NeoGenomics, Inc. — Q3 2011 Form 10-Q
Business and period: NeoGenomics operates high-complexity clinical laboratories focused on cancer diagnostic, prognostic, and predictive testing. This unaudited report covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $11.320 | $8.708 | $30.591 | $25.616 |
| Gross profit / margin | $5.074 / 44.8% | $3.890 / 44.7% | $13.595 / 44.4% | $11.879 / 46.4% |
| Operating income (loss) | $0.042 | $(1.012) | $(0.784) | $(2.400) |
| Net loss | $(0.143) | $(1.198) | $(1.329) | $(2.926) |
| Net loss per share, basic and diluted | $(0.00) | $(0.03) | $(0.03) | $(0.08) |
| Adjusted EBITDA (non-GAAP) | $0.693 | $(0.398) | $1.078 | $(0.596) |
Q3 revenue rose 30.0%; nine-month revenue rose 19.4%. Requisitions increased 32.9% in Q3 and 21.4% year to date, while tests performed increased 38.0% and 25.0%, respectively. Average revenue per test declined 5.8% in Q3 and 4.5% year to date. Management attributed lower reimbursement per test to payer contracting and reimbursement reductions, including cuts to bladder cancer FISH reimbursement, Medicare fee schedule rates, and reimbursable flow-cytometry markers.
Q3 gross margin was broadly flat year over year, but the nine-month margin declined 2.0 percentage points. Management cited lower revenue per test, higher supply costs, and increased courier and transportation costs. Nine-month operating expenses were nearly unchanged overall; lower sales and marketing costs were largely offset by higher general and administrative costs.
Cash flow, liquidity, and debt
- Nine-month operating cash use was $1.170, versus $2.413 in 2010; investing cash use was $0.338, versus $0.813. Financing provided $3.060, including $3.176 net proceeds from common stock issuance, partly offset by lease and loan repayments.
- Cash and cash equivalents were $2.649 at September 30, 2011, excluding $0.500 restricted cash. Working capital was $1.774, compared with negative $0.332 at year-end 2010.
- Current assets were $12.313 and current liabilities $10.539. Total liabilities were $12.125; stockholders’ equity was $5.360.
- The CapitalSource revolving facility had a $5.0 maximum, approximately $0.5 of availability, and approximately $4.5 outstanding after netting compensating cash. Its effective rate was 6.25%; the agreement requires a minimum $2.0 outstanding balance and runs through February 2013. The company reported compliance with all covenants at quarter-end.
- Equipment capital-lease liabilities totaled $3.452, comprising $1.866 current and $1.586 long-term. The company added equipment financing during Q3, including a fully drawn $1.0 LTI lease line; a new Garic $1.0 equipment line remained available at quarter-end.
Changes, outlook, and risks
- The company moved to operating profitability in Q3, though it remained loss-making for the first nine months. Management attributed improvement to revenue growth and operating leverage.
- Management said it expected modest increases in sales and marketing and general and administrative expense as volume, billing and collection activity, facility needs, test development, and laboratory information systems investment grow. It expected those expenses as a share of revenue to remain similar or decline as volume increases.
- Management anticipated $3–$4 million in additional capital equipment purchases over the next 12 months and believed available cash, credit, and lease financing would meet operating commitments over that period. It cautioned that faster-than-expected growth or acquisitions could require additional financing, which might not be available on attractive terms or at all.
- The Fusion Capital stock purchase agreement expired July 27, 2011; the company said it had never drawn funds under it and did not plan to replace it with a similar instrument.
- Key risks include reimbursement and coverage changes, dependence on third-party payors, collection uncertainty, growth and capacity management, competition, regulation of laboratory-developed tests, and reliance on a dominant supplier of FISH probes with limited alternatives. Testing volume may also be seasonal and affected by holidays or severe weather.
- The company reported no material legal proceedings, effective disclosure controls at a reasonable assurance level, and no material changes in internal control over financial reporting during the quarter. No specific revenue or earnings guidance was provided.
Important facts for investors to verify
- Reconcile the doubtful-account allowance: the balance sheet reports $2.046 million, while the MD&A allowance table reports $1.826 million at September 30, 2011.
- Assess whether growth in requisitions and tests can offset declining average revenue per test and sustain gross margins.
- Review receivables, collection performance, and the concentration represented by one client, which accounted for 13.5% of Q3 revenue and 8.5% of nine-month revenue.
- Confirm liquidity, credit-facility availability and covenant headroom against planned capital spending and lease obligations.
- Evaluate reimbursement exposure, especially the reported rate and marker reductions, and the operational impact of reliance on a principal FISH-probe supplier.