10-KSB 2006
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20459
(
X )
Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934.
For
the Year Ended December 31, 2006
(
)
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of
1934.
For
the
transition period from __________ to __________.
Commission
File Number: 333-72097
NEOGENOMICS,
INC.
(Name
of
small business issuer)
NEVADA
|
74-2897368
|
(State
or other jurisdiction of
|
(IRS
Employer I.D. No.)
|
incorporation
or organization)
|
|
12701
Commonwealth Drive, Suite 9, Fort Myers, FL 33913
Address
of Principal Executive Offices:
(239)
768-0600
Issuers
telephone number
Securities
registered pursuant to Section 12(b) of the Act:
NONE
Securities
registered pursuant to Section 12(g) of the Act:
NONE
Check
whether the issuer (1) has filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
X
Yes __
No
Check
if
there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form and no disclosure will be contained,
to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by referencing Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). _
Yes X No
The
issuer's revenues for the most recent fiscal year were approximately
$6,476,000.
The
aggregate market value of the voting stock held by non-affiliates of the
registrant at March 29, 2007 was approximately $23,227,159 (Based on 14,889,205
shares held by non-affiliates and a closing share price of $1.56/share on March
29, 2007). Shares of common stock held by each officer and director and by
each
person who owns more than 10% of the outstanding common stock have been excluded
in that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As
of
March 29, 2007, 27,695,984 shares of common stock were
outstanding.
Transitional
small business disclosure format. _
Yes
X
No
PART
I
FORWARD-LOOKING
STATEMENTS
This
Form
10-KSB contains “forward-looking statements” relating to NeoGenomics, Inc., a
Nevada corporation (referred to individually as the “Parent Company” or
collectively with all of its subsidiaries as “NeoGenomics” or the “Company” in
this Form 10-KSB), which represent the Company’s current expectations or beliefs
including, but not limited to, statements concerning the Company’s operations,
performance, financial condition and growth. For this purpose, any statements
contained in this Form 10-KSB that are not statements of historical fact are
forward-looking statements. Without limiting the generality of the foregoing,
words such as “may”, “anticipation”, “intend”, “could”, “estimate”, or
“continue” or the negative or other comparable terminology are intended to
identify forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, such as credit losses, dependence on
management and key personnel, variability of quarterly results, and the ability
of the Company to continue its growth strategy and competition, certain of
which
are beyond the Company’s control. Should one or more of these risks or
uncertainties materialize or should the underlying assumptions prove incorrect,
actual outcomes and results could differ materially from those indicated in
the
forward-looking statements.
Any
forward-looking statement speaks only as of the date on which such statement
is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of
each
such factor on the business or the extent to which any factor, or combination
of
factors, may cause actual results to differ materially from those contained
in
any forward-looking statements.
ITEM
1. DESCRIPTION
OF BUSINESS
NeoGenomics,
Inc., a Nevada corporation (referred to individually as the “Parent Company” or
collectively with all of its subsidiaries as “NeoGenomics” or the “Company” in
this Form 10-KSB) is the registrant for SEC reporting purposes. Our common
stock
is listed on the NASDAQ Over-The-Counter Bulletin Board (the “OTCBB”) under the
symbol “NGNM.”
NeoGenomics
operates cancer-focused testing laboratories that specifically target the
rapidly growing genetic and molecular testing segment of the medical laboratory
industry. Headquartered in Fort Myers, Florida, 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
genetic and molecular testing segment of the medical laboratory industry is
the
most rapidly growing niche of the market. Approximately six years ago, the
World
Health Organization reclassified cancers as genetic anomalies. This growing
awareness of the genetic root behind most cancers combined with advances in
technology and genetic research, including the complete sequencing of the human
genome, have made possible a whole new set of tools to diagnose and treat
diseases. This has opened up a vast opportunity for laboratory companies that
are positioned to address this growing market segment.
The
medical testing laboratory market can be broken down into three primary
segments:
• clinical
lab testing,
• anatomic
pathology testing, and
• genetic
and molecular testing.
Clinical
laboratories are typically engaged in high volume, highly automated, lower
complexity tests on easily procured specimens such as blood and urine. Clinical
lab tests often involve testing of a less urgent nature, for example,
cholesterol testing and testing associated with routine physical exams. This
type of testing yields relatively low average revenue per test. 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. The higher complexity AP tests typically involve more labor
and
are more technology intensive than clinical lab tests. Thus AP tests generally
result in higher average revenue per test than clinical lab tests.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or base
pairs of DNA or RNA for abnormalities. Genetic and molecular testing have become
important and highly accurate diagnostic tools over the last five years. 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 following chart shows the differences between
the
genetic and molecular niche and other segments of the medical laboratory
industry. Up until approximately five years ago, the genetic and molecular
testing niche was considered to be part of the Anatomic Pathology segment,
but
given its rapid growth, it is now more routinely broken out and accounted for
as
its own segment.
COMPARISON
OF THE MEDICAL LABORATORY MARKET SEGMENTS (1)
Attributes
|
Clinical
|
Anatomic
Pathology
|
Genetic/Molecular
|
Testing
Performed On
Testing
Volume
Physician
Involvement
Malpractice
Ins. Required
Other
Professionals Req.
Level
of Automation
Diagnostic
in Nature
Types
of Diseases Tested
Typical
per Price/Test
Estimated
Size of Market
Estimated
Annual Growth Rate
|
Blood,
Urine
High
Low
Low
None
High
Usually
Not
Many
Possible
$5
- $35/Test
$25
- $30 Billion
4%
-5%
|
Tissue/Cells
Low
High
- Pathologist
High
None
Low-Moderate
Yes
Primarily
to Rule out Cancer
$25
- $500/Test
$10
- $12 Billion
6%
- 7%
|
Chromosomes/Genes/DNA
Low
Low
- Medium
Low
Cyto/Molecular
geneticist
Moderate
Yes
Rapidly
Growing
$200
- $1,000/Test
$4
- $5 Billion (2)
25+%
|
Established
Competitors
|
Quest
Diagnostics
LabCorp
Bio
Reference Labs
DSI
Laboratories
Hospital
Labs
Regional
Labs
|
Quest
Diagnostics
LabCorp
Genzyme
Genetics
Ameripath
Local
Pathologists
|
Genzyme
Genetics
Quest
Diagnostics
LabCorp
Major
Universities
|
(1)
Derived from industry analyst reports
(2)
Includes flow cytometry testing, which historically has been classified under
anatomic pathology.
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 liquid 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 March 31, 2007, NeoGenomics’ sales organization totaled 9
individuals. Recent, key hires included our Vice President of Sales &
Marketing, and various sales managers and representatives in the Northeastern,
Southeastern, and Western states. We intend to continue adding sales
representatives on a quarterly basis throughout the year As more sales
representatives are added, 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. 2006 saw the introduction of our Genetic Pathology
Solutions (GPS) product that provides summary interpretation of multiple testing
platforms all in one consolidated report. Response from clients has been very
favorable and provides another option for those customers that require a higher
degree of customized service.
Another
important service was initiated in December 2006 when we became the first
laboratory to offer technical-component only (tech-only) FISH testing to the
key
community-based pathologist market segment. NeoFISH has been enthusiastically
received and has provided our sales team with another differentiating product
to
meet the needs of our target community-based pathologists. With NeoFISH these
customers are able to retain a portion of the overall testing revenue from
such
FISH specimens themselves, which serves to much better align their interests
with those of NeoGenomics than what might otherwise be possible with larger
laboratory competitors.
We
believe NeoGenomics average 3-5 day turn-around time for our cytogenetics
services remains an industry-leading benchmark. 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 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
2006
we began an aggressive campaign to form new laboratories around the country
that
will allow us to regionalize our operations 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 2006, NeoGenomics achieved the milestone of opening two other
laboratories to complement our headquarters in Fort Myers, Florida. NeoGenomics
facilities in Nashville, Tennessee and Irvine, California received the
appropriate state and CLIA licensure and are now receiving live specimens.
As
situations dictate and opportunities arise, we will continue to develop and
open
new laboratories, seamlessly linked together by our optimized Laboratory
Information System (LIS), to better meet the regionalized needs of our
customers.
2006
also
saw the initial establishment of 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.
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 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.
Historically,
the above approach has borne out well for the Company. For most of FY 2004,
the
Company only performed one type of test in-house, cytogenetics, which resulted
in only one test being performed per customer requisition for most of the year
and an average revenue per requisition of approximately $490. With the
subsequent addition of FISH testing in FY 2005 and flow cytometry to our
pre-existing cytogenetics testing in FY 2006, our average revenue/requisition
increased by 35.6% in FY 2005 to approximately $632 and a further 7% in FY
2006
to approximately $677/requisition. We believe with focused sales and marketing
efforts and the recent launch of GPS reporting, NeoFISH tech-only FISH services,
and the future addition of additional testing platforms, the Company can
continue to increase our average revenue per customer requisition.
|
|
FY
2006
|
|
FY
2005
|
|
%
Inc (Dec)
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Rec’d (Cases)
|
|
|
9,563
|
|
|
2,982
|
|
|
220.7
|
%
|
Number
of Tests Performed
|
|
|
12,838
|
|
|
4,082
|
|
|
214.5
|
%
|
Average
Number of Tests/Requisition
|
|
|
1.34
|
|
|
1.37
|
|
|
(2.1
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$
|
6,475,996
|
|
$
|
1,885,324
|
|
|
243.5
|
%
|
Average
Revenue/Requisition
|
|
$
|
677.19
|
|
$
|
632.23
|
|
|
7.1
|
%
|
Average
Revenue/Test
|
|
$
|
504.44
|
|
$
|
461.86
|
|
|
9.2
|
%
|
We
believe this bundled approach to testing represents a clinically sound practice.
In addition, as the average number of tests performed per requisition increases,
this should drive large increases in our revenue and afford the Company
significant synergies and efficiencies in our operations and sales and marketing
activities. For instance, initial testing for many hematologic cancers may
yield
total revenue ranging from approximately $1,800 - $3,600/requisition and is
generally comprised of a combination of some or all of the following tests:
cytogenetics, fluorescence in-situ hybridization (FISH), flow cytometry and,
per
client request, morphology testing. Whereas in FY 2004, we only addressed
approximately $500 of this potential revenue per requisition; in FY 2005 we
addressed approximately $1,200 - $1,900 of this potential revenue per
requisition; and in FY 2006, we could address this revenue stream (see below),
dependent on medical necessity criteria and guidelines:
|
|
Average
Revenue/Test
|
|
|
|
|
|
Cytogenetics
|
|
$
|
400-$500
|
|
Fluorescence
In
Situ Hybridization (FISH)
|
|
|
|
|
-
Technical component
|
|
$
|
300-$1000
|
|
-
Professional component
|
|
$
|
200-$500
|
|
Flow
cytometry
|
|
|
|
|
-
Technical component
|
|
$
|
400-$700
|
|
-
Professional component
|
|
$
|
100-$200
|
|
Morphology
|
|
$
|
400-$700
|
|
Total
|
|
$
|
1,800-$3,600
|
|
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 the chromosomes of 20 different cells. Examples of cytogenetics testing
include bone marrow aspirate or peripheral blood analysis to diagnose various
types of leukemia and lymphoma, and amniocentesis testing of pregnant women
to
diagnose genetic anomalies such as Down syndrome in a fetus.
Cytogenetics
testing by large national reference laboratories and other competitors has
historically taken anywhere from 10-14 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. These turnaround times are among the best in the industry and we believe
that, with further demonstration of our consistency in generating results,
more
physicians will incorporate cytogenetics testing into their diagnostic regimens
and thus drive incremental growth in our business.
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 types. 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
specific genes that are implicated in cancer. FISH was originally used as an
additional staining methodology for metaphase analysis (cells in a divided
state
after they have been cultured), but the technique is now routinely applied
to
interphase analysis (non-dividing quiescent cells). During the past 5 years,
FISH testing has begun to demonstrate 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 investigative and diagnostic tool.
Molecular
Testing. Molecular
testing primarily involves the analysis of DNA to screen for and diagnose single
gene disorders such as cystic fibrosis and Tay-Sachs disease as well as
abnormalities in liquid and solid tumors. There are approximately 1.0 - 2.0
million base pairs of DNA in each of the estimated 25,000 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 its 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 during the next several years to 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
virtual 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 2006, we performed 12,838
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. In 2005, four
customers accounted for 65% of our total revenue. For 2006, 3 customers
represented 61% of our revenue with each party representing greater than 15%
of
such revenues. However, as a result of our rapid increase in revenues from
other
customers, these 3 customers only represented 41% of our monthly revenue in
December 2006. Given the substantial increase in customers in the first quarter
of 2007, we expect this percentage to continue to decline. In the event that
we
lost one of these customers, we would potentially lose a significant percentage
of our revenues.
Trademarks
The
“NeoGenomics” name and logo has been trademarked with the United States Patent
and Trademark Office.
Number
of Employees
As
of
December 31, 2006, we had 48 full-time employees. In addition, our Acting
Principal Financial Officer and a pathologist serve as consultants to the
Company on a part-time basis. On December 31, 2005, we had 23 employees. Our
employees are not represented by any union and we believe our employee relations
are good.
Government
Regulation
Our
business is subject to government regulation at the federal, state and local
levels, some of which regulations are described under "Clinical Laboratory
Operations," "Anti-Fraud and Abuse Laws," “The False Claims Act,”
"Confidentiality of Health Information," and "Food and Drug Administration"
below.
Clinical
Laboratory Operations
Genetics
and Molecular Testing.
The
Company operates clinical laboratories in Fort Myers, FL, Nashville, TN, and
Irvine, CA. All locations have obtained CLIA certification 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 genetics laboratories.
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.
In
addition, federal regulatory authorities require participation in a proficiency
testing program approved by HHS for many of the specialties and subspecialties
for which a clinical laboratory seeks approval from Medicare or Medicaid and
certification under CLIA `88. 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.
A
final
rule implementing CLIA `88, published by HHS on February 28, 1992, became
effective September 1, 1992. This rule has been revised on several occasions
and
further revision is expected. The CLIA `88 rule applies to virtually all
clinical laboratories in the United States, including our clinical laboratory
locations. We have reviewed our operations as they relate to CLIA `88,
including, among other things, the CLIA `88 rule's requirements regarding
clinical laboratory administration, participation in proficiency testing,
patient test management, quality control, quality assurance and personnel for
the types of testing we undertake, and believe that all of our clinical
laboratory locations are in compliance with these requirements. Our clinical
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 any clinical laboratory locations,
CLIA
`88 certificate or state license, as well as civil and/or criminal
penalties.
Regulation
of Genetic Testing. In
2000,
the Secretary of Health and Human Services Advisory Committee on Genetic Testing
published recommendations for increased oversight by the Centers for Disease
Control and the FDA for all genetic testing. This committee continues to meet
and discuss potential regulatory changes, but final recommendations have not
been issued.
With
respect to genetic therapies, which may become part of our business in the
future, in addition to FDA requirements, the National Institutes of Health
(“NIH”) has established guidelines providing that transfers of recombinant DNA
into human subjects at NIH laboratories or with NIH funds must be approved
by
the NIH Director. The NIH has established the Recombinant DNA Advisory Committee
to review gene therapy protocols. Although we do not currently offer any gene
therapy services, if we decide to enter this business in the future, we would
expect that all of our gene therapy protocols will be subject to review by
the
Recombinant DNA Advisory Committee.
Anti-Fraud
and Abuse Laws
Existing
federal laws governing Medicare and Medicaid, as well as some other state and
federal laws, also regulate certain aspects of the relationship between
healthcare providers, including clinical and anatomic laboratories, and their
referral sources, including physicians, hospitals and other laboratories. One
provision of these laws, known as the "anti-kickback law," contains extremely
broad proscriptions. Violation of this provision may result in criminal
penalties, exclusion from participation in Medicare and Medicaid programs,
and
significant civil monetary penalties.
In
January 1990, following a study of pricing practices in the clinical laboratory
industry, the Office of the Inspector General ("OIG") of HHS issued a report
addressing how these pricing practices relate to Medicare and Medicaid. The
OIG
reviewed the industry's use of one fee schedule for physicians and other
professional accounts and another fee schedule for patients/third-party payers,
including Medicare, in billing for testing services, and focused specifically
on
the pricing differential when profiles (or established groups of tests) are
ordered.
Existing
federal law authorizes the Secretary of HHS to exclude providers from
participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees "substantially in excess" of their "usual
and
customary charges." On September 2, 1998, the OIG issued a final rule in which
it indicated that this provision has limited applicability to services for
which
Medicare pays under a Prospective Payment System or a fee schedule, such as
anatomic pathology services and clinical laboratory services. In several
Advisory Opinions, the OIG has provided additional guidance regarding the
possible application of this law, as well as the applicability of the
anti-kickback laws to pricing arrangements. The OIG concluded in a 1999 Advisory
Opinion that an arrangement under which a laboratory offered substantial
discounts to physicians for laboratory tests billed directly to the physicians
could potentially trigger the "substantially in excess" provision and might
violate the anti-kickback law, because the discounts could be viewed as being
provided to the physician in exchange for the physician's referral to the
laboratory of non-discounted Medicare business, unless the discounts could
otherwise be justified. The Medicaid laws in some states also have prohibitions
related to discriminatory pricing.
Under
another federal law, known as the "Stark" law or "self-referral prohibition,"
physicians who have an investment or compensation relationship with an entity
furnishing clinical laboratory services (including anatomic pathology and
clinical chemistry services) may not, subject to certain exceptions, refer
clinical laboratory testing for Medicare patients to that entity. Similarly,
laboratories may not bill Medicare or Medicaid or any other party for services
furnished pursuant to a prohibited referral. Violation of these provisions
may
result in disallowance of Medicare and Medicaid claims for the affected testing
services, as well as the imposition of civil monetary penalties and application
of False Claims submissions penalties. Some states also have laws similar to
the
Stark law.
The
False Claims Act
The
Civil False Claims Act enacted
in 1864, pertains to any federally funded program and defines “Fraudulent” as:
knowingly submitting a false claim, i.e. actual knowledge of the falsity of
the
claim, reckless disregard or deliberate ignorance of the falsity of the claim.
These are the claims to which criminal penalties are applied. Penalties include
permissive exclusion in federally funded programs by Center for Medicare
Services (“CMS”) as well as $11,500 plus treble damages per false claim
submitted, and can include imprisonment. High risk areas include but are not
limited to accurate use and selection of CPT codes, ICD-9 codes provided by
the
ordering physician, billing calculations, performance and billing of reported
testing, use of reflex testing, and accuracy of charges at fair market
value.
We
will
seek to structure our arrangements with physicians and other customers to be
in
compliance with the Anti-Kickback Statute, Stark Law, State laws, and the Civil
False Claims Act and to keep up-to-date on developments concerning their
application by various means, including consultation with legal counsel.
However, we are unable to predict how these laws will be applied in the future,
and the arrangements into which we enter could become subject to scrutiny there
under.
In
February 1997 (as revised in August 1998), the OIG released a model compliance
plan for laboratories that is based largely on corporate integrity agreements
negotiated with laboratories that had settled enforcement action brought by
the
federal government related to allegations of submitting false claims. We believe
that we comply with the aspects of the model plan that we deem appropriate
to
the conduct of our business.
Confidentiality
of Health Information
The
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") contains
provisions that affect the handling of claims and other patient information
that
are, or have been used or disclosed by healthcare providers. These provisions,
which address security and confidentiality of PHI (Protected Health Information
or “patient information”) as well as the administrative aspects of claims
handling, have very broad applicability and they specifically apply to
healthcare providers, which include physicians and clinical laboratories. Rules
implementing various aspects of HIPAA are continuing to be developed.
The
HIPAA
Rules include the following components which have already been implemented
at
our locations and industry wide: The Privacy Rule which granted patients rights
regarding their information also pertains to the proper uses and disclosures
of
PHI by healthcare providers in written and verbal formats required
implementation no later than April 14, 2003 for all covered entities except
small health plans which had another year for implementation. The Electronic
Health Care Transactions and Code Sets Standards which established standard
data
content and formats for submitting electronic claims and other administrative
healthcare transactions required implementation no later than October 16, 2003
for all covered entities. On April 20, 2005, CMS required compliance with the
Security Standards which established standards for electronic uses and
disclosures of PHI for all covered entities except small health plans who had
an
additional year to meet compliance. Currently, the industry, including all
of
our locations, is working to comply with the National Provider Identification
number to replace all previously issued provider (organizational and individual)
identification numbers. This number is being issued by CMS and must be used
on
all covered transactions no later than May 23, 2007 by all covered entities
except small health plans which have an additional year to meet compliance
with
this rule.
In
addition to the HIPAA rules described above, we are subject to state laws
regarding the handling and disclosure of patient records and patient health
information. These laws vary widely, and many states are passing new laws in
this area. Penalties for violation include sanctions against a laboratory's
licensure as well as civil or criminal penalties. We believe we are in
compliance with current state law regarding the confidentiality of health
information and continue to keep abreast of new or changing state laws as they
become available.
Food
and Drug Administration
In
January 1998, the FDA issued a revised draft Compliance Policy Guide ("CPG")
that sets forth FDA's intent to undertake a heightened enforcement effort with
respect to the improper Commercialization of In Vitro Diagnostic Devices prior
to receipt of FDA premarket clearance or approval. September, 2006, the FDA
issued the Draft Guidance for Industry, Clinical Laboratories, and FDA Staff
on
In
Vitro Diagnostic
Multivariate Index Assays (IVDMIAs) as a current initiative of the FDA to
regulate test systems that employ data, derived in part from one or more in
vitro assays, and an algorithm that usually, but not necessarily, runs on
software to generate a result that diagnoses a disease or condition or is used
in the cure, mitigation, treatment, or prevention of disease. In the future,
we
plan to perform some testing services using test kits purchased from
manufacturers for which FDA premarket clearance or approval for commercial
distribution in the United States has not been obtained by the manufacturers
("investigational test kits"). Under current FDA regulations and policies,
such
investigational test kits may be sold by manufacturers for investigational
use
only if certain requirements are met to prevent commercial distribution. The
manufacturers of these investigational test kits are responsible for marketing
them under conditions meeting applicable FDA requirements. That draft CPG as
well as the current Draft Guidance on IVDMIAs is not presently in effect but,
if
implemented as written, would place greater restrictions on the distribution
of
such investigational test kits or devices. If we were to be substantially
limited in or prevented from purchasing investigational test kits or devices
by
reason of the FDA finalizing these guidelines, there could be an adverse effect
on our ability to access new technology, which could have a material adverse
effect on our business.
We
also
perform some testing services using reagents, known as analyte specific reagents
("ASRs"), purchased from companies in bulk rather than as part of a test kit.
In
November 1997, the FDA issued a new regulation placing restrictions on the
sale,
distribution, labeling and use of ASRs. Most ASRs are treated by the FDA as
low
risk devices, requiring the manufacturer to register with the agency, its ASRs
(and any other devices), conform to good manufacturing practice requirements,
and comply with medical device reporting of adverse events.
Risk
Factors
We
are
subject to various risks that may materially harm our business, financial
condition and results of operations. An investor should carefully consider
the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline or we may be forced to cease operations.
We
Have A Limited Operating History Upon Which You Can Evaluate Our
Business
The
Company commenced revenue operations in 2002 and is just beginning to generate
meaningful revenue. Accordingly, the Company has a limited operating history
upon which an evaluation of the Company and its prospects can be based. The
Company and its prospects must be considered in light of the risks, expenses
and
difficulties frequently encountered by companies in the rapidly evolving market
for healthcare and medical laboratory services. To address these risks, the
Company must, among other things, respond to competitive developments, attract,
retain and motivate qualified personnel, implement and successfully execute
its
sales strategy, develop and market additional services, and upgrade its
technological and physical infrastructure in order to scale its revenues. The
Company may not be successful in addressing such risks. The limited operating
history of the Company makes the prediction of future results of operations
difficult or impossible.
We
May Not Be Able To Implement The Company’s Business Strategies Which Could
Impair Our Ability to Continue Operations
Implementation
of the Company’s business strategies will depend in large part on the Company’s
ability to (i) attract and maintain a significant number of customers; (ii)
effectively provide acceptable products and services to the Company’s customers;
(iii) obtain adequate financing on favorable terms to fund the Company’s
business strategies; (iv) maintain appropriate procedures, policies, and
systems; (v) hire, train, and retain skilled employees; (vi) continue to operate
with increasing competition in the medical laboratory industry; (vii) establish,
develop and maintain name recognition; and (viii) establish and maintain
beneficial relationships with third-party insurance providers and other third
party payers. The Company’s inability to obtain or maintain any or all these
factors could impair its ability to implement its business strategies
successfully, which could have material adverse effects on its results of
operations and financial condition.
We
May Be Unsuccessful In Managing Our Growth Which Could Prevent the Company
From
Becoming Profitable
The
Company’s recent growth has placed, and is expected to continue to place, a
significant strain on its managerial, operational and financial resources.
To
manage its potential growth, the Company must continue to implement and improve
its operational and financial systems and to expand, train and manage its
employee base. The Company may not be able to effectively manage the expansion
of its operations and the Company’s systems, procedures or controls may not be
adequate to support the Company’s operations. The Company’s management may not
be able to achieve the rapid execution necessary to fully exploit the market
opportunity for the Company’s products and services. Any inability to manage
growth could have a material adverse effect on the Company’s business, results
of operations, potential profitability and financial condition.
Part
of
the Company’s business strategy may be to acquire assets or other companies that
will complement the Company’s existing business. The Company is unable to
predict whether or when any material transaction will be completed should
negotiations commence. If the Company proceeds with any such transaction, the
Company may not effectively integrate the acquired operations with the Company’s
own operations. The Company may also seek to finance any such acquisition by
debt financings or issuances of equity securities and such financing may not
be
available on acceptable terms or at all.
We
May Incur Greater Costs Than Anticipated, Which Could Result in Sustained
Losses
The
Company used reasonable efforts to assess and predict the expenses necessary
to
pursue its business plan. However, implementing the Company’s business plan may
require more employees, capital equipment, supplies or other expenditure items
than management has predicted. Similarly, the cost of compensating additional
management, employees and consultants or other operating costs may be more
than
the Company estimates, which could result in sustained losses.
We
May Face Fluctuations in Results of Operations Which Could Negatively Affect
Our
Business Operations and We are Subject to Seasonality in our
Business
As
a
result of the Company’s limited operating history and the relatively limited
information available on the Company’s competitors, the Company may not have
sufficient internal or industry-based historical financial data upon which
to
calculate anticipated operating expenses. Management expects that the Company’s
results of operations may also fluctuate significantly in the future as a result
of a variety of factors, including, but not limited to, (i) the continued rate
of growth, usage and acceptance of the Company’s products and services; (ii)
demand for the Company’s products and services; (iii) the introduction and
acceptance of new or enhanced products or services by us or by competitors;
(iv)
the Company’s ability to anticipate and effectively adapt to developing markets
and to rapidly changing technologies; (v) the Company’s ability to attract,
retain and motivate qualified personnel; (vi) the initiation, renewal or
expiration of significant contracts with the Company’s major clients; (vii)
pricing changes by us, our suppliers or our competitors; (viii) seasonality;
and
(ix) general economic conditions and other factors. Accordingly, future sales
and operating results are difficult to forecast. The Company’s expenses are
based in part on the Company’s expectations as to future revenues and to a
significant extent are relatively fixed, at least in the short-term. The Company
may not be able to adjust spending in a timely manner to compensate for any
unexpected revenue shortfall. Accordingly, any significant shortfall in relation
to the Company’s expectations would have an immediate adverse impact on the
Company’s business, results of operations and financial condition. In addition,
the Company may determine from time to time to make certain pricing or marketing
decisions or acquisitions that could have a short-term material adverse effect
on the Company’s business, results of operations and financial condition and may
not result in the long-term benefits intended. Furthermore, in Florida,
currently a primary referral market for our lab testing services, a meaningful
percentage of the population returns to homes in the Northern U.S. to avoid
the
hot summer months. This may result in seasonality in our business. Because
of
all of the foregoing factors, the Company’s operating results could be less than
the expectations of investors in future periods.
We
Substantially Depend Upon Third Parties for Payment of Services, Which Could
Have A Material Adverse Affect On Our Cash Flows And Results Of
Operations
The
Company is a clinical medical laboratory that provides medical testing services
to doctors, hospitals, and other laboratories on patient specimens that are
sent
to the Company. In the case of most specimen referrals that are received for
patients that are not in-patients at a hospital or institution or otherwise
sent
by another reference laboratory, the Company generally has to bill the patient’s
insurance company or a government program for its services. As such it relies
on
the cooperation of numerous third party payers, including but not limited to
Medicare, Medicaid and various insurance companies, in order to get paid for
performing services on behalf of the Company’s clients. Wherever possible, the
amount of such third party payments is governed by contractual relationships
in
cases where the Company is a participating provider for a specified insurance
company or by established government reimbursement rates in cases where the
Company is an approved provider for a government program such as Medicare.
However, the Company does not have a contractual relationship with many of
the
insurance companies with whom it deals, nor is it necessarily able to become
an
approved provider for all government programs. In such cases, the Company is
deemed to be a non-participating provider and there is no contractual assurance
that the Company is able to collect the amounts billed to such insurance
companies or government programs. Currently, the Company is not a participating
provider with the majority of the insurance companies it bills for its services.
Until such time as the Company becomes a participating provider with such
insurance companies, there can be no contractual assurance that the Company
will
be paid for the services it bills to such insurance companies, and such third
parties may change their reimbursement policies for non-participating providers
in a manner that may have a material adverse affect on the Company’s cash flow
or results of operations.
Our
Business Is Subject To Rapid Scientific Change, Which Could Have A Material
Adverse Affect On Our Business, Results of Operations And Financial
Condition
The
market for genetic and molecular testing services is characterized by rapid
scientific developments, evolving industry standards and customer demands,
and
frequent new product introductions and enhancements. The Company’s future
success will depend in significant part on its ability to continually improve
its offerings in response to both evolving demands of the marketplace and
competitive service offerings, and the Company may be unsuccessful in doing
so.
The
Market For Our Services Is Highly Competitive, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial
Condition
The
market for genetic and molecular testing services is highly competitive and
competition is expected to continue to increase. The Company competes with
other
commercial medical laboratories in addition to the in-house laboratories of
many
major hospitals. Many of the Company’s existing competitors have significantly
greater financial, human, technical and marketing resources than the Company.
The Company’s competitors may develop products and services that are superior to
those of the Company or that achieve greater market acceptance than the
Company’s offerings. The Company may not be able to compete successfully against
current and future sources of competition and in such case, this may have a
material adverse effect on the Company’s business, results of operations and
financial condition.
We
Face The Risk of Capacity Constraints, Which Could Have A Material Adverse
Affect On Our Business, Results Of Operations And Financial
Condition
We
compete in the market place primarily on three factors: a) the quality and
accuracy of our test results; b) the speed or turn-around times of our testing
services; and c) our ability to provide after-test support to those physicians
requesting consultation. Any unforeseen increase in the volume of customers
could strain the capacity of our personnel and systems, which could lead to
inaccurate test results, unacceptable turn-around times, or customer service
failures. In addition, as the number of customers and cases increases, the
Company’s products, services, and infrastructure may not be able to scale
accordingly. Any failure to handle higher volume of requests for the Company’s
products and services could lead to the loss of established customers and have
a
material adverse effect on the Company’s business, results of operations and
financial condition.
If
we
produce inaccurate test results, our customers may choose not to use us in
the
future. This could severely harm our business, results of operations and
financial condition. In addition, based on the importance of the subject matter
of our tests, inaccurate results could result in improper treatment of patients,
and potential liability for the Company.
We
May Fail to Protect Our Facilities, Which Could Have A Material Adverse Affect
On Our Business, Results Of Operations And Financial
Condition
The
Company’s operations are dependent in part upon its ability to protect its
laboratory operations against physical damage from fire, floods, hurricanes,
power loss, telecommunications failures, break-ins and similar events. The
Company does not presently have an emergency back-up generator in place at
its
Fort Myers, Fl, Nashville, TN and Irvine, CA laboratory locations that can
mitigate to some extent the effects of a prolonged power outage. The occurrence
of any of these events could result in interruptions, delays or cessations
in
service to Customers, which could have a material adverse effect on the
Company’s business, results of operations and financial condition.
The
Steps Taken By The Company To Protect Its Proprietary Rights May Not Be
Adequate
The
Company regards its copyrights, trademarks, trade secrets and similar
intellectual property as critical to its success, and the Company relies upon
trademark and copyright law, trade secret protection and confidentiality and/or
license agreements with its employees, customers, partners and others to protect
its proprietary rights. The steps taken by the Company to protect its
proprietary rights may not be adequate or third parties may infringe or
misappropriate the Company’s copyrights, trademarks, trade secrets and similar
proprietary rights. In addition, other parties may assert infringement claims
against the Company.
We
are Dependent on Key Personnel and Need to Hire Additional Qualified
Personnel
The
Company’s performance is substantially dependent on the performance of its
senior management and key technical personnel. In particular, the Company’s
success depends substantially on the continued efforts of its senior management
team, which currently is composed of a small number of individuals. The loss
of
the services of any of its executive officers, its laboratory director or other
key employees could have a material adverse effect on the business, results
of
operations and financial condition of the Company.
The
Company’s future success also depends on its continuing ability to attract and
retain highly qualified technical and managerial personnel. Competition for
such
personnel is intense and the Company may not be able to retain its key
managerial and technical employees or may not be able to attract and retain
additional highly qualified technical and managerial personnel in the future.
The inability to attract and retain the necessary technical and managerial
personnel could have a material adverse effect upon the Company’s business,
results of operations and financial condition.
The
Failure to Obtain Necessary Additional Capital to Finance Growth and Capital
Requirements, Could Adversely Affect The Company’s Business, Financial Condition
and Results of Operations
The
Company may seek to exploit business opportunities that require more capital
than what is currently planned. The Company may not be able to raise such
capital on favorable terms or at all. If the Company is unable to obtain such
additional capital, the Company may be required to reduce the scope of its
anticipated expansion, which could adversely affect the Company’s business,
financial condition and results of operations.
Our
Net Revenue will be Diminished If Payers do not Adequately Cover or Reimburse
our Services.
There
has
been and will continue to be significant efforts by both federal and state
agencies to reduce costs in government healthcare programs and otherwise
implement government control of healthcare costs. In addition, increasing
emphasis on managed care in the U.S. may continue to put pressure on the pricing
of healthcare services. Uncertainty exists as to the coverage and reimbursement
status of new applications or services. Third party payers, including
governmental payers such as Medicare and private payers, are scrutinizing new
medical products and services and may not cover or may limit coverage and the
level of reimbursement for our services. Third party insurance coverage may
not
be available to patients for any of our existing assays or assays we discover
and develop. However, a substantial portion of the testing for which we bill
our
hospital and laboratory clients is ultimately paid by third party payers. Any
pricing pressure exerted by these third party payers on our customers may,
in
turn, be exerted by our customers on us. If government and other third party
payers do not provide adequate coverage and reimbursement for our assays, our
operating results, cash flows or financial condition may decline.
Third
Party Billing is Extremely Complicated and will Result in Significant Additional
Costs to us.
Billing
for laboratory services is extremely complicated. The customer refers the tests;
the payer is the party that pays for the tests, and the two are not always
the
same. Depending on the billing arrangement and applicable law, we need to bill
various payers, such as patients, insurance companies, Medicare, Medicaid,
doctors and employer groups, all of which have different billing requirements.
Additionally, our billing relationships require us to undertake internal audits
to evaluate compliance with applicable laws and regulations as well as internal
compliance policies and procedures. Insurance companies also impose routine
external audits to evaluate payments made. This adds further complexity to
the
billing process.
Among
many other factors complicating billing are:
•
|
pricing
differences between our fee schedules and the reimbursement rates
of the
payers;
|
•
|
disputes
with payers 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 payers, to enter into substantial
settlements under these laws. In particular, if an entity is determined to
have
violated the federal False Claims Act, it may be required to pay up to three
times the actual damages sustained by the government, plus civil penalties
of
between $5,500 to $11,000 for each separate false claim. There are many
potential bases for liability under the federal False Claims Act. Liability
arises, primarily, when an entity knowingly submits, or causes another to
submit, a false claim for reimbursement to the federal government. Submitting
a
claim with reckless disregard or deliberate ignorance of its truth or falsity
could result in substantial civil liability. A trend affecting the healthcare
industry is the increased use of the federal False Claims Act and, in
particular, actions under the False Claims Act’s “whistleblower” or “qui tam”
provisions to challenge providers and suppliers. Those provisions allow a
private individual to bring actions on behalf of the government alleging that
the defendant has submitted a fraudulent claim for payment to the federal
government. The government must decide whether to intervene in the lawsuit
and
to become the primary prosecutor. If it declines to do so, the individual may
choose to pursue the case alone, although the government must be kept apprised
of the progress of the lawsuit. Whether or not the federal government intervenes
in the case, it will receive the majority of any recovery. In addition, various
states have enacted laws modeled after the federal False Claims
Act.
Government
investigations of clinical laboratories have been ongoing for a number of years
and are expected to continue in the future. Written “corporate compliance”
programs to actively monitor compliance with fraud laws and other regulatory
requirements are recommended by the Department of Health and Human Services’
Office of the Inspector General.
The
Failure to Comply With Significant Government Regulation and Laboratory
Operations May Subject the Company to Liability, Penalties or Limitation of
Operations
As
discussed in the Government Regulation section of our business description,
the
Company is subject to extensive state and federal regulatory oversight. Our
laboratory locations may not pass inspections conducted to ensure compliance
with CLIA `88 or with any other applicable licensure or certification laws.
The
sanctions for failure to comply with CLIA `88 or state licensure requirements
might include the inability to perform services for compensation or the
suspension, revocation or limitation of the a laboratory location’s CLIA `88
certificate or state license, as well as civil and/or criminal penalties. In
addition, any new legislation or regulation or the application of existing
laws
and regulations in ways that we have not anticipated could have a material
adverse effect on the Company’s business, results of operations and financial
condition.
Existing
federal laws governing Medicare and Medicaid, as well as some other state and
federal laws, also regulate certain aspects of the relationship between
healthcare providers, including clinical and anatomic laboratories, and their
referral sources, including physicians, hospitals and other laboratories.
Certain provisions of these laws, known as the "anti-kickback law" and the
“Stark Laws”, contain extremely broad proscriptions. Violation of these laws may
result in criminal penalties, exclusion from Medicare and Medicaid, and
significant civil monetary penalties. We will seek to structure our arrangements
with physicians and other customers to be in compliance with the anti-kickback,
Stark and state laws, and to keep up-to-date on developments concerning their
application by various means, including consultation with legal counsel.
However, we are unable to predict how these laws will be applied in the future
and the arrangements into which we enter may become subject to scrutiny
thereunder.
Furthermore,
the Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and
other state laws contains provisions that affect the handling of claims and
other patient information that are, or have been, transmitted electronically
and
regulate the general disclosure of patient records and patient health
information. These provisions, which address security and confidentiality of
patient information as well as the administrative aspects of claims handling,
have very broad applicability and they specifically apply to healthcare
providers, which include physicians and clinical laboratories. Although we
believe we have complied with the Standards, Security and Privacy rules under
HIPAA and state laws, an audit of our procedures and systems could find
deficiencies. Such deficiencies, if found, could have a material adverse effect
on the Company’s business, results of operations and financial condition and
subject us to liability.
We
Are Subject to Security Risks Which Could Harm Our
Operations
Despite
the implementation of various security measures by the Company, the Company’s
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by its customers or others. Computer viruses,
break-ins or other security problems could lead to interruption, delays or
cessation in service to the Company’s customers. Further, such break-ins whether
electronic or physical could also potentially jeopardize the security of
confidential information stored in the computer systems of the Company’s
customers and other parties connected through the Company, which may deter
potential customers and give rise to uncertain liability to parties whose
security or privacy has been infringed. A significant security breach could
result in loss of customers, damage to the Company’s reputation, direct damages,
costs of repair and detection, and other expenses. The occurrence of any of
the
foregoing events could have a material adverse effect on the Company’s business,
results of operations and financial condition.
The
Company Is Controlled by Existing Shareholders And Therefore Other Shareholders
Will Not Be Able to Direct The Company
The
majority of the Company’s shares and thus voting control of the Company is held
by a relatively small group of shareholders. Because of such ownership, those
shareholders will effectively retain control of the Company’s Board of Directors
and determine all of the Company’s corporate actions. In addition, the Company
and shareholders owning 13,106,579 shares, or approximately 47.3% of the
Company’s voting shares outstanding as of March 29, 2007 have executed a
Shareholders’ Agreement that, among other provisions, gives Aspen Select
Healthcare, LP, our largest shareholder, the right to elect three out of the
seven directors authorized for our Board, and nominate one mutually acceptable
independent director. Accordingly, it is anticipated that Aspen Select
Healthcare, LP and other parties to the Shareholders’ Agreement will continue to
have the ability to elect a controlling number of the members of the Company’s
Board of Directors and the minority shareholders of the Company may not be
able
to elect a representative to the Company’s Board of Directors. Such
concentration of ownership may also have the effect of delaying or preventing
a
change in control of the Company.
No
Foreseeable Dividends
The
Company does not anticipate paying dividends on its common shares in the
foreseeable future. Rather, the Company plans to retain earnings, if any, for
the operation and expansion of Company business.
There
Is No Guarantee of Registration Exemption for Sales of Unregistered Stock,
Which
Could Result in the Liquidation of the Company
From
time
to time, the Company sells shares of unregistered stock in various private
placements to accredited investors. These sales are generally made in reliance
upon the "private placement" exemption from registration provided by Section
4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation
D
promulgated pursuant thereto. Reliance on this exemption does not, however,
constitute a representation or guarantee that such exemption is indeed
available.
If
for
any reason any future sales of unregistered stock are deemed to be a public
offering of the Company’s shares (and if no other exemption from registration is
available), the sale of the offered shares would be deemed to have been made
in
violation of the applicable laws requiring registration of the offered shares
and the delivery of a prospectus. As a remedy in the event of such violation,
each purchaser of the offered shares would have the right to rescind his or
her
purchase of the offered shares and to have his or her purchase price returned.
If such a purchaser requests a return of his or her purchase price, funds might
not be available for that purpose. In that event, liquidation of the Company
might be required. Any refunds made would reduce funds available for the
Company’s working capital needs. A significant number of requests for rescission
would probably cause the Company to be without funds sufficient to respond
to
such requests or to proceed with the Company’s activities successfully.
ITEM
2. DESCRIPTION
OF PROPERTY
In
August
2003, we entered into a three year lease for 5,200 square feet at our laboratory
facility in Fort Myers, Florida. On June 29, 2006 we signed an amendment to
the
original lease which extended the lease through June 30, 2011. The amendment
included the rental of an additional 4,400 square feet adjacent to our current
facility. This space will allow for future expansion of our business. The lease
was further amended on January 17, 2007 but this amendment did not materially
alter the terms of the lease, which has total payments of approximately $653,000
over the remaining life of the lease, including annual increases of rental
payments of 3% per year. Such amount excludes estimated operating and
maintenance expenses and property taxes.
As
part
of the acquisition of The Center for CytoGenetics, Inc. by the Company on April
18, 2006, we assumed the lease of an 850 square foot facility in Nashville,
Tennessee. The lease expires on August 31, 2008. The average monthly rental
expense is approximately $1,350 per month. This space was not adequate for
our
future plans and the Company is currently not using the facility and is actively
trying to sublease this facility. On June 15, 2006, we entered into a lease
for
a new facility totaling 5,386 square feet of laboratory space in Nashville,
Tennessee. This space will be adequate to accommodate our current plans for
the
Tennessee laboratory. As part of the lease, we have the right of first refusal
on an additional 2,420 square feet, if needed, directly adjacent to the
facility. The lease is a five year lease and results in total payments by us
of
approximately $340,000.
On
August
1, 2006, the Company entered into a lease for 1,800 square feet of laboratory
space in Irvine, California. The lease is a nine month lease and results in
total payments by the Company of approximately $23,000. This lease will expire
on April 30, 2007. We are currently in negotiations on a new larger facility,
which can accommodate our future growth.
ITEM
3. LEGAL
PROCEEDINGS
On
October 26, 2006, Accupath Diagnostics Laboratories, Inc. d/b/a US Labs, a
California corporation (“US Labs”) filed a complaint in the Superior Court of
the State of California for the County of Los Angeles (the “Court”) against the
Company and Robert Gasparini, as an individual, and certain other employees
and
non-employees of NeoGenomics with respect to claims arising from discussions
with current and former employees of US Labs. US Labs alleges, among other
things, that NeoGenomics engaged in “unfair competition” by having access to
certain salary information of four recently hired sales personnel prior to
the
time we hired such individuals. We believe that US Labs’ claims against
NeoGenomics lack any merit and that there are well-established laws that affirm
the rights of employees to seek employment with any company they desire and
employers to offer such employment to anyone they desire. US Labs seeks
unspecified monetary relief. As part of the complaint, US Labs also sought
preliminary injunctive relief against NeoGenomics and requested that the Court
bar NeoGenomics from, among other things: a) inducing any further US Labs’
employees to resign employment with US Labs, b) soliciting, interviewing or
employing US Labs’ employees for employment, c) directly or indirectly
soliciting US Labs’ customers with whom four new employees of NeoGenomics did
business while employed at US Labs; and d) soliciting, initiating and/or
maintaining economic relationships with US Labs’ customers that are under
contract with US Labs.
On
November 15, 2006, the Court heard arguments on US Labs request for a
preliminary injunction and denied the majority of US Labs’ requests for such
injunction on the grounds that US Labs was not likely to prevail at trial.
The
Court did, however, issue a much narrower preliminary injunction which prevents
NeoGenomics from “soliciting” the US Labs’ customers of such new sales personnel
until such time as a full trial could be held. This preliminary injunction
is
limited only to the “solicitation” of the US Labs’ customers of the sales
personnel in question and does not in any way prohibit NeoGenomics from doing
business with any such customers to the extent they have sought or seek a
business relationship with NeoGenomics on their own initiative. Furthermore,
NeoGenomics is not in any way prohibited from recruiting any additional
personnel from US Labs through any lawful means. We believe that none of US
Labs’ claims will be affirmed at trial; however, even if they were, NeoGenomics
does not believe such claims would result in a material impact to our business.
NeoGenomics further believes that this lawsuit is nothing more than a blatant
attempt by a large corporation to impede the progress of a smaller and more
nimble competitor, and we intend to vigorously defend ourselves.
Discovery
commenced in December 2006. While the Company received unsolicited and
inaccurate salary information for three individuals that were ultimately hired,
no evidence of misappropriation of trade secrets has been discovered by either
side. As such, the Company is currently contemplating filing motions to narrow
or end the litigation, and expects to ultimately prevail at trial.
The
Company is also a defendant in one lawsuit from a former employee relating
to
compensation related claims. The Company does not believe this lawsuit is
material to its operations or financial results and intends to vigorously pursue
its defense of the matter.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not
applicable.
PART
II
ITEM
5. MARKET
FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our
common stock is quoted on the OTC Bulletin Board. Set forth below is a table
summarizing the high and low bid quotations for our common stock during the
last
two fiscal years.
QUARTER
|
|
HIGH
BID
|
|
LOW
BID
|
|
4th
Quarter 2006
|
|
$
|
2.05
|
|
$
|
0.94
|
|
3rd
Quarter 2006
|
|
$
|
1.25
|
|
$
|
0.60
|
|
2nd
Quarter 2006
|
|
$
|
0.78
|
|
$
|
0.45
|
|
1st
Quarter 2006
|
|
$
|
0.72
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
4th
Quarter 2005
|
|
$
|
0.35
|
|
$
|
0.18
|
|
3rd
Quarter 2005
|
|
$
|
0.59
|
|
$
|
0.24
|
|
2nd
Quarter 2005
|
|
$
|
0.60
|
|
$
|
0.26
|
|
1st
Quarter 2005
|
|
$
|
0.70
|
|
$
|
0.25
|
|
The
above table is based on over-the-counter quotations. These quotations reflect
inter-dealer prices, without retail mark-up, markdown or commissions, and may
not represent actual transactions. All historical data was obtained from the
www.BigCharts.com web site.
As
of March 29, 2007 there were 388 stockholders of record of our common stock,
excluding shareholders who hold their shares in brokerage accounts in “street
name”. We have never declared or paid cash dividends on our common stock. We
intend to retain all future earnings to finance future growth and therefore
we
do not anticipate paying any cash dividends in the foreseeable future.
Sales
of Unregistered Securities
Except
as
otherwise noted, all of the following shares were issued and options and
warrants granted pursuant to the exemption provided for under Section 4(2)
of
the Securities Act of 1933, as amended, as a "transaction not involving a public
offering." No commissions were paid, and no underwriter participated, in
connection with any of these transactions. Each such issuance was made pursuant
to individual contracts which are discrete from one another and are made only
with persons who were sophisticated in such transactions and who had knowledge
of and access to sufficient information about the Company to make an informed
investment decision. Among this information was the fact that the securities
were restricted securities.
During
2004, we sold 3,040,000 shares of our common stock in a series of private
placements at $0.25/share to unaffiliated third party investors. These
transactions generated net proceeds to the Company of approximately $740,000
after deducting certain transaction expenses. These transactions involved the
issuance of unregistered stock to accredited investors in transactions that
we
believed were exempt from registration under Rule 506 promulgated under the
Securities Act of 1933. All of these shares were subsequently registered on
a
SB-2 Registration Statement, which was declared effective by the SEC on August
1, 2005.
During
the period January 1, 2005 to May 31, 2005, we sold 450,953 shares of our common
stock in a series of private placements at $0.30 - $0.35/share to unaffiliated
third party investors. These transactions generated net proceeds to the Company
of approximately $146,000. These transactions involved the issuance of
unregistered stock to accredited investors in transactions that we believed
were
exempt from registration under Rule 506 promulgated under the Securities Act
of
1933. All of these shares were subsequently registered on a SB-2 Registration
Statement, which was declared effective by the SEC on August 1,
2005.
On
March 23, 2005, the Company entered into a Loan Agreement with Aspen Select
Healthcare, LP (“Aspen”) to provide up to $1.5 million of indebtedness pursuant
to a credit facility (the “Credit Facility”). As part of the Credit Facility
transaction, the Company also issued to Aspen a five year Warrant to purchase
up
to 2,500,000 shares of its common stock at an original exercise price of
$0.50/share. Steven
C.
Jones, our Acting Principal Financial Officer and a Director of the Company,
and
is a general partner of Aspen.
On
June
6, 2005, we entered into a Standby Equity Distribution Agreement (“SEDA”) with
Cornell Capital Partners, LP (“Cornell”). Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell
to
Cornell shares of common stock for a total purchase price of up to $5.0
million. Upon execution of the Standby Equity Distribution Agreement,
Cornell received 381,888 shares of the Company’s common stock as a commitment
fee under the Standby Equity Distribution Agreement. The Company also issued
27,278 shares of the Company’s common stock to Spartan Securities Group, Ltd.
under a placement agent agreement relating to the Standby Equity Distribution
Agreement.
On
January 18, 2006, the Company entered into a binding letter agreement (the
"Aspen Agreement") with Aspen Select Healthcare, LP, which provided, among
other
things, that:
(a)
Aspen
waived certain pre-emptive rights in connection with the sale of $400,000 of
common stock at a purchase price of $0.20/share and the granting of 900,000
warrants with an exercise price of $0.26/share to SKL Limited Partnership,
LP
("SKL" as more fully described below) in exchange for five year warrants to
purchase 150,000 shares at an exercise price of $0.26/share (the “Waiver
Warrants”).
(b)
Aspen
had the right, up to April 30, 2006, to purchase up to $200,000 of restricted
shares of the Company's common stock at a purchase price per share of
$0.20/share (1,000,000 shares) and receive a five year warrant to purchase
450,000 shares of the Company's common stock at an exercise price of $0.26/share
in connection with such purchase (the "Equity Purchase Rights"). On March 14,
2006, Aspen exercised its Equity Purchase Rights.
(c)
Aspen
and the Company amended the Loan Agreement, dated March 23, 2005 (the "Loan
Agreement") between the parties to extend the maturity date until September
30,
2007 and to modify certain covenants (such Loan Agreement as amended, the
"Credit Facility Amendment").
(d)
Aspen
had the right, until April 30, 2006, to provide up to $200,000 of additional
secured indebtedness to the Company under the Credit Facility Amendment and
to
receive a five year warrant to purchase up to 450,000 shares of the Company's
common stock with an exercise price of $0.26/share (the "New Debt Rights").On
March 30, 2006, Aspen exercised its New Debt Rights and entered into the
definitive transaction documentation for the Credit Facility Amendment and
other
such documents required under the Aspen Agreement.
(e)
The
Company agreed to amend and restate the warrant agreement, dated March 23,
2005,
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.
(f)
The
Company agreed to amend the Registration Rights Agreement, dated March 23,
2005
(the "Registration Rights Agreement"), between the parties to incorporate the
Existing 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.
During
the period from January 18 - 21, 2006, the Company entered into agreements
with
four other shareholders who are parties to a Shareholders’ Agreement, dated
March 23, 2005, to exchange five year warrants to purchase an aggregate of
150,000 shares of stock at an exercise price of $0.26/share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
January 21, 2006 the Company entered into a subscription agreement (the
"Subscription") with SKL Family Limited Partnership, LP, a New Jersey limited
partnership, whereby SKL purchased 2.0 million shares (the "Subscription
Shares") of the Company's common stock at a purchase price of $0.20/share for
$400,000. Under the terms of the Subscription, the Subscription Shares are
restricted for a period of 24 months and then carry piggyback registration
rights to the extent that exemptions under Rule 144 are not available to SKL.
In
connection with the Subscription, the Company also issued a five year warrant
to
purchase 900,000 shares of the Company's common stock at an exercise price
of
$0.26/share. SKL has no previous affiliation with the Company.
Securities
Authorized for Issuance Under Equity Compensation Plans
(a)
Plan
Category
|
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
|
Number
of securities remaining available for future
issuance
|
|
|
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
|
|
2,116,667
|
|
$
|
0.43
|
|
|
1,703,223
|
|
Equity
compensation plans not approved by security holders
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Total
|
|
|
2,116,667
|
|
$
|
0.43
|
|
|
1,703,223
|
|
(a)
As of
December 31, 2006. Currently, the Company’s Equity Incentive Plan, as amended
and restated on October 31, 2006 is the only equity compensation plan in effect.
The Company’s Employee Stock Purchase Plan, dated October 31, 2006 started on
January 1, 2007.
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Introduction
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, and the Notes thereto included herein. The
information contained below includes statements of the Company’s or management’s
beliefs, expectations, hopes, goals and plans that, if not historical, are
forward-looking statements subject to certain risks and uncertainties that
could
cause actual results to differ materially from those anticipated in the
forward-looking statements. For a discussion on forward-looking statements,
see
the information set forth in the Introductory Note to this Annual Report under
the caption “Forward Looking Statements”, which information is incorporated
herein by reference.
Overview
NeoGenomics
operates 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 genetic
sequence disorders. All of these testing services are widely used in the
diagnosis and prognosis of various types of cancer.
Our
common stock is listed on the NASDAQ Over-the-Counter Bulletin Board (the
“OTCBB”) under the symbol “NGNM.”
The
genetic and molecular testing segment of the medical laboratory industry is
the
most rapidly growing segment of the medical laboratory market. Approximately
six
years ago, the World Health Organization reclassified cancers as being genetic
anomalies. This growing awareness of the genetic root behind most cancers
combined with advances in technology and genetic research, including the
complete sequencing of the human genome, have made possible a whole new set
of
tools to diagnose and treat diseases. This has opened up a vast opportunity
for
laboratory companies that are positioned to address this growing market segment.
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.
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:
Revenue
Recognition
Net
revenues are recognized in the period when tests are performed and consist
primarily of net patient revenues that are recorded based on established billing
rates less estimated discounts for contractual allowances principally for
patients covered by Medicare, Medicaid and managed care and other health plans.
Adjustments of the estimated discounts are recorded in the period payment is
received. These revenues also are subject to review and possible audit by the
payers. We believe that adequate provision has been made for any adjustments
that may result from final determination of amounts earned under all the above
arrangements. There are no known material claims, disputes or unsettled matters
with any payers that are not adequately provided for in the accompanying
consolidated financial statements.
Accounts
Receivable
We
record
accounts receivable net of estimated and contractual discounts. We provide
for
accounts receivable that could become uncollectible in the future by
establishing an allowance to reduce the carrying value of such receivables
to
their estimated net realizable value. We estimate this allowance based on the
aging of our accounts receivable and our historical collection experience for
each type of payer. Receivables are charged off to the allowance account at
the
time they are deemed uncollectible.
Results
of Operations for the twelve months ended December 31, 2006 as compared with
the
twelve months ended December 31, 2005
Revenue
During
the fiscal year ended December 31, 2006, our revenues increased approximately
244% to $6,476,000 from $1,885,000 during the fiscal year ended December 31,
2005. This was the result of an increase in testing volume of 214% 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, 2006, our average revenue per customer
requisition increased by approximately 7% to $677.19 from $632.23 in 2005.
Our
average revenue per test increased by approximately 9% to $504.44 from $461.86
in 2005. This was primarily as a result of price increases to certain customers
as well as product and payer mix changes. Revenues per test are a function
of
both the nature of the test and the payer (Medicare, Medicaid, third party
insurer, institutional client etc.). Our policy is to record as revenue the
amounts that we expect to collect based on published or contracted amounts
and/or prior experience with the payer. We have established a reserve for
uncollectible amounts based on estimates of what we will collect from a)
third-party payers with whom we do not have a contractual arrangement or
sufficient experience to accurately estimate the amount of reimbursement we
will
receive, b) co-payments directly from patients, and c) those procedures that
are
not covered by insurance or other third party payers. On December 31, 2006,
our
Allowance for Doubtful Accounts was approximately $103,500, a 174% increase
from
our balance at December 31, 2005 of $37,800. The allowance for doubtful accounts
was approximately 6% of accounts receivables on December 31, 2006 and December
31, 2005.
Cost
of Revenue
During
2006, our cost of revenue increased approximately 144% to $2,759,000 from
$1,133,000 in 2005, primarily as a result of the 214% increase in testing
volumes as well as increased costs from opening new lines of business and this
is explained further as follows:
|
·
|
Increase
of approximately 234% in employee labor and benefit related
costs
|
|
·
|
Increase
of approximately 136% in supply costs;
and
|
|
·
|
Increase
of approximately 183% in postage and delivery
costs
|
Gross
Profit
As
a
result of the 244% increase in revenue and 144% increase in cost of revenue,
our
gross profit increased 394% to $3,717,000 in 2006, from a gross profit of
$753,000 in 2005. When expressed as a percentage of revenue, our gross margins
increased from 39.9% in 2005 to 57.4% in 2006. This increase in gross profit
and
gross profit margin was largely a result of higher testing volumes in 2006
and
the economies of scale related to such higher volumes.
General
and Administrative Expenses
During
2006, our general and administrative expenses increased by approximately 130%
to
$3,577,000 from approximately $1,553,000 in 2005. This increase was primarily
a
result of higher personnel and personnel-related expenses associated with the
increase in management, 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. Finally we had an increase
in
bad debt expense as a result of increased revenue.
Other
Income/Expense
Other
income for the twelve months ended December 31, 2006 consisted of approximately
$56,000 related to the settlement on December 29, 2006 of our 2002 research
and
license agreement with Ciphergen Biosystems. We paid Ciphergen $34,000 to
discharge our required performance under the research and license agreement.
We
had approximately $90,000 of deferred revenue related to that agreement which
was reversed and resulted in other income. However, the company also recorded
in
General and Administrative expenses a $53,000 impairment related to the
write-off of the remaining undepreciated book value of the Ciphergen protein
chip mass spectrometer.
Interest
expense for 2006 increased approximately 65% to approximately $326,000 from
approximately $197,000 for 2005. Interest expense is primarily comprised of
interest payable on advances under our Credit Facility with Aspen, which has
increased as a result of our increased borrowing to fund operations and
increases in the prime interest rate during 2006, and to a lesser extent
interest on capital leases entered into during 2006.
Net
Loss
As
a
result of the foregoing, our net loss decreased by approximately 87% to $130,000
in 2006 from $997,000 in 2005.
Liquidity
and Capital Resources
During
the fiscal year ended December 31, 2006, our operating activities used
approximately $694,000 in cash compared with $902,000 used in 2005. 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 $399,000 on new equipment in 2006 compared with $118,000 in 2005.
We were able to finance operations and equipment purchases primarily through
the
sale of equity securities which provided approximately $1,090,000 and to a
lessor extent with borrowings on the Aspen credit facility. This resulted in
net
cash provided by financing activities of approximately $1,208,000 in 2006
compared to $918,000 in 2005. At December 31, 2006 and December 31, 2005, we
had
cash and cash equivalents of approximately $126,000, and $11,000
respectively.
On
January 18, 2006, the Company entered into a binding letter agreement (the
"Aspen Agreement") with Aspen Select Healthcare, LP, which provided, among
other
things, that:
(a)
Aspen
waived certain pre-emptive rights in connection with the sale of $400,000 of
common stock at a purchase price of $0.20/share and the granting of 900,000
warrants with an exercise price of $0.26/share to SKL Limited Partnership,
LP
("SKL" as more fully described below) in exchange for five year warrants to
purchase 150,000 shares at an exercise price of $0.26/share (the “Waiver
Warrants”).
(b)
Aspen
had the right, up to April 30, 2006, to purchase up to $200,000 of restricted
shares of the Company's common stock at a purchase price per share of
$0.20/share (1,000,000 shares) and receive a five year warrant to purchase
450,000 shares of the Company's common stock at an exercise price of $0.26/share
in connection with such purchase (the "Equity Purchase Rights"). On March 14,
2006, Aspen exercised its Equity Purchase Rights.
(c)
Aspen
and the Company amended the Loan Agreement, dated March 23, 2005 (the "Loan
Agreement") between the parties to extend the maturity date until September
30,
2007 and to modify certain covenants (such Loan Agreement as amended, the
"Credit Facility Amendment").
(d)
Aspen
had the right, until April 30, 2006, to provide up to $200,000 of additional
secured indebtedness to the Company under the Credit Facility Amendment and
to
receive a five year warrant to purchase up to 450,000 shares of the Company's
common stock with an exercise price of $0.26/share (the "New Debt Rights").On
March 30, 2006, Aspen exercised its New Debt Rights and entered into the
definitive transaction documentation for the Credit Facility Amendment and
other
such documents required under the Aspen Agreement.
(e)
The
Company agreed to amend and restate the warrant agreement, dated March 23,
2005,
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.
(f)
The
Company agreed to amend the Registration Rights Agreement, dated March 23,
2005
(the "Registration Rights Agreement"), between the parties to incorporate the
Existing 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.
We
borrowed an additional $100,000 from the Aspen credit facility in May 2006,
$25,000 in September 2006 and $50,000 in December 2006. At December 31, 2006,
$1,675,000 was outstanding on the credit facility, which bears interest at
prime
plus 6%, and $25,000 remained available. Subsequent to December 31, 2006 we
borrowed the remaining $25,000 available under the Aspen Facility.
During
the period from January 18 - 21, 2006, the Company entered into agreements
with
four other shareholders who are parties to a Shareholders’ Agreement, dated
March 23, 2005, to exchange five year warrants to purchase an aggregate of
150,000 shares of stock at an exercise price of $0.26/share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
January 21, 2006 the Company entered into a subscription agreement (the
"Subscription") with SKL Family Limited Partnership, LP, a New Jersey limited
partnership, whereby SKL purchased 2.0 million shares (the "Subscription
Shares") of the Company's common stock at a purchase price of $0.20/share for
$400,000. Under the terms of the Subscription, the Subscription Shares are
restricted for a period of 24 months and then carry piggyback registration
rights to the extent that exemptions under Rule 144 are not available to SKL.
In
connection with the Subscription, the Company also issued a five year warrant
to
purchase 900,000 shares of the Company's common stock at an exercise price
of
$0.26/share. SKL has no previous affiliation with the Company.
On
June
6, 2005, we entered into a Standby Equity Distribution Agreement (“S.E.D.A.”)
with Cornell Capital Partners, LP (“Cornell”). Pursuant to the S.E.D.A., the
Company may, at its discretion, periodically sell to Cornell shares of common
stock for a total purchase price of up to $5.0 million.
On
June
6, 2006 as a result of not terminating our S.E.D.A. with Cornell, a short-term
note payable in the amount of $50,000 became due to Cornell and was subsequently
paid in July 2006 from the proceeds of a $53,000 advance under the
S.E.D.A.
The
following sales of common stock have been made under our S.E.D.A. with Cornell
since it was first declared effective on August 1, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Request
|
Completion
|
Shares
of
|
Gross
|
Cornell
|
Escrow
|
Net
|
|
Date
|
Date
|
Common
Stock
|
Proceeds
|
Fee
|
Fee
|
Proceeds
|
ASP(1)
|
|
|
|
|
|
|
|
|
8/29/2005
|
9/8/2005
|
63,776
|
$25,000
|
$1,250
|
$500
|
$23,250
|
|
|
|
|
|
|
|
|
|
12/10/2005
|
12/18/2005
|
241,779
|
50,000
|
2,500
|
500
|
47,000
|
|
|
|
|
|
|
|
|
|
Subtotal
- 2005
|
305,555
|
$75,000
|
$3,750
|
$1,000
|
$70,250
|
$0.25
|
|
|
|
|
|
|
|
|
7/19/2006
|
7/28/2006
|
83,491
|
53,000
|
2,500
|
500
|
50,000
|
|
|
|
|
|
|
|
|
|
8/8/2006
|
8/16/2006
|
279,486
|
250,000
|
12,500
|
500
|
237,000
|
|
|
|
|
|
|
|
|
|
10/18/2006
|
10/23/2006
|
167,842
|
200,000
|
10,000
|
500
|
189,500
|
|
|
|
|
|
|
|
|
|
Subtotal
- 2006
|
530,819
|
$503,000
|
$25,000
|
$1,500
|
$476,500
|
$0.95
|
|
|
|
|
|
|
|
|
12/29/2006
|
1/10/2007
|
98,522
|
150,000
|
7,500
|
500
|
142,000
|
|
|
|
|
|
|
|
|
|
1/16/2007
|
1/24/2007
|
100,053
|
150,000
|
7,500
|
500
|
142,000
|
|
|
|
|
|
|
|
|
|
2/1/2007
|
2/12/2007
|
65,902
|
100,000
|
5,000
|
500
|
94,500
|
|
|
|
|
|
|
|
|
|
2/19/2007
|
2/28/2007
|
166,611
|
250,000
|
12,500
|
500
|
237,000
|
|
|
|
|
|
|
|
|
|
2/28/2007
|
3/7/2007
|
180,963
|
250,000
|
12,500
|
500
|
237,000
|
|
|
|
|
|
|
|
|
|
Subtotal
- 2007 YTD
|
612,051
|
$900,000
|
$45,000
|
$2,500
|
$852,500
|
$1.47
|
|
|
|
|
|
|
|
|
Total
Since Inception
|
1,448,425
|
$1,478,000
|
$73,750
|
$5,000
|
$1,399,250
|
$1.02
|
|
|
|
|
|
|
|
|
Remaining
|
-
|
$3,522,000
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Total
Facility
|
-
|
$5,000,000
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
(1)
Average Selling Price of shares issued
At
the
present time, we anticipate that based on our current business plan, operations
and our plans to repay or refinance the Aspen Credit Facility of $1.7 million
that is due September 30, 2007, we will need to raise approximately $3 - $5
million of new working capital in FY2007. 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.
We plan to raise this additional money through issuing a combination of debt
and/or equity securities primarily to banks and/or other large institutional
investors. To the extent we are not successful in this regard, we plan to use
our S.E.D.A. with Cornell, which currently has $3,522,000 of remaining
availability to fund our operations. 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 availability under the S.E.D.A. 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. On March 29, 2007 we had approximately $274,000 in cash on
hand.
Capital
Expenditures
We
currently forecast capital expenditures for 2007 in order to execute on our
business plan. The amount and timing of such capital expenditures will be
determined by the volume of business, but we currently anticipate that we will
need to purchase approximately $1,500,000 to $2,000,000 of additional capital
equipment during the next twelve months. We plan to fund these expenditures
via
capital leases. If we are unable to obtain such funding, we will need to pay
cash for these items or we will be required to curtail our equipment purchases,
which may have an impact on our ability to continue to grow our
revenues.
Commitments
Operating
Leases
In
August
2003, we entered into a three year lease for 5,200 square feet at our laboratory
facility in Fort Myers, Florida. On June 29, 2006 we signed an amendment to
the
original lease which extended the lease through June 30, 2011. The amendment
included the rental of an additional 4,400 square feet adjacent to our current
facility. This space will allow for future expansion of our business. The lease
was further amended on January 17, 2007 but this amendment did not materially
alter the terms of the lease, which has total payments of approximately $653,000
over the remaining life of the lease, including annual increases of rental
payments of 3% per year. Such amount excludes estimated operating and
maintenance expenses and property taxes.
As
part
of the acquisition of The Center for CytoGenetics, Inc. by the Company on April
18, 2006, we assumed the lease of an 850 square foot facility in Nashville,
Tennessee. The lease expires on August 31, 2008. The average monthly rental
expense is approximately $1,350 per month. This space was not adequate for
our
future plans and the Company is currently not using the facility and is actively
trying to sublease this facility. On June 15, 2006, we entered into a lease
for
a new facility totaling 5,386 square feet of laboratory space in Nashville,
Tennessee. This space will be adequate to accommodate our current plans for
the
Tennessee laboratory. As part of the lease, we have the right of first refusal
on an additional 2,420 square feet, if needed, directly adjacent to the
facility. The lease is a five year lease and results in total payments by us
of
approximately $340,000.
On
August
1, 2006, the Company entered into a lease for 1,800 square feet of laboratory
space in Irvine, California. The lease is a nine month lease and results in
total payments by the Company of approximately $23,000. This lease will expire
on April 30, 2007. We are currently in negotiations on a new larger facility,
which can accommodate our future growth.
Future
minimum lease payments under these leases as of December 31, 2006 are as
follows:
Years
ending December 31,
|
|
Amounts
|
|
|
|
|
|
2007
|
|
$
|
227,082
|
|
2008
|
|
|
219,471
|
|
2009
|
|
|
214,015
|
|
2010
|
|
|
219,907
|
|
2011
|
|
|
105,710
|
|
Total
minimum lease payments
|
|
$
|
986,185
|
|
Capital
Leases
During
2006, we entered into the following capital leases:
Date
|
Type
|
Months
|
Cost
|
Monthly
Payment
|
Balance
at
December
31
|
March
2006
|
Laboratory
Equipment
|
60
|
$134,200
|
$2,692
|
$117,117
|
August
2006
|
Laboratory
Equipment
|
60
|
48,200
|
1,200
|
43,724
|
August
2006
|
Laboratory
Equipment
|
60
|
98,400
|
2,366
|
90,140
|
August
2006
|
Laboratory
Equipment
|
60
|
101,057
|
2,316
|
89,630
|
August
2006
|
Laboratory
Equipment
|
60
|
100,200
|
2,105
|
86,740
|
November
2006
|
Laboratory
Equipment
|
60
|
19,900
|
434
|
19,348
|
November
2006
|
Computer
Equipment
|
60
|
9,700
|
228
|
9,366
|
December
2006
|
Computer
Equipment
|
48
|
19,292
|
549
|
17,742
|
December
2006
|
Computer
Equipment
|
48
|
25,308
|
718
|
24,003
|
December
2006
|
Office
Equipment
|
60
|
46,100
|
994
|
45,567
|
|
|
|
|
|
|
Total
|
|
|
$602,357
|
$13,602
|
$543,377
|
Future
minimum lease payments under these leases as of December 31, 2006 are as
follows:
Years
ending December 31,
|
|
Amounts
|
|
|
|
|
|
2007
|
|
$
|
163,219
|
|
2008
|
|
|
163,219
|
|
2009
|
|
|
163,219
|
|
2010
|
|
|
161,951
|
|
2011
|
|
|
89,582
|
|
Total
future minimum lease payments
|
|
|
741,190
|
|
Less
amount representing interest
|
|
|
197,813
|
|
Present
value of future minimum lease payments
|
|
|
543,377
|
|
Less
current maturities
|
|
|
94,430
|
|
|
|
|
|
|
Obligations
under capital leases - long term
|
|
$
|
448,947
|
|
The
equipment covered under the lease agreements is pledged as collateral to secure
the performance of the future minimum lease payments above.
Legal
Contingency
On
October 26, 2006, Accupath Diagnostics Laboratories, Inc. d/b/a US Labs (“US
Labs”) filed a complaint in the Superior Court of the State of California for
the County of Los Angeles naming as defendants the Company and its president,
Robert Gasparini. Also individually named are Company employees Jeffrey
Schreier, Maria Miller, Douglas White and Gary Roche.
The
complaint alleges the following causes of action: 1) Misappropriation of Trade
Secrets; 2) Tortious Interference with Prospective Economic Advantage; 3) Unfair
Competition (Common Law); and 4) Unfair Competition (Cal. Bus. & Prof. Code
section 17200). The allegations are the result of the Company's hiring four
salespeople who were formerly employed by US Labs. Specifically, US Labs alleges
that the Company had access to the US Labs salaries of the new hires,
and was therefore able to obtain them as employees.
US
Labs
also sought broad injunctive relief against NeoGenomics preventing the Company
from doing business with its customers. US Labs requests were largely denied,
but the court did issue a much narrower preliminary injunction that prevents
NeoGenomics from soliciting the four new employees' former US Labs customers
until trial.
Discovery
commenced in December 2006. While the Company received unsolicited and
inaccurate salary information for three individuals that were ultimately hired,
no evidence of misappropriation of trade secrets has been discovered by either
side. As such, the Company is currently contemplating filing motions to narrow
or end the litigation, and expects to ultimately prevail at trial.
We
believe that none of US Labs’ claims will be affirmed at trial; however, even if
they were, NeoGenomics does not believe such claims would result in a material
impact to our business. At this time we cannot accurately predict our legal
fees
but if this case were to proceed to trial, we estimate that our legal fees
could be as high as $300,000 to $400,000 in FY 2007.
Purchase
Commitment
On
June
22, 2006, we entered into an agreement to purchase three automated FISH signal
detection and analysis systems over the next 24 months for a total of $420,000.
We agreed to purchase two systems immediately and to purchase a third system
in
the next 15 months if the vendor is able to make certain improvements to the
system. As of December 31, 2006, the Company had purchased and installed 2
of
the systems.
Subsequent
Event
On
April
2, 2007, we concluded an agreement with Power3 Medical Products, Inc., a New
York Corporation (“Power3”) regarding the formation of a joint venture Contract
Research Organization (“CRO”) and the issuance of convertible debentures and
related securities by Power3 to us. Power3 is an early stage company engaged
in
the discovery, development, and commercialization of protein biomarkers. Under
the terms of the agreement, NeoGenomics and Power3 will jointly own a CRO and
begin commercializing Power3’s intellectual property portfolio of 17 patents
pending by developing diagnostic tests and other services around one or more
of
the 523 protein biomarkers that Power3 believes it has discovered to date.
Power3 has agreed to license all of its intellectual property on a non-exclusive
basis to the CRO for selected commercial applications as well as provide certain
management personnel. We will provide access to cancer samples, management
and
sales & marketing personnel, laboratory facilities and working capital.
Subject to final negotiation, we will own a minimum of 60% and up to 80% of
the
new CRO venture which is anticipated to be launched in the third or fourth
quarter of FY 2007.
As
part
of the agreement, we will provide $200,000 of working capital to Power3 by
purchasing a convertible debenture on or before April 16, 2007. We were also
granted two options to increase our stake in Power3 to up to 60% of the Power3
fully diluted shares outstanding. The first option (the “First Option”) is a
fixed option to purchase convertible preferred stock of Power3 that is
convertible into such number of shares of Power3 common stock, in one or more
transactions, up to 20% of Power3’s voting common stock at a purchase price per
share, which will also equal the initial conversion price per share, equal
to
the lesser of a) $0.20/share, or b) an equity valuation of $20,000,000 divided
by the fully-diluted shares outstanding on the date of the exercise of the
First
Option. This First Option is exercisable for a period starting on the date
of
purchase of the convertible debenture by NeoGenomics and extending until the
day
which is the later of a) November 16, 2007 or b) the date that certain
milestones specified in the agreement have been achieved. The First Option
is
exercisable in cash or NeoGenomics common stock at our option, provided,
however, that we must include at least $1.0 million of cash in the consideration
if we elect to exercise this First Option. In addition to purchasing convertible
preferred stock as part of the First Option, we are also entitled to receive
that number of warrants which is equal to the same percentage as the percentage
of convertible preferred stock being purchased on such day of Power3’s warrants
and options. Such warrants will have an exercise price equal to the initial
conversion price of the convertible preferred stock that was purchased and
will
have a five year term.
The
second option (the “Second Option”), which is only exercisable to the extent
that we have exercised the First Option, provides that we will have the option
to increase our stake in Power3 to up to 60% of fully diluted shares of Power3
over the twelve month period beginning on the expiration date of the First
Option in one or a series of transactions by purchasing additional convertible
preferred stock of Power3 that is convertible into voting common stock and
receiving additional warrants. The purchase price per share, and the initial
conversion price of the Second Option convertible preferred stock will, to
the
extent such Second Option is exercised within six (6) months of exercise of
the
First Option, be the lesser of a) $0.40/share or b) an equity price per share
equal to $40,000,000 divided by the fully diluted shares outstanding on the
date
of any purchase. The purchase price per share, and the initial conversion price
of the Second Option convertible preferred stock will, to the extent such Second
Option is exercised after six (6) months, but within twelve (12) months of
exercise of the First Option, be the lesser of a) $0.50/share or b) an equity
price per share equal to $50,000,000 divided by the fully diluted shares
outstanding on the date of any purchase. The exercise price of the Second Option
may be paid in cash or in any combination of cash and our common stock at our
option. In addition to purchasing convertible preferred stock as part of the
Second Option, we are also entitled to receive that number of warrants which
is
equal to the same percentage as the percentage of convertible preferred stock
being purchased on such day of Power3’s warrants and options. Such warrants will
have an exercise price equal to the initial conversion price of the convertible
preferred stock being purchased that date and will have a five year
term.
Employment
Contracts
On
December 14, 2004, we entered into an employment agreement with Robert P.
Gasparini to serve as our President and Chief Science Officer. The employment
agreement has an initial term of three years, effective January 3, 2005;
provided, however that either party may terminate the agreement by giving the
other party sixty days written notice. The employment agreement specifies an
initial base salary of $150,000/year, with specified salary increases to
$185,000/year over the first 18 months of the contract. Mr. Gasparini is also
entitled to receive cash bonuses for any given fiscal year in an amount equal
to
15% of his base salary if he meets certain targets established by the Board
of
Directors. In addition, Mr. Gasparini was granted 1,000,000 Incentive Stock
Options that have a ten year term so long as Mr. Gasparini remains an employee
of the Company (these options, which vest according to the passage of time
and
other performance-based milestones, resulted in us recording stock based
compensation expense under SFAS 123(R) beginning in 2006. Mr. Gasparini's
employment agreement also specifies that he is entitled to four weeks of paid
vacation per year and other health insurance and relocation 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 six months.
Recent
Accounting Pronouncements
SFAS
159 - ‘The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115’
In
February 2007, the FASB issued Financial
Accounting Standard No. 159 The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115
or FAS
159. This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
this Statement apply only to entities that elect the fair value option.
The
following are eligible items for the measurement option established by this
Statement:
|
1.
|
Recognized
financial assets and financial liabilities
except:
|
|
a.
|
An
investment in a subsidiary that the entity is required to
consolidate
|
|
b.
|
An
interest in a variable interest entity that the entity is required
to
consolidate
|
|
c.
|
Employers’
and plans’ obligations (or assets representing net over funded positions)
for pension benefits, other postretirement benefits (including health
care
and life insurance benefits), postemployment benefits, employee stock
option and stock purchase plans, and other forms of deferred compensation
arrangements.
|
|
d.
|
Financial
assets and financial liabilities recognized under leases as defined
in
FASB Statement No. 13, Accounting
for Leases.
|
|
e.
|
Deposit
liabilities, withdrawable on demand, of banks, savings and loan
associations, credit unions, and other similar depository
institutions
|
|
f.
|
Financial
instruments that are, in whole or in part, classified by the issuer
as a
component of shareholder’s equity (including “temporary equity”). An
example is a convertible debt security with a noncontingent beneficial
conversion feature.
|
|
2.
|
Firm
commitments that would otherwise not be recognized at inception and
that
involve only financial instruments
|
|
3.
|
Nonfinancial
insurance contracts and warranties that the insurer can settle by
paying a
third party to provide those goods or
services
|
|
4.
|
Host
financial instruments resulting from separation of an embedded
nonfinancial derivative instrument from a nonfinancial hybrid
instrument.
|
The
fair
value option:
|
1.
|
May
be applied instrument by instrument, with a few exceptions, such
as
investments otherwise accounted for by the equity
method
|
|
2.
|
Is
irrevocable (unless a new election date
occurs)
|
|
3.
|
Is
applied only to entire instruments and not to portions of
instruments.
|
The
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of FASB Statement No. 157, Fair
Value Measurements.
We have
not yet determined what effect, if any, adoption of this Statement
will
have on
our financial position or results of operations.
SFAS
158 - ‘Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statement Nos. 87, 88, 106, and 132(R)’
In
September 2006, the FASB issued Financial Accounting Standard No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statement Nos. 87, 88, 106, and 132(R),
or FAS 158. This Statement requires an employer that is a business entity and
sponsors one or more single-employer defined benefit plans to (a) recognize
the
funded status of a benefit plan—measured as the difference between plan assets
at fair value (with limited exceptions) and the benefit obligation—in its
statement of financial position; (b) recognize, as a component of other
comprehensive income, net of tax, the gains or losses and prior service costs
or
credits that arise during the period but are not recognized as components of
net
periodic benefit cost pursuant to FAS 87, Employers’
Accounting for Pensions,
or FAS 106, Employers’
Accounting for Postretirement Benefits Other Than Pensions;
(c) measure defined benefit plan assets and obligations as of the date of the
employer’s fiscal year-end statement of financial position (with limited
exceptions); and (d) disclose in the notes to financial statements additional
information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition assets or obligations. An employer
with
publicly traded equity securities is required to initially recognize the funded
status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15, 2006.
This statement is not expected to have a significant effect on our financial
statements.
SFAS
157 - ‘Fair Value Measurements’
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This
standard establishes a standard definition for fair value establishes a
framework under generally accepted accounting principles for measuring fair
value and expands disclosure requirements for fair value measurements. This
standard is effective for financial statements issued for fiscal years beginning
after November 15, 2007. Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
SAB
108 - ‘Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements’
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108),
Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements. SAB 108 provides guidance
on
the consideration of the effects of prior year unadjusted errors in quantifying
current year misstatements for the purpose of a materiality assessment.
Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
FIN
48
- ‘Accounting for Uncertainty in Income Taxes’
In
June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes”, an interpretation of SFAS No. 109. FIN 48
prescribes a comprehensive model for how companies should recognize, measure,
present and disclose uncertain tax positions taken or expected to be taken
on a
tax return. Under FIN 48, we shall initially recognize tax positions in the
financial statements when it is more likely than not the position will be
sustained upon examination by the tax authorities. We shall initially and
subsequently measure such tax positions as the largest amount of tax benefit
that is greater than 50% likely of being realized upon ultimate settlement
with
the tax authority assuming full knowledge of the position and all relevant
facts. FIN 48 also revises disclosure requirements to include an annual tabular
roll-forward of unrecognized tax benefits. We will adopt this interpretation
as
required in 2007 and will apply its provisions to all tax positions upon initial
adoption with any cumulative effect adjustment recognized as an adjustment
to
retained earnings. Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
SFAS
156 - ‘Accounting for Servicing of Financial Assets’
In
March 2006, the FASB issued SFAS 156 “Accounting for Servicing of Financial
Assets.” This Statement amends FASB Statement No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities,” with
respect to the accounting for separately recognized servicing assets and
servicing liabilities. This statement:
|
a.
|
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
|
b.
|
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if
practicable.
|
|
c.
|
Permits
an entity to choose “Amortization method” or “Fair value measurement
method” for each class of separately recognized servicing assets and
servicing liabilities.
|
|
d.
|
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
|
e.
|
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
SFAS
155 - ‘Accounting for Certain Hybrid Financial Instruments—an amendment of FASB
Statements No. 133 and 140’
This
Statement, issued in February 2006, amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and No.
140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.”
This
Statement:
|
a.
|
Permits
fair value remeasurement for any hybrid financial instrument that
contains
an embedded derivative that otherwise would require
bifurcation
|
|
b.
|
Clarifies
which interest-only strips and principal-only strips are not subject
to
the requirements of Statement 133
|
|
c.
|
Establishes
a requirement to evaluate interests in securitized financial assets
to
identify interests that are freestanding derivatives or that are
hybrid
financial instruments that contain an embedded derivative requiring
bifurcation
|
|
d.
|
Clarifies
that concentrations of credit risk in the form of subordination are
not
embedded derivatives
|
|
e.
|
Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains
to a
beneficial interest other than another derivative financial
instrument.
|
This
Statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15,
2006.
The
fair
value election provided for in paragraph 4(c) of this Statement may also be
applied upon adoption of this Statement for hybrid financial instruments that
had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
of
this Statement. Earlier adoption is permitted as of the beginning of our fiscal
year, provided we have not yet issued financial statements, including financial
statements for any interim period, for that fiscal year. Provisions of this
Statement may be applied to instruments that we hold at the date of adoption
on
an instrument-by-instrument basis. Adoption of this statement is not expected
to
have any material effect on our financial position or results of
operations.
Recently
Adopted Accounting Standards
Effective
January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”) requiring that compensation cost relating to share-based payment
transactions be recognized in our financial statements. The cost is measured
at
the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity award). We adopted SFAS 123R using the modified
prospective method and, accordingly, did not restate prior periods to reflect
the fair value method of recognizing compensation cost. Under the modified
prospective approach, SFAS 123R applies to new awards and to awards that were
outstanding on January 1, 2006 that are subsequently modified, repurchased
or cancelled.
The
shareholders of the Company have approved our Equity Incentive Plan, as amended
and restated on October 31, 2006 (the “Plan”), that permits the grant of stock
awards and stock options to officers, directors, employees and consultants.
Options granted under the plan are either Incentive Stock Options (“ISOs”) or
Non-Qualified Stock Options (“NQSOs”). Under this Plan, we are authorized to
grant awards for up to 12% of our Adjusted Diluted Shares Outstanding (as
defined in the Plan), which equated to 3,819,890 shares of our common stock
as
of December 31, 2006. As of December 31, 2006, option and stock awards totaling
2,116,667 shares were outstanding. Options typically have a 10 year life
and
vest over 3 or 4 years but each grant’s vesting and exercise price provisions
are determined by the Board of Directors at the time the awards are
granted.
As
a
result of adopting SFAS 123R on January 1, 2006, we recorded compensation
cost related to stock options of approximately $64,000 for the year ended
December 31, 2006. As of December 31, 2006, there was approximately $123,000
of
total unrecognized compensation costs related to outstanding stock options,
which is expected to be recognized over a weighted average period of
1.52 years.
Prior
to
January 1, 2006, we applied Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations
which required compensation costs to be recognized based on the difference,
if
any, between the quoted market price of the stock on the grant date and the
exercise price. As all options granted to employees under such plans had an
exercise price at least equal to the market value of the underlying common
stock
on the date of grant, and given the fixed nature of the equity instruments,
no
stock-based employee compensation cost relating to stock options was reflected
in net income (loss). If we had expensed stock options for the year ended
December 31, 2005 our net loss and pro forma net loss per share amounts would
have been reflected as follows:
|
|
2005
|
|
Net
loss:
|
|
|
|
As
reported
|
|
$
|
(997,160
|
)
|
Pro
forma
|
|
$
|
(1,022,550
|
)
|
Loss
per share:
|
|
|
|
|
As
reported
|
|
$
|
(0.04
|
)
|
Pro
forma
|
|
$
|
(0.05
|
)
|
We
use
the Black-Scholes option-pricing model to estimate fair value of stock-based
awards. The fair value of options granted during 2006 was estimated on the
date
of the grants using the following approximate assumptions: dividend yield of
0
%, expected volatility of 12 - 44% (depending on the date of issue), risk-free
interest rate of 4.5 - 4.6% (depending on the date of issue), and an expected
life of 3 or 4 years.
SEC
Staff
Accounting Bulletin 107 (SAB 107) requires that the estimate of fair value
used
in valuing employee equity options should reflect the assumptions marketplace
participants would use in determining how much to pay for an instrument on
the
date of the measurement (generally the grant date for equity awards). We
calculate expected volatility for stock options by taking the standard deviation
of the stock price for the 3 months preceding the option grant and dividing
it
by the average stock price for the same 3 month period. We believe that since
the Company’s financial condition and prospects continue to improve
significantly on a quarterly and annual basis, no reasonable market participants
would value NeoGenomics stock options, if there were any such options that
traded on a public exchange, by using expected future volatility estimates
based
on anything other than recent market information. This conclusion is based
on
our Principal Financial Officer’s previous experience as a senior executive in
one of the largest over the counter options trading firms in the U.S. and his
intimate knowledge of how professional investors value exchange traded options.
As such we do not believe that using historical volatility information from
anything other than the most recent 3 month period prior to a grant date as
the
basis for estimating future volatility is consistent with the provisions of
SAB
107. Therefore, over the last four years we have consistently estimated future
volatility in determining the fair value of employee options based on the three
month period prior to any given grant date. The risk-free interest rate we
use
in determining the fair value of equity awards under the Black Scholes model
is
the equivalent U.S. Treasury yield in effect at the time of grant for an
instrument with a similar expected life as the option.
The
status of our stock options and stock awards are summarized as
follows:
|
|
Number
|
|
Weighted
Average
|
|
|
|
Of
Shares
|
|
Exercise
Price
|
|
Outstanding
at December 31, 2004
|
|
|
882,329
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,442,235
|
|
|
0.27
|
|
Exercised
|
|
|
(42,235
|
)
|
|
0.00
|
|
Canceled
|
|
|
(482,329
|
)
|
|
0.09
|
|
Outstanding
at December 31, 2005
|
|
|
1,800,000
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,010,397
|
|
|
0.69
|
|
Exercised
|
|
|
(211,814
|
)
|
|
0.31
|
|
Canceled
|
|
|
(481,916
|
)
|
|
0.41
|
|
Outstanding
at December 31, 2006
|
|
|
2,116,667
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2006
|
|
|
1,155,166
|
|
$
|
0.28
|
|
The
following table summarizes information about our options outstanding at December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
Exercise
Price
|
|
Number
Outstanding
|
|
Remaining
Contractual
Life
(in years)
|
Options
Exercisable
|
|
Average
Exercise
Price
|
$
0.00-0.30
|
|
1,289,000
|
|
7.9
|
1,032,500
|
|
$
0.25
|
$
0.31-0.46
|
|
188,417
|
|
7.4
|
73,916
|
|
$
0.34
|
$
0.47-0.71
|
|
406,250
|
|
9.5
|
28,750
|
|
$
0.62
|
$
0.72-1.08
|
|
85,000
|
|
9.7
|
0
|
|
$
0.00
|
$
1.09-1.64
|
|
148,000
|
|
9.9
|
20,000
|
|
$
1.30
|
|
|
|
|
|
|
|
|
|
|
2,116,667
|
|
|
1,155,166
|
|
|
The
weighted average fair value of options granted during 2006 was approximately
$130,000 or $0.13 per option share. The total intrinsic value of options (which
is the amount by which the stock price exceeded the exercise price of the
options on the date of exercise) exercised during 2006 was approximately
$214,000 or $1.03 per option share exercised. During the year ended December
31,
2006, the amount of cash received from the exercise of stock options was
$64,000. The total fair value of shares vested during the year is
$37,000.
SFAS
154 'Accounting Changes and Error Corrections--a replacement of APB Opinion
No.
20 and FASB Statement No. 3
In
May
2005, the Financial Accounting Standards Board ("FASB") issued Statement No.
154. This Statement replaces APB Opinion No. 20, Accounting Changes, and FASB
Statement No. 3, Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for, and reporting of, a change
in accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
SFAS
154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Adoption of this Statement did not
have
any material impact on our financial statements.
ITEM
7. FINANCIAL
STATEMENTS
NEOGENOMICS,
INC.
Consolidated
Financial Statements as of
December
31, 2006 and for the years ended
December
31, 2006 and 2005 and
Report
of Independent Registered Public Accounting Firm
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
Report
of Independent Registered Public Accounting Firm.
|
44
|
Consolidated
Balance Sheet as of December 31, 2006.
|
45
|
Consolidated
Statements of Operations for the years ended December 31, 2006 and
2005.
|
46
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2006
and 2005.
|
47
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2006 and
2005.
|
48
|
Notes
to Consolidated Financial Statements.
|
49
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of NeoGenomics, Inc. and
subsidiary:
We
have audited the accompanying consolidated balance sheet of NeoGenomics, Inc.
and subsidiary (collectively the “Company”), as of December 31, 2006, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for the years ended December 31, 2006 and 2005. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit
of
its internal control over financial reporting. Our audit included consideration
of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our opinion, the financial statements referred to above present fairly, in
all
material respects, the financial position of the Company as of December 31,
2006, and the results of its operations and its cash flows for the years ended
December
31, 2006 and 2005,
in
conformity with accounting principles generally accepted in the United States
of
America.
/s/
Kingery & Crouse, P.A.
April
2, 2007
Tampa,
FL
NEOGENOMICS,
INC.
CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2006
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
Cash
and cash equivalents
|
$
|
126,266
|
Accounts
receivable (net of allowance for doubtful accounts of
$103,463)
|
|
1,549,758
|
Inventories
|
|
117,362
|
Other
current assets
|
|
102,172
|
Total
current assets
|
|
1,895,558
|
|
|
|
FURNITURE
AND EQUIPMENT
(net of accumulated depreciation of $494,942)
|
|
1,202,487
|
|
|
|
OTHER
ASSETS
|
|
33,903
|
|
|
|
TOTAL
ASSETS
|
$
|
3,131,948
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
Accounts
payable
|
$
|
697,754
|
Accrued
compensation
|
|
133,490
|
Accrued
expenses and other liabilities
|
|
67,098
|
Due
to affiliates (net
of discount of $39,285)
|
|
1,635,715
|
Short-term
portion of equipment capital leases
|
|
94,430
|
Total
current liabilities
|
|
2,628,487
|
|
|
|
LONG
TERM LIABILITIES:
|
|
|
Long-term
portion of equipment capital leases
|
|
448,947
|
|
|
|
TOTAL
LIABILITIES
|
|
3,077,434
|
STOCKHOLDERS’
EQUITY:
|
|
|
Common
stock, $.001 par value, (100,000,000 shares authorized;
27,061,476
|
|
|
shares
issued and outstanding)
|
|
27,061
|
Additional
paid-in capital
|
|
11,300,135
|
Deferred
stock compensation
|
|
(122,623)
|
Accumulated
deficit
|
|
(11,150,059)
|
Total stockholders’ equity
|
|
54,514
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
|
3,131,948
|
See
notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
|
2006
|
|
2005
|
|
|
|
|
|
|
NET
REVENUE
|
|
$
|
6,475,996
|
$
|
1,885,324
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
2,759,190
|
|
1,132,671
|
|
|
|
|
|
|
GROSS
MARGIN
|
|
|
3,716,806
|
|
752,653
|
|
|
|
|
|
|
OTHER
OPERATING EXPENSE
|
|
|
|
|
|
General
and administrative
|
|
|
3,576,812
|
|
1,553,017
|
|
|
|
|
|
|
OTHER
(INCOME)/EXPENSE:
|
|
|
|
|
|
Other
income
|
|
|
(55,970)
|
|
(42)
|
Interest
expense
|
|
|
325,625
|
|
196,838
|
Other
(income)/expense - net
|
|
|
269,655
|
|
196,796
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(129,661)
|
$
|
(997,160)
|
NET
LOSS PER SHARE -
Basic and Diluted
|
|
$
|
(0.00)
|
$
|
(0.04)
|
WEIGHTED
AVERAGE NUMBER
OF
SHARES OUTSTANDING - Basic
and Diluted
|
|
|
26,166,031
|
|
22,264,435
|
|
|
|
|
|
|
See
notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
Common
|
|
Common
|
|
Additional
|
|
Deferred
|
|
|
|
|
|
|
|
Stock
|
|
Stock
|
|
Paid-In
|
|
Stock
|
|
Accumulated
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2004
|
|
|
21,539,416
|
|
|
$
21,539
|
|
|
$
9,603,664
|
|
|
$
(28,620
|
)
|
|
$
(10,023,238
|
)
|
|
$
(426,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issuances
|
|
|
1,237,103
|
|
|
1,237
|
|
|
394,763
|
|
|
-
|
|
|
-
|
|
|
396,000
|
|
Transaction
fees and expenses
|
|
|
-
|
|
|
-
|
|
|
(191,160
|
)
|
|
-
|
|
|
-
|
|
|
(191,160
|
)
|
Options
issued to Scientific Advisory Board members
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,953
|
|
|
-
|
|
|
2,953
|
|
Value
of non-qualified stock options
|
|
|
-
|
|
|
-
|
|
|
5,638
|
|
|
(5,638
|
)
|
|
-
|
|
|
-
|
|
Warrants
issued for services
|
|
|
-
|
|
|
-
|
|
|
187,722
|
|
|
-
|
|
|
-
|
|
|
187,722
|
|
Stock
issued for services
|
|
|
60,235
|
|
|
60
|
|
|
15,475
|
|
|
-
|
|
|
-
|
|
|
15,535
|
|
Deferred
stock compensation related to warrants issued for services
|
|
|
-
|
|
|
-
|
|
|
(10,794
|
)
|
|
10,794
|
|
|
-
|
|
|
-
|
|
Amortization
of deferred stock compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
17,826
|
|
|
-
|
|
|
17,826
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(997,160
|
)
|
|
(997,160
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2005
|
|
|
22,836,754
|
|
|
22,836
|
|
|
10,005,308
|
|
|
(2,685
|
)
|
|
(11,020,398
|
)
|
|
(994,939
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock issuances for cash
|
|
|
3,530,819
|
|
|
3,531
|
|
|
1,099,469
|
|
|
-
|
|
|
-
|
|
|
1,103,000
|
|
Common
Stock issued for acquisition
|
|
|
100,000
|
|
|
100
|
|
|
49,900
|
|
|
-
|
|
|
-
|
|
|
50,000
|
|
Transaction
fees and expenses
|
|
|
-
|
|
|
-
|
|
|
(80,189
|
)
|
|
-
|
|
|
-
|
|
|
(80,189
|
)
|
Adjustment
of credit facility discount
|
|
|
-
|
|
|
-
|
|
|
2,365
|
|
|
|
|
|
-
|
|
|
2,365
|
|
Exercise
of stock options and warrants
|
|
|
546,113
|
|
|
546
|
|
|
66,345
|
|
|
-
|
|
|
-
|
|
|
66,891
|
|
Warrants
and stock issued for services
|
|
|
7,618
|
|
|
8
|
|
|
7,642
|
|
|
-
|
|
|
-
|
|
|
7,650
|
|
Payment
of Note on Cornell Capital fee
|
|
|
-
|
|
|
-
|
|
|
(50,000
|
)
|
|
-
|
|
|
-
|
|
|
(50,000
|
)
|
Stock
issued to settle accounts payable
|
|
|
40,172
|
|
|
40
|
|
|
15,627
|
|
|
-
|
|
|
-
|
|
|
15,667
|
|
Value
of stock option grants
|
|
|
-
|
|
|
-
|
|
|
183,668
|
|
|
(183,668
|
)
|
|
-
|
|
|
-
|
|
Stock
compensation expense
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
63,730
|
|
|
-
|
|
|
63,730
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(129,661
|
)
|
|
(129,661
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006
|
|
|
27,061,476
|
|
|
|
|
|
|
|
|
|
)
|
|
|
)
|
|
|
|
See
notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2006 AND 2005
|
|
2006
|
|
2005
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
loss
|
|
$
|
(129,661
|
)
|
$
|
(997,160
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Depreciation
|
|
|
233,632
|
|
|
123,998
|
|
Impairment
of fixed assets
|
|
|
53,524
|
|
|
50,000
|
|
Amortization
of credit facility discounts and debt issue costs
|
|
|
72,956
|
|
|
57,068
|
|
Stock
based compensation
|
|
|
63,730
|
|
|
-
|
|
Non-cash
consulting and bonuses
|
|
|
7,650
|
|
|
85,877
|
|
Provision
for bad debts
|
|
|
444,133
|
|
|
132,633
|
|
Other
non-cash expenses
|
|
|
59,804
|
|
|
29,576
|
|
Changes
in current assets and liabilities, net:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(1,442,791
|
)
|
|
(627,241
|
)
|
Inventory
|
|
|
(57,362
|
)
|
|
(44,878
|
)
|
Other
current assets
|
|
|
(101,805
|
)
|
|
(54,529
|
)
|
Deposits
|
|
|
(31,522
|
)
|
|
300
|
|
Deferred
revenues
|
|
|
(100,000
|
)
|
|
(10,000
|
)
|
Accounts
payable and accrued expenses
and
other liabilities
|
|
|
233,930
|
|
|
352,305
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES:
|
|
|
(693,782
|
)
|
|
(902,051
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(398,618
|
)
|
|
(117,628
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Advances
from affiliates, net
|
|
|
175,000
|
|
|
760,000
|
|
Notes
payable
|
|
|
2,000
|
|
|
-
|
|
Repayments
of capital leases
|
|
|
(58,980
|
)
|
|
-
|
|
Debt
issue costs
|
|
|
-
|
|
|
(53,587
|
)
|
Issuances
of common stock for cash, net of transaction expenses
|
|
|
1,089,702
|
|
|
211,662
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
1,207,722
|
|
|
918,075
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
115,322
|
|
|
(101,
604
|
)
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
10,944
|
|
|
112,548
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
126,266
|
|
$
|
10,944
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
269,316
|
|
$
|
136,936
|
|
|
|
|
|
|
|
|
|
Income
taxes paid
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
|
Equipment
leased under capital leases
|
|
$
|
602,357
|
|
|
-
|
|
Common
stock issued for acquisition
|
|
$
|
50,000
|
|
|
-
|
|
__________________________________________________________________________________
See
notes
to consolidated financial statements.
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION
AND OPERATIONS OF THE COMPANY
NeoGenomics,
Inc. (“NEO” or the “Subsidiary”) was incorporated under the laws of the state of
Florida on June 1, 2001 and on November 14, 2001 agreed to be acquired by
American Communications Enterprises, Inc. (“ACE”, or the “Parent”). ACE was
formed in 1998 and succeeded to NEO’s name on January 3, 2002 (NEO and ACE are
collectively referred to as “we”, “us”, “our” or the “Company”).
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Parent and the Subsidiary. All significant intercompany accounts and balances
have been eliminated in consolidation.
Reclassification
Certain
amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current year presentation.
Revenue
Recognition
Net
revenues are recognized in the period when tests are performed and consist
primarily of net patient revenues that are recorded based on established billing
rates less estimated discounts for contractual allowances principally for
patients covered by Medicare, Medicaid and managed care and other health plans.
Adjustments of the estimated discounts are recorded in the period payment is
received. These revenues also are subject to review and possible audit by the
payers. We believe that adequate provision has been made for any adjustments
that may result from final determination of amounts earned under all the above
arrangements. There are no known material claims, disputes or unsettled matters
with any payers that are not adequately provided for in the accompanying
consolidated financial statements.
Accounts
Receivable
We
record
accounts receivable net of contractual discounts. We provide for accounts
receivable that could become uncollectible in the future by establishing an
allowance to reduce the carrying value of such receivables to their estimated
net realizable value. We estimate this allowance based on the aging of our
accounts receivable and our historical collection experience for each type
of
payer. Receivables are charged off to the allowance account at the time they
are
deemed uncollectible.
Concentrations
of Credit Risk
We
currently market our services to pathologists, oncologists, urologists,
hospitals and other clinical laboratories. During 2006, we performed 12,838
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. In 2005, four
customers accounted for 65% of our total revenue. For the year ended December
31, 2006, three customers represented 61% of our revenue with each party
representing greater than 15% of such revenues. As revenue continues to
increase, these concentrations are expected to decease. In the event that we
lost one of these customers, we would potentially lose a significant percentage
of our revenues.
Financial
instruments that potentially subject us to
significant concentrations of credit risk consist principally of cash and cash
equivalents. We maintain all of our cash and cash equivalents in deposit
accounts with several high quality financial institutions, which accounts may
at
times exceed federally insured limits. We have not experienced any losses in
such accounts.
Inventories
Inventories,
which consist principally of supplies, are valued at the lower of cost (first
in, first out method) or market.
Use
of
Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements include estimates related
to the allowances discussed under Accounts Receivable above as well as
estimating depreciation periods of tangible assets, and long-lived impairments,
among others. The markets for our services are characterized by intense price
competition, evolving standards and changes in healthcare regulations, all
of
which could impact the future realizability of our assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined
to be
necessary. It is at least reasonably possible that our estimates could change
in
the near term with respect to these matters.
Financial
Instruments
We
believe the book value of our financial instruments included in our current
assets and liabilities approximates their fair values due to their short-term
nature.
We
also
believe the book value of our long-term liabilities approximates their fair
value as the consideration (i.e. interest and, in certain cases, warrants)
on
such obligations approximate the consideration at which similar types of
borrowing arrangements could be currently obtained.
Furniture
and Equipment
Furniture
and equipment are stated at cost. Major additions are capitalized, while minor
additions and maintenance and repairs, which do not extend the useful life
of an
asset, are expensed as incurred. Depreciation is provided using the
straight-line method over the assets’ estimated useful lives, which range from 3
to 7 years.
Long-Lived
Assets
Statement
of Financial Accounting Standards (SFAS) 144, "Accounting for the Impairment
or
Disposal of Long-Lived Assets” requires that long-lived assets, including
certain identifiable intangibles, be reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying value of the assets in
question may not be recoverable. As a result of experiencing losses from
operations, we evaluated our long-lived assets during 2006 and 2005 and
determined that certain equipment had a remaining net book value in excess
of
their fair value (as determined by our management). Accordingly, we recorded
an
impairment loss of approximately $54,000 during the year ended December 31,
2006
and $50,000 during the year ended December 31, 2005.
Income
Taxes
We
compute income taxes in accordance with Financial Accounting Standards Statement
No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109, deferred
taxes are recognized for the tax consequences of temporary differences by
applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Also, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that included the enactment date.
Temporary differences between financial and tax reporting arise primarily from
the use of different depreciation methods for furniture and
equipment
as well
as impairment losses and the timing of recognition of bad debts.
Stock-Based
Compensation
Prior
to January 2006, we used Statement of Financial Accounting Standards No. 148
"Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
No.
148) to account for our stock based compensation arrangements. This statement
amended the disclosure provision of FASB statement No. 123 to require prominent
disclosure about the effects on reported net income of an entity's accounting
policy decisions with respect to stock-based employee compensation. As permitted
by SFAS No. 123 and amended by SFAS No. 148, we continued to apply the intrinsic
value method under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for our stock-based
employee compensation arrangements.
In
December 2004, the Financial Accounting Standards Board issued Statement
Number 123 (R) (“SFAS 123 (R)”), Share-Based Payments, which is effective for
the reporting period beginning on January 1, 2006. The statement requires us
to
recognize compensation expense in an amount equal to the fair value of
share-based payments such as stock options granted to employees. We had the
option to either apply SFAS 123 (R) on a modified prospective method or to
restate previously issued financial statements, and chose to utilize the
modified prospective method. Under this method, we are required to record
compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption.
In
January 2006, we adopted the expense recognition provisions of SFAS 123 (R),
and
for the year ended December 31, 2006 we recorded approximately $64,000 in stock
compensation expense. If we had expensed stock options for the year ended
December 31, 2005 the stock compensation expense would have been approximately
$25,000.
Statement
of Cash Flows
For
purposes of the statement of cash flows, we consider all highly liquid
investments purchased with an original maturity of three months or less to
be
cash equivalents.
Unamortized
Discount
Unamortized
discount resulting from transaction expenses incurred in the establishment
of
the Credit Facility (see Note G) is being amortized to interest expense over
the
contractual life of the Credit Facility (24 months) using the straight line
method.
Net
Loss Per Common Share
We
compute loss per share in accordance with Financial Accounting Standards
Statement No. 128 “Earnings per Share” (“SFAS 128”) and SEC Staff Accounting
Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS No. 128 and SAB 98,
basic net loss per share is computed by dividing the net loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
outstanding as of December 31, 2006 and 2005, which consisted of employee stock
options and certain warrants issued to consultants and other providers of
financing to the Company, were excluded from diluted net loss per common share
calculations as of such dates because they were anti-dilutive.
Recent
Pronouncements
SFAS
159 - ‘The Fair Value Option for Financial Assets and Financial
Liabilities—Including an amendment of FASB Statement No. 115’
In
February 2007, the FASB issued Financial
Accounting Standard No. 159 The
Fair Value Option for Financial Assets and Financial Liabilities—Including an
amendment of FASB Statement No. 115
or FAS
159. This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. Most of the provisions of
this Statement apply only to entities that elect the fair value option.
The
following are eligible items for the measurement option established by this
Statement:
|
1.
|
Recognized
financial assets and financial liabilities
except:
|
|
a.
|
An
investment in a subsidiary that the entity is required to
consolidate
|
|
b.
|
An
interest in a variable interest entity that the entity is required
to
consolidate
|
|
c.
|
Employers’
and plans’ obligations (or assets representing net overfunded positions)
for pension benefits, other postretirement benefits (including health
care
and life insurance benefits), postemployment benefits, employee stock
option and stock purchase plans, and other forms of deferred compensation
arrangements.
|
|
d.
|
Financial
assets and financial liabilities recognized under leases as defined
in
FASB Statement No. 13, Accounting
for Leases.
|
|
e.
|
Deposit
liabilities, withdrawable on demand, of banks, savings and loan
associations, credit unions, and other similar depository
institutions
|
|
f.
|
Financial
instruments that are, in whole or in part, classified by the issuer
as a
component of shareholder’s equity (including “temporary equity”). An
example is a convertible debt security with a noncontingent beneficial
conversion feature.
|
|
2.
|
Firm
commitments that would otherwise not be recognized at inception and
that
involve only financial instruments
|
|
3.
|
Nonfinancial
insurance contracts and warranties that the insurer can settle by
paying a
third party to provide those goods or
services
|
|
4.
|
Host
financial instruments resulting from separation of an embedded
nonfinancial derivative instrument from a nonfinancial hybrid
instrument.
|
The
fair
value option:
|
1.
|
May
be applied instrument by instrument, with a few exceptions, such
as
investments otherwise accounted for by the equity
method
|
|
2.
|
Is
irrevocable (unless a new election date
occurs)
|
|
3.
|
Is
applied only to entire instruments and not to portions of
instruments.
|
The
Statement is effective as of the beginning of an entity’s first fiscal year that
begins after November 15, 2007. Early adoption is permitted as of the beginning
of a fiscal year that begins on or before November 15, 2007, provided the entity
also elects to apply the provisions of FASB Statement No. 157, Fair
Value Measurements.
We have
not yet determined what effect, if any, adoption of this Statement will have
on
our financial position or results of operations.
SFAS
158 - ‘Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statement Nos. 87, 88, 106, and 132(R)’
In
September 2006, the FASB issued Financial Accounting Standard No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an
amendment of FASB Statement Nos. 87, 88, 106, and 132(R),
or FAS 158. This Statement requires an employer that is a business entity and
sponsors one or more single-employer defined benefit plans to (a) recognize
the
funded status of a benefit plan—measured as the difference between plan assets
at fair value (with limited exceptions) and the benefit obligation—in its
statement of financial position; (b) recognize, as a component of other
comprehensive income, net of tax, the gains or losses and prior service costs
or
credits that arise during the period but are not recognized as components of net
periodic benefit cost pursuant to FAS 87, Employers’
Accounting for Pensions,
or FAS 106, Employers’
Accounting for Postretirement Benefits Other Than Pensions;
(c) measure defined benefit plan assets and obligations as of the date of the
employer’s fiscal year-end statement of financial position (with limited
exceptions); and (d) disclose in the notes to financial statements additional
information about certain effects on net periodic benefit cost for the next
fiscal year that arise from delayed recognition of the gains or losses, prior
service costs or credits, and transition assets or obligations. An employer
with
publicly traded equity securities is required to initially recognize the funded
status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after December 15, 2006.
Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
SFAS
157 - ‘Fair Value Measurements’
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements.
This standard establishes a standard definition for fair value establishes
a
framework under generally accepted accounting principles for measuring fair
value and expands disclosure requirements for fair value measurements. This
standard is effective for financial statements issued for fiscal years beginning
after November 15, 2007. Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
SAB
108 - ‘Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements’
In
September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108),
Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
SAB 108 provides guidance on the consideration of the effects of prior year
unadjusted errors in quantifying current year misstatements for the purpose
of a
materiality assessment. Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
FIN
48
- ‘Accounting for Uncertainty in Income Taxes’
In
June 2006, the FASB issued Interpretation No. 48 (“FIN 48”), Accounting
for Uncertainty in Income Taxes,
an interpretation of SFAS No. 109. FIN 48 prescribes a comprehensive model
for
how companies should recognize, measure, present and disclose uncertain tax
positions taken or expected to be taken on a tax return. Under FIN 48, we shall
initially recognize tax positions in the financial statements when it is more
likely than not the position will be sustained upon examination by the tax
authorities. We shall initially and subsequently measure such tax positions
as
the largest amount of tax benefit that is greater than 50% likely of being
realized upon ultimate settlement with the tax authority assuming full knowledge
of the position and all relevant facts. FIN 48 also revises disclosure
requirements to include an annual tabular roll forward of unrecognized tax
benefits. We will adopt this interpretation as required in 2007 and will apply
its provisions to all tax positions upon initial adoption with any cumulative
effect adjustment recognized as an adjustment to retained earnings.
Adoption of this statement is not expected to have any material effect on our
financial position or results of operation.
SFAS
156 - ‘Accounting for Servicing of Financial Assets’
In
March 2006, the FASB issued SFAS 156, Accounting
for Servicing of Financial Assets.
This Statement amends FASB Statement No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities,
with respect to the accounting for separately recognized servicing assets and
servicing liabilities. This statement:
|
a.
|
Requires
an entity to recognize a servicing asset or servicing liability each
time
it undertakes an obligation to service a financial asset by entering
into
a servicing contract.
|
|
b.
|
Requires
all separately recognized servicing assets and servicing liabilities
to be
initially measured at fair value, if
practicable.
|
|
c.
|
Permits
an entity to choose “Amortization method” or “Fair value measurement
method” for each class of separately recognized servicing assets and
servicing liabilities.
|
|
d.
|
At
its initial adoption, permits a one-time reclassification of
available-for-sale securities to trading securities by entities with
recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided
that
the available-for-sale securities are identified in some manner as
offsetting the entity’s exposure to changes in fair value of servicing
assets or servicing liabilities that a servicer elects to subsequently
measure at fair value.
|
|
e.
|
Requires
separate presentation of servicing assets and servicing liabilities
subsequently measured at fair value in the statement of financial
position
and additional disclosures for all separately recognized servicing
assets
and servicing liabilities.
|
This
statement is effective as of the beginning of the Company’s first fiscal year
that begins after September 15, 2006. Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
SFAS
155 - ‘Accounting for Certain Hybrid Financial Instruments—an amendment of FASB
Statements No. 133 and 140’
This
Statement, issued in February 2006, amends FASB Statements No. 133, Accounting
for Derivative Instruments and Hedging Activities,
and No.
140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
This
Statement resolves issues addressed in Statement 133 Implementation Issue No.
D1, “Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets.”
This
Statement:
|
a.
|
Permits
fair value remeasurement for any hybrid financial instrument that
contains
an embedded derivative that otherwise would require
bifurcation
|
|
b.
|
Clarifies
which interest-only strips and principal-only strips are not subject
to
the requirements of Statement 133
|
|
c.
|
Establishes
a requirement to evaluate interests in securitized financial assets
to
identify interests that are freestanding derivatives or that are
hybrid
financial instruments that contain an embedded derivative requiring
bifurcation
|
|
d.
|
Clarifies
that concentrations of credit risk in the form of subordination are
not
embedded derivatives
|
|
e.
|
Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains
to a
beneficial interest other than another derivative financial
instrument.
|
This
Statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15,
2006.
The
fair
value election provided for in paragraph 4(c) of this Statement may also be
applied upon adoption of this Statement for hybrid financial instruments that
had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
of
this Statement. Earlier adoption is permitted as of the beginning of our fiscal
year, provided we have not yet issued financial statements, including financial
statements for any interim period, for that fiscal year. Provisions of this
Statement may be applied to instruments that we hold at the date of adoption
on
an instrument-by-instrument basis.
Adoption
of this statement is not expected to have any material effect on our financial
position or results of operations.
Recently
Adopted Accounting Standards
SFAS
154 'Accounting Changes and Error Corrections--A Replacement of APB Opinion
No.
20 and FASB Statement No. 3
In
May
2005, the Financial Accounting Standards Board ("FASB") issued Statement No.
154. This Statement replaces APB Opinion No. 20, Accounting
Changes,
and
FASB Statement No. 3, Reporting
Accounting Changes in Interim Financial Statements,
and
changes the requirements for the accounting for, and reporting of, a change
in
accounting principle. This Statement applies to all voluntary changes in
accounting principle. It also applies to changes required by an accounting
pronouncement in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes specific
transition provisions, those provisions should be followed.
SFAS
154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. Adoption of this Statement did not
have
any material impact on our financial statements.
Effective
January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”) requiring that compensation cost relating to share-based payment
transactions be recognized in our financial statements. The specific information
on share-based payments are contained in Note E to the financial
statements.
NOTE
B - LIQUIDITY
Our
consolidated financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business. At December 31, 2006, we had
stockholders’ equity of approximately $54,000. Subsequent to December 31, 2006,
we enhanced our working capital by issuing 612,051 shares of common stock for
$900,000. We also have the ability to draw up to $3,522,000 available under
our
Standby Equity Distribution Agreement with Cornell Capital. As such, we believe
we have adequate cash resources to meet our operating commitments for the next
twelve months and accordingly our consolidated financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going concern.
NOTE
C - FURNITURE AND EQUIPMENT, NET
Furniture
and equipment consists of the following at December 31, 2006:
Equipment
|
|
$
|
1,566,330
|
|
Leasehold
Improvements
|
|
|
12,945
|
|
Furniture
& Fixtures
|
|
|
118,154
|
|
Subtotal
|
|
$
|
1,697,429
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(494,942
|
)
|
Furniture
and Equipment, net
|
|
$
|
1,202,487
|
|
Equipment
under capital leases, included above, consists of the following at December
31,
2006:
Equipment
|
|
$
|
585,131
|
|
Furniture
& Fixtures
|
|
|
17,226
|
|
Subtotal
|
|
$
|
602,357
|
|
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(43,772
|
)
|
Furniture
and Equipment, net
|
|
$
|
558,585
|
|
NOTE
D - INCOME TAXES
We
recognized losses for both financial and tax reporting purposes during 2005,
and
for financial reporting purposes during 2006 in the accompanying consolidated
statements of operations. As we have significant loss carryforwards for tax
purposes, no provisions for income taxes and/or deferred income taxes payable
have been provided in the accompanying consolidated financial statements.
At
December 31, 2006, we have net operating loss carryforwards of approximately
$2,100,000 (the significant difference between this amount, and our accumulated
deficit of approximately $11,150,000 arises primarily from certain stock based
compensation that is considered to be a permanent difference). Assuming our
net
operating loss carryforwards are not disallowed because of certain “change in
control” provisions of the Internal Revenue Code, these net operating loss
carryforwards expire in various years through the year ended December 31,
2026. However, we have established a valuation allowance to fully reserve our
deferred income tax assets as such assets did not meet the required asset
recognition standard established by SFAS 109. Our valuation allowance decreased
by $200 during the year ended December 31, 2006.
At
December 31, 2006, our current and non-current deferred income tax assets
(assuming an effective income tax rate of approximately 40%) consisted of the
following:
Net
current deferred income tax asset:
|
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$
|
39,900
|
|
Less
valuation allowance
|
|
|
(39,900
|
)
|
Total
|
|
$
|
-
|
|
Net
non-current deferred income tax asset:
|
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
816,500
|
|
Accumulated
depreciation and impairment
|
|
|
(75,600
|
)
|
Subtotal
|
|
|
740,900
|
|
Less
valuation allowance
|
|
|
(740,900
|
)
|
Total
|
|
$
|
-
|
|
NOTE
E - INCENTIVE STOCK OPTIONS AND AWARDS
Effective
January 1, 2006, we adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123R”) requiring that compensation cost relating to share-based payment
transactions be recognized in our financial statements. The cost is measured
at
the grant date, based on the calculated fair value of the award, and is
recognized as an expense over the employee’s requisite service period (generally
the vesting period of the equity award). We adopted SFAS 123R using the modified
prospective method and, accordingly, did not restate prior periods to reflect
the fair value method of recognizing compensation cost. Under the modified
prospective approach, SFAS 123R applies to new awards and to awards that were
outstanding on January 1, 2006 that are subsequently modified, repurchased
or cancelled.
The
shareholders of the Company have approved our Equity Incentive Plan, as amended
and restated on October 31, 2006 (the “Plan”), that permits the grant of stock
awards and stock options to officers, directors, employees and consultants.
Options granted under the plan are either Incentive Stock Options (“ISOs”) or
Non-Qualified Stock Options (“NQSOs”). Under this Plan, we are authorized to
grant awards for up to 12% of our Adjusted Diluted Shares Outstanding (as
defined in the Plan), which equated to 3,819,890 shares of our common stock
as
of December 31, 2006. As of December 31, 2006, option and stock awards totaling
2,116,667 shares were outstanding. Options typically have a 10 year life and
vest over 3 or 4 years but each grant’s vesting and exercise price provisions
are determined by the Board of Directors at the time the awards are
granted.
As
a
result of adopting SFAS 123R on January 1, 2006, we recorded compensation
cost related to stock options of approximately $64,000 for the year ended
December 31, 2006. As of December 31, 2006, there was approximately $123,000
of
total unrecognized compensation costs related to outstanding stock options,
which is expected to be recognized over a weighted average period of
1.52 years.
Prior
to
January 1, 2006, we applied Accounting Principles Board (APB) Opinion
No. 25, “Accounting for Stock Issued to Employees,” and related interpretations
which required compensation costs to be recognized based on the difference,
if
any, between the quoted market price of the stock on the grant date and the
exercise price. As all options granted to employees under such plans had an
exercise price at least equal to the market value of the underlying common
stock
on the date of grant, and given the fixed nature of the equity instruments,
no
stock-based employee compensation cost relating to stock options was reflected
in net income (loss). If we had expensed stock options for the year ended
December 31, 2005 our net loss and pro forma net loss per share amounts would
have been reflected as follows:
|
|
2005
|
|
Net
loss:
|
|
|
|
|
As
reported
|
|
$
|
(997,160
|
)
|
Pro
forma
|
|
$
|
(1,022,550
|
)
|
Loss
per share:
|
|
|
|
|
As
reported
|
|
$
|
(0.04
|
)
|
Pro
forma
|
|
$
|
(0.05
|
)
|
We
use
the Black-Scholes option-pricing model to estimate fair value of stock-based
awards. The fair value of options granted during 2006 was estimated on the
date
of the grants using the following approximate assumptions: dividend yield of
0
%, expected volatility of 12% - 44% (depending on the date of issue), risk-free
interest rate of 4.5% - 4.6% (depending on the date of issue), and an expected
life of 3 or 4 years.
SEC
Staff
Accounting Bulletin 107 (SAB 107) requires that the estimate of fair value
used
in valuing employee equity options should reflect the assumptions marketplace
participants would use in determining how much to pay for an instrument on
the
date of the measurement (generally the grant date for equity awards). We
calculate expected volatility for stock options by taking the standard deviation
of the stock price for the 3 months preceding the option grant and dividing
it
by the average stock price for the same 3 month period. We believe that since
the Company’s financial condition and prospects continue to improve
significantly on a quarterly and annual basis, no reasonable market participants
would value NeoGenomics stock options, if there were any such options that
traded on a public exchange, by using expected future volatility estimates
based
on anything other than recent market information. This conclusion is based
on
our Principal Financial Officer’s previous experience as a senior executive in
one of the largest over the counter options trading firms in the U.S. and his
intimate knowledge of how professional investors value exchange traded options.
As such we do not believe that using historical volatility information from
anything other than the most recent 3 month period prior to a grant date as
the
basis for estimating future volatility is consistent with the provisions of
SAB
107. Therefore, over the last four years we have consistently estimated future
volatility in determining the fair value of employee options based on the three
month period prior to any given grant date. The risk-free interest rate we
use
in determining the fair value of equity awards under the Black Scholes model
is
the equivalent U.S. Treasury yield in effect at the time of grant for an
instrument with a similar expected life as the option.
The
status of our stock options and stock awards are summarized as
follows:
|
Number
|
|
Weighted
Average
|
|
Of
Shares
|
|
Exercise
Price
|
Outstanding
at December 31, 2004
|
882,329
|
$
|
0.16
|
|
|
|
|
Granted
|
1,442,235
|
|
0.27
|
Exercised
|
(42,235)
|
|
0.00
|
Canceled
|
(482,329)
|
|
0.09
|
Outstanding
at December 31, 2005
|
1,800,000
|
|
0.27
|
|
|
|
|
Granted
|
1,010,397
|
|
0.69
|
Exercised
|
(211,814)
|
|
0.31
|
Canceled
|
(481,916)
|
|
0.41
|
Outstanding
at December 31, 2006
|
2,116,667
|
|
0.43
|
|
|
|
|
Exercisable
at December 31, 2006
|
1,155,166
|
$
|
0.28
|
The
following table summarizes information about our options outstanding at December
31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average
|
|
|
Weighted
|
Exercise
Price
|
|
Number
Outstanding
|
|
Remaining
Contractual
Life
(in years)
|
Options
Exercisable
|
|
Average
Exercise
Price
|
$
0.00-0.30
|
|
1,289,000
|
|
7.9
|
1,032,500
|
|
$
0.25
|
$
0.31-0.46
|
|
188,417
|
|
7.4
|
73,916
|
|
$
0.34
|
$
0.47-0.71
|
|
406,250
|
|
9.5
|
28,750
|
|
$
0.62
|
$
0.72-1.08
|
|
85,000
|
|
9.7
|
0
|
|
$
0.00
|
$
1.09-1.64
|
|
148,000
|
|
9.9
|
20,000
|
|
$
1.30
|
|
|
|
|
|
|
|
|
|
|
2,116,667
|
|
|
1,155,166
|
|
|
The
weighted average fair value of options granted during 2006 was approximately
$130,000 or $0.13. The total intrinsic value of options (which is the amount
by
which the stock price exceeded the exercise price of the options on the date
of
exercise) exercised during 2006 was approximately $214,000 or $1.03 per option
share exercised. During the year ended December 31, 2006, the amount of cash
received from the exercise of stock options was approximately $64,000. The
total
fair value of shares vested during the year is $37,000.
NOTE
F - COMMITMENTS AND CONTINGENCIES
Operating
Leases
In
August
2003, we entered into a three year lease for 5,200 square feet at our laboratory
facility in Fort Myers, Florida. On June 29, 2006 we signed an amendment to
the
original lease which extended the lease through June 30, 2011. The amendment
included the rental of an additional 4,400 square feet adjacent to our current
facility. This space will allow for future expansion of our business. The lease
was further amended on January 17, 2007 but this amendment did not materially
alter the terms of the lease, which has total payments of approximately $653,000
over the remaining life of the lease, including annual increases of rental
payments of 3% per year. Such amount excludes estimated operating and
maintenance expenses and property taxes.
As
part
of the acquisition of The Center for CytoGenetics, Inc. by the Company on April
18, 2006, we assumed the lease of an 850 square foot facility in Nashville,
Tennessee. The lease expires on August 31, 2008. The average monthly rental
expense is approximately $1,350 per month. This space was not adequate for
our
future plans and the Company is currently not using the facility and is actively
trying to sublease this facility. On June 15, 2006, we entered into a lease
for
a new facility totaling 5,386 square feet of laboratory space in Nashville,
Tennessee. This space will be adequate to accommodate our current plans for
the
Tennessee laboratory. As part of the lease, we have the right of first refusal
on an additional 2,420 square feet, if needed, directly adjacent to the
facility. The lease is a five year lease and results in total payments by us
of
approximately $340,000.
On
August
1, 2006, the Company entered into a lease for 1,800 square feet of laboratory
space in Irvine, California. The lease is a nine month lease and results in
total payments by the Company of approximately $23,000. This lease will expire
on April 30, 2007. We are currently in negotiations on a new larger facility,
which can accommodate our future growth.
Future
minimum lease payments under these leases as of December 31, 2006 are as
follows:
Years
ending December 31,
|
|
Amounts
|
|
|
|
|
|
2007
|
|
$
|
227,082
|
|
2008
|
|
|
219,471
|
|
2009
|
|
|
214,015
|
|
2010
|
|
|
219,907
|
|
2011
|
|
|
105,710
|
|
Total
minimum lease payments
|
|
$
|
986,185
|
|
Capital
Leases
During
2006, we entered into the following capital leases:
Date
|
Type
|
Months
|
Cost
|
Monthly
Payment
|
Balance
at
December
31
|
March
2006
|
Laboratory
Equipment
|
60
|
$134,200
|
$2,692
|
$117,117
|
August
2006
|
Laboratory
Equipment
|
60
|
48,200
|
1,200
|
43,724
|
August
2006
|
Laboratory
Equipment
|
60
|
98,400
|
2,366
|
90,140
|
August
2006
|
Laboratory
Equipment
|
60
|
101,057
|
2,316
|
89,630
|
August
2006
|
Laboratory
Equipment
|
60
|
100,200
|
2,105
|
86,740
|
November
2006
|
Laboratory
Equipment
|
60
|
19,900
|
434
|
19,348
|
November
2006
|
Computer
Equipment
|
60
|
9,700
|
228
|
9,366
|
December
2006
|
Computer
Equipment
|
48
|
19,292
|
549
|
17,742
|
December
2006
|
Computer
Equipment
|
48
|
25,308
|
718
|
24,003
|
December
2006
|
Office
Equipment
|
60
|
46,100
|
994
|
45,567
|
|
|
|
|
|
|
Total
|
|
|
$602,357
|
$13,602
|
$543,377
|
Future
minimum lease payments under these leases as of December 31, 2006 are as
follows:
Years
ending December 31,
|
|
Amounts
|
|
|
|
|
|
2007
|
|
$
|
163,219
|
|
2008
|
|
|
163,219
|
|
2009
|
|
|
163,219
|
|
2010
|
|
|
161,951
|
|
2011
|
|
|
89,582
|
|
Total
future minimum lease payments
|
|
|
741,190
|
|
Less
amount representing interest
|
|
|
197,813
|
|
Present
value of future minimum lease payments
|
|
|
543,377
|
|
Less
current maturities
|
|
|
94,430
|
|
|
|
|
|
|
|