10QSB: Optional form for quarterly and transition reports of small business issuers
Published on November 1, 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 September 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 ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule-12b-2 of the Exchange Act).
YES ( ) NO (X)
State the number of shares outstanding of each of the issuer's classes of common
equity, as of October 31, 2005.
22,576,975
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 September 30, 2005................ 4
Consolidated Statements of Operations for the three
and nine months ended September 30, 2005 and 2004.................. 5
Consolidated Statements of Cash Flows for the nine
months ended September 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.................................................. 18
Item 2. Changes in Securities.............................................. 18
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 as "NeoGenomics", the
"Company", "we", "us", or "our" 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, 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.
3
NeoGenomics, Inc.
CONSOLIDATED BALANCE SHEET AS OF
September 30, 2005
(unaudited)
________________________________________________________________________________
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 76,823
Accounts receivable (net of allowance for doubtful
accounts of $20,140) 374,090
Inventories 44,366
Other current assets 46,656
Total current assets 541,935
PROPERTY AND EQUIPMENT (net of accumulated depreciation
of $225,648) 442,716
OTHER ASSETS 14,002
TOTAL $ 998,653
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 274,545
Deferred revenue 110,000
Accrued and other liabilities 53,627
Total current liabilities 438,172
LONG TERM LIABILITIES (net of unamortized discount of
$97,090) 1,263,361
TOTAL LIABILITIES 1,701,533
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 100,000,000 shares
authorized; 22,576,975 shares issued and
outstanding 22,577
Additional paid-in capital 9,934,250
Deficit (10,659,707)
Total stockholders' deficit (702,880)
TOTAL $ 998,653
============
________________________________________________________________________________
See notes to consolidated financial statements.
4
NeoGenomics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
_________________________________________________________________________________________________________
For the For the For the For the
Nine-Months Nine-Months Three-Months Three-Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2005 2004 2005 2004
REVENUE $ 1,134,429 $ 422,254 $ 559,349 $ 121,859
COST OF REVENUE 683,694 417,133 313,176 132,773
GROSS (DEFICIT) PROFIT 450,735 5,121 246,173 (10,914)
OPERATING EXPENSES:
Selling, general and administrative 946,358 447,510 424,470 137,091
Interest expense 140,845 66,820 61,640 22,851
Total operating expenses 1,087,203 514,330 486,110 159,942
NET INCOME (LOSS) $ (636,468) $ (509,209) $ (239,937) $ (170,856)
============= ============ ============ ===========
NET INCOME (LOSS) PER SHARE - Basic and
Diluted $ (0.03) $ (0.03) $ (0.01) $ (0.01)
============= ============ ============ ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
Basic and Diluted 22,145,593 19,350,912 22,526,370 20,785,612
============= ============ ============ ===========
_________________________________________________________________________________________________________
See notes to consolidated financial statements.
5
NeoGenomics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
_______________________________________________________________________________________
For the For the
Nine-Months Nine-Months
Ended Ended
September September
30, 2005 30, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(636,468) $ (509,209)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation 88,335 64,908
Amortization of credit facility discount 34,247 -
Amortization of debt issue costs 13,973 -
Other Amortization 14,009 -
Equity-based compensation 64,244 -
Provision for bad debts 65,727 12,694
Changes in assets and liabilities, net:
(Increase) decrease in accounts receivables, net
of write-offs (383,326) (15,179)
(Increase) decrease in inventory (29,244) 4,370
(Increase) decrease in pre-paid expenses (25,223) (2,217)
(Increase) decrease in other current assets 3,474 (6,040)
(Increase) decrease in deposits 1,500 4,540
Increase (decrease) in accounts payable and other
liabilities 104,161 (61,069)
NET CASH USED IN OPERATING ACTIVITIES (684,592) (507,202)
CASH FLOWS USED IN INVESTING ACTIVITIES -
Purchases of property and equipment (82,659) (14,473)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net 620,451 80,000
Debt issue costs (53,587) -
Issuances of common stock, net of transaction expenses 164,662 740,228
NET CASH PROVIDED BY FINANCING ACTIVITIES 731,526 820,228
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (35,725) 298,533
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 112,548 25,051
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 76,823 $ 323,604
========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 89,834 $ 86,474
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 nine months
ended September 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, our Standby Equity
Distribution Agreement with Cornell Capital (See Note D) and improving
operations, will provide adequate capital to fund our operations and growth for
2005 and beyond. At September 30, 2005, we had a working capital surplus of
$103,763. 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 nine months ending September 30, 2005, and fiscal year 2004, the
Company incurred consulting expenses from a director of $55,000 and $44,000,
respectively, for various consulting work performed in connection with managing
the financial affairs of the Company and acting as the Principal 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 $2.50
- - $10.00 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.
8
On March 23, 2005, we entered into an agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) ("Aspen") 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, 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,
which is secured by substantially all of our assets 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 a Registration Rights
Agreement, dated March 23, 2005 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. As of September 30, 2005
$1,488,520 was available for use and $1,360,451 had been drawn.
NOTE D - EQUITY FINANCING TRANSACTIONS
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 maintaining 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 1, 2005, we issued 14,947 shares of our common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
9
satisfaction of $4,933 of accrued, but unpaid vacation.
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 Standby Equity Distribution Agreement. Such registration
statement became effective as of August 1, 2005.
On August 29, 2005, we requested a $25,000 advance on our Standby Equity
Distribution Agreement with Cornell. The advance was completed to provide
funding for general corporate purposes. The advance was completed on September
8, 2005 and resulted in the sale of 63,776 shares of common stock. Our net
proceeds were $23,250 after deducting $1,250 in fees to Cornell and a $500
escrow agent fee to Yorkville Advisors Management, LLC.
________________________________________________________________________________
End of Financial Statements
10
Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
NeoGenomics 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 Involvemen Low High - Pathologist Low
Malpractice Ins. Require Low High Low
Other Professionals Req None None Cyto/Molecular geneticist
Level of Automatio High Low-Moderate Moderate
Diagnostic in Natur Usually Not Yes Yes
Types of Diseases Teste 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 - $5.0 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 primary focus is on the oncology market. We target oncologists that
perform bone marrow sampling and treat patients with leukemia, lymphoma and
other forms of cancer as well as urologists that treat patients with bladder
cancer. 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. This
was successful and we landed several clients in the Eastern United States. We
also signed up several clients in the Midwestern United States as well. During
the third quarter of 2005 we began testing for cervical, breast and bladder
cancer. As we grow, we anticipate offering additional tests that broaden our
focus from genetic and molecular biology testing to more traditional types of
anatomic pathology testing that is 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 customer feedback,
we believe that most competing cytogenetics labs typically have 7-14 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 result 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
hematological cancers yields total revenue ranging from approximately $1,500 -
12
$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 following discussion and analysis should be read in conjunction with
the financial statements for the three months ended September 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
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.
13
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 September 30, 2005 as Compared
to the Three Months ended September 30, 2004
During the three months ended September 30, 2005, our revenues increased
approximately 359% to approximately $559,000 from approximately $122,000 during
the three months ending September 30, 2004, primarily as a result of attracting
new customers to our services and to a lesser extent increasing the volume of
services sold to existing customers. During the three months ending September
30, 2005, our cost of revenue increased approximately 136% to approximately
$313,000 from approximately $133,000 during the three months ending September
30, 2004, primarily as a result of personnel, supplies and transportation costs
associated with processing higher test volumes. This resulted in an increase of
approximately $257,000 in our gross profit to approximately $246,000 for the
three months ended September 30, 2005 from a gross deficit of approximately
$11,000 during the three months ended September 30, 2004. This change is
primarily attributable to our increased revenues and testing volumes for the
period ended September 30, 2005 as compared to the three month period ended
September 30, 2004.
During the three months ended September 30, 2005, our selling, general and
administrative expenses increased by approximately 210% to approximately
$425,000 from approximately $137,000 for the three months ended September 30,
2004. This increase was primarily a result of higher personnel and
personnel-related expenses associated with increased levels of staffing and with
infrastructure related to supporting our growing operations. 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 three months ended September 30, 2005 increased
approximately 169% to approximately $62,000 from approximately $23,000 for the
three months ended September 30, 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 September 30, 2005, includes
approximately $23,000 of non-cash charges in connection with the amortization of
this debt discount and financing costs. There was no amortization of debt
discount and financing costs to interest expense during the three months ended
September 30, 2004.
As a result of the foregoing, our net loss for the three months ended
September 30, 2005 increased approximately 40% to approximately $240,000 from
approximately $171,000 during the three months-ended September 30, 2004.
Results of Operations for the Nine Months ended September 30, 2005 as Compared
to the Nine Months ended September 30, 2004
During the nine months ended September 30, 2005, our revenues increased
approximately 169% to approximately $1,134,000 from approximately $422,000
during the nine months ending September 30, 2004, primarily as a result of
attracting new customers to our services and to a lesser extent increasing the
volume of services sold to existing customers. During the nine months ending
September 30, 2005, our cost of revenue increased approximately 63% to $684,000
from approximately $417,000 during the nine months ending September 30, 2004,
14
primarily as a result of personnel, supplies transportation costs associated
with processing higher test volumes as well as increased costs as a result of
opening new lines of business. This resulted in gross profit during the nine
months ended September 30, 2005 of approximately $451,000 from approximately
$5,000 during the nine months ended September 30, 2004. This increase is
primarily attributable to realizing economies of scale from our increased
revenues and testing volumes for the nine months ended September 30, 2005 as
compared to the nine months ended September 30, 2004.
During the nine months ended September 30, 2005, our selling, general and
administrative expenses increased by approximately 112% to approximately
$946,000 from approximately $448,000 in the nine months ended September 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 nine months ended September 30, 2005 increased
approximately 110% to approximately $141,000 from approximately $67,000 for the
nine months ended September, 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 nine months
ending September 30, 2005, includes approximately $48,000 of non-cash charges in
connection with the amortization of this debt discount and financing costs.
There was no amortization of debt discount and financing costs to interest
expense during the nine months ended September 30, 2004..
As a result of the foregoing, our net loss for the nine months ended
September 30, 2005 increased approximately 25% to approximately $636,000 from
approximately $509,000 during the nine months-ended September 30, 2004.
Liquidity and Capital Resources
During the nine months ended September 30, 2005, our operating activities
used approximately $685,000 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 $83,000 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 $732,000 (net of $97,090 of debt
issue costs) during the nine months-ended September 30, 2005. At September 30,
2005, we had cash and cash equivalents of approximately $76,823.
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 nine months ending September 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, 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 with an initial maturity of March 31,
15
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,
which is secured by substantially all of our assets 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. As of September 30,
2005 $1,488,520 was available for use and $1,360,451 had been drawn.
On June 6, 2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP. 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 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 1, 2005, we issued 14,947 shares of our common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $4,933 of accrued, but unpaid vacation.
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 Standby Equity Distribution Agreement. Such registration
statement became effective as of August 1, 2005.
On August 29, 2005 we requested a $25,000 advance on our Standby Equity
Distribution Agreement with Cornell. The advance was completed to provide
funding for general corporate purposes. The advance was completed on September
8, 2005 and resulted in the sale of 63,776 shares of common stock. Our net
proceeds were $23,250 after deducting $1,250 in fees to Cornell and a $500
escrow agent fee to Yorkville Advisors Management, LLC.
At the present time, we have limited cash resources. We do not anticipate
that we will generate significant cash flow from operating activities until
2006. 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 related to business growth. 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,
16
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
maybe required to curtail 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
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.
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 third fiscal quarter ended September 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.
17
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 July 1, 2005, we issued 14,947 shares of our common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $4,933 of accrued, but unpaid vacation.
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
Number Description
Certification by Principal Executive Officer
31.1 pursuant to 15 U.S.C. Section 7241, as adopted Provided herewith
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification by Principal Financial Officer
31.2 pursuant to 15 U.S.C. Section 7241, as adopted Provided herewith
pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
Certification by Principal Executive Officer and
32.1 Principal Financial Officer pursuant to 18 U.S.C. Provided herewith
Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
18
(b) Reports on Form 8-K.
None
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: November 1, 2005 /s/ Robert P. Gasparini
Robert P. Gasparini
President and
Principal Executive Officer
19