NeoGenomics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2016. Unaudited consolidated results. NeoGenomics operates U.S. cancer-focused genetic and molecular testing laboratories. Results include Clarient, acquired December 30, 2015; therefore, year-over-year comparisons are substantially affected by Clarient’s inclusion in 2016 but not 2015.
Key Financial Results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $63.1 million | $24.4 million | $122.8 million | $47.4 million |
| Gross profit / margin | $28.6 million / 45.3% | $10.8 million / 44.4% | $55.8 million / 45.4% | $20.4 million / 43.0% |
| Operating income (loss) | $2.2 million | $28,000 | $4.1 million | ($534,000) |
| Net income (loss) | $413,000 | ($176,000) | $568,000 | ($937,000) |
| Net loss attributable to common stockholders | ($5.2 million) | ($176,000) | ($10.6 million) | ($937,000) |
| Adjusted EBITDA (non-GAAP) | $9.2 million | $2.4 million | $17.4 million | $3.9 million |
Revenue increased 159% in both the quarter and first half. Management attributed most of the increase to Clarient: 77% of the clinical-revenue increase and 91% of the Q2, and 94% of the six-month, BioPharma and research revenue increase. Management also reported legacy NeoGenomics clinical genetic testing revenue growth of approximately 32% in Q2 and 35% for the first half, excluding Clarient.
Clinical testing revenue was $56.3 million in Q2 and $110.9 million for the first half; BioPharma and research revenue was $6.8 million and $11.9 million, respectively. In the clinical genetic testing metrics excluding PathLogic and BioPharma, tests performed rose 158% in Q2 and 166% for the first half. Average revenue per test declined 4.9% and 5.5%, respectively, while average cost per test declined 4.4% and 8.5%.
Operating expenses were $26.4 million in Q2 and $51.7 million for the first half. Net interest expense rose to $1.4 million and $3.0 million, respectively, primarily because of acquisition-related debt. Common-stockholder losses substantially exceeded GAAP net losses because of preferred-stock deemed dividends and amortization of its beneficial conversion feature: $5.6 million combined in Q2 and $11.1 million for the first half.
Cash Flow, Balance Sheet and Liquidity
- Cash and cash equivalents were $21.8 million at June 30, 2016, down from $23.4 million at year-end 2015. Six-month operating cash flow was $12.1 million; investing cash flow was negative $3.4 million; financing cash flow was negative $10.3 million. The financing outflow included a $10.0 million revolving-credit repayment.
- Working capital was $52.6 million. Current assets were $87.5 million and current liabilities were $35.0 million.
- Accounts receivable, net, was $53.5 million, versus $48.9 million at year-end. The allowance for doubtful accounts increased to $9.2 million from $4.8 million; management attributed the increase and higher bad-debt rate largely to Clarient’s historically higher bad debt experience.
- The company reported $62.3 million of indebtedness outstanding in its risk disclosures. Term-loan borrowings were approximately $52.7 million before unamortized issuance costs; the revolving facility was undrawn, with approximately $25 million available. The company reported compliance with applicable debt covenants at quarter-end.
- Series A redeemable convertible preferred stock had a $39.7 million carrying value and a $110 million liquidation value. Until redeemed, at least 50% of net cash proceeds from certain future equity or unsecured-debt issuances must be used for redemption. GE Medical held a significant ownership position and related governance rights.
Management Outlook, Risks and Unusual Items
- Management said it expected 2016 revenue to more than double, reflecting the Clarient acquisition; this is not presented as a quantified formal revenue forecast. It anticipated 2016 capital expenditures of $12 million to $14 million and expected cash, undrawn credit and operating cash flow to cover commitments and interest for at least 12 months.
- Management’s priorities included integrating Clarient, combining test menus, information and billing systems, consolidating Southern California laboratory operations, reducing cost per test, and pursuing organic growth and new tests. It reported strong Q2 growth in MultiOmyx BioPharma testing and planned a full commercial launch of its NeoLAB Prostate Test in 2016.
- Principal risks include integration and execution challenges; reimbursement and pricing pressure, including potential effects of PAMA and Medicare policy; uncertain regulation of laboratory-developed tests; payer collections and billing complexity; rising bad debt; competition and customer internalization of testing; variable-rate debt and covenant constraints; and dependence on skilled staff, laboratory capacity, information systems and reliable specimen transport.
- Other notable items: the Clarient purchase accounting remained provisional; the company recorded $3.7 million of preferred-stock deemed dividends and $7.5 million of beneficial-conversion-feature amortization during the first half; and it entered into a $1.8 million capital lease in July 2016 for infrastructure upgrades. Management reported effective disclosure controls and no material legal proceedings.
Important Facts for Investors to Verify
- How much reported growth is organic, and whether Clarient integration delivers the anticipated cost savings and customer retention.
- Whether receivables aging, the allowance for doubtful accounts and bad-debt expense improve as Clarient billing practices are integrated.
- Whether declining average revenue per test and payer reimbursement pressure are offset by lower testing costs and improved gross margins.
- Debt service, covenant headroom, variable interest-rate exposure, capital spending needs and the terms and redemption implications of Series A Preferred Stock.
- Progress on reimbursement coverage and regulatory requirements for new and existing tests, including the planned NeoLAB Prostate Test launch.