NeoGenomics, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Unaudited; amounts below are in millions of dollars unless noted. NeoGenomics provides cancer-focused clinical diagnostic testing and pharmaceutical research services.
Financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $121.3 | $125.4 | $358.6 | $318.5 |
| Gross profit | $47.2 | $54.1 | $141.8 | $128.4 |
| Gross margin | 38.9% | 43.1% | 39.5% | 40.3% |
| Operating income (loss) | $(39.7) | $4.7 | $(77.2) | $(19.5) |
| Net income (loss) | $(20.3) | $2.6 | $33.4 | $(11.2) |
| Basic EPS | $(0.17) | $0.02 | $0.28 | $(0.10) |
| Adjusted EBITDA, non-GAAP | $(3.1) | $16.7 | $5.6 | $16.6 |
Revenue mix and trends: Q3 revenue fell 3.3% year over year, while nine-month revenue rose 12.6%. Clinical Services revenue was down 6.0% in Q3 but up 8.9% year to date; Pharma Services revenue grew 14.4% in Q3 and 36.5% year to date. Management reported underlying clinical testing volumes, excluding COVID-19 PCR tests, up 6.8% in Q3 and 14.7% for nine months. Q3 clinical revenue comparisons were affected by the exit from COVID-19 PCR testing: the company reported $17.0 million of such revenue in Q3 2020 and none in Q3 2021.
Margins and expenses: Gross margin contracted as testing volume was affected by the pandemic and laboratory costs remained partly fixed; Q3 cost of revenue also included $4.8 million of acquired-technology amortization. Nine-month cost of revenue included $5.3 million of COVID-19 inventory write-offs. Q3 operating expenses rose to $87.0 million from $49.4 million, including higher general and administrative, research and development, and sales and marketing costs. Management cited acquisition and integration expenses, a regulatory-matter reserve, increased staffing and professional fees, and investment in test development.
Cash flow and liquidity: Nine-month operating cash flow was $(6.9) million, versus $(4.5) million in 2020. Investing cash flow was $(622.8) million, largely reflecting acquisitions, marketable-security purchases and capital expenditures; financing cash flow was $722.8 million, principally from equity and convertible-note offerings. At September 30, cash and cash equivalents were $340.6 million and marketable securities were $202.1 million; working capital was $617.2 million. Management said available cash, securities and collections should fund near-term operating and capital needs for at least 12 months.
Debt and balance sheet: Convertible notes had $546.3 million aggregate principal outstanding: $345 million of 0.25% notes due 2028 and $201.25 million of 1.25% notes due 2025. Their combined net carrying value was $531.8 million. Total debt carrying value, including equipment financing, was $533.5 million. Total assets were $1.906 billion and total liabilities were $769.1 million. The company raised equity through a January public offering and a June private placement; shares outstanding increased to 123.2 million from 112.1 million at year-end 2020.
Material changes and unusual items
- Inivata was acquired in June 2021 for $398.6 million cash, alongside the settlement of a related line of credit and remeasurement of prior holdings. The company recorded a $109.3 million nine-month gain on its prior investment, option and loan; this non-operating gain was a key reason nine-month net income was positive despite an operating loss.
- Trapelo Health was acquired in April 2021 for $35.6 million cash and $29.2 million in stock. Both acquisitions added substantial goodwill and intangible assets; purchase-price allocations were preliminary.
- The company exited COVID-19 PCR testing in March 2021 following lower demand, recording $6.1 million of related inventory and equipment write-offs for the first nine months.
- The company recorded a $10.5 million reserve for a regulatory matter involving certain consulting and service agreements. It voluntarily notified the HHS Office of Inspector General in November 2021; the investigation was ongoing and additional loss could not be estimated.
- The company committed to sell its Carlsbad facility and classified $10.1 million of assets as held for sale. It expected a sale within one year, but gave no assurance it would be completed as expected.
Outlook, commentary and risks
- Management forecast 2021 capital expenditures of $60 million to $75 million, including acquisition-related spending; $52.2 million had been spent in the first nine months.
- Signed Pharma Services backlog increased from $208.9 million at December 31, 2020 to $261 million at September 30, 2021. Management expected it to support higher revenue in future quarters; timing depends on contract schedules and trial enrollment.
- Management expected research and development spending to increase significantly in future quarters as it develops tests and pursues FDA initiatives. It also expected higher sales commissions in coming quarters.
- COVID-19, variants, reimbursement changes, payer denials, regulatory requirements, laboratory capacity, acquisition integration and competition may affect demand, costs and results. The filing does not provide numerical earnings or revenue guidance.
- Inivata subsidiaries face a patent-infringement suit brought by Natera concerning the InVisionFirst-Lung test. The case was in the pleadings stage; the company stated it believed it had defenses, but the outcome was not estimable or probable.
- Management reported disclosure controls effective at a reasonable assurance level. The company had moved to a cloud-based Oracle ERP system in July and continued post-implementation monitoring; it also identified integration of acquired-company controls as a risk.
Important facts for investors to verify
- Whether clinical volume and Pharma Services growth can offset the loss of COVID-19 testing revenue and the Q3 decline in consolidated revenue.
- How much of nine-month reported profit came from the nonrecurring $109.3 million Inivata remeasurement gain, and the acquired businesses’ future operating performance and integration costs.
- Whether gross margins and adjusted EBITDA recover amid higher operating expenses, amortization, and planned R&D investment.
- The eventual scope and outcome of the OIG-related matter, including whether losses exceed the $10.5 million reserve; the filing provides no estimable range above that reserve.
- Conversion, dilution and repayment implications of the 2025 and 2028 notes, and execution of the Carlsbad property sale and planned capital expenditures.