NeoGenomics, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 26, 2019. The filing also reports fourth-quarter results. NeoGenomics operates cancer-focused genetic and molecular testing laboratories, with Clinical Services and Pharma Services segments. Clinical Services generated 87% of 2018 revenue and Pharma Services 13%.
Financial performance and position
| Metric | FY 2018 | FY 2017, as adjusted |
|---|---|---|
| Revenue | $276.7 million | $240.3 million |
| Gross profit / margin | $127.3 million / 46.0% | $102.0 million / 42.4% |
| Operating income | $10.0 million | $2.9 million |
| Net income (loss), GAAP | $2.6 million | $(0.4) million |
| Net income (loss) attributable to common stockholders | $6.1 million | $(10.9) million |
| Diluted earnings (loss) per common share | $0.07 | $(0.14) |
| Cash from operating activities | $44.8 million | $18.0 million |
| Adjusted EBITDA (non-GAAP) | $43.6 million; 15.7% of revenue | $33.6 million; 14.0% of revenue |
- Clinical Services revenue rose 13.5% to $241.9 million; Pharma Services revenue rose 28.4% to $34.9 million. Clinical requisitions increased 11.4%, and tests performed increased 14.1%.
- Fourth-quarter revenue was $76.5 million, gross profit was $37.1 million, and GAAP net income was $0.4 million.
- Year-end cash was $9.8 million and working capital was $42.7 million. Current assets were $103.7 million and current liabilities $60.9 million.
- Debt at year-end included $96.8 million outstanding on the term loan and $5.0 million on the revolver; total debt including capital leases was $113.3 million. The company reported $60.9 million of available revolver capacity and compliance with debt covenants.
Material changes and notable items
- Revenue increased 15.2% year over year. Gross margin expanded 3.6 percentage points, with management attributing improvement to higher revenue per test, lower cost per test, automation, scale efficiencies, and the 2017 sale of Path Logic.
- Days sales outstanding improved from 91 to 77 days. Operating cash flow increased by $26.7 million, partly reflecting higher accounts payable and accrued expenses.
- On December 10, 2018, NeoGenomics acquired Genoptix for approximately $127 million in cash and 1 million common shares. Genoptix contributed $4.6 million in revenue and a $0.3 million net loss from acquisition through year-end. The purchase accounting was provisional; acquired goodwill was $50.9 million and identifiable intangible assets were $71.8 million.
- The company issued 11.27 million shares in an August 2018 offering, receiving $135.1 million net proceeds, and redeemed all remaining Series A preferred stock for approximately $50.1 million. Common-share count increased during the year.
- Comparisons use 2017 figures retrospectively adjusted for ASC 606. The standard reduced reported 2017 revenue by $18.4 million, primarily because certain bad-debt amounts were presented as reductions to clinical revenue rather than as operating expense.
Outlook, risks, and contingencies
- Management’s 2019 priorities are profitable growth, Genoptix integration, quality and service, new assays and informatics, and improved operational efficiency. It expects continued growth and says Pharma backlog should support higher future revenue; no specific consolidated revenue or earnings guidance is provided.
- Management forecast 2019 capital expenditures of $16–$20 million and stated cash, available credit, and operating cash flows should fund commitments and interest payments for at least 12 months from issuance of the financial statements.
- Management cited a Pharma signed-contract backlog of $98.9 million at year-end, up from $68.7 million. Separately, the revenue note reports approximately $65.0 million in signed contracts, substantially all with cancellation provisions; the filing’s measures differ in definition and should not be treated as directly comparable.
- Key risks include reimbursement and payer-policy changes, including Medicare and molecular-test coverage; possible new FDA or legislative regulation of laboratory-developed tests; billing and collection uncertainty; intense competition and price pressure; and execution risks integrating Genoptix and consolidating systems and controls.
- Borrowings are largely variable-rate and tied to LIBOR, with swaps hedging part of the exposure. The company disclosed uncertainty around LIBOR transition and reported $31.8 million of unhedged variable-rate debt at year-end.
- NeoGenomics is involved in binding arbitration with Health Discovery Corporation over licensed technology. The panel had not issued a decision; management did not expect a material adverse financial effect based on information then available. Ordinary-course legal matters were also disclosed.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Genoptix was excluded from the internal-control assessment and audit scope; management said it was migrating Genoptix to its control systems.
Most important facts for investors to verify
- Whether Genoptix integration achieves expected growth, cost efficiencies, and service levels, and how final purchase accounting compares with provisional estimates.
- How the company defines and reconciles the $98.9 million backlog with the $65.0 million of signed contracts disclosed in the revenue note, including cancellation risk and expected timing of conversion to revenue.
- The sustainability of margin expansion and operating cash flow, particularly given the contribution from working-capital movements and acquisition-related costs.
- Debt repayment requirements, covenant headroom, available revolver capacity, and exposure to interest-rate and LIBOR-transition changes.
- Potential effects of reimbursement decisions, LDT regulation, and payer billing policies on test coverage, realized pricing, and collections.
- Progress integrating Genoptix’s financial reporting controls, given its exclusion from the 2018 internal-control assessment.