NeoGenomics, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing; quarterly Q4 results are noted below. The company provides cancer-focused clinical testing and pharmaceutical clinical-trial services. Clinical Services generated 88% of 2019 revenue and Pharma Services 12%. Genoptix, acquired in December 2018, materially affects year-over-year comparability.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Revenue | $408.8 million | $276.7 million |
| Clinical Services revenue | $361.2 million; +49.3% | $241.9 million |
| Pharma Services revenue | $47.7 million; +36.7% | $34.9 million |
| Gross profit / margin | $196.8 million / 48.1% | $127.3 million / 46.0% |
| Operating income / margin | $13.0 million / 3.1% | $10.0 million / 3.6% |
| Net income | $8.0 million; $0.08 per diluted share | $2.6 million; $0.07 per diluted share |
| Operating cash flow | $23.4 million | $44.8 million |
| Adjusted EBITDA (non-GAAP) | $57.2 million; 14.0% of revenue | $43.6 million; 15.7% of revenue |
| Cash and working capital at year-end | $173.0 million; $226.8 million | $9.8 million; $42.7 million |
| Total debt, including financing obligations | $106.1 million | $113.3 million |
Operating cash flow was reduced by working-capital needs, chiefly higher accounts receivable and inventory. Year-end accounts receivable was $94.2 million, versus $76.9 million a year earlier; days sales outstanding rose from 77 to 81. The company reported $96.8 million outstanding under its term loan and no revolver borrowings; approximately $130.6 million of borrowing capacity was available. Management said cash, available credit and operating cash flow should be sufficient for at least 12 months from the report’s issuance.
For Q4 2019, revenue was $106.9 million, gross profit $49.9 million and net income $6.3 million, or $0.06 per share. Revenue increased sequentially from $104.7 million in Q3; gross profit declined from $50.8 million.
Material changes versus the prior period
- Revenue increased 47.7%; clinical testing volume rose 31.7%, including acquisition contribution and organic growth. Clinical requisitions increased 30.4%.
- Gross margin improved by 2.1 percentage points, which management attributed to higher revenue per test, productivity gains and cost efficiencies. Average clinical revenue per test rose 13.3%; average cost per test rose 9.9%.
- Operating expenses grew faster than revenue: general and administrative expense rose 50.9%, research and development 182.8%, and sales and marketing 61.0%. Operating margin consequently fell from 3.6% to 3.1%.
- Net income increased, but operating cash flow declined by nearly half. Adjusted EBITDA increased in dollars while its margin declined from 15.7% to 14.0%.
- Pharma signed-contract backlog increased from $98.9 million to $130.3 million. The company cautions that substantially all signed contracts have cancellation provisions.
- A May 2019 stock offering raised $160.8 million net, increasing shares outstanding. The June refinancing replaced the prior credit agreement; the term loan balance was $97.5 million before unamortized issuance costs.
Outlook, commentary, risks and unusual items
- Management’s 2020 priorities are profitable growth, improved service and turnaround times, automation, quality, new assays and informatics, and expansion of NGS, liquid biopsy, MRD and companion-diagnostic capabilities. No specific revenue or earnings guidance is provided.
- 2020 capital expenditures were forecast at $30 million to $35 million. A new Fort Myers laboratory and headquarters facility had not yet begun construction; the company disclosed $50.3 million of future minimum lease payments for an executed lease and additional planned construction and leasehold-improvement funding.
- Key risks include reimbursement reductions and payer coverage decisions, billing and collection uncertainty, proposed FDA oversight of laboratory-developed tests, healthcare fraud-and-abuse rules, privacy and cybersecurity obligations, competitive pricing, integration and scaling challenges, staffing and laboratory capacity, reliance on FedEx for specimen transport, and variable-rate debt. The filing also identified the emerging coronavirus outbreak as a potential operational and financial risk.
- The company paid $6.7 million in June 2019 to settle its HDC licensing arbitration; the agreement was terminated and the company no longer uses HDC technology. The settlement was a principal contributor to the $4.6 million increase in other expense.
- In January 2020, a subsidiary agreed to acquire substantially all assets of Human Longevity, Inc.’s oncology division for $37 million cash. The filing also reports the 2019 opening of a Singapore laboratory.
- The 2019 income-tax benefit was $4.4 million despite pretax income of $3.6 million; the effective tax rate was unusual, and valuation allowances were maintained for certain foreign losses. A 2017 federal tax return was under IRS examination.
- The auditors issued an unqualified opinion on the 2019 financial statements and internal controls. The critical audit matter was management’s estimate of clinical revenue implicit price concessions, which depends on judgments about payer collections. The filing also describes immaterial corrections and reclassifications to prior equity presentations, with no effect on previously reported operating results or cash flows.
Important facts for investors to verify
- How much of reported growth reflects Genoptix and how much represents sustainable organic volume, pricing and test-mix gains.
- Whether the improved gross margin can be sustained while operating expenses rise, and whether Adjusted EBITDA margin recovers.
- Accounts-receivable aging, collections, payer denials and the assumptions underlying implicit price concessions, given higher DSO and the audit focus.
- Backlog conversion, cancellations and timing of Pharma contract revenue and cash receipts.
- Debt covenant headroom, interest-rate exposure, planned capital spending and the funding commitments for the Fort Myers facility and HLI acquisition.
- Actual reimbursement effects from Medicare, commercial payers and any future LDT regulation, along with integration and execution costs.