MDxHealth SA(MDXH) - 2022 Q4 - Annual Report

PART I Key Information This section details significant risks across business, operations, intellectual property, and regulatory environment, including financial losses and market dependence Risk Factors The company faces substantial risks across business, industry, intellectual property, operations, and regulatory landscape, including financial losses and market dependence - The company has a significant history of financial losses, with an accumulated deficit of $288.3 million as of December 31, 2022, and a net loss of $44.0 million for the fiscal year 2022, expecting continued losses due to R&D and sales & marketing costs[31] - Commercial success is highly dependent on market acceptance and adequate reimbursement for its tests from third-party payors like Medicare and private insurers, which is an uncertain and complex process[30][50][56] - The business operates in a heavily regulated industry, subject to oversight from bodies like the FDA and CMS, where potential changes could lead to substantial costs and delays[33][104][113] - The company faces intense competition from other molecular diagnostics firms, some with substantially greater financial and marketing resources, including OPKO Health, Myriad Genetics, and Veracyte[43][44][47] Information on the Company This section details the company's history, business operations, and corporate structure, focusing on urologic precision diagnostics History and Development of the Company MDxHealth SA was incorporated in Belgium in 2003, listed on Euronext in 2006, and its ADSs began trading on Nasdaq in 2021 - The company was incorporated in Belgium in 2003, listed on Euronext Brussels in 2006, and its ADSs began trading on the Nasdaq Capital Market on November 4, 2021[173][15] Capital Expenditures and R&D Costs (2020-2022) | Metric | 2020 | 2021 | 2022 | | :--- | :--- | :--- | :--- | | Capital Expenditures | $0.54M | $1.2M | $2.8M | | R&D Costs | $4.5M | $6.7M | $7.6M | Business Overview MDxHealth is a precision diagnostics company specializing in urologic solutions, primarily for prostate cancer, with a focus on the U.S. market - The company is a commercial-stage precision diagnostics firm focused on providing non-invasive, clinically actionable urologic solutions, particularly for prostate cancer[177] - Core products include Select mdx (pre-biopsy risk assessment), Confirm mdx (post-negative biopsy analysis), and GPS (post-diagnosis treatment guidance) to improve treatment decisions[177][179][182] - In August 2022, the company acquired the GPS (Genomic Prostate Score) test from Exact Sciences, expanding its portfolio into cancer management[180] - The company's primary commercial focus is the U.S. market, which accounts for over 95% of its revenues and where over 90% of its staff is based[183] - A key strategy is expanding reimbursement, with Select mdx, Confirm mdx, and GPS tests all receiving positive Medicare Local Coverage Determinations (LCDs)[191][242] Organizational Structure MDxHealth SA, a Belgian entity, is the parent company with direct wholly-owned subsidiaries in Delaware and The Netherlands Subsidiary Structure as of December 31, 2022 | Subsidiary Name | Jurisdiction | Ownership Interest | | :--- | :--- | :--- | | MDxHealth, Inc. | Delaware | 100% (held directly) | | MDxHealth BV | The Netherlands | 100% (held directly) | | MDxHealth Servicelab BV | The Netherlands | 100% (held through MDxHealth BV) | | MDxHealth Research BV | The Netherlands | 100% (held through MDxHealth BV) | | Delta Laboratories LLC | Texas | 100% (held through MDxHealth, Inc.) | Property, Plant and Equipment The company operates from leased facilities, with its main U.S. lab in Irvine, California, and European operations in Nijmegen, The Netherlands - The main U.S. headquarters and laboratory is a 38,000 sq. ft. leased facility in Irvine, California, with the lease expiring in 2026[293] - European operations are based in a 7,800 sq. ft. leased facility in Nijmegen, The Netherlands, with the lease expiring in 2027[294] - The company also operates a smaller laboratory in Plano, Texas, and its corporate headquarters is in Herstal, Belgium[293][294] Operating and Financial Review and Prospects This section analyzes the company's financial performance, condition, and liquidity, highlighting revenue growth and persistent net losses Operating Results Operating results show significant revenue growth to $37.1 million in 2022, alongside widening net losses to $44.0 million Operating Results Summary (2021 vs. 2022) | (in Thousands) | 2022 | 2021 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Revenues | $37,054 | $22,239 | $14,815 | 67% | | Gross Profit | $19,219 | $10,564 | $8,655 | 82% | | Operating loss | ($37,900) | ($26,841) | ($11,059) | 41% | | Loss for the year | ($44,044) | ($29,002) | ($15,042) | 52% | | Basic and Diluted EPS | ($0.28) | ($0.24) | ($0.04) | 17% | - Revenue for 2022 increased by 67% year-over-year, driven by the GPS test acquisition and volume growth in Confirm mdx and Resolve mdx, with 25% growth excluding GPS[323] - Gross margin improved to 51.9% in 2022 from 47.5% in 2021, a 440 basis-point increase attributed to a better product mix with the GPS test[325] - Operating expenses increased significantly in 2022, with selling & marketing up 50% and G&A up 66%, including $3.7 million in one-time expenses for the GPS acquisition[327][328] Liquidity and Capital Resources The company manages liquidity through equity financing and debt, holding $15.5 million in cash as of December 31, 2022, and raising $43.0 million in early 2023 - As of December 31, 2022, the company had $15.5 million in cash and cash equivalents and an accumulated deficit of $288.3 million[343] - In February and March 2023, the company raised a total of $43.0 million in gross proceeds from a public offering of ADSs, which management believes will be sufficient for at least the next 12 months[344][345][351] - In August 2022, the company entered into a $70 million loan and security agreement with Innovatus, drawing an initial $35 million, with an additional $35 million available in 2024 and 2025 subject to conditions[347] Cash Flow Summary (2021 vs. 2022) | (in Thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in operations | ($34,118) | ($22,548) | | Net cash used in investing activities | ($29,163) | ($896) | | Net cash from financing activities | $20,841 | $66,509 | Trend Information Key trends include expanding ordering physicians, securing broader reimbursement, and menu expansion, all crucial for revenue growth and market acceptance - Revenue growth depends on expanding the base of ordering physicians and increasing penetration with existing customers[365] - Securing and maintaining adequate reimbursement from third-party payors, including Medicare and commercial insurers, is essential for commercial success, with Medicare LCDs secured for Confirm mdx, GPS, and Select mdx tests[367][368] - Increasing market acceptance requires educating clinicians and patients about the clinical benefits of the company's tests, supported by peer-reviewed publications[370] - The company is actively expanding its test menu to cover the full continuum of prostate cancer care, with pipeline products like Monitor mdx for active surveillance monitoring[372] Directors, Senior Management and Employees This section details the company's leadership, compensation practices, board structure, and employee base, including key personnel and their roles Directors and Senior Management The Board of Directors consists of eight members, with five independent, and the executive management team is led by CEO Michael K. McGarrity - The Board of Directors consists of 8 members, with Koen Hoffman as Chairperson, and five out of the eight members are determined to be independent[376][381] - The executive management team is composed of Michael K. McGarrity (CEO), John Bellano (CCO), Ron Kalfus (CFO), and Joseph Sollee (EVP, Corporate Development & General Counsel)[395] Compensation Compensation for non-executive directors is fixed, while executive management receives a fixed salary, performance-based bonus, and long-term incentives - Non-Executive Directors receive fixed annual fees (€35,000) and additional fees for committee roles, but no performance-based bonuses[403] - Executive management remuneration includes a fixed salary and a variable bonus linked to personal and company performance objectives, such as budget adherence, revenue targets, and test volume goals[415][416][432] 2022 Executive Management Compensation (Excluding Stock Options) | Executive(s) | Total Compensation (EUR) | Total Compensation (USD) | | :--- | :--- | :--- | | Michael K. McGarrity (CEO) | €533,396 | $561,932 | | Other Executive Management (3 persons) | €1,196,446 | $1,260,456 | - The total remuneration for the entire executive management team (including the CEO) was €1,729,842 ($1,822,389) in 2022, compared to €1,526,037 ($1,814,834) in 2021[428] Board Practices The Board of Directors operates with an Audit Committee and a Nomination and Remuneration Committee, both with independent director representation - The Board of Directors has established two primary committees: an Audit Committee and a Nomination and Remuneration Committee[442] - The Audit Committee consists of three independent directors, with Regine Slagmulder and Hilde Windels qualifying as "audit committee financial experts," monitoring financial reporting and internal controls[443][445][446] - The Nomination and Remuneration Committee consists of five non-executive directors, with a majority being independent, responsible for recommending candidates and proposing remuneration policies[448][449][450] Employees As of December 31, 2022, MDxHealth had 258 employees, predominantly based in the United States, with no collective bargaining agreements Employee Headcount as of Dec 31, 2022 | Category | Number of Employees | | :--- | :--- | | Total Employees | 258 | | Full-time | 252 | | Location: United States | 244 | | Location: Europe | 14 | - None of the company's employees are covered by a collective bargaining agreement[452] Major Shareholders and Related Party Transactions This section identifies major shareholders and details transactions with related parties, including compensation and equity participation Major Shareholders As of March 31, 2023, significant shareholders include MVM Partners LLP (16.8%), Bleichroeder LP (14.3%), and Valiance Asset Management Limited (7.7%) Major Shareholders (as of March 31, 2023) | Shareholder | Percentage Ownership | | :--- | :--- | | MVM Partners LLP | 16.8% | | Bleichroeder LP | 14.3% | | Valiance Asset Management Limited | 7.7% | | Biovest NV | 4.4% | | All current directors and executive management (as a group) | 1.9% | - The percentage ownership is based on 270,380,936 ordinary shares outstanding as of March 31, 2023[458] Related Party Transactions Related party transactions primarily involve executive compensation agreements with severance clauses and major shareholder participation in equity offerings - Executive employment agreements for the CEO, CFO, and CCO include severance provisions for termination without cause, generally equal to twelve months of base salary[471] - The company has a subscription agreement with MVM Partners LLP that entitles MVM to have one observer at Board of Directors meetings as long as it holds at least 5% of the company's shares[473] - Several major shareholders, including Bleichroeder LP, MVM Partners LLP, and Valiance Asset Management Limited, purchased a significant number of ADSs in the February 2023 public offering[474] Financial Information This section contains consolidated financial statements, legal proceedings, and the company's dividend policy, emphasizing no anticipated cash dividends Consolidated Statements and Other Financial Information The company's audited consolidated financial statements are appended, with no material legal proceedings, and a policy of retaining earnings rather than paying dividends - The company is not a party to any pending material legal proceedings[477] - A dispute exists with the former owners of NovioGendix over milestone payments totaling approximately $880,000, which the company believes have not been earned and are not payable[478] - The company has never paid cash dividends and intends to retain all future earnings to fund business operations and expansion[479] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to credit risk from receivables, minimal interest rate risk due to fixed-rate debt, and foreign currency risk from Euro-denominated operations - Credit risk arises from cash equivalents and receivables from over 1,000 customers. This includes reimbursement risk from third-party payors and credit risk from patients' co-payments and deductibles[560][561][562] - As of December 31, 2022, trade accounts receivable amounted to $9.4 million, and no allowance for expected credit loss was recorded[563] - Interest rate risk is minimal as the company's long-term debt bears a fixed interest rate, and its cash portfolio is relatively insensitive to rate changes[565] - Foreign currency risk is present due to Euro-denominated operations in Europe, but exchange rate fluctuations have not been significant to date[566] PART II Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022, despite an interim material weakness - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[579] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022[580] - A material weakness in internal control over financial reporting related to interim financial close was identified as of September 30, 2022, but was subsequently corrected and did not affect year-end reporting[583] - As an emerging growth company, this annual report does not include an attestation report from the registered public accounting firm on internal control over financial reporting[581] Principal Accountant Fees and Services BDO Réviseurs d'Entreprises SRL served as the independent auditor, with total fees of $471,766 in 2022, all pre-approved by the Audit Committee Principal Accountant Fees (2021-2022) | Fee Category | 2022 | 2021 | | :--- | :--- | :--- | | Audit fees | $238,500 | $182,125 | | Other audit fees | $191,455 | $183,652 | | Audit-related and other fees | $41,811 | $16,569 | | Total | $471,766 | $382,346 | - The Audit Committee's policy is to pre-approve all audit and permissible non-audit services performed by the independent registered public accounting firm[591] Corporate Governance As a foreign private issuer, the company follows Belgian home country governance practices, differing from Nasdaq rules in areas like quorum and shareholder approval - The company, as a foreign private issuer, follows Belgian home country governance practices in lieu of certain Nasdaq listing rules[595] - Key areas of difference from Nasdaq rules include: * Quorum at Shareholder Meetings: No general quorum requirement under Belgian law, unlike Nasdaq's 33.33% rule[596] * Committee Composition: The Nomination and Remuneration Committee requires only a majority of independent directors, not solely independent directors[599] * Shareholder Approval: The board has authority to issue shares under the 'authorized capital' framework without prior shareholder approval for certain transactions that would require it under Nasdaq rules[599] PART III Financial Statements This section presents the company's audited consolidated financial statements for 2020-2022, prepared under IFRS, detailing profit/loss, financial position, and cash flow Consolidated Statement of Profit or Loss The consolidated statement shows revenue increased to $37.1 million in 2022, but the loss for the year widened to $44.0 million Consolidated Profit or Loss (in Thousands USD) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Revenues | 37,054 | 22,239 | 18,460 | | Gross profit | 19,219 | 10,564 | 8,044 | | Operating loss | (37,900) | (26,841) | (27,123) | | Loss for the year | (44,044) | (29,002) | (28,662) | | Basic and diluted loss per share | ($0.28) | ($0.24) | ($0.34) | Consolidated Statement of Financial Position Total assets increased to $119.1 million in 2022, driven by the GPS acquisition, while total equity decreased and liabilities substantially increased Consolidated Financial Position (in Thousands USD) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Total non-current assets | 89,986 | 8,466 | | Total current assets | 29,149 | 66,606 | | Total Assets | 119,135 | 75,072 | | Equity & Liabilities | | | | Total equity | 9,315 | 46,899 | | Total non-current liabilities | 91,542 | 11,741 | | Total current liabilities | 18,278 | 16,432 | | Total Equity and Liabilities | 119,135 | 75,072 | Consolidated Statement of Cash Flow Net cash used in operations increased to $34.1 million in 2022, with a $42.4 million decrease in cash and cash equivalents for the year Consolidated Cash Flow (in Thousands USD) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash outflow from operating activities | (34,118) | (22,548) | (20,244) | | Net cash outflow from investing activities | (29,163) | (896) | (537) | | Net cash inflow from financing activities | 20,841 | 66,509 | 14,290 | | Net Change in cash and cash equivalents | (42,440) | 43,065 | (6,491) | | Cash and cash equivalents at end of year | 15,503 | 58,498 | 15,953 | Notes to Consolidated Financial Statements The notes detail accounting policies, the going concern assumption, critical estimates, the $80.5 million GPS acquisition, and revenue breakdown by geography - The financial statements are prepared on a going concern basis, supported by a $43 million gross proceeds capital raise in February/March 2023, providing sufficient cash for at least the next 12 months[636][637] - The August 2022 acquisition of the GPS test from Exact Sciences was accounted for as a business combination with total consideration of $80.5 million, including $25 million cash, $5 million in stock, and $50.5 million in contingent consideration, resulting in $35.9 million of goodwill[716][720] - In 2022, 99.8% of revenue was from external customers, with 99% generated from clinical laboratory testing in the U.S.[736] - As of December 31, 2022, the company had $35.5 million in loans and borrowings, primarily from a new $35 million facility with Innovatus, replacing a previous facility with Kreos Capital[788][789]