NeoGenomics, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 14, 2012. Unaudited consolidated results. NeoGenomics operates high-complexity cancer diagnostic laboratories serving healthcare providers across the United States.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $15.160 million | $8.805 million | +72.2% |
| Gross profit / margin | $7.144 million / 47.1% | $3.865 million / 43.9% | Margin +3.2 percentage points |
| Operating income (loss) | $861,000 | $(711,000) | Turned profitable |
| Net income (loss) | $603,000; $0.01 diluted EPS | $(893,000); $(0.02) diluted EPS | Turned profitable |
| Adjusted EBITDA (non-GAAP) | $1.775 million | $(97,000) | Improved |
| Operating cash flow | $(1.065) million | $(1.544) million | Cash use decreased |
Requisitions rose 65.8% to 16,934 and tests performed rose 74.9% to 26,932. Average revenue per requisition increased 3.9% to $895, while average revenue per test declined 1.6% to $563, mainly reflecting a shift toward lower-priced molecular and histology tests. Cost of revenue increased 62.3%, slower than revenue; management attributed the improved gross margin to productivity gains and lower cost per test.
Cash, liquidity and debt
- At March 31, cash and cash equivalents were $2.756 million; restricted cash was $300,000. Working capital was $1.239 million.
- Operating cash outflow reflected a $3.628 million increase in accounts receivable, partly offset by net income and noncash expenses. Investing outflows were $1.314 million, including $1.037 million for intangible assets and $277,000 for equipment.
- Financing provided $2.507 million, primarily from $2.788 million of credit-facility advances. Cash increased by $128,000 during the quarter.
- Revolving-credit borrowing was $6.686 million, with approximately $800,000 available under the $8 million facility; effective interest rate was 5.25%. The facility was extended to March 26, 2015, and may be increased, subject to terms, to a maximum of $10 million. The amendment carried an $80,000 commitment fee.
- Equipment capital-lease obligations totaled $5.333 million ($2.312 million current and $3.021 million long term). Management said available cash and credit were adequate for the next 12 months. It anticipated $4.5–$5.5 million of equipment purchases over the next year, primarily funded through capital leases; inability to obtain financing could constrain growth.
Material changes and business developments
- Growth was attributed to new client accounts and expansion across office locations of a large oncology practice. That practice represented approximately 18% of Q1 revenue, versus 1.3% a year earlier, increasing customer concentration.
- On January 6, NeoGenomics licensed HDC intellectual property and know-how, including cancer-test and image-analysis technologies. Consideration included $1 million cash and 1.36 million shares valued at $1.945 million; the company recorded approximately $2.98 million of intangible assets. Additional milestone payments and royalties may apply. HDC may revoke exclusivity for certain initial products if specified commercialization and revenue conditions are not met.
- Accounts receivable increased to $10.683 million from $7.894 million at year-end. Management cited first-quarter patient deductible patterns and complications from newly introduced molecular billing codes, which increased rebilling and receivables.
- Common shares outstanding rose to 44.851 million from 43.416 million at year-end, including shares issued for the HDC license.
Outlook, risks and contingencies
No formal revenue or earnings guidance was provided. Management expected to introduce at least 25–30 new molecular tests and expand immunohistochemistry offerings in 2012, while continuing development of HDC-based cancer tests and interpretation software. It expected research and development expense to increase modestly and sales and marketing expense to rise modestly with volume, while remaining stable as a percentage of revenue. General and administrative costs may also rise with hiring, infrastructure, billing and collection needs, though management expected them to decline as a percentage of revenue over time.
Key risks include reimbursement and payer policy changes, regulatory and CLIA compliance, competition, collection and bad-debt exposure, reliance on a major customer, financing needs and execution of new-product development. Management noted seasonality and weather may affect testing volume. The company reported no legal proceedings it considered material; disclosure controls were assessed effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the large oncology practice’s 18% revenue contribution persists or creates material customer-concentration risk.
- Receivable aging, collections, bad-debt trends and the effects of molecular billing-code adoption on cash conversion.
- Availability and terms of credit and capital-lease financing, including capacity to fund planned equipment purchases.
- Commercialization milestones, revenue thresholds, potential HDC milestone payments and royalties, and the value ultimately realized from the licensed assets.
- Whether test-volume growth and laboratory productivity improvements translate into sustained margins and positive operating cash flow.