NeoGenomics, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. The company provides cancer-focused clinical laboratory testing and pharmaceutical research services. Results include Genoptix, acquired in December 2018, so year-over-year comparisons reflect both acquisition-related and organic growth.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $101.7 million | $67.7 million | $197.3 million | $131.2 million |
| Gross profit / margin | $49.0 million / 48.1% | $30.5 million / 45.1% | $96.1 million / 48.7% | $57.8 million / 44.1% |
| Income (loss) from operations | $4.5 million | $0.8 million | $7.0 million | $3.3 million |
| Net income (loss) | $2.0 million | ($0.4) million | ($0.4) million | $0.3 million |
| Net income (loss) attributable to common stockholders | $2.0 million | $5.9 million | ($0.4) million | $3.7 million |
| Adjusted EBITDA (non-GAAP) | $14.9 million | $10.1 million | $28.7 million | $19.3 million |
Q2 revenue increased 50.1%; first-half revenue increased 50.4%. Clinical Services revenue rose 49.4% in Q2 and Pharma Services revenue rose 55.1%. Clinical testing volume increased 33.7% in Q2, while average revenue per test increased 11.8%. Gross margin improved year over year; management cited volume growth, higher revenue per test, productivity gains and cost efficiencies. The 2018 common-stockholder earnings figures were affected by preferred-stock deemed dividends and a redemption gain, so they are not directly comparable with 2019.
- Cash flow: First-half operating cash flow was $1.4 million, down from $21.0 million. Investing cash outflow was $6.2 million; financing cash inflow was $162.5 million, primarily from the May equity offering.
- Liquidity: Cash and cash equivalents were $167.4 million at June 30, versus $9.8 million at year-end 2018. Working capital was $217.2 million.
- Debt: Gross debt was $110.6 million, including $100.0 million of term-loan borrowings and $10.6 million of equipment and other financing obligations. No revolver borrowings were outstanding. The company reported approximately $98.2 million of available borrowing capacity under its new credit agreement.
- Balance sheet: Total assets were $696.7 million and total liabilities were $206.9 million. Operating lease liabilities totaled $27.6 million and are separate from reported debt.
Material changes and unusual items
- In May, NeoGenomics issued 8.05 million shares at $21.25 per share, receiving approximately $160.8 million in net proceeds. Shares outstanding increased to 103.8 million at June 30.
- On June 27, the company refinanced its prior facilities with a new secured agreement providing a $100 million revolving facility, a $100 million term loan and a $50 million delayed-draw term loan. It repaid the prior facilities and recorded a $1.0 million debt-extinguishment loss.
- The company paid $6.7 million to settle Health Discovery Corporation litigation. The arbitration award terminated the relevant license and included awards to HDC; the company stated it no longer uses HDC technology.
- First-half results included $1.8 million of acquisition and integration expenses. General and administrative expenses also reflect Genoptix, increased staffing and infrastructure investment.
- Adoption of the new lease accounting standard in January resulted in recognition of lease right-of-use assets and liabilities; management said it did not materially affect operations or cash flows.
Outlook, risks and management commentary
- Management expects the $106.1 million Pharma Services backlog at June 30 to support higher revenue in future quarters; the backlog had been $100.8 million at March 31. The Houston facility expansion provides additional capacity.
- Management forecast 2019 capital expenditures of $16 million to $20 million; approximately $9.6 million had been purchased during the first half. It stated cash, available credit and operating cash flows should cover commitments and interest for at least the next 12 months.
- Management’s priorities include profitable growth, integrating Genoptix, maintaining service quality, developing tests and expanding facilities and infrastructure. It expects R&D spending to increase and G&A spending to rise while remaining stable as a share of revenue; sales and marketing costs are also expected to grow with volume.
- Key risks include reimbursement and payer changes, collection and billing estimates, regulatory requirements for laboratory-developed tests, competition, integration and execution risks, and variable-rate debt exposure. Clinical testing may also be affected by seasonality and severe weather.
- The filing provides no specific full-year revenue or earnings guidance. Management cautions that interim results are not necessarily indicative of future periods.
Investor verification points
- Separate Genoptix-acquired revenue and volume from organic growth, and assess whether improved gross margins persist.
- Track cash conversion, receivables growth and payer collections: first-half operating cash flow fell sharply despite higher revenue.
- Review Pharma backlog conversion, timing and cancellations, rather than treating backlog as guaranteed revenue.
- Monitor new-credit-agreement covenants, borrowing availability, interest costs and debt repayment requirements.
- Assess integration costs, planned capital expenditures and dilution from the equity offering.
- Confirm the final accounting for the Genoptix acquisition and monitor reimbursement, regulatory and other litigation developments.