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
OPERATIONS samples such as lymph nodes following additional processing steps. Cells are labeled with selective fluorescent antibodies and analyzed as they flow in a fluid stream through a beam of light. The properties measured in these antibodies include the relative size, relative granularity or internal complexity, and relative fluorescence intensity. These fluorescent antibodies bind to specific cellular antigens and are used to identify abnormal and/or malignant cell populations. Flow cytometry is typically utilized in diagnosing a wide variety of hematopoietic and lymphoid neoplasms. Flow cytometry is also used to monitor patients during the course of therapy to identify extremely low levels of residual malignant cells, known as minimal residual disease (MRD) 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-directionalSanger 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 atNeoGenomics 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 atNeoGenomics 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 byNeoGenomics' 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 thatNeoGenomics 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 24 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS performed byNeoGenomics . 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 theFederal 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 thatNeoGenomics 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 throughNeoGenomics 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 ofGenesis 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 ofHuman 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 25 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 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 differentiatesNeoGenomics from its competitors. TurnaroundTimes 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. 26 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS World-class Medical and Scientific Team Our team of medical professionals and Ph.Ds. are specialists in the field of genetics, oncology and pathology. As ofMarch 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 aNeoGenomics pathologist's interpretation of the test results. Our clients appreciate the flexibility to accessNeoGenomics' 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. OurPharma 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. 27 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Results of Operations for the Three Months EndedMarch 31, 2020 as Compared to the Three Months EndedMarch 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 endingMarch 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 endingMarch 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 endedMarch 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 ofDecember 31, 2019 to$147.7 million as ofMarch 31, 2020 . We expect this backlog to result in higher revenues in future quarters. The following table shows Clinical Services revenue, cost of revenue, requisitions received and tests performed for the three months endedMarch 31, 2020 and 2019. This data excludes tests performed for Pharma customers. 28 -------------------------------------------------------------------------------- NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Testing revenue and cost of revenue are presented in thousands below:
Three Months Ended March 31, 2020 2019 % Change Clinical Services: Requisitions (cases) received 144,319 137,111 5.3 % Number of tests performed 250,376 234,317 6.9 % Average number of tests/requisitions 1.73 1.71 1.2 % Total clinical testing revenue$ 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 endedMarch 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 endedMarch 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 endedMarch 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. 29 -------------------------------------------------------------------------------- NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Gross profit margin decreased for the three months endedMarch 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 endedMarch 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$1.3 million for the three months endedMarch 31, 2020 . We expect our general and administrative expenses to increase in total but decrease as a percentage of revenue as we add employee and compensation expenses, incur additional expenses associated with the expansion of our facilities, and continue to expand our physical and technological infrastructure to support our anticipated growth. Research and Development Expenses Research and development expenses relate to costs of developing new proprietary and non-proprietary genetic tests, including payroll and payroll related costs, maintenance of laboratory equipment, laboratory supplies (reagents), and outside consultants and experts assisting our research and development team. Consolidated research and development expenses for the periods presented are as follows: Three Months Ended March 31, ($ 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$0.9 million for the three months endedMarch 31, 2020 , compared to the same period in 2019. This increase was driven by investments in new test development, particularly in our Next-Generation Sequencing and FDA initiatives. We anticipate research and development expenditures will increase in future quarters as we invest in innovation projects and bringing new tests to market. Sales and Marketing Expenses Sales and marketing expenses are primarily attributable to employee-related costs including sales management, sales representatives, sales and marketing consultants and marketing and customer service personnel. Consolidated sales and marketing expenses for the periods presented are as follows: Three Months Ended March 31, ($ 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 % 30
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Sales and marketing expenses increased$2.0 million for the three months endedMarch 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 endingMarch 31, 2020 decreased 55.1%, or$1.0 million , compared to the same period in 2019. We expect our interest expense to fluctuate based on timing of advances and payments on our revolving credit facility as well as changes in interest rates and cash balances. Earnings Per Share The following table provides consolidated net loss available to common stockholders for each period along with the computation of basic and diluted net loss per share for the three months endedMarch 31, 2020 and 2019 (in thousands, except per share amounts): Three Months Ended March 31, 2020 2019 Net loss available to common shareholders$ (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
31 -------------------------------------------------------------------------------- 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 endedMarch 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 endedMarch 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 theOncology Division of HLI as well as cash used for capital expenditures. Cash Flows from Financing Activities During the three months endedMarch 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 endedMarch 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 OnJune 27, 2019 , the Company entered into a new senior secured credit agreement ("New Credit Agreement") withPNC 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 ofMarch 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 atMarch 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 endingDecember 31, 2020 will be in the range of$25 million to$30 million . During the three months endedMarch 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 inthe 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 endedDecember 31, 2019 , except for the adoption of new accounting standards. 33 --------------------------------------------------------------------------------NEOGENOMICS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS Related Party Transactions OnNovember 4, 2016 , the Company entered into an amended and restated consulting agreement (the "Amended and Restated Consulting Agreement") withSteven C. Jones , a director, officer and shareholder of the Company wherebyMr. 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 ofNovember 4, 2016 throughApril 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. OnMay 6, 2019 , the Company andMr. 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 onApril 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 ofApril 4, 2019 . During the three months endedMarch 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 endedMarch 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 endedMarch 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, includingMr. Jones , during the three months endedMarch 31, 2020 orMarch 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. 34 --------------------------------------------------------------------------------NEOGENOMICS, INC.
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