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When it comes to the long-term sustainability of any micro-cap company, one of the first things I look to do is determine its sustainability ratio. I calculate a company's sustainability ratio by taking the its total cash as of its most recent reportable quarter and dividing by the combined total of its most recent negative operating cash flow and negative free cash flow.

For example, if a company has $20 million in total cash and a combined total of negative $25 million (operating cash flow plus free cash flow) it would be left with a deficit of $5 million or a sustainability a ratio of 0.8, which it equates to of a timeframe of roughly nine and a half months until the company would begin to seek additional funding or initiate the steps needed for a secondary offering.

In this particular article I wanted to examine three micro-cap biotech companies, all of which must have between $2 and $18 million in total cash, a sustainability ratio under 1.00, a market cap under $250 million and trade under $5.00/share.

Why have I chosen such specific criteria, you ask? The answer is actually quite simple. First off, I wanted to examine four firms which trade under the $5.00/share threshold simply because these companies are less likely to be on the radar of the larger institutional investors. Secondly, is the fact I've chosen to limit each company's market cap to under $250 million in order stay within the confines of the micro-cap classification. Third, is the fact I wanted to find companies that have between $2 and $18 million in total cash since they have a better chance of running into cash flow issues within the next 12 months. Lastly is the fact that I wanted to compare the total amount of cash within each company to the combined total of their operating cash flow and free cash flow and determine a sustainability ratio under 1.00.

Neogenomics, Inc. (NEO): Based in Fort Myers, Florida, Neogenomics operates "a network of cancer-focused testing laboratories in the United States. It focuses on cancer genetic diagnostic, prognostic, and predictive testing services. The company primarily performs bone marrow aspirate and peripheral blood specimen sampling for the diagnosis of blood and lymphoid tumors; analysis of solid tumors, such as breast, lung, colon, and bladder cancer; and a Fluorescence In-Situ Hybridization (FISH) genetic test for the diagnosis of malignant melanoma".

On Thursday, and from a fundamental perspective, shares of Neogenomics which closed at $3.04/share currently possess a market cap of $137.62 million, and a total of $2.04 million in cash on its books. In the past 12 months, Neogenomics has a demonstrated a negative operating cash flow of $0.746 million and a negative free cash flow of $3.12 million.

After crunching the numbers, and dividing the company's total cash of $2.04 million by the total of both its operating cash flow and free cash flow which equaled $3.866 million, I've given Neogenomics a sustainability ratio of 0.53, which equates to, in my opinion, a timeframe of just over 6 months until the company could request additional funding or take the steps needed to initiate a secondary offering.

Response Genetics, Inc. (RGDX): Based in Los Angeles, California, Response Genetics is a life sciences company, which "was founded in 1999 to leverage breakthrough patented technology from USC for the extraction of genetic information from formalin-fixed, paraffin-embedded clinical trial samples. Until that time, it was not possible to extract meaningful genetic information from standard diagnostic specimens".

On Thursday, and from a fundamental perspective, shares of Response Genetics which closed at $1.39/share currently possess a market cap of $45.59 million, and a total of $10.84 million in cash on its books. In the past 12 months, Response Genetics has a demonstrated a negative operating cash flow of $8.26 million and a negative free cash flow of $4.82 million.

After crunching the numbers, and dividing the company's total cash of $10.84 million by the total of both its operating cash flow and free cash flow which equaled $13.08 million, I've given Response Genetics a sustainability ratio of 0.83, which equates to, in my opinion, a timeframe of just about 10 months until the company could request additional funding or take the steps needed to initiate a secondary offering.

BG Medicine, Inc. (BGMD): Based in Waltham, Massachusetts, BG Medicine is also a life sciences company, which "engages in the discovery, development, and commercialization of novel cardiovascular diagnostics to address unmet medical needs. The company markets the BGM Galectin-3, a diagnostic test for measuring galectin-3 levels in blood plasma or serum for use in patients with heart failure through regional and national laboratory testing facilities and directly to hospitals and clinics in the United States, as well as through distributors in certain countries in Europe".

On Thursday, and from a fundamental perspective, shares of BG Medicine which closed at $2.14/share currently possess a market cap of $43.87 million, and a total of $17.58 million in cash on its books. In the past 12 months, BG Medicine has a demonstrated a negative operating cash flow of $20.29 million and a negative free cash flow of $10.92 million.

After crunching the numbers, and dividing the company's total cash of $17.58 million by the total of both its operating cash flow and free cash flow which equaled $31.21 million, I've given BG Medicine a sustainability ratio of 0.56, which equates to, in my opinion, a timeframe of just over 6 months until the company could request additional funding or take the steps needed to initiate a secondary offering.

Final Analysis

For potential investors looking to establish a position in Neogenomics, Response Genetics or BG Medicine, I'd take a closer look at each company and keep in mind all of the necessary catalysts moving forward. Given the fact that all three companies have produced sustainability ratios under 1.00, I'd begin to consider companies such as Sequenom (SQNM) which possesses $193.39 million in total cash and a sustainability ratio of 1.36 and Tear Lab Corp. (TEAR) which possesses $18.36 million in total cash and a sustainability ratio of 2.20.

Source: 3 Small Cap Biotech Plays Potentially Facing Cash-Flow Issues