NeoGenomics, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Unaudited consolidated results; financial amounts below are in millions of dollars unless noted. NeoGenomics operates specialized cancer diagnostic laboratories.
Financial results and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $20.670 | $15.603 | $38.852 | $31.260 |
| Gross profit / margin | $10.239 / 49.5% | $7.157 / 45.9% | $18.948 / 48.8% | $14.403 / 46.1% |
| Operating income / margin | $0.578 / 2.8% | $0.505 / 3.3% | $0.972 / 2.5% | $0.810 / 2.6% |
| Net income | $0.274 | $0.273 | $0.376 | $0.276 |
| Adjusted EBITDA (non-GAAP) | $2.082 | $1.825 | $3.767 | $3.619 |
- Q2 requisitions increased 40.6% and tests performed 39.8%; six-month growth for both was 30.3%. Revenue rose 32.5% in Q2 and 24.3% year to date.
- Average revenue per test declined 5.3% in Q2 and 4.6% for six months, partly reflecting Medicare FISH billing edits. Average cost per test fell 11.9% in Q2 and 9.6% for six months; gross margin improved.
- Operating expenses grew faster than Q2 revenue: G&A rose 44.4% and sales and marketing 60.2% year over year. Operating margin declined to 2.8% from 3.3%, while Q2 net income was nearly unchanged.
- Six-month operating cash flow was $5.298, versus $0.533 in 2013; investing cash use was $1.966 and financing cash use $3.143. Cash increased $0.189 to $5.023.
- At June 30, cash was $5.023; working capital was $12.857. Current assets were $28.082 and current liabilities $15.226. Revolver borrowings were approximately $2.0 at an effective rate of 4.25%, with approximately $8.0 of available credit. Equipment capital lease liabilities totaled $7.785.
- Accounts receivable, net, was $18.800; the allowance for doubtful accounts was $5.709, or 23.2% of gross receivables, up from 19.6% at year-end. Management cited efforts to leave claims open longer to pursue collection.
Material developments and outlook
- Medicare NCCI FISH edits created uncertainty about billable units for certain tests. The company conservatively reduced recognized revenue by $1.050 in Q2 and $1.750 for the first half. CMS clarification was pending; favorable guidance could permit billing for some or all of the foregone amount, but no recovery was assured.
- Florida Cancer Specialists represented 9.6% of Q2 revenue and 12.0% of six-month revenue, down from 16.5% and 15.4%, respectively, in 2013. The company expects FCS to continue internalizing some testing. A renewed agreement runs through December 31, 2015, subject to its terms and renewal provisions.
- On July 8, 2014, the company acquired Path Logic for approximately $5.85 million net of estimated assumed capital lease liabilities, funded with cash and revolver borrowings. Management cited approximately $10 million of 2013 Path Logic revenue, $3–4 million of near-term cross-selling opportunity, and expected earnings accretion within six months. These are management expectations, not reported results. The acquisition reduced post-quarter cash and borrowing capacity.
- Management planned $7–8 million of additional capital equipment purchases over the next year, primarily financed through capital leases. It also planned a full launch of the NeoLAB prostate test in 2015, subject to further validation. No formal consolidated revenue or earnings guidance is provided in the filing.
- Other risks include reimbursement and regulatory changes, payer collections and bad debts, customer concentration and internalization, competition, seasonal testing volumes, and execution/integration of growth initiatives. The company reported compliance with credit-facility covenants at June 30 and effective disclosure controls.
Key facts for investors to verify
- Whether CMS clarified the FISH edits and whether any previously unbilled testing can be recovered.
- Subsequent-period receivables aging, allowance adequacy, cash collections, and average revenue per test.
- FCS testing internalization and the continuing effect of customer concentration.
- Path Logic’s realized revenue, synergies, earnings contribution, and acquisition-related borrowing and liquidity impact.
- Capital expenditure and lease commitments, and progress toward the planned NeoLAB launch and other new-test initiatives.