NeoGenomics, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing; quarterly results are noted where relevant. NeoGenomics operates U.S. cancer-focused genetic and molecular testing laboratories and provides pharmaceutical clinical-trial services. The year-over-year comparison is substantially affected by Clarient, acquired on December 30, 2015, so 2015 included only two days of Clarient operations.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $244.1 million | $99.8 million |
| Gross profit / margin | $110.4 million / 45.2% | $43.8 million / 43.8% |
| Operating income (loss) | $2.6 million | ($5.6 million) |
| Net income (loss) | ($5.7 million) | ($2.5 million) |
| Net loss attributable to common stockholders / diluted EPS | ($30.4 million) / ($0.39) | ($2.7 million) / ($0.04) |
| Cash from operating activities | $21.5 million | $6.4 million |
| Cash and cash equivalents at year-end | $12.5 million | $23.4 million |
Revenue rose approximately 145%. Clinical testing revenue was $222.0 million and Pharma Services revenue was $22.1 million, compared with $98.6 million and $1.2 million, respectively, in 2015. Management attributed growth to Clarient, expanded sales coverage, new tests including PD-L1, and cross-selling. Clinical requisitions increased 159.5% and tests performed increased 154.6%; average clinical revenue per requisition declined 8.6% to $594, partly due to test mix.
Gross margin improved to 45.2% from 43.8%. Clinical cost per test declined 9.0% to $201, which management attributed to operating efficiencies and mix. Operating expenses were $107.8 million, including $3.5 million of impairment charges. Interest expense and debt termination fees were $10.0 million, versus $0.9 million in 2015. Adjusted EBITDA, a company-defined non-GAAP measure, was $34.7 million (14.2% of revenue), versus $9.7 million (9.7%).
Common-stockholder loss substantially exceeded the GAAP net loss, primarily because of $18.0 million in deemed preferred-stock dividends and $6.7 million in preferred-stock beneficial-conversion-feature amortization. These items are not operating losses but affect reported earnings available to common holders.
Balance sheet, debt and liquidity
At December 31, 2016, current assets were $78.8 million and current liabilities $38.1 million, for working capital of $40.7 million. Net accounts receivable was $55.5 million, after a $13.7 million allowance for doubtful accounts; the allowance was $4.8 million a year earlier. The filing attributes the increase partly to Clarient’s receivables and a temporary unbilled-test backlog during billing-system integration, which also delayed collections.
Year-end debt included a $75.0 million term loan, $22.9 million drawn on a $75.0 million revolver, and $10.5 million of capital leases and car loans. The company reported approximately $27.0 million of additional borrowing capacity under the revolver, subject to facility terms. The new senior secured facility matures in December 2021, bears variable-rate interest, and includes financial covenants and mandatory prepayment provisions. A $50 million interest-rate swap hedges part of the variable-rate exposure. Management stated that cash, available credit and operating cash flows were expected to meet operating commitments and interest payments for at least 12 months.
Operating cash flow was $21.5 million; investing cash outflow was $6.5 million, including $7.5 million of property and equipment purchases; financing cash outflow was $25.9 million, including $55.0 million to redeem preferred stock and repayment of the prior term loan, offset in part by new borrowings. Management estimated 2017 capital expenditures of $15–17 million.
Material changes, outlook and risks
- Clarient integration was substantially advanced: clients were migrated to common test menus, laboratory information and billing systems. The acquisition also materially expanded revenue, operations and debt.
- In 2016, the company redeemed 8,066,667 Series A preferred shares for $55.0 million; 6.6 million shares remained outstanding. Preferred shares have cumulative, escalating in-kind dividends, conversion rights and other protections. Future equity or unsecured-debt proceeds may be subject to a requirement to use at least 50% to redeem the remaining preferred stock.
- Fourth-quarter 2016 revenue was $60.5 million and gross profit $27.3 million; net loss was $6.2 million and loss available to common stockholders was $14.2 million. The full-year results included $3.5 million of impairment charges: $1.9 million related to disputed termination of the Health Discovery Corporation license and lack of revenue, and $1.6 million for declining Path Logic customer relationships.
- Management expected improved profitability in 2017 and at least $6–8 million of Clarient cost synergies during 2017, with further synergies thereafter. It also planned to consolidate the Irvine laboratory into Aliso Viejo, expand testing and Pharma Services, and invest in technology and automation. These are expectations, not guarantees; the filing provides no specific revenue or EPS guidance.
- Key exposures include reimbursement reductions and coverage uncertainty, payer collection and billing risks, LDT regulation, competition and customer internalization of tests, integration and execution risks, and debt service and covenant constraints. The filing notes that FDA did not finalize its proposed LDT guidance and that future regulatory requirements remained uncertain.
- The company reported no material legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting; management also concluded disclosure controls and financial-reporting controls were effective as of year-end.
Important facts for investors to verify
- How much of FY2016 growth reflects Clarient acquisition effects versus organic volume, pricing and new-test growth.
- Whether the projected $6–8 million of 2017 synergies and improved profitability are realized, alongside the planned capital spending.
- Receivable aging, cash collections and the adequacy of the increased doubtful-account allowance following the billing backlog.
- Debt covenant headroom, borrowing availability, variable-rate exposure and capacity to service debt while funding operations and investment.
- Potential dilution and cash obligations from the remaining Series A preferred shares, including accumulating dividends and conversion or redemption terms.
- The effect of Medicare and commercial-payer reimbursement, coverage and LDT regulatory changes on test pricing and demand.