NeoGenomics, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited consolidated financial statements. NeoGenomics operates cancer-focused clinical and anatomic pathology laboratories. Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $24.370 | $20.670 | $47.396 | $38.852 |
| Gross profit | $10.813 | $10.239 | $20.356 | $18.948 |
| Gross margin | 44.4% | 49.5% | 43.0% | 48.8% |
| Operating income (loss) | $0.028 | $0.578 | ($0.534) | $0.972 |
| Net income (loss) | ($0.176) | $0.274 | ($0.937) | $0.376 |
| Adjusted EBITDA (non-GAAP) | $2.407 | $2.082 | $3.925 | $3.767 |
- Revenue rose 18% in Q2 and 22% for the first half. Path Logic, acquired in July 2014, contributed $1.9 million and $4.3 million, respectively; base-business testing revenue increased 8.5% and 11.0%.
- Base-business test volume increased 21.4% in Q2 and 24.2% in the first half, while average revenue per test fell 10.6% and 10.7%. Management attributed the decline primarily to lower Medicare reimbursement for certain FISH and immunohistochemistry codes, with commercial payers adopting similar reductions.
- Gross margin contracted as reimbursement pressure outweighed volume growth. Base-business cost per test improved, but revenue per test declined more: first-half base-business gross profit per test fell to $187 from $225.
- Operating expenses increased 12% in Q2 and 16% in the first half. General and administrative costs rose, partly from Path Logic, staffing and stock-based compensation; sales and marketing was lower in Q2 but approximately flat for the half.
Cash, liquidity and debt
- Operating cash flow was $1.9 million for the first half, down from $5.3 million a year earlier. Capital spending used $1.2 million and financing activities used $1.5 million, principally for capital-lease repayments. Cash decreased $0.7 million to $33.0 million.
- At June 30, current assets were $59.6 million and current liabilities $15.1 million, yielding working capital of $44.5 million. Total assets were $83.0 million and stockholders’ equity $60.9 million.
- Equipment capital-lease obligations totaled approximately $10.0 million ($3.9 million current and $6.2 million long term), up from $8.5 million at year-end 2014. The company reported no revolving-credit-facility balance; it had paid off that facility in August 2014.
- Management said cash on hand and available resources were adequate for operating commitments over the next 12 months. It forecast $8.0–$9.5 million of 2015 capital expenditures; about $4.6 million had been spent in the first half, including $3.4 million financed through capital leases.
Changes, outlook and risks
- Operating results shifted from profit to loss year over year: first-half net loss was $0.9 million versus net income of $0.4 million. Management cited reimbursement reductions, higher costs and investment in growth; the filing gives no formal earnings or revenue guidance.
- Management’s 2015 priorities were growth, test innovation, diversification and efficiency. It reported 33 new tests introduced in the first half, including liquid-biopsy tests for hematologic disease. A prostate liquid-biopsy test was in an 800–1,000-patient validation study, with unrestricted commercial launch planned for 2016, subject to validation.
- The company expects continued investment in research and development, facilities, systems and personnel. It also expects general and administrative expenses to increase in dollars and sales and marketing costs to rise modestly with test volume.
- Key disclosed risks include reimbursement reductions, payer collection and billing performance, regulatory changes (including potential FDA oversight of laboratory-developed tests), CLIA compliance, competition, customer internalization of testing, acquisition integration, staffing and scaling capacity. The company noted that LabCorp acquired Covance in February 2015 and said the effect on its five-year Covance alliance was uncertain.
- Management maintained a full valuation allowance against deferred tax assets, citing reimbursement uncertainty and the first-half loss, while noting that future profitability could support a release. Such a release would reduce tax expense in the period recorded.
- Gross accounts receivable aged over 120 days were $6.4 million, or 25% of gross receivables, at June 30. Management reported improved collections and a lower allowance as a percentage of receivables, but collection trends remain important to monitor.
- No material legal proceedings were reported. Management concluded disclosure controls were effective at a reasonable-assurance level and reported no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether reimbursement reductions persist or widen, and whether test-volume growth can offset falling revenue per test and gross margin.
- Whether operating cash flow and collections improve, especially for aged receivables, and whether planned capital spending can be funded without materially increasing lease or other debt obligations.
- Whether Path Logic improves profitability: its first-half gross margin was 18.2%, versus 45.4% for the base business.
- Progress and commercial potential of new tests, including validation and the planned 2016 prostate-test launch, and the effect of LabCorp’s Covance acquisition on the alliance.
- The impact of equity compensation and dilution: 1.65 million options were granted in May; common shares outstanding were 60.5 million at June 30.