UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-KSB
(Mark
One)
[X] Annual report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the fiscal year ended December
31, 2007
or
[X]
Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act
1934
Commission
File Number: 333-72097
NEOGENOMICS,
INC.
(Name of
small business issuer in its charter)
Nevada 74-2897368
(State
or other jurisdiction
of
(IRS Employer Identification No.)
incorporation or organization)
12701 Commonwealth Drive,
Suite 9 Fort Myers, FL 33913
(Address
of principal executive offices, Zip code)
(239)
768-0600
(Issuer’s
telephone number)
Securities
registered pursuant to Section 12(g) of the Exchange
Act: None.
Securities
registered pursuant to Section 12(b) of the Exchange Act: None
Indicate
by check mark if the Company is not required to file reports pursuant to Section
13 or Section 15(d) of the Exchange Act. [ ]
Indicate
by check mark whether the Company (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. [X] Yes [ ] No
Indicate
by check mark if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Company’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Indicate
by check mark whether the Company is a shell company (as defined in Rule 12b-2
of the Exchange Act): [ ] Yes [X] No
The
Company’s revenues for the fiscal year ended December 31, 2007 were
approximately $11,505,000.
The
aggregate market value of the voting stock held by non-affiliates of the Company
at March 31, 2008 was approximately $17,956,000 (based on 17,603,888 shares held
by non-affiliates and a closing share price of $1.02/share on March 31,
2008). Shares of common stock held by each officer and director and
by each person who owns 10% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other persons.
As of
March 31, 2008, 31,407,545 shares of common stock were outstanding.
Transitional
Small Business Disclosure
Format: [ ]Yes [X]No
PART
I
FORWARD-LOOKING
STATEMENTS
This Form 10-KSB contains
“forward-looking statements” relating to NeoGenomics, Inc., a Nevada
corporation (referred to individually as the “Parent Company” or collectively
with all of its subsidiaries as “NeoGenomics” or the “Company” in this Form
10-KSB), which represent the Company’s current expectations or beliefs
including, but not limited to, statements concerning the Company’s operations,
performance, financial condition and growth. For this purpose, any statements
contained in this Form 10-KSB that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or
“continue” or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel, variability of quarterly results, and the ability
of the Company to continue its growth strategy and competition, certain of which
are beyond the Company’s control. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in the
forward-looking statements.
Any forward-looking statement speaks
only as of the date on which such statement is made, and the Company undertakes
no obligation to update any forward-looking statement or statements to reflect
events or circumstances after the date on which such statement is made or to
reflect the occurrence of unanticipated events. New factors emerge from time to
time and it is not possible for management to predict all of such factors, nor
can it assess the impact of each such factor on the business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
ITEM
1. DESCRIPTION
OF BUSINESS
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-KSB) is the
registrant for SEC reporting purposes. Our common stock is listed on
the NASDAQ Over-The-Counter Bulletin Board (the “OTCBB”) under the symbol
“NGNM.”
NeoGenomics
operates a network of cancer-focused testing laboratories. The
Company’s growing network of laboratories currently offers the following types
of testing services to pathologists, oncologists, urologists, hospitals, and
other laboratories throughout the United States:
a) cytogenetics testing, which analyzes human chromosomes;
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b)
Fluorescence In-Situ Hybridization (FISH) testing, which
analyzes abnormalities at the chromosomal and gene
levels;
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c)
flow cytometry testing, which analyzes gene expression of specific markers
inside cells and on cell surfaces;
and
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d)
molecular testing which involves analysis of DNA and RNA to diagnose and
predict the clinical significance of various genetic sequence
disorders.
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All of
these testing services are widely utilized in the diagnosis and prognosis of
various types of cancer.
The
medical testing laboratory market can be broken down into three primary
segments:
• clinical
lab testing,
• anatomic
pathology testing, and
• genetic
and molecular testing.
Clinical
laboratories are typically engaged in high volume, highly automated, lower
complexity tests on easily procured specimens such as blood and
urine. Clinical lab tests often involve testing of a less urgent
nature, for example, cholesterol testing and testing associated with routine
physical exams.
Anatomic
pathology (“AP”) testing involves evaluation of tissue, as in surgical
pathology, or cells as in cytopathology. The most widely performed AP
procedures include the preparation and interpretation of pap smears, skin
biopsies, and tissue biopsies.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or base
pairs of DNA or RNA for abnormalities. New tests are being developed
at an accelerated pace, thus this market niche continues to expand
rapidly. Genetic and molecular testing requires highly specialized
equipment and credentialed individuals (typically MD or PhD level) to certify
results and typically yields the highest average revenue per test of the three
market segments. The estimated size of this market is $4-5
Billion and growing at an annual rate of greater than 25%.
NeoGenomics’,
primary focus is to provide high complexity laboratory testing for the
community-based pathology and oncology marketplace. Within these key
market segments, we currently provide our services to pathologists and
oncologists in the United States that perform bone marrow and/or peripheral
blood sampling for the diagnosis of blood and lymphoid tumors (leukemias and
lymphomas) and archival tissue referral for analysis of solid tumors such as
breast cancer. A secondary strategic focus targets community-based
urologists due to the availability of UroVysion®, a
FISH-based test for the initial diagnosis of bladder cancer and early detection
of recurrent disease. We focus on community-based practitioners for
two reasons: First, academic pathologists and associated clinicians tend to have
their testing needs met within the confines of their university
affiliation. Secondly, most of the cancer care in the United States
is administered by community based practitioners, not in academic centers, due
to ease of local access. Moreover, within the community-based
pathologist segment it is not our intent to willingly compete with our customers
for testing services that they may seek to perform
themselves. Fee-for-service pathologists for example, derive a
significant portion of their annual revenue from the interpretation of biopsy
specimens. Unlike other larger laboratories, which strive to perform
100% of such testing services themselves, we do not compete with our customers
for such specimens. Rather, our high complexity cancer testing focus is a
natural extension of and complementary to many of the services that our
community-based customers often perform within their own
practices. As such, we believe our relationship as a non-competitive
consultant, empowers these physicians to expand their testing breadth and
provide a menu of services that matches or exceeds the level of service found in
academic centers of excellence around the country.
We
continue to make progress growing our testing volumes and revenue beyond our
historically focused effort in Florida due to our expanding field sales
footprint. As of March 15, 2008, NeoGenomics’ sales and marketing
organization totaled 16 individuals, and we have received business from 24
states throughout the country. Recent, key hires included various
territory business managers (sales representatives) in the Northeastern,
Southeastern, and Western states. We intend to continue to add
additional sales and marketing personnel throughout FY 2008. As more
sales representatives are added, we believe that the base of our business
outside of Florida will continue to grow and ultimately eclipse that which is
generated within the state.
We are
successfully competing in the marketplace based on the quality and
comprehensiveness of our test results, and our innovative flexible levels of
service, industry-leading turn-around times, regionalization of laboratory
operations and ability to provide after-test support to those physicians
requesting consultation.
2007 saw
the refinement of our industry leading NeoFISHTM
technical component-only FISH service offering. Upon the suggestion
of our installed customer base, we made numerous usability and technical
enhancements throughout last year. The result has been a product line
for NeoGenomics that continues to resonate very well with our client
pathologists. Utilizing NeoFISHTM, such
clients are empowered to extend the outreach efforts of their practices and
exert a high level of sign out control over their referral work in a manner that
was previously unobtainable.
NeoFLOWTM
tech-only flow cytometry was launched as a companion service to NeoFISHTM in late
2007. While not a first to market product line for NeoGenomics, the
significant breadth of the service offering together with high usability scores
from early customers indicate NeoFLOWTM will be
a key growth driver in 2008. Moreover, the combination of
NeoFLOWTM and
NeoFISHTM serves
to strengthen the market differentiation of each product line for NeoGenomics
and allows us to compete more favorably against larger, more entrenched
competitors in our testing niche.
At the
risk of becoming known solely as a technical component-only laboratory, we
increased our professional level staffing for global requisitions requiring
interpretation in 2007. We currently employ two full-time MDs as our
medical directors and pathologists, two PhDs as our scientific directors and
cytogeneticists, and two part-time MDs acting as consultants and backup
pathologists for case sign out purposes. We have plans to hire
several more hematopathologists in 2008 as our product mix continues to expand
beyond tech-only services and more sales emphasis is focused on our ability to
issue consolidated reporting with case interpretation under our Genetic
Pathology Solutions (GPSTM)
product line.
We
believe NeoGenomics average 3-5 day turn-around time for our cytogenetics
services continues to remain an industry-leading benchmark for national
laboratories. The timeliness of results continues to increase the
usage patterns of cytogenetics and act as a driver for other add-on testing
requests by our referring physicians. Based on anecdotal information,
we believe that typical cytogenetics labs have 7-14 day turn-around times on
average with some labs running as high as 21 days. Traditionally,
longer turn-around times for cytogenetics tests have resulted in fewer FISH and
other molecular tests being ordered since there is an increased chance that the
test results will not be returned within an acceptable diagnostic window when
other adjunctive diagnostic test results are available. We believe
our turn-around times result in our referring physicians requesting more of our
testing services in order to augment or confirm other diagnostic tests, thereby
giving us a significant competitive advantage in marketing our services against
those of other competing laboratories.
In 2007
we continued an aggressive campaign to regionalize our laboratory operations
around the country to be closer to our customers. High complexity
laboratories within the cancer testing niche have frequently operated a core
facility on one or both coasts to service the needs of their customers around
the country. Informal surveys of customers and prospects uncovered a
desire to do business with a laboratory with national breadth but with a more
local presence. In such a scenario, specimen integrity,
turnaround-time of results, client service support, and interaction with our
medical staff are all enhanced. In 2007, NeoGenomics’ three
laboratory locations in Fort Myers, FL; Irvine, CA; and Nashville TN each
received the appropriate state, Clinical Laboratory Improvement Amendments
(CLIA), and College of American Pathologists (CAP) licenses and accreditations
are now receiving specimens. As situations dictate and opportunities
arise, we will continue to develop and open new laboratories, seamlessly linked
together by our optimized Laboratory Information System (LIS), to better meet
the regionalized needs of our customers.
2007 also
brought much progress in the NeoGenomics Contract Research Organization (“CRO”)
division based at our Irvine, CA facility. This division was created
to take advantage of our core competencies in genetic and molecular high
complexity testing and act as a vehicle to compete for research projects and
clinical trial support contracts in the biotechnology and pharmaceutical
industries. The CRO division will also act as a development conduit
for the validation of new tests which can then be transferred to our clinical
laboratories and be offered to our clients. We envision the CRO as a
way to infuse some intellectual property into the mix of our services and in
time create a more “vertically integrated” laboratory that can potentially offer
additional clinical services of a more proprietary nature.
2007
brought the first revenue to NeoGenomics’ CRO
division. Traditionally, the initial revenue stream is rather small
due to the size of contracts closed and this was the case for NeoGenomics’ CRO
last year. As pharmaceutical and biotechnology clients increase their
commitment to lead drugs in development the size and scope of the projects
outsourced to their CRO partners increases in tandem, and that is what we expect
to occur in 2008.
As
NeoGenomics grows, we anticipate offering additional tests that broaden our
focus from genetic and molecular testing to more traditional types of anatomic
pathology testing (i.e. immunohistochemistry) that are complementary to our
current test offerings. At no time do we expect to intentionally
compete with fee-for-service pathologists for services of this type and Company
sales efforts will operate under a strict “right of first refusal” philosophy
that supports rather than undercuts the practice of community-based
pathology. We believe that by adding additional types of tests to our
product offering we will be able to capture increases in our testing volumes
through our existing customer base as well as more easily attract new customers
via the ability to package our testing services more appropriately to the needs
of the market.
The above
market strategy continues to bear fruit for the Company, resulting in strong
year over year growth of 78% in FY 2007 versus FY 2006. Our average
revenue/requisition FY 2006 was approximately $677/requisition. FY
2007 saw a slight erosion of average tests per requisition due to the
overwhelming success of our UroVysion (bladder cancer) product line, which tends
to be a singly ordered test request. New sales hires and a new focus
on global workups with interpretation and our integrated GPS product line should
allow us to increase our average revenue per customer requisition in
2008.
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FY 2007
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FY 2006
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% Inc (Dec)
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Customer
Requisitions Rec’d (Cases)
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16,385 |
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9,563 |
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71.3 |
% |
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Number
of Tests Performed
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20,998 |
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12,838 |
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63.6 |
% |
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Average
Number of Tests/Requisition
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1.28 |
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1.34 |
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(4.5 |
)% |
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Total
Testing Revenue
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$ |
11,504,725 |
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$ |
6,475,996 |
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77.7 |
% |
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Average
Revenue/Requisition
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702.15 |
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$ |
677.19 |
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3.7 |
% |
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Average
Revenue/Test
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547.90 |
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$ |
504.44 |
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8.6 |
% |
We
believe this bundled approach to testing represents a clinically sound practice
that is medically valid. Within the subspecialty field of hematopathology, such
a bundled approach to the diagnosis and prognosis of blood and lymph node
diseases has become the standard of care throughout the country. In
addition, as the average number of tests performed per requisition increases, we
believe this should drive large increases in our revenue and afford the Company
significant synergies and efficiencies in our operations and sales and marketing
activities.
Business
of NeoGenomics
Services
We
currently offer four primary types of testing services: cytogenetics,
flow cytometry, FISH testing and molecular testing.
Cytogenetics
Testing. Cytogenetics
testing involves analyzing chromosomes taken from the nucleus of cells and
looking for abnormalities in a process called karyotyping. A
karyotype evaluates the entire 46 human chromosomes by number and banding
patterns to identify abnormalities associated with disease. In
cytogenetics testing, we typically analyze chromosomes from 20
different cells. Examples of cytogenetics testing at NeoGenomics
include bone marrow aspirate or peripheral blood analysis to diagnose various
types of leukemias and lymphomas.
Cytogenetics
testing by large national reference laboratories and other competitors has
historically taken anywhere from 7-14 days on average to obtain a complete
diagnostic report. We believe that as a result of this timeframe,
many practitioners have refrained to some degree from ordering such tests
because the results traditionally were not returned within an acceptable
diagnostic window. NeoGenomics has designed our laboratory operations
in order to complete cytogenetics tests for most types of biological samples,
produce a final diagnostic report and make it available via fax or
online viewing within 3-5 days. We have consistently delivered these
turnaround times over the last three years without taking shortcuts that can
undermine the quality of the delivered result. These turnaround times
are among the best in the industry and we believe that more physicians are
incorporating cytogenetics testing into their diagnostic regimens, thus
affording NeoGenomics the opportunity to drive the incremental growth of our
business via this product line for the foreseeable future.
Flow Cytometry
Testing. Flow cytometry
testing analyzes clusters of differentiation on cell surfaces. Gene
expression of many cancers creates protein-based clusters of differentiation on
the cell surfaces that can then be traced back to a specific lineage or type of
cancer. Flow cytometry is a method of separating liquid specimens or
disaggregated tissue into different constituent cell populations. This
methodology is used to determine which of these cell types is abnormal in a
patient specific manner. Flow cytometry is important in developing an
accurate diagnosis, defining the patient’s prognosis, and clarifying what
treatment options may be optimal. Flow cytometry testing is performed using
sophisticated lasers and will typically analyze over 100,000 individual cells in
an automated fashion. Flow cytometry testing is highly complementary
with cytogenetics and the combination of these two testing methodologies allows
the results from one test to complement the findings of the other methodology,
which can lead to a more accurate snapshot of a patient’s disease
state.
FISH
Testing. As an adjunct to
traditional chromosome analysis, we offer Fluorescence In Situ Hybridization
(FISH) testing to extend our capabilities beyond routine
cytogenetics. FISH testing permits identification of the most
frequently occurring numerical chromosomal abnormalities in a rapid manner by
looking at centromeres or specific genes that are implicated in
cancer. During the past 5 years, FISH testing has demonstrated its
considerable diagnostic potential. The development of molecular probes by using
DNA sequences of differing sizes, complexity, and specificity, coupled with
technological enhancements (direct labeling, multicolor probes, computerized
signal amplification, and image analysis) make FISH a powerful and diagnostic
and prognostic tool.
Molecular
Testing. Molecular testing primarily involves the analysis of
DNA to diagnose DNA & RNA abnormalities in liquid and solid
tumors. There are approximately 1.0 – 2.0 million base pairs of DNA
in each of the estimated 20,000 genes located
across the 46 chromosomes in the nucleus of every cell. Molecular
testing allows us to look for variations in this DNA that are associated with
specific types of diseases. Today there are molecular tests for about
500 genetic diseases. However, the majority of these tests remain
available under the limited research use only designation and are only offered
on a restricted basis to family members of someone who has been diagnosed with a
genetic condition. About 50 molecular tests are now available for the
diagnosis, prognosis or monitoring of various types of cancers and physicians
are becoming more comfortable ordering such adjunctive tests. We
currently provide these tests on an outsourced basis. We anticipate
in the near future performing some of the more popular tests within our
facilities as the number of requests continues to increase. Although
reimbursement rates for these new molecular tests still need to improve, we
believe that molecular testing is an important and growing market segment with
many new diagnostic tests being developed every year. We are
committed to providing the latest and most accurate testing to clients and we
will invest accordingly when market demand warrants.
Distribution
Methods
The
Company currently performs testing services at each of its’ three main clinical
laboratory locations: Fort Myers, FL, Nashville, TN and Irvine, CA, and then
produces a report for the requesting physician. The Company currently
out sources all of its molecular testing to third parties, but expects to
validate some of this testing in-house in FY 2008 and offer it to customers to
best meet client demand.
Competition
We are
engaged in segments of the medical testing laboratory industry that are highly
competitive. Competitive factors in the genetic and molecular testing
business generally include reputation of the laboratory, range of services
offered, pricing, convenience of sample collection and pick-up, quality of
analysis and reporting and timeliness of delivery of completed
reports.
Our
competitors in the United States are numerous and include major medical testing
laboratories and biotechnology research companies. Many of these
competitors have greater financial resources and production
capabilities. These companies may succeed in developing service
offerings that are more effective than any that we have or may develop and may
also prove to be more successful than we are in marketing such services. In
addition, technological advances or different approaches developed by one or
more of our competitors may render our products obsolete, less effective or
uneconomical.
We
estimate that the United States market for genetics and molecular testing is
divided among approximately 300 laboratories. However, approximately 80% of
these laboratories are attached to academic institutions and only provide
clinical services to their affiliate university hospitals. We further believe
that less than 20 laboratories market their services nationally. We
believe that the industry as a whole is still quite fragmented, with the top 20
laboratories accounting for approximately 50% of market revenues.
We intend
to continue to gain market share by offering industry leading turnaround times,
a broad service menu, high-quality test reports, and enhanced post-test
consultation services. In addition, we have a fully integrated and
interactive internet-enabled Laboratory Information System that enables us to
report real time results to customers in a secure environment.
Suppliers
The
Company orders its laboratory and research supplies from large national
laboratory supply companies such as Fisher Scientific, Inc., Invitrogen and
Beckman Coulter and does not believe any disruption from any one of these
suppliers would have a material effect on its business. The Company
orders the majority of its FISH probes from Abbott Laboratories and as a result
of their dominance of that marketplace and the absence of any competitive
alternatives, if they were to have a disruption and not have inventory available
it could have a material effect on our business. This risk cannot be
completely offset due to the fact that Abbott Laboratories has patent protection
which limits other vendors from supplying these probes.
Dependence on Major
Customers
We
currently market our services to pathologists, oncologists, urologists,
hospitals and other clinical laboratories. During 2007, we performed
20,998 individual tests. Ongoing sales efforts have decreased
dependence on any given source of revenue. Notwithstanding this fact,
several key customers still account for a disproportionately large case volume
and revenues. Accordingly, for the year ended December 31, 2007, one customer
accounted for 25% of total revenue and all others were less than 10% of total
revenue individually. During the year ended December 31, 2006, three customers
accounted for 26%, 18% and 17% of total revenue, respectively. In the
event that we lost one of these customers, we would potentially lose a
significant percentage of our revenues. For the year ended
December 31, 2007, Medicare and one commercial insurance provider accounted for
44% and 10% of the Company’s total accounts receivable balance,
respectively.
Trademarks
The
“NeoGenomics” name and logo has been trademarked with the United States Patent
and Trademark Office.
Number of
Employees
As of
December 31, 2007, we had 92 full-time employees. In addition, our
Acting Principal Financial Officer and two pathologists serve as consultants to
the Company on a part-time basis. On December 31, 2006, we had 48
employees. Our employees are not represented by any union and we believe our
employee relations are good.
Government
Regulation
Our
business is subject to government regulation at the federal, state and local
levels, some of which regulations are described under "Clinical Laboratory
Operations," "Anti-Fraud and Abuse Laws," “The False Claims Act,”
"Confidentiality of Health Information," and "Food and Drug
Administration" below.
Clinical Laboratory
Operations
Licensure and
Accreditation
The
Company operates clinical laboratories in Fort Myers, FL, Nashville, TN, and
Irvine, CA. All locations have obtained CLIA licensure under the
federal Medicare program, the Clinical Laboratories Improvement Act of 1967 and
the Clinical Laboratory Amendments of 1988 (collectively “CLIA ‘88”) as well as
state licensure as required in FL, TN, and CA. CLIA ‘88 provides for the
regulation of clinical laboratories by the U.S. Department of Health and Human
Services (“HHS”). Regulations promulgated under the federal Medicare guidelines,
CLIA ’88 and the clinical laboratory licensure laws of the various states affect
our testing laboratories. All locations are also accredited by the College of
American Pathologists and actively participate in CAP’s proficiency testing
programs and educational challenges for all tests offered by the Company.
Proficiency testing programs involve actual testing of specimens that have been
prepared by an entity running an approved program for testing by a clinical
laboratory.
The
federal and state certification and licensure programs establish standards for
the operation of clinical laboratories, including, but not limited to, personnel
and quality control. Compliance with such standards is verified by periodic
inspections by inspectors employed by federal or state regulatory agencies as
well as routine internal inspections conducted by the Company’s Quality
Assurance team which is comprised of representatives of all departments of the
Company.
Quality
of Care
The
quality of care provided by the Company to its customers is of paramount
importance to the Company and a distinct differentiator from many of our
competitors. As such, all employees are committed to providing
accurate, reliable, and consistent services at all times. Any concerns regarding
the quality of testing or services provided by the Company are immediately
communicated to Company management and if necessary, the Compliance Department,
or Human Resources Department. All employees are responsible for the Company’s
commitment to quality and immediately communicating activities that do not
support quality.
Compliance
Program
The
healthcare industry is one of the most highly regulated industries with respect
to federal and state oversight of Fraud, Waste, and Abuse. As such the Company
has implemented a Compliance Program that is overseen by the senior management
of the Company (collectively the “Compliance Committee”) to assure compliance
with the vast regulations and governmental guidance. Our program consists of
training / education of the employees and monitoring / audits of Company
practices. The Company actively discusses with the Board of Directors any
Compliance related findings as well as any Compliance related issues that may
have material effect on the Company.
Hotline
The
Company provides a Hotline for employees who wish to anonymously or
confidentially report suspected violations of our codes of conduct,
policies/procedures, or laws and regulations. Employees are strongly encouraged
to report any suspected violation if they do not feel the problem can be
appropriately addressed through the normal chain of command. The Hotline does
not replace other resources available to Employees, including supervisors,
managers and human resources staff, but is an alternate channel available 24
hours a day, 365 days a year. The Company does not allow any retaliation against
an employee who reports a compliance related issue in good faith.
Anti-Fraud
and Abuse Laws
Existing
federal laws governing Medicare and Medicaid, as well as some other state and
federal laws, also regulate certain aspects of the relationship between
healthcare providers, including clinical and anatomic laboratories, and their
referral sources, including physicians, hospitals and other laboratories. One
provision of these laws, known as the "anti-kickback law," contains extremely
broad proscriptions. Violation of this provision may result in criminal
penalties, exclusion from participation in Medicare and Medicaid programs, and
significant civil monetary penalties.
In January 1990, following a study of
pricing practices in the clinical laboratory industry, the Office of the
Inspector General ("OIG") of HHS issued a report addressing how these pricing
practices relate to Medicare and Medicaid. The OIG reviewed the industry's use
of one fee schedule for physicians and other professional accounts and another
fee schedule for patients/third-party payers, including Medicare, in billing for
testing services, and focused specifically on the pricing differential when
profiles (or established groups of tests) are ordered.
Existing
federal law authorizes the Secretary of HHS to exclude providers from
participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees "substantially in excess" of their "usual and
customary charges." On September 2, 1998, the OIG issued a final rule in which
it indicated that this provision has limited applicability to services for which
Medicare pays under a Prospective Payment System or a fee schedule, such as
anatomic pathology services and clinical laboratory services. In several
Advisory Opinions, the OIG has provided additional guidance regarding the
possible application of this law, as well as the applicability of the
anti-kickback laws to pricing arrangements. The OIG concluded in a 1999 Advisory
Opinion that an arrangement under which a laboratory offered substantial
discounts to physicians for laboratory tests billed directly to the physicians
could potentially trigger the "substantially in excess" provision and might
violate the anti-kickback law, because the discounts could be viewed as being
provided to the physician in exchange for the physician's referral to the
laboratory of non-discounted Medicare business, unless the discounts could
otherwise be justified. The Medicaid laws in some states also have prohibitions
related to discriminatory pricing.
Under
another federal law, known as the "Stark" law or "self-referral prohibition,"
physicians who have an investment or compensation relationship with an entity
furnishing clinical laboratory services (including anatomic pathology and
clinical chemistry services) may not, subject to certain exceptions, refer
clinical laboratory testing for Medicare patients to that entity. Similarly,
laboratories may not bill Medicare or Medicaid or any other party for services
furnished pursuant to a prohibited referral. Violation of these provisions may
result in disallowance of Medicare and Medicaid claims for the affected testing
services, as well as the imposition of civil monetary penalties and application
of False Claims submissions penalties. Some states also have laws similar to the
Stark law.
The
False Claims Act
The
Civil False Claims Act pertains to any federally funded program and
defines “Fraudulent” as: knowingly submitting a false claim, i.e. actual
knowledge of the falsity of the claim, reckless disregard or deliberate
ignorance of the falsity of the claim. These are the claims to which criminal
penalties are applied. Penalties include permissive exclusion in federally
funded programs by Center for Medicare Services (“CMS”) as well as $11,500 plus
treble damages per false claim submitted, and can include
imprisonment. High risk areas include but are not limited to accurate
use and selection of CPT codes, ICD-9 codes provided by the ordering physician,
billing calculations, performance and billing of reported testing, use of reflex
testing, and accuracy of charges at fair market value.
We
will seek to structure our arrangements with physicians and other customers to
be in compliance with the Anti-Kickback Statute, Stark Law, State laws, and the
Civil False Claims Act and to keep up-to-date on developments concerning their
application by various means, including consultation with legal
counsel. However, we are unable to predict how these laws will be
applied in the future, and the arrangements into which we enter could become
subject to scrutiny there under.
In
February 1997 (as revised in August 1998), the OIG released a model compliance
plan for laboratories that is based largely on corporate integrity agreements
negotiated with laboratories that had settled enforcement action brought by the
federal government related to allegations of submitting false
claims. We believe that we comply with the aspects of the model plan
that we deem appropriate to the conduct of our business.
Confidentiality
of Health Information
The
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") contains
provisions that affect the handling of claims and other patient information that
are, or have been used or disclosed by healthcare providers. These provisions,
which address security and confidentiality of PHI (Protected Health Information
or “patient information”) as well as the administrative aspects of claims
handling, have very broad applicability and they specifically apply to
healthcare providers, which include physicians and clinical laboratories. Rules
implementing various aspects of HIPAA are continuing to be developed. The HIPAA
Rules include the following components which have already been implemented at
our locations and industry wide: The Privacy Rule which granted patients rights
regarding their information also pertains to the proper uses and disclosures of
PHI by healthcare providers in written and verbal formats required
implementation no later than April 14, 2003 for all covered entities except
small health plans which had another year for implementation. The Electronic
Health Care Transactions and Code Sets Standards which established standard data
content and formats for submitting electronic claims and other administrative
healthcare transactions required implementation no later than October 16, 2003
for all covered entities. On April 20, 2005, CMS required compliance with the
Security Standards which established standards for electronic uses and
disclosures of PHI for all covered entities except small health plans who had an
additional year to meet compliance. Currently, the industry, including all of
our locations, is working to comply with the National Provider Identification
number to replace all previously issued provider (organizational and individual)
identification numbers. This number is being issued by CMS and must be used on
all covered transactions no later than May 23, 2007 by all covered entities
except small health plans which have an additional year to meet compliance with
this rule.
In
addition to the HIPAA rules described above, we are subject to state laws
regarding the handling and disclosure of patient records and patient health
information. These laws vary widely, and many states are passing new laws in
this area. Penalties for violation include sanctions against a laboratory's
licensure as well as civil or criminal penalties. We believe we are
in compliance with current state law regarding the confidentiality of health
information and continue to keep abreast of new or changing state laws as they
become available.
Risk
Factors
We are subject to various risks that
may materially harm our business, financial condition and results of operations.
An investor should carefully consider the risks and uncertainties described
below and the other information in this filing before deciding to purchase our
common stock. If any of these risks or uncertainties actually occurs, our
business, financial condition or operating results could be materially harmed.
In that case, the trading price of our common stock could decline or we may be
forced to cease operations.
We
Have A Limited Operating History Upon Which You Can Evaluate Our
Business
The
Company commenced revenue operations in 2002 and is just beginning to generate
meaningful revenue. Accordingly, the Company has a limited operating
history upon which an evaluation of the Company and its prospects can be
based. The Company and its prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
rapidly evolving market for healthcare and medical laboratory
services. To address these risks, the Company must, among other
things, respond to competitive developments, attract, retain and motivate
qualified personnel, implement and successfully execute its sales strategy,
develop and market additional services, and upgrade its technological and
physical infrastructure in order to scale its revenues. The Company
may not be successful in addressing such risks. The limited operating
history of the Company makes the prediction of future results of operations
difficult or impossible.
We
May Not Be Able To Implement The Company’s Business Strategies Which Could
Impair Our Ability To Continue Operations
Implementation
of the Company’s business strategies will depend in large part on the Company’s
ability to (i) attract and maintain a significant number of customers; (ii)
effectively provide acceptable products and services to the Company’s customers;
(iii) obtain adequate financing on favorable terms to fund the Company’s
business strategies; (iv) maintain appropriate procedures, policies, and
systems; (v) hire, train, and retain skilled employees; (vi) continue to operate
with increasing competition in the medical laboratory industry; (vii) establish,
develop and maintain name recognition; and (viii) establish and maintain
beneficial relationships with third-party insurance providers and other third
party payers. The Company’s inability to obtain or maintain any or
all these factors could impair its ability to implement its business strategies
successfully, which could have material adverse effects on its results of
operations and financial condition.
We
May Be Unsuccessful In Managing Our Growth Which Could Prevent The Company From
Becoming Profitable
The
Company’s recent growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial
resources. To manage its potential growth, the Company must continue
to implement and improve its operational and financial systems and to expand,
train and manage its employee base. The Company may not be able to
effectively manage the expansion of its operations and the Company’s systems,
procedures or controls may not be adequate to support the Company’s
operations. The Company’s management may not be able to achieve the
rapid execution necessary to fully exploit the market opportunity for the
Company’s products and services. Any inability to manage growth could
have a material adverse effect on the Company’s business, results of operations,
potential profitability and financial condition.
Part
of the Company’s business strategy may be to acquire assets or other companies
that will complement the Company’s existing business. The Company is unable to
predict whether or when any material transaction will be completed should
negotiations commence. If the Company proceeds with any such
transaction, the Company may not effectively integrate the acquired operations
with the Company’s own operations. The Company may also seek to
finance any such acquisition by debt financings or issuances of equity
securities and such financing may not be available on acceptable terms or at
all.
We
May Incur Greater Costs Than Anticipated, Which Could Result In Sustained
Losses
The
Company used reasonable efforts to assess and predict the expenses necessary to
pursue its business plan. However, implementing the Company’s business plan may
require more employees, capital equipment, supplies or other expenditure items
than management has predicted. Similarly, the cost of compensating
additional management, employees and consultants or other operating costs may be
more than the Company estimates, which could result in sustained
losses.
We
May Face Fluctuations In Results of Operations Which Could Negatively Affect Our
Business Operations And We are Subject To Seasonality In Our
Business
As
a result of the Company’s limited operating history and the relatively limited
information available on the Company’s competitors, the Company may not have
sufficient internal or industry-based historical financial data upon which to
calculate anticipated operating expenses. Management expects that the
Company’s results of operations may also fluctuate significantly in the future
as a result of a variety of factors, including, but not limited to, (i) the
continued rate of growth, usage and acceptance of the Company’s products and
services; (ii) demand for the Company’s products and services; (iii) the
introduction and acceptance of new or enhanced products or services by us or by
competitors; (iv) the Company’s ability to anticipate and effectively adapt to
developing markets and to rapidly changing technologies; (v) the Company’s
ability to attract, retain and motivate qualified personnel; (vi) the
initiation, renewal or expiration of significant contracts with the Company’s
major clients; (vii) pricing changes by us, our suppliers or our competitors;
(viii) seasonality; and (ix) general economic conditions and other
factors. Accordingly, future sales and operating results are
difficult to forecast. The Company’s expenses are based in part on
the Company’s expectations as to future revenues and to a significant extent are
relatively fixed, at least in the short-term. The Company may not be
able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in relation
to the Company’s expectations would have an immediate adverse impact on the
Company’s business, results of operations and financial condition. In
addition, the Company may determine from time to time to make certain pricing or
marketing decisions or acquisitions that could have a short-term material
adverse effect on the Company’s business, results of operations and financial
condition and may not result in the long-term benefits
intended. Furthermore, in Florida, currently a primary referral
market for our lab testing services, a meaningful percentage of the population
returns to homes in the Northern U.S. to avoid the hot summer
months. This may result in seasonality in our
business. Because of all of the foregoing factors, the
Company’s operating results could be less than the expectations of investors in
future periods.
We
Substantially Depend Upon Third Parties For Payment Of Services, Which Could
Have A Material Adverse Affect On Our Cash Flows And Results Of
Operations
The
Company is a clinical medical laboratory that provides medical testing services
to doctors, hospitals, and other laboratories on patient specimens that are sent
to the Company. In the case of most specimen referrals that are
received for patients that are not in-patients at a hospital or institution or
otherwise sent by another reference laboratory, the Company generally has to
bill the patient’s insurance company or a government program for its
services. As such it relies on the cooperation of numerous third
party payers, including but not limited to Medicare, Medicaid and various
insurance companies, in order to get paid for performing services on behalf of
the Company’s clients. Wherever possible, the amount of such third
party payments is governed by contractual relationships in cases where the
Company is a participating provider for a specified insurance company or by
established government reimbursement rates in cases where the Company is an
approved provider for a government program such as Medicare. However,
the Company does not have a contractual relationship with many of the insurance
companies with whom it deals, nor is it necessarily able to become an approved
provider for all government programs. In such cases, the Company is
deemed to be a non-participating provider and there is no contractual assurance
that the Company is able to collect the amounts billed to such insurance
companies or government programs. Currently, the Company is not a
participating provider with the majority of the insurance companies it bills for
its services. Until such time as the Company becomes a participating
provider with such insurance companies, there can be no contractual assurance
that the Company will be paid for the services it bills to such insurance
companies, and such third parties may change their reimbursement policies for
non-participating providers in a manner that may have a material adverse affect
on the Company’s cash flow or results of operations.
Our
Business Is Subject To Rapid Scientific Change, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial
Condition
The
market for genetic and molecular testing services is characterized by rapid
scientific developments, evolving industry standards and customer demands, and
frequent new product introductions and enhancements. The Company’s
future success will depend in significant part on its ability to continually
improve its offerings in response to both evolving demands of the marketplace
and competitive service offerings, and the Company may be unsuccessful in doing
so.
The
Market For Our Services Is Highly Competitive, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial
Condition
The
market for genetic and molecular testing services is highly competitive and
competition is expected to continue to increase. The Company competes
with other commercial medical laboratories in addition to the in-house
laboratories of many major hospitals. Many of the Company’s existing
competitors have significantly greater financial, human, technical and marketing
resources than the Company. The Company’s competitors may develop
products and services that are superior to those of the Company or that achieve
greater market acceptance than the Company’s offerings. The Company
may not be able to compete successfully against current and future sources of
competition and in such case, this may have a material adverse effect on the
Company’s business, results of operations and financial condition.
We
Face The Risk Of Capacity Constraints, Which Could Have A Material Adverse
Affect On Our Business, Results Of Operations And Financial
Condition
We
compete in the market place primarily on three factors: a) the
quality and accuracy of our test results; b) the speed or turn-around times of
our testing services; and c) our ability to provide after-test support to those
physicians requesting consultation. Any unforeseen increase in the
volume of customers could strain the capacity of our personnel and systems,
which could lead to inaccurate test results, unacceptable turn-around times, or
customer service failures. In addition, as the number of customers
and cases increases, the Company’s products, services, and infrastructure may
not be able to scale accordingly. Any failure to handle higher volume
of requests for the Company’s products and services could lead to the loss of
established customers and have a material adverse effect on the Company’s
business, results of operations and financial condition.
If
we produce inaccurate test results, our customers may choose not to use us in
the future. This could severely harm our business, results of
operations and financial condition. In addition, based on the
importance of the subject matter of our tests, inaccurate results could result
in improper treatment of patients, and potential liability for the
Company.
We
May Fail To Protect Our Facilities, Which Could Have A Material Adverse Affect
On Our Business, Results Of Operations And Financial Condition
The
Company’s operations are dependent in part upon its ability to protect its
laboratory operations against physical damage from fire, floods, hurricanes,
power loss, telecommunications failures, break-ins and similar
events. The Company does not presently have an emergency back-up
generator in place at its Fort Myers, Fl, Nashville, TN and Irvine, CA
laboratory locations that can mitigate to some extent the effects of a prolonged
power outage. The occurrence of any of these events could result in
interruptions, delays or cessations in service to Customers, which could have a
material adverse effect on the Company’s business, results of operations and
financial condition.
The
Steps Taken By The Company To Protect Its Proprietary Rights May Not Be
Adequate
The
Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success, and the Company relies upon
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with its employees, customers, partners and others to protect
its proprietary rights. The steps taken by the Company to protect its
proprietary rights may not be adequate or third parties may infringe or
misappropriate the Company’s copyrights, trademarks, trade secrets and similar
proprietary rights. In addition, other parties may assert
infringement claims against the Company.
We
Are Dependent On Key Personnel And Need To Hire Additional Qualified
Personnel
The
Company’s performance is substantially dependent on the performance of its
senior management and key technical personnel. In particular, the
Company’s success depends substantially on the continued efforts of its senior
management team, which currently is composed of a small number of
individuals. The loss of the services of any of its executive
officers, its laboratory director or other key employees could have a material
adverse effect on the business, results of operations and financial condition of
the Company.
The
Company’s future success also depends on its continuing ability to attract and
retain highly qualified technical and managerial
personnel. Competition for such personnel is intense and the Company
may not be able to retain its key managerial and technical employees or may not
be able to attract and retain additional highly qualified technical and
managerial personnel in the future. The inability to attract and
retain the necessary technical and managerial personnel could have a material
adverse effect upon the Company’s business, results of operations and financial
condition.
The
Failure To Obtain Necessary Additional Capital To Finance Growth And Capital
Requirements, Could Adversely Affect The Company’s Business, Financial Condition
And Results Of Operations
The
Company may seek to exploit business opportunities that require more capital
than what is currently planned. The Company may not be able to raise
such capital on favorable terms or at all. If the Company is unable
to obtain such additional capital, the Company may be required to reduce the
scope of its anticipated expansion, which could adversely affect the Company’s
business, financial condition and results of operations.
Our
Net Revenue Will Be Diminished If Payers Do Not Adequately Cover Or Reimburse
Our Services.
There has been and will continue to
be significant efforts by both federal and state agencies to reduce costs in
government healthcare programs and otherwise implement government control of
healthcare costs. In addition, increasing emphasis on managed care in the U.S.
may continue to put pressure on the pricing of healthcare services. Uncertainty
exists as to the coverage and reimbursement status of new applications or
services. Third party payers, including governmental payers such as Medicare and
private payers, are scrutinizing new medical products and services and may not
cover or may limit coverage and the level of reimbursement for our services.
Third party insurance coverage may not be available to patients for any of our
existing assays or assays we discover and develop. However, a substantial
portion of the testing for which we bill our hospital and laboratory clients is
ultimately paid by third party payers. Any pricing pressure exerted by these
third party payers on our customers may, in turn, be exerted by our customers on
us. If government and other third party payers do not provide adequate coverage
and reimbursement for our assays, our operating results, cash flows or financial
condition may decline.
Third
Party Billing Is Extremely Complicated And Will Result In Significant Additional
Costs To Us.
Billing for laboratory services is
extremely complicated. The customer refers the tests; the payer is the party
that pays for the tests, and the two are not always the same. Depending on the
billing arrangement and applicable law, we need to bill various payers, such as
patients, insurance companies, Medicare, Medicaid, doctors and employer groups,
all of which have different billing requirements. Additionally, our billing
relationships require us to undertake internal audits to evaluate compliance
with applicable laws and regulations as well as internal compliance policies and
procedures. Insurance companies also impose routine external audits to evaluate
payments made. This adds further complexity to the billing process.
Among many other factors complicating
billing are:
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pricing
differences between our fee schedules and the reimbursement rates of
the payers;
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•
disputes with payers as to which party is responsible
for payment; and
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• disparity in coverage and
information requirements among various carriers.
We incur significant additional costs
as a result of our participation in the Medicare and Medicaid programs, as
billing and reimbursement for clinical laboratory testing are subject to
considerable and complex federal and state regulations. The additional costs we
expect to incur include those related to: (1) complexity added to our
billing processes; (2) training and education of our employees and customers;
(3) implementing compliance procedures and oversight; (4) collections and legal
costs; and (5) costs associated with, among other factors, challenging coverage
and payment denials and providing patients with information regarding claims
processing and services, such as advanced beneficiary notices.
Our
Operations Are Subject To Strict Laws Prohibiting Fraudulent Billing And Other
Abuse, And Our Failure To Comply With Such Laws Could Result In Substantial
Penalties
Of particular importance to our
operations are federal and state laws prohibiting fraudulent billing and
providing for the recovery of non-fraudulent overpayments, as a large number of
laboratories have been forced by the federal and state governments, as well as
by private payers, to enter into substantial settlements under these laws. In
particular, if an entity is determined to have violated the federal False Claims
Act, it may be required to pay up to three times the actual damages sustained by
the government, plus civil penalties of between $5,500 to $11,000 for each
separate false claim. There are many potential bases for liability under the
federal False Claims Act. Liability arises, primarily, when an entity knowingly
submits, or causes another to submit, a false claim for reimbursement to the
federal government. Submitting a claim with reckless disregard or deliberate
ignorance of its truth or falsity could result in substantial civil liability. A
trend affecting the healthcare industry is the increased use of the federal
False Claims Act and, in particular, actions under the False Claims Act’s
“whistleblower” or “qui tam” provisions to challenge providers and suppliers.
Those provisions allow a private individual to bring actions on behalf of the
government alleging that the defendant has submitted a fraudulent claim for
payment to the federal government. The government must decide whether to
intervene in the lawsuit and to become the primary prosecutor. If it declines to
do so, the individual may choose to pursue the case alone, although the
government must be kept apprised of the progress of the lawsuit. Whether or not
the federal government intervenes in the case, it will receive the majority of
any recovery. In addition, various states have enacted laws modeled after the
federal False Claims Act.
Government investigations of
clinical laboratories have been ongoing for a number of years and are expected
to continue in the future. Written “corporate compliance” programs to actively
monitor compliance with fraud laws and other regulatory requirements are
recommended by the Department of Health and Human Services’ Office of the
Inspector General.
The
Failure To Comply With Significant Government Regulation And Laboratory
Operations May Subject The Company To Liability, Penalties Or Limitation Of
Operations
As
discussed in the Government Regulation section of our business description, the
Company is subject to extensive state and federal regulatory
oversight. Our laboratory locations may not pass inspections
conducted to ensure compliance with CLIA `88 or with any other applicable
licensure or certification laws. The sanctions for failure to comply with CLIA
`88 or state licensure requirements might include the inability to perform
services for compensation or the suspension, revocation or limitation of a
laboratory location’s CLIA `88 certificate or state license, as well as civil
and/or criminal penalties. In addition, any new legislation or
regulation or the application of existing laws and regulations in ways that we
have not anticipated could have a material adverse effect on the Company’s
business, results of operations and financial condition.
Existing
federal laws governing Medicare and Medicaid, as well as some other state and
federal laws, also regulate certain aspects of the relationship between
healthcare providers, including clinical and anatomic laboratories, and their
referral sources, including physicians, hospitals and other laboratories.
Certain provisions of these laws, known as the "anti-kickback law" and the
“Stark Laws”, contain extremely broad proscriptions. Violation of these laws may
result in criminal penalties, exclusion from Medicare and Medicaid, and
significant civil monetary penalties. We will seek to structure our
arrangements with physicians and other customers to be in compliance with the
anti-kickback, Stark and state laws, and to keep up-to-date on developments
concerning their application by various means, including consultation with legal
counsel. However, we are unable to predict how these laws will be
applied in the future and the arrangements into which we enter may become
subject to scrutiny thereunder.
We are
also subject to regulation of laboratory operations under state clinical
laboratory laws. State clinical laboratory laws may require that laboratories
and/or laboratory personnel meet certain qualifications, specify certain quality
controls or require maintenance of certain records. For example, California
requires that we maintain a license to conduct testing in California and
California law establishes standards for our day-to-day laboratory operations,
including the training and skill required of laboratory personnel and quality
control. Certain other states, including Florida, Maryland, New York,
Pennsylvania and Rhode Island, each require that we hold licenses to test
specimens from patients residing in those states, and additional states may
require similar licenses in the future. Potential sanctions for violation of
these statutes and regulations include significant fines and the suspension or
loss of various licenses, certificates and authorizations, which could adversely
affect our business and results of operations
Furthermore,
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and
other state laws contains provisions that affect the handling of claims and
other patient information that are, or have been, transmitted electronically and
regulate the general disclosure of patient records and patient health
information. These provisions, which address security and confidentiality of
patient information as well as the administrative aspects of claims handling,
have very broad applicability and they specifically apply to healthcare
providers, which include physicians and clinical laboratories. Although we
believe we have complied with the Standards, Security and Privacy rules under
HIPAA and state laws, an audit of our procedures and systems could find
deficiencies. Such deficiencies, if found, could have a material
adverse effect on the Company’s business, results of operations and financial
condition and subject us to liability.
We
Are Subject To Security Risks Which Could Harm Our Operations
Despite
the implementation of various security measures by the Company, the Company’s
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by its customers or others. Computer
viruses, break-ins or other security problems could lead to interruption, delays
or cessation in service to the Company’s customers. Further, such
break-ins whether electronic or physical could also potentially jeopardize the
security of confidential information stored in the computer systems of the
Company’s customers and other parties connected through the Company, which may
deter potential customers and give rise to uncertain liability to parties whose
security or privacy has been infringed. A significant security breach
could result in loss of customers, damage to the Company’s reputation, direct
damages, costs of repair and detection, and other expenses. The
occurrence of any of the foregoing events could have a material adverse effect
on the Company’s business, results of operations and financial
condition.
The
Company Is Controlled By Existing Shareholders and Therefore Other Shareholders
Will Not Be Able To Direct the Company
The
majority of the Company’s shares and thus voting control of the Company is held
by a relatively small group of shareholders. Because of such
ownership, those shareholders will effectively retain control of the Company’s
Board of Directors and determine all of the Company’s corporate
actions. In addition, the Company and shareholders controlling
11,220,450 shares, or approximately 36% of the Company’s voting shares
outstanding as of March 31, 2008 have executed a Shareholders’ Agreement that,
among other provisions, gives Aspen Select Healthcare, LP, our largest
shareholder, the right to elect three out of the seven directors authorized for
our Board, and nominate one mutually acceptable independent
director. Accordingly, it is anticipated that Aspen Select
Healthcare, LP and other parties to the Shareholders’ Agreement will continue to
have the ability to elect a controlling number of the members of the Company’s
Board of Directors and the minority shareholders of the Company may not be able
to elect a representative to the Company’s Board of Directors. Such
concentration of ownership may also have the effect of delaying or preventing a
change in control of the Company.
No
Foreseeable Dividends
The
Company does not anticipate paying dividends on its common shares in the
foreseeable future. Rather, the Company plans to retain earnings, if
any, for the operation and expansion of Company business.
There
May Not Be A Viable Public Market For Our Common Stock
We cannot
predict the extent to which investor interest in our company will sustain an
active trading market for our stock on The NASDAQ Over The Counter Bulletin
Board (“OTCBB”) or any other stock market or how liquid any such market might
remain. If an active public market is not sustained, it may be difficult for our
stockholders to sell their shares of common stock at a price that is attractive
to them, or at all.
We
May Become Involved In Securities Class Action Litigation That Could Divert
Management's Attention And Harm Our Business.
The stock
markets have from time to time experienced significant price and volume
fluctuations that have affected the market prices for the common stock of
diagnostic companies. These broad market fluctuations may cause the market price
of our common stock to decline. In the past, securities class action litigation
has often been brought against a company following a decline in the market price
of its securities. This risk is especially relevant for us because clinical
laboratory service companies have experienced significant stock price volatility
in recent
years. We
may become involved in this type of litigation in the future. Litigation often
is expensive and diverts management's attention and resources, which could
adversely affect our business.
If
We Are Not the Subject Of Securities Analyst Reports Or If Any Securities
Analyst Downgrades Our Common Stock Or Our Sector, The Price Of Our
Common
Stock
Could Be Negatively Affected.
Securities
analysts may publish reports about us or our industry containing information
about us that may affect the trading price of our common stock. There
are many publicly traded companies active in the healthcare industry, which may
mean it will be less likely that we receive analysts' coverage, which in turn
could affect the price of our common stock. In addition, if a securities or
industry analyst downgrades the outlook for our stock or one of our
competitors'
stocks or
chooses to terminate coverage of our stock, the trading price of our common
stock may also be negatively affected.
Changes
In Regulations, Payor Policies Or Contracting Arrangements With Payors Or
Changes In Other Laws, Regulations Or Policies May Adversely Affect Coverage Or
Reimbursement For Our Specialized Diagnostic Services, Which May Decrease Our
Revenues And Adversely Affect Our Results Of Operations And Financial
Condition.
Governmental
payors, as well as private insurers and private payors, have implemented and
will continue to implement measures to control the cost, utilization and
delivery of healthcare services, including clinical laboratory and pathology
services. Congress has from time to time considered and implemented changes to
laws and regulations governing healthcare service providers, including
specialized diagnostic service providers. These changes have adversely affected
and may in the future adversely affect coverage for our services. We
also believe that healthcare professionals will not use our services if third
party payors do not provide
adequate
coverage and reimbursement for them. These changes in federal, state, local and
third party payor regulations or policies may decrease our revenues and
adversely affect our results of operations and financial
condition. We will continue to be a non-contracting provider
until such time as we enter into contracts with third party payors for whom we
are not currently contracted. Because a portion of our revenues is
from third-party payors with whom we are not currently contracted, it is likely
that we will be required to make positive or negative adjustments to accounting
estimates with respect to contractual allowances in the future, which may
adversely affect our results of operations, our credibility with financial
analysts and investors, and our stock price.
We
Must Hire And Retain Qualified Sales Representatives To Grow Our
Sales.
Our
ability to retain existing customers for our specialized diagnostic services and
attract new customers is dependent upon retaining existing sales representatives
and hiring new sales representatives, which is an expensive and time-consuming
process. We face intense competition for qualified sales personnel and our
inability to hire or retain an adequate number of sales representatives could
limit our ability to maintain or expand our business and increase
sales.
Even if we are able to increase our sales force, our new sales personnel may not
commit the necessary resources or provide sufficient high quality service and
attention to effectively market and sell our services. If we are unable to
maintain and expand our marketing and sales networks or if our sales personnel
do not perform to our high standards, we may be unable to maintain or grow our
existing business and our results of operations and financial condition will
likely suffer accordingly. If a sales representative ceases employment, we risk
the loss of customer goodwill based on the impairment of relationships developed
between the sales representative and the healthcare professionals for whom the
sales representative was responsible. This is particularly a risk if the
representative goes to work for a competitor, as the healthcare professionals
that are our customers may choose to use a competitor's services based on their
relationship with the departed sales representative.
We
Are Currently Expanding Our Infrastructure, Including Through The Acquisition
And Development Of Additional Office Space And The Expansion Of Our Current
Laboratory Capacity At Our Existing Facility, And We Intend To Further Expand
Our Infrastructure By Establishing A New Laboratory Facility, Which, Among Other
Things, Could Divert Our Resources And May Cause Our Margins To
Suffer.
In
November 2007, we entered into a lease which expires on June 30, 2010 for
additional office space in Fort Myers, FL to house our expanding Florida
laboratory, administrative, sales, billing and client services departments.
Within the first half of 2008, we will initiate construction to expand our
current laboratory capacity by building out unimproved areas within our existing
facility. When the additional laboratory facility is operational, it
may take time for us to derive the same economies of scale as in our existing
facility. Each expansion of our facilities or systems could divert
resources, including the focus of our management, away from our current
business. In addition, expansions of our facilities may increase our costs and
potentially decrease operating margins, both of which would, individually or in
the aggregate, negatively impact our business, financial condition and results
of operations.
We
Rely On A Limited Number Of Third Parties For Manufacture And Supply Of Certain
Of Our Critical Laboratory Instruments And Materials, And We May Not Be Able To
Find Replacement Suppliers Or Manufacturers In A Timely Manner In The Event Of
Any Disruption, Which Could Adversely Affect Our Business.
We rely
on third parties for the manufacture and supply of some of our critical
laboratory instruments, equipment and materials that we need to perform our
specialized diagnostic services, and rely on a limited number of suppliers for
certain laboratory materials and some of the laboratory equipment with which we
perform our diagnostic services. We do not have long-term contracts with our
suppliers and manufacturers that commit them to supply equipment and materials
to us. Because we cannot ensure the actual production or manufacture of such
critical equipment and materials, or the ability of our suppliers to comply with
applicable legal and regulatory requirements, we may be subject to significant
delays caused by interruption in production or manufacturing. If any of our
third party suppliers or manufacturers were to become unwilling or unable to
provide this equipment or these materials in required quantities or on our
required timelines, we would need to identify and acquire acceptable replacement
sources on a timely basis. While we have developed alternate sourcing strategies
for the equipment and materials we use, we cannot be certain that these
strategies will be effective and even if we were to identify other suppliers and
manufacturers for the equipment and materials we need to perform our specialized
diagnostic services, there can be no assurance that we will be able to enter
into agreements with such suppliers and manufacturers or otherwise obtain such
items on a timely basis or on acceptable terms, if at all. If we encounter
delays or difficulties in securing necessary laboratory equipment or materials,
including consumables, we would face an interruption in our ability to perform
our specialized diagnostic services and experience other disruptions that would
adversely affect our business, results of operations and financial
condition.
Performance
Issues, Service Interruptions Or Price Increases By Our Shipping Carrier Could
Adversely Affect Our Business, Results Of Operations And Financial Condition,
And Harm Our Reputation And Ability To Provide Our Specialized Diagnostic
Services On A Timely Basis.
Expedited,
reliable shipping is essential to our operations. One of our marketing
strategies entails highlighting the reliability of our point-to-point transport
of patient samples.
We rely
heavily on a single carrier, Federal Express, and also our local courier, for
reliable and secure point-to-point transport of patient samples to our
laboratory and enhanced tracking of these patient samples. Should
Federal Express encounter delivery performance issues such as loss, damage or
destruction of a sample, it may be difficult to replace our patient samples in a
timely manner and such occurrences may damage our reputation and lead to
decreased demand for our services and increased cost and expense to our
business. In addition, any significant increase in shipping rates could
adversely affect our operating margins and results of operations. Similarly,
strikes, severe weather, natural disasters or other service interruptions by
delivery services we use would adversely affect our ability to receive and
process patient samples on a timely basis. If Federal Express or we were to
terminate our relationship, we would be required to find another party to
provide expedited, reliable point-to-point transport of our patient samples.
There are only a few other providers of such nationwide transport services, and
there can be no assurance that we will be able to enter into arrangements with
such other providers on acceptable terms, if at all. Finding a new provider of
transport services would be time-consuming and costly and result in delays in
our ability to provide our specialized diagnostic services. Even if we were to
enter into an arrangement with such provider, there can be no assurance that
they will provide the same level of quality in transport services currently
provided to us by Federal Express. If the new provider does not provide the
required quality and reliable transport services, it could adversely affect our
business, reputation, results of operations and financial
condition.
We Use Biological And Hazardous
Materials That Require Considerable Expertise And Expense For Handling, Storage
Or Disposal And May Result In Claims Against Us.
We work
with hazardous materials, including chemicals, biological agents and compounds,
blood samples and other human tissue that could be dangerous to human health and
safety or the environment. Our operations also produce hazardous and
biohazardous waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and disposal of these
materials and wastes. Compliance with applicable environmental laws and
regulations may be expensive, and current or future environmental laws and
regulations may impair business efforts. If we do not comply with applicable
regulations, we may be subject to fines and penalties. In addition,
we cannot entirely eliminate the risk of accidental injury or contamination from
these materials or wastes. Our general liability insurance and/or workers'
compensation insurance policy may not cover damages and fines arising from
biological or hazardous waste exposure or contamination. Accordingly, in the
event of contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our operations
could be suspended or otherwise adversely affected.
Our
Failure To Comply With Governmental Payor Regulations Could Result In Our Being
Excluded From Participation In Medicare, Medicaid Or Other Governmental Payor
Programs, Which Would Decrease Our Revenues And Adversely Affect Our Results Of
Operations And Financial Condition.
Reimbursement
from Medicare and Medicaid accounted for approximately 52% and 38% of our
revenues for the years ended December 31, 2007 and 2006, respectively. The
Medicare program imposes extensive and detailed requirements on diagnostic
services providers, including, but not limited to, rules that govern how we
structure our relationships with physicians, how and when we submit
reimbursement claims and how we provide our specialized diagnostic services. Our
failure to comply with applicable Medicare, Medicaid and other governmental
payor rules could result in our inability to participate in a governmental payor
program, our returning funds already paid to us, civil monetary penalties,
criminal penalties and/or limitations on the operational function of our
laboratory. If we were unable to receive reimbursement under a governmental
payor program, a substantial portion of our revenues would be lost, which would
adversely affect our results of operations and financial condition.
Our
Business Could Be Harmed By Future Interpretations Of Clinical Laboratory
Mark-Up Prohibitions.
Our
laboratory currently uses the services of outside reference laboratories to
provide certain complementary laboratory services to those services provided
directly by our laboratory. Although Medicare policies do not prohibit certain
independent-laboratory-to-independent-laboratory referrals and subsequent
mark-up for services, California and other states have rules and regulations
that prohibit or limit the mark-up of these laboratory-to-laboratory services.
Achallenge
to our charge-setting procedures under these rules and regulations could have a
material adverse effect on our business, results of operations and financial
condition.
Failure
To Comply With The HIPAA Security And Privacy Regulations May Increase Our
Operational Costs.
The HIPAA privacy and security
regulations establish comprehensive federal standards with respect to the uses
and disclosures of PHI by health plans and healthcare providers, in addition to
setting standards to protect the confidentiality, integrity and availability of
electronic PHI. The regulations establish a complex regulatory framework on a
variety of subjects, including the circumstances under
which uses and disclosures of PHI are permitted or required without a specific
authorization by the patient, including but not limited to treatment purposes,
activities to obtain payments for services and healthcare operations activities;
a patient's rights to access, amend and receive an accounting of certain
disclosures of PHI; the content of notices of privacy practices for PHI; and
administrative, technical and physical safeguards required of entities that use
or receive PHI electronically. We have implemented policies and
procedures related to compliance with the HIPAA privacy and security
regulations, as required by law. The privacy regulations establish a uniform
federal "floor" and do not supersede state laws that are more stringent.
Therefore, we are required to comply with both federal privacy regulations and
varying state privacy laws. The federal privacy regulations restrict our ability
to use or disclose patient identifiable laboratory data, without patient
authorization, for purposes other than payment, treatment or healthcare
operations (as defined by HIPAA), except for disclosures for various public
policy purposes and other permitted purposes outlined in the privacy
regulations. The privacy and security regulations provide for significant fines
and other penalties for wrongful use or disclosure of PHI, including potential
civil and criminal fines and penalties. Although the HIPAA statute and
regulations do not expressly provide for a private right of damages, we also
could incur damages under state laws to private parties for the wrongful use or
disclosure of confidential health information or other private personal
information.
Correspondence
From The SEC Regarding Our 2006 Form 10KSB.
In the third quarter of 2007, we
received a comment letter from the SEC regarding certain disclosures in our 2006
10KSB. The issues raised by the SEC are still pending
resolution. Our ongoing efforts to adequately address these comments
may cause us to incur additional administrative and legal
expenses. Additionally, if our response does not properly satisfy the
SEC demands, we may be required to amend or redisclose previously issued
reports, causing additional administrative costs and a negative impact on our
stock price.
Our
Ability To Comply With The Financial Covenants In Our Credit Agreements Depends
Primarily On Our Ability To Generate Substantial Operating Cash
Flow.
Our
ability to comply with the financial covenants under the agreement with
CapitalSource Funding, LLC will depend primarily on our success in
generating substantial operating cash flow. Our credit agreement contains
numerous financial and other restrictive covenants, including restrictions on
purchasing and selling assets, paying dividends to our shareholders, and
incurring additional indebtedness. Our failure to meet these covenants could
result in a default and acceleration of repayment of the indebtedness under our
credit facility. If the maturity of our indebtedness were accelerated, we
may not have sufficient funds to pay such indebtedness. In such event,
our lenders would be entitled to proceed against the collateral securing
the indebtedness, which includes substantially our entire accounts receivable,
to the extent permitted by our credit agreements and applicable
law.
We
Have Potential Conflicts Of Interest Relating To Our Related Party
Transactions Which Could Harm Our Business.
We have
potential conflicts of interest relating to existing agreements we have with
certain of our directors, officers, principal shareholders,
shareholders and employees. Potential
conflicts
of interest can exist if a related party director or officer has to make a
decision that has different implications for us and the related party. If a
dispute arises in connection with any of these agreements, if not resolved
satisfactorily to us, our business could be harmed. There can be no
assurance that the above or any future conflicts of interest will be resolved in
our favor. If not resolved, such conflicts could harm our
business.
We
Have Material Weaknesses In Our Internal Control Over Financial Reporting That
May Prevent The Company From Being Able To Accurately Report Its Financial
Results Or Prevent Fraud, Which Could Harm Its Business And Operating
Results.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and prevent fraud. In addition, Section 404 under the
Sarbanes-Oxley Act of 2002 requires that we assess the design and operating
effectiveness of internal control over financial reporting. If we cannot provide
reliable and accurate financial reports and prevent fraud, our business and
operating results could be harmed. We have discovered, and may in the future
discover, areas of internal controls that need improvement. We have identified
four material weaknesses in our internal controls as of December 31, 2007. These
matters and our efforts regarding remediation of these matters, as well as
efforts regarding internal controls generally are discussed in detail in this
Annual Report on Form 10-KSB. However, as our material weaknesses in internal
controls demonstrates, we cannot be certain that the remedial measures taken to
date will ensure that we design, implement, and maintain adequate controls over
financial processes and reporting in the future. Remedying the
material weaknesses that have been presently identified, and any additional
deficiencies, significant deficiencies or material weaknesses that we may
identify in the future, could require us to incur significant costs, hire
additional personnel, expend significant time and management resources or make
other changes. Disclosure of our material weaknesses, any failure to remediate
such material weaknesses in a timely fashion or having or maintaining
ineffective internal controls could cause investors to lose confidence in our
reported financial information, which could have a negative effect on the
trading price of our stock and access to capital.
ITEM
2. DESCRIPTION
OF PROPERTY
Our headquarters are located in
approximately 25,725 square feet of leased office space in Fort Myers,
Florida. In addition, we maintain laboratory and office space in
Irvine, California and Nashville, Tennessee. All our
facilities are leased and we believe they are sufficient to meet our needs for
the foreseeable future, and if needed, additional space will be available at a
reasonable cost.
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
On
October 26, 2006, Accupath Diagnostics Laboratories, Inc. d/b/a US Labs, a
California corporation (“US Labs”) filed a complaint in the Superior Court of
the State of California for the County of Los Angeles (the “Court”) against the
Company and Robert Gasparini, as an individual, and certain other employees and
non-employees of NeoGenomics with respect to claims arising from discussions
with current and former employees of US Labs. On March 18, 2008, we
reached a preliminary agreement to settle US Labs' claims (see Note L of Notes
to Consolidated Financial Statements). As a result, as of December
31, 2007 we have accrued a $375,000 loss contingency, which consists of $250,000
to provide for the Company's expected share of this settlement, and $125,000 to
provide for the Company's share of the estimated legal fees up to the date of
settlement.
The
Company is also a defendant in one lawsuit from a former employee relating to
compensation related claims. The Company does not believe this
lawsuit is material to its operations or financial results and intends to
vigorously pursue its defense of the matter.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted
to a vote of security holders during the fiscal year ending December 31,
2007.
PART
II
|
ITEM
5.
|
MARKET
FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
common stock is quoted on the OTC Bulletin Board. Set forth below is
a table summarizing the high and low bid quotations for our common stock during
the last two fiscal years.
|
QUARTER
|
|
HIGH BID
|
|
|
LOW BID
|
|
|
4th
Quarter 2007
|
|
$ |
1.59 |
|
|
$ |
1.02 |
|
|
3rd
Quarter 2007
|
|
$ |
1.70 |
|
|
$ |
1.05 |
|
|
2nd
Quarter 2007
|
|
$ |
1.90 |
|
|
$ |
1.41 |
|
|
1st
Quarter 2007
|
|
$ |
1.79 |
|
|
$ |
1.39 |
|
|
|
|
|
|
|
|
|
|
|
|
4th
Quarter 2006
|
|
$ |
2.05 |
|
|
$ |
0.94 |
|
|
3rd
Quarter 2006
|
|
$ |
1.25 |
|
|
$ |
0.60 |
|
|
2nd
Quarter 2006
|
|
$ |
0.78 |
|
|
$ |
0.45 |
|
|
1st
Quarter 2006
|
|
$ |
0.72 |
|
|
$ |
0.12 |
|
The above
table is based on over-the-counter quotations. These quotations reflect
inter-dealer prices, without retail mark-up, markdown or commissions, and may
not represent actual transactions. All historical data was obtained
from the www.NASDAQ.com web site.
Holders
of Common Stock
As of
March 31, 2008 there were 460 stockholders of record of our common stock,
excluding shareholders who hold their shares in brokerage accounts in “street
name”.
Dividends
We have
never declared or paid cash dividends on our common stock. We intend
to retain all future earnings to finance future growth and therefore we do not
anticipate paying any cash dividends in the foreseeable future. In
addition, certain financing agreements entered into by the Company may limit our
ability to pay dividends in the future.
Securities
Authorized for Issuance Under Equity Compensation Plans (a)
|
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
|
|
Number
of securities remaining available for future issuance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
2,796,044
|
|
|
$ |
0.81
|
|
|
|
1,170,050 |
|
|
Employee
Stock Purchase Plan (“ESPP”)
|
|
|
-
|
|
|
|
N/A
|
|
|
|
334,463 |
|
|
Equity
compensation plans not approved by security holders
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A |
|
|
Total
|
|
|
2,796,044 |
|
|
|
N/A |
|
|
|
1,504,513 |
|
|
(a)
|
As
of December 31, 2007. Currently, the Company’s Equity Incentive
Plan, as amended and restated on October 31, 2006, and the Company’s
Employee Stock Purchase Plan, dated October 31, 2006, are the only equity
compensation plans in effect.
|
|
ITEM
6.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
|
Introduction
The following discussion and analysis
should be read in conjunction with the 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 Annual Report under the caption “Forward Looking
Statements”, which information is incorporated herein by reference.
Overview
NeoGenomics
operates a network of cancer-focused testing laboratories that specifically
target the rapidly growing genetic and molecular testing segment of the medical
laboratory industry. We currently operate in three laboratory
locations: Fort Myers, Florida, Nashville,
Tennessee and Irvine, California. We currently offer throughout the
United States the following types of testing services to oncologists,
pathologists, urologists, hospitals, and other laboratories: a)
cytogenetics testing, which analyzes human chromosomes, b) Fluorescence In-Situ
Hybridization (FISH) testing, which analyzes abnormalities at the chromosome and
gene levels, c) flow cytometry testing services, which analyzes gene expression
of specific markers inside cells and on cell surfaces, d) morphological testing,
which analyzes cellular structures and e) molecular testing which involves,
analysis of DNA and RNA and predict the clinical significance of various
cancers. All of these testing services are widely used in the
diagnosis and prognosis of various types of cancer.
Our
common stock is listed on the NASDAQ Over-the-Counter Bulletin Board (the
“OTCBB”) under the symbol “NGNM.”
Critical Accounting
Policies
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. For a complete description of our
significant accounting policies, see Note B to our Consolidated Financial
Statements included in this annual report, Form 10-KSB.
Our
critical accounting policies are those where we have made difficult, subjective
or complex judgments in making estimates, and/or where these estimates can
significantly impact our financial results under different assumptions and
conditions. Our critical accounting policies are:
|
·
|
Accounting
For Contingencies
|
|
·
|
Stock
Based Compensation
|
Revenue
Recognition
The Company recognizes revenues in
accordance with the Securities and Exchange Commission’s (the “Commission”)
Staff Accounting Bulletin No. 104, “Revenue Recognition”, when the price is
fixed or determinable, persuasive evidence of an arrangement exists, the service
is performed and collectability of the resulting receivable is reasonably
assured.
The
Company’s specialized diagnostic services are performed based on a written test
requisition form and revenues are recognized once the diagnostic services have
been performed, the results have been delivered to the ordering physician, the
payor has been identified and eligibility and insurance have been
verified. These diagnostic services are billed to various payors,
including Medicare, commercial insurance companies, other directly billed
healthcare institutions such as hospitals and clinics, and
individuals. The Company reports revenues from contracted payors,
including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of Medicare,
published fee schedules. The Company reports revenues from
non-contracted payors, including certain insurance companies and individuals,
based on the amount expected to be collected. The difference between
the amount billed and the amount expected to be collected from non-contracted
payors is recorded as a contractual allowance to arrive at the reported
revenues. The expected revenues from non-contracted payors are based
on the historical collection experience of each payor or payor group, as
appropriate. In each reporting period, the Company reviews its
historical collection experience for non-contracted payors and adjusts its
expected revenues for current and subsequent periods accordingly.
Trade Accounts Receivable
and Allowance For Doubtful Accounts
We record
accounts receivable net of estimated discounts, contractual allowances and
allowances for bad debts. We provide for accounts receivable that
could become uncollectible in the future by establishing an allowance to reduce
the carrying value of such receivables to their estimated net realizable
value. We estimate this allowance based on the aging of our accounts
receivable and our historical collection experience for each type of
payer. Receivables are charged off to the allowance account at the
time they are deemed uncollectible. In the event that the actual
amount of payment received differs from the previously recorded estimate of an
account receivable, an adjustment to revenue is made in the current period at
the time of final collection and settlement. During 2007, we recorded
approximately $24,000 of net total incremental revenue from tests in which we
underestimated the revenue in 2006 relative to the amounts that we were
ultimately paid in 2007. This was less than 1% of our total FY 2007
revenue and less than 1% of our FY 2006 revenue. These adjustments 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 payer’s with
whom we deal. We regularly refine our estimates in order to make our
estimated revenue for future periods as accurate as possible based on our most
recent collection experience with each third party payer.
The
following tables present the dollars and percentage of the Company’s net
accounts receivable from customers outstanding by aging category at December 31,
2007 and 2006. All of our receivables were pending approval by
third-party payers as of the date that the receivables were
recorded:
NEOGENOMICS
AGING OF RECEIVABLES BY PAYOR GROUP
FY
2007
|
Payor
Group
|
|
|
0-30 |
|
|
%
|
|
|
|
30-60 |
|
|
%
|
|
|
|
60-90 |
|
|
%
|
|
|
|
90-120 |
|
|
%
|
|
|
>
120
|
|
|
%
|
|
|
Total
|
|
|
%
|
|
|
Client
|
|
$ |
159,649 |
|
|
|
4 |
% |
|
$ |
148,909 |
|
|
|
4 |
% |
|
$ |
200,073 |
|
|
|
5 |
% |
|
$ |
69,535 |
|
|
|
2 |
% |
|
$ |
122,753 |
|
|
|
3 |
% |
|
|
700,919 |
|
|
|
19 |
% |
|
Commercial
Insurance
|
|
|
427,876 |
|
|
|
12 |
% |
|
|
184,761 |
|
|
|
5 |
% |
|
|
126,477 |
|
|
|
3 |
% |
|
|
66,922 |
|
|
|
2 |
% |
|
|
487,387 |
|
|
|
13 |
% |
|
|
1,293,423 |
|
|
|
35 |
% |
|
Medicaid
|
|
|
918 |
|
|
|
0 |
% |
|
|
904 |
|
|
|
0 |
% |
|
|
2,331 |
|
|
|
0 |
% |
|
|
1,292 |
|
|
|
0 |
% |
|
|
11,892 |
|
|
|
0 |
% |
|
|
17,337 |
|
|
|
0 |
% |
|
Medicare
|
|
|
662,560 |
|
|
|
18 |
% |
|
|
293,870 |
|
|
|
8 |
% |
|
|
94,755 |
|
|
|
3 |
% |
|
|
70,579 |
|
|
|
2 |
% |
|
|
486,002 |
|
|
|
13 |
% |
|
|
1,607,766 |
|
|
|
44 |
% |
|
Self
Pay
|
|
|
9,745 |
|
|
|
0 |
% |
|
|
6,324 |
|
|
|
0 |
% |
|
|
6,889 |
|
|
|
0 |
% |
|
|
3,238 |
|
|
|
0 |
% |
|
|
7,646 |
|
|
|
0 |
% |
|
|
33,842 |
|
|
|
1 |
% |
|
Total
|
|
$ |
1,260,748 |
|
|
|
34 |
% |
|
$ |
634,768 |
|
|
|
17 |
% |
|
$ |
430,525 |
|
|
|
12 |
% |
|
$ |
211,566 |
|
|
|
6 |
% |
|
$ |
1,115,680 |
|
|
|
31 |
% |
|
$ |
3,653,287 |
|
|
|
100 |
% |
FY 2006
|
Payor
Group
|
|
|
0-30 |
|
|
%
|
|
|
|
30-60 |
|
|
%
|
|
|
|
60-90 |
|
|
%
|
|
|
|
90-120 |
|
|
%
|
|
|
>
120
|
|
|
%
|
|
|
Total
|
|
|
%
|
|
|
Client
|
|
$ |
146,005 |
|
|
|
9 |
% |
|
$ |
150,698 |
|
|
|
10 |
% |
|
$ |
79,481 |
|
|
|
5 |
% |
|
$ |
8,606 |
|
|
|
1 |
% |
|
$ |
33,827 |
|
|
|
2 |
% |
|
$ |
418,617 |
|
|
|
27 |
% |
|
Commercial
Insurance
|
|
|
133,333 |
|
|
|
8 |
% |
|
|
105,464 |
|
|
|
7 |
% |
|
|
58,026 |
|
|
|
4 |
% |
|
|
48,847 |
|
|
|
3 |
% |
|
|
35,248 |
|
|
|
2 |
% |
|
|
380,918 |
|
|
|
24 |
% |
|
Medicaid
|
|
|
325 |
|
|
|
0 |
% |
|
|
650 |
|
|
|
0 |
% |
|
|
2,588 |
|
|
|
0 |
% |
|
|
400 |
|
|
|
0 |
% |
|
|
- |
|
|
|
0 |
% |
|
|
3,963 |
|
|
|
0 |
% |
|
Medicare
|
|
|
293,298 |
|
|
|
19 |
% |
|
|
282,463 |
|
|
|
18 |
% |
|
|
71,283 |
|
|
|
5 |
% |
|
|
68,830 |
|
|
|
4 |
% |
|
|
56,598 |
|
|
|
4 |
% |
|
|
772,472 |
|
|
|
49 |
% |
|
Self
Pay
|
|
|
135 |
|
|
|
0 |
% |
|
|
2,058 |
|
|
|
0 |
% |
|
|
723 |
|
|
|
0 |
% |
|
|
- |
|
|
|
0 |
% |
|
|
- |
|
|
|
0 |
% |
|
|
2,916 |
|
|
|
0 |
% |
|
Total
|
|
$ |
573,096 |
|
|
|
36 |
% |
|
$ |
541,333 |
|
|
|
35 |
% |
|
$ |
212,101 |
|
|
|
13 |
% |
|
$ |
126,683 |
|
|
|
8 |
% |
|
$ |
125,673 |
|
|
|
8 |
% |
|
$ |
1,578,886 |
|
|
|
100 |
% |
The large increase in our
accounts receivable greater than 120 days as of December 31, 2007 as compared to
December 31, 2006 was the result of several factors. In the fourth
quarter of 2006, the Company implemented a new billing system that was not
scalable as our volume continued to grow and this made accounts receivable
management very difficult. In 2007, as we grew, we determined that we
also needed proper management in this area. Accordingly, in the
fourth quarter of 2007, we reorganized
our entire billing department and replaced the existing billing system and we
discovered an issue with incorrectly filed claims, that were aged significantly
and the clean-up of these claims was ongoing in the first quarter of
2008. The new billing system went live in March 2008 and is designed
specifically for laboratory billing
Based on
a detailed analysis, we believe that our $415,000 allowance for doubtful
accounts, which represents approximately 11% of our receivables balance, is
adequate as of December 31, 2007. At December 31, 2006, our allowance
for doubtful accounts was $103,000 or 6% of accounts receivable.
Accounting for
Contingencies
When
involved in litigation or claims, in the normal course of our business, we
follow the provisions of SFAS No. 5, Accounting for Contingencies,
to record litigation or claim-related expenses. We evaluate, among other
factors, the degree of probability of an unfavorable outcome and the ability to
make a reasonable estimate of the amount of loss. We accrue for settlements when
the outcome is probable and the amount or range of the settlement can be
reasonably estimated. In addition to our judgments and use of estimates, there
are inherent uncertainties surrounding litigation and claims that could result
in actual settlement amounts that differ materially from
estimates. With respect to the preliminary agreement to settle the
claims brought against the Company by US Labs, as of December 31, 2007 we have
accrued a $375,000 loss contingency, which consists of $250,000 to provide for
the Company's expected share of this settlement, and $125,000 to provide for the
Company's share of the estimated legal fees up to the date of
settlement.
Stock Based
Compensation.
Prior to
January 1, 2006, we accounted for stock-based awards and our Employee Stock
Purchase Plan using the intrinsic method in accordance with APB Opinion
No. 25, “Accounting for
Stock Issued to Employees”, FASB Interpretation No. 44 (“FIN
44”) “Accounting for Certain
Transactions Involving
Stock-Based Compensation, an Interpretation of APB Opinion No. 25”,FASB Technical Bulletin
No. 97-1 (“FTB 97-1”)
“Accounting under
Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back
Option”, and
related interpretations and provided the required pro forma disclosures of SFAS
123 “Accounting for Stock-Based
Compensation ”. In accordance with APB 25, non-cash,
stock-based compensation expense was recognized for any options for which the
exercise price was below the market price on the actual grant date and for any
grants that were modified from their original terms. The charge for the
options with an exercise price below the market price on the actual grant date
was equal to the number of options multiplied by the difference between the
exercise price and the market price of the option shares on the actual grant
date. That expense was amortized over the vesting period of the options.
The charge for modifications of options in general was equal to the number
of options modified multiplied by the difference between the market price of the
options on the modification date and the grant price. The charge for
modified options was taken over the remaining service period, if
any.
Effective
January 1, 2006, we adopted SFAS 123(R), which requires the measurement at
fair value and recognition of compensation expense for all stock-based payment
awards. We selected the modified prospective method of adoption which
recognizes compensation expense for the fair value of all stock-based payments
granted after January 1, 2006 and for the fair value of all awards granted
to employees prior to January 1, 2006 that remain unvested on the date of
adoption. We used the trinomial lattice valuation model to estimate fair
value of stock option grants made on or after January 1, 2006. The
trinomial lattice option-pricing model requires the estimation of highly complex
and subjective variables. These variables include expected volatility,
expected life of the award, expected dividend rate and expected risk-free rate
of return. The assumptions for expected volatility and expected life are
the two assumptions that most significantly affect the grant date fair value.
The expected volatility is a blended rate based on both the historical
volatility of our stock price and the volatility of certain peer company stock
prices. The expected term assumption for our stock option grants was
determined using trinomial lattice simulation model which projects future option
holder behavior patterns based upon actual historical option exercises.
SFAS 123(R) also requires the application of a forfeiture rate to the
calculated fair value of stock options on a prospective basis. Our
assumption of forfeiture rate represents the historical rate at which our
stock-based awards were surrendered prior to vesting over the trailing four
years. If our assumption of forfeiture rate changes, we would have to
make a cumulative adjustment in the current period. We monitor the
assumptions used to compute the fair value of our stock options and similar
awards on a regular basis and we will revise our assumptions as
appropriate. See Note B – Summary of
Significant Accounting Policies section, “Stock-based
compensation” subsection and Note F – Stock Based Compensation in the
Notes to Consolidated Financial Statements for more information regarding the
valuation of stock-based compensation.
Results of Operations for
the twelve months ended December 31, 2007 as compared with the twelve months
ended December 31, 2006
Revenue
During
the fiscal year ended December 31, 2007, our revenues increased approximately
78% to $11,505,000 from $6,476,000 during the fiscal year ended December 31,
2006. This was the result of an increase in testing volume of 64% and a 9%
increase in average revenue per test. This volume
increase is the result of wide acceptance of our bundled testing product
offering and our industry leading turnaround times resulting in new
customers. The increase in average revenue per test is a direct
result of restructuring arrangements with certain existing customers that
increased average revenue per test and realigning our pricing policies with new
customers.
During
the twelve months ended December 31, 2007, our average revenue per customer
requisition increased by approximately 4% to $702.15 from $677.19 in
2006. Our average revenue per test increased by approximately 9% to
$547.90 in 2007 from $504.44 in 2006. This was primarily a result of
price increases to certain customers as well as product and payer mix
changes. Revenues per test are a function of both the nature of
the test and the payer (Medicare, Medicaid, third party insurer, institutional
client etc.). Our policy is to record as revenue the amounts that we
expect to collect based on published or contracted amounts and/or prior
experience with the payer. We have established a reserve for
uncollectible amounts based on estimates of what we will collect from a)
third-party payers with whom we do not have a contractual arrangement or
sufficient experience to accurately estimate the amount of reimbursement we will
receive, b) co-payments directly from patients, and c) those procedures that are
not covered by insurance or other third party payers. On
December 31, 2007, our Allowance for Doubtful Accounts was approximately
$414,500, a 301% increase from our balance at December 31, 2006 of
$103,500. The allowance for doubtful accounts was approximately 11.3%
and 6.5% of accounts receivables on December 31, 2007 and December 31, 2006,
respectively. This increase was the result of an increase in
Accounts Receivable due to increased revenues and the increase in the percentage
of our aged accounts receivable greater than 120 days.
Cost of
Revenue
During
2007, our cost of revenue, as a percentage of gross revenue, increased from 43%
in 2006 to 48% in 2007. This was primarily a result of increases in
the number of employees and related benefits as well as increased lab supply and
postage/delivery costs from opening new lines of business and meeting the
increase in testing volumes.
Gross
Profit
As
a result of the 78% increase in revenue and our 48% cost of revenue, our gross
profit increased 61% to $5,982,000 in 2007, from a gross profit of $3,717,000 in
2006. When expressed as a percentage of revenue, our gross margins decreased
from 57.4% in 2006 to 52.1% in 2007. The increase in gross profit was
largely a result of higher testing volumes in 2007, and the decrease in gross
profit margin was due to the increased costs in 2007 for employee labor and
benefits, lab supplies, and postage and delivery costs.
General and Administrative
Expenses
During
2007, our general and administrative expenses increased by approximately 155% to
$9,123,000 from approximately $3,577,000 in 2006. General and administrative
expenses, as a percentage of sales was 79% as of December 31, 2007, compared
with 55% as of December 31, 2006, an increase of 24%. This increase
was primarily a result of higher personnel and personnel-related expenses
associated with the increase in management and sales and administrative
headcount that was necessary to manage the significant increases in test volumes
described above. In addition to management, sales, and administrative personnel,
our general and administrative expenses also include all overhead and technology
expenses as well, which have also increased as a result of higher test
volumes. We also incurred significant expenses related to scaling our
operations to meet our ongoing business plan and significant expenses associated
with the litigation with US Labs that was recently settled (see Note L to our
financial statements). For the year ended December 31, 2007, we
incurred approximately $619,000 of litigation related expenses, net of
reimbursements from our insurance company, as compared to approximately $159,000
of such litigation related expenses for the year ended December 31,
2006. Bad debt expense for the years ended December 31, 2007 and 2006
was $1,013,804 and $444,133, respectively. This increase was
necessitated by the significant increase in revenues noted above and to a lesser
extent by the issues denoted in our critical accounting policies regarding
accounts receivable management.
Other
Income/Expense
Net other
income/expense, which primarily consists of interest expense, decreased
approximately 11% in 2007 to approximately $239,000 from approximately $270,000
for 2006. Interest expense is comprised of interest payable on
advances under our Credit Facility with Aspen and interest paid for capital
lease obligations. The year-over-year decrease is primarily
attributed to paying off the Aspen credit facility on June 7, 2007.
Net Loss
As
a result of the foregoing, our net loss increased from ($130,000) in 2006 to
($3,380,000) in 2007, an increase of approximately 2,500%.
Liquidity
and Capital Resources
During
the fiscal year ended December 31, 2007, our operating activities used
approximately $2,643,000 in cash compared with $694,000 used in the fiscal year
ended 2006. This amount primarily represented cash tied-up in
receivables as a result of increased revenues and to a lesser extent cash used
to pay the expenses associated with our operations as well as fund our other
working capital. We also spent approximately $516,000 on new
equipment in 2007 compared with $399,000 in 2006. Through the sale of
equity securities, which provided approximately $5,287,000, we were able to
retire the $1,675,000 due on the Aspen Credit facility and finance operations.
This resulted in net cash provided by financing activities of approximately
$3,443,000 in 2007 compared to $1,208,000 in 2006. At December 31,
2007 and December 31, 2006, we had cash and cash equivalents of approximately
$211,000, and $126,000 respectively.
On January
18, 2006, the Company entered into a binding letter agreement (the "Aspen Letter
Agreement") with Aspen, which provided, among other things, that:
(a) Aspen
waived certain pre-emptive rights in connection with the sale of $400,000 of
common stock at a purchase price of $0.20/share and the granting of 900,000
warrants with an exercise price of $0.26/share to SKL Limited Partnership, LP
("SKL" as more fully described below) in exchange for five year warrants to
purchase 150,000 shares at an exercise price of $0.26/share (the “Waiver
Warrants”).
(b) Aspen
had the right, up to April 30, 2006, to purchase up to $200,000 of restricted
shares of the Company's common stock at a purchase price per share of
$0.20/share (1,000,000 shares) and receive a five year warrant to purchase
450,000 shares of the Company's common stock at an exercise price of $0.26/share
in connection with such purchase (the "Equity Purchase Rights"). On March 14,
2006, Aspen exercised its Equity Purchase Rights.
(c) Aspen
and the Company amended the Loan Agreement (the “Credit Facility Amendment”),
dated March, 2005 to extend the maturity date until September 30, 2007, and to
modify certain covenants. In addition, Aspen had the right, until
April 30, 2006, to provide the Company up to $200,000 of additional secured
indebtedness to the Company under the Credit Facility Amendment and to receive a
five year warrant to purchase up to 450,000 shares of the Company's common stock
with an exercise price of $0.26/share (the "New Debt Rights"). On
March 30, 2006, Aspen exercised its New Debt Rights and entered into the
definitive transaction documentation for the Credit Facility Amendment and other
such documents required under the Aspen Agreement.
(d) The
Company agreed to amend and restate the Initial Warrants, dated March 23, 2005,
which more formally implemented the original agreement made on February 18, 2005
with respect to such warrants, to provide that all 2,500,000 warrant shares were
vested and the exercise price was reset to $0.31 per share. The
difference, between the value of the warrants on the original February, 18, 2005
measurement date which was calculated using an exercise price of $0.50/share,
and their value on the January 18, 2006 modification date which was calculated
using an exercise price of $0.31/share, amounted to $2,365 and, was credited to
additional paid-in capital and included in deferred financing fees.
(e) The
Company agreed to amend the Registration Rights Agreement, dated March 23, 2005
(the "Registration Rights Agreement"), between the parties to incorporate the
Initial Warrants, the Waiver Warrants and any new shares or warrants issued to
Aspen in connection with the Equity Purchase Rights or the New Debt
Rights.
(f) All
Waiver Warrants, the Initial Warrants and all warrants issued to Aspen and SKL
in connection with the purchase of equity or debt securities are exercisable at
the option of the holder for a term of five years, and each such warrant
contains provisions that allow for a physical exercise, a net cash exercise or a
net share settlement. We used the Black-Scholes pricing model to
estimate the fair value of all such warrants as of the date of issue for each,
using the following approximate assumptions: dividend yield of 0 %,
expected volatility of 14.6 – 19.3% (depending on the date of agreement),
risk-free interest rate of 4.5%, and a term expected life of 3 - 5
years.
The Aspen
Credit Facility was paid in full in June 2007 and it expired on September 30,
2007.
During the period from January 18 - 21,
2006, the Company entered into agreements with four other shareholders who are
parties to a Shareholders’ Agreement, dated March 23, 2005, to exchange five
year warrants to purchase an aggregate of 150,000 shares of stock at an exercise
price of $0.26/share for such shareholders’ waiver of their pre-emptive rights
under the Shareholders’ Agreement.
On January 21, 2006 the Company entered
into a subscription agreement (the "Subscription") with SKL Family Limited
Partnership, LP, a New Jersey limited partnership, whereby SKL purchased 2.0
million shares (the "Subscription Shares") of the Company's common stock at a
purchase price of $0.20/share for $400,000. Under the terms of the Subscription,
the Subscription Shares are restricted for a period of 24 months and then carry
piggyback registration rights to the extent that exemptions under Rule 144 are
not available to SKL. In connection with the Subscription, the Company also
issued a five year warrant to purchase 900,000 shares of the Company's common
stock at an exercise price of $0.26/share. SKL has no previous
affiliation with the Company.
On June
6, 2005, we entered into a Standby Equity Distribution Agreement (the
“S.E.D.A.”) with Yorkville Advisors, LLC (“Yorkville” f/k/a Cornell Capital
Partners, LP). Pursuant to the S.E.D.A., the Company could, at its
discretion, periodically sell to Yorkville shares of common stock for a total
purchase price of up to $5.0 million. On August 1, 2007,
the S.E.D.A expired and we decided not to renew it.
The
following sales of common stock were made under our S.E.D.A. with Yorkville
since it was first declared effective on August 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Request
|
Completion
|
|
Shares
of
|
|
|
Gross
|
|
|
Yorkville
|
|
|
Escrow
|
|
|
Net
|
|
|
|
|
|
Date
|
Date
|
|
Common
Stock
|
|
|
Proceeds
|
|
|
Fee
|
|
|
Fee
|
|
|
Proceeds
|
|
|
ASP(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/29/2005
|
9/8/2005
|
|
|
63,776 |
|
|
$ |
25,000 |
|
|
$ |
1,250 |
|
|
$ |
500 |
|
|
$ |
23,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2005
|
12/18/2005
|
|
|
241,779 |
|
|
|
50,000 |
|
|
|
2,500 |
|
|
|
500 |
|
|
|
47,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
– 2005
|
|
|
305,555 |
|
|
$ |
75,000 |
|
|
$ |
3,750 |
|
|
$ |
1,000 |
|
|
$ |
70,250 |
|
|
$ |
0.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/19/2006
|
7/28/2006
|
|
|
83,491 |
|
|
|
53,000 |
|
|
|
2,500 |
|
|
|
500 |
|
|
|
50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/8/2006
|
8/16/2006
|
|
|
279,486 |
|
|
|
250,000 |
|
|
|
12,500 |
|
|
|
500 |
|
|
|
237,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/18/2006
|
10/23/2006
|
|
|
167,842 |
|
|
|
200,000 |
|
|
|
10,000 |
|
|
|
500 |
|
|
|
189,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
– 2006
|
|
|
530,819 |
|
|
$ |
503,000 |
|
|
$ |
25,000 |
|
|
$ |
1,500 |
|
|
$ |
476,500 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/29/2006
|
1/10/2007
|
|
|
98,522 |
|
|
|
150,000 |
|
|
|
7,500 |
|
|
|
500 |
|
|
|
142,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/16/2007
|
1/24/2007
|
|
|
100,053 |
|
|
|
150,000 |
|
|
|
7,500 |
|
|
|
500 |
|
|
|
142,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/1/2007
|
2/12/2007
|
|
|
65,902 |
|
|
|
100,000 |
|
|
|
5,000 |
|
|
|
500 |
|
|
|
94,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/19/2007
|
2/28/2007
|
|
|
166,611 |
|
|
|
250,000 |
|
|
|
12,500 |
|
|
|
500 |
|
|
|
237,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/28/2007
|
3/7/2007
|
|
|
180,963 |
|
|
|
250,000 |
|
|
|
12,500 |
|
|
|
500 |
|
|
|
237,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/5/2007
|
4/16/2007
|
|
|
164,777 |
|
|
|
250,000 |
|
|
|
12,500 |
|
|
|
500 |
|
|
|
237,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2007
|
4/30/2007
|
|
|
173,467 |
|
|
|
250,000 |
|
|
|
12,500 |
|
|
|
500 |
|
|
|
237,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
– 2007
|
|
|
950,295 |
|
|
$ |
1,400,000 |
|
|
$ |
70,000 |
|
|
$ |
3,500 |
|
|
$ |
1,326,500 |
|
|
$ |
1.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Since
Inception
|
|
|
1,786,
669 |
|
|
$ |
1,978,000 |
|
|
$ |
98,750 |
|
|
$ |
6,000 |
|
|
$ |
1,873,250 |
|
|
$ |
1.19 |
|
(1) Average
Selling Price of shares issued
During
the period from May 31, 2007 through June 6, 2007, we sold 2,666,667 shares of
our Common Stock to ten unaffiliated accredited investors (the “Investors”) at a
price of $1.50 per share in a Private Placement of our Common Stock (the
“Private Placement”). The Private Placement generated gross proceeds
to the Company of $4.0 million, and after estimated transaction costs, the
Company received net cash proceeds of approximately $3.8 million. The
Company also issued warrants to purchase 98,417 shares of our Common Stock to
Noble International Investments, Inc. (“Noble”), in consideration for its
services as a placement agent for the Private Placement and paid Noble a cash
fee of $147,625. Additionally, the Company issued to
Aspen Capital
Advisors, LLC (“ACA”) warrants to purchase
250,000 shares at
$1.50 per share and paid ACA a cash fee of $52,375 in consideration for ACA’s
services to the Company in connection with the Private Placement. The Private
Placement involved the issuance of the aforementioned unregistered securities in
transactions that we believed were exempt from registration under Rule 506
promulgated under the Securities Act. All of the aforementioned
stockholders received registration rights (“Registration Rights”) for the
Private Placement shares so purchased and we filed a registration statement on
Form SB-2 on July 12, 2007 to register these shares (the “Registration
Statement”). Certain of the Investors also purchased 1,500,000 shares and
500,000 warrants from Aspen Select Healthcare, LP in a separate transaction that
occurred simultaneously with the Private Placement and the Company agreed to an
assignment of Aspen’s registration rights for such shares and warrants, and
those shares and warrants were included in the Registration
Statement.
The
Registration Rights contained a provision that if the Registration Statement was
not declared effective within 120 days of the Private Placement, we would be
responsible for partial relief of the damages resulting from a holder’s
inability to sell the shares covered by the Registration
Statement. Beginning after 120 days from the date that the Private
Placement was consummated, the Company is obligated to pay as liquidated damages
to each holder of shares covered by the Registration Statement (“Registered
Securities”) an amount equal to one half percent (0.5%) of the purchase price of
the Registered Securities for each thirty (30) day period that the Registration
Statement is not effective after the required effective date specified in the
Registration Rights Agreement. Such liquidated damages may be paid,
at the holder’s option, either in cash or shares of our Common Stock, after
demand therefore has been made.
In
August, 2007, we received a comment letter from the Accounting Staff of the SEC
regarding certain disclosure and accounting questions with respect to our FY
2006 annual report filed on Form 10-KSB. In September 2007, we
responded to the SEC Staff and filed an amended Form 10-KSB/A that responded to
the matters raised by the Staff. In October 2007, we received a
follow up comment letter from the Staff that continued to question the
accounting we use in connection with non-cash employee stock-based compensation
and warrants issued under the newly adopted SFAS 123(R). We
responded to the Staff’s October 2007 letter in March 2008, and currently
anticipate resolving all open issues by the end of April 2008 and being able to
proceed with registering the Private Placement shares in May 2008.
As a
result of the aforementioned SEC correspondence, the Company was not able to
register the securities issued in the Private Placement within the allowed 120
period, and was thus responsible for damages. Accordingly, as of
December 31, 2007, in accordance with FASB Staff Position 00-19-2, “Accounting
for Registration Payment Arrangements” we have accrued approximately $282,000 in
penalties as liquidated damages for the period from the end of the 120 day
period through May 2008 when we expect to be able to go effective on the
Registration Statement for the Private Placement shares. Such
penalties are included in Accrued Expenses and Other Liabilities.
On June
6, 2007, the Company issued to Lewis Asset Management (“LAM”) 500,000 shares of
Common Stock at a purchase price of $0.26 per share and received gross proceeds
of $130,000 upon the exercise by LAM of 500,000 warrants which were purchased by
LAM from Aspen Select Healthcare, LP on that day.
On June
7, 2007, we used part of the net proceeds of the Private Placement to pay off
the $1.7 million principal balance of the Aspen Credit
Facility.
On August
15, 2007 our Board of Directors voted to issue warrants to purchase 533,334
shares of our Common Stock to the investors who purchased shares in the Private
Placement. Such warrants have an exercise price of $1.50 per share
and are exercisable for a period of two years. Such warrants also
have a provision for piggyback registration rights in the first year and demand
registration rights in the second year.
On
February 1, 2008, we entered into a Revolving Credit and Security
Agreement (the “Credit Facility” or “Credit Agreement”) with CapitalSource
Finance LLC (“Lender”) pursuant to which the Lender shall make available to us a
revolving credit facility in a maximum principal amount at any time outstanding
of up to Three Million Dollars ($3,000,000), subject to certain
restrictions. See subsequent event paragraph below, and Note L to the
Consolidated Financial Statements.
At the
present time, we anticipate that based on our current business plan and
operations, our existing cash balances, the availability of our accounts
receivable line with Capital Source, and loans from our directors that we will
have adequate cash for at least the next twelve months. This estimate
of our cash needs does not include any additional funding which may be required
for growth in our business beyond that which is planned, strategic transactions
or acquisitions. In the event that the Company grows faster than we
currently anticipate or we engage in strategic transactions or acquisitions and
our cash on hand and/or our availability under the Capital Source Credit
Facility or other loans from our directors is not sufficient to meet our
financing needs, we may need to raise additional capital from other
resources. In such event, the Company may not be able to obtain such
funding on attractive terms or at all and the Company may be required to curtail
its operation. In the event that we do need to raise additional
capital, we would seek to raise this additional money through issuing a
combination of debt and/or equity securities primarily to banks and/or other
large institutional investors. On March 31, 2008 we had approximately
$283,000 in cash on hand and $983,000 of availability under our Credit
Facility.
Recent Accounting
Pronouncements
In February 2007 the FASB issued SFAS
No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159”). SFAS 159 provides companies with an option to
irrevocably elect to measure certain financial assets and financial liabilities
at fair value on an instrument-by-instrument basis with the resulting changes in
fair value recorded in earnings. The objective of SFAS 159 is to
reduce both the complexity in accounting for financial instruments and the
volatility in earnings caused by using different measurement attributes for
financial assets and financial liabilities. SFAS 159 is effective for
the Company as of January 1, 2008 and as of this effective date, the Company has
elected not to apply the fair value option to any of its financial assets for
financial liabilities.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 provides a new single authoritative definition of fair value and
provides enhanced guidance for measuring the fair value of assets and
liabilities and requires additional disclosures related to the extent to which
companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on
earnings. SFAS 157 is effective for the Company as of January 1,
2008 for financial assets and financial liabilities within its scope and it is
not expected to have a material impact on its consolidated financial
statements. In February 2008, the FASB issued FASB Staff Position No.
FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”)
which defers the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at
least
annually), for fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years for items within the scope of FSP FAS
157-2. The Company is currently assessing the impact, if any, of SFAS
157 and FSP FAS 157-2 for non-financial assets and non-financial liabilities on
its consolidated financial statements.
Subsequent
Events
Revolving
Credit and Security Agreement
On February 1, 2008, our operating
subsidiary, NeoGenomics, Inc., a Florida Company (“Borrower”), entered into a
Revolving Credit and Security Agreement (“Credit Facility” or “Credit
Agreement”) with CapitalSource Finance LLC (“Lender”) pursuant to which the
Lender shall make available to us a revolving credit facility in a maximum
principal amount at any time outstanding of up to Three Million Dollars
($3,000,000) (the “Facility Cap”). Subject to the provisions of the Credit
Agreement, the Lender shall make advances to us from time to time during the
three (3) year term following the closing date, and the revolving Credit
Facility may be drawn, repaid and redrawn from time to time as permitted under
the Credit Agreement. Interest on outstanding advances under the Credit Facility
shall be payable monthly in arrears on the first day of each calendar month at
an annual rate of one-month LIBOR plus 3.25% in accordance with the terms of the
Credit Agreement, subject to a LIBOR floor of 3.14%. As of March 31,
2008, the effective annual interest rate of the Agreement was
6.39%. To secure the payment and performance in full of the
Obligations (as defined in the Credit Agreement), we granted to the Lender a
continuing security interest in and lien upon, all of our rights, title and
interest in and to our Accounts (as such term is defined in the Credit
Agreement), which primarily consist of accounts
receivable. Furthermore, pursuant to the Credit Agreement, the Parent
Company guaranteed the punctual payment when due, whether at stated maturity, by
acceleration or otherwise, of all of our obligations. The Parent Company’s
guaranty is a continuing guarantee and shall remain in force and effect until
the indefeasible cash payment in full of the Guaranteed Obligations (as defined
in the Credit Agreement) and all other amounts payable under the Credit
Agreement.
Us Labs
Settlement
On March 18, 2008, we reached a
preliminary agreement to settle US Labs' claims against the Company and certain
of its officers and employees. Under the terms of the agreement, NeoGenomics, on
behalf of all defendants, will make a $250,000 payment to US Labs within thirty
days and pay another $250,000 over the remaining nine months of this year. It is
expected that approximately 50% of these payments will be covered by our
insurance policies. As a result, our fourth quarter financial statements include
a $250,000 charge to cover the Company's expected portion of this settlement and
an additional $125,000 charge to cover the Company's portion of the estimated
legal fees incurred in Q1 2008 up to the date of settlement.
Employment
Contracts
On March 12, 2008, we entered into an
employment agreement with Robert Gasparini, our President and Chief Scientific
Officer to extend his employment with the Company for an additional four year
term. This employment agreement was retroactive to January 1, 2008
and provides that it will automatically renew after the initial four year term
for one year increments unless either party provides written notice to the other
party with their intention to terminate the agreement 90 days before the end of
the initial term. The employment agreement specifies an initial base
salary of $225,000/year with specified salary increases tied to meeting
revenue
goals. Mr.
Gasparini is also entitled to receive cash bonuses for any given fiscal year in
an amount equal to 30% of his base salary if he meets certain targets
established by the Board of Directors. In addition, Mr. Gasparini was
granted 784,000 stock options that have a seven year term so long as Mr.
Gasparini remains an employee of the Company. These options are
scheduled to vest according to the passage of time and the meeting of certain
performance-based milestones. Mr. Gasparini's employment agreement
also specifies that he is entitled to four weeks of paid vacation per year and
other insurance benefits. In the event that Mr. Gasparini is terminated without
cause by the Company, the Company has agreed to pay Mr. Gasparini's base salary
and maintain his employee benefits for a period of twelve
months.
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
Page
|
Report
of Independent Registered Public Accounting Firm.
|
|
|
45
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet as of December 31, 2007.
|
|
|
46
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2007 and
2006.
|
|
|
47
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years
ended December 31, 2007 and 2006.
|
|
|
48
|
|
|
Consolidated
Statements of Cash Flows for the years ended December
31, 2007 and 2006.
|
|
|
49
|
|
|
Notes
to Consolidated Financial Statements.
|
|
|
50
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of NeoGenomics, Inc.:
We
have audited the accompanying consolidated balance sheet of NeoGenomics, Inc.
(the “Company”), as of December 31, 2007, and the related consolidated
statements of operations, stockholders’ equity and cash flows for the years
ended December 31, 2007 and 2006. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2007, and the results of its operations and its cash flows for the years ended
December 31, 2007 and 2006, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Kingery & Crouse, P.A
Tampa,
FL
April
14, 2008
NEOGENOMICS,
INC.
CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2007
|
ASSETS
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
210,573 |
|
|
Accounts
receivable (net of allowance for doubtful accounts of
$414,548)
|
|
|
3,236,751 |
|
|
Inventories
|
|
|
304,750 |
|
|
Other
current assets
|
|
|
400,168 |
|
|
Total
current assets
|
|
|
4,152,242 |
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
(net of accumulated depreciation of $862,030)
|
|
|
2,108,083 |
|
|
|
|
|
|
|
|
OTHER
ASSETS
|
|
|
260,575 |
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$ |
6,520,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,799,159 |
|
|
Accrued
compensation
|
|
|
370,496 |
|
|
Accrued
expenses and other liabilities
|
|
|
574,084 |
|
|
Legal
contingency (Note G)
|
|
|
375,000 |
|
|
Short-term
portion of equipment capital leases
|
|
|
242,966 |
|
|
Total
current liabilities
|
|
|
3,361,705 |
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES
|
|
|
|
|
|
Long-term
portion of equipment capital leases
|
|
|
837,081 |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES
|
|
|
4,198,786 |
|
|
Commitments
and contingencies
STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
Common
stock, $.001 par value, (100,000,000 shares authorized;
31,391,660
|
|
|
|
|
|
shares
issued and outstanding)
|
|
|
31,391 |
|
|
Additional
paid-in capital
|
|
|
16,820,954 |
|
|
Accumulated
deficit
|
|
|
(14,530,231 |
) |
|
Total stockholders’ equity
|
|
|
2,322,114 |
|
|
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
$ |
6,520,900 |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
|
$ |
11,504,725 |
|
|
$ |
6,475,996 |
|
|
COST
OF REVENUE
|
|
|
5,522,775 |
|
|
|
2,759,190 |
|
|
GROSS
MARGIN
|
|
|
5,981,950 |
|
|
|
3,716,806 |
|
|
OTHER
OPERATING EXPENSE
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
9,122,922 |
|
|
|
3,576,812 |
|
|
|
|
|
|
|
|
|
|
|
|
INCOME
/ (LOSS) FROM OPERATIONS
|
|
|
(3,140,972 |
) |
|
|
139,994 |
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME / (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
24,256 |
|
|
|
55,970 |
|
|
Interest
expense
|
|
|
(263,456 |
) |
|
|
(325,625 |
) |
|
Other
income / (expense) – net
|
|
|
(239,200 |
) |
|
|
(269,655 |
) |
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$ |
(3,380,172 |
) |
|
$ |
(129,661 |
) |
|
NET LOSS PER
SHARE - Basic and Diluted
|
|
$ |
(0.11 |
) |
|
$ |
(0.00 |
) |
|
WEIGHTED
AVERAGE NUMBER
OF SHARES OUTSTANDING
– Basic and
Diluted
|
|
|
29,764,289 |
|
|
|
26,166,031 |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
Common
|
|
|
Common
|
|
|
Additional
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Paid-In
|
|
|
Stock
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2005
|
|
|
22,836,754 |
|
|
$ |
22,836 |
|
|
$ |
10,005,308 |
|
|
$ |
(2,685 |
) |
|
$ |
(11,020,398 |
) |
|
$ |
(994,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuances for cash
|
|
|
3,530,819 |
|
|
|
3,531 |
|
|
|
1,099,469 |
|
|
|
- |
|
|
|
- |
|
|
|
1,103,000 |
|
|
Common
stock issued for acquisition
|
|
|
100,000 |
|
|
|
100 |
|
|
|
49,900 |
|
|
|
- |
|
|
|
- |
|
|
|
50,000 |
|
|
Transaction
fees and expenses
|
|
|
- |
|
|
|
- |
|
|
|
(80,189 |
) |
|
|
- |
|
|
|
- |
|
|
|
(80,189 |
) |
|
Adjustment
of credit facility discount
|
|
|
- |
|
|
|
- |
|
|
|
2,365 |
|
|
|
- |
|
|
|
- |
|
|
|
2,365 |
|
|
Exercise
of stock options and warrants
|
|
|
546,113 |
|
|
|
546 |
|
|
|
66,345 |
|
|
|
- |
|
|
|
- |
|
|
|
66,891 |
|
|
Warrants
and stock issued for services
|
|
|
7,618 |
|
|
|
8 |
|
|
|
7,642 |
|
|
|
- |
|
|
|
- |
|
|
|
7,650 |
|
|
Payment
of note on Yorkville Capital fee
|
|
|
- |
|
|
|
- |
|
|
|
(50,000 |
) |
|
|
- |
|
|
|
- |
|
|
|
(50,000 |
) |
|
Stock
issued to settle accounts payable
|
|
|
40,172 |
|
|
|
40 |
|
|
|
15,627 |
|
|
|
- |
|
|
|
- |
|
|
|
15,667 |
|
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
63,730 |
|
|
|
- |
|
|
|
- |
|
|
|
63,730 |
|
|
Reclassification
of deferred compensation to additional paid in capital upon adoption of
SFAS 123R
|
|
|
- |
|
|
|
- |
|
|
|
(2,685 |
) |
|
|
2,685 |
|
|
|
- |
|
|
|
- |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(129,661 |
) |
|
|
(129,661 |
) |
|
Balances,
December 31, 2006
|
|
|
27,061,476 |
|
|
|
27,061 |
|
|
|
11,177,512 |
|
|
|
- |
|
|
|
(11,150,059 |
) |
|
|
54,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuances for cash
|
|
|
4,154,684 |
|
|
|
4,155 |
|
|
|
5,574,682 |
|
|
|
- |
|
|
|
- |
|
|
|
5,578,837 |
|
|
Transaction
fees and expenses
|
|
|
- |
|
|
|
- |
|
|
|
(346,110 |
) |
|
|
- |
|
|
|
- |
|
|
|
(346,110 |
) |
|
Exercise
of stock options and warrants
|
|
|
175,500 |
|
|
|
175 |
|
|
|
53,619 |
|
|
|
- |
|
|
|
- |
|
|
|
53,794 |
|
|
Warrants
issued for services
|
|
|
- |
|
|
|
- |
|
|
|
159,153 |
|
|
|
- |
|
|
|
- |
|
|
|
159,153 |
|
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
202,098 |
|
|
|
- |
|
|
|
- |
|
|
|
202,098 |
|
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,380,172 |
) |
|
|
(3,380,172 |
) |
|
Balances,
December 31, 2007
|
|
|
31,391,660 |
|
|
$ |
31,391 |
|
|
$ |
16,820,954 |
|
|
$ |
- |
|
|
$ |
(14,530,231 |
) |
|
$ |
2,322,114 |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2007 AND 2006
|
|
|
2007
|
|
|
2006
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(3,380,172 |
) |
|
$ |
(129,661 |
) |
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
451,459 |
|
|
|
233,632 |
|
|
Impairment
of assets
|
|
|
2,235 |
|
|
|
53,524 |
|
|
Amortization
of credit facility warrants and debt issue costs
|
|
|
54,900 |
|
|
|
72,956 |
|
|
Stock
based compensation
|
|
|
202,098 |
|
|
|
63,730 |
|
|
Non-cash
consulting
|
|
|
159,153 |
|
|
|
7,650 |
|
|
Other
non-cash expenses
|
|
|
29,423 |
|
|
|
59,804 |
|
|
Provision
for bad debts
|
|
|
1,013,804 |
|
|
|
444,133 |
|
|
Changes
in assets and liabilities, net:
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable, net of write-offs
|
|
|
(2,700,797 |
) |
|
|
(1,442,791 |
) |
|
(Increase)
decrease in inventory
|
|
|
(187,388 |
) |
|
|
(57,362 |
) |
|
(Increase)
decrease in prepaid expenses
|
|
|
(343,032 |
) |
|
|
(101,805 |
) |
|
(Increase)
decrease in other current assets
|
|
|
(26,671 |
) |
|
|
(31,522 |
) |
|
Increase
(decrease) in deferred revenues
|
|
|
- |
|
|
|
(100,000 |
) |
|
Increase
(decrease) in legal contingency
|
|
|
375,000 |
|
|
|
- |
|
|
Increase
(decrease) in accounts payable and other liabilities
|
|
|
1,707,397 |
|
|
|
233,930 |
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(2,642,591 |
) |
|
|
(693,782 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(516,144 |
) |
|
|
(398,618 |
) |
|
Investment
in other assets (Power 3)
|
|
|
(200,000 |
) |
|
|
- |
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(716,144 |
) |
|
|
(398,618 |
) |
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Advances
(repayments) from/to affiliates, net
|
|
|
(1,675,000 |
) |
|
|
175,000 |
|
|
Notes
payable
|
|
|
(2,000 |
) |
|
|
2,000 |
|
|
Repayment
of capital lease obligations
|
|
|
(166,479 |
) |
|
|
(58,980 |
) |
|
Issuance
of common stock and warrants for cash , net of transaction
expenses
|
|
|
5,286,521 |
|
|
|
1,089,702 |
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
3,443,042 |
|
|
|
1,207,722 |
|
|
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
84,307 |
|
|
|
115,322 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
126,266 |
|
|
|
10,944 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
210,573 |
|
|
$ |
126,266 |
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
204,670 |
|
|
$ |
269,316 |
|
|
Equipment
leased under capital leases
|
|
$ |
703,145 |
|
|
$ |
602,357 |
|
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
|
Common
stock issued for acquisition
|
|
$ |
- |
|
|
$ |
50,000 |
|
|
Common
stock issued in settlement of financing fees
|
|
$ |
- |
|
|
$ |
50,000 |
|
See notes to
consolidated financial statements.
NEOGENOMICS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2007
NOTE A – Nature of Business and Basis of
Presentation
NeoGenomics,
Inc., a Nevada Company, was formed in 1998 under the name of American
Communications Enterprises, Inc. (“ACE”, the “Parent”, or the “Parent
Company”).
NeoGenomics,
Inc., a Florida company, doing business as NeoGenomics Laboratories (“NEO”,
“NeoGenomics” or “Subsidiary”) was formed in June 2001, and agreed to
be acquired by ACE in a reverse acquisition in November
2001. NeoGenomics operates as a certified “high complexity” clinical
laboratory in accordance with the federal government’s Clinical Laboratory
Improvement Amendments of 1988 (“CLIA”), and is dedicated to the delivery of
clinical diagnostic services to pathologists, oncologists, urologists,
hospitals, and other laboratories throughout the United States.
ACE
succeeded to NEO’s name in January, 2002, and NeoGenomics remains a wholly-owned
subsidiary of the Parent Company. (NEO and ACE are collectively referred to as
“we”, “us”, “our” or the “Company”).
The
accompanying consolidated financial statements include the accounts of the
Parent and the Subsidiary. All significant intercompany accounts and
balances have been eliminated in consolidation.
Certain
amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current year presentation.
NOTE B – Summary of Significant Accounting
Policies
Use of
Estimates
The
Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America. These principles require management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, together with amounts disclosed in the
related notes to the consolidated financial statements. Actual
results and outcomes may differ from management’s estimates, judgments and
assumptions. Significant estimates, judgments and assumptions used in
these consolidated financial statements include, but are not limited to, those
related to revenues, accounts receivable and related reserves, contingencies,
useful lives and recovery of long-term assets, income and other taxes, and the
fair value of stock-based compensation. These estimates, judgments,
and assumptions are reviewed periodically and the effects of material revisions
in estimates are reflected in the consolidated financial statements
prospectively from the date of the change in estimate.
Revenue
Recognition
The
Company recognizes revenues in accordance with the Securities and Exchange
Commission’s (the “Commission”) Staff Accounting Bulletin No. 104, “Revenue
Recognition”, when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed and collectability of the resulting
receivable is reasonably assured.
The
Company’s specialized diagnostic services are performed based on a written test
requisition form and revenues are recognized once the diagnostic services have
been performed, the results have been delivered to the ordering physician, the
payor has been identified and eligibility and insurance have been
verified. These diagnostic services are billed to various payors,
including Medicare, commercial insurance companies, other directly billed
healthcare institutions such as hospitals and clinics, and
individuals. The Company reports revenues from contracted payors,
including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Medicare,
published fee schedules. The Company reports revenues from
non-contracted payors, including certain insurance companies and individuals,
based on the amount expected to be collected. The difference between
the amount billed and the amount expected to be collected from non-contracted
payors is recorded as a contractual allowance to arrive at the reported
revenues. The expected revenues from non-contracted payors are based
on the historical collection experience of each payor or payor group, as
appropriate. In each reporting period, the Company reviews its
historical collection experience for non-contracted payors and adjusts its
expected revenues for current and subsequent periods accordingly.
Costs of
Revenues
Costs of
revenues consists primarily of lab related materials and supplies, salaries
related to laboratory personnel, allocated facility costs, and depreciation of
equipment used to deliver the Company’s services.
Accounting for
Contingencies
When
involved in litigation or claims, in the normal course of our business, we
follow the provisions of SFAS No. 5, Accounting for Contingencies,
to record litigation or claim-related expenses. We evaluate, among other
factors, the degree of probability of an unfavorable outcome and the ability to
make a reasonable estimate of the amount of loss. We accrue for settlements when
the outcome is probable and the amount or range of the settlement can be
reasonably estimated. In addition to our judgments and use of estimates, there
are inherent uncertainties surrounding litigation and claims that could result
in actual settlement amounts that differ materially from
estimates. With respect to the agreement to settle the claims brought
against the Company by US Labs, as of December 31, 2007 we have accrued a
$375,000 loss contingency, which consists of $250,000 to provide for the
Company's expected portion of this settlement, and $125,000 to provide for the
Company's portion of the estimated legal fees up to the date of
settlement.
Accounts Receivable and
Allowance for Doubtful Accounts
Accounts
receivable are reported at realizable value, net of allowance for doubtful
accounts (the “Allowance”), which is estimated and recorded in the period the
related revenue is recorded based on the historical collection experience for
each type of payor. In addition, the Allowance is adjusted
periodically, based upon an evaluation of historical collection experience with
specific payors, payor types, and 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 reserve
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.
Statement of Cash
Flows
For
purposes of the statement of cash flows, we consider all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Fair Value of Financial
Instruments and Concentrations of Credit Risk
The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and liabilities and other current assets and
liabilities are considered reasonable estimates of their respective fair values
due to their short-term nature. The Company maintains its cash and
cash equivalents with domestic financial institutions that the Company believes
to be of high credit standing. The Company believes that, as of
December 31, 2007, its concentration of credit risk related to cash and cash
equivalents was not significant.
Concentrations
of credit risk with respect to revenue and accounts receivable are primarily
limited to certain customers to whom the Company provides a significant volume
of its services to, and to specific payors of our services such as Medicare, and
individual insurance companies. The Company’s customer base consists
of a large number of geographically dispersed customers diversified across
various customer types. The Company continues to focus its sales
efforts to decrease the dependency on any given source of revenue and decrease
its credit risk from any one large customer or payor type, these efforts have
led to the significant decrease of our credit risk from the previous
year. Accordingly, for the year ended December 31, 2007 one customer
accounted for 25% of total revenue and all others were less than 10% of total
revenue individually. During the year ended December 31, 2006, three customers
accounted for 26%, 18% and 17% of total revenue, respectively. In the
event that we lost one of these customers, we would potentially lose a
significant percentage of our revenues. For the year ended
December 31, 2007, Medicare and one commercial insurance provider accounted for
44% and 10% of the Company’s total accounts receivable balance,
respectively.
The
Company orders the majority of its FISH probes from one vendor and as a result
of their dominance of that marketplace and the absence of any competitive
alternatives, if they were to have a disruption and not have inventory available
it could have a material effect on our business. This risk cannot be
completely offset due to the fact that they have patent protection which limits
other vendors from supplying these probes.
Inventories
Inventories,
which consist principally of testing supplies, are valued at the lower of cost
or market, using the first-in, first-out method (FIFO)
Property and
Equipment
Property
and equipment are recorded at cost, net of accumulated depreciation and
amortization. Property and equipment generally includes purchases of
items with a cost greater than $1,000 and a useful life greater than one
year. Depreciation and amortization are computed on a straight line
basis over the estimated useful lives of the assets.
Leasehold
improvements are amortized over the shorter of the related lease terms or their
estimated useful lives. Property and equipment acquired under capital
leases are depreciated over the shorter of the related lease terms or the useful
lives of the assets. The Company periodically reviews the estimated
useful lives of property and equipment. Changes to the estimated useful lives
are recorded prospectively from the date of the change. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in income (loss) from operations. Repairs and
maintenance costs are expensed as incurred.
Income
Taxes
We
compute income taxes in accordance with Financial Accounting Standards Statement
No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Also, the effect on deferred taxes of a
change in tax rates is recognized in income in the period that included the
enactment date. Temporary differences between financial and tax
reporting arise primarily from the use of different depreciation methods for
property and equipment as well as impairment losses and the timing of
recognition of bad debts.
Stock-Based
Compensation
For the
years ended December 31, 2006 and 2005, the Company maintained a stock
option plan covering potential equity grants including primarily the issuance of
stock options. In addition, effective January 1, 2007, the Company
began sponsoring an Employee Stock Purchase Plan (“ESPP”), whereby eligible
employees are entitled to purchase Common Stock monthly, by means of limited
payroll deductions, at a 5% discount from the fair market value of the Common
Stock as of specific dates. The Company’s ESPP plan is considered
exempt from fair value accounting under SFAS No. 123R since the discount offered
to employees is only 5%. See Note F for a detailed description
of the Company’s plans.
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards
No. 123(R), “Share-Based
Payment” (“SFAS 123(R)”), which is a revision of Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”). SFAS 123(R) supersedes our previous
accounting under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
Employees” (“APB 25”) and disclosure under SFAS 123. In March
2005, the SEC issued Staff Accounting Bulletin No. 107 (“SAB 107”) relating
to SFAS 123(R). We have applied the provisions of SAB 107 in our
adoption of SFAS 123(R). Under SFAS 123(R), compensation cost
for all stock-based awards, including grants of employee stock options,
restricted stock and other equity awards, is measured at fair value at grant
date and recognized as compensation expense on a straight line basis over the
employees’ expected requisite service period. In addition, SFAS
123(R) requires the benefits of tax deductions in excess of recognized
compensation expense to be reported as a financing cash flow, rather than as an
operating cash flow as prescribed under previous accounting
rules. The Company selected the modified prospective method of
adoption, which recognizes compensation expense for the fair value of all
share-based payments granted after January 1, 2006 and for the fair value
of all awards granted to employees prior to January 1, 2006 that remain
unvested on the date of adoption. This method does not require a
restatement of prior periods. However, awards granted and still
unvested on the date of adoption are attributed to expense under SFAS 123(R),
including the application of forfeiture rates on a prospective
basis. Our forfeiture rate represents the historical rate at which
our stock-based awards were surrendered prior to vesting. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and revised on a
cumulative basis, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. Prior to fiscal year 2006, the Company
accounted for forfeitures as they occurred, for the purposes of pro forma
information under SFAS 123.
Tax
Effects of Stock-Based Compensation
We will
only recognize a tax benefit from windfall tax deductions for stock-based awards
in additional paid-in capital if an incremental tax benefit is realized after
all other tax attributes currently available have been utilized.
Net Loss Per Common
Share
We
compute loss per share in accordance with Financial Accounting Standards
Statement No. 128 “Earnings per Share” (“SFAS 128”) and SEC Staff Accounting
Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and
SAB 98, basic net loss per share is computed by dividing the net loss available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted net loss per share is computed
by dividing the net loss for the period by the weighted average number of common
and common equivalent shares outstanding during the period. Common
equivalent shares outstanding as of December 31, 2007 and 2006, which consisted
of employee stock options and certain warrants issued to consultants and other
providers of financing to the Company, were excluded from diluted net loss per
common share calculations as of such dates because they were
anti-dilutive. During the years ended December 31, 2007 and 2006, we
reported net loss per share and as such basic and diluted loss per share were
equivalent.
Recent
Pronouncements
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities” (SFAS 159”). SFAS 159 provides
companies with an option to irrevocably elect to measure certain financial
assets and financial liabilities at fair value on an instrument-by-instrument
basis with the resulting changes in fair value recorded in
earnings. The objective of SFAS 159 is to reduce both the complexity
in accounting for financial instruments and the volatility in earnings caused by
using different measurement attributes for financial assets and financial
liabilities. SFAS 159 is effective for the Company as of January 1,
2008 and as of this effective date, the Company has elected not to apply the
fair value option to any of its financial assets for financial
liabilities.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 provides a new single authoritative definition of fair value and
provides enhanced guidance for measuring the fair value of assets and
liabilities and requires additional disclosures related to the extent to which
companies measure assets and liabilities at fair value, the information used to
measure fair value, and the effect of fair value measurements on
earnings. SFAS 157 is effective for the Company as of January 1, 2008
for financial assets and financial liabilities within its scope and it is not
expected to have a material impact on its consolidated financial
statements. In February 2008, the FASB issued FASB Staff Position No.
FAS 157-2 “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”) which
defers the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis (at least annually), for
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years for items within the scope of FSP FAS 157-2. The Company
is currently assessing the impact, if any, of SFAS 157 and FSP FAS 157-2 for
non-financial assets and non-financial liabilities on its consolidated financial
statements.
NOTE
C – LIQUIDITY
Our
consolidated financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business. At December 31,
2007, we had stockholders’ equity of approximately $2,322,000. On
February 1, 2008, we entered into a revolving credit facility with CapitalSource
Finance, LLC, which allows us to borrow up to $3,000,000 based on a formula
which is tied to our eligible accounts receivable that are aged less than 150
days (See Note L). As of March 31, 2008 we had approximately
$283,000 in cash on hand and $983,000 of availability under our Credit Facility.
As such, we believe we have adequate resources to meet our operating
commitments for the next twelve months and accordingly our consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should we be unable to
continue as a going concern.
NOTE
D – PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following at December 31, 2007:
|
|
|
|
|
|
Estimated
Useful Lives in Years
|
|
|
Equipment
|
|
$ |
2,319,601 |
|
|
|
3-7 |
|
|
Leasehold
Improvements
|
|
|
51,989 |
|
|
|
3-5 |
|
|
Furniture
& Fixtures
|
|
|
163,324 |
|
|
|
7 |
|
|
Computer
Hardware
|
|
|
152,405 |
|
|
|
3 |
|
|
Computer
Software
|
|
|
209,134 |
|
|
|
3 |
|
|
Assets
not yet placed in service
|
|
|
73,660 |
|
|
|
- |
|
|
Subtotal
|
|
|
2,970,113 |
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(862,030 |
) |
|
|
|
|
|
Furniture
and Equipment, net
|
|
$ |
2,108,083 |
|
|
|
|
|
Depreciation
and amortization expense on property and equipment, including leased assets, for
the years ended December 31, 2007 and 2006, was $451,459 and $233,632,
respectively.
Property
and equipment under capital leases, included above, consists of the following at
December 31, 2007:
|
Equipment
|
|
$ |
1,127,889 |
|
|
Furniture
& Fixtures
|
|
|
22,076 |
|
|
Computer
Hardware
|
|
|
49,086 |
|
|
Computer
Software
|
|
|
94,963 |
|
|
Subtotal
|
|
|
1,294,014 |
|
|
Less
accumulated depreciation and amortization
|
|
|
(248,711 |
) |
|
Property
and Equipment under capital leases, net
|
|
$ |
1,045,303 |
|
NOTE
E – INCOME TAXES
We
recognized losses for financial reporting purposes for the years ended December
31, 2007 and
2006, in the accompanying consolidated statements of
operations. Accordingly, no provisions for income taxes and/or
deferred income taxes payable have been provided in the accompanying
consolidated financial statements.
At
December 31, 2007, we have net operating loss carryforwards of approximately
$4,700,000, the significant difference between this amount, and our accumulated
deficit arises primarily from certain stock based compensation that is
considered to be a permanent difference. Assuming our net operating
loss carryforwards are not disallowed because of certain “change in control”
provisions of the Internal Revenue Code, these net operating loss carryforwards
expire in various years through the year ended December 31,
2027. However, we have established a valuation allowance to fully
reserve our deferred income tax assets as such assets did not meet the required
asset recognition standard established by SFAS 109. Our valuation allowance
increased by $1,014,110 during the
year ended December 31, 2007.
At
December 31, 2007, our current and non-current deferred income tax assets
(assuming an effective income tax rate of approximately 39%) consisted of the
following:
|
Net
current deferred income tax asset:
|
|
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
159,900 |
|
|
Less
valuation allowance
|
|
|
(159,900 |
) |
|
Total
|
|
$ |
- |
|
|
Net
non-current deferred income tax asset:
|
|
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
1,830,450 |
|
|
Accumulated
depreciation and impairment
|
|
|
(166,000 |
) |
|
Subtotal
|
|
|
1,664,450 |
|
|
Less
valuation allowance
|
|
|
(1,664,450 |
) |
|
Total
|
|
$ |
- |
|
NOTE
F – INCENTIVE STOCK OPTIONS AND AWARDS
Stock Option
Plan
On
October 31, 2006, our shareholders and Board of Directors amended and restated
the NeoGenomics Equity Incentive Plan, which was originally approved in October
2003 (the “Plan”). The Plan permits the grant of stock awards and
stock options to officers, directors, employees and
consultants. Options granted under the Plan are either outright stock
awards, Incentive Stock Options (“ISOs”) or Non-Qualified Stock Options
(“NQSO’s). As part of this amendment and restatement, the
shareholders and Board of Directors approved an increase in the shares reserved
under the Plan from 10% of our outstanding common stock at any given time to 12%
of our Adjusted Diluted Shares Outstanding, which equated to 4,463,643 shares of
our common stock as of December 31, 2007. Adjusted Diluted Shares
Outstanding are defined as basic common shares outstanding on the measurement
date plus that number of shares that would be issued if all convertible debt,
convertible preferred equity securities and warrants were assumed to be
converted into common stock on the measurement date. The definition
of Adjusted Diluted Shares Outstanding specifically excludes any unexercised
stock options that may be outstanding under either the Stock Option Plan or the
ESPP on any measurement date. As of December 31, 2007, option and
stock awards totaling 2,796,044 shares were outstanding and 497,549 option and
stock awards had been exercised, leaving a total of 1,170,050 options and stock
awards available for future issuance. Options typically have a 5-10
year life and vest over 3 or 4 years but each grant’s vesting and exercise price
provisions are determined at the time the awards are granted by the Compensation
Committee of the Board of Directors or by the President by virtue of authority
delegated to him by the Compensation Committee.
Adoption
of SFAS 123(R)
Effective
January 1, 2006, we adopted SFAS 123(R), which requires the measurement and
recognition of compensation expense in the Company’s statement of operations for
all share-based payment awards made to our employees and directors, including
employee stock options and employee stock purchases related to all our
stock-based compensation plans based on estimated fair values.
SFAS
123(R) requires companies to estimate the fair value of stock-based compensation
on the date of grant using an option-pricing model. The fair value of
the award is recognized as expense over the requisite service periods in our
consolidated statement of operations using the straight-line method consistent
with the methodology used under SFAS 123. Under SFAS 123(R) the
attributed stock-based compensation expense must be reduced by an estimate of
the annualized rate of stock option forfeitures. For grants prior to
the January 1, 2006 adoption date of SFAS 123(R), The unrecognized expense of
awards not yet vested at the date of adoption is recognized in net income (loss)
in the periods after the date of adoption, using the same valuation method and
assumptions determined under the original provisions of SFAS 123.
We
estimate the fair value of stock-based awards using the trinomial lattice
model. This model determines the fair value of stock-based
compensation and is affected by our stock price on the date of the grant as well
as assumptions regarding a number of highly complex and subjective
variables. These variables include expected term, expected risk-free
rate of return, expected volatility, and expected dividend yield, each of which
is more fully described below. The assumptions for expected term and
expected volatility are the two assumptions that significantly affect the
grant date fair value.
Expected Term: The
expected term of an option is the period of time that such option is expected to
be outstanding. The average expected term is determined using the
trinomial lattice simulation model.
Risk-free Interest
Rate: We base the risk-free interest rate used in the
trinomial lattice valuation method on the implied yield at the grant date of the
U.S. Treasury zero-coupon issue with an equivalent term to the stock-based award
being valued. Where the expected term of a stock-based award does not
correspond with the term for which a zero coupon interest rate is quoted, we
used the nearest interest rate from the available maturities.
Expected Stock Price
Volatility: Effective January 1, 2006, we evaluated the
assumptions used to estimate volatility and determined that, under SAB 107, we
should use a blended average of our volatility and the volatility of the nearest
peer companies. We believe that the use of this blended average peer
volatility is more reflective of market conditions and a better indicator of our
expected volatility due to the limited trading history available for our Company
since its last change of control, prior to which we operated under a different
business model.
Dividend
Yield: Since we have never paid a dividend and do not expect
to begin doing so in the foreseeable future, we have assumed a 0% dividend yield
in valuing our stock-based awards.
The fair
value of stock option awards granted during the years ended December 31, 2007
and 2006 was estimated as of the grant date using the trinomial lattice model
with the following weighted average assumptions:
|
|
|
2007
|
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
4.7 |
|
|
|
5.4 |
|
|
Risk-free
interest rate (%)
|
|
|
4.6 |
% |
|
|
4.8 |
% |
|
Expected volatility (%)
|
|
|
35 |
% |
|
|
36 |
% |
|
Dividend
yield (%)
|
|
|
0 |
% |
|
|
0 |
% |
|
Weighted average fair value/share at grant date
|
|
$ |
0.45 |
|
|
$ |
0.23 |
|
The
status of our stock options and stock awards are summarized as
follows:
|
|
|
Number
of Shares
|
|
|
Weighted
Average
|
|
|
|
|
|
|
|
Exercise
Price
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,735,000 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,011,897 |
|
|
|
0.68 |
|
|
Exercised
|
|
|
(211,814 |
) |
|
|
0.30 |
|
|
Canceled
|
|
|
(428,083 |
) |
|
|
0.42 |
|
|
Outstanding
at December 31, 2006
|
|
|
2,107,000 |
|
|
|
0.43 |
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,232,583 |
|
|
|
1.48 |
|
|
Exercised
|
|
|
(175,500 |
) |
|
|
0.31 |
|
|
Canceled
|
|
|
(368,039 |
) |
|
|
1.14 |
|
|
Outstanding
at December 31, 2007
|
|
|
2,796,044 |
|
|
|
0.81 |
|
|
Exercisable
at December 31, 2007
|
|
|
1,721,874 |
|
|
$ |
0.55 |
|
The
following table summarizes information about our options outstanding at December
31, 2007:
Options Outstanding, Expected to
Vest
Options Exercisable
| Range of Exercise prices(s) |
|
|
Number
Outstanding |
|
|
Weighted
Average Remaining Contractual Life (yrs) |
|
|
Weighted Average Exercise Price |
|
|
Number
Exercisable |
|
|
Weighted
Average Remaing Contractual Life(Yrs) |
|
|
Weighted
Acerage Exercise price |
|
| |
|
|
|
1,120,000 |
|
|
|
6.6 |
|
|
$ |
0.25 |
|
|
|
1,120,000 |
|
|
|
6.6 |
|
|
$ |
.025 |
|
| |
0.31-0.46
|
|
|
|
94,750 |
|
|
|
7.4 |
|
|
|
0.35 |
|
|
|
68,750 |
|
|
|
7.4 |
|
|
|
0.35 |
|
| |
0.47-0.71 |
|
|
|
389,000 |
|
|
|
8.4 |
|
|
|
.62 |
|
|
|
159,666 |
|
|
|
8.2 |
|
|
|
0.62 |
|
| |
0-72-1.08 |
|
|
|
60,000 |
|
|
|
8.7 |
|
|
|
1.00 |
|
|
|
20,001 |
|
|
|
8.7 |
|
|
|
1.00 |
|
| |
1-09-1.47 |
|
|
|
608,042 |
|
|
|
7.0 |
|
|
|
1.39 |
|
|
|
256,042 |
|
|
|
9.0 |
|
|
|
1.45
|
|
| |
1.48-1.82
|
|
|
|
524,252
|
|
|
|
8.6
|
|
|
|
1.55
|
|
|
|
97,415
|
|
|
|
8.7
|
|
|
|
1.54
|
|
| |
|
|
|
|
2,796,044
|
|
|
|
7.4
|
|
|
$ |
0.81
|
|
|
|
1,721,874
|
|
|
|
7.3
|
|
|
$ |
0.55
|
|
As of
December 31, 2007, the aggregate intrinsic value of all stock options
outstanding and expected to vest was approximately $1.2 million and the
aggregate intrinsic value of currently exercisable stock options was
approximately $1.1 million. The Intrinsic value of each option share
is the difference between the fair market value of NeoGenomics common stock and
the exercise price of such option share to the extent it is
“in-the-money”. Aggregate Intrinsic value represents the value that
would have been received by the holders of in-the-money options had they
exercised their options on the last trading day of the year and sold the
underlying shares at the closing stock price on such day. The
intrinsic value calculation is based on the $1.08 closing stock price of
NeoGenomics Common Stock on December 31, 2007, the last trading day of
2007. The total number of in-the-money options outstanding and
exercisable as of December 31, 2007 was 1,368,417.
The total
intrinsic value of options exercised during the years ended December 31, 2007
and 2006 was approximately $200,000 and $215,000,
respectively. Intrinsic value of exercised shares is the total value
of such shares on the date of exercise less the cash received from the option
holder to exercise the options. The total cash proceeds received from
the exercise of stock options was approximately $54,000 and $63,000 for the
years ended December 31, 2007 and 2006, respectively. The total
fair value of options granted during the years ended December 31, 2007 and 2006
was approximately $561,000 and 236,000, respectively. The total
fair value of option shares vested during the years ended December 31, 2007
and 2006 was approximately $276,000 and $91,000, respectively, before taking
into consideration cancellations and expected forfeitures for such
options.
As of
December 31, 2007, there was approximately $312,500 of total unrecognized
stock-based compensation cost, net of expected forfeitures, related to unvested
stock options granted under the Plan. This cost is expected to be
recognized over a weighted-average period of 2.6 years.
NOTE
G – COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases its laboratory and office facilities under non-cancelable
operating leases. These operating leases expire at various dates
through April 2012 and generally require the payment of real estate taxes,
insurance, maintenance and operating costs. In November 2007, the
Company entered into a facility lease agreement with a sub-landlord for
additional 16,125 square feet of office space at our corporate headquarters in
Fort Myers, Florida. In addition, we maintain laboratory and office
space in Irvine California and Nashville Tennessee.
The
minimum aggregate future obligations under non-cancelable operating leases as of
December 31, 2007 are as follows:
|
Years ending December 31,
|
|
|
|
|
2008
|
|
$ |
714,735 |
|
|
2009
|
|
|
732,724 |
|
|
2010
|
|
|
654,430 |
|
|
2011
|
|
|
325,618 |
|
|
2012
|
|
|
57,140 |
|
|
Total
minimum lease payments
|
|
$ |
2,484,647 |
|
Rent
expense for the years ended December 31, 2007 and 2006 was $510,825 and
$135,785, respectively and is included in costs of revenues and in general and
administrative expenses, depending on the allocation of work space in each
facility. Certain of the Company’s facility leases include rent
escalation clauses. The Company normalizes rent expense on a
straight-line basis over the term of the lease for known changes in lease
payments over the life of the lease.