NeoGenomics, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited results are GAAP. NeoGenomics operates U.S. cancer-focused diagnostic laboratories and acquired Clarient on December 30, 2015; year-over-year comparisons therefore include Clarient in 2016 but not in 2015.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $60.8 | $25.1 | $183.6 | $72.5 |
| Gross profit / margin | $27.3 / 45.0% | $11.2 / 44.5% | $83.1 / 45.3% | $31.5 / 43.5% |
| Operating income (loss) | $1.4 | $0.1 | $5.5 | $(0.4) |
| GAAP net income (loss) | $(0.1) | $(0.1) | $0.5 | $(1.1) |
| Net loss attributable to common stockholders | $(5.6) | $(0.1) | $(16.2) | $(1.1) |
| Adjusted EBITDA (non-GAAP) | $9.1 | $2.8 | $26.5 | $6.7 |
- Revenue increased 142% in Q3 and 153% for the nine-month period. Clarient accounted for 78% and 79%, respectively, of the dollar increase in clinical revenue, and 93% of the increase in Pharma Services and research revenue in both periods. Management reported legacy clinical genetic testing revenue growth of approximately 29% in Q3 and 33% year to date.
- Common-stockholder losses reflect $1.8 million of Q3 and $5.5 million of nine-month preferred-stock deemed dividends, plus $3.7 million and $11.2 million, respectively, of noncash amortization of the preferred stock beneficial conversion feature.
- Net interest expense was $1.5 million in Q3 and $4.5 million year to date, up from $0.2 million and $0.6 million, respectively, primarily due to acquisition financing. Adjusted EBITDA is a company-defined non-GAAP measure; consider it alongside GAAP results.
Cash flow, liquidity and debt
- For the first nine months, operating cash flow was $21.7 million, investing cash outflow was $5.3 million, and financing cash outflow was $10.9 million. Cash increased $5.5 million to $28.9 million.
- At September 30, current assets were $92.6 million and current liabilities $35.4 million; working capital was $57.2 million. Net accounts receivable was $50.2 million, against a doubtful-account allowance of $11.1 million, or 18.1% of gross receivables (8.9% at year-end 2015).
- The term loan had a carrying value of $54.6 million, including current maturities and net of unamortized issuance costs. Capital-lease obligations totaled $10.5 million. The $25 million revolving facility was undrawn, with the full amount available. The company reported compliance with its debt covenants at quarter-end.
- Series A redeemable convertible preferred stock had a $45.3 million carrying value and $110 million liquidation value. The filing describes redemption and conversion provisions; future equity proceeds are subject to a provision dedicating 50% of net proceeds to preferred-stock redemption until the shares are redeemed.
Changes, outlook and risks
- Consolidated gross margin improved to 45.0% in Q3 and 45.3% year to date. For clinical genetic testing, average revenue per test fell 5.4% in both comparison periods, while average cost per test declined 6.2% in Q3 and 7.6% year to date. Management attributed the lower revenue per test mainly to Clarient’s test mix and cost improvements to scale, internalized testing and operating efficiencies.
- Bad-debt expense was $2.8 million in Q3 and $8.2 million year to date; management attributed the elevated rate primarily to Clarient’s historically higher bad-debt experience and expected improvement as billing processes are integrated. Gross receivables over 120 days represented 26% at September 30, versus 19% at December 31, 2015.
- Management said cash on hand, available credit and operating cash flow were expected to meet commitments and interest payments for at least 12 months. It forecast 2016 capital expenditures of $12.5–$14.5 million and expected further investment through year-end. Management expected the Irvine laboratory move into Aliso Viejo to be substantially complete by the end of Q1 2017, with no significant exit costs anticipated.
- Management’s stated priorities included integrating Clarient, retaining clients, pursuing organic growth and developing new tests; it expected the acquisition to more than double 2016 revenue. The filing does not provide a specific numerical revenue or earnings guidance range.
- Key uncertainties include successful integration and expected synergies, collections and reimbursement levels, healthcare reimbursement and regulatory changes (including potential laboratory-developed-test regulation), competition, billing accuracy, and the ability to retain personnel and scale facilities and systems. Management reported no material change in previously disclosed risk factors, no legal proceedings considered material, and effective disclosure controls at a reasonable-assurance level.
Important facts for investors to verify
- How much reported growth and profitability reflect Clarient versus organic performance, and whether integration savings materialize.
- Receivables aging, the adequacy of the allowance, and whether bad-debt expense and collections improve as billing systems are combined.
- Preferred-stock redemption, dividend and conversion terms, including potential dilution and the effect of future equity financing.
- Debt covenant headroom, refinancing or repayment requirements, and cash generation relative to interest, leases and planned capital expenditures.
- Execution of the laboratory consolidation and exposure to reimbursement, regulatory and testing-volume changes.