NeoGenomics, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2017. The unaudited filing covers NeoGenomics’ U.S. cancer-focused diagnostic laboratory and Pharma Services operations. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and condition
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $66.1 | $63.1 | $127.8 | $122.8 |
| Gross profit / margin | $31.2 / 47.2% | $28.6 / 45.3% | $58.4 / 45.7% | $55.8 / 45.4% |
| Operating income | $1.3 | $2.2 | $1.2 | $4.1 |
| GAAP net income (loss) | ($0.04) | $0.41 | ($0.70) | $0.57 |
| Net loss attributable to common stockholders | ($2.68) | ($5.15) | ($5.90) | ($10.57) |
| Adjusted EBITDA (non-GAAP) | $9.15 | $9.18 | $16.22 | $17.42 |
- Q2 clinical testing revenue rose 6% to $59.8 million; Pharma Services declined 8% to $6.3 million. For the first half, clinical revenue rose 5% to $116.5 million and Pharma Services fell 5% to $11.3 million.
- Clinical test volume grew 16.2% in Q2 and 15.8% in the first half. Revenue per test declined 7.8% and 8.5%, respectively, which management attributed mainly to test mix and a 19% Medicare reimbursement cut for flow cytometry.
- Q2 gross margin improved, but operating income fell as general and administrative expense rose 21% to $22.7 million. Management cited higher payroll, professional fees, depreciation and bad debt. Bad debt was 6.4% of revenue in Q2 versus 4.4% a year earlier; first-half rates were 6.3% versus 4.4%.
- Six-month operating cash flow was $4.8 million, down from $12.1 million. Investing cash outflow was $7.9 million, principally for equipment and facility improvements; financing provided $1.4 million. Cash declined to $10.9 million from $12.5 million at year-end 2016.
- At June 30, current assets were $83.4 million and current liabilities $35.2 million; working capital was $48.2 million. Net accounts receivable was $61.8 million, up from $55.5 million at year-end. DSO was 85 days, compared with 84 at year-end, after improving from 90 days in Q1. Gross receivables were $73.4 million, of which 29% were over 120 days past due.
- Total debt, including capital leases and auto loans, was $111.3 million, versus $108.4 million at year-end. The $75 million revolving facility had $26.9 million drawn on a net carrying-value basis; management reported approximately $18.6 million of availability. The term loan and revolver mature in December 2021. The company was in compliance with debt covenants at quarter-end.
Material changes and management commentary
- Revenue growth reflected higher clinical testing volume, particularly molecular testing and immunohistochemistry, including demand for PD-L1 testing. Management said higher volume and lower laboratory costs offset lower average revenue per test.
- Management reported early cost synergies from consolidating the Irvine and Aliso Viejo laboratories in March 2017 and expected additional efficiencies in coming quarters. Q2 included $0.3 million of facility moving expenses; first-half expense was $0.6 million.
- Pharma Services revenue increased approximately 26% from Q1 to Q2. Signed-contract backlog reached a record $46.5 million at June 30, versus $26.0 million a year earlier; management expected the backlog to contribute to future revenue.
- The company expected to open a Geneva, Switzerland laboratory in the second half of 2017 and complete a Houston laboratory expansion in Q1 2018. It forecast 2017 capital expenditures of $15–$17.5 million; first-half cash purchases were $7.9 million, with another $2.6 million acquired through capital leases.
- Management stated that cash, available credit and operating cash flow were expected to provide adequate resources for operating commitments and interest payments for at least 12 months. This is management’s outlook, not a guarantee.
Outlook, risks and unusual items
- On August 1, 2017, after quarter-end, the company completed the sale of PathLogic. PathLogic reported first-half 2017 sales of $3.3 million and operating losses of $1.6 million; management anticipated a $1.25–$1.5 million sale loss in Q3.
- The Series A redeemable convertible preferred stock had a $49.5 million remaining face value and a $27.7 million carrying amount. Preferred deemed dividends and accretion of the beneficial conversion feature reduced earnings available to common stockholders. The filing says 50% of net proceeds from future equity raises must be dedicated to preferred-stock redemption until it is fully redeemed.
- Variable-rate debt creates LIBOR exposure; a $50 million interest-rate swap pays a fixed 1.59% through December 2019 on the hedged amount. Unhedged borrowings remain exposed to rate changes.
- Key disclosed risks include reimbursement pressure, payer collection and billing estimates, bad debt, regulatory and CLIA compliance, possible FDA regulation of laboratory-developed tests, competition, staffing and execution of laboratory expansion. The filing reported no material change to the risk factors in the 2016 Form 10-K and no legal proceedings believed material.
- The company adopted share-based compensation guidance in 2017, recording a $6.6 million increase in deferred tax assets with an offsetting cumulative adjustment to retained earnings. It expected the new revenue-recognition standard, planned for adoption in Q1 2018, to move some bad debt from operating expense to a reduction of revenue; the quantitative impact was still under evaluation.
- The Principal Accounting Officer resigned effective August 18, 2017; the CFO was to assume those duties on an interim basis. Management reported disclosure controls were effective at a reasonable assurance level and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the $46.5 million Pharma Services backlog converts to recognized revenue on the expected timing and at sustainable margins.
- Whether billing integration and collection initiatives reduce bad debt and DSO, particularly given the aged receivables balance.
- Whether clinical volume growth can offset lower average revenue per test and reimbursement pressure while sustaining gross-margin gains.
- Progress and costs for the Geneva and Houston projects, 2017 capital spending, and the expected PathLogic sale loss.
- Debt covenant headroom, revolving-credit availability, required debt repayments, and the cash impact of preferred-stock redemption obligations.