities 2,470 9,427
Net cash provided by operating activities 20,010 29,333
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (13,953) (11,091)
Acquisition adjustment 399 —
Net cash used in investing activities (13,554) (11,091)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on revolving credit facility — 10,000
Repayment of revolving credit facility (5,000) (35,400)
Redemption of preferred stock — (50,096)
Repayment of equipment and other loans (5,481) (4,774)
Proceeds from term loan 100,000 30,000
Repayment of term loan (96,750) (3,187)
Payments of debt issue costs (1,051) (576)
Issuance of common stock, net 10,132 6,535
Proceeds from equity offering, net 160,774 134,910
Net cash provided by financing activities 162,624 87,412
Effects of foreign exchange rate changes on cash and cash equivalents — (35)
Net change in cash and cash equivalents 169,080 105,619
Cash and cash equivalents, beginning of period 9,811 12,821
Cash and cash equivalents, end of period $ 178,891 $ 118,440
Supplemental disclosure of cash flow information:
Cash paid for operating lease liabilities $ 2,878 $ —
Interest paid $ 4,295 $ 4,722
Income taxes paid (refunded), net $ 316 $ (76)
Supplemental disclosure of non-cash investing and financing information:
Working capital adjustment related to acquisition $ 1,977 $ —
Equipment acquired under loan obligations $ 3,665 $ 7,569
Property and equipment included in accounts payable $ 810 $ 571
(unaudited)


	Three Months Ended March 31,
	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(6,978)	$	(2,424)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	6,240		5,271
Loss on disposal of assets	17		156

Amortization of intangibles	2,452		2,559
Amortization of debt issue costs	70		150
Non-cash stock-based compensation	2,186		2,139
Non-cash operating lease expense	2,021		1,141

Changes in assets and liabilities, net
Accounts receivable, net	(5,722)		(5,795)
Inventories	(5,348)		(1,019)
Prepaid assets	270		(250)
Prepaid lease asset	(3,316)		—
Other current assets	(16)		(265)
Accounts payable, accrued and other liabilities	1,191		4,434
Net cash (used in) provided by operating activities	(6,933)		6,097
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(4,708)		(3,196)
Business acquisition	(37,000)		—
Net cash used in investing activities	(41,708)		(3,196)
CASH FLOWS FROM FINANCING ACTIVITIES



Repayment of equipment financing obligations	(1,598)		(1,797)

Repayment of term loan	(1,250)		(1,968)

Issuance of common stock, net	3,465		4,248

Net cash provided by financing activities	617		483

Net change in cash, cash equivalents and restricted cash	(48,024)		3,384
Cash, cash equivalents and restricted cash, beginning of period	173,016		9,811
Cash, cash equivalents and restricted cash, end of period	$	124,992	$	13,195

Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents	$	86,254	$	13,195

Restricted cash, non-current	38,738		—
Total cash, cash equivalents and restricted cash	$	124,992	$	13,195

Supplemental disclosure of cash flow information:
Interest paid	$	1,136	$	1,696
Income taxes paid, net	$	2	$	8
Supplemental disclosure of non-cash investing and financing information:

Equipment acquired under financing obligations	$	—	$	2,003
Property and equipment included in accounts payable	$	1,844	$	1,175

See the accompanying notes to the unaudited consolidated financial statements.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note ~~A –~~1. Nature of Business and Basis of Presentation

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

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

Certain information and footnote disclosures normally included in the Company’s annual audited consolidated financial statements and accompanying notes have been condensed or omitted in these accompanying interim consolidated financial statements and footnotes. Accordingly, the accompanying interim consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s annual report on Form 10-K for the year ended December 31, ~~2018. The year-end consolidated balance sheet information has been derived from the audited consolidated financial statements in the annual report as of December 31, 2018.~~2019.

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

The Company reports its activities in 2 operating segments; the Clinical Services Segment and the Pharma Services Segment. These reportable segments deliver testing services to hospitals, pathologists, oncologists, clinicians, pharmaceutical firms and researchers and represent 100% of the Company’s consolidated assets, net revenues and net income for each period presented. For further financial information about these segments, see Note N,11. Segment Information, in the accompanying notes to the consolidated financial statements.

~~The Company has evaluated events through the filing date of the financial statements. There were no subsequent events that require disclosure.~~

~~Immaterial Restatement and Reclassification~~

Subsequent to the issuance of the September 30, 2018 consolidated financial statements, during the third quarter of 2019 the Company identified that the gain on redemption of preferred stock for the three months ended June 30, 2018 of $9.1 million was incorrectly presented as a loss on redemption with an offsetting decrease to additional paid in capital in the consolidated statements of redeemable preferred stock and stockholders' equity. As a result, the Company has revised the presentation of the impact of the redemption on the carrying value of the preferred stock in the consolidated statements of redeemable preferred stock and stockholders' equity for the three month period ended June 30, 2018. There was no impact to the beginning and ending balances of preferred stock as a result of this error.

In addition, the Company identified that it has historically incorrectly classified deemed dividends, amortization of BCF and redemption value measurement adjustments on preferred stock as adjustments to its accumulated deficit. As a result, the Company has corrected the historical presentation of all amounts of deemed dividends, amortization of BCF and redemption value measurement adjustments for the three year period ended December 31, 2017 as a cumulative reduction of additional paid-in capital as of December 31, 2017 and other applicable periods as further disclosed within the table below.

The adjustments to correct for these errors have no impact to the previously reported consolidated statements of operations, comprehensive income, or cash flows. The adjustments to correct for these errors also have no impact to total preferred stock or total stockholders' equity as presented within the consolidated balance sheets or statements of redeemable convertible preferred stock and stockholders' equity. Management has considered these errors from a qualitative and quantitative perspective and believes the impact of these errors is not material to previously issued consolidated financial statements. The Company has

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

restated its accompanying consolidated statements of redeemable preferred stock and stockholders’ equity and consolidated balance sheets to correct for these immaterial errors for the applicable periods presented in this Form 10-Q.

Additionally, the Company made certain other presentation reclassifications to previously reported information related to the redemption of preferred stock in June 2018, including reclassifying $21.3 million of deemed dividends on preferred stock and amortization of beneficial conversion feature to redemption of Series A preferred stock within additional paid-in capital in the accompanying consolidated statements of redeemable preferred stock and stockholders’ equity. Such presentation reclassifications have no impact to total additional paid-in capital for any period.

The following table shows the amounts of additional paid-in capital, accumulated deficit, deemed dividends on preferred stock and amortization of beneficial conversion feature, and gain on redemption of preferred stock for the applicable periods, as previously reported and as corrected in the consolidated statements of redeemable preferred stock and stockholders' equity and balance sheets (in thousands):

As Previously Reported As Corrected
Additional Paid-in Capital Accumulated Deficit Additional Paid-in Capital Accumulated Deficit
Balance at December 31, 2017 $ 230,030 $ (58,422) $ 194,687 $ (23,079)
Deemed dividends on preferred stock and amortization of beneficial conversion feature — (2,856) (2,856) —
Balance at March 31, 2018 232,039 (60,634) 193,840 (22,435)
Deemed dividends on preferred stock and amortization of beneficial conversion feature* 419 (2,771) (2,352) —
Gain on redemption of preferred stock — 9,075 9,075 —
Balance at June 30, 2018 217,451 (53,580) 185,556 (21,685)
Balance at September 30, 2018 354,487 (51,557) 322,592 (19,662)
Balance at December 31, 2018 372,186 (51,258) 340,291 (19,363)
Balance at March 31, 2019 378,571 (53,682) 346,676 (21,787)
Balance at June 30, 2019 $ 543,484 $ (51,691) $ 511,589 $ (19,796)

*The deemed dividends on preferred stock and amortization of beneficial conversion feature within additional paid-in capital as previously reported as shown here reflects a $21.3 million reclassification to the redemption of Series A preferred stock within additional paid-in capital. As discussed above, such presentation reclassifications have no impact to total paid-in capital for any period.

The following table shows the amounts of the redemption of preferred stock, deemed dividends on preferred stock and amortization of beneficial conversion feature, and gain on redemption of preferred stock for the applicable periods, as previously reported and as currently reported in the consolidated statements of redeemable preferred stock and stockholders' equity (in thousands):

As Previously Reported As Currently Reported
Series A Redeemable Convertible Preferred Stock Immaterial Correction of an Error Reclassification Series A Redeemable Convertible Preferred Stock
Balance at March 31, 2018 $ 35,471 $ — $ — $ 35,471
Redemption of Series A Preferred Stock (50,096) — 12,273 (37,823)
Deemed dividends on preferred stock and amortization of beneficial conversion feature 5,550 18,150 (21,348) 2,352
Gain on redemption of preferred stock 9,075 (18,150) 9,075 —
Balance at June 30, 2018 $ — $ — $ — $ —

Note ~~B –~~2. Recently Adopted and Issued Accounting Guidance

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Recently Adopted

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

The Company adopted Topic 842 effective January 1, 2019 using the modified retrospective method and using the optional transition method to apply the new lease accounting standard prospectively as of January 1, 2019, rather than as of the earliest period presented. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard. Adoption of this standard resulted in the recording of net operating lease right-of-use (“ROU”) assets of $9.7 million and corresponding operating lease liabilities of $10.1 million upon adoption. The adoption did not materially impact the Company’s Consolidated Statements of Operations or Cash Flows. Refer to Note C, Leases, herein for further details regarding the impact of the adoption of Topic 842 and other information related to the Company’s lease portfolio.

~~Issued~~

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326)~~: ~~Measurement of Credit Losses on Financial Instruments~~, which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The new standard requires the use of forward-looking expected credit loss models based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount, which may result in earlier recognition of credit losses under the new standard. This new standard also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The standard is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those years. The Company plans to implement the new standard in the first quarter of 2020 using a modified retrospective approach, and is in the process of reviewing its credit loss models to assess the impact of the adoption of the standard on its consolidated financial statements.

~~In January 2017, the FASB issued ASU 2017-04,~~ ~~Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment~~. This new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. Topic 350 is effective for public business entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, and early adoption is permitted. The Company will adopt this pronouncement on January 1, 2020 and does not expect the impact of the adoption of the standard to have a material impact on its consolidated financial statements.Guidance

In August 2018, the FASB issued ASU ~~2018-13,~~ ~~Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement~~, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. This update is effective for annual periods beginning after December 15, 2019, and interim periods within those periods, and early adoption is permitted. Certain provisions of the ASU must be adopted retrospectively, while others must be adopted prospectively. The Company will adopt this pronouncement on January 1, 2020 and does not expect the impact of the adoption of the standard to have a material impact on its consolidated financial statements.

~~In August 2018, the FASB issued ASU~~No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which changes the accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The implementation costs should be presented as a prepaid asset on the balance sheet and expensed over the term of the hosting arrangement. The ~~standard is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019 and early adoption is permitted. The~~ Company ~~will adopt~~adopted this pronouncement on January 1, 2020 and ~~does not expect~~ the impact was not material to the Company's Consolidated Financial Statements.

In August 2018, the FASB also issued ASU No. 2018-13, Fair Value Measurement: Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement, which adds and modifies certain disclosure requirements for fair value measurements. Under the new guidance, entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the ~~adoption~~fair value hierarchy, or valuation processes for Level 3 fair value measurements. However, public companies are required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and related changes in unrealized gains and losses included in other comprehensive income. Certain provisions of the ~~standard~~ASU must be adopted retrospectively, while others must be adopted prospectively. The Company adopted this pronouncement on January 1, 2020 and the impact was not material to ~~have~~the Company's Consolidated Financial Statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (“Topic 230”): Restricted Cash. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include cash, cash equivalents and restricted cash. ASU 2016-08 was effective for fiscal years beginning after December 15, 2017, including interim periods within those periods, using a ~~material impact on its consolidated financial statements.~~

retrospective transition method to each period presented. As a result, restricted cash of approximately $38.7 million as of March 31, 2020 is included with cash and cash equivalents when reconciling the beginning and ending balances in the Consolidated Statements of Cash Flows. Please refer to Note ~~C –~~3. Leases,

for

1210

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

additional information regarding the use of restricted cash. There were no restricted cash balances in any reportable period prior to January 2020.

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

Accounting Pronouncements Pending Adoption

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (“Topic 848”): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides for temporary optional expedients and exceptions to the current guidance on certain contract modifications and hedging relationships to ease the burdens related to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) or other reference rates to alternative reference rates. The guidance is effective upon issuance and can be applied through December 31, 2022. The Company is currently evaluating the impact of this standard on the Company’s Consolidated Financial Statements.

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

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

Note 3. Leases

The Company leases corporate offices and laboratory space throughout the world, all of which are classified as operating leases expiring at various dates and generally have terms ranging from 1 to 1015 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet.

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

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

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

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Company utilizes its incremental borrowing rate by lease term in order to calculate the present value of our future lease payments. The discount rate represents a risk-adjusted rate on a secured basis, and is the rate at which the Company would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term. On January 1, 2019, the discount rate used on existing leases at adoption was determined based on the remaining lease term using available data as of that date. For new or renewed leases starting in 2019, theThe discount rate is determined using the incremental borrowing rate at lease commencement and based on the lease term.

Operating Leases

Operating lease costs include an immaterial amount of variable lease cost, and are recorded in cost of revenue and general and administrative expenses, depending on the nature of the leased asset. Aside from variable lease costs, operating lease costs represent fixed lease payments recognized on a straight-line basis over the lease term.

As of ~~September 30, 2019,~~March 31, 2020, the maturities of our operating lease liabilities and a reconciliation to the present value of lease liabilities were as follows (in thousands):


		Remaining Lease Payments				Remaining Lease Payments
Remainder of 2019		$	1,540
2020		4,969
Remainder of 2020					Remainder of 2020	$	4,850
2021	2021	5,050			2021	7,486
2022	2022	4,213			2022	5,358
2023	2023	4,076			2023	5,253
2024	2024	4,097			2024	5,309

Thereafter	Thereafter	12,705			Thereafter	37,340
Total remaining lease payments	Total remaining lease payments	36,650			Total remaining lease payments	65,596
Less: imputed interest	Less: imputed interest	(9,253)			Less: imputed interest	(15,181)
Total operating lease liabilities	Total operating lease liabilities	27,397			Total operating lease liabilities	50,415
Less: current portion	Less: current portion	(3,527)			Less: current portion	(4,505)
Long-term operating lease liabilities	Long-term operating lease liabilities	$	23,870		Long-term operating lease liabilities	$	45,910
Weighted-average remaining lease term (in years)	Weighted-average remaining lease term (in years)	8.1			Weighted-average remaining lease term (in years)	12.1
Weighted-average discount rate	Weighted-average discount rate	6.5		%	Weighted-average discount rate	4.4		%

The following summarizes additional supplemental data related to our operating leases (in thousands):

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Three Months Ended
September 30, 2019 Nine Months Ended
September 30, 2019
Operating lease costs $ 1,271 $ 4,365
Nine Months Ended
September 30, 2019
Right-of-use assets obtained in exchange for operating lease liabilities $ 19,341

Three Months Ended
March 31, 2020

Operating lease costs

2,105

Three Months Ended
March 31, 2020

Right-of-use assets obtained in exchange for operating lease liabilities

24,071

Cash paid for operating leases

1,553

Lease contracts that have been executed but have not yet commenced are excluded from the tables above. As of ~~September 30, 2019,~~March 31, 2020, the Company has entered into ~~$50.3~~$33.8 million of contractually binding minimum lease payments for leases executed but not yet commenced. This amount ~~primarily~~ relates to the lease of the laboratory and headquarters facility in Fort Myers, Florida that is expected to commence in 2021. In addition to the minimum lease payments, the Company will pay approximately $25.0 million relating to the construction of the underlying ~~assets. This amount~~assets and approximately $17.0 million in leasehold improvements. These amounts were placed into separate construction disbursement escrow accounts and are initially classified as restricted cash, non-current, on the Consolidated Balance Sheets. Disbursements to the landlord will take place from time to time to pay for the costs of the Landlord’s work. These disbursements will be ~~initially recorded~~classified as a prepaid ~~asset. On the commencement date of the~~ lease ~~the amount will be reclassed to either the right-of-use~~ asset or leasehold improvements, as appropriate, until the lease commences. Upon lease commencement, the prepaid lease asset will be included in the calculation of the right-of-use asset and ~~amortized accordingly.~~the leasehold improvements will be placed in service. Construction of the infrastructure of this facility ~~has not yet commenced.~~commenced in the first quarter of 2020. The Company is not expected to control the underlying assets during the construction period and therefore is not considered the owner of the underlying assets for accounting purposes.

As previously disclosed in our 2018 Annual Report on Form 10-K and under the previous lease accounting standard, future minimum lease payments for operating leases having initial or remaining noncancellable lease terms in excess of one year were as follows (in thousands):

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Years ending December 31,
2019 $ 5,247
2020 2,798
2021 1,082
2022 453
2023 92
Thereafter —
Total minimum lease payments $ 9,672

Note ~~D –~~4. Revenue Recognition and Contractual Adjustments

The Company has 2 operating segments for which it recognizes revenue; Clinical Services and Pharma Services. The Clinical Services segment provides various clinical testing services to community-based pathology practices, oncology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. The Pharma Services segment supports pharmaceutical firms in their drug development programs by providing testing services and data analytics for clinical trials and research.

Clinical Services Revenue

The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent. The performance obligation is satisfied and revenues are recognized once the diagnostic services have been performed and the results have been delivered to the ordering physician. These diagnostic services are billed to various payers, including client direct billing, commercial insurance, Medicare and other government payers, and patients. Revenue is recorded for all payers based on the amount expected to be collected, which considers implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated consideration the Company expects to receive based on negotiated discounts, historical collection experience and other anticipated adjustments, including anticipated payer denials. Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing for commercial insurance, Medicare and other governmental and self-pay payers and within 60 to 90 days of billing for client payers.

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Pharma Services Revenue

The Company’s Pharma Services segment generally enters into contracts with pharmaceutical ~~and biotech~~ customers as well as other Contract Research Organizations (“CROs”) to provide research and clinical trial services ranging in duration from one month to several years. The Company records revenue on a unit-of-service basis based on number of units completed and the total expected contract value. The total expected contract value is estimated based on historical experience of total contracted units compared to realized units as well as known factors on a specific contract-by-contract basis. Certain contracts include upfront fees, final settlement amounts or billing milestones that may not align with the completion of performance obligations. The value of these upfront fees or final settlement amounts is usually recognized over time based on the number of units completed, which aligns with the progress of the Company towards fulfilling its obligations under the contract.

The Company also enters into other contracts, such as validation studies, for which the sole deliverable is a final report that is sent to sponsors at the completion of contracted activities. For these contracts, revenue is recognized at a point in time upon delivery of the final report to the sponsor. Any contracts that contain multiple performance obligations and include both units-of-service and point-in-time deliverables are accounted for as separate performance obligations and revenue is recognized as previously disclosed. The Company negotiates billing schedules and payment terms on a contract-by-contract basis. While the contract terms generally provide for payments based on a unit-of-service arrangement, the billing schedules, payment terms and related cash payments may not align with the performance of services and, as such, may not correspond to revenue recognized in any given period.

Amounts collected in advance of services being provided are deferred as contract liabilities on the Consolidated Balance ~~Sheet.~~Sheets. The associated revenue is recognized and the contract liability is reduced as the contracted services are subsequently performed. Contract assets are established for revenue that has been recognized but not yet billed. These contract assets are reduced once the customer is invoiced and a corresponding receivable is recorded. Additionally, certain costs to obtain contracts, primarily for sales commissions, are capitalized when incurred and are amortized over the term of the contract. Amounts capitalized for contracts with an initial contract term of twelve months or less are classified as current assets. All others are classified as non-current assets.

Most contracts are terminable by the customer, either immediately or according to advance notice terms specified within the contracts. All contracts require payment of fees to the Company for services rendered through the date of termination and may require payment for subsequent services necessary to conclude the study or close out the contract.

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

September 30, 2019 December 31, 2018
Current pharma contract assets (1) $ 234 $ 86
Long-term pharma contract assets (2) 627 268
Total pharma contract assets $ 861 $ 354
Current pharma capitalized commissions (1) $ 222 $ 271
Long-term pharma capitalized commissions (2) 839 650
Total pharma capitalized commissions $ 1,061 $ 921
Current pharma contract liabilities $ 1,187 $ 927
Long-term pharma contract liabilities (3) 1,898 1,652
Total pharma contract liabilities $ 3,085 $ 2,579

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


	March 31, 2020		December 31, 2019
Current pharma contract assets ⁽¹⁾	$	1,127	$	1,000
Long-term pharma contract assets ⁽²⁾	199		153
Total pharma contract assets	$	1,326	$	1,153


Current pharma capitalized commissions ⁽¹⁾	$	141	$	133
Long-term pharma capitalized commissions ⁽²⁾	761		798
Total pharma capitalized commissions	$	902	$	931


Current pharma contract liabilities	$	2,974	$	1,610
Long-term pharma contract liabilities ⁽³⁾	526		1,171
Total pharma contract liabilities	$	3,500	$	2,781

⁽¹⁾ Current pharma contract assets and Current pharma capitalized commissions are classified as “Other current assets” on the Consolidated Balance Sheets.

⁽²⁾ Long-term pharma contract assets and Long-term pharma capitalized commissions are classified as “Other assets” on the Consolidated Balance Sheets.

⁽³⁾ Long-term pharma contract liabilities are classified as “Other long-term liabilities” on the Consolidated Balance Sheets.

Pharma contract assets increased ~~$0.5~~$0.2 million, or ~~143%~~15%, from December 31, ~~2018~~2019 to ~~September 30, 2019.~~March 31, 2020. Pharma contract liabilities increased ~~$0.5~~$0.7 million, or ~~20%~~26%, during the same period, while capitalized commissions ~~also increased~~decreased slightly by ~~$0.1 million,~~$29 thousand, or ~~15%~~3%. ~~These increases are due to higher upfront fees driven by increases in the volume of Pharma contracts in process.~~

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

Revenue recognized for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and March 31, 2019 related to Pharma contract liability balances outstanding at the beginning of the period was ~~$0.1~~$1.2 million and ~~$2.0~~$1.3 million, respectively. Amortization of capitalized commissions for ~~the three~~both three-month periods ended March 31, 2020 and ~~nine months ended September 30,~~March 31, 2019 was ~~$0.3 million and $0.9 million, respectively.~~$0.2 million.

Disaggregation of Revenue

The Company considered various factors for both its Clinical Services and Pharma Services segments in determining appropriate levels of homogeneous data for its disaggregation of revenue, including the nature, amount, timing and uncertainty of revenue and cash flows. For Clinical Services, the categories identified align with our type of customer due to similarities of billing method, level of reimbursement and timing of cash receipts. Unbilled amounts are accrued and allocated to payor categories based on historical experience. In future periods, actual billings by payor category may differ from accrued amounts. Pharma Services revenue was not further disaggregated as substantially all of our revenue relates to contracts with large pharmaceutical and biotech customers as well as other CROs for which the nature, timing and uncertainty of revenue and cash flows is similar and primarily driven by individual contract terms.

The following table details the disaggregation of revenue for both the Clinical and Pharma Services Segments (in thousands):


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Clinical Services:	Clinical Services:									Clinical Services:
Client direct billing	Client direct billing	$	53,555	$	39,779	$	155,999	$	120,925	Client direct billing	$	54,292	$	49,756
Commercial Insurance	Commercial Insurance	20,956		10,253		63,052		28,726		Commercial Insurance	21,993		20,433
Medicare and Medicaid	Medicare and Medicaid	17,818		8,603		47,961		25,333		Medicare and Medicaid	16,483		15,793
Self-Pay	Self-Pay	236		814		745		976		Self-Pay	214		228
Total Clinical Services	Total Clinical Services	$	92,565	$	59,449	$	267,757	$	175,960	Total Clinical Services	$	92,982	$	86,210
Pharma Services:	Pharma Services:	12,107		9,647		34,205		24,306		Pharma Services:	13,048		9,367
Total Revenue	Total Revenue	$	104,672	$	69,096	$	301,962	$	200,266	Total Revenue	$	106,030	$	95,577

Note ~~E –~~5. Acquisition

On December 10, 2018 (the “Acquisition Date”), the Company acquired all of the issued and outstanding shares of common stock of Genesis Acquisition Holding Corp (“Genesis”), and its wholly owned subsidiary, Genoptix, Inc. (“Genoptix”, and collectively with its subsidiaries and Genesis, referred to herein as “Genoptix”), for a purchase price consisting of (i) cash consideration of approximately $127.0 million, which included approximately $2.0 million in estimated working capital adjustments and adjustments for estimated cash on hand of Genoptix on the Closing Date and (ii) 1.0 million shares of NeoGenomics’ common stock pursuant to an Agreement and Plan of Merger dated October 23, 2018 (the “Merger Agreement”).

Cartesian Medical Group, Inc. (“Cartesian”) is a California professional corporation that provided hematopathology and other pathology services to Genoptix as an independent contractor. Cartesian was consolidated into Genoptix as a variable interest entity. Subsequent to December 31, 2018, the professional services agreement between Genoptix and Cartesian was terminated and the Company entered into separate medical services agreements with the entities owned by the physicians who were previously employees of Cartesian. The termination of the agreement with Cartesian did not have any impact on the Company’s consolidated financial statements.

The Company issued approximately 1.0 million shares of common stock as consideration for the acquisition of Genoptix. This common stock was issued as unregistered shares, which carries a minimum six-month holding period before they may be sold to the public. The fair value of the common stock consideration was estimated using inputs not observable in the market and thus represents a Level 3 measurement. The key assumption in the fair value determination was a 5 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):

1614

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


~~Common Stock Valuation~~	~~Amount~~
~~Shares of common stock issued as consideration~~	~~1,000,000~~
~~Stock price per share on closing date~~	$	~~13.94~~
~~Value of common stock issued as consideration~~	$	~~13,940~~
~~Issue discount due to lack of marketability~~	$	~~(697)~~
~~Fair value of common stock at December 10, 2018~~	$	~~13,243~~

On January 10, 2020 (the “Acquisition Date”), the Company acquired the Oncology Division assets of Human Longevity, Inc. (“HLI - Oncology”) for a purchase price consisting of cash consideration of $37.0 million. Acquisition and integration costs related to HLI - Oncology were approximately $1.3 million for the three months ended March 31, 2020 and are reported as general and administrative expenses in the Company's Consolidated Statements of Operations.

HLI - Oncology performs Next Generation Sequencing for pharmaceutical customers. The acquisition of HLI - Oncology adds whole exome and whole genome sequencing capabilities to the Company's current Pharma Services offerings. Revenue related to HLI - Oncology is reported in the Pharma Services segment. The acquisition included assets, primarily consisting of lab equipment, inventory, maintenance agreements for acquired equipment, backlog contracts with HLI - Oncology's customers, as well as HLI - Oncology’s molecular workforce that is experienced with Next Generation Sequencing.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the Acquisition Date and measurement period and other adjustments recorded during 2019. Included in the measurement period and other adjustments is a $2.4 million working capital adjustment to the original cash consideration, as defined within the Merger Agreement, of which $0.4 million was received in cash with the remainder received as a return of common stock. The Company is in the process of completing its valuation of certain assets and liabilities, primarily related to accounts receivable and accounts payable assumed; thus, the provisional measurements of current assets and current liabilities are subject to change.

December 10, 2018
(As Initially Reported) Measurement Period and Other Adjustments December 10, 2018
(As Adjusted)
Current assets $ 22,172 $ 2,257 $ 24,429
Property and equipment 21,029 (428) 20,601
Identifiable intangible assets 71,792 (3,463) 68,329
Goodwill 50,873 679 51,552
Long-term assets 170 — 170
Total assets acquired $ 166,036 $ (955) $ 165,081
Current liabilities (10,769) (892) (11,661)
Long-term liabilities (1) (15,265) 282 (14,983)
Net assets acquired $ 140,002 $ (1,565) $ 138,437

⁽¹⁾ ~~Includes $14.7 million and $12.9 million as initially reported and as adjusted, respectively, in deferred tax liabilities associated with tangible and intangible assets acquired.~~

Of the $68.3 million of acquired intangible assets, $54.2 million was provisionally assigned to customer relationships which are amortized over fifteen years, $0.7 million was provisionally assigned to the Genoptix trade name which is being amortized over one year, and $13.4 million was provisionally assigned to trade marks which are assigned as indefinite-lived assets.

The goodwill arising from the acquisition of Genoptix includes revenue synergies as a result of our existing customers and Genoptix' customers having access to each other’s testing menus and capabilities and also from the new product lines, which Genoptix adds to the Company’s product portfolio, including the use of COMPASS and CHART trade names. None of the goodwill is expected to be deductible for income tax purposes. The provisional fair value of accounts receivable acquired is approximately $16.6 million, net of a $1.5 million fair value adjustment.

~~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 of Genoptix occurred on January 1, 2018, nor are they necessarily indicative of future results.:


	~~Nine Months Ended September 30, 2018~~January 10, 2020
~~Revenue~~Inventory	$	~~274,609~~ 534
Prepaid assets	185
Property and equipment	16,839
Internally developed software	3,110
Customer relationships ⁽¹⁾	4,100
Long-term assets	346
Goodwill ⁽²⁾	12,232
Total assets acquired	$	37,346
Long-term liabilities	(346)
Net ~~loss~~assets acquired	$	~~(1,164)~~
~~Net income available to common shareholders~~	$	~~2,284~~37,000

⁽¹⁾
Acquired intangible assets consisted of customer relationships which are amortized over seven years.

⁽²⁾The ~~unaudited pro forma consolidated results have been prepared by adjusting our historical results to include~~goodwill arising from the acquisition of ~~Genoptix~~HLI - Oncology is the amount the Company paid in excess of the fair value of the net assets acquired was primarily for (i) the expected future cash flows derived from the existing business capabilities and infrastructure, (ii) expanding the Company's scientific expertise as ~~if it occurred on January 1, 2018. These unaudited pro forma consolidated historical results were then adjusted~~a leading provider of Pharma Services and Next Generational Sequencing and (iii) an enhanced Pharma Services menu including germline, whole exome and whole genome sequencing. All of the goodwill resulting from the acquisition of HLI - Oncology is expected to be deductible for income tax purposes.

The above purchase price and purchase price allocation are preliminary and subject to future revision as the acquired assets and liabilities assumed are dependent upon the finalization of the related valuations. The fair values assigned to assets acquired and liabilities assumed for HLI - Oncology are based upon management's best estimates and assumptions as of the reporting date, and are considered preliminary.

Note 6. Goodwill and Intangible Assets

Goodwill as of March 31, 2020 and December 31, 2019 was $210.8 million and $198.6 million, respectively.

Intangible assets consisted of the following as of (in thousands):


		March 31, 2020
	Amortization Period	Cost		Accumulated Amortization		Net


Customer Relationships	84-180 months	143,371		28,529		114,842
Trade Name - Indefinite-lived	—	13,447		—		13,447
Total		$	156,818	$	28,529	$	128,289

1715

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

certain items, primarily related to a net increase in amortization expense during the nine months ended September 30, 2019 due to higher intangible assets recorded related to the acquisition of Genoptix and a reduction in interest expense during the nine months ended September 30, 2018, as the Company did not acquire the existing debt.

~~Note F – Goodwill and Intangible Assets~~

Goodwill as of September 30, 2019 and December 31, 2018 was $198.6 million and $197.9 million, respectively. In 2019, the Company recorded measurement period and other adjustments of $0.7 million. Refer to Note E, Acquisition, ~~herein~~ ~~for further detail.~~

~~Intangible assets consisted of the following as of (in thousands):~~

September 30, 2019
Amortization
Period Cost Accumulated
Amortization Net
Trade Name 12-24 months $ 3,679 $ 3,552 $ 127
Non-Compete Agreement 24 months 27 27 —
Customer Relationships 180 months 139,271 23,761 115,510
Trade Name - Indefinite-lived — 13,447 — 13,447
Total $ 156,424 $ 27,340 $ 129,084


			December 31, 2018												December 31, 2019
		Amortization Period	Cost		Accumulated Amortization		Net			Amortization Period	Cost		Accumulated Amortization		Net
Trade Name	Trade Name	12-24 months	$	3,675	$	3,042	$	633	Trade Name	12-24 months	$	3,679	$	3,679	$	—
Non-Compete Agreement	Non-Compete Agreement	24 months	27		18		9		Non-Compete Agreement	24 months	27		27		—
Customer Relationships	Customer Relationships	180 months	141,626		16,798		124,828		Customer Relationships	180 months	139,271		26,078		113,193
Trade Name - Indefinite-lived	Trade Name - Indefinite-lived	—	14,559		—		14,559		Trade Name - Indefinite-lived	—	13,447		—		13,447
Total	Total		$	159,887	$	19,858	$	140,029	Total		$	156,424	$	29,784	$	126,640

The Company recorded ~~approximately $2.4 million and $1.4 million in straight-line~~ amortization expense of intangible assets of approximately $2.5 million and $2.6 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and approximately $7.5 million and $4.3 million for the nine months ended September 30, 2019 and 2018,~~ respectively. The Company records amortization expense as a general and administrative expense.

The estimated amortization expense related to amortizable intangible assets for each of the four succeeding fiscal years and thereafter as of ~~September 30, 2019~~March 31, 2020 is as follows (in thousands):


Remainder of 2019		$	2,448
2020		9,285
Remainder of 2020				Remainder of 2020	$	7,403
2021	2021	9,285		2021	9,870
2022	2022	9,285		2022	9,870
2023	2023	9,285		2023	9,870
2024				2024	9,870
Thereafter	Thereafter	76,049		Thereafter	67,959
Total	Total	$	115,637	Total	$	114,842

Note ~~G –~~7. Debt

The following table summarizes the long term debt, net at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 (in thousands):

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~


		September 30, 2019		December 31, 2018			March 31, 2020		December 31, 2019
Term loan	Term loan	$	100,000	$	96,750	Term loan	$	96,250	$	97,500
Revolving credit facility		—		5,000

Financing obligations	Financing obligations	9,732		11,548		Financing obligations	7,369		8,631
Total debt	Total debt	$	109,732	$	113,298	Total debt	$	103,619	$	106,131
Less: Debt issuance costs	Less: Debt issuance costs	(723)		(997)		Less: Debt issuance costs	(645)		(671)
Less: Current portion of long-term debt and financing obligations	Less: Current portion of long-term debt and financing obligations	(12,000)		(14,171)		Less: Current portion of long-term debt and financing obligations	(9,941)		(10,432)
Total long-term debt, net	Total long-term debt, net	$	97,009	$	98,130	Total long-term debt, net	$	93,033	$	95,028

The carrying value of the Company’s term loan and financing obligations approximates fair value based on the current market conditions for similar instruments.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Senior Secured Credit Agreement

On June 27, 2019 (the “Closing Date”), the Company entered into a new senior secured credit agreement (the “New Credit Agreement”) with PNC Bank National Association (“PNC”), as administrative agent, and the lenders party thereto. The New Credit Agreement provides for a $100.0 million revolving credit facility (the “Revolving Credit Facility”), a $100.0 million term loan facility (the “Term Loan Facility”), and a $50.0 million delayed draw term loan which has an availability period beginning on the Closing Date and ending on December 27, 2020 (the “Delayed Draw Term Loan”). The Term Loan Facility and amounts borrowed under the Revolving Credit Facility are secured on a first priority basis by a security interest in substantially all of the tangible and intangible assets of the Company.

Borrowings under the New Credit Agreement bear interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the agreement (2) an alternate base rate determined by reference to the greatest of (a) the federal funds rate for the relevant interest period plus 0.5% per annum, (b) the prime lending rate of PNC and (c) the daily LIBOR rate plus 1% per annum, or (3) a combination of (1) and (2). The applicable margin will range from 1.25% to 2.25% for LIBOR loans and 0.25% to 1.25% for base rate loans, in each case based on NeoGenomics’ Consolidated Leverage Ratio (as defined in the New Credit Agreement). Interest on borrowings under the New Credit Agreement is payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of LIBOR loans. The Company has previously entered into an interest rate swap agreements to hedge against changes in the variable rate for a portion of our long term debt. See Note H,8. Derivative Instruments and Hedging Activities, for more information on these instruments.

The Revolving Credit Facility includes a $10.0 million swing loan sublimit, with swing loans bearing interest at the alternate base rate plus the applicable margin. Any principal outstanding under the Revolving Credit Facility is due and payable on June 27, 2024 or such earlier date as the obligations under the New Credit Agreement become due and payable pursuant to the terms of the New Credit Agreement. No amounts were outstanding under Revolving Credit Facility as of ~~September 30, 2019.~~March 31, 2020.

Principal payments on the Term Loan Facility ~~will be~~are due on the last day of each fiscal quarter ~~beginning September 30, 2019,~~ with an annual principal amortization of 5% in the first year, 5% in the second year, 7.5% in the third year, 7.5% in the fourth year, and 10% in each year thereafter, with the remainder due upon maturity on June 27, 2024 or such earlier date as the obligations under the New Credit Agreement become due and payable pursuant to the terms of the New Credit Agreement.

On ~~September 30, 2019,~~March 31, 2020, the Company had current outstanding borrowings under the Term Loan Facility of approximately ~~$6.3~~$5.0 million, and long-term outstanding borrowings of approximately ~~$93.7~~$90.6 million, net of unamortized debt issuance costs of ~~$0.7~~$0.6 million. These costs were recorded as a reduction in the carrying amount of the related liability and are being amortized over the life of the loan.

In addition to paying interest on outstanding principal under the New Credit Agreement, the Company will be required to pay a commitment fee in respect of the unutilized portion of the commitments under the Revolving Credit Facility and the Delayed Draw Term Loan. The commitment fee rate ~~will initially be 0.25% per annum, and, beginning in the fourth quarter of 2019, will range~~ranges from 0.15% to 0.35% depending on NeoGenomics’ Consolidated Leverage Ratio. The Company will also pay customary letter of credit and agency fees.

The Term Loan Facility contains various covenants including entering into certain indebtedness; ability to incur liens and encumbrances; make certain restricted payments, including paying dividends on its equity securities or payments to redeem, repurchase or retire its equity securities; enter into certain burdensome agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into certain sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it conducts. In addition, the Company must meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter.

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

The Term Loan Facility requires the Company to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, and (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt.

~~Prior Financing Agreement~~

~~Simultaneous with entering into the New Credit Agreement, on June 27, 2019, the Company terminated the Prior Financing Agreement and repaid all outstanding amounts owed thereunder.~~

The Prior Financing Agreement, originally entered into on December 22, 2016, with Regions Bank as administrative agent and collateral agent, provided for a $75.0 million term loan facility (the “Prior Term Loan Facility”) and a $75.0 million revolving credit facility (the “Prior Revolving Credit Facility”). On June 21, 2018, the Company entered into an amendment to the Prior Credit Agreement (the “Amendment”) which provided for an additional term loan in the amount of $30.0 million, for which revised terms are included below.

On December 31, 2018, the Company had current outstanding borrowings under the Prior Term Loan Facility, as amended, of approximately $7.9 million, and long-term outstanding borrowings of approximately $87.9 million, net of unamortized debt issuance costs of $1.0 million. During the fourth quarter of 2018, $5.0 million was drawn from the Prior Revolving Credit Facility, resulting in outstanding borrowings of $5.0 million as of December 31, 2018. The Prior Term Loan Facility and Prior Revolving Credit Facility were terminated on June 27, 2019. In association with the early termination of debt, the Company incurred a loss on the extinguishment of debt of $1.0 million.

Borrowings under the Prior Term Loan Facility bore interest at a rate per annum equal to an applicable margin plus, at the Company’s option, either (1) the Adjusted LIBOR rate for the relevant interest period, as defined within the Credit Agreement, (2) an alternate base rate determined by reference to the greatest of (a) the prime lending rate of Regions, (b) the federal funds rate for the relevant interest period plus 0.5% per annum and (c) the one month LIBOR rate plus 1% per annum (the “Alternate Base Rate”), or (3) a combination of (1) and (2). The applicable margin ranged from 2.25% to 4.00% for LIBOR loans and 1.25% to 3.00% for base rate loans, in each case based on NeoGenomics’ consolidated leverage ratio (as defined in the Prior Financing Agreement and revised in the Amendment). Interest on borrowings was payable on the last day of each month, in the case of each base rate loan, and on the last day of each interest period (but no less frequently than every three months), in the case of Adjusted LIBOR loans.

~~The Prior Revolving Credit Facility included a $10.0 million swing loan sublimit, with swingline loans bearing interest at the Alternate Base Rate plus the applicable margin.~~

The Prior Term Loan Facility and amounts borrowed under the Prior Revolving Credit Facility were secured on a first priority basis by a security interest in substantially all of the tangible and intangible assets of the Company. The Prior Term Loan Facility contained various affirmative and negative covenants including ability to incur liens and encumbrances; make certain restricted payments, including paying dividends on its equity securities or payments to redeem, repurchase or retire its equity securities; enter into certain restrictive agreements; make investments, loans and acquisitions; merge or consolidate with any other person; dispose of assets; enter into sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it conducts. In addition, the Company was required to meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter.

The Prior Financing Agreement required the Company to mandatorily prepay the Prior Term Loan Facility and amounts borrowed under the Prior Revolving Credit Facility with (i) 100% of net cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, (ii) 100% of net cash proceeds from certain issuances or incurrences of additional debt, (iii) beginning with the fiscal year ended December 31, 2018, 75% of consolidated excess cash flow (as defined) if the Company’s consolidated leverage ratio was greater than or equal to 3.25:1.0 or 50% of consolidated excess cash flow (as defined) if the Company’s consolidated leverage ratio was less than or equal to 3.25:1.0 but greater than or equal to 2.75:1.0 and (iv) 100% of net cash proceeds from issuances of permitted equity securities by the Company made in order to cure a failure to comply with the financial covenants.

Financing Obligations

The Company has entered into loans with various banks to finance the purchase of laboratory equipment, office equipment and leasehold improvements. These loans mature at various dates through 2022 and the weighted average interest rate under such loans was approximately ~~4.67%~~4.82% as of ~~September 30, 2019~~March 31, 2020 and ~~4.56%~~4.64% as of December 31, ~~2018.~~

2019.

2017

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Maturities of Long-Term Debt

Maturities of long-term debt as of ~~September 30, 2019~~March 31, 2020 are summarized as follows (in thousands):


		Term Loan		Financing Obligations		Total Long-Term Debt			Term Loan		Financing Obligations		Total Long-Term Debt
Remainder of 2019		$	2,500	$	1,667	$	4,167
2020		5,000		5,270		10,270
Remainder of 2020								Remainder of 2020	$	3,750	$	3,893	$	7,643
2021	2021	6,250		2,455		8,705		2021	6,250		2,732		8,982
2022	2022	7,500		340		7,840		2022	7,500		744		8,244
2023	2023	8,750		—		8,750		2023	8,750		—		8,750
2024	2024	70,000		—		70,000		2024	70,000		—		70,000

Total Debt	Total Debt	100,000		9,732		109,732		Total Debt	96,250		7,369		103,619
Less: Current portion of long-term debt	Less: Current portion of long-term debt	(6,250)		(5,750)		(12,000)		Less: Current portion of long-term debt	(5,000)		(4,941)		(9,941)
Less: Debt issuance costs	Less: Debt issuance costs	(723)		—		(723)		Less: Debt issuance costs	(645)		—		(645)
Long-term debt, net	Long-term debt, net	$	93,027	$	3,982	$	97,009	Long-term debt, net	$	90,605	$	2,428	$	93,033

Note ~~H –~~8. Derivative Instruments and Hedging Activities

In ~~December of 2016 and~~ June of 2018, the Company entered into an interest rate swap ~~agreements~~agreement to reduce the Company’s exposure to interest rate fluctuations on the Company’s variable rate debt obligations. ~~These~~This derivative financial ~~instruments are~~instrument is accounted for at fair value as a cash flow ~~hedges,~~hedge, which effectively modifies the Company’s exposure to interest rate risk by converting a portion of its floating rate debt to a fixed rate obligation, thus reducing the impact of interest rate changes on future interest expense.

Under ~~these~~the hedging ~~agreements,~~agreement, the Company receives a variable rate of interest based on LIBOR and we pay a fixed rate of interest. The following table summarizes the interest rate swap agreements.

December 2016 Hedge June 2018 Hedge
Notional Amount $50 million $20 million (1)
Effective Date December 30, 2016 June 29, 2018
Index One month LIBOR One month LIBOR
Maturity December 31, 2019 December 31, 2021
Fixed Rate 1.59 % 2.98 %

⁽¹⁾~~The notional amount increases to $70 million upon maturity of December 2016 hedge on December 31, 2019.~~


	June 2018 Hedge
Notional Amount	$	70	million
Effective Date	June 29, 2018
Index	One month LIBOR
Maturity	December 31, 2021
Fixed Rate	2.98		%

The fair value of the interest rate ~~swaps are~~swap is included in other assets or liabilities, when applicable. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the fair value of the derivative financial instruments included in other long-term assets ~~were $0.04 million and $0.48 million, respectively.~~was $0 for both periods. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the fair value of the derivative financial instruments included in other long-term liabilities were ~~$2.3~~$3.3 million and ~~$0.9~~$2.0 million, respectively. Fair value adjustments are recorded as an adjustment to ~~accumulated other comprehensive earnings,~~AOCI, except that any gains and losses on ineffectiveness of the interest rate swap would be recorded as an adjustment to other expense (income), net. Fair value adjustments will be reclassified to interest expense in the period during which the hedged transaction affects earnings, whether upon termination or maturity. Hedge effectiveness is assessed quarterly. The Company determined that the interest rate ~~swaps are~~swap is highly effective and, thus, there is no impact to the Company’s Consolidated Statements of ~~Operations.~~Operations from changes in fair value. Upon ~~termination of the interest rate swap agreement, the Company will reclassify gains~~maturity or ~~losses on derivative instruments from accumulated other comprehensive income (“AOCI”) to earnings. The December 2016 interest rate swap agreement matures in December 2019. Upon maturity,~~termination, gains or losses, if any, on this derivative instrument will be reclassified from AOCI to earnings. Based on interest rates in effect at September 30, 2019, the Company estimates the amount reclassified from AOCI to earnings during the next twelve months as the anticipated cash flows occur will be immaterial. There were no amounts reclassified for gains or losses on derivative instruments during the ~~three~~first quarter of 2020.

Note 9. Stock Based Compensation

The Company recorded approximately $2.2 million and ~~nine~~$2.1 million in stock based compensation expense for the three months ended ~~September 30, 2019.~~March 31, 2020 and 2019, respectively.

A summary of the stock option activity under the Company’s plans for the three months ended March 31, 2020 is as follows:

~~Note I – Class A Redeemable Convertible Preferred Stock~~

2118

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

On December 30, 2015, the Company issued 14,666,667 shares of its Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock") as part of the consideration for the acquisition of Clarient. The Series A Preferred Stock had a face value of $7.50 per share for a total liquidation value of $110 million. On December 22, 2016, the Company redeemed 8,066,667 shares of the Series A Preferred Stock for $55.0 million in cash. The redemption amount per share equaled $6.82 ($7.50 minus the liquidation discount of 9.09%). In December 2017, the Company issued 264,000 additional shares of preferred stock as a paid-in-kind dividend, resulting in a balance of 6,864,000 shares of Series A Preferred Stock outstanding at March 31, 2018. On June 25, 2018, the Company redeemed the remaining outstanding preferred stock for an aggregate redemption amount of $50.1 million, prior to consideration of any transaction related expenses. The shares were redeemed at $7.30 per share, representing the applicable 4.55% redemption discount on the original liquidation preference plus an additional $0.14 per share in respect of accrued and unpaid dividends for 2018. Following the redemption, no shares of preferred stock remain outstanding.

The $9.1 million gain was calculated as the carrying value of the shares of preferred stock before the redemption of $37.8 million plus the amount of the beneficial conversion feature originally recorded with the redeemed shares of $21.3 million, as compared to the total consideration being paid, in this case the $50.1 million.

~~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 representing the impact the rights and features of the instrument had on the value to the Company. After the partial redemption, the Series A Preferred stock had a fair value of approximately $32.9 million, or $4.99 per share. The difference between the fair value of $32.9 million and the liquidation value of $49.5 million represented a discount of approximately $16.6 million.

~~Beneficial Conversion Features~~ ~~(“BCF”)~~

The fair value of the common stock into which the Series A Preferred Stock was convertible exceeded the allocated purchase price fair value of the Series A Preferred Stock at the date of issuance and after the partial redemption in December of 2016 by approximately $44.7 million and $20.1 million, respectively, resulting in a beneficial conversion feature. The Company recognized the beneficial conversion feature as non-cash, deemed dividends to the holder of Series A Preferred Stock over the first three years the Series A Preferred Stock was outstanding, as the date the stock first becomes convertible was three years from the issue date. In addition to the BCF recorded at the original issue date, the Company recorded additional BCF discounts for payment-in-kind shares accrued for the quarter ended March 31, 2018 as dividends.

~~Classification~~

Prior to redemption, the Company classified the Preferred Stock as temporary equity on the Consolidated Balance Sheets due to certain change in control events that could have occurred and would have been outside of the Company’s control, including deemed liquidation events described in the Series A Certificate of Designation.

~~Note J – Equity~~

The Company recorded approximately $3.3 million and $1.1 million in stock based compensation expense for the three months ended September 30, 2019 and 2018, respectively, and approximately $7.7 million and $5.0 million in stock based compensation expense for the nine month periods ended September 30, 2019 and 2018, respectively.

~~A summary of the stock option activity under the Company’s plans for the nine months ended September 30, 2019 is as follows:~~

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~


		Number of Shares	Weighted Average Exercise Price			Number of Shares	Weighted Average Exercise Price
Options outstanding at December 31, 2018		6,839,417	$	7.63
Options outstanding at December 31, 2019					Options outstanding at December 31, 2019	5,318,759	$	9.97
Options granted	Options granted	943,345	$	19.74	Options granted	571,316	$	28.36
Less:	Less:				Less:
Options exercised	Options exercised	1,439,869	$	6.58	Options exercised	504,127	$	7.58
Options canceled or expired	Options canceled or expired	174,927	$	13.15	Options canceled or expired	51,210	$	14.61
Options outstanding at September 30, 2019		6,167,966	$	9.56
Exercisable at September 30, 2019		2,995,419	$	7.20
Options outstanding at March 31, 2020					Options outstanding at March 31, 2020	5,334,738	$	12.14
Exercisable at March 31, 2020					Exercisable at March 31, 2020	2,535,621	$	8.35

The fair value of each stock option award granted during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was estimated as of the grant date using a trinomial lattice model with the following weighted average assumptions:


	~~Nine~~Three Months Ended ~~September 30, 2019~~March 31, 2020
Expected term (in years)	~~3.0~~4.0 - ~~4.5~~5.5
Risk-free interest rate (%)	~~2.5%~~	0.9%
Expected volatility (%)	~~38.9%~~39.9% - ~~44.0%~~44.5%
Dividend yield (%)	—
Weighted average fair value/share at grant date	$~~5.76~~	8.90

As of ~~September 30, 2019,~~March 31, 2020, there was approximately ~~$5.7~~$8.2 million of unrecognized ~~share~~stock based compensation expense related to stock options that will be recognized over a weighted-average period of approximately ~~1.37~~1.54 years.

A summary of the restricted stock activity under the Company’s plans for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is as follows:


		Number of Restricted Shares	Weighted Average Grant Date Fair Value			Number of Restricted Shares	Weighted Average Grant Date Fair Value
Nonvested at December 31, 2018		282,508	$	9.01
Nonvested at December 31, 2019					Nonvested at December 31, 2019	335,298	$	15.75
Granted	Granted	227,188	$	19.91	Granted	88,736	$	28.36
Vested	Vested	(121,801)	$	9.60	Vested	(37,674)	$	19.29
Forfeited	Forfeited	(51,389)	$	11.72	Forfeited	(4,585)	$	19.66
Nonvested at September 30, 2019		336,506	$	15.75
Nonvested at March 31, 2020					Nonvested at March 31, 2020	381,775	$	18.29

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

Employee Stock Purchase Plan (ESPP)

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

During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ employees purchased ~~28,672~~34,330 and ~~21,100~~36,154 shares, respectively under the ESPP. The expense recorded for these periods was approximately ~~$0.1~~$0.2 million and $0.1 million, respectively. During the nine months ended September 30, 2019 and 2018, employees purchased 101,959 and 87,288 shares, respectively, under the ESPP. The expense recorded for these periods was approximately $0.4 million and $0.2 million, respectively.

~~Working Capital Adjustment~~

In the first quarter of 2019, the Company recorded a $2.4 million working capital adjustment to the original cash consideration, as defined within the Merger Agreement. In June 2019, the Company received the proceeds of the working capital adjustment as $0.4 million in cash with the remainder received as a return of 99,254 shares of common stock.

~~Public Offering of Common Stock~~

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

In May 2019, the Company completed an offering of 8,050,000 shares of registered common stock, at a price of $21.25 per share, for gross proceeds of approximately $171.1 million. The Company received approximately $160.8 million in net proceeds after deducting underwriting fees of approximately $10.3 million.

Note ~~K - Income Taxes~~

To calculate its interim tax provision, at the end of each interim period, the Company estimates the annual effective tax rate and applies such rate to its year-to-date ordinary earnings. The effect of changes in enacted tax laws or rates and excess tax benefits and tax deficiencies related to stock option exercises are recognized in the interim period in which the change occurs. In addition, the effect of significant, unusual, or infrequent items are recognized in the interim period in which the event occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.

The income tax benefit for the nine months ended September 30, 2019 relates primarily to non-qualified stock option exercises, disqualified incentive stock option exercises, as well as a pre-tax loss incurred related to legal settlements, which includes the Health Discovery Corporation litigation (see Note L, Commitments and Contingencies) for which the income tax benefit was recognized within the quarter ended March 31, 2019. The Company’s effective tax rate was a benefit of 41.3% for the nine months ended September 30, 2019, differs from the federal statutory rate of 21% primarily due to tax deductions for equity compensation in excess of GAAP expense, offset by losses in foreign jurisdictions with no associated tax benefit and other non-deductible permanent differences.

~~Note L – Commitments and Contingencies~~

~~Legal Matters~~

The Company was involved in litigation with Health Discovery Corporation (“HDC”) regarding the use of certain licensed technology under a Master License Agreement (“MLA”) dated January 6, 2012 between the Company and HDC. An arbitration hearing took place in December 2018, where the Company vigorously defended its legal rights and remedies pertaining to this licensing dispute. On April 25, 2019, the American Arbitration Association’s Panel of Arbitrators (the “Panel”) issued their ruling (the “Final Award”) which, in pertinent part, terminated the MLA, awarded $1.5 million to HDC in connection with the claims that SmartFlow infringes a valid patent and that internal use by NeoGenomics was subject to milestone and royalty payments, and awarded $5.1 million to HDC with respect to the claim of lack of development and commercialization of SVM-CYTO. All other claims by HDC were denied. The Company’s request for a declaratory judgment was denied and its counterclaims were denied.

The Company recorded an accrual of $4.9 million, net of tax, for this matter during the quarter ended March 31, 2019 and paid $6.7 million to HDC related to this matter in the quarter ended June 30, 2019 . This payment settled all obligations of the Company in connection with this litigation. The Company no longer utilizes any HDC technology.

~~Note M –~~10. Related Party Transactions

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

to renew it in writing; a description of consulting services to be provided to the Company (the “Services”) with a target of up to 15 hours per month of working time and attention to the Company; a fixed monthly cash consulting fee in the amount of $5,000 per month for the provision of the Services; and continuation of health insurance coverage at the levels currently in effect. In addition, Mr. Jones relinquished the title of Executive Vice President effective as of April 4, 2019.

~~NEOGENOMICS, INC.~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~(unaudited)~~

~~and $125,000, respectively, for consulting work performed and for reimbursement of related expenses. During the nine months ended September 30, 2019 and 2018,~~ Mr. Jones also ~~earned $38,125~~received approximately $0 and ~~$37,500,~~$58,000 during the three months ended March 31, 2020 and 2019, respectively, as payment of his annual bonus compensation for ~~his services on~~ the ~~Board.~~

~~On June 1, 2018, the~~previous fiscal years. The Company ~~granted~~did not grant stock ~~options and~~or restricted stock to ~~each~~any of its Board members, ~~as part of its annual Board compensation process.~~including Mr. Jones, ~~was granted 3,017 stock options and 6,897 shares of restricted stock for his services on~~during the ~~Board. The options were granted at a price of $11.60 per option and each option had a fair market value of $3.74. The options vested on June 1,~~three months ended March 31, 2020 or March 31, 2019. ~~The restricted stock had a fair value of $11.60 per share and vested on June 1, 2019.~~

On June 6, 2019, the Company granted stock options and restricted stock to each of its Board members as part of its annual Board compensation process. Mr. Jones was granted 4,269 stock options and 3,419 shares of restricted stock for his services on the Board. The options were granted at a price of $22.52 per option and each option had a fair market value of $8.14. The options vest on June 6, 2020. The restricted stock has a fair value of $22.52 per share and vests on June 6, 2020.

2520

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note ~~N –~~11. Segment Information

The Company has 2 operating segments for which it recognizes revenue; Clinical Services and Pharma Services. Our Clinical Services segment provides various clinical testing services to community-based pathology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing, commercial insurance, Medicare and other government payers, and patients. Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research.

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

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


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Net revenues:	Net revenues:									Net revenues:
Clinical Services	Clinical Services	$	92,565	$	59,449	$	267,757	$	175,960	Clinical Services	$	92,982	$	86,210
Pharma Services	Pharma Services	12,107		9,647		34,205		24,306		Pharma Services	13,048		9,367
Total Revenue		104,672		69,096		301,962		200,266
Total revenue										Total revenue	106,030		95,577

Cost of revenue:	Cost of revenue:									Cost of revenue:
Clinical Services	Clinical Services	47,526		31,509		136,557		94,586		Clinical Services	48,923		42,651
Pharma Services	Pharma Services	6,314		5,266		18,492		15,525		Pharma Services	10,738		5,811
Total Cost of Revenue		53,840		36,775		155,049		110,111
Total cost of revenue										Total cost of revenue	59,661		48,462

Gross Profit:	Gross Profit:									Gross Profit:
Clinical Services	Clinical Services	45,039		27,940		131,200		81,374		Clinical Services	44,059		43,559
Pharma Services	Pharma Services	5,793		4,381		15,713		8,781		Pharma Services	2,310		3,556
Total Gross Profit		50,832		32,321		146,913		90,155
Total gross profit										Total gross profit	46,369		47,115

Operating expenses:	Operating expenses:									Operating expenses:
General and administrative	General and administrative	33,054		21,055		94,773		59,106		General and administrative	36,344		32,142
Research and development	Research and development	2,611		446		6,407		2,475		Research and development	2,060		1,209
Sales and marketing	Sales and marketing	11,508		6,900		35,048		21,355		Sales and marketing	13,258		11,216
Total operating expenses	Total operating expenses	47,173		28,401		136,228		82,936		Total operating expenses	51,662		44,567
Income from Operations		3,659		3,920		10,685		7,219
(Loss) income from operations										(Loss) income from operations	(5,293)		2,548
Interest expense, net	Interest expense, net	203		1,873		3,333		4,766		Interest expense, net	819		1,826
Other (income) expense	Other (income) expense	(35)		(30)		5,124		31		Other (income) expense	(223)		5,169
Loss on extinguishment of debt		—		—		1,018		—
Income before taxes		3,491		2,077		1,210		2,422

Loss before taxes										Loss before taxes	(5,889)		(4,447)
Income tax expense (benefit)	Income tax expense (benefit)	1,348		54		(500)		135		Income tax expense (benefit)	1,089		(2,023)
Net income		$	2,143	$	2,023	$	1,710	$	2,287
Net loss										Net loss	$	(6,978)	$	(2,424)

Note 12. Subsequent Event

On March 27, 2020, the President of the United States signed the Coronavirus Aid Relief, and Economic Security (“CARES”) Act into law. The Act includes several significant provisions for corporations, including the usage of net operating losses, interest deductions and payroll benefits. On April 13, 2020, the Company received a stimulus payment in the amount of $3.9 million related to the CARES Act which may partially offset losses in consolidated revenue due to the impact of the

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

COVID-19 pandemic. The Company's ability to utilize the full amount received will depend on the guidelines and rules of the CARES Act, which have not yet been announced.

2622

NEOGENOMICS, INC.

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 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.

COVID-19 Considerations

In December 2019, a novel strain of coronavirus (“COVID-19”) was identified and the disease has since spread across the world, including the United States. In March 2020, the World Health Organization characterized COVID-19 as a pandemic. As a result, on April 9, 2020, the Company withdrew its previously issued 2020 guidance until the effects of the pandemic can be better assessed.

The Company has implemented significant actions to protect its employees while maintaining a continuity of critical oncology testing for cancer patients. Among other actions, the Company has de-densified laboratories and facilities, adjusted laboratory shifts, restricted visitors to facilities, restricted employee travel, implemented an Emergency Paid Time Off policy, provided remote work-environment training and support, and managed its supply chains. Importantly, all main laboratory facilities have remained open and there has been an uninterrupted continuity of high-quality testing services for clients. The Company's top priority remains the health and safety of employees and continued quality and service for all clients with a focus on patient care.

The Company saw a material impact to volume growth rates and clinical test volume in the last two weeks of March and in April. Clinical test volume was down approximately 20% year-over-year in the last two weeks of March and volume continued to be impacted in April. Demand may continue to decrease from historically low levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Such events may result in business disruption, reduced revenues and number of tests, any of which could materially affect our business, financial condition, and results of operations.

For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to “Risk Factors” in Part II, Item 1A of this Form 10-Q.

Overview

We operate a network of cancer-focused testing laboratories in the United States, Europe and Asia. Our mission is to improve patient care through exceptional cancer-focused 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.

As of ~~September 30, 2019,~~March 31, 2020, the Company had laboratory locations in Fort Myers and Tampa, Florida; Aliso Viejo, Carlsbad, Fresno and ~~Fresno,~~San Diego, California; Houston, Texas; Atlanta, Georgia; Nashville, Tennessee; Rolle, Switzerland and Singapore. The Company currently offers the following types of testing services:

a.Cytogenetics ~~(karyotype analysis)~~(“karyotype analysis”) - the study of normal and abnormal chromosomes and their relationship to disease. ~~This~~Cytogenetics involves analyzing the chromosome structure to identify changes from patterns seen in normal chromosomes. Cytogenetic studies are often performed to provide diagnostic, prognostic and occasionally predictive information for patients with hematological malignancies.

b.Fluorescence In-Situ Hybridization (“FISH”) - a molecular cytogenetic technique that focuses on detecting and localizing the presence or absence of specific DNA sequences and genes on chromosomes. 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 numerous types of gene alterations, including amplifications, deletions, and translocations.

c.Flow cytometry - a technique utilized to measure the characteristics of cell populations. Typically performed on liquid samples such as peripheral blood and bone marrow aspirate, it may also be performed on solid tissue

NEOGENOMICS, INC.

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

samples such as lymph nodes following additional processing steps. Cells 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 cellular antigens and are used to identify abnormal and/or malignant cell populations. Flow cytometry is typically utilized in diagnosing a wide variety of hematopoietic and lymphoid neoplasms. Flow cytometry is also used to monitor patients during the course of therapy to identify extremely low levels of residual malignant cells, known as minimal residual disease ~~(“MRD”).~~(MRD) monitoring.

d.Immunohistochemistry ~~(“IHC”)~~(IHC) and Digital Imaging – ~~refers to~~ the process of localizing cellular proteins in tissue sections and relies on the principle of antigen-antibody binding. IHC is widely used in the diagnosis of abnormal cells such as those found in cancer. Specific surface membrane, cytoplasmic, or nuclear markers may be identified. IHC is also widely used to understand the distribution and localization of differentially expressed proteins. Digital imaging allows clients to visualize scanned slides, and also 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 field which includes a broad range of laboratory techniques utilized in cancer testing. Most molecular techniques rely on the analysis of DNA and/or RNA, as well as the structure and function of genes at the molecular level. Molecular testing technologies include: DNA fragment length analysis; polymerase chain reaction ~~(“PCR”)~~(PCR) analysis; reverse transcriptase polymerase chain reaction ~~(“RT-PCR”)~~(RT-PCR) analysis, real-time (or quantitative) polymerase chain reaction ~~(“pPCR”)~~(pPCR) analysis; bi-directional Sanger sequencing analysis; and ~~Next-Generation Sequencing (“NGS”)~~next-generation sequencing (NGS) analysis.

~~NEOGENOMICS, INC.~~

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

f.Morphologic analysis – ~~refers to~~ the process of analyzing cells under the microscope by a pathologist, usually for the purpose of diagnosis. Morphologic analysis may be performed on a wide variety of samples, such as peripheral blood, bone marrow, lymph node, and from other sites such as lung, breast, etc. The services provided at NeoGenomics may include primary diagnosis, in which a sample is received for processing and our pathologists provide the initial diagnosis; or may include secondary consultations, in which slides and/or tissue blocks are received from an outside institution for second opinion. In the latter setting, the expert pathologists at NeoGenomics assist our client pathologists on their most difficult and complex cases.

Clinical Services Segment

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 provide a menu of services that 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 consultative services using our own specialized team of pathologists for difficult or complex cases and provide overflow interpretation services when requested by clients.

NeoGenomics is a leading provider of Molecular and next-generation sequencing (“NGS”) testing. These tests are interpreted by NeoGenomics’ team of Molecular experts and are often ordered in conjunction with other testing modalities. NGS panels are one of our fastest growing testing areas and clients can often receive a significant amount of biomarker information from very limited samples. These comprehensive panels can allow for faster treatment decisions for patients as compared to a series of single-gene molecular tests being ordered sequentially. NeoGenomics has one of the broadest Molecular menus in the industry and our targeted NeoTYPE panels include genes relevant to a particular cancer type, as well as other complementary tests such as immunohistochemistry and FISH. This comprehensive menu means that NeoGenomics can be a one-stop-shop for our clients who can get all of their oncology testing needs satisfied by our laboratory. This is attractive to our clients as patient samples do not need to be split and then managed across several laboratories. NeoGenomics expects our Molecular laboratory and NGS capabilities to be a key growth driver in the coming years.

In addition, we directly serve oncology, dermatology and other clinician practices that prefer to have a direct relationship with a laboratory for cancer-related genetic 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. Included in these service offerings are our COMPASS and CHART reports. COMPASS is a hematopathologist-directed multi-platform comprehensive evaluation, which includes an integrated assessment in the final COMPASS consultation report. CHART is a longitudinal patient report comprised of a series of COMPASS reports generated over time. In certain instances, larger clinician practices have begun to internalize ~~some components of pathology services. When~~ pathology interpretation services, ~~are internalized,~~and our ~~“tech-only”~~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

NEOGENOMICS, INC.

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

performed by NeoGenomics. In these instances, NeoGenomics will typically provide all of the more complex, molecular testing services.

Pharma Services Segment

Our Pharma Services revenue consists of three revenue streams:

•Clinical trials and research;

•Validation laboratory services; and

•Informatics

Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials and research. This 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 sponsor and works closely with them as specimens are received from the enrolled sites. We also work on developing tests that will be used as part of a companion diagnostic to determine patients’ response to a particular drug. As studies unfold, our clinical trials team reports the data and often ~~provide~~provides key analysis and insights back to the sponsors.

Our Pharma Services segment 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 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.

Whether serving as the single contract research organization or partnering with one, our Pharma Services team provides significant technical expertise, working 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~~oversight.We have experience in supporting submissions to the Federal ~~Food and~~ Drug Administration (“FDA”) for companion diagnostics. Our Pharma Services strategy is focused on helping bring more effective oncology treatments to market through providing ~~world class~~world-class laboratory services in oncology to key pharmaceutical companies in the industry.

We believe that NeoGenomics is uniquely positioned to service Pharma sponsors across the full continuum of the drug development process. Our Pharma Services ~~revenue consists~~team can work with them during the basic research and development phase as compounds come out of ~~three revenue streams:~~translational research departments as well as work with clients from Phase 1 clinical trials through Phases II and III as the sponsors work to prove the efficacy of their drugs. The laboratory biomarker tests that are developed during this process may become companion diagnostic, or CDx tests, that will be used on patients to determine if they could respond to a certain therapy. NeoGenomics is able to offer these CDx tests to the market immediately after FDA approval as part of our Day 1 readiness program. This ability helps to speed the commercialization of their drug and enables Pharma sponsors to reach patients through NeoGenomics broad distribution channel in the Clinical Services segment.

•~~Clinical~~We are building informatics and data-related tools to leverage our unique market position and oncology expertise to help our stakeholders solve real-world problems such as identifying patients for clinical trials or providing clinical decision support tools for physicians and ~~research;~~

•~~Validation laboratory services; and~~

•~~Data services.~~providers.

2020 Focus Areas:

We are committed to improving patient care while being an innovative leader in our industry. Over the past two years we have grown our business organically as well as through the acquisition of Genesis Acquisition Holding Corp (“Genesis”), and its wholly owned subsidiary, Genoptix, Inc. (“Genoptix”, and collectively with its subsidiaries and Genesis, referred to herein as “Genoptix”) in December of 2018, as well as the acquisition of the Oncology Division assets of Human Longevity, Inc. (“HLI - Oncology”). Our focus for 2020 includes initiatives to drive profitable growth while pursuing innovation and maintaining exceptional service levels. We expect these initiatives to allow the Company to continue becoming one of the world’s leading cancer testing and information company.

Strengthen Our World-Class Culture

Enhancing our culture to closely align with the values of our Company is a key priority. We will invest in the development of our people by creating mentoring, coaching and training opportunities to enhance and capitalize on the talent within our

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~~2019 Focus Areas:~~

We are committed to being an innovative leader in our industry. Over the past year, we have grown our business organically as well as through the acquisition of Genoptix in December of 2018. We have continued to expand internationally with the opening of a laboratory in Singapore. Our plans for 2019 include initiatives to drive profitable growth while successfully integrating Genoptix and maintaining exceptional service levels. We expect these initiatives to continue to position our Company to be the world’s leading cancer testing and information company.

~~Strengthen Our World-Class Culture~~

Our belief is that a culture of motivated and engaged employees will deliver superior service to our clients. We are focused on continuing to strengthen our culture by actively seeking feedback and ideas from employees on ways to innovate and grow our business. We will foster employee engagement through collaborative forums, frequent team dialogue and programs to reward teams for exceptional performance.

Enhancing our culture to closely align with the values of our Company is a key priority. We will focus on creating a unified culture as we bring Genoptix and NeoGenomics employees together to become one team. We will create mentoring and training opportunities to enhance and capitalize on the talent within our Company. We believe these initiatives will foster a culture of accountability and empowerment. We also believe these initiatives are necessary to ensure the success of our Company.

~~Communication~~We actively promote the health and well-being of our employees. We recognize that health goes beyond greater health benefits and preventative care and includes the quality of the physical work environment and programs that encourage social responsibility and community engagement.

Additionally, inclusive communication is a key element in our high performance culture. ~~Through effective~~Effective communication ~~we facilitate~~facilitates collaboration and enhances our employees’ understanding of ~~our Company’s priorities and how they contribute~~their contributions to the Company’s overall objectives. We ~~believe our~~will foster employee engagement through collaborative forums, frequent team dialogue and recognition programs to reward teams for exceptional performance. Our employee retention rate is above average for ~~the laboratory~~our industry and continuing to strengthen our culture will enable us to ~~continually~~ recruit and retain ~~talented employees.~~world-class talent.

Continue to Provide Uncompromising Quality and Exceptional Service

Maintaining the highest quality laboratory operations and service levels has enabled us to consistently grow our business. We are continuously looking for ways to improve quality and ~~in integrating Genoptix and NeoGenomics, we will identify~~implement best practices ~~and implement changes~~ to streamline ~~processes across the organization.~~processes. We are ~~keenly~~ focused on increasing automation ~~and looking for~~with solutions that will maintain quality while improving efficiency in operations.

We ~~plan to~~will continue to grow a culture of quality through ~~company-wide~~our leadership, coaching and employee ~~engagement~~training initiatives. ~~Through training, we~~We aim to empower our employees to ~~understand the importance of quality and how to ensure quality~~deliver high-quality results in their respective function. We will implement initiatives to ~~significantly~~measure and improve ~~the Corrective and Preventative Actions (“CAPA”) process~~turnaround times while maintaining a culture of quality, which we expect will continue to ~~ensure FDA readiness and will challenge employees to identify quality issues and find solutions.~~

~~We have been successful in retaining clients while also gaining market share. As we integrate Genoptix,~~meet or exceed our ~~goal is to ensure that we maintain the highest quality operation.~~customers' expectations.

Pursue ~~Exceptional Service~~Innovation and Growth

Our plans for ~~2019~~2020 include initiatives to continue to drive profitable ~~growth.~~growth and innovate. We will continue to pursue market share gains by providing high complexity, cancer-related laboratory testing services to hospitals, community-based pathology and oncology practices, academic centers, clinicians, and pharmaceutical companies. Additionally, we will focus on continued reimbursement effectiveness through improving coverage, streamlining processes and providing clients more efficient, automated ordering methods, which we believe will continue to fuel our growth and market share.

Our laboratory and informatics teams will continue focus on ~~service by improving the customer experience. We intend to accomplish this through the development~~new assays and ~~launch of innovative assays, informatics products~~product offerings, including continued progress towards liquid biopsy, minimal residual disease (“MRD”) and ~~companion diagnostics as well as enhancements to our educational programs.~~other high-quality tests. We expect this to result in increased ~~product and process understanding, increased ability to gain~~ market share as well as enabling us to maintain our high levels of client retention.

~~We will work to maintain our~~Our broad and innovative test menu of molecular, including NGS, immunohistochemistry, and other testing ~~which~~ has helped make us a ~~“one-stop~~“one stop shop” for many clients who value that all of their testing can be sent to one laboratory. ~~We believe successfully integrating Genoptix’ and NeoGenomics’operations will allow us to increase efficiency and reduce cost per test.~~ We will continue to look for growth opportunities through mergers and/or acquisitions and are focused on strategic opportunities that would be complementary to our menu of services and would increase our earnings and cash flow in the short to medium time frame. We are also focused on investing in business development and informatics capabilities to partner with our key stakeholders, including patients, providers, payers and pharmaceutical companies to provide solutions to current or near-term problems that they face.

~~NEOGENOMICS, INC.~~

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

Competitive Strengths

In addition to the competitive strengths discussed below, the Company believes that its superior testing technologies and instrumentation, laboratory information system, client education programs and broad domestic and growing international presence also ~~differentiate~~differentiates NeoGenomics from its competitors.

Turnaround Times

We strive to provide industry leading turnaround times for test results to our clients nationwide, both in the Clinical Services and Pharma Services segments. By providing information to our clients in a rapid manner, physicians can begin treating their patients as soon as possible. Our consistent timeliness of results inby our Clinical Services segment 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. Additionally, we believe that our rapid turnaround time on testing and our project milestones are a key differentiator in ~~the~~our Pharma Services segment.

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

World-class Medical and Scientific Team

Our team of medical professionals and ~~Ph.D.’s.~~Ph.Ds. are specialists in the field of genetics, oncology and pathology. As of ~~September 30, 2019,~~March 31, 2020, we employed or ~~are~~ contracted with ~~approximately 100 full-time M.D.’s~~over 120 M.D.s and ~~Ph.D.’s.~~Ph.Ds. We have many nationally and world-renowned pathologists on staff, which is a key differentiator from many smaller laboratories. Our clinical customers look to our staff and their expertise and they often call our medical team on challenging cases. For our Pharma Services segment, many sponsors work with our medical team on their study design and on the interpretation of results from the studies. Our medical team is a key differentiator as we have a depth of medical expertise that many other laboratories cannot offer to Pharmaceutical companies.

Innovative Service Offerings

We believe we currently have the most extensive menu of tech-only FISH services in the country as well as extensive and advanced tech-only flow cytometry and IHC 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 tech-only services are designed to give pathologists the option to choose, on a ~~case-by-case~~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 offer a comprehensive suite of technical and interpretation services, to meet the needs of those clients who are not credentialed and trained in interpreting genetic tests and who require pathology specialists to interpret ~~the~~their 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.D.’s. provide the service of interpreting the results of those tests. Our professional staff is also available for post-test consultative services. Clients using our global service offering 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.

~~Global Service Offerings~~

We offer a comprehensive suite of technical and interpretation services, to meet the needs of those clients who are not credentialed and trained in interpreting genetic tests and who require pathology specialists to interpret the testing results for them.results. In our global service offerings, our lab performs the technical component of the tests and our M.D.s and Ph.Ds. provide the service of interpreting the results of those tests. Our professional staff is also available for post-test consultative services. Clients using our global service offering 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~~

We believe we have one of ~~our tech-only clients also rely on our medical team~~the broadest Molecular and Next Generation Sequencing test menus in the world, with approximately 13,300 NGS tests completed in the first quarter of 2020. Clients have the ability to order single gene molecular tests, targeted NeoTYPE panels that include the relevant actionable genes for ~~difficult or challenging cases by ordering our global~~a particular cancer type as well as large NGS panels. Our Pharma Services Division offers a full range of sequencing testing ~~services on~~including whole exome sequencing. Our menu enables us to be a ~~case-by-case basis or our medical team can serve as a backup to support~~true one-stop-shop for our clients ~~who need help to satisfy the continued and demanding requirements~~as we can meet all 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, NeoGenomics bills for both the technical and professional component of the test, which results in a higher reimbursement level.

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

oncology testing needs.

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 team for the clinical cancer testing services is organized into ~~ten regions.~~five regions - Northeast, Southeast, North Central, South Central and West. Our Pharma Services segment has a dedicated team of business development specialists who are experienced in working with pharma sponsors and helping them with the testing needs of their research and development projects as well as Phase ~~1-3~~I, II and III studies. These sales representatives 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 Laboratory Information ~~System~~Services (“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. Our sales force educates clients on new test offerings and their proper utilization and our representatives are often seen as trusted advisors by our clients.

Seasonality

The majority of our clinical testing volume is dependent on patients being treated by hematology/oncology professionals and other healthcare providers. The volume of our testing services generally declines modestly during the summer vacation season, year-end holiday periods and other major holidays, particularly when those holidays fall during the middle of the week. In addition, the volume of our testing tends to decline due to extreme adverse weather conditions, such as excessively hot or cold spells, heavy snow, hurricanes or tornadoes in certain regions, consequently reducing revenues and cash flows in any affected period.

~~Please see~~In our Pharma Services segment, we enter into both short term and long term contracts, ranging from one month to several years. While the ~~section captioned Part II, Item 7, “Management’s Discussion~~volume of this testing is not as directly affected by seasonality as described above, the testing volume does vary based on the terms of the contract. Our volumes are often based on how quickly sponsors can get patient enrollees for their trials and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the SEC on February 26, 2019 and as amended and filed with the SEC on May 8, 2019, for a detailed descriptionseasonality can impact how quickly they can get patients enrolled. Many of our ~~business.~~long term contracts contain specific performance obligations where the testing is performed on a specific schedule. This results in revenue that is not consistent among periods. In addition, this results in backlog that can be significant.

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

Results of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2019~~March 31, 2020 as Compared to the Three ~~and Nine~~ Months Ended ~~September 30, 2018~~March 31, 2019

The following table presents the Consolidated Statements of Operations as a percentage of revenue:


		Three Months Ended September 30,						Nine Months Ended September 30,							Three Months Ended March 31,
		2019		2018		2019		2018			2020		2019
Net revenue	Net revenue	100.0	%	100.0	%	100.0	%	100.0	%	Net revenue	100.0	%	100.0	%
Cost of revenue	Cost of revenue	51.4	%	53.2	%	51.3	%	55.0	%	Cost of revenue	56.3	%	50.7	%
Gross Profit	Gross Profit	48.6	%	46.8	%	48.7	%	45.0	%	Gross Profit	43.7	%	49.3	%
Operating expenses:	Operating expenses:									Operating expenses:
General and administrative	General and administrative	31.6	%	30.5	%	31.4	%	29.5	%	General and administrative	34.3	%	33.6	%
Research and development	Research and development	2.5	%	0.6	%	2.1	%	1.2	%	Research and development	1.9	%	1.3	%
Sales and marketing	Sales and marketing	11.0	%	10.0	%	11.6	%	10.7	%	Sales and marketing	12.5	%	11.7	%
Total operating expenses	Total operating expenses	45.1	%	41.1	%	45.1	%	41.4	%	Total operating expenses	48.7	%	46.6	%
Income from operations		3.5	%	5.7	%	3.6	%	3.6	%
Loss (income) from operations										Loss (income) from operations	(5.0)	%	2.7	%
Interest expense, net	Interest expense, net	0.2	%	2.7	%	1.1	%	2.4	%	Interest expense, net	0.8	%	1.9	%
Other income		—	%	—	%	1.7	%	—	%
Loss on extinguishment of debt		—	%	—	%	0.3	%	—	%
Income before income taxes		3.3	%	3.0	%	0.5	%	1.2	%
Income tax (benefit) expense		1.3	%	0.1	%	(0.2)	%	0.1	%
Net income		2.0	%	2.9	%	0.7	%	1.1	%
Other (loss) income										Other (loss) income	(0.2)	%	5.4	%

Loss before taxes										Loss before taxes	(5.6)	%	(4.7)	%
Income tax expense (benefit)										Income tax expense (benefit)	1.0	%	(2.1)	%
Net loss										Net loss	(6.6)	%	(2.5)	%

Clinical and Pharma Services revenue for the periods presented are as follows ($ in thousands):


	Three Months Ended March 31,
	2020		2019		$ Change		% Change
Net revenues:
Clinical Services	$	92,982	$	86,210	$	6,772	7.9	%
Pharma Services	13,048		9,367		3,681		39.3	%
Total Revenue	$	106,030	$	95,577	$	10,453	10.9	%

Revenue

Clinical Services revenue for the three month period ending March 31, 2020 increased $6.8 million when compared to the same period in 2019. Testing volumes also increased in our clinical genetic testing business by approximately 6.9% for the three month period ending March 31, 2020 compared to the same period in 2019. The increases in revenue and volume primarily reflect a more favorable test mix as well as the benefit of reimbursement initiatives. This growth was offset by a decline in overall Clinical Services testing volume in the second half of March related to the COVID-19 pandemic.

Pharma Services revenue for the three month period ended March 31, 2020 increased $3.7 million compared to the same period in 2019, primarily due to the impact of the acquisition of HLI - Oncology. This growth was offset by an overall decrease in revenue due to the COVID-19 impact. In addition, our backlog of signed contracts has continued to grow from $130.3 million as of December 31, 2019 to $147.7 million as of March 31, 2020. We expect this backlog to result in higher revenues in future quarters.

The following table shows Clinical Services revenue, cost of revenue, requisitions received and tests performed for the three months ended March 31, 2020 and 2019. This data excludes tests performed for Pharma customers.

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~~The following table presents consolidated net revenue for the test type indicated:~~

Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2019 2018 $ Change % Change 2019 2018 $ Change % Change
Clinical Services $ 92,565 $ 59,449 $ 33,116 55.7 % $ 267,757 $ 175,960 $ 91,797 52.2 %
Pharma Services 12,107 9,647 2,460 25.5 % 34,205 24,306 9,899 40.7 %
Total Revenue $ 104,672 $ 69,096 $ 35,576 51.5 % $ 301,962 $ 200,266 $ 101,696 50.8 %

~~Revenue~~

Clinical Services revenue for the three and nine month periods ending September 30, 2019 increased $33.1 million and $91.8 million, respectively, compared to the same periods in 2018. Testing volumes also increased in our clinical genetic testing business by approximately 34.9% and 33.2% for the three and nine month periods ending September 30, 2019, respectively, compared to the same periods in 2018. The increases in revenue and volume primarily reflect the acquisition of Genoptix and organic volume growth, as well as the benefit of a more favorable test mix and reimbursement initiatives. We continue to negotiate managed care and group purchasing contracts to increase our in-network coverage and facilitate the addition of new accounts.

Pharma Services revenue for the three and nine month periods ended September 30, 2019 increased $2.5 million and $9.9 million, compared to the same periods in 2018. In addition, our backlog of signed contracts has continued to grow from $106.1 million as of June 30, 2019 to $118.3 million as of September 30, 2019. The expansion of our Pharma facility in Houston, Texas, provides additional capacity to manage this backlog. We expect this backlog to result in higher revenues in future quarters.

We also expect to achieve continued revenue growth in our Pharma Services segment due to our international presence. In addition to our laboratory in Rolle, Switzerland, we announced a global strategic partnership with Pharmaceutical Product Development, LLC (“PPD”) in 2018, and continued our international expansion including the opening of a laboratory in Singapore.

The following table shows Clinical Services revenue, cost of revenue, requisitions received and tests performed for the three and nine months ended September 30, 2019 and 2018. This data excludes tests performed for Pharma customers.

Testing revenue and cost of revenue are presented in thousands below:


		Three Months Ended September 30,										Nine Months Ended September 30,									Three Months Ended March 31,
		2019		2018		% Change		2019		2018		% Change			2020		2019		% Change
Clinical Services:														Clinical Services:
Requisitions (cases) received	Requisitions (cases) received	145,312		108,467		34.0	%	427,406		323,682		32.0	%	Requisitions (cases) received	144,319		137,111		5.3	%
Number of tests performed	Number of tests performed	250,518		185,738		34.9	%	735,165		551,721		33.2	%	Number of tests performed	250,376		234,317		6.9	%
Average number of tests/requisitions	Average number of tests/requisitions	1.72		1.71		0.7	%	1.72		1.70		0.9	%	Average number of tests/requisitions	1.73		1.71		1.2	%

Total clinical testing revenue	Total clinical testing revenue	$	92,565	$	59,449	55.7	%	$	267,757	$	175,960	52.2	%	Total clinical testing revenue	$	92,982	$	86,210	7.9	%
Average revenue/requisition	Average revenue/requisition	$	637	$	548	16.2	%	$	626	$	544	15.2	%	Average revenue/requisition	$	644	$	629	2.4	%
Average revenue/test	Average revenue/test	$	369	$	320	15.4	%	$	364	$	319	14.2	%	Average revenue/test	$	371	$	368	0.8	%

Cost of revenue	Cost of revenue	$	47,526	$	31,509	50.8	%	$	136,557	$	94,586	44.4	%	Cost of revenue	$	48,923	$	42,651	14.7	%
Average cost/requisition	Average cost/requisition	$	327	$	290	12.6	%	$	320	$	292	9.3	%	Average cost/requisition	$	339	$	311	9.0	%
Average cost/test	Average cost/test	$	190	$	170	11.8	%	$	186	$	171	8.3	%	Average cost/test	$	195	$	182	7.1	%

We continue to realize growth in our clinical testing revenue, which we believe is the direct result of our efforts to innovate by developing and maintaining one of the most comprehensive cancer testing menus in the industry. Our broad test menu enables our sales teams to identify opportunities for increasing revenues from existing clients and allows us to gain market share from competitors as well as attract new clients looking for a one-stop shop.

Average revenue per test increased ~~15.4% and 14.2%~~0.8% for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2019, respectively,~~March 31, 2020 compared to the corresponding period in ~~2018. These changes reflect the acquisition of Genoptix,~~2019. The increase reflects a more favorable test

~~NEOGENOMICS, INC.~~

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

mix ~~as well as~~and the positive impact of our internal reimbursement ~~initiatives, partially offset by changes in Medicare reimbursement and regulation.~~

initiatives.

Cost of Revenue and Gross Profit

Average cost per test increased ~~11.8% and 8.3%~~7.1% for the three ~~and nine~~ month ~~periods~~period ended ~~September 30, 2019,~~March 31, 2020, compared to the corresponding period in ~~2018, primarily due~~2019, reflecting the impact of payroll and payroll related costs in addition to the ~~acquisition~~impact of ~~Genoptix. This increase was partially offset by increased automation in our laboratories as well as the benefit of increased economies of scale and continuous process improvement.~~COVID-19.

Cost of revenue includes payroll and payroll related costs for performing tests, maintenance and depreciation of laboratory equipment, rent for laboratory facilities, laboratory reagents, probes and supplies, and delivery and courier costs relating to the transportation of specimens to be tested.

The consolidated cost of revenue and gross profit metrics are as follows:


		Three Months Ended September 30,														Nine Months Ended September 30,											Three Months Ended March 31,
($ in thousands)	($ in thousands)	2019			2018			% Change		2019			2018			% Change		($ in thousands)	2020			2019			% Change
Cost of revenue:	Cost of revenue:																	Cost of revenue:
Clinical Services	Clinical Services	$	47,526		$	31,509		50.8	%	$	136,557		$	94,586		44.4	%	Clinical Services	$	48,923		$	42,651		14.7	%
Pharma Services	Pharma Services	6,314			5,266			19.9	%	18,492			15,525			19.1	%	Pharma Services	10,738			5,811			84.8	%
Total Cost of Revenue		$	53,840		$	36,775		46.4	%	$	155,049		$	110,111		40.8	%
Total cost of revenue																		Total cost of revenue	$	59,661		$	48,462		23.1	%
Cost of revenue as a % of revenue	Cost of revenue as a % of revenue	51.4		%	53.2		%			51.3		%	55.0		%			Cost of revenue as a % of revenue	56.3		%	50.7		%
Gross Profit:

Gross profit:																		Gross profit:
Clinical Services	Clinical Services	$	45,039		$	27,940		61.2	%	$	131,200		$	81,374		61.2	%	Clinical Services	$	44,059		$	43,559		1.1	%
Pharma Services	Pharma Services	5,793			4,381			32.2	%	15,713			8,781			78.9	%	Pharma Services	2,310			3,556			(35.0)	%
Total Gross Profit		$	50,832		$	32,321		57.3	%	$	146,913		$	90,155		63.0	%
Gross Profit Margin		48.6		%	46.8		%			48.7		%	45.0		%
Total gross profit																		Total gross profit	$	46,369		$	47,115		(1.6)	%
Gross profit margin																		Gross profit margin	43.7		%	49.3		%

Consolidated cost of revenue in dollars increased for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 when compared to the same period in ~~2018 while cost~~2019. Cost of revenue as a percentage of revenue ~~decreased~~increased year-over-year. These increases in cost of revenue are largely due to ~~the acquisition of Genoptix.~~an increase in payroll-related costs.

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

Gross profit margin ~~increased~~decreased for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period in ~~2018. Gross margin improvement reflects~~2019, primarily due to the timing of Pharma Services revenue, higher costs due to the integration of Genoptix and additional testing capacity which was unused due to the impact of ~~volume growth, higher revenue per test, productivity gains, and cost efficiencies.~~COVID-19.

General and Administrative Expenses

General and administrative expenses consist of payroll and payroll related costs for our billing, finance, human resources, information technology and other administrative personnel as well as stock-based compensation. We also allocate professional services, facilities expense, IT infrastructure costs, depreciation, amortization and other administrative-related costs to general and administrative expenses.

Consolidated general and administrative expenses are as follows:


		Three Months Ended September 30,																		Nine Months Ended September 30,													Three Months Ended March 31,
($ in thousands)	($ in thousands)	2019			2018			$ Change		% Change		2019			2018			$ Change		% Change		($ in thousands)	2020			2019			$ Change		% Change
General and administrative	General and administrative	$	33,054		$	21,055		$	11,999	57.0	%	$	94,773		$	59,106		$	35,667	60.3	%	General and administrative	$	36,344		$	32,142		$	4,202	13.1	%
As a % of revenue	As a % of revenue	31.6		%	30.5		%					31.4		%	29.5		%					As a % of revenue	34.3		%	33.6		%

General and administrative expenses increased ~~$12.0 million and $35.7~~$4.2 million for the three ~~and nine~~ months ended ~~September 30, 2019, respectively,~~March 31, 2020, compared to the same period in ~~2018.~~2019. The increase reflects transaction costs and incremental expenses related to the acquisition of ~~Genoptix~~HLI - Oncology as well as higher payroll and payroll related costs due to increases in ~~personnel. Additionally, these expenses include~~personnel to support our near and long-term growth. Acquisition and integration costs related to HLI - Oncology were approximately ~~$0.3 million and $2.1~~$1.3 million for the three ~~and nine~~ months ended ~~September 30, 2019~~ i~~n acquisition and integration related costs.~~

~~NEOGENOMICS, INC.~~

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

March 31, 2020.

We expect our general and administrative expenses to increase in total but ~~remain stable~~decrease as a percentage of revenue as we add employee and compensation expenses, incur additional expenses associated with the expansion of our facilities, and ~~as we~~ continue to expand our physical and technological infrastructure to support our anticipated growth.

Research and Development Expenses

Research and development expenses relate to costs of developing new proprietary and non-proprietary genetic tests, including payroll and payroll related costs, maintenance of laboratory equipment, laboratory supplies (reagents), and outside consultants and experts assisting our research and development team.

Consolidated research and development expenses for the periods presented are as follows:


		Three Months Ended September 30,																		Nine Months Ended September 30,													Three Months Ended March 31,
($ in thousands)	($ in thousands)	2019			2018			$ Change		% Change		2019			2018			$ Change		% Change		($ in thousands)	2020			2019			$ Change		% Change
Research and development	Research and development	$	2,611		$	446		$	2,165	485.4	%	$	6,407		$	2,475		$	3,932	158.9	%	Research and development	$	2,060		$	1,209		$	851	70.4	%
As a % of revenue	As a % of revenue	2.5		%	0.6		%					2.1		%	1.2		%					As a % of revenue	1.9		%	1.3		%

Research and development expenses increased ~~$2.2 million and $3.9~~$0.9 million for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period in ~~2018.~~2019. This ~~485.4%~~ increase was driven by investments in new test development, particularly in our Next-Generation Sequencing and FDA initiatives.

We anticipate research and development expenditures will increase in future quarters as we invest in innovation projects and bringing new tests to market.

Sales and Marketing Expenses

Sales and marketing expenses are primarily attributable to employee-related costs including sales management, sales representatives, sales and marketing consultants and marketing and customer service personnel.

Consolidated sales and marketing expenses for the periods presented are as follows:


		Three Months Ended September 30,																		Nine Months Ended September 30,													Three Months Ended March 31,
($ in thousands)	($ in thousands)	2019			2018			$ Change		% Change		2019			2018			$ Change		% Change		($ in thousands)	2020			2019			$ Change		% Change
Sales and marketing	Sales and marketing	$	11,508		$	6,900		$	4,608	66.8	%	$	35,048		$	21,355		$	13,693	64.1	%	Sales and marketing	$	13,258		$	11,216		$	2,042	18.2	%
As a % of revenue	As a % of revenue	11.0		%	10.0		%					11.6		%	10.7		%					As a % of revenue	12.5		%	11.7		%

NEOGENOMICS, INC.

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

Sales and marketing expenses increased ~~$4.6 million and $13.7~~$2.0 million for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, when compared to the same ~~periods~~period in ~~2018.~~2019. This increase primarily reflects the ~~acquisition~~expansion of ~~Genoptix~~our sales team, as well as higher commissions due to our increase in revenues ~~the expansion of our sales team~~ and continued investment in marketing. We expect higher commissions expense in the coming ~~quarters~~years as the sales representatives’ continue generating new business with a focus on oncology office sales. We expect our sales and marketing expenses over the long term to align with changes in revenue.

Interest Expense, net

Net interest expense is comprised of interest incurred on our term ~~debt,~~loan, revolving credit facility and our other financing obligations offset by the interest income we earn on cash balances. Net interest expense for the three months ending ~~September 30, 2019~~March 31, 2020 decreased ~~89.2%~~55.1%, or ~~$1.7~~$1.0 million, compared to the same period in ~~2018. For the nine months ended September 30, 2019, net interest expense decreased by 30.1%, or $1.4 million.~~2019. We expect our interest expense to fluctuate based on timing of advances and payments on our revolving credit facility as well as changes in interest rates and cash balances.

~~NEOGENOMICS, INC.~~

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

Earnings Per Share

The following table provides consolidated net ~~income~~loss available to common stockholders for each period along with the computation of basic and diluted net ~~earnings~~loss per share for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018:~~(in thousands, except per share amounts):

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands, except per share amounts) 2019 2018 2019 2018
Net income available to common shareholders $ 2,143 $ 2,023 $ 1,710 $ 5,735
Basic weighted average shares outstanding 103,899 87,253 99,149 87,381
Diluted weighted average shares outstanding 107,880 90,899 102,766 89,925
Basic net earnings per share $ 0.02 $ 0.02 $ 0.02 $ 0.07
Diluted net earnings per share $ 0.02 $ 0.02 $ 0.02 $ 0.06


	Three Months Ended March 31,
	2020		2019
Net loss available to common shareholders	$	(6,978)	$	(2,424)

Basic weighted average shares outstanding	104,484		94,740
Diluted weighted average shares outstanding	104,484		94,740

Basic net loss per share	$	(0.07)	$	(0.03)
Diluted net loss per share	$	(0.07)	$	(0.03)

Non-GAAP Measures

Use of Non-GAAP Financial Measures

The ~~Company~~’sCompany’s financial results and financial guidance are provided in accordance with GAAP and using certain non-GAAP financial measures. Management believes that the presentation of operating results using non-GAAP financial measures provides useful supplemental information to investors and facilitates the analysis of the Company’s core operating results and comparison of core operating results across reporting periods. Management also uses non-GAAP financial measures for financial and operational decision making, planning and forecasting purposes and to manage the ~~Company~~’sCompany’s business. Management believes that these non-GAAP financial measures enable investors to evaluate the ~~Company~~’sCompany’s operating results and future prospects in the same manner as management. The non-GAAP financial measures do not replace the presentation of GAAP financial results and should only be used as a supplement to, and not as a substitute for, the ~~Company~~’sCompany’s financial results presented in accordance with GAAP. There are limitations inherent in non-GAAP financial measures because they exclude charges and credits that are required to be included in a GAAP presentation, and do not present the full measure of the ~~Company~~’sCompany’s recorded costs against its net revenue. In addition, the ~~Company~~’sCompany’s definition of the non-GAAP financial measures below may differ from non-GAAP measures used by other companies.

Definitions of Non-GAAP Measures

Non-GAAP Adjusted EBITDA

“Adjusted EBITDA” is defined by NeoGenomics as net income from continuing operations before: (i) interest expense, (ii) tax expense, (iii) depreciation and amortization expense, (iv) non-cash stock-based compensation expense, and, if applicable in a reporting period, (v) acquisition and integration related expenses, (vi) non-cash impairments of intangible assets, (vii) debt financing costs, (viii) and other significant non-recurring or non-operating (income) or expenses.

The following is a reconciliation of GAAP net loss to Non-GAAP EBITDA and Adjusted EBITDA for the three months ended March 31, 2020:

3531

NEOGENOMICS, INC.

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

~~The following is a reconciliation of GAAP net income to Non-GAAP EBITDA and Adjusted EBITDA for the three and nine months ended September 30, 2019:~~

Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2019 2018 2019 2018
Net income (GAAP) $ 2,143 $ 2,023 $ 1,710 $ 2,287
Adjustments to net income:
Interest expense, net 203 1,873 3,333 4,766
Income tax expense (benefit) 1,348 54 (500) 135
Amortization of intangibles 2,380 1,421 7,482 4,255
Depreciation 4,848 4,034 15,200 11,477
EBITDA (non-GAAP) $ 10,922 $ 9,405 $ 27,225 $ 22,920
Further adjustments to EBITDA:
Acquisition and integration related expenses 334 — 2,143 —
Loss on extinguishment of debt — — 1,018 —
Other significant non-recurring expense (1) 364 670 5,509 2,486
Non-cash, stock-based compensation 3,275 1,191 7,727 5,148
Adjusted EBITDA (non-GAAP) $ 14,895 $ 11,266 $ 43,622 $ 30,554

(1) Certain other items that neither relate to the ordinary course of our business nor reflect our underlying business performance are also excluded, including applicable facility moving expenses, expenses and/or proceeds related legal settlements and other items.


	Three Months Ended March 31,
(in thousands)	2020		2019
Net loss (GAAP)	$	(6,978)	$	(2,424)
Adjustments to net income:
Interest expense, net	819		1,826
Income tax expense (benefit)	1,089		(2,023)
Amortization of intangibles	2,452		2,559
Depreciation	6,240		5,271
EBITDA (non-GAAP)	$	3,622	$	5,209
Further adjustments to EBITDA:
Acquisition and integration related expenses	1,296		1,266

Other significant non-recurring expenses	(30)		5,145
Non-cash, stock-based compensation expense	2,186		2,139
Adjusted EBITDA (non-GAAP)	$	7,074	$	13,759

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash generated from operations, public and private sales of equity securities, and bank debt borrowings.

The following table presents a summary of our consolidated cash flows for operating, investing and financing activities for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ as well balances of cash and cash equivalents and working capital:


		Nine Months Ended September 30,							Three Months Ended March 31,
(in thousands)	(in thousands)	2019		2018		(in thousands)	2020		2019
Net cash provided by (used in):	Net cash provided by (used in):					Net cash provided by (used in):
Operating activities	Operating activities	$	20,010	$	29,333	Operating activities	$	(6,933)	$	6,097
Investing activities	Investing activities	(13,554)		(11,091)		Investing activities	(41,708)		(3,196)
Financing activities	Financing activities	162,624		87,412		Financing activities	617		483
Effects of foreign exchange rate changes		—		(35)
Net change in cash and cash equivalents		169,080		105,619
Cash and cash equivalents, beginning of period		$	9,811	$	12,821
Cash and cash equivalents, end of period		$	178,891	$	118,440
Working Capital (1), end of period		$	223,094	$	147,215

Net change in cash, cash equivalents and restricted cash						Net change in cash, cash equivalents and restricted cash	(48,024)		3,384
Cash, cash equivalents and restricted cash, beginning of period						Cash, cash equivalents and restricted cash, beginning of period	$	173,016	$	9,811
Cash, cash equivalents and restricted cash, end of period						Cash, cash equivalents and restricted cash, end of period	$	124,992	$	13,195
Working Capital ⁽¹⁾, end of period						Working Capital ⁽¹⁾, end of period	$	147,793	$	43,242

⁽¹⁾ Defined as current assets less current liabilities.

Cash Flows from Operating Activities

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, cash flows ~~from~~used in operating activities were ~~$20.0~~$6.9 million, a ~~$9.3~~$13.0 million decrease compared to the same period in ~~2018. The decrease was~~2019, consisting of a net loss of $7.0 million and the cash flow impact of net decreases in operating assets and liabilities of $12.9 million, primarily ~~due to an increase~~driven by increases in accounts receivable, inventory and funds distributed for the construction of ~~$12.0 million, as well as an increase~~the new headquarters facility. The decrease in ~~inventory~~cash used in operating activities was partially offset by net adjustments to the net loss of ~~$4.6~~$13.0 million. Receivables have increased year-over-year due to increases in ~~revenue. These increases were partially offset by a decrease in accrued expenses~~revenue as well as timing of ~~$7.0 million.~~cash receipts. Inventory increased due to higher spend on materials to mitigate the risk of potential supply chain disruptions resulting from the COVID-19 pandemic. As of March 31, 2020, we have paid $3.3 million related to the construction of the new headquarters facility from the restricted cash escrow account.

Cash Flows from Investing Activities

3632

NEOGENOMICS, INC.

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

~~Cash Flows from Investing Activities~~

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, cash used in investing activities was ~~$13.6~~$41.7 million, an increase of approximately ~~$2.5~~$38.5 million compared to the same period in ~~2018.~~2019. This was primarily due to ~~an increase in~~ the ~~purchases~~acquisition of ~~property and equipment, partially offset by~~ the ~~working~~Oncology Division of HLI as well as cash used for capital ~~adjustment related to the Genoptix acquisition.~~expenditures.

Cash Flows from Financing Activities

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, cash provided by financing activities was ~~$162.6~~$0.6 million compared to ~~$87.4~~$0.5 million in the same period in ~~2018.~~2019. Cash provided by financing activities during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 consisted ~~primarily~~ of ~~net cash proceeds of $160.8~~$3.5 million ~~resulting~~ from the ~~equity offering and $10.1 million from~~net issuance of common stock, ~~option exercises,~~primarily offset by net repayment of the term loan and other ~~finance~~financing obligations of ~~$7.2~~$2.8 million.

Credit Facility

On June 27, 2019, the Company entered into a new senior secured credit agreement (“New Credit Agreement”) with PNC Bank National Association. ~~Simultaneous with entering into the New Credit Agreement, the Company terminated the Prior Financing Agreement and repaid all outstanding amounts owed thereunder.~~ For further details regarding the new ~~and prior agreements,~~agreement, see Note G,7. Debt. In order to reduce our exposure to interest rate fluctuations on this floating rate debt obligation, we entered into interest rate swap agreements. For more information on these hedging instruments, see Note H,8. Derivative Instruments and Hedging Activities, to the Consolidated Financial Statements herein. The interest rate swap agreement effectively converts a portion of our floating rate debt to a fixed obligation, thus reducing the impact of interest rate changes on future interest expense. We believe this strategy will enhance our ability to manage cash flow within our Company.

Liquidity Outlook

We had approximately ~~$178.9~~$86.3 million in unrestricted cash and cash equivalents as of ~~September 30, 2019.~~March 31, 2020. In addition, the ~~new~~ senior secured credit agreement provides for up to $250.0 million in borrowing capacity of which ~~$100.0~~approximately $96.0 million is outstanding at ~~September 30, 2019.~~March 31, 2020. Based on our level of Adjusted EBITDA and the balance drawn, approximately ~~$115~~$102.8 million was available at that same date. We believe that the cash on hand, available credit lines and ~~positive~~ cash ~~flows generated from operations~~collections will provide adequate resources to meet our operating commitments and interest payments for at least the next 12 months from the issuance of these financial statements.

Capital Expenditures

We currently forecast capital expenditures in order to execute on our business plan and maintain growth; however, the actual amount and timing of such capital expenditures will ultimately be determined by the volume of business. We currently anticipate that our cash payments for capital expenditures for the year ending December 31, ~~2019~~2020 will be in the range of ~~$18~~$25 million to ~~$20~~$30 million. During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, we purchased, with cash, approximately ~~$17.6~~$4.7 million of capital equipment, software and leasehold ~~improvements, which included $14.0 million in cash payments. The remaining $3.7 million was financed under loan obligations.~~improvements. We have historically funded and plan to continue funding these capital expenditures with financing obligations, cash, and through bank loan facilities, if necessary.

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.

There have been no significant changes to our critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018, as amended,~~2019, except for the adoption of new accounting ~~standards, including the new standard related to leases. For further details regarding our leases, see Note C, Leases.~~

standards.

3733

NEOGENOMICS, INC.

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

Related Party Transactions

On November 4, 2016, the Company entered into an amended and restated consulting agreement (the “Amended and Restated Consulting Agreement”) with Steven C. Jones, a director, officer and shareholder of the Company whereby Mr. Jones would provide consulting services to the Company in the capacity of Executive Vice President. The Amended and Restated Consulting Agreement has an initial term of November 4, 2016 through April 30, 2020, which automatically renews for additional one year periods unless either party provides notice of termination at least three months prior to the expiration of the initial term or any renewal term. On May 6, 2019, the Company and Mr. Jones entered into a letter agreement to modify certain provisions of the ~~consulting agreement (the “Letter Agreement”)~~Amended and Restated Consulting Agreement which modifications included, by mutual agreement of the parties, the following: automatic expiration of the ~~consulting agreement~~Amended and Restated Consulting Agreement on April 30, 2020 unless the parties mutually agree to renew it in writing; a description of consulting services to be provided to the Company (the “Services”) with a target of up to 15 hours per month of working time and attention to the Company; a fixed monthly cash consulting fee in the amount of $5,000 per month for the provision of the Services; and continuation of health insurance coverage at the levels currently in effect. In addition, Mr. Jones relinquished the title of Executive Vice President effective as of April 4, 2019.

During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ Mr. Jones earned approximately $15,750 and $38,000, respectively, for consulting work performed and for reimbursement of related expenses. During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ Mr. Jones earned approximately $13,125 and $12,500, respectively, as compensation for his services on the Board. During the nine months ended September 30, 2019 and 2018, Mr. Jones earned approximately $76,250 and $125,000, respectively, for consulting work performed and for reimbursement of related expenses. During the nine months ended September 30, 2019 and 2018, Mr. Jones also ~~earned $38,125~~received approximately $0 and ~~$37,500,~~$58,000 during the three months ended March 31, 2020 and 2019, respectively, as payment of his annual bonus compensation for ~~his services on~~ the ~~Board.~~

Off-balance Sheet Arrangements

We do not use special purpose entities or other off-balance sheet financing techniques that we believe have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital resources.

3834

NEOGENOMICS, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange rates, interest rates and other relevant market rate or price changes. We are exposed to market risk associated with changes in the LIBOR interest rate and foreign currency exchange rates. We regularly evaluate our exposure to such changes and may elect to minimize this risk through the use of interest rate swap agreements. For further details regarding our significant accounting policies relating to derivative instruments and hedging activities, see Note B to our Consolidated Financial Statements included in our Annual Report on Form 10-K. We do not have any material foreign operations or foreign sales and thus have limited exposure to foreign currency exchange rate risk.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 15d-15, our management carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

3935

NEOGENOMICS, INC.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~From time to time~~None for the ~~Company is engaged in legal proceedings in the ordinary course of business, see Note L, Commitments and Contingencies.~~quarterly period ended March 31, 2020.

ITEM 1A. RISK FACTORS

~~There have been no material changes in our~~The following risk factors ~~from those set forth~~are in ~~Part I,~~addition to the risks described in the Company’s Form 10-K under Item 1A, “Risk Factors” contained in our Annual Report on Form 10-K for the for the year ended December 31, ~~2018;~~2019; as filed with the SEC on February ~~26, 2019~~28, 2019. The effects of the events and circumstances described in the following risk factors may heighten the risks contained in the Company’s Form 10-K.

The COVID-19 pandemic is highly dynamic in the United States and throughout the world and may adversely affect our operations and financial condition.

We are subject to risks related to the public health crises such as ~~amended~~the global pandemic associated with COVID-19. Economic and ~~filed~~health conditions in the United States and across most of the globe continue to change rapidly. The Company saw a material impact to volume growth rates and clinical test volume in the last two weeks of March and in early April. Demand may continue to decrease from historically low levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Such events may result in business disruption, reduced revenues and number of tests, any of which could materially affect our business, financial condition, and results of operations.

Numerous state and local jurisdictions have imposed, and others in the future may impose, “shelter-in-place” orders, quarantines, executive orders and similar government orders and restrictions for their residents to control the spread of COVID-19. Starting in mid-March 2020, the governor of California, where several of our laboratories are located, issued “shelter-in-place” or “stay at home” orders restricting non-essential activities, travel and business operations for an indefinite period of time, subject to certain exceptions for necessary activities, which has been followed by similar orders in other states in which we operate, including in Florida where our headquarters is located. Such orders or restrictions, have resulted in our headquarters closing, work stoppages, slowdowns and delays, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our operations.Other disruptions or potential disruptions include restrictions on our personnel and personnel of partners to travel and access customers; delays in approvals by regulatory bodies; delays in product development efforts; and additional government requirements or other incremental mitigation efforts that may further impact our testing capacity.

The COVID-19 pandemic is affecting the Company’s customers, suppliers, vendors, and other business partners, but the Company is not able to assess the full extent of the current impact nor predict the ultimate consequences that may result. At this time, we have not experienced interruptions in our operations due to supplier delays. We have established a COVID-19 procurement team to partner with our suppliers to reduce the ~~SEC~~risk of disruption. Distribution channels have not been disrupted as incoming and outgoing tests are delivered via major carriers.

While the potential economic impact brought by and the duration of COVID-19 may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets and a recession or market correction resulting from the spread of COVID-19 could materially affect our business and the value of our common stock. The Company is continuously monitoring its own operations and intends to take appropriate actions to mitigate the risks arising from the COVID-19 pandemic to the best of its abilities, but there can be no assurances that the Company will be successful in doing so. To the extent the Company is able to obtain information about and maintain communications with its customers, suppliers, vendors, and other business partners, the Company will seek to minimize disruptions to its supply chain. The ultimate extent of the effects of the COVID-19 pandemic on ~~May 8, 2019.~~the Company is highly uncertain and will depend on future developments which cannot be predicted.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~None.~~

Unregistered Sales of Equity Securities

None for the quarterly period ended March 31, 2020.

Issuer Purchases of Equity Securities

The following table sets forth information concerning our purchases of common stock for the periods indicated:


Period of Repurchase	Total Number of Shares Purchased⁽¹⁾	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1, 2020 - January 31, 2020	—	$	—	—	—
February 1, 2020 - February 29, 2020	—	—		—	—
March 1, 2020 - March 31, 2020	7,533	28.19		—	—
Total	7,533	$	28.19	—	—

⁽¹⁾The Company’s Equity Incentive Plan, as amended on May 25, 2017, allows participants to surrender already-owned shares having a fair market value equal to the required withholding tax related to the vesting of restricted stock. Pursuant to a share withholding election made by participants in connection with the vesting of such awards, all of which were outside of a publicly-announced repurchase plan, we acquired from such participants the shares noted in the table above to satisfy tax withholding obligations related to the vesting of their restricted stock. The average prices listed in the above table are averages of the fair market prices at which we valued shares withheld for purposes of calculating the number of shares to be withheld.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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NEOGENOMICS, INC.

ITEM 6. EXHIBITS


EXHIBIT NO.						DESCRIPTION

10.1						~~Commercial Lease~~Asset Purchase Agreement, dated ~~September 13, 2019,~~January 10, 2020, by and ~~between~~among Human Longevity, Inc. and NeoGenomics Laboratories, Inc. ~~and Seagate Alico I, LLC~~

~~10.2~~						~~Development Agreement, dated September~~(Incorporated by reference to the Company 's Current Report on Form 8-K as filed with the SEC on Jan uary 13, ~~2019, by and between NeoGenomics Laboratories, Inc. and Seagate Alico I, LLC~~2020.)

31.1						Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2						Certification by Principal Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1						Certification by Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101						The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2019,~~March 31, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Statements of Comprehensive Income (Loss) and (v) related notes

4138

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: ~~November 13, 2019~~April 29, 2020

NEOGENOMICS, INC.

By:

/s/ Douglas M. VanOort

Name:

Douglas M. VanOort

Title:

Chairman and Chief Executive Officer

By:

/s/ Kathryn B. McKenzie

Name:

Kathryn B. McKenzie

Title:

~~Vice President &~~ Chief ~~Accounting~~Financial Officer

4239


PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)						45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations						2723
Item 3. Quantitative and Qualitative Disclosures About Market Risk						3935
Item 4. Controls and Procedures						3935
PART II OTHER INFORMATION
Item 1. Legal Proceedings						4036
Item 1A. Risk Factors						4036
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds						4036
Item 3. Defaults Upon Senior Securities						4037
Item 4. Mine Safety Disclosures						4037
Item 5. Other Information						4037
Item 6. Exhibits						4138
SIGNATURES						4239


	As Previously Reported						As Corrected
	Additional Paid-in Capital		Accumulated Deficit		Additional Paid-in Capital		Accumulated Deficit

Balance at December 31, 2017	$	230,030	$	(58,422)	$	194,687	$	(23,079)
Deemed dividends on preferred stock and amortization of beneficial conversion feature	—		(2,856)		(2,856)		—
Balance at March 31, 2018	232,039		(60,634)		193,840		(22,435)

Deemed dividends on preferred stock and amortization of beneficial conversion feature*	419		(2,771)		(2,352)		—
Gain on redemption of preferred stock	—		9,075		9,075		—
Balance at June 30, 2018	217,451		(53,580)		185,556		(21,685)
Balance at September 30, 2018	354,487		(51,557)		322,592		(19,662)
Balance at December 31, 2018	372,186		(51,258)		340,291		(19,363)
Balance at March 31, 2019	378,571		(53,682)		346,676		(21,787)
Balance at June 30, 2019	$	543,484	$	(51,691)	$	511,589	$	(19,796)


	As Previously Reported						As Currently Reported
	Series A Redeemable Convertible Preferred Stock		Immaterial Correction of an Error		Reclassification		Series A Redeemable Convertible Preferred Stock



Balance at March 31, 2018	$	35,471	$	—	$	—	$	35,471
Redemption of Series A Preferred Stock	(50,096)		—		12,273		(37,823)
Deemed dividends on preferred stock and amortization of beneficial conversion feature	5,550		18,150		(21,348)		2,352
Gain on redemption of preferred stock	9,075		(18,150)		9,075		—
Balance at June 30, 2018	$	—	$	—	$	—	$	—


Years ending December 31,
2019	$	5,247
2020	2,798
2021	1,082
2022	453
2023	92
Thereafter	—
Total minimum lease payments	$	9,672


	September 30, 2019		December 31, 2018
Current pharma contract assets (1)	$	234	$	86
Long-term pharma contract assets (2)	627		268
Total pharma contract assets	$	861	$	354


Current pharma capitalized commissions (1)	$	222	$	271
Long-term pharma capitalized commissions (2)	839		650
Total pharma capitalized commissions	$	1,061	$	921


Current pharma contract liabilities	$	1,187	$	927
Long-term pharma contract liabilities (3)	1,898		1,652
Total pharma contract liabilities	$	3,085	$	2,579


	December 10, 2018 (As Initially Reported)		Measurement Period and Other Adjustments		December 10, 2018 (As Adjusted)
Current assets	$	22,172	$	2,257	$	24,429
Property and equipment	21,029		(428)		20,601
Identifiable intangible assets	71,792		(3,463)		68,329
Goodwill	50,873		679		51,552
Long-term assets	170		—		170
Total assets acquired	$	166,036	$	(955)	$	165,081
Current liabilities	(10,769)		(892)		(11,661)
Long-term liabilities (1)	(15,265)		282		(14,983)
Net assets acquired	$	140,002	$	(1,565)	$	138,437


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2019		2018		2019		2018
Net income available to common shareholders	$	2,143	$	2,023	$	1,710	$	5,735

Basic weighted average shares outstanding	103,899		87,253		99,149		87,381
Diluted weighted average shares outstanding	107,880		90,899		102,766		89,925

Basic net earnings per share	$	0.02	$	0.02	$	0.02	$	0.07
Diluted net earnings per share	$	0.02	$	0.02	$	0.02	$	0.06