NeoGenomics, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The unaudited filing covers a cancer-focused diagnostic laboratory and clinical-trial services business. Comparative 2017 results were restated for ASC 606 revenue recognition.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $69.1 million | $59.1 million | $200.3 million | $178.8 million |
| Gross profit / margin | $32.3 million / 46.8% | $24.9 million / 42.1% | $90.2 million / 45.0% | $75.2 million / 42.0% |
| Operating income (loss) | $3.9 million | ($2.1 million) | $7.2 million | ($0.8 million) |
| Net income (loss) | $2.0 million | ($4.3 million) | $2.3 million | ($4.9 million) |
| Diluted earnings (loss) per share attributable to common stockholders | $0.02 | ($0.09) | $0.06 | ($0.16) |
Q3 revenue increased 16.8% on the consolidated statement comparison; nine-month revenue increased 12.0%. Management’s continuing-business comparisons, which exclude Path Logic revenue from 2017, show growth of 17.7% for Q3 and 14.2% for the nine-month period. Clinical Services and Pharma Services both grew; management cited increased clinical test volumes and higher Pharma contract activity. Pharma signed-contract backlog rose to $97.2 million at September 30 from $89.6 million at June 30.
Gross margin improved year over year, which management attributed to lower clinical cost per test from automation and scale, revenue-per-test trends, and the prior-year Path Logic divestiture. Adjusted EBITDA, a non-GAAP measure, was $11.3 million for Q3 and $30.6 million for the nine months, versus $7.3 million and $23.6 million, respectively, in the adjusted 2017 comparisons.
Cash, debt, and liquidity
- Cash and cash equivalents were $118.4 million at September 30, 2018, versus $12.8 million at December 31, 2017. Working capital was $147.2 million.
- Nine-month operating cash flow was $29.3 million, compared with $12.3 million in 2017; capital expenditures were $11.1 million in investing cash flows. Financing cash flow was $87.4 million.
- Total debt was $111.4 million, including $98.1 million of term loans and $13.3 million of capital leases and car loans. The revolving facility had no outstanding balance at quarter-end; approximately $71.0 million was available.
- The August common-stock offering generated approximately $135.1 million in net proceeds. The company redeemed its remaining preferred stock for approximately $50.1 million in June and repaid its revolving borrowings during the third quarter.
- The term loan matures in December 2021. The company reported compliance with financial covenants at September 30. Management said cash, available credit, and operating cash flows were expected to cover projected requirements for at least the next 12 months.
Changes, outlook, and material matters
- On October 23, 2018, after quarter-end, the company agreed to acquire Genoptix for $125 million in cash and 1.0 million common shares, subject to customary closing conditions. Management expected to use cash and the revolving facility to fund the cash consideration.
- Management forecast 2018 capital expenditures of $21 million to $23 million. It expected G&A costs to rise but remain stable as a percentage of revenue, and anticipated higher R&D investment in future quarters.
- The company early adopted ASC 606 retrospectively, changing clinical bad-debt presentation to a reduction of revenue and changing timing for certain Pharma revenue and contract costs. It also early adopted ASU 2018-07, recording a $1.1 million cumulative adjustment between retained earnings and additional paid-in capital.
- The company expects adoption of the new lease standard in 2019 to materially increase balance-sheet assets and liabilities, but does not currently expect a material effect on operating results.
- Interest-rate exposure is partly hedged through swaps. Management cited reimbursement changes and healthcare regulation, billing and collection estimates, competition, staffing, capacity expansion, and acquisition integration as risks. A licensing dispute with Health Discovery Corporation was expected to go to binding arbitration in December 2018; the company did not expect a material adverse financial effect based on information available.
- Disclosure controls were assessed as effective at a reasonable-assurance level, with no material quarterly change in internal control over financial reporting reported.
Important facts for investors to verify
- Genoptix transaction closing, final cash purchase-price adjustments, funding mix, integration costs, and realization of expected benefits.
- Whether clinical and Pharma growth, signed-contract backlog, and improved gross margins persist; assess the impact of reimbursement and payer mix.
- Cash generation and capital spending against the $21 million–$23 million 2018 capex forecast, alongside acquisition funding and debt service.
- Debt covenant headroom, variable-rate interest exposure, and any required excess-cash-flow repayment.
- Outcome of the Health Discovery Corporation arbitration and any material developments in reimbursement, regulatory, or billing risks.