NeoGenomics, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. The company operates cancer-focused clinical diagnostic laboratories and provides pharmaceutical clinical-trial and research services. Comparisons below use Q1 2017 figures adjusted retrospectively for adoption of ASC 606, unless noted otherwise. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $63.4 million | $57.4 million | +10% |
| Gross profit / margin | $27.3 million / 43.0% | $22.9 million / 40.0% | +19%; margin +3.0 pts |
| Operating income (loss) | $2.5 million | $(0.6) million | Improved |
| Net income (loss) | $0.6 million | $(1.2) million | Turned profitable |
| Net loss attributable to common stockholders | $(2.2) million | $(3.7) million | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $9.2 million | $6.6 million | +40% |
| Operating cash flow | $14.3 million | $(1.7) million | Improved by $16.0 million |
Clinical testing revenue was $57.0 million, up 8%; Pharma Services revenue was $6.5 million, up 43%. Clinical genetic testing volume rose 14.9%, while average revenue per test declined 3.4%, which management attributed primarily to Medicare reimbursement and regulatory changes. Pharma Services gross profit increased to $1.4 million from $0.7 million; Clinical Services gross profit was $25.9 million, up 17%.
Operating expenses totaled $24.8 million, up 5%. Sales and marketing increased 20% to $6.8 million, largely from higher commissions and expanded sales staffing. General and administrative expense was nearly flat at $17.1 million.
Financial position and liquidity
- Cash and cash equivalents were $15.2 million at March 31, 2018, versus $12.8 million at year-end 2017. Working capital was $44.5 million.
- Total debt was $102.8 million, including $70.3 million under the term loan, $20.0 million under the revolving facility, and $12.5 million in capital leases and car loans. The company repaid $5.4 million of revolving borrowings during the quarter.
- Approximately $21.6 million was available under the $75 million revolving facility, based on the company’s adjusted EBITDA. Management said cash, available credit and operating cash flow should cover operating commitments and interest for at least the next 12 months.
- Capital expenditures were $4.7 million in cash purchases, with an additional $3.4 million acquired through capital leases. Management forecast 2018 capital expenditures of $18–$22 million.
- The company was in compliance with debt covenants at quarter-end. No excess-cash-flow payment was due as of March 31, 2018.
Material changes, outlook and risks
- Gross margin improved as increased testing volume and laboratory efficiencies lowered costs per test, despite lower clinical revenue per test.
- Signed Pharma Services backlog increased to $73.1 million from $38.2 million a year earlier. Long-term unsatisfied performance obligations were $51.1 million; management expected approximately 45% to be recognized as revenue in the next 12 months. These measures are not directly interchangeable.
- Management expects further Pharma growth from international expansion and the expanded Houston laboratory, anticipated to open in May 2018. A small Atlanta laboratory was also planned to open in May. No specific full-year revenue or earnings guidance was provided.
- ASC 606 was adopted using full retrospective application. It reduced reported Q1 2017 revenue by $4.2 million and also reduced operating expenses; Pharma contract timing and estimates now require management judgment. The filing states the adoption did not materially change Pharma Services revenue cumulatively.
- The Series A redeemable convertible preferred stock had a $35.5 million carrying value and a $49.5 million remaining face value. Deemed dividends and amortization of its beneficial conversion feature contributed $2.9 million to the difference between GAAP net income and the loss attributable to common stockholders.
- Key stated risks include reimbursement pressure, payer denials and collections, regulatory requirements including CLIA and potential FDA oversight of laboratory-developed tests, customer internalization of testing, competition, and execution of growth and facility expansions. The filing reported no material change to the risk factors in the 2017 Form 10-K and no legal proceedings believed material.
Investor verification points
- Confirm clinical volume growth and whether reimbursement pressure continues to reduce average revenue per test.
- Track Pharma backlog conversion, performance-obligation recognition, and the expected contribution from Houston and international expansion.
- Assess cash generation against planned capital spending, debt repayments, covenant requirements and remaining revolver availability.
- Review the preferred stock’s redemption and conversion terms, ongoing deemed dividends and beneficial-conversion-feature charges.
- Compare operating performance on both GAAP and non-GAAP bases, including the effects of ASC 606 and stock-based compensation.