NeoGenomics, Inc. — FY 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures below are unaudited. NeoGenomics operates cancer-focused genetic and molecular testing laboratories. In the fourth quarter, it began reporting two segments: Clinical Services and Pharma Services. Clinical represented 90% of FY 2017 revenue and Pharma 10%.
Key financial results
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $258.6 million | $244.1 million |
| Gross profit / margin | $120.3 million / 46.5% | $110.4 million / 45.2% |
| Operating income | $2.3 million | $2.6 million |
| Net loss | $0.8 million | $5.7 million |
| Net loss attributable to common stockholders | $11.4 million; $0.14 per share | $30.4 million; $0.39 per share |
| Operating cash flow | $18.0 million | $21.5 million |
| Investing cash flow | $(13.7) million | $(6.5) million |
| Cash and cash equivalents at year-end | $12.8 million | $12.5 million |
| Working capital at year-end | $49.9 million | $40.7 million |
Revenue and margins. Revenue grew 6.0%. Clinical revenue increased 4.4% to $231.7 million; Pharma Services revenue rose 21.7% to $26.9 million. Clinical test volume increased approximately 16.7%, while revenue per test declined 9.0%, reflecting test mix, Medicare reimbursement reductions and contract changes. Cost per clinical test fell 10.9%. Consolidated gross margin improved 130 basis points.
Quarterly context. Unaudited fourth-quarter revenue was $67.8 million, gross profit $33.1 million, and net income $5.0 million. After preferred-stock deemed dividends and amortization, income available to common stockholders was $2.3 million, or $0.03 per share.
Debt and liquidity. Year-end cash was $12.8 million, with $16.7 million of borrowing capacity available under the $75 million revolving facility. The filing cites $96.7 million of outstanding indebtedness; the debt note reports $107.2 million of total debt including capital leases and car loans, before debt issuance costs and current maturities. The company reported compliance with its debt covenants and said cash, available credit and operating cash flow should cover commitments and interest for at least 12 months. Working capital increased to $49.9 million.
Material changes versus the prior year
- Revenue increased 6.0%, supported by clinical volume growth and Pharma Services expansion. Management attributed approximately $1.0 million of third-quarter revenue impact to Hurricanes Harvey and Irma.
- Gross margin rose to 46.5%, but adjusted EBITDA declined to $32.8 million from $34.7 million; adjusted EBITDA margin fell to 12.7% from 14.2%.
- General and administrative expense increased 17.1% to $88.8 million, including an approximately $6.8 million rise in bad-debt expense. Bad debt was 7.2% of revenue versus 4.9% in 2016.
- Operating cash flow declined $3.4 million, primarily amid higher working capital and receivables. Pharma Services DSO increased to 107 days from 95, while consolidated DSO improved to 82 days from 84.
- Investing cash outflow increased to $13.7 million, reflecting laboratory, facility, equipment and information-technology investments. Path Logic was sold in August 2017, generating a reported $1.1 million loss.
Outlook, commentary, risks and unusual items
- Outlook: No numerical 2018 revenue or earnings guidance is provided. Management plans to pursue organic growth, new tests, market share gains and expansion in Pharma Services, including the Rolle, Switzerland laboratory and a larger Houston facility. Signed Pharma contract backlog increased to $66.5 million from $36.4 million; management expects it to support future revenue.
- Reimbursement and collections: The company cited payer denials, preauthorization issues and uncertainty over Medicare coverage and payment for molecular testing. The 2018 Medicare “14-day rule” change may shift some molecular billing from clients to Medicare and reduce revenue on those tests. Management did not anticipate significant clinical revenue changes in 2018 from known legislative changes.
- Regulation: Potential FDA or congressional regulation of laboratory-developed tests remains uncertain and could increase compliance costs, delay tests or require clearance or approval. CMS was reviewing coverage of next-generation sequencing tests for advanced cancer.
- Debt and investment: Debt covenants, variable interest rates and substantial planned capital expenditures are relevant liquidity considerations. The company estimated $18–$20 million of capital equipment purchases over the next year and approximately $2.9 million to complete the Houston facility, expected to be funded primarily through lease financing.
- Preferred stock: Series A preferred stock generated $10.5 million of 2017 deemed dividends and beneficial-conversion-feature amortization, contributing to the gap between the $0.8 million GAAP net loss and the $11.4 million loss attributable to common stockholders. Preferred stock outstanding increased to 6.864 million shares after a payment-in-kind dividend.
- Accounting and tax: The 2017 income tax benefit included a $3.0 million net benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act lowered the federal corporate rate. ASC 606 adoption in 2018 was expected to reclassify substantially all clinical bad-debt expense as a reduction in revenue, materially lowering reported historical clinical revenue and general and administrative expense on a comparable basis; the company planned full retrospective adoption.
- Operations and contingencies: The company reported no current legal proceedings it considered material. It disclosed a lawsuit-related increase in legal reserves, but the filing text does not provide a clear value. The auditors gave an unqualified opinion and concluded internal control over financial reporting was effective.
Important facts for investors to verify
- How ASC 606 retrospective restatement changes reported revenue, margins and year-over-year comparisons.
- Whether rising bad-debt expense, payer denials and the aged receivables balance translate into further collection losses.
- Whether the $66.5 million Pharma backlog converts to revenue on schedule, and whether expansion in Switzerland and Houston delivers expected growth and returns.
- Actual borrowing availability, leverage covenant headroom, interest-rate exposure and funding for planned capital expenditures.
- The continuing effect of Medicare and commercial-payer reimbursement rules, including NGS coverage and the 14-day rule change.
- The future cost, conversion or redemption implications of Series A preferred stock and its cumulative payment-in-kind dividends.