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NEOGENOMICS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

NeoGenomics, Inc., a Nevada corporation is the registrant for SEC reporting purposes. Our common stock is quoted on the OTC Bulletin Board and the OTCQB under the symbol "NGNM." The Company has laboratory locations in Ft. Myers and Tampa, Florida; Irvine, California; and Nashville, Tennessee, and currently offers the following types of testing services: a)...

Edgar Online, Inc.
NeoGenomics, Inc., a Nevada corporation (referred to individually as the "Parent
Company" or collectively with all of its subsidiaries as "NeoGenomics" or the
"Company" in this Form 10-Q) is the registrant for SEC reporting purposes. Our
common stock is 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.

Overview


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. Myers and 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

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        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. NeoGenomics offers testing
services on both a "tech-only" basis, where NeoGenomics performs 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
NeoGenomics performs both the technical component and the professional
interpretation component.



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Our Focus


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.

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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.

Competitive Strengths

Turnaround Times


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 NeoGenomics versus other
national laboratories, and our clients often cite them as a key factor in their
relationship with us.



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Medical Team


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 Institute
and 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 States in
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
NeoGenomics and allowed us to compete more effectively against larger, more
entrenched competitors in our niche of the industry.

Global Service Offerings

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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,
NeoGenomics performs 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.



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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 NeoGenomics into 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.

Client Care


Our 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.

Geographic Locations


Many high complexity laboratories within the cancer testing niche have
frequently operated a core facility on either the West Coast or the East Coast
to 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, Florida and Irvine, California and two smaller
laboratory locations in Nashville, Tennessee and 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.

Scientific Pipeline


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 FDA approved 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 NeoGenomics and 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.



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Seasonality


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

Critical Accounting Policies


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

While many operational aspects of our business are subject to complex federal,
state and local regulations, the accounting for our business is generally
straightforward with net revenues primarily recognized upon completion of the
testing process. Our revenues are primarily comprised of laboratory tests, and
approximately one-half of total operating costs and expenses consist of employee
compensation and benefits. Due to the nature of our business, several of our
accounting policies involve significant estimates and judgments. These
accounting policies have been described in our Annual Report on Form 10-K for
the year ended December 31, 2011.

Intangible Assets


In the three month period ended March 31, 2012 we acquired approximately $3.0
million of 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.



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Results of Operations for the Three Months Ended March 31, 2012 as Compared to the Three Months Ended March 31, 2011


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 %                  

31 %

        Research and development                    3 %                    1 %
        Sales and marketing                        13 %                   20 %

        TOTAL OPERATING EXPENSES                   41 %                  

52 %



        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,
2012 and 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, 2012 compared 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, 2012 was 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.



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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 $ 320.86 $ (23.21 ) (7.2 %)



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 March 31, 2012 and 2011 is as follows:



                            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 %




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Sales and marketing expenses increased approximately 16%, or $0.3 million to $2.0 million for the three months ended March 31, 2012 as compared to $1.75 million for the three months ended March 31, 2011, primarily as a result of sales commissions related to increased revenues.


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 $ 3,750,000$ 2,704,000$ 1,046,000 38.7 %

  As a % of revenue                      24.7 %           30.7 %


General and administrative expenses increased approximately 38.7%, or $1.0
million to $3.75 million for the three months ended March 31, 2012 as compared
to $2.7 million for 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 $245,000 to
$839,000 for the three months ended March 31, 2012 as compared to approximately
$595,000 for 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, 2012 from 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
$500,000 for the three months ended March 31, 2012 as compared to approximately
$100,000 for 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.



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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 March 31, 2012.

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 $182,000 in for the
three months ended March 31, 2011 to $258,000 for 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 $603,000, or $0.01/share, for the three months ended March 31, 2012 as compared to a net loss of $893,000 or ($0.02)/share, for the three months ended March 31, 2011.

Non-GAAP Measures


"Adjusted EBITDA" is defined by NeoGenomics as net income (loss) from continuing
operations before (i) interest expense, (ii) tax expense and therapeutic
discovery tax grants, (iii) depreciation and amortization expense, (iv) non-cash
stock-based compensation and warrant amortization expense and (v) other
extraordinary or non-recurring charges. NeoGenomics believes that Adjusted
EBITDA provides a more consistent measurement of operating performance and
trends across reporting periods by excluding 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 NeoGenomics is not a measurement under GAAP and
may differ from non-GAAP measures used by other companies. There are limitations
inherent in non-GAAP financial measures such as Adjusted EBITDA because they
exclude a variety of charges and credits that are required to be included in a
GAAP presentation, and do not therefore present the full measure of NeoGenomics
recorded costs against its net revenue. Accordingly, investors should consider
non-GAAP results together with GAAP results in analyzing NeoGenomics financial
performance.

The following is a reconciliation of GAAP net loss to Non-GAAP EBITDA and Adjusted EBITDA for the three months ending March 31, 2012 and 2011:



                                                 For the three months ended
                                                          March 31,
                                                    2012               2011

      Net income (loss) (Per GAAP)             $       603,000      $

(893,000 )

Adjustments to Net Loss:

      Interest expense (income), net                   258,000         

182,000

      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         

126,000


      Adjusted EBITDA (non-GAAP)               $     1,775,000      $  (97,000 )





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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 $494,000 increase 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, 2012 and 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, 2012 and 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         

1,436,000

Cash and cash equivalents, beginning of period 2,628,000 1,097,000

Cash and cash equivalents, end of period (1) $ 2,756,000$ 2,533,000


  Working Capital (2), end of period               $   1,239,000      $  1,954,000




(1) Excludes restricted cash of $0.3M in 2012 and $0.5M in 2011.

(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 Association introduced 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.



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Our cash provided from financing activities for the three months ended March 31, 2012 consisted primarily of advances on our credit facility and consisted primarily of issuance of common stock for the three months ended March 31, 2011.


On January 6, 2012, we entered into a Master License Agreement (the "License
Agreement") with Health Discovery Corporation, a Georgia corporation ("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 $1,000,000 in cash and
issued to HDC 1,360,000 shares of our common stock which had a market value of
$1,945,000 using the closing price of $1.43 per 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 $8.0 million from $5.0 million; provided, that the

Borrower may request to increase the Facility Cap twice during the term of

the Amended and Restated Credit Agreement in increments of $1.0 million to a

    maximum of $10,000,000;



II.) Extends the term of the Amended and Restated Credit Agreement to March 26,

     2015;



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,
        2013 but 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

        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

"the LIBOR shall be not less than 2.0%" and replacing it with "the LIBOR

shall be not less than 1.0%".

We paid Capital Source a commitment fee of $80,000 in connection with the Amendment.


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 $800,000 and the outstanding borrowing was $6,686,000
after netting compensating cash on hand.

We have unrestricted cash on hand of $2,756,000 as of March 31, 2012, along with the unused portion of our credit line. As such, we believe we have adequate resources to meet our operating commitments for the next twelve months.

Capital Expenditures


We currently forecast capital expenditures in order to execute on our business
plan. The amount and timing of such capital expenditures will be determined by
the volume of business, but we currently anticipate that we will need to
purchase approximately $4.5 million to $5.5 million of 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.



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Related Party Transactions

Consulting Agreements

During the three months ended March 31, 2012 and 2011, Steven C. Jones, a
director of the Company, earned approximately $50,000 and $45,000, respectively,
for various consulting work performed in connection with his duties as Executive
Vice President of Finance. Mr. Jones also received $55,000 and $6,000 for the
three months ended March  31, 2012 and 2011 for payment of his annual bonus
compensation for the previous fiscal year.
Wordcount: 6743



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