UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
or
For the transition period from _________ to __________
Commission File Number: 001-35756
NEOGENOMICS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
Nevada
74-2897368
(IRS Employer Identification No.)
12701 Commonwealth Drive, Suite 9, Fort Myers, FL 33913
(Address of principal executive offices, Zip code)
(239) 768-0600
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.001 per share
Trading Symbol(s):
NEO
Name of each exchange on which registered:
The Nasdaq Stock Market LLC
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒
Securities registered pursuant to Section 12(g) of the Act: Common Stock par value $0.001 per share
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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
Non-accelerated filer
☒
☐
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 Act): ☐ Yes ☒ No
As of June 30, 2019, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $ 1.9 billion, based on the closing price of the registrant’s
common stock of $21.94 per share on June 30, 2019.
The number of shares outstanding of the registrant’s Common Stock, par value $0.001 per share, as of February 24, 2020: 104,831,687.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
NEOGENOMICS, INC.
FORM 10-K ANNUAL REPORT
For the Fiscal Year Ended December 31, 2019
Table of Contents
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
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PART I
FORWARD-LOOKING STATEMENTS
The information in this Annual Report on Form 10-K 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 this Annual Report on Form 10-K and in our other filings with the Securities and Exchange
Commission, or “SEC”.
Forward-looking statements include, but are not limited to, statements about:
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Our ability to respond to rapid scientific change;
The risk of liability in conducting clinical trials and the sufficiency of our insurance to cover such claims;
Our ability to implement our business strategy;
The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels;
The application, to our business and the services we provide, of existing laws, rules and regulations, including without limitation, Medicare laws, anti-kickback laws,
Health Insurance Portability and Accountability Act of 1996 regulations, state medical privacy laws, international privacy laws, federal and state false claims laws and
corporate practice of medicine laws;
Regulatory developments in the United States including downward pressure on health care reimbursement;
Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”);
Food and Drug Administration, or FDA regulation of Laboratory Developed Tests (“LDTs”);
Failure to timely or accurately bill for our services;
Our ability to expand our operations and increase our market share;
Our ability to expand our service offerings by adding new testing capabilities;
Our ability to meet our future capital requirements;
Our ability to manage our indebtedness;
Our ability to protect our intellectual property from infringement;
Our ability to integrate future acquisitions and costs related to such acquisitions;
The effects of seasonality on our business;
Our ability to maintain service levels and compete with other diagnostic laboratories;
Our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs;
Our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure;
Our handling, storage and disposal of biological and hazardous materials;
The accuracy of our estimates regarding reimbursement, expenses, future revenues and capital requirements and,
Our ability to manage expenses and risks associated with international operations, including anti-corruption and trade sanction laws and other regulations, and economic,
political, legal and other operational risks associated with foreign jurisdictions.
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
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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.
Trademarks
The “NeoGenomics”,“Genoptix” and “Clarient” names and logos have been trademarked with the United States Patent and Trademark Office. We have trademarked or have
applications pending for the brand names FLEXREPORT, HEMEFISH, MelanoSITE, NEOACTT, NEOANTIGEN DISCOVERY, NEOARRAY, NEOCOMPLETE,
NEOFISH, NeoLink, NeoLIQUID, NEONET, NEOREACH, NEOSEQ, NEOSMART, NeoSmartFlow, NeoTYPE, NeoUniversity, and NEOVUE. We have also a pending
trademark for the marketing slogan “Unifying Cancer Care.” Any other trademarks, registered marks and trade names appearing in this annual report on Form 10-K are the
property of their respective holders.
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ITEM 1. BUSINESS
NeoGenomics, Inc., a Nevada corporation (referred to individually as the “Parent Company” or collectively with its subsidiaries as “NeoGenomics”, “we”, “us”, “our” or the
“Company” in this Annual Report) is the registrant for SEC reporting purposes. Our common stock is listed on the NASDAQ Capital Market under the symbol “NEO”.
Overview
We operate a network of cancer-focused testing laboratories in the United States as well as laboratories in Switzerland and Singapore. Our mission is to improve patient care
through exceptional cancer-focused testing services. Our vision is to be the World’s leading cancer testing and information company by delivering uncompromising quality and
innovative solutions while providing exceptional service and operating with a world-class culture.
As of December 31, 2019, the Company has laboratory locations in Fort Myers and Tampa, Florida; Aliso Viejo, Carlsbad, Fresno and San Diego, California; Houston, Texas;
Atlanta, Georgia; Nashville, Tennessee; Rolle, Switzerland, and Singapore. We currently offer the following types of testing services:
a.
b.
c.
d.
e.
f.
Cytogenetics (“karyotype analysis”) - the study of normal and abnormal chromosomes and their relationship to disease. 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.
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.
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 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) monitoring.
Immunohistochemistry (IHC) and Digital Imaging – 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.
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) analysis; reverse transcriptase polymerase chain reaction (RT-PCR) analysis, real-time (or quantitative)
polymerase chain reaction (pPCR) analysis; bi-directional Sanger sequencing analysis;and next-generation sequencing (NGS) analysis.
Morphologic analysis – 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.
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Operating Segments
We have analyzed our reporting structure, the information available to our Chief Operating Decision Maker and the information being used to make strategic decisions and have
identified two primary types of customers: Clinical and Pharma. Our Clinical customers include community-based pathology practices, oncology groups, hospitals and
academic centers. Our Pharma customers include pharmaceutical companies to whom we provide testing and other services to support their studies and clinical trials.
In 2019, our Clinical Services segment accounted for 88% of consolidated revenues and our Pharma Services segment accounted for 12% of consolidated revenues. For further
financial information about these segments, please refer to Note R, Segment Information, to our Consolidated Financial Statements included in this Annual Report.
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. In certain instances, larger clinician practices have begun to internalize pathology interpretation services, and our tech-only service offering allows these larger
clinician practices to also participate in the diagnostic process by performing the PC interpretation services on TC testing performed by NeoGenomics. 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
Data services
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 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
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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 have experience in supporting submissions to the Federal 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 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 team can
work with them during the basic research and development phase as compounds come out of 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.
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 providers.
Markets
The medical testing laboratory market can be broken down into three primary markets:
•
•
•
Clinical Pathology testing;
Anatomic Pathology testing; and
Genetic and Molecular testing
Clinical Pathology testing covers high volume, highly automated, lower complexity tests on easily procured specimens such as blood and urine. Clinical Pathology tests often
involve testing of a less urgent nature, for example, cholesterol testing and testing associated with routine physical exams.
Anatomic Pathology testing involves evaluation of tissue, as in surgical pathology, or cells as in cytopathology. The most widely performed Anatomic Pathology procedures
include the preparation and interpretation of pap smears, skin biopsies, and tissue biopsies.
Genetic and Molecular testing typically involves analyzing chromosomes, genes, proteins and/or DNA/RNA sequences for abnormalities. Genetic and molecular testing
requires highly specialized equipment and credentialed individuals (typically M.D. or Ph.D. level) to certify results and typically yields the highest reimbursement levels of the
three market segments.
NeoGenomics operates primarily in the Genetic and Molecular testing market. We also act as a reference laboratory supplying anatomic pathology testing. NeoGenomics
typically does not operate in the clinical pathology testing market.
The field of cancer genetics is evolving rapidly and new tests continue to be developed at an accelerated pace. Based on medical and scientific discoveries over the last decade,
cancer testing falls into one of three categories: diagnostic testing, prognostic testing and predictive testing. Of the three, the fastest growing area is predictive testing, which is
utilized by clinicians to predict a patient’s response to the various treatment options in order to deliver “personalized or precision medicine” that is optimized to that patient’s
particular circumstances. Personalized or precision medicine better allows clinicians to know if a patient will or will not respond to certain cancer medications like Herceptin,
Keytruda, PIQRAY and Opdivo. This saves the healthcare system money by ensuring that expensive cancer drugs are only given to those who will benefit from them. This type
of testing improves patient care and potentially saves lives by identifying optimized therapies much more rapidly than what was possible in previous years.
The United States’ market for genetic and molecular testing is divided among numerous laboratories. Many of these laboratories are attached to academic institutions and
primarily provide clinical services to their affiliated university hospitals and associated physicians.
We believe several key factors are influencing the rapid growth in the market for cancer testing: (i) every year, more and more genes and genomic pathways are implicated in
the development and/or clinical course of cancer; (ii) cancer is primarily a disease of the elderly - one in four senior citizens is likely to develop some form of cancer during the
rest of their lifetime once
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they turn sixty, and now that the baby boomer generation has started to reach this age range, the incidence rates of cancer are rising; (iii) increasingly, new drugs are being
targeted to certain cancer subtypes and pathways which require companion diagnostic testing; (iv) patient and payer awareness of the value of genetic and molecular testing;
(v) decreases in the cost of performing genetic and molecular testing; (vi) increased coverage from third party payers and Medicare for such testing; and (vii) the health
insurance coverage to uninsured Americans under the Patient Protection and Affordable Care Act as amended by the Health Care and Education Reconciliation Act, each
enacted in March 2010. These factors have driven significant growth in the market for this type of testing. Additionally, there is an increased focus on developing tests for
monitoring purposes, including minimal residual disease and recurrence detection in cancer survivors, which could also broaden the use of certain tests and influence the market
for cancer testing.
2020 Focus Areas:
We are committed to improving patient care while being an innovative leader in our industry. Over the past year, 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. 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 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.
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. Effective communication facilitates collaboration and enhances our employees’
understanding of their contributions to the Company’s overall objectives. We 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 our industry and continuing to strengthen our culture will
enable us to recruit and retain 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 implement best practices to streamline processes. We are focused on increasing automation with solutions that will maintain quality while improving efficiency in
operations.
We will continue to grow a culture of quality through our leadership, coaching and employee training initiatives. We aim to empower our employees to deliver high-quality
results in their respective function. We will implement initiatives to measure and improve turnaround times while maintaining a culture of quality, which we expect will
continue to meet or exceed our customers' expectations.
Pursue Innovation and Growth
Our plans for 2020 include initiatives to continue to drive profitable 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 new assays and product offerings, including continued progress towards liquid biopsy, minimal residual disease
(“MRD”) and other high-quality tests. We expect this to result in increased market share as well as enabling us to maintain our high levels of client retention.
Our broad and innovative test menu of molecular, including NGS, immunohistochemistry, and other testing has helped make us a “one stop shop” for many clients who value
that all of their testing can be sent to one laboratory. 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
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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.
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 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 by our Clinical Services segment
is a competitive strength and a driver of additional testing requests by 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 our Pharma Services segment.
World-class Medical and Scientific Team
Our team of medical professionals and Ph.Ds. are specialists in the field of genetics, oncology and pathology. As of December 31, 2019, we employed or contracted with over
100 M.D.s and 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 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 their testing 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.
We believe we have one of the broadest Molecular and Next Generation Sequencing test menus in the world. Clients have the ability to order single gene molecular tests,
targeted NeoTYPE panels that include the relevant actionable genes for a particular cancer type as well as large NGS panels. Our Pharma Services Division offers a full range
of sequencing testing including whole exome sequencing. Our menu enables us to be a true one-stop-shop for our clients as we can meet all of their oncology testing needs.
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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 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 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 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.
In our Pharma Services segment, we enter into both short term and long term contracts, ranging from one month to several years. While the 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 seasonality can impact how quickly they can get patients enrolled. Many of our 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.
Competition
For our Clinical Services segment, the genetic and molecular testing niche of the laboratory testing industry is highly competitive and, given the opportunities in this industry,
we expect it to become even more competitive. Competitive factors in genetic and molecular testing generally include the reputation of the laboratory, range of services offered,
pricing, convenience of sample collection and pick-up, quality of analysis and reporting, medical staff, timeliness of delivery of completed reports (i.e. turnaround times) and
post-reporting follow-up for clients.
Our competitors for our Clinical Services segment in the United States are numerous and include major national medical testing laboratories, hospital laboratories and in-house
physician laboratories. Some of our competitors have greater financial resources and production capabilities than us. These companies may succeed in developing service
offerings that are more effective than any that we have or may develop, and may also prove to be more successful than we are in marketing such services. In addition,
technological advances or different approaches developed by one or more of our competitors may render our service offerings obsolete, less effective or uneconomical.
We intend to continue our efforts to gain market share by offering industry-leading turnaround times, a broad service menu, high-quality test reports, new tests including
proprietary ones, enhanced post-test consultation services, and the personal attention from our direct sales force. In addition, we believe our flexible reporting solutions, which
enable clients to report out customized results in a secure, real-time environment, will allow us to continue to gain market share.
Our Pharma Services business competes against many other clinical research organizations and central reference laboratories. Many of these competitors are much larger and
have a greater international presence than we do. Over the past few years, we have expanded our Pharma Services business into Europe and Asia at the request of our clients
and believe that our state of the art testing menu and our high level of service along with our international expansion will allow us to continue to gain market share in this
segment.
Our Pharma Services segment competitors are numerous Contract Resource Organizations (“CROs”). These competitors are larger than NeoGenomics and have global
operations including operations in some regions where we do not yet have service capabilities. These laboratories may be more effective than us in gaining business for global
clinical trials. Many clinical reference laboratories have also entered the space in support of clinical trials and the related laboratory testing. These reference laboratories are
often willing to compete with lower pricing for smaller more limited studies. We believe our strong scientific and medical team is a key differentiator where NeoGenomics is
used as an advisor to the sponsors on their trials. Our extensive
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experience in anatomic pathology continues to result in our winning clinical trials business as sponsors trust our medical team and want them to closely oversee their trials. We
believe our service focus and our leading molecular and immunohistochemistry platforms, as well as our exclusive MultiOmyxTM platform will continue to lead to rapid growth
in this segment.
Suppliers
The Company orders its laboratory and research supplies from large national laboratory supply companies. While we do not depend on a concentrated, limited number of
suppliers, we do rely on certain suppliers for specific reagents or other equipment, including sequencers. While we do not believe a short term disruption from any one of these
suppliers would have a material effect on our business, it could result in short term impact on gross margin depending on the nature of or extent of the disruption.
Concentrations of Credit Risk
Concentrations of credit risk with respect to revenue and accounts receivable are primarily limited to certain clients to which the Company provides a significant volume of its
services, and to specific payers of our services such as Medicare and individual insurance companies.
Dependence on Major Clients
We market our services to pathologists, oncologists, urologists, other clinicians, hospitals, pharmaceutical companies, academic centers and other clinical laboratories
throughout the United States, Europe and Asia. The Company’s client base consists of a large number of geographically dispersed clients diversified across various customer
types. For the years ended December 31, 2019, 2018 and 2017, no single client accounted for more than 10% of revenue.
Payer Mix
The following table reflects our estimate of the breakdown of net clinical revenue by type of payer for the fiscal years ended December 31, 2019, 2018 and 2017:
Medicare and other government
Commercial insurance
Client direct billing
Total
2019
2018
2017
18 %
23 %
59 %
100 %
15 %
17 %
68 %
100 %
14 %
17 %
69 %
100 %
The change in payer mix during the year ended December 31, 2019, is primarily due to the acquisition of Genoptix. Genoptix has a higher concentration in commercial
insurance payers and Medicare. Medicare, private commercial insurances and Medicare Advantage plans, are practicing “consolidated payment” or “bundled payment” models
where they pay the hospitals a lump sum, which is intended to include laboratory testing. This reflects an increase in the amount of risk sharing that Centers for Medicare and
Medicaid Services (“CMS”) and other private payers are encouraging providers such as hospital systems to undertake. Due to these factors we anticipate a gradual increase in
the percentage of client direct billing in the coming years. All of our Pharma Services revenue is billed directly to clients, or the pharmaceutical sponsor.
Trademarks
The “NeoGenomics”,“Genoptix” and “Clarient” names and logos have been trademarked with the United States Patent and Trademark Office. We have trademarked or have
applications pending for the brand names FLEXREPORT, HemeFISH, MelanoSITE, NeoACTT, NeoANTIGEN DISCOVERY, NeoARRAY, NeoCOMPLETE, NeoFISH,
NeoLink, NeoLIQUID, NeoNET, NeoREACH, NeoSEQ, NeoSMART, NeoSmartFlow, NeoTYPE, NeoUniversity, and NeoVUE. We have also a pending trademark for the
marketing slogan “Unifying Cancer Care”.
Insurance
We maintain professional liability and numerous other insurance policies. We believe that our present insurance is sufficient to cover currently estimated exposures, but we
cannot assure that we will not incur liabilities in excess of the policy coverage limits. In addition, although we believe that we will be able to continue to obtain adequate
insurance coverage, we cannot assure that we will be able to do so at acceptable cost.
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Available Information
Our internet website address is www.neogenomics.com. Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to
those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are available free of charge through our website as soon as reasonably practicable after we
electronically file with or furnish them to the SEC, and are available in print to any stockholder who requests a copy. Information on our website shall not be deemed
incorporated into, or to be part of, this Annual Report on Form 10-K.
Additionally, the SEC maintains a website that contains reports, proxy statements, information statements and other information regarding issuers, including us, that file
electronically with the SEC at www.sec.gov.
Employees
As of December 31, 2019, the Company had approximately 1,700 full-time equivalent employees and contracted pathologists. Our employees are not represented by any union
and we believe our employee relations are good.
Government Regulation
The laboratory business is subject to extensive governmental regulation at the federal, state and local levels. Our laboratories are required to be licensed by the states, certified
by the federal government to participate in the Medicare and Medicaid programs, and are subject to extensive requirements as a condition of participation in various
governmental health benefits programs. The failure to comply with any of the applicable federal and state laws, regulations, and reimbursement guidelines could have a material
adverse effect on the Company’s business. The applicable laws and regulations, and the interpretations of them, change frequently and there can be no assurance that the
Company will not be subject to audit, inquiry, or investigation with respect to some aspect of its operations. Some of the federal and state laws and regulations are described
below under “Clinical Laboratory Operations,” “Anti-Fraud and Abuse Laws,” “The False Claims Act,” “Confidentiality of Health Information” and “Food and Drug
Administration”.
Clinical Laboratory Operations
Licensure and Accreditation
The Company operates clinical laboratories in Florida, Georgia, Tennessee, Texas and California. The laboratories are licensed as required by the states in which they are
located. In addition, the laboratories in Fort Myers, Florida, Aliso Viejo and Carlsbad, California, and Nashville, Tennessee are licensed by the State of New York as they accept
clinical specimens obtained in New York. All of our domestic laboratories are certified in accordance with the Clinical Laboratory Improvement Amendments, as amended
(“CLIA”). Under CLIA, the U.S. Department of Health and Human Services (“HHS”) establishes quality standards for each category of testing performed by the laboratory.
The categories of testing include waived, moderate complexity and high complexity. NeoGenomics’ laboratories are categorized as high complexity. Six of the ten site locations
for NeoGenomics’ laboratories are also accredited by the College of American Pathologists (“CAP”) and actively participate in CAP’s proficiency testing programs for all tests
offered by the Company. Our Tampa, Florida and Fresno, California facilities are read-only laboratories and, therefore, wouldn’t qualify for CAP accreditation. Proficiency
testing programs require the participating laboratories to test specimens that they receive from the testing entity and return the results. The testing entity, conducting an
approved program, analyzes the results returned and provides to the Company a quality control report assessing the results. An important component of a quality assurance
program is to establish whether the laboratory’s test results are accurate and valid.
The federal and state certification and licensure programs establish standards for the operation of clinical laboratories, including, but not limited to, qualifications of personnel
and quality control. Compliance with such standards is verified by periodic inspections by inspectors employed by federal and state regulatory agencies and accrediting
organizations. The Company has a Quality Management System meeting applicable regulatory requirements and industry standards.
Quality of Care
Our mission is to improve patient care through quality cancer genetic diagnostic services. By delivering exceptional service and innovative solutions, we are becoming the
world’s leading cancer and information company. The quality of care provided to clients and their patients is of paramount importance to us. We maintain quality control
processes, including standard operating procedures, controls, performance measurement and reporting mechanisms. Our employees are committed to providing accurate,
reliable and consistent services at all times. Any concerns regarding the quality of testing or services provided by the Company are immediately communicated to our Medical
Team, Company management and, if necessary, the Vice President of Quality, the Compliance Department or Human Resources Department. We also continually revise and
improve our tests and work with laboratory equipment vendors to ensure that our laboratory has the highest possible quality.
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Compliance Program
The health care industry is highly regulated and scrutinized with respect to fraud, abusive billing practices and improper financial relationships between health care companies
and their referral sources. The Office of the Inspector General of HHS (the “OIG”) has published compliance guidance, including the Compliance Program Guidance for Clinical
Laboratories in August of 1998, and advisory opinions. The Company has implemented a robust Compliance Program, which is overseen by our Board of Directors. Its
objective is to ensure compliance with the myriad of international, federal and state laws, regulations and governmental guidance applicable to our business. Our program
consists of the development and implementation of standards of conduct, training/education of employees, monitoring and auditing Company practices, investigation, and
response to reported or detected compliance issues. The Board of Directors has formed a Compliance Committee of the Board, which meets regularly to discuss all compliance-
related issues that may affect the Company. The Company reviews its policies and procedures as new regulations and interpretations come to light to comply with applicable
regulations. The Chief Compliance Officer reports directly to the Compliance Committee.
Hotline
As part of its Compliance Program, the Company provides a hotline for employees who wish to anonymously or confidentially report suspected violations of our codes of
conduct, policies/procedures, or laws and regulations. Employees are strongly encouraged to report any suspected violation if they do not feel the problem can be appropriately
addressed through the normal chain of command. The hotline does not replace other resources available to our employees, including supervisors, managers and human resources
staff, but is an alternative channel available 24 hours a day, 365 days a year. The hotline forwards all reports to the Chief Compliance Officer who is responsible for
investigating, reporting to the Compliance Committee, and documenting the disposition of each report. The hotline forwards any calls pertaining to the financial statements or
financial issues to the Chairman of the Audit Committee. The Company does not allow any retaliation against an employee who reports a compliance related issue in good faith.
Laboratory Developed Tests (“LDTs”)
The FDA has regulatory responsibility over, among other areas, instruments, test kits, reagents and other medical devices used by clinical laboratories to perform diagnostic
testing. High complexity and CLIA-certified laboratories, such as ours, frequently develop internal testing procedures to provide diagnostic results to customers. These tests are
referred to as laboratory developed tests (“LDTs”). LDTs are subject to CMS oversight through its enforcement of CLIA. The FDA has also claimed regulatory authority over
all LDTs, but indicates that it has exercised enforcement discretion with regard to most LDTs offered by high complexity CLIA-certified laboratories, and has not subjected
these tests to FDA rules and regulations governing medical devices. However, the FDA has stated that it has been considering changes in the way it believes that laboratories
ought to be allowed to offer these LDTs, and since 2010 publicly announced that it would be exercising regulatory authority over LDTs, using a risk-based approach that will
direct more resources to tests with the highest risk of injury. On July 31, 2014 the FDA issued a notification to Congress of the “Anticipated Details of the Draft Guidance for
Industry, Food and Drug Administration Staff, and Clinical Laboratories: Framework for Regulatory Oversight of Laboratory Developed Tests,” or the Draft LDT Guidance.
As described in this notification, the FDA planned to provide draft guidance to clinical laboratories that develop their own LDTs regarding how the FDA intends to regulate
such laboratories under the Federal Food, Drug, and Cosmetic Act. In October 2014, the FDA published Draft LDT Guidance setting forth its proposed framework and
timetable for regulating LDTs. The FDA received numerous comments both in support of and opposed to the draft guidance. The FDA provided an opportunity for public
comment through February 2015 and received numerous public comments in response to the Draft LDT Guidance. The FDA then announced that it would not be finalizing the
draft guidance. On January 13, 2017, FDA published a non-binding Discussion Paper to “advance the public discussion by providing a possible approach to spur further
dialogue.” The Discussion Paper sets forth a possible LDT regulatory approach where LDTs currently on the market would be exempt from FDA regulation except for adverse
event and malfunction reporting, and regulation of new and modified LDTs would be phased in over four years, based on risk. Recently, Congress has submitted a legislative
discussion draft, the Diagnostic Accuracy and Innovation Act (“DAIA”) to the FDA and requested technical assistance on the draft. FDA’s technical assistance consisted of
recommendations for significant changes to the bill. In December 2018, Congress released an updated bill, the Verifying Accurate Leading-edge IVCT Development
(“VALID”) Act that is largely consistent with FDA’s technical assistance on DAIA. However, it remains unknown whether Congress will enact legislation regulating LDTs
and, if so, whether the legislation will be similar to the framework described in the Draft LDT Guidance, or in the VALID Act. It is possible that legislation and resulting FDA
regulation may result in increased regulatory burdens for us to register and continue to offer our tests or to develop and introduce new tests, or modify existing tests and may
increase our costs. We cannot be certain as to which of our tests would require FDA review and approval, and if approval was to be required, that our tests could obtain FDA
approval.
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Laws Governing Source Relationships
The federal laws governing Medicare, Medicaid and other federal health benefits, as well as other state and federal laws, regulate certain aspects of the relationships between
health care providers, including clinical laboratories, and their referral sources, including physicians, hospitals, other laboratories and other entities. We are subject to the federal
Anti-Kickback Statute (“federal AKS”), as well as similar state statutes and regulations, which prohibit the offer, payment, solicitation or receipt of any form of remuneration in
return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid or
any other federally funded healthcare program. The federal AKS defines remuneration to include anything of value, in cash or in kind, and thus can implicate financial
relationships including payments not commensurate with fair market value, such as in the form of space, equipment leases, professional or technical services or anything else of
value. For additional information regarding the federal AKS and similar state anti-kickback laws, see Item 1A. Risk Factors, Risks Relating to Regulation, “The failure to
comply with Anti-Kickback laws may subject us to liability, penalties or limitation of operations.”
In addition, we are subject to laws and regulations globally, including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, relating to corrupt and illegal
payments to, and contracting practices with regard to, government officials and others. The scope of the types of payments or other benefits covered by these laws is very broad
and regulators are frequently using enforcement proceedings to define the scope of these laws. The FCPA includes a criminal penalty of up to $5,000,000 per violation and up to
20 years imprisonment for individuals; a civil penalty of up to $750,000 per violation for enterprises; and a civil penalty of up to $150,000 per violation for individuals. Under
the UK Bribery Act, individuals or businesses may face up to 10 years in prison or unlimited fines. The obligation of the Company under these laws is to screen third parties
who are hired to carry out certain services on behalf of the Company, to monitor for and report suspicious transactions, and to monitor direct and indirect payments to
government officials. The Company has implemented a program to comply with these laws and has educates employees and its relevant vendors regularly on the requirements
for vendor onboarding and conducting appropriate business interactions globally.
Medicare Payment Guidelines
We have various billing arrangements with our clients and with third party payers, including the Medicare program. When the Company bills the client for all, or a portion of, a
laboratory test performed, these client billing arrangements are priced competitively at fair market value. These client billing arrangements may implicate the prohibition of the
Medicare program against charging the Medicare or Medicaid programs fees substantially in excess of the Company’s usual and customary charges. Given our participation in
Medicare and Medicaid, we are subject to Medicare and Medicaid regulations related to billing those programs as well as agency sub-regulatory guidance regarding the same,
the federal Stark Law and the federal and state anti-kickback statutes.
In light of the various federal regulations and guidance from the OIG, the Company seeks to price its products competitively while endeavoring to meet applicable statutes and
regulations.
Physician Self-Referral Laws
The federal law referred to as the “Stark Law”, prohibits payments for certain health care services, referred to as designated health services (“DHS”), which were rendered as a
result of referrals by physicians to DHS entities with which the physicians (or their immediate family members) have a financial relationship. A “financial relationship” includes
both an ownership interest and/or a compensation arrangement with a physician, both direct and indirect, and DHS includes, but is not limited to, laboratory services.
The Stark Law prohibits an entity that receives a prohibited DHS referral from seeking payment from Medicare and Medicaid for any DHS services performed as a result of
such a referral, unless an arrangement is carefully structured to satisfy every requirement of a regulatory exception. The Company endeavors to structure its financial
relationships in compliance with the Stark Law and with similar state physician self-referral laws.
Further, many states have promulgated self-referral laws and regulations similar to the federal Stark Law, but these vary significantly based on the state. In addition to services
reimbursed by Medicaid or government payers, often these state laws and regulations can encompass services reimbursed by private payers and paid by self-pay patients as well.
Penalties for violating state self-referral laws and regulations vary based on the state, but often include civil and criminal penalties, exclusion from Medicaid, and loss of
licenses. Our financial arrangements with physicians are governed by the federal Stark Law and similar state self-referral laws, and we rely on certain exceptions to the Stark
Law with respect to such relationships. While we believe that our financial relationships with physicians and referral practices are in compliance with applicable laws and
regulations, we cannot guarantee that government authorities would agree. If we are found by the government to be in violation of the Stark Law or a similar state self-referral
law, we could be subject to significant penalties, including fines as specified
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above, exclusion from participation in government and private payer programs and requirements to refund amounts previously received from government.
The False Claims Act
The federal False Claims Act prohibits any person or entity from knowingly presenting, or causing to be presented, to the U.S. government, or to a Medicare program
contractor, a false or fraudulent claim for payment, or knowingly making or using a false record or statement to have a false claim paid by the government, or conspiring to
defraud the U.S. government, or knowingly making or using a false statement to conceal an obligation to pay the government, or improperly retaining overpayments from, the
government. Following enactment of the ACA, knowing retention of overpayments is also considered a false claim and could lead to liability under the False Claims Act.
Further, False Claims Act liability may lead to exclusion from participation in Medicare, Medicaid and other federal healthcare programs. The False Claims Act’s
“whistleblower” or “qui tam” provisions are being used with more frequency to challenge the reimbursement practices of providers and suppliers. Those provisions allow a
private individual to bring an action on behalf of the government alleging that the defendant has submitted false claims for payment to the federal government. The government
must decide whether to intervene in the lawsuit and whether to prosecute the case. If it declines to do so, the individual may pursue the case alone, although the government
must be kept apprised of the progress of the lawsuit. Whether or not the federal government intervenes in the case, it will receive the majority of any recovery. The successful
qui tam relator who brought the case is entitled to a portion of the proceeds and its attorneys’ fees and costs. As most qui tam cases are filed by current or former employees, an
effective compliance program plays a crucial role in reducing the Company’s exposure to liability. It is also a criminal offense, under Title 18 U.S. Code, Section 287, for a
person or entity to make a claim against the United States or any department or agency, knowing the claim to be false, fictitious or fraudulent. The penalty is a fine, and
imprisonment of up to five years. The federal False Claims Act has been an effective enforcement tool for the federal government. Many states have enacted similar false claims
acts as well.
The Company seeks to structure its arrangements with physicians and other clients to be in compliance with the Anti-Kickback Statute, Stark Law, state laws, and the federal
False Claims Act and to stay abreast of current developments and changes in the law and regulations. However, these laws and regulations are complex and subject to
interpretation. Consequently, we are unable to ascertain with certainty that any of our transactions will not be subject to scrutiny and, if scrutinized, will not result in sanctions or
penalties. The Company has taken, and will continue to take, actions to endeavor to ensure compliance with the myriad federal and state laws that govern our business.
Confidentiality and Security of Personal Information
The Health Insurance Portability and Accountability Act of 1996, as amended (“HIPAA”), contains provisions that protect individually identifiable health information from
unauthorized use or disclosure by covered entities and their business associates. The Office for Civil Rights of HHS, the agency responsible for enforcing HIPAA, has published
regulations to address the privacy (the “Privacy Rule”) and security (the “Security Rule”) of protected health information (“PHI”). The Company is a covered entity under
HIPAA and has adopted policies and procedures to comply with the Privacy Rule and the Security Rule and HIPAA. The health care facilities and providers that refer
specimens to the Company are also bound by HIPAA. HIPAA also requires that all providers who transmit claims for health care goods or services electronically utilize
standard transaction and data sets and use standardized national provider identification codes. The Company has taken necessary steps to comply with HIPAA regulations,
utilizes standard transaction data sets, and has obtained and implemented national provider identifiers, or NPIs, as the standard unique health identifier in filing and processing
health care claims and other transactions.
The American Recovery and Reinvestment Act (“ARRA”) enacted the HITECH Act which extends the scope of HIPAA to permit enforcement against business associates for a
violation, establishes new requirements to notify the Office for Civil Rights of a breach of PHI, and allows the Attorneys General of the states to bring actions to enforce
violations of HIPAA. Rules implementing various aspects of HIPAA are continuing to be promulgated. With respect to these rules, as of July 1, 2012, CMS required all
HIPAA-covered entities such as the Company to conduct electronic claim submissions and related electronic transactions under a new HIPAA transaction standard called
Version 5010.
In addition to the HIPAA Privacy Rule and Security Rule described above, the Company is subject to state laws regarding the handling and disclosure of patient records and
patient health information. The HIPAA Privacy Rule and Security Rule regulations do not supersede state laws that may be more stringent; therefore, we are required to comply
with both federal privacy and security regulations and varying state privacy and security laws and regulations. These laws vary widely. Penalties for violation include sanctions
against a laboratory’s licensure as well as civil or criminal penalties. Additionally, private individuals may have a right of action against the Company for a violation of a state’s
privacy laws. We believe we are in material compliance with current state laws regarding the confidentiality of health information and will continue to monitor and comply with
new or changing state laws.
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The California Consumer Privacy Act (CCPA) took effect on January 1, 2020 and imposed privacy compliance obligations with regard to the personal information of California
residents. This legislation creates significant new requirements for identifying, managing, securing, tracking, producing and deleting consumer personal information and takes
the position that consumers “own” their personal information and provides specific rights, including the right to opt out of their data being sold to a third party by the Company.
The CCPA defines personal information extremely broadly as “information that identifies, relates to, describes, is capable of being associated with, or could reasonably be
linked, directly or indirectly, with a particular consumer or household.” Like the international privacy laws, this creates greater complexity in implementing a compliance
program to support these requirements. This law becomes enforceable by the California Attorney General on July 1, 2020 and the Company has already implemented significant
mechanisms to comply with this law.
Due the Company’s international expansion, we are subject to a variety of international laws which serve to protect the personally identifiable information (PII) of individuals
who reside in those countries. These laws include the European Union’s General Data Protection Regulation (GDPR), The Swiss Federal Data Protection Act, and Singapore’s
Personal Data Protection Act. These laws are much more complex and stringent in nature than HIPAA and are not limited to protecting patient data alone; they include
employees, clients, and other individuals, for which we have collected their data. Like HIPAA, these laws contain regulatory requirements for robust both data privacy and
security programs and require data breach reporting should PII be used or disclosed in a manner not allowed under the laws. Penalties for violations of these laws can be
significant, for instance GDPR’s maximum penalties are up to 4% of a company’s annual global turnover or €20 million – whichever is greater. Although the Company’s
business is conducted primarily in the United States, we do receive some clinical testing from countries outside of the U.S. and we do collect data of individuals internationally
as part of the Company’s Pharma business, which obligates us to comply with these laws. We have developed privacy and security programs to meet these international
obligations and continue to reassess and improve these programs continually.
In addition, we are subject to laws and regulations worldwide, including the U.S. Foreign Corrupt Practices Act (FCPA) and the U.K. Bribery Act, relating to corrupt and illegal
payments to, and hiring practices with regard to, government officials and others. The scope of the types of payments or other benefits covered by these laws is very broad and
regulators are frequently using enforcement proceedings to define the scope of these laws.
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ITEM 1A. RISK FACTORS
We are subject to various risks that may materially harm our business, financial condition and results of operations. They are not, however, the only risks we face. Additional
risks and uncertainties not presently known to us or that we currently believe not to be material may also adversely affect our business, financial condition or results of
operations. An investor should carefully consider the risks and uncertainties described below and the other information in this filing before deciding to purchase our common
stock. If any of these risks or uncertainties actually occurs, our business, financial condition or operating results could be materially harmed. In that case, the trading price of our
common stock could decline or we may be forced to cease operations.
Risks Relating to Our Business
Our business is subject to rapid scientific change, which could have a material adverse effect on our business, results of operations and financial condition.
The market for genetic and molecular testing services is characterized by rapid scientific developments, evolving industry standards and customer demands, and frequent new
product introductions and enhancements. For example, new tests developed by our competitors may prove superior and replace our existing tests. Additionally, certain
technological changes such as advances in point-of-care testing, could reduce the need for the laboratory tests we provide. Our future success will depend in significant part on
our ability to continually improve our offerings in response to both evolving demands of the marketplace and competitive service offerings, and we may be unsuccessful in
doing so, which could have a material adverse effect on our business, results of operations and financial condition.
Increased competition, including price competition, could have a material adverse impact on our net revenues and profitability.
The market for genetic and molecular testing services is highly competitive and we expect competition to continue to increase. Our major competitors, including Quest
Diagnostics and Laboratory Corporation of America, are large national laboratories that possess greater name recognition, larger customer bases, and significantly greater
financial resources and employ substantially more personnel than we do. Our competitors may develop products and services that are superior to ours or that achieve greater
market acceptance than our offerings. Many of our competitors have long established relationships with their customers and third-party payers. We cannot assure you that we
will be able to compete successfully with such entities in the future.
The laboratory business is intensely competitive both in terms of price and service. Pricing of laboratory testing services is often one of the most significant factors used by
health care providers and third-party payers in selecting a laboratory. As a result of the laboratory industry undergoing consolidation, larger laboratory providers are able to
increase cost efficiencies afforded by large-scale automated testing. This consolidation results in greater price competition. We may be unable to increase cost efficiencies
sufficiently, if at all, and as a result, our net earnings and cash flows could be negatively impacted by such price competition. Additionally, we may also face changes in fee
schedules, competitive bidding for laboratory services or other actions or pressures reducing payment schedules as a result of increased or additional competition.
We face the risk of capacity constraints, which could have a material adverse effect on our business, results of operations and financial condition.
We compete in the market place primarily on three factors: i) the quality and accuracy of our test results; ii) the speed or turn-around times of our testing services; and iii) our
ability to provide after-test support to those physicians requesting consultation. Any unforeseen increase in the volume of clients could strain the capacity of our personnel and
systems, leading to unacceptable turn-around times, or customer service failures. In addition, as the number of our clients and specimens increases, our products, services, and
infrastructure may not be able to scale accordingly. We may also not be able to hire additional licensed medical technologists that we need to handle increased volumes. Any
failure to handle higher volume of requests for our products and services could lead to the loss of established clients and have a material adverse effect on our business, results
of operations and financial condition. If we produce inaccurate test results, our clients may choose not to use us in the future. This could severely harm our business, results of
operations and financial condition. In addition, based on the importance of the subject matter of our tests, inaccurate results could result in improper treatment of patients, and
potential liability for us.
Failure to develop, or acquire licenses for, new or improved testing technologies could materially and adversely affect our revenues.
Our industry is subject to rapidly changing technology and new product introductions. Other companies or individuals, including our competitors, may obtain patents or other
intellectual property rights that would prevent, limit or interfere with our ability to develop, perform or sell our solutions or operate our business or increase our costs. In
addition, they could introduce new tests, technologies or services that may result in a decrease in the demand for our services or cause us to reduce the prices
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of our services. Our success will depend, in part, on our ability to develop, acquire or license new and improved technologies on favorable terms and to obtain appropriate
coverage and reimbursement for these technologies. We may not be able to negotiate acceptable licensing arrangements and we cannot be certain that such arrangements will
yield commercially successful diagnostic tests. If we are unable to license these testing methods at competitive rates, our research and development costs may increase as a
result. In addition, if we are unable to license new or improved technologies to expand our testing operations, our testing methods may become outdated when compared with
our competition and testing volume and revenue may be materially and adversely affected.
Clinical trials and research services create a risk of liability.
We conduct clinical trials, which ordinarily involve testing an investigational drug on a limited number of individuals to evaluate a product’s safety, determine a safe dosage
range and identify side effects. Errors or omissions could occur during a clinical trial that may result in harm to study volunteers, or if unnoticed and regulatory approval
received, to consumers of the drug, or that undermine the usefulness of the clinical trial or data from the clinical trial and may delay the entry of a drug to the market.
Our contracts with the pharmaceutical firms include provisions entitling us to be indemnified or entitling us to a limitation of liability. These provisions do not uniformly protect
us against liability arising from certain of our own actions, such as gross negligence or misconduct. We could be materially and adversely affected if we were required to pay
damages or bear the costs of defending any claim which is not covered by or exceeds a contractual indemnification provision or in the event that a party who must indemnify us
does not fulfill its indemnification obligations or which is beyond the level of our insurance coverage.
Our business operations and reputation may be materially impaired if we do not comply with privacy laws or information security policies.
In our business, we collect, generate, process or maintain sensitive information, such as patient data and other personal information. If we do use or not adequately safeguard
that information in compliance with applicable requirements under federal, state and international laws, or if it were disclosed to persons or entities that should not have access
to it, our business could be materially impaired, our reputation could suffer and we could be subject to fines, penalties and litigation. In the event of a data security breach, we
may be subject to notification obligations, litigation and governmental investigation or sanctions, and may suffer reputational damage, which could have an adverse impact on
our business.
We are subject to laws and regulations regarding protecting the security and privacy of certain healthcare and personal information, including: (a) the federal Health Insurance
Portability and Accountability Act and the regulations thereunder, which establish (i) a complex regulatory framework including requirements for safeguarding protected health
information and (ii) comprehensive federal standards regarding the uses and disclosures of protected health information; (b) state laws, including the California Consumer
Privacy Act; and (c) the European Union's General Data Protection Regulation.
Clinicians or patients using our services may sue us, and our insurance may not sufficiently cover all claims brought against us, which will increase our expenses.
The development, marketing, sale and performance of healthcare services expose us to the risk of litigation, including professional negligence or product liability claims were
someone to allege that our tests failed to perform as designed. We may also be subject to liability for errors in the test results we provide to pathologists and oncologists or for a
misunderstanding of, or inappropriate reliance upon, the information we provide. Damages assessed in connection with, and the costs of defending, any legal action could be
substantial. We may be faced with litigation claims that exceed our insurance coverage or are not covered under any of our insurance policies. In addition, litigation could have
a material adverse effect on our business if it impacts our existing and potential customer relationships, creates adverse public relations, diverts management resources from the
operation of the business, or hampers our ability to otherwise conduct our business.
We may not be able to implement our business strategy, which could impair our ability to continue operations.
Implementation of our business strategies will depend in large part on our ability to (i) attract and maintain a significant number of clients; (ii) effectively provide acceptable
products and services to our clients; (iii) develop and license new products and technologies; (iv) obtain adequate financing on favorable terms to fund our business strategies;
(v) maintain appropriate internal procedures, policies, and systems; (vi) hire, train, and retain skilled employees and management; (vii) continue to operate despite competition
in the medical laboratory industry; (viii) be paid reasonable fees by government payer’s that will adequately cover our costs; (ix) establish, develop and maintain our name
recognition; and (x) establish and maintain beneficial relationships with third-party insurance providers and other third-party payers. Our inability to obtain or maintain any or
all these factors could impair our ability to implement our business strategies successfully, which could have material adverse effects on our results of operations and financial
condition.
We may be unsuccessful in managing our growth which could prevent us from operating profitably.
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Our growth, including through our acquisition of the Genoptix business in December 2018, has placed, and is expected to continue to place, a significant strain on our
managerial, operational and financial resources. To manage our expanded business and our potential growth, we must continue to implement and improve our operational,
financial and billing systems and to expand, train and manage our employee base. We may not be able to effectively manage the expansion of our operations and our systems
and our procedures or controls may not be adequate to support our operations. Our management may not be able to achieve the rapid execution necessary to fully exploit the
market opportunity for our products and services. Any inability to manage growth could have a material adverse effect on our business, results of operations, potential
profitability and financial condition.
We have a substantial amount of indebtedness. This level of indebtedness could adversely affect our flexibility in operating our business and our ability to react to
changes in the economy or our industry.
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. Our substantial indebtedness could have significant
consequences for our business and financial condition. For example:
• We could be required to dedicate a greater percentage of our cash flows to payments on our debt, thereby reducing the availability of cash flow to fund capital
expenditures, pursue other acquisitions or investments in new technologies, make stock repurchases and fund other general corporate purposes. If we fail to meet our
payment obligations or otherwise fail to comply with the covenants in our debt, including failure as a result of events beyond our control, it could result in an event of
default on our debt. Upon an event of default, the lenders of that debt could elect to cause all amounts outstanding with respect to that debt to become immediately due
and payable and we would be unable to access our revolving credit facility. Our debt imposes operating and financial covenants and restrictions on us, and compliance
with such covenants and restrictions may adversely affect our ability to adequately finance our operations or capital needs, pursue attractive business opportunities that
may arise, redeem or repurchase capital stock, pay dividends, sell assets, and make capital expenditures.
• We may experience increased vulnerability to general adverse economic conditions, including increases in interest rates for those borrowings that bear interest at
variable rates or if such indebtedness is refinanced at a time when interest rates are higher.
• We may experience limited flexibility in planning for, or reacting to, changes in or challenges relating to our businesses and industry, creating competitive disadvantages
compared to other competitors with lower debt levels and borrowing costs.
We cannot assure you that cash flows, combined with additional borrowings under the revolving credit facility or any future credit facility, will be available in an amount
sufficient to enable us to repay our indebtedness, or to fund other liquidity needs.
In addition, we may incur substantial additional indebtedness in the future, which could cause the related risks to intensify. We may need to refinance all or a portion of our
indebtedness on or before their respective maturities. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
If we are unable to refinance our debt, we may default under the terms of our indebtedness, which could lead to an acceleration of the debt. We do not expect that we could
repay all of our outstanding indebtedness if the repayment of such indebtedness was accelerated.
The failure to obtain necessary additional capital to finance growth and capital requirements, could adversely affect our business, financial condition and results of
operations.
We may seek to exploit business opportunities that require more capital than we have currently available. We may not be able to raise such capital on favorable terms or at all. If
we are unable to obtain such additional capital, we may be required to reduce the scope of our anticipated expansion, which could adversely affect our business, financial
condition and results of operations.
As of December 31, 2019, we had cash and cash equivalents of approximately $173 million and approximately $131 million in available borrowing capacity under our senior
secured revolving credit facility. We may still need additional capital to fully implement our business, operating and development plans. Should the financing we require to
sustain our capital needs be unavailable or prohibitively expensive when we require it, there could be a material adverse effect on our long-term business, rate of growth,
operating results, financial condition and prospects.
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If we are unable to successfully integrate future acquisitions with our legacy business, the anticipated benefits of such transaction may not be realized.
Acquisitions require us to devote significant management attention and resources to integrating the acquired company’s business practices and operations with our own.
Potential difficulties we may encounter as part of the integration process, all of which could materially and adversely affect our business, financial condition, results of
operations, and cash flows, include the following:
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the potential inability to successfully combine the acquired company’s business with our legacy business in a manner that permits us to achieve the cost synergies
expected to be achieved when expected, or at all, and other benefits anticipated to result from such transaction;
challenges optimizing the customer information and technology of the two companies, including the goal of consolidating to one laboratory information system and one
billing system;
challenges effectuating any diversification strategy, including challenges achieving revenue growth from sales of each company’s products and services to the customers
of the other company;
difficulties offering products and services across our expanded portfolio;
the need to revisit assumptions about reserves, revenues, capital expenditures, and operating costs, including expected synergies;
challenges faced by a potential diversion of the attention of our management as a result of the integration, which in turn could adversely affect our ability to maintain
relationships with customers, employees and other constituencies or our ability to achieve the anticipated benefits of such transaction;
the potential loss of key employees, customers, managed care contracts or strategic partners, or the ability to attract or retain key management and other key personnel,
which could have an adverse effect on our ability to integrate and operate the acquired business;
complexities associated with managing the combined businesses, including difficulty addressing possible differences in corporate cultures and management philosophies
and the challenge of integrating complex systems, technology, networks and other assets of each of the companies in a seamless manner that minimizes any adverse
impact on customers, suppliers, employees and other constituencies;
costs and challenges related to the integration of the acquired company’s internal controls over financial reporting with ours; and
potential unknown liabilities and unforeseen increased expenses.
We cannot be assured that all of the goals and anticipated benefits of an acquisition will be achievable, particularly as the achievement of the benefits are in many important
respects subject to factors that we do not control. These factors would include such things as the reactions of third parties with whom we enter into contracts and to business and
the reactions of investors and analysts.
If we cannot integrate our legacy business with any future business we may acquire successfully, we may fail to realize the expected benefits of such transaction, including the
anticipated cost synergies. We could also encounter additional transaction and integration costs or be subject to other factors that affect preliminary estimates.
We may incur greater costs than anticipated, which could result in sustained losses.
We use reasonable efforts to assess and predict the expenses necessary to pursue our business strategies. However, implementing our business strategies may require more
employees, capital equipment, supplies or other expenditure items than management has predicted, particularly as we continue to assess any further needs resulting from the
integration of Genoptix. Similarly, the cost of compensating additional management, employees and consultants or other operating costs may be more than we estimate, which
could result in ongoing and sustained losses.
Other manufacturers may discontinue or recall testing products used in our business.
We rely heavily on reagents, test kits and instruments manufactured by third parties in our testing services. From time to time, manufacturers discontinue or recall the reagents,
test kits or instruments used by us to perform laboratory testing. Such discontinuations or recalls could adversely affect our costs, testing volume, costs and revenues.
We may face fluctuations in our results of operations and we are subject to seasonality in our business which could negatively affect our business operations.
Management expects that our results of operations may fluctuate significantly in the future as a result of a variety of factors, including, but not limited to: (i) the continued rate
of growth, usage and acceptance of our products and services; (ii) demand
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for our products and services; (iii) the introduction and acceptance of new or enhanced products or services by us or by competitors; (iv) our ability to anticipate and effectively
adapt to developing markets and to rapidly changing technologies; (v) our ability to attract, retain and motivate qualified personnel; (vi) the initiation, renewal or expiration of
significant contracts with any major clients; (vii) pricing changes by us, our suppliers or our competitors; (viii) seasonality; and (ix) general economic conditions and other
factors. Accordingly, future sales and operating results are difficult to forecast. Our expenses are based in part on our expectations as to future revenues and to a significant
extent are relatively fixed, at least in the short-term. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly,
any significant shortfall in relation to our expectations would likely have an immediate adverse impact on our business, results of operations and financial condition. In
addition, we may determine from time to time to make certain pricing or marketing decisions or acquisitions that could have a short-term material adverse effect on our
business, results of operations and financial condition and may not result in the long-term benefits intended. Furthermore, in Florida, historically our largest referral market for
laboratory testing services, a meaningful percentage of the population, returns to homes in the Northern United States to avoid the hot summer months. This combined with the
usual summer vacation schedules of our clients usually results in seasonality in our business. Because of all of the foregoing factors, our operating results in future periods could
be less than the expectations of investors.
We depend substantially upon third parties for payment of services, which could have a material adverse effect on our cash flows and results of operations.
Our business consists of clinical laboratories that provide medical testing services for doctors, hospitals, and other laboratories on patient specimens that are sent to our
laboratory. In the case of some specimen referrals that are received for patients that are not in-patients or out-patients at a hospital or institution or otherwise sent by another
reference laboratory, we typically bill the patient’s insurance company or a government program for our services. As such, we rely on the cooperation of numerous third-party
payers, including but not limited to Medicare, Medicaid, and various insurance companies, to get paid for performing services on behalf of our clients and their patients. The
amount of such third-party payments is governed by contractual relationships in cases where we are a participating provider for a specified insurance company or by established
government reimbursement rates in cases where we are an approved provider for a government program such as Medicare or Medicaid. However, we do not have contractual
relationships with some of the insurance companies with whom we deal, nor are we necessarily able to become an approved provider for all government programs. In such
cases, we are deemed to be a non-participating provider and there is no contractual assurance that we will be able to collect the amounts billed to such insurance companies or
government programs. Currently, we are not a participating provider with some of the insurance companies we bill for our services. Until such time we become a participating
provider with such insurance companies, there can be no contractual assurance that we will be paid for the services we bill to such insurance companies or patients, and such
third-parties may change their reimbursement policies for non-participating providers in a manner that may have a material adverse effect on our cash flow or results of
operations. When new Current Procedural Terminology (“CPT”) codes are introduced by the American Medical Association it often takes time for commercial insurance
providers to recognize the new codes, which can significantly impact the timing of payments, if any, and can increase our days-sales-outstanding. Medicare has also, at times,
issued codes or coding guidance that conflicts with the AMA CPT coding, which can cause confusion when secondary insurance is involved. Insurance companies may also try
to steer business away from us towards in-network providers by sending letters to physicians and even imposing financial penalties if they continue to send us business.
We may fail to protect our facilities, which could have a material adverse effect on our business, results of operations and financial condition.
Our operations are dependent in part upon our ability to protect our laboratory operations against physical damage from explosions, fire, floods, hurricanes, earthquakes, power
loss, telecommunications failures, break-ins and similar events. We do not presently have an emergency back-up generator in place at our Tampa, Florida, Nashville, Tennessee,
Atlanta, Georgia, Rolle, Switzerland or Fresno, California laboratories locations which would otherwise mitigate to some extent the effects of a prolonged power outage. The
occurrence of any of these events could result in interruptions, delays or cessations in service to clients, which could have a material adverse effect on our business, results of
operations and financial condition.
The steps we have taken to protect our proprietary rights may not be adequate, which could result in infringement or misappropriation by third-parties.
We regard our copyrights, trademarks, trade secrets and similar intellectual property as critical to our success, and we rely upon trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees, clients, partners and others to protect our proprietary rights. The steps taken by us to protect our
proprietary rights may not be adequate or third parties may infringe or misappropriate our copyrights, trademarks, trade secrets and similar proprietary rights. In addition, other
parties may assert infringement claims against us.
We are dependent on key personnel and need to hire additional qualified personnel in order for our business to succeed.
Our performance is substantially dependent on the performance of our senior management and key technical personnel. In particular, our success depends substantially on the
continued efforts of our senior management team. The loss of the services of any of our executive officers, our medical staff, our laboratory directors or other key employees
could have a material
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adverse effect on our business, results of operations and our financial condition. Our future success also depends on our continuing ability to attract and retain highly qualified
managerial and technical personnel, as we grow. Competition for such personnel is intense and we may not be able to retain our key managerial and technical employees or may
not be able to attract and retain additional highly qualified managerial and technical personnel in the future. The inability to attract and retain the necessary managerial and
technical personnel could have a material adverse effect upon our business, results of operations and financial condition.
Additionally, our ability to retain existing clients for our specialized diagnostic services and attract new clients is dependent upon retaining existing sales representatives and
hiring and training new sales representatives, which is an expensive and time-consuming process. We face intense competition for qualified sales personnel and our inability to
hire or retain an adequate number of sales representatives could limit our ability to maintain or expand our business and increase sales. Even if we are able to increase our sales
force, our new sales personnel may not commit the necessary resources or provide sufficient high quality service and attention to effectively market and sell our services. If we
are unable to maintain and expand our marketing and sales networks or if our sales personnel do not perform to our standards, we may be unable to maintain or grow our
existing business and our results of operations and financial condition will likely suffer accordingly. If a sales representative ceases employment, we risk the loss of client
goodwill based on the impairment of relationships developed between the sales representative and the healthcare professionals for whom the sales representative was
responsible. This is particularly a risk if the representative goes to work for a competitor, as the healthcare professionals that are our clients may choose to use a competitor’s
services based on their relationship with our former sales representative.
Further, non-compliant activities and unlawful conduct by sales and marketing personnel could give rise to significant risks under the AKS. We require extensive,
comprehensive training of all sales and marketing personnel, but cannot guarantee that every staff member will comply with the training. Thus, in addition to the cost of training
sales and marketing personnel, we could face liability under the AKS for non-compliance by individuals engaged in prohibited sales and marketing activities.
Failure in our information technology systems could significantly increase testing turn-around time or billing processes and otherwise disrupt our operations.
Our laboratory operations depend, in part, on the continued performance of our information technology systems. Our information technology systems are potentially vulnerable
to physical or electronic break-ins, computer viruses and similar disruptions. Sustained system failures or interruption of our systems in one or more of our laboratory operations
could disrupt our ability to process laboratory requisitions, perform testing, provide test results in a timely manner and/or bill the appropriate party. Breaches with respect to
personally identifiable information and protected health information (“PHI”) could result in violations of the Health Insurance Portability and Accountability Act of 1996
(“HIPAA”), the Health Information Technology for Economic and Clinical Health Act, (“HITECH Act”), and analogous state laws that protect the privacy, confidentiality and
security of such information, and risk the imposition of significant fines and penalties. Failure of our information technology systems could adversely affect our business,
results of operations and financial condition.
Performance issues, service interruptions or price increases by our shipping carrier could adversely affect our business, results of operations and financial condition,
and harm our reputation and ability to provide our specialized diagnostic services on a timely basis.
Expedited, reliable shipping is essential to our operations. One of our marketing strategies entails highlighting the reliability of our point-to-point transport of patient samples.
We rely heavily on a single provider of transport services, FedEx Corporation (the “Carrier”) for reliable and secure point-to-point transport of patient samples to our laboratory
and enhanced tracking of these patient samples. Should the Carrier encounter delivery performance issues such as loss, damage or destruction of a sample, it may be difficult to
replace our patient samples in a timely manner and such occurrences may damage our reputation and lead to decreased demand for our services and increased cost and expense
to our business. In addition, any significant increase in shipping rates could adversely affect our operating margins and results of operations. Similarly, strikes, severe weather,
natural disasters or other service interruptions by delivery services we use would adversely affect our ability to receive and process patient samples on a timely basis. If the
Carrier or we were to terminate our relationship, we would be required to find another party to provide expedited, reliable point-to-point transport of our patient samples. There
are only a few other providers of such nationwide transport services, and there can be no assurance that we will be able to enter into arrangements with such other providers on
acceptable terms, if at all. Finding a new provider of transport services would be time-consuming and costly and result in delays in our ability to provide our specialized
diagnostic services. Even if we were to enter into an arrangement with such provider, there can be no assurance that they will provide the same level of quality in transport
services currently provided to us by the Carrier. If the new provider does not provide the required quality and reliable transport services, it could adversely affect our business,
reputation, results of operations and financial condition.
We use biological and hazardous materials that require considerable expertise and expense for handling, storage or disposal and may result in claims against us
We work with hazardous materials, including chemicals, biological agents and compounds, blood samples and other human tissue that could be dangerous to human health and
safety or the environment. Our operations also produce hazardous and bio hazardous waste products. Federal, state and local laws and regulations govern the use, generation,
manufacture, storage,
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handling and disposal of these materials and wastes. Compliance with applicable environmental laws and regulations may be expensive, and current or future environmental
laws and regulations may impair business efforts. If we do not comply with applicable regulations, we may be subject to fines and penalties. In addition, we cannot entirely
eliminate the risk of accidental injury or contamination from these materials or wastes. Our general liability insurance and/or workers’ compensation insurance policy may not
cover damages and fines arising from biological or hazardous waste exposure or contamination. Accordingly, in the event of contamination or injury, we could be held liable
for damages or penalized with fines in an amount exceeding our resources, and our operations could be suspended or otherwise adversely affected.
The price of our common stock may fluctuate significantly.
The price of our common stock has been, and is likely to continue to be, volatile, which means that it could decline substantially within a short period of time. The price of our
common stock could fluctuate significantly for many reasons including the following:
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future announcements concerning us or our competitors;
regulatory developments and enforcement actions bearing on advertising, marketing or sales;
reports and recommendations of analysts and whether or not we meet the milestones and metrics set forth in such reports; gaining or losing large customers or managed
care plans;
introduction of new products or services and related insurance coverage;
acquisition or loss of significant manufacturers, distributors or suppliers or an inability to obtain sufficient quantities of materials needed to provide our services;
quarterly variations in operating results;
business acquisitions or divestitures;
changes in the regulation of Laboratory Developed Tests (“LDTs”);
changes in governmental or third-party reimbursement practices and rates; and fluctuations in the economy, political events or general market conditions.
In addition, stock markets in general and the market for shares of health care stocks in particular, have experienced extreme price and volume fluctuations in recent years,
fluctuations that frequently have been unrelated to the operating performance of the affected companies. These broad market fluctuations may adversely affect the market price
of our common stock. The market price of our common stock could decline below its current price and the market price of our shares may fluctuate significantly in the future.
These fluctuations may be unrelated to our performance.
An epidemic of the coronavirus disease is ongoing in China and other parts of the world and may adversely affect our operations and financial condition.
An epidemic of the coronavirus disease is ongoing in China and other parts of the world. As the outbreak is still evolving, much of its impact remains unknown. It is impossible
to predict the effect and potential spread of the coronavirus in China and globally. Should the coronavirus continue to spread or not be contained in China or other parts of the
world, our business operations could be delayed or interrupted. China has implemented travel bans to contain the coronavirus, and several countries are placing certain
limitations on travelers. If bans are implemented and extended to other countries, our business operations could be adversely affected.
Risks Relating to Regulation
If we were required to conduct additional clinical trials prior to continuing to sell our current tests or launching any other tests we may develop, those trials could
result in delays or failure to obtain necessary regulatory approvals, which could harm our business.
In the event that, in the future, the FDA begins to regulate our tests, it may require additional pre-market clinical testing prior to submitting a regulatory notification or
application for commercial sales. Such pre-market clinical testing could delay the commencement or completion of clinical testing, significantly increase our test development
costs, delay commercialization of any future tests, and interrupt sales of our current tests. Many of the factors that may cause or lead to a delay in the commencement or
completion of clinical trials may also ultimately lead to delay or denial of regulatory clearance or approval. The commencement of clinical trials may be delayed due to
insufficient patient enrollment, which is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to clinical
sites and the eligibility criteria for the clinical trial.
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We may find it necessary to engage contract research organizations to perform data collection and analysis and other aspects of our clinical trials, which might increase the cost
and complexity of our trials. We may also depend on clinical investigators, medical institutions and contract research organizations to perform the trials. If these parties do not
successfully carry out their contractual duties or obligations or meet expected deadlines, or if the quality, completeness or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to our clinical protocols or for other reasons, our clinical trials may have to be extended, delayed or terminated. Many of these factors
would be beyond our control. We may not be able to enter into replacement arrangements without undue delays or considerable expenditures. If there are delays in testing or
approvals as a result of the failure to perform by third parties, our research and development costs would increase, and we may not be able to obtain regulatory clearance or
approval for our tests. In addition, we may not be able to establish or maintain relationships with these parties on favorable terms, if at all. Each of these outcomes would harm
our ability to market our tests and/or to achieve sustained profitability.
Proposed government regulation of LDTs may result in delays to launching certain laboratory tests and increase our costs to implement new tests.
We frequently develop diagnostic tests for clients that cannot currently be provided using test kits approved or cleared by the FDA. The FDA has been considering changes to
the way that it regulates these Laboratory Developed Tests. Currently all LDTs are conducted and offered in accordance with the CLIA, and individual state licensing
procedures. The FDA has published a draft guidance document that would require FDA clearance or approval of a subset of LDTs, as well as a modified approach for some
lower risk LDTs that may require FDA oversight short of the full premarket approval or clearance process. Congress may enact legislation to provide a regulatory framework
for the FDA’s role with regard to LDTs. As a result, there is a risk that the FDA’s proposed regulatory process could delay the offering of certain tests and result in additional
validation costs and fees. There is also an associated risk for us that some tests currently offered might become subject to FDA premarket approval or clearance. This FDA
approval or clearance process may be time-consuming and costly, with no guarantee of ultimate approval or clearance.
On July 31, 2014 the FDA issued a notification to Congress of the “Anticipated Details of the Draft Guidance for Industry, Food and Drug Administration Staff, and Clinical
Laboratories: Framework for Regulatory Oversight of Laboratory Developed Tests,” or the Draft LDT Guidance. As described in this notification, the FDA planned to provide
draft guidance to clinical laboratories that develop their own LDTs regarding how the FDA intends to regulate such laboratories under the Federal Food, Drug, and Cosmetic
Act. On October 3, 2014 the FDA issued the draft guidance to clinical laboratories. The regulatory framework will use a risk-based approach to enforce the FDA’s premarket
review requirements, and for high-risk tests, the framework may require laboratories to use FDA-approved tests, if available, rather than LDTs. If implemented, the framework
outlined in the Draft LDT Guidance may also require us to obtain premarket clearance or approval for certain of our LDTs. Implementation of this framework would include a
lengthy phase-in period ranging from two to nine years depending on the risk assessment rating of each particular test. The FDA provided an opportunity for public comment
through February 2015 and received numerous public comments in response to the Draft LDT Guidance. In January 2017 the FDA announced that it would not issue a final
guidance on the oversight of LDTs at the request of various stakeholders to allow for further public discussion on an appropriate oversight approach, and to give congressional
authorizing committees the opportunity to develop a legislative solution. At the same time, Congress, the FDA, and various industry stakeholders have worked to provide
recommendations for comprehensive reform of LDTs. Recently, Congress has submitted a legislative discussion draft, the Diagnostic Accuracy and Innovation Act (“DAIA”)
to the FDA and requested technical assistance on the draft. FDA's technical assistance consisted of recommendations for significant changes in the bill. In December 2018,
Congress released an updated bill, the Verifying Accurate Leading-edge IVCT Development (“VALID”) Act that is largely consistent with the FDA's technical assistance on
DAIA. However, it remains unknown whether Congress will enact legislation regulating LDTs and, if so, whether the legislation will be similar to the framework described in
the Draft LDT Guidance, or in the VALID act. This legislation and resulting FDA regulation may result in increased regulatory burdens for us to register and continue to offer
our tests or to develop and introduce new tests and may increase our costs. We do not yet know which of our tests would be classified as high-risk and would require a full FDA
approval. If such approval was required, we cannot be certain that our tests would obtain FDA approval or clearance.
If the FDA and/or congressional authorizing committees begin to regulate our tests, it could require a significant volume of applications with the FDA and/or document
responses to congressional authorizing committees which would be burdensome. Furthermore, FDA and/or congressional authorizing committees could take a long time to
review such applications and/or document responses if every laboratory in the country files a large volume of applications and/or document responses for each of their LDTs.
In November of 2017, CMS initiated a national coverage analysis for the use of Next Generation Sequencing “NGS” diagnostic tests for patients with advanced cancer. The
proposed decision memo was released and open to a public comment period. On March 16, 2018, CMS issued a final decision memorandum for NGS as a diagnostic laboratory
test and determined it to be reasonable and necessary and covered nationally, when performed in a CLIA-certified laboratory, when ordered by a treating physician and when all
of the following requirements are met: (a) the patient has either recurrent, relapsed, refractory, metastatic, or advanced stages III or IV cancer; (b) the patient has either not been
previously tested using the same NGS test for the same primary diagnosis of cancer or has had repeat testing using the same NGS test only when a new primary cancer
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diagnosis is made by the treating physician; and (c) the patient has decided to seek further cancer treatment (e.g., therapeutic chemotherapy). CMS also determined that the
diagnostic laboratory test using NGS must have: FDA approval or clearance as a companion in vitro diagnostic; an FDA approved or cleared indication for use in that patient’s
cancer; and results provided to the treating physician for management of the patient using a report template to specify treatment options. On October 29, 2019, CMS issued a
proposed decision memo open to a public comment period that would expand coverage of NGS test when performed in a CLIA-certified laboratory, when ordered by a treating
physician and when all of the following requirements are met (a) the patient has ovarian or breast cancer; (b) the patient has clinical indications for germline (inherited) testing;
(c) the patient has risk factors for germline (inherited) breast or ovarian cancer; and (d) the patient has not been previously tested using NGS. These CMS changes to
reimbursement for NGS testing could directly affect our revenue for this test type.
Healthcare reform programs may impact our business and the pricing we receive for our services.
In March of 2010, health care reform legislation known as the “Patient Protection and Affordable Care Act,” also known as the ACA, was passed into law. The ACA also makes
changes that are expected to significantly impact the pharmaceutical and medical device industries and clinical laboratories. For example, the ACA contains several provisions
that seek to limit Medicare spending in the future. One key provision in the ACA is the establishment of “Accountable Care Organizations,” or (“ACOs”), under which hospitals
and physicians are able to share savings that result from improved coordination of health care. We cannot predict how the continued establishment and implementation of these
new business models will impact our business. There is the possibility that value-based payment models, such as ACOs, will drive down the utilization and/or reimbursement
rates for our services. We may not be able to gain access into certain ACOs. These changes could have an adverse and material impact on our operations.
The ACA provided for states to create health insurance “Marketplaces” where individuals can compare and enroll in Qualified Health Plans, (“QHPs”). Individuals with an
income less than 400% of the federal poverty level that purchase insurance on a Marketplace may be eligible for federal subsidies to cover a portion of their health insurance
premium costs and cost-sharing of co-insurance or co-pay obligations. Our patients may be enrolled in QHPs, and we may begin to submit bills to QHPs for services we
provide. The presence of federal funds in QHPs in the form of subsidies and cost-sharing may subject providers to heightened government scrutiny and enforcement, which
could significantly increase the cost of compliance and could materially impact our operations. For example, it is not clear whether the availability of these federal subsidies
classifies a QHP as a federal healthcare program, particularly for purposes of federal fraud and abuse laws. In letters published on October 30, 2013 and February 6, 2014, the
former Secretary of the Department of Health & Human Services, (“DHHS”), Kathleen Sebelius, indicated that DHHS does not consider QHPs to be federal healthcare
programs. However, a judge may not agree with this statement by Secretary Sebelius, and other government regulators, including, but not limited to the current of future
Secretary of the DHHS, may take a different position. For example, subsequent letters from U.S. Senator Charles Grassley to Secretary Sebelius and Attorney General Eric
Holder on November 7, 2013 and February 12, 2014 indicate that this issue remains an outstanding question. If QHPs are classified as federal healthcare programs, it could
significantly increase our costs of compliance.
In January 2017, Congress voted to adopt a budget resolution for fiscal year 2017, or the Budget Resolution, that authorizes the implementation of legislation that would repeal
portions of the ACA. Further, in January 2017, President Trump signed an Executive Order directing federal agencies with authorities and responsibilities under the ACA to
waive, defer, grant exemptions from, or delay the implementation of any provision of the ACA that would impose a fiscal or regulatory burden on states, individuals, healthcare
providers, health insurers, or manufacturers of pharmaceuticals or medical devices. In December of 2017, President Trump signed into law Public Law No. 115-97, which made
changes to the tax code and included, among other things, a repeal of the ACA’s penalties for the individual mandate, a provision that required individuals to buy health
insurance or pay a fine. On December 14, 2018 a federal district court judge in the Northern District of Texas ruled that Public Law No. 115-97 rendered the individual mandate
unconstitutional and further ruled that the rest of the ACA was inseverable from the individual mandate, rendering the ACA in its entirety invalid. In December 2019, the U.S.
Fifth Circuit Court of Appeals held that the individual mandate is unconstitutional because it can no longer be read as a tax, and there is no other constitutional provision that
justifies this exercise of congressional power, and remanded the severability question back to the district court to provide additional analysis of the provisions of the ACA as
they currently exist. Additionally, the ACA continues to be challenged in other lawsuits. Congress also could consider subsequent legislation to replace elements of the ACA
that are repealed or ruled invalid. Because of the continued uncertainty about the implementation and constitutionality of the ACA, there can be no assurance at this time that
the implementation (or repeal) of these provisions, or the ACA as a whole, will not have a material adverse effect on our business.
Steps taken by government payers, such as Medicare and Medicaid to control the utilization and reimbursement of healthcare services, including esoteric testing may
diminish our net revenue.
We face efforts by government payers to reduce utilization as well as reimbursement for laboratory testing services. Changes in governmental reimbursement may result from
statutory and regulatory changes, prospective and/or retroactive rate adjustments, administrative rulings and other policy changes.
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From time to time, legislative freezes and updates affect some of our tests that are reimbursed by the Medicare program under the Medicare Physician Fee Schedule, (“MPFS”),
or the Clinical Laboratory Fee Schedule, (“CLFS”). The MPFS is updated on an annual basis. In the past, the MPFS was updated using a prescribed statutory formula; (i.e., the
sustainable growth rate formula). The Medicare Access and CHIP Reauthorization Act of 2015, (“MACRA”), repealed the previous statutory formula and specified new annual
conversion factors for calendar years 2015 and beyond. If the new annual conversion factor results in negative reimbursement in future years, the resulting decrease in payment
may adversely affect our revenue, business, operating results, financial condition and prospects.
In addition, recent laws have made changes to Medicare reimbursement for our tests that are reimbursed under the CLFS, many of which have already gone into effect. In June
2016, CMS published the Clinical Laboratory Fee CLFS final rule entitled “Medicare Program: Medicare Clinical Diagnostic Laboratory Tests Payment System” (CMS-1621-
F). The final rule provides regulations to implement the provisions of the Protecting Access to Medicare Act of 2014, (“PAMA”), which was signed into law in April 2014.
Under the final rule, laboratories, including physician office laboratories, are required to report private payer rate and volume data if they:
•
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Have $12,500 or more in Medicare revenues from laboratory services on the CLFS, and
Receive more than 50 percent of their Medicare revenues from CLFS or PFS during a data collection period.
Tests that meet the criteria for being considered new advanced tests will be paid at actual list charge during an initial period of three calendar quarters. Once the initial period is
over, payment for new, advanced tests would be based on the weighted median private payer rate reported by the single laboratory that performs the new ADLT. Advanced tests
are tests furnished by only one laboratory that include a unique algorithm and, at a minimum, are an analysis of RNA, DNA or proteins or are cleared or approved by the FDA.
Applicable laboratories must report data that includes the payment rate (reflecting all discounts, rebates, coupons and other price concessions) and the volume of each test that
was paid by each private payer (including health insurance issuers, group health plans, Medicare Advantage plans and Medicaid managed care organizations). The definition of
“applicable” laboratory may exclude certain types of laboratories that generally receive more favorable pricing than other laboratories, and thus the make-up of laboratories
reporting pricing data to CMS under the final rule may result in lower overall pricing data. Beginning in 2017, the Medicare payment rate for each clinical diagnostic lab test is
equal to the weighted median amount for the test from the most recent data collection period. For example, applicable laboratories were required to collect private payer data
from January 1, 2016 through June 30, 2016 and report it to CMS by March 31, 2017. The new Medicare CLFS rates (based on weighted median private payer rates) were
released in November 2017 and were effective on January 1, 2018. For the years 2017 through 2019, the amount of reduction in the Medicare rate (if any) shall not exceed 10
percent from the prior year’s rate. From January 1, 2019 through June 30, 2019, applicable laboratories are required to collect private payer data and report it to CMS by March
31, 2021. The new Medicare CLFS rates (based on weighted median private payer rates) will be released in November 2020 and will become effective January 1, 2021. For
2020, any reduction in the Medicare rate shall not exceed 10 percent of the 2019 rates, and for the years 2021 through 2023, any reduction in the Medicare rate shall not exceed
15 percent from the prior year’s rate. It is too early to predict the impact on reimbursement for our tests reimbursed under the CLFS, though we believe the government’s goal is
to reduce Medicare program payments for CLFS tests. Specifically, CMS projected that the effect of this rule on the Medicare program will be a savings of $360 million in
program payments for CLFS tests furnished in FY 2017, and a savings of $5.14 billion over 10 years, although estimates by the Congressional Budget Office have been
significantly less. CMS also finalized its proposal that a laboratory’s failure to comply with reporting obligations, or a laboratory that makes a misrepresentation or omission in
reporting required information, could lead to liability under the Civil Monetary Penalties Law.
Also under PAMA, CMS is required to adopt temporary billing codes to identify new tests and new advanced diagnostic laboratory tests that have been cleared or approved by
the FDA. For an existing test that is cleared or approved by the FDA and for which Medicare payment is made, CMS is required to assign a unique billing code if one has not
already been assigned by the agency. Further, PAMA provides special payment status to “advanced diagnostic laboratory tests,” (“ADLTs”), to allow such ADLTs to be paid
using their actual list charge amount during a certain time frame. We cannot determine at this time the full impact of the new law on our business, financial condition and results
of operations.
CMS also adopts regulations and policies, from time to time, revising, limiting or excluding coverage or reimbursement for certain of the tests that we perform. Likewise, many
state governments are under budget pressures and are also considering reductions to their Medicaid fees. Further, Medicare, Medicaid and other third party payers audit for
overutilization of billed services. Even though all tests performed by us are ordered by our clients, who are responsible for establishing the medical necessity for the tests
ordered, we may be subject to recoupment of payments, as the recipient of the payments for such tests, in the event that a third party payer such as CMS determines that the tests
failed to meet all applicable criteria for payment. When third party payers like CMS revise their coverage regulations or policies, our costs generally increase due to the
complexity of complying with additional administrative requirements. Furthermore, Medicaid reimbursement and regulations vary by state. Accordingly, we are subject to
varying administrative and billing regulations, which also increase the complexity of servicing such programs and our administrative costs. Finally, state budget pressures have
encouraged states to consider several courses
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that may impact our business, such as delaying payments, restricting coverage eligibility, service coverage restrictions and imposing taxes on our services.
In certain jurisdictions, Palmetto GBA administers the Molecular Diagnostic Services Program, (“MolDx”), and establishes coverage and reimbursement for certain molecular
diagnostic tests, including many of our tests. To obtain Medicare coverage for a molecular diagnostic test (FDA approved or LDT), laboratories must apply for and obtain a
unique test identifier or what is known as a “Z” code. For newly developed tests or for established tests that have not been validated for clinical and analytical validity and
clinical utility, laboratories must submit a detailed dossier of clinical data to substantiate that the test meets Medicare’s requirements for coverage. We have received favorable
coverage for many of our molecular tests, however we have also received non-coverage determinations for many newer tests. The field of molecular diagnostics is evolving very
rapidly, and clinical studies on many new tests are still underway. We cannot be assured that some of our molecular tests will ever be covered services by Medicare, nor can we
determine when the medical literature will meet the standard for coverage that Medicare administrative contractors have set.
In recent years, Medicare has encouraged beneficiaries to participate in managed care programs, known as “Medicare Advantage” programs, and has encouraged beneficiaries
from the traditional fee-for-service Medicare program to switch to Medicare Advantage programs. This has resulted in rapid growth of health insurance and managed care plans
offering Medicare Advantage programs and growth in Medicare beneficiary enrollment in these programs. Also in recent years, many states have increasingly mandated that
Medicaid beneficiaries enroll in managed care arrangements. If these efforts continue to be successful, we may experience a further shift of traditional Medicare and Medicaid
fee-for-service beneficiaries to managed care programs. As a result, we would be required to contract with those private managed care programs in order to be reimbursed for
services provided to their Medicare and Medicaid members. There can be no assurance that we will be successful in entering into agreements with these managed care programs
at rates of payment similar to those we realize from our non-managed care lines of business.
Effective January 1, 2018 CMS implemented an additional exception to the laboratory date of service rules. Prior to 2018, CMS’ 14-day rule prevented reference and
independent laboratories such as ours from billing Medicare directly for clinical laboratory tests or the technical component of pathology services if, among other things, the
tests were ordered less than 14 days following an outpatient’s discharge from the hospital. Instead, we would seek reimbursement from the hospital and the hospital would bill
Medicare. Effective January 1, 2018, certain molecular pathology tests and advanced diagnostic laboratory tests (“ADLTs”) that previously had to be billed or could be billed
by the hospital are now required to be billed by the performing laboratory if certain requirements are met. Since our client-bill pricing is typically higher for Molecular testing
than the Medicare fee schedule, we anticipate a reduction in revenue from this policy change. Under the MolDx program there are many policies that limit reimbursement on
certain tests based on diagnosis codes, and for certain tests there is no reimbursement regardless of the patient’s condition.
We expect the initiatives described above to continue and, if they do, to reduce reimbursements for clinical laboratory services, to impose more stringent cost controls on clinical
laboratory services and to reduce utilization of clinical laboratory services. These efforts, including changes in law or regulations that may occur in the future, may each
individually or collectively have a material adverse impact on our business, results of operations, financial condition and prospects.
Changes in regulations, payer policies or contracting arrangements with payers or changes in other laws, regulations or policies may adversely affect coverage or
reimbursement for our specialized diagnostic services, which may decrease our revenues and adversely affect our results of operations and financial condition.
Governmental payers, as well as private insurers and private payers, have implemented and will continue to implement measures to control the cost, utilization and delivery of
healthcare services, including clinical laboratory and pathology services. Congress and federal agencies, such as CMS, have, from time to time, implemented changes to laws
and regulations governing healthcare service providers, including specialized diagnostic service providers. These changes have adversely affected and may in the future
adversely affect coverage for our services. We also believe that healthcare professionals may not use our services if third-party payers do not provide adequate coverage and
reimbursement for them. These changes in federal, state, local and third-party payer regulations or policies may decrease our revenues and adversely affect our results of
operations and our financial condition. We will continue to be a non-contracting provider until such time as we enter into contracts with third-party payers with whom we are not
currently contracted until such time as we enter into contracts with such third-party payers. Because a portion of our revenues is from third-party payers with whom we are not
currently contracted, it is likely that we will be required to make positive or negative adjustments to accounting estimates with respect to contractual allowances in the future,
which may adversely affect our results of operations, our credibility with financial analysts and investors, and our stock price.
Failure to comply with environmental, health and safety laws and regulations, including the federal Occupational Safety and Health Administration Act, and the
Needlestick Safety and Prevention Act could result in fines and penalties and loss of licensure, and have a material adverse effect upon our business.
We are subject to licensing and regulation under federal, state and local laws and regulations relating to the protection of the environment and human health and safety,
including laws and regulations relating to the handling, transportation and disposal
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of medical specimens, infectious and hazardous waste and radioactive materials, as well as regulations relating to the safety and health of laboratory employees. The federal
Occupational Safety and Health Administration has established extensive requirements relating to workplace safety for health care employers, including clinical laboratories,
whose workers may be exposed to blood-borne pathogens such as HIV and the hepatitis B virus. These requirements, among other things, require work practice controls,
protective clothing and equipment, training, medical follow-up, vaccinations and other measures designed to minimize exposure to, and transmission of, blood-borne pathogens.
In addition, the Needlestick Safety and Prevention Act requires, among other things, that we include in our safety programs the evaluation and use of engineering controls such
as safety needles, if found to be effective at reducing the risk of needlestick injuries in the workplace.
Failure to comply with such federal, state and local laws and regulations could subject us to denial of the right to conduct business, fines, criminal penalties and/or other
enforcement actions, any of which could have a material adverse effect on our business. In addition, compliance with future legislation could impose additional requirements for
us, which may be costly.
Our net revenue will be diminished if payers do not adequately cover or reimburse our services.
There has been and will continue to be significant efforts by both federal and state agencies to reduce costs in government healthcare programs and otherwise implement
government control of healthcare costs. In addition, private payers continually seek ways to reduce and control overall healthcare costs, and increasing emphasis on managed
care in the United States will continue to put pressure on the pricing of healthcare services. Uncertainty exists as to the coverage and reimbursement status of new applications
and services. Third-party payers, including governmental payers such as Medicare and private payers, are scrutinizing new medical products and services and may not cover or
may limit coverage and the level of reimbursement for our services. Third-party insurance coverage may not be available to patients for any of our existing tests or for tests we
discover and develop, and a substantial portion of the testing for which we bill our hospital and laboratory clients is ultimately paid by third-party payers. Likewise, any pricing
pressure exerted by these third party payers on our clients may, in turn, be exerted by our clients on us. If government and other third-party payers do not provide adequate
coverage and reimbursement for our tests, it could adversely affect our operating results, cash flows and/or our financial condition.
Third party billing is extremely complicated and results in significant additional costs to us.
Billing for laboratory services is extremely complicated. Depending on the billing arrangement and applicable laws, we must bill various payers, such as patients, insurance
companies, Medicare, Medicaid, physician practices, employer groups, hospitals and other laboratories, all of which have different billing requirements. Additionally, we
undertake internal audits to evaluate compliance with applicable laws and regulations as well as internal compliance policies and procedures. Insurance companies and
government payers such as Medicare and Medicaid also impose routine external audits to evaluate payments, which adds further complexity to the billing process.
Among others, the primary factors which complicate our billing practices are:
•
•
•
•
•
pricing differences between our fee schedules and the reimbursement rates of the payers;
changes in payer rules or contracts;
disputes with payers as to the party who is responsible for payment;
disparity in coverage and information requirements among various carriers; and
differing pre-authorization requirements across payers.
We incur significant additional costs as a result of our participation in the Medicare and Medicaid programs, as billing and reimbursement for clinical laboratory services are
subject to considerable and complex federal and state regulations. The additional costs we expect to incur include those related to: (i) complexity added to our billing processes
and systems; (ii) training and education of our employees and clients; (iii) implementing compliance procedures and oversight; (iv) collections and legal costs; and (v) costs
associated with, among other factors, challenging coverage and payment denials and providing patients with information regarding claims processing and services, such as
advance beneficiary notices.
Our operations are subject to strict laws prohibiting fraudulent billing and other abuse, and our failure to comply with such laws could result in substantial penalties.
Of particular importance to our operations is ensuring compliance with federal and state laws prohibiting fraudulent billing and the retention of overpayments. In particular, if
we fail to comply with federal and state documentation, coding and billing rules, we could be subject to liability under the federal False Claims Act, including civil penalties,
loss of licenses and exclusion from the Medicare and Medicaid programs. The False Claims Act prohibits individuals and companies from knowingly submitting false claims
for payments to, or improperly retaining overpayments from, the government.
If an entity is determined to have violated the federal False Claims Act, it may be required to pay up to three times the actual damages sustained by the government, plus civil
penalties of between $10,461 and $52,308 for each separate false claim. Further, False Claims Act liability may lead to exclusion from participation in Medicare, Medicaid and
other federal healthcare programs. There are a number of potential bases for liability under the federal False Claims Act. For example, liability arises when an entity knowingly
submits, or causes another to submit, a claim for reimbursement to the federal government for a
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service which was not provided or which did not qualify for reimbursement. Submitting a claim with reckless disregard or deliberate ignorance of its truth or falsity could also
result in liability under the False Claims Act. Following enactment of the ACA, knowing retention of overpayments is also considered a false claim and could lead to liability
under the False Claims Act.
The False Claims Act’s “whistleblower” or “qui tam” provisions are being used with more frequency to challenge the reimbursement practices of providers and suppliers. Those
provisions allow a private individual to bring an action on behalf of the government alleging that the defendant has submitted false claims for payment to the government. The
government must decide whether to intervene in the lawsuit and whether to prosecute the case. If it declines to do so, the individual may pursue the case alone, although the
government must be kept apprised of the progress of the lawsuit. Whether or not the federal government intervenes in the case, it will receive the majority of any recovery. The
successful qui tam relator who brought the case is entitled to a portion of the proceeds and his or her attorneys’ fees and costs. In addition, various states have enacted laws
modeled after the federal False Claims Act, which prohibit submitting false claims for payment to the state or, in some states, to other commercial payers. If we fail to comply
with federal and state documentation, coding, and billing rules, we could be subject to liability under analogous state laws as well as criminal liability through a variety of
federal and state criminal statutes.
Government investigations of clinical laboratories have been ongoing for a number of years and are expected to continue in the future. When we submit bills for our services to
third-party payers, we must follow complex documentation, coding and billing rules which are based on federal and state laws, rules and regulations, various government
publications, and on industry practice. A large number of laboratories have entered into substantial settlements with the federal and state governments for alleged
noncompliance under these laws and rules. Private payers have also brought civil actions against laboratories which have resulted in substantial judgments. Failure to follow
these rules could result in potential civil liability under the False Claims Act, under which extensive financial penalties can be imposed. It could further result in criminal
liability under various federal and state criminal statutes. For example, there are various state and federal laws and rules regulating laboratory billing practices, such as
prohibiting a clinical laboratory from charging a higher price for tests ordered by a physician and provided by a third-party (anti-markup rules) as well as requiring a laboratory
performing certain laboratory tests to directly bill Medicare instead of the ordering provider (direct billing rules).
We submit thousands of claims for payment to governmental programs and private payers, and we cannot guarantee that there have not been errors in our claims. While we
maintain a robust compliance program that includes consistent, detailed review of our documentation, and coding and billing practices, the rules are frequently vague, complex,
and continually changing and we cannot assure that governmental authorities, private insurers or private whistleblowers will not challenge our practices. Such a challenge could
result in a material adverse effect on our business.
The failure to comply with significant government regulation and laboratory operations may subject us to liability, penalties or limitation of operations.
We are subject to extensive state and federal regulatory oversight. Specifically, our laboratories must satisfy federal requirements under CLIA and to maintain the appropriate
CLIA Certificate for all testing performed at the lab. Additionally, most states have adopted various laws and regulations setting standards for laboratories performing clinical
laboratory testing and requiring laboratories to obtain and maintain a state laboratory license before the laboratory is authorized to perform testing. These state licensure laws
address a host of requirements and often include permissible and prohibited practices involving digital health, including but not limited to telehealth and telepathology.
Upon periodic inspection or survey, our laboratory locations may be found to be non-compliant with CLIA requirements or with applicable state licensure or certification laws.
The sanctions for failure to comply with CLIA, state licensure requirements, or other applicable laws and regulations could include the suspension, revocation, or limitation of
the right to perform clinical laboratory services or receive compensation for those services, as well as the requirement to enter into a corrective action plan to monitor
compliance, and the imposition of civil or criminal penalties or administrative fines. In addition, any new legislation or regulation or the application of existing laws and
regulations in ways that we have not anticipated could have a material adverse effect on our business, results of operations and financial condition.
Existing federal laws governing Medicare and Medicaid, as well as some other state and federal laws, also regulate certain aspects of the relationship between healthcare
providers, including clinical laboratories, and their referral sources, including physicians, hospitals and other laboratories. Certain of these laws, including the federal Anti-
Kickback Statutes (“AKS”) and the federal physician self-referral law (the “Stark Law”) contain extremely broad proscriptions. Violation of these laws may result in criminal
penalties, exclusion from participation in the Medicare, Medicaid, and other federal healthcare programs, repayment of all reimbursement received by us related to services tied
to any impermissible referrals, and significant civil monetary penalties, as well as False Claims Act liability. We seek to structure our arrangements with physicians and other
clients to be in compliance with the federal AKS, Stark Law and similar state laws, and to keep up-to-date on developments concerning their application by various means,
including consultation with legal counsel and review of the annual Work Plan by the Office of the Inspector General (“OIG”) identifying targeted issues. We cannot guarantee,
however, that government authorities will not take a contrary view and impose civil monetary penalties and exclude us based on our arrangements with physicians and other
clients.
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The federal Civil Monetary Penalties Law, (“federal CMP Law”), imposes civil monetary penalties and potential exclusion from Medicare and Medicaid programs on any
person who offers or transfers remuneration to any patient who is a Medicare or Medicaid beneficiary, when the person knows or should know that the remuneration is likely to
induce the patient to receive medical services from a particular provider. The federal CMP Law applies, among other things, to many kinds of inducements or benefits provided
to patients, including complimentary items, services or transportation that are of more than nominal value. We have structured our operations and provision of services to
patients in a manner that we believe complies with the law and its interpretation by government authorities. We cannot guarantee, however, that government authorities will not
take a contrary view and impose civil monetary penalties and exclude us from participation in Medicare and Medicaid for past or present practices related to patient incentive,
coordination of care and need-based programs.
Furthermore, HIPAA, the HITECH Act, (as implemented through HIPAA’s privacy and security regulations) and similar state laws contain provisions that require the electronic
exchange of health information, such as claims submission and receipt of remittances, using standard transactions and code sets, which we refer to as “Standards”, and regulate
the use and disclosure of patient records and other PHI. These provisions, which address security and confidentiality of patient information as well as the administrative aspects
of claims handling, have very broad applicability and govern many healthcare providers, including physicians and clinical laboratories. Although we believe we are in material
compliance with the Standards, the HIPAA privacy and security regulations, and applicable state privacy and security laws, a failure to comply with these laws could have a
material adverse effect on our business, results of operations and our financial condition and could subject us to liability. Additionally, while there is no private right of action
under HIPAA, state Attorneys General may bring an action against a covered entity, such as us, for a violation of HIPAA, and the federal Office for Civil Rights can impose
fines and penalties.
The failure to comply with physician self-referral laws may subject us to liability, penalties or limitation of operations.
We are subject to the federal Stark Law, as well as similar state statutes and regulations, which prohibit payments for certain health care services, which are referred to as
designated health services (“DHS”), rendered as a result of referrals by physicians to DHS entities with which the physicians (or their immediate family members) have a
financial relationship. A “financial relationship” includes both an ownership interest and/or a compensation arrangement with a physician, both direct and indirect, and DHS
includes, but is not limited to, laboratory services. The Stark Law prohibits an entity that receives a prohibited DHS referral from seeking payment from Medicare for any DHS
services performed as a result of such a referral, unless an arrangement is carefully structured to satisfy every requirement of a regulatory exception. The Stark Law is a strict
liability statute, and thus any technical violation requires repayment of all “tainted” referrals, regardless of the intent, unless an exception applies. Penalties for violating the
Stark Law may include the denial of payment to an entity for the impermissible provision of DHS, the requirement to refund any amounts collected in violation of the Stark
Law, and civil monetary penalties of up to $25,372 for each violation and $169,153 for each circumvention arrangement or scheme. The amounts may be further increased by
civil monetary penalty increases imposed by the Bipartisan Budget Act of 2018. Other implications of a Stark Law violation may include exclusion from Medicare and
Medicaid programs, and potential False Claims Act liability, including via “qui tam” action.
Further, many states have promulgated self-referral laws and regulations similar to the federal Stark Law, but these vary significantly based on the state. In addition to services
reimbursed by Medicaid or government payers, often these state laws and regulations can encompass services reimbursed by private payers as well. Penalties for violating state
self-referral laws and regulations vary based on the state, but often include civil penalties, exclusion from Medicaid, and loss of licenses.
Our financial arrangements with physicians are governed by the federal Stark Law, and we rely on certain exceptions to the Stark Law with respect to such relationships. While
we believe that our financial relationships with physicians and physician practices are in compliance with applicable laws and regulations, we cannot guarantee that government
authorities would agree. If we are found by the government to be in violation of the Stark Law, we could be subject to significant penalties, including fines as specified above,
exclusion from participation in government and private payer programs and requirements to refund amounts previously received from government. Further, as our operations
expand into new states and jurisdictions, we must continually evaluate whether our relationships with physicians comply with that jurisdiction’s laws. This may require
structural and organizational modifications to our relationships with physicians which could adversely affect our results of operations and financial condition.
The failure to comply with Anti-Kickback laws may subject us to liability, penalties or limitation of operations
We are subject to the federal AKS, which prohibits the offer, payment, solicitation or receipt of any form of remuneration in return for referring, ordering, leasing, purchasing or
arranging for or recommending the ordering, purchasing or leasing of items or services payable by Medicare, Medicaid or any other federally funded healthcare program. The
AKS defines remuneration to include anything of value, in cash or in kind, and thus can implicate financial relationships involving payments not commensurate with fair market
value, such as in the form of space, equipment leases, professional or technical services or anything else of value.
The AKS is an “intent-based” statute, meaning that a violation occurs when one or both parties intend the remuneration to be in exchange for or to induce referrals. In 2010, the
ACA, amended the intent requirement of the AKS. A person or entity no longer needs to have actual knowledge of the statute or specific intent to violate it. In addition, the
ACA provides that a claim
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submitted for reimbursement for items or services resulting from a violation of the AKS constitutes a false or fraudulent claim for purposes of the federal False Claims Act.
There are a number of statutory exceptions and regulatory safe harbors protecting certain common activities from prosecution or other regulatory sanctions; however, the
exceptions and safe harbors are drawn narrowly, and practices that do not fit squarely within an exception or safe harbor may be subject to scrutiny. Violations of the AKS may
result in substantial civil or criminal penalties, including criminal fines of up to $102,522, imprisonment of up to ten years, civil penalties under the federal CMP Law of up to
$102,522 for each violation, plus three times the remuneration involved, civil penalties under the federal False Claims Act of a maximum of $52,308 for each claim submitted,
plus three times the amounts paid for such claims and exclusion from participation in the Medicare and Medicaid programs. If we face these penalties or exclusion from
participation in Medicare and Medicaid, it could significantly reduce our revenues and could have a material adverse effect on our business.
Further, most states have adopted similar anti-kickback laws prohibiting the offer, payment, solicitation or receipt of remuneration in exchange for referrals, and typically
impose criminal and civil penalties as well as loss of licenses. Some of these state laws apply to items and services paid for by private payers as well as by government payers.
In addition, many states have adopted laws prohibiting the splitting or sharing of fees between physicians and non-physicians, as well as between treating physicians and
referral sources. We believe our arrangements with physicians comply with the AKS, and state anti-kickback and fee splitting laws of the states in which we operate, however, if
government authorities were to disagree, we could be subject to civil and criminal penalties, and be required to restructure or terminate our contractual and other arrangements
with physicians. This could result in a loss of revenue and have a material adverse effect on our business.
Some states have also adopted laws prohibiting the corporate practice of medicine, or prohibiting business corporations from employing physicians or engaging in activities
considered to be the “practice of medicine.” In these states, we rely on service agreements with physicians and/or professional associations owned by physicians, to perform
needed professional pathology services. We cannot assure you that a physician or physician’s professional organization will not seek to terminate an agreement with us on any
basis, nor can we assure you that governmental authorities in those states will not seek termination of these arrangements on the basis of state laws prohibiting the corporate
practice of medicine.
A failure to comply with governmental payer regulations could result in our being excluded from participation in Medicare, Medicaid or other governmental payer
programs.
Tests which are reimbursed by Medicare and other Government payers (for example, State Medicaid programs) accounted for approximately 18%, 15% and 14% of our
revenues for the years ended December 31, 2019, 2018 and 2017, respectively. The Medicare program imposes extensive and detailed requirements on diagnostic service
providers, including, but not limited to, rules that govern how we structure our relationships with physicians, how and when we submit claims for reimbursement and how we
provide specialized diagnostic laboratory services. Further, we are prohibited from contracting with any individuals or entities who have been excluded from participation in
Medicare or Medicaid and are listed on the OIG’s List of Excluded Individuals and Entities List (“LEIE”) or in the System for Award Management, which includes the
previously independent Government Services Administration’s Excluded Parties List System (“GSA-EPLS”). Contracting with excluded individuals or entities, such as hiring
an excluded person or contracting with an excluded vendor, can result in significant penalties.
Our failure to comply with applicable Medicare, Medicaid and other governmental payer rules could result in our inability to participate in a governmental payer program, an
obligation to repay funds already paid to us for services performed, civil monetary penalties, criminal penalties, False Claims Act liability and/or limitations on the operational
function of our laboratory. If we were unable to receive reimbursement under a governmental payer program, a substantial portion of our revenues would be lost, which would
adversely affect our results of operations and financial condition.
Failure to comply with the HIPAA Privacy, Security and Breach Notification Regulations may increase our operational costs.
The HIPAA privacy and security regulations establish comprehensive federal standards with respect to the uses and disclosures of PHI by certain entities including health plans
and health care providers, and set standards to protect the confidentiality, integrity and availability of electronic medical records. The regulations establish a complex regulatory
framework governing the use and disclosure of PHI, including, for example, the circumstances under which uses and disclosures of PHI are permitted or required without a
specific authorization by the patient; a patient’s right to access, amend and receive an accounting of certain disclosures of PHI; the content of notices of privacy practices
describing how PHI is used and disclosed and individuals’ rights with respect to their PHI; and implementation of administrative, technical and physical safeguards to protect
privacy and security of PHI. The federal privacy regulations restrict our ability to use or disclose certain individually identifiable patient health information, without patient
authorization, for purposes other than payment, treatment or health care operations (as defined by HIPAA), except for disclosures for various public policy purposes and other
permitted purposes outlined in the privacy regulations. The HIPAA privacy and security regulations do not supersede state laws that may be more stringent; therefore, we are
required to comply with both federal privacy and security regulations and varying state privacy and security laws and regulations.
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The HIPAA privacy and security regulations also require healthcare providers like us to notify affected individuals, the Secretary of the U.S. Department of Health and Human
Services, and in some cases, the media, when PHI has been “breached”, as defined by HIPAA. Many states have similar breach notification laws. In the event of a breach, we
could incur substantial operational and financial costs related to mitigation and remediation, including preparation and delivery of notices to affected individuals. Additionally,
HIPAA, and its implementing regulations provide for significant civil fines, criminal penalties, and other sanctions for failure to comply with the privacy, security, and breach
notification rules, including for wrongful or impermissible use or disclosure of PHI. Although the HIPAA statute and regulations do not expressly provide for a private right of
action for damages, we could incur damages under state laws to private parties for the wrongful or impermissible use or disclosure of confidential health information or other
private personal information. Additionally, HIPAA allows state Attorneys General to bring an action against a covered entity, such as us, for a violation of HIPAA. We insure
some of our risk with respect to HIPAA security breaches, but operational costs and penalties associated with HIPAA breaches easily could exceed our insured limits.
We are subject to security risks which could harm our operations.
HIPAA imposes additional requirements, restrictions and penalties on covered entities and their business associates to, among other things, deter breaches of security. As a
result, required preventative and remedial actions, along with the aforementioned reporting requirements, and sanctions for a breach are stringent. Our electronic health records
system is periodically modified to meet applicable security standards. Despite the implementation of various security measures by us, our infrastructure may be vulnerable to
computer viruses, break-ins and other disruptive problems inadvertently introduced by authorized users such as employees and clients, or purposefully targeted by hackers and
other cybercriminals which could lead to interruption, delays or cessation in service to our clients. Further, such incidents, whether electronic or physical, could jeopardize the
security of confidential information, including PHI and other sensitive information stored in our computer systems related to clients, patients, and other parties connected
through us, which may deter potential clients and give rise to uncertain liability to parties whose security or privacy has been infringed. A significant security breach could
result in fines, loss of clients, damage to our reputation, direct damages, costs of repair and detection, costs to remedy the breach, government penalties, and other expenses. We
insure some of our risk with respect to security breaches but the occurrence of any of the foregoing events could have a material adverse effect on our business, results of
operations and our financial condition.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
We operate an international network of laboratories. Our corporate office and most of our laboratory facilities are leased except we own 43,560 square feet of our Carlsbad,
California facility. These leases expire at various dates through 2030. We believe that these locations are sufficient to meet our needs at existing volume levels and that, if
needed, additional space will be available at a reasonable cost.
The following table summarizes our facilities by type and location:
Location
Carlsbad, California
Aliso Viejo, California
Fort Myers, Florida
Houston, Texas
Geneva (Rolle), Switzerland
Nashville, Tennessee
Tampa, Florida
Singapore
Fresno, California
Atlanta, Georgia
Plantation, Florida
Purpose
Laboratory and administrative offices
Laboratory and administrative offices
Corporate headquarters and laboratory
Laboratory
Laboratory
Laboratory
Laboratory
Laboratory
Laboratory
Laboratory
Courier office
Square Footage
105,178
96,917
73,689
32,757
7,976
7,806
5,574
3,957
2,541
1,190
240
Our Switzerland and Singapore laboratories support our Pharma Services segment exclusively; all other locations support both segments of our business. For further financial
information about our segments see Note R, Segment Information, to our Consolidated Financial Statements included in this Annual Report.
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ITEM 3. LEGAL PROCEEDINGS
From time to time the Company is engaged in legal proceedings that arise in the ordinary course of business. The Company believes that any resulting liability from these
proceedings will not, either individually or in the aggregate have a material adverse effect on our consolidated financial position, results of operations, or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our common stock is listed on the NASDAQ Capital Market under the symbol “NEO”.
Holders of Common Stock
As of February 24, 2019, there were 631 stockholders of record of our common stock. The number of record holders does not include beneficial owners of common stock
whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
Dividends
We have never declared or paid cash dividends on our common stock. We intend to retain all future earnings to finance operations and future growth and, therefore, we do not
anticipate paying any cash dividends in the foreseeable future. Our financing arrangements contain certain restrictions on our ability to pay dividends on our common stock.
Equity Compensation Plan Information
The following table summarizes the securities authorized for issuance under equity compensation plans as of December 31, 2019:
Plan Category
Equity compensation plans approved by security holders:
Amended and Restated Equity Incentive Plan
(“Equity Incentive Plan”)
Employee Stock Purchase Plan (“ESPP”)
Total
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
Weighted average exercise
price of outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans
5,318,759 $
—
5,318,759 $
9.97
N/A
9.97
2,341,350 (a)
374,960 (b)
2,716,310
a.
b.
The Company’s Equity Incentive Plan was amended, restated and subsequently approved by a majority of shareholders on December 21, 2015 and amended and
subsequently approved by a majority of shareholders on May 25, 2017. The most recent amendment increased the maximum aggregate number of shares of the
Company’s common stock reserved and available for issuance under the Amended Plan to 18,650,000.
The Company’s Employee Stock Purchase Plan was amended, restated and subsequently approved by a majority of shareholders on June 6, 2013 and amended and
subsequently approved by a majority of shareholders on May 25, 2017 and June 1, 2018. The most recent amendment increased the maximum aggregate number of
shares reserved and available for issuance under the Plan to 1,500,000.
Currently, the Company’s Equity Incentive Plan, as amended on May 25, 2017 and the Company’s ESPP, as amended on June 1, 2018, are the only equity compensation plans
in effect.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
The following table sets forth information concerning our purchases of common stock for the periods indicated:
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Period of Repurchase
May 1, 2019 - May 31, 2019
August 1, 2019 - August 30, 2019
Total
Total Number of Shares
Purchased (a)
Average Price Paid per
Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
32,405 $
6,090
38,495 $
21.25
24.37
21.74
—
—
—
Maximum Number (or
Approximate Dollar Value) of
Shares that May Yet Be
Purchased Under the Plans or
Programs
—
—
—
a.
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.
Comparison of Cumulative Five Year Total Return
We have presented below the cumulative total return to our stockholders of $100 during the period from December 31, 2014, through December 31, 2019 in comparison to the
cumulative return on the S&P 500 Index and a customized peer group of six publicly traded companies during that same period. The peer group is made up of Qiagen N.V.,
Exact Sciences Corporation, Laboratory Corporation of America Holdings, Myriad Genetics, Inc. and Quest Diagnostics, Inc. Several of our closest competitors are part of
large pharmaceutical or other multi-national firms, or are privately held and, as such, we are unable to obtain financial information for them.
The results assume that $100 (with reinvestment of all dividends) was invested in our common stock, the index and in the peer group and its relative performance tracked
through December 31, 2019. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our common stock. The
performance graph set forth above shall not be deemed incorporated by reference into any filing by us under the Securities Act or the Exchange Act except to the extent that we
specifically incorporate such information by reference therein.
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NEOGENOMICS, INC.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of our historical consolidated financial data for the periods ended and at the dates indicated below. You are encouraged to read this information
together with our audited Consolidated Financial Statements and the related footnotes and “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” included elsewhere in this Annual Report.
The historical consolidated financial data for the years ended December 31, 2019, 2018 and 2017 (Statement of Operations Data and Other Cash Data) has been derived from
our audited Consolidated Financial Statements, which are included elsewhere in this Annual Report. The historical consolidated financial data for the years ended December
31, 2016 and 2015 has been derived from our audited Consolidated Financial Statements, which are not included in this Annual Report.
The historical consolidated financial data as of December 31, 2019 and 2018 (Balance Sheet Data) has been derived from our audited Consolidated Financial Statements, which
are included elsewhere in this Annual Report. The historical consolidated financial data (Balance Sheet Data) as of December 31, 2017, 2016 and 2015 has been derived from
our audited Consolidated Financial Statements, which are not included in this Annual Report.
We believe that the comparability of our financial results between the periods presented in the table below is significantly impacted by factors which are more fully described in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and the notes thereto included elsewhere
in this Annual Report.
Statement of Operations Data:
Net revenue
Cost of revenue
Gross profit
Operating expenses
Income (loss) from operations
Interest and other expense (income)
Income tax (benefit) expense
Net income (loss)
Deemed dividends on preferred stock and amortization of beneficial
conversion feature
Gain on redemption of preferred stock
Net income (loss) due to common stockholders
Net income (loss) per common share – Basic
Net income (loss) per common share – Diluted
Other Cash Data:
Net cash – operating activities
Net cash – investing activities
Net cash – financing activities
2019
2018 (1)
2017 (2)
2016
2015 (3)(4)
For the Years Ended December 31,
(In thousands, except per share data)
$
408,830 $
211,994
276,741 $
149,476
196,836
183,830
13,006
8,343
(4,361)
8,006
—
—
127,265
117,225
10,040
6,216
1,184
2,640
5,627
(9,075)
240,251 $
138,295
101,956
99,054
2,902
5,552
(2,254)
(396)
10,547
—
231,808 $
133,704
98,104
95,949
2,155
9,998
(1,701)
(6,142)
24,674
—
99,802
56,046
43,756
49,391
(5,635)
(1,146)
(1,954)
(2,535)
122
—
$
$
$
$
$
$
8,006 $
6,088 $
(10,943) $
(30,816) $
(2,657)
0.08 $
0.08 $
0.07 $
0.07 $
(0.14) $
(0.14) $
(0.40) $
(0.40) $
(0.04)
(0.04)
23,369 $
(19,630) $
159,466 $
44,786 $
(139,687) $
91,959 $
18,037 $
(13,690) $
(4,095) $
21,477 $
(6,501) $
(25,871) $
6,393
(75,155)
58,493
(1) Reflects the acquisition of Genoptix in December 2018.
(2) Reflects the sale of Path Logic in August 2017.
(3) Reflects the acquisition of Clarient in December 2015.
(4) Does not reflect the impact of the adoption of ASU 2014-09, revenue form Contracts with Customers (Topic 606), which was adopted in the first quarter of 2018.
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NEOGENOMICS, INC.
Balance Sheet Data:
Current assets
Property and equipment
Operating lease right-of-use assets
Intangible assets
Goodwill
Other assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities
Series A Redeemable Convertible Preferred Stock
Stockholders’ equity
Total liabilities, preferred stock and stockholders’ equity
Working Capital
2019
2018 (1)
2017 (2)
2016
2015 (3)(4)(5)
December 31,
(In thousands)
$
$
$
$
$
290,738 $
64,188
26,492
126,640
198,601
2,847
103,668 $
60,888
—
140,029
197,892
2,538
85,875 $
36,504
—
74,165
147,019
891
79,398 $
34,036
—
77,064
147,019
206
709,506 $
505,015 $
344,454 $
337,723 $
63,904 $
60,925 $
36,471 $
39,789 $
138,194
202,098
—
507,408
123,647
184,572
—
320,443
103,406
139,877
32,615
171,962
112,746
152,535
22,873
162,315
709,506 $
505,015 $
344,454 $
337,723 $
82,360
34,577
—
87,800
146,421
129
351,287
40,058
73,117
113,175
28,602
209,510
351,287
226,835 $
42,743 $
49,404 $
39,609 $
42,302
(1) Reflects the acquisition of Genoptix in December 2018.
(2) Reflects the sale of Path Logic in August 1, 2017.
(3) Reflects the acquisition of Clarient in December 2015.
(4) Reflects the adoption of ASU 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes.
(5) Does not reflect the impact of the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which was adopted in the first quarter of 2018.
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NEOGENOMICS, INC.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in this Annual Report on Form
10-K. The information contained below includes statements of 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 Annual Report under the caption “Forward Looking Statements”, which information is
incorporated herein by reference. For discussion and analysis pertaining to 2018 overview and highlights as compared to 2017, please refer to the Company’s Annual Report on
Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on February 26, 2019 and as amended on May 8, 2019.
Our Company
NeoGenomics, Inc. is a high-complexity CLIA-certified clinical laboratory that specializes in cancer genetics diagnostic testing and pharma services. The Company’s testing
services include cytogenetics, fluorescence in-situ hybridization (“FISH”), flow cytometry, immunohistochemistry, anatomic pathology and molecular genetic testing.
Headquartered in Fort Myers, FL, NeoGenomics operates CAP accredited and CLIA certified laboratories in Ft. Myers and Tampa, Florida; Aliso Viejo, Carlsbad, Fresno and
San Diego California; Houston, Texas; Atlanta, Georgia; Nashville, Tennessee; and CAP accredited laboratories in Rolle, Switzerland, and Singapore. NeoGenomics serves the
needs of pathologists, oncologists, academic centers, hospital systems, pharmaceutical firms, integrated service delivery networks, and managed care organizations throughout
the United States, and pharmaceutical firms in Europe and Asia.
2019 Overview and Highlights
• We increased revenues by 47.7% compared to 2018, including an increase in Clinical revenue of 49.3% and an increase in Pharma revenue of 36.7%.
• We substantially integrated Genoptix, acquired in December 2018.
• We completed a $160.8 million net equity offering in May 2019.
• On June 27, 2019, we entered into a new senior secured credit agreement. The New Credit Agreement provides for a $100.0 million revolving credit facility, a
$100.0 million term loan facility, and a $50.0 million delayed draw term loan.
Company Outlook
Advances in science and technology are driving a proliferation of oncology therapies and associated diagnostic tests. These diagnostic tools and therapies are increasing
survival and enhancing quality-of-life for cancer patients. As a leading global oncology diagnostics company serving biopharmaceutical companies as well as practicing
oncologists and pathologists, NeoGenomics facilitates the adoption of these advanced oncology diagnostic tools beyond the academic environment into the community setting.
We are continuously enhancing and expanding our test menu to ensure that providers and patients have access to leading edge solutions such as advanced molecular testing and
state-of-the art digital pathology. Moreover, our team of MDs and PhDs, along with our highly-trained oncology-focused sales team provide continuous education to our clients
to ensure that they remain abreast of cutting-edge developments in oncology.
We are a leading provider of oncology-diagnostic services to biopharma companies. We will continue to work with these clients across the drug development continuum, from
research and development, through clinical trials testing, to commercialization of companion diagnostic tests. We are growing our Pharma Services business through global
expansion in both Europe and Asia, expansion of our test offering, including leading edge next-generation-sequencing tools, and unique capabilities for developing and
commercializing companion diagnostic tests.
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 providers.
As we focus on profitable growth, we will continue to pursue large purchasing group contracts. In 2019, we were successful in gaining market share by entering into contracts
with managed care organizations and large hospital groups, which will be part of our strategy as we continue to gain scale. In addition, our molecular testing menu remains a
strong selling point as it enables us to offer clients a “one stop shop” where they can send all of their oncology testing rather than using multiple labs.
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We believe lower cost and increased value of testing is extremely important to the healthcare industry and creates a competitive advantage for our company. We will invest in
information technology, automation and best practices to continually improve our processes and drive down the cost of testing. We will continue to expand our test menu and
remain at the forefront of the ongoing revolution in cancer related genetic and molecular testing to achieve our vision of becoming the world’s leading cancer testing and
information company.
We have developed a company-wide focus for 2020, which includes the following three critical success factors:
• World Class Culture: To strengthen our world-class culture through continued training and development, programs to promote wellness and work-life balance, and
enhanced communication.
• Uncompromising Quality and Exceptional Service: To provide uncompromising quality and exceptional service, with a focus on industry leading turn-around time,
automation and process control, and advancing our culture of quality. We will further automate our laboratory operations to enhance quality, reduce cost, and improve
turn-around time. We have established rigorous turn-around time objectives for each test modality based on customer feedback and industry benchmarks. Our goal is to
ultimately achieve industry leading turn-around-time for each modality. Our laboratory teams will focus on quality by improving the Corrective and Preventative Actions
(“CAPA”) process and streamlining and simplifying processes.
•
Innovation and Growth: To pursue exceptional service and growth through the launch of innovative assays, informatics products and companion diagnostics as well as
enhanced educational programs. To support this objective we will invest in research and development activities with a focus on expanding and enhancing our capabilities
for next-generation sequencing, including liquid biopsy, and expanding our companion diagnostic offering. Our informatics and data-related tools leverage our unique
market position and oncology expertise to help our stakeholders solve real-world problems. We will continue to pursue market share gains in both our Clinical and
Pharma Services businesses.
These critical success factors have been communicated throughout our Company. We have structured departmental goals around these factors and have created employee
incentive plans in which every employee will have a meaningful incentive for our success.
Regulatory Environment
The FDA is currently considering changes which may include increased regulation of Laboratory Developed Tests (“LDTs”) by the FDA. In October 2014, the FDA announced
its proposed framework and timetable and indicated it would move toward greater oversight of LDTs. The FDA has not finalized the framework they announced in 2014. In
2017, the FDA shifted its approach to oversight of LDTs, indicating that they would work with Congress and stakeholders on a new legislative framework and pathway for all
diagnostic testing. In 2018, the FDA began limited enforcement activities on a subset of LDTs known as pharmacogenetic testing (“PGx”). NeoGenomics is a member of the
American Clinical Laboratory Association (“ACLA”), which has been in active discussions with the FDA and Congress regarding FDA oversight of LDT’s. At this time we
cannot predict the outcome of this proposed framework or if there will be any additional changes to current rules and regulations.
We closely monitor changes in legislation and take specific actions to identify and estimate the impact of changes in legislation whenever possible as regulatory changes can
affect reimbursement for clinical laboratory services. We do not anticipate significant changes to our clinical revenue in 2020 based on known changes in legislation.
Operating Segments
The Company reports its activities in two operating segments: the Clinical Services Segment and the Pharma Services Segment. We have presented the financial information
reviewed by the Chief Operating Decision Maker (“CODM”) including revenues, cost of revenue and gross margin for each of our operating segments. The segment
information presented in these financial statements has been conformed to present segments on this revised basis for all prior periods. Assets are not presented at the segment
level as that information is not used by the CODM.
Clinical Services
Our Clinical Services segment includes the cancer testing services we offer to community-based pathologists, hospitals, academic centers, and oncology groups and is 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.
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Pharma Services
Our Pharma Services segment supports pharmaceutical firms in their drug development programs by supporting various clinical trials. This portion of our business often
involves working with the pharmaceutical firms (sponsors) on study design as well as performing the testing required to validate assays in development and support of Phase I,
II and III clinical trials. Our medical team often advises the sponsor and works closely with them as specimens are received from 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 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 group 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 have experience in supporting submissions to the Federal Drug Administration for companion diagnostics and our Pharma Services strategy is focused on helping
bring more effective oncology treatments to market through providing world-class laboratory services in oncology to key pharmaceutical companies in the industry.
Critical Accounting Policies
The preparation of financial statements in conformity with United States generally accepted accounting principles (“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Our management routinely makes judgments and estimates
about the effects of matters that are inherently uncertain. For a complete description of our significant accounting policies, see Note B, Summary of Significant Accounting
Policies, to our Consolidated Financial Statements.
Our critical accounting policies are those where we have made difficult, subjective or complex judgments in making estimates, and/or where these estimates can significantly
impact our financial results under different assumptions and conditions. Our critical accounting policies are:
•
•
•
•
Revenue Recognition
Accounts Receivable
Stock Based Compensation
Deferred taxes
Revenue Recognition
We adopted Accounting Standards Codification (“ASC”) 606, Revenues from Contracts with Customers, on January 1, 2018 using a full retrospective method of adoption.
Under this method, the Company has restated its results for each prior reporting period presented as if ASC 606 had been effective for those periods. The adoption of this
standard required us to implement new revenue policies, procedures and internal controls related to revenue recognition. In addition, the adoption resulted in enhanced financial
statement disclosures surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
The new standard impacted each of our two reportable segments differently due to the transactional nature of the Clinical Services segment versus the generally long-term
nature of our Pharma Services segment contracts. The specific effect on our reportable segments is explained further in Note B, Summary of Significant Accounting Policies, to
our Consolidated Financial Statements.
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
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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.
The following table reflects our estimate of the breakdown of net revenue by type of payer for the fiscal years ended December 31, 2019, 2018, and 2017:
Medicare and other government
Commercial insurance
Client direct billing
Total
2019
2018
2017
18 %
23 %
59 %
100 %
15 %
17 %
68 %
100 %
14 %
17 %
69 %
100 %
Client direct billing is down 9% as compared to 2018 due to the acquisition of Genoptix. Historically, Genoptix has had has less volume of client direct billings within their
payer mix. However, our proportion of client direct billing remains high, as more payers, including private commercial insurances and Medicare Advantage plans are practicing
“consolidated payment” or “bundled payment” models where they pay the hospitals a lump sum, which is intended to include laboratory testing. This reflects an increase in the
amount of risk sharing that CMS and other private payers are encouraging providers such as hospital systems to undertake. On January 1, 2018, Medicare made a significant
change to what is known as the “14-day rule”. The net result of this rule change is that certain molecular tests that were previously billed to clients, are once again eligible to be
billed directly to the Medicare program.
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 balance sheet. 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 account 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 and 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.
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NEOGENOMICS, INC.
Trade Accounts Receivable
Accounts receivable are reported for all clinical services 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.
For Pharma Services, the Company negotiates billing schedules and payment terms on a contract-by-contract basis which often includes payments based on certain milestones
being achieved. Receivables are generally reported over time based on the number of units completed, which aligns with the progress of the Company towards fulfilling its
obligations under the contract.
Days Sales Outstanding (“DSO”) increased from 77 days at December 31, 2018 to 81 days at December 31, 2019 due to timing of cash receipts.
Stock Based Compensation
We recognize compensation costs for all share-based payment awards made to employees, non-employee contracted physicians and directors based upon the awards’ initial
grant-date fair value. For stock options, we use a trinomial lattice option-pricing model to estimate the fair value of stock option awards, and recognize compensation cost on a
straight-line basis over the awards’ requisite service periods. The Company’s periodic expense is adjusted for actual forfeitures.
See Note B, Summary of Significant Accounting Policies and Note M, Stock Compensation, in the Consolidated Financial Statements included in this Annual Report for more
information regarding the assumptions used in our valuation of stock-based compensation.
Deferred Taxes
Our accounting for deferred tax consequences represents our best estimate of future events that can be appropriately reflected in accounting estimates. The factors included in
the analysis are historical and projected future taxable income including evolving business practices of our industry. Changes in existing tax laws, regulations, rates and future
operating results may impact the amount of deferred tax liabilities and deferred tax assets over time.
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to realize the existing deferred tax assets.
As of December 31, 2018 and 2019, the Company determined that sufficient positive evidence did not exist to conclude that it is more likely than not that net operating losses
generated by the Company's Switzerland and Singapore operations would be able to be utilized in future periods and has therefore established a full valuation allowance against
the deferred tax assets generated by such losses.
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NEOGENOMICS, INC.
Results of Operations for the year ended December 31, 2019 as compared with the year ended December 31, 2018
The following table presents the condensed Consolidated Statements of Operations as a percentage of revenue:
NET REVENUE
Cost of revenue
GROSS PROFIT
Operating expenses:
General and administrative
Research and development
Sales and marketing
Total operating expenses
INCOME FROM OPERATIONS
Interest expense, net
Other income
Loss on extinguishment of debt
Net income before income taxes
Income tax (benefit) expense
NET INCOME
Revenue
For the Years Ended
December 31,
2019
2018
100.0 %
51.9 %
48.1 %
31.3 %
2.1 %
11.6 %
45.0 %
3.1 %
0.9 %
1.1 %
0.2 %
0.9 %
(1.1)%
2.0 %
100.0 %
54.0 %
46.0 %
30.7 %
1.1 %
10.6 %
42.4 %
3.6 %
2.3 %
— %
— %
1.3 %
0.4 %
0.9 %
Clinical and Pharma Services revenue for the periods presented are as follows ($ in thousands):
Net revenues:
Clinical Services
Pharma Services
Total Revenue
For the Years Ended December 31,
2019
2018
% Change
$
$
361,161 $
47,669
408,830 $
241,873
34,868
276,741
49.3 %
36.7 %
47.7 %
Consolidated revenues increased $132.1 million, or 47.7%, year-over-year. Growth in our Clinical Services segment year-over-year, was $119.3 million, or 49.3%. Testing
volumes also increased in our Clinical Services Segment by approximately 31.7% year-over-year. 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 increased $12.8 million, or 36.7%, year-over-year. In addition, our backlog of signed contracts has continued to grow from $98.9 million as of
December 31, 2018 to $130.3 million as of December 31, 2019. We define backlog as the stated amount of signed contracts less dormant contracts with no activity for twelve
months, contingencies and cancellations. We expect this backlog to result in higher revenues in future years.
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 in 2019, including the
opening of a laboratory in Singapore in 2019.
The following table shows Clinical Services revenue, cost of revenue, requisitions received and tests performed for the years ended December 31, 2019 and 2018. This data
excludes tests performed for Pharma customers.
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NEOGENOMICS, INC.
Testing revenue and cost of revenue are presented in thousands below:
Clinical Services:
Requisitions (cases) received
Number of tests performed
Average number of tests/requisitions
Total clinical testing revenue
Average revenue/requisition
Average revenue/test
Cost of revenue
Average cost/requisition
Average cost/test
For the Years Ended December 31,
2019
2018
% Change
573,085
987,539
1.72
361,161 $
630 $
366 $
185,612 $
324 $
188 $
439,597
749,902
1.71
241,873
550
323
128,297
292
171
$
$
$
$
$
$
30.4 %
31.7 %
0.6 %
49.3 %
14.5 %
13.3 %
44.7 %
11.0 %
9.9 %
We continue to realize growth in our clinical testing revenue which we believe is the direct result of the Genoptix acquisition and 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 13.3% year-over-year, reflecting the acquisition of Genoptix, favorable test mix, as well as the positive impact of internal reimbursement
initiatives, partially offset by changes in Medicare reimbursement and regulation.
Cost of Revenue and Gross Margin
Average cost per test increased 9.9% year-over-year, primarily due to the acquisition and integration of Genoptix reflecting the impact of the Genoptix acquisition and test mix.
The increase was partially offset by continued efficiencies as we integrate Genoptix.
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.
Clinical and Pharma Services cost of revenue and gross profit metrics for the periods presented are as follows ($ in thousands):
Cost of revenue:
Clinical Services
Pharma Services
Total Cost of revenue
Cost of revenue as a % of revenue
Gross Profit:
Clinical Services
Pharma Services
Total Gross Profit
Gross Profit Margin
For the Years Ended December 31,
2019
2018
% Change
$
$
$
$
$
185,612
26,382
211,994
$
51.9 %
$
175,549
21,287
196,836
$
48.1 %
128,297
21,179
149,476
54.0 %
113,576
13,689
127,265
46.0 %
44.7 %
24.6 %
41.8 %
54.6 %
55.5 %
54.7 %
In 2019, cost of revenue in dollars increased while cost of revenue as a percentage of revenue decreased year-over-year. Consolidated cost of revenue as a percentage of revenue
was 51.9% compared to 54.0%, in 2018. The increases in cost of revenue was largely due to the acquisition of Genoptix.
Gross profit margin for 2019 was 48.1% compared to 46.0% in 2018. Gross margin improvement reflects the impact of, higher revenue per test, productivity gains, and cost
efficiencies.
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NEOGENOMICS, INC.
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, and other administrative-related
costs to general and administrative expenses.
Consolidated general and administrative expenses for the periods presented are as follows ($ in thousands):
General and administrative
General and administrative as a % of revenue
$
127,993
$
31.3 %
84,822
$
30.7 %
43,171
50.9 %
For the Years Ended
December 31,
2019
2018
$ Change
% Change
General and administrative expenses for the year ended December 31, 2019 increased $43.2 million compared to 2018, primarily reflecting an increase in payroll and payroll-
related expenses of $23.1 million. as a result of the acquisition of Genoptix as well as higher payroll and payroll-related costs due to increases in personnel to support our near
and long-term growth as well as the Genoptix integration. Additionally, general and administrative expenses include approximately $3.2 million in acquisition and integration
related expenses.
Depreciation and amortization expense for the year ended December 31, 2019 increased by approximately $7.2 million, when compared to the same period in 2018, primarily
reflecting increases in capital expenditures over the last several years including capital expenditures associated with the acquisition of Genoptix, relocation of our expanded
Houston, Texas laboratory and continued investment in our laboratory information system.
We expect our general and administrative expenses to increase in total but decrease as a percentage of revenue as we add employee and compensation expenses, incur additional
expenses associated with the expansion of our facilities, and continue to expand our physical and technological infrastructure to support our anticipated growth.
Research and Development Expenses
Research and development expenses relate to the cost of developing new genetic tests, including payroll and payroll-related costs, maintenance of laboratory equipment,
laboratory supplies, outside consultants and experts assisting our research and development team.
Consolidated research and development expense for the periods presented are as follows ($ in thousands):
Research and development
Research and development as a % of revenue
$
8,487
$
2.1 %
3,001
$
1.1 %
5,486
182.8 %
For the Years Ended
December 31,
2019
2018
$ Change
% Change
Research and development expenses for the year ended December 31, 2019 increased $5.5 million, when compared to the same period in 2018. This increase was driven by
investments in new test development, particularly in our next-generation sequencing and FDA initiatives.
We anticipate research and development expenditures will increase in future quarters as we invest in innovation projects and bringing new tests to market.
Sales and Marketing Expenses
Sales and marketing expenses are primarily attributable to employee-related costs, including sales management, sales representatives, marketing, and customer service
personnel. Expenses also include marketing-related costs such as consulting, attending trade shows, advertising and maintaining our website.
Consolidated sales and marketing expenses for the periods presented are as follows ($ in thousands):
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NEOGENOMICS, INC.
Sales and marketing
Sales and marketing as a % of revenue
For the Years Ended
December 31.
2019
2018
$ Change
% Change
$
47,350
$
11.6 %
29,402
$
10.6 %
17,948
61.0 %
Sales and marketing expenses for the year ended December 31, 2019 increased $17.9 million when compared to the same period in 2018. This increase primarily reflects the
acquisition of Genoptix, including the expansion of our sales team, as well as higher commissions due to our increase in revenues and continued investment in marketing. We
expect higher commissions expense in the coming 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 and Other Expense (Income)
Net interest expense is comprised of interest incurred on our term debt, revolving credit facility and our other financing obligations, offset by the interest income we earn on
cash balances. Net interest expense for the year ended December 31, 2019 decreased $2.5 million compared to the same period in 2018. 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.
Other expense (income) for the year ended December 31, 2019 increased $4.6 million compared to the same period in 2018. This increase is primarily attributable to the
settlement of the litigation with Health Discovery Corporation (“HDC”). For more information regarding this settlement, refer to Note N, Commitments and Contingencies, in
our Consolidated Financial Statements.
Net Income
The following table provides the net loss for each period along with the computation of basic and diluted net income per share (in thousands, except per share amounts):
NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS
Basic weighted average common shares outstanding
Effect of potentially dilutive securities
Diluted weighted average shares outstanding
Basic net income per common share
Diluted net income per share
Non-GAAP Measures
Use of Non-GAAP Financial Measures
For the Years Ended December 31,
2019
2018
8,006 $
6,088
100,470
3,145
103,615
0.08 $
0.08 $
85,618
5,950
91,568
0.07
0.07
$
$
$
The Company’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’s business. Management believes that these non-GAAP financial measures enable investors to evaluate
the Company’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’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’s recorded costs against its net revenue. In addition, the Company’s definition of the non-GAAP financial measures below may differ from non-GAAP
measures used by other companies.
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NEOGENOMICS, INC.
Definitions of Non-GAAP Measures
Non-GAAP Adjusted EBITDA
“Adjusted EBITDA” is defined by NeoGenomics as net income from continuing operations before: (i) net interest expense, (ii) tax (benefit) expense, and, if applicable in a
reporting period, (iii) depreciation and amortization expense, (iv) non-cash stock-based compensation expense, (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 income to Non-GAAP EBITDA and Adjusted EBITDA for the years ending December 31, 2019 and 2018 ($ in thousands):
NET INCOME (GAAP)
Adjustments to net income:
Interest expense, net
Income tax (benefit) expense
Amortization of intangibles
Depreciation of property and equipment
EBITDA (non-GAAP)
Further Adjustments to EBITDA:
Acquisition and integration related expenses
Loss on extinguishment of debt
Other significant non-recurring expense
Non-cash stock-based compensation
ADJUSTED EBITDA (non-GAAP)
Adjusted EBITDA as % of Revenue
Liquidity and Capital Resources
For the Years Ended
December 31,
2019
2018
$
8,006
$
2,640
3,713
(4,361)
9,925
20,346
37,629
3,195
1,018
5,375
10,000
$
57,217
$
14.0 %
6,230
1,184
5,928
15,804
31,786
2,325
—
2,486
6,955
43,552
15.7 %
The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the years ended December 31, 2019 and 2018
as well as the period ending cash and cash equivalents and working capital (in thousands).
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Effects of foreign exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Working Capital (1), end of period
(1) Defined as current assets less current liabilities.
47
For the Years Ended December 31,
2019
2018
23,369 $
(19,630)
159,466
—
163,205
9,811
173,016 $
226,834 $
44,786
(139,687)
91,959
(68)
(3,010)
12,821
9,811
42,743
$
$
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NEOGENOMICS, INC.
Cash Flows from Operating Activities
During the year ended December 31, 2019, cash provided by operating activities was $23.4 million, consisting of net income of $8.0 million plus net adjustments to income of
$47.8 million. This was partially offset by the cash flow impact of net changes in operating assets and liabilities of $32.4 million, primarily driven by increases in accounts
receivable and inventory. Account receivables increased year-over-year due to the increase in revenue as well as the timing of cash receipts. Inventory increased due to greater
test volume as well as strategic purchasing opportunities in the second-half of 2019.
Cash Flows from Investing Activities
During the year ended December 31, 2019, cash used in investing activities decreased by $120.1 million compared to the same period in 2018. This decrease was primarily
related to the cash consideration of approximately $125.8 million related to the acquisition of Genoptix used in December of 2018. This decrease was partially offset by an
increase of $5.7 million in cash used for capital expenditures.
Cash Flows from Financing Activities
During the year ended December 31, 2019, cash flows provided by financing activities was $159.5 million compared to $92.0 million for the same period in 2018. Cash
provided by financing activities at December 31, 2019 consisted primarily of net cash proceeds of $160.8 million resulting from the equity offering completed in May 2019 and
$11.2 million from the net issuance of common stock, offset by net repayment of the term loan and other finance obligations of $12.5 million. Cash provided by financing
activities at December 31, 2018 consisted primarily of net cash proceeds of $135.1 million from the equity offering completed in August 2018, partially offset by $50.1 million
paid to redeem 6.9 million shares of Series A Redeemable Convertible Preferred Stock in June 2018. Cash flows from financing activities also included an increase in the term
loan of $30.0 million, which was partially offset by a $20.4 million net repayment on the Revolving Facility.
Credit Facility
On June 27, 2019, the Company entered into a new senior secured credit agreement (“New Credit Agreement”) with PNC Bank National Association, as administrative agent.
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, see Note H, Debt, to our Consolidated Financial Statements herein. 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 I, Derivative
Instruments and Hedging Activities, to the Consolidated Financial Statements. 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.
Liquidity Outlook
We had approximately $173.0 million in cash and cash equivalents as of December 31, 2019. In addition, the new senior secured credit agreement provides for up to
$250.0 million in borrowing capacity of which $96.8 million is outstanding at December 31, 2019. Based on our level of Adjusted EBITDA and the balance drawn,
approximately $130.6 million was available at that same date. We believe that the cash on hand, available credit lines and positive cash flows generated from operations will
provide adequate resources to meet our operating commitments and interest payments for at least the next 12 months from the issuance of this annual report.
Related Party Transactions
See Note O, Related Party Transactions, to our Consolidated Financial Statements for a description of our related party transactions.
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NEOGENOMICS, INC.
Contractual Obligations
The following table summarizes our significant contractual obligations as of December 31, 2019 ($ in thousands):
Total
2020
2021-2022
2023-2024
Thereafter
Purchase obligations
Financing obligations
Operating lease obligations
Principal payments of long term debt (1)
Interest on swap agreement (2)
Interest on term loan facility (3)
Revolving credit facility - unutilized fees on $100m at .2% (4)
Delayed draw term loan - unutilized fees on $50m at .2% (4)
$
12,580 $
8,631
36,283
97,500
4,172
12,156
900
100
7,360 $
5,432
5,094
5,000
2,086
3,061
200
100
Total contractual obligations
$
172,322 $
28,333 $
5,220 $
3,199
9,965
13,750
2,086
5,568
400
—
40,188 $
— $
—
8,519
78,750
—
3,527
300
—
91,096 $
—
—
12,705
—
—
—
—
—
12,705
(1) Amounts represent required principal debt payments on our Term Loan Facility. For a full description of the terms of our indebtedness and the related debt service requirements, see Note H,
Debt.
(2) Amounts represent fixed interest owed on the swap agreement. For further details of the swap agreement, see Note I, Derivative Instruments and Hedging Activities.
(3) Amounts represent interest payments due on the Term Loan Facility assuming principal payments are made as specified in the loan agreement and estimated interest rates based on the rates
in effect at December 31, 2019.
(4) Amounts represent fees due on our unused Revolving Facility and Delayed Draw Term Loan based on the December 31, 2019 balances and rates in effect at December 31, 2019.
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 capital expenditures for the year ended December 31, 2020 will be in the range of $30
million to $35 million. We have funded and plan to continue funding these capital expenditures with capital lease financing arrangements, cash, and through bank loan
facilities, if necessary.
Recently Adopted Accounting Guidance
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”). Topic 842 supersedes the lease requirements in FASB 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 on January 1, 2019 using the modified retrospective method and using the optional transition method to apply the new lease accounting
standard 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 D, Leases, for further details regarding the impact of the adoption of Topic 842 and other information related to the Company’s lease portfolio.
In May 2014, the FASB issued ASU 2014-09, which amends FASB Accounting Standards Codification by creating Topic 606, Revenues from Contracts with Customers
(“ASC 606”). This standard update calls for a number of revisions in the revenue recognition rules. The Company adopted this ASU on January 1, 2018 using a full retrospective
method of adoption. Under this method, the Company has restated its results for each prior reporting period presented as if ASC 606 had been effective for those periods.
The adoption of this standard required us to implement new revenue policies, procedures and internal controls related to revenue recognition. In addition, the adoption resulted
in enhanced financial statement disclosures surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For further
details, see Note C, Revenue Recognition.
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NEOGENOMICS, INC.
The new standard impacts each of our two reportable segments differently due to the transactional nature of the Clinical Services segment versus the generally long-term nature
of our Pharma Services contracts. The specific effect on our reportable segments is explained below:
Clinical Services Revenue
Under the new standard, substantially all of our bad debt expense, which has historically been presented as part of general and administrative expense, is considered an implicit
price concession and is reported as a reduction in revenue. As a result of ASC 606, we reported a material cumulative reduction in clinical revenue from previously reported
periods and a similar reduction in general and administrative expenses.
Pharma Services Revenue
The adoption of ASC 606 also resulted in changes to the timing of revenue recognition related to Pharma Services contracts as certain individual deliverables such as study
setup fees, for which revenue was previously recognized in the period when the deliverables were completed and invoiced, are recognized over the remaining performance period
under the new standard. Additionally, certain costs to obtain contracts, primarily for sales commissions, are capitalized when incurred and are amortized over the term of the
contract. Under ASC 606, the Company is required to make estimates of the total transaction price per contract, including estimates of variable consideration and the number of
performance obligations, and recognize the estimated amount as revenue as it transfers control of the product or performance obligations to its customers. The estimation of total
transaction price, number of performance obligations, variable consideration and the application of the related constraint, was not required under previous GAAP and requires
the use of significant management judgment and estimates. The Company elected certain practical expedients as allowed under the standard including the following: contracts
that began and ended within the same annual reporting period were not restated; contracts with variable consideration were estimated using the transaction price at the date the
contract was completed; contract modifications that occurred prior to the earliest reporting period have not been retrospectively restated but have rather been reflected as an
aggregate adjustment in the earliest reporting period. The cumulative effect of this standard did not result in a material change to our Pharma Services revenue.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the
goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual and interim periods beginning after December 15, 2019. The
Company early adopted this standard on January 1, 2018. The adoption of this standard did not have an impact on the Consolidated Financial Statements.
Accounting Pronouncements Pending Adoption
In August 2018, the FASB issued ASU 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 was effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2019. The Company will adopt this pronouncement as of January 1, 2020. We
currently do not expect the adoption to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB also 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 was effective for annual periods beginning after December 15, 2019, and interim periods
within those periods. Certain provisions of ASU 2018-13 must be adopted retrospectively, while others must be adopted prospectively. The Company will adopt this
pronouncement as of January 1, 2020. We currently do not expect the adoption to have a material impact on our Consolidated Financial Statements.
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 standard, effective January 1, 2020 for public business
entities for annual periods beginning after December 15, 2019, and interim periods within those years, requires the use of forward-looking expected credit
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NEOGENOMICS, INC.
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 is not expected to have a material impact on the
Company’s Consolidated Financial Statements and disclosures.
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.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenues, or operating results during the periods presented.
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NEOGENOMICS, INC.
ITEM 7A. 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 risks, including changes in interest rates and changes in foreign currency exchange rates.
Interest Rate Risk
The Company is exposed to market risk associated with changes in the LIBOR interest rate. The Company regularly evaluates its exposure to such changes and may elect to
minimize this risk through the use of interest rate swap agreements. During the second quarter of 2019, the Company entered into a New Credit Agreement which provides for a
$100.0 million revolving credit facility, a $100.0 million term loan facility and a $50.0 million delayed draw term loan. 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).
In December of 2016 and June of 2018, the Company entered into interest rate swap agreements to reduce the Company's exposure to interest rate fluctuations on the Company's
variable debt obligations. On December 31, 2019, the interest rate swap agreement entered into in December of 2016 matured. Concurrently, the notional amount of the interest
rate swap agreement entered into in June of 2018 increased from $20 million to $70 million. As of December 31, 2019, the Company had approximately $27.5 million of
unhedged variable rate debt under the senior secured credit facility. For further details regarding our significant accounting policies relating to derivative instruments and
hedging activities, see Note B, Summary of Significant Accounting Policies, to our Consolidated Financial Statements included in this Annual Report.
Each quarter-point increase or decrease in the one-month LIBOR rate would result in a change in the Company’s interest expense by approximately $0.6 million per year based
on the unhedged debt outstanding at December 31, 2019.
Foreign Currency Exchange Risk
We have expanded our business into Europe, and in 2019 further expanded by opening a laboratory in Singapore. Our international revenues and expenses, including payroll and
supply purchases in Singapore, denominated in foreign currencies (primarily Swiss Francs and Singapore dollars), expose us to the risk of fluctuations in foreign currency
exchange rates against the U.S. dollar. We do not hedge foreign currency exchange risks and do not currently feel that these risks are significant.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm – Deloitte & Touche LLP
Report of Independent Registered Public Accounting Firm – Crowe LLP
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Redeemable Convertible Preferred Stock and Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Page
55
56
57
58
59
60
61
62
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REPORT OF INDEPENDENT REGISTERED ACCOUNTING FIRM
To the stockholders and the Board of Directors of NeoGenomics, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of NeoGenomics, Inc. and subsidiaries (the “Company”) as of December 31, 2019, the related consolidated
statements of operations, comprehensive income (loss), redeemable convertible preferred stock and stockholders' equity, and cash flows, for the year ended December 31, 2019,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2019 and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with accounting principles
generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over
financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated February 28, 2020, expressed an unqualified opinion on the Company's internal control over financial
reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our
audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be
communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging,
subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are
not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue Recognition—Clinical Services—Refer to Notes B and C to the financial statements
Critical Audit Matter Description
As discussed in Note C to the financial statements, revenue for the Company’s clinical services is recognized once the diagnostic services have been performed and the results
have been delivered to the ordering physician. 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.
We identified management’s estimation of implicit price concessions related to revenue recorded that has not been received in cash as a critical audit matter due to
management’s manual process used to determine the estimate, and the significant judgments required by management to estimate payer behavior. This required a high degree of
auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s assumptions related to expected receipts
that were applied in the estimate of implicit price concessions.
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NEOGENOMICS, INC.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to management’s judgments in the estimate of implicit price concessions included the following, among others:
• We tested the effectiveness of controls over management’s determination of assumptions used to calculate implicit price concessions.
• We tested the methodology used by the Company to estimate implicit price concessions.
• We tested the assumptions used by management to calculate implicit price concessions by:
◦
◦
◦
◦
Testing the mathematical accuracy of management’s calculation of implicit price concessions.
Testing the historical cash receipts from payers used in the estimate of implicit price concessions, by making selections and agreeing the selected information to
source documents.
Testing management’s ability to estimate implicit price concessions accurately by comparing recorded net revenue to cash receipts received through January
2020.
Evaluating trends in revenue and accounts receivable compared to previous periods to identify any evidence that may contradict management’s assertion
regarding implicit price concessions.
/s/ Deloitte & Touche LLP
San Diego, California
February 28, 2020
We have served as the Company's auditor since 2019.
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NEOGENOMICS, INC.
Report of Independent Registered Public Accounting Firm
Shareholders and the Board of Directors of NeoGenomics, Inc.
Fort Myers, Florida
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of NeoGenomics, Inc. (the "Company") as of December 31, 2018, the related consolidated statements of
operations, comprehensive income (loss), redeemable convertible preferred stock and stockholders’ equity, and cash flows for each of the years in the two-year period ended
December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for each of the years in the two-year period
ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
We served as the Company's auditor from 2014 to 2018.
Indianapolis, Indiana
February 26, 2019
/s/Crowe LLP
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NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
As of December 31,
2019
2018
ASSETS
Current assets
Cash and cash equivalents
Accounts receivable, net
Inventories
Prepaid assets
Other current assets
Total current assets
Property and equipment (net of accumulated depreciation of $68,809 and $50,127,
respectively)
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable
Accrued compensation
Accrued expenses and other liabilities
Short-term portion of financing obligations
Short-term portion of operating lease liabilities
Short-term portion of term loan
Pharma contract liability
Total current liabilities
Long-term liabilities
Long-term portion of financing obligations
Long-term portion of operating lease liabilities
Long-term portion of term loan, net
Revolving credit facility, net
Other long-term liabilities
Deferred income tax liability, net
Total long-term liabilities
Total liabilities
Stockholders’ equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 104,781,236 and 94,465,440 shares issued and outstanding,
respectively)
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
$
$
$
173,016 $
94,242
14,405
6,327
2,748
290,738
64,188
26,492
126,640
198,601
2,847
709,506 $
19,568 $
21,365
7,548
5,432
3,381
5,000
1,610
63,904
3,199
24,034
91,829
—
3,566
15,566
138,194
202,098
105
520,278
(1,618)
(11,357)
507,408
See notes to Consolidated Financial Statements.
$
709,506 $
57
9,811
76,919
8,650
7,727
561
103,668
60,888
—
140,029
197,892
2,538
505,015
17,779
19,062
8,986
6,298
—
7,873
927
60,925
5,250
—
87,880
5,000
3,060
22,457
123,647
184,572
94
340,291
(579)
(19,363)
320,443
505,015
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NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
NET REVENUE
Clinical Services
Pharma Services
Total Revenue
COST OF REVENUE
GROSS PROFIT
Operating expenses:
General and administrative
Research and development
Sales and marketing
Loss on sale of Path Logic
Total operating expenses
INCOME FROM OPERATIONS
Interest expense, net
Other expense (income)
Loss on extinguishment of debt
Income (loss) before taxes
Income tax expense (benefit)
NET INCOME (LOSS)
Deemed dividends on preferred stock and
amortization of beneficial conversion feature
Gain on redemption of preferred stock
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCKHOLDERS
INCOME (LOSS) PER SHARE ATTRIBUTABLE TO
COMMON STOCKHOLDERS
Basic
Diluted
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING
Basic
Diluted
$
$
$
$
For the Years Ended December 31,
2019
2018
2017
361,161 $
47,669
408,830
241,873 $
34,868
276,741
213,097
27,154
240,251
211,994
149,476
138,295
196,836
127,265
101,956
127,993
8,487
47,350
—
183,830
13,006
3,713
4,630
1,018
3,645
(4,361)
8,006
—
—
84,822
3,001
29,402
—
117,225
10,040
6,230
(14)
—
3,824
1,184
2,640
5,627
(9,075)
70,359
3,636
24,001
1,058
99,054
2,902
5,540
12
—
(2,650)
(2,254)
(396)
10,547
—
8,006 $
6,088 $
(10,943)
0.08 $
0.08 $
0.07 $
0.07 $
(0.14)
(0.14)
100,470
103,615
85,618
91,568
79,426
79,426
See notes to Consolidated Financial Statements.
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NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
NET INCOME (LOSS)
OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAX:
Foreign currency translation adjustments
Gain (loss) on effective cash flow hedge
Total other comprehensive (loss) income, net of tax
COMPREHENSIVE INCOME (LOSS)
For the Years Ended December 31,
2019
2018
2017
8,006 $
2,640 $
(396)
—
(1,039)
(1,039)
(68)
(785)
(853)
44
230
274
6,967 $
1,787 $
(122)
$
$
See notes to Consolidated Financial Statements.
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NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY
(In thousands, except share amounts)
Balance, December 31, 2016
Common stock issuance ESPP plan
Issuance of Series A Preferred Stock
Stock issuance fees and expenses
Foreign currency translation adjustments
Gain on effective cash flow hedge
Issuance of restricted stock, net of forfeitures
Issuance of stock for warrant exercise
Issuance of common stock for stock options
Deemed dividends on preferred stock and
amortization of beneficial conversion feature
ESPP expense
Adjustment for impact of accounting standard
Stock compensation expense - options and restricted
stock
Net loss
Balance, December 31, 2017
Common stock issuance ESPP plan
Series A Redeemable Convertible
Preferred Stock
Common Stock
Additional Paid-In
Accumulated Other
Comprehensive
Accumulated
Shares
Amount
Shares
Amount
Capital
Income
Deficit
Total
6,600,000 $
22,873
78,571,158 $
79 $
191,308 $
— $
(29,071) $
162,316
—
264,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
9,742
—
—
—
—
108,599
—
—
—
—
822,711
364,600
595,506
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
844
—
(218)
—
—
4,094
—
1,960
(9,742)
96
—
6,345
—
—
—
—
44
230
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,388
—
(396)
844
—
(218)
44
230
4,095
—
1,960
(9,742)
96
6,388
6,345
(396)
6,864,000
32,615
80,462,574 $
80 $
194,687 $
274 $
(23,079) $
171,962
—
—
117,146
Redemption of Series A Preferred Stock
(6,864,000)
(37,823)
Stock issuance fees and expenses
Foreign currency translation adjustments
Loss on effective cash flow hedge
Issuance of common stock - Acquisition
Issuance of common stock - Public Offering
Issuance of restricted stock, net of forfeitures
Issuance of common stock for stock options
Deemed dividends on preferred stock and
amortization of beneficial conversion feature
Gain on redemption of preferred stock
ESPP Expense
Stock compensation expense - options and restricted
stock
Adjustment for impact of accounting standard
Net income
Balance, December 31, 2018
Common stock issuance ESPP plan
Stock issuance fees and expenses
Loss on effective cash flow hedge
Issuance of restricted stock, net of forfeitures
Working capital adjustment related to acquisition
Issuance of common stock - Public Offering
Issuance of common stock for stock options
ESPP Expense
Stock compensation expense - options and restricted
stock
Net income
Balance, December 31, 2019
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5,208
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
999,994
11,270,000
62,182
1,553,544
—
—
—
—
—
—
—
—
—
—
—
1
11
—
2
—
—
—
—
—
—
1,050
(21,348)
(354)
—
—
13,242
135,060
(297)
8,596
(5,208)
9,075
243
6,640
(1,095)
—
—
—
—
(68)
(785)
—
—
—
—
—
—
—
—
—
—
—
—
—
(54)
—
—
—
—
—
—
—
—
—
1,130
2,640
1,050
(21,348)
(354)
(122)
(785)
13,243
135,071
(297)
8,598
(5,208)
9,075
243
6,640
35
2,640
94,465,440 $
94 $
340,291 $
(579) $
(19,363) $
320,443
141,908
—
—
168,501
(99,524)
8,050,000
2,054,911
—
—
—
—
—
—
—
—
8
3
—
—
—
2,332
(263)
—
(837)
(1,977)
160,766
9,971
609
9,386
—
—
—
(1,039)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8,006
2,332
(263)
(1,039)
(837)
(1,977)
160,774
9,974
609
9,386
8,006
104,781,236 $
105 $
520,278 $
(1,618) $
(11,357) $
507,408
See notes to Consolidated Financial Statements.
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NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income to net cash provided by operating activities:
For the Years Ended December 31,
2019
2018
2017
$
8,006 $
2,640 $
(396)
Depreciation
Loss on disposal of assets
Loss on debt extinguishment
Loss on sale of business
Amortization of intangibles
Amortization of debt issue costs
Non-cash stock based compensation
Non-cash operating lease expense
Changes in assets and liabilities, net:
Accounts receivable, net
Inventories
Prepaid assets
Other assets
Accounts payable, accrued and other liabilities
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment
Acquisition, net of cash acquired
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on revolving credit facility
Repayment of revolving credit facility
Redemption of preferred stock
Repayment of equipment and other loans
Proceeds from term loan
Repayment of term loan
Payments of debt issue costs
Issuance of common stock, net
Proceeds from equity offering, net
Net cash provided by (used in) financing activities
Effects of foreign exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalent, beginning of year
Cash and cash equivalents, end of year
Supplemental disclosure of cash flow information:
Interest paid
Income taxes paid (refunded), net
Supplemental disclosure of non-cash investing and financing information:
Fair value of common stock issued to fund acquisition
Fair value of common stock issued to fund purchase of customer list
Working capital adjustment related to acquisition
Equipment acquired under financing obligations
Property and equipment included in accounts payable
20,346
472
1,018
—
9,925
390
10,000
5,635
(17,301)
(5,754)
(234)
(133)
(9,001)
23,369
(20,029)
399
(19,630)
—
(5,000)
—
(7,201)
100,000
(99,250)
(1,059)
11,202
160,774
159,466
—
163,205
9,811
15,804
404
—
—
5,928
542
6,955
—
209
734
(482)
(1,352)
13,404
44,786
(14,310)
(125,377)
(139,687)
15,000
(35,400)
(50,096)
(6,563)
30,000
(4,500)
(576)
9,023
135,071
91,959
(68)
(3,010)
12,821
$
173,016 $
9,811 $
$
$
$
$
$
$
$
4,775 $
319 $
— $
— $
1,977 $
4,283 $
1,034 $
6,511 $
(31) $
13,243 $
— $
— $
7,569 $
660 $
15,596
253
—
1,058
6,995
440
6,441
—
(5,594)
(1,423)
(372)
(475)
(4,486)
18,037
(13,690)
—
(13,690)
2,496
—
—
(5,424)
—
(3,753)
—
2,586
—
(4,095)
44
296
12,525
12,821
5,155
284
—
4,095
—
5,728
495
See notes to Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A – Nature of Business and Basis of Presentation
NeoGenomics, Inc., a Nevada corporation (the “Parent”, “Company”, “NeoGenomics”, “we” or “our”), and its subsidiaries operates as a certified high complexity clinical
laboratory in accordance with the federal government’s Clinical Laboratory Improvement Act, as amended, 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 Consolidated Financial Statements include the accounts of the Parent, all subsidiaries, and the accounts of any variable interest entities where the Company
has determined it is the primary beneficiary. All intercompany accounts and balances have been eliminated in consolidation.
Segment Reporting
The Company reports its activities in two operating segments; the Clinical Services segment and the Pharma Services segment. These reportable segments deliver testing
services to hospitals, pathologists, oncologists, clinicians, pharmaceutical firms and researchers and represent 100% of the Company’s consolidated assets, net revenues and net
income for each of the three years ended December 31, 2019, 2018 and 2017, respectively. For further financial information about these segments, see Note R, Segment
Information.
Reclassifications
Certain immaterial reclassifications have been made to the prior period financial statements to conform to the current period presentation. For further details regarding the
impact of these new accounting standards see Note B, Summary of Significant Accounting Policies.
Immaterial Restatement and Reclassification
Subsequent to the issuance of the December 31, 2018 Consolidated Financial Statements, during the third quarter of 2019 the Company identified that the gain on redemption of
preferred stock for the year ended December 31, 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 year ended December 31, 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 the beneficial conversion feature (“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 years prior to December 31, 2016 as a cumulative reduction of additional paid-
in capital as of December 31, 2016 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
Consolidated 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 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-K.
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 for the year ended December 31, 2018. 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 BCF, 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 Consolidated Balance Sheets (in thousands):
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Balance at December 31, 2016
Deemed dividends on preferred stock and amortization of beneficial conversion
feature
Balance at December 31, 2017
Deemed dividends on preferred stock and amortization of beneficial conversion
feature*
Gain on redemption of preferred stock
Balance at December 31, 2018
As Previously Reported
As Corrected
Additional Paid-in
Capital
Accumulated Deficit
Additional Paid-in
Capital
Accumulated Deficit
$
216,104 $
(53,867)
$
191,308 $
(29,071)
805
230,030
419
—
372,186
(10,547)
(58,422)
(5,627)
9,075
(51,258)
(9,742)
194,687
(5,208)
9,075
340,291
—
(23,079)
—
—
(19,363)
*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 BCF, 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
Series A Redeemable
Convertible Preferred
Stock
Immaterial Correction of
an Error
Reclassification
As Currently Reported
Series A Redeemable
Convertible Preferred
Stock
Balance at December 31, 2017
Redemption of Series A Preferred Stock
Deemed dividends on preferred stock and amortization of beneficial
conversion feature
Gain on redemption of preferred stock
Balance at December 31, 2018
$
$
32,615 $
(50,096)
8,406
9,075
— $
— $
—
18,150
(18,150)
— $
— $
12,273
(21,348)
9,075
— $
32,615
(37,823)
5,208
—
—
Note B – Summary of Significant Accounting Policies
Use of Estimates
The Company prepares its Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”). These
principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with
amounts disclosed in the related notes to the Consolidated Financial Statements. Actual results and outcomes may differ from management’s estimates, judgments and
assumptions. Significant estimates, judgments and assumptions used in these Consolidated Financial Statements include, but are not limited to those related to revenues,
accounts receivable and related allowances, contingencies, useful lives and recovery of long-term assets and intangible assets, income taxes and valuation allowances, stock-
based compensation and impairment analysis of goodwill. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in
estimates are reflected in the Consolidated Financial Statements prospectively from the date of the change in estimate.
Revenue Recognition
Clinical Services
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 at the point in time the diagnostic services have been performed and the results have been delivered to the ordering physician. These diagnostic services
are billed to various payers, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals.
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,
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including anticipated payer denials. Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing for commercial insurance,
Medicare and other governmental and self-pay payers and within 60 to 90 days of billing for client payers.
Pharma Services
The Company’s Pharma Services segment generally enters into contracts with pharmaceutical and biotech customers as well as other Clinical 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 for services provided in advance of revenue being earned are deferred as contract liabilities. The associated revenue is recognized and the contract liability is
reduced as the contracted services are subsequently earned. 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 account 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 and all others are classified as non-current assets. Contract assets are included in other current assets and other assets on the Consolidated Balance Sheets.
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.
Cost of Revenue
Cost of revenue includes payroll and payroll related costs for performing tests, 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.
Shipping Costs
The Company has expenses related to shipping specimens to our facilities for testing, including costs incurred for contract couriers, commercial airline flights and FedEx
charges. We also incur expenses returning samples and slides to our customers. We had approximately $ 14.2 million, $9.8 million and $10.8 million in shipping expenses for
the years ended December 31, 2019, 2018 and 2017, respectively. These costs were expensed as fulfillment costs and included in our cost of revenue.
Advertising Costs
Advertising costs are expensed at the time they are incurred and are deemed immaterial for the years ended December 31, 2019, 2018 and 2017.
Research and Development
In 2019, we made significant investments in research and development, including substantial upgrades to our next-generation sequencing offering and capabilities. Research
and development (“R&D”) costs are expensed as incurred. R&D expenses consist of payroll and payroll related costs, laboratory supplies, and costs for samples to complete
validation studies. These expenses are primarily incurred to develop new genetic tests.
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Accounts Receivable
Accounts receivable are reported for all clinical services 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.
For Pharma Services, the Company negotiates billing schedules and payment terms on a contract-by-contract basis which can include payments based on certain milestones
being achieved. Receivables are generally reported over time based on the number of units completed, which generally aligns with the progress of the Company towards
fulfilling its obligations under the contract.
Cash and cash equivalents
We consider all highly liquid investments purchased with an original maturity of ninety days or less to be cash equivalents.
Fair Value of Financial Instruments
The carrying value of cash and cash equivalents, accounts receivable, net, accounts payable, accrued expenses and other liabilities, and other current assets and liabilities,
including our revolving credit facility are considered reasonable estimates of their respective fair values due to their short-term nature. The Company maintains its cash and
cash equivalents with financial institutions that the Company believes to be of high credit standing. The Company believes that, as of December 31, 2019, its concentration of
credit risk related to cash and cash equivalents was not significant. The carrying values of the Company’s long-term financing obligations and term loan approximate their fair
value based on the current market conditions for similar instruments. In December of 2016 and June of 2018, the Company entered into interest rate swap agreements. See Note
I, Derivative Instruments and Hedging Activities for additional discussion.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of
observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered
observable and the last unobservable.
Level 1: Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets
involving identical assets.
Level 2: Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from
readily-available pricing sources for comparable instruments.
Level 3: Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that
market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
Inventories
Inventories, which consist principally of testing supplies, are valued at lower of cost or net realizable value, using the first-in, first-out method (FIFO).
Other Current Assets
As of December 31, 2019 and 2018, other current assets consist primarily of pharma contract assets, capitalized commissions and non-trade receivables.
Property and Equipment, net
Property and equipment are recorded at cost, net of accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line basis over the
estimated useful lives of the assets. Leasehold improvements and property and equipment under capital leases are amortized over the shorter of the related lease terms or their
estimated useful lives. Costs incurred in connection with the development of internal-use software are capitalized in accordance with the accounting standard for internal-use
software, and are amortized over the expected useful life of the software, generally 2-10 years. We perform a fair value assessment on property and equipment acquired in a
business combination and record the fair value as the cost basis for those assets.
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The Company periodically reviews the estimated useful lives of property and equipment. Changes to the estimated useful lives are recorded prospectively from the date of the
change. Upon retirement or sale, the cost of the assets disposed of and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is
included in income (loss) from operations. Repairs and maintenance costs are expensed as incurred and are included in general and administrative expenses.
Intangible Assets
Intangible assets with determinable useful lives are recorded at acquired fair value or cost, less accumulated amortization. Each intangible asset is amortized over its estimated
useful life using the straight-line method. We periodically review the estimated pattern in which the economic benefits will be consumed and adjust the amortization period and
pattern to match our estimate. Intangible assets with indefinite useful lives are recorded at fair value or cost and not amortized but tested annually for impairment. There were no
impairment losses related to intangible assets with indefinite useful lives for the years ended December 31, 2019 and 2018.
At December 31, 2019 and 2018, the Company’s intangible assets were comprised of customer relationships, trademarks, and trade names.
Goodwill
The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could
include, but are not limited to (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a
regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount,
including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management performs a
quantitative goodwill impairment test. The quantitative analysis is performed by comparing the fair value of the reporting unit to its carrying value. If the carrying value is
greater than our estimate of fair value, an impairment loss will be recognized for the amount in which the carrying amount exceeds the reporting unit's fair value. The Company
estimates the fair values of its reporting units using a combination of the income, or discounted cash flows, approach and the market approach, which utilizes comparable
companies’ data. The Company’s evaluation of goodwill resulted in no impairment losses for the years ended December 31, 2019 and 2018.
Recoverability and Impairment of Long-Lived Assets
The Company reviews the recoverability of its long-lived assets (including definite-lived intangible assets) if events or changes in circumstances indicate the assets may be
impaired. Evaluation of possible impairment is based on the Company’s ability to recover the asset from the expected future pretax cash flows (undiscounted and without
interest charges) of the related operations. If the expected undiscounted pretax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for
the difference between the estimated fair value and carrying amount of the asset. No impairment losses were recognized in the years ended December 31, 2019, 2018 or 2017.
Debt Issuance Costs
We record debt issuance costs related to our term loan as direct deductions from the carrying amount of the term loan. The costs are amortized to interest expense over the life
of the debt using the effective interest method. Debt issuance costs relating to line of credit arrangements are recorded as assets and amortized over the term of the credit
arrangement regardless of whether any outstanding borrowing exists.
Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage risks related to interest expense. We account for derivatives in accordance with Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 815, which establishes accounting and reporting standards requiring that derivative instruments be recorded on
the balance sheet as either an asset or liability and measured at fair value. Additionally, changes in the derivative’s fair value will be recognized currently in earnings unless
specific hedge accounting criteria are met. For further information on derivative instruments and hedging activities, see Note I, Derivative Instruments and Hedging Activities.
Series A Redeemable Convertible Preferred Stock
The Company classified its Series A Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) as temporary equity on the Consolidated Balance Sheets due to
certain deemed liquidation events that were outside the Company’s control. We evaluated our Series A Preferred Stock upon issuance in order to determine classification as to
permanent or temporary equity and whether or not the instrument contains an embedded derivative that requires bifurcation. This analysis followed the whole
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instrument approach which compares an individual feature against the entire instrument which includes that feature. This analysis was based on a consideration of the economic
characteristics and risk of the Series A Preferred Stock.
As a result of this analysis, we concluded that the Series A Preferred Stock represented an equity host and, therefore, the redemption feature of the Series A Preferred Stock was
not considered to be clearly and closely related to the associated equity host instrument. However, the redemption features did not meet the net settlement criteria of a derivative
and, therefore, were not considered embedded derivatives that required bifurcation.
We also concluded that the conversion rights under the Series A Preferred Stock were clearly and closely related to the equity host instrument. Accordingly, the conversion
rights features on the Series A Preferred Stock were not considered an embedded derivative that required bifurcation.
Beneficial Conversion Feature
The issuance of the Company’s Series A Preferred Stock generated a BCF, which arises when a debt or equity security is issued with an embedded conversion option that is
beneficial to the investor or in the money at inception because the conversion option has an effective strike price that is less than the market price of the underlying stock at the
commitment date. We recognized this BCF by allocating the intrinsic value of the conversion option, to additional paid-in capital, resulting in a discount on the Series A
Preferred Stock. NeoGenomics accreted the discount from the date of issuance through the earliest conversion date, which was three years. Accretion expense was recognized as
dividend equivalents. On June 25, 2018, the Company redeemed the remaining outstanding Series A Preferred Stock. For further information on the redemption, see Note J,
Class A Redeemable Convertible Preferred Stock.
Income Taxes
We compute income taxes in accordance with FASB ASC Topic 740, Income Taxes, under which deferred taxes are recognized for the tax consequences of temporary
differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and
liabilities. Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date. Temporary differences between
financial and tax reporting arise primarily from the use of different depreciation methods and lives for property and equipment, recognition of bad debts, compensation related
expenses and various other expenses that have been allowed for or accrued for financial statement purposes but are not currently deductible for income tax purposes.
The provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and
state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and any estimated valuation allowances deemed necessary to
recognize deferred tax assets at an amount that is more likely than not to be realized. We evaluate tax positions that have been taken or are expected to be taken in our tax
returns, and record a liability for uncertain tax positions, if deemed necessary. We follow a two-step approach to recognizing and measuring uncertain tax positions. First, tax
positions are recognized if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon examination, including resolution of
related appeals or litigation processes, if any. Second, the tax position is measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized
upon settlement.
We recognize interest and penalties related to unrecognized tax benefits in the provision for income taxes in the accompanying Consolidated Balance Sheets. During the year
ended December 31, 2019 we had an insignificant amount on our Consolidated Balance Sheets related to uncertain tax positions including a provision for interest and penalties
related to such positions. During the year ended December 31, 2018, we had an uncertain tax position related to the deductibility of certain accrued compensation. During the
year ended December 31, 2017, we do not believe we had any significant uncertain tax positions. We do not expect a significant change in our uncertain tax positions in the next
12 months.
Stock-Based Compensation
We measure compensation expense for stock-based awards to employees, non-employee contracted physicians, and directors based upon the awards’ initial grant-date fair
value. The estimated grant-date fair value of the award is recognized as expense over the requisite service period using the straight-line method.
We estimate the fair value of stock options using a trinomial lattice model. This model is affected by our stock price on the date of the grant as well as assumptions regarding a
number of highly complex and subjective variables. These variables include the expected term of the option, expected risk-free interest rate the expected volatility of our
common stock, and expected dividend yield, each of which is more fully described below. The assumptions for expected term and expected volatility are the two assumptions
that significantly affect the grant date fair value.
Expected Term: The expected term of an option is the period of time that the option is expected to be outstanding. The average expected term is determined using a trinomial
lattice simulation model.
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Risk-free Interest Rate: We base the risk-free interest rate used in the trinomial lattice valuation method on the implied yield at the grant date of the U.S. Treasury zero-coupon
issue with an equivalent term to the stock-based award being valued. Where the expected term of a stock-based award does not correspond with the term for which a zero
coupon interest rate is quoted, we use the nearest interest rate from the available maturities.
Expected Stock Price Volatility: We use our own historical weekly volatility because that is more reflective of market conditions.
Dividend Yield: Because we have never paid a dividend and do not expect to begin doing so in the foreseeable future, we have assumed no dividend yield in valuing our stock-
based awards.
Tax Effects of Stock-Based Compensation
We will only recognize a tax benefit from windfall tax deductions for stock-based awards in additional paid-in capital if an incremental tax benefit is realized after all other tax
attributes currently available have been utilized. Excess tax benefits and tax deficiencies for share-based payment awards are recorded within income tax expense in the
Consolidated Statements of Operations, rather than directly to additional paid-in capital.
Net Income (Loss) per Common Share
We have adopted the two class method of calculating earnings (loss) per share, due to the issuance of the Series A Preferred Stock in December 2015. Under this method, when
we have a net loss we will not allocate the net loss to the holders of the Series A Preferred Stock (our participating shareholders) as they do not have a contractual obligation to
share in losses. Under this method, when we have net income, we will compute net income per share using the weighted average number of common shares outstanding during
the applicable period plus the weighted average number of preferred shares outstanding during the period.
Diluted net income per share is computed using the weighted average number of common shares outstanding during the applicable period, plus the dilutive effect of potential
common stock. Potential common stock consists of shares issuable pursuant to stock options and warrants. Calculations of net income per share are done using the treasury
stock method.
Recently Adopted Accounting Guidance
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (“Topic 842”). Topic 842 supersedes the lease requirements in FASB 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 on January 1, 2019 using the modified retrospective method and using the optional transition method to apply the new lease accounting
standard 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 D, Leases, for further details regarding the impact of the adoption of Topic 842 and other information related to the Company’s lease portfolio.
In May 2014, the FASB issued ASU 2014-09, which amends FASB Accounting Standards Codification by creating Topic 606, Revenues from Contracts with Customers
(“ASC 606”). This standard update calls for a number of revisions in the revenue recognition rules. The Company adopted this ASU on January 1, 2018 using a full retrospective
method of adoption. Under this method, the Company has restated its results for each prior reporting period presented as if ASC 606 had been effective for those periods.
The adoption of this standard required us to implement new revenue policies, procedures and internal controls related to revenue recognition. In addition, the adoption resulted
in enhanced financial statement disclosures surrounding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. For further
details, see Note C, Revenue Recognition.
The new standard impacts each of our two reportable segments differently due to the transactional nature of the Clinical Services segment versus the generally long-term nature
of our Pharma Services contracts. The specific effect on our reportable segments is explained below:
Clinical Services Revenue
Under the new standard, substantially all of our bad debt expense, which has historically been presented as part of general and administrative expense, is considered an implicit
price concession and is reported as a reduction in revenue. As a result of ASC
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606, we reported a material cumulative reduction in clinical revenue from previously reported periods and a similar reduction in general and administrative expenses.
Pharma Services Revenue
The adoption of ASC 606 also resulted in changes to the timing of revenue recognition related to Pharma Services contracts as certain individual deliverables such as study
setup fees, for which revenue was previously recognized in the period when the deliverables were completed and invoiced, are recognized over the remaining performance period
under the new standard. Additionally, certain costs to obtain contracts, primarily for sales commissions, are capitalized when incurred and are amortized over the term of the
contract. Under ASC 606, the Company is required to make estimates of the total transaction price per contract, including estimates of variable consideration and the number of
performance obligations, and recognize the estimated amount as revenue as it transfers control of the product or performance obligations to its customers. The estimation of total
transaction price, number of performance obligations, variable consideration and the application of the related constraint, was not required under previous GAAP and requires
the use of significant management judgment and estimates. The Company elected certain practical expedients as allowed under the standard including the following: contracts
that began and ended within the same annual reporting period were not restated; contracts with variable consideration were estimated using the transaction price at the date the
contract was completed; contract modifications that occurred prior to the earliest reporting period have not been retrospectively restated but have rather been reflected as an
aggregate adjustment in the earliest reporting period. The cumulative effect of this standard did not result in a material change to our Pharma Services revenue.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment. This standard eliminates Step 2 of the
goodwill impairment test. Instead, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying
amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized
should not exceed the total amount of goodwill allocated to that reporting unit. This update is effective for annual and interim periods beginning after December 15, 2019. The
Company early adopted this standard on January 1, 2018. The adoption of this standard did not have an impact on the Consolidated Financial Statements.
Accounting Pronouncements Pending Adoption
In August 2018, the FASB issued ASU 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 was effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2019. The Company will adopt this pronouncement as of January 1, 2020. We
currently do not expect the adoption to have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB also 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 was effective for annual periods beginning after December 15, 2019, and interim periods
within those periods. Certain provisions of ASU 2018-13 must be adopted retrospectively, while others must be adopted prospectively. The Company will adopt this
pronouncement as of January 1, 2020. We currently do not expect the adoption to have a material impact on our Consolidated Financial Statements.
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 standard, effective January 1, 2020 for public business
entities for annual periods beginning after December 15, 2019, and interim periods within those years, 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
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NEOGENOMICS, INC.
historical trends, current economic conditions, supportable forecasts, and customer and credit risks. The adoption of Topic 326 is not expected to have a material impact on the
Company’s Consolidated Financial Statements and disclosures.
Note C – Revenue Recognition
The Company has two operating segments for which it recognizes revenue; Clinical Services and Pharma Services. The Clinical Services segment provides various clinical
testing services to community-based pathology practices, hospital pathology labs and academic centers with reimbursement from various payers including client direct billing,
commercial insurance, Medicare and other government payers, and patients. The Pharma Services segment supports pharmaceutical firms in their drug development programs
by providing testing services and data analytics for clinical trials and research
Clinical Services Revenue
The Company’s specialized diagnostic services are performed based on a written test requisition form or electronic equivalent. The performance obligation is satisfied and
revenues are recognized once the diagnostic services have been performed and the results have been delivered to the ordering physician. These diagnostic services are billed to
various payers, including client direct billing, commercial insurance, Medicare and other government payers, and patients. Revenue is recorded for all payers based on the
amount expected to be collected, which considers implicit price concessions. Implicit price concessions represent differences between amounts billed and the estimated
consideration the Company expects to receive based on negotiated discounts, historical collection experience and other anticipated adjustments, including anticipated payer
denials. Collection of consideration the Company expects to receive typically occurs within 30 to 60 days of billing for commercial insurance, Medicare and other governmental
and self-pay payers and within 60 to 90 days of billing for client payers.
Pharma Services Revenue
The Company’s Pharma Services segment generally enters into contracts with pharmaceutical customers as well as other Contract Research Organizations (“CROs”) to provide
research and clinical trial services ranging in duration from one month to several years. The Company records revenue on a unit-of-service basis based on number of units
completed and the total expected contract value. The total expected contract value is estimated based on historical experience of total contracted units compared to realized units
as well as known factors on a specific contract-by-contract basis. Certain contracts include upfront fees, final settlement amounts or billing milestones that may not align with
the completion of performance obligations. The value of these upfront fees or final settlement amounts is usually recognized over time based on the number of units completed,
which aligns with the progress of the Company towards fulfilling its obligations under the contract.
The Company also enters into other contracts, such as validation studies, for which the sole deliverable is a final report that is sent to sponsors at the completion of contracted
activities. For these contracts, revenue is recognized at a point in time upon delivery of the final report to the sponsor. Any contracts that contain multiple performance
obligations and include both units-of-service and point-in-time deliverables are accounted for as separate performance obligations and revenue is recognized as previously
disclosed. The Company negotiates billing schedules and payment terms on a contract-by-contract basis. While the contract terms generally provide for payments based on a
unit-of-service arrangement, the billing schedules, payment terms and related cash payments may not align with the performance of services and, as such, may not correspond to
revenue recognized in any given period.
Amounts collected in advance of services being provided are deferred as contract liabilities on the Consolidated Balance Sheets. The associated revenue is recognized and the
contract liability is reduced as the contracted services are subsequently performed. Contract assets are established for revenue that has been recognized but not yet billed. These
contract assets are reduced once the customer is invoiced and a corresponding receivable is recorded. Additionally, certain costs to obtain contracts, primarily for sales
commissions, are capitalized when incurred and are amortized over the term of the contract. Amounts capitalized for contracts with an initial contract term of twelve months or
less are classified as current assets. All others are classified as non-current assets.
Most contracts are terminable by the customer, either immediately or according to advance notice terms specified within the contracts. All contracts require payment of fees to
the Company for services rendered through the date of termination and may require payment for subsequent services necessary to conclude the study or close out the contract.
The following table summarizes the values of contract assets, capitalized commissions and contract liabilities as of December 31, 2019 and December 31, 2018 (in thousands):
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Current pharma contract assets (1)
Long-term pharma contract assets (2)
Total pharma contract assets
Current pharma capitalized commissions (1)
Long-term pharma capitalized commissions (2)
Total pharma capitalized commissions
Current pharma contract liabilities
Long-term pharma contract liabilities (3)
Total pharma contract liabilities
December 31, 2019
December 31, 2018
$
$
$
$
$
$
1,000
153
1,153
133
798
931
1,610
1,171
2,781
$
$
$
$
$
$
86
268
354
271
650
921
927
1,652
2,579
(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.
The increases in the contract assets for the period ended December 31, 2019 as compared to the balances at December 31, 2018 are driven by increases in the volume of Pharma
contracts nearing completion. Total Pharma contract liabilities increased $0.2 million, or 8%, from December 31, 2018 while capitalized commissions were flat year-over-year.
Revenue recognized for the year ended December 31, 2019 related to Pharma contract liabilities outstanding at the beginning of the period was $2.2 million. Amortization of
capitalized commissions for the years ended December 31, 2019 and 2018 were $1.2 million and $1.0 million, respectively.
During the year ended December 31, 2019, we signed approximately $102 million in net new contracts bringing the total amount of signed contracts at year-end to
$130.3 million, substantially all of which contain cancellation provisions. The Company applied the practical expedient and does not disclose information about remaining
performance obligations that have original expected durations of one year or less. The unsatisfied existing performance obligations under long-term contracts as defined by
ASC 606 differs from backlog in that these obligations do not include wholly unperformed contracts where the promised consideration is variable and/or the application of other
practical expedients.
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):
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Clinical Services:
Client direct billing
Commercial Insurance
Medicare and Medicaid
Self-Pay
Total Clinical Services
Pharma Services:
Total Revenue
December 31, 2019
December 31, 2018
December 31, 2017
$
$
212,703 $
83,107
64,745
606
361,161
47,669
408,830 $
164,888 $
40,360
35,566
1,059
241,873
34,868
276,741 $
147,726
35,473
29,493
405
213,097
27,154
240,251
Note D – 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 10 years. Leases with an initial term of 12 months or less are not recorded on the balance sheet.
Some of the Company’s real estate lease agreements include options to either renew or early terminate the lease. Leases with renewal options allow the Company to extend the
lease term typically between 1 and 5 years. When it is reasonably certain that the Company will exercise an option to renew or terminate a lease, these options are considered in
determining the classification and measurement of the lease.
Lease liabilities are recorded based on the present value of the future lease payments over the lease term and assessed as of the commencement date. Incentives received from
landlords, such as reimbursements for tenant improvements and rent abatement periods, effectively reduce the total lease payments owed for leases.
Certain real estate leases also include executory costs such as common area maintenance (non-lease component), as well as property insurance and property taxes (non-
components). Lease payments, which may include lease components, non-lease components and non-components, are included in the measurement of the Company’s lease
liabilities to the extent that such payments are either fixed amounts or variable amounts based on a rate or index (fixed in substance) as stipulated in the lease contract. Any
actual costs in excess of such amounts are expensed as incurred as variable lease cost.
The Company utilizes its incremental borrowing rate by lease term in order to calculate the present value of our future lease payments as the implicit rates in our leases are not
readily determinable. 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 for existing leases at adoption was determined based on the
remaining lease term using available data as of that date. For new or renewed leases that started in 2019, the discount rate was determined using the incremental borrowing rate
at lease commencement and based on the lease term.
Operating Leases
Operating lease costs represent fixed lease payments recognized on a straight-line basis over the lease term. Operating lease costs include an immaterial amount of variable lease
costs, and are recorded in cost of revenue and general and administrative, sales and marketing and R&D expenses, depending on the nature of the leased asset.
As of December 31, 2019, the maturities of our operating lease liabilities and a reconciliation to the present value of lease liabilities were as follows (in thousands):
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NEOGENOMICS, INC.
2020
2021
2022
2023
2024
Thereafter
Total remaining lease payments
Less: imputed interest
Total operating lease liabilities
Less: current portion
Long-term operating lease liabilities
Weighted-average remaining lease term (in years)
Weighted-average discount rate
The following summarizes additional supplemental data related to our operating leases (in thousands):
Operating lease costs
Right-of-use assets obtained in exchange for operating lease liabilities
Cash paid for operating lease liabilities
Remaining Lease Payments
5,094
5,648
4,317
4,246
4,273
12,705
36,283
(8,868)
27,415
(3,381)
24,034
7.74
6.5 %
For the Year Ended
December 31, 2019
6,060
For the Year Ended
December 31, 2019
21,091
5,940
$
$
$
$
$
Lease contracts that have been executed but have not yet commenced are excluded from the tables above. In 2019, the Company entered into $50.3 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 $25.0 million relating to the construction of the
underlying assets and $17.0 million in leasehold improvements. These amounts shall be placed into separate construction disbursement escrow accounts and will be initially
classified as restricted cash 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.
Construction of this facility has not yet commenced. 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):
Years ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
$
$
73
5,247
2,798
1,082
453
92
—
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NEOGENOMICS, INC.
Note E – Property and Equipment, Net
Property and equipment consisted of the following at December 31, 2019 and 2018 (in thousands):
Equipment
Building
Leasehold improvements
Furniture and fixtures
Computer hardware and office equipment
Computer software
Land
Assets not yet placed in service
Subtotal
Less: accumulated depreciation
Property and equipment, net
Depreciation expense on property and equipment in each period was as follows (in thousands):
2019
2018
Estimated Useful
Lives in Years
$
49,633 $
7,400
23,683
5,858
15,280
20,806
3,170
7,167
132,997
(68,809)
$
64,188 $
43,164
7,400
22,207
5,675
12,137
14,341
3,170
2,921
111,015
(50,127)
60,888
3-13
40
2-20
5-10
3-10
2-10
—
—
For the Years Ended December 31,
2019
2018
2017
Depreciation expense
$
20,346 $
15,804 $
15,596
In our Consolidated Statements of Operations, we recorded depreciation as follows: $9.4 million, $8.2 million and $9.3 million was recorded in cost of revenue for the years
ended December 31, 2019, 2018 and 2017, respectively, $10.8 million, $7.6 million and $6.2 million was recorded in general and administrative expenses for the years ended
December 31, 2019, 2018 and 2017, respectively, and $0.1 million, $0, and $0.1 million was recorded in research and development expense for the years ended December 31,
2019, 2018 and 2017.
Note F – Acquisitions
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 an approximately $2.0 million estimated working capital adjustment and adjustments
for estimated cash on hand of Genoptix on the Acquisition Date and (ii) 1.0 million shares of NeoGenomics’ common stock pursuant to the 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 its agreement with Cartesian did not have an impact on its 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 carried a minimum six-month holding period before such common stock could be sold to the public. We estimated the fair value of the common stock consideration using
inputs not observable in the market and thus represents a Level 3 measurement as defined in ASC 820, Fair Value Measurements. 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):
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NEOGENOMICS, INC.
Common Stock Valuation
Shares of common stock issued as consideration
Value of common stock issued as consideration
Issue discount due to lack of marketability
Fair value of common stock at December 10, 2018
Amount
1,000,000
13.94
13,940
(697)
13,243
$
$
$
$
The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on 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 has finalized its valuation of
certain assets and liabilities.
The acquisition fair values below are presented as of December 10, 2018 (in thousands):
Current assets
Property and equipment
Identifiable intangible assets
Goodwill
Long-term assets
Total assets acquired
Current liabilities
Long-term liabilities (1)
Net assets acquired
December 10, 2018
(As Initially Reported)
Measurement Period and Other
Adjustments
December 10, 2018
(As Adjusted)
$
$
$
22,172 $
21,029
71,792
50,873
170
166,036 $
(10,769)
(15,265)
140,002 $
2,765 $
(428)
(3,463)
709
—
(417) $
(1,430)
1,847
— $
24,937
20,601
68,329
51,582
170
165,619
(12,199)
(13,418)
140,002
(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 assigned to customer relationships which are being amortized over fifteen years, $0.7 million was assigned
to the Genoptix trade name which is being amortized over one year, and $13.4 million was 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
trademarks. None of the goodwill is expected to be deductible for income tax purposes. The 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) has been provided for illustrative purposes only and is 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.
Revenue
Net loss
Net income available to common stockholders
For the Year Ended December 31, 2018
(unaudited)
$
$
$
367,988
(1,999)
1,401
The following unaudited pro forma information (in thousands) has been provided for illustrative purposes only and is not necessarily indicative of results that would have
occurred had the Acquisition been in effect since January 1, 2017, nor are they necessarily indicative of future results.
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Revenue
Net income (loss) attributable to common stockholders
Income (loss) per share
Basic
Diluted
$
$
For the Years ended December 31,
(unaudited)
2018
2017
367,988 $
1,401
0.02 $
85,618
91,568
356,711
(42,930)
(0.53)
80,426
80,426
The unaudited pro forma consolidated results during the year ended December 31, 2018 and 2017 have been prepared by adjusting our historical results to include the
acquisition of Genoptix as if it occurred on January 1, 2017. These unaudited pro forma consolidated historical results were then adjusted for the following:
• Adjustments to reflect amortization expense associated with the acquired assets, partially offset by the elimination of the amortization and depreciation expense
•
associated with Genoptix historical assets.
Remove interest expense under the Credit Facilities as the Company has paid cash for the acquisition of Genoptix and has paid all outstanding debt balances of
Genoptix.
As noted above, the unaudited pro forma results of operations do not purport to be indicative of the actual results that would have been achieved by the combined company for
the periods presented or that may be achieved by the combined company in the future.
Note G – Goodwill and Intangible Assets
As a result of the acquisition of Genoptix in December of 2018, we recorded $51.6 million in goodwill, including amounts for measurement period and other adjustments. Refer
to Note F, Acquisitions, for more information regarding the Genoptix acquisition.
The following table summarizes the changes in goodwill for the years ended December 31, 2019 and 2018 (in thousands):
Balance, beginning of year
Goodwill acquired
Purchase price adjustment
Balance, end of year
For the Years Ended December 31,
2019
2018
$
$
$
197,892
—
709
198,601
$
147,019
50,873
—
197,892
The following table summarizes the allocation of goodwill by segment for the years ended December 31, 2019 and 2018 (in thousands):
Clinical Services
2019
Pharma Services
2019
Total 2019
Clinical Services
2018
Pharma Services
2018
Total 2018
Goodwill
$
179,534 $
19,067 $
198,601 $
178,825 $
19,067 $
197,892
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Intangible assets consisted of the following (in thousands):
Trade Names
Non-Compete Agreement
Customer Relationships
Trademark - Indefinite lived
Total
Trade Name
Non-Compete Agreement
Customer Relationships
Trademark - Indefinite lived
Total
Amortization
Period
12-24 months
24 months
180 months
—
Amortization
Period
12-24 months
24 months
180 months
—
$
$
$
$
Cost
3,679 $
27
139,271
13,447
156,424 $
Cost
3,675 $
27
141,626
14,559
159,887 $
December 31, 2019
Accumulated
Amortization
3,679 $
27
26,078
—
29,784 $
December 31, 2018
Accumulated
Amortization
3,042 $
18
16,798
—
19,858 $
Net
—
—
113,193
13,447
126,640
Net
633
9
124,828
14,559
140,029
The Company recorded amortization expense of intangible assets in the Consolidated Statements of Operations as follows (in thousands):
Amortization of intangible assets
$
9,925 $
5,928 $
6,995
For the Years Ended December 31,
2019
2018
2017
The Company records amortization expense as a general and administrative expense.
The estimated amortization expense related to amortizable intangible assets for each of the five succeeding fiscal years and thereafter as of December 31, 2019 is as follows (in
thousands):
For the Years Ending December 31,
As of December 31,
2020
2021
2022
2023
2024
Thereafter
Total
$
$
9,285
9,285
9,285
9,285
9,285
66,768
113,193
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Note H – Debt
NEOGENOMICS, INC.
The following table summarizes the long term debt, net at December 31, 2019 and 2018 (in thousands):
Term loan
Revolving credit facility
Financing obligations
Total debt
Less: Unamortized debt issuance costs
Less: Current portion of term loan and financing obligations
Total long-term debt, net
2019
2018
$
$
$
97,500 $
—
8,631
106,131 $
(671)
(10,432)
95,028 $
96,750
5,000
11,548
113,298
(997)
(14,171)
98,130
The carrying value of the Company’s long-term financing obligations and term debt approximates its fair value based on the current market conditions for similar instruments.
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,
(“Consolidated Leverage Ratio”). 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 interest rate swap
agreements to hedge against changes in the variable rate for a portion of our long term debt. See Note I, 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 the Revolving Credit Facility as of December 31, 2019.
Principal payments on the Term Loan Facility will be 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 December 31, 2019, the Company had current outstanding borrowings under the Term Loan Facility of approximately $5.0 million, and long-term outstanding borrowings
of approximately $91.8 million, net of unamortized debt issuance costs of $0.7 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 is 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, and will range 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 incurring certain indebtedness; ability to incur liens and encumbrances; make certain restricted payments,
including paying dividends on its equity securities or payments to redeem,
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NEOGENOMICS, INC.
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 certain sale and leaseback transactions; engage in transactions with its affiliates, and materially alter the business it conducts. In addition, the Company must
meet certain maximum leverage ratios and fixed charge coverage ratios as of the end of each fiscal quarter.
The Term Loan Facility requires the Company to mandatorily prepay the Term Loan Facility and amounts borrowed under the Revolving Credit Facility with (i) 100.0% of net
cash proceeds from certain sales and dispositions, subject to certain reinvestment rights, and (ii) 100.0% 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 its 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.
At 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 $88.9 million, net of unamortized debt issuance costs of $1.0 million. At December 31, 2018 the Company had $5.0 million
outstanding related to the Prior Revolving Credit Facility. 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 an alternate base rate plus the applicable margin, as
defined in the Agreement.
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 Amendment 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 financing obligations with various banks for the purchase of laboratory equipment, office equipment and leasehold improvements. These assets
are included as part of property, plant and equipment and related depreciation is included in depreciation expense. The obligations mature at various dates through 2022 and the
weighted average interest rate under such loans was approximately 4.64% as of December 31, 2019 and 4.56% as of December 31, 2018. The Company’s obligations under
these contracts are collateralized by the equipment purchased.
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Maturities of Long-Term Debt
Maturities of long-term debt at December 31, 2019 are summarized as follows (in thousands):
2020
2021
2022
2023
2024
Total Debt
Less: Debt issuance costs
Less: Current portion of long-term debt
Total long-term debt, net
Note I – Derivative Instruments and Hedging Activities
Cash Flow Hedges
Term Loan
Financing Obligations
Total Long-Term Debt
5,000 $
6,250
7,500
8,750
70,000
97,500
(671)
(5,000)
5,432 $
2,662
537
—
—
8,631
—
(5,432)
91,829 $
3,199 $
10,432
8,912
8,037
8,750
70,000
106,131
(671)
(10,432)
95,028
$
$
In December of 2016 and June of 2018, the Company entered into interest rate swap agreements to reduce the Company’s exposure to interest rate fluctuations on the
Company’s variable rate debt obligations. On December 31, 2019, the interest rate swap agreement entered into in December of 2016 matured. Upon maturity, no gains or
losses on the derivative instrument were reclassified from AOCI to earnings. Concurrently, the notional amount of the interest rate swap agreement entered into in June of 2018
increased from $20 million to $70 million with no change in the terms of the agreement.
These derivative financial instruments are accounted for at fair value as cash flow hedges, 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. We account for derivatives in accordance
with ASC Topic 815. See Note B for more information on our accounting policy related to derivative instruments and hedging activities. The fair value measurements of the
Company’s interest rate swaps are classified within Level 2 of the fair value hierarchy.
Under the hedging agreement outstanding as of December 31, 2019, 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 agreement.
Notional Amount
Effective Date
Index
Maturity
Fixed Rate
June 2018 Hedge
$70 million
June 29, 2018
One month LIBOR
December 31, 2021
2.98 %
The fair value of the interest rate swaps are included in other assets or liabilities, when applicable. As of December 31, 2019 and December 31, 2018, the fair value of the
derivative financial instruments included in other long-term assets were $0 and $0.5 million, respectively. As of December 31, 2019 and December 31, 2018, the fair value of
the derivative financial instruments included in other long-term liabilities were $2.0 million and $0.9 million, respectively. Fair value adjustments are recorded as an adjustment
to AOCI, except that any gains and losses on ineffectiveness of the interest rate swap would be recorded as an adjustment to other expense (income), net. Fair value adjustments
will be reclassified to interest expense in the period during which the hedged transaction affects earnings, whether upon termination or maturity. Hedge effectiveness is assessed
quarterly. The Company determined that the interest rate swap is highly effective and, thus, there is no impact to the Company’s Consolidated Statements of Operations from
changes in fair value. Upon maturity or termination, gains or losses, if any, on this derivative instrument will be reclassified from AOCI to earnings. There were no amounts
reclassified for gains or losses on derivative instruments during the years ended December 31, 2019 and 2018.
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Note J – Class A Redeemable Convertible Preferred Stock
On December 30, 2015, (“Original Issue Date”), the Company issued 14,666,667 shares of its Series A Preferred Stock as part of the consideration given to acquire all of the
outstanding stock of Clarient Inc. The Series A Preferred Stock has a face value of $7.50 per share for a total liquidation value of $110.0 million.
During the first year, the Series A Preferred Stock had a liquidation value of $100.0 million if the shares were redeemed prior to December 29, 2016. 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 (“PIK”) dividend, resulting in a balance
of 6,864,000 shares of Series A Preferred Stock outstanding at December 31, 2017.
On June 25, 2018, the Company redeemed the remaining outstanding Series A 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 Series A 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 BCF 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 Original Issue Date. 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
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 Original Issue Date and after the partial redemption in December of 2016 by approximately $44.7 million and $20.1 million, respectively, resulting in a BCF. The Company
recognized the BCF 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 became convertible was three years from the Original Issue Date. In addition to the BCF recorded at the Original Issue Date, we recorded additional BCF
discounts for PIK shares accrued for the quarter ended March 31, 2018 as dividends.
Automatic Conversion
Absent an early redemption, each share of Series A Preferred Stock issued and outstanding as of the tenth anniversary of the Original Issue Date would have automatically
converted into fully paid and non-assessable shares of common stock.
Note K – Income Taxes
On December 22, 2017, the United States enacted the Tax Cuts and Jobs Act. The Act made significant modifications to the provisions of the Internal Revenue Code, including
but not limited to, a corporate tax rate decrease from 35% to 21% effective as of January 1, 2018. The Company’s net deferred tax assets and liabilities have been revalued at
the newly enacted U.S. corporate rate in the year of enactment. The adjustment related to the remeasurement of the deferred tax asset and liability balances, including the
revaluation of amounts originally reported in other comprehensive income (loss), is a net benefit of $3.0 million and is included in income as of December 31, 2017.
Significant components of the provision for income taxes for the years ended December 31, 2019, 2018 and 2017 are as follows (in thousands):
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Current:
Federal
State
Total Current (Benefit)
Deferred:
Federal
State
Foreign
Total Deferred Provision (Benefit)
Total Tax Provision (Benefit)
2019
2018
2017
$
$
$
$
$
(303) $
290
(13) $
(3,409) $
(939)
—
(4,348) $
(4,361) $
(448) $
126
(322) $
1,070 $
321
115
1,506 $
1,184 $
(91)
14
(77)
(2,359)
297
(115)
(2,177)
(2,254)
A reconciliation of the differences between the effective tax rate and the federal statutory tax rate for the years ended December 31, 2019, 2018 and 2017 is as follows:
2017
2018
2019
Federal statutory tax rate
State income taxes, net of federal income tax benefit
Non-deductible expenses
Compensation expense
Transaction expenses
Deferred revaluation for Tax Cuts and Jobs Act
Adjustment due to adoption of Accounting Standards
Deferred income tax adjustments
Foreign Tax Rate Differential
Other, net
Valuation allowance
Effective tax rate
21.00 %
(19.47)%
7.49 %
(135.12)%
— %
— %
— %
(10.98)%
— %
(8.32)%
25.74 %
(119.66)%
21.00 %
11.01 %
3.80 %
(12.52)%
7.09 %
— %
(13.84)%
— %
7.20 %
(1.21)%
8.44 %
30.97 %
34.00 %
(4.96)%
(17.57)%
(25.95)%
— %
116.24 %
— %
— %
(12.99)%
(3.72)%
— %
85.05 %
At December 31, 2019 and 2018, our current and non-current deferred income tax assets and liabilities consisted of the following (in thousands):
Deferred tax assets:
Allowance for doubtful accounts
Accrued compensation
Other accruals
Other
Net operating loss carry-forwards
Nonqualified stock options and warrants
Operating lease liabilities
Gross deferred tax assets
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Operating right-of-use assets
Accumulated depreciation and amortization
Total deferred tax liabilities
Net deferred income tax liability
2019
2018
$
1,401 $
3,718
—
571
17,687
2,056
6,822
32,255
(1,261)
30,994
(6,422)
(40,138)
(46,560)
$
(15,566) $
634
1,935
156
502
17,825
1,613
—
22,665
(323)
22,342
—
(44,799)
(44,799)
(22,457)
At December 31, 2019, the Company has federal net operating loss carry forwards of approximately $67.7 million, foreign net operating loss carryforwards of $7.1 million and
state net operating loss carry forwards of approximately $30.7 million. These
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net operating loss carry forwards will begin to expire in 2036 for federal tax, 2022 for state tax and 2024 for Switzerland tax purposes, if not utilized in future periods. The net
operating loss carryforwards in Singapore do not expire. An ownership change of more than 50 percent could result in a limitation of the use of net operating loss carryforwards
under IRC Section 382 and the regulations thereunder. Management believes it is more likely than not that a limitation under Section 382 would not impact the realizability of
the federal and state net operating loss deferred tax assets.
Management assesses the recoverability of its deferred tax assets as of the end of each quarter, weighing all positive and negative evidence, and is required to establish and
maintain a valuation allowance for these assets if it is more likely than not that some or all of the deferred tax assets will not be realized. The weight given to the evidence is
commensurate with the extent to which the evidence can be objectively verified. If negative evidence exists, positive evidence is necessary to support a conclusion that a
valuation allowance is not needed. As of December 31, 2019, management determined that sufficient positive evidence did not exist to conclude that it is more likely than not
that the Net Operating Losses incurred by the Company's Switzerland and Singapore operations would be utilized in future periods. Accordingly, management established a full
valuation allowance of $1.3 million against the deferred tax assets generated by these two jurisdictions.
We file income tax returns in the U.S. as well as Singapore, Switzerland and in various state jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant judgment. For federal and state purposes, we have open tax years ending December 31, 2015 to
December 31, 2018. Our 2017 U.S. federal income tax filing is currently under examination by the IRS.
The Company adopted the accounting standard for uncertain tax positions, ASC 740-10, and as required by the standard, the Company recognizes the financial statement benefit
of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more
likely than not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. Increases or decreases to the unrecognized tax benefits could result from management’s belief that a position can or cannot be
sustained upon examination based on subsequent information or potential lapse of the applicable statute of limitation for certain tax positions.
The following are our unrecognized tax benefits as of December 31, 2019 and 2018 (in thousands):
Unrecognized tax benefits - January 1
Increases in prior year positions
Reversals of prior year positions
Increases in tax positions taken in current year
Statute expirations
Unrecognized tax benefits - December 31
For the Years Ended December 31,
2019
2018
$
$
1,847 $
27
(1,215)
—
(215)
444 $
—
632
—
1,215
—
1,847
The amount of unrecognized tax benefits at December 31, 2019, if recognized would favorably affect the Company's effective tax rate. These unrecognized tax benefits are
classified as other long term liabilities in the Company’s Consolidated Balance Sheets. The interest and penalties related to the unrecognized tax benefit are $0.1 million. Interest
and tax penalties related to unrecognized tax benefits are included in income tax expense.
The Company has received a temporary tax holiday in Switzerland as an incentive to locate and grow our operations. The tax holiday is for two consecutive 5-year periods
beginning with the year ended December 31, 2017 and is dependent on meeting agreed upon employment and capital investment targets. The first 5-year period ends with the
fiscal year ended December 31, 2021 and the second 5-year period, should our employment and capital investment targets be met end with the 2026 fiscal year. As the
Switzerland operations have been in a tax loss position since inception, no financial benefits have been realized in 2018 or 2019 under the tax holiday.
Note L – Net Income (Loss) per Share
The following table provides the computation of basic and diluted net income (loss) per share for the years ended December 31, 2019, 2018 and 2017 (in thousands, except
share and per share amounts):
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Net income (loss)
Deemed dividends on preferred stock and
amortization of beneficial conversion feature
Gain on redemption of preferred stock
Net income (loss) available to common stockholders
Basic weighted average common shares outstanding
Effect of potentially dilutive securities
Diluted weighted average shares outstanding
Basic net income (loss) per share attributable to common stockholders
Diluted net income (loss) per share attributable to common stockholders
For the Year Ended December 31,
2019
2018
2017
8,006 $
2,640 $
(396)
—
—
5,627
(9,075)
8,006 $
6,088 $
100,470
3,145
103,615
0.08 $
0.08 $
85,618
5,950
91,568
0.07 $
0.07 $
10,547
—
(10,943)
79,426
—
79,426
(0.14)
(0.14)
$
$
$
$
For the years ended December 31, 2019, 2018 and 2017, 0.1 million, 0.3 million and 1.6 million options were excluded from the calculation of diluted earnings per share
because the effect of including these potential shares was anti-dilutive. For periods in which the impact of contingently convertible Series A Preferred Stock was anti-dilutive,
these shares were excluded from the calculation of diluted earnings per share.
Note M – Stock Based Compensation
Stock Option Plan
On May 25, 2017, the shareholders of the Company approved an amendment to the Equity Incentive Plan, originally effective as of October 14, 2003, and previously amended
and restated and approved by the shareholders on December 21, 2015 (the “Amended Plan”). The Amended Plan allows for the award of equity incentives, including stock
options, stock appreciation rights, restricted stock awards, stock bonus awards, deferred stock awards, and other stock-based awards to certain employees, directors, or officers
of, or key non-employee advisers or consultants, including contracted physicians to the Company or its subsidiaries. The Amended Plan, provides that the maximum aggregate
number of shares of the Company’s common stock reserved and available for issuance under the Amended Plan is 18,650,000.
As of December 31, 2019 and 2018, stock options outstanding totaled 5.3 million and 6.8 million shares, respectively. As of December 31, 2019 and 2018, a total of
approximately 2.3 million and 3.3 million shares, respectively, were available for future option and stock awards under the Amended Plan. Options typically expire after 5 or 7
years and generally vest over 3 or 4 years, but each grant’s expiration, vesting and exercise price provisions are determined at the time the awards are granted by the
Compensation Committee of the Board of Directors.
The fair value of each stock option award granted during the years ended December 31, 2019, 2018 and 2017 was estimated as of the grant date using a trinomial lattice model
with the following weighted average assumptions:
Expected term (in years)
Risk-free interest rate (%)
Expected volatility (%)
Dividend yield (%)
Weighted average fair value/share at grant date
2019
2018
2017
3.0 – 5.5
2.4 %
43.2 %
0.0 %
1.6 – 4.0
2.5 %
43.0 %
0.0 %
$
5.77
$
2.80
$
3.0 – 4.5
1.5 %
49.0 %
0.0 %
2.26
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The status of our stock options are summarized as follows:
Outstanding at December 31, 2016
Granted
Exercised
Forfeited
Outstanding at December 31, 2017
Granted
Exercised
Forfeited
Outstanding at December 31, 2018
Granted
Exercised
Forfeited
Outstanding at December 31, 2019
Exercisable at December 31, 2019
Number
of
Shares
Weighted
Average
Exercise
Price
5,136,110 $
2,119,498
(565,569)
(347,513)
6,342,526
2,457,102
(1,570,211)
(390,000)
6,839,417
969,720
(2,309,451)
(180,927)
5,318,759
2,261,999
5.76
7.60
3.84
6.12
6.51
9.03
5.48
7.15
7.63
19.70
6.83
13.34
9.97
7.48
The number and weighted average grant-date fair values of options non-vested at the beginning and end of 2019, as well as options granted, vested and forfeited during the year
was as follows:
Non-vested at December 31, 2018
Granted
Vested
Forfeited
Non-vested at December 31, 2019
The following table summarizes information about our options outstanding at December 31, 2019:
Number of
Options
4,330,526 $
969,720
(2,067,559)
(175,928)
3,056,759
Weighted
Average
Grant Date
Fair Value
2.67
5.77
2.67
4.09
3.60
Range of
Exercise
Prices ($)
3.31 – 6.00
6.01 – 7.00
7.01 – 8.00
8.01 – 9.00
9.01 – 14.00
14.01 – 26.42
Options Outstanding
Options Exercisable
Number
Outstanding
274,500
210,417
1,697,935
1,561,425
690,686
883,796
5,318,759
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
0.39 $
1.08
2.05
3.00
3.51
4.93
2.87
4.84
6.78
7.39
8.02
11.07
19.86
9.97
Number
Exercisable
274,500
182,917
1,129,420
454,167
216,662
4,333
2,261,999
Weighted
Average
Remaining
Contractual
Life (Years)
Weighted
Average
Exercise
Price
0.39 $
0.06
1.92
2.66
3.40
3.70
1.96
4.84
6.77
7.36
7.97
10.91
14.25
7.48
As of December 31, 2019, the aggregate intrinsic value of all stock options outstanding and expected to vest was approximately $102.5 million and the aggregate intrinsic value
of currently exercisable stock options was approximately $49.2 million. The intrinsic value of each option share is the difference between the fair market value of
NeoGenomics’ common stock and the exercise price of such option share to the extent it is “in-the-money”. Aggregate intrinsic value represents the value that would have been
received by the holders of in-the-money options had they exercised their options on the last trading day of the year
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and sold the underlying shares at the closing stock price on such day. The intrinsic value calculation is based on the $29.25 closing stock price of NeoGenomics Common Stock
on December 31, 2019, the last trading day of 2019. The total number of in-the-money options outstanding and exercisable as of December 31, 2019 was approximately 2.3
million.
The total intrinsic value of options exercised during the years ended December 31, 2019, 2018 and 2017 was approximately $35.3 million, $29.3 million and $2.8 million,
respectively. Intrinsic value of exercised shares is the total value of such shares on the date of exercise less the cash received from the option holder to exercise the options. The
total cash proceeds received from the exercise of stock options was approximately $12.4 million, $8.6 million and $2.2 million for the years ended December 31, 2019, 2018
and 2017, respectively.
The total fair value of options granted during the years ended December 31, 2019, 2018 and 2017 was approximately $5.6 million, $6.9 million and $4.8 million, respectively.
The total fair value of option shares vested during the years ended December 31, 2019, 2018 and 2017 was approximately $5.5 million, $5.5 million and $3.6 million,
respectively.
We recognize stock-based compensation expense using the straight-line basis over the awards’ requisite service periods. Stock compensation expense related to stock options
for the years ended December 31, 2019, 2018 and 2017 was approximately $6.8 million, $5.4 million and $5.0 million, respectively. As of December 31, 2019, there was
approximately $4.6 million of total unrecognized stock-based compensation cost related to non-vested stock options granted under the Amended Plan. This cost is expected to
be recognized over a weighted-average period of 1.5 years.
Employee Stock Purchase Plan
The Company sponsors an Employee Stock Purchase Plan (“ESPP”), under which eligible employees can purchase common stock at a 15% discount from the fair market
value. Stock-based compensation expense related to the ESPP for the years ended December 31, 2019, 2018 and 2017 was approximately $0.6 million, $0.2 million and $0.1
million, respectively. Shares issued pursuant to this plan were 141,908, 113,503 and 108,599 for the years ended December 31, 2019, 2018 and 2017, respectively.
Restricted Stock Awards
The number and weighted average grant date fair values of restricted non-vested common stock at the beginning and end of 2019, 2018 and 2017, as well as stock awards
granted, vested and forfeited during the year are as follows:
Nonvested at December 31, 2016
Granted in 2017
Vested in 2017
Forfeited in 2017
Nonvested at December 31, 2017
Granted in 2018
Vested in 2018
Forfeited in 2018
Nonvested at December 31, 2018
Granted in 2019
Vested in 2019
Forfeited in 2019
Nonvested at December 31, 2019
Number
of
Restricted
Shares
Weighted
Average
Grant Date
Fair Value
137,244 $
372,711
(182,744)
—
327,211
87,811
(119,180)
(13,334)
282,508
230,980
(115,711)
(62,479)
335,298
3.59
7.27
4.50
—
7.27
12.87
7.27
7.27
9.01
19.93
9.36
12.53
15.75
Stock compensation expense related to restricted stock for the years ended December 31, 2019, 2018 and 2017 was approximately $2.6 million, $1.3 million, and $1.3 million,
respectively. As of December 31, 2019, there was approximately $2.9 million of total unrecognized stock-based compensation cost related to non-vested restricted stock granted
under the Amended Plan. This cost is expected to be recognized over a weighted-average period of 1.4 years.
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Note N – Commitments and Contingencies
Purchase Commitments
The Company has agreements in place to purchase a specified level of reagents from certain vendors. These purchase commitments expire at various dates through 2021. The
purchase commitments as of December 31, 2019 are as follows (in thousands):
Years ending December 31,
2020
2021
Total purchase commitments
$
$
7,360
5,220
12,580
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 4.64% as of December 31, 2019 and 4.56% as of December 31, 2018.
See Note H, Debt, for further details on these obligations.
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 issued their ruling 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 paid $6.7 million to HDC related to this matter in June 2019. This payment settled all obligations of the Company in connection with this litigation. The
Company no longer utilizes any HDC technology.
Note O – Related Party Transactions
On May 3, 2010, the Company entered into a consulting agreement (the “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. On May 3, 2010, the Company also entered into a warrant
agreement with Mr. Jones and issued a warrant to purchase 450,000 shares of the Company’s common stock, which were all vested as of December 31, 2016 and fully exercised
at December 31, 2017.
On November 4, 2016, the Company amended and restated the Consulting Agreement with Mr. Jones (the “Amended and Restated Consulting Agreement”). The Amended and
Restated Consulting Agreement has an initial term of November 4, 2016 through April 30, 2020, which automatically renews for additional one year periods unless either party
provides notice of termination at least three months prior to the expiration of the initial term or any renewal term. On May 6, 2019, the Company and Mr. Jones entered into a
letter agreement to modify certain provisions of the Amended and Restated Consulting Agreement which modifications included, by mutual agreement of the parties, the
following: automatic expiration of the Amended and Restated Consulting Agreement on April 30, 2020 unless the parties mutually agree 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 years ended December 31, 2019, 2018 and 2017, Mr. Jones earned approximately $93.0 thousand, $163.0 thousand and $242.0 thousand, respectively, for various
consulting work performed and reimbursement of incurred expenses. Mr. Jones also earned approximately $0, $58.0 thousand and $31.9 thousand as payment of bonuses for the
periods indicated above. During the years ended December 31, 2019, 2018 and 2017, Mr. Jones earned approximately $ 51.3 thousand, $50.0 thousand, and $50.0 thousand,
respectively as compensation for his services on the Board.
The following table summarizes stock options and restricted stock granted to Mr. Jones during the years ended December 31, 2019, 2018 and 2017:
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Grant Date
Common Stock Shares
Granted
Restricted Common Stock
Shares Granted
Fair Value
Fair Value per Share
Grant Price
June 6, 2019
June 6, 2019
June 1, 2018
June 1, 2018
May 25, 2017
May 25, 2017
4,269
—
3,017
—
10,000
—
— $
3,419 $
— $
6,897 $
— $
8,667 $
34,762 $
76,996 $
11,284 $
80,005 $
24,700 $
63,009 $
8.14 $
22.52 $
3.74 $
11.60 $
2.47 $
7.27 $
22.52
—
11.60
—
7.27
—
Note P – Retirement Plan
We maintain a defined-contribution 401(k) retirement plan covering substantially all employees (as defined). Our employees may make voluntary contributions to the plan,
subject to limitations based on IRS regulations and compensation. Effective January 1, 2017 the Company matches 100% of every dollar contributed up to 3% of the respective
employee’s compensation and an additional 50% of every dollar contributed on the next 2% of compensation (4% maximum Company match). We made matching
contributions of approximately $4.4 million, $2.7 million and $2.5 million during the years ended December 31, 2019, 2018 and 2017, respectively.
Note Q – Equity Transactions
Public Offering of Common Stock
In August 2018, the Company completed an offering of approximately 11.3 million shares of registered common stock, at a price of $12.75 per share, for gross proceeds of
approximately $143.7 million. The Company received approximately $135.1 million in net proceeds after deducting underwriting fees of approximately $8.6 million.
In May 2019, the Company completed an offering of approximately 8.1 million 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.
Common Stock Issued for Acquisitions
As discussed in Note F, Acquisitions, the Company issued 1.0 million shares of restricted common stock as consideration for the acquisition of Genoptix in December of 2018.
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 99,524 shares of common
stock.
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Note R – Segment Information
We have two primary types of customers, Clinical and Pharma. Our Clinical customers include community based pathology practices, oncology groups, hospitals and academic
centers. Our Pharma customers include pharmaceutical companies to whom we provide testing and other services to support their studies and clinical trials.
We have presented the financial information reviewed by the Chief Operating Decision Maker (“CODM”) including revenues, cost of revenue and gross profit for each of our
operating segments. The segment information presented in these financial statements has been conformed to present segments on this revised basis for all prior periods. Balance
sheet accounts are not presented at the segment level as that information is not used by the CODM.
The following table summarizes segment information for the years ended December 31, 2019, 2018 and 2017 (in thousands).
Net revenues:
Clinical Services
Pharma Services
Total Revenue
Cost of revenue:
Clinical Services
Pharma Services
Total Cost of Revenue
Gross Profit:
Clinical Services
Pharma Services
Total Gross Profit
Operating expenses:
General and administrative
Research and development
Sales and marketing
Loss on sale of Path Logic
Total operating expenses
Income from Operations
Interest expense, net
Other expense (income), net
Loss on extinguishment of debt
Income (loss) before taxes
Income tax (benefit) expense
Net income (loss)
For the Years Ended December 31,
2019
2018
2017
$
361,161 $
47,669
408,830
241,873 $
34,868
276,741
185,612
26,382
211,994
175,549
21,287
196,836
127,993
8,487
47,350
—
183,830
13,006
3,713
4,630
1,018
3,645
(4,361)
128,297
21,179
149,476
113,576
13,689
127,265
84,822
3,001
29,402
—
117,225
10,040
6,230
(14)
—
3,824
1,184
$
8,006 $
2,640 $
89
213,097
27,154
240,251
121,785
16,510
138,295
91,313
10,643
101,956
70,359
3,636
24,001
1,058
99,054
2,902
5,540
12
—
(2,650)
(2,254)
(396)
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NEOGENOMICS, INC.
Note S – Quarterly Financial Data (Unaudited)
Supplementary Data
Selected Quarterly Financial Data
(unaudited) (in thousands, except per share data)
Net revenues
Gross profit
Net (loss) income
Net (loss) income available to common stockholders
Net (loss) income per common share:
Basic
Diluted
Weighted average common shares outstanding –
Basic
Weighted average shares outstanding –
Diluted
Net revenues
Gross profit
Net income (loss)
Deemed dividends on preferred stock and amortization of preferred stock beneficial
conversion feature
Net (loss) income available to common stockholders
Net (loss) income per common share:
Basic
Diluted
Weighted average common shares outstanding –
Basic
Weighted average shares outstanding –
Diluted
Note T – Subsequent Events
$
$
$
$
$
$
$
$
$
$
$
$
$
For the Quarters Ended
03/31/19
06/30/19
09/30/19
12/31/19
Total 2019
95,577 $
47,115 $
(2,424) $
(2,424) $
101,713 $
48,966 $
1,991 $
104,672 $
50,832 $
2,143 $
106,868 $
49,923 $
6,296 $
408,830
196,836
8,006
1,991 $
2,143 $
6,296 $
8,006
(0.03) $
(0.03) $
0.02 $
0.02 $
0.02 $
0.02 $
0.06 $
0.06 $
0.08
0.08
94,740
98,297
103,899
104,393
100,470
94,740
102,336
107,880
107,816
103,615
For the Quarters Ended
03/31/18
06/30/18
09/30/18
12/31/18
Total 2018
63,423 $
27,303 $
644 $
67,746 $
30,530 $
(380) $
69,097 $
32,321 $
2,023 $
76,475 $
37,111 $
353 $
276,741
127,265
2,640
2,856 $
(6,304) $
— $
(2,212) $
5,924 $
2,023 $
— $
353 $
(3,448)
6,088
(0.03) $
(0.03) $
0.07 $
0.07 $
0.02 $
0.02 $
— $
— $
0.07
0.07
80,507
81,017
87,253
93,270
85,618
80,507
90,168
90,899
96,874
91,568
The Company has evaluated subsequent events through the issuance of these consolidated financial statements. Based on this evaluation, it was determined that no subsequent
events occurred, other than the items noted below, that require recognition or disclosure in the consolidated financial statements.
On January 2, 2020, the Company deposited $25.0 million relating to the construction of the new laboratory and headquarters facility in Fort Myers, Florida and $17.0 million
in leasehold improvements funds into two separate construction disbursement escrow accounts. Disbursements to the landlord will take place from time to time to pay for the
costs of the landlord’s work.
On January 10, 2020, NeoGenomics Laboratories, Inc. (“NeoGenomics Labs”), a wholly-owned subsidiary of the Company and Human Longevity, Inc. (“HLI”) entered into
an Asset Purchase Agreement pursuant to which NeoGenomics Labs acquired substantially all the assets of the oncology division of HLI for $37 million in cash.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our
disclosure controls and procedures as of December 31, 2019. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of
December 31, 2019, our disclosure controls and procedures were (1) effective in that they were designed to ensure that material information relating to us, and information
required to be disclosed in our reports to the SEC, including our consolidated subsidiaries, is made known to our Chief Executive Officer and Chief Financial Officer by others
within those entities, particularly during the period in which this report was being prepared, as appropriate to allow timely discussions and decisions regarding required
disclosure therein and (2) effective, in that they provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or
under the supervision of, our principal executive and principal financial officer and effected by the Company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures: (1) that pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate. Our management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment,
our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework
(2013 Framework). Based on our assessment, management, with the participation of our Chief Executive Officer and Chief Financial Officer, concluded that, as of December
31, 2019, our internal control over financial reporting was effective based on those criteria at the reasonable assurance level. The effectiveness of our internal control over
financial reporting as of December 31, 2019 has been audited by Deloitte Touche LLP, an independent registered public accounting firm, as stated and attested to in their report
that is included in Item 8, Financial Statements and Supplementary Data.
Changes in Internal Control over Financial Reporting
During the fourth quarter of 2019, we continued to monitor and evaluate the design and operating effectiveness of key controls. There were no changes in our internal control
over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that materially affected or are reasonably likely to materially affect internal control
over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of NeoGenomics, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of NeoGenomics, Inc. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in
Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company
maintained, in all material
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respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control — Integrated Framework (2013) issued by
COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as
of and for the year ended December 31, 2019, of the Company and our report dated February 28, 2020, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
/s/ Deloitte & Touche LLP
San Diego, California
February 28, 2020
ITEM 9B. OTHER INFORMATION
None.
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10 will be included under the captions “Election of Directors”, “Information as to Nominees and Other Directors”, “Information
Regarding Meetings and Committees of the Board”, “Section 16(a) Beneficial Ownership Reporting Compliance” and as otherwise, set forth in the Company’s 2020 Proxy
Statement and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 will be included under the captions “Executive Compensation and Other Information” and “Compensation Committee Interlocks and
Insider Participation” and as otherwise set forth in the Company’s 2020 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item 12 will be included under the captions “Security Ownership” and “Equity Compensation Plan Information” and as otherwise set forth in
the Company’s 2020 Proxy Statement and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item 13 will be included under the captions “Certain Relationships and Related Party Transactions” and “Information Regarding Meetings and
Committees of the Board” and as otherwise set forth in the Company’s 2020 Proxy Statement and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item 14 will be included under the caption “Independent Auditors” and as otherwise set forth in the Company’s 2020 Proxy Statement and is
incorporated herein by reference.
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NEOGENOMICS, INC.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements: See Index to Consolidated Financial Statements under Part II, Item 8 of this Annual Report on Form 10-K
PART IV
Exhibit
No.
3.1
3.2
4.1
10.1
10.2
10.3
10.4*
10.5*
10.6
10.7
10.8*
10.9*
10.10*
10.11*
Description of Exhibit
Articles of Incorporation, as amended
Amended and Restated Bylaws, as amended
Description of our Common Stock
Amended and Restated Registration Rights Agreement between
NeoGenomics, Inc. and Aspen Select Healthcare, L.P. and individuals dated
March 23, 2005
Registration Rights Agreement between NeoGenomics, Inc. and Aspen Select
Healthcare, L.P., dated March 30, 2006
Subscription Agreement dated March 16, 2009 between the Douglas M.
VanOort Living Trust and NeoGenomics, Inc.
Amended and Restated Employment Agreement dated October 28, 2009
between NeoGenomics, Inc. and Douglas M. VanOort
Employment Letter dated November 3, 2009 between NeoGenomics
Laboratories, Inc. and George Cardoza
Amended and Restated Consulting Agreement dated November 4, 2016
between NeoGenomics, Inc. and Steven C. Jones.
Letter Agreement, dated May 6, 2019 between NeoGenomics, Inc. and Steven
C. Jones.
Offer Letter between NeoGenomics Laboratories, Inc. and Steven Ross dated
April 19, 2013
Employment Agreement, dated September 18, 2014 by and between
NeoGenomics, Inc. and Robert J. Shovlin
Employment Agreement, dated April 14, 2017 between NeoGenomics, Inc.
and William Bonello.
Amended and Restated Equity Incentive Plan effective as of October 15,
2015.
Location
Provided herewith
Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2015, as filed with the
SEC on November 6, 2015
Provided herewith
Incorporated by reference to the Company’s Current Report on Form 8-K
as filed with the SEC on March 30, 2005
Incorporated by reference to the Company’s Annual Report on Form 10-
KSB for the year ended December 31, 2005, as filed with the SEC on
April 3, 2006
Incorporated by reference to the Company’s Current Report on Form 8-K
as filed with the SEC on March 20, 2009
Incorporated by reference to the Company’s Current Report on Form 8-K
as filed with the SEC on November 3, 2009
Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 2010, as filed with the SEC
on August 16, 2010
Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2016, as filed with the
SEC on November 7, 2016
Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2019, as filed with the SEC
on May 8, 2019
Incorporated by reference to the Company’s Current Report on Form 8-K
as filed with the SEC on April 23, 2013
Incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K as filed with the SEC on October 3, 2014
Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2019, as filed with the SEC
on May 8, 2019
Incorporated by reference to the Company’s Annual Report on Form 10-
K for the year ended December 31, 2015, as filed with the SEC on March
15, 2016
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NEOGENOMICS, INC.
10.12*
10.13
10.14
10.15
10.16*
10.17*
10.18*
14.1
21.1
23.1
23.2
31.1
31.2
32.1**
99.1
99.2
Amendment No. 1 of the Amended and Restated Equity Incentive Plan,
effective as of May 25, 2017.
Form of Indemnification Agreement between NeoGenomics, Inc. and each of
its executive officers and directors.
Credit Agreement, dated June 27, 2019, by and among NeoGenomics,
Laboratories Inc., NeoGenomics, Inc., and certain of its subsidiaries, the
lenders party thereto and PNC Bank, National Association, as administrative
agent
Separation Agreement and General Release of Claims between NeoGenomics,
Inc. and Sharon Virag dated August 8, 2019
Consulting Agreement between NeoGenomics, Inc. and Sharon Virag dated
August 8, 201Consulting Agreement between NeoGenomics, Inc. and Sharon
Virag dated August 8, 2019
Medical Services Agreement between NeoGenomics, Inc., and Lawrence
Weiss, M.D., Inc., effective November 25, 2019
Employment Agreement dated February 5, 2020 between Ms. Kathryn B.
McKenzie and NeoGenomics, Inc.
NeoGenomics, Inc. Code of Ethics for Senior Financial Officers and the
Principal Executive Officer
Subsidiaries of NeoGenomics, Inc.
Consent of Deloitte, LLP
Consent of Crowe, LLP
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
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
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
Charter of the Compliance Committee
Charter of the Nominating and Corporate Governance Committee
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
XBRL Instance Document - the instance document does not appear in the
Interactive Data File because its XBRL tags are embedded within the Inline
XBRL document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
95
Incorporated by reference to the Company’s Proxy Statement, dated
April 24, 2017, as filed with the SEC on April 25, 2017
Incorporated by reference to the Company’s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 2016, as filed with
the SEC on November 7, 2016
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on June 28, 2019
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on August 8, 2019
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on August 8, 2019
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on December 2, 2019
Provided herewith
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on July 20, 2011
Provided herewith
Provided herewith
Provided herewith
Provided herewith
Provided herewith
Provided herewith
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on October 17, 2014
Incorporated by reference to the Company’s Current Report on Form
8-K as filed with the SEC on October 17, 2014
Provided herewith
Provided herewith
Provided herewith
Provided herewith
Provided herewith
Provided herewith
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NEOGENOMICS, INC.
104
†
*
**
Cover Page Interactive Data File (formatted as Inline XBRL and contained in
Exhibit 101)
Provided herewith
Portions of the exhibit have been omitted pursuant to a request for confidential treatment pursuant to Rule 24b-2 promulgated under the Exchange Act. The
omitted information has been filed separately with the SEC.
Denotes a management contract or compensatory plan or arrangement.
The certification attached as Exhibit 32.1 that accompanies this Form 10-K is not deemed filed with the SEC and is not to be incorporated by reference into any
filing of NeoGenomics, Inc. under the Securities Act or the Exchange Act, whether made before or after the date of this Form 10-K, irrespective of any general
incorporation language contained in such filing.
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ITEM 16. FORM 10-K SUMMARY
None.
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NEOGENOMICS, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: February 28, 2020
NEOGENOMICS, INC.
By:
Name:
Title:
/s/ Douglas M. VanOort
Douglas M. VanOort
Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
Signatures
Title(s)
Date
/s/ Douglas M. VanOort
Douglas M. VanOort
/s/ Kathryn B. McKenzie
Kathryn B. McKenzie
/s/ Steven C. Jones
Steven C. Jones
/s/ Lynn A. Tetrault
Lynn A. Tetrault
/s/ Raymond R. Hipp
Raymond R. Hipp
/s/ Bruce K. Crowther
Bruce K. Crowther
Chairman of the Board and Chief Executive Officer (Principal Executive
February 28, 2020
Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Director
Director
Director
Director
98
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
February 28, 2020
Exhibit 4.01
DESCRIPTION OF THE REGISTRANT’S SECURITIES REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934
NeoGenomics, Inc. (“NeoGenomics” or the “Company”) has one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended: the
Company’s common stock, par value $0.001 per share (the “Common Stock”)
Description of Common Stock
The following summary description sets forth some of the general terms and provisions of the Common Stock. Because this is a summary description, it does not contain all of
the information that may be important to you. For a more detailed description of the Company’s Common Stock, you should refer to the provisions of the Company’s Articles
of Incorporation, as amended (the “Articles of Incorporation”) and the Company’s Amended and Restated By-Laws, as amended (the “Bylaws”), each of which is an exhibit to
the Annual Report on Form 10-K to which this description is an exhibit.
Authorized Shares
We are authorized to issue 250,000,000 shares of common stock, par value $0.001 per share.
Voting Rights
The outstanding shares of our common stock are fully paid and non-assessable. The holders of common stock are entitled to one vote per share for the election of directors and
with respect to all other matters submitted to a vote of stockholders. Shares of our common stock do not have cumulative voting rights, which means that the holders of more
than 50% of such shares voting for the election of directors can elect 100% of the directors if they choose to do so. Our common stock does not have preemptive rights, meaning
that the common stockholders’ ownership interest in the Company would be diluted if additional shares of common stock are subsequently issued and the existing stockholders
are not granted the right, at the discretion of the Board of Directors, to maintain their ownership interest in our Company.
Liquidation, Dissolution or Similar Rights
Upon liquidation, dissolution or winding-up of the Company, our assets, after the payment of debts and liabilities and any liquidation preferences of, and unpaid dividends on,
any class of preferred stock then outstanding, will be distributed pro-rata to the holders of our common stock.
Preemptive Rights
The holders of our common stock do not have preemptive or conversion rights to subscribe for any of our securities and have no right to require us to redeem or purchase their
shares.
Dividend Rights
The holders of common stock are entitled to share equally in dividends, if, as and when declared by our Board of Directors, out of funds legally available therefore, subject to
the priorities given to any class of preferred stock which may be issued.
Transfer Agent
The Company’s transfer agent is Standard Registrar & Transfer Company. The transfer agent’s telephone number is (801) 571-8844.
Indemnification Of Directors And Executive Officers And Limitation On Liability
The Company’s Articles of Incorporation provide that no director or officer of the Company shall be personally liable to the Company or any of its stockholders for damages for
breach of fiduciary duty as a director or officer of for any act or omission of any such director or officer; however such indemnification shall not eliminate or limit the
liability of a director or officer for (a) acts or omissions which involve intentional misconduct, fraud or a knowing violation of law or (b) the payment of dividends in violation
of Section 78.300 of the Nevada Revised Statutes. The Bylaws provide that any person who was or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer, employee or
agent of the Company (or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or
other enterprise) shall be indemnified and held harmless by the Company to the fullest extent permitted by Nevada law against expenses including attorneys’ fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding.
The Bylaws also provide that the Company must indemnify any person who was or is a party, or is threatened to be made a party, to any threatened, pending or completed
proceeding by or in the right of the Company to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, employee or agent of the
Company, or is or was serving at the request of the Company as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise
against costs incurred by such person in connection with the defense or settlement of such action or suit. Such indemnification may not be made for any claim, issue or matter as
to which such person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals, to be liable to the Company or for amounts paid in settlement to the
Company, unless and only to the extent that the court determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to
indemnity for such expenses as the court deems proper.
The Bylaws provide that the Company must pay the costs incurred by any person entitled to indemnification in defending a proceeding as such costs are incurred and in advance
of the final disposition of a proceeding; provided however, that the Company must pay such costs only upon receipt of an undertaking by or on behalf of such person to repay
the amount if it is ultimately determined by a court of competent jurisdiction that such person is not entitled to be indemnified by the Company.
The Bylaws provide that the Company may purchase and maintain insurance or make other financial arrangements on behalf of any person who is or was a director, officer,
employee or agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise in accordance with Section 78.752 of the Nevada Revised Statutes.
Nevada Revised Statutes 78.751 and 78.7502 have provisions that provide for discretionary and mandatory indemnification of officers, directors, employees, and agents of a
corporation. Under these provisions, such persons may be indemnified by a corporation against expenses, including attorney’s fees, judgment, fines and amounts paid in
settlement, actually and reasonably incurred by him in connection with the action, suit or proceeding, if he acted in good faith and in a manner which he reasonably believed to
be in or not opposed to the best interests of the corporation and with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful.
To the extent that a director, officer, employee or agent has been successful on the merits or otherwise in defense of any action, suit or proceeding, or in defense of any claim,
issue or matter, the Nevada Revised Statues provide that he must be indemnified by the Company against expenses, including attorney’s fees, actually and reasonably incurred
by him in connection with the defense.
Section 78.751 of the Nevada Revised Statues also provides that any discretionary indemnification, unless ordered by a court or advanced by the Company, may be made only
as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances. The determination must be
made:
•
•
By the stockholders;
By the Company’s Board of Directors by majority vote of a quorum consisting of directors who were not parties to that act, suit or proceeding;
•
•
If a majority vote of a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written
opinion; or
If a quorum consisting of directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (“Agreement”) is made this 5th day of February, 2020 (the “Effec(cid:43)ve Date”) by and between NeoGenomics, Inc. a
Nevada corpora(cid:43)on (“NeoGenomics” and collec(cid:43)vely with any en(cid:43)ty that is wholly or par(cid:43)ally owned by NeoGenomics, the “Company”), located at
12701 Commonwealth Drive, Suite #5, Fort Myers, Florida 33913 and Kathryn B. McKenzie (“Executive”), an individual who resides at XXXXXXX.
WHEREAS, the Company is engaged in the business of providing gene(cid:43)c and molecular diagnos(cid:43)c tes(cid:43)ng services to doctors, hospitals and
other healthcare institutions; and
RECITALS:
WHEREAS, NeoGenomics desires to employ Execu(cid:43)ve as an officer in the capacity of Chief Financial Officer (the “CFO”), and Execu(cid:43)ve desires
to be employed by NeoGenomics in such capacity, in accordance with the terms, covenants, and conditions as set forth in this Agreement.
NOW, THEREFORE, in considera(cid:43)on of the mutual promises set forth herein and other good and valuable considera(cid:43)on, the receipt and
sufficiency of which are hereby acknowledged, NeoGenomics and Executive agree as follows:
1. Employment and Term. Subject to the terms and condi(cid:43)ons set forth in this Agreement, the Company hereby offers and the Execu(cid:43)ve hereby
accepts employment as CFO the Effec(cid:43)ve Date, or such other date as may be mutually agreed upon in wri(cid:43)ng. The Execu(cid:43)ve’s employment with the
Company will be “at will” as such term is construed under Florida law. Either the Execu(cid:43)ve or the Company may terminate such employment at any
(cid:43)me and for any reason, subject to the provisions of Sec(cid:43)ons 4 and 5 hereof. For purposes of this Agreement, the period from the Effec(cid:43)ve Date un(cid:43)l
the termination of the Executive’s employment shall hereinafter be referred to as the “Term”.
2. Position and Duties.
a) Position. During the Term hereof, Execu(cid:43)ve shall serve the Company as the CFO of both NeoGenomics, Inc., the parent company, and
NeoGenomics Laboratories, Inc., the primary opera(cid:43)ng subsidiary, or such other posi(cid:43)on or posi(cid:43)ons as the Company may in the future determine, at
such loca(cid:43)on or loca(cid:43)ons as the Company may determine a(cid:68)er consulta(cid:43)on with the Execu(cid:43)ve. Execu(cid:43)ve will report to and be subject to the general
supervision and direc(cid:43)on of the Chairman and Chief Execu(cid:43)ve Officer (the “CEO”). If requested, Execu(cid:43)ve will serve in similar capaci(cid:43)es for each or
any subsidiary of NeoGenomics without additional compensation.
b ) Duties. Execu(cid:43)ve shall perform such du(cid:43)es as are customarily performed by someone holding the (cid:43)tle of CFO in the same or similar
businesses or enterprises as that engaged in by the Company and such other duties as the CEO may assign from time to time. Executive shall devote his
or her full business (cid:43)me and his best efforts, business judgment, skill and knowledge exclusively to the advancement of the business and interests of
the Company and its affiliates and to the discharge of his or her du(cid:43)es and responsibili(cid:43)es hereunder. Execu(cid:43)ve shall not engage in any other business
ac(cid:43)vity or serve in any industry, trade, professional, governmental or academic posi(cid:43)on during the Term, except as may be expressly be approved in
advance by the CEO in wri(cid:43)ng; provided, however, that Execu(cid:43)ve may, without advance approval, par(cid:43)cipate in charitable ac(cid:43)vi(cid:43)es and passive
personal ac(cid:43)vi(cid:43)es, provided that such ac(cid:43)vi(cid:43)es do not, individually or in the aggregate, interfere with the performance of Execu(cid:43)ve’s du(cid:43)es under this
Agreement, are not in conflict with the business interests of the Company or any of its
affiliates, and do not violate the terms of that certain Confidentiality, Non-Solicitation and Non-Compete Agreement attached hereto as Addendum A.
c) Compliance with Policies, Practices, etc. During the Term hereof, Executive shall comply with all Company policies, practices and procedures and
all codes of ethics and or business conduct as may be in effect for officers of the Company from time to time.
3. Compensation and Benefits of Executive. The Company shall compensate Executive for Executive’s services rendered under this Agreement as
follows:
a) Base Salary. Unless otherwise adjusted by the Compensa(cid:43)on Commi(cid:72)ee of the Board (the “Compensa(cid:43)on Commi(cid:72)ee”), the Company shall pay
Execu(cid:43)ve a base salary of $375,000 per annum (the “Base Salary”), payable in equal installments at such (cid:43)mes as is consistent with normal Company
payroll policy.
b) Bonus. Execu(cid:43)ve will be eligible for a performance-based bonus as a par(cid:43)cipant in the Company’s Management Incen(cid:43)ve Plan (“MIP”), which shall
set annual target incen(cid:43)ves for the Execu(cid:43)ve and other senior ranking employees that are determined by the Compensa(cid:43)on Commi(cid:72)ee. The
Company will target an annual bonus of up to 50% of the Execu(cid:43)ve’s Base Salary (the “Target Bonus”), with the actual amount of the bonus, if any, to
be determined by and in the sole discre(cid:43)on of the Compensa(cid:43)on Commi(cid:72)ee a(cid:68)er considera(cid:43)on of specified metrics established by the Company’s
Board of Directors (the “Board”) or the Compensa(cid:43)on Commi(cid:72)ee for such fiscal year. Execu(cid:43)ve shall be eligible to receive up to 200% of the Target
Bonus in the event that the Company’s and/or the Execu(cid:43)ve’s performance exceeds the thresholds set for the Target Bonus. Except as otherwise
agreed to by the par(cid:43)es in wri(cid:43)ng, Execu(cid:43)ve must be employed hereunder on the last day of a fiscal year in order to be eligible for a bonus for such
fiscal year.
c) Benefits. Subject to the eligibility requirements (including, but not limited to, par(cid:43)cipa(cid:43)on by part-(cid:43)me employees), and enrollment provisions of
the Company’s employee benefit plans, Execu(cid:43)ve may, to the extent he or she so chooses, par(cid:43)cipate in any and all of the Company’s employee
benefit plans, at the Company’s expense. All Company benefits are iden(cid:43)fied in the Company’s Employee Handbook and are subject to change
without no(cid:43)ce or explana(cid:43)on. In addi(cid:43)on, subject to the eligibility requirements (including, but not limited to, par(cid:43)cipa(cid:43)on by a part-(cid:43)me employee)
and enrollment provisions of the Company’s execu(cid:43)ve benefit programs, Execu(cid:43)ve shall also be en(cid:43)tled to par(cid:43)cipate in any and all other benefits
programs established for officers of the Company.
d) Stock Op(cid:51)ons and Restricted Shares. Upon approval of the Compensa(cid:43)on Commi(cid:72)ee, Execu(cid:43)ve will be granted an op(cid:43)on to purchase shares of
the Company’s common stock (the “Options”), in such number approved by the Compensa(cid:43)on Commi(cid:72)ee and on the terms and condi(cid:43)ons listed
below. Such Op(cid:43)ons will have a strike price equal to the fair market value of the common stock as of the date of the grant, which pursuant to
NeoGenomics’ Amended and Restated Equity Incen(cid:43)ve Plan (the “Plan”), shall be equal to the closing price per share of NeoGenomics’ common stock
on the last trading day immediately preceding the grant date. The Op(cid:43)ons shall be treated as incen(cid:43)ve stock op(cid:43)ons (ISOs) to the maximum extent
permi(cid:72)ed under applicable law, and the remainder of the Op(cid:43)ons, if any, shall be treated as non-qualified stock op(cid:43)ons. The grant of the Op(cid:43)ons will
be made pursuant to the Company’s Plan and will be evidenced by a separate op(cid:43)on agreement (the “Op(cid:43)on Agreement”) to be executed by the
Company and Execu(cid:43)ve, which will contain all the terms and condi(cid:43)ons of the Op(cid:43)ons (including, but not limited to, the provisions set forth in this
Section 3(d)). So long as Executive remains employed by the Company, such Options will have a
seven (7) year term before expiration and will vest ratably over a period of four (4) years from the grant date.
In addi(cid:43)on, upon approval of the Compensa(cid:43)on Commi(cid:72)ee, Execu(cid:43)ve will be granted restricted shares of the Company’s common stock (the
“Restricted Shares”), in such number approved by the Compensa(cid:43)on Commi(cid:72)ee and on the terms and condi(cid:43)ons listed below. Such Restricted
Shares will have a strike price equal to the fair market value of the common stock as of the date of the grant, which pursuant to the Plan, shall be equal
to the closing price per share of NeoGenomics’ common stock on the last trading day immediately preceding the grant date. The grant of the
Restricted Shares will be made pursuant to the Company’s Plan and will be evidenced by a separate restricted stock agreement (the “Restricted Stock
Agreement”) to be executed by the Company and Execu(cid:43)ve, which will contain all the terms and condi(cid:43)ons of the Restricted Shares (including, but
not limited to, the provisions set forth in this Sec(cid:43)on 3(d)). So long as Execu(cid:43)ve remains employed by the Company, such Restricted Shares will have a
seven (7) year term before expiration and will vest ratably over a period of four (4) years of the grant date.
Execu(cid:43)ve understands that, pursuant to the Plan, upon termina(cid:43)on of his or her employment, he or she will only have ninety (90) days (the “Exercise
Period”) to exercise any vested por(cid:43)on of the Stock Op(cid:43)ons. In the event Execu(cid:43)ve is under a blackout period at the (cid:43)me of termina(cid:43)on of his or her
employment, such Exercise Period may be extended for a reasonable period only upon approval by the Compensation Committee.
All Stock Op(cid:43)ons and Restricted Shares awarded pursuant to this Sec(cid:43)on 3(d) will contain a provision in the Stock Op(cid:43)on and Restricted Stock
Agreements that allows for immediate ves(cid:43)ng of any remaining unvested por(cid:43)on of the Stock Op(cid:43)ons and Restricted Shares in the event of the
termina(cid:43)on of Execu(cid:43)ve’s employment or services with the Company and without “Cause,” as defined in such Stock Op(cid:43)on and Restricted Stock
Agreements, or by Execu(cid:43)ve for “Good Reason,” as defined in such Stock Op(cid:43)on and Restricted Stock Agreements, during the 12-month period
commencing on the date of a Change in Control, as defined in such Stock Op(cid:43)on and Restricted Stock Agreements, and such Stock Op(cid:43)on and
Restricted Stock Agreements will expire upon the earliest of (a) 12 months a(cid:68)er the termina(cid:43)on of Execu(cid:43)ve’s service with the Company, and (b) the
Stock Options Expiration Date and the Restricted Shares Expiration Date.
e) Paid Time-Off and Holidays. Execu(cid:43)ve’s paid (cid:43)me-off (“PTO”) and holidays shall be consistent with the standards set forth in the Company’s
Employee Handbook, as revised from (cid:43)me to (cid:43)me or as otherwise published by the Company. Notwithstanding the previous sentence, Execu(cid:43)ve will
be eligible for one hundred sixty (160) hours of PTO/year, which will accrue on a pro-rata basis throughout the year, provided, however, that it is the
Company’s policy that no more than forty (40) hours of PTO can be accrued beyond this annual limit for any employee at any (cid:43)me. Thus, when
accrued PTO reaches two hundred forty (240) hours, Execu(cid:43)ve will cease accruing PTO un(cid:43)l accrued PTO is one hundred sixty (160) hours or less, at
which point Execu(cid:43)ve will again accrue PTO un(cid:43)l Execu(cid:43)ve reaches two hundred forty (240) hours. In addi(cid:43)on to PTO, there are also six (6) paid
na(cid:43)onal holidays, one (1) “floater” day and three (3) paid sick days annually available to Company employees. Execu(cid:43)ve agrees to schedule such PTO
so that it minimally interferes with the Company’s operations. Such PTO does not include Board excused absences.
f) Reimbursement of Normal Business Expenses . The Company will reimburse all reasonable business expenses of Executive, including, but not
limited to, cell phone expenses and
business related travel, meals and entertainment expenses in accordance with the Company’s polices for such reimbursement.
4. Termination. The parties agree that any termination of the Executive under this Agreement will be governed as follows:
a) By the Company for Cause. The Company shall have the right to terminate this Agreement and to discharge the Execu(cid:43)ve for Cause (as defined
below), at any (cid:43)me during the Term. For the purposes of this Agreement, the Company shall have “Cause” to terminate the Execu(cid:43)ve’s employment
hereunder upon:
(i) failure to materially perform and discharge the du(cid:43)es and responsibili(cid:43)es of Execu(cid:43)ve under this Agreement a(cid:68)er receiving wri(cid:72)en
no(cid:43)ce and allowing Execu(cid:43)ve ten (10) business days to create a plan to cure such failure(s), such plan being acceptable to the Board, and a further
thirty (30) days to cure such failure(s), if so curable, provided, however, that a(cid:68)er one such no(cid:43)ce has been given to Execu(cid:43)ve and the thirty (30) day
cure period has lapsed, the Company is no longer required to provide time to cure subsequent failures under this provision, or
(ii) any breach by Executive of the material provisions of this Agreement; or
(iii) misconduct which, in the good faith opinion and sole discretion of the Board, is injurious to the Company; or
(iv) felony conviction involving the personal dishonesty or moral turpitude of Executive; or a determination by the Board, after
consideration of all available information, that Executive has willfully and knowingly violated Company policies or procedures involving discrimination,
harassment, or work place violence; or
(v) engagement in illegal drug use or alcohol abuse which prevents Executive from performing his duties in any manner, or
(vi) any misappropriation, embezzlement or conversion of the Company’s opportunities or property by the Executive; or
(vii) willful misconduct, recklessness or gross negligence by the Executive in respect of the duties or obligations of the Executive under
this Agreement and/or the Confidentiality, Non-Solicitation or Non-Competition Agreement.
Any termina(cid:43)on for Cause pursuant to this Sec(cid:43)on shall be given to the Execu(cid:43)ve in wri(cid:43)ng and shall set forth in detail all acts or omissions upon
which the Company is relying to terminate the Execu(cid:43)ve for Cause. If an Execu(cid:43)ve is terminated for Cause, the Execu(cid:43)ve shall only be en(cid:43)tled to
receive his or her accrued and unpaid Salary, bonus and other benefits through the termina(cid:43)on date and the Company shall have no further
obligations under this Agreement from and after the date of termination.
b) Termina(cid:51)on by Company Without Cause. At any (cid:43)me during the Term, the Company shall have the right to terminate this Agreement and to
discharge the Execu(cid:43)ve without Cause effec(cid:43)ve upon delivery of wri(cid:72)en no(cid:43)ce to the Execu(cid:43)ve. If the Company terminates the Execu(cid:43)ve without
“Cause” for any reason, as long as the Execu(cid:43)ve executes a general waiver and release of all claims which the Execu(cid:43)ve may have against the
Company which form of the general waiver and release will be determined in the sole discre(cid:43)on of the Company, then the Company agrees that, as
severance,
it will con(cid:43)nue to pay the Execu(cid:43)ve’s Base Salary in accordance with Sec(cid:43)on 3(a) above (the “Severance Payments”) for twelve (12) months from the
date of the no(cid:43)ce of termina(cid:43)on. Execu(cid:43)ve further agrees that in the event that Execu(cid:43)ve obtains employment during any period where Severance
Payments are being made, Execu(cid:43)ve will promptly no(cid:43)fy the Company of the nature of his or her new employment. Provided that such employment
does not violate the terms of the Confiden(cid:43)ality, Non-Solicita(cid:43)on and Non-Compete Agreement, such Severance Payments will con(cid:43)nue to be paid.
Other than the Severance Payments, the Company shall have no further obliga(cid:43)on to the Execu(cid:43)ve a(cid:68)er the date of such termina(cid:43)on; provided,
however, that the Execu(cid:43)ve shall only be en(cid:43)tled to con(cid:43)nua(cid:43)on of the Severance Payments as long as Execu(cid:43)ve is in compliance with the provisions
of the Confiden(cid:43)ality, Non-Solicita(cid:43)on & Non-Compete Agreement, which is part of this Agreement. If termina(cid:43)on without Cause shall occur at any
(cid:43)me, then the pro rata por(cid:43)on of any unvested (cid:43)me-based op(cid:43)ons and/or restricted stock (as specified in Sec(cid:43)on 3(d)) up un(cid:43)l the date of no(cid:43)ce of
termina(cid:43)on that are due to vest in the month of termina(cid:43)on shall vest; with regard to any other unvested (cid:43)me-based op(cid:43)ons and/or restricted stock
(as specified in Sec(cid:43)on 3(d)) up un(cid:43)l the date of no(cid:43)ce of termina(cid:43)on that are due to vest during the period a(cid:68)er such month of termina(cid:43)on, but
within the year of termination, shall only vest upon approval of the Compensation Committee.
c) By Resignation of the Executive . The Execu(cid:43)ve may terminate his or her employment hereunder, upon giving sixty (60) days wri(cid:72)en no(cid:43)ce to the
Company. The Execu(cid:43)ve agrees that, unless otherwise agreed upon in wri(cid:43)ng, during such sixty (60) day period no more than one week of unused PTO
may be u(cid:43)lized and that all other unused PTO up to the (cid:43)me of termina(cid:43)on shall be forfeited. In the event of such a termina(cid:43)on, the Execu(cid:43)ve shall
comply with any reasonable request of the Company to assist in providing for an orderly transi(cid:43)on of authority, but such assistance shall not delay the
Execu(cid:43)ve’s termina(cid:43)on of employment longer than the Execu(cid:43)ve’s original no(cid:43)ce of termina(cid:43)on. Upon such a termina(cid:43)on, the Execu(cid:43)ve shall
become en(cid:43)tled to any accrued but unpaid salary and other benefits up to and including the date of termina(cid:43)on and the pro rata por(cid:43)on of any
unvested (cid:43)me-based op(cid:43)ons and/or restricted stock (as specified in Sec(cid:43)on 3(d)) up un(cid:43)l the date of separa(cid:43)on that are due to vest in the month of
separation shall vest.
d) Disability of the Execu(cid:51)ve. This Agreement may be terminated by the Company upon the Disability of the Execu(cid:43)ve. “Disability” shall mean any
mental or physical illness, condi(cid:43)on, disability or incapacity which prevents the Execu(cid:43)ve from reasonably discharging his du(cid:43)es and responsibili(cid:43)es
under this Agreement for a period of ninety (90) days in any one hundred eighty (180) day period. In the event that any disagreement or dispute shall
arise between the Company and the Execu(cid:43)ve as to whether the Execu(cid:43)ve suffers from any Disability, then, in such event, the Execu(cid:43)ve shall submit
to the physical or mental examina(cid:43)on of a physician licensed under the laws of the State of Florida, who is agreeable to the Company and the
Execu(cid:43)ve, and such physician shall determine whether the Execu(cid:43)ve suffers from any Disability. In the absence of fraud or bad faith, the
determina(cid:43)on of such physician shall be final and binding upon the Company and the Execu(cid:43)ve. The en(cid:43)re cost of such examina(cid:43)on shall be paid
solely by the Company. In the event the Company has purchased disability insurance for Execu(cid:43)ve, the Execu(cid:43)ve shall be deemed disabled if he is
disabled as defined by the terms of the disability policy. On the date that the Execu(cid:43)ve is deemed to have a Disability, this Agreement will be deemed
to have been terminated and the Execu(cid:43)ve shall be en(cid:43)tled to receive from the Company his accrued and unpaid Base Salary, bonus and other
benefits through the termina(cid:43)on date. If a termina(cid:43)on of the Execu(cid:43)ve by Disability shall occur at any (cid:43)me, then the pro rata por(cid:43)on of any unvested
(cid:43)me-based op(cid:43)ons and/or restricted stock (as specified in Sec(cid:43)on 3(d)) up un(cid:43)l the date of the Execu(cid:43)ve’s termina(cid:43)on that were due to vest in the
month of the Executive’s termination shall vest. Other than as set forth in the immediately preceding two sentences, the
Company shall have no further salary or bonus payment or other benefits obliga(cid:43)ons under this Agreement from and a(cid:68)er the date of termina(cid:43)on
due to Disability.
e) Death of the Executive . In the event of the death of Execu(cid:43)ve, the employment of the Execu(cid:43)ve by the Company shall automa(cid:43)cally terminate on
the date of the Execu(cid:43)ve’s death and the Company shall be obligated to pay Execu(cid:43)ve’s estate (i) the Execu(cid:43)ve’s accrued and unpaid Base Salary,
bonus and other benefits through the termination date. If the death of the Execu(cid:43)ve shall occur at any (cid:43)me, than the pro rata por(cid:43)on of any unvested
(cid:43)me-based op(cid:43)ons and/or restricted stock up un(cid:43)l the date of the Execu(cid:43)ve’s death that were due to vest in the month of the Execu(cid:43)ve’s death shall
vest. Other than as set forth in the immediately preceding two sentences, the Company shall have no further obliga(cid:43)ons under this Agreement from
and after the date of termination due to the death of the Executive.
5. Effect of Termination. The provisions of this Section 5 shall apply to any termination of the Executive’s employment under this Agreement,
whether pursuant to Section 4 or otherwise.
a) Provision by the Company of Severance Payments, if any, due to the Executive in accordance with this Agreement shall constitute the entire
obligation of the Company to the Executive hereunder. The Executive shall promptly give the Company notice of all facts necessary for the Company to
determine the amount and duration of its obligations in connection with any termination pursuant to this Agreement.
b) Except for any right of the Executive to continue medical, vision, or dental plan participation in accordance with applicable law or as expressly
provided herein, the Executive’s participation in all Employee Benefit Plans shall terminate pursuant to the terms of the applicable plan documents
based on the date of termination of the Executive’s employment without regard to any Severance Payments, notice required hereunder, or any other
payment made to or on behalf of the Executive following such date of termination.
c) Provisions of this Agreement shall survive any termina(cid:43)on of the Execu(cid:43)ve’s employment if so provided herein or if necessary or desirable fully to
accomplish the purposes of other surviving provisions, including without limita(cid:43)on the obliga(cid:43)ons of the Execu(cid:43)ve under the Confiden(cid:43)ality, Non-
Solicita(cid:43)on & Non-Compete Agreement. The obliga(cid:43)on of the Company to provide Severance Payments hereunder is expressly condi(cid:43)oned on the
Execu(cid:43)ve’s execu(cid:43)on of a general release and waiver, as referenced in Sec(cid:43)on 4(b), and the Execu(cid:43)ve’s con(cid:43)nued full compliance with the terms of
the Confiden(cid:43)ality, Non-Compete & Non-Solicita(cid:43)on Agreement. The Execu(cid:43)ve acknowledges that, except as expressly provided in Sec(cid:43)on 4(b), no
compensation is earned after termination of employment.
6. Confiden(cid:51)ality, Non-Solicita(cid:51)on & Non-Compete Agreement. Execu(cid:43)ve agrees to the terms of the Confiden(cid:43)ality, Non-Solicita(cid:43)on and Non-
Compete Agreement a(cid:72)ached hereto as Addendum A and has signed that Agreement. Such Confiden(cid:43)ality, Non-Solicita(cid:43)on and Non-Compete
Agreement is hereby incorporated into and made a part of this Agreement.
7. Importance of Certain Clauses. Execu(cid:43)ve and the Company agree that the covenants contained in the Confiden(cid:43)ality, Non-Solicita(cid:43)on and Non-
Compete Agreement a(cid:72)ached hereto and incorporated into this Agreement are material terms of this Agreement and all par(cid:43)es understand the
importance of such provisions to the ongoing business of the Company. As such, because the Company’s con(cid:43)nued business and viability depend on
the protection of such secrets and non-competition, these clauses are interpreted by the parties to have the widest and most expansive
applicability as may be allowed by law and Executive understands and acknowledges his or his understanding of same.
8. Consideration. Execu(cid:43)ve acknowledges and agrees that the provision of employment under this Agreement and the execu(cid:43)on by the Company of
this Agreement cons(cid:43)tute full, adequate and sufficient considera(cid:43)on to Execu(cid:43)ve for the Execu(cid:43)ve’s du(cid:43)es, obliga(cid:43)ons and covenants under this
Agreement and under the Confidentiality, Non-Solicitation and Non-Compete Agreement incorporated into this Agreement.
9 . Acknowledgement of Post Termina(cid:51)on Obliga(cid:51)ons. Upon the effec(cid:43)ve date of termina(cid:43)on of Execu(cid:43)ve’s employment (unless due to
Execu(cid:43)ve’s death), if requested by the Company, Execu(cid:43)ve shall par(cid:43)cipate in an exit interview with the Company and cer(cid:43)fy in wri(cid:43)ng that Execu(cid:43)ve
has complied with his contractual obliga(cid:43)ons and intends to comply with his con(cid:43)nuing obliga(cid:43)ons under this Agreement, including, but not limited
to, the terms of the Confiden(cid:43)ality, Non-Solicita(cid:43)on and Non-Compete Agreement. To the extent it is known or applicable at the (cid:43)me of such exit
interview, Execu(cid:43)ve shall also provide the Company with informa(cid:43)on concerning Execu(cid:43)ve’s subsequent employer and the capacity in which
Execu(cid:43)ve will be employed. Execu(cid:43)ve’s failure to comply shall be a material breach of this Agreement, for which the Company, in addi(cid:43)on to any
other civil remedy, may seek equitable relief.
10. Withholding. All payments made to Execu(cid:43)ve shall be made net of any applicable withholding for income taxes and Execu(cid:43)ve’s share of FICA,
FUTA or other employment taxes. The Company shall withhold such amounts from such payments to the extent required by applicable law and remit
such amounts to the applicable governmental authorities in accordance with applicable law.
11. Representations of Executive. Execu(cid:43)ve represents and warrants to the Company that (a) nothing in his past legal and/or work and/or personal
experiences, which if became broadly known in the marketplace, would impair his or her ability to serve as the CFO of a publicly-traded company or
materially damage his credibility with public shareholders; (b) Execu(cid:43)ve has not been convicted of any criminal offense related to health care, or been
debarred, sanc(cid:43)oned, excluded or otherwise made ineligible for par(cid:43)cipa(cid:43)on in a federal or state health care program by any federal or state agency;
(c) there are no restric(cid:43)ons, agreements, or understandings whatsoever to which Execu(cid:43)ve is a party which would prevent or make unlawful his or
her execu(cid:43)on of this Agreement or employment hereunder, (d) Execu(cid:43)ve’s execu(cid:43)on of this Agreement and his or her employment hereunder shall
not cons(cid:43)tute a breach of any contract, agreement or understanding, oral or wri(cid:72)en, to which Execu(cid:43)ve is a party or by which Execu(cid:43)ve is bound, (e)
Execu(cid:43)ve is free and able to execute this Agreement and to con(cid:43)nue employment with the Company, and (f) Execu(cid:43)ve has not used and will not use
confidential information or trade secrets belonging to any prior employers to perform services for the Company.
12. Compliance Agreements. Execu(cid:43)ve agrees to provide services to the Company in compliance with all applicable federal and state laws and
regula(cid:43)ons, as well as all compliance guidance published by federal or state agencies, including, without limita(cid:43)on, the Medicare and Medicaid an(cid:43)-
kickback law, the Stark self-referral prohibi(cid:43)on, and compliance guidance published by the Office of the Inspector General of the Department of
Health and Human Service, and to assist the Company in remaining educated and in compliance with respect to such laws and regula(cid:43)ons and
compliance guidance. Execu(cid:43)ve acknowledges that he understands these requirements, and shall remain educated and informed regarding the
applicable federal and state laws and regula(cid:43)ons, as well as all compliance guidance published by federal or state agencies. In the event that Execu(cid:43)ve
knows or suspect that any ac(cid:43)vi(cid:43)es of the Company or any personnel or contractor of the Company, or any client of the Company implicates any such
requirements or guidance, Execu(cid:43)ve agrees that he or she will immediately inform the CEO and cooperate fully with the Company to inves(cid:43)gate and
address any compliance issues arising
as a result of such known or suspected ac(cid:43)vi(cid:43)es. Execu(cid:43)ve further understands and acknowledges that compliance with this paragraph shall be a
condition of employment.
13. Effect of Par(cid:51)al Invalidity. The invalidity of any por(cid:43)on of this Agreement shall not affect the validity of any other provision. In the event that
any provision of this Agreement is held to be invalid, the parties agree that the remaining provisions shall remain in full force and effect.
14. Entire Agreement. This Agreement, together with the other documents referenced herein, reflects the complete agreement between the par(cid:43)es
regarding the subject ma(cid:72)er iden(cid:43)fied herein and shall supersede all other previous agreements, either oral or wri(cid:72)en, between the par(cid:43)es. The
par(cid:43)es s(cid:43)pulate that neither of them, nor any person ac(cid:43)ng on their behalf has made any representa(cid:43)ons except as are specifically set forth in this
Agreement and each of the par(cid:43)es acknowledges that neither party has relied upon any representa(cid:43)on of any third party in execu(cid:43)ng this Agreement,
but rather each party has relied exclusively on their own respective judgment in entering into this Agreement.
15. Assignment. The Company may assign its interest and rights under this Agreement at its sole discre(cid:43)on and without approval of Execu(cid:43)ve to a
successor in interest by the Company’s merger, consolida(cid:43)on or other form of business combina(cid:43)on with or into a third party where the Company’s
stockholders before such event do not control a majority of the resul(cid:43)ng business en(cid:43)ty a(cid:68)er such event. All rights and en(cid:43)tlements arising from this
Agreement, including but not limited to those protec(cid:43)ve covenants and prohibi(cid:43)ons set forth in the Confiden(cid:43)ality, Non-Solicita(cid:43)on and Non-
Compete Agreement a(cid:72)ached as Addendum A and incorporated into this Agreement shall inure to the benefit of any purchaser, assignor or transferee
of this Agreement and shall con(cid:43)nue to be enforceable to the extent allowable under applicable law. Neither this Agreement, nor the employment
status conferred with its execution is assignable or subject to transfer in any manner by Executive.
16. Notices. All notices, requests, demands, and other communications shall be in writing and shall be given by registered or certified mail, postage
prepaid, a) if to the Company, at the Company’s then current headquarters location, and b) if to Executive, via hand delivery or at the most recent
address on file with the Company for Executive or to such subsequent addresses as either party shall so designate in writing to the other party.
17. Remedies. If any action at law, equity or in arbitration, including an action for declaratory relief, is brought to enforce or interpret the provisions
of this Agreement, the prevailing party may, if the court or arbitrator hearing the dispute, so determines, have its reasonable attorneys’ fees and costs
of enforcement recouped from the non-prevailing party.
18. Amendment/Waiver. No waiver, modification, amendment or change of any term of this Agreement shall be effective unless it is in a written
agreement signed by both parties. No waiver by the Employer of any breach or threatened breach of this Agreement shall be construed as a waiver of
any subsequent breach unless it so provides by its terms.
19. Governing Law, Venue and Jurisdic(cid:51)on. This Agreement and all transac(cid:43)ons contemplated by this Agreement shall be governed by, construed,
and enforced in accordance with the laws of the State of Florida without regard to any conflicts of laws, statutes, rules, regula(cid:43)ons or ordinances.
Execu(cid:43)ve consents to personal jurisdic(cid:43)on and venue in the Circuit Court in and for Lee County, Florida regarding any ac(cid:43)on arising under the terms of
this Agreement and any and all other disputes between Executive and Employer.
20. Arbitration. Any and all controversies and disputes between Execu(cid:43)ve and Company arising from this Agreement or regarding any other ma(cid:72)er
whatsoever shall be submi(cid:72)ed to arbitra(cid:43)on before a single unbiased arbitrator skilled in arbitra(cid:43)ng such disputes under the American Arbitra(cid:43)on
Associa(cid:43)on, u(cid:43)lizing its Commercial Rules. Any arbitra(cid:43)on ac(cid:43)on brought pursuant to this sec(cid:43)on shall be heard in Fort Myers, Lee County, Florida.
The Circuit Court in and for Lee County, Florida shall have concurrent jurisdic(cid:43)on with any arbitra(cid:43)on panel for the purpose of entering temporary and
permanent injunctive relief, but only with respect to any alleged breach of the Confidentiality, Non-Solicitation and Non-Compete Agreement.
21. Headings. The (cid:43)tles to the sec(cid:43)ons of this Agreement are solely for the convenience of the par(cid:43)es and shall not affect in any way the meaning or
interpretation of this Agreement.
22. Miscellaneous Terms. The parties to this Agreement declare and represent that:
a.
b.
c.
d.
e.
They have read and
understand this Agreement;
They have been given the
opportunity to consult with
an attorney if they so
desire;
They intend to be legally
bound by the promises set
forth in this Agreement and
enter into it freely, without
duress or coercion;
They have retained signed
copies of this Agreement for
their records; and
The rights, responsibilities
and duties of the parties
hereto, and the covenants
and agreements contained
herein, shall continue to
bind the parties and shall
continue in full force and
effect until each and every
obligation of the parties
under this Agreement has
been performed.
23. Counterparts. This Agreement may be executed in counterparts and by facsimile, or by pdf, each of which shall be deemed an original for all
intents and purposes.
Signatures appear on the following page.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.
NEOGENOMICS, INC.
By: ______________________________
Name: Douglas M. VanOort
Title: Chairman and Chief Executive Officer
EXECUTIVE
By: ________________________________
Name: Kathryn B. McKenzie
Addendum A
Confidentiality, Non-Solicitation & Non-Compete Agreement
SUBSIDIARIES OF NEOGENOMICS, INC.
EXHIBIT 21.1
NeoGenomics Laboratories, Inc., a Florida corporation
Clarient, Inc., a Delaware corporation
Clarient Diagnostic Services, Inc., a Delaware corporation
NeoGenomics Bioinformatics, Inc., a Florida corporation
NeoGenomics Europe, SA, a Swiss société anonyme
NeoGenomics Singapore, Pte. Ltd, a Singapore private limited company
Genesis Acquisition Holdings Corp., a Delaware corporation
Genoptix, Inc., a Delaware corporation
Minuet Diagnostics, Inc., a Delaware corporation
Cynogen, Inc., a Delaware corporation
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-189391, 333-205906, 333-125994, 333-139484, 333-159749, 333-173494, 333-180095, 333-
210402 on Form S-8 and Registration Statement Nos. 333-155784, 333-166526, and 333-231608 on Form S-3 of our reports dated February 28, 2020, relating to the
consolidated financial statements of NeoGenomics, Inc. and subsidiaries and the effectiveness of NeoGenomics Inc. and subsidiaries’ internal control over financial reporting
appearing in this Annual Report on Form 10-K of NeoGenomics, Inc. for the year ended December 31, 2019.
EXHIBIT 23.1
/s/ Deloitte & Touche LLP
San Diego, California
February 28, 2020
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-205906, 333-125994, 333-139484, 333-159749, 333-173494, 333-180095, 333-189391, 333-
210402 on Form S-8, Registration Statement Nos. 333-186067, 333-212099, 333-155784, and 333-166526 on Form S-3, and Registration Statement Nos. 333-228743 and 333-
231608 on Form S-3ASR of NeoGenomics, Inc. of our report dated February 26, 2019 relating to the consolidated financial statements as of and for each of the years in the two-
year period ended December 31, 2018, appearing in this Annual Report on Form 10-K for the year ended December 31, 2019.
EXHIBIT 23.2
Indianapolis, Indiana
February 28, 2020
/s/ Crowe LLP
EXHIBIT 31.1
I, Douglas VanOort, certify that:
1. I have reviewed this Annual Report on Form 10-K of NeoGenomics, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
February 28, 2020
/s/ Douglas M. VanOort
Douglas M. VanOort
Chairman & Chief Executive Officer
EXHIBIT 31.2
I, Kathryn B. McKenzie, certify that:
1. I have reviewed this Annual Report on Form 10-K of NeoGenomics, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of
the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)), and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
February 28, 2020
/s/ Kathryn B. McKenzie
Kathryn B. McKenzie
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of NeoGenomics, Inc. (the “Company”) on Form 10-K for the fiscal year ended December 31, 2019 as filed with the Securities and
Exchange Commission on the date hereof (the “Report”), each of the undersigned, in the capacities and on the dates indicated below, hereby certify pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: February 28, 2020
Date: February 28, 2020
/s/Douglas M. VanOort
Douglas M. VanOort
Chairman & Chief Executive Officer
/s/Kathryn B. McKenzie
Kathryn B. McKenzie
Chief Financial Officer
The foregoing certification is being furnished solely to accompany the Report pursuant to 18 U.S.C. § 1350, and is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any
general incorporation language in such filing. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or
otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company
and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.