forms1.htm
As
filed with the U.S. Securities and Exchange Commission on June 3,
2008
Registration
No. 333-126754
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 4
TO
FORM
SB-2 ON FORM S-1/A
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Nevada
|
NeoGenomics, Inc.
|
74-2897368
|
(State
or Other Jurisdiction of Incorporation or Organization)
|
(Name
of Registrant in Our Charter)
|
(I.R.S.
Employer Identification No.)
|
|
|
|
|
|
Robert
P. Gasparini
|
12701
Commonwealth Drive, Suite 9
|
|
12701
Commonwealth Drive, Suite 9
|
Fort
Myers, Florida 33913
|
|
Fort
Myers, Florida 33913
|
(239) 768-0600
|
8731
|
(239) 768-0600
|
(Address
and Telephone Number
of
Principal Executive Offices and
Principal
Place of Business)
|
(Primary
Standard Industrial
Classification
Code Number)
|
(Name,
Address and Telephone Number of Agent for Service)
|
|
|
|
With
a copy to:
Clayton
E. Parker, Esq.
Kirkpatrick
& Lockhart Preston Gates Ellis LLP
200 S.
Biscayne Boulevard, Suite 3900
Miami,
Florida 33131
Telephone:
(305) 539-3300
Facsimile:
(305) 358-7095
Approximate
date of commencement of proposed sale to the public: As soon as practicable after this
registration statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. /X/
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. /_/
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. /_/
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. /_/
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer /__/
|
Accelerated
filer /__/
|
Non-accelerated
filer /__/ (Do not check if a smaller reporting company)
|
Smaller
reporting company /X/
|
CALCULATION
OF REGISTRATION FEE
|
|
Title
Of Each Class
Of
Securities To Be Registered
|
|
|
Proposed
Maximum Offering Price
Per
Share(1)
|
|
|
Aggregate
Offering
Price(1)
|
|
|
Amount
Of
Registration Fee
|
|
Common
Stock, par value $0.001 per share
|
|
|
$ |
1.30 |
|
|
$ |
9,100,000 |
|
|
$ |
280.60 |
(2) |
TOTAL
|
|
|
$ |
1.30 |
|
|
$ |
9,100,000 |
|
|
$ |
280.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Estimated
solely for the purpose of calculating the registration fee pursuant to
Rule 457(c) under the Securities Act of 1933. For the purposes of this
table, we have used the average of the closing bid and asked prices as of
a recent date.
|
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
MI-268286 v5 0437575-00201
PROSPECTUS
NEOGENOMICS,
INC.
7,000,000
shares of Common Stock
This prospectus relates to the sale of
up to 7,000,000 shares of the Common Stock, par value $0.001 per
share (“Common
Stock”) of NeoGenomics, Inc. (referred to individually as the “Parent Company” or,
collectively with all of its subsidiaries, as the “Company”, “NeoGenomics”, or
“we”, “us”, or “our”) by certain
persons who are stockholders of the Parent Company. The selling
stockholders consist of:
|
·
|
Those Investors set
forth in the section herein entitled “Selling Stockholders” who intend to
sell up to 2,666,667 shares of Common Stock previously issued and sold by
the Parent Company to the Investors for a purchase price equal
to $1.50 per share during the period from May 31, 2007 through June 6,
2007 pursuant to a private equity transaction (the “Private
Placement”). The Investors
received registration rights with their shares and therefore, such shares
are being registered
hereunder;
|
|
·
|
Those Investors set forth in the
section herein entitled “Selling Stockholders” who intend to sell up to
1,500,000 shares of Common Stock previously sold by Aspen Select
Healthcare, L.P. (“Aspen”) to the Investors during the period from
June 1, 2007 through June 5, 2007 in connection with the Private
Placement. The Investors received registration
rights with their shares and therefore, such shares are being registered
hereunder;
|
|
·
|
Noble International Investments,
Inc. (“Noble”) which intends to sell up to
98,417 shares of Common Stock underlying warrants previously issued by the
Parent Company to Noble on June 5, 2007 in consideration for Noble’s
services as placement agent in connection with the Private
Placement. Noble received piggy back registration rights with
its shares and therefore, such shares are being registered
hereunder;
|
|
·
|
Dr. Michael Dent, Chairman of the
Board who intends to sell up to 345,671 shares of Common Stock previously
issued and sold by the Company to Michael Dent as founder
shares;
|
|
·
|
Aspen, which intends to sell up
to 1,889,245 shares of Common Stock previously issued and sold by the
Company to Aspen on April 15, 2003. Aspen
received registration rights with respect to these
1,889,245 shares and therefore, such shares
are being registered hereunder;
and
|
|
·
|
Lewis Opportunity Fund and LAM
Opportunity Fund are managed by Lewis Asset Management (“LAM”), which
intends to sell up to 500,000 shares of Common Stock previously issued to
LAM by the Company on June 6, 2007 upon conversion of certain
warrants previously sold by Aspen to LAM on June 6, 2007. The
Company issued these shares at an exercise price of $0.26 per share and received gross
proceeds equal to $130,000. LAM
received registration rights with its warrants and therefore,
such shares underlying such warrants are being registered
hereunder.
|
Please
refer to “Selling Stockholders” beginning on page 22.
The
Company is not selling any shares of Common Stock in this offering and therefore
will not receive any proceeds from this offering. All costs associated with this
registration will be borne by the Company.
Shares of
Common Stock are being offered for sale by the selling stockholders at prices
established on the Over-the-Counter Bulletin Board (the “OTCBB”) during the
term of this offering. On May 30, 2008, the last reported sale price
of our Common Stock was $1.30 per share. Our Common Stock is quoted
on the OTCBB under the symbol “NGMN.OB”. These prices will fluctuate
based on the demand for the shares of our Common Stock.
Brokers
or dealers effecting transactions in these shares should confirm that the shares
are registered under the applicable state law or that an exemption from
registration is available.
These
securities are speculative and involve a high degree of risk.
Please
refer to “Risk Factors” beginning on page 10.
The
information in this prospectus is not complete and may be changed. We and the
selling stockholders may not sell these securities until the registration
statement filed with the U.S. Securities and Exchange Commission (the
“SEC”) is
effective. This prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
No
underwriters or persons have been engaged to facilitate the sale of shares of
our Common Stock in this offering. None of the proceeds from the sale of stock
by the selling stockholders will be placed in escrow, trust or any similar
account.
The
SEC and state securities regulators have not approved or disapproved of these
securities, or determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
The date
of this prospectus is________, 2008.
TABLE OF CONTENTS
PROSPECTUS
SUMMARY |
1 |
THE
OFFERING |
4 |
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION |
6 |
RISK
FACTORS |
10 |
FORWARD-LOOKING
STATEMENTS |
20 |
SELLING
STOCKHOLDERS |
21 |
USE OF
PROCEEDS |
25 |
PLAN OF
DISTRIBUTION |
26 |
MANAGEMNET'S
DISCUSSION AND ANALYSIS OR PALN OF OPERATION |
27 |
DESCRIPTION OF
BUSINESS |
37 |
MANAGEMENT |
46 |
PRINCIPAL
STOCKHOLDERS |
53 |
MARKET PRICE
OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER STOCKHOLDER
MATTERS |
56 |
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE |
59 |
DESCRIPTION OF
CAPITAL STOCK |
61 |
LEGAL
MATTERS |
63 |
AVAILABLE
INFORMATION |
63 |
FINANCIAL
STATEMENTS OF NEOGENOMICS, INC |
F-i |
PART
II |
II-1 |
SIGNATURES |
II-8 |
|
|
The
following is only a summary of the information, Financial Statements and the
Notes thereto included in this prospectus. You should read the entire prospectus
carefully, including “Risk Factors” and our Financial Statements and the Notes
thereto before making any investment decision.
Our
Company
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;
|
b)
|
Fluorescence
In-Situ Hybridization (FISH) testing, which analyzes abnormalities at the
chromosomal and gene levels;
|
|
c)
|
flow
cytometry testing, which analyzes gene expression of specific markers
inside cells and on cell surfaces;
and
|
|
d)
|
molecular
testing which involves analysis of DNA and RNA to diagnose and predict the
clinical significance of various genetic sequence
disorders.
|
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:
|
·
|
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%.
Our
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 intend to 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 May 15, 2008, NeoGenomics’ sales and marketing
organization totaled fourteen individuals, and we have received business from
twenty-six 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.
We also
recently increased our professional level staffing for global requisitions
requiring interpretation in 2007. We currently employ three 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 twenty-one
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 operated three
laboratory locations in Fort Myers, FL; Irvine, CA; and Nashville TN, each of
which has received the appropriate state, Clinical Laboratory Improvement
Amendments (CLIA), and College of American Pathologists (CAP) licenses and
accreditations. 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 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 acts 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. This initial
revenue stream was small due to the size of contracts closed. In
2008, we hope to expand on our CRO revenue stream with more and larger
contracts.
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 in FY 2007 was approximately $702, which was an increase of
approximately 4% from FY 2006. Our average revenue/test in FY 2007
was approximately $548, which was an increase of approximately 9% over FY
2006. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Received (Cases)
|
|
|
16,385 |
|
|
|
9,563 |
|
|
|
71.3 |
% |
Number
of Tests Performed
|
|
|
20,998 |
|
|
|
12,838 |
|
|
|
63.6 |
% |
Average
Number of Tests/Requisition
|
|
|
1.28 |
|
|
|
1.34 |
|
|
|
(4.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$ |
11,504,725 |
|
|
$ |
6,475,996 |
|
|
|
77.7 |
% |
Average
Revenue/Requisition
|
|
$ |
702.15 |
|
|
$ |
677.19 |
|
|
|
3.7 |
% |
Average
Revenue/Test
|
|
$ |
547.90 |
|
|
$ |
504.44 |
|
|
|
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 increases in our revenue and afford the Company
significant synergies and efficiencies in our operations and sales and marketing
activities.
About
Us
Our
principal executive offices are located at 12701 Commonwealth Drive, Suite 5,
Fort Myers, Florida 33913. Our telephone number is (239)
768-0600. Our website can be accessed at www.neogenomics.org.
This
prospectus relates to the sale of up to 7,000,000 shares of the Common Stock,
par value $0.001 per share (“Common Stock”) of
NeoGenomics, Inc. (referred to individually as the “Parent Company” or,
collectively with all of its subsidiaries, as the “Company”, “NeoGenomics”, or
“we”, “us”, or “our”) by certain
persons who are stockholders of the Parent Company. The selling
stockholders consist of:
|
·
|
Those Investors set forth in
the section herein entitled “Selling Stockholders” who intend to sell up
to 2,666,667 shares of Common Stock previously issued and sold by the
Parent Company to the Investors for a purchase price equal to
$1.50 per share during the period from May 31, 2007 through June 6, 2007
pursuant to a private equity transaction (the “Private
Placement”). The Investors
received registration rights with their shares and therefore, such shares
are being registered
hereunder;
|
|
·
|
Those Investors set forth in the
section herein entitled “Selling Stockholders” who intend to sell up to
1,500,000 shares of Common Stock previously sold by Aspen Select
Healthcare, L.P. (“Aspen”) to the Investors
during the period from June 1, 2007 through June 5, 2007 in connection
with the Private Placement. The Investors
received registration rights with their shares and therefore,
such shares are being registered
hereunder;
|
|
·
|
Noble International Investments,
Inc. (“Noble”) which intends to sell up to
98,417 shares of Common Stock underlying warrants previously issued by the
Parent Company to Noble on June 5, 2007 in consideration for Noble’s
services as placement agent in connection with the Private
Placement. Noble received piggy-back registration rights with
its shares and therefore, such shares are being registered
hereunder;
|
|
·
|
Dr. Michael Dent, Chairman of the
Board who intends to sell up to 345,671 shares of Common Stock previously
issued and sold by the Company to Michael Dent as founder
shares;
|
|
·
|
Aspen, which intends to sell up
to 1,889,245 shares of Common Stock previously issued and sold by the
Company to Aspen on April 15, 2003. Aspen
received registration rights with respect to these
1,889,245 shares and therefore, such shares
are being registered hereunder;
and
|
|
·
|
Lewis Opportunity Fund and LAM
Opportunity Fund are managed by Lewis Asset Management (“LAM”), which
intends to sell up to 500,000 shares of Common Stock previously issued to
LAM by the Company on June 6, 2007 upon conversion of certain
warrants previously sold by Aspen to LAM on June 6, 2007. The
Company issued these shares at an exercise price of $0.26 per share and received gross
proceeds equal to $130,000. LAM
received registration rights with its warrants and therefore,
such shares underlying such warrants are being registered
hereunder.
|
Please
refer to “Selling Stockholders” beginning on page 22.
The
Company is not selling any shares of Common Stock in this offering and therefore
will not receive any proceeds from this offering. All costs associated with this
registration will be borne by the Company.
Shares of
Common Stock are being offered for sale by the selling stockholders at prices
established on the Over-the-Counter Bulletin Board (the “OTCBB”) during the
term of this offering. On May 30, 2008, the last reported sale price
of our Common Stock was $1.30 per share. Our Common Stock is quoted
on the OTCBB under the symbol “NGMN.OB”. These prices will fluctuate
based on the demand for the shares of our Common Stock.
The
Company engaged Noble, an unaffiliated registered broker-dealer, to advise us as
our placement agent in connection with the Private Placement pursuant to that
certain Letter Agreement, dated May 21, 2007, by and between the Parent Company
and Noble. In consideration for its services, Noble received (a)
warrants to purchase 98,417 shares of our Common Stock, which warrants have a
five (5) year term, an exercise price equal to $1.50 per share, cashless
exercise provisions, customary anti-dilution provisions and the same other
terms, conditions, rights and preferences as those shares sold to
the Investors in the Private Placement, and (b) a cash fee equal to
five percent (5%) of the gross proceeds from each sale made to
the Investors introduced by Noble to the Company, or
$147,625.
We also
engaged Aspen Capital Advisors, a Company affiliated with one of our directors,
to assist us in this offering. In consideration for its services,
Aspen Capital Advisors received: (a) warrants to purchase 250,000
shares of our Common Stock, which warrants have a five (5) year term, an
exercise price equal to $1.50 per share, cashless exercise provisions, customary
anti-dilution provisions and the same other terms, conditions, rights and
preferences as those shares sold to the Investors in the Private Placement, and
(b) a cash fee equal to $52,375.
On August
31, 2007, the Company issued warrants to purchase 533,334 shares of it’s 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. No shares underlying are being registered
hereunder.
Common
Stock Offered
|
7,000,000
shares by selling stockholders
|
Offering
Price
|
Market
price
|
Common
Stock Currently Outstanding
|
31,365,021
shares as of May 30, 2008
|
Use
of Proceeds
|
We
will not receive any proceeds of the shares offered by the selling
stockholders. See “Use of Proceeds”.
|
Risk
Factors
|
The
securities offered hereby involve a high degree of risk. See “Risk
Factors”.
|
Over-the-Counter
Bulletin Board Symbol
|
NGNM.OB
|
The
Summary Consolidated Financial Information set forth below was excerpted from
the Company’s unaudited Quarterly Report on Form 10-Q for the three months ended
March 31, 2008 and 2007, as filed with the SEC.
Statement
of Operations Data
|
|
For
the Three Months Ended
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$ |
4,162,762 |
|
|
$ |
2,242,661 |
|
Cost
of Revenue
|
|
|
1,858,474 |
|
|
|
936,734 |
|
Gross
Profit
|
|
|
2,304,288 |
|
|
|
1,305,927 |
|
Other
Operating Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
2,514,555 |
|
|
|
1,426,548 |
|
Interest
expense, net
|
|
|
55,096 |
|
|
|
98,924 |
|
Total
Operating Expenses
|
|
|
2,569,651 |
|
|
|
1,525,472 |
|
Net
Loss
|
|
$ |
(265,363 |
) |
|
$ |
(219,545 |
) |
Net
Loss Per Share - Basic And Fully Diluted
|
|
$ |
(0.01 |
) |
|
$ |
(0.01 |
) |
Weighted
Average Number Of Shares Outstanding – Basic and Fully
Diluted
|
|
$ |
31,400,947
|
|
|
$ |
27,371,233
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
March
31,
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
330,358 |
|
|
$ |
575,393 |
|
Accounts
receivable (net of allowance for doubtful accounts of
$390,275
and $126,363, respectively)
|
|
|
2,937,905 |
|
|
|
1,986,229 |
|
Inventories
|
|
|
245,986 |
|
|
|
155,190 |
|
Other
current assets
|
|
|
426,739 |
|
|
|
106,039 |
|
Total
current assets
|
|
|
3,940,988 |
|
|
|
2,822,851 |
|
Property
and equipment (net of accumulated depreciation of $1,018,446 and $862,030,
respectively)
|
|
|
2,032,537 |
|
|
|
1,409,381 |
|
Other
assets
|
|
|
248,374 |
|
|
|
39,791 |
|
Total
Assets
|
|
$ |
6,221,899 |
|
|
$ |
4,272,023 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities
And Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
1,609,775 |
|
|
$ |
761,071 |
|
Accrued
compensation
|
|
|
- |
|
|
|
162,672 |
|
Due
to affiliates
|
|
|
- |
|
|
|
1,674,186 |
|
Accrued
expenses and other liabilities
|
|
|
1,280,212 |
|
|
|
132,030 |
|
Short-term
portion of equipment capital leases
|
|
|
288,415 |
|
|
|
142,318 |
|
Total
current liabilities
|
|
|
3,178,402 |
|
|
|
2,872,277 |
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
|
Long-term
portion of equipment capital leases
|
|
|
890,468 |
|
|
|
610,056 |
|
Total
Liabilities
|
|
|
4,068,870 |
|
|
|
3,482,333 |
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
|
|
|
|
Common
stock, $.001 par value, (100,000,000 shares authorized; 31,415,021 and
31,391,660 shares issued and outstanding, respectively)
|
|
|
31,407 |
|
|
|
27,698 |
|
Additional
paid-in capital
|
|
|
16,917,216 |
|
|
|
12,342,983 |
|
Deferred
stock compensation
|
|
|
- |
|
|
|
(211,388 |
) |
Accumulated
deficit
|
|
|
(14,795,594 |
) |
|
|
(11,369,603 |
) |
Total
stockholders’ equity
|
|
|
2,153,029 |
|
|
|
789,690 |
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
6,221,899 |
|
|
$ |
4,272,023 |
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations Data
|
|
For
the Periods Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
$
|
11,504,725
|
|
$
|
6,475,996
|
|
Cost
of Revenue
|
|
|
|
|
|
|
Gross
Profit
|
|
5,981,950
|
|
|
3,716,806
|
|
|
|
|
|
|
|
|
Other
Operating Expense:
|
|
|
|
|
|
|
General
and Administrative
|
|
|
|
|
|
|
Income
/ (Loss) from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
Income / (Expense):
|
|
|
|
|
|
|
Other
Income
|
|
24,256
|
|
|
55,.970
|
|
Interest
expense
|
|
|
|
|
|
|
Other
income / (expense) – net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Share – Basic and Diluted
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding – Basic
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
210,573 |
|
|
$ |
126,266 |
|
Accounts
receivable (net of allowance for doubtful accounts of $414,548 and 103,463
for December 31, 2007 and 2006, respectively)
|
|
|
3,236,751 |
|
|
|
1,549,758 |
|
Inventories
|
|
|
304,750 |
|
|
|
117,362 |
|
Other
current assets
|
|
|
400,168 |
|
|
|
102,172 |
|
Total
current assets
|
|
|
4,152,242 |
|
|
|
1,895,558 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment (net of accumulated depreciation of
$862,030)
|
|
|
2,108,083 |
|
|
|
1,202,487 |
|
Other
assets
|
|
|
260,575 |
|
|
|
33,903 |
|
Total
Assets
|
|
$ |
6,520,900 |
|
|
$ |
3,131,948 |
|
|
|
|
|
|
|
|
|
|
Liabilities
& Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Account
payable
|
|
$ |
1,799,159 |
|
|
$ |
697,754 |
|
Accrued
compensation
|
|
|
370,496 |
|
|
|
133,490 |
|
Accrued
expenses and other liabilities
|
|
|
574,084 |
|
|
|
67,098 |
|
Legal
contingency
|
|
|
375,000 |
|
|
|
- |
|
Due
to affiliates (net of discount of $39,285)
|
|
|
- |
|
|
|
1,635,715 |
|
Short-term
portion of equipment capital leases
|
|
|
242,966 |
|
|
|
94,430 |
|
Total
current liabilities
|
|
$ |
3,361,705 |
|
|
$ |
2,628,487 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Long-term
portion of equipment capital leases
|
|
|
837,081 |
|
|
|
448,947 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities:
|
|
|
4,198,786 |
|
|
|
3,077,434 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $0.01 par value, (100,000,000 shares authorized;
and 31,391,660
and 27,061,476 shares issued and outstanding
at
December 31, 2007 and 2006, respectively)
|
|
|
31,391 |
|
|
|
27,061- |
|
Additional
paid-in capital
|
|
|
16,820,954 |
|
|
|
11,300,135 |
|
Deferred
stock compensation
|
|
|
- |
|
|
|
(122,623 |
) |
Accumulated
deficit
|
|
|
(14,530,231 |
) |
|
|
(11,150,059 |
) |
Total
stockholders’ equity
|
|
$ |
2,322,114 |
|
|
$ |
54,514 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
6,520,900 |
|
|
$ |
3,131,948 |
|
|
|
|
|
|
|
|
|
|
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.
Risks
Related To Our Business
We
Have A Limited Operating History Upon Which You Can Evaluate Our Business And
Unforeseen Risks May Harm The Success Of Our Business
We
commenced revenue operations in 2002 and are just beginning to generate
meaningful revenue. Accordingly, we have a limited operating history
upon which an evaluation of us and our prospects can be based. We and
our 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, we must, among other things, respond to competitive developments,
attract, retain and motivate qualified personnel, implement and successfully
execute our sales strategy, develop and market additional services, and upgrade
our technological and physical infrastructure in order to scale our
revenues. We may not be successful in addressing such
risks. Our limited operating history makes the prediction of future
results of operations difficult or impossible.
We
May Not Be Able To Implement Our Business Strategies Which Could Impair Our
Ability to Continue Operations
Implementation
of our business strategies will depend in large part on our ability to (i)
attract and maintain a significant number of customers; (ii) effectively provide
acceptable products and services to our customers; (iii) obtain adequate
financing on favorable terms to fund our 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 payors. Our
inability to obtain or maintain any or all these factors could impair our
ability to implement our business strategies successfully, which could have
material adverse effects on our results of operations and financial
condition.
We
May Be Unsuccessful In Managing Our Growth Which Could Prevent the Company From
Becoming Profitable
Our
recent growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. To
manage our potential growth, we must continue to implement and improve our
operational and financial systems and to expand, train and manage our employee
base. We may not be able to effectively manage the expansion of our
operations and our systems, procedures or controls may not be adequate to
support our operations. Our management may not be able to achieve the
rapid execution necessary to fully exploit the market opportunity for our
products and services. Any inability to manage growth could have a
material adverse effect on our business, results of operations, potential
profitability and financial condition.
Part of
our business strategy may be to acquire assets or other companies that will
complement our existing business. At this time, we are unable to predict whether
or when any material transaction will be completed should negotiations
commence. If we proceed with any such transaction, we may not
effectively integrate the acquired operations with our own
operations. We 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
We used
reasonable efforts to assess and predict the expenses necessary to pursue our
business plan. However, implementing our 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 we estimate, 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 our limited operating history and the relatively limited information
available on our competitors, we may not have sufficient internal or
industry-based historical financial data upon which to calculate anticipated
operating expenses. Management expects that our 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 our products and services; (ii) demand for our products and
services; (iii) the introduction and acceptance of new or enhanced products or
services by us or by competitors; (iv) our ability to anticipate and effectively
adapt to developing markets and to rapidly changing technologies; (v) our
ability to attract, retain and motivate qualified personnel; (vi) the
initiation, renewal or expiration of significant contracts with our 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. Our expenses are based in part on our
expectations as to future revenues and to a significant extent are relatively
fixed, at least in the short-term. We 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 our
expectations would have an immediate adverse impact on our business, results of
operations and financial condition. In addition, we may determine
from time to time to make certain pricing or marketing decisions or acquisitions
that could have a short-term material adverse affect on our business, results of
operations and financial condition and may not result in the long-term benefits
intended. Furthermore, in Florida, currently our primary referral
market for 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, our
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 payors, 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 effect
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. Our future
success will depend in significant part on our ability to continually improve
our offerings in response to both evolving demands of the marketplace and
competitive service offerings, and we 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. We compete with other
commercial medical laboratories in addition to the in-house laboratories of many
major hospitals. Many of our existing competitors have significantly
greater financial, human, technical and marketing resources than we
do. Our competitors may develop products and services that are
superior to ours or that achieve greater market acceptance than our
offerings. We 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 our 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, our products, services, and infrastructure may not be able
to scale accordingly. Any failure to handle higher volume of requests
for our products and services could lead to the loss of established customers
and have a material adverse effect on our 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 us.
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 our business, results of operations and financial
condition.
The
Steps Taken By The Company To Protect Its Proprietary Rights May Not Be
Adequate, Which Could Result In Infringement Or Misappropriation By
Third-Parties
We regard
our copyrights, trademarks, trade secrets and similar intellectual property as
critical to our success, and we rely upon trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary
rights. The steps taken by us to protect our proprietary rights may
not be adequate or third parties may infringe or misappropriate our copyrights,
trademarks, trade secrets and similar proprietary rights. In
addition, other parties may assert infringement claims against us.
We
Are Dependent On Key Personnel And Need To Hire Additional Qualified Personnel
In Order For Our Business To Succeed
Our
performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success
depends substantially on the continued efforts of our senior management team,
which currently is composed of a small number of individuals. The
loss of the services of any of our executive officers, our laboratory director
or other key employees could have a material adverse effect on our business,
results of operations and our financial condition.
Our
future success also depends on our continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for
such personnel is intense and we may not be able to retain our 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 our business,
results of operations and financial condition.
The
Failure to Obtain Necessary Additional Capital to Finance Growth and Capital
Requirements, Could Adversely Affect Our Business, Financial Condition and
Results of Operations
We may
seek to exploit business opportunities that require more capital than what is
currently planned. We may not be able to raise such capital on
favorable terms or at all. If we are unable to obtain such additional
capital, We may be required to reduce the scope of our anticipated expansion,
which could adversely affect our business, financial condition and results of
operations.
Our
Net Revenue Will Be Diminished If Payors 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 payors, including
governmental payors such as Medicare and private payors, 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 payors. Any
pricing pressure exerted by these third party payors on our customers may, in
turn, be exerted by our customers on us. If government and other third party
payors 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 payor 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 payors, 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:
|
·
|
pricing differences between our
fee schedules and the reimbursement rates of
the payors;
|
|
·
|
disputes
with payors as to which party is responsible for payment;
and
|
|
·
|
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 payors, 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 (3)
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, we
are 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 the 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.
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 us, our infrastructure is
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by our customers or others. Computer viruses, break-ins or other
security problems could lead to interruption, delays or cessation in service to
our customers. Further, such break-ins whether electronic or physical
could also potentially jeopardize the security of confidential information
stored in our computer systems of our customers and other parties connected
through us, 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 our
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 our business, results of operations and financial
condition.
We
Are Controlled by Existing Stockholders And Therefore Other Stockholders Will
Not Be Able to Direct The Company
The
majority of our shares and thus voting control of the Company is held by a
relatively small group of stockholders. Because of such ownership,
those stockholders will effectively retain control of our Board of Directors and
determine all of our corporate actions. In addition, the Company and
stockholders owning 11,220,453 shares, or approximately 36% of the Company’s
voting shares outstanding as of May 30, 2008 have executed a Shareholders’
Agreement that, among other provisions, gives Aspen, our largest
stockholder, the right to elect three (3) out of the seven (7) Directors
authorized for our Board, and nominate one (1) mutually acceptable independent
Director. Accordingly, it is anticipated that Aspen and other parties
to the Shareholders’ Agreement will continue to have the ability to elect a
controlling number of the members of our Board of Directors and the minority
stockholders of the Company may not be able to elect a representative to the our
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
We do not
anticipate paying dividends on our Common Stock in the foreseeable
future. Rather, we plan to retain earnings, if any, for the operation
and expansion of our 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 Common 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 Common Stock or
one of our competitors' stocks or chooses to terminate coverage of our Common
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.
A
challenge
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.
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 our Annual Report on Form 10-KSB. However,
as our material weaknesses in internal controls demonstrate, 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 Common Stock and access
to capital.
Risks
Related To This Offering
Future
Sales By Our Stockholders May Adversely Affect Our Stock Price And Our Ability
To Raise Funds In New Stock Offerings
Sales of
our Common Stock in the public market following this offering could lower the
market price of our Common Stock. Sales may also make it more difficult for us
to sell equity securities or equity-related securities in the
future
at a time
and price that our management deems acceptable or at all. Of the
31,365,021 shares of Common Stock outstanding as of May 30, 2008,
15,270,341 shares are freely tradable without restriction, unless held by our
“affiliates”. The remaining 16,094,680 shares of our Common
Stock which are held by existing stockholders, including the officers and
Directors, are “restricted securities” and may be resold in the public market
only if registered or pursuant to an exemption from registration. Some of these
shares may be resold under Rule 144.
The
Selling Stockholders Intend To Sell Their Shares Of Common Stock In The Market,
Which Sales May Cause Our Stock Price To Decline
The
selling stockholders intend to sell in the public market 7,000,000 shares of our
Common Stock being registered in this offering. That means that up to 7,000,000
shares may be sold pursuant to this Registration Statement. Such sales may cause
our stock price to decline. Our Officers and Directors and those stockholders
who are significant stockholders as defined by the SEC will continue to be
subject to the provisions of various insider trading and Rule 144
regulations.
The
Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower Than
The Prices Paid By Other People Participating In This Offering
The price
in this offering will fluctuate based on the prevailing market price of our
Common Stock on the OTCBB. Accordingly, the price you pay in this
offering may be higher or lower than the prices paid by other people
participating in this offering.
Our
Common Stock Is Deemed To Be “Penny Stock”, Which May Make It More Difficult For
Investors To Sell Their Shares Due To Suitability Requirements
Our
Common Stock is deemed to be “penny stock” as that term is defined in Rule
3a51-1 promulgated under the Securities Exchange Act of 1934, as
amended (the “Exchange
Act”). Penny stocks are stocks:
|
·
|
With a price of less than $5.00
per share;
|
|
·
|
That are not traded on a
“recognized” national
exchange;
|
|
·
|
Whose prices are not quoted on
the Nasdaq automated quotation
system;
|
|
·
|
Nasdaq stocks that trade below
$5.00 per share are deemed a “penny stock” for purposes of Section
15(b)(6) of the Exchange
Act;
|
|
·
|
In issuers with net tangible
assets less than $2.0 million (if the issuer has been in continuous
operation for at least three (3) years) or $5.0 million (if in continuous
operation for less than three (3) years), or with average revenues of less
than $6.0 million for the last three (3)
years.
|
|
·
|
Broker/dealers dealing in penny
stocks are required to provide potential investors with a document
disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. These requirements may reduce the
potential market for our Common Stock by reducing the number of potential
investors. This may make it more difficult for investors in our Common
Stock to sell shares to third parties or to otherwise dispose of them.
This could cause our stock price to
decline.
|
Information
included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words “may”, “should”, “expect”, “anticipate”, “estimate”, “believe”,
“intend” or “project” or the negative of these words or other variations on
these words or comparable terminology.
This
prospectus contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our growth
strategies, (c) anticipated trends in our industry, (d) our future financing
plans and (e) our anticipated needs for working capital. These statements may be
found under “Management’s Discussion and Analysis or Plan of Operations” and
“Description of Business”, as well as in this prospectus generally. Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under “Risk Factors” and matters described in this prospectus
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this prospectus will in fact
occur.
The
following table presents information regarding our selling stockholders who
intend to sell up to 7,000,000 shares of our Common Stock. A
description of each stockholder’s relationship to the Company and how each
selling stockholder acquired or will acquire shares to be sold in this offering
is detailed in the information immediately following this table.
|
|
Shares
Beneficially Owned Before Offering(1)
|
|
|
|
|
|
Percentage
of Outstanding Shares Beneficially Owned Before Offering(1)
|
|
|
Shares
To Be Sold In The Offering
|
|
|
|
|
|
Percentage
of Outstanding Shares Beneficially Owned After The
Offering
|
|
James
R. Rehak & Joann M. Rehak JTWROS
|
|
|
330,714 |
|
|
|
|
|
|
1.05
|
% |
|
|
33,333 |
|
|
|
|
|
|
*
|
% |
Leonard
Samuels IRA
|
|
|
148,842 |
|
|
|
|
|
|
* |
|
|
|
110,000 |
|
|
|
|
|
|
* |
|
A.
Scott Logan Revocable Living Trust
|
|
|
3,500,000 |
|
|
|
|
(2) |
|
|
10.81
|
% |
|
|
500,000 |
|
|
|
|
|
|
9.41
|
% |
William
J. Robison
|
|
|
91,000 |
|
|
|
|
|
|
|
* |
|
|
|
55,000 |
|
|
|
|
|
|
* |
|
Mosaic
Partners Fund
|
|
|
- |
|
|
|
|
|
|
|
* |
|
|
|
177,500 |
|
|
|
|
(10) |
|
|
* |
|
Mosaic
Partners Fund (US), LP
|
|
|
- |
|
|
|
|
|
|
|
* |
|
|
|
72,500 |
|
|
|
|
(11) |
|
|
* |
|
Ridgecrest
Ltd.
|
|
|
63,600 |
|
|
|
|
|
|
|
* |
|
|
|
53,000 |
|
|
|
|
|
|
|
* |
|
Ridgecrest
Partners QP, LP
|
|
|
246,000 |
|
|
|
|
|
|
|
* |
|
|
|
205,000 |
|
|
|
|
|
|
|
* |
|
Ridgecrest,
LP
|
|
|
14,400 |
|
|
|
|
|
|
|
* |
|
|
|
12,000 |
|
|
|
|
|
|
|
* |
|
Leviticus
Partners, LP
|
|
|
640,000 |
|
|
|
|
|
|
|
2.04
|
% |
|
|
200,000 |
|
|
|
|
|
|
|
1.41
|
% |
1837
Partners, L.P.
|
|
|
1,948,354 |
|
|
|
|
|
|
|
6.17
|
% |
|
|
886,000 |
|
|
|
|
(3) |
|
|
3.46
|
% |
1837
Partners QP, L.P.
|
|
|
719,211 |
|
|
|
|
|
|
|
2.29
|
% |
|
|
228,200 |
|
|
|
|
(4) |
|
|
1.57
|
% |
1837
Partners, Ltd.
|
|
|
734,325 |
|
|
|
|
|
|
|
2.34
|
% |
|
|
235,500 |
|
|
|
|
(5) |
|
|
1.60
|
% |
Lewis
Opportunity Fund, LP
|
|
|
215,523 |
|
|
|
|
|
|
|
* |
|
|
|
1,077,617 |
|
|
|
|
(6) |
|
|
* |
|
LAM
Opportunity Fund, Ltd.
|
|
|
44,143 |
|
|
|
|
|
|
|
* |
|
|
|
220,717 |
|
|
|
|
(7) |
|
|
* |
|
Mark
G. Egan IRA Rollover
|
|
|
720,000 |
|
|
|
|
|
|
|
2.29
|
% |
|
|
600,000 |
|
|
|
|
(8) |
|
|
* |
|
Aspen
Select Healthcare, L.P.
|
|
|
9,553,279 |
|
|
|
|
|
|
|
27.76
|
% |
|
|
1,889,245 |
|
|
|
|
|
|
|
23.56
|
% |
Michael
T. Dent, M.D.
|
|
|
2,655,463 |
|
|
|
|
|
|
|
8.33
|
% |
|
|
345,671 |
|
|
|
|
|
|
|
7..32
|
% |
Noble
International Investments, Inc.
|
|
|
98,417 |
|
|
|
|
(9) |
|
|
* |
|
|
|
98,417 |
|
|
|
|
(9) |
|
|
* |
|
Total:
|
|
|
21,723,271 |
|
|
|
|
|
|
|
58.89
|
% |
|
|
7,000,000 |
|
|
|
|
|
|
|
49.26
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Less
than one percent (1%).
|
(1)
|
Applicable
percentage of ownership is based on 31,365,021 shares of our Common Stock
outstanding as of May 30, 2008, together with securities exercisable or
convertible into shares of Common Stock within sixty (60) days of May 30,
2008, for each stockholder. Beneficial ownership is determined
in accordance with the rules of the SEC and generally includes voting or
investment power with respect to securities. Shares of Common
Stock are deemed to be beneficially owned by the person holding such
securities for the purpose of computing the percentage of ownership of
such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Note
that affiliates are subject to Rule 144 and insider trading regulations -
percentage computation is for form purposes
only.
|
(2)
|
SKL
Family Limited Partnership has direct ownership of 2,000,000 shares and
currently exercisable warrants to purchase 1,000,000 shares. A.
Scott Logan Revocable Living Trust has direct ownership of 500,000
shares. A. Scott Logan is the general partner SKL Limited
Family Partnership and trustee for A. Scott Logan Revocable Living
Trust. A. Scott Logan has only 1% of the assets of SKL Family
Limited Partnership. An additional 1% of asset is owned by
A. Scott Logan son’s, and 98% of asserts is owned by a grantor retained
annuity trust.
|
(3)
|
Of
these shares, 383,100 were acquired by 1837 Partners, L.P. as
an Investor from the Company and 502,900 were acquired as an Investor
from Aspen in connection with the Private
Placement.
|
(4)
|
Of
these shares, 108,000 were acquired by 1837 Partners QP, L.P. as an
Investor from the Company and 120,500 were acquired as an Investor from
Aspen in connection with the Private
Placement.
|
(5)
|
Of
these shares, 108,900 were acquired by 1837 Partners Ltd. as an Investor
from the Company and 126,600 were acquired as an Investor from Aspen in
connection with the Private
Placement.
|
(6)
|
Of
these shares, 455,117 were acquired by Lewis Opportunity Fund, LP as an
Investor from the Company, 207,500 were acquired as an Investor from Aspen
in connection with the Private Placement and 415,000 were issued by the
Company upon the conversion of warrants previously purchased from
Aspen. Subsequent to the purchase of these shares and prior to
the effectiveness of this Registration Statement, all of these shares were
sold pursuant to Rule 144.
|
(7)
|
Of
these shares, 93,217 were acquired by Lewis Opportunity Fund, Ltd. as an
Investor from the Company, 42,500 were acquired as an Investor from Aspen
in connection with the Private Placement and 85,000 were issued by the
Company upon the conversion of warrants previously purchased from
Aspen. Subsequent to the purchase of these shares and prior to
the effectiveness of this Registration Statement, all of these shares were
sold pursuant to Rule 144.
|
(8)
|
Of
these shares, 100,000 were acquired by Mark G. Egan IRA Rollover as an
Investor from the Company and 500,000 were acquired from Aspen
in connection with the Private
Placement.
|
(9)
|
These
shares represent shares of our Common Stock issuable to Noble upon
conversion of currently exercisable warrants issued by the Company in
connection with the Private Placement for Noble’s service as placement
agent.
|
(10)
|
Subsequent
to the purchase of these shares in the Private Placement and prior to the
effectiveness of this Registration Statement, Mosaic Partners Fund was
liquidated and 135,055 shares were sold to 1837 Partners, LP, 40,980
shares were sold to 1837 Partners, QP LP and 1,465 shares were sold to
1837 Partners, Ltd.
|
(11)
|
Subsequent
to the purchase of these shares in the Private Placement and prior to the
effectiveness of this Registration Statement, Mosaic Partners Fund (US),
LP was liquidated and 42,500 shares were sold to 1837 Partners, Ltd.,
15,000 shares were sold to Ms. Frances E. Tuite, and 15,000 shares were
sold to Mr. Blair R. Haarlow. Ms. Tuite and Mr. Haarlow are
both affiliated with RMB Capital Management, which makes all the
investment decisions for the 1837 Partners LP, 1837 Partners QP, LP and
1837 Partners Ltd.
|
The
following information contains a description of each selling stockholder’s
relationship to us and how each selling stockholder acquired or will acquire
shares to be sold in this offering is detailed below. None of the selling
stockholders have held a position or office, or had any other material
relationship, with us, except as follows:
Shares
Acquired In Connection With Private Placement
During
the period from May 31, 2007 through June 6, 2007, the Company sold 2,666,667
shares of Common Stock to the Investors who are listed herein below pursuant to
the Private Placement at a price equal to $1.50 per share. This
resulted in the Company receiving gross proceeds of $4 million in
cash. After estimated transaction costs, the Parent Company received
net cash proceeds of $3.75 million. The Investors received
registration rights with their shares, and therefore all of those 2,666,667
shares are being registered hereunder. Each of the Investors listed
below are accredited investors.
|
·
|
James
R. Rehak & Joann M. Rehak JTWROS (Rehaks). The Rehaks purchased 33,333
shares of our Common Stock at a purchase price of $1.50 per share, and the
Company in turn received $50,000 as part of the Private
Placement. The Rehaks received registration rights with the
shares and therefore, we are registering these 33,000 shares in this
offering. All investment decisions of the Rehaks are made by
James R. Rehak and Joann M.
Rehak.
|
|
·
|
Leonard
Samuels IRA (LSI).
LSI purchased 110,000 shares of our Common Stock at a purchase price of
$1.50 per share, and the Company in turn received $165,000 as part of the
Private Placement. LSI received registration rights with the
shares and therefore, we are registering these 110,000 shares in this
offering. All investment decisions of LSI are made by Charles
Schwab & Co. Inc., as Custodian for Leonard Samuels
IRA.
|
|
·
|
A.
Scott Logan Revocable Living Trust (SL Trust). SL Trust purchased 500,000 shares
of our Common Stock at a purchase price of $1.50 per share, and the
Company in turn received $750,000 as part of the Private
Placement. SL Trust received registration rights with the
shares and therefore, we are registering these 500,000 shares in this
offering. All investment decisions of SL Trust are made by A.
Scott Logan, Trustee.
|
|
·
|
William
J. Robison (Mr. Robison). Mr. Robison, who serves as a
member of the Board of Directors of the Company, purchased 55,000 shares
of our Common Stock at a purchase price of $1.50 per share, and the
Company in turn received $82,500 as part of the Private
Placement. Mr. Robison received registration rights with the
shares and therefore, we are registering these 55,000 shares in this
offering.
|
|
·
|
1837
Partners, L.P. (1837P1). 1837P1 purchased 383,100 shares
of our Common Stock from the Company at a purchase price of $1.50 per
share, and the Company in turn received $574,650 as part of the Private
Placement. 1837P1 received registration rights with the shares
and therefore, we are registering these 383,100 shares in this
offering. All investment decisions of 1837P1 are made by
Frances Tuite. Subsequent to the Private Placement by the
Company, 1837P1 purchased135,055 shares from
Mosaic.
|
|
·
|
1837
Partners QP, L.P. (1837P2). 1837P2 purchased 108,000
shares of our Common Stock from the Company at a purchase price of $1.50
per share, and the Company in turn received $162,000 as part of the
Private Placement. 1837P2 received registration
rights with the shares and therefore, we are registering these 108,000
shares in this offering. All investment decisions of 1837P2 are
made by Frances Tuite. Subsequent to the Private Placement by
the Company, 1837P2 purchased 40,980 shares from
Mosaic.
|
|
·
|
1837
Partners, Ltd. (1837P3). 1837P3 purchased 108,900
shares of our Common Stock from the Company at a purchase price of $1.50
per share, and the Company in turn received $163,350 as part of the
Private Placement. 1837P3 received registration rights with the
shares and therefore, we are registering these 383,100 shares in this
offering. All investment decisions of 1837P3 are made by
Frances Tuite. Subsequent to the offering by the Company,
1837P3 purchased 1,465 shares from Mosaic and 42,500 shares from
MPF.
|
|
·
|
Lewis
Opportunity Fund, LP (LOF). LOF purchased 455,117 shares of
our Common Stock from the Company at a purchase price of $1.50 per share,
and the Company in turn received $682,676 as part of the Private
Placement. LOF received registration rights with the shares and
therefore, we are registering these 455,117 shares in this
offering. All investment decisions of LOF are made by Austin
Lewis. Subsequent to the Private Placement, but prior to the
effectiveness of this Registration Statement, LOF sold all of these shares
pursuant to Rule 144.
|
|
·
|
LAM
Opportunity Fund, Ltd. (LAMOF). LAMOF purchased 93,217 shares of
our Common Stock from the Company at a purchase price of $1.50 per
share, and the Company in turn received $139,826 as part of the Private
Placement. LAMOF received registration rights with the shares
and therefore, we are registering these 93,217 shares in this
offering. All investment decisions of LAMOF are made by Austin
Lewis. Subsequent to the Private Placement, but prior to the
effectiveness of this Registration Statement, LAMOF sold all of these
shares pursuant to Rule 144.
|
|
·
|
Mark
G. Egan IRA Rollover (MGE). MGE purchased 100,000 shares of
our Common Stock from the Company at a purchase price of $1.50 per share,
and the Company in turn received $150,000 as part of the Private
Placement. MGE received registration rights with the shares and
therefore, we are registering these 100,000 shares in this
offering. All investment decisions of MGE are made by Marlin
Capital.
|
|
·
|
Mosaic
Partners Fund (Mosaic). Mosaic purchased 177,500 shares
of our Common Stock from the Company at a purchase price of $1.50 per
share, and the Company in turn received $266,250 as part of the Private
Placement. Mosaic received registration rights with
the shares and therefore, we are registering these 177,500 shares in this
offering. All investment decisions of Mosaic are made by Ajay
Sekhand. Subsequent to the offering Mosaic was liquidated and
135,055 shares were sold to 1837 Partners, LP, 40,980 shares were sold to
1837 Partners, QP LP and 1,465 shares were sold to 1837 Partners,
Ltd.
|
|
·
|
Mosaic
Partners Fund (US), LP (MPF). MPF purchased 72,500 shares of
our Common Stock from the Company at a purchase price of $1.50 per share,
and the Company in turn received $108,750 as part of the Private
Placement. MPF received registration rights with the shares and
therefore, we are registering these 72,500 shares in this
offering. All investment decisions of MPF are made Ajay
Sekhand. Subsequent to the offering Mosaic was liquidated and
42,500 shares were sold to 1837 Partners, Ltd., 15,000 shares were sold to
Ms. Frances E. Tuite, and 15,000 shares were sold to Mr. Blair R.
Haarlow. Ms. Tuite and Mr. Haarlow are both affiliated with RMB
Capital Management, which makes all the investment decisions for the 1837
Partners LP, 1837 Partners QP, LP and 1837 Partners
Ltd.
|
|
·
|
Ridgecrest
Ltd. (Ridgecrest). Ridgecrest purchased 53,000
shares of our Common Stock from the Company at a purchase price of $1.50
per share, and the Company in turn received $79,500 as part of the Private
Placement. Ridgecrest received registration rights with the
shares and therefore, we are registering these 53,000 shares in this
offering. All investment decisions of Ridgecrest are made by
Todd McElroy.
|
|
·
|
Ridgecrest
Partners QP, LP (Ridgecrest II). Ridgecrest
II purchased 205,000 shares of our Common Stock from the Company at a
purchase price of $1.50 per share, and the Company in turn received
$307,500 as part of the Private Placement. Ridgecrest II
received registration rights with the shares and therefore, we are
registering these 205,000 shares in this offering. All
investment decisions of Ridgecrest II are made by Todd
McElroy.
|
|
·
|
Ridgecrest,
LP (Ridgecrest III). Ridgecrest III purchased 12,000
shares of our Common Stock from the Company at a purchase price of $1.50
per share, and the Company in turn received $18,000 as part of the Private
Placement. Ridgecrest III received registration rights with the
shares and therefore, we are registering these 12,000 shares in this
offering. All investment decisions of Ridgecrest III are made
by Todd McElroy.
|
|
·
|
Leviticus
Partners, LP (Leviticus). Leviticus purchased 200,000
shares of our Common Stock from the Company at a purchase price of $1.50
per share, and the Company in turn received $300,000 as part of the
Private Placement. Leviticus received registration rights with
the shares and therefore, we are registering these 200,000 shares in this
offering. All investment decisions of Leviticus are made by
Adam M. Hutt.
|
During
the period from June 1, 2007 through June 5, 2007, the Investors purchased
1,500,000 shares of Common Stock from Aspen in connection with the Private
Placement. The Investors received registration rights with
their shares, and therefore all of those 1,500,000 shares are being registered
hereunder. Each of the Investors is an accredited
investor.
|
·
|
1837
Partners, L.P. (1837P1). 1837P1 purchased 502,900 shares
of our Common Stock from Aspen on June 1, 2007 and
received registration rights with the shares and therefore, we
are registering these 502,900 shares in this
offering.
|
|
·
|
1837
Partners QP, L.P. (1837P2). 1837P2 purchased 120,500 shares
of our Common Stock on June 1, 2007 and received registration rights with
the shares and therefore, we are registering these 108,000 shares in this
offering.
|
|
·
|
1837
Partners, Ltd. (1837P3). 1837P3 purchased
126,600 shares of our Common Stock from Aspen on June 1, 2007 and received
registration rights with the shares and therefore, we are registering
these 126,600 shares in this
offering.
|
|
·
|
Lewis
Opportunity Fund, LP (LOF). LOF purchased 207,500 shares of
our Common Stock from Aspen on June 5, 2007 and
received registration rights with the shares and therefore, we
are registering these 207,500 shares in this offering. All
investment decisions of LOF are made by LAM. Subsequent to the
Private Placement, but prior to the effectiveness of this Registration
Statement, LOF sold all of these shares pursuant to Rule
144.
|
|
·
|
LAM
Opportunity Fund, Ltd. (LAMOF). LAMOF purchased 42,500 shares of
our Common Stock from Aspen on June 5, 2007 and received registration
rights with the shares and therefore, we are registering these 42,500
shares in this offering. Subsequent to the Private Placement,
but prior to the effectiveness of this Registration Statement, LAMOF sold
all of these shares pursuant to Rule
144.
|
|
·
|
Lewis
Opportunity Fund, LP (LOF). LOF purchased from Aspen a
warrant to purchase 415,000 shares of our Common Stock on June 6, 2007 and
received registration rights for the shares underlying the
warrant. On June 6, 2007, 2007, LOF exercised the warrant
whereby the Company issued and sold to LOF 415,000 shares at $0.26 per
share. As a result, the Company received
$107,900. We are registering these 415,000 shares in this
offering. All investment decisions of LOF are made by Austin
Lewis. Subsequent to the Private Placement, but prior to the
effectiveness of this Registration Statement, LOF sold all of these shares
pursuant to Rule 144.
|
|
·
|
LAM
Opportunity Fund, Ltd. (LAMOF). LAMOF purchased from
Aspen a warrant to purchase 85,000 shares of our Common Stock on June 6,
2007 and received registration rights for the shares underlying the
warrant. On June 6, 2007, LAMOF exercised the warrant whereby
the Company issued and sold to LAMOF 85,000 shares at $0.26 per
share. As a result, the Company received $22,100. We
are registering these 85,000 shares in this offering. All
investment decisions of LAMOF are made by Austin
Lewis. Subsequent to the Private Placement, but prior to the
effectiveness of this Registration Statement, LAMOF sold all of these
shares pursuant to Rule 144.
|
|
·
|
Mark
G. Egan IRA Rollover (MGE). MGE purchased 500,000 shares of
our Common Stock from Aspen on June 5, 2007 and received registration
rights with the shares and therefore, we are registering these 500,000
shares in this offering. All investment decisions of MGE are made by
Mark G. Egan.
|
Other Selling
Stockholders
|
·
|
Noble
International Investments, Inc. (Noble). The Company engaged
Noble, an unaffiliated registered broker-dealer, to advise us as our
placement agent in connection with the Private Placement pursuant to that
certain Letter Agreement, dated May 21, 2007, by and between the Parent
Company and Noble. In consideration for its services, Noble
received (a) warrants to purchase 98,417 shares of our Common Stock, which
such warrants have a five (5) year term, a purchase price equal
to $1.50 per share, cashless exercise provisions, customary anti-dilution
provisions and the same other terms, conditions, rights and preferences as
those shares sold to the Investors by the Company in the Private
Placement, and (b) an additional cash fee equal to five percent (5%) of
the gross proceeds from each sale made to the Investors by the Company, or
$147,625.50. Noble received piggy-back registration rights with
its shares, and therefore we are registering 98,417 shares for Noble
hereunder. All investment decisions for Noble are made by Shaun
Titcomb.
|
|
·
|
Aspen
Select Healthcare, L.P. (Aspen). In April 2003, we conducted a
private placement to Aspen and its affiliates in which we received net
proceeds of $114,271 (after deducting certain transaction expenses)
through the issue of 13,927,062 shares of Common Stock. In the
April 2003 transaction, Aspen purchased 9,303,279 shares, of which
1,300,000 were subsequently transferred to other entities. All
investment decisions of Aspen are made by Mr. Steven C. Jones, a member of
our Board of Directors and our Acting Principal Financial
Officer. We are registering 1,889,245 of these shares in this
offering.
|
|
·
|
Certain
Funds of Lewis Asset Management, Inc. (LAM). Lewis
Opportunity Fund and LAM Opportunity Fund received shares of our Common
Stock issued by the Company upon the exercise of warrants on June 6,
2007. These warrants had been previously purchased by the funds
from Aspen on June 6, 2007. Subsequent to the exercise of
these warrants, but prior to the effectiveness of this Registration
Statement, LAM sold all of these shares pursuant to Rule
144.
|
This
prospectus relates to shares of our Common Stock that may be offered and sold
from time to time by certain selling stockholders. There will be no proceeds to
us from the sale of shares of Common Stock in this
offering.
The
selling stockholders have advised us that the sale or distribution of our Common
Stock owned by the selling stockholders may be effected directly to purchasers
by the selling stockholders as principals or through one or more underwriters,
brokers, dealers or agents from time to time in one or more transactions (which
may involve crosses or block transactions) (i) on the over-the-counter market or
in any other market on which the price of our shares of Common Stock are quoted
or (ii) in transactions otherwise than on the over-the-counter market or in any
other market on which the price of our shares of Common Stock are quoted. Any of
such transactions may be effected at market prices prevailing at the time of
sale, at prices related to such prevailing market prices, at varying prices
determined at the time of sale or at negotiated or fixed prices, in each case as
determined by the selling stockholders or by agreement between the selling
stockholders and underwriters, brokers, dealers or agents, or purchasers. If the
selling stockholders effect such transactions by selling their shares of our
Common Stock to or through underwriters, brokers, dealers or agents, such
underwriters, brokers, dealers or agents may receive compensation in the form of
discounts, concessions or commissions from the selling stockholders or
commissions from purchasers of Common Stock for whom they may act as agent
(which discounts, concessions or commissions as to particular underwriters,
brokers, dealers or agents may be in excess of those customary in the types of
transactions involved).
Under the
securities laws of certain states, the shares of our Common Stock may be sold in
such states only through registered or licensed brokers or dealers.
The
selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty (50) states. In
addition, in certain states shares of our Common Stock may not be sold unless
the shares have been registered or qualified for sale in such state or an
exemption from registration or qualification is available and is complied
with.
We will
pay all expenses incident to the registration, offering and sale of the shares
of our Common Stock to the public hereunder other than commissions, fees and
discounts of underwriters, brokers, dealers and agents. If any of these other
expenses exists, we expect the selling stockholders to pay these
expenses.
We
estimate that the expenses of the offering to be borne by us will be
approximately $85,000. The offering expenses consisted of: a SEC
registration fee of $885, printing expenses of $2,500; accounting fees of
$15,000; legal fees of $30,000 and miscellaneous expenses of
$36,600. We will not receive any proceeds from the sale of any of the
shares of our Common Stock by the selling stockholders.
The
selling stockholders are subject to applicable provisions of the Exchange Act
and its regulations, including, Regulation M. Under Regulation M, the
selling stockholders or their agents may not bid for, purchase, or attempt to
induce any person to bid for or purchase, shares of our Common Stock while such
selling stockholders are distributing shares covered by this prospectus.
Pursuant to the requirements of Item 512 of Regulation S-K and as stated in Part
II of this Registration Statement, we must file a post-effective amendment to
the accompanying Registration Statement once informed of a material change from
the information set forth with respect to the Plan of Distribution.
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 OTCBB under the symbol “NGNM.OB.”
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 herein.
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 SEC 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
payor. 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 payor’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 payor.
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 payors as of the date that the receivables were
recorded:
NEOGENOMICS
AGING OF RECEIVABLES BY PAYOR GROUP
|
|
|
|
|
|
|
|
|
0-30 |
|
|
|
|
|
|
30-60 |
|
|
|
|
|
|
60-90 |
|
|
|
|
|
|
90-120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
% |
|
|
5,658 |
|
|
|
0 |
% |
|
|
31,854 |
|
|
|
1 |
% |
Total
|
|
$ |
1,260,748 |
|
|
|
34 |
% |
|
$ |
634,768 |
|
|
|
17 |
% |
|
$ |
430,525 |
|
|
|
12 |
% |
|
$ |
211,566 |
|
|
|
6 |
% |
|
$ |
1,113,692 |
|
|
|
31 |
% |
|
$ |
3,651,299 |
|
|
|
100 |
% |
|
|
|
|
|
|
|
0-30 |
|
|
|
|
|
|
30-60 |
|
|
|
|
|
|
60-90 |
|
|
|
|
|
|
90-120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 claims brought against the Company by
Accupath Diagnostics Laboratories, Inc. (“US Labs”), on April
23, 2008, the Company and US Labs entered into a settlement agreement and
release (the “Settlement Agreement”); whereby, both parties agreed to settle and
resolve all claims asserted in and arising out of the aforementioned
lawsuit. Pursuant to the Settlement Agreement, we are required to pay
$500,000 to US Labs, of which $250,000 was paid on May 1, 2008 with funds from
the Company’s insurance carrier and the remaining $250,000 shall be paid by the
Company on the last day of each month in equal installments of $31,250
commencing on May 31, 2008. Under the terms of the Settlement
Agreement, there are certain provisions agreed to in the event of
default.
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 of our Annual Report on Form 10-KSB
as filed with the SEC on April 14, 2008 for more information regarding the
valuation of stock-based compensation. Results Of Operations For The Three
Months Ended March 31, 2008 As Compared To The Three Months Ended March 31,
2007
Results Of Operations For The Three Months
Ended March 31, 2008 As Compared To The Three Months Ended March 31,
2007
Revenue
During
the three months ended March 31, 2008, our revenues increased approximately 86%
to $4,162,800 from $2,242,700 during the three months ended March 31, 2007. This
was the result of a 61% increase in testing volume and a 15% 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 primarily attributable to an increase in certain Medicare reimbursements for
2008, and a modest increase in flow cytometry testing which has the highest
reimbursement rate of any test we offer. Revenues per test are a function of
both the nature of the test and the payor (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 payor. We have
established a reserve for uncollectible amounts based on estimates of what we
will collect from a) third-party payors 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
payors. On March 31, 2008, our allowance for doubtful accounts
was $390,275, a 209% increase from our balance at March 31, 2007 of
$126,363. The allowance for doubtful accounts was approximately 11.7%
and 6.0% of accounts receivables on March 31, 2008 and March 31, 2007,
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. The increase
in accounts receivable greater than 120 days old was primarily the result of two
factors. First, in July 2007 we determined that our current billing
system was not scalable as our volume grew and made management of accounts
receivable very difficult. Second, in 2007 we determined that we were
understaffed and lacked adequate management in our billing
department. Therefore, in the fourth quarter of 2007 we reorganized
our billing department and in the first quarter of 2008 we implemented a new
billing system. We are still in the process of resolving previous
billing claim issues which has resulted in a much higher allowance for doubtful
accounts as a percentage of accounts receivable. As a result, the
percentage of our claims over 120 days at March 31, 2008 declined 5% from the
previous period ended December 31, 2007.
Cost
of Revenue
During
the three months ended March 31, 2008, our cost of revenue, as a percentage of
revenue, increased from 42% for the three months ended March 31, 2007 to
45%. This was primarily a result of increases in the number of
employees and related benefits as well as increased facilities and other related
costs as the Company expanded in 2007 in order to have additional capacity in
order to handle anticipated growth in 2008.
General
and Administrative Expenses
For the
three months ended March 31, 2008, our general and administrative expenses
increased by approximately 76% to $2,514,600 from approximately $1,426,500 for
the three months ended March 31, 2007. General and administrative expenses, as a
percentage of sales were 60% for the three months ended March 31, 2008, compared
with 64% for the three months ended March 31, 2007, a decrease of
4%. This decrease was primarily a net result of an 8% decrease in
legal expense as a percentage of revenue offset by a 5% increase in bad debt
expense as a percentage of revenue. Bad debt expense for the three
months ended March 31, 2008 and March 31, 2007 was $425,500 and $110,000,
respectively. This increase was necessitated by the significant
increase in revenues noted above and to a lesser extent by the issues denoted in
the revenue paragraph above and in our critical accounting policies
as described herein.
Other
Income/Expense
Interest
expense, net decreased approximately 44% in the first three months of 2008 to
approximately $55,100 from approximately $98,900 for the first three months of
2007. This decrease is primarily a result of the different amounts
and borrowing instruments in place in the respective
periods. Interest expense for the period ended March 31, 2008 is
related to our new credit facility, while interest expense for the period ended
March 31, 2007 was related to our previous credit facility with
Aspen.
Net
Loss
As a
result of the foregoing, our net loss increased from approximately ($219,500)
for the three months ended March 31, 2007 to approximately ($265,400) for the
three months ended March 31, 2008, an increase in loss of $45,818 or
21%.
Liquidity
and Capital Resources
During
the three months ended March 31, 2008, our operating activities provided
approximately $201,400 in cash compared with $382,000 used in the three months
ended March 31, 2007. We also spent approximately $23,100 on new
equipment during the three months ended March 31, 2008, compared with $24,400
for the three months ended March 31, 2007. At March 31, 2008 and
March 31, 2007, we had cash and cash equivalents of approximately $330,358 and
$575,393, respectively. 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 CapitalSource, 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 CapitalSource Credit Facility
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 operations. 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 through
banks and/or other large institutional investors. On March 31, 2008,
we had $330,358 in cash on hand and approximately $1,036,000 of availability
under our Credit Facility.
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 payor mix
changes. Revenues per test are a function of both the nature of
the test and the payor (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 payor. We have established a reserve for
uncollectible amounts based on estimates of what we will collect from a)
third-party payors 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 payors. 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 our
Common Stock at a purchase price of $0.20 per/share and the granting of 900,000
warrants with an exercise price of $0.26 per/share to SKL Limited Partnership,
LP (“SKL” as more fully described below) in exchange for five (5) year warrants
to purchase 150,000 shares at an exercise price of $0.26 per/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
per/share (1,000,000 shares) and receive a five (5) year warrant to purchase
450,000 shares of the Company’s common stock at an exercise price of $0.26
per/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, through
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 per/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 warrant agreement, 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 (the
“Existing
Warrants”) were vested and the exercise price per share 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 per/share, and their value on the January 18, 2006
modification date which was calculated using an exercise price of $0.31
per/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 Existing 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 through 21, 2006, the Company entered into agreements
with four (4) other shareholders who are parties to a Shareholders’ Agreement,
dated March 23, 2005, to exchange five (5) year warrants to purchase an
aggregate of 150,000 shares of stock at a purchase price of $0.26 per/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 per/share
for $400,000. Under the terms of the Subscription, the Subscription Shares are
restricted for a period of twenty-four (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 (5) year warrant to purchase 900,000 shares of the Company’s Common Stock
at an exercise price of $0.26 per/share. SKL has no previous
affiliation with the Company.
On June
6, 2005, we entered into a Standby Equity Distribution Agreement (the “SEDA”)
with Cornell Capital Partners, LP. Pursuant to the SEDA, the Company
could, at its discretion, periodically sell to Cornell Capital Partners, LP
shares of common stock for a total purchase price of up to $5.0
million. On August 1, 2007, the SEDA expired and we
decided not to renew it.
The
following sales of common stock were made under our SEDA with Cornell Capital
Partners LP since it was first declared effective on August 1,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 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 the Securities Act of 1933, as amended (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 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 this 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 resolved all open issues 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. 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 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
(“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.
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 $330,358 in
cash on hand and approximately $1,036,000 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 became 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.
US
Labs Settlement
On April
23, 2008, the Company and US Labs entered into the Settlement Agreement;
whereby, both parties agreed to settle and resolve all claims asserted in and
arising out of US Labs’ lawsuit against the Company and certain of its officers
and employees. Pursuant to the Settlement Agreement, we are required to pay
$500,000 to US Labs, of which $250,000 was paid on May 1, 2008 with funds from
the Company’s insurance carrier and the remaining $250,000 shall be paid by the
Company on the last day of each month in equal installments of $31,250
commencing on May 31, 2008. Under the terms of the Settlement
Agreement, there are certain provisions agreed to in the event of
default.
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.
DESCRIPTION
OF BUSINESS
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;
b) Fluorescence
In-Situ Hybridization (FISH) testing, which analyzes abnormalities at the
chromosomal and gene levels;
c) flow
cytometry testing, which analyzes gene expression of specific markers inside
cells and on cell surfaces; and
d) molecular
testing which involves analysis of DNA and RNA to diagnose and predict the
clinical significance of various genetic sequence disorders.
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:
|
·
|
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.
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 May 15, 2008, NeoGenomics’ sales and marketing
organization totaled 14 individuals, and we have received business from 26
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.
We also
recently increased our professional level staffing for global requisitions
requiring interpretation in 2007. We currently employ three 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 operated three
laboratory locations in Fort Myers, FL; Irvine, CA; and Nashville TN, each of
which received the appropriate state, Clinical Laboratory Improvement Amendments
(CLIA), and College of American Pathologists (CAP) licenses and
accreditations. 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 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. This initial
revenue stream was small due to the size of the contracts closed. In
2008, we hope to expand on our CRO revenue stream with more and larger
contracts.
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 in FY 2007 was approximately $702, which was an increase of
approximately 4% from FY 2006. Our average revenue/test in FY 2007
was approximately $548, which was an increase of approximately 9% over FY
2006. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Received (Cases)
|
|
|
16,385 |
|
|
|
9,563 |
|
|
|
71.3 |
% |
Number
of Tests Performed
|
|
|
20,998 |
|
|
|
12,838 |
|
|
|
63.6 |
% |
Average
Number of Tests/Requisition
|
|
|
1.28 |
|
|
|
1.34 |
|
|
|
(4.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$ |
11,504,725 |
|
|
$ |
6,475,996 |
|
|
|
77.7 |
% |
Average
Revenue/Requisition
|
|
|
702.15 |
|
|
$ |
677.19 |
|
|
|
3.7 |
% |
Average
Revenue/Test
|
|
|
547.90 |
|
|
$ |
504.44 |
|
|
|
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 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 ninety-two 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 forty-eight employees. Our employees are not represented by any
union and we believe our employee relations are good.
As of
March 31, 2008, we had ninety full-time employees.
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,” and
“Confidentiality of Health Information” 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 payors,
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
originally enacted in 1863 and subsequently amended several times
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 after May 30, 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.
Other
Our
operations currently are, or may be in the future, subject to various federal,
state and local laws, regulations and recommendations relating to data
protection, safe working conditions, laboratory and manufacturing practices and
the purchase, storage, movement, use and disposal of hazardous or potentially
hazardous substances used in connection with our research work and manufacturing
operations, including radioactive compounds and infectious disease agents.
Although we believe that our safety procedures comply with the standards
prescribed