NeoGenomics, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; filed August 9, 2022. NeoGenomics operates cancer-focused clinical diagnostic laboratories and provides testing, research, and data services to pharmaceutical customers.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $125.1 | $121.7 | $242.2 | $237.3 |
| Gross profit | $43.9 | $53.0 | $82.2 | $94.6 |
| Gross margin | 35.1% | 43.5% | 33.9% | 39.9% |
| Operating loss | $(39.7) | $(22.4) | $(91.7) | $(37.5) |
| Net income (loss) | $(35.3) | $75.9 | $(84.7) | $53.8 |
| Diluted EPS | $(0.28) | $0.59 | $(0.68) | $0.44 |
- Q2 revenue grew 2.8% year over year. Clinical Services rose 4.2% to $105.6 million; Pharma Services fell 4.3% to $19.4 million, which management attributed to project-billing timing. Six-month revenue rose 2.1%.
- Gross margin declined 8.4 percentage points in Q2. Management cited acquired Inivata technology amortization and higher payroll-related costs. Q2 cost of revenue increased 18.0%, faster than revenue.
- Q2 operating expenses were $83.6 million, up from $75.4 million. Research and development expense rose to $8.6 million from $3.5 million; general and administrative expense was $58.0 million, up 6.1%.
- Prior-year net income included a $96.5 million gain associated with the Inivata acquisition. The comparison with 2021 earnings is therefore materially affected by this non-recurring gain; no comparable gain was recorded in 2022.
- Non-GAAP adjusted EBITDA was a loss of $16.3 million in Q2 and $35.3 million for the six-month period, compared with income of $4.6 million and $8.7 million, respectively, in 2021.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $(46.0) million, compared with positive $0.8 million in 2021. Investing activities provided $5.8 million, including proceeds from the sale of the Carlsbad property; financing activities provided $7.1 million. Cash and cash equivalents declined $33.2 million during the period.
- At June 30, cash and cash equivalents were $283.6 million and marketable securities were $182.3 million, for combined cash and securities of about $466.0 million. Working capital was $539.6 million.
- Convertible notes had a balance-sheet carrying value of $533.9 million; outstanding principal was $201.3 million of 1.25% notes due 2025 and $345.0 million of 0.25% notes due 2028. Neither series was convertible during Q3 2022 under its stock-price conversion condition. The company also had $0.4 million of current equipment-financing obligations.
- Management said cash, marketable securities, and expected collections should fund near-term capital and operating needs for at least 12 months. Planned 2022 capital expenditures were $25 million–$35 million; approximately $19.1 million had been spent in the first half.
Changes, outlook, and risks
- Backlog of signed contracts increased to $299 million at June 30 from $267 million at year-end 2021. Management described growth through new tests, reimbursement, precision medicine, and continued R&D investment as priorities; it did not provide a revenue or earnings forecast in the supplied filing text.
- Management said COVID-19 disruptions adversely affected test volumes and growth in 2021 and the first half of 2022; pharmaceutical customers also faced patient-enrollment and clinical-trial challenges. Further effects remain uncertain.
- An internal investigation into certain consulting and service agreements and compliance with federal healthcare laws is ongoing. The company had an $11.2 million reserve and said it could not estimate any additional loss range. DOJ notified the company on June 30, 2022 that it would participate in the investigation; additional penalties or operating restrictions could be material.
- Natera patent litigation concerning Inivata’s InVisionFirst-Lung test remained at the pleadings stage; the outcome was not estimable or probable at filing.
- Following executive leadership changes and a decline in share price from $12.15 at March 31 to $8.15 at June 30, the company performed a quantitative goodwill impairment test and recorded no impairment. Further market or operating deterioration could create impairment risk.
- Executive departures led to accelerated stock-award vesting and $8.1 million of incremental stock-based compensation in the first half, including $2.2 million related to the Chief Legal Officer’s departure in Q2.
Important facts for investors to verify
- Whether clinical-testing growth and the $299 million backlog convert into revenue and improved operating cash flow.
- How much margin pressure persists from labor costs and Inivata-related amortization, and whether R&D and administrative spending moderates.
- The outcome, potential additional exposure, and any required remediation from the OIG/DOJ investigation.
- Liquidity needs relative to the planned capital-spending range, ongoing cash burn, and convertible-note obligations.
- Whether future financial performance or share-price declines trigger goodwill or intangible-asset impairment.