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 theNasdaq Stock Market LLC ("NASDAQ") 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 Pandemic 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 declared the outbreak of COVID-19 a pandemic. The outbreak of the pandemic is materially adversely affecting the Company's employees, patients, communities and business operations, as well asthe United States ("U.S.") economy and financial markets. The full extent to which the COVID-19 outbreak will impact the Company's business, results of operations, financial condition and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national and international markets. As the COVID-19 pandemic continues, the Company's results of operations, financial condition and cash flows are likely to continue to be materially adversely affected, particularly if the pandemic persists for a significant amount of time. The impact from the COVID-19 pandemic and the related disruptions have had a material adverse impact on our results of operations, volume growth rates and clinical test volumes in 2020. Demand may fluctuate to 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. We have implemented significant actions to protect our employees and maintain a safe environment while maintaining a continuity of critical oncology testing for cancer patients. Among other actions, we have de-densified our 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. We are positioned to recover from the effects of the COVID-19 pandemic. The addition of COVID-19 PCR testing capabilities and our broad test menu enables our sales teams to identify opportunities for increasing revenues. 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, and in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 and our Quarterly Reports on Form 10-Q for the fiscal quarters endedMarch 31, 2020 andJune 30, 2020 . 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 ofSeptember 30, 2020 , the Company had laboratory locations inFort Myers andTampa, Florida ;Aliso Viejo ,Carlsbad 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 34 --------------------------------------------------------------------------------NEOGENOMICS, INC.
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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 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: liquid
biopsy tests for advanced non-small cell lung cancer, all solid tumor types
(pan-cancer), and certain breast cancer cases; DNA fragment length analysis;
polymerase chain reaction (PCR) analysis; reverse transcriptase polymerase chain
reaction (RT-PCR) analysis, real-time (or quantitative) polymerase chain
reaction (qPCR) 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
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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
•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
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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") in January of 2020. 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 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
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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 September 30, 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. 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.
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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.
Results of Operations for the Three and Nine Months Ended September 30, 2020 as
Compared to the Three and Nine Months Ended September 30, 2019
The following table presents the Consolidated Statements of Operations as a
percentage of revenue:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of revenue 56.9 % 51.4 % 59.7 % 51.3 %
Gross Profit 43.1 % 48.6 % 40.3 % 48.7 %
Operating expenses:
General and administrative 28.8 % 31.6 % 33.6 % 31.4 %
Research and development 1.6 % 2.5 % 1.9 % 2.1 %
Sales and marketing 9.0 % 11.0 % 10.9 % 11.6 %
Total operating expenses 39.4 % 45.1 % 46.4 % 45.1 %
Income (loss) from operations 3.7 % 3.5 % (6.1) % 3.6 %
Interest expense, net 2.0 % 0.2 % 1.5 % 1.1 %
Other (income) expense - % - % (2.4) % 1.7 %
Loss on extinguishment of debt - % - % 0.4 % 0.3 %
Loss on termination of cash flow hedge - % - % 1.1 % - %
Income (loss) before taxes 1.7 % 3.3 % (6.7) % 0.5 %
Income tax (benefit) expense (0.3) % 1.3 % (3.3) % (0.2) %
Net income (loss) 2.0 % 2.0 % (3.4) % 0.7 %
Clinical and Pharma Services revenue for the periods presented are as follows ($
in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 $ Change % Change 2020 2019
$ Change % Change
Net revenues:
Clinical Services $ 108,733 $ 92,565 $ 16,168 17.5 % $ 275,599 $ 267,757 $ 7,842 2.9 %
Pharma Services 16,711 12,107 4,604 38.0 % 42,852 34,205 8,647 25.3 %
Total Revenue $ 125,444 $ 104,672 $ 20,772 19.8 % $ 318,451 $ 301,962 $ 16,489 5.5 %
Revenue
Clinical Services revenue for the three and nine month periods ending September
30, 2020 increased $16.2 million and $7.8 million when compared to the same
periods in 2019. These increases in revenue were primarily driven by COVID-19
PCR testing revenue of $17.0 million in the three month period ended September
30, 2020 . Clinical testing volume(1) increased by approximately 2.0% and
decreased by approximately 3.3% for the three and nine month periods ending
September 30, 2020 , respectively, compared to the same periods in 2019.
Pharma Services revenue for the three and nine month periods ended September 30,
2020 increased $4.6 million and $8.6 million compared to the same periods in
2019, primarily due to the impact of an increase in revenues related to clinical
trials and the acquisition of HLI - Oncology. This growth was partially offset
by an overall decrease in revenue due to the COVID-19 pandemic. In addition, our
backlog of signed contracts has continued to grow from $130.3 million as of
December 31, 2019 to $185.4 million as of September 30, 2020 . We expect this
backlog to result in higher revenues in future quarters.
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The following table shows Clinical revenue, cost of revenue, requisitions
received and tests performed for the three and nine months ended September 30,
2020 and 2019 excluding requisitions, tests, revenue and costs of revenue for
Pharma Services and COVID-19 PCR tests. Testing revenue and cost of revenue are
presented in thousands below:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 % Change 2020 2019 % Change
Clinical(1):
Requisitions (cases) received 147,518 145,312 1.5 % 406,250 427,406 (4.9) %
Number of tests performed 255,458 250,518 2.0 % 710,678 735,165 (3.3) %
Average number of tests/requisitions 1.73 1.72 0.6 % 1.75 1.72 1.7 %
Clinical testing revenue(1) $ 91,777 $ 92,565 (0.9) % $ 256,680 $ 267,757 (4.1) %
Average revenue/requisition $ 622 $ 637 (2.4) % $ 632 $ 626 1.0 %
Average revenue/test $ 359 $ 369 (2.7) % $ 361 $ 364 (0.8) %
Cost of revenue(1) $ 50,401 $ 47,526 6.0 % $ 146,645 $ 136,557 7.4 %
Average cost/requisition $ 342 $ 327 4.6 % $ 361 $ 320 12.8 %
Average cost/test $ 197 $ 190 3.7 % $ 206 $ 186 10.8 %
(1) Clinical tests exclude requisitions, tests, revenue and costs of revenue
for Pharma Services and COVID-19 PCR tests.
Average revenue per test was approximately flat for the three and nine months
ended September 30, 2020 compared to the corresponding periods in 2019.
Cost of Revenue and Gross Profit
Average cost per clinical test increased 3.7% and 10.8% for the three and nine
month periods ended September 30, 2020 , compared to the corresponding periods in
2019, reflecting a volume reduction due to the COVID-19 pandemic and the fixed
nature of many of our laboratory costs. In addition, the Company did not reduce
its workforce due to temporary declines in volume related to the COVID-19
pandemic.
Cost of revenue includes payroll and payroll related costs for performing tests,
maintenance and depreciation of laboratory equipment, rent for laboratory
facilities, laboratory reagents, probes and supplies, and delivery and courier
costs relating to the transportation of specimens to be tested.
The consolidated cost of revenue and gross profit metrics are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2020 2019 % Change 2020 2019 % Change
Cost of revenue:
Clinical Services $ 60,607 $ 47,526 27.5 % $ 158,287 $ 136,557 15.9 %
Pharma Services 10,772 6,314 70.6 % 31,724 18,492 71.6 %
Total cost of revenue $ 71,379 $ 53,840 32.6 % $ 190,011 $ 155,049 22.5 %
Cost of revenue as a % of
revenue 56.9 % 51.4 % 59.7 % 51.3 %
Gross profit:
Clinical Services $ 48,126 $ 45,039 6.9 % $ 117,312 $ 131,200 (10.6) %
Pharma Services 5,939 5,793 2.5 % 11,128 15,713 (29.2) %
Total gross profit $ 54,065 $ 50,832 6.4 % $ 128,440 $ 146,913 (12.6) %
Gross profit margin 43.1 % 48.6 % 40.3 % 48.7 %
Consolidated cost of revenue in dollars increased for the three and nine months
ended September 30, 2020 when compared to the same periods in 2019. Cost of
revenue as a percentage of revenue also 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 and nine months ended September 30,
2020 , compared to the same periods in 2019, primarily due to the timing of
Pharma Services revenue, higher costs due to the integration of Genoptix and HLI
- Oncology and additional testing capacity which was unused due to the impact of
the COVID-19 pandemic.
General and Administrative Expenses
General and administrative expenses consist of payroll and payroll related costs
for our billing, finance, human resources, information technology and other
administrative personnel as well as stock-based compensation. We also allocate
professional services, facilities expense, IT infrastructure costs,
depreciation, amortization and other administrative-related costs to general and
administrative expenses.
Consolidated general and administrative expenses are as follows:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change 2020 2019
$ Change % Change
General and administrative $ 36,128 $ 33,054 $ 3,074 9.3 % $ 107,085 $ 94,773 $ 12,312 13.0 %
As a % of revenue 28.8 % 31.6 % 33.6 % 31.4 %
General and administrative expenses increased $3.1 million and $12.3 million for
the three and nine months ended September 30, 2020 , compared to the same period
in 2019. These increases reflect acquisition 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 $0.4 million and $1.9 million for the three and nine months
ended September 30, 2020 .
We expect our general and administrative expenses to increase in total but
decrease as a percentage of revenue as we add employee and compensation
expenses, incur additional expenses associated with the expansion of our
facilities, and continue to expand our physical and technological infrastructure
to support our anticipated growth.
Research and Development Expenses
Research and development expenses relate to costs of developing new proprietary
and non-proprietary genetic tests, including payroll and payroll related costs,
maintenance of laboratory equipment, laboratory supplies (reagents), and outside
consultants and experts assisting our research and development team.
Consolidated research and development expenses for the periods presented are as
follows:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
Research and development $ 1,964 $ 2,611 $ (647) (24.8) % $ 6,129 $ 6,407 $ (278) (4.3) %
As a % of revenue 1.6 % 2.5 % 1.9 % 2.1 %
Research and development expenses decreased $0.6 million and $0.3 million for
the three and nine month periods ended September 30, 2020 when compared to the
same periods in 2019. These decreases are due to the timing of project expenses
offset by investments in new test development, particularly in COVID-19 PCR test
development, our Next-Generation Sequencing and FDA initiatives.
We anticipate research and development expenditures will increase in future
quarters as we invest in innovation projects and bringing new tests to market.
Sales and Marketing Expenses
Sales and marketing expenses are primarily attributable to employee-related
costs including sales management, sales representatives, sales and marketing
consultants and marketing and customer service personnel.
Consolidated sales and marketing expenses for the periods presented are as
follows:
Three Months Ended September 30, Nine Months Ended September 30,
($ in thousands) 2020 2019 $ Change % Change 2020 2019 $ Change % Change
Sales and marketing $11,304 $ 11,508 $ (204) (1.8) % $ 34,757 $ 35,048 $ (291) (0.8) %
As a % of revenue 9.0 % 11.0 % 10.9 % 11.6 %
41
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NEOGENOMICS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Sales and marketing expenses decreased $0.2 million and $0.3 million for the
three and nine months ended September 30, 2020 , when compared to the same
periods in 2019. These decreases primarily reflect lower commissions paid in
addition to a decrease in travel. Tradeshows switched to virtual formats
beginning in March 2020 due to COVID-19 and that contributed to sharply reduced
travel costs. 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 and
nine months ending September 30, 2020 increased $2.3 million and $1.5 million ,
respectively, compared to the same period in 2019. These increases reflect the
effective interest rate on the Convertible Notes which is 5.5%. Interest on the
Convertible Notes began accruing upon issuance and is payable semi-annually. For
further details regarding the Convertible Notes, please refer to Note 8. Debt,
in the accompanying notes to the consolidated financial statements.
Other (income) expense, net
For the three and nine months ended September 30, 2020 , other (income) expense,
net, was income of $0.01 million and $7.7 million , respectively. The income for
the nine months ended September 30, 2020 primarily relates to the recognition of
$7.9 million in grant income related to the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") Public Health and Emergency Fund . The
Public Health and Emergency Fund created by the CARES Act and payments made are
intended to reimburse healthcare providers for health care related expenses or
lost revenues attributable to COVID-19 and are not required to be repaid
provided that recipients attest to and comply with certain terms and conditions,
including limitations on balance billing for COVID-19 patients. The stimulus
payments were issued to partially offset losses in consolidated revenue due to
the impact of the COVID-19 pandemic. For the nine months ended September 30,
2019 , the Company reported expense of $5.1 million primarily related to a
litigation settlement.
Income (Loss) Per Share
The following table provides consolidated net income (loss) for each period
along with the computation of basic and diluted net income (loss) per share for
the three and nine months ended September 30, 2020 and 2019 (in thousands,
except per share amounts):
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net income (loss) $ 2,557 $ 2,143 $ (11,245) $ 1,710
Adjustment to the numerator for convertible
notes in diluted EPS
Net income (loss) $ 2,557 $ 2,143 $ (11,245) $ 1,710
Convertible note accretion, amortization, and
interest, net of tax 1,975 - - -
Net income (loss) used in diluted EPS $ 4,532 $
2,143
Basic weighted average shares outstanding 110,461 103,899 107,605 99,149 Diluted weighted average shares outstanding 119,191 107,880 107,605 102,766 Basic net income (loss) per share$ 0.02 $ 0.02 $ (0.10) $ 0.02 Diluted net income (loss) per share$ 0.04 $ 0.02 $ (0.10) $ 0.02 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. 42 -------------------------------------------------------------------------------- NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 by NeoGenomics as net income (loss) 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) and other
significant non-recurring or non-operating (income) or expenses, including any
debt financing costs.
The following is a reconciliation of GAAP net income (loss) to Non-GAAP EBITDA
and Adjusted EBITDA for the three and nine months ended September 30, 2020 :
Three Months Ended September 30, Nine Months Ended September 30,
(in thousands) 2020 2019 2020 2019
Net income (loss) (GAAP) $ 2,557 $ 2,143 $ (11,245) $ 1,710
Adjustments to net income (loss):
Interest expense, net 2,458 203 4,825 3,333
Income tax (benefit) expense (335) 1,348 (10,378) (500)
Amortization of intangibles 2,468 2,380 7,387 7,482
Depreciation 6,528 4,848 18,705 15,200
EBITDA (non-GAAP) $ 13,676 $ 10,922 $ 9,294 $ 27,225
Further adjustments to EBITDA:
Acquisition and integration related
expenses 446 334 1,852 2,143
Other significant non-recurring
income and expenses (1) (105) 364 (2,100) 6,527
Non-cash stock-based compensation
expense 2,715 3,275 7,536 7,727
Adjusted EBITDA (non-GAAP) $ 16,732 $ 14,895 $ 16,582 $ 43,622
(1) Other significant non-recurring income and expenses includes grant income
received related to the CARES Act, cash flow hedge termination fees, debt
retirement fees and other non-recurring items.
Liquidity and Capital Resources
To date, we have financed our operations primarily through cash generated from
operations, public and private sales of equity securities, and bank debt
borrowings.
The following table presents a summary of our consolidated cash flows for
operating, investing and financing activities for the nine months ended
September 30, 2020 and 2019 as well balances of cash and cash equivalents and
working capital:
43
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NEOGENOMICS, INC.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Nine Months Ended
(in thousands) 2020 2019 Net cash (used in) provided by: Operating activities $ (4,525)$ 20,010 Investing activities (130,587) (13,554) Financing activities 227,332 162,624 Net change in cash, cash equivalents and restricted cash 92,220 169,080
Cash, cash equivalents and restricted cash, beginning of period $
173,016 $ 9,811
Cash, cash equivalents and restricted cash, end of period $ 265,236 $ 178,891
Working Capital (1), end of period $
357,763
(1) Defined as current assets less current liabilities. Cash Flows from Operating Activities During the nine months endedSeptember 30, 2020 , we used$4.5 million in cash for operating activities compared to$20.0 million cash provided by operating activities for the same period in 2019. Cash used in operating activities in the nine months endedSeptember 30, 2020 consisted of a net loss of$11.2 million , a decrease in net operating assets of$32.1 million , and a decrease in net operating liabilities of$9.3 million . The increase in cash used in operating activities was partially offset by net working capital adjustments of$48.1 million . Included in the net loss of$11.2 million was grant income of$7.9 million related to the CARES Act. The change in operating assets was primarily driven by an increase in accounts receivable due to an increases in revenue, an increase in funds distributed for the construction of the new headquarters facility, and an increase in inventory due to higher spend on materials to mitigate the risk of potential supply chain disruptions resulting from the COVID-19 pandemic, as well as inventory purchased to perform COVID-19 testing. Cash Flows from Investing Activities During the nine months endedSeptember 30, 2020 , cash used in investing activities was$130.6 million , an increase of approximately$117.0 million compared to the same period in 2019. This was primarily due to a net investment of$50.3 million in marketable securities,$37.0 million for the acquisition of the HLI - Oncology, the$25.0 million investment made inInivata and$3.2 million of cash used for capital expenditures. Cash Flows from Financing Activities During the nine months endedSeptember 30, 2020 , cash provided by financing activities was$227.3 million compared to$162.6 million in the same period in 2019. Cash provided by financing activities during the nine months endedSeptember 30, 2020 consisted of convertible debt proceeds of$194.5 million , net of deferred finance charges, proceeds from the equity offering of$127.3 million and$10.8 million for the net issuance of common stock. This activity was primarily offset by the use of cash in the amounts of$101.9 million for the net repayment of the term loan and other financing obligations and$3.3 million in cash flow hedge terminations fees. Liquidity Outlook OnMay 4, 2020 , the Company completed the sale of$175.0 million of 1.25% Convertible Senior Notes dueMay 2025 (the "Convertible Notes"). And onMay 19, 2020 , the Underwriters of the Convertible Notes exercised their option to purchase an additional$26.3 million aggregate principal amount of the Convertible Notes (the "Over-allotment Option") on the same terms and conditions, solely to cover over-allotments with respect to the Convertible Notes offering. The total net proceeds from the issuance of the Convertible Notes and the total exercise of the Over-allotment Option was approximately$194.4 million , which includes approximately$6.9 million of discounts, commissions and offering expenses paid by the Company. For further details regarding the Convertible Notes, please refer to Note 8. Debt, in the accompanying notes to the consolidated financial statements. In addition, inApril 2020 , the Company entered into an underwriting agreement relating to the issuance and sale of 4,400,000 shares of the Company's common stock ("Common Stock Offering"),$0.001 par value per share. The price to the public in this offering was$28.50 per share and the Company agreed to sell the shares to the Underwriters at the public offering price, less underwriting discounts and commission of$1.71 per share. Under the terms of the underwriting agreement, the Company also granted the Underwriters a 30-day option to purchase up to 660,000 additional shares of Common Stock at the public offering price, less underwriting discounts and commissions. InJune 2020 , closing took place on a partial exercise of the Underwriters' option and the Company issued the Underwriters an additional 351,500 shares. The net proceeds from the Common Stock 44 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Offering and partial exercise of the Underwriters' option were approximately
$127.3 million , net of underwriting commissions of approximately $8.1 million .
The Company used $96.3 million of the net proceeds from the offering of the
Convertible Notes and the Common Stock Offering to repay all outstanding
amounts, including principal, accrued interest and fees, under its Prior Senior
Secured Credit Agreement with PNC Bank National Association and intends to use
the remainder for general corporate purposes and may use a portion of the net
proceeds to acquire or invest in complementary businesses and technologies.
We had $233.2 million in unrestricted cash and cash equivalents as of September
30, 2020 . The Company had $50.4 million of marketable securities and considers
all securities available-for-sale, including those with maturity dates beyond 12
months as they are available to support current operational liquidity needs. We
believe that the cash on hand, marketable securities 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 nine months ended September 30, 2020 , we purchased, with
cash, approximately $17.6 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.
Please refer to our critical accounting policies as disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2019 and Note 1. Nature of
the Business, Basis of Presentation and Significant Accounting Policies and Note
2. Recently Adopted and Issued Accounting Guidance, in the accompanying notes to
the consolidated financial statements, for additional information and changes to
our critical accounting policies.
Off-balance Sheet Arrangements
On May 22, 2020 , in conjunction with the Investment Agreement, the Company and
Inivata entered into a five-year, line of credit agreement in the amount of
$15.0 million . The amounts borrowed under the line of credit are contractually
limited to the working capital purposes of Inivata , but not towards acquisitions
of companies, businesses or undertakings. This line of credit has an
availability period beginning on January 1, 2021 and ends one month prior to the
final repayment date of January 1, 2026 . The line of credit bears interest at 0%
per annum and interest and unpaid principal balance is payable on the final
repayment date. As of September 30, 2020 , the Company believes it has sufficient
funds to support the line of credit. Please refer to Note 14. Investment in
Non-Consolidated Affiliate, in the accompanying notes to the consolidated
financial statements, for additional information on our non-consolidated
affiliate.
45
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