NeoGenomics, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. NeoGenomics operates cancer-focused clinical testing laboratories and provides clinical-trial and research services to pharmaceutical customers. Financial amounts below are in U.S. dollars; figures are unaudited.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $128.8 million | $121.3 million | $371.0 million | $358.6 million |
| Gross profit / margin | $48.9 million / 38.0% | $47.2 million / 38.9% | $131.1 million / 35.3% | $141.8 million / 39.5% |
| Operating loss | $39.5 million | $39.7 million | $131.2 million | $77.2 million |
| Net loss (income) | $36.9 million loss | $20.3 million loss | $121.6 million loss | $33.4 million income |
| Diluted loss (income) per share | $0.30 loss | $0.17 loss | $0.98 loss | $0.28 income |
| Operating cash flow | Not separately reported for quarter | Not separately reported for quarter | $62.3 million used | $6.9 million used |
Q3 revenue rose 6.1% year over year; nine-month revenue rose 3.5%. Clinical Services revenue increased 3.8% in Q3 and 3.5% year to date. Pharma Services revenue increased 18.3% in Q3 and 3.3% year to date; management attributed its changes primarily to project-billing timing. Clinical revenue growth reflected higher average unit prices from reimbursement initiatives and a more favorable test mix.
At September 30, 2022, cash and cash equivalents were $266.1 million and marketable securities were $177.4 million, totaling $443.5 million. Working capital was $518.4 million. Cash and marketable securities were down from $316.8 million and $198.6 million, respectively, at December 31, 2021. Total assets were $1.76 billion and stockholders’ equity was $1.01 billion.
Convertible senior notes had a carrying value, net of discounts and issuance costs, of $534.6 million. Principal outstanding comprised $201.3 million of 1.25% notes due 2025 and $345.0 million of 0.25% notes due 2028. Neither series was convertible in Q4 2022 under the stated stock-price conversion condition. Nine-month capital expenditures were $26.4 million.
Changes versus comparable periods
- Q3 gross margin slipped 0.9 percentage points year over year; nine-month margin fell 4.2 points. Management cited acquired Inivata technology amortization and higher payroll-related costs.
- Nine-month operating expenses rose to $262.3 million from $219.0 million, including higher G&A, R&D and sales and marketing spending. G&A included acquisition-related operations, higher stock compensation, professional fees, technology investment, transition and severance costs, and consulting expenses.
- Nine-month net results changed from income to loss. The prior-year period included a $109.3 million gain related to the Inivata acquisition; there was no comparable gain in 2022. Q3 2021 also included a $17.8 million related gain.
- Operating cash use increased by $55.4 million year over year. Management cited operating results, increased cash tied up in operating assets and liabilities, Inivata operations, and payroll costs supporting growth initiatives.
Outlook, risks and unusual items
- Management said cash, marketable securities and expected collections should fund near-term operating and capital needs for at least 12 months. It forecast 2022 capital expenditures of $30 million to $40 million. The filing provides no specific revenue or earnings guidance.
- Management expects R&D spending to increase as it invests in innovation and new tests, and expects higher sales commissions in coming quarters. COVID-19 disruptions continued to adversely affect volumes, growth rates and Pharma trial recruitment; future effects remain uncertain.
- The company recorded an $11.2 million reserve for potential liabilities tied to an ongoing voluntary investigation of certain consulting and service agreements and federal healthcare laws. The DOJ joined the investigation in June 2022. The company could not estimate potential losses beyond the reserve; additional liabilities, penalties or business restrictions may arise.
- Inivata subsidiary faces patent-infringement litigation brought by Natera. The company said it believes it has defenses, but the outcome was not estimable or probable at filing.
- Management’s June 2022 goodwill assessment found reporting-unit fair values above carrying values, with no impairment. The filing warns that further stock-price declines or weaker performance could create future impairment risk. A $4.3 million goodwill and deferred-tax-liability adjustment corrected an immaterial prior-period error.
- Other notable items included a $2.0 million gain on sale of a property, accelerated vesting-related stock compensation for departing executives, and accumulated unrealized marketable-securities losses. The company also identified reimbursement pressure, regulatory and LDT oversight, billing, staffing, acquisition integration, and debt-management risks.
Investor verification priorities
- Track revenue growth against the deterioration in gross margin and the drivers of higher laboratory payroll and acquired-intangible amortization.
- Monitor cash burn, investment liquidity and capital spending against management’s 12-month funding assessment.
- Follow the OIG/DOJ investigation, the adequacy of the $11.2 million reserve and any related disclosure of potential exposure.
- Assess whether new tests, reimbursement initiatives and Pharma project timing translate into sustained growth and improved profitability.
- Review goodwill and intangible-asset assumptions, convertible-note terms and potential dilution as operating and market conditions change.