NeoGenomics, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Financial statements are unaudited. Dollar amounts are in millions unless otherwise indicated.
Business context
NeoGenomics operates high-complexity clinical laboratories focused on cancer-related genetic and molecular testing, serving pathologists, oncologists, hospitals, and other clients. It offers cytogenetics, FISH, flow cytometry, immunohistochemistry, and molecular testing. Management attributed higher test volumes to new client accounts and an expanded test menu.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $15.603 | $15.611 | $31.260 | $30.771 |
| Gross profit | $7.157 | $7.367 | $14.403 | $14.510 |
| Gross margin | 45.9% | 47.2% | 46.1% | 47.2% |
| Operating income | $0.505 | $0.839 | $0.810 | $1.700 |
| Net income | $0.273 | $0.551 | $0.276 | $1.154 |
| Diluted EPS | $0.01 | $0.01 | $0.01 | $0.02 |
| Adjusted EBITDA (non-GAAP) | $1.825 | $1.943 | $3.619 | $3.718 |
For the first half, requisitions rose 16.9% and tests performed rose 15.8%, while revenue increased 1.6%. Average revenue per test fell 12.3% to $484. Q2 test volume increased 12.7%, but revenue was essentially flat; average revenue per test declined 11.3% to $480.
Operating cash flow was $0.533 million for the first half, versus $0.016 million in the comparable 2012 period. Investing cash outflow was $0.608 million and financing cash inflow was $2.843 million. Cash increased by $2.768 million to $4.636 million.
Financial position and material changes
- At June 30, cash was $4.636 million, current assets $23.163 million, and current liabilities $12.056 million; reported working capital was $11.107 million.
- Revolving-credit borrowings were $3.193 million; the company reported approximately $6.8 million of availability under its $10 million facility. The facility’s stated effective interest rate was 5.25%, and the company reported covenant compliance.
- Equipment capital-lease liabilities totaled $5.517 million, comprising $2.554 million current and $2.963 million long-term.
- In March, the company sold 3,322,500 shares at $3.00 per share, raising $10.0 million gross and approximately $9.2 million net. Shares outstanding were 48,888,215 at June 30, compared with 45,280,280 at year-end 2012.
- Accounts receivable, net, was $16.005 million; the allowance for doubtful accounts increased to $4.147 million from $3.002 million. Gross receivables over 120 days were 36% of gross receivables, versus 28% at December 31, 2012.
Management commentary, outlook, and risks
- The expiration of Medicare’s Technical Component Grandfather Clause reduced revenue by an estimated $1.3 million in Q2 and $2.6 million in the first half versus 2012. Management said this also pressured margins and lengthened collections because hospital clients are billed directly and may pay in 30–90 days or more.
- Lower Medicare molecular-code fee schedules further reduced revenue by an estimated $0.3 million in Q2 and $0.45 million in the first half. The filing also cites improved laboratory productivity and lower cost per test, though gross margin declined year over year.
- Management expected modestly higher R&D and sales and marketing expenses, and anticipated general and administrative spending to rise with staffing, billing, facilities, and infrastructure needs. It expected G&A as a share of revenue to decline as volumes grow. The company forecast $5.5–$6.5 million of additional capital equipment purchases over the next year, primarily financed through capital leases.
- CMS proposed 2014 reimbursement changes affecting tests on the Clinical Laboratory Fee Schedule and Physician Fee Schedule. The company could not quantify the effect, but warned that enactment without changes would likely have a material adverse impact. Final rates were not expected until November 2013.
- One affiliated oncology practice represented approximately 16.5% of Q2 revenue. Testing volumes may also vary seasonally and with weather. Forward-looking statements are subject to reimbursement, regulatory, competitive, operational, staffing, and financing risks.
- The company reported effective disclosure controls and no material current legal proceedings. It identified no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether proposed CMS reimbursement rules were finalized, and their actual effect on NeoGenomics’ test rates and revenue.
- Whether higher test volumes translate into revenue and earnings growth despite lower revenue per test and the ongoing impact of the Grandfather Clause expiration.
- Receivables aging, allowance adequacy, collection times, and the company’s exposure to its largest affiliated client group.
- Execution and financing of planned capital spending, lease obligations, and continued compliance with credit-facility covenants.
- The effect of the March equity issuance and outstanding options and warrants on future share dilution.