NeoGenomics(NEO) - 2022 Q4 - Annual Report

Part I Business NeoGenomics is a specialized oncology diagnostics company providing a comprehensive range of cancer testing services through its global network of laboratories Overview and Testing Services NeoGenomics operates a network of cancer-focused laboratories offering a wide array of oncology diagnostic services to a global client base - The company operates a network of CAP-accredited and CLIA-certified laboratories in the United States, Europe, and Asia[16][17] - NeoGenomics provides a comprehensive suite of oncology testing services, including cytogenetics, Fluorescence In-Situ Hybridization (FISH), flow cytometry, Immunohistochemistry (IHC), advanced molecular testing (such as PCR and NGS), and morphologic analysis[18] Reportable Segments The company operates through two segments, with Clinical Services accounting for 82% of 2022 revenue and Pharma Services accounting for the remaining 18% Revenue by Segment (FY 2022) | Segment | Revenue Percentage | | :--- | :--- | | Clinical Services | 82% | | Pharma Services | 18% | - The Clinical Services segment offers testing to community-based pathologists, oncologists, and hospitals, and is a leading provider of Molecular and NGS testing, including liquid biopsy assays like InVisionFirst®-Lung and RaDaR®[22][23] - The Pharma Services segment supports pharmaceutical companies throughout the drug development process, from biomarker discovery to clinical trials and commercialization of companion diagnostics (CDx)[24][25][26] Markets and Strategy The company operates in the high-growth Genetic and Molecular testing market, with a 2023 strategy focused on core business growth, advanced diagnostics, and profitability - The company operates mainly in the Genetic and Molecular testing market, which is the fastest-growing segment due to the rise of predictive testing for personalized medicine[32][33][34] - Key market growth drivers include an aging population, new targeted drug development requiring companion diagnostics, increased patient and payer awareness, and decreasing testing costs[36] - The company's 2023 focus areas are: 1) Profitably Grow Core Business, 2) Accelerate Advanced Diagnostics (launch clinical RaDaR™ and new NGS offerings), and 3) Improve Profitability (increase efficiency, manage spending)[37] Competition, Suppliers, and Payer Mix NeoGenomics faces intense competition, relies on key suppliers, and has a clinical payer mix dominated by client direct billing at 67% in 2022 - Competitors in the Clinical Services segment include major national labs (Quest, LabCorp) and specialized genomics companies (Guardant, Natera), while the Pharma Services segment competes with large CROs[47][49][50] - The company relies on certain suppliers for specific reagents and equipment and experienced some supply chain disruptions in 2021 and 2022[51] Net Clinical Revenue Payer Mix | Payer Type | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Client direct billing | 67% | 63% | 63% | | Commercial insurance | 17% | 19% | 20% | | Medicare and other government | 16% | 18% | 17% | Human Capital and Government Regulation The company employed approximately 2,100 people at year-end 2022 and is subject to extensive governmental regulation, including potential FDA oversight of LDTs - As of year-end 2022, the company had approximately 2,100 full-time equivalent employees and a medical/scientific team of about 170 MDs and PhDs[58][59] - The company reports a diverse workforce, with women making up 58% of global employees and 68% of the top two management tiers, while ethnically diverse individuals comprise 54% of the workforce[61] - The company is subject to extensive regulation, including CLIA for laboratory certification, the Stark Law and Anti-Kickback Statute governing relationships with referral sources, the False Claims Act for billing, and HIPAA for patient data privacy[66][75][77][79][85] - The regulatory framework for Laboratory Developed Tests (LDTs) remains uncertain, with potential for increased FDA oversight through legislation like the proposed VALID Act, which could increase regulatory burdens and costs[72][73] Risk Factors The company faces significant business, financial, and regulatory risks, including technological change, price competition, debt obligations, and evolving LDT regulations Risks Relating to Our Business Business risks stem from rapid scientific change, intense price competition, reliance on third-party payers, and the vulnerability of IT systems to cyber-attacks - The genetic testing market is characterized by rapid scientific developments, and new tests from competitors could prove superior and replace existing offerings[100] - The company faces intense price competition from larger laboratories, which could negatively impact net earnings and cash flows[102][103] - The business depends on information technology systems that are susceptible to cyber-attacks, which could lead to increased costs, lost revenue, and legal or regulatory penalties[118][119] Risks Related to Our Common Stock and Indebtedness The company's stock price is volatile, and its significant convertible note obligations pose a risk to cash flow and could dilute stockholder ownership - The company has significant debt from its 2025 and 2028 Convertible Notes, and its ability to make scheduled payments depends on future performance and factors beyond its control[126] - The company may not have enough available cash to repurchase the Convertible Notes upon a fundamental change or to settle conversions in cash, which could lead to a default[127] - Conversion of the Convertible Notes may dilute the ownership interests of existing stockholders and could depress the price of the common stock[130] Risks Relating to Government Regulation and Reimbursement The company faces substantial regulatory risks from potential FDA oversight of LDTs, reimbursement pressures under PAMA, and strict compliance with fraud and abuse laws - Proposed government regulation of Laboratory Developed Tests (LDTs) could require additional clinical trials, increase costs, and delay or prevent regulatory approvals, harming the business[131][133] - Changes in laws and payer policies, such as the Protecting Access to Medicare Act of 2014 (PAMA), may adversely affect coverage and reimbursement for diagnostic services, potentially decreasing revenues[139][142] - Failure to comply with fraud and abuse laws, including the Anti-Kickback Statute (AKS) and the Stark Law, could result in substantial penalties and exclusion from Medicare/Medicaid; the company disclosed an ongoing internal investigation related to compliance[163][168][171] - Non-compliance with federal, state, and international data privacy and security laws (e.g., HIPAA, GDPR, CCPA) could result in significant fines, penalties, and reputational damage[176][182][183] General Risk Factors General risks include public health crises, dependence on key personnel, challenges in integrating acquisitions, and potential failure of cost reduction efforts - The COVID-19 pandemic has caused significant volatility in testing volumes and may continue to adversely affect operations and financial condition[187] - The company's performance is substantially dependent on its senior management and key technical personnel, and the loss of their services could have a material adverse effect[190] - The company may be unable to realize the estimated benefits from its cost reduction and restructuring efforts, which could hurt profitability[197] - Integrating future acquisitions presents significant challenges, and failure to do so successfully could mean that anticipated benefits, such as cost synergies, are not realized[198][201] Unresolved Staff Comments The company reports that it has no unresolved staff comments - None[207] Properties NeoGenomics operates an international network of leased laboratories and offices, with its largest facilities located in Florida and California Major Facilities by Square Footage | Location | Square Footage | | :--- | :--- | | Fort Myers, Florida | 150,000 | | Aliso Viejo, California | 112,700 | | Houston, Texas | 32,800 | | Carlsbad, California | 28,600 | | San Diego, California | 25,400 | - Certain locations exclusively serve either the Clinical Services segment (e.g., Nashville, Tampa) or the Pharma Services segment (e.g., Rolle, Singapore, Suzhou), while others serve both[209][210] Legal Proceedings The company is engaged in legal proceedings from time to time, with details provided in Note 18 of the Consolidated Financial Statements - The company is engaged in various legal proceedings; for further information, refer to Note 18, Commitments and Contingencies, in the notes to the Consolidated Financial Statements[211] Mine Safety Disclosures This item is not applicable to the company - Not applicable[212] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on Nasdaq as "NEO," it has never paid dividends, and it has authorized securities for issuance under equity compensation plans - The company's common stock is listed on The Nasdaq Stock Market LLC under the symbol "NEO"[214] - The company has never declared or paid cash dividends and intends to retain all future earnings to finance operations and growth[215] Securities Authorized for Issuance under Equity Compensation Plans (as of Dec 31, 2022) | Plan Category | Number of securities to be issued upon exercise | Weighted average exercise price | Number of securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 3,271,004 | $17.67 | 5,577,305 | | Equity compensation plans not approved by security holders (Inducement Awards) | 943,613 | $12.36 | — | | Total | 4,214,617 | | 5,577,305 | Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue grew 5.2% in 2022, but a higher net loss of $144.3 million was reported due to increased operating expenses and restructuring charges 2022 Overview and Company Outlook In 2022, the company grew revenue by 5.2% and initiated restructuring, with a 2023 outlook focused on core growth, advanced diagnostics, and profitability - Key achievements in 2022 include a 5.2% consolidated revenue increase, strengthening the executive leadership team, and initiating a significant cost-reduction restructuring effort[233] - The company's 2023 critical success factors are: Profitably Grow Core Business, Accelerate Advanced Diagnostics (e.g., RaDaR™ launch), and Improve Profitability through efficiency and cost management[233][234][236] - The regulatory environment for LDTs remains uncertain, with the VALID Act's future unclear, but the company does not anticipate significant revenue changes in 2023 from known regulatory shifts[237][238] Critical Accounting Policies and Estimates Critical accounting policies requiring significant judgment include revenue recognition, business combinations, and the annual impairment testing of goodwill - Critical accounting policies involve significant management judgment and include Business Combinations, Accounts Receivable, Goodwill, Contingencies, Stock-based Compensation, Revenue Recognition, and Deferred Taxes[250] - For Clinical Services revenue, the company estimates implicit price concessions based on negotiated discounts, historical collection experience, and anticipated payer denials to determine the amount expected to be collected[259] - Goodwill is evaluated for impairment annually; a quantitative analysis as of June 30, 2022, triggered by a sustained stock price decline, showed no impairment, but risk remains if performance declines[254][256] Results of Operations (2022 vs. 2021) Consolidated revenue increased 5.2% to $509.7 million in 2022, but gross margin declined and the net loss widened significantly to $144.3 million Consolidated Revenue (in thousands) | Segment | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Clinical Services | $418,754 | $404,172 | 3.6% | | Pharma Services | $90,974 | $80,157 | 13.5% | | Total net revenue | $509,728 | $484,329 | 5.2% | - Gross profit margin decreased by 1.7 percentage points to 36.9% in 2022, primarily due to the amortization of acquired Inivata developed technology intangibles and higher payroll-related costs[278] - General and administrative expenses increased by $22.0 million (9.9%) in 2022, driven by expenses from acquired subsidiaries, increased stock-based compensation, severance costs, and investments in technology[280] - The company recorded restructuring charges of $4.5 million in 2022, related to severance, facility optimization, and consulting costs, with no such charges in 2021[285][286] Net Loss and EPS | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net loss | $(144,250) | $(8,347) | | Diluted net loss per share | $(1.16) | $(0.07) | Non-GAAP Measures The company uses non-GAAP measures like Adjusted EBITDA, which showed a loss of $48.0 million in 2022 compared to a $4.2 million loss in 2021 Reconciliation of Net Loss to Adjusted EBITDA (in thousands) | | 2022 | 2021 | | :--- | :--- | :--- | | NET LOSS (GAAP) | $ (144,250) | $ (8,347) | | EBITDA (non-GAAP) | $ (88,406) | $ 43,359 | | Further Adjustments to EBITDA | $ 40,396 | $ (47,520) | | ADJUSTED EBITDA (non-GAAP) | $ (48,010) | $ (4,161) | Liquidity and Capital Resources The company ended 2022 with $263.2 million in cash and believes it has sufficient liquidity for the next 12 months despite increased cash used in operations Summary of Cash Flows (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash used in Operating activities | $ (65,993) | $ (26,723) | | Net cash provided by (used in) Investing activities | $ 517 | $ (632,367) | | Net cash provided by Financing activities | $ 11,829 | $ 725,285 | - As of December 31, 2022, the company had $263.2 million in cash and cash equivalents and $174.8 million in marketable securities[301] - Total contractual obligations as of December 31, 2022, amount to $633.2 million, with the largest components being principal payments on long-term debt ($535.3 million) and operating lease obligations ($96.8 million)[303] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk affecting its convertible notes and investment portfolio, and to unhedged foreign currency exchange risk - The company has fixed annual interest rates on its 2025 and 2028 Convertible Notes, so it does not have economic interest rate exposure on the debt itself, but the fair value of the notes is exposed to interest rate risk[308] - The investment portfolio is exposed to market risk from interest rate fluctuations, but this is minimized by investing in short-term, high-quality securities[309] - The company is exposed to foreign currency exchange rate fluctuations against the U.S. dollar from its operations in the UK, Switzerland, Singapore, and China, but does not currently hedge this risk[311] Financial Statements and Supplementary Data This section contains the audited consolidated financial statements for FY2022 and the unqualified opinion from the independent auditor, Deloitte & Touche LLP Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, identifying revenue recognition and goodwill impairment as critical audit matters - The auditor, Deloitte & Touche LLP, issued an unqualified opinion, stating the financial statements are presented fairly in all material respects[317] - A critical audit matter was the estimation of implicit price concessions for clinical services revenue, which required significant auditor judgment to evaluate management's assumptions[322][324] - A second critical audit matter was the goodwill impairment test for the Clinical and Pharma reporting units, involving complex judgments on discount rates and future revenues[325][326][327] Consolidated Financial Statements The company's total assets were $1.74 billion as of December 31, 2022, and it reported a net loss of $144.3 million for the year Consolidated Balance Sheet Highlights (in thousands) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $1,740,034 | $1,869,778 | | Goodwill | $522,766 | $527,115 | | Total Liabilities | $742,011 | $761,501 | | Convertible senior notes, net | $535,322 | $532,483 | | Total Stockholders' Equity | $998,023 | $1,108,277 | Consolidated Statement of Operations Highlights (in thousands) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total net revenue | $509,728 | $484,329 | $444,448 | | Gross Profit | $187,896 | $187,060 | $185,893 | | Loss from Operations | $(157,623) | $(118,754) | $(13,992) | | Net (Loss) Income | $(144,250) | $(8,347) | $4,172 | Notes to Consolidated Financial Statements The notes detail acquisitions, debt instruments, and a significant regulatory contingency for which an $11.2 million reserve has been accrued - In 2021, the company acquired Trapelo Health for $64.8 million and the remaining equity of Inivata Limited for a total fair value of $552.8 million[416][424] - The company has two outstanding series of convertible senior notes: $201.3 million of 1.25% notes due 2025 and $345.0 million of 0.25% notes due 2028[456][469][472] - The company is involved in a regulatory matter after voluntarily notifying the OIG and DOJ of an internal investigation; an $11.2 million reserve for potential damages has been accrued[528] Segment Gross Profit (in thousands) | Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Clinical Services | $157,012 | $159,812 | $166,808 | | Pharma Services | $30,884 | $27,248 | $19,085 | | Total gross profit | $187,896 | $187,060 | $185,893 | Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[539] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[542] - The independent registered public accounting firm, Deloitte & Touche LLP, audited and issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2022[543][546] Part III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Information for Items 10-14 is incorporated by reference from the company's upcoming Definitive Proxy Statement for its 2023 Annual Meeting of Stockholders - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's upcoming 2023 Annual Meeting Proxy Statement[555][556][557][558][559] Part IV Exhibits and Financial Statement Schedules This section lists all documents filed with the Form 10-K, noting that financial statement schedules are omitted as they are not applicable - The Consolidated Financial Statements of the Company are included in Part II, Item 8 of the Annual Report[561] - All financial statement schedules have been omitted because they are not applicable or the required information is already present in the financial statements or accompanying notes[562] Form 10-K Summary This item is not applicable, and no summary is provided - None[571]