NEOGENOMICS INC quarterly report, Q2 FY2021

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NeoGenomics, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results. Unless stated otherwise, dollar amounts are in millions.

Business context

NeoGenomics provides cancer-focused clinical laboratory testing and pharmaceutical research services. It operates Clinical Services and Pharma Services segments. During the quarter, the company completed its acquisition of Inivata, a liquid-biopsy company, after acquiring Trapelo Health in April.

Financial performance and liquidity

  • Q2 revenue: $121.7, up 39.9% year over year. Clinical Services revenue was $101.4, up 37.2%; Pharma Services was $20.3, up 55.2%.
  • Six-month revenue: $237.3, up 22.9%. Clinical Services revenue grew 18.6% and Pharma Services grew 50.6%.
  • Profitability: Q2 gross profit was $53.0, with a 43.5% gross margin versus 32.2% a year earlier. Six-month gross profit was $94.6 and margin was 39.9%, versus 38.5%. Despite higher gross profit, operating loss widened to $22.4 in Q2 from $18.9; the six-month operating loss was $37.5 versus $24.2.
  • Net income and EPS: Q2 net income was $75.9 ($0.64 basic and $0.59 diluted per share), compared with a $6.8 loss. Six-month net income was $53.8 ($0.46 basic and $0.44 diluted per share), versus a $13.8 loss. Results included a $96.5 gain on the Inivata investment and loan; excluding this and other adjustments, GAAP net income does not represent underlying operating profitability.
  • Adjusted EBITDA: Non-GAAP adjusted EBITDA was $4.6 for Q2 and $8.7 for the first six months, compared with losses of $7.2 and $0.2, respectively. The company’s reconciliation excludes, among other items, acquisition costs, COVID-19 testing exit costs and the Inivata gain.
  • Cash flow: Six-month operating cash flow was $0.8, versus cash used of $5.1. Investing used $608.1, including $419.4 for acquisitions, $37.2 in capital expenditures and $15.0 for the Inivata line of credit; financing provided $729.5, mainly from equity offerings and convertible notes.
  • Liquidity: At June 30, cash and cash equivalents were $368.8 and marketable securities were $203.0; working capital was $622.7. Management said cash, securities and collections should fund near-term operating and capital needs for at least 12 months.
  • Debt and equity: Long-term debt, net, was $531.5, including $345.0 principal of 0.25% convertible notes due 2028 and $201.25 principal of 1.25% notes due 2025. The company raised $418.3 net from equity offerings and $334.4 net from the 2028 notes in the first half. Shares outstanding were 122.7 million at June 30.

Material changes versus the prior comparable period

  • Revenue and clinical test volumes rose as patient access recovered from pandemic disruption. Q2 clinical tests performed increased 37.3%; six-month volume increased 19.1%.
  • Higher volume and operating leverage lifted gross margin, while general and administrative, research and development, and sales and marketing expenses increased. Q2 G&A included about $11.0 in acquisition and integration costs.
  • The June acquisition of Inivata generated a $96.5 Q2 remeasurement gain, including gains on the previously held investment, purchase option and loan. The gain drove reported net income despite an operating loss.
  • The company exited COVID-19 PCR testing after demand declined, recording $6.1 of inventory and equipment write-offs in the first half. No such expense was recorded in Q2.
  • Inivata and Trapelo acquisitions added substantial goodwill and intangible assets. At June 30, goodwill was $500.0 and intangible assets, net, were $471.0, compared with $211.1 and $120.7 at year-end 2020.

Outlook, risks and unusual items

  • Management reported Pharma Services backlog of $238.1 at June 30, up from $208.9 at December 31, 2020, and expects the backlog to support higher future-quarter revenue. The filing provides no specific revenue or earnings guidance.
  • 2021 capital expenditures were forecast at $55–$70, including acquisition-related spending; $37.2 had been spent in the first half.
  • Management expects G&A to increase in total as the business expands, but decrease as a share of revenue over time; R&D spending is expected to increase as the company develops tests and pursues FDA initiatives.
  • COVID-19 remains a risk to demand, operations and supply chains. Other key risks include reimbursement pressure, regulatory oversight of laboratory-developed tests, integration and control challenges from acquisitions, and the ability to scale operations and manage convertible debt and dilution.
  • Natera filed a patent-infringement suit concerning Inivata’s InVisionFirst-Lung test. The case was at the pleadings stage; the outcome was not estimable or probable at filing. The company intends to defend it.
  • Acquisition purchase-price allocations and certain Inivata fair-value estimates were preliminary. Management also disclosed potential unknown acquired-company liabilities and integration-related internal-control challenges. Disclosure controls were assessed as effective; a cloud-based Oracle ERP system went live July 1, 2021, with post-implementation monitoring ongoing.

Important facts for investors to verify

  • How much ongoing operating performance supports reported results after separating the Inivata gain, acquisition costs, COVID-19 exit charges and other adjustments.
  • Whether higher testing volumes and Pharma backlog convert into sustained revenue growth and improved operating profitability.
  • Final purchase accounting, acquired-asset valuations, amortization and integration costs for Inivata and Trapelo.
  • Cash requirements for planned capital spending, the new headquarters facility, and debt service or potential conversion-related dilution.
  • Developments in the Natera litigation, acquisition-related liabilities, reimbursement and regulatory matters, and post-acquisition internal controls.