NeoGenomics, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise. NeoGenomics operates cancer-focused clinical testing laboratories and provides testing and data services to pharmaceutical companies.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $104.7 | $69.1 | $302.0 | $200.3 |
| Gross profit / margin | $50.8 / 48.6% | $32.3 / 46.8% | $146.9 / 48.7% | $90.2 / 45.0% |
| Operating income / margin | $3.7 / 3.5% | $3.9 / 5.7% | $10.7 / 3.6% | $7.2 / 3.6% |
| Net income | $2.1 | $2.0 | $1.7 | $2.3 |
| Diluted EPS | $0.02 | $0.02 | $0.02 | $0.06 |
| Adjusted EBITDA (non-GAAP) | $14.9 | $11.3 | $43.6 | $30.6 |
Revenue increased 51.5% in Q3 and 50.8% for the nine months. Clinical Services revenue grew 55.7% and 52.2%, respectively; Pharma Services grew 25.5% and 40.7%. Q3 clinical tests performed rose 34.9%; average revenue per test increased 15.4%. Management attributed growth to Genoptix, organic volume gains, test mix and reimbursement initiatives.
Gross margin improved, but operating margin declined in Q3 as operating expenses grew faster than revenue. General and administrative expense rose 57% in Q3, including Genoptix-related costs and higher staffing; research and development rose with investment in new tests, including next-generation sequencing and FDA initiatives. Nine-month results included $1.0 million of debt-extinguishment expense and $5.1 million of other expense; the filing does not clearly identify the full composition of that other expense in the supplied text.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $20.0 million, down from $29.3 million. The company cited higher accounts receivable and inventory, partly offset by lower accrued expenses.
- Investing cash outflow was $13.6 million, primarily for property and equipment. Financing cash inflow was $162.6 million, principally reflecting the May equity offering.
- Cash and cash equivalents were $178.9 million at September 30, 2019, versus $9.8 million at year-end 2018. Working capital was $223.1 million.
- Total debt and financing obligations were $109.7 million, including a $100 million term loan; no revolving-credit borrowings were outstanding. The new credit agreement provides $100 million of revolver capacity and a $50 million delayed-draw term loan. Management reported approximately $115 million available, based on leverage and amounts drawn.
- Management said cash, available credit and operating cash flow should cover operating commitments and interest for at least 12 months. 2019 capital expenditure cash payments were forecast at $18–$20 million; $14.0 million had been paid in cash through September, with additional equipment financed.
Material changes, outlook and risks
- Comparability: Genoptix was acquired in December 2018, so 2019 results include its operations while the 2018 reported periods do not. Acquisition and integration costs were $2.1 million for the nine months.
- Pharma outlook: Signed-contract backlog increased from $106.1 million at June 30 to $118.3 million at September 30. Management expects the backlog to support higher revenue in future quarters; Houston facility expansion is intended to add capacity. No specific revenue or earnings guidance is provided in the filing text.
- Long-term commitments: Operating lease liabilities totaled $27.4 million. The company also disclosed $50.3 million of binding minimum payments for executed leases not yet commenced, primarily for a planned Fort Myers facility, plus $25.0 million of construction costs.
- Legal matter: An arbitration award in the Health Discovery Corporation dispute terminated the license and awarded amounts to HDC. NeoGenomics paid $6.7 million in Q2 2019 to settle all obligations and no longer uses the technology.
- Financing and dilution: The May offering of 8.05 million shares generated approximately $160.8 million net proceeds. Outstanding common shares were 104.1 million at quarter-end.
- Other items: Adoption of lease accounting added right-of-use assets and lease liabilities without material operating-statement or cash-flow impact. The company corrected immaterial prior-period presentation errors related to preferred-stock accounting; it reported no effect on previously reported operations, cash flows, or total equity.
- Risks: Management highlights reimbursement pressure, payer and regulatory changes, billing and collection, laboratory and FDA/LDT requirements, integration and scaling, competition, staffing, indebtedness and interest rates, and seasonality. It reported no material change in the risk factors from its 2018 Form 10-K.
Investor facts to verify
- How much of reported revenue growth reflects Genoptix versus organic volume, pricing, test mix and reimbursement changes.
- Whether margin improvement can continue as integration, staffing, R&D and sales costs rise.
- Conversion and timing of the $118.3 million Pharma backlog into recognized revenue and cash.
- Receivables, inventory and operating cash-flow trends, including cash collection performance.
- Availability and covenant headroom under the secured credit agreement, interest-rate exposure, and the scale of future lease and facility commitments.
- Execution and costs of Genoptix integration, new test development, and the planned Fort Myers facility.