NeoGenomics, Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019. NeoGenomics operates cancer-focused clinical testing laboratories and provides pharmaceutical clinical-trial and research services. The quarter includes Genoptix, acquired in December 2018; therefore, year-over-year growth reflects both the acquisition and organic growth.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $95.6 million | $63.4 million |
| Gross profit / margin | $47.1 million / 49.3% | $27.3 million / 43.0% |
| Operating income / margin | $2.5 million / 2.7% | $2.5 million / 3.9% |
| Net income (loss) | $(2.4) million | $0.6 million |
| Net loss per common share | $(0.03) | $(0.03), including preferred-stock charges |
| Operating cash flow | $6.1 million | $14.3 million |
| Cash and cash equivalents, March 31 | $13.2 million | $15.2 million |
| Total debt, including finance obligations | $111.5 million | Not stated here for the comparable date |
- Revenue by segment: Clinical Services was $86.2 million, up 51.3%; Pharma Services was $9.4 million, up 45.2%. Clinical testing volume rose 31.1%, while requisitions increased 48.2% year over year.
- Margins and expenses: Gross margin improved to 49.3%, attributed to volume growth, higher revenue per test, productivity and cost efficiencies. Operating expenses rose to $44.6 million from $24.8 million; general and administrative expense included approximately $1.3 million of acquisition and integration costs.
- Adjusted EBITDA: $13.8 million versus $9.2 million, a non-GAAP measure. The company added back $5.1 million of other significant non-recurring expense, as well as acquisition/integration costs and stock-based compensation.
- Liquidity: Working capital was $43.2 million. The $75 million revolving facility had $5 million drawn and approximately $70 million available. The company reported compliance with financial covenants at quarter-end.
- Debt and interest: Term loan and revolver mature December 2021. The term loan bears variable interest, partly hedged by swaps; net interest expense was $1.8 million versus $1.5 million.
Material changes and unusual items
- Revenue increased 50.7% year over year, reflecting Genoptix, organic clinical-volume growth and reimbursement initiatives. Average clinical revenue per test rose 15.5%; the filing attributes this partly to the acquisition and reimbursement initiatives, partly offset by Medicare reimbursement and regulatory changes.
- Net loss included significant other expense of $5.2 million. After quarter-end, an arbitration panel issued an award to Health Discovery Corporation (HDC), including $1.5 million related to SmartFlow and $5.1 million related to SVM-CYTO. The company recorded a $4.9 million accrual, net of tax, in Q1 and said it was evaluating its options.
- Operating cash flow fell by $8.2 million year over year, primarily due to higher accounts receivable and inventory, and the net loss. Cash from operations was also affected by working-capital changes.
- The company adopted the new lease accounting standard on January 1, 2019, recording operating lease right-of-use assets and liabilities. The adoption did not materially affect the income statement or cash flows.
Outlook, commentary and risks
- Management expects cash on hand, available credit and operating cash flows to provide adequate resources for operating commitments and interest payments for at least 12 months from issuance of the statements.
- 2019 capital expenditures were forecast at $16 million to $20 million; approximately $5.2 million of capital equipment, software and leasehold improvements were purchased in Q1.
- Pharma Services backlog of signed contracts rose from $98.9 million at December 31, 2018 to $100.8 million at March 31, 2019. Management expects the backlog to support higher revenue in future quarters and cited expanded Houston capacity and international growth plans.
- Management’s priorities include profitable growth, Genoptix integration, maintaining service and quality, automation, new assays and infrastructure expansion. It expects G&A to increase but remain stable as a percentage of revenue, and anticipates higher R&D investment and sales commissions.
- Key stated risks include reimbursement pressure and payer changes, regulatory and FDA oversight of laboratory-developed tests, billing and collections, integration and scaling, competition, debt and capital needs, and seasonality. The filing reported no material changes to the risk factors in its latest Form 10-K.
Investor verification priorities
- Separate Genoptix’s contribution from organic growth, and assess whether clinical volumes, reimbursement and revenue per test remain sustainable.
- Track receivables, collections and operating cash flow against rapid revenue growth.
- Verify the final financial and operational effects of the HDC arbitration award, including any further payments or proceedings.
- Monitor integration costs, gross-margin progress, capital spending, debt repayment and covenant headroom.
- Assess conversion of the Pharma backlog into recognized revenue and cash receipts.