NeoGenomics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018. NeoGenomics operates cancer-focused clinical diagnostic laboratories and provides testing services for pharmaceutical clinical trials and research. Financial statements are unaudited; 2017 comparisons were retrospectively adjusted for adoption of ASC 606.
Financial performance
- Revenue: Second-quarter revenue was $67.7 million, compared with $62.3 million in the adjusted prior-year quarter. Six-month revenue was $131.2 million versus $119.7 million. Clinical Services generated $59.5 million and Pharma Services $8.2 million in Q2.
- Comparable growth: Management reports Q2 revenue growth of 11.6% and six-month growth of 12.5% excluding Path Logic, which was sold in August 2017. These comparisons use a different basis from the consolidated statement totals.
- Profitability: Q2 gross profit was $30.5 million, with a 45.1% gross margin, up from 43.9%. Operating income was $0.8 million, versus $1.8 million. GAAP net loss was $0.4 million, compared with net income of $0.5 million. Six-month net income was $0.3 million, versus a $0.7 million loss.
- Common-stockholder results: Q2 income attributable to common stockholders was $5.9 million, or $0.07 per diluted share; six-month income was $3.7 million, or $0.04 per diluted share. These amounts include a $9.1 million gain on redemption of preferred stock; they differ from consolidated net income.
- Cash flow: Operating cash flow for the six months was $21.0 million, versus $4.8 million a year earlier. Investing used $8.9 million, principally for property and equipment; financing used $15.4 million. Cash declined by $3.4 million to $9.4 million.
- Liquidity and debt: Working capital was $35.3 million. Total debt was $140.6 million, including $30.0 million drawn on the revolving facility; approximately $20.4 million of revolver capacity remained available. The company reported compliance with debt covenants.
Material changes and drivers
- Clinical Services revenue grew 10.3% in Q2 on the consolidated statement basis; Pharma Services revenue grew 22.2%. Management cites higher testing volumes, with clinical tests performed up 14.4%, and continued growth in Pharma contracts.
- Clinical average revenue per test declined 3.6%, primarily due to Medicare reimbursement and regulatory changes. Average cost per test declined 4.5%, which management attributes to automation and scale; gross margin improved.
- Operating expenses rose: Q2 general and administrative expense increased 13.8%, and sales and marketing increased 25.2%. Higher costs included Houston laboratory relocation expenses, increased staffing, stock compensation, commissions, and marketing.
- On June 25, the company redeemed all remaining Series A preferred stock for $50.1 million. It funded the redemption with a $30 million term-loan increase, approximately $10 million of additional revolver borrowing, and cash. No preferred shares remained outstanding at quarter-end.
- The Houston laboratory expansion was completed in May. Pharma signed-contract backlog rose from $73.1 million at March 31 to $91.0 million at June 30.
Outlook, risks, and other notable items
- Management expects cash, available credit, and operating cash generation to fund operating commitments and interest payments for at least 12 months. It forecast 2018 capital expenditures of $18–$20 million.
- Of $63.7 million in unsatisfied long-term Pharma performance obligations, the company expects to recognize approximately 40–45% as revenue in the next 12 months. This is not equivalent to total backlog.
- Management expects continued Pharma growth, citing expanded Houston capacity and international operations, and announced a strategic partnership with PPD that it expects to support future international laboratory openings, including in Singapore and China.
- Key disclosed risks include reimbursement reductions and payer denials, regulatory changes affecting laboratory-developed tests and CLIA compliance, billing and collection execution, competition, customer internalization of testing, acquisition integration, staffing, and scaling facilities and systems. The filing reported no material change in risk factors and no legal proceedings considered material.
- Interest-rate exposure arises from variable-rate debt; interest-rate swaps hedge portions of the borrowings. The company reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile reported consolidated revenue growth with management’s growth comparisons excluding Path Logic and review the retrospective ASC 606 adjustments to 2017 results.
- Assess whether clinical volume growth and lower cost per test can offset reimbursement pressure and declining average revenue per test.
- Track Pharma backlog conversion, contract estimates, and capacity utilization; backlog and remaining performance obligations are not identical measures.
- Monitor leverage, interest expense, remaining revolver availability, covenant compliance, and cash generation after the preferred-stock redemption and planned capital spending.
- Separate recurring operating performance from the $9.1 million preferred-stock redemption gain and review the basis for adjusted EBITDA, which excludes specified expenses.