NeoGenomics, Inc. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company operates high-complexity cancer diagnostics laboratories. Financial statements are unaudited.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $23.217 million | $16.884 million | $62.070 million | $48.144 million |
| Gross profit / margin | $10.294 million / 44.3% | $8.171 million / 48.4% | $29.244 million / 47.1% | $22.574 million / 46.9% |
| Operating income (loss) | $(0.073) million | $1.160 million | $0.899 million | $1.971 million |
| Net income (loss) | $(0.291) million | $0.900 million | $0.085 million | $1.176 million |
| Adjusted EBITDA (non-GAAP) | $2.636 million | $2.163 million | $6.403 million | $5.783 million |
- Q3 revenue grew 37.5%; management reported 23% organic growth, with Path Logic contributing $2.4 million of revenue. Nine-month revenue grew 28.9%, including 24% organic growth.
- Base-business test volume rose 33.4% in Q3 and 31.4% year to date, while average revenue per test fell 7.5% and 5.6%, respectively. Management attributed much of the decline to Medicare coding changes for certain FISH tests.
- Q3 gross margin fell 4.1 percentage points year over year, reflecting lower reimbursement and the acquired Path Logic business, whose reported gross margin was 26.5%. Nine-month gross margin increased slightly.
- Cash from operations was $8.464 million for the first nine months, versus $2.732 million a year earlier. Investing used $8.548 million, including $5.829 million for the Path Logic acquisition; financing provided $29.616 million.
Liquidity, debt and capital
- Cash and cash equivalents were $34.366 million at September 30, 2014, versus $4.834 million at December 31, 2013. Working capital was $43.289 million.
- The $10 million revolving credit facility was repaid and terminated on August 26, 2014. The company reported $8.370 million in current and long-term equipment capital lease obligations and notes payable combined; the filing does not separately state total debt excluding leases.
- An August public offering of 8.05 million shares at $4.60 per share generated approximately $34.5 million net proceeds. Shares outstanding at September 30 were 59.97 million.
- Net accounts receivable was $18.297 million. The allowance for doubtful accounts was $5.471 million, or 23.0% of gross receivables. Days sales outstanding improved to 73 from 94 at year-end 2013, while 37% of gross receivables were over 120 days old.
Material developments, outlook and risks
- NeoGenomics acquired Path Logic in July for approximately $5.9 million. The acquisition added anatomic pathology services and contributed $2.382 million in revenue from July 8 through September 30. Purchase-price allocation was preliminary. Management estimated $3–4 million in annual revenue opportunities from cross-selling.
- Management said it expects capital expenditures of approximately $8.2–9.2 million over the next year, primarily funded through capital leases. It reiterated a goal to reduce base-business cost of goods sold per test by 8–10% annually through 2015.
- CMS’s October 31, 2014 proposed rule could reduce Medicare FISH reimbursements by an estimated 20–30% in 2015 if interim relative value units are adopted as drafted. The final rates were not yet known. Medicare FISH revenue was approximately $4.4 million in the first nine months of 2014.
- The company recorded conservative reductions to revenue of $1.15 million in Q3 and $2.9 million year to date for certain FISH tests under NCCI coding edits. A favorable CMS clarification could allow future billing for some or all of the foregone services, but recovery was uncertain.
- Management cited reimbursement pressure, possible FDA oversight of laboratory-developed tests, payer coverage and collection risks, competition, and the challenges of integrating acquisitions. Florida Cancer Specialists represented 10.5% of nine-month revenue, down from 15.8% a year earlier; management expects some continued internalization of testing by that customer.
- Other unusual Q3 costs included $473,000 for acquisition or potential acquisition activity and $98,000 related to terminating the credit facility. The filing reported effective disclosure controls and no material legal proceedings.
Most important facts to verify
- Final 2015 Medicare reimbursement rates and their actual effect on FISH and IHC revenue.
- Whether the NCCI FISH policy is clarified and whether any foregone billing can be recovered.
- Path Logic’s post-acquisition growth, margins, integration costs and realization of cross-selling opportunities.
- Receivables aging, allowance adequacy and whether improved collections persist.
- Funding and economics of planned capital expenditures, including future lease obligations and dilution from equity issuance.