10QSB: Optional form for quarterly and transition reports of small business issuers
Published on August 11, 2005
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-QSB
(X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.
For the quarterly period ended June 30, 2005.
( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for
the transition period from _____ ____________ to ____________.
Commission File Number: 333-72097
NeoGenomics, Inc.
(Exact name of registrant as specified in charter)
Nevada 74-2897368
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12701 Commonwealth Drive, Suite 9, Fort Myers, FL 33913
(Address of principal executive offices)
(239) 768-0600
(Registrant's Telephone Number, Including Area Code)
Check 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 ( )
State the number of shares outstanding of each of the issuer's classes of common
equity, as of August 10, 2005.
22,498,252
Transitional Small Business Disclosure Format:
YES ( ) NO (X)
1
NeoGenomics, Inc.
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheet as of June 30,2005....................... 4
Consolidated Statements of Operations for the three and
six months ended June 30, 2005 and 2004..............................5
Consolidated Statements of Cash Flows for the three and
six months ended June 30, 2005 and 2004..............................6
Notes to Consolidated Financial Statements...........................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (including cautionary statement)..........11
Item 3. Controls and Procedures.............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................17
Item 2. Changes in Securities...............................................17
Item 3. Defaults Upon Senior Securities.....................................18
Item 4. Submission of Matters to a Vote of Securities Holders.............. 18
Item 5. Other Information...................................................18
Item 6. Exhibits and Reports on Form 8-K....................................18
Signatures 19
2
PART I
FORWARD-LOOKING STATEMENTS
This Form 10-QSB 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 the "Company" in this
Form 10-QSB), which 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-QSB that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as "may", "anticipation", "intend", "could", "estimate", or
"continue" or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel, variability of quarterly results, and the ability
of the Company to continue its growth strategy and competition, 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.
3
NeoGenomics, Inc.
CONSOLIDATED BALANCE SHEET AS OF
June 30, 2005
(unaudited)
________________________________________________________________________________
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,258
Accounts receivable (net of allowance
for doubtful accounts of $13,137) 278,377
Inventories 30,373
Other current assets 29,676
Total current assets 359,684
PROPERTY AND EQUIPMENT (net of accumulated
depreciation of $193,001) 413,056
OTHER ASSETS 20,700
TOTAL $ 793,440
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 136,397
Deferred revenue 110,000
Accrued and other liabilities 19,173
Total current liabilities 265,570
LONG TERM LIABILITIES(net of unamortized discount
of $113,508) 1,016,943
TOTAL LIABILITIES 1,282,513
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 100,000,000 shares authorized;
22,498,252 shares issued and outstanding 22,498
Additional paid-in capital 9,908,199
Deficit (10,419,770)
Total stockholders' deficit (489,073)
TOTAL $ 793,440
==============
________________________________________________________________________________
See notes to consolidated financial statements.
4
NeoGenomics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
_________________________________________________________________________________________________________________
For the For the For the For the
Six-Months Six-Months Three-Months Three-Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
REVENUE $ 575,080 $ 300,396 $ 344,888 $ 121,533
COST OF REVENUE 370,518 284,359 193,680 138,373
GROSS (DEFICIT) PROFIT 204,562 16,037 151,208 (16,840)
OPERATING EXPENSES:
Selling, general and administrative 521,888 310,420 280,542 128,650
Interest expense 79,205 43,969 52,024 23,253
Total operating expenses 601,093 354,389 332,566 151,903
NET INCOME (LOSS) $ (396,531) $ (338,352) $ (181,358) $ (168,743)
=============== =============== =============== ===============
NET INCOME (LOSS) PER SHARE -
Basic and Diluted $ (0.02) $ (0.02) $ (0.01) $ (0.01)
=============== =============== =============== ===============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
Basic and Diluted 21,952,046 18,625,680 22,157,538 18,801,943
=============== =============== =============== ===============
_________________________________________________________________________________________________________________
See notes to consolidated financial statements.
5
NeoGenomics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
_____________________________________________________________________________________
For the For the
Six-Months Six-Months
Ended Ended
June 30, 2005 June 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (396,531) $ (338,352)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation 55,688 39,901
Equity-based compensation 59,840 -
Provision for bad debts 30,077 9,041
Amortization of debt issue costs 7,275 -
Changes in assets and liabilities, net:
(Increase) decrease in accounts
receivables, net of write-offs (251,963) 4,475
(Increase) decrease in inventory (15,251) 957
(Increase) decrease in pre-paid expenses 5,765 (1,099)
(Increase) decrease in other current assets 3,474 894
(Increase) decrease in deposits 1,500 5,000
Increase (decrease) in accounts
payable and other liabilities (13,086) (35,395)
NET CASH USED IN OPERATING ACTIVITIES (513,212) (314,578)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (75,708) (13,437)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net 390,451 149,215
Debt issue costs (53,587) -
Issuances of common stock, net of
transaction expenses 160,766 344,629
NET CASH PROVIDED BY FINANCING ACTIVITIES 497,630 493,844
NET INCREASE IN CASH AND CASH EQUIVALENTS (91,290) 165,829
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 112,548 25,051
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,258 $ 190,880
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 51,309 $ 52,651
============== ==============
Income taxes paid $ - $ -
============== ==============
_____________________________________________________________________________________
See notes to consolidated financial statements.
6
NeoGenomics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
________________________________________________________________________________
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
NeoGenomics, Inc. ("NEO") was incorporated under the laws of the state of
Florida on June 1, 2001 and on November 14, 2001 agreed to be acquired by
American Communications Enterprises, Inc., a Nevada corporation ("ACE"). As a
result of the acquisition, NEO became the operating subsidiary of ACE. ACE was
formed in 1998 and succeeded to NEO's name on January 3, 2002 (collectively NEO
and ACE are referred to as "NeoGenomics", the "Company", "we", "us", or "our"
throughout this Form 10-QSB).
On April 4, 2003, we amended our Articles of Incorporation to (1) effect a
one-for-100 reverse split of our common stock, (2) reduce the authorized number
of common shares from 500,000,000 to 100,000,000, and (3) authorize 10,000,000
shares of preferred stock for future issuance, with such terms, restrictions and
limitations as may be established by the Board of Directors.
As a result of the above, all references to the number of shares and par
value in the accompanying consolidated financial statements and notes thereto
have been adjusted to reflect the April 2003 reverse stock split as though it
had been completed as of January 1, 2003.
Basis of Presentation
Our accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-QSB and Rule 10-1 of Regulation S-X of the Securities and Exchange
Commission (the "SEC"). Accordingly, these consolidated financial statements do
not include all of the footnotes required by accounting principles generally
accepted in the United States of America. In our opinion, all adjustments
(consisting of normal and recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three and six months
ended June 30, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005. The accompanying consolidated
financial statements and the notes thereto should be read in conjunction with
our audited consolidated financial statements as of and for the year ended
December 31, 2004 contained in our Form 10-KSB.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
NEO and ACE. All significant intercompany accounts and balances have been
eliminated in consolidation.
Revenue Recognition
Net revenues are recognized in the period when tests are performed and
consist primarily of net patient revenues that are recorded based on established
billing rates less estimated discounts for contractual allowances principally
for patients covered by Medicare, Medicaid and managed care and other health
plans. These revenues also are subject to review and possible audit by the
payers. We believe that adequate provision has been made for any adjustments
that may result from final determination of amounts earned under all the above
arrangements. There are no known material claims, disputes or unsettled matters
with any payers that are not adequately provided for in the accompanying
consolidated financial statements.
7
Accounts Receivable and Allowance for Doubtful Accounts
We record accounts receivable net of estimated and contractual discounts.
We provide for accounts receivable that could become uncollectible in the future
by establishing an allowance to reduce the carrying value of such receivables to
their estimated net realizable value. We estimate this allowance based on the
aging of our accounts receivable and our historical collection experience for
each type of payer. Bad debts are charged off to the allowance account at the
time they are deemed uncollectible.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements. The reported amounts of revenues and
expenses during the reporting period may be affected by the estimates and
assumptions we are required to make. Estimates that are critical to the
accompanying consolidated financial statements include estimates related to
contractual adjustments, and the allowance for doubtful accounts. It is at least
reasonably possible that our estimates could change in the near term with
respect to these matters.
NOTE B - LIQUIDITY
Our consolidated financial statements were prepared using accounting
principles generally accepted in the United States of America applicable to a
going concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. At December 31, 2004, we had
working capital and stockholders' deficits of approximately $822,000 and
$426,000 respectively. However, subsequent to December 31, 2004, we enhanced our
working capital as we refinanced our short-term indebtedness of $740,000
included in current liabilities with indebtedness that does not mature until
March 31, 2007 (see Note C). We believe this debt facility, which allows for
unsecured borrowings of $1,000,000 after April 30, 2005, and improving
operations, will provide adequate capital to fund our operations and growth for
2005 and beyond. At June 30, 2005, we had a working capital surplus of $94,114.
As such, our 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.
NOTE C - RELATED PARTY TRANSACTIONS
During the six months ending June 30, 2005, and FY 2004, the Company
incurred consulting expenses from a director of $32,500 and $56,000,
respectively, for various consulting work performed in connection with managing
the financial affairs of the Company and acting as the Principle Financial
Officer.
On March 11, 2005 we entered into an agreement with HCSS, LLC and
eTelenext, Inc. to provide eTelenext, Inc's Accessioning Application, AP
Anywhere Application and CMQ Application. HCSS, LLC is a holding company created
to build a small laboratory network for the 50 small commercial genetics
laboratories in the United States. HCSS, LLC is owned 66.7% by Dr. Michael T.
Dent, our Chairman. By becoming the first customer of HCSS in the small
laboratory network, the Company is saving approximately $152,000 in up front
licensing fees. Under the terms of the agreement, the Company is required to pay
$22,500 over three months to customize this software and will pay an annual
membership fee of $6,000 per year and monthly transaction fees of between $10.00
- - $2.50 per completed test, depending on the volume of tests performed. The
eTelenext system is an elaborate laboratory information system (LIS) that is in
use at many larger labs. By assisting in the formation of the small laboratory
network, the Company will be able to increase the productivity of its
technologists and have on-line links to other small labs in the network in order
to better manage its workflow.
On March 23, 2005, we entered into an agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) to refinance our existing
8
indebtedness of $740,000 and provide for additional liquidity of up to $760,000
to the Company. Under the terms of the agreement, Aspen Select Healthcare, LP
("Aspen"), a Naples, Florida-based private investment fund will make available
up to $1.5 million of debt financing in the form of a revolving credit facility
(the "Credit Facility") with an initial maturity of March 31, 2007. Aspen is
managed by its General Partner, Medical Venture Partners, LLC, which is
controlled by a director of NeoGenomics. We incurred $53,587 of transaction
expenses in connection with establishing the Credit Facility, which have been
capitalized and are being amortized to interest expense over the term of the
agreement.
Under the terms of the Credit Facility, we are able to borrow up to 80% of
"eligible" accounts receivable, 50% of our net furniture and equipment balance,
secured by substantially all of our assets, and up to $500,000 on an unsecured
basis until April 30, 2005 and up to $1,000,000 on an unsecured basis after
April 30, 2005. The interest rate on the Credit Facility is prime + 6.0%,
payable monthly in arrears. With respect to this agreement, we are subject to
the following restrictive covenants: (i) we are not to incur indebtedness
outside of this agreement in excess of $50,000 without written authorization of
Aspen, (ii) we cannot declare or pay any dividend on our common stock, and (iii)
we are also subject to other general covenants typical of an instrument of this
kind. In addition, as a condition to these transactions, the Company, Aspen and
certain individual shareholders agreed to amend and restate their shareholders'
agreement to provide that Aspen will have the right to appoint up to three of
seven of our directors and one mutually acceptable independent director. We also
amended and restated the Registration Rights Agreement with Aspen and certain
individual shareholders, which grants to Aspen certain demand registration
rights and which grants to all parties to the agreement, piggyback registration
rights. As part of the Credit Facility transaction, the Company also issued to
Aspen a five year Warrant to purchase up to 2,500,000 shares of its common stock
at an exercise price of $0.50/share (which we anticipate will result in us
recording stock based interest expense in 2005 and beyond). We have accrued
$131,337 for the value of such Warrant as of the original commitment date as a
discount to the face amount of the Credit Facility. The Company is amortizing
such discount to interest expense over the 24 month of the Credit Facility.
NOTE D - EQUITY FINANCING TRANSACTIONS
During 2004, we sold 3,040,000 shares of our common stock in a series of
private placements at $0.25 per share to unaffiliated third party investors. These
transactions generated net proceeds to the Company of approximately $740,000
after deducting certain transaction expenses.
On January 3, 2005, we issued 27,288 shares of common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $6,822 of accrued, but unpaid vacation.
During the six months ending June 30, 2005, we sold 522,382 shares of our
common stock in a series of private placements at $0.30 per share and $0.35 per
share to unaffiliated third party investors. These transactions generated net
proceeds to the Company of approximately $171,000.
On June 6, 2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP ("Cornell"). Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell shares of common stock for a total purchase price of up to $5.0 million.
For each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell will pay the Company 98% of the lowest volume weighted
average price ("VWAP") of the Company's common stock as quoted by Bloomberg, LP
on the Over-the-Counter Bulletin Board or other principal market on which the
Company's common stock is traded for the 5 days immediately following the notice
date (the "Purchase Price"). The total number of shares issued to Cornell under
each advance request will be equal to the total dollar amount of the advance
request divided by the Purchase Price determined during the five day pricing
period. Cornell will also retain 5% of each advance under the Standby Equity
Distribution Agreement. Cornell's obligation to purchase shares of the Company's
common stock under the Standby Equity Distribution Agreement is subject to
certain conditions, including the Company obtaining an effective registration
statement for shares of common stock sold under the Standby Equity Distribution
Agreement and is limited to $750,000 per weekly advance. The amount and timing
9
of all advances under the Standby Equity Distribution Agreement are at the
discretion of the Company and the Company is not obligated to issue and sell any
securities to Cornell, unless and until it decides to do so. Upon execution of
the Standby Equity Distribution Agreement, Cornell received 381,888 shares of
the Company's common stock as a commitment fee under the Standby Equity
Distribution Agreement. The Company also issued 27,278 shares of the Company's
common stock to Spartan Securities Group, Ltd. under a placement agent agreement
relating to the Standby Equity Distribution Agreement.
On July 28, 2005 we filed an amended SB-2 registration statement with the
Securities and Exchange Commission to register 10,000,000 shares of our common
stock related to the above. Such registration statement became effective as of
August 1, 2005.
________________________________________________________________________________
End of Financial Statements
10
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
NeoGenomics, Inc. operates a medical testing laboratory and research
facility based in Fort Myers, Florida that is targeting the rapidly growing
genetic and molecular testing segment of the medical laboratory market. Our
common stock is listed on the NASDAQ Over-the-Counter Bulletin Board (the
"OTCBB") under the symbol "NGNM." Our business plan features two concurrent
objectives:
1. Development of a clinical laboratory to offer routine cytogenetics,
FISH, Flow Cytometry and molecular biology testing services; and
2. Development of a research laboratory to offer sponsored research
services to other companies that are seeking to develop genomic
products that will determine the genetic basis for female and neonatal
diseases, cancers and other forms of disease.
The vision of NeoGenomics is to merge a high-end genetic and molecular
testing laboratory with ongoing research activities to help bridge the gap
between clinical medicine and genomic research. We believe that this combination
could allow the Company to speed the process of discovery and innovation and
develop new advanced testing methods to identify the genetic and molecular
causes of disease. Over the last five years, advances in technology and genetic
research, including the complete sequencing of the human genome, have made
possible a whole new set of tools to diagnose and treat diseases. This has
opened up a vast opportunity for laboratory companies that are positioned to
address this growing market segment.
The medical testing laboratory market can be broken down into three primary
segments:
o clinical lab testing,
o anatomic pathology testing, and
o genetic/molecular testing.
Clinical labs typically are engaged in high volume, high automation tests
on blood and urine. Clinical lab tests often involve testing of a less urgent
nature, for example, cholesterol testing and testing associated with routine
physical exams. This type of testing yields relatively low average revenue per
test. Anatomic pathology ("AP") testing involves evaluation of tissue, as in
surgical pathology, or cells as in cytopathology. AP testing typically seeks to
answer the question: is it cancer? The most widely known AP tests are Pap
smears, skin biopsies, and tissue biopsies. AP tests are typically more labor
and technology intensive than clinical lab tests and thus typically have higher
average revenue per test than clinical lab tests.
We believe genetic/molecular testing is the newest and fastest growing
subset of the laboratory market. Genetic testing or "cytogenetics" involves
analyzing chromosomes taken from the nucleus of cells for abnormalities in a
process called karyotyping. A karyotype evaluates the entire 46 human
chromosomes by number, and banding patterns to identify abnormalities associated
with diseases. Examples of cytogenetics testing include bone marrow testing to
diagnose various types of leukemia and lymphoma, and amniocentesis testing of
pregnant women to diagnose genetic anomalies such as Down syndrome in a fetus.
Molecular biology involves testing for even more specific causes of diseases
based on very small alterations in cellular biology and DNA. Examples of common
molecular biology testing include screening for paternity, cystic fibrosis or
Tay-Sachs disease.
Both cytogenetics and molecular biology have become important and
highly-accurate diagnostic tools over the last five years. New tests are being
developed rapidly, thus this market segment is expanding rapidly.
Genetic/molecular testing requires very specialized equipment and credentialed
individuals (typically PhD level) to certify the results. The following chart
11
shows the differences between the genetic/molecular segment and other segments
of the medical laboratory testing market. Up until about five years ago, the
genetic/molecular segment was considered to be part of the Anatomic Pathology
segment, but given its rapid growth, many industry veterans now break
genetic/molecular testing out into its own segment.
Comparison of the Medical Testing Laboratory Market Segments:
Attributes Clinical Anatomic Pathology Genetic/Molecular
Testing Performed On Blood, Urine Tissue/Cells Chromosomes/Molecules
Volume High Low Low
Physician Involvement Low High - Pathologist Low
Malpractice Ins. Required Low High Low
Other Professionals Req. None None Cyto/Molecular geneticist
Level of Automation High Low-Moderate Moderate
Diagnostic in Nature Usually Not Yes Yes
Types of Diseases Tested Many Possible Primarily to Rule out Rapidly Growing
Cancer
Typical Price/Test(1) $5 - $35/Test $25 - $500/Test $200 - $1,000/Test
Estimated Size of Market $25 - $30 Billion $8.0 - $10.0 Billion $3.0 - $4.0 Billion
Est. Growth Rate of Market 4.0 -5.0% Annually 6.0 - 7.0% Annually 25.0 +% Annually
________________________________________________________________________________________________________
Established Competitors Quest Diagnostics Quest Diagnostics Genzyme Genetics
LabCorp LabCorp/US Labs Quest Diagnostics
Bio Reference Lab Genzyme/Impath LabCorp/Esoterics
Specialty Labs Ameripath Major Universities
DSI Laboratories Local Pathologists
Hospital Labs
Source: Research Analysts and Company Estimates
(1) Estimated Revenue/Test is for the technical component of such tests and does
not include revenue for the professional component or interpretation of such
tests.
Our initial focus is on the oncology and advanced natology testing markets.
We target oncologists that perform bone marrow sampling and obstetricians and
perinatologists that perform amniocentesis testing and other natology screening
tests. Historically, our clients have been predominantly located in Florida.
Beginning in January 2005, based on the experience of our new President, we
began targeting large institutional clients in the Eastern United States. As we
grow, we anticipate offering additional tests that will allow us to more broadly
penetrate the oncology and advanced natology testing markets as well as broaden
our focus from genetic and molecular biology testing to more traditional types
of anatomic pathology testing that are complementary to our current test
offerings.
We compete in the marketplace based on the quality and accuracy of our test
results, our turn-around times and our ability to provide after-test support to
those physicians requesting consultation. We believe our average 3-5 day
turn-around times on oncology-related cytogenetics tests is among the best in
the industry and is helping to increase the usage patterns of cytogenetics tests
by our referring oncologists and hematopathologists. Based on anecdotal
information, we believe that most competing cytogenetics labs typically have
7-21 day turn-around times on average. Traditionally, longer turn-around times
for cytogenetics tests have resulted in fewer tests being ordered since there is
an increased chance that the test results will not be returned within an
acceptable diagnostic window when other adjunctive diagnostic test results are
available. We believe our turn-around times are resulting in our referring
physicians requesting more of our testing services in order to augment or
confirm other diagnostic tests, thereby giving us a significant competitive
advantage in marketing our services against those of other competing
laboratories.
We have an opportunity to add additional types of tests to our product
offering. We believe that by doing so we may be able to capture increases in our
testing volumes through our existing customer base as well as more easily
attract new customers via the ability to bundle our testing services more
appropriately to the needs of the market. For instance, initial testing for most
12
hematological cancers yields total revenue ranging from approximately $1,500 -
$2,500/case and is generally comprised of cytogenetic, fluorescence in-situ
hybridization (FISH), flow cytometry, and morphology testing. Until recently, we
only performed cytogenetic testing in-house, which averaged approximately $500
of revenue per case. In December 2004, we added FISH testing to our product
offering, and in February 2005, we began offering flow cytometry testing
services. We believe that with the addition of these two new testing platforms,
we will nearly double our average revenue per oncology case.
We believe this bundled offering approach could drive large increases in
our revenue and afford the Company significant synergies and efficiencies in our
operations, sales and marketing activities.
Avg. Rev/Test
Cytogenetics $400-$600
Fluorescence In Situ Hybridization (FISH) $200-$400
Flow cytometry
- Technical component $400-$600
- Professional component $100-$200
Morphology $400-$700
Total $1,500-$2,500
The cytogenetics and molecular biology testing markets in general can be
seasonal and the volumes of such tests tend to decline somewhat in the summer
months as referring physicians and their patients are vacationing. In southern
Florida, currently our primary referral market for lab tests, this seasonality
is further exacerbated because a meaningful percentage of the population returns
to homes in the Northern U.S. to avoid the hot summer months. We estimate that
our growth rates during the second and third quarter of each year will be
somewhat impacted by these seasonality factors.
The following discussion and analysis should be read in conjunction with
the financial statements for the three months ended June 30, 2005, included with
this Form 10-QSB. Readers are also referred to the cautionary statement, which
addresses forward-looking statements made by us.
Critical Accounting Policies
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires our management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain.
Our critical accounting policies are those where we have made difficult,
subjective or complex judgments in making estimates, and/or where these
estimates can significantly impact our financial results under different
assumptions and conditions. Our critical accounting policies are:
o Revenue Recognition
o Accounts Receivable
Revenue Recognition
Net revenues are recognized in the period when tests are performed and
consist primarily of net patient revenues that are recorded based on established
billing rates less estimated discounts for contractual allowances principally
for patients covered by Medicare, Medicaid and managed care and other health
plans. These revenues also are subject to review and possible audit by the
13
payers. We believe that adequate provision has been made for any adjustments
that may result from final determination of amounts earned under all the above
arrangements. There are no known material claims, disputes or unsettled matters
with any payers that are not adequately provided for in the accompanying
consolidated financial statements.
Accounts Receivable
We record accounts receivable net of estimated and contractual discounts.
We provide for accounts receivable that could become uncollectible in the future
by establishing an allowance to reduce the carrying value of such receivables to
their estimated net realizable value. We estimate this allowance based on the
aging of our accounts receivable and our historical collection experience for
each type of payer. Bad debts are charged off to the allowance account at the
time they are deemed uncollectible.
Results of Operations for the Three Months ended June 30, 2005 as Compared to
the Three Months ended June 30, 2004
During the three months ended June 30, 2005, our revenues increased
approximately 184% to $345,000 from $122,000 during the three months ending June
30, 2004, primarily as a result of attracting new customers to our services and
increasing the volume of services sold to existing customers. During the three
months ending June 30, 2005, our cost of revenue increased approximately 40% to
$194,000 from $138,000 during the three months ending June 30, 2004, primarily
as a result of additional costs associated with hiring more laboratory personnel
to support our increased testing volumes as well as increased costs as a result
of opening new lines of business. This resulted in an increase of $168,000 in
our gross profit to approximately $151,000 for the three months ended June 30,
2005 from a gross deficit of approximately $17,000 during the three months ended
June 30, 2004. This change is primarily attributable to our increased revenues
and testing volumes for the period ended June 30, 2005 as compared to the three
month period ended June 30, 2004.
During the three months ended June 30, 2005, our selling, general and
administrative expenses increased by approximately 118% to approximately
$281,000 from approximately $129,000 in the three months ended June 30, 2004.
This increase was primarily as a result of higher personnel and
personnel-related expenses associated with increased levels of staffing.
Selling, general and administrative expenses include all of our overhead and
technology expenses as well as the cost of our management and sales personnel.
Interest expense for the most recent quarter increased approximately 124% to
approximately $52,000 from approximately $23,000 for the three months ended
June, 2004. Interest expense is mainly comprised of interest payable on advances
under our Credit Facility from Aspen, which have increased as a result of our
increased borrowing. In addition, in connection with our new credit facility,
discussed below in "Liquidity and Capital Resources," we recorded $131,337 of a
debt discount for the issuance of warrants and we incurred $53,587 of financing
costs. These amounts are being amortized to interest expense over the 24 month
period of the new credit facility. Thus interest expense for the three months
ending June 30, 2005, includes approximately $23,000 of non-cash charges in
connection with the amortization of this debt discount and financing costs which
were not included in interest expense during the three months ended June 30,
2005.
As a result of the foregoing, our net loss for the three months ended June
30, 2005 increased approximately 8% to approximately $181,000 from approximately
$169,000 during the three months-ended June 30, 2004.
Results of Operations for the Six Months ended June 30, 2005 as Compared to the
Six Months ended June 30, 2004
During the six months ended June 30, 2005, our revenues increased
approximately 91% to $575,000 from $300,000 during the six months ending June
30, 2004, primarily as a result of attracting new customers to our services and
increasing the volume of services sold to existing customers. During the six
14
months ending June 30, 2005, our cost of revenue increased approximately 30% to
$371,000 from $284,000 during the six months ending June 30, 2004, primarily as
a result of additional costs associated with hiring more laboratory personnel to
support our increased testing volumes as well as increased costs as a result of
opening new lines of business. This resulted in an increase of approximately
1,175% in our gross profit during the six months ended June 30, 2005 to
approximately $205,000 from $16,000 during the six months ended June 30, 2004.
This increase is primarily attributable to realizing economies of scale from our
increased revenues and testing volumes for the six months ended June 30, 2005 as
compared to the six months ended June 30, 2004. We believe we will continue to
realize economies of scale.
During the six months ended June 30, 2005, our selling, general and
administrative expenses increased by approximately 68% to approximately $522,000
from approximately $310,000 in the six months ended June 30, 2004. This increase
was primarily as a result of higher personnel and personnel-related expenses
associated with increased levels of staffing. Selling, general and
administrative expenses include all of our overhead and technology expenses as
well as the cost of our management and sales personnel. Interest expense for the
six months ended June 30, 2005 increased approximately 80% to $79,000 from
$44,000 for the six months ended June, 2004. Interest expense is mainly
comprised of interest payable on advances under our Credit Facility from Aspen,
which have increased as a result of our increased borrowing. In addition, in
connection with our new credit facility, discussed below in "Liquidity and
Capital Resources," we recorded $131,337 of a debt discount for the issuance of
warrants and we incurred $53,587 of financing costs. These amounts are being
amortized to interest expense over the 24 month period of the new credit
facility. Thus interest expense for the six months ending June 30, 2005,
includes approximately $25,000 of non-cash charges in connection with the
amortization of this debt discount and financing costs which were not included
in interest expense during the six months ended June 30, 2005.
As a result of the foregoing, our net loss for the six months ended June
30, 2005 increased approximately 17% to approximately $397,000 from
approximately $338,000 during the six months-ended June 30, 2004.
Liquidity and Capital Resources
During the six months ended June 30, 2005, our operating activities used
approximately $513,000 in cash. This amount primarily represented cash used to
pay general and administrative expenses associated with our operations and to
fund our working capital needs. We also spent approximately $76,000 on new
equipment. We were able to finance operations and equipment purchases primarily
through the sale of equity securities and net advances under our Credit
Facility, which together provided approximately $498,000 (net of $54,000 of debt
issue costs) during the six months-ended June 30, 2005. At June 30, 2005, we had
cash and cash equivalents of approximately $21,000.
During 2004, we sold 3,040,000 shares of our common stock in a series of
private placements at $0.25 per share to unaffiliated third party investors.
These transactions generated net proceeds to the Company of approximately
$740,000 after deducting certain transaction expenses.
On January 3, 2005, we issued 27,288 shares of common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $6,822 of accrued, but unpaid vacation.
During the six months ending June 30, 2005, we sold 522,382 shares of our
common stock in a series of private placements at $0.30 per share and $0.35 per
share to unaffiliated third party investors. These transactions generated net
proceeds to the Company of approximately $171,000.
On March 23, 2005, we entered into an agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) to refinance our existing
indebtedness of $740,000 and provide for additional liquidity of up to $760,000
to the Company. Under the terms of the agreement, Aspen Select Healthcare, LP
("Aspen"), a Naples, Florida-based private investment fund will make available
15
up to $1.5 million of debt financing in the form of a revolving credit facility
(the "Credit Facility") with an initial maturity of March 31, 2007. Aspen is
managed by its General Partner, Medical Venture Partners, LLC, which is
controlled by a director of NeoGenomics.
Under the terms of the Credit Facility, we are able to borrow up to 80% of
"eligible" accounts receivable, 50% of our net furniture and equipment balance,
secured by substantially all of our assets, and up to $500,000 on an unsecured
basis until April 30, 2005 and up to $1,000,000 on an unsecured basis after
April 30, 2005. The interest rate on the Credit Facility is prime + 6.0%,
payable monthly in arrears. With respect to this agreement, we are subject to
the following restrictive covenants: (i) we are not to incur indebtedness
outside of this agreement in excess of $50,000 without written authorization of
Aspen, (ii) we cannot declare or pay any dividend on our common stock, and (iii)
we are also subject to other general covenants typical of an instrument of this
kind. As part of the Credit Facility transaction, the Company also issued to
Aspen a five year Warrant to purchase up to 2,500,000 shares of its common stock
at an exercise price of $0.50 per share.
On June 6, 2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP ("Cornell"). Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell shares of common stock for a total purchase price of up to $5.0 million.
For each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell will pay the Company 98% of the lowest volume weighted
average price ("VWAP") of the Company's common stock as quoted by Bloomberg, LP
on the Over-the-Counter Bulletin Board or other principal market on which the
Company's common stock is traded for the 5 days immediately following the notice
date (the "Purchase Price"). The total number of shares issued to Cornell under
each advance request will be equal to the total dollar amount of the advance
request divided by the Purchase Price determined during the five day pricing
period. Cornell will also retain 5% of each advance under the Standby Equity
Distribution Agreement. Cornell's obligation to purchase shares of the Company's
common stock under the Standby Equity Distribution Agreement is subject to
certain conditions, including the Company obtaining an effective registration
statement for shares of common stock sold under the Standby Equity Distribution
Agreement and is limited to $750,000 per weekly advance. The amount and timing
of all advances under the Standby Equity Distribution Agreement are at the
discretion of the Company and the Company is not obligated to issue and sell any
securities to Cornell, unless and until it decides to do so. Upon execution of
the Standby Equity Distribution Agreement, Cornell received 381,888 shares of
the Company's common stock as a commitment fee under the Standby Equity
Distribution Agreement. The Company also issued 27,278 shares of the Company's
common stock to Spartan Securities Group, Ltd. under a placement agent agreement
relating to the Standby Equity Distribution Agreement.
On July 28, 2005 we filed an amended SB-2 registration statement with the
Securities and Exchange Commission to register 10,000,000 shares of our common
stock related to the above.
At the present time, we have limited cash resources. We do not anticipate
that we will generate significant cash flow from operating activities until late
2005. As a result, we anticipate that we will require approximately $200,000 to
$300,000 of additional working capital financing during the next twelve months
in order to meet our working capital requirements during this period. We
currently plan to finance our operations through borrowings under our Credit
Facility with Aspen and advances under the Standby Equity Distribution Agreement
with Cornell. Advances under the Credit Facility are limited, at any given time,
based on a formula contained in the loan agreement and advances under the
Cornell Standby Equity Distribution Agreement may not be favorable to the
Company based on where the Company's stock price is trading at any given time.
The Company may not be eligible to obtain all of its working capital funding
needs from Aspen or from the Cornell Standby Equity Distribution Agreement or
any other source. If the Company is unable to obtain such funding, the Company
will be required to curtail or discontinue operations.
Capital Expenditures
We currently forecast capital expenditures for the coming year 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
16
we will need to purchase approximately $200,000 to $300,000 of additional
capital equipment during the next twelve months. We plan to fund these
expenditures through borrowings under our Credit Facility with Aspen and through
traditional lease financing from equipment lessors. We may not be eligible to
obtain all of our capital equipment funding needs from Aspen or another source.
If we are unable to obtain such funding, we will be required to curtail our
equipment purchases, which may have an impact on our ability to generate
revenues.
Staffing
Currently, we have thirteen full-time employees, one part-time employee and
four part-time consultants. During 2005, we plan to add additional laboratory
technologists and laboratory assistants to assist us in handling a greater
volume of tests and to perform sponsored research projects. In addition, we
intend to continue building our sales force in an effort to sustain our sales
growth, as well as add personnel in management, accounting, and administrative
functions. The number of such additional personnel and their salaries will be
determined by the volume of business we are generating and the availability of
adequate financial resources to pay the salaries of such personnel.
Item 3 - CONTROLS AND PROCEDURES
A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
Principal Executive Officer and Acting Principal Financial Officer of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. The Company's disclosure controls and procedures are designed to
provide a reasonable level of assurance of achieving the Company's disclosure
control objectives. The Company's Principal Executive Officer and Acting
Principal Financial Officer have concluded that the Company's disclosure
controls and procedures are, in fact, effective at this reasonable assurance
level as of the period covered. In addition, the Company reviewed its internal
controls, and there have been no significant changes in its internal controls or
in other factors that could significantly affect those controls subsequent to
the date of their last evaluation or from the end of the reporting period to the
date of this Form 10-QSB.
(B) Changes in Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls during
the Company's second fiscal quarter ended June 30, 2005, the Company's Principal
Executive Officer and Acting Principal Financial Officer have determined that
there are no changes to the Company's internal controls over financial reporting
that has materially affected, or is reasonably likely to materially effect, the
Company's internal controls over financial reporting.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently a defendant in one lawsuit from a former employee
relating to compensation related claims. The Company does not believe this
lawsuit is material to its operations or financial results and intends to
vigorously pursue its defense of the matter.
Item 2. Changes in Securities
On January 3, 2005, we issued 27,288 shares of common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $6,822 of accrued, but unpaid vacation.
17
On March 23, 2005, the Company entered into a Loan Agreement with Aspen
Select Healthcare, LP ("Aspen") to provide up to $1.5 million of indebtedness
pursuant to a credit facility (the "Credit Facility"). As part of the Credit
Facility transaction, the Company also issued to Aspen a five year Warrant to
purchase up to 2,500,000 shares of its common stock at an exercise price of
$0.50 per share.
During the six months ending June 30, 2005, we sold 522,382 shares of our
common stock in a series of private placements at $0.30 per share and $0.35 per
share to unaffiliated third party investors. These transactions generated net
proceeds to the Company of approximately $171,000. These transactions involved
the issuance of unregistered stock to accredited investors in transactions that
we believed were exempt from registration under Rule 506 promulgated under the
Securities Act of 1933.
On June 6, 2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP ("Cornell"). Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell shares of common stock for a total purchase price of up to $5.0 million.
For each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell will pay the Company 98% of the lowest volume weighted
average price ("VWAP") of the Company's common stock as quoted by Bloomberg, LP
on the Over-the-Counter Bulletin Board or other principal market on which the
Company's common stock is traded for the 5 days immediately following the notice
date (the "Purchase Price"). The total number of shares issued to Cornell under
each advance request will be equal to the total dollar amount of the advance
request divided by the Purchase Price determined during the five day pricing
period. Cornell will also retain 5% of each advance under the Standby Equity
Distribution Agreement. Cornell's obligation to purchase shares of the Company's
common stock under the Standby Equity Distribution Agreement is subject to
certain conditions, including the Company obtaining an effective registration
statement for shares of common stock sold under the Standby Equity Distribution
Agreement and is limited to $750,000 per weekly advance. The amount and timing
of all advances under the Standby Equity Distribution Agreement are at the
discretion of the Company and the Company is not obligated to issue and sell any
securities to Cornell, unless and until it decides to do so. Upon execution of
the Standby Equity Distribution Agreement, Cornell received 381,888 shares of
the Company's common stock as a commitment fee under the Standby Equity
Distribution Agreement. The Company also issued 27,278 shares of the Company's
common stock to Spartan Securities Group, Ltd. under a placement agent agreement
relating to the Standby Equity Distribution Agreement.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Securities Holders
NONE
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following exhibits are filed as part of this Form 10-QSB.
Exhibit
18
Number Description
31.1 Certification by Principal Executive Officer Provided herewith
pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Principal Financial Officer Provided herewith
pursuant to 15 U.S.C. Section 7241, as
adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification by Principal Executive Officer Provided herewith
and Principal Financial Officer pursuant
to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K.
On June 8, 2005, we filed a report on Form 8-K announcing that the Company
had entered into a Standby Equity Distribution Agreement with Cornell Capital
Partners, LP, whereby the Company may, at its discretion, periodically sell to
Cornell shares of common stock for a total purchase price of up to $5.0 million.
All of the related transaction documents were filed as attachments to this Form
8-K.
On June 23, 2005 we filed a report on Form 8-K announcing that the Company,
pursuant to a written consent of the majority of its shareholders, elected three
new Directors to the Company's Board of Directors. The three new Directors are
Dr. Thomas D. Conrad, Mr. George O'Leary and Mr. Peter M. Peterson. The Company
also announced that pursuant to the same shareholder action, Dr. Michael T.
Dent, Mr. Robert P. Gasparini, and Mr. Steven C. Jones have been reappointed to
the Company's Board for another one-year term.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NEOGENOMICS, INC.
Date: August 11, 2005 /s/ Robert P. Gasparini
Robert P. Gasparini
President and
Principal Executive Officer
19