NeoGenomics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated statements. NeoGenomics operates high-complexity cancer diagnostic laboratories serving clinicians, hospitals, and pathology practices.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $25.1 million | $23.2 million | $72.5 million | $62.1 million |
| Gross profit | $11.2 million | $10.3 million | $31.5 million | $29.2 million |
| Gross margin | 44.5% | 44.3% | 43.5% | 47.1% |
| Operating income (loss) | $0.1 million | $(0.1) million | $(0.4) million | $0.9 million |
| Net income (loss) | $(0.1) million | $(0.3) million | $(1.1) million | $0.1 million |
| Adjusted EBITDA (non-GAAP) | $2.8 million | $2.6 million | $6.7 million | $6.4 million |
- Revenue rose 8.2% in Q3 and 16.8% year to date. Excluding Path Logic, base-business testing revenue grew 10.9% in both periods; test volumes increased 25.4% in Q3 and 24.6% year to date.
- Base-business average revenue per test fell 11.4% in Q3 and 11.0% year to date, primarily reflecting lower Medicare and commercial reimbursement for certain FISH and immunohistochemistry tests. Higher volume and lower unit costs supported Q3 gross profit, but year-to-date gross margin declined.
- Path Logic contributed $2.0 million of Q3 and $6.3 million of nine-month 2015 revenue. Its Q3 revenue fell 14.8% versus the comparable post-acquisition 2014 period as requisitions declined 19.9%; fixed costs raised its cost per requisition and compressed gross margin.
Cash flow, balance sheet, and liquidity
- At September 30, cash and cash equivalents were $34.0 million, current assets $60.9 million, current liabilities $15.3 million, and working capital $45.5 million. Total liabilities were $21.9 million.
- Equipment capital-lease obligations totaled $9.9 million ($4.2 million current and $5.7 million long-term); the company reported no outstanding revolving-credit-facility borrowings. It entered into new equipment leases during the period.
- Nine-month operating cash flow was $4.3 million, down from $8.5 million; investing cash outflow was $1.7 million, versus $8.5 million; financing cash outflow was $2.3 million, versus $29.6 million of inflow. 2014 financing included a $34.6 million equity raise. Cash increased $0.3 million during 2015.
- Management said cash on hand and expected operating cash generation should cover operating commitments for the next 12 months. Planned 2015 capital expenditures were $7.5–$9.0 million; approximately $6.0 million had been purchased through the first nine months, including $4.3 million financed through capital leases.
- Gross receivables were $26.0 million; 31% were over 120 days past due. The doubtful-account allowance was $4.5 million, or 17.2% of gross receivables.
Outlook, material developments, and risks
- Clarient transaction: After quarter-end, the company agreed to acquire Clarient from GE Medical for $80 million cash, 15.0 million common shares, and 14.7 million Series A preferred shares. Closing was subject to shareholder, regulatory, and other approvals; management expected completion near year-end 2015 or early 2016. Proposed financing included a $25 million receivables-based revolving facility and a $55 million term loan, with expected use of $10 million from the revolver at closing. The filing describes substantial closing, financing, integration, leverage, dilution, and execution risks.
- The filing estimated that, if the proposed 2016 Medicare Physician Fee Schedule were finalized without further changes, Medicare reimbursement for FISH would rise approximately 75% and flow cytometry reimbursement fall approximately 18%. The rule was not final; commercial-payer effects were uncertain.
- An October amendment to the Covance agreement was expected to provide $2 million in Q4 2015 and permit relationships with other central laboratories and contract research organizations.
- Management cited continuing test-menu innovation, new molecular and liquid-biopsy tests, and laboratory automation as growth and efficiency priorities. It reported a 7.9% reduction in average base-business cost of goods sold per test year to date.
- Other risks include reimbursement pressure, collections and bad debt, Path Logic customer attrition, and the costs and operational demands of growth. The company maintained a full valuation allowance against deferred tax assets, citing uncertainty over sustained profitability and reimbursement conditions.
- Management reported disclosure controls were effective at a reasonable-assurance level and no material change in internal control over financial reporting during the quarter. The company said no current legal proceedings were material to its business.
Most important facts for investors to verify
- Whether Clarient received required approvals, closed on expected terms, and obtained committed financing; assess resulting debt, preferred-stock terms, dilution, and integration costs.
- Final 2016 Medicare rates and actual effects on FISH, flow cytometry, commercial reimbursement, and realized revenue per test.
- Whether testing-volume growth can offset pricing pressure, and whether Path Logic requisitions and margins recover.
- Receivables aging, collections, bad-debt trends, and operating cash conversion relative to planned capital spending and lease commitments.
- Progress toward sustained GAAP profitability and any change in the deferred-tax valuation allowance.