NeoGenomics, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The unaudited consolidated statements are prepared under U.S. GAAP. NeoGenomics operates cancer-focused clinical diagnostic laboratories and provides testing and clinical-trial services to pharmaceutical companies.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $61.7 million | $59.7 million | +3% |
| Clinical testing revenue | $56.7 million | $54.6 million | +4% |
| Pharma Services revenue | $5.0 million | $5.1 million | -2% |
| Gross profit / margin | $27.2 million / 44.1% | $27.2 million / 45.5% | Margin down 1.4 percentage points |
| Operating income (loss) | $(0.1) million | $1.9 million | Down $2.0 million |
| Net income (loss) | $(0.7) million | $0.2 million | Declined |
| Net loss attributable to common stockholders | $(3.2) million | $(5.4) million | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $7.1 million | $8.2 million | Down $1.2 million |
| Operating cash flow | $(1.7) million | $7.1 million | Down $8.7 million |
Clinical testing volumes increased 15.3%, while clinical testing revenue rose 4.5% on the company’s detailed clinical metrics. Average revenue per test fell 9.4%, primarily due to growth in lower-priced PD-L1 testing and a 19% Medicare Physician Fee Schedule reduction for certain flow cytometry codes. Average cost per test also fell 9.7%; overall gross margin nevertheless contracted.
Balance sheet, debt and liquidity
- At March 31, 2017, cash was $11.0 million, current assets were $84.6 million and current liabilities were $39.9 million. Reported working capital was $44.7 million.
- Net accounts receivable was $61.7 million, up from $55.5 million at year-end 2016; gross receivables increased to $76.4 million from $69.2 million. The allowance for doubtful accounts was $14.6 million, or 19.2% of gross receivables.
- Total debt, including capital leases and loans, was $113.1 million gross; the reported long-term debt balance, net of issuance costs and current portion, was $102.2 million. Revolver borrowings were approximately $27.9 million gross, up from $22.9 million at year-end.
- The $75 million revolving facility had approximately $19 million available at quarter-end, subject to borrowing capacity based on adjusted EBITDA. The company reported compliance with its debt covenants.
- Management said cash, available credit and expected operating cash flows should cover operating commitments and interest for at least the next 12 months. Q1 investing cash outflow was $3.0 million, mainly for equipment and facility improvements; financing cash inflow was $3.2 million.
Changes, outlook and other important items
- Operating cash flow turned negative, principally reflecting higher receivables and billing delays following integration of Clarient’s billing operations. Management said the unbilled-claims backlog had returned to a normal level after quarter-end; delayed billing had not yet converted to cash by March 31.
- Management attributed higher general and administrative expense, up $2.8 million to $20.8 million, partly to payroll, depreciation, stock compensation and bad debt. Bad debt expense was approximately 6.1% of revenue versus 4.5% a year earlier; management expected it to decline in the second half of 2017 as billing integration progressed.
- The company completed consolidation of its Irvine laboratory into its Aliso Viejo facility in March. Related overtime and validation work pressured costs; management expected cost synergies and improved efficiency in subsequent quarters.
- Management expected 2017 capital expenditures of $15–$17 million, including investment to support growth and facility expansion. It planned a Geneva, Switzerland laboratory in the second half of 2017 and expected growing pharma contract backlog to support future revenue, without providing a quantified revenue forecast.
- Revenue risks include payer reimbursement pressure, including the Medicare rate reduction, payer mix and test pricing, and collection estimates for non-contracted payers. The company also cited seasonal volume declines and weather-related disruption.
- Debt bears variable interest rates, although a $50 million interest-rate swap fixes the company’s payment rate at 1.59% on the hedged amount through December 31, 2019. Unhedged debt remains exposed to rate changes. The credit agreement includes leverage and fixed-charge coverage covenants and restrictions on certain transactions.
- Series A preferred stock had a $25.4 million carrying value and $49.5 million remaining face value. Deemed dividends and amortization of its beneficial conversion feature reduced income attributable to common stockholders by a combined $2.6 million in Q1. Certain future equity proceeds must be used to redeem preferred shares.
- The company adopted share-based-payment accounting guidance in January 2017 and recorded a $6.6 million increase in deferred tax assets with an offsetting cumulative-effect adjustment to retained earnings. Separately, subsequent to quarter-end, it granted 1.43 million employee and executive options with an estimated $3.9 million fair value.
- No material changes to the previously disclosed risk factors were reported; the company said current legal proceedings were not material. Management reported disclosure controls effective at a reasonable-assurance level and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether the post-quarter normalization of billing and receivables produces improved collections and operating cash flow.
- Whether bad debt expense declines as management expects, given the increased receivable balance and aging profile.
- Whether clinical volume growth can offset lower average revenue per test, reimbursement reductions and margin pressure.
- Whether laboratory consolidation delivers the anticipated savings, and whether Geneva expansion and planned capital spending remain on schedule and within the stated range.
- Debt availability, covenant headroom and interest-rate exposure, including the effect of variable rates on unhedged borrowings.
- The continuing cost and dilution implications of preferred-stock accretion, future preferred redemptions and the April 2017 option grant.