NEOGENOMICS INC – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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NeoGenomics, Inc., a Nevadacorporation (referred to individually as the "Parent Company" or collectively with all of its subsidiaries as "NeoGenomics" or the "Company" in this Form 10-Q) is the registrant for SECreporting purposes. Our common stock is quoted on the OTC Bulletin Board and the OTCQB under the symbol "NGNM." Introduction The following discussion and analysis should be read in conjunction with the unaudited consolidated financial statements, and the notes thereto included herein. The information contained below includes statements of the Company's or management's beliefs, expectations, hopes, goals and plans that, if not historical, are forward-looking statements subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. For a discussion on forward-looking statements, see the information set forth in the introductory note to this Quarterly Report on Form 10-Q under the caption "Forward Looking Statements", which information is incorporated herein by reference.
We operate a network of cancer-focused testing laboratories whose mission is to improve patient care through exceptional genetic and molecular testing services. Our vision is to become America's premier cancer testing laboratory by delivering uncompromising quality, exceptional service and innovative products and solutions. The Company has laboratory locations in
Ft. Myersand Tampa, Florida; Irvine, California; and Nashville, Tennessee, and currently offers the following types of testing services: a) Cytogenetics testing - the study of normal and abnormal chromosomes and
their relationship to disease. Cytogenetic studies are often utilized to
assist in refining treatment options for hematopoietic cancers such as leukemia and lymphoma;
b) Fluorescence In-Situ Hybridization ("FISH") testing - a branch of cancer
genetics that focuses on detecting and locating the presence or absence of
specific DNA sequences and genes on chromosomes; c) Flow cytometry testing - a rapid way to measure the characteristics of
cell populations. Cells from peripheral blood, bone marrow aspirate, lymph
nodes, and other areas are labeled with selective fluorescent antibodies
and quantified according to their surface antigens. These fluorescent
antibodies bind to specific cell surface antigens and are used to identify
malignant cell populations. Flow cytometry is typically performed in
conjunction with morphology testing which looks at smears on glass slides
for abnormal cell populations;
d) Immunohistochemistry ("IHC") testing - the process of identifying cell
proteins in a tissue section utilizing the principle of antibodies binding
specifically to antigens. Specific surface cytoplasmic or nuclear markers
are characteristic of cellular events such as proliferation or cell death
(apoptosis). IHC is also widely used to understand the distribution and
localization of differentially expressed proteins; and
e) Molecular testing - a rapidly emerging cancer diagnostic tool focusing on
the analysis of DNA and RNA, as well as the structure and function of
genes at a molecular level. Molecular testing employs multiple
technologies including point mutation analysis, sequencing analysis, DNA
fragment length analysis, and real-time polymerase chain reaction
("RT-PCR") RNA analysis.
All of these testing services are widely utilized to inform the diagnosis and prognosis of various types and subtypes of cancer and to help predict a patient's potential response to specific therapies.
NeoGenomicsoffers testing services on both a "tech-only" basis, where NeoGenomicsperforms the technical component of the testing (specimen set-up, staining, imaging, sorting and categorization of cells, chromosomes, genes or DNA) and the client physician performs the related professional interpretation component (analyzing the laboratory data, developing the diagnosis or prognosis as well as preparing and writing the final report), as well as on a full service or "global" basis where NeoGenomicsperforms both the technical component and the professional interpretation component. 13
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Our primary focus is to provide high complexity, cancer-related laboratory testing services to hospitals, community-based pathology practices, and clinicians throughout
the United States. We currently perform analyses for hematopoietic cancers such as leukemia and lymphoma (blood and lymphoid tumors) and solid tumor cancers such as breast, lung, colon, and bladder cancer. For hematopoietic cancers, we typically analyze bone marrow aspirate and peripheral blood specimens. For solid tumor cancers, we typically analyze formalin fixed, paraffin embedded tissue samples or urine. The cancer testing services we offer to community-based pathologists are designed to be a natural extension of, and complementary to, the services that they perform within their own practices. We believe our relationship as a non-competitive partner to community-based pathology practices empowers them to expand their breadth of testing and provide a menu of services that matches or exceeds the level of service found in academic centers of excellence around the country. Community-based pathology practices typically order our services on a "tech-only" basis, which allows them to participate in the diagnostic process by performing the professional interpretation services without having to make the investment in laboratory personnel or equipment needed to perform the technical component of the tests. In areas where we do not provide services to community-based pathology practices, we may directly serve oncology, dermatology, urology and other clinician practices that prefer to have a direct relationship with a laboratory for cancer-related genetic and molecular testing services. We typically service these types of clients with a "global" service offering where we perform both the technical and professional components of the tests ordered. Increasingly, however, larger clinician practices have begun to internalize pathology testing, and our "tech-only" service offering allows these larger clinician practices to also participate in the diagnostic process by performing the professional interpretation services. We are also focused on innovation because we are committed to being a leader in oncology testing. With the recent advances in genomics, proteomics and digital pathology, frequently large amounts of data are generated and managing this data is difficult without the aid of computer-based algorithms and pattern recognition. We believe that the best system for pattern recognition and data analysis is a technology known as Support Vector Machine or "SVM", especially when combined with a technology called Recursive Feature Elimination or "RFE". Health Discovery Corporation has an extensive array of pending and issued patents surrounding SVM and RFE technology. By licensing this technology and combining the expertise that already existed at Health Discovery Corp with our expertise in genomics, proteomics and digital imaging, we believe we are well-positioned to begin developing innovative and proprietary new products.
Our goal is to develop new assays to help our physicians better manage their patients and to enable them to practice evidence-based medicine tailored specifically for each of their patients. High priority will be given to the development of better tests for the diagnosis and prediction of clinical behavior in prostate cancer, pancreatic cancer, breast cancer and leukemia/lymphoma.
We intend to combine and analyze data from genomics, proteomics and digital imaging using SVM-RFE techniques to develop practical, cost-effective and reliable new assays. Using this technology, we believe we will be able to offer a whole line of advanced tests that will help physicians better manage the treatment options for cancer patients.
We strive to provide industry leading turnaround times for test results to our clients nationwide. By providing information to physicians in a rapid manner, they can begin treating their patients as soon as possible. We believe our average 4-5 day turn-around time for our cytogenetics testing services, our average 3-4 day turn-around time for FISH testing services, and our average 1 day turn-around time for flow cytometry testing services are industry-leading benchmarks for national laboratories. Our consistent timeliness of results is a competitive strength and a driver of additional testing requests by our referring physicians. Quick turn-around times allow for the performance of other adjunctive tests within an acceptable diagnosis window in order to augment or confirm results and more fully inform treatment options. We believe that our rapid turnaround times are a key differentiator of
NeoGenomicsversus other national laboratories, and our clients often cite them as a key factor in their relationship with us. 14
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Our team of medical professionals and Ph.Ds. are specialists in the field of genetics and oncology. Our medical team is led by our Chief Medical Officer, Dr.
Maher Albitar, a renowned hematopathologist with extensive experience in molecular and genetic testing. Prior to joining NeoGenomics, Dr. Albitar was Medical Director for Hematopathology and Oncology at the Quest Nichols Instituteand Chief R&D Director for Hematopathology and Oncology for Quest Diagnostics. He also served as Section Chief for Leukemia at the University of Texas M. D. Anderson Cancer Center. In addition to Dr. Albitar, we employ other full-time M.D.s and Ph.Ds.
Extensive Tech-Only Service Offerings
We launched the first tech-only FISH testing services in
the United Statesin 2006, and we currently have the most extensive menu of tech-only FISH services in the country. Indeed, we believe we are the only national laboratory offering tech-only FISH services for hematopoietic cancers in the U.S. We also offer tech-only flow cytometry and immunohistochemistry testing services. These types of testing services generally allow the professional interpretation component of a test to be billed separately from the technical component. Our NeoFISHTM, NeoFLOWTMand other tech-only service offerings allow properly trained and credentialed community-based pathologists to extend their own practices by performing professional interpretations services, which allows them to better service the needs of their local clientele without the need to invest in the lab equipment and personnel required to perform the technical component of genetic and molecular testing. Our tech-only services are designed to give pathologists the option to choose, on a case by case basis, whether they want to order just the technical information and images relating to a specific test so they can perform the professional interpretation, or order "global" services and receive a comprehensive test report which includes a NeoGenomics Pathologist's interpretation of the test results. Our clients appreciate the flexibility to access NeoGenomics'medical staff for difficult or complex cases or when they are otherwise unavailable to perform professional interpretations. We believe this innovative approach to serving the needs of pathology client's results in longer term, more committed client relationships that are more akin to strategic partnerships. Our extensive tech-only service offerings have differentiated NeoGenomicsand allowed us to compete more effectively against larger, more entrenched competitors in our niche of the industry.
Global Service Offerings
We also offer a full set of global services to meet the needs of those clients who are not credentialed and trained in interpreting genetic tests and who are looking for specialists to interpret the testing results for them. In our global service offerings, our lab performs the technical component of the tests and our M.D.s and Ph.Ds. provide the interpretation services. Our professional staff is also available for post testing consultative services. These clients rely on the expertise of our medical team to give them the answers they need in a timely manner to help inform their diagnoses and treatment decisions. Many of our tech-only clients also rely on our medical team for difficult or challenging cases by ordering our global testing services on a case by case basis. Our Genetic Pathology Solutions ("GPS") report summarizes all relevant case data from our global services on one summary report. When providing global services,
NeoGenomicsperforms both the technical and professional component of the test, which results in a higher reimbursement level.
Client Education Programs
We believe we have one of the most extensive client education programs in the genetic and molecular testing industry. We train pathologists how to use and interpret genetic testing services so that they can then participate in our tech-only service offerings. Our educational programs include an extensive library of on-demand training modules, online courses, and custom tailored on-site training programs that are designed to prepare clients to utilize our tech-only services. Each year, we also regularly sponsor seminars and webinars on emerging topics of interest in our field. Our medical staff is involved in many aspects of our training programs. 15
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Laboratory Information System (LIS)
We believe we have a state-of-the-art Laboratory Information System ("LIS") that interconnects our locations and provides flexible reporting solutions to clients. This system allows us to standardize testing and deliver uniform test results and images throughout our network, regardless of the location that any specific portion of a test is performed within our network. This allows us to move specimens and image analysis work between locations to better balance our workload. Our LIS also allows us to offer highly specialized and customizable reporting solutions to our tech-only clients. For instance, our tech-only NeoFISHTM and NeoFLOWTM applications allow our community-based pathologist clients to tailor individual reports to their specifications and incorporate only the images they select and then issue and sign-out such reports from our system with their own logos at the top. Our customized reporting solution even allows our clients to incorporate test results performed on ancillary tests not performed at
NeoGenomicsinto summary report templates. This feature has been well-received by clients. National Direct Sales Force Our direct sales force has been trained extensively in cancer genetic testing and consultative selling skills to service the needs of clients. Our sales representatives ("Territory Business Managers") are organized into three regions (Northeast, Southeast and West). These sales representatives all utilize Salesforce.com to manage their territories, and we have integrated all of the important customer care functionality within our LIS into Salesforce.com so that our Territory Business Managers can stay informed of emerging issues and opportunities within their regions.
Customer Care Specialists("CCS") are organized by region into territories that service not only our external clients, but also work very closely with and support our sales team. A client receives personalized assistance when dealing with their dedicated CCS because each CCS understands their clients' specific needs. When problems or questions do arise, the CCS is responsible for providing answers to the client. CCS's handle everything from arranging specimen pickup to managing questions that arise during the test process to delivering test results in order to deliver exceptional services to our clients.
Many high complexity laboratories within the cancer testing niche have frequently operated a core facility on either the
West Coastor the East Coastto service the needs of their customers around the country. We believe our clients and prospects desire to do business with a laboratory with national breadth and a local presence. We have four facilities, two large laboratory locations in Fort Myers, Floridaand Irvine, Californiaand two smaller laboratory locations in Nashville, Tennesseeand Tampa, Florida. Our objective is to "operate one lab with four locations" in order to deliver standardized test results. We intend to continue to develop and open new laboratories or expand our current facilities as market situations dictate and business opportunities arise.
In the past few years our field has experienced a rapid increase in tests that are tied to specific "genomic pathways". These predictive tests are typically individualized for a small sub-set of patients with a specific subtype of cancer. The therapeutic target in the genomic pathways is typically a small molecule found at the level of the cell surface, within the cytoplasm and/or within the nucleus. These genomic pathways, known as the "Hallmarks of Cancer", contain a target-rich environment for small-molecule "anti-therapies". These anti-therapies target specific mutations in the major cancer pathways such as the Proliferation Pathway, the Apoptotic Pathway, the Angiogenic Pathway, the Metastasis Pathway, and the Signaling Pathways and Anti-Signaling Pathways. As an example, recently the
FDAapproved a small molecule anti-therapy drug (Xalkori) that targets a mutation in the ALK gene for a small sub-set of patients with Non-Small Cell Lung Cancer (NSCLC). Approximately 50-61% of patients with an ALK gene rearrangement will respond to this therapy. To identify patients eligible for this specific small-molecule therapy, an FDA-approved FISH test that NeoGenomicsand certain other laboratories offer, must be performed. This ALK FISH test is considered a companion diagnostic test and it is critical that this test be performed and the patient found to have an ALK mutation before therapy can be administered. Tests such as the ALK FISH test allow our clients to direct individualized treatments to each cancer patient in a timely manner. We are increasingly focused on attempting to develop new predictive tests such as this in our new product development pipeline and expect to bring up at least 25-30 new molecular tests and greatly expand our immunohistochemistry service offerings in 2012. 16
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The majority of our testing volume is dependent on patients being treated by hematology/oncology professionals and other healthcare providers. Volume of testing generally declines during the vacation seasons, year-end holiday periods and other major holidays, particularly when those holidays fall during the middle of the week. In addition, volume of testing tends to decline due to adverse weather conditions, such as heavy snow, excessively hot or cold spells or hurricanes, tornados in certain regions, consequently reducing revenues and cash flows in any affected period. Therefore, comparison of the results of successive periods may not accurately reflect trends for future periods.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in
the United Statesrequires us to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. While many operational aspects of our business are subject to complex federal, state and local regulations, the accounting for our business is generally straightforward with net revenues primarily recognized upon completion of the testing process. Our revenues are primarily comprised of laboratory tests, and approximately one-half of total operating costs and expenses consist of employee compensation and benefits. Due to the nature of our business, several of our accounting policies involve significant estimates and judgments. These accounting policies have been described in our Annual Report on Form 10-K for the year ended December 31, 2011.
In the three month period ended
March 31, 2012we acquired approximately $3.0 millionof intangible assets related to our Master License Agreement ("the License Agreement") with Health Discovery Corporation ("HDC") pursuant to which we were granted an exclusive worldwide license to utilize 84 issued and pending patents to develop and commercialize laboratory developed tests ("LDTs") and other products relating to hematopoietic and solid tumor cancers. The licensed intellectual property and know-how relates to support vector machine ("SVM"), recursive feature elimination ("SVM-RFE"), fractal genomic modeling ("FGM") and other pattern recognition technology as well as certain patents relating to digital image analysis, biomarker discovery, and gene and protein-based diagnostic, prognostic, and predictive testing. Under the terms of the License Agreement, we may, subject to certain limitations, use, develop, make, have made, modify, sell, and commercially exploit products and services in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis relating to the development, marketing, production or sale of any LDTs or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer (collectively, the "Field"). The License Agreement allows us to develop and sell any gene, gene-product or protein-based LDTs based on HDC's technology in the Field and provides for sublicensing rights and the assignment of the License Agreement, in whole or in part, in our discretion. The License Agreement further provides us with access to certain HDC personnel and consulting resources in the fields of mathematics and in genetic and molecular test development. The licensed technology also includes, among other things, certain tests, algorithms and computer software which have already been developed by HDC. Initially, we intend to focus on developing prostate, pancreatic, and colon cancer LDTs. In addition, we plan to develop interpretation software that will help to automate the analysis of cytogenetics and flow cytometry tests. The intangible assets were valued at fair value based on cost of the assets as we acquired the assets in an arms-length transaction. We present intangible assets net of accumulated amortization in our financial statements. We have three classes of intangible assets and each class of intangible assets is amortized over its estimated service period from acquisition date through the weighted average patent expiration date of each classes patents or the period of economic benefit. 17
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Results of Operations for the Three Months Ended
The following table presents the consolidated statements of operations as a percentage of revenue: For the Three months ended March 31. 2012 2011 NET REVENUE 100 % 100 % COST OF REVENUE 53 % 56 % GROSS PROFIT 47 % 44 % OPERATING EXPENSES:
General and administrative 25 %
Research and development 3 % 1 % Sales and marketing 13 % 20 %
TOTAL OPERATING EXPENSES 41 %
INTEREST (INCOME) EXPENSE, NET 2 % 2 % NET INCOME (LOSS) 4 % (10 )% Revenue Our revenue, requisition and test metrics for the three months ended
March 31, 2012and 2011 (in thousands, except test and requisition data) are as follows: For the Three For the Three Months Ended Months Ended % March 31, 2012 March 31, 2011 Change Requisitions Received 16,934 10,214 65.8 % Number of Tests Performed 26,932 15,396 74.9 % Avg. # of Tests / Case 1.59 1.51 5.5 % Total Testing Revenue $ 15,160 $ 8,805 72.2 % Average Revenue/Requisition $ 895 $ 862 3.9 % Average Revenue/Test $ 563 $ 572 (1.6 )% Our increase in test counts and revenue was primarily the result of adding significant new client accounts as well as the expansion of our relationship with a large oncology practice to multiple new office locations. All of the office locations of this oncology practice combined represented approximately 18% of our revenue for the three months ended March 31, 2012compared to 1.3% of our revenue for the quarter ended March 31, 2011. We have seen an increase in molecular testing and we anticipate continued growth as we plan to expand our Molecular testing menu during 2012. Revenues per test are a function of both the type of the test (e.g. FISH, cytogenetics, flow cytometry, etc.) and the payer (e.g., Medicare, Medicaid, third party insurer, institutional client etc.). Average revenue per test is primarily driven by our test type mix and our payer mix. The decrease in average revenue per test for the three months ended March 31, 2012was almost entirely due to a shift in test mix. Lower priced molecular and histology tests now make up a greater percentage of our test mix and our total revenue compared to last year. 18
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Cost of Revenue and Gross Profit
Cost of revenue includes payroll and payroll related costs for performing tests, depreciation of laboratory equipment, rent for laboratory facilities, laboratory reagents, probes and supplies, and delivery and courier costs relating to the transportation of specimens to be tested. For the three months ended March 31. % 2012 2011 Change Change Cost of Revenue $ 8,016,000 $ 4,940,000 $ 3,076,000 62.3 % As a % of revenue 52.9 % 56.1 %
Cost of Revenue per Test $ 297.65
Overall cost of revenue increased due to the large increase in testing volumes. Cost as a percentage of revenue decreased by 3.2 margin points primarily due to declines in our average cost per test. Average cost per test decreased 7.2% from Quarter 1 2011 to Quarter 1 2012 as a result of improved productivity in our laboratory. Laboratory productivity improved as we saw an increase in the amount of tests processed per laboratory FTE (full time equivalent). This was driven by improved capacity planning and utilization along with several process improvements. We continue to focus on laboratory operations and on streamlining our processes in order to continue to drive further gross margin improvement.
As a result of the above, our gross profit for the three months ended
For the three months ended March 31. % 2012 2011 Change Change Gross Profit $ 7,144,000 $ 3,865,000 $ 3,279,000 84.4 % As a % of revenue 47.1 % 43.9 %
Revenue, Cost of Revenue and Gross Profit per Test
The following table is a summary of per test data on revenue, cost of sales and gross profit. The increase in gross margin percentage was driven by the decline in our average cost per test, which was driven by productivity improvements in our laboratory operations. For the three months ended March 31, % 2012 2011 Change Change Revenue per Test $ 562.89 $ 571.87 $ (8.98 ) (1.6 %) Cost of Revenue per Test $ 297.65 $ 320.86 $ (23.21 ) (7.2 %) Gross Profit per Test $ 265.24 $ 251.01 $ 14.23 5.6 % Gross Margin % per Test 47.1 % 43.9 %
Sales and Marketing
Sales and marketing expenses relate primarily to the employee related costs of our sales management, sales representatives, sales and marketing consultants, marketing, and customer service personnel. For the three months ended March 31. % 2012 2011 Change Change Sales and marketing $ 2,036,000 $ 1,753,000 $ 283,000 16.1 As a % of revenue 13.4 % 19.9 % 19
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Sales and marketing expenses increased approximately 16%, or
We expect our overall sales and marketing expenses to increase modestly with increased test volumes in 2012 but remain stable as a percentage of revenue. We also anticipate growing our sales force in 2012.
General and Administrative Expenses
General and administrative expenses relate to billing, bad debts, finance, human resources, information technology and other administrative functions. They primarily consist of employee related costs (such as salaries, fringe benefits, and stock-based compensation expense), professional services, facilities expense, and depreciation and administrative-related costs allocated to general and administrative expenses. For the three months ended March 31. % 2012 2011 Change Change
General and administrative
As a % of revenue 24.7 % 30.7 % General and administrative expenses increased approximately 38.7%, or
$1.0 million to $3.75 millionfor the three months ended March 31, 2012as compared to $2.7 millionfor the three months ended March 31, 2011. The increase in general and administrative expenses is primarily a result of adding information technology and billing personnel to support the increase in our testing volumes as well as health insurance costs, recruiting expenses to hire new employees across the organization and an increase in corporate performance based bonuses. Bad debt expense increased by approximately 41.2%, or approximately $245,000to $839,000for the three months ended March 31, 2012as compared to approximately $595,000for the three months ended March 31, 2011. This increase was primarily a result of the 72% increase in revenue partially offset by a decrease in bad debt as a percentage of revenue. Bad debt as a percentage of revenue decreased 1.21% to 5.54% for the three months ended March 31, 2012from 6.75% of revenue for the three months ended March 31, 2011. This decline resulted from having a greater number of managed care contracts in place with more insurance companies and improved performance by our billing department. We expect our general and administrative expenses to increase as we add personnel, increase our billing and collections activities; incur additional expenses associated with the expansion of our facilities and backup systems; incur additional bad debt expense related to increasing sales, and as we continue to build our physical infrastructure to support our anticipated growth. However, we expect general and administrative expenses to continue to decline as a percentage of our revenue as our case volumes increase and as we continue to develop more operating leverage in our business.
Research and Development Expenses
Research and development expenses relate to cost of developing new proprietary and non-proprietary genetic tests as well as cost related to our licensing agreement with Health Discovery Corporation, including amortization of the licensed technology. For the three months ended March 31. % 2012 2011 Change Change Research and development $ 497,000 $ 119,000 $ 378,000 317.7 % As a % of revenue 3.3 % 1.4 % Research and development expenses increased approximately 317.7%, or
$400,000 to $500,000for the three months ended March 31, 2012as compared to approximately $100,000for the three months ended March 31, 2011. The increase in research and development expenses is primarily a result of increased personnel and supply costs to develop and launch new molecular tests as well as to develop proprietary testing products and services pursuant to our license with Health Discovery Corporation. 20
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We expect our research and development expenses in future quarters to increase modestly from the level of our expenses incurred for the three months ended
Other (Income) Expense
Other income and expense primarily consists of the interest expense we incur on our borrowing arrangements (primarily comprised of interest payable on advances under our revolving credit facility with Capital Source and interest paid on capital lease obligations) offset by the interest income we earn on cash deposits. Interest expense increased from approximately
$182,000in for the three months ended March 31, 2011to $258,000for the three months ended March 31, 2012, reflecting higher borrowings, particularly related to our revolving credit facility and capital lease obligations as we acquired additional equipment to support our increasing testing volumes.
Net Income (Loss)
As a result of the foregoing, we reported net income of
"Adjusted EBITDA" is defined by
NeoGenomicsas net income (loss) from continuing operations before (i) interest expense, (ii) tax expense and therapeutic discovery tax grants, (iii) depreciation and amortization expense, (iv) non-cash stock-based compensation and warrant amortization expense and (v) other extraordinary or non-recurring charges. NeoGenomicsbelieves that Adjusted EBITDA provides a more consistent measurement of operating performance and trends across reporting periods by excluding these cash and non-cash items of expense not directly related to ongoing operations from income. Adjusted EBITDA also assists investors in performing analysis that is consistent with financial models developed by research analysts. Adjusted EBITDA as defined by NeoGenomicsis not a measurement under GAAP and may differ from non-GAAP measures used by other companies. There are limitations inherent in non-GAAP financial measures such as Adjusted EBITDA because they exclude a variety of charges and credits that are required to be included in a GAAP presentation, and do not therefore present the full measure of NeoGenomicsrecorded costs against its net revenue. Accordingly, investors should consider non-GAAP results together with GAAP results in analyzing NeoGenomicsfinancial performance.
The following is a reconciliation of GAAP net loss to Non-GAAP EBITDA and Adjusted EBITDA for the three months ending
For the three months ended March 31, 2012 2011 Net income (loss) (Per GAAP) $ 603,000 $
Adjustments to Net Loss:
Interest expense (income), net 258,000
Amortization of intangibles 14,000 - Depreciation of property and equipment 749,000 488,000 EBITDA (non-GAAP) 1,624,000 (223,000 )
Further Adjustments to EBITDA:
Non-cash stock-based compensation 151,000
Adjusted EBITDA (non-GAAP) $ 1,775,000 $ (97,000 ) 21
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Allowance for Doubtful Accounts
We have established a reserve for uncollectible amounts which is estimated based on the aging of accounts receivable within each payer category and our historical data on bad debts in these aging categories. In addition, the allowance is adjusted periodically for other relevant factors, including regularly assessing the state of our billing operations in order to identify issues which may impact the collectability of receivables or allowance estimates. Revisions to the allowance are recorded as an adjustment to bad debt expense within general and administrative expenses. After appropriate collection efforts have been exhausted, specific receivables deemed to be uncollectible are charged against the allowance in the period they are deemed uncollectible. Recoveries of receivables previously written-off are recorded as credits to the allowance. Total adjustments for incremental revenue from tests in which we underestimated the revenue in previous years from collections we received in the current year are not material to the Company's results of operations in any period presented. Our estimates of net revenue are subject to change based on the contractual status and payment policies of the third party payers with whom we deal. We regularly refine our estimates in order to make our estimated revenue as accurate as possible based on our most recent collection experience with each third party payer. March 31. % 2012 2011 Change Change Allowance for doubtful accounts $ 2,293,000 $ 1,799,000 $ 494,000 27 % As a % of gross accounts receivable 18 % 23 % The
$494,000increase in the allowance for doubtful accounts is the result of increased revenue causing our receivable balance to increase. However, our allowance as a percentage of gross accounts receivable has declined as a result of our being on contract with more managed care payers and an improvement in our receivable aging. Bad debt expense as a percentage of revenue was 5.5% for the three month period ended March 31, 2012and was 6.8% of revenue for the three month period ended March 31, 2011.
Liquidity and Capital Resources
The following table presents a summary of our cash flows provided by (used in) operating, investing and financing activities for the three months ended
March 31, 2012and 2011 as well as the period ending cash and cash equivalents and working capital. For the three months ended March 31. 2012 2011
Net cash provided by (used in):
Operating activities $ (1,065,000 ) $ (1,544,000 ) Investing activities (1,314,000 ) (71,000 ) Financing activities 2,507,000 3,051,000 Net increase in cash and cash equivalents 128,000
Cash and cash equivalents, beginning of period 2,628,000 1,097,000
Cash and cash equivalents, end of period (1)
Working Capital (2), end of period $ 1,239,000 $ 1,954,000
(1) Excludes restricted cash of
(2) Defined as current assets - current liabilities.
Our net cash used in operating activities is driven primarily by increases in our accounts receivable balance. Our accounts receivable balance usually increases significantly in the first quarter as most patients have not yet reached their deductible limits for the year, which results in an increased amount of billing and collection activity with individual patients. In addition, the
American Medical Associationintroduced new Molecular billing codes that went into effect on January 1, 2012. Only some payers have adopted these new codes, which has complicated billing. Complications from the different billing formats have increased our "re-bill rate" for molecular testing and have increased balances in accounts receivable. 22
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Our cash provided from financing activities for the three months ended
January 6, 2012, we entered into a Master License Agreement (the "License Agreement") with Health Discovery Corporation, a Georgiacorporation ("HDC"). We were granted an exclusive worldwide license to certain of HDC's "Licensed Patents" and "Licensed Know-How" (as defined in the License Agreement) to, among other things, use, develop, make, have made, sell, offer to sell, modify, and commercially exploit "Licensed Uses" (as defined in the License Agreement) and "Licensed Products" (as defined in the License Agreement), in the fields of laboratory testing, molecular diagnostics, clinical pathology, anatomic pathology and digital image analysis (excluding non-pathology-related radiologic and photographic image analysis) relating to the development, marketing production or sale of any "Laboratory Developed Tests" or LDTs (as defined in the License Agreement) or other products used for diagnosing, ruling out, predicting a response to treatment, and/or monitoring treatment of any or all hematopoietic and solid tumor cancers excluding cancers affecting the retina and breast cancer (collectively with certain other qualifications as defined in the License Agreement, the "Field" or "Field of Use"). Upon the execution of the License Agreement, we paid HDC $1,000,000in cash and issued to HDC 1,360,000 shares of our common stock which had a market value of $1,945,000using the closing price of $1.43per share for the Company's common stock on the OTCQB Market on January 6, 2012. We have recorded this transaction as a purchase of intangible assets. On March 26, 2012, the Parent Company, NeoGenomics Laboratories("Borrower"), and CapitalSource Finance LLC("Capital Source") entered into a First Amendment (the "Amendment") to the Amended and Restated Revolving Credit and Security Agreement, dated April 26, 2010(the "Amended and Restated Credit Agreement" or the "Credit Facility"). The Amended and Restated Credit Agreement amended and restated the original Revolving Credit and Security Agreement dated February 1, 2008, as amended, among the Parent Company, Borrower and CapitalSource (the "Original Credit Agreement"). The terms of the Amendment and the Amended and Restated Credit Agreement are substantially similar except that the Amendment, among other things:
I.) Increases the maximum principal amount of the revolving credit facility (the
"Facility Cap") to
Borrower may request to increase the Facility Cap twice during the term of
the Amended and Restated Credit Agreement in increments of
II.) Extends the term of the Amended and Restated Credit Agreement to March 26,
III.) Revises the definition of "Minimum Termination Fee" to be:
a. 2.5% of the Facility Cap if the "Revolver Termination" (as defined in the Agreement) is at any time before
March 26, 2013; b. 1.5% of the Facility Cap if the Revolver Termination is after March 26, 2013but before March 26, 2014; c. 0.5% of the Facility Cap if the Revolver Termination is on or after March 26, 2014; and
d. That there shall be no Minimum Termination Fee if the Revolver Termination
<pre> occurs within five (5) days of the end of the term.
IV.) Modifies the definition of "Permitted Indebtedness" and "Fixed Charge
Coverage Ratio"; and
V.) Amends Section 3.1 of the Amended and Restated Credit Agreement by deleting
shall be not less than 1.0%".
We paid Capital Source a commitment fee of
Interest on outstanding advances under the Credit Facility are payable monthly in arrears on the first day of each calendar month. At
March 31, 2012, the effective rate of interest was 5.25% and the available credit under the Credit Facility was approximately $800,000and the outstanding borrowing was $6,686,000after netting compensating cash on hand.
We have unrestricted cash on hand of
We currently forecast capital expenditures in order to execute on our business plan. The amount and timing of such capital expenditures will be determined by the volume of business, but we currently anticipate that we will need to purchase approximately
$4.5 million to $5.5 millionof additional capital equipment during the next year. We plan to fund primarily through capital lease financing arrangements. If we are unable to obtain such funding, we will need to pay cash for these items or we will be required to curtail our equipment purchases, which may have an impact on our ability to continue to grow our revenues. 23
Table of Contents Related Party Transactions Consulting Agreements During the three months ended
March 31, 2012and 2011, Steven C. Jones, a director of the Company, earned approximately $50,000and $45,000, respectively, for various consulting work performed in connection with his duties as Executive Vice President of Finance. Mr. Jonesalso received $55,000and $6,000for the three months ended March 31, 2012and 2011 for payment of his annual bonus compensation for the previous fiscal year.