NeoGenomics, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. NeoGenomics provides cancer-focused clinical diagnostic testing and pharmaceutical clinical-trial and research services through its Clinical Services and Pharma Services segments. Results were materially affected by the COVID-19 pandemic.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $87.0m | $101.7m | $193.0m | $197.3m |
| Gross profit / margin | $28.0m / 32.2% | $49.0m / 48.1% | $74.4m / 38.5% | $96.1m / 48.7% |
| Operating income (loss) | $(18.9)m | $4.5m | $(24.2)m | $7.0m |
| Net income (loss) | $(6.8)m | $2.0m | $(13.8)m | $(0.4)m |
| Basic and diluted EPS | $(0.06) | $0.02 | $(0.13) | $0.00 |
| Operating cash flow | Not provided separately for quarter | Not provided separately for quarter | $(5.1)m | $1.4m |
Q2 revenue fell 14.5% year over year; first-half revenue fell 2.2%. Clinical Services revenue decreased 17.0% in Q2 and 4.8% in the first half. Pharma Services revenue increased 2.8% in Q2 and 18.3% in the first half, primarily reflecting the HLI-Oncology acquisition, partly offset by pandemic-related weakness. Q2 adjusted EBITDA, a non-GAAP measure, was $(7.2)m versus $14.9m; first-half adjusted EBITDA was $(0.2)m versus $28.7m.
Lower clinical volumes and the relatively fixed cost base drove higher costs per test and weaker gross margins. Clinical tests performed, excluding COVID-19 PCR tests, declined 18.2% in Q2 and 6.1% in the first half. Management attributed margin pressure also to the timing of Pharma Services revenue, integration costs, and unused capacity.
Liquidity, debt and capital
- At June 30, cash and cash equivalents were $295.3m, including $36.0m of separately classified restricted cash; cash, cash equivalents and restricted cash totaled $331.3m. Working capital was $357.3m.
- Six-month investing cash outflow was $59.9m, including the $37.0m HLI-Oncology acquisition, a $13.1m investment-in-affiliate cash outflow, and $9.7m of property and equipment purchases. Financing cash inflow was $223.2m.
- The company issued $201.3m principal of 1.25% convertible senior notes due 2025, receiving approximately $194.4m net proceeds, and raised approximately $127.3m net from a common-stock offering. It used $96.3m to repay and terminate its prior secured credit agreement.
- Convertible notes had a $164.5m net carrying value at quarter-end; principal was $201.3m. Total debt including financing obligations was reported at $170.9m before current-portion presentation adjustments. The notes’ effective interest rate is 5.5%, above the 1.25% cash coupon.
- Management stated available cash and expected collections should fund operating commitments and interest payments for at least 12 months from issuance of the statements. Planned 2020 capital expenditures were $25m–$30m; $9.7m had been paid in the first half.
Material changes, outlook and risks
- COVID-19: Management said the pandemic materially adversely affected operations, volumes, financial results and cash flows, and that effects could continue. Laboratories remained open and testing continuity was maintained. The company recognized $7.9m of CARES Act grant income in the first half, classified in other income; these funds were subject to program conditions.
- Outlook: No specific revenue or earnings guidance was provided. Signed Pharma Services contract backlog increased from $130.3m at December 31, 2019 to $172.9m at June 30, 2020; management expected it to support higher revenue in future quarters. Management also anticipated increased R&D spending on new tests and expected G&A to rise in dollars while declining as a share of revenue over time.
- Unusual items: Other income included CARES Act grant income. The company recorded a $1.4m loss on extinguishment of debt and a $3.5m loss on termination of its cash-flow hedge, including reclassification of accumulated hedge losses. The Q2 income tax benefit was $11.1m.
- Acquisition and investment: The company acquired HLI-Oncology assets for $37.0m in cash in January, adding sequencing capabilities; purchase accounting remained preliminary. It also entered a strategic alliance with Inivata and committed to a $25m investment in installments; the reported investment carrying value was $13.1m at quarter-end. A separate $15m, zero-interest line of credit to Inivata becomes available in 2021.
- Key risks: COVID-19 duration and demand recovery; reimbursement and regulatory changes; execution and integration of acquisitions; ability to service, settle or refinance convertible notes; potential conversion dilution; and substantial facility and capital commitments. The filing also disclosed $34.6m of minimum lease payments for executed leases not yet commenced and approximately $42m in construction and leasehold-improvement funding arrangements.
Investor verification checklist
- Track clinical test volumes, revenue recovery and cost per test as pandemic disruptions ease.
- Assess whether Pharma backlog converts to revenue on expected timing and whether Pharma margins improve.
- Reconcile cash availability, restricted construction funds, capital spending and the Inivata investment and credit commitments.
- Review convertible-note terms, cash-versus-share settlement choices, interest accretion, and potential dilution or repurchase obligations.
- Separate recurring operating performance from CARES Act grant income, debt and hedge termination charges, and acquisition-related costs.