NeoGenomics, Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited consolidated results. NeoGenomics operates high-complexity cancer diagnostic laboratories serving clinicians, hospitals, pathologists, and other laboratories.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $16.884 million | $14.202 million | $48.144 million | $44.973 million |
| Gross profit / margin | $8.171 million / 48.4% | $5.892 million / 41.5% | $22.574 million / 46.9% | $20.402 million / 45.4% |
| Operating income (loss) | $1.160 million | $(0.684) million | $1.971 million | $1.015 million |
| Net income (loss) | $0.900 million | $(0.975) million | $1.176 million | $0.178 million |
| Diluted EPS | $0.02 | $(0.02) | $0.02 | $0.00 |
| Adjusted EBITDA (non-GAAP) | $2.163 million | $0.842 million | $5.783 million | $4.559 million |
Q3 revenue rose 18.9% year over year; nine-month revenue rose 7.0%. Testing volumes increased 19.1% in Q3 and 16.9% year to date, while nine-month average revenue per test fell 8.5%. Management attributed volume growth mainly to new accounts and broader molecular testing offerings.
Cost of revenue was 51.6% of revenue in Q3 versus 58.5% a year earlier; management cited improved lab productivity, capacity utilization, lower send-outs, and supply efficiencies. Nine-month gross margin improved 1.5 percentage points. Operating expenses totaled $7.011 million in Q3 and $20.603 million year to date.
Cash, liquidity, and debt
- At September 30, cash and cash equivalents were $4.929 million; working capital was $11.581 million, compared with $0.451 million at year-end 2012.
- Nine-month operating cash flow was $2.732 million, versus cash used of $0.493 million in 2012. Investing used $1.486 million; financing provided $1.815 million. Cash increased $3.061 million.
- Revolving-credit borrowings were $2.736 million, with approximately $7.3 million available; the effective interest rate was 5.25%. The company reported compliance with facility covenants.
- Equipment capital-lease obligations totaled $5.257 million ($2.600 million current and $2.657 million long-term). The company also disclosed $1.590 million of pending lease commitments for assets not yet delivered.
- March 2013 stock offering: 3,322,500 shares at $3.00 each, generating $9.2 million net proceeds. Shares outstanding were 48,962,275 at quarter-end; options and warrants add potential dilution.
Changes, outlook, and risks
- Q3 returned to operating and net profitability from losses in Q3 2012. Nine-month net income increased to $1.176 million from $0.178 million.
- The expiration of the Medicare Technical Component Grandfather Clause affected billing and pricing. Management estimated a $2.6 million adverse revenue impact for the first nine months of 2013 versus 2012; it also lengthened collections for certain hospital-client billings.
- The allowance for doubtful accounts rose to $4.355 million from $3.002 million at year-end 2012. Gross receivables over 120 days were 37% of the reported aging total. Management cited Medicare molecular-testing payment delays and more complex Blue Cross billing.
- CMS had proposed 2014 reimbursement changes affecting tests on the Clinical Laboratory Fee Schedule and Physician Fee Schedule. The company said the potential impact could be materially adverse if adopted as proposed, but could not quantify it; final rates were not yet known when the filing was signed.
- Management expected R&D expense to rise to $600,000–$900,000 per quarter from Q3’s $340,000 as it develops proprietary tests. It anticipated modestly higher sales and marketing expense with test volumes in 2014, and expected G&A to rise in absolute dollars while declining as a percentage of revenue over time.
- Management forecast $5.5–$6.5 million of additional capital equipment purchases over the next year, primarily funded through capital leases. Next-generation sequencing was planned for early 2014; a laboratory redesign was expected to be operational by Q1 2014.
- Additional uncertainties include dependence on reimbursement and payer collections, client concentration (one oncology practice’s affiliated offices represented 16.5% of Q3 revenue), internalization of testing by customers, and whether the HDC-licensed technology achieves commercial returns. Management noted 2014 milestones could affect the value of the HDC licenses.
- The filing reported no legal proceedings believed material, no material control changes, and effective disclosure controls at quarter-end. Management stated it believed available resources were adequate for operating commitments.
Investor verification priorities
- Track final CMS reimbursement rules and their realized effect on test pricing, revenue, and margins.
- Assess receivables aging, allowance adequacy, Medicare payment delays, and collections from hospital and commercial-insurance clients.
- Compare continued test-volume growth with average revenue per test, especially after the Technical Component Grandfather Clause change.
- Monitor operating cash generation against planned capital spending, lease commitments, and revolving-credit availability.
- Evaluate execution and commercial evidence for new tests, next-generation sequencing, and HDC-licensed technology; consider potential dilution from outstanding options and warrants.