Business context and reporting period
NeoGenomics, Inc. is a cancer-focused clinical laboratory and provider of pharmaceutical research and clinical-trial testing services. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same period in 2019. The company operates Clinical Services and Pharma Services segments.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $106.0 million | $95.6 million |
| Gross profit / margin | $46.4 million / 43.7% | $47.1 million / 49.3% |
| Operating income (loss) | $(5.3) million | $2.5 million |
| Net income (loss) | $(7.0) million | $(2.4) million |
| Diluted loss per share | $(0.07) | $(0.03) |
| Adjusted EBITDA (non-GAAP) | $7.1 million | $13.8 million |
| Operating cash flow | $(6.9) million | $6.1 million |
Revenue increased 10.9% year over year: Clinical Services grew 7.9% to $93.0 million and Pharma Services grew 39.3% to $13.0 million. Clinical test volume rose 6.9% for the quarter, but company-reported clinical test volume was down about 20% year over year in the final two weeks of March. Pharma Services contract backlog increased from $130.3 million at December 31, 2019 to $147.7 million at March 31, 2020; management expected it to support future-quarter revenue.
Cost of revenue rose 23.1%, faster than revenue, and gross margin fell 5.6 percentage points. Management attributed margin pressure primarily to payroll-related costs, the timing of Pharma Services revenue, Genoptix integration costs and added testing capacity left unused amid COVID-19. Operating expenses increased 15.9% to $51.7 million. Q1 included approximately $1.3 million of HLI acquisition and integration costs. Prior-year other expense included $5.1 million of significant non-recurring expense; Q1 2020 reported $0.2 million of other income. The filing does not identify that prior-year item more specifically in the supplied text.
At March 31, 2020, cash and cash equivalents were $86.3 million, with an additional $38.7 million of restricted cash. Working capital was $147.8 million. Total assets were $732.2 million and total liabilities were $227.2 million. Debt was $103.6 million before unamortized issuance costs, including a $96.3 million term loan; no revolving-credit borrowings were outstanding. The company reported approximately $102.8 million of available borrowing capacity. Operating cash use and the $48.0 million decrease in cash, cash equivalents and restricted cash reflected working-capital needs, capital spending and the acquisition; investing cash use was $41.7 million, including the acquisition.
Material changes, outlook and risks
- On January 10, 2020, NeoGenomics acquired Human Longevity, Inc.’s Oncology Division for $37.0 million in cash, adding next-generation, whole-exome and whole-genome sequencing capabilities to Pharma Services. The purchase-price allocation remained preliminary.
- On April 9, 2020, the company withdrew its previously issued 2020 guidance because the effects of COVID-19 could not yet be assessed. The filing provides no replacement guidance or clear quantified full-year outlook.
- Management said all main laboratories remained open and testing continued without interruption, while describing material late-March and April volume impacts. The duration and severity of the pandemic, restrictions, customer demand and related effects on revenue and test volumes were uncertain. The company reported no supplier-delay interruption at the filing date, but was building inventory to mitigate potential supply-chain disruption.
- Management believed cash, available credit and collections were sufficient for operating commitments and interest payments for at least the next 12 months. The credit agreement includes leverage and fixed-charge coverage tests, other covenants and mandatory prepayment provisions.
- Planned 2020 capital expenditures were $25–$30 million; $4.7 million was spent in Q1. A new Fort Myers laboratory and headquarters facility was expected to commence operations under its lease in 2021. The company disclosed $33.8 million of binding minimum lease payments for that not-yet-commenced lease, in addition to construction and leasehold-improvement amounts.
- Other cited risks include reimbursement levels, regulatory requirements for laboratory-developed tests, billing and collections, integration of acquisitions, interest-rate exposure and the ability to manage growth and debt. No legal proceedings were reported for the quarter.
Important facts for investors to verify
- Subsequent clinical and Pharma Services volumes, revenue trends and any reinstated guidance as COVID-19 conditions evolve.
- Whether backlog converts to revenue on expected timing and at margins sufficient to improve profitability.
- Cash generation, working-capital needs, borrowing availability and compliance with credit-facility covenants.
- HLI integration results, acquisition-related costs and final purchase-price allocation.
- Actual spending and commitments for the new facility and planned capital expenditures.