NeoGenomics, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. NeoGenomics operates U.S. cancer-focused genetic and molecular testing laboratories. Results include Clarient, acquired on December 30, 2015; the filing is unaudited.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net revenue | $59.7 million | $23.0 million |
| Gross margin | $27.2 million; 45.5% | $9.5 million; 41.4% |
| Operating income (loss) | $1.9 million | ($0.6 million) |
| Net income (loss), GAAP | $0.2 million | ($0.8 million) |
| Net loss attributable to common stockholders | ($5.4 million); ($0.07) per share | ($0.8 million); ($0.01) per share |
| Adjusted EBITDA (non-GAAP) | $8.2 million | $1.5 million |
| Cash from operations | $7.1 million | ($0.8 million) |
Revenue increased about 159%; Clarient contributed approximately $29.5 million, or 49%, of Q1 2016 revenue. Clinical genetic testing revenue excluding Clarient grew 36.8% year over year. Gross margin improved 4.1 percentage points. The common-stockholder loss exceeded GAAP net loss because of $1.8 million in preferred-stock deemed dividends and $3.7 million in amortization of the preferred stock beneficial conversion feature.
At March 31, cash was $19.3 million and working capital was $46.9 million. Cash declined $4.2 million during the quarter, mainly as the company repaid about $10.0 million on its revolver. Operating cash flow was positive; investing cash outflow was $1.0 million. The company had no revolver borrowings and reported $25 million of available capacity.
Debt included a $55 million term loan at face value (reported net of issuance costs), approximately $8.4 million in capital-lease liabilities, and a small amount of auto loans. The term loan matures in 2020; the revolving facility also matures in 2020. The company said it complied with applicable debt covenants at quarter-end. Total assets were $346.8 million and total liabilities were $106.7 million.
Changes versus the prior comparable period
- Clarient’s inclusion drove much of the increase in revenue and operating scale; reported growth is not directly comparable to the legacy business.
- Clinical test volume rose substantially, while average clinical revenue per test declined 6.2%, partly due to Clarient’s lower-reimbursement test mix. Average cost per test declined 12.7%, reflecting scale and tests brought in-house.
- PathLogic revenue declined 20.1% to $1.9 million, with requisitions down 18.0%.
- BioPharma and research revenue rose to $5.1 million from $0.2 million, almost entirely due to Clarient.
- Interest expense increased to $1.6 million from $0.2 million, primarily reflecting acquisition financing.
- Bad debt expense was $2.7 million, or 4.5% of revenue, versus 2.6% a year earlier. The allowance for doubtful accounts increased to $7.3 million, or 12.8% of gross receivables, from $4.8 million, or 8.9%, at year-end.
Outlook, commentary, risks, and unusual items
- Management said it expected 2016 revenue to more than double, reflecting the acquisition, and forecast 2016 capital expenditures of $10 million to $12.5 million. These are management expectations, not formal earnings guidance.
- Priorities include integrating Clarient’s test menus, systems, billing and operations; consolidating Southern California laboratory facilities; pursuing cost synergies; and continuing investment in new tests. Management expects G&A to decline as a percentage of revenue over time and anticipates further testing-cost efficiencies.
- Management cited reimbursement pressure, including potential effects of the Protecting Access to Medicare Act; payer collection and billing execution; regulation of laboratory-developed tests; competition; and the ability to integrate Clarient and realize synergies as risks.
- The Series A preferred stock has a $110 million liquidation value. The company stated that 50% of net proceeds from future equity raises must be dedicated to preferred-stock redemption until the shares are redeemed. Preferred-stock accounting materially increased the loss attributable to common stockholders.
- Management reported effective disclosure controls at a reasonable assurance level and no material changes in internal control during the quarter. The company reported no material legal proceedings and no material changes to the risk factors in its latest Form 10-K.
- After quarter-end, the company granted 1.53 million options to executives and key employees, with an estimated total fair value of $3.8 million; it expects related compensation expense over 2016–2019.
Investor verification priorities
- Separate Clarient’s acquired revenue and earnings contribution from organic growth, and assess whether integration benefits and projected revenue growth materialize.
- Monitor receivables aging, allowance adequacy, bad-debt rates, billing integration, and cash conversion.
- Review debt service, interest costs, covenant headroom, and the availability and borrowing-base terms of the revolver.
- Assess the economic and potential dilution effects of Series A preferred stock, including its conversion, redemption, and liquidation provisions.
- Track capital spending against the $10–$12.5 million forecast and evaluate whether cost savings sustain or improve gross margin.