NeoGenomics(NEO) - 2021 Q2 - Quarterly Report

FORWARD-LOOKING STATEMENTS This section outlines the nature of forward-looking statements, cautioning readers about inherent risks and uncertainties that could cause actual results to differ materially from projections - This section outlines the nature of forward-looking statements within the report, cautioning readers about inherent risks and uncertainties that could cause actual results to differ materially from projections[7] - Key risks include the ability to respond to rapid scientific change, liability in clinical trials, business strategy implementation, the potential impact of the COVID-19 pandemic, expected reimbursement levels, regulatory developments, and the ability to protect intellectual property[8] - The Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made[9] PART I FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with detailed notes explaining the company's accounting policies, significant transactions, and financial position for the periods ended June 30, 2021, and December 31, 2020 Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time Consolidated Balance Sheet Highlights (in thousands): | Metric | June 30, 2021 (unaudited) | December 31, 2020 | Change | | :--------------------------------- | :------------------------ | :---------------- | :----- | | Total current assets | $721,795 | $448,730 | +60.8% | | Total non-current assets | $1,174,516 | $539,601 | +117.7% | | Total assets | $1,896,311 | $988,331 | +91.9% | | Total current liabilities | $99,131 | $73,183 | +35.5% | | Total long-term liabilities | $648,822 | $220,854 | +193.8% | | Total liabilities | $747,953 | $294,037 | +154.4% | | Total stockholders' equity | $1,148,358 | $694,294 | +65.4% | - Cash and cash equivalents increased from $228.7 million to $368.8 million, and marketable securities increased from $67.5 million to $203.0 million[12] - Convertible senior notes, net, increased significantly from $168.1 million to $531.1 million, reflecting new debt issuances[12] Consolidated Statements of Operations This section details the company's revenues, expenses, and net income or loss over specific reporting periods Consolidated Statements of Operations Highlights (in thousands, except per share data): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | % Change (YoY) | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | % Change (YoY) | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------- | :------------------------------- | :------------------------------- | :------------- | | Total revenue | $121,724 | $86,977 | +39.9% | $237,257 | $193,007 | +22.9% | | Gross profit | $52,990 | $28,006 | +89.2% | $94,564 | $74,375 | +27.1% | | Loss from operations | $(22,367) | $(18,907) | +18.3% | $(37,474) | $(24,200) | +54.8% | | Gain on investment in affiliate, net | $(96,534) | $0 | N/A | $(91,510) | $0 | N/A | | Net income (loss) | $75,873 | $(6,824) | N/A | $53,759 | $(13,802) | N/A | | Basic EPS | $0.64 | $(0.06) | N/A | $0.46 | $(0.13) | N/A | | Diluted EPS | $0.59 | $(0.06) | N/A | $0.44 | $(0.13) | N/A | - The significant net income for Q2 and H1 2021 was largely due to a $96.5 million (Q2) and $91.5 million (H1) gain on investment in and loan receivable from a non-consolidated affiliate[14] Consolidated Statements of Comprehensive Income (Loss) This section presents the company's net income or loss and other comprehensive income or loss, reflecting all changes in equity during the period Consolidated Statements of Comprehensive Income (Loss) (in thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | $75,873 | $(6,824) | $53,759 | $(13,802) | | Total other comprehensive (loss) income, net of tax | $(183) | $2,699 | $(343) | $1,661 | | Comprehensive income (loss) | $75,690 | $(4,125) | $53,416 | $(12,141) | Consolidated Statements of Stockholders' Equity This section details changes in the company's equity, including common stock, additional paid-in capital, and retained earnings, over the reporting period Stockholders' Equity Changes (in thousands, except share data): | Metric | December 31, 2020 | June 30, 2021 | Change | | :------------------------- | :---------------- | :------------ | :----- | | Common Stock (Shares) | 112,075,474 | 122,711,352 | +9.5% | | Common Stock (Amount) | $112 | $123 | +9.8% | | Additional Paid-In Capital | $701,357 | $1,101,298 | +57.0% | | Retained Earnings | $(7,185) | $47,270 | N/A | | Total Stockholders' Equity | $694,294 | $1,148,358 | +65.4% | - Significant increases in additional paid-in capital were driven by common stock issuances from public offerings ($218.5 million) and private placements ($189.9 million), and common stock issued for acquisition ($29.2 million)[19][152][154] - Retained earnings shifted from a deficit of $7.2 million to a positive balance of $47.3 million, reflecting net income for the period[19] Consolidated Statements of Cash Flows This section summarizes the cash inflows and outflows from operating, investing, and financing activities over specific reporting periods Consolidated Statements of Cash Flows Highlights (in thousands): | Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change | | :---------------------------------------- | :------------------------------- | :------------------------------- | :----- | | Net cash provided by (used in) operating activities | $820 | $(5,051) | +$5,871 | | Net cash used in investing activities | $(608,098) | $(59,871) | -$548,227 | | Net cash provided by financing activities | $729,545 | $223,217 | +$506,328 | | Net change in cash, cash equivalents and restricted cash | $122,267 | $158,295 | -$36,028 | | Cash, cash equivalents and restricted cash, end of period | $372,899 | $331,311 | +$41,588 | - Operating activities generated $0.8 million in cash in H1 2021, a significant improvement from a $5.1 million use in H1 2020, despite a large non-cash gain on investment and COVID-19 PCR testing write-offs[25][263] - Investing activities used $608.1 million in H1 2021, primarily due to $419.4 million for acquisitions (Inivata and Trapelo) and $136.5 million in net investments in marketable securities[25][264] - Financing activities provided $729.5 million in H1 2021, mainly from $418.3 million in equity offerings and $334.4 million from convertible debt issuance[25][265] Note 1. Nature of the Business This note describes the company's core operations as a clinical laboratory, the impact of the COVID-19 pandemic, and related financial adjustments - NeoGenomics operates as a certified, high complexity clinical laboratory providing diagnostic services to healthcare providers and clinical trial services to pharmaceutical firms[29] - The COVID-19 pandemic materially adversely affected the Company's operations, but cash on hand and marketable securities are anticipated to be sufficient to fund near-term capital and operating needs for at least the next 12 months[30][31] - The Company exited COVID-19 PCR testing at the end of Q1 2021, recording a $6.1 million expense related to inventory and equipment write-offs[32] - The Company recognized $0.3 million and $0.7 million under the Employee Retention Tax Credit (ERTC) for the three and six months ended June 30, 2021, respectively, with no CARES Act grant income recognized in 2021[35][37] Note 2. Summary of Significant Accounting Policies This note outlines the key accounting principles, estimates, and recent accounting standard adoptions used in preparing the interim financial statements - The interim financial statements are unaudited and prepared in accordance with GAAP, with certain information condensed or omitted compared to annual reports[39][41] - Significant estimates and judgments are made for revenues, accounts receivable, long-term assets, income taxes, stock-based compensation, business combinations, and goodwill impairment[43] - The Company adopted ASU 2020-06 on January 1, 2021, using a modified retrospective approach, simplifying accounting for convertible instruments and impacting deferred income tax liabilities and additional paid-in capital[63][64] - A valuation allowance of approximately $15.5 million was established against U.S. deferred income tax assets as of June 30, 2021, due to a three-year cumulative loss position[56][57] Note 3. Acquisitions This note details the acquisitions of Trapelo Health and Inivata Limited, including their financial impact on goodwill, intangible assets, and the gain on investment - On April 7, 2021, NeoGenomics acquired Trapelo Health for $64.8 million, consisting of $35.6 million cash and $29.2 million in common stock, enhancing clinical decision support in precision oncology[69][70] - The Trapelo acquisition resulted in $44.7 million in goodwill, assigned to the Clinical Services segment, and identifiable intangible assets of $19.0 million for developed technology and $0.5 million for marketing assets[70][73] - On June 18, 2021, NeoGenomics acquired the remaining equity interests in Inivata Limited for $398.6 million cash, adding liquid biopsy platform technology and minimal residual disease testing capabilities[76][77] - The Inivata acquisition was accounted for as a business combination achieved in stages, resulting in a $96.5 million gain on investment in and loan receivable from non-consolidated affiliate[78][123] - The Inivata acquisition generated $244.2 million in goodwill ($214.5 million to Clinical Services, $29.7 million to Pharma Services) and identifiable intangible assets of $303.0 million for developed technology, $31.7 million for trademarks, and $2.3 million for trade name[81][86] Note 4. Fair Value Measurements This note explains the company's fair value measurement hierarchy for financial and non-financial assets, primarily marketable securities and intangible assets - Fair value is defined as the exit price in an orderly transaction between market participants, categorized into Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), and Level 3 (unobservable inputs)[90][91][92] Marketable Securities at Fair Value (in thousands): | Type | June 30, 2021 | December 31, 2020 | | :------------------------ | :------------ | :---------------- | | U.S. Treasury securities | $51,560 | $21,340 | | Yankee bonds | $3,069 | — | | Agency bonds | $17,635 | — | | Municipal bonds | $12,472 | — | | Commercial paper | $22,658 | $14,543 | | Asset-backed securities | $26,467 | $14,538 | | Corporate bonds | $69,089 | $17,125 | | Total | $202,950 | $67,546 | - The majority of cash equivalents ($263.9 million) and U.S. Treasury securities ($51.6 million) are classified as Level 1 fair value measurements as of June 30, 2021[101] - Non-financial assets like intangible assets and goodwill are measured at fair value on a nonrecurring basis using primarily unobservable (Level 3) inputs for impairment evaluations[105] Note 5. Leases This note provides details on the company's operating lease liabilities, lease costs, and future minimum lease payments, including commitments for new facilities Operating Lease Liabilities (in thousands): | Period | Remaining Lease Payments | | :------------------ | :----------------------- | | Remainder of 2021 | $3,671 | | 2022 | $8,043 | | 2023 | $7,638 | | 2024 | $7,885 | | 2025 | $5,087 | | Thereafter | $37,142 | | Total | $69,466 | | Less: imputed interest | $(14,200) | | Total operating lease liabilities | $55,266 | | Weighted-average remaining lease term | 10.67 years | | Weighted-average discount rate | 4.1% | - Operating lease costs for the six months ended June 30, 2021, were $4.7 million, up from $4.3 million in the prior year[108] - The Company has $33.8 million in contractually binding minimum lease payments for executed but not yet commenced leases, primarily for a new laboratory and headquarters facility in Fort Myers, Florida, expected to commence in Q3 2021[108] Note 6. Goodwill and Intangible Assets This note details the changes in goodwill and intangible assets by segment, primarily driven by recent acquisitions, and related amortization expenses Goodwill by Segment (in thousands): | Segment | December 31, 2020 | June 30, 2021 | Change | | :---------------- | :---------------- | :------------ | :----- | | Clinical Services | $179,534 | $438,761 | +144.4% | | Pharma Services | $31,549 | $61,216 | +94.0% | | Total | $211,083 | $499,977 | +137.0% | - Goodwill increased significantly due to the acquisitions of Trapelo ($44.7 million, all to Clinical Services) and Inivata ($244.2 million, with $214.5 million to Clinical Services and $29.7 million to Pharma Services)[109][111] Intangible Assets, Net (in thousands): | Type | June 30, 2021 | December 31, 2020 | | :------------------------ | :------------ | :---------------- | | Customer Relationships | $102,290 | $107,206 | | Developed Technology | $320,855 | — | | Marketing Assets | $517 | — | | Trademarks | $31,624 | — | | Trade Name | $2,305 | — | | Trademark - Indefinite lived | $13,447 | $13,447 | | Total | $471,038 | $120,653 | - Amortization expense for intangibles was $3.8 million for Q2 2021 (up from $2.5 million in Q2 2020) and $6.2 million for H1 2021 (up from $4.9 million in H1 2020)[111] Note 7. Investment in Non-Consolidated Affiliate This note describes the company's prior strategic alliance and investment in Inivata, leading to its eventual acquisition and the recognition of a significant gain - NeoGenomics formed a strategic alliance with Inivata on May 22, 2020, acquiring a minority interest for $25 million and a fixed-price option to purchase the remainder[114] - Prior to the June 18, 2021 acquisition, the investment in Inivata (Preference Shares and Purchase Option) was measured at cost, adjusted for observable price changes, and a $15 million Line of Credit was extended to Inivata[116][117][119] - Upon acquiring control of Inivata on June 18, 2021, the previously-held equity interest and Purchase Option were remeasured to acquisition-date fair values of $62.9 million and $58.5 million, respectively[123] - The acquisition resulted in a total gain on investment in and loan receivable from non-consolidated affiliate, net, of $96.5 million for Q2 2021 and $91.5 million for H1 2021[123] Note 8. Debt This note details the company's long-term debt, including convertible senior notes issued in 2028 and 2025, and their associated terms and effective interest rates Long-Term Debt, Net (in thousands): | Debt Type | June 30, 2021 | December 31, 2020 | | :--------------------------------- | :------------ | :---------------- | | 0.25% Convertible Senior Notes due 2028 | $335,088 | — | | 1.25% Convertible Senior Notes due 2025 | $195,989 | $168,120 | | Equipment financing obligations | $2,361 | $3,808 | | Total long-term debt, net | $531,525 | $169,087 | - On January 11, 2021, the Company sold $345 million of 0.25% Convertible Senior Notes due 2028, with net proceeds of approximately $334.4 million[126] - The 2028 Convertible Notes have an initial conversion price of $66.15 per share and an effective interest rate of 0.70%[128][134] - In connection with the 2028 Convertible Notes, the Company entered into Capped Call Transactions at a cost of $29.3 million to reduce potential stock dilution, classified as equity[135] - The 2025 Convertible Senior Notes (issued May 4, 2020) have an initial conversion price of $36.34 per share and an effective interest rate of 1.96%[142][148] Note 9. Equity Transactions This note outlines significant equity transactions, including public offerings and private placements of common stock, and shares issued for acquisitions - On June 18, 2021, the Company completed a private placement of 4,444,445 common shares at $45.00 per share, generating net proceeds of approximately $189.9 million, used for the Inivata acquisition[152][271] - In April 2021, 597,712 shares of common stock were issued as consideration for the Trapelo acquisition[153] - On January 6, 2021, the Company completed a public offering of 4,081,632 common shares (plus an over-allotment option for 612,244 shares), generating net proceeds of approximately $218.3 million[154][155][267] Note 10. Stock-Based Compensation This note details the company's stock-based compensation expense, unrecognized compensation, and the valuation methods for stock options and restricted stock Stock-Based Compensation Expense (in thousands): | Period | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Stock-based compensation expense | $4,500 | $2,600 | $7,200 | $4,800 | - As of June 30, 2021, there was $15 million of unrecognized stock-based compensation expense for stock options (weighted-average period of 2.2 years) and $12.1 million for restricted stock (weighted-average period of 1.9 years)[160][161] - The Company uses the Black-Scholes option valuation model for new stock option awards since January 1, 2021, with a weighted average fair value of $18.53 per share at grant date for H1 2021[160] - Employees purchased 55,756 shares under the ESPP for H1 2021, resulting in an expense of approximately $0.5 million[163] Note 11. Revenue Recognition This note explains the company's revenue recognition policies for its Clinical Services and Pharma Services segments, including disaggregation of revenue by payer - The Company has two operating segments: Clinical Services (diagnostic testing for healthcare providers) and Pharma Services (clinical trial services and data analytics for pharmaceutical firms)[165] - Clinical Services revenue is recognized upon performance and delivery of diagnostic services, billed to various payers based on expected collection amounts[166] - Pharma Services revenue is generally recognized on a unit-of-service basis, with upfront fees or milestones recognized over time, and includes validation studies and informatics[167][168] Disaggregation of Revenue (in thousands): | Segment/Payer | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------ | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Clinical Services: | | | | | | Client direct billing | $63,137 | $45,244 | $123,846 | $99,535 | | Commercial Insurance | $20,528 | $15,148 | $39,102 | $37,142 | | Medicare and Medicaid | $17,484 | $13,541 | $34,634 | $30,024 | | Self-Pay | $256 | $(49) | $310 | $165 | | Total Clinical Services | $101,405 | $73,884 | $197,892 | $166,866 | | Pharma Services | $20,319 | $13,093 | $39,365 | $26,141 | | Total Revenue | $121,724 | $86,977 | $237,257 | $193,007 | Note 12. Net Income (Loss) Per Share This note details the calculation of basic and diluted net income or loss per share, including the impact of potential dilutive securities - Basic EPS is computed by dividing net income (loss) by weighted-average common shares outstanding, while diluted EPS reflects potential dilution from stock awards and convertible notes using the if-converted method[177] Net Income (Loss) Per Share (in thousands, except per share amounts): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | $75,873 | $(6,824) | $53,759 | $(13,802) | | Net income (loss) used in diluted EPS | $77,425 | $(6,824) | $56,756 | $(13,802) | | Basic weighted average shares outstanding | 118,287 | 107,887 | 117,249 | 106,209 | | Diluted weighted average shares outstanding | 131,237 | 107,887 | 130,247 | 106,209 | | Basic net income (loss) per share | $0.64 | $(0.06) | $0.46 | $(0.13) | | Diluted net income (loss) per share | $0.59 | $(0.06) | $0.44 | $(0.13) | - Dilutive effects for Q2 2021 included 2,027 thousand stock options, 170 thousand restricted stock awards, 5,538 thousand 2025 Convertible Notes shares, and 5,215 thousand 2028 Convertible Notes shares[178] - Potential dilutive shares from stock options, restricted stock awards, and 2025 Convertible Notes were excluded from diluted EPS in Q2 and H1 2020 due to their anti-dilutive effect[178] Note 13. Defined Contribution Plans This note describes the company's 401(k) retirement plan for U.S. employees and other country-specific pension plans, including matching contributions - The Company maintains a 401(k) retirement plan for U.S. employees, matching 100% of contributions up to 3% of compensation and an additional 50% on the next 2% (4% maximum match)[181] - Matching contributions were $1.5 million for Q2 2021 (up from $1.2 million in Q2 2020) and $3.1 million for H1 2021 (up from $2.6 million in H1 2020)[181] - Post-Inivata acquisition, the Company also operates country-specific defined contribution pension plans for Inivata employees, with immaterial contributions for the period through June 30, 2021[182] Note 14. Commitments and Contingencies This note discloses a patent infringement lawsuit filed against Inivata, which the company intends to vigorously defend, with an uncertain outcome - On January 20, 2021, Natera, Inc. filed a patent infringement complaint against Inivata Limited and Inivata, Inc., alleging infringement by Inivata's InVisionFirst-Lung cancer diagnostic test[183][287] - The Company intends to vigorously defend the matter, believing it has good and substantial defenses, but the outcome is not estimable or probable at the time of filing[183][287] Note 15. Related Party Transactions This note details transactions with Inivata prior to its acquisition, including testing services and a line of credit, now consolidated post-acquisition - Prior to the Inivata acquisition, Inivata provided $0.4 million and $0.8 million in testing services to NeoGenomics for the three and six months ended June 30, 2021, respectively[186] - The $15 million Line of Credit between NeoGenomics and Inivata was settled after the Inivata Acquisition Date, with no outstanding amounts as of June 30, 2021[187] - As of June 18, 2021, Inivata became a wholly-owned consolidated subsidiary, and its financial activities are now consolidated within NeoGenomics' financial statements[188] Note 16. Segment Information This note provides financial information disaggregated by the company's Clinical Services and Pharma Services operating segments, including net revenues and gross profit - NeoGenomics operates two segments: Clinical Services (diagnostic testing for healthcare providers) and Pharma Services (clinical trials and research for pharmaceutical firms)[191] Segment Net Revenues (in thousands): | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Clinical Services | $101,405 | $73,884 | $197,892 | $166,866 | | Pharma Services | $20,319 | $13,093 | $39,365 | $26,141 | | Total Revenue | $121,724 | $86,977 | $237,257 | $193,007 | Segment Gross Profit (in thousands): | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Clinical Services | $44,172 | $25,127 | $79,094 | $69,186 | | Pharma Services | $8,818 | $2,879 | $15,470 | $5,189 | | Total Gross Profit | $52,990 | $28,006 | $94,564 | $74,375 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results for the three and six months ended June 30, 2021, compared to the prior year It covers revenue, expenses, liquidity, capital resources, and the impact of the COVID-19 pandemic and recent acquisitions Introduction This introduction emphasizes reading the discussion in conjunction with financial statements and acknowledges the presence of forward-looking statements subject to risks - The discussion and analysis should be read in conjunction with the unaudited Consolidated Financial Statements and notes, and includes forward-looking statements subject to certain risks and uncertainties[194] COVID-19 Pandemic This section discusses the material adverse impact of the COVID-19 pandemic on operations and test volumes, alongside the company's measures to ensure testing continuity - The COVID-19 pandemic materially adversely affected the Company's operations, volume growth, and test volumes in 2020 and H1 2021, with future impact dependent on the pandemic's duration and severity[195][196] - The Company implemented significant actions to protect employees and maintain critical oncology testing continuity, including de-densifying laboratories, adjusting shifts, and restricting travel[197] - All main laboratory facilities have remained open, ensuring uninterrupted high-quality testing services for clients[197] Overview This overview describes NeoGenomics' global network of cancer-focused testing laboratories, its comprehensive service offerings, and its Clinical and Pharma Services segments - NeoGenomics operates a network of cancer-focused testing laboratories in the United States, Europe, and Asia, aiming to be the world's leading cancer testing and information company[199] - The company offers a broad range of testing services including Cytogenetics, FISH, Flow cytometry, Immunohistochemistry (IHC) and Digital Imaging, Molecular testing (including NGS and liquid biopsy), and Morphologic analysis[200][204] - Clinical Services provide diagnostic services to pathology practices, hospitals, and academic centers, with a focus on comprehensive and tech-only offerings[203][207] - Pharma Services support pharmaceutical firms in drug development, clinical trials, and research, including biomarker discovery, companion diagnostic development, and informatics[208][209][210][212] 2021 Focus Areas This section outlines the company's strategic priorities for 2021, including culture, quality, innovation, growth initiatives, and business development - Key focus areas for 2021 include strengthening world-class culture through investment in people development, coaching, and training[216][218] - The Company is committed to providing uncompromising quality and exceptional service by improving laboratory operations, increasing automation, and enhancing turnaround times[219][220] - Innovation and growth initiatives include pursuing market share gains, improving reimbursement effectiveness, and developing new assays and product offerings like liquid biopsy and MRD[221][222] - The Company also seeks growth opportunities through mergers and acquisitions and investing in business development and informatics capabilities[223] Competitive Strengths This section highlights the company's competitive advantages, such as industry-leading turnaround times, a world-class medical team, innovative service offerings, and a national sales force - Competitive strengths include industry-leading turnaround times for test results in both Clinical and Pharma Services, enabling rapid treatment decisions[225][227] - A world-class medical and scientific team of approximately 120 M.D.s and Ph.Ds. provides expertise for challenging cases and study design[228] - Innovative service offerings include extensive tech-only FISH, flow cytometry, and IHC testing, as well as a broad Molecular and Next Generation Sequencing test menu, making NeoGenomics a 'one-stop shop'[229][231] - A national direct sales force, extensively trained in cancer genetic testing, utilizes a custom Customer Relationship Management System (CRM) and Laboratory Information Services (LIS) to manage territories and educate clients[232] Seasonality This section explains the seasonal variations in clinical testing volume and the inconsistent revenue patterns in Pharma Services due to contract terms and trial enrollment - Clinical testing volume generally declines modestly during summer vacation, year-end holidays, and due to extreme adverse weather conditions[233] - Pharma Services testing volume varies based on contract terms and patient enrollment rates for trials, which can be impacted by seasonality, leading to inconsistent revenue among periods[234][236] Results of Operations for the Three and Six Months Ended June 30, 2021 as Compared to the Three and Six Months Ended June 30, 2020 This section provides a comparative analysis of the company's operational results for the specified periods, presented as a percentage of net revenue Consolidated Statements of Operations as a Percentage of Net Revenue: | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net revenue | 100.0% | 100.0% | 100.0% | 100.0% | | Cost of revenue | 56.5% | 67.8% | 60.1% | 61.5% | | Gross Profit | 43.5% | 32.2% | 39.9% | 38.5% | | General and administrative | 44.9% | 39.8% | 40.1% | 36.7% | | Research and development | 2.9% | 2.4% | 2.5% | 2.2% | | Sales and marketing | 14.2% | 11.7% | 13.1% | 12.2% | | Loss from operations | (18.5)% | (21.7)% | (15.8)% | (12.6)% | | Income (loss) before taxes | 60.2% | (20.6)% | 22.0% | (12.3)% | | Net income (loss) | 62.2% | (7.8)% | 22.6% | (7.1)% | Revenue This section analyzes the company's consolidated and segment-specific revenue growth, driven by increased testing volume and recovery from the COVID-19 pandemic Net Revenue by Segment (in thousands): | Segment | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | $ Change | % Change | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | $ Change | % Change | | :---------------- | :------------------------------- | :------------------------------- | :------- | :------- | :------------------------------- | :------------------------------- | :------- | :------- | | Clinical Services | $101,405 | $73,884 | $27,521 | 37.2% | $197,892 | $166,866 | $31,026 | 18.6% | | Pharma Services | $20,319 | $13,093 | $7,226 | 55.2% | $39,365 | $26,141 | $13,224 | 50.6% | | Total Revenue | $121,724 | $86,977 | $34,747 | 39.9% | $237,257 | $193,007 | $44,250 | 22.9% | - Consolidated revenues increased by 39.9% YoY for Q2 2021 and 22.9% YoY for H1 2021, primarily driven by increased patient access to testing as COVID-19 pandemic recovery continued[238] - Clinical testing volume increased by 37.3% for Q2 2021 and 19.1% for H1 2021, while average revenue per test increased 2.6% for Q2 2021 and was flat for H1 2021[238][241] - Pharma Services backlog grew from $208.9 million as of December 31, 2020, to $238.1 million as of June 30, 2021, indicating expected higher future revenues[239][240] Cost of Revenue and Gross Profit This section analyzes changes in cost of revenue and gross profit, highlighting improvements in gross profit margin due to higher testing volume and cost efficiencies Cost of Revenue and Gross Profit (in thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | % Change | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | % Change | | :------------------------ | :------------------------------- | :------------------------------- | :------- | :------------------------------- | :------------------------------- | :------- | | Total cost of revenue | $68,734 | $58,971 | 16.6% | $142,693 | $118,632 | 20.3% | | Cost of revenue as a % of revenue | 56.5% | 67.8% | | 60.1% | 61.5% | | | Total gross profit | $52,990 | $28,006 | 89.2% | $94,564 | $74,375 | 27.1% | | Gross profit margin | 43.5% | 32.2% | | 39.9% | 38.5% | | - Average cost per clinical test decreased by 13.0% for Q2 2021 and 3.8% for H1 2021, reflecting increased volume and the fixed nature of many laboratory costs[243] - Gross profit margin improved due to higher testing volume and recovery from the COVID-19 pandemic in both segments[246] - Clinical cost of revenue for H1 2021 included $5.3 million in write-offs for COVID-19 PCR testing inventory[245] General and Administrative Expenses This section details the increase in general and administrative expenses, primarily due to acquisition-related costs and higher payroll, with expectations for future efficiency General and Administrative Expenses (in thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | $ Change | % Change | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | $ Change | % Change | | :--------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | :------------------------------- | :------------------------------- | :------- | :------- | | General and administrative expenses | $54,638 | $34,613 | $20,025 | 57.9% | $95,114 | $70,957 | $24,157 | 34.0% | | As a % of revenue | 44.9% | 39.8% | | | 40.1% | 36.7% | | | - Increases were driven by approximately $11 million (Q2) and $11.8 million (H1) in acquisition and integration costs related to Inivata and Trapelo, and higher payroll costs due to increased personnel[248] - General and administrative expenses are expected to increase in total but decrease as a percentage of revenue over time due to facility expansion and infrastructure investments[249] Research and Development Expenses This section discusses the increase in research and development expenses, driven by investments in new test development and future innovation projects Research and Development Expenses (in thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | $ Change | % Change | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | $ Change | % Change | | :--------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | :------------------------------- | :------------------------------- | :------- | :------- | | Research and development expenses | $3,495 | $2,105 | $1,390 | 66.0% | $5,951 | $4,165 | $1,786 | 42.9% | | As a % of revenue | 2.9% | 2.4% | | | 2.5% | 2.2% | | | - Increases were driven by investments in new test development, particularly in next-generation sequencing and FDA initiatives[250] - R&D expenditures are anticipated to significantly increase in future quarters due to continued investment in innovation projects and new test market entry[251] Sales and Marketing Expenses This section analyzes the increase in sales and marketing expenses, attributed to higher commissions, sales team expansion, and continued marketing investments Sales and Marketing Expenses (in thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | $ Change | % Change | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | $ Change | % Change | | :--------------------------------- | :------------------------------- | :------------------------------- | :------- | :------- | :------------------------------- | :------------------------------- | :------- | :------- | | Sales and marketing expenses | $17,224 | $10,195 | $7,029 | 68.9% | $30,973 | $23,453 | $7,520 | 32.1% | | As a % of revenue | 14.2% | 11.7% | | | 13.1% | 12.2% | | | - Increases primarily reflect higher commissions due to increased revenues, expansion of the sales team, and continued marketing investment[254] - Sales and marketing expenses are expected to align with changes in revenue over the long term[254] Interest Expense, net This section details the net interest expense, reflecting the effective interest rates of the company's convertible senior notes - Net interest expense decreased by $0.6 million for Q2 2021 and $0.3 million for H1 2021 compared to the same periods in 2020[255] - Interest expense reflects effective interest rates of 0.70% for the 2028 Convertible Notes and 1.96% for the 2025 Convertible Notes[255] Income (Loss) Per Share This section presents the basic and diluted net income or loss per share, highlighting the significant improvement in diluted EPS for the current period Net Income (Loss) Per Share (in thousands, except per share data): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) | $75,873 | $(6,824) | $53,759 | $(13,802) | | Basic net income (loss) per share | $0.64 | $(0.06) | $0.46 | $(0.13) | | Diluted net income (loss) per share | $0.59 | $(0.06) | $0.44 | $(0.13) | - Diluted EPS for Q2 2021 was $0.59, a significant improvement from $(0.06) in Q2 2020, reflecting the net income turnaround[256] Non-GAAP Measures This section explains the use of non-GAAP financial measures like Adjusted EBITDA to provide supplemental information and facilitate analysis of core operating results - Management uses non-GAAP financial measures, such as Adjusted EBITDA, to provide useful supplemental information for investors and facilitate analysis of core operating results[257] - Adjusted EBITDA is defined as net income (loss) from continuing operations before interest, tax, depreciation, amortization, non-cash stock-based compensation, acquisition/integration expenses, COVID-19 PCR write-offs, new headquarters moving expenses, gain on investment in affiliate, and other significant non-recurring items[259] Reconciliation of GAAP Net Income (Loss) to Non-GAAP Adjusted EBITDA (in thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :----------------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | :------------------------------- | | Net income (loss) (GAAP) | $75,873 | $(6,824) | $53,759 | $(13,802) | | EBITDA (non-GAAP) | $85,038 | $(8,004) | $74,215 | $(4,382) | | Adjusted EBITDA (non-GAAP) | $4,550 | $(7,224) | $8,736 | $(151) | Liquidity and Capital Resources This section discusses the company's financing strategies, cash flow summary, and the sufficiency of cash and marketable securities to fund near-term capital and operating needs - The Company's operations are financed primarily through cash generated from operations, public and private sales of debt and equity securities, and bank debt borrowings[261] Summary of Consolidated Cash Flows (in thousands): | Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :---------------------------------------- | :------------------------------- | :------------------------------- | | Net cash provided by (used in) operating activities | $820 | $(5,051) | | Net cash used in investing activities | $(608,098) | $(59,871) | | Net cash provided by financing activities | $729,545 | $223,217 | | Net change in cash, cash equivalents and restricted cash | $122,267 | $158,295 | | Cash, cash equivalents and restricted cash, end of period | $372,899 | $331,311 | | Working Capital, end of period | $622,664 | $357,300 | - As of June 30, 2021, the Company had $368.8 million in unrestricted cash and cash equivalents and $203 million in marketable securities, deemed sufficient to fund near-term capital and operating needs for at least the next 12 months[266][272] - Recent financing activities include $218.3 million net proceeds from a January 2021 common stock offering, $334.4 million net proceeds from 2028 Convertible Notes, and $189.9 million net proceeds from a June 2021 private placement (used for Inivata acquisition)[267][269][271] Capital Expenditures This section outlines the forecast for capital expenditures for the year, including amounts spent on equipment, software, and leasehold improvements during the period - Capital expenditures for the year ending December 31, 2021, are forecast to be in the range of $55 million to $70 million, including capital expenditures related to Trapelo and Inivata[273] - During H1 2021, $37.2 million was spent on capital equipment, software, and leasehold improvements, funded by cash and financing[273] Critical Accounting Policies This section notes that financial statement preparation involves significant estimates and refers to the detailed disclosure of critical accounting policies in other reports - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, with actual results potentially differing from estimates[274] - Critical accounting policies are disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020, and Note 2 of the accompanying unaudited Consolidated Financial Statements[274] Off-balance Sheet Arrangements This section confirms the absence of material off-balance sheet financing arrangements that would significantly impact the company's financial condition - As of June 30, 2021, the Company does not use special purpose entities or other off-balance sheet financing techniques that are expected to have a material effect on its financial condition or results of operations[275] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily interest rate risk on short-term investments and foreign currency exchange risk from international operations, concluding that these risks are not currently significant Interest Rate Risk This section addresses the company's exposure to interest rate risk on short-term investments, emphasizing principal preservation and minimal impact from rate changes - The Company is exposed to interest rate risk on its short-term investments, with the primary objective to preserve principal while maximizing yields without significantly increasing risk[278] - Investments are made in highly liquid, high-quality U.S. government and other highly credit-rated debt securities with short maturities to minimize exposure to adverse interest rate shifts[278] - A 1% change in interest rates on June 30, 2021, would not have had a material effect on the fair value of the investment portfolio[278] Foreign Currency Exchange Risk This section discusses the company's exposure to foreign currency fluctuations from international operations, noting that these risks are not currently considered significant - Operations in Cambridge, United Kingdom; Rolle, Switzerland; Suzhou, China; and Singapore expose the Company to foreign currency exchange rate fluctuations against the U.S. dollar[279] - The Company does not hedge foreign currency exchange risks and does not currently believe these risks are significant[279] Item 4. Controls and Procedures This section details the company's disclosure controls and procedures, confirming their effectiveness, and notes the transition to a new ERP system with ongoing internal control monitoring Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures in ensuring timely and accurate reporting of required information - Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported timely[280] - Management, including the principal executive officer and principal financial officer, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021[281] Changes in Internal Control over Financial Reporting This section reports no material changes in internal control over financial reporting, while noting the transition to a new Oracle ERP system post-period end - There were no changes in internal control over financial reporting that materially affected, or are reasonably likely to materially affect, internal control over financial reporting during the six months ended June 30, 2021[282] - On July 1, 2021, the Company transitioned from its Great Plains Dynamics ERP system to a hosted, cloud-based Oracle ERP system, with pre-implementation planning, design, and testing of internal controls completed[283] PART II OTHER INFORMATION Item 1. Legal Proceedings This section discloses ongoing legal proceedings, specifically a patent infringement complaint filed against the company's newly-acquired subsidiary, Inivata, which the company intends to vigorously defend - On January 20, 2021, Natera, Inc. filed a patent infringement complaint against Inivata Limited and Inivata, Inc., alleging infringement by Inivata's InVisionFirst-Lung cancer diagnostic test[287] - The Company intends to vigorously defend the matter, believing it has good and substantial defenses to the claims alleged in the suit, but there is no guarantee that the Company will prevail[287] Item 1A. Risk Factors This section highlights additional risk factors, particularly those arising from the recent acquisitions of Trapelo and Inivata, including challenges in integrating internal controls and potential unknown liabilities - The Company may be unable to make necessary changes to its internal control structure resulting from the acquisitions of Trapelo and Inivata, potentially causing difficulties or delays in compliance with Sarbanes-Oxley Act requirements[289] - Trapelo and Inivata may have unknown, unasserted, or contingent liabilities that could adversely affect the Company's business if not covered by indemnification or insurance[290] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's purchases of common stock to satisfy tax withholding obligations related to restricted stock vesting, with no unregistered sales of equity securities during the period - No unregistered sales of equity securities occurred for the quarterly period ended June 30, 2021[291] Issuer Purchases of Equity Securities (Common Stock): | Period of Repurchase | Total Number of Shares Purchased | Average Price Paid per Share | | :------------------------- | :------------------------------- | :--------------------------- | | April 1, 2021 - April 30, 2021 | — | $— | | May 1, 2021 - May 31, 2021 | 3,212 | $48.92 | | June 1, 2021 - June 30, 2021 | 143 | $42.19 | | Total | 3,355 | $48.64 | - The shares purchased were acquired from participants to satisfy tax withholding obligations related to the vesting of their restricted stock under the Company's Equity Incentive Plan[293] Item 3. Defaults Upon Senior Securities This section states that there were no defaults upon senior securities during the reporting period - Not applicable for defaults upon senior securities[294] Item 4. Mine Safety Disclosures This section indicates that there are no mine safety disclosures applicable to the company - Not applicable for mine safety disclosures[295] Item 5. Other Information This section states that there is no other information to report for the period - No other information to report[296] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including various agreements, certifications, and financial statements in iXBRL format - Exhibits include Securities Purchase Agreement, Registration Rights Agreement, Share Purchase Agreement, Services Agreement, Employment Agreements, and certifications by executive officers[299] - The Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Cash Flows, Consolidated Statements of Comprehensive Income (Loss), and related notes are formatted in Inline Extensible Business Reporting Language (iXBRL)[299] SIGNATURES This section formally attests to the accuracy and completeness of the report, signed by the company's principal executive and financial officers - The report is duly signed on behalf of NeoGenomics, Inc. by Mark W. Mallon, Director and Chief Executive Officer, and Kathryn B. McKenzie, Chief Financial Officer, on August 9, 2021[301][302]