10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on November 6, 2023
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, 2023
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
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
(Address of principal executive offices) | (Zip Code) |
(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 | ||||||||||||
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.
S |
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 2, 2023, the registrant had 127,465,820 shares of Common Stock, par value $0.001 per share outstanding.
TABLE OF CONTENTS
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 24, 2023, 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 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;
•Our ability to realize estimated benefits from our cost reduction and restructuring efforts;
•The effects of seasonality on our business;
3
•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.
4
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited) September 30, 2023 |
December 31, 2022 | |||||||||||||
ASSETS | ||||||||||||||
Current assets | ||||||||||||||
Cash and cash equivalents | $ | $ | ||||||||||||
Marketable securities, at fair value | ||||||||||||||
Accounts receivable, net | ||||||||||||||
Inventories | ||||||||||||||
Prepaid assets | ||||||||||||||
Other current assets | ||||||||||||||
Total current assets | ||||||||||||||
Property and equipment (net of accumulated depreciation of $ |
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Operating lease right-of-use assets | ||||||||||||||
Intangible assets, net | ||||||||||||||
Goodwill | ||||||||||||||
Other assets | ||||||||||||||
Total non-current assets | ||||||||||||||
Total assets | $ | $ | ||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||
Current liabilities | ||||||||||||||
Accounts payable | $ | $ | ||||||||||||
Accrued compensation | ||||||||||||||
Accrued expenses and other liabilities | ||||||||||||||
Current portion of equipment financing obligations | ||||||||||||||
Current portion of operating lease liabilities | ||||||||||||||
Contract liabilities | ||||||||||||||
Total current liabilities | ||||||||||||||
Long-term liabilities | ||||||||||||||
Convertible senior notes, net | ||||||||||||||
Operating lease liabilities | ||||||||||||||
Deferred income tax liabilities, net | ||||||||||||||
Other long-term liabilities | ||||||||||||||
Total long-term liabilities | ||||||||||||||
Total liabilities | $ | $ | ||||||||||||
Commitments and contingencies (Note 11) | ||||||||||||||
Stockholders’ equity | ||||||||||||||
Common stock, $ |
$ | $ | ||||||||||||
Additional paid-in capital | ||||||||||||||
Accumulated other comprehensive loss | ( |
( |
||||||||||||
Accumulated deficit | ( |
( |
||||||||||||
Total stockholders’ equity | $ | $ | ||||||||||||
Total liabilities and stockholders’ equity | $ | $ |
See the accompanying notes to the unaudited Consolidated Financial Statements.
5
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
NET REVENUE | |||||||||||||||||||||||
Clinical Services | $ | $ | $ | $ | |||||||||||||||||||
Advanced Diagnostics | |||||||||||||||||||||||
Total net revenue | |||||||||||||||||||||||
COST OF REVENUE | |||||||||||||||||||||||
GROSS PROFIT | |||||||||||||||||||||||
Operating expenses: | |||||||||||||||||||||||
General and administrative | |||||||||||||||||||||||
Research and development | |||||||||||||||||||||||
Sales and marketing | |||||||||||||||||||||||
Restructuring charges | |||||||||||||||||||||||
Total operating expenses | |||||||||||||||||||||||
LOSS FROM OPERATIONS | ( |
( |
( |
( |
|||||||||||||||||||
Interest (income) expense, net | ( |
( |
|||||||||||||||||||||
Other expense (income), net | ( |
( |
|||||||||||||||||||||
Loss before taxes | ( |
( |
( |
( |
|||||||||||||||||||
Income tax benefit | ( |
( |
( |
( |
|||||||||||||||||||
NET LOSS | $ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||
NET LOSS PER SHARE | |||||||||||||||||||||||
Basic | $ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||
Diluted | $ | ( |
$ | ( |
$ | ( |
$ | ( |
|||||||||||||||
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | |||||||||||||||||||||||
Basic | |||||||||||||||||||||||
Diluted |
See the accompanying notes to the unaudited Consolidated Financial Statements.
6
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
NET LOSS | $ | ( |
$ | ( |
$ | ( |
$ | ( |
||||||||||||||||||
OTHER COMPREHENSIVE INCOME (LOSS): | ||||||||||||||||||||||||||
Net unrealized gain (loss) on marketable securities, net of tax | ( |
( |
||||||||||||||||||||||||
Total other comprehensive income (loss), net of tax | ( |
( |
||||||||||||||||||||||||
COMPREHENSIVE LOSS | $ | ( |
$ | ( |
$ | ( |
$ | ( |
See the accompanying notes to the unaudited Consolidated Financial Statements.
7
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(unaudited, in thousands, except share data)
Common Stock | Additional Paid-In Capital | Accumulated Other Comprehensive (Loss) Income | Accumulated Deficit | Total | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance, December 31, 2022 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Issuance of common stock for ESPP | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures | — | ( |
— | — | ( |
||||||||||||||||||||||||||||||
Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
Stock-based compensation expense - ESPP | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
Net unrealized gain on marketable securities, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
Balance, March 31, 2023 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Issuance for common stock for ESPP | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures | ( |
— | ( |
— | — | ( |
|||||||||||||||||||||||||||||
Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
Stock-based compensation expense - ESPP | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
Net unrealized gain on marketable securities, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
Balance, June 30, 2023 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Issuance for common stock for ESPP | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures | ( |
— | ( |
— | — | ( |
|||||||||||||||||||||||||||||
Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
Stock issuance fees and expenses | — | — | ( |
— | — | ( |
|||||||||||||||||||||||||||||
Stock-based compensation expense - ESPP | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
Net unrealized gain on marketable securities, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
Balance, September 30, 2023 | $ | $ | $ | ( |
$ | ( |
$ |
8
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 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Issuance of common stock for ESPP | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures | — | ( |
— | — | ( |
||||||||||||||||||||||||||||||
Issuance of common stock for stock options | — | — | |||||||||||||||||||||||||||||||||
Stock-based compensation expense - ESPP | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
Net unrealized loss on marketable securities, net of tax | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
Balance, March 31, 2022 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Issuance of common stock for ESPP | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures | ( |
— | — | ( |
|||||||||||||||||||||||||||||||
Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
Stock-based compensation expense - ESPP | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
Net unrealized loss on marketable securities, net of tax | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
Balance, June 30, 2022 | $ | $ | $ | ( |
$ | ( |
$ | ||||||||||||||||||||||||||||
Issuance for common stock for ESPP | — | — | — | ||||||||||||||||||||||||||||||||
Issuance of restricted stock, net of forfeitures | ( |
— | — | ( |
|||||||||||||||||||||||||||||||
Issuance of common stock for stock options | — | — | — | ||||||||||||||||||||||||||||||||
Stock-based compensation expense - ESPP | — | — | — | — | |||||||||||||||||||||||||||||||
Stock-based compensation expense - options and restricted stock | — | — | — | — | |||||||||||||||||||||||||||||||
Net unrealized loss on marketable securities, net of tax | — | — | — | ( |
— | ( |
|||||||||||||||||||||||||||||
Net loss | — | — | — | — | ( |
( |
|||||||||||||||||||||||||||||
Balance, September 30, 2022 | $ | $ | $ | ( |
$ | ( |
$ |
See the accompanying notes to the unaudited Consolidated Financial Statements.
9
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Nine Months Ended September 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||||||||
Net loss | $ | ( |
$ | ( |
||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
Depreciation | ||||||||||||||
Amortization of intangibles | ||||||||||||||
Non-cash stock-based compensation | ||||||||||||||
Non-cash operating lease expense | ||||||||||||||
Amortization of convertible debt discount | ||||||||||||||
Amortization of debt issuance costs | ||||||||||||||
Loss on disposal of assets, net | ||||||||||||||
Impairment of assets | ||||||||||||||
Gain on sale of assets held for sale | ( |
|||||||||||||
Other adjustments | ||||||||||||||
Changes in assets and liabilities, net | ||||||||||||||
Accounts receivable, net | ( |
|||||||||||||
Inventories | ( |
( |
||||||||||||
Prepaid and other assets | ( |
( |
||||||||||||
Operating lease liabilities | ( |
( |
||||||||||||
Deferred income tax liabilities, net | ( |
( |
||||||||||||
Accrued compensation | ( |
|||||||||||||
Accounts payable and other liabilities | ( |
( |
||||||||||||
Net cash used in operating activities | ( |
( |
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CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||||||||
Purchases of marketable securities | ( |
( |
||||||||||||
Proceeds from maturities of marketable securities | ||||||||||||||
Purchases of property and equipment | ( |
( |
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Proceeds from assets held for sale | ||||||||||||||
Net cash provided by investing activities | ||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||||||||
Repayment of equipment financing obligations | ( |
( |
||||||||||||
Issuance of common stock, net | ||||||||||||||
Net cash provided by financing activities | ||||||||||||||
Net change in cash and cash equivalents | ( |
|||||||||||||
Cash and cash equivalents, beginning of period | ||||||||||||||
Cash and cash equivalents, end of period | $ | $ |
Supplemental disclosure of cash flow information: | ||||||||||||||
Interest paid | $ | $ | ||||||||||||
Income taxes paid, net | $ | $ | ||||||||||||
Supplemental disclosure of non-cash investing and financing information: | ||||||||||||||
Purchases of property and equipment included in accounts payable | $ | $ |
See the accompanying notes to the unaudited Consolidated Financial Statements.
10
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. Nature of the Business
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 generally accepted accounting principles in the United States (“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, 2022, except for Stock-based Compensation and new accounting standards discussed under Recent Accounting Pronouncements as referenced below.
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, 2022.
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.
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, impairment analysis of goodwill, and restructuring reserves. 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.
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 segment. Advertising costs are expensed at the time they are incurred and were immaterial for the three and nine months ended September 30, 2023 and 2022.
Stock-based Compensation
In the second quarter of 2023, the Company began granting performance stock units (“PSUs”) subject to a market condition to certain of its executives as part of its executive compensation program. The number of shares awarded will be subject to adjustment based on the achievement of an absolute total shareholder return (“TSR”) performance target. If the TSR
11
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
performance target is achieved, the awards will vest at the end of the three-year requisite service period so long as the employee remains employed with the Company through the applicable vesting date.
The Company measures compensation expense for stock-based awards to employees, non-employee contracted physicians, and directors based upon the awards’ initial grant-date fair values. Stock-based compensation expense for stock options, restricted stock awards, restricted stock units and performance awards is recorded over the requisite service period in general and administrative expenses on the Consolidated Statements of Operations. For awards with only a service condition, the Company expenses stock-based compensation using the straight-line method over the requisite service period for the entire award. For awards with a market condition, the Company expenses the grant date fair value at the target over the vesting period regardless of the value that the award recipients ultimately receive. The fair values of stock option grants are estimated as of the date of grant by applying the Black-Scholes option valuation model (“Black-Scholes”). The fair value of restricted stock with a market condition is estimated at the date of grant using the Monte Carlo simulation model (“Monte Carlo”). The Black-Scholes and Monte Carlo models incorporate assumptions as to stock price volatility, the expected life of options or restricted stock, a risk-free interest rate and dividend yield. The fair value of restricted stock without a market condition is estimated using the current market price of the Company’s common stock on the date of grant.
Black-Scholes is affected by the stock price on the date of the grant as well as assumptions regarding a number of highly complex and subjective variables. These variables include the expected term of the option, expected risk-free interest rate, the expected volatility of common stock, and expected dividend yield; each of which is described below. The assumptions for expected term and expected volatility are the two assumptions that significantly affect the grant date fair value.
Expected Term: The expected term of an option is determined using the simplified method under SAB 107 which represents the average between the vesting term and the contractual term. The Company utilizes the simplified method to determine the expected life of the options due to insufficient exercise activity during recent years.
Risk-free Interest Rate: The risk-free interest rate used in the Black-Scholes model is based on the implied yield at the grant date of the U.S. Treasury zero-coupon issue with an equivalent term to the stock-based award being valued. Where the expected term of a stock-based award does not correspond with the term for which a zero-coupon interest rate is quoted, the Company uses the nearest interest rate from available maturities.
Expected Stock Price Volatility: The Company uses its own historical weekly volatility because that is more reflective of market conditions.
Dividend Yield: Because the Company has never paid a dividend and does not expect to begin doing so in the foreseeable future, the Company assumed no dividend yield in valuing the stock-based awards.
The fair value of the PSUs granted during the nine months ended September 30, 2023 was estimated as of the grant date using the Monte Carlo, which requires management to make assumptions regarding risk-free interest rates and volatility of the Company’s stock price. The Monte Carlo incorporates the same assumptions as Black-Scholes as to stock price volatility, the risk-free interest rate and dividend yield. The Company utilized the expected life of the PSUs for the expected term of the award, as the vesting term and contractual term of the awards are identical.
Recent Accounting Pronouncements
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 adopted this standard as of January 1, 2023 and there was no impact on its Consolidated Financial Statements.
12
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 3. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy has been established based on three levels of inputs, of which the first two are considered observable and the last unobservable.
Level 1: Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets.
Level 2: Inputs, other than quoted prices included within Level 1, which are observable for the asset or liability, either directly or indirectly. These are typically obtained from readily-available pricing sources for comparable instruments.
Level 3: Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own assumptions of the data that market participants would use in pricing the asset or liability, based on the best information available in the circumstances.
Assets and Liabilities that are Measured at Fair Value on a Recurring Basis
The Company measures certain financial assets at fair value on a recurring basis, including its marketable securities and certain cash equivalents. The Company considers all securities available-for-sale, including those with maturity dates beyond 12 months, and therefore these securities are classified within current assets on the Consolidated Balance Sheets as they are available to support current operational liquidity needs. The money market accounts are valued based on quoted market prices in active markets and are included in cash and cash equivalents on the Consolidated Balance Sheets. The marketable securities are generally valued based on other observable inputs for those securities (including market corroborated pricing or other models that utilize observable inputs such as interest rates and yield curves) based on information provided by independent third-party pricing entities, except for U.S. Treasury securities which are valued based on quoted market prices in active markets.
The following tables set forth the amortized cost, gross unrealized gains, gross unrealized losses and fair values of the Company’s marketable securities accounted for as available-for-sale securities as of September 30, 2023 and December 31, 2022.
September 30, 2023 | ||||||||||||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Short-term marketable securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | $ | $ | ( |
$ | |||||||||||||||||||||
Yankee bonds | ( |
|||||||||||||||||||||||||
Agency bonds | ( |
|||||||||||||||||||||||||
Municipal bonds | ( |
|||||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Asset-backed securities | ( |
|||||||||||||||||||||||||
Corporate bonds | ( |
|||||||||||||||||||||||||
Total | $ | $ | $ | ( |
$ |
13
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 2022 | ||||||||||||||||||||||||||
(in thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Short-term marketable securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | $ | $ | ( |
$ | |||||||||||||||||||||
Yankee bonds | ( |
|||||||||||||||||||||||||
Agency bonds | ( |
|||||||||||||||||||||||||
Municipal bonds | ( |
|||||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Asset-backed securities | ( |
|||||||||||||||||||||||||
Corporate bonds | ( |
|||||||||||||||||||||||||
Total | $ | $ | $ | ( |
$ |
The Company had $1.6 million and $0.9 million of accrued interest receivable at September 30, 2023 and December 31, 2022, respectively, included in other current assets on its Consolidated Balance Sheets related to its marketable securities. There were no realized gains or losses on marketable securities for the three and nine months ended September 30, 2023. Realized gains or losses for the three and nine months ended September 30, 2022 were immaterial .
September 30, 2023 | ||||||||||||||||||||||||||
(in thousands) | One Year or Less | Over One Year Through Five Years | Over Five Years | Total | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Marketable Securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | $ | $ | $ | ||||||||||||||||||||||
Yankee bonds | ||||||||||||||||||||||||||
Agency bonds | ||||||||||||||||||||||||||
Municipal bonds | ||||||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||||
Corporate bonds | ||||||||||||||||||||||||||
Total | $ | $ | $ | $ |
14
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 2022 | ||||||||||||||||||||||||||
(in thousands) | One Year or Less | Over One Year Through Five Years | Over Five Years | Total | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Marketable Securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | $ | $ | $ | $ | ||||||||||||||||||||||
Yankee bonds | ||||||||||||||||||||||||||
Agency bonds | ||||||||||||||||||||||||||
Municipal bonds | ||||||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||||
Corporate bonds | ||||||||||||||||||||||||||
Total | $ | $ | $ | $ |
The following tables set forth the Company’s cash equivalents and marketable securities accounted for as available-for-sale securities that were measured at fair value on a recurring basis based on the fair value hierarchy as of September 30, 2023 and December 31, 2022.
September 30, 2023 | ||||||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
Marketable securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | ||||||||||||||||||||||||||
Yankee bonds | ||||||||||||||||||||||||||
Agency bonds | ||||||||||||||||||||||||||
Municipal bonds | ||||||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||||
Corporate bonds | ||||||||||||||||||||||||||
Total | $ | $ | $ | $ |
15
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 2022 | ||||||||||||||||||||||||||
(in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||
Financial Assets: | ||||||||||||||||||||||||||
Cash equivalents: | ||||||||||||||||||||||||||
Money market funds | $ | $ | $ | $ | ||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Marketable securities: | ||||||||||||||||||||||||||
U.S. Treasury securities | ||||||||||||||||||||||||||
Yankee bonds | ||||||||||||||||||||||||||
Agency bonds | ||||||||||||||||||||||||||
Municipal bonds | ||||||||||||||||||||||||||
Commercial paper | ||||||||||||||||||||||||||
Asset-backed securities | ||||||||||||||||||||||||||
Corporate bonds | ||||||||||||||||||||||||||
Total | $ | $ | $ | $ |
There were no transfers of financial assets or liabilities into or out of Level 1, Level 2, or Level 3 for the three and nine months ended September 30, 2023 and September 30, 2022.
The carrying value of cash and cash equivalents, accounts receivable, net, accounts payable, accrued expenses and other liabilities, and other current assets and liabilities, are considered reasonable estimates of their respective fair values at September 30, 2023 and December 31, 2022 due to their short-term nature.
Note 4. Goodwill and Intangible Assets
The following table summarizes the carrying amounts of goodwill by segment at September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023 | December 31, 2022 | |||||||||||||
Clinical Services | $ | $ | ||||||||||||
Advanced Diagnostics | ||||||||||||||
Total | $ | $ |
September 30, 2023 | ||||||||||||||||||||||||||
Amortization Period (years) |
Cost | Accumulated Amortization |
Net | |||||||||||||||||||||||
Customer Relationships | $ | $ | $ | |||||||||||||||||||||||
Developed Technology | ||||||||||||||||||||||||||
Marketing Assets | ||||||||||||||||||||||||||
Trademarks | ||||||||||||||||||||||||||
Trade Name | ||||||||||||||||||||||||||
Trademark - Indefinite lived | — | — | ||||||||||||||||||||||||
Total | $ | $ | $ |
16
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
December 31, 2022 | ||||||||||||||||||||||||||
Amortization Period (years) |
Cost | Accumulated Amortization |
Net | |||||||||||||||||||||||
Customer Relationships | $ | $ | $ | |||||||||||||||||||||||
Developed Technology | ||||||||||||||||||||||||||
Marketing Assets | ||||||||||||||||||||||||||
Trademarks | ||||||||||||||||||||||||||
Trade Name | ||||||||||||||||||||||||||
Trademark - Indefinite lived | — | — | ||||||||||||||||||||||||
Total | $ | $ | $ |
The Company records amortization expense within cost of revenue and general and administrative expense on the Consolidated Statement of Operations. The following table summarizes the amortization expense for the three and nine months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
Amortization of intangibles included in cost of revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Amortization of intangibles included in general and administrative expenses | ||||||||||||||||||||||||||
Total amortization of intangibles | $ | $ | $ | $ |
The estimated amortization expense related to amortizable intangible assets for each of the following periods as of September 30, 2023 is as follows (in thousands):
Remainder of 2023 | $ | ||||
2024 | |||||
2025 | |||||
2026 | |||||
2027 | |||||
Thereafter | |||||
Total | $ |
Note 5. Debt
2028 Convertible Senior Notes
On January 11, 2021, the Company completed the sale of $345.0 million of Convertible Senior Notes with a stated interest rate of 0.25 % and a maturity date of January 15, 2028 (the “2028 Convertible Notes”), unless earlier converted, redeemed, or repurchased.
The last reported sales price of the Company’s common stock was not greater than or equal to 130.0 % of the conversion price of the 2028 Convertible Notes on at least 20 of the last 30 consecutive trading days of the quarter ended June 30, 2023. Based on the terms of the 2028 Convertible Notes, the holders could not have converted all or a portion of their 2028 Convertible Notes in the third quarter of 2023. The last reported sales price of the Company’s common stock was not greater than or equal to 130.0 % of the conversion price of the 2028 Convertible Notes on at least 20 of the last 30 consecutive trading days of the quarter ended September 30, 2023. Based on the terms of the 2028 Convertible Notes, the holders cannot convert all or a portion of their 2028 Convertible Notes in the fourth quarter of 2023. The value of the 2028 Convertible Notes, if-converted, does not exceed the principal amount based on a closing stock price of $12.30 on September 29, 2023.
The interest expense recognized on the 2028 Convertible Notes includes $0.2 million, $0.4 million and $8,500 for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the three months ended September 30, 2023. The interest expense recognized on the 2028 Convertible Notes includes $0.6 million, $1.1 million and $26,000 for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the nine months ended September 30, 2023. The interest expense
17
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
recognized on the 2028 Convertible Notes includes $0.2 million, $0.4 million and $8,500 for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the three months ended September 30, 2022. The interest expense recognized on the 2028 Convertible Notes includes $0.7 million, $1.1 million and $25,300 for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the nine months ended September 30, 2022. The effective interest rate on the 2028 Convertible Notes is 0.70 %, which includes the interest on the 2028 Convertible Notes and amortization of the debt discount and debt issuance costs. The 2028 Convertible Notes bear interest at a rate of 0.25 % per annum, payable semi-annually in arrears on January 15 and July 15 of each year, beginning on July 15, 2021.
At September 30, 2023, the estimated fair values (Level 2) of the 0.25 % Convertible Senior Notes due 2028 was $245.8 million. At December 31, 2022, the estimated fair value (Level 2) of the 0.25 % Convertible Senior Notes due 2028 was $218.2 million.
2025 Convertible Senior Notes
On May 4, 2020, the Company completed the sale of $201.3 million of Convertible Senior Notes with a stated interest rate of 1.25 % and a maturity date of May 1, 2025 (the “2025 Convertible Notes”), unless earlier converted, redeemed, or repurchased.
The last reported sales price of the Company’s common stock was not greater than or equal to 130.0 % of the conversion price of the 2025 Convertible Notes on at least 20 of the last 30 consecutive trading days of the quarter ended June 30, 2023. Based on the terms of the 2025 Convertible Notes, the holders could not have converted all or a portion of their 2025 Convertible Notes in the third quarter of 2023. The last reported sales price of the Company’s common stock was not greater than or equal to 130.0 % of the conversion price of the 2025 Convertible Notes on at least 20 of the last 30 consecutive trading days of the quarter ended September 30, 2023. Based on the terms of the 2025 Convertible Notes, the holders cannot convert all or a portion of their 2025 Convertible Notes in the fourth quarter of 2023. The value of the 2025 Convertible Notes, if-converted, does not exceed the principal amount based on a closing stock price of $12.30 on September 29, 2023.
The interest expense recognized on the 2025 Convertible Notes includes $0.6 million, $0.3 million and $37,900 for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the three months ended September 30, 2023. The interest expense recognized on the 2025 Convertible Notes includes $1.9 million, $0.9 million and $0.1 million for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the nine months ended September 30, 2023. The interest expense recognized on the 2025 Convertible Notes includes $0.6 million, $0.3 million and $37,200 for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the three months ended September 30, 2022. The interest expense recognized on the 2025 Convertible Notes includes $1.9 million, $0.9 million and $0.1 million for the contractual coupon interest, the amortization of the debt discount and the amortization of the debt issuance costs, respectively, for the nine months ended September 30, 2022. The effective interest rate on the 2025 Convertible Notes is 1.96 %, which includes the interest on the 2025 Convertible Notes and amortization of the debt discount and debt issuance costs. The 2025 Convertible Notes bear interest at a rate of 1.25 % per annum, payable semi-annually in arrears on May 1 and November 1 of each year, which began on November 1, 2020.
Note 6. Stock-Based Compensation
Equity Incentive Plan
Effective May 25, 2023, the Company adopted the NeoGenomics, Inc. 2023 Equity Incentive Plan (the “2023 Plan”) as approved by the Board of Directors on March 28, 2023 and the Company’s stockholders on May 25, 2023. The 2023 Plan replaced the NeoGenomics, Inc. Amended and Restated Equity Incentive Plan, as most recently amended and subsequently approved by the stockholders on May 25, 2017 (the “Prior Plan”). The 2023 Plan allows for the award of equity incentives including stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance shares, performance units, and other stock-based awards to certain employees, directors, or officers of, or key non-employee advisers or consultants, including contracted physicians to the Company or its subsidiaries. The 2023 Plan provides that the maximum aggregate number of shares of the Company’s common stock reserved and available for issuance under the 2023 Plan is 3,975,000 . Additionally, effective May 25, 2023, any remaining unissued shares from the Prior Plan are available for the grant of new awards under the 2023 Plan.
18
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company recorded approximately $7.2 million and $4.3 million for stock-based compensation in general and administrative expenses on the Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022, respectively, and approximately $17.6 million and $20.0 million for the nine months ended September 30, 2023 and 2022, respectively.
Stock Options
The Company recorded approximately $3.0 million and $1.6 million for stock-based compensation related to stock options in general and administrative expenses on the Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022, respectively, and approximately $7.0 million and $6.4 million for the nine months ended September 30, 2023 and 2022, respectively.
A summary of the stock option activity under the Company’s plans for the nine months ended September 30, 2023 is as follows:
Number of Shares |
Weighted Average Exercise Price | |||||||||||||
Outstanding at December 31, 2022 | $ | |||||||||||||
Granted | $ | |||||||||||||
Exercised | ( |
$ | ||||||||||||
Forfeited | ( |
$ | ||||||||||||
Outstanding at September 30, 2023 | $ | |||||||||||||
Exercisable at September 30, 2023 | $ |
Nine Months Ended September 30, 2023 |
|||||
Expected term (in years) | |||||
Risk-free interest rate (%) | |||||
Expected volatility (%) | |||||
Dividend yield (%) | |||||
Weighted average grant date fair value per share | $ |
As of September 30, 2023, there was approximately $15.8 million of unrecognized stock-based compensation expense related to stock options that will be recognized over a weighted-average period of approximately 1.9 years.
Restricted Stock
The Company recorded approximately $3.4 million and $2.4 million for stock-based compensation related to restricted stock in general and administrative expenses on the Consolidated Statements of Operations for the three months ended September 30, 2023 and 2022, respectively, and approximately $8.9 million and $12.8 million for the nine months ended September 30, 2023 and 2022, respectively.
A summary of the restricted stock activity under the Company’s plans for the nine months ended September 30, 2023 is as follows:
Number of Restricted Shares |
Weighted Average Grant Date Fair Value | |||||||||||||
Nonvested at December 31, 2022 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | ( |
$ | ||||||||||||
Forfeited | ( |
$ | ||||||||||||
Nonvested at September 30, 2023 | $ |
As of September 30, 2023, there was approximately $18.8 million of unrecognized stock-based compensation expense related to restricted stock that will be recognized over a weighted-average period of approximately 1.9 years.
19
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Performance-Based Restricted Stock Units
In the second quarter of 2023, the Company granted 305,105 PSUs subject to a market condition to certain of its executives with an aggregated grant date fair value of approximately $6.7 million. The number of shares awarded will be subject to adjustment based on the achievement of a TSR performance target. If the TSR performance target is achieved, the awards will vest at the end of the three-year requisite service period so long as the employee remains employed with the Company through the applicable vesting date. Compensation cost for the PSUs is recognized straight-line over the requisite service period, regardless of when, if ever, the market condition is satisfied.
The Company recognized approximately $0.6 million and $0.9 million of stock-based compensation related to the PSUs in general and administrative expenses on the Consolidated Statements of Operations for the three and nine months ended September 30, 2023, respectively. There were no such amounts for the three and nine months ended September 30, 2022.
A summary of the PSU activity under the Company’s plans for the nine months ended September 30, 2023 is as follows:
Number of Stock Units | Weighted Average Grant Date Fair Value | |||||||||||||
Nonvested at December 31, 2022 | $ | |||||||||||||
Granted | $ | |||||||||||||
Vested | $ | |||||||||||||
Forfeited | $ | |||||||||||||
Nonvested at September 30, 2023 | $ |
Nine Months Ended September 30, 2023 |
|||||
Expected term (in years) | |||||
Risk-free interest rate (%) | |||||
Expected volatility (%) | |||||
Dividend yield (%) | |||||