November 8, 2022 - 10-Q: Quarterly report pursuant to Section 13 or 15(d)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35756

NEOGENOMICS, INC.

(Exact name of registrant as specified in its charter)

Nevada

74-2897368

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

9490 NeoGenomics Way,

Fort Myers,

Florida

33912

(Address of principal executive offices)

(Zip Code)

(239) 768-0600

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common stock ($0.001 par value)

NEO

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes S No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

☐

Non-accelerated filer

☐

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No S

As of November 4, 2022, the registrant had 126,303,261 shares of Common Stock, par value $0.001 per share outstanding.

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Item 1A. Risk Factors

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 3. Defaults Upon Senior Securities

Item 4. Mine Safety Disclosures

Item 5. Other Information

Item 6. Exhibits

SIGNATURES

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements. These forward-looking statements generally can be identified by the use of words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “forecast,” “goal,” “intends,” “may,” “plan,” “potential,” “project,” “will,” “would” and similar expressions, although not all forward-looking statements contain these identifying words. These forward-looking statements address various matters, including the Company’s strategy, future operations, future financial position, future revenues, changing reimbursement levels from government payers and private insurers, projected costs, prospects and plans and objectives of management. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. These forward-looking statements involve known and unknown risks and uncertainties that could cause our actual results, performance or achievements to differ materially from those expressed or implied by the forward-looking statements, including, without limitation, the risks set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2022, and in Part II, Item 1A, “Risk Factors” in this Quarterly Report on Form 10-Q.

Forward-looking statements include, but are not limited to, statements about:

•Our ability to respond to rapid scientific change;

•The risk of liability in conducting clinical trials and providing research services and the sufficiency of our insurance to cover such claims;

•Our ability to implement our business strategy;

•The potential impact to our business operations, customer demand and supply chain due to the ongoing global COVID-19 coronavirus pandemic and its related variants;

•The expected reimbursement levels from governmental payers and private insurers and proposed changes to those levels;

•The application, to our business and the services we provide, of existing laws, rules and regulations, including without limitation, Medicare laws, anti-kickback laws, Health Insurance Portability and Accountability Act of 1996 regulations, state medical privacy laws, international privacy laws, federal and state false claims laws and corporate practice of medicine laws;

•Regulatory developments in the United States including downward pressure on health care reimbursement;

•Our ability to maintain our license under the Clinical Laboratory Improvement Amendments of 1988 (“CLIA”);

•Food and Drug Administration, or FDA regulation of Laboratory Developed Tests (“LDTs”);

•Failure to timely or accurately bill for our services;

•Our ability to expand our operations and increase our market share;

•Our ability to expand our service offerings by adding new testing capabilities and overcome capacity constraints;

•Our ability to develop or acquire licenses for new or improved testing technologies;

•Our ability to meet our future capital requirements;

•Our ability to manage our indebtedness;

•Our ability to manage the quality of our investment portfolio;

•Our expectations regarding the conversion of our outstanding 1.25% Convertible Senior Notes due May 2025 (the “2025 Convertible Notes”) or our outstanding 0.25% Convertible Senior Notes due January 2028 (the “2028 Convertible Notes”) in the aggregate principal amount of $201.3 million and $345.0 million, respectively, and our ability to make debt service payments under the 2025 Convertible Notes or 2028 Convertible Notes if such notes are not converted;

•Our ability to have sufficient cash to pay our obligations under the 2025 Convertible Notes or the 2028 Convertible Notes;

•The dilutive impact of the conversion of the 2025 Convertible Notes or the 2028 Convertible Notes;

•Our ability to protect our intellectual property from infringement;

•Our ability to integrate acquisitions and costs related to such acquisitions;

•The effects of seasonality on our business;

•Our ability to maintain service levels and compete with other diagnostic laboratories;

•Our ability to hire and retain sufficient managerial, sales, clinical and other personnel to meet our needs;

•Our ability to successfully scale our business, including expanding our facilities, our backup systems and infrastructure;

•Our handling, storage and disposal of biological and hazardous materials;

•The accuracy of our estimates regarding reimbursement, expenses, future revenues and capital requirements; and

•Our ability to manage expenses and risks associated with international operations, including anti-corruption and trade sanction laws and other regulations, and economic, political, legal and other operational risks associated with foreign jurisdictions.

The forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this report, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

NEOGENOMICS, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2022 (unaudited)		December 31, 2021
ASSETS
Current assets
Cash and cash equivalents	$	266,126	$	316,827

Marketable securities, at fair value	177,414		198,563
Accounts receivable, net	111,994		112,130
Inventories	23,799		23,395
Prepaid assets	16,511		12,354
Assets held for sale	—		10,050
Other current assets	7,516		8,189
Total current assets	603,360		681,508
Property and equipment (net of accumulated depreciation of $125,018 and $109,952, respectively)	106,818		109,465
Operating lease right-of-use assets	98,945		102,197

Intangible assets, net	416,848		442,325
Goodwill	522,766		527,115




Other assets	6,845		7,168
Total non-current assets	1,152,222		1,188,270
Total assets	$	1,755,582	$	1,869,778
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	13,708	$	17,921
Accrued compensation	37,992		38,304
Accrued expenses and other liabilities	20,420		17,796
Current portion of equipment financing obligations	118		1,135
Current portion of operating lease liabilities	6,379		6,884


Pharma contract liabilities	6,386		5,192
Total current liabilities	85,003		87,232
Long-term liabilities
Convertible senior notes, net	534,609		532,483

Operating lease liabilities	70,471		72,289


Deferred income tax liabilities, net	38,345		55,475
Other long-term liabilities	14,166		14,022
Total long-term liabilities	657,591		674,269
Total liabilities	$	742,594	$	761,501
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock, $0.001 par value, (250,000,000 shares authorized; 126,562,037 and 124,107,500 shares issued and outstanding, respectively)	$	127	$	124
Additional paid-in capital	1,154,365		1,123,628
Accumulated other comprehensive loss	(5,104)		(638)
Accumulated deficit	(136,400)		(14,837)
Total stockholders’ equity	$	1,012,988	$	1,108,277
Total liabilities and stockholders’ equity	$	1,755,582	$	1,869,778

See the accompanying notes to the unaudited Consolidated Financial Statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
NET REVENUE
Clinical Services	$	106,162	$	102,227	$	310,588	$	300,119
Pharma Services	22,620		19,113		60,435		58,478
Total net revenue	128,782		121,340		371,023		358,597

COST OF REVENUE	79,889		74,101		239,952		216,794

GROSS PROFIT	48,893		47,239		131,071		141,803
Operating expenses:
General and administrative	64,282		63,839		188,481		158,953
Research and development	7,312		7,409		23,651		13,360
Sales and marketing	16,809		15,704		50,179		46,677
Total operating expenses	88,403		86,952		262,311		218,990
LOSS FROM OPERATIONS	(39,510)		(39,713)		(131,240)		(77,187)
Interest expense, net	139		1,296		2,366		3,375
Other (income) expense, net	(25)		(89)		212		(431)
Gain on investment in and loan receivable from non-consolidated affiliate, net	—		(17,750)		—		(109,260)


(Loss) income before taxes	(39,624)		(23,170)		(133,818)		29,129
Income tax benefit	(2,772)		(2,822)		(12,255)		(4,283)
NET (LOSS) INCOME	$	(36,852)	$	(20,348)	$	(121,563)	$	33,412






NET (LOSS) INCOME PER SHARE
Basic	$	(0.30)	$	(0.17)	$	(0.98)	$	0.28
Diluted	$	(0.30)	$	(0.17)	$	(0.98)	$	0.28

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic	124,425		122,559		124,055		119,087
Diluted	124,425		122,559		124,055		121,356

See the accompanying notes to the unaudited Consolidated Financial Statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
NET (LOSS) INCOME	$	(36,852)	$	(20,348)	$	(121,563)	$	33,412

OTHER COMPREHENSIVE LOSS:

Net unrealized loss on marketable securities, net of tax	(1,048)		(57)		(4,466)		(400)


Total other comprehensive loss, net of tax	(1,048)		(57)		(4,466)		(400)
COMPREHENSIVE (LOSS) INCOME	$	(37,900)	$	(20,405)	$	(126,029)	$	33,012

See the accompanying notes to the unaudited Consolidated Financial Statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands, except share data)


	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Loss		Accumulated Deficit		Total
		Shares			Amount
Balance, December 31, 2021		124,107,500	$	124		$	1,123,628	$	(638)	$	(14,837)	$	1,108,277
Common stock issuance ESPP Plan		47,853	—			971		—		—		971
Issuance of restricted stock, net of forfeitures		100,253	—			(1,049)		—		—		(1,049)
Issuance of common stock for stock options		466,609	1			6,479		—		—		6,480

ESPP expense		—	—			249		—		—		249
Stock-based compensation expense - options and restricted stock		—	—			11,855		—		—		11,855
Net unrealized loss on marketable securities, net of tax		—	—			—		(2,371)		—		(2,371)
Net loss		—	—			—		—		(49,408)		(49,408)
Balance, March 31, 2022		124,722,215	$	125		$	1,142,133	$	(3,009)	$	(64,245)	$	1,075,004
Common stock issuance ESPP Plan		89,374	—			807		—		—		807
Issuance of restricted stock, net of forfeitures		773,010	1			(311)		—		—		(310)
Issuance of common stock for stock options		94,974	—			743		—		—		743



ESPP expense		—	—			293		—		—		293
Stock-based compensation expense - options and restricted stock		—	—			3,332		—		—		3,332
Net unrealized loss on marketable securities, net of tax		—	—			—		(1,047)		—		(1,047)
Net loss		—	—			—		—		(35,303)		(35,303)
Balance, June 30, 2022		125,679,573	$	126		$	1,146,997	$	(4,056)	$	(99,548)	$	1,043,519
Common stock issuance ESPP Plan		150,585	—			1,133		—		—		1,133
Issuance of restricted stock, net of forfeitures		493,907	1			(6)		—		—		(5)
Issuance of common stock for stock options		237,972	—			1,961		—		—		1,961

ESPP expense		—	—			257		—		—		257
Stock-based compensation expense - options and restricted stock		—	—			4,023		—		—		4,023
Net unrealized loss on marketable securities, net of tax		—	—			—		(1,048)		—		(1,048)
Net loss		—	—			—		—		(36,852)		(36,852)
Balance, September 30, 2022		126,562,037	$	127		$	1,154,365	$	(5,104)	$	(136,400)	$	1,012,988

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited, in thousands, except share data)


	Common Stock		Additional Paid-In Capital			Accumulated Other Comprehensive Income (Loss)		(Accumulated Deficit) Retained Earnings		Total
		Shares			Amount
Balance, December 31, 2020		112,075,474	$	112		$	701,357	$	10	$	(7,185)	$	694,294
Cumulative-effect adjustment from change in accounting principle		—	—			(23,271)		—		696		(22,575)
Premiums paid for capped call confirmations		—	—			(29,291)		—		—		(29,291)
Common stock issuance ESPP Plan		23,917	—			1,024		—		—		1,024
Issuance of restricted stock, net of forfeitures		83,220	—			(614)		—		—		(614)
Issuance of common stock for stock options		260,167	—			2,239		—		—		2,239
Issuance of common stock - public offering, net of underwriting discounts		4,693,876	5			218,495		—		—		218,500
Stock issuance fees and expenses		—	—			(242)		—		—		(242)
ESPP expense		—	—			241		—		—		241
Stock-based compensation expense - options and restricted stock		—	—			2,412		—		—		2,412
Net unrealized loss on marketable securities, net of tax		—	—			—		(160)		—		(160)
Net loss		—	—			—		—		(22,114)		(22,114)
Balance, March 31, 2021		117,136,654	$	117		$	872,350	$	(150)	$	(28,603)	$	843,714
Common stock issuance ESPP Plan		31,839	—			1,245		—		—		1,245
Issuance of restricted stock, net of forfeitures		146,392	—			(163)		—		—		(163)
Issuance of common stock for stock options		354,310	1			4,429		—		—		4,430
Issuance of common stock - private placement, net of private placement fees		4,444,445	4			189,859		—		—		189,863
Issuance of common stock for acquisition		597,712	1			29,174		—		—		29,175
Stock issuance fees and expenses		—	—			(102)		—		—		(102)
ESPP expense		—	—			298		—		—		298
Stock-based compensation expense - options and restricted stock		—	—			4,208		—		—		4,208
Net unrealized loss on marketable securities, net of tax		—	—			—		(183)		—		(183)

Net income		—	—			—		—		75,873		75,873




Balance, June 30, 2021		122,711,352	$	123		$	1,101,298	$	(333)	$	47,270	$	1,148,358
Common stock issuance ESPP Plan		27,210	—			1,020		—		—		1,020
Issuance of restricted stock, net of forfeitures		160,971	—			(304)		—		—		(304)
Issuance of common stock for stock options		317,477	—			3,374		—		—		3,374
Stock issuance fees and expenses		—	—			(35)		—		—		(35)
ESPP expense		—	—			236		—		—		236
Stock based compensation expense - options and restricted stock		—	—			5,001		—		—		5,001
Net unrealized loss on marketable securities, net of tax		—	—			—		(57)		—		(57)
Net loss		—	—			—		—		(20,348)		(20,348)
Balance, September 30, 2021		123,217,010	$	123		$	1,110,590	$	(390)	$	26,922	$	1,137,245

See the accompanying notes to the unaudited Consolidated Financial Statements.

NEOGENOMICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)


	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income	$	(121,563)	$	33,412
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation	25,894		21,807
Amortization of intangibles	25,470		14,683
Non-cash stock-based compensation	20,009		12,396
Non-cash operating lease expense	7,375		6,167
Amortization of convertible debt discount	1,989		1,904
Amortization of debt issue costs	136		133

Gain on investment in and loan receivable from non-consolidated affiliate, net	—		(109,260)
Interest receivable on loan receivable from non-consolidated affiliate	—		(391)
Loss on disposal of assets, net	3,066		166
Gain on sale of assets held for sale	(2,048)		—
Write-off of COVID-19 PCR testing inventory and equipment	—		6,061
Other adjustments	1,428		1,222
Changes in assets and liabilities, net
Accounts receivable, net	136		2,475
Inventories	(403)		3,196
Prepaid lease asset	—		(4,435)
Prepaid and other assets	(3,605)		(11,796)

Accounts payable, operating lease liabilities, deferred taxes, accrued and other liabilities	(20,192)		15,313
Net cash used in operating activities	(62,308)		(6,947)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of marketable securities	(73,973)		(180,961)
Proceeds from sales and maturities of marketable securities	89,812		44,736
Purchases of property and equipment	(26,357)		(52,155)
Proceeds from assets held for sale	12,098		—
Business acquisitions, net of cash acquired	—		(419,404)
Loan receivable from non-consolidated affiliate	—		(15,000)
Net cash provided by (used in) investing activities	1,580		(622,784)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of equipment financing obligations	(706)		(2,537)
Issuance of common stock, net	10,733		12,110

Proceeds from issuance of convertible debt, net of issuance costs	—		334,410
Premiums paid for capped call confirmations	—		(29,291)
Proceeds from equity offering, net of issuance costs	—		408,133
Net cash provided by financing activities	10,027		722,825

Net change in cash, cash equivalents and restricted cash	(50,701)		93,094
Cash, cash equivalents and restricted cash, beginning of period	316,827		250,632
Cash, cash equivalents and restricted cash, end of period	$	266,126	$	343,726


	Nine Months Ended September 30,
	2022		2021
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheets:
Cash and cash equivalents	$	266,126	$	340,565

Restricted cash, non-current	—		3,161
Total cash, cash equivalents and restricted cash	$	266,126	$	343,726

Supplemental disclosure of cash flow information:
Interest paid	$	2,145	$	1,792
Income taxes paid, net	$	155	$	113
Supplemental disclosure of non-cash investing and financing information:
Fair value of common stock issued to fund business acquisition	$	—	$	29,174



Purchases of property and equipment included in accounts payable	$	1,144	$	2,184

See the accompanying notes to the unaudited Consolidated Financial Statements.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1. Nature of the Business

Nature of the Business

NeoGenomics, Inc., a Nevada corporation (the “Company,” or “NeoGenomics”), and its subsidiaries, operate as a certified, high complexity clinical laboratory in accordance with the federal government’s CLIA, as amended, and is dedicated to the delivery of clinical diagnostic services to pathologists, oncologists, urologists, hospitals, and other laboratories as well as providing clinical trial services to pharmaceutical firms.

COVID-19 Pandemic Update

The impact from the COVID-19 pandemic, including recent COVID-19 variants, and the related disruptions had a significant adverse impact on the Company’s results of operations, volume growth rates and test volumes in 2020, 2021, and in the first three quarters of 2022. The full extent to which the COVID-19 outbreak will impact the Company’s business, results of operations, financial condition, and cash flows will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19 and the actions to contain it or treat its impact and the economic impact on local, regional, national, and international markets. As the COVID-19 pandemic continues, the Company’s results of operations, financial condition, and cash flows may continue to be materially adversely affected, particularly if the pandemic continues to persist for a significant amount of time.

The Company anticipates that the cash on hand, marketable securities, and expected cash collections are sufficient to fund near-term capital and operating needs for at least the next 12 months.

At the end of the first quarter 2021, due to the broad roll-out of the COVID-19 vaccine and a sharp decline in COVID-19 polymerase chain reaction (“PCR”) testing demand, the Company made the decision to exit COVID-19 PCR testing and the Company recorded a $6.1 million expense related to the exit from COVID-19 PCR testing. This amount consisted of write-offs of $5.3 million for all remaining COVID-19 PCR testing inventory recorded to cost of revenue and $0.8 million for all remaining COVID-19 PCR testing laboratory equipment recorded to general and administrative expenses on the Consolidated Statements of Operations for the nine months ended September 30, 2021. There were no COVID-19 PCR testing laboratory equipment or COVID-19 PCR testing inventory write-offs recorded for the three months ended September 30, 2021 and the three and nine months ended September 30, 2022.

Coronavirus Aid, Relief and Economic Security Act

The Federal government passed legislation that the President of the United States signed into law on March 27, 2020, known as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The CARES Act permits the deferral of payment of the employer portion of social security taxes between March 27, 2020 and December 31, 2020. Fifty percent of the deferred amount was due on December 31, 2021 and the remaining 50% is due on December 31, 2022. As of September 30, 2022 and December 31, 2021, the total accrued deferred social security taxes related to the CARES Act was $3.0 million. This amount was recorded in accrued expenses and other liabilities on the Consolidated Balance Sheets.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying interim Consolidated Financial Statements are unaudited and have been prepared in accordance with GAAP for interim financial information. All intercompany transactions and balances have been eliminated in the accompanying Consolidated Financial Statements.

The accounting policies of the Company are the same as those set forth in Note 2. Summary of Significant Accounting Policies, to the audited Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, except for new accounting standards discussed under Recent Accounting Pronouncements.

Unaudited Interim Financial Information

Certain information and footnote disclosures normally included in the Company’s annual audited Consolidated Financial Statements and accompanying notes have been condensed or omitted in these accompanying interim Consolidated Financial Statements and footnotes. Accordingly, the accompanying interim unaudited Consolidated Financial Statements included herein should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.

The results of operations presented in this Quarterly Report on Form 10-Q are not necessarily indicative of the results of operations that may be expected for any future periods. In the opinion of management, these unaudited Consolidated Financial Statements include all adjustments and accruals, consisting only of normal, recurring adjustments that are necessary for a fair statement of the results of all interim periods reported herein.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Use of Estimates

The Company prepares its Consolidated Financial Statements in conformity with GAAP. These principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the Consolidated Financial Statements. Actual results and outcomes may differ from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these Consolidated Financial Statements include, but are not limited, to those related to revenues, accounts receivable and related allowances, contingencies, useful lives and recovery of long-term assets and intangible assets, income taxes and valuation allowances, stock-based compensation, business combinations, and impairment analysis of goodwill. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected on the Consolidated Financial Statements prospectively from the date of the change in estimate.

Assets Held for Sale

Assets to be disposed of by sale are reclassified as held for sale if their carrying amounts are expected to be recovered through a sale transaction rather than through continuing use and when the Company commits to a plan to sell the assets. Assets classified as held for sale are measured at the lower of their carrying value or fair value less selling costs. Such assets are classified within current assets if there is reasonable certainty that the sale and collection of consideration will take place within one year. Upon reclassification as held for sale, long-lived assets are no longer depreciated or amortized and a measurement for impairment is performed to determine if there is an excess of carrying value over fair value less costs to sell. Any remeasurement is reported as an adjustment to the carrying value of the assets. Subsequent changes to estimated fair value less the selling costs will impact the measurement of assets held for sale if the fair value is determined to be less than the carrying value of the assets.

The Company owned 43,560 square feet of its Carlsbad, California facility. During the third quarter of 2021, the Company committed to selling this property and the associated land and concluded that these assets met the held for sale criteria. As of December 31, 2021, $10.1 million was recorded as assets held for sale within current assets on the Consolidated Balance Sheets for this property and associated land and reflected its carrying value which was lower than its fair value less costs to sell. The Company sold this property and associated land for proceeds of $12.1 million, net of closing costs, in the first quarter of 2022. For the nine months ended September 30, 2022, a net gain on the sale of this property and associated land of $2.0 million is included in general and administrative expenses on the Consolidated Statements of Operations.

Goodwill

The Company evaluates goodwill on an annual basis in the fourth quarter or more frequently if management believes indicators of impairment exist. Such indicators could include, but are not limited to, (1) a significant adverse change in legal factors or in business climate, (2) unanticipated competition, or (3) an adverse action or assessment by a regulator. The Company first assesses qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If management concludes that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, management performs a quantitative goodwill impairment test. The quantitative analysis is performed by comparing the fair value of the reporting unit to its carrying value. If the carrying value is greater than the estimate of fair value, an impairment loss will be recognized for the amount in which the carrying amount exceeds the reporting unit’s fair value. The Company estimates the fair values of its reporting units using a combination of the income, or discounted cash flows approach and the market approach, which utilizes comparable companies’ data.

At June 30, 2022, the Company performed a qualitative assessment to determine whether it was more likely than not that the fair values of its reporting units were less than their carrying values. Such qualitative factors included macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and other relevant events. As a result of the qualitative assessment, the Company determined that there were indicators that it was more likely than not that the fair values of its reporting units were less than their carrying values. Accordingly, the Company performed a quantitative analysis and determined the reporting units’ fair values exceeded the reporting units’ carrying values and there was no impairment of the recorded goodwill as of June 30, 2022.

General and Administrative Expenses

General and administrative expenses consist of payroll and payroll related costs for the Company’s billing, finance, human resources, information technology, and other administrative personnel as well as stock-based compensation. The Company also includes professional services, facilities expense, IT infrastructure costs, gains or losses on disposals of assets, depreciation, amortization, and other administrative-related costs in general and administrative expenses in the Consolidated Statements of Operations.

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 in the Clinical Services

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

segment. Advertising costs are expensed at the time they are incurred and were immaterial for the three and nine months ended September 30, 2022 and 2021.

Recent Accounting Pronouncements

In November 2021, the FASB issued ASU No. 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance (“ASU 2021-10”). This update requires business entities to disclose information annually about certain government assistance they receive. Such annual disclosure requirements include the nature of the transactions and the related accounting policy used, the line items on the balance sheet and income statement that are affected and the amounts applicable to each financial statement line item and significant terms and conditions of the transactions. ASU 2021-10 is effective for annual periods beginning after December 15, 2021, with early adoption permitted. ASU 2021-10 should be applied either (1) prospectively to all transactions within the scope of the amendments that are reflected in financial statements at the date of initial application and new transactions that are entered into after the date of initial application or (2) retrospectively to those transactions. The Company will adopt this new accounting standard in its Annual Report on Form 10-K for the year ended December 31, 2022 and does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements.

In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805), Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). This update amends guidance to require that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Revenue from Contracts with Customers (Topic 606). At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption of the amendments is permitted including adoption in an interim period. If the Company early adopts in an interim period, the Company is required to apply the amendments (1) retrospectively to all business combinations for which the acquisition date occurs on or after the beginning of the fiscal year that includes the interim period of early application and (2) prospectively to all business combinations that occur on or after the date of initial application. The amendments in ASU 2021-08 should be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently evaluating its adoption date of this standard and the impact of the standard on its Consolidated Financial Statements.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”) which provides for temporary optional expedients and exceptions to the current guidance on certain contract modifications and hedging relationships to ease the burdens related to the expected market transition from the London Inter-bank Offered Rate (“LIBOR”) or other reference rates to alternative reference rates. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848) (“ASU 2021-01”) to clarify that certain optional expedients and exceptions apply to modifications of derivative contracts and certain hedging relationships affected by changes in the interest rates used for discounting cash flows, computing variation margin settlements, and for calculating price alignment interest. ASU 2020-04 was effective beginning on March 12, 2020 and may be applied prospectively to such transactions through December 31, 2022 and ASU 2021-01 was effective beginning on January 7, 2021 and may be applied retrospectively or prospectively to such transactions through December 31, 2022. The Company will evaluate transactions or contract modifications occurring as a result of reference rate reform and determine whether to apply the optional guidance on an ongoing basis. As of September 30, 2022, there was no impact to the Company’s Consolidated Financial Statements related to ASU 2020-04 or ASU 2021-01.

Note 3. Acquisitions

Trapelo Health

On April 7, 2021 (the “Trapelo Acquisition Date”), the Company completed the acquisition of a 100% ownership interest in Intervention Insights, Inc. d/b/a Trapelo Health (“Trapelo”), an information technology company focused on precision oncology. The purchase price consisted of (i) cash consideration of $35.6 million, which included a net adjustment of $0.6 million for estimated cash on hand of Trapelo and estimated working capital adjustments on the Trapelo Acquisition Date, and (ii) equity consideration of $29.2 million, consisting of 597,712 shares of the Company’s common stock, par value $0.001 per share, valued at $48.81 per share. The Company acquired control of Trapelo on the Trapelo Acquisition Date; therefore, the fair value of the common stock issued as part of consideration was determined on the basis of the closing market price of the Company’s common stock immediately prior to the Trapelo Acquisition Date. The Trapelo acquisition enhances the Company’s ability to provide customers clinical decision support to help answer complex questions related to precision oncology biomarker testing and treatment options as part of the Company’s comprehensive oncology offerings.

The acquisition of Trapelo was determined to be a business combination and has been accounted for using the acquisition method. The purchase price and purchase price allocation were based upon management’s best estimates and assumptions and were considered final as of March 31, 2022. The following table summarizes the purchase consideration recorded for the acquisition of Trapelo, the fair value of the net assets acquired and liabilities assumed, and the calculation of goodwill based on

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

the excess of the consideration transferred over the fair value of the net assets acquired and liabilities assumed at the Trapelo Acquisition Date (in thousands, except per share data):


	Amount
Purchase consideration:
Shares of common stock issued as consideration	597,712
Per share value of common stock issued as consideration	$	48.81
Fair value of common stock at Trapelo Acquisition Date	$	29,174
Plus: Cash paid at closing	35,591
Total purchase consideration	$	64,765

Allocation of the purchase consideration:
Cash	$	713
Other current assets	282
Identifiable intangible asset - marketing assets	549
Identifiable intangible asset - developed technology	19,040
Other long-term assets	268
Total identifiable assets acquired	20,852
Current liabilities	(751)
Net identifiable assets acquired	20,101
Goodwill	44,664
Total purchase consideration	$	64,765

The identified developed technology and marketing intangible assets are being amortized over ten years and four years, respectively, based on their estimated useful lives. The weighted-average amortization period in total for all classes of intangible assets from the Trapelo acquisition is 9.8 years. The developed technology was valued using the income approach, specifically, the multi-period excess earnings method, which measures the after-tax cash flows attributable to the developed technology. The marketing intangible assets were valued using the income approach, specifically, the relief from royalty method, which measures the cash flow streams attributable to the marketing intangible assets in the form of the avoided royalty payment that would be paid to the owner in return for the rights to use the marketing intangible assets had the intangible assets not been acquired. The values of the identifiable intangible assets represent Level 3 measurements as they were based on unobservable inputs reflecting the Company’s assumptions used in pricing the assets at fair value. These inputs required significant judgments and estimates at the time of the valuation.

The goodwill recognized, all of which was assigned to the Clinical Services segment, was primarily attributable to expected synergies of the combined businesses and the acquisition of an assembled workforce knowledgeable of the healthcare and information technology industries. None of the goodwill resulting from the acquisition of Trapelo is expected to be deductible for income tax purposes.

The results of operations of Trapelo are included in the Company’s unaudited Consolidated Financial Statements beginning on the Trapelo Acquisition Date. No pro forma information has been included relating to the Trapelo acquisition, as this acquisition was not deemed to be material to the Company’s revenue or net loss on a pro forma basis.

Inivata Limited

On June 18, 2021 (the “Inivata Acquisition Date”), the Company completed the acquisition of the remaining equity interests in Inivata Limited, a private limited company incorporated in England and Wales (“Inivata”). Inivata is a global, commercial stage, liquid biopsy platform company. The acquisition follows a $25.0 million minority equity investment by the Company in Series C1 Preference Shares (the “Preference Shares” or “previously-held equity interest”) in Inivata in May 2020, at which time the Company also acquired a fixed price option to purchase the remainder of equity interests in Inivata for $390.0 million (the “Purchase Option”). The Company and Inivata also entered into a line of credit agreement in the amount of $15.0 million (the “Line of Credit”) in May 2020. In the first quarter of 2021, prior to the Inivata Acquisition Date, an observable transaction of an identical investment in Inivata Preference Shares occurred which resulted in a remeasurement of the Preference Shares to the value of this observable transaction. The Company recorded a net unrealized loss of $5.0 million on investment in non-consolidated affiliate for this remeasurement for the three months ended March 31, 2021 in other expense (income), net on the Consolidated Statements of Operations.

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

The Inivata acquisition adds liquid biopsy platform technology, including minimal residual disease testing capabilities, to the Company’s comprehensive portfolio of oncology testing solutions. The purchase price consisted of cash consideration of $398.6 million, which included a net adjustment of $8.6 million for estimated cash on hand of Inivata and other adjustments on the Inivata Acquisition Date, and was funded through cash on hand and a private placement of equity.

Prior to the acquisition of the remaining equity interests in Inivata, the Company accounted for its previously-held equity interest and the Purchase Option in Inivata as equity securities without a readily determinable fair value. The equity interests were recorded at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Therefore, the Company’s acquisition of control of Inivata on the Inivata Acquisition Date was accounted for as a business combination achieved in stages under the acquisition method. Accordingly, the Company used a discounted cash flow to derive a business enterprise value of Inivata in order to determine the acquisition-date fair value of the Company’s previously-held equity interest and Purchase Option in Inivata. To determine the fair value of the previously-held equity interest, the fair value of Inivata’s total equity was allocated to its various classes of equity based on the respective rights and privileges of each class of stock in liquidation. The business enterprise value and a Black-Scholes model were then used to determine the fair value of the remaining equity acquired through the exercise of the Purchase Option. The Purchase Option was recorded at the fair value at the Inivata Acquisition Date based on its settlement value. This resulted in fair values of $64.9 million in Preference Shares and a $74.3 million Purchase Option, immediately prior to the acquisition. On the Inivata Acquisition Date, the $10.3 million outstanding under the Line of Credit extended by the Company to Inivata was effectively settled as part of the acquisition of Inivata at the $15.0 million principal amount and was recorded as part of the consideration transferred in the acquisition. The Company recorded a gain on investment in and loan receivable from non-consolidated affiliate, net, within the Company’s Consolidated Statements of Operations of $109.3 million for the year ended December 31, 2021 for the excess of the acquisition-date fair value of the Company’s previously-held equity interest, Purchase Option, and Line of Credit over their carrying values.

The purchase price and purchase price allocation were based upon management’s best estimates and assumptions and were considered final as of June 30, 2022. The following table summarizes the calculation of goodwill based on the excess of the estimated fair value of the consideration transferred including the fair value of the Line of Credit, and the estimated fair value of the previously-held equity interest and Purchase Option, over the estimated fair value of the net assets acquired and liabilities assumed at the Inivata Acquisition Date and includes measurement period adjustments recorded during 2021 (in thousands):

NEOGENOMICS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)


	June 18, 2021 (as initially reported)		Measurement Period Adjustments		Adjustment		June 18, 2021 (as adjusted)
Fair value of business combination:
Cash paid at closing	$	398,594	$	—	$	—	$	398,594
Fair value of Line of Credit	15,000		—		—		15,000
Fair value of consideration transferred	$	413,594	$	—	$	—	$	413,594
Fair value of previously-held equity interest(1)	62,919		1,987		—		64,906
Fair value of Purchase Option(1)	58,537		15,763		—		74,300
Total fair value of business combination	$	535,050	$	17,750	$	—	$	552,800

Allocation of the fair value business combination:
Cash	$	14,068	$	—	$	—	$	14,068
Other current assets(2)	5,366		345		—		5,711
Property and equipment	1,753		—		—		1,753
Identifiable intangible assets - developed technology(1)	302,982		(11,796)		—		291,186
Identifiable intangible assets - trademarks(1)	31,700		(226)		—		31,474

Form: 10-Q

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