NEOGENOMICS, INC. NeoGenomics, Inc. , aNevada corporation, (referred to collectively with its subsidiaries as "NeoGenomics", "we", "us", "our" or the "Company" in this Form 10-Q) is the registrant forSEC reporting purposes. Our common stock is listed on the NASDAQ Capital Market under the symbol "NEO". Introduction The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements and the notes thereto included herein. The information contained below includes statements of the Company's or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the introductory note to this quarterly report on Form 10-Q under the caption "Forward-Looking Statements", which information is incorporated herein by reference. COVID-19 Considerations InDecember 2019 , a novel strain of coronavirus ("COVID-19") was identified and the disease has since spread across the world, includingthe United States . InMarch 2020 , theWorld Health Organization characterized COVID-19 as a pandemic. As a result, onApril 9, 2020 , the Company withdrew its previously issued 2020 guidance until the effects of the pandemic can be better assessed. The Company has implemented significant actions to protect its employees while maintaining a continuity of critical oncology testing for cancer patients. Among other actions, the Company has de-densified laboratories and facilities, adjusted laboratory shifts, restricted visitors to facilities, restricted employee travel, implemented an Emergency Paid Time Off policy, provided remote work-environment training and support, and managed its supply chains. Importantly, all main laboratory facilities have remained open and there has been an uninterrupted continuity of high-quality testing services for clients. The Company's top priority remains the health and safety of employees and continued quality and service for all clients with a focus on patient care. The Company saw a material impact to volume growth rates and clinical test volume in the last two weeks of March and in April. Clinical test volume was down approximately 20% year-over-year in the last two weeks of March and volume continued to be impacted in April. Demand may continue to decrease from historically low levels depending on the duration and severity of the COVID-19 pandemic, the length of time it takes for normal economic and operating conditions to resume, additional governmental actions that may be taken and/or extensions of time for restrictions that have been imposed to date, and numerous other uncertainties. Such events may result in business disruption, reduced revenues and number of tests, any of which could materially affect our business, financial condition, and results of operations. For additional information on risk factors related to the pandemic or other risks that could impact our results, please refer to "Risk Factors" in Part II, Item 1A of this Form 10-Q. Overview We operate a network of cancer-focused testing laboratories inthe United States ,Europe andAsia . Our mission is to improve patient care through exceptional cancer-focused testing services. Our vision is to become the World's leading cancer testing and information company by delivering uncompromising quality, exceptional service and innovative solutions. As ofMarch 31, 2020 , the Company had laboratory locations inFort Myers andTampa, Florida ;Aliso Viejo ,Carlsbad ,Fresno andSan Diego, California ;Houston, Texas ;Atlanta, Georgia ;Nashville, Tennessee ; Rolle,Switzerland andSingapore . The Company currently offers the following types of testing services: a.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. b.Fluorescence In-Situ Hybridization ("FISH") - a molecular cytogenetic technique that focuses on detecting and localizing the presence or absence of specific DNA sequences and genes on chromosomes. The technique uses fluorescent probes that bind to only those parts of the chromosome with which they show a high degree of sequence similarity. Fluorescence microscopy is used to visualize the fluorescent probes bound to the chromosomes. FISH can be used to help identify numerous types of gene alterations, including amplifications, deletions, and translocations. c.Flow cytometry - a technique utilized to measure the characteristics of cell populations. Typically performed on liquid samples such as peripheral blood and bone marrow aspirate, it may also be performed on solid tissue 23 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
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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.
d.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.
e.Molecular testing - a rapidly growing field which includes a broad range of
laboratory techniques utilized in cancer testing. Most molecular techniques rely
on the analysis of DNA and/or RNA, as well as the structure and function of
genes at the molecular level. Molecular testing technologies include: DNA
fragment length analysis; polymerase chain reaction (PCR) 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.
f.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.
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
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performed by NeoGenomics . In these instances, NeoGenomics will typically provide
all of the more complex, molecular testing services.
Pharma Services Segment
Our Pharma Services revenue consists of three revenue streams:
•Clinical trials and research;
•Validation laboratory services; and
•Informatics
Our Pharma Services segment supports pharmaceutical firms in their drug
development programs by supporting various clinical trials and research. This
portion of our business often involves working with the pharmaceutical firms
(sponsors) on study design as well as performing the required testing. Our
medical team often advises the sponsor and works closely with them as specimens
are received from the enrolled sites. We also work on developing tests that will
be used as part of a companion diagnostic to determine patients' response to a
particular drug. As studies unfold, our clinical trials team reports the data
and often provides key analysis and insights back to the sponsors.
Our Pharma Services segment provides comprehensive testing services in support
of our pharmaceutical clients' oncology programs from discovery to
commercialization. In biomarker discovery, our aim is to help our customers
discover the right content. We help our customers develop a biomarker hypothesis
by recommending an optimal platform for molecular screening and backing our
discovery tools with the informatics to capture meaningful data. In other pre
and non-clinical work, we can use our platforms to characterize markers of
interest. Moving from discovery to development, we help our customers refine
their biomarker strategy and, if applicable, develop a companion diagnostic
pathway using the optimal technology for large-scale clinical trial testing.
Whether serving as the single contract research organization or partnering with
one, our Pharma Services team provides significant technical expertise, working
closely with our customers to support each stage of clinical trial
development. Each trial we support comes with rapid turnaround time, dedicated
project management and quality assurance oversight.We 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.
2020 Focus Areas:
We are committed to improving patient care while being an innovative leader in
our industry. Over the past two years we have grown our business organically as
well as through the acquisition of Genesis Acquisition Holding Corp ("Genesis"),
and its wholly owned subsidiary, Genoptix, Inc. ("Genoptix", and collectively
with its subsidiaries and Genesis, referred to herein as "Genoptix") in December
of 2018, as well as the acquisition of the Oncology Division assets of Human
Longevity, Inc. ("HLI - Oncology"). Our focus for 2020 includes initiatives to
drive profitable growth while pursuing innovation and maintaining exceptional
service levels. We expect these initiatives to allow the Company to continue
becoming one of the world's leading cancer testing and information company.
Strengthen Our World-Class Culture
Enhancing our culture to closely align with the values of our Company is a key
priority. We will invest in the development of our people by creating mentoring,
coaching and training opportunities to enhance and capitalize on the talent
within our
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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 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.
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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 March 31, 2020 , we employed or
contracted with over 120 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, with approximately 13,300 NGS tests completed in the
first quarter of 2020. Clients have the ability to order single gene molecular
tests, targeted NeoTYPE panels that include the relevant actionable genes for 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.
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.
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Results of Operations for the Three Months Ended March 31, 2020 as Compared to
the Three Months Ended March 31, 2019
The following table presents the Consolidated Statements of Operations as a
percentage of revenue:
Three Months Ended March 31,
2020 2019
Net revenue 100.0 % 100.0 %
Cost of revenue 56.3 % 50.7 %
Gross Profit 43.7 % 49.3 %
Operating expenses:
General and administrative 34.3 % 33.6 %
Research and development 1.9 % 1.3 %
Sales and marketing 12.5 % 11.7 %
Total operating expenses 48.7 % 46.6 %
Loss (income) from operations (5.0) % 2.7 %
Interest expense, net 0.8 % 1.9 %
Other (loss) income (0.2) % 5.4 %
Loss before taxes (5.6) % (4.7) %
Income tax expense (benefit) 1.0 % (2.1) %
Net loss (6.6) % (2.5) %
Clinical and Pharma Services revenue for the periods presented are as follows ($
in thousands):
Three Months Ended March 31,
2020 2019 $ Change % Change
Net revenues:
Clinical Services $ 92,982 $ 86,210 $ 6,772 7.9 %
Pharma Services 13,048 9,367 3,681 39.3 %
Total Revenue $ 106,030 $ 95,577 $ 10,453 10.9 %
Revenue
Clinical Services revenue for the three month period ending March 31, 2020
increased $6.8 million when compared to the same period in 2019. Testing volumes
also increased in our clinical genetic testing business by approximately 6.9%
for the three month period ending March 31, 2020 compared to the same period in
2019. The increases in revenue and volume primarily reflect a more favorable
test mix as well as the benefit of reimbursement initiatives. This growth was
offset by a decline in overall Clinical Services testing volume in the second
half of March related to the COVID-19 pandemic.
Pharma Services revenue for the three month period ended March 31, 2020
increased $3.7 million compared to the same period in 2019, primarily due to the
impact of the acquisition of HLI - Oncology. This growth was offset by an
overall decrease in revenue due to the COVID-19 impact. In addition, our backlog
of signed contracts has continued to grow from $130.3 million as of December 31,
2019 to $147.7 million as of March 31, 2020 . We expect this backlog to result in
higher revenues in future quarters.
The following table shows Clinical Services revenue, cost of revenue,
requisitions received and tests performed for the three months ended March 31,
2020 and 2019. This data excludes tests performed for Pharma customers.
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NEOGENOMICS, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONSTesting revenue and cost of revenue are presented in thousands below:
Three Months Ended March 31,
2020 2019 % Change
Clinical Services:
Requisitions (cases) received 144,319 137,111 5.3 %
Number of tests performed 250,376 234,317 6.9 %
Average number of tests/requisitions 1.73 1.71 1.2 %
Total clinical testing revenue $ 92,982 $ 86,210 7.9 %
Average revenue/requisition $ 644 $ 629 2.4 %
Average revenue/test $ 371 $ 368 0.8 %
Cost of revenue $ 48,923 $ 42,651 14.7 %
Average cost/requisition $ 339 $ 311 9.0 %
Average cost/test $ 195 $ 182 7.1 %
We continue to realize growth in our clinical testing revenue, which we believe
is the direct result of our efforts to innovate by developing and maintaining
one of the most comprehensive cancer testing menus in the industry. Our broad
test menu enables our sales teams to identify opportunities for increasing
revenues from existing clients and allows us to gain market share from
competitors as well as attract new clients looking for a one-stop shop.
Average revenue per test increased 0.8% for the three month period ended March
31, 2020 compared to the corresponding period in 2019. The increase reflects a
more favorable test mix and the positive impact of our internal reimbursement
initiatives.
Cost of Revenue and Gross Profit
Average cost per test increased 7.1% for the three month period ended March 31,
2020 , compared to the corresponding period in 2019, reflecting the impact of
payroll and payroll related costs in addition to the impact of COVID-19.
Cost of revenue includes payroll and payroll related costs for performing tests,
maintenance and depreciation of laboratory equipment, rent for laboratory
facilities, laboratory reagents, probes and supplies, and delivery and courier
costs relating to the transportation of specimens to be tested.
The consolidated cost of revenue and gross profit metrics are as follows:
Three Months Ended March 31,
($ in thousands) 2020 2019 % Change
Cost of revenue:
Clinical Services $ 48,923 $ 42,651 14.7 %
Pharma Services 10,738 5,811 84.8 %
Total cost of revenue $ 59,661 $ 48,462 23.1 %
Cost of revenue as a % of revenue 56.3 % 50.7 %
Gross profit:
Clinical Services $ 44,059 $ 43,559 1.1 %
Pharma Services 2,310 3,556 (35.0) %
Total gross profit $ 46,369 $ 47,115 (1.6) %
Gross profit margin 43.7 % 49.3 %
Consolidated cost of revenue in dollars increased for the three months ended
March 31, 2020 when compared to the same period in 2019. Cost of revenue as a
percentage of revenue increased year-over-year. These increases in cost of
revenue are largely due to an increase in payroll-related costs.
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Gross profit margin decreased for the three months ended March 31, 2020 ,
compared to the same period in 2019, primarily due to the timing of Pharma
Services revenue, higher costs due to the integration of Genoptix and additional
testing capacity which was unused due to the impact of COVID-19.
General and Administrative Expenses
General and administrative expenses consist of payroll and payroll related costs
for our billing, finance, human resources, information technology and other
administrative personnel as well as stock-based compensation. We also allocate
professional services, facilities expense, IT infrastructure costs,
depreciation, amortization and other administrative-related costs to general and
administrative expenses.
Consolidated general and administrative expenses are as follows:
Three Months Ended March 31,
($ in thousands) 2020 2019 $ Change % Change
General and administrative $ 36,344 $ 32,142 $ 4,202 13.1 %
As a % of revenue 34.3 % 33.6 %
General and administrative expenses increased $4.2 million for the three months
ended March 31, 2020 , compared to the same period in 2019. The increase reflects
transaction costs and incremental expenses related to the acquisition of HLI -
Oncology as well as higher payroll and payroll related costs due to increases in
personnel to support our near and long-term growth. Acquisition and integration
costs related to HLI - Oncology were approximately $1.3 million for the three
months ended March 31, 2020 .
We expect our general and administrative expenses to increase in total but
decrease as a percentage of revenue as we add employee and compensation
expenses, incur additional expenses associated with the expansion of our
facilities, and continue to expand our physical and technological infrastructure
to support our anticipated growth.
Research and Development Expenses
Research and development expenses relate to costs of developing new proprietary
and non-proprietary genetic tests, including payroll and payroll related costs,
maintenance of laboratory equipment, laboratory supplies (reagents), and outside
consultants and experts assisting our research and development team.
Consolidated research and development expenses for the periods presented are as
follows:
Three Months Ended March 31,
($ in thousands) 2020 2019 $ Change % Change
Research and development $ 2,060 $ 1,209 $ 851 70.4 %
As a % of revenue 1.9 % 1.3 %
Research and development expenses increased $0.9 million for the three months
ended March 31, 2020 , compared to the same period in 2019. This increase was
driven by investments in new test development, particularly in our
Next-Generation Sequencing and FDA initiatives.
We anticipate research and development expenditures will increase in future
quarters as we invest in innovation projects and bringing new tests to market.
Sales and Marketing Expenses
Sales and marketing expenses are primarily attributable to employee-related
costs including sales management, sales representatives, sales and marketing
consultants and marketing and customer service personnel.
Consolidated sales and marketing expenses for the periods presented are as
follows:
Three Months Ended March 31,
($ in thousands) 2020 2019 $ Change % Change
Sales and marketing $ 13,258 $ 11,216 $ 2,042 18.2 %
As a % of revenue 12.5 % 11.7 %
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Sales and marketing expenses increased $2.0 million for the three months ended
March 31, 2020 , when compared to the same period in 2019. This increase
primarily reflects 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
Net interest expense is comprised of interest incurred on our term loan,
revolving credit facility and our other financing obligations offset by the
interest income we earn on cash balances. Net interest expense for the three
months ending March 31, 2020 decreased 55.1%, or $1.0 million , compared to the
same period in 2019. We expect our interest expense to fluctuate based on timing
of advances and payments on our revolving credit facility as well as changes in
interest rates and cash balances.
Earnings Per Share
The following table provides consolidated net loss available to common
stockholders for each period along with the computation of basic and diluted net
loss per share for the three months ended March 31, 2020 and 2019 (in thousands,
except per share amounts):
Three Months Ended March 31,
2020 2019
Net loss available to common shareholders $ (6,978) Basic weighted average shares outstanding 104,484
94,740
Diluted weighted average shares outstanding 104,484 94,740 Basic net loss per share$ (0.07) $ (0.03) Diluted net loss per share$ (0.07) $ (0.03) Non-GAAP Measures Use of Non-GAAP Financial Measures The Company'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.
Definitions of Non-GAAP Measures
Non-GAAP Adjusted EBITDA
"Adjusted EBITDA" is defined byNeoGenomics as net income from continuing operations before: (i) interest expense, (ii) tax expense, (iii) depreciation and amortization expense, (iv) non-cash stock-based compensation expense, and, if applicable in a reporting period, (v) acquisition and integration related expenses, (vi) non-cash impairments of intangible assets, (vii) debt financing costs, (viii) and other significant non-recurring or non-operating (income) or expenses.
The following is a reconciliation of GAAP net loss to Non-GAAP EBITDA and
Adjusted EBITDA for the three months ended
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NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Three Months Ended March 31,
(in thousands) 2020 2019
Net loss (GAAP) $ (6,978) $ (2,424)
Adjustments to net income:
Interest expense, net 819 1,826
Income tax expense (benefit) 1,089 (2,023)
Amortization of intangibles 2,452 2,559
Depreciation 6,240 5,271
EBITDA (non-GAAP) $ 3,622 $ 5,209
Further adjustments to EBITDA:
Acquisition and integration related expenses 1,296 1,266
Other significant non-recurring expenses (30) 5,145
Non-cash, stock-based compensation expense 2,186 2,139
Adjusted EBITDA (non-GAAP) $ 7,074 $ 13,759
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash generated from
operations, public and private sales of equity securities, and bank debt
borrowings.
The following table presents a summary of our consolidated cash flows for
operating, investing and financing activities for the three months ended March
31, 2020 and 2019 as well balances of cash and cash equivalents and working
capital:
Three Months Ended March 31,
(in thousands) 2020 2019
Net cash provided by (used in):
Operating activities $ (6,933) $ 6,097
Investing activities (41,708) (3,196)
Financing activities 617 483
Net change in cash, cash equivalents and restricted cash (48,024) 3,384
Cash, cash equivalents and restricted cash, beginning of period $
173,016$ 9,811 Cash, cash equivalents and restricted cash, end of period$ 124,992 $ 13,195 Working Capital (1), end of period$ 147,793 $ 43,242 (1) Defined as current assets less current liabilities. Cash Flows from Operating Activities During the three months endedMarch 31, 2020 , cash flows used in operating activities were$6.9 million , a$13.0 million decrease compared to the same period in 2019, consisting of a net loss of$7.0 million and the cash flow impact of net decreases in operating assets and liabilities of$12.9 million , primarily driven by increases in accounts receivable, inventory and funds distributed for the construction of the new headquarters facility. The decrease in cash used in operating activities was partially offset by net adjustments to the net loss of$13.0 million . Receivables have increased year-over-year due to increases in revenue as well as timing of cash receipts. Inventory increased due to higher spend on materials to mitigate the risk of potential supply chain disruptions resulting from the COVID-19 pandemic. As ofMarch 31, 2020 , we have paid$3.3 million related to the construction of the new headquarters facility from the restricted cash escrow account. Cash Flows from Investing Activities 32 -------------------------------------------------------------------------------- NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
During the three months ended March 31, 2020 , cash used in investing activities
was $41.7 million , an increase of approximately $38.5 million compared to the
same period in 2019. This was primarily due to the acquisition of the Oncology
Division of HLI as well as cash used for capital expenditures.
Cash Flows from Financing Activities
During the three months ended March 31, 2020 , cash provided by financing
activities was $0.6 million compared to $0.5 million in the same period in 2019.
Cash provided by financing activities during the three months ended March 31,
2020 consisted of $3.5 million from the net issuance of common stock, primarily
offset by net repayment of the term loan and other financing obligations of $2.8
million .
Credit Facility
On June 27, 2019 , the Company entered into a new senior secured credit agreement
("New Credit Agreement") with PNC Bank National Association . For further details
regarding the new agreement, see Note 7. Debt. In order to reduce our exposure
to interest rate fluctuations on this floating rate debt obligation, we entered
into interest rate swap agreements. For more information on these hedging
instruments, see Note 8. Derivative Instruments and Hedging Activities, to the
Consolidated Financial Statements herein. The interest rate swap agreement
effectively converts a portion of our floating rate debt to a fixed obligation,
thus reducing the impact of interest rate changes on future interest expense. We
believe this strategy will enhance our ability to manage cash flow within our
Company.
Liquidity Outlook
We had approximately $86.3 million in unrestricted cash and cash equivalents as
of March 31, 2020 . In addition, the senior secured credit agreement provides for
up to $250.0 million in borrowing capacity of which approximately $96.0 million
is outstanding at March 31, 2020 . Based on our level of Adjusted EBITDA and the
balance drawn, approximately $102.8 million was available at that same date. We
believe that the cash on hand, available credit lines and cash collections will
provide adequate resources to meet our operating commitments and interest
payments for at least the next 12 months from the issuance of these financial
statements.
Capital Expenditures
We currently forecast capital expenditures in order to execute on our business
plan and maintain growth; however, the actual amount and timing of such capital
expenditures will ultimately be determined by the volume of business. We
currently anticipate that our cash payments for capital expenditures for the
year ending December 31, 2020 will be in the range of $25 million to $30
million . During the three months ended March 31, 2020 , we purchased, with cash,
approximately $4.7 million of capital equipment, software and leasehold
improvements. We have historically funded and plan to continue funding these
capital expenditures with financing obligations, cash, and through bank loan
facilities, if necessary.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions and select accounting policies that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
There have been no significant changes to our critical accounting policies from
those disclosed in our Annual Report on Form 10-K for the year ended December
31, 2019 , except for the adoption of new accounting standards.
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NEOGENOMICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Related Party Transactions
On November 4, 2016 , the Company entered into an amended and restated consulting
agreement (the "Amended and Restated Consulting Agreement") with Steven C.
Jones , a director, officer and shareholder of the Company whereby Mr. Jones
would provide consulting services to the Company in the capacity of Executive
Vice President. The Amended and Restated Consulting Agreement has an initial
term of November 4, 2016 through April 30, 2020 , which automatically renews for
additional one year periods unless either party provides notice of termination
at least three months prior to the expiration of the initial term or any renewal
term. On May 6, 2019 , the Company and Mr. Jones entered into a letter agreement
to modify certain provisions of the 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 three months ended March 31, 2020 and 2019, Mr. Jones earned
approximately $15,750 and $38,000 , respectively, for consulting work performed
and for reimbursement of related expenses. During the three months ended March
31, 2020 and 2019, Mr. Jones earned approximately $13,125 and $12,500 ,
respectively, as compensation for his services on the Board. Mr. Jones also
received approximately $0 and $58,000 during the three months ended March 31,
2020 and 2019, respectively, as payment of his annual bonus compensation for the
previous fiscal years. The Company did not grant stock or restricted stock to
any of its Board members, including Mr. Jones , during the three months ended
March 31, 2020 or March 31, 2019 .
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.
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