NeoGenomics, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; unaudited. The company operates high-complexity cancer diagnostic laboratories serving clinicians, hospitals, and pathology practices in the United States.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $15.657 million | $15.160 million; up 3.3% |
| Gross profit / margin | $7.246 million / 46.3% | $7.144 million / 47.1% |
| Operating income | $305,000 | $861,000 |
| Net income | $3,000; $0.00 per diluted share | $603,000; $0.01 per diluted share |
| Adjusted EBITDA (non-GAAP) | $1.794 million | $1.775 million |
| Operating cash flow | $(1.330) million | $(1.065) million |
| Cash and cash equivalents | $4.628 million | $1.868 million at Dec. 31, 2012 |
| Working capital | $10.794 million | $1.239 million at Mar. 31, 2012 |
Revenue increased alongside higher volumes: requisitions rose 21.7% to 20,604 and tests performed rose 19.1% to 32,088. Average revenue per test fell 13.3% to $488, and average revenue per requisition fell 15.1% to $760. Operating expenses increased 10.5% to $6.941 million; general and administrative expense rose 11.3% to $4.175 million, while research and development rose 67.8% to $835,000. Interest expense, net, was $285,000.
At March 31, 2013, total assets were $33.616 million and total liabilities were $14.786 million. Current assets were $22.743 million and current liabilities $11.949 million. The company had $4.190 million outstanding on its revolving credit line, with approximately $5.8 million of availability; the effective interest rate was 5.25%. Equipment capital lease obligations totaled $5.120 million, including current and long-term portions.
Material changes and management commentary
- Management attributed an estimated $1.3 million year-over-year revenue reduction to the July 2012 expiration of Medicare’s Technical Component Grandfather clause. The change shifted billing for certain hospital services to clients, often at lower reimbursement rates.
- Despite higher overall cost of revenue, average cost per test declined 12.1% to $262, which management attributed to improved laboratory productivity, process improvements, and fewer send-outs. Gross margin nevertheless fell 0.8 percentage points.
- The company completed a March 2013 public offering of 3,322,500 shares at $3.00 per share, raising $10.0 million gross and approximately $9.2 million net. Shares outstanding were 48,685,947 at quarter-end.
- Operating cash use reflected increased accounts receivable, delayed Medicare and commercial-insurer payments related to molecular billing changes, incentive bonus payments, and an additional payroll in the quarter. Net accounts receivable was $15.628 million; the doubtful-account allowance was $3.615 million, or 18.8% of gross receivables. Approximately 32% of gross receivables were more than 120 days old.
- The filing reports the company was in compliance with credit facility covenants at quarter-end and management believed available cash and borrowing capacity were adequate for operating commitments.
Outlook, risks, and other notable items
- No specific revenue or earnings guidance was provided. Management expected modestly higher sales and marketing expense in 2013, expected Q1-level R&D expense to decline as variable stock compensation stabilized, and anticipated further laboratory cost-per-test improvements.
- Management forecast approximately $5 million to $6 million of capital expenditures over the next year for equipment, software, and leasehold improvements, to be funded through cash, capital leases, and bank facilities.
- The company introduced 17 molecular tests in Q1 and expanded its immunohistochemistry and digital pathology offerings. Management stated these new services were expected to support growth.
- Key risks include reimbursement and regulatory changes, delayed collections and bad debts, competition and customer internalization of testing, dependence on hiring and scaling laboratory capacity, and the ability to fund planned investment. Testing volumes may also vary seasonally and with adverse weather.
- One affiliated oncology-practice client group represented approximately 14.3% of Q1 2013 revenue, compared with 18.0% in Q1 2012. The filing states that ordinary-course legal proceedings were not believed material and reports no material proceedings terminated during the quarter.
- Steven C. Jones, a director and Executive Vice President of Finance, received approximately $62,500 for consulting work and $55,000 in prior-year bonus compensation during the quarter.
Important facts for investors to verify
- Whether the revenue and margin impact from the Medicare billing change persists, and whether reimbursement levels or client billing arrangements improve.
- Collection trends, the aging of receivables, allowance adequacy, and the effects of Medicare and commercial-insurer payment delays.
- Whether increased test volumes and lower cost per test can offset pricing pressure and higher operating expenses.
- Cash use, planned capital expenditures, lease commitments, revolving-credit availability, and continued compliance with facility covenants.
- The effect of the equity offering and potential dilution from outstanding options and warrants.