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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2011.

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                              to                             

Commission File Number: 000-54384

 

 

NEOGENOMICS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Nevada

 

74-2897368

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

12701 Commonwealth Drive, Suite 9,

Fort Myers, Florida

 

33913

(Address of principal executive offices)   (Zip Code)

(239) 768-0600

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of October 21, 2011, the registrant had 43,236,498 shares of common stock, par value $0.001 per share outstanding.

 

 

 


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TABLE OF CONTENTS

 

PART I FINANCIAL INFORMATION

  

Item 1.  Financial Statements (unaudited)

     4   

Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

     12   

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

     20   

Item 4.  Controls and Procedures

     20   

Item 4T.  Controls and Procedures

  

PART II OTHER INFORMATION

  

Item 1.  Legal Proceedings

     21   

Item 1A.  Risk Factors

     21   

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

     22   

Item 3.  Defaults Upon Senior Securities

     22   

Item 4.  Removed and Reserved

     22   

Item 5.  Other Information

     22   

Item 6.  Exhibits

     23   

SIGNATURES

  

 

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FORWARD-LOOKING STATEMENTS

The information in this Quarterly Report on Form 10-Q contains “forward-looking statements” relating to NeoGenomics, Inc., a Nevada corporation (referred to individually as the “Parent Company” or collectively with all of its subsidiaries as “NeoGenomics” or the “Company”) within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. These “forward looking statements” represent the Company’s current expectations or beliefs including, but not limited to, statements concerning the Company’s operations, performance, financial condition and growth. For this purpose, any statements contained in this Form 10-Q that are not statements of historical fact are forward-looking statements. Without limiting the generality of the foregoing, words such as “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” or the negative or other comparable terminology are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These statements by their nature involve substantial risks and uncertainties, such as credit losses, dependence on management and key personnel, variability of quarterly results, competition and the ability of the Company to continue its growth strategy, certain of which are beyond the Company’s control. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual outcomes and results could differ materially from those indicated in the forward-looking statements.

Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time and it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

 

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PART I — FINANCIAL INFORMATION

Item 1.  Financial Statements

NEOGENOMICS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

ASSETS

   September 30, 2011     December 31, 2010  
     (unaudited)     

CURRENT ASSETS

    

Cash and cash equivalents

   $ 2,649      $ 1,097   

Restricted cash

     500        500   

Accounts receivable (net of allowance for doubtful accounts of

        $2,046 and $1,459, respectively)

     7,366        5,236   

Inventories

     1,096        887   

Other current assets

     702        1,018   
  

 

 

   

 

 

 

Total current assets

     12,313        8,738   

PROPERTY AND EQUIPMENT (net of accumulated depreciation of

        $6,052 and $4,568 respectively)

     5,062        4,839   

DEPOSITS

     110        74   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 17,485      $ 13,651   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES

    

Accounts payable

   $ 2,285      $ 1,933   

Accrued compensation

     1,291        1,338   

Other accrued expenses and liabilities

     625        460   

Short-term portion of equipment capital leases

     1,866        1,995   

Revolving credit line

     4,472        3,442   
  

 

 

   

 

 

 

Total current liabilities

     10,539        9,168   

LONG TERM LIABILITIES

    

Long-term portion of equipment capital leases

     1,586        1,348   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     12,125        10,516   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $.001 par value, (100,000,000 shares authorized;

        43,106,434 and 37,341,285 shares issued and outstanding at

        September 30, 2011 and December 31, 2010, respectively)

     43        37   

Additional paid-in capital

     28,105        24,557   

Accumulated deficit

     (22,788     (21,459
  

 

 

   

 

 

 

Total stockholders’ equity

     5,360        3,135   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 17,485      $ 13,651   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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NEOGENOMICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     For the Three Months Ended
September 30,
    For the Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

NET REVENUE

   $ 11,320      $ 8,708      $ 30,591      $ 25,616   

COST OF REVENUE

     6,246        4,818        16,996        13,737   
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     5,074        3,890        13,595        11,879   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES

        

General and administrative

     3,307        2,919        9,217        8,590   

Sales and marketing

     1,725        1,983        5,162        5,689   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     5,032        4,902        14,379        14,279   

INCOME (LOSS) FROM OPERATIONS

     42        (1,012     (784     (2,400
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST AND OTHER INCOME (EXPENSE) — NET

     (185     (186     (545     (526
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS

   $ (143   $ (1,198   $ (1,329   $ (2,926
  

 

 

   

 

 

   

 

 

   

 

 

 

NET LOSS PER SHARE

        

— Basic and diluted

   $ (0.00   $ (0.03   $ (0.03   $ (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE NUMBER

OF SHARES OUTSTANDING

        

Basic and diluted

     43,103,707        37,376,676        42,569,914        37,302,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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NEOGENOMICS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     For the Nine Months Ended
September 30,
 
     2011     2010  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net (loss)

   $ (1,329   $ (2,926

Adjustments to reconcile net (loss) to net cash (used in) operating activities:

    

Provision for bad debts

     1,740        1,746   

Depreciation

     1,484        1,297   

Amortization of debt issue costs

     30        38   

Stock-based compensation

     378        508   

Changes in assets and liabilities, net:

    

(Increase) decrease in accounts receivable, net of write-offs

     (3,870     (2,744

(Increase) decrease in inventories

     (208     (166

(Increase) decrease in other current assets

     286        (25

(Increase) decrease in deposits

     (37     (0

Increase (decrease) in accounts payable, accrued expenses and other liabilities

     356        (141
  

 

 

   

 

 

 

NET CASH USED IN OPERATING ACTIVITIES

     (1,170     (2,413
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Purchases of property and equipment

     (338     (813
  

 

 

   

 

 

 

NET CASH USED IN INVESTING ACTIVITIES

     (338     (813
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from capital lease obligations

     —          146   

Advances on credit facility

     1,030        3,348   

Repayment of capital leases and loans

     (1,146     (995

Decrease in restricted cash

     —          500   

Issuance of common stock, net of transaction costs

     3,176        151   
  

 

 

   

 

 

 

NET CASH PROVIDED BY FINANCING ACTIVITIES

     3,060        3,150   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     1,552        (76

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     1,097        1,631   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 2,649      $ 1,555   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

    

Interest paid

   $ 519      $ 484   
  

 

 

   

 

 

 

Income taxes paid

   $ —        $ 13   
  

 

 

   

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES

    

Equipment leased under capital leases

   $ 1,255      $ 1,419   
  

 

 

   

 

 

 

See notes to unaudited condensed consolidated financial statements.

 

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NEOGENOMICS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AS OF SEPTEMBER 30, 2011

NOTE A — NATURE OF BUSINESS AND BASIS OF FINANCIAL STATEMENT PRESENTATION

Nature of Business

NeoGenomics, Inc., a Nevada corporation (the “Parent Company”), and its subsidiary, NeoGenomics Laboratories, Inc., a Florida corporation (“NeoGenomics Laboratories” or the “Subsidiary”) (collectively referred to as “we”, “us”, “our”, “NeoGenomics”, or the “Company”), operates as a certified “high complexity” clinical laboratory in accordance with the federal government’s Clinical Laboratory Improvement Act, as amended (“CLIA”), and is dedicated to the delivery of clinical diagnostic services to pathologists, oncologists, urologists, hospitals, and other laboratories throughout the United States.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Parent and the Subsidiary. All significant intercompany accounts and balances have been eliminated in consolidation.

The accompanying condensed consolidated financial statements of the Company are unaudited and include all adjustments, in the opinion of management, which are necessary to make the financial statements not misleading. Except as otherwise disclosed, all such adjustments are of a normal recurring nature. Interim results are not necessarily indicative of results for a full year.

The interim condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the Securities and Exchange Commission and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Therefore, the interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on February 23, 2011.

Use of Estimates

The Company prepares its condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the condensed consolidated financial statements. Actual results and outcomes may differ from management’s estimates, judgments and assumptions. Significant estimates, judgments and assumptions used in these condensed consolidated financial statements include, but are not limited to, those related to revenues, accounts receivable and related reserves, contingencies, useful lives and recovery of long-lived assets, income and other taxes, and the fair value of stock-based compensation. These estimates, judgments, and assumptions are reviewed periodically and the effects of material revisions in estimates are reflected in the condensed consolidated financial statements prospectively from the date of the change in estimate.

Research and Development

Research and development costs are expensed as incurred and are included in our general and administrative expenses. Research and development expenses consist of compensation and benefits for research and development personnel, license fees, related supplies, inventory and payment for samples to complete validation studies. These expenses were incurred to develop our melanoma test (MelanoSITE), new FISH assays and to develop other new molecular tests.

Net Income (Loss) Per Share

We compute net income (loss) per share in accordance with FASB ASC Topic 260, Earnings per Share. Under the provisions of ASC 260, basic net income (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding,

 

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using the treasury stock method, during the period. Equivalent shares consist of employee stock options and certain warrants issued to consultants and other providers of financing to the Company that are in-the-money based on the weighted average closing share price for the period. Under the treasury stock method, the number of in-the-money shares that are considered outstanding for this calculation is reduced by the number of common shares that theoretically could have been re-purchased by the Company with the aggregate exercise proceeds of such warrant and option exercises if such shares were re-purchased at the weighted average market price for the period.

There were no common equivalent shares included in the calculation of diluted earnings per share for the three and nine month periods ended September 30, 2011 and 2010 because the Company had a net loss for such periods and therefore such common equivalent shares were anti-dilutive.

Concentrations of Credit Risk

Concentrations of credit risk with respect to revenue and accounts receivable are primarily limited to certain clients to whom the Company provides a significant volume of its services, and to specific payors of our services such as Medicare and individual insurance companies. The Company’s client base consists of a large number of geographically dispersed clients diversified across various customer types. The Company continues to focus its sales efforts to decrease the dependency on any given source of revenue and decrease its credit risk from any one large client or payor type. For the three and nine months ended September 30, 2011, one client with multiple locations represented 13.5% and 8.5% of revenue. For the same periods in the previous year no customer accounted for more than 5% of our revenue. There have been no significant changes in payor type mix since the Annual Report on Form 10-K was filed with the SEC on February 23, 2011.

The Company orders the majority of its FISH probes from one vendor and as a result of such vendor’s dominance of that marketplace and the absence of any competitive alternatives, if they were to have a disruption in the supply of these probes and we did not have inventory available, it could have a material effect on our business. This risk cannot be completely offset due to the fact the vendor has patent protection which limits other vendors from supplying these probes.

NOTE B — CRITICAL ACCOUNTING POLICIES

Revenue Recognition

The Company recognizes revenues in accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin Topic 13.A.1 and FASB ASC 605-10-S99-1, when (a) the price is fixed or determinable, (b) persuasive evidence of an arrangement exists, (c) the service is performed and (d) collectability of the resulting receivable is reasonably assured.

The Company’s specialized diagnostic services are performed based on a written test requisition form and revenues are recognized once the diagnostic services have been performed, the results have been delivered to the ordering physician, the payor has been identified and eligibility and insurance have been verified. These diagnostic services are billed to various payors, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals. The Company reports revenues from contracted payors, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules. The Company reports revenues from non-contracted payors, including certain insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and the amount expected to be collected from non-contracted payors is recorded as a contractual allowance to arrive at the reported net revenues. The expected revenues from non-contracted payors are based on the historical collection experience of each payor or payor group, as appropriate. The Company records revenues from patient pay tests net of a large discount and as a result recognizes minimal revenue on those tests. In each reporting period, the Company reviews its historical collection experience for non-contracted payors and adjusts its expected revenues for current and subsequent periods accordingly.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable are reported, net of an allowance for doubtful accounts, which is estimated and recorded in the same period the related revenue is recorded based on the historical collection experience for each type of payor. In addition, the allowance is adjusted periodically, based upon an evaluation of historical collection experience with specific payors, payor types, and other relevant factors, including regularly assessing the state of our billing operations in order to identify issues which may impact the collectability of receivables or allowance estimates. Revisions to the allowance are recorded as an adjustment to bad debt expense within general and administrative expenses. After appropriate collection efforts have been exhausted, specific receivables deemed to be uncollectible are

charged against the allowance in the period they are deemed uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance.

 

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Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718 Compensation — Stock Compensation. ASC 718 requires recognizing compensation costs for all share-based payment awards made to employees and directors based upon the awards’ grant-date fair value. The standard covers employee stock options, restricted stock, and other equity awards.

For stock options, the Company uses a trinomial lattice option-pricing model to estimate the grant-date fair value of stock option awards, and recognizes compensation cost on a straight-line basis over the awards’ vesting periods. The Company estimates an expected forfeiture rate, which is factored into the determination of the Company’s periodic expense.

Reclassification

One amount in the December 31, 2010 statement of cash flows was reclassified to conform to the presentation in the current year statement of cash flows.

NOTE C — REVOLVING CREDIT FACILITY

On February 1, 2008, we entered into a revolving credit facility with CapitalSource, which allowed us to borrow up to $3,000,000 based on a formula tied to our eligible accounts receivable that are aged less than 150 days. On April 26, 2010, the Parent Company, NeoGenomics Laboratories, Inc., the wholly-owned subsidiary of the Parent Company (“Borrower”), and CapitalSource entered into an Amended and Restated Revolving Credit and Security Agreement (the “Amended and Restated Credit Agreement” or the “Credit Facility”). The Amended and Restated Credit Agreement amended and restated the Revolving Credit and Security Agreement dated February 1, 2008, as amended, among the Parent Company, Borrower and CapitalSource (the “Original Credit Agreement”). The terms of the Amended and Restated Credit Agreement and the Original Credit Agreement are substantially similar except that the Amended and Restated Credit Agreement, among other things, (i) increased the maximum principal amount of the revolving credit facility from $3,000,000 to $5,000,000, (ii) provided that the term of the Amended and Restated Credit Agreement shall end on February 1, 2013, (iii) increased the amount of the collateral management fee and unused line fees paid by Borrower to CapitalSource, (iv) modified the definitions of “Minimum Termination Fee” and “Permitted Indebtedness”, (v) provided that the Borrower must maintain a minimum outstanding principal balance under the revolving facility of at least $2,000,000, (vi) increased the interest rate to LIBOR plus 4.25% (provided that LIBOR shall not be less than 2.0%) and (vii) revised certain covenants and representations and warranties. The Amended and Restated Credit Agreement also made permanent a previously enacted temporary change to the methodology for calculating the Fixed Charge Coverage Ratio covenant, which permits us to add amounts of unrestricted cash and cash equivalents and unused availability under the Credit Facility to Adjusted EBITDA for the purposes of calculating this covenant. We paid CapitalSource a commitment fee of $33,500 in connection with the execution of the Amended and Restated Credit Agreement. In addition, CapitalSource credited $25,000 of an amendment fee previously paid by us towards this commitment fee.

Interest on outstanding advances under the Credit Facility are payable monthly in arrears on the first day of each calendar month. At September 30, 2011, the effective rate of interest was 6.25%. On September 30, 2011, the available credit under the Credit Facility was approximately $0.5 million and the outstanding borrowing was $4.5 million after netting compensating cash on hand.

NOTE D — CAPITAL LEASE TRANSACTIONS

On July 28, 2010 NeoGenomics Laboratories and Leasing Technologies, Inc. (LTI) agreed on the terms and conditions of a new $1.0 million lease line of credit. The line had the same terms and conditions of our November 5, 2008 Master Lease Agreement with LTI. Advances under the lease line could be made for one year by executing equipment schedules for each advance. The lease terms of all equipment schedules issued under the lease line were for 36 months. The lease rate factor applicable for each equipment schedule was 0.0327/month. If the Subsidiary made use of the entire lease line, the monthly rent would be $32,700. Monthly rent for the leased equipment is payable in advance on the first day of each month. The obligations of the Subsidiary are guaranteed by the Parent Company. At the end of the term of each equipment schedule the Subsidiary could: (a) renew the lease with respect to such equipment for an additional 12 months at fair market value; (b) purchase the equipment at fair market value, which price will not be less than 10% of cost nor more than 14% of cost; (c) extend the term for an additional six months at 35% of the monthly rent paid by the lessee

during the initial term, after which the equipment may be purchased for the lesser of fair market value or 8% of cost; or (d) return the equipment subject to a remarketing charge equal to 6% of cost.

 

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The immaterial amount of availability we had remaining at June 30, 2011 expired and on July 21, 2011, NeoGenomics Laboratories and LTI agreed on the terms and conditions of a new $1.0 million lease line of credit. The terms and conditions are the same as described above and advances under the lease line could be made for a period of one year.

During the third quarter of fiscal year 2011, we entered into lease schedules for $1.0 million to purchase laboratory equipment to make investments for further growth and to increase our testing menu. Therefore we have no availability on this LTI lease line as of September 30, 2011.

During the third quarter of fiscal year 2011, we also used a vendor to lease an additional $378,000 of laboratory equipment. The lease has a five year term with a fair market value buyout option at the end of the term. The payment on the lease is $7,713 per month and the annual interest rate is approximately 11%.

During the third quarter of fiscal year 2011, we also entered into several small capital leases to purchase approximately $218,000 of laboratory equipment, computer equipment and furniture. The leases have either three or four year terms and annual interest rates in the 14% to 16% range.

On September 9, 2011, we entered into a master lease agreement for a $1.0 million equipment line of credit with Garic, Inc. The lease has a 12 month draw down period and each schedule has a 36 month term and a lease rate factor of 3.1947%. The lease has a fair market value option at the end of the term at a price not to exceed 15% of the equipment cost or the right to return the equipment. Monthly payments on the entire amount will be $31,647 and will have an annual interest rate of 16.12%. We have $1.0 million of availability on this agreement as of September 30, 2011. On October 6, 2011 the Company entered into a lease schedule for approximately $50,000 and has $950,000 of remaining availability on the lease line.

NOTE E — EQUITY

Warrant Exercises

During January 2011, Aspen Select Healthcare, LP, Steven C. Jones, Dr. Michael T. Dent, SKL Family Limited Partnership (“SKL”), Larry Kuhnert and John Elliott, who previously received warrants for a) participating in our private equity offering in 2006, b) modifying a debt arrangement with us, or c) waiving certain rights they had with respect to the 2006 offering exercised 1,600,000 warrants at an exercise price of $0.26 per share in a cashless exercise. In order to settle these exercises, we issued 1,326,633 shares of common stock.

On January 21, 2011, Aspen Select Healthcare, LP exercised 2,500,000 warrants to purchase common stock at an exercise price of $0.31 per share in a cashless transaction. The Company issued 1,991,391 unrestricted shares of common stock to settle this transaction. These warrants were originally issued as part of the March 23, 2005 loan facility with Aspen Select Healthcare, LP.

On January 31, 2011, Hawk & Associates exercised 35,000 warrants to purchase common stock at an exercise price of $0.30 per share in a cashless transaction. Hawk and Associates also exercised 35,000 warrants to purchase common stock at an exercise price of $0.68 per share in a cashless transaction in February 2011. The Company issued a combined total of 47,185 unrestricted shares of common stock to settle these exercises.

January 2011 Private Equity Offering

Between January 10, 2011 and January 12, 2011 the Company entered into subscription agreements with certain investors (the “Investors”) pursuant to which the Company sold 2,001,667 shares of common stock at a price of $1.50 per share, which resulted in gross proceeds to the Company of approximately $3.0 million. In connection with this Common Stock Financing, the Company entered in registration rights agreements with the Investors which entitle them to certain demand and piggyback registration rights.

The investors included officers and directors of the Company or an affiliate of officers and directors of the Company.

 

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NOTE F — RESTRICTED STOCK AWARDS

On April 27, 2011, the Company granted 24,000 shares of restricted stock to each of the five non-officer directors of the Company for a total of 120,000 restricted shares. These directors were elected by the shareholders and the stock award is for service on the Board of Directors only. Such restricted shares vest a rate of 2,000 shares per quarter on the last day of each calendar quarter beginning on June 30, 2011 and ending on March 31, 2014 so long as each director remains a member of the Board of Directors. The fair market value of each grant of restricted stock on award date was deemed to be $34,560 or $1.44 per share, which was the closing price of the Company’s common stock on the day before the grant as approved by the Board of Directors. The company also agreed to reimburse each Director $12,000, payable in quarterly installments over three quarters, to offset the income taxes due on such restricted stock awards, provided each remains a director of the Company.

NOTE G — RELATED PARTY TRANSACTIONS

Consulting Agreements

During the three and nine months ended September 30, 2011 Steven C. Jones, a director of the Company, earned approximately $50,000 and $151,000, respectively, for various consulting work performed in connection with his duties as Executive Vice President of Finance. Mr. Jones earned approximately $45,000 and $147,350, respectively for the three and nine months ended September 30, 2010.

During May 2010 Mr. Jones received 450,000 warrants as described in more detail in Note L of our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on February 23, 2011 and as such we recorded $9,400 and $32,900, respectively, in stock compensation expense for these warrants for the three and nine months ended September 30, 2011. During the three and nine months ended September 30, 2010 we recorded $28,092 and $123,735, respectively of stock compensation expense for these warrants.

END OF FINANCIAL STATEMENTS.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NeoGenomics, Inc., a Nevada corporation (referred to individually as the “Parent Company” or collectively with all of its subsidiaries as “NeoGenomics” or the “Company” in this Form 10-Q) is the registrant for SEC reporting purposes. Our common stock is listed on the OTC Bulletin Board under the symbol “NGNM.”

Introduction

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements, and the notes thereto included herein. The information contained below includes statements of the Company’s or management’s beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the introductory note to this Quarterly Report on Form 10-Q under the caption “Forward Looking Statements”, which information is incorporated herein by reference.

Overview

NeoGenomics operates a network of cancer-focused testing laboratories whose mission is to improve patient care through exceptional cancer genetic diagnostic, prognostic and predictive testing services. Our vision is to become America’s premier cancer testing laboratory by delivering uncompromising quality, exceptional service and innovative products and solutions. The Company’s laboratory network currently offers the following types of testing services:

 

  a) cytogenetics testing, which analyzes human chromosomes to identify changes from patterns seen in normal chromosomes;

 

  b) Fluorescence In-Situ Hybridization (“FISH”) testing, which analyzes abnormalities at the chromosomal and gene levels and is used to help identify a number of gene alterations, such as amplification, deletions and translocations;

 

  c) flow cytometry testing, which analyzes gene expression of specific markers inside cells and on cell surfaces and is used in diagnosing a wide variety of leukemia and lymphoma neoplasms;

 

  d) hisotology which is the study of microscopic tissues; where a NeoGenomics physician, or one under contract with the Company attempts to determine the diagnosis of disease;

 

  e) immunohistochemistry testing (IHC), which analyzes the distribution of tumor antigens in specific cell and tissue types, and

 

  f) molecular testing which involves analysis of DNA and RNA to diagnose and predict the clinical significance of various genetic sequence disorders.

All of these testing services are widely utilized in the diagnosis, prognosis, and prediction for response to therapy of various types of cancers.

Our Focus

NeoGenomics’ primary focus is to provide high complexity laboratory testing for hospitals and community-based pathology practices throughout the United States. The high complexity cancer testing services we offer to community-based pathologists and hospitals are designed to be a natural extension of, and complementary to, the services that our pathologist clients perform within their own practices. We currently perform analyses of bone marrow and/or peripheral blood for the diagnosis of blood and lymphoid tumors (leukemias and lymphomas) and archival tissue referred for analysis of solid tumors such as breast, lung and colon cancer.

We believe our relationship as a non-competitive partner to the community-based pathologist empowers these pathologists to expand their breadth of testing and provide a menu of services that matches or exceeds the level of service found in academic centers of excellence around the country.

In geographic areas where we do not provide services to a community based pathology practice, we may call directly on community based oncology, dermatology and urology practices. We serve community-based urologists by providing a FISH-based genetic test for the diagnosis of bladder cancer and early detection of recurrent disease. We serve community based dermatologists by providing a

 

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FISH-based genetic test for the diagnosis of malignant melanoma as well as several molecular tests. We also believe that we can provide a competitive choice to those larger oncology practices that prefer to have a direct relationship with a laboratory for cancer genetic testing services. Our regionalized approach allows us strong interactions with clients and our innovative Genetic Pathology Solutions (“GPS”) report summarizes all relevant case data on one summary report.

Seasonality

The majority of our testing volume is dependent on patients being treated by hematology/oncology professionals and other healthcare providers. Volume of testing generally declines during the vacation seasons, year-end holiday periods and other major holidays, particularly when those holidays fall during the middle of the week. In addition, volume of testing tends to decline due to adverse weather conditions, such as heavy snow, excessively hot or cold spells or hurricanes, tornados in certain regions, consequently reducing revenues and cash flows in any affected period. Therefore, comparison of the results of successive periods may not accurately reflect trends for future periods.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of laboratory tests, and approximately one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our Annual Report on Form 10-K for the year ended December 31, 2010, and there have been no material changes in the three and nine months ended September 30, 2011.

Results of Operations for the Three and Nine Months Ended September 30, 2011 as Compared to the Three and Nine Months Ended September 30, 2010

The following table presents the unaudited condensed consolidated statements of operations as a percentage of revenue:

 

     For the three months ended
September 30.
    For the nine months  ended
September 30,
 
     2011     2010     2011     2010  

NET REVENUE

     100.0     100.0     100.0     100.0

COST OF REVENUE

     55.2     55.3     55.6     53.6
  

 

 

   

 

 

   

 

 

   

 

 

 

GROSS PROFIT

     44.8     44.7     44.4     46.4
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

        

General and administrative

     29.2     33.5     30.1     33.5

Sales and marketing

     15.2     22.8     16.9     22.2
  

 

 

   

 

 

   

 

 

   

 

 

 

TOTAL OPERATING EXPENSES

     44.4     56.3     47.0     55.7
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME (LOSS) FROM OPERATIONS

     0.4     (11.6 )%      (2.6 )%      (9.3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

INTEREST AND OTHER INCOME (EXPENSE) — NET

     (1.7 )%      (2.2 )%      (1.7 )%      (2.1 )% 

NET LOSS

     (1.3 )%      (13.8 )%      (4.3 )%      (11.4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Revenue

The Company’s specialized testing services are performed based on a written or computer generated test requisition form and revenues are recognized once the testing services have been performed, the results have been delivered to the ordering physician, the payor has been identified and eligibility and insurance have been verified. Our testing services are billed to various payors, including Medicare, commercial insurance companies, other directly billed healthcare institutions such as hospitals and clinics, and individuals. We report revenues from contracted payors, including Medicare, certain insurance companies and certain healthcare institutions, based on the contractual rate, or in the case of Medicare, published fee schedules. We report revenues from non-contracted payors, including certain insurance companies and individuals, based on the amount expected to be collected. The difference between the amount billed and the amount expected to be collected from non-contracted payors is recorded as an allowance to arrive at the reported net revenues. The expected revenues from non-contracted payors are based on the historical collection experience of each payor or payor group, as appropriate. In each reporting period, we review our historical collection experience for non-contracted payors and adjust our expected revenues for current and subsequent periods accordingly.

Our revenue, requisition and test metrics for the three and nine months ended September 30, 2011 and 2010 are as follows:

Supplemental Information on Customer Requisitions Received and Tests Performed

(in thousands, except test and requisition amount)

 

     For the
Three-Months
Ended
September  30,
2011
     For the
Three-Months
Ended
September  30,
2010
     %
Inc
(Dec)
    For the
Nine-Months
Ended
September 30,
2011
     For the
Nine-Months
Ended
September 30,
2010
     %
Inc
(Dec)
 

Requisitions Rec’d (cases)

     12,857         9,677         32.9     34,995         28,833         21.4

Number of Tests Performed

     19,977         14,477         38.0     53,731         42,983         25.0

Avg. # of Tests / Requisition

     1.55         1.50         3.9     1.54         1.49         3.0

Total Testing Revenue

   $ 11,320       $ 8,708         30.0   $ 30,591       $ 25,616         19.4

Avg Revenue/Requisition

   $ 880.47       $ 899.82         (2.2 %)    $ 874.15       $ 888.42         (1.6 %) 

Avg Revenue/Test

   $ 566.66       $ 601.48         (5.8 %)    $ 569.33       $ 595.95         (4.5 %) 

We saw a large quarterly and yearly increase in revenue in 2011 as the result of the addition of several new clients and additional sales to existing clients.

Revenues per test are a function of both the type of the test (e.g. FISH, cytogenetics, flow cytometry, etc.) and the payer (e.g., Medicare, Medicaid, third party insurer, client bill, etc.). Average revenue per test is primarily driven by our test type mix and our payer mix. The decrease in average revenue per test for the three and nine months ended September 30, 2011 and 2010 is the result of: a) going on contract with Aetna and Blue Cross Blue Shield in July 2010 at rates below previous averages, b) a 50% decrease in the average reimbursement for bladder cancer FISH testing as a result of Medicare and several insurance carriers reducing reimbursement beginning in January 2011, and c) a 1.75% decrease in reimbursement for all Medicare tests covered under the Clinical Lab Fee Schedule which affected all our Cytogenetics and Molecular tests. In addition, one Medicare service provider reduced the maximum allowable number of markers reimbursable for flow cytometry testing in late 2010 and another in June 2011.

We have established a reserve for uncollectible amounts based on estimates of what we will collect from: a) third-party payers with whom we do not have a contractual arrangement or sufficient experience to accurately estimate the amount of reimbursement we will receive, b) payments directly from patients, and c) those procedures that are not covered by insurance or other third party payers. Also we take significant discounts to gross revenue on all patient self-pay and Medicaid tests to arrive at net revenues.

The following table represents our allowance balances at each balance sheet date presented and that allowance as a percentage of gross accounts receivable:

 

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     September 30,        
     2011     2010     Change  

Allowance for doubtful accounts

   $ 1,826,000      $ 1,281,000      $ 545,000   

As a % of gross accounts receivable

     19.9     19.0  

Bad debt expense as a percentage of revenue which is described in more detail under general and administrative expenses was 5.6% and 5.7% for the three and nine month periods ended September 30, 2011, respectively, and was 6.7% and 6.8% of revenue for the three and nine month periods ended September 30, 2010. The reason for this decrease is described later under our discussion of General and Administrative expenses.

Cost of Revenue and Gross Profit

Cost of revenue includes payroll and payroll-related costs for performing tests, depreciation of laboratory equipment, rent for laboratory facilities, laboratory reagents, probes and supplies, and delivery and courier costs relating to the transportation of specimens to be tested.

 

     For the three months ended
September 30.
           For the nine months ended
September 30,
       
     2011     2010     Change      2011     2010     Change  

Cost of revenue

   $ 6,246,000      $ 4,818,000      $ 1,428,000       $ 16,996,000      $ 13,737,000      $ 3,259,000   

As a % of revenue

     55.2     55.3        55.6     53.6  

The increase in cost of revenue as a percentage of revenue was primarily related to a decline in our average revenue per test for the nine months ended September 30, 2011 versus the comparable periods last year. The dollar increase in cost of revenue in the three and nine months ended September 30, 2011 was primarily attributable to increases in all areas of costs of revenue as the Company scaled its operations in order to meet increased testing demand. In addition, we have seen an increase in our courier and transportation costs related to delivering specimens to our labs due to increasing fuel costs in 2011, and our average supply costs on a per test basis have increased in 2011.

As a result of the above, our gross profit and gross profit margins for these periods are as follows:

 

     For the three months ended
September 30.
           For the nine months ended
September 30,
       
     2011     2010     Change      2011     2010     Change  

Gross Profit

   $ 5,074,000      $ 3,890,000      $ 1,184,000       $ 13,595,000      $ 11,879,000      $ 1,715,000   

Gross Margin as a % of revenue

     44.8     44.7        44.4     46.4  

Revenue, Cost of Revenue and Gross Profit per Test

The following table is a summary of per test data on revenue, cost of sales and gross profit. The decrease in gross margin was driven largely by the decline in our average revenue per test in the three and nine months ended September 30, 2011 versus the comparable periods last year:

 

     For the three months ended
September 30.
    Pos/(Neg)     For the nine months  ended
September 30,
    Pos/(Neg)  
     2011     2010     Change     2011     2010     Change  

Revenue per Test

   $         566.66      $           601.48      $ (34.82   $           569.33      $       595.95      $ (26.62

Cost of Revenue per Test

   $ 312.66      $ 332.79      $ 20.13      $ 316.31      $ 319.59      $ 3.28   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit per Test

   $ $254.00      $ 268.69      $ (14.69   $ 253.02      $ 276.36      $ (23.34

Gross Margin % per Test

     44.8     44.7       44.4     46.4  

 

 

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Table of Contents

Sales and Marketing

Sales and marketing expenses relate primarily to the employee related costs of our sales management, sales representatives, sales and marketing consultants, marketing, and customer service personnel.

 

     For the three months ended
September 30.
          For the nine months ended
September 30,
       
     2011     2010     Change     2011     2010     Change  

Sales and marketing

   $ 1,725,000      $ 1,983,000      $ (258,000   $ 5,162,000      $ 5,689,000      $ (527,000

As a % of revenue

     15.2     22.8       16.9     22.2  

The decline in sales and marketing expenses for the three and nine months ended September 30, 2011 as compared to the same period in 2010 was driven primarily by reductions in headcount. The reduction in sales and marketing as a percentage of revenue is the result of increases in productivity which resulted in strong revenue growth along with reduced headcount.

Moving forward, we expect our sales and marketing expenses to increase modestly on dollar terms with increased volume; however, as a percentage of revenue, we expect these expenses to remain at levels similar to the current levels.

General and Administrative Expenses

General and administrative expenses relate to billing, bad debts, finance, human resources, information technology, research and development and other administrative functions. They primarily consist of employee related costs (such as salaries, fringe benefits, and stock-based compensation expense), professional services, facilities expense, and depreciation and administrative-related costs allocated to general and administrative expenses.

 

     For the three months ended
September 30.
           For the nine months ended
September 30,
       
     2011     2010     Change      2011     2010     Change  

General and administrative

   $ 3,307,000      $ 2,919,000      $ 388,000       $ 9,217,000      $ 8,590,000      $ 627,000   

As a % of revenue

     29.2     33.5        30.1     33.5  

The increase in general and administrative expenses for the three and nine months ended September 30, 2011 as compared to the comparable periods in 2010 is primarily a result of increases in payroll, recruiting, information technology, and research and development expenses. As a percentage of revenue, general and administrative expenses have declined as a result of increased operating leverage in our selling, general and administrative expenses.

Bad debt expense increased by approximately 8.9%, or $52,000 to $631,000 for the three months ended September 30, 2011 as compared to $579,000 for the three months ended September 30, 2010. Bad debt expense as a percentage of revenue for the three months ended September 30, 2011 was 5.6% as compared to 6.7% for the three months ended September 30, 2010.

Bad debt expense decreased slightly to $1,739,000 for the nine months ended September 30, 2011 as compared to $1,746,000 for the nine months ended September 30, 2010. Bad debt expense as a percentage of revenue for the nine months ended September 30, 2011 was 5.7% as compared to 6.8% for the nine months ended September 30, 2010.

The decrease in bad debt expense as a percentage of revenue is the result of having contracts in place with Blue Cross Blue Shield and Aetna which were consummated in July 2010, both of which eliminated a substantial amount of uncertainty with respect to the amount of payments we receive from these payers.

We expect our general and administrative expenses to increase modestly as we increase our billing and collections activities and incur additional bad debt expense associated with incremental revenue. In addition, we expect to incur additional expenses associated with the expansion of our facilities to support our anticipated growth and make additional investments to further bring up new tests for our clients and strengthen the capabilities of our Laboratory Information System over coming quarters. These initiatives will result in higher general and administrative costs in the short term, but we expect they will help open up additional growth opportunities and increase our lab productivity over time. However, we expect general and administrative expenses as a percentage of revenue to remain around the same or decline as our case volumes increase and we develop more operating leverage in our business.

 

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Table of Contents

Selling, General and Administrative Expenses

The following table summarizes our total Selling, General and Administrative expenses for the three and nine month periods ended September 30, 2011 and 2010:

 

     For the three months ended
September 30.
           For the nine months ended
September 30,
       
     2011     2010     Change      2011     2010     Change  

Selling, general and administrative

   $ 5,032,000      $ 4,902,000      $ 130,000       $ 14,379,000      $ 14,279,000      $ 100,000   

As a % of revenue

     44.4     56.3        47.0     55.7  

Interest Expense, net and Other Expense

Interest expense net, represents the interest expense we incur on our borrowing arrangements offset by the interest income we earn on cash deposits. Interest expense, net increased approximately 3.3%, or $6,000 to $185,000 for the three months ended September 30, 2011 as compared to $179,000 for the three months ended September 30, 2010.

For the nine months ended September 30, 2011, interest expense, net increased approximately 6.2%, or $32,000 to $545,000 as compared to $513,000 for the nine months ended September 30, 2010.

Interest expense is primarily related to the amount of our capital leases outstanding and to a lesser extent to the amount we have outstanding at any given time under our Credit Facility with CapitalSource. Interest expense increased slightly over the comparable periods in 2010 primarily as a result of the higher capital lease and Credit Facility balances.

Other expense was minimal for the three and nine months ended September 30, 2011 and 2010.

Net Loss

As a result of the foregoing, we reported a net loss of $143,000 or $(0.00)/share, for the three months ended September 30, 2011 as compared to a net loss of $1,198,000, or $(0.03)/share, for the three months ended September 30, 2010. We reported a net loss of $1,329,000 or $(0.03) per share, for the nine months ended September 30, 2011 as compared to a net loss of approximately $2,926,000, or $(0.08) per share, for the nine months ended September 30, 2010.

Non-GAAP Measures

“Adjusted EBITDA” is defined by NeoGenomics as net income (loss) from continuing operations before (i) interest expense, (ii) tax expense and therapeutic discovery tax grants, (iii) depreciation and amortization expense, (iv) non-cash stock-based compensation and warrant amortization expense and (v) other extraordinary or non-recurring charges. NeoGenomics believes that Adjusted EBITDA provides a more consistent measurement of operating performance and trends across reporting periods by excluding from income these cash and non-cash items of expense not directly related to ongoing operations. Adjusted EBITDA also assists investors in performing analysis that is consistent with financial models developed by research analysts.

Adjusted EBITDA as defined by NeoGenomics is not a measurement under GAAP and may differ from non-GAAP measures used by other companies. There are limitations inherent in non-GAAP financial measures such as Adjusted EBITDA because they exclude a variety of charges and credits that are required to be included in a GAAP presentation, and do not therefore present the full measure of NeoGenomics recorded costs against its net revenue. Accordingly, investors should consider non-GAAP results together with GAAP results in analyzing NeoGenomics financial performance.

EBITDA for the three and nine months ended September 30, 2011 was $563,000 and $700,000, respectively as compared to $(553,000) and $(1,104,000) for the corresponding periods in 2010. Adjusted EBITDA for the three and nine months ended September 30, 2011 was $693,000 and $1,078,000, respectively as compared to $(398,000) and $(596,000) for the corresponding period in 2010. The following is a reconciliation of GAAP net loss to Non-GAAP EBITDA and Adjusted EBITDA for the corresponding periods:

 

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     For the Three-Months Ended
September 30,
    For the Nine-Months Ended
September 30,
 
     2011     2010     2011     2010  

Net loss (Per GAAP)

   $ (143,000   $ (1,198,000   $ (1,329,000   $ (2,927,000

Adjustments to Net Loss:

        

Interest expense (income), net

     185,000        179,000        545,000        513,000   

Income tax expense

     —          7,000        —          13,000   

Depreciation and amortization

     521,000        459,000        1,484,000        1,297,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     563,000        (553,000     700,000        (1,104,000

Further Adjustments to EBITDA:

        

Non-cash stock-based compensation

     130,000        155,000        378,000        508,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA (non-GAAP)

   $ 693,000      $ (398,000   $ 1,078,000      $ (596,000
  

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

The following table presents a summary of our cash flows provided by (used in) operating, investing and finance activities for the nine months ended September 30, 2011 and 2010 as well as the period ending cash and cash equivalents and working capital.

 

     For the nine months ended
September 30,
 
     2011     2010  

Net cash provided by (used in):

    

Operating activities

   $ (1,170,000   $ (2,413,000

Investing activities

     (338,000     (813,000

Financing activities

     3,060,000        3,150,000   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,552,000        (76,000

Cash and cash equivalents, beginning of period (1)

     1,097,000        1,631,000   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period (1)

   $ 2,649,000      $ 1,555,000   
  

 

 

   

 

 

 

Working Capital (2), end of period

   $ 1,774,000      $ (332,000
  

 

 

   

 

 

 

 

(1)  Excludes restricted cash of $500,000
(2)  Defined as current assets — current liabilities.

The decrease in cash used in operations for the nine months ended September 30, 2011 as compared to the comparable period in 2010 is primarily the result of reduced operating losses and increases in accounts payable and other liabilities partially offset by increases in our accounts receivable from increased revenues.

The decrease in cash used in investing activities in the nine months ended September 30, 2011 as compared to the comparable period in 2010 was primarily the result of reduced spending on items that cannot typically be lease financed, such as leasehold improvements, costs to improve our Laboratory Information System and certain equipment upgrades.

The increase in net cash flow provided by financing activities was primarily the result of our $3.0 million private equity raise in January 2011, and increases in funding from our Credit Facility with Capital Source. This funding was partially offset by payments on our capital lease facilities.

On February 1, 2008, we entered into a revolving credit facility with CapitalSource, which allowed us to borrow up to $3,000,000 based on a formula tied to our eligible accounts receivable that are aged less than 150 days. On April 26, 2010, the Parent Company, NeoGenomics Laboratories, Inc., the wholly-owned subsidiary of the Parent Company (“Borrower”), and CapitalSource entered into an Amended and Restated Revolving Credit and Security Agreement (the “Amended and Restated Credit Agreement” or the “Credit Facility”). The Amended and Restated Credit Agreement amended and restated the Revolving Credit and Security Agreement dated February 1, 2008, as amended, among the Parent Company, Borrower and CapitalSource (the “Original Credit Agreement”). The terms of the Amended and Restated Credit Agreement and the Original Credit Agreement are substantially similar except that the

 

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Amended and Restated Credit Agreement, among other things, (i) increased the maximum principal amount of the revolving credit facility from $3,000,000 to $5,000,000, (ii) provided that the term of the Amended and Restated Credit Agreement shall end on February 1, 2013, (iii) increased the amount of the collateral management fee and unused line fees paid by Borrower to CapitalSource, (iv) modified the definitions of “Minimum Termination Fee” and “Permitted Indebtedness”, (v) provided that the Borrower must maintain a minimum outstanding principal balance under the revolving facility of at least $2,000,000, (vi) increased the interest rate to LIBOR plus 4.25% (provided that LIBOR shall not be less than 2.0%) and (vii) revised certain covenants and representations and warranties. The Amended and Restated Credit Agreement also made permanent a previously enacted temporary change to the methodology for calculating the Fixed Charge Coverage Ratio covenant, which permits us to add amounts of unrestricted cash and cash equivalents and unused availability under the Credit Facility to Adjusted EBITDA for the purposes of calculating this covenant. A full description of the covenants in the Amended and Restated Credit Agreement can be found in our Annual Report on Form 10-K for the year ended December 31, 2010, which was filed with the SEC on February 23, 2011. We paid CapitalSource a commitment fee of $33,500 in connection with the execution of the Amended and Restated Credit Agreement. In addition, CapitalSource credited $25,000 of an amendment fee previously paid by us towards this commitment fee.

Interest on outstanding advances under the Credit Facility are payable monthly in arrears on the first day of each calendar month. At September 30, 2011, the effective rate of interest was 6.25%. On September 30, 2011, the available credit under the Credit Facility was approximately $0.5 million and the outstanding borrowing was $4.5 million after netting compensating cash on hand. We were in compliance with all covenants contained in the Credit Facility as of September 30, 2011.

On July 28, 2010 NeoGenomics Laboratories and Leasing Technologies, Inc. (LTI) agreed on the terms and conditions of a new $1.0 million lease line of credit. The line had the same terms and conditions of our November 5, 2008 Master Lease Agreement with LTI. Advances under the lease line could made for one year by executing equipment schedules for each advance. The lease term of all equipment schedules issued under the lease line were for 36 months. The lease rate factor applicable for each equipment schedule was 0.0327/month. If the Subsidiary made use of the entire lease line, the monthly rent would be $32,700. Monthly rent for the leased equipment is payable in advance on the first day of each month. The obligations of the Subsidiary are guaranteed by the Parent Company. At the end of the term of each equipment schedule the Subsidiary may: (a) renew the lease with respect to such equipment for an additional 12 months at fair market value; (b) purchase the equipment at fair market value, which price will not be less than 10% of cost nor more than 14% of cost; (c) extend the term for an additional six months at 35% of the monthly rent paid by the lessee during the initial term, after which the equipment may be purchased for the lesser of fair market value or 8% of cost; or (d) return the equipment subject to a remarketing charge equal to 6% of cost.

The immaterial amount of availability we had remaining at June 30, 2011 expired and on July 21, 2011, NeoGenomics Laboratories and LTI agreed on the terms and conditions of a new $1.0 million lease line of credit. The terms and conditions are the same as described above and advances under the lease line could be made for a period of one year.

During the third quarter of fiscal year 2011, we entered into lease schedules for $1.0 million to purchase laboratory equipment to make investments for further growth and to increase our testing menu. Therefore we have no availability on this LTI lease line as of September 30, 2011.

During the third quarter of fiscal year 2011, we also used a vendor to lease an additional $378,000 of laboratory equipment. The lease has a five year term with a fair market value buyout option at the end of the term. The payment on the lease is $7,713 per month and the annual interest rate is approximately 11%.

During the third quarter of fiscal year 2011, we also entered into several small capital leases to purchase approximately $218,000 of laboratory equipment, computer equipment and furniture. The leases have either three or four year terms and annual interest rates in the 14% to 16% range.

On September 9, 2011, we entered into a master lease agreement on a $1.0 million equipment line of credit with Garic, Inc. The lease has a 12 month draw down period and each schedule has a 36 month term and a lease rate factor of 3.1947%. The lease has a fair market value option at the end of the term at a price not to exceed 15% of the equipment cost or the right to return the equipment. Monthly payments on the entire amount will be $31,647 and will have an annual interest rate of 16.12%. We have $1.0 million of availability on this agreement as of September 30, 2011. On October 6, 2011 the Company entered into a lease schedule for approximately $50,000 and has $950,000 of remaining availability on the lease line.

As of September 30, 2011, we had approximately $2.65 million in unrestricted cash on hand, up to $0.5 million of availability currently under our Credit Facility with Capital Source, and up to $1.0 million of availability on our lease line with Garic, Inc. We

 

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believe we have adequate capital resources to meet our operating commitments over the next twelve months from these sources and from other bank loan facilities and capital lease financing arrangements which we may enter into during this period. As such, our condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. In the event that the Company grows at a rate that is different from what we currently anticipate or we engage in strategic transactions or acquisitions and our cash on hand and availability under our Credit Facility or lease lines at such time is not adequate, we may need to increase the size or our credit facility or raise additional debt or equity capital from other sources. In such event, the Company may not be able to obtain such funding on attractive terms or at all and the Company may be required to curtail its operations.

On July 27, 2011, the common stock purchase agreement (the “Stock Agreement”) between NeoGenomics, Inc. and Fusion Capital Fund II, LLC (“Fusion”), expired without any action by any party pursuant to its terms. Under the Stock Agreement, NeoGenomics had the option to sell common stock to Fusion in its sole discretion in amounts of up to $1.0 million per instance, depending on the then price of our common stock, at times of our choosing, up to a total of $8.0 million in the aggregate over a thirty (30) month period. During the period the Stock Agreement was effective, we never drew down any funds pursuant to it. As a result, we have decided that we will not seek to replace the Stock Agreement with any other similar type of instrument.

Capital Expenditures

We currently forecast capital expenditures in order to execute on our business plan. The amount and timing of such capital expenditures will be determined by the volume of business, but we currently anticipate that we will need to purchase approximately $3.0 million to $4.0 million of additional capital equipment during the next twelve months.

ITEM 3 — Quantitative and Qualitative Disclosures About Market Risk

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item.

ITEM 4 — Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer, principal financial officer, and principal accounting officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

As required by SEC Rule 15d-15, our management carried out an evaluation, under the supervision and with the participation of our principal executive officer, principal financial officer, and principal accounting officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our principal executive officer, principal financial officer, and principal accounting officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS

From time to time the Company is engaged in legal proceeding in the ordinary course of business. We do not believe any current legal proceedings are material to our business.

ITEM 1A — RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide information under this item. Certain risks relating to the Company as described in more detail in Section 1A of our Annual Report on Form 10K as filed with the Securities and Exchange Commission on February 23, 2011 may include but are not limited to the following:

 

   

We May Not Be Able To Implement Our Business Strategies Which Could Impair Our Ability To Continue Operations

 

   

We May Be Unsuccessful In Managing Our Growth

 

   

We May Incur Greater Costs Than Anticipated

 

   

We Rely On A Limited Number Of Third Parties For Manufacture And Supply Of Certain Of Our Critical Laboratory Instruments And Materials, And We May Not Be Able To Find Replacement Suppliers Or Manufacturers In A Timely Manner In The Event Of Any Disruption Which Could Adversely Affect Our Business

 

   

We May Face Fluctuations In Results Of Operations Which Could Negatively Affect Our Business Operations And We Are Subject To Seasonality In Our Business

 

   

We Substantially Depend Upon Third Parties For Payment Of Services

 

   

Our Business Is Subject To Rapid Scientific Change

 

   

The Market For Our Services Is Highly Competitive

 

   

We Face The Risk of Capacity Constraints

 

   

We May Fail To Protect Our Facilities

 

   

The Steps Taken By The Company To Protect Its Proprietary Rights May Not Be Adequate

 

   

We Are Dependent On Key Personnel And Need To Hire Additional Qualified Personnel In Order For Our Business To Succeed

 

   

We may Fail To Obtain Necessary Additional Capital To Finance Growth And Capital Requirements

 

   

Proposed Government Regulation Of Laboratory Developed Tests (“LDT’s”) May Result In Delays To Certain Laboratory Tests and Increase Our Costs To Implement New Tests

 

   

Healthcare Reform Programs May Impact Our Business And The Pricing We Receive For Our Services, Including The Expiration of the Grandfather Clause On December 31, 2011

 

   

Our Net Revenue Will Be Diminished If Payors Do Not Adequately Cover Or Reimburse Our Services

 

   

Third Party Billing Is Extremely Complicated And Will Result In Significant Additional Costs To Us

 

   

Our Operations Are Subject To Strict Laws Prohibiting Fraudulent Billing And Other Abuse, And Our Failure To Comply With Such Laws Could Result In Substantial Penalties

 

   

The Failure To Comply With Significant Government Regulation And Laboratory Operations May Subject The Company To Liability, Penalties Or Limitation Of Operations

 

   

Our Failure To Comply With Governmental Payor Regulations Could Result In Our Being Excluded From Participation In Medicare, Medicaid Or Other Governmental Payor Programs

 

   

Our Business Could Be Harmed By Future Interpretations Of Clinical Laboratory Mark-Up Prohibitions

 

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Failure To Comply With The HIPAA Security And Privacy Regulations May Increase Our Operational Costs

 

   

Changes In Regulations, Payor Policies Or Contracting Arrangements With Payors Or Changes In Other Laws, Regulations Or Policies May Adversely Affect Coverage Or Reimbursement For Our Specialized Diagnostic Services

 

   

We Are Subject To Security Risks Which Could Harm Our Operations

 

   

We Must Hire And Retain Qualified Sales Representatives To Grow Our Sales

 

   

Performance Issues, Service Interruptions Or Price Increases By Our Shipping Carrier Could Adversely Affect Our Business, Results Of Operations And Financial Condition, And Harm Our Reputation And Ability To Provide Our Specialized Diagnostic Services On A Timely Basis

 

   

We Use Biological And Hazardous Materials That Require Considerable Expertise And Expense For Handling, Storage Or Disposal And May Result In Claims Against Us

 

   

Our Ability To Comply With The Financial Covenants In Our Credit Agreements Depends Primarily On Our Ability To Generate Substantial Operating Cash Flow

 

   

We Have Potential Conflicts Of Interest Relating To Our Related Party Transactions Which Could Harm Our Business

 

   

We Are Effectively Controlled By Existing Stockholders And Therefore Other Stockholders Will Not Be Able To Direct The Company

 

   

No Foreseeable Dividends

 

   

There May Not Be A Viable Market For Our Common Stock

 

   

We May Become Involved In Securities Class Action Litigation That Could Divert Management’s Attention And Harm Our Business

 

   

If Penny Stock Regulations Impose Restrictions On The Marketability Of Our Common Stock, The Ability Of Our Stockholders To Sell Shares Of Our Stock Could Be Impaired

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not Applicable

ITEM 3 — DEFAULTS UPON SENIOR SECURITIES

Not Applicable

ITEM 4 — REMOVED AND RESERVED

ITEM 5 — OTHER INFORMATION

Not Applicable

 

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ITEM 6 — EXHIBITS

 

EXHIBIT

NO.

   DESCRIPTION
  10.1    Master Lease Agreement dated September 9, 2011 between the Company and Garic, Inc
  31.1    Certification by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.2    Certification by Principal Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  31.3    Certification by Principal Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  32.1    Certification by Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101    The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in Extensible Business Reporting Language (XBRL): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Cash Flows and (iv) related notes.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: October 25, 2011     NEOGENOMICS, INC.
    By:   /s/  Douglas M. VanOort
     

Name: Douglas M. VanOort

Title:   Chairman and

            Chief Executive Officer

 

    By:   /s/  George Cardoza
     

Name: George Cardoza

Title:   Chief Financial Officer

 

    By:   /s/  Jerome J. Dvonch
     

Name: Jerome J. Dvonch

Title:   Director of Finance and

            Principal Accounting Officer

 

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