NeoGenomics, Inc. — Q3 2020 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. NeoGenomics provides cancer-focused clinical diagnostic testing and pharmaceutical clinical-trial and research services through its Clinical Services and Pharma Services segments. The company attributed material operating disruption in 2020 to COVID-19.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $125.4 million | $104.7 million | $318.5 million | $302.0 million |
| Gross profit / margin | $54.1 million / 43.1% | $50.8 million / 48.6% | $128.4 million / 40.3% | $146.9 million / 48.7% |
| Operating income (loss) | $4.7 million | $3.7 million | ($19.5 million) | $10.7 million |
| Net income (loss) | $2.6 million | $2.1 million | ($11.2 million) | $1.7 million |
| Adjusted EBITDA (non-GAAP) | $16.7 million | $14.9 million | $16.6 million | $43.6 million |
- Q3 revenue rose 19.8% year over year. Clinical Services revenue increased 17.5%, including $17.0 million of COVID-19 PCR testing; Pharma Services revenue increased 38.0%. Excluding COVID-19 PCR testing, clinical revenue was $91.8 million versus $92.6 million, down 0.9%.
- For the nine months, revenue increased 5.5%, while clinical testing volume declined 3.3%. Pharma Services revenue increased 25.3%.
- Gross margin contracted in both comparison periods. Management cited higher payroll-related costs, lower or disrupted volumes, unused testing capacity, timing of Pharma Services revenue, and integration of Genoptix and HLI-Oncology.
- Nine-month operating cash flow was negative $4.5 million, versus positive $20.0 million in 2019. Investing cash outflow was $130.6 million; financing provided $227.3 million. Cash, cash equivalents and restricted cash totaled $265.2 million at period-end, including $233.2 million of unrestricted cash; marketable securities were $50.4 million. Working capital was $357.8 million.
- At September 30, the company had $201.3 million principal amount of 1.25% convertible notes due 2025, carried at $166.4 million net of discount and issuance costs, and $5.1 million of equipment financing obligations. The prior term loan was repaid in May. Notes’ effective interest rate is 5.5%; conversion and potential dilution are relevant considerations.
Material changes and unusual items
- In May, NeoGenomics issued $201.3 million of convertible notes, receiving approximately $194.4 million net, and completed a public equity offering that raised approximately $127.3 million net. It used $96.3 million of financing proceeds to repay its prior secured credit agreement.
- The company acquired Human Longevity, Inc.’s Oncology Division for $37 million in cash in January, adding sequencing capabilities. The purchase-price allocation remained preliminary; acquisition and integration costs were $1.9 million for the nine-month period.
- NeoGenomics invested $25 million in Inivata, recorded a $25.6 million investment asset, and granted Inivata access to a $15 million, zero-interest line of credit beginning January 2021. The investment includes a purchase option; the company said it was not Inivata’s primary beneficiary.
- Nine-month results included $7.9 million of CARES Act grant income and a $1.1 million Employee Retention Tax Credit. A $1.4 million debt-extinguishment loss and $3.5 million cash-flow-hedge termination loss also affected results. The nine-month tax benefit included recognition of $1.9 million of research and development tax credits.
- An October 22, 2020 HHS notice reinstated a lost-revenue definition underlying the $7.9 million grant. The company’s evaluation was ongoing, and the amount of grant income it could ultimately use was not yet known.
Outlook, management commentary and risks
- Management expected cash on hand, marketable securities and collections to fund operations and interest payments for at least the next 12 months. Expected 2020 cash capital expenditures were $25 million to $30 million; $17.6 million had been spent in the first nine months.
- Signed Pharma Services backlog grew from $130.3 million at year-end 2019 to $185.4 million at September 30, 2020; management expected it to support higher future revenue. No specific revenue or earnings guidance was provided in the supplied filing text.
- Management said the pandemic materially harmed clinical volumes and growth rates, and could continue to adversely affect operations, results and cash flows. Laboratories remained open, and the company reported uninterrupted testing service. It described COVID-19 testing and its broader menu as potential revenue opportunities.
- Key risks include reimbursement changes, payer collections and denials, COVID-19-related demand and supply disruption, regulatory oversight of laboratory-developed tests, execution and integration of acquisitions, cash requirements and convertible-note dilution. Marketable securities could lose value or liquidity.
Most important facts for investors to verify
- Whether clinical volumes and core clinical revenue recover, and how much reported growth depends on COVID-19 PCR testing.
- Whether gross margins improve as volumes, utilization and integration costs change.
- How the October 2020 HHS notice affects recognition or permitted use of the $7.9 million CARES Act grant.
- Whether operating cash flow improves while the company funds capital spending, the Inivata commitment and planned facility expansion.
- The potential share dilution, cash settlement requirements and future interest expense associated with the convertible notes.