Unassociated Document
As
filed with the U.S. Securities and Exchange Commission on April 28 ,
2009
Registration
No. 333-155784
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
POST
EFFECTIVE
AMENDMENT
NO. 1
TO
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
NeoGenomics, Inc.
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(Name
of Registrant in Our Charter)
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Nevada
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74-2897368
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(State
or Other Jurisdiction of Incorporation or
Organization)
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(I.R.S.
Employer Identification No.)
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Robert
P. Gasparini
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12701
Commonwealth Drive, Suite 9
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12701
Commonwealth Drive, Suite 9
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Fort
Myers, Florida 33913
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Fort
Myers, Florida 33913
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(239) 768-0600
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8731
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(239) 768-0600
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(Address
and Telephone Number
of
Principal Executive Offices and
Principal
Place of Business)
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(Primary
Standard Industrial
Classification
Code Number)
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(Name,
Address and Telephone Number
of
Agent for Service)
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With
copies to:
Clayton
E. Parker, Esq.
Mark E.
Fleisher, Esq.
K&L
Gates, LLP
200 S.
Biscayne Boulevard, Suite 3900
Miami,
Florida 33131
Telephone:
(305) 539-3300
Facsimile:
(305) 358-7095
Approximate
date of commencement of proposed sale to the public: As soon as practicable after this
registration statement becomes effective.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. x
If this
Form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
If this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller
reporting company x
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EXPLANATORY
NOTE
The
Registrant’s Registration Statement on Form S-1 (File No. 333-155784) originally
filed with the Securities and Exchange Commission on November 28, 2008 was
declared effective on February 5, 2009 (the “Original Registration
Statement”). The Registrant is filing this Post-Effective
Amendment No. 1 to the Original Registration Statement in order to update the
Original Registration Statement to include, among other things, the Registrant’s
consolidated financial statements for the fiscal year ended December 31, 2008
and other updated information about the Registrant.
The
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT
TO COMPLETION, DATED APRIL 28, 2009 .
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities in any
state where the offer or sale is not permitted.
PROSPECTUS
NEOGENOMICS,
INC.
6,500,000
Shares of Common Stock
This
prospectus relates to the sale of up to 6,500,000 shares of the common stock,
par value $0.001 per share, of NeoGenomics, Inc., a Nevada corporation, by the
selling stockholders named in this prospectus in the section “Selling
Stockholders”. In this prospectus we refer to NeoGenomics, Inc., a
Nevada corporation, individually as the “Parent Company” and
collectively with all of its subsidiaries as "Company," "we," "us," "our" and "NeoGenomics".
The
Company is not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. All costs associated with this
registration will be borne by the Company. The prices at which the
selling stockholders may sell the shares will be determined by the prevailing
market price for the shares or in negotiated transactions.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol “NGNM.OB”. On April 17, 2009, the last reported sale price of
our common stock on the Over-The-Counter Bulletin Board was $1.00 per
share.
One of
the selling stockholders, Fusion Capital Fund II, LLC, is an "underwriter"
within the meaning of the Securities Act of 1933, as amended (the “Securities
Act”).
These securities are
speculative and involve a high degree of risk. Please refer to
“Risk Factors” beginning on page 10 for a discussion of these
risks.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal
offense.
The date
of this prospectus is ________, 2009.
TABLE
OF CONTENTS
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PROSPECTUS
SUMMARY
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1
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THE
OFFERING
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4
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SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
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8
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RISK
FACTORS
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10
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FORWARD-LOOKING
STATEMENTS
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20
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SELLING
STOCKHOLDERS
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21
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THE
FUSION TRANSACTION
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23
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USE
OF PROCEEDS
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25
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PLAN
OF DISTRIBUTION
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26
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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27
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DESCRIPTION
OF BUSINESS
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36
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MANAGEMENT
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44
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PRINCIPAL
STOCKHOLDERS
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53
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MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
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57
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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58
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DESCRIPTION
OF CAPITAL STOCK
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61
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LEGAL
MATTERS
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64
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EXPERTS
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64
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AVAILABLE
INFORMATION
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64
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CONSOLIDATED
FINANCIAL STATEMENTS OF NEOGENOMICS, INC.
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F-i
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PROSPECTUS
SUMMARY
The
following is only a summary of the information, financial statements and the
notes thereto included in this prospectus. You should read the entire prospectus
carefully, including “Risk Factors” and our consolidated financial statements
and the notes thereto before making any investment decision.
Our
Company
NeoGenomics
operates a network of cancer-focused testing laboratories whose mission is to
provide high quality testing services to pathologists, oncologists, urologists,
hospitals, and other laboratories throughout the United States under the mantra
“When time matters and results count”. The Company’s laboratory
network currently offers the following types of testing
services:
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a)
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cytogenetics
testing, which analyzes human
chromosomes;
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b)
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Fluorescence
In-Situ Hybridization (“FISH”) testing,
which analyzes abnormalities at the chromosomal and gene
levels;
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c)
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flow
cytometry testing, which analyzes gene expression of specific markers
inside cells and on cell
surfaces;
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d)
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immunohistochemistry
testing, which analyzes the distribution of tumor antigens in specific
cell and tissue types,
and
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e)
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molecular
testing which involves analysis of DNA and RNA to diagnose and predict the
clinical significance of various genetic sequence
disorders.
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All of
these testing services are widely utilized in the diagnosis, prognosis, and
prediction for response to therapy of various types of cancers.
Market Opportunity
The
medical testing laboratory market can be broken down into three primary
segments:
• clinical
lab testing,
• anatomic
pathology testing, and
• genetic
and molecular testing.
Clinical
laboratories are typically engaged in high volume, highly automated, lower
complexity tests on easily procured specimens such as blood and
urine. Clinical lab tests often involve testing of a less urgent
nature, for example, cholesterol testing and testing associated with routine
physical exams.
Anatomic
pathology (“AP”) testing involves
evaluation of tissue, as in surgical pathology, or cells as in
cytopathology. The most widely performed AP procedures include the
preparation and interpretation of pap smears, skin biopsies, and tissue
biopsies.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or DNA/RNA
sequences for abnormalities. New tests are being developed at an
accelerated pace, thus this market niche continues to expand
rapidly. Genetic and molecular testing requires highly specialized
equipment and credentialed individuals (typically MD or PhD level) to certify
results and typically yields the highest reimbursement levels of the three
market segments.
The
market for cancer testing is growing rapidly. Key factors influencing
this growth are: (i) cancer is primarily a disease of the elderly and
now that the baby boomer generation has started to turn sixty, the U.S. is
experiencing a significant increase in the number of senior citizens, (ii) The
American Cancer Society estimates that one in four senior citizens will develop
some form of cancer during the rest of their lifetime, and (iii) every year more
and more genes are discovered to have a specific link to cancer, which then
enables a genetic or molecular test to be developed. We
estimate that the Company addresses a $5-6 billion total market opportunity,
about half of which is derived from genetic and molecular testing with the other
half derived from more traditional anatomic pathology testing services that are
complementary to and often ordered with the genetic testing services we
offer.
Our Focus
NeoGenomics’
primary focus is to provide high complexity laboratory testing for
community-based pathology, oncology and urology markets in the United
States. 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 due to ease of local
access. We currently provide our services to pathologists and
oncologists that perform bone marrow and/or peripheral blood sampling for the
diagnosis of blood and lymphoid tumors (leukemias and lymphomas) and archival
tissue referred for analysis of solid tumors such as breast
cancer. We also serve community-based urologists by providing a
FISH-based genetic test for the diagnosis of bladder cancer and early detection
of recurrent disease.
The
high complexity cancer testing services we offer to community-based pathologists
are designed to be a natural extension of and complementary to the services that
our pathologist clients perform within their own
practices. Since fee-for-service pathologists derive a
significant portion of their annual revenue from the interpretation of cancer
biopsy specimens, they represent an important market segment to
us. We believe our relationship as a non-competitive partner to the
community-based pathologist empowers these pathologists 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
also believe that we can provide a competitive choice to those larger oncology
practices that prefer to have a direct relationship with a laboratory for cancer
genetic testing services. Our regionalized approach allows us strong
interactions with clients and our innovative Genetic Pathology Solutions (“GPS
TM”) report summarizes all relevant case data on one
page.
Competitive
Strengths
Turnaround
Times
At
NeoGenomics we strive to provide industry leading turnaround times to our
clients nationwide and to provide information so that patients can get the
correct treatment quickly.
We
believe our average 4-5 day turn-around time for our cytogenetics
testing services and our average 3-4 day turn-around time for FISH testing
services continue to be industry-leading benchmarks for national
laboratories. The consistent timeliness of results is a competitive
strength in cytogenetics and FISH testing and a driver of additional testing
requests by our referring physicians. Quick turn-around times for
cytogenetics and FISH tests allow for the performance of other tests to augment
or confirm results and improve patient care. Without rapid turnaround
times 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 required. We believe our turn-around times result in our
referring physicians requesting more of our testing services and give us a
significant competitive advantage in marketing our services against those of
other competing laboratories.
National
Direct Sales Force
NeoGenomics
has assembled a strong direct sales force. Our sales representatives
(“Territory Business
Managers”) are organized into three regions (Northeast, Southeast and
West). These sales representatives are trained extensively in cancer
genetic testing and consultative selling skills. As of March 31,
2009, we had 17 Territory Business Managers and three Regional
Managers.
Client
Care
NeoGenomics Client Care Specialists
(“CCS”) are
organized by region into territories that service not only our external clients,
but also work very closely with and support our sales team. A client
receives personalized assistance when dealing with their dedicated CCS because
each CCS understands their clients’ specific needs. CCS’s handle
everything from arranging specimen pickup to delivering the results to fulfill
NeoGenomics’ objective of delivering exceptional services to our
clients.
Geographic
Locations
In
2008, we continued an aggressive campaign to regionalize our laboratory
operations around the country to be closer to our clients. Many 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. We believe that our clients and prospects desire
to do business with a laboratory with national breadth and a local
presence. NeoGenomics’ three laboratory locations in Fort Myers,
Florida; Irvine, California; and Nashville Tennessee each have the appropriate
state, Clinical Laboratory Improvement Act, as amended (“CLIA”), and College
of American Pathologists (“CAP”) licenses and
accreditations and are currently receiving specimens. As situations
dictate and opportunities arise, we will continue to develop and open new
laboratories, linked together by our optimized Laboratory Information System
(“LIS”), to
better meet the regionalized needs of our clients.
Laboratory
Information System
NeoGenomics
has a state of the art LIS that interconnects our locations and provides
flexible reporting options to clients. This system allows us to
deliver uniform test results throughout our network, regardless of where the lab
that performs any specific test is located. This allows us to move
specimens between locations to better balance our workload. Our LIS
also allows us to offer highly specialized services to certain sub-segments of
our client base. For instance, our tech-only NeoFISHTM and
NeoFLOWTM
applications allow our community-based pathologist clients to tailor individual
reports to their own customizable report templates. This feature has
been extremely well-received by our tech-only clients.
Scientific
Pipeline
The
field of cancer genetics is rapidly evolving, and we are committed to developing
and offering new tests to meet the needs of the market place based on the latest
scientific discoveries. During 2008, the Company made significant
strides in broadening our product line-up by developing the capability to
perform molecular diagnostic testing and immunohistochemistry testing
in-house. We believe that by adding additional types of tests to our
product offering, we will be able to increase our testing volumes through our
existing client base as well as more easily attract new clients via the ability
to package our testing services more appropriately to the needs of the
market.
Competition
We
operate in segments of the medical testing laboratory industry that are highly
competitive. Competitive factors in the genetic and molecular testing
business generally include the reputation of the laboratory, range of services
offered, pricing, convenience of sample collection and pick-up, quality of
analysis and reporting, timeliness of delivery of completed reports (i.e.
turnaround times) and post-reporting follow-up for clients.
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 genetic and molecular testing is
divided among approximately 300 laboratories. Approximately 80% of these
laboratories are attached to academic institutions and primarily provide
clinical services to their affiliate university hospitals. We believe that the
remaining 20% is quite fragmented and that less than 20 laboratories market
their services nationally. We estimate that the top 20 laboratories
account for approximately 50% of market revenues for genetic and molecular
testing.
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 through our direct sales force. In addition, we
have a fully integrated and interactive internet-enabled LIS that enables us to
report real time results to clients in a secure environment.
Global Products
We
offer a full set of global services to meet the needs of our clients to improve
patient care. In our global service offerings, our lab performs the
technical component of tests, and our M.D.s and Ph.D.’s interpret the test
results for our clients. This product line provides a comprehensive
testing service to those clients who are not credentialed and trained in
interpreting genetic and molecular tests. Global products also allow
NeoGenomics to derive a higher level of reimbursement than would otherwise be
possible with a tech-only test.
We
increased our professional level staffing for global requisitions requiring
interpretation in 2008. Importantly, in April 2008 we recruited two
well-known hematopathologists to NeoGenomics at our Irvine, California
laboratory location, enabling this west coast facility to become the mirror
image of our main facility in Fort Myers, Florida. We currently
employ three full-time MDs as our medical directors and pathologists, two PhDs
as our scientific directors and cytogeneticists, and one part-time MD acting as
a consultant and backup pathologist for case sign out purposes. We
have plans to hire several more pathologists in 2009 as our product mix
continues to expand beyond tech-only services and more sales emphasis is focused
on our ability to issue consolidated reporting with case interpretation under
our GPSTM product
line.
Tech-Only Products
In
2006, NeoGenomics launched a technical component only (“tech-only”) FISH
product offering. Tech-only products allow our community-based
pathology clients that are properly trained and credentialed to provide services
to clinicians based on established and trusted relationships. These pathologist
clients perform the professional interpretation of results themselves and bill
for such work under the physician fee schedule. For tech-only FISH,
NeoGenomics performs the technical component of the test (specimen set-up,
staining, sorting and categorization of cells, chromosomes, genes or DNA, etc)
and the pathology client performs the professional component. This
allows NeoGenomics to partner with its pathology clients and provides for close
collaboration in meeting market needs. Prior to the advent of
tech-only products, pathologists who did not have a genetic lab would have had
to send all of the work out to a reference lab. Utilizing
NeoFISHTM,
pathologist clients are empowered to extend the outreach efforts of their
practices and exert a high level of involvement in the delivery of high quality
patient care.
NeoFLOWTM
tech-only flow cytometry was launched as a companion service to NeoFISHTM in late
2007. While not a first to market product line for NeoGenomics, the
additional service offering allowed our flow cytometry testing services to be
the fastest growing segment of our business in 2008. We believe the
NeoFLOWTM service
offering will continue to be a key growth driver for the Company in
2009. Moreover, the combination of NeoFLOWTM and
NeoFISHTM
strengthens and differentiates NeoGenomics and allows us to compete more
favorably against larger, more entrenched competitors in our testing
niche.
Contract Research
Organization
Our
Contract Research Organization (“CRO”) division, based
at our Irvine, California facility, was formed in 2007. 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. This division also handles all of our internal research
and development and acts as a conduit for the validation of new tests that are
developed for our clients. We believe our CRO will allow us to infuse
some intellectual property into our mix of our services and help us to create a
more “vertically integrated” laboratory that can offer proprietary tests and
other product extensions over time. 2008 saw the NeoGenomics’ CRO
division continue to ramp up. Although CRO revenue in 2008 was modest
as a percentage of our total revenue, we believe our CRO will continue to grow
in size and scope and it is an important component of our overall
business.
Response Genetics
In October 2008, NeoGenomics signed
an agreement with Response Genetics, Inc. (NASDAQ: RGDX) to distribute their
proprietary molecular tests nationwide. This agreement named
NeoGenomics as the exclusive national reference laboratory authorized to offer
these predictive tests that can help medical oncologists make optimal treatment
decisions for patients with non-small cell lung cancer (“NSCLC”) and
colorectal cancer (“CRC”). This
partnership continues to benefit both companies and has allowed NeoGenomics to
establish new accounts, further differentiate our services, and increase our
footprint in the expanding field of molecular cancer genetics.
Sales and Marketing
We
continue to grow our testing volumes and revenue due to our expanding field
sales footprint. As of March 31, 2009, NeoGenomics’ sales and
marketing team totaled 28 individuals, including 17 Territory Business Managers
(sales representatives), 3 Regional Managers, 5 marketing, and 3 senior level
positions. This is up from 16 sales and marketing representatives as
of March 31, 2008. As of March 31, 2007, NeoGenomics’ sales
organization totaled nine individuals. Key hires in 2008 included
territory business managers in the Northeastern, Southeastern, and Western
states, with a disproportionally higher number hired in the Western states as
the Company continues to scale our Irvine, California based operations to handle
higher testing volumes. We intend to continue to add additional sales
and marketing personnel throughout FY 2009. As more sales
representatives are added, we believe that the base of our business outside of
Florida will continue to grow and ultimately eclipse that generated within the
state of Florida, which historically has been our largest
market.
As
a result of our expanding sales force, we experienced 74% year-over-year revenue
growth to $20.0M in 2008 from $11.5M in 2007. Our average
revenue/requisition increased 15% to $808 in 2008 from $702 in 2007 due to a
higher mix on global products with interpretation and an increase of higher
revenue flow cytometry testing as a percentage of our total
revenue.
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FY 2008
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FY 2007
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% Increase
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Client
Requisitions Received (Cases)
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24,780 |
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16,385 |
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51.2 |
% |
Number
of Tests Performed
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32,539 |
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20,998 |
|
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55.0 |
% |
Average
Number of Tests/Requisition
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1.31 |
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1.28 |
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2.3 |
% |
|
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Total
Testing Revenue
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$ |
20,015,319 |
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|
$ |
11,504,725 |
|
|
|
74.0 |
% |
Average
Revenue/Requisition
|
|
$ |
808 |
|
|
$ |
702 |
|
|
|
15.0 |
% |
Average
Revenue/Test
|
|
$ |
615 |
|
|
$ |
548 |
|
|
|
12.2 |
% |
Within
the subspecialty field of hematopathology, our scientific expertise and product
offering allows us to be able to perform multiple tests on each specimen
received. Many physicians believe that a comprehensive approach to
the diagnosis and prognosis of blood and lymph node disease to be the standard
of care throughout the country. As the average number of tests
performed per requisition increases, we believe this will help to generate
significant synergies and efficiencies in our operations and our sales and
marketing activities.
Seasonality
The cancer testing markets in
general are seasonal and “same customer sales” tend to decline somewhat in the
summer months as referring physicians are vacationing. In Florida,
this seasonality is further exacerbated because a meaningful percentage of the
population returns to homes in the Northern U.S. to avoid the hot summer
months. Although, we have made great strides in diversifying
our business on a national basis over the last few years, our revenue derived
from the state of Florida still represented about 43% of our total revenue in
2008. As a result, our test volumes and sequential growth rates
during the second and third quarter of each year have historically been impacted
by these seasonality factors.
Distribution
Methods
The
Company currently performs the vast majority of its testing services at each of
its three main clinical laboratory locations: Fort Myers, Florida, Nashville,
Tennessee and Irvine, California, and then produces a report for the requesting
physician. Services performed in-house include cytogenetics, FISH,
flow cytometry, morphology, immunohistochemistry, and some molecular
testing. The Company currently outsources approximately half of its
molecular testing to third parties, but expects to validate and perform the
majority of this testing in-house during 2009 to better meet client demand and
quality requirements.
Suppliers
The
Company orders its laboratory and research supplies from large national
laboratory supply companies such as Abbott Laboratories, Fisher Scientific,
Invitrogen, Cardinal Health, Ventana and Beckman Coulter. Other than
as discussed below, we do 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 there was a disruption in the supply of these probes, and we
did 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 Clients
We
currently market our services to pathologists, oncologists, urologists,
hospitals and other clinical laboratories. During 2008, we performed
32,539 individual tests. Ongoing sales efforts have decreased
dependence on any given source of revenue. Notwithstanding this fact,
one key client still accounts for a disproportionately large case volume and
revenue total. For the years ended December 31, 2008 and 2007, one
client with multiple locations accounted for 22% and 25% respectively, of total
revenue. All others were less than 5% of total revenue
individually. In the event that we lost this client, the Company
would potentially lose a significant percentage of revenues.
Payor Mix
In
2008, approximately 47% of our revenue was derived from Medicare claims, 28%
from commercial insurance companies, 21% from clients such as hospitals and
other reference laboratories, and 4% from all others including
patients. As of December 31, 2008, Medicare and one commercial
insurance provider accounted for 22% and 14% of the Company’s total accounts
receivable balance, respectively. There is no other significant
concentration in our payor mix.
About
Us
Our
principal executive offices are located at 12701 Commonwealth Drive, Suite 5,
Fort Myers, Florida 33913. Our telephone number is (239)
768-0600. Our website can be accessed at www.neogenomics.org.
THE
OFFERING
This
prospectus relates to the offer and sale of up to 6,500,000 shares of our common
stock by the selling stockholders described below.
Fusion Capital
On
November 5, 2008, the Company and Fusion Capital Fund II, LLC, an Illinois
limited liability company (“Fusion Capital”),
entered into a Common Stock Purchase Agreement (the “Purchase Agreement”),
and a Registration Rights Agreement (the “Registration Rights
Agreement”). Under the Purchase Agreement, Fusion Capital is
obligated, under certain conditions, to purchase shares from us in an aggregate
amount of $8.0 million from time to time over a thirty (30) month
period. Under the terms of the Purchase Agreement, Fusion Capital has
received a commitment fee consisting of 400,000 shares of our common
stock. As of March 31, 2009, there were 33,056,021 shares outstanding
(19,879,295 shares held by non-affiliates) excluding the 3,000,000 shares
offered by Fusion Capital pursuant to this prospectus which it has not yet
purchased from us. If all of such 3,000,000 shares offered hereby
were issued and outstanding as of the date hereof, the 3,000,000 shares would
represent 8.3% of the total common stock outstanding or 13.1% of the
non-affiliates shares outstanding as of the date hereof.
Under
the Purchase Agreement and the Registration Rights Agreement we are required to
register and have included in the offering pursuant to this prospectus (1)
400,000 shares which have already been issued as a commitment fee, (2) 17,500
shares which we have issued to Fusion Capital as an expense reimbursement and
(3) at least 3,000,000 shares which we may sell to Fusion Capital in the
future. All 3,417,500 shares, 10.6% of our outstanding on November 5,
2008, the date of the Purchase Agreement, are being offered pursuant to this
prospectus. Under the Purchase Agreement, we have the right but not
the obligation to sell more than the 3,000,000 shares to Fusion
Capital. As of the date hereof, we do not currently have any plans or
intent to sell to Fusion Capital any shares beyond the 3,000,000 shares offered
hereby. However, if we elect to sell more than the 3,000,000 shares
(which we have the right but not the obligation to do), we must first register
such additional shares under the Securities Act before we can elect to sell such
additional shares to Fusion Capital. In the event we elect to do so,
this could cause substantial dilution to our shareholders. The number
of shares ultimately offered for sale by Fusion Capital is dependent upon the
number of shares purchased by Fusion Capital under the Purchase
Agreement.
We do
not have the right to commence any sales of our shares to Fusion Capital until
the SEC has declared effective the registration statement of which this
prospectus is a part. The registration statement was declared
effective on February 5, 2009 and the conditions to commence funding were
satisfied. Generally, we have the right but not the obligation from
time to time to sell our shares to Fusion Capital in amounts between $50,000 and
$1.0 million depending on certain conditions. We have the right to
control the timing and amount of any sales of our shares to Fusion
Capital. The purchase price of the shares will be determined based
upon the market price of our shares without any fixed discount at the time of
each sale. Fusion Capital shall not have the right nor the obligation
to purchase any shares of our common stock on any business day that the price of
our common stock is below $0.45. There are no negative covenants,
restrictions on future fundings, penalties or liquidated damages in the Purchase
Agreement or the Registration Rights Agreement. The Purchase
Agreement may be terminated by us at any time at our discretion without any cost
to us. The Purchase Agreement provides that neither party has the
ability to amend the Purchase Agreement and the obligations of both parties are
non-transferable.
Other Selling Stockholders
|
·
|
Aspen
Select Healthcare, LP (“Aspen”), which
intends to sell up to 2,130,364 shares of common stock previously issued
and sold by the Company to Aspen on April 15, 2003 (the “2003 Aspen
Placement”). Aspen received registration rights
with respect to these shares and therefore, such shares are being
registered hereunder.
|
|
·
|
Mary
S. Dent, the spouse of Dr. Michael Dent, who is our Chairman of the Board
and founder, who intends to sell up to 553,488 shares of common stock
previously issued and sold by the Company to Dr. Dent as founder
shares. Such shares were subsequently transferred to Mary Dent
in February 2007. Dr. Dent received registration rights with
respect to these shares and therefore, such shares are being registered
hereunder.
|
|
·
|
Those
shareholders other than Aspen and Mary Dent who are set forth in the
section herein entitled “Selling Stockholders” who intend to sell up to an
aggregate of 398,648 shares of common stock which they received in a
distribution from Aspen in September 2007. All of such shares
were originally purchased by Aspen in the 2003 Aspen
Placement. Aspen received registration rights with respect to
these shares and has assigned such rights to these selling stockholders
and therefore, such shares are being registered
hereunder.
|
Please
refer to “Selling Stockholders” beginning on page 21.
The
Company is not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. All costs associated with this
registration will be borne by the Company. The prices at which the
selling stockholders may sell the shares will be determined by the prevailing
market price for the shares or in negotiated transactions.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol “NGNM.OB”. On April 17, 2009, the last reported sale price of
our common stock on the Over-The-Counter Bulletin Board was $1.00 per
share.
Common
Stock Offered
|
6,500,000
shares by selling stockholders
|
|
|
Offering
Price
|
Market
price
|
|
|
Common
Stock Currently Outstanding
|
33,056,021
shares as of March 31, 2009
|
|
|
Use
of Proceeds
|
We
will not receive any proceeds of the shares offered by the selling
stockholders. See “Use of Proceeds”.
|
|
|
Risk
Factors
|
The
securities offered hereby involve a high degree of risk. See “Risk
Factors” beginning on page 10 for a discussion of these
risks.
|
|
|
Over-the-Counter
Bulletin Board Symbol
|
NGNM.OB
|
SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
The
Summary Consolidated Financial Information set forth below was excerpted from
the Company’s Annual Reports on Form 10-K for the years ended December 31, 2008
and 2007, as filed with the SEC.
Statement
of Operations Data
|
|
For
the Years Ended
December
31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$ |
20,015,319 |
|
|
$ |
11,504,725 |
|
Cost
of Revenue
|
|
|
9,353,852 |
|
|
|
5,522,775 |
|
Gross
Profit
|
|
|
10,661,467 |
|
|
|
5,981,950 |
|
|
|
|
|
|
|
|
|
|
Other
Operating Expense:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
11,545,456 |
|
|
|
9,122,922 |
|
Income
/ (Loss) from Operations
|
|
|
(883,989 |
) |
|
|
(3,140,972 |
) |
|
|
|
|
|
|
|
|
|
Other
Income / (Expense):
|
|
|
|
|
|
|
|
|
Other
income
|
|
|
9,926 |
|
|
|
24,256 |
|
Interest
expense
|
|
|
(308,523 |
) |
|
|
(263,456 |
) |
Loss
on investment
|
|
|
(200,000 |
) |
|
|
- |
|
Other
income / (expense) – net
|
|
|
(498,597 |
) |
|
|
(239,200 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(1,382,586 |
) |
|
$ |
(3,380,172 |
) |
|
|
|
|
|
|
|
|
|
Net
Loss Per Share – Basic and Diluted
|
|
$ |
(0.04 |
) |
|
$ |
(0.11 |
) |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding – Basic and
Diluted
|
|
|
31,506,824 |
|
|
|
29,764,289 |
|
Balance
Sheet Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
468,171 |
|
|
$ |
210,573 |
|
Accounts
receivable (net of allowance for doubtful accounts of $358,642 and
$414,548, respectively)
|
|
|
2,913,531 |
|
|
|
3,236,751 |
|
Inventories
|
|
|
491,459 |
|
|
|
304,750 |
|
Other
current assets
|
|
|
482,408 |
|
|
|
400,168 |
|
Total
current assets
|
|
|
4,355,569 |
|
|
|
4,152,242 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment (net of accumulated depreciation of $1,602,594 and $862,030
respectively)
|
|
|
2,875,297 |
|
|
|
2,108,083 |
|
Other
assets
|
|
|
64,509 |
|
|
|
260,575 |
|
Total
Assets
|
|
$ |
7,295,375 |
|
|
$ |
6,520,900 |
|
|
|
|
|
|
|
|
|
|
Liabilities
& Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Account
payable
|
|
$ |
1,512,427 |
|
|
$ |
1,799,159 |
|
Accrued
compensation
|
|
|
736,552 |
|
|
|
370,496 |
|
Accrued
expenses and other liabilities
|
|
|
358,265 |
|
|
|
574,084 |
|
Legal
contingency (Note G)
|
|
|
- |
|
|
|
375,000 |
|
Short-term
portion of equipment capital leases
|
|
|
636,900 |
|
|
|
242,966 |
|
Revolving
credit line
|
|
|
1,146,850 |
|
|
|
- |
|
Total
current liabilities
|
|
|
4,390,994 |
|
|
|
3,361,705 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
|
Long-term
portion of equipment capital leases
|
|
|
1,403,271 |
|
|
|
837,081 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities:
|
|
|
5,794,265 |
|
|
|
4,198,786 |
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $0.001 par value, (100,000,000 shares authorized; 32,117,008 and
31,391,660 shares issued and outstanding at December 31, 2008 and 2007,
respectively)
|
|
|
32,117 |
|
|
|
31,391 |
|
Additional
paid-in capital
|
|
|
17,381,810 |
|
|
|
16,820,954 |
|
Accumulated
deficit
|
|
|
(15,912,817 |
) |
|
|
(14,530,231 |
) |
Total
stockholders’ equity
|
|
|
1,501,110 |
|
|
|
2,322,114 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$ |
7,295,375 |
|
|
$ |
6,520,900 |
|
|
|
|
|
|
|
|
|
|
RISK
FACTORS
We
are subject to various risks that may materially harm our business, financial
condition and results of operations. An investor should carefully consider the
risks and uncertainties described below and the other information in this filing
before deciding to purchase our common stock. If any of these risks or
uncertainties actually occurs, our business, financial condition or operating
results could be materially harmed. In that case, the trading price of our
common stock could decline or we may be forced to cease operations.
Risks
Related To Our Business
We
May Not Be Able To Implement Our Business Strategies Which Could Impair Our
Ability To Continue Operations
Implementation
of our business strategies will depend in large part on our ability to (i)
attract and maintain a significant number of clients; (ii) effectively provide
acceptable products and services to our clients; (iii) obtain adequate financing
on favorable terms to fund our business strategies; (iv) maintain appropriate
procedures, policies, and systems; (v) hire, train, and retain skilled employees
and management; (vi) continue to operate with increasing competition in the
medical laboratory industry; (vii) establish, develop and maintain name
recognition; and (viii) establish and maintain beneficial relationships with
third-party insurance providers and other third party payors. Our
inability to obtain or maintain any or all these factors could impair our
ability to implement our business strategies successfully, which could have
material adverse effects on our results of operations and financial
condition.
We
May Be Unsuccessful In Managing Our Growth Which Could Prevent The Company From
Becoming Profitable
Our
recent growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. To
manage our potential growth, we must continue to implement and improve our
operational and financial systems and to expand, train and manage our employee
base. We may not be able to effectively manage the expansion of our
operations and our systems and our procedures or controls may not be adequate to
support our operations. Our management may not be able to achieve the
rapid execution necessary to fully exploit the market opportunity for our
products and services. Any inability to manage growth could have a
material adverse effect on our business, results of operations, potential
profitability and financial condition. Part of our business strategy
may be to acquire assets or other companies that will complement our existing
business. At this time, we are unable to predict whether or when any material
transaction will be completed should negotiations commence. If we
proceed with any such transaction, we may not be able to effectively integrate
the acquired operations with our own operations. We may also seek to
finance any such acquisition by debt financings or issuances of equity
securities and such financing may not be available on acceptable terms or at
all.
We
May Incur Greater Costs Than Anticipated, Which Could Result In Sustained
Losses
We used
reasonable efforts to assess and predict the expenses necessary to pursue our
business plan. However, implementing our business plan may require more
employees, capital equipment, supplies or other expenditure items than
management has predicted. Similarly, the cost of compensating
additional management, employees and consultants or other operating costs may be
more than we estimate, which could result in sustained losses.
We
Rely On A Limited Number Of Third Parties For Manufacture And Supply Of Certain
Of Our Critical Laboratory Instruments And Materials, And We May Not Be Able To
Find Replacement Suppliers Or Manufacturers In A Timely Manner In The Event Of
Any Disruption, Which Could Adversely Affect Our Business.
We rely on third parties for the
manufacture and supply of some of our critical laboratory instruments, equipment
and materials that we need to perform our specialized diagnostic services, and
rely on a limited number of suppliers for certain laboratory materials and some
of the laboratory equipment with which we perform our diagnostic services. We do
not have long-term
contracts with our suppliers and manufacturers that commit them to supply
equipment and materials to us. Because we cannot ensure the actual production or
manufacture of such critical equipment and materials, or the ability of our
suppliers to comply with applicable legal and regulatory requirements, we may be
subject to significant delays caused by interruption in production or
manufacturing. If any of our third party suppliers or manufacturers were to
become unwilling or unable to provide this equipment or these materials in
required quantities or on our required timelines, we would need to identify and
acquire acceptable replacement sources on a timely basis. While we have
developed alternate sourcing strategies for most of the equipment and materials
we use, we cannot be certain that these strategies will be effective and even if
we were to identify other suppliers and manufacturers for the equipment and
materials we need to perform our specialized diagnostic services, there can be
no assurance that we will be able to enter into agreements with such suppliers
and manufacturers or otherwise obtain such items on a timely basis or on
acceptable terms, if at all. In addition, some of the reagents we use to perform
certain FISH tests are covered by a patent and thus are only
available
from one supplier. If we encounter delays or difficulties in securing
necessary laboratory equipment or materials, including consumables, we would
face an interruption in our ability to perform our specialized diagnostic
services and experience other disruptions that would adversely affect our
business, results of operations and financial condition.
We
May Face Fluctuations In Results Of Operations Which Could Negatively Affect Our
Business Operations And We Are Subject To Seasonality In Our
Business
As a
result of our limited operating history and the relatively limited information
available on our competitors, we may not have sufficient internal or
industry-based historical financial data upon which to calculate anticipated
operating expenses. Management expects that our results of operations
may also fluctuate significantly in the future as a result of a variety of
factors, including, but not limited to: (i) the continued rate of growth, usage
and acceptance of our products and services; (ii) demand for our products and
services; (iii) the introduction and acceptance of new or enhanced products or
services by us or by competitors; (iv) our ability to anticipate and effectively
adapt to developing markets and to rapidly changing technologies; (v) our
ability to attract, retain and motivate qualified personnel; (vi) the
initiation, renewal or expiration of significant contracts with our major
clients; (vii) pricing changes by us, our suppliers or our competitors; (viii)
seasonality; and (ix) general economic conditions and other
factors. Accordingly, future sales and operating results are
difficult to forecast. Our expenses are based in part on our
expectations as to future revenues and to a significant extent are relatively
fixed, at least in the short-term. We may not be able to adjust spending in
a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in relation to our
expectations would have an immediate adverse impact on our business, results of
operations and financial condition. In addition, we may determine
from time to time to make certain pricing or marketing decisions or acquisitions
that could have a short-term material adverse affect on our business, results of
operations and financial condition and may not result in the long-term benefits
intended. Furthermore, in Florida, currently our primary referral
market for lab testing services, a meaningful percentage of the population,
returns to homes in the Northern U.S. to avoid the hot summer
months. This combined with the usual summer vacation schedules
of our clients usually results in seasonality in our
business. Because of all of the foregoing factors, our operating
results could be less than the expectations of investors in future
periods.
We
Substantially Depend Upon Third Parties For Payment Of Services, Which Could
Have A Material Adverse Affect On Our Cash Flows And Results Of
Operations
The
Company is a clinical medical laboratory that provides medical testing services
to doctors, hospitals, and other laboratories on patient specimens that are sent
to the Company. In the case of most specimen referrals that are
received for patients that are not in-patients at a hospital or institution or
otherwise sent by another reference laboratory, the Company generally has to
bill the patient’s insurance company or a government program for its
services. As such it relies on the cooperation of numerous third
party payors, including but not limited to Medicare, Medicaid and various
insurance companies, in order to get paid for performing services on behalf of
the Company’s clients. Wherever possible, the amount of such third
party payments is governed by contractual relationships in cases where the
Company is a participating provider for a specified insurance company or by
established government reimbursement rates in cases where the Company is an
approved provider for a government program such as Medicare. However,
the Company does not have a contractual relationship with many of the insurance
companies with whom it deals, nor is it necessarily able to become an approved
provider for all government programs. In such cases, the Company is
deemed to be a non-participating provider and there is no contractual assurance
that the Company is able to collect the amounts billed to such insurance
companies or government programs. Currently, the Company is not a
participating provider with the majority of the insurance companies it bills for
its services. Until such time as the Company becomes a participating
provider with such insurance companies, there can be no contractual assurance
that the Company will be paid for the services it bills to such insurance
companies, and such third parties may change their reimbursement policies for
non-participating providers in a manner that may have a material adverse effect
on the Company’s cash flow or results of operations.
Our
Business Is Subject To Rapid Scientific Change, Which Could Have A Material
Adverse Affect On Our Business, Results of Operations And Financial
Condition
The
market for genetic and molecular testing services is characterized by rapid
scientific developments, evolving industry standards and customer demands, and
frequent new product introductions and enhancements. Our future
success will depend in significant part on our ability to continually improve
our offerings in response to both evolving demands of the marketplace and
competitive service offerings, and we may be unsuccessful in doing
so.
The
Market For Our Services Is Highly Competitive, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial
Condition
The
market for genetic and molecular testing services is highly competitive and
competition is expected to continue to increase. We compete with other
commercial medical laboratories in addition to the in-house laboratories of many
major hospitals. Many of our existing competitors have significantly
greater financial, human, technical and marketing resources than we
do. Our competitors may develop products and services that are
superior to ours or that achieve greater market acceptance than our
offerings. We
may not be able to compete successfully against current and future sources of
competition and in such case, this may have a material adverse effect on our
business, results of operations and financial condition.
We
Face The Risk of Capacity Constraints, Which Could Have A Material Adverse
Affect On Our Business, Results Of Operations And Financial
Condition
We
compete in the market place primarily on three factors: a) the
quality and accuracy of our test results; b) the speed or turn-around times of
our testing services; and c) our ability to provide after-test support to those
physicians requesting consultation. Any unforeseen increase in the
volume of clients 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 clients and
cases increases, our products, services, and infrastructure may not be able to
scale accordingly. Any failure to handle higher volume of requests
for our products and services could lead to the loss of established clients and
have a material adverse effect on our business, results of operations and
financial condition. If we produce inaccurate test results, our
clients may choose not to use us in the future. This could severely
harm our business, results of operations and financial condition. In
addition, based on the importance of the subject matter of our tests, inaccurate
results could result in improper treatment of patients, and potential liability
for us.
We
May Fail to Protect Our Facilities, Which Could Have A Material Adverse Affect
On Our Business, Results Of Operations And Financial Condition
The
Company’s operations are dependent in part upon its ability to protect its
laboratory operations against physical damage from fire, floods, hurricanes,
earthquakes, 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, Florida, Nashville, Tennessee or Irvine,
California 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 clients, which could
have a material adverse effect on our business, results of operations and
financial condition.
The
Steps Taken By The Company To Protect Its Proprietary Rights May Not Be
Adequate, Which Could Result In Infringement Or Misappropriation By
Third-Parties
We
regard our copyrights, trademarks, trade secrets and similar intellectual
property as critical to our success, and we rely upon trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
our employees, clients, partners and others to protect our proprietary
rights. The steps taken by us to protect our proprietary rights may
not be adequate or third parties may infringe or misappropriate our copyrights,
trademarks, trade secrets and similar proprietary rights. In
addition, other parties may assert infringement claims against
us.
We
Are Dependent On Key Personnel And Need To Hire Additional Qualified Personnel
In Order For Our Business To Succeed
Our
performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success
depends substantially on the continued efforts of our senior management team,
which currently is composed of a small number of individuals. The
loss of the services of any of our executive officers, our laboratory directors
or other key employees could have a material adverse effect on our business,
results of operations and our financial condition.
Our
future success also depends on our continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for
such personnel is intense and we may not be able to retain our key managerial
and technical employees or may not be able to attract and retain additional
highly qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary technical
and managerial personnel could have a material adverse effect upon our business,
results of operations and financial condition.
The
Failure to Obtain Necessary Additional Capital To Finance Growth And Capital
Requirements, Could Adversely Affect Our Business, Financial Condition And
Results of Operations
We may
seek to exploit business opportunities that require more capital than we have
currently available. We may not be able to raise such capital on
favorable terms or at all. If we are unable to obtain such additional
capital, we may be required to reduce the scope of our anticipated expansion,
which could adversely affect our business, financial condition and results of
operations.
On
February 1, 2008, we entered into a revolving credit facility with CapitalSource
Finance, LLC (“CapitalSource”),
which allows us to borrow up to $3,000,000 based on a formula which is tied to
our eligible accounts receivable that are aged less than 150 days. As
of March 31, 2009, we only had approximately $1,054,000 of availability under
this credit facility. If we were
unable
to obtain sufficient working capital financing from CapitalSource or sell enough
of our products, we will need to secure other sources of funding, including
possibly equity financing, in order to satisfy our working capital
needs.
We only have the right to receive
$50,000 every four business days under the Purchase Agreement unless our stock
price equals or exceeds $0.75, in which case we can sell greater
amounts to Fusion Capital as the price of our common stock
increases. Fusion Capital shall not have the right nor the obligation
to purchase any shares of our common stock on any business day that the market
price of our common stock is less than $0.45. Since we are
registering 3,000,000 shares for sale under the Purchase Agreement by Fusion
Capital pursuant to the registration statement of which this prospectus is a
part, the selling price of our common stock to Fusion Capital will have to
average at least $2.67 per share for us to receive the maximum proceeds of $8.0
million. Assuming a purchase price of $1.00 per share (the closing
sale price of the common stock on April 17, 2009) and the purchase by Fusion
Capital of the full 3,000,000 shares under the Purchase Agreement, proceeds to
us would only be $3,000,000 unless we choose to
register more than 3,000,000 shares, which we have the right, but not the
obligation, to do. Subject to approval by our board of directors, we
have the right but not the obligation to sell more than 3,000,000 shares to
Fusion Capital. In the event we elect to sell more than 3,000,000
shares offered hereby, we will be required to file a new registration statement
and have it declared effective by the U.S. Securities & Exchange
Commission.
The
extent we rely on Fusion Capital as a source of funding will depend on a number
of factors, including the prevailing market price of our common stock and the
extent to which we are able to secure working capital from other
sources. Specifically, Fusion Capital shall not have the right nor
the obligation to purchase any shares of our common stock on any business days
that the market price of our common stock is less than $0.45. If
obtaining sufficient financing from Fusion Capital were to prove unavailable or
prohibitively dilutive and if we are unable to sell enough of our products, we
will need to secure another source of funding in order to satisfy our working
capital needs.
Even
if we are able to access the full $3.0 million from CapitalSource and the full
$8.0 million under the Purchase Agreement with Fusion Capital, we may still need
additional capital to fully implement our business, operating and development
plans. Should the financing we require to sustain our working capital
needs be unavailable or prohibitively expensive when we require it, there could
be a material adverse effect on our business, operating results, financial
condition and prospects.
Our
Net Revenue Will Be Diminished If Payors Do Not Adequately Cover Or Reimburse
Our Services
There
has been and will continue to be significant efforts by both federal and state
agencies to reduce costs in government healthcare programs and otherwise
implement government control of healthcare costs. In addition, increasing
emphasis on managed care in the U.S. may continue to put pressure on the pricing
of healthcare services. Uncertainty exists as to the coverage and reimbursement
status of new applications or services. Third party payors, including
governmental payors such as Medicare and private payors, are scrutinizing new
medical products and services and may not cover or may limit coverage and the
level of reimbursement for our services. Third party insurance coverage may not
be available to patients for any of our existing tests or for tests we discover
and develop. In addition, a substantial portion of the testing for
which we bill our hospital and laboratory clients is ultimately paid by third
party payors. Any pricing pressure exerted by these third party
payors on our clients may, in turn, be exerted by our clients on
us. If government and other third party payors do not provide
adequate coverage and reimbursement for our tests, our operating results, cash
flows or financial condition may decline.
Third
Party Billing Is Extremely Complicated And Will Result In Significant Additional
Costs To Us
Billing
for laboratory services is extremely complicated. The customer refers the tests;
the payor is the party that pays for the tests, and the two are not usually the
same. Depending on the billing arrangement and applicable law, we need to bill
various payors, such as patients, insurance companies, Medicare, Medicaid,
doctors and employer groups, hospitals and other laboratories, 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, which
adds further complexity to the billing process.
Among
others, the primary factors which complicate our billing practices
are:
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pricing differences between our
fee schedules and the reimbursement rates of
the payors;
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disputes
with payors as to which party is responsible for payment;
and
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disparity
in coverage and information requirements among various
carriers.
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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 clients; (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. A large number of laboratories have been forced by the
federal and state governments, as well as by private payors, to enter into
substantial settlements under these laws. In particular, if an entity is
determined to have violated the federal False Claims Act, it may be required to
pay up to three 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 also 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.
The
Failure To Comply With Significant Government Regulation And Laboratory
Operations May Subject The Company To Liability, Penalties Or Limitation Of
Operations
As
discussed in the Government Regulation section of our business description, we
are subject to extensive state and federal regulatory oversight. Our
laboratory locations may not pass inspections conducted to ensure compliance
with CLIA or with any other applicable licensure or certification laws. The
sanctions for failure to comply with CLIA or state licensure requirements might
include the inability to perform services for compensation or the suspension,
revocation or limitation of the laboratory location’s CLIA 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 seek to structure our
arrangements with physicians and other clients 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 contain 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.
Our
Failure To Comply With Governmental Payor Regulations Could Result In Our Being
Excluded From Participation In Medicare, Medicaid Or Other Governmental Payor
Programs, Which Would Decrease Our Revenues And Adversely Affect Our Results Of
Operations And Financial Condition.
Billable
tests which are reimbursable from Medicare and Medicaid accounted for
approximately 47% and 52% of our revenues for the years ended December 31, 2008
and 2007, respectively. The Medicare program imposes extensive and detailed
requirements on diagnostic services providers, including, but not limited to,
rules that govern how we structure our relationships with physicians, how and
when we submit reimbursement claims and how we provide our specialized
diagnostic services. Our
failure
to comply with applicable Medicare, Medicaid and other governmental payor rules
could result in our inability to participate in a governmental payor program,
our returning funds already paid to us, civil monetary penalties, criminal
penalties and/or limitations on the operational function of our laboratory. If
we were unable to receive reimbursement under a governmental payor program, a
substantial portion of our revenues would be lost, which would adversely affect
our results of operations and financial condition.
Our Business Could Be Harmed By
Future Interpretations Of Clinical Laboratory Mark-Up
Prohibitions.
Our
laboratory currently uses the services of outside reference laboratories to
provide certain complementary laboratory services to those services provided
directly by our laboratory. Although Medicare policies do not prohibit certain
independent-laboratory-to-independent-laboratory referrals and subsequent
mark-up for services, California and other states have rules and regulations
that prohibit or limit the mark-up of these laboratory-to-laboratory services. A
challenge to our charge-setting procedures under these rules and regulations
could have a material adverse effect on our business, results of operations and
financial condition.
Failure
To Comply With The HIPAA Security And Privacy Regulations May Increase Our
Operational Costs.
The HIPAA privacy and security
regulations establish comprehensive federal standards with respect to the uses
and disclosures of Protected Health Information, (“PHI”), by health
plans and healthcare providers, in addition to setting standards to protect the
confidentiality, integrity and availability of electronic PHI. The regulations
establish a complex regulatory framework on a variety of subjects,
including the
circumstances under which uses and disclosures of PHI are permitted or required
without a specific authorization by the patient, including but not limited to
treatment purposes, activities to obtain payments for services and healthcare
operations activities; a patient's rights to access, amend and receive an
accounting of certain disclosures of PHI; the content of notices of privacy
practices for PHI; and administrative, technical and physical safeguards
required of entities that use or receive PHI electronically. We have
implemented policies and procedures related to compliance with the HIPAA privacy
and security regulations, as required by law. The privacy regulations establish
a uniform federal "floor" and do not supersede state laws that are more
stringent. Therefore, we are required to comply with both federal privacy
regulations and varying state privacy laws. The federal privacy regulations
restrict our ability to use or disclose patient identifiable laboratory data,
without patient authorization, for purposes other than payment, treatment or
healthcare operations (as defined by HIPAA), except for disclosures for various
public policy purposes and other permitted purposes outlined in the privacy
regulations. The privacy and security regulations provide for significant fines
and other penalties for wrongful use or disclosure of PHI, including potential
civil and criminal fines and penalties. Although the HIPAA statute and
regulations do not expressly provide for a private right of damages, we also
could incur damages under state laws to private parties for the wrongful use or
disclosure of confidential health information or other private personal
information.
Changes
In Regulations, Payor Policies Or Contracting Arrangements With Payors Or
Changes In Other Laws, Regulations Or Policies May Adversely Affect Coverage Or
Reimbursement For Our Specialized Diagnostic Services, Which May Decrease Our
Revenues And Adversely Affect Our Results Of Operations And Financial
Condition.
Governmental
payors, as well as private insurers and private payors, have implemented and
will continue to implement measures to control the cost, utilization and
delivery of healthcare services, including clinical laboratory and pathology
services. Congress has from time to time considered and implemented changes to
laws and regulations governing healthcare service providers, including
specialized diagnostic service providers. These changes have adversely affected
and may in the future adversely affect coverage for our services. We
also believe that healthcare professionals will not use our services if third
party payors do not provide adequate coverage and reimbursement for them. These
changes in federal, state, local and third party payor regulations or policies
may decrease our revenues and adversely affect our results of operations and
financial condition. We will continue to be a non-contracting
provider until such time as we enter into contracts with third party payors for
whom we are not currently contracted. Because a portion of our
revenues is from third-party payors with whom we are not currently contracted,
it is likely that we will be required to make positive or negative adjustments
to accounting estimates with respect to contractual allowances in the future,
which may adversely affect our results of operations, our credibility with
financial analysts and investors, and our stock price.
We
Are Subject To Security Risks Which Could Harm Our Operations
Despite
the implementation of various security measures by us, our infrastructure is
vulnerable to computer viruses, break-ins and similar disruptive problems caused
by our clients or others. Computer viruses, break-ins or other
security problems could lead to interruption, delays or cessation in service to
our clients. Further, such break-ins whether electronic or physical
could also potentially jeopardize the security of confidential information
stored in our computer systems as it relates to clients and other parties
connected through us, which may deter potential clients and give rise to
uncertain liability to parties whose security or privacy has been
infringed. A significant security breach could result in loss of
clients, damage to our reputation, direct damages, costs of repair and
detection, and other expenses. The occurrence of any of the foregoing
events could have a material adverse effect on our business, results of
operations and financial condition.
We
Must Hire And Retain Qualified Sales Representatives To Grow Our
Sales.
Our
ability to retain existing clients for our specialized diagnostic services and
attract new clients is dependent upon retaining existing sales representatives
and hiring new sales representatives, which is an expensive and time-consuming
process. We face intense competition for qualified sales personnel and our
inability to hire or retain an adequate number of sales representatives could
limit our ability to maintain or expand our business and increase sales. Even if
we are able to increase our sales force, our new sales personnel may not commit
the necessary resources or provide sufficient high quality service and attention
to effectively market and sell our services. If we are unable to maintain and
expand our marketing and sales networks or if our sales personnel do not perform
to our high standards, we may be unable to maintain or grow our existing
business and our results of operations and financial condition will likely
suffer accordingly. If a sales representative ceases employment, we risk the
loss of client goodwill based on the impairment of relationships developed
between the sales representative and the healthcare professionals for whom the
sales representative was responsible. This is particularly a risk if the
representative goes to work for a competitor, as the healthcare professionals
that are our clients may choose to use a competitor's services based on their
relationship with the departed sales representative.
Performance
Issues, Service Interruptions Or Price Increases By Our Shipping Carrier Could
Adversely Affect Our Business, Results Of Operations And Financial Condition,
And Harm Our Reputation And Ability To Provide Our Specialized Diagnostic
Services On A Timely Basis.
Expedited,
reliable shipping is essential to our operations. One of our marketing
strategies entails highlighting the reliability of our point-to-point transport
of patient samples. We rely heavily on a single carrier, Federal
Express, and also our local courier, for reliable and secure point-to-point
transport of patient samples to our laboratory and enhanced tracking of these
patient samples. Should Federal Express encounter delivery
performance issues such as loss, damage or destruction of a sample, it may be
difficult to replace our patient samples in a timely manner and such occurrences
may damage our reputation and lead to decreased demand for our services and
increased cost and expense to our business. In addition, any significant
increase in shipping rates could adversely affect our operating margins and
results of operations. Similarly, strikes, severe weather, natural disasters or
other service interruptions by delivery services we use would adversely affect
our ability to receive and process patient samples on a timely basis. If Federal
Express or we were to terminate our relationship, we would be required to find
another party to provide expedited, reliable point-to-point transport of our
patient samples. There are only a few other providers of such nationwide
transport services, and there can be no assurance that we will be able to enter
into arrangements with such other providers on acceptable terms, if at all.
Finding a new provider of transport services would be time-consuming and costly
and result in delays in our ability to provide our specialized diagnostic
services. Even if we were to enter into an arrangement with such provider, there
can be no assurance that they will provide the same level of quality in
transport services currently provided to us by Federal Express. If the new
provider does not provide the required quality and reliable transport services,
it could adversely affect our business, reputation, results of operations and
financial condition.
We
Use Biological And Hazardous Materials That Require Considerable Expertise And
Expense For Handling, Storage Or Disposal And May Result In Claims Against
Us.
We work
with hazardous materials, including chemicals, biological agents and compounds,
blood samples and other human tissue that could be dangerous to human health and
safety or the environment. Our operations also produce hazardous and
biohazardous waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and disposal of these
materials and wastes. Compliance with applicable environmental laws and
regulations may be expensive, and current or future environmental laws and
regulations may impair business efforts. If we do not comply with applicable
regulations, we may be subject to fines and penalties. In addition,
we cannot entirely eliminate the risk of accidental injury or contamination from
these materials or wastes. Our general liability insurance and/or workers'
compensation insurance policy may not cover damages and fines arising from
biological or hazardous waste exposure or contamination. Accordingly, in the
event of contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our operations
could be suspended or otherwise adversely affected.
Our
Ability To Comply With The Financial Covenants In Our Credit Agreements Depends
Primarily On Our Ability To Generate Substantial Operating Cash
Flow.
Our
ability to comply with the financial covenants under our credit agreement with
CapitalSource will depend primarily on our success in generating substantial
operating cash flow. Our credit agreement contains numerous financial and other
restrictive covenants, including restrictions on purchasing and selling assets,
paying dividends to our shareholders, and incurring additional indebtedness. Our
failure to meet these covenants could result in a default and acceleration of
repayment of the indebtedness under our credit facility. If the maturity of our
indebtedness were accelerated, we may not have sufficient funds to pay such
indebtedness. In such event, our lenders would be entitled to proceed against
the collateral securing the indebtedness, which includes substantially our
entire accounts receivable, to the extent permitted by our credit agreements and
applicable law.
We
Have Potential Conflicts Of Interest Relating To Our Related Party Transactions
Which Could Harm Our Business.
We have
potential conflicts of interest relating to existing agreements we have with
certain of our directors, officers, principal shareholders, shareholders and
employees. Potential conflicts of interest can exist if a related party director
or officer has to make a decision that has different implications for us and the
related party. If a dispute arises in connection with any of these agreements,
if not resolved satisfactorily to us, our business could be
harmed. There can be no assurance that the above or any future
conflicts of interest will be resolved in our favor. If not resolved, such
conflicts could harm our business.
We
Have Material Weaknesses In Our Internal Control Over Financial Reporting That
May Prevent The Company From Being Able To Accurately Report Its Financial
Results Or Prevent Fraud, Which Could Harm Its Business And Operating
Results.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and prevent fraud. In addition, Section 404 of the
Sarbanes-Oxley Act of 2002 requires that we assess the design and operating
effectiveness of internal control over financial reporting. If we cannot provide
reliable and accurate financial reports and prevent fraud, our business and
operating results could be harmed. We have discovered, and may in the future
discover, areas of internal controls that need improvement. We identified one
material weakness in our internal controls as of December 31,
2008. This matter and our efforts regarding remediation of this
matter, as well as efforts regarding internal controls generally are discussed
in detail in our Annual Report on Form 10-K. However, as our material weaknesses
in internal controls demonstrate, we cannot be certain that the remedial
measures taken to date will ensure that we design, implement, and maintain
adequate controls over financial processes and reporting in the
future. Remedying the material weaknesses that have been presently
identified, and any additional deficiencies, significant deficiencies or
material weaknesses that we may identify in the future, could require us to
incur significant costs, hire additional personnel, expend significant time and
management resources or make other changes. Disclosure of our material
weaknesses, any failure to remediate such material weaknesses in a timely
fashion or having or maintaining ineffective internal controls could cause
investors to lose confidence in our reported financial information, which could
have a negative effect on the trading price of our common stock and access to
capital.
We
Are Effectively Controlled By Existing Stockholders And Therefore Other
Stockholders Will Not Be Able To Direct The Company
Effective
voting control of the Company is held by a relatively small group of
stockholders. These stockholders effectively retain control of our
Board of Directors and determine all of our corporate actions. In
addition, the Company and stockholders owning and/or having the right to vote
11,784,384 shares, or approximately 35.6% of the Company’s voting shares
outstanding as of March 31, 2009, have executed a Shareholders’ Agreement that,
among other provisions, gives Aspen Select Healthcare, LP (“Aspen”), our largest
stockholder, the right to elect three out of the eight directors authorized for
our Board and nominate one mutually acceptable independent director and Dr.
Michael T. Dent, our founder, the right to nominate one
director. Accordingly, it is anticipated that Aspen and other parties
to the Shareholders’ Agreement will continue to have the ability to effectively
elect a controlling number of the members of our Board of
Directors. Such concentration of ownership may also have the effect
of delaying or preventing a change in control of the Company.
No
Foreseeable Dividends
We do
not anticipate paying dividends on our common stock in the foreseeable
future. Rather, we plan to retain earnings, if any, for the operation
and expansion of our business.
There
May Not Be A Viable Public Market For Our Common Stock
We
cannot predict the extent to which investor interest in our Company will sustain
an active trading market for our common stock on the OTC Bulletin Board or any
other stock market on which we may be listed or how liquid any such market might
remain. If an active public market is not sustained, it may be difficult for our
stockholders to sell their shares of common stock at a price that is attractive
to them, or at all.
We
May Become Involved In Securities Class Action Litigation That Could Divert
Management's Attention And Harm Our Business.
The
stock markets have from time to time experienced significant price and volume
fluctuations that have affected the market prices for the common stock of
diagnostic companies. These broad market fluctuations may cause the market price
of our common stock to decline. In the past, securities class action litigation
has often been brought against a company following a decline in the market price
of its securities. This risk is especially relevant for us because clinical
laboratory service companies have experienced significant stock price volatility
in recent years. We may become involved in this type of litigation in
the future. Litigation often is expensive and diverts management's attention and
resources, which could adversely affect our business.
If
We Are Not The Subject Of Securities Analyst Reports Or If Any Securities
Analyst Downgrades Our Common Stock Or Our Sector, The Price Of Our Common Stock
Could Be Negatively Affected.
Securities
analysts may publish reports about us or our industry containing information
about us that may affect the trading price of our common stock. There
are many publicly traded companies active in the healthcare industry, which may
mean it will be less likely that we receive analysts' coverage, which in turn
could affect the price of our common stock. In addition, if a securities or
industry analyst downgrades the outlook for our common stock or one of our
competitors' stocks or chooses to terminate coverage of our common stock, the
trading price of our common stock may also be negatively
affected.
Risks
Related To This Offering
The
Sale Of Our Common Stock To Fusion Capital May Cause Dilution And The Sale Of
The Shares Of Common Stock Acquired By Fusion Capital Could Cause The Price Of
Our Common Stock To Decline
In
connection with entering into the Purchase Agreement, we authorized the sale to
Fusion Capital of up to 3,000,000 shares of our common stock. The
number of shares ultimately offered for sale by Fusion Capital under this
prospectus is dependent upon the number of shares purchased by Fusion Capital
under the Purchase Agreement. The purchase price for the common stock to be sold
to Fusion Capital pursuant to the Purchase Agreement will fluctuate based on the
price of our common stock. Specifically, under the Purchase Agreement
for purchases up to $50,000, the purchase price would be equal to the lesser of:
(i) the lowest sale price of the Company’s common stock on the purchase date; or
(ii) the average of the three lowest closing sale prices of the Company’s common
stock during the twelve consecutive business days prior to the date of a
purchase by Fusion Capital. The price at which the Company’s common
stock would be purchased for purchases in excess of $50,000 will be the lesser
of: (i) the lowest sale price of the Company’s common stock on the purchase date
and (ii) the lowest purchase price (as described above) during the previous
seven business days prior to the purchase date. Therefore, at the
time of our sales to Fusion Capital, it is likely that the purchase price to
Fusion Capital will be below the then market price.
All
3,417,500 shares registered in this offering related to the Fusion Capital
transaction are expected to be freely tradable. It is anticipated
that such shares will be sold over a period of up to 30 months from the date of
this prospectus. Depending upon market liquidity at the time, a sale
of shares under this offering at any given time could cause the trading price of
our common stock to decline. Fusion Capital may ultimately purchase
all, some or none of the 3,000,000 shares of common stock not yet issued but
registered in this offering. Such shares may be sold by us to Fusion
Capital at a sale price below the then market price of our shares which would be
dilutive to the value of shares held by our other shareholders.
After
Fusion Capital has acquired such shares, it may sell all, some or none of such
shares. Under the Purchase Agreement, we have the right but not the obligation
to sell more than the 3,000,000 shares to Fusion Capital. As of the
date hereof, we do not currently have any plans or intent to sell to Fusion
Capital any shares beyond the 3,000,000 shares offered
hereby. However, if we elect to sell more than the 3,000,000 shares
(which we have the right but not the obligation to do), we must first register
such additional shares under the Securities Act before we can elect to sell such
additional shares to Fusion Capital. In the event we elect to do so,
this could cause substantial dilution to the ownership interests of our
shareholders. The number of shares ultimately offered for sale by
Fusion Capital is dependent upon the number of shares purchased by Fusion
Capital under the Purchase Agreement. Moreover, the sale of a substantial number
of shares of our common stock under this offering, or anticipation of such
sales, could make it more difficult for us to sell equity or equity-related
securities in the future at a time and at a price that we might otherwise wish
to effect sales. However, we have the right to control the timing and
amount of any sales of our shares to Fusion Capital and the Purchase Agreement
may be terminated by us at any time at our discretion without any further cost
to us.
Future
Sales By Our Stockholders May Adversely Affect Our Stock Price And Our Ability
To Raise Funds In New Stock Offerings
Sales
of our common stock in the public market following this offering could lower the
market price of our common stock. Sales may also make it more difficult for us
to sell equity securities or equity-related securities in the future at a time
and price that our management deems acceptable or at all. Of the
33,056,021 shares of common stock outstanding as of March 31, 2009,
22,619,816 shares are freely tradable without restriction, unless held by our
“affiliates”. The remaining 10,436,205 shares of our common stock
which are held by existing stockholders, including the officers and directors,
are “restricted securities” and may be resold in the public market only if
registered or pursuant to an exemption from registration. Some of these shares
may be resold under Rule 144.
The
Selling Stockholders May Sell Their Shares Of Common Stock In The Market, Which
Sales May Cause Our Stock Price To Decline
The
selling stockholders may sell in the public market 6,500,000 shares of our
common stock being registered in this offering. That means that up to 6,500,000
shares may be sold pursuant to this prospectus. Such sales may cause our stock
price to decline.
The
Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower Than
The Prices Paid By Other People Participating In This Offering
The price
in this offering will fluctuate based on the prevailing market price of our
common stock on the Over-The-Counter Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid by
other people participating in this offering.
The Market Price Of Our Common Stock
Is Highly Volatile.
The
market price of our common stock has been and is expected to continue to be
highly volatile. Factors, including announcements of technological innovations
by us or other companies, regulatory matters, new or existing products or
procedures, concerns about our financial position, operating results,
litigation, government regulation, developments or disputes relating to
agreements, patents or proprietary rights, may have a significant impact on the
market price of our common stock. In addition, potential dilutive effects of
future sales of shares of common stock by stockholders and by the Company,
including Fusion Capital and the other selling stockholders pursuant to this
prospectus, and subsequent sale of common stock by the holders of warrants and
options could have an adverse effect on the market price of our
shares.
If
Penny Stock Regulations Impose Restrictions On The Marketability Of Our Common
Stock, The Ability Of Our Stockholders To Sell Shares Of Our Stock Could Be
Impaired.
The SEC has adopted regulations that
generally define a "penny stock" to be an equity security that has a market
price of less than $5.00 per share or an exercise price of less than $5.00 per
share subject to certain exceptions. Exceptions include equity securities issued
by an issuer that has (i) net tangible assets of at least $2,000,000, if such
issuer has been in continuous operation for more than three years, or (ii) net
tangible assets of at least $5,000,000, if such issuer has been in continuous
operation for less than three years, or (iii) average revenue of at least
$6,000,000 for the preceding three years. Our common stock is currently trading
at under $5.00 per share. Although we currently fall under one of the
exceptions, if at a later time we fail to meet one of the exceptions, our common
stock will be considered a penny stock. Broker/dealers dealing in
penny stocks are required to provide potential investors with a document
disclosing the risks of penny stocks. Moreover, broker/dealers are required to
determine whether an investment in a penny stock is a suitable investment for a
prospective investor. These requirements, among others, may reduce the potential
market for our common stock by reducing the number of potential investors. This
may make it more difficult for investors in our common stock to resell shares to
third parties or to otherwise dispose of them. This could cause our stock price
to decline.
FORWARD-LOOKING
STATEMENTS
Information
included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words “may”, “should”, “expect”, “anticipate”, “estimate”, “believe”,
“intend” or “project” or the negative of these words or other variations on
these words or comparable terminology.
This
prospectus contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our growth
strategies, (c) anticipated trends in our industry, (d) our future financing
plans and (e) our anticipated needs for working capital. These statements may be
found under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Description of Business”, as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under “Risk Factors” and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
SELLING
STOCKHOLDERS
The
following table presents information regarding our selling stockholders who
intend to sell up to 6,500,000 shares of our common
stock.
|
|
Shares
Beneficially Owned Before Offering(1)
|
|
|
Percentage
of Outstanding Shares Beneficially Owned Before Offering(1)
|
|
|
Shares
To Be Sold In The Offering
|
|
|
Percentage
of Outstanding Shares Beneficially Owned After The
Offering
|
|
Fusion
Capital Fund II, LLC(2)
|
|
|
417,500 |
|
|
|
1.3
|
% |
|
|
3,417,500 |
|
|
|
0.0
|
% |
Aspen
Select Healthcare, LP(3)
|
|
|
11,876,387 |
|
|
|
32.9
|
% |
|
|
2,130,364 |
|
|
|
24.9
|
% |
Mary
S. Dent(4)
|
|
|
2,648,380 |
|
|
|
7.9
|
% |
|
|
553,488 |
|
|
|
5.7
|
% |
Steven
C. Jones(5)
|
|
|
13,159,461 |
|
|
|
36.0
|
% |
|
|
238,826 |
|
|
|
27.0
|
% |
Jones
Network, LP(6)
|
|
|
107,143 |
|
|
|
* |
|
|
|
107,143 |
|
|
|
0.0
|
% |
Marvin
E. Jaffe(7)
|
|
|
69,346 |
|
|
|
* |
|
|
|
21,429 |
|
|
|
* |
|
Steven
C. Jones ROTH IRA(8)
|
|
|
20,450 |
|
|
|
* |
|
|
|
18,750 |
|
|
|
* |
|
Peter
M. Peterson(9)
|
|
|
12,045,137 |
|
|
|
33.2
|
% |
|
|
12,500 |
|
|
|
25.2
|
% |
Total(10):
|
|
|
16,380,103 |
|
|
|
44.0
|
% |
|
|
6,500,000 |
|
|
|
32.0
|
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
Less
than one percent (1%).
|
(1)
|
Applicable
percentage of ownership is based on 33,056,021 shares of our common stock
outstanding as of March 31, 2009, together with securities exercisable or
convertible into shares of common stock within sixty (60) days of March
31, 2009, for each stockholder. Beneficial ownership is
determined in accordance with the rules of the SEC and generally includes
voting or investment power with respect to securities. Shares
of common stock are deemed to be beneficially owned by the person holding
such securities for the purpose of computing the percentage of ownership
of such person, but are not treated as outstanding for the purpose of
computing the percentage ownership of any other person. Note
that affiliates are subject to Rule 144 and insider trading regulations -
percentage computation is for form purposes
only.
|
(2)
|
Steven
G. Martin and Joshua B. Scheinfeld, the principals of Fusion Capital, are
deemed to be beneficial owners of all of the shares of common stock owned
by Fusion Capital. Messrs. Martin and Scheinfeld have shared voting and
disposition power over the shares being offered under this
prospectus. As of the date hereof, 417,500 shares of our common
stock have been previously acquired by Fusion Capital, consisting of
400,000 shares we issued to Fusion Capital as a commitment fee and 17,500
shares that were issued as an expense reimbursement. The
Company may elect in its sole discretion to sell to Fusion Capital up to
an additional 3,000,000 shares under the Purchase Agreement. Fusion
Capital does not presently beneficially own those shares as determined in
accordance with the rules of the
SEC.
|
(3)
|
Aspen
Select Healthcare, LP (“Aspen”) has
direct ownership of 6,238,279 shares and has certain warrants to purchase
3,050,000 shares, all of which are currently
exercisable. Aspen’s beneficial ownership also includes
2,588,108 shares to which Aspen has received a voting
proxy. The general partner of Aspen is Medical Venture
Partners, LLC, an entity controlled by Steven C. Jones and Peter M.
Peterson.
|
(4)
|
Mary
S. Dent is the spouse of Dr. Michael T. Dent, our chairman and
founder. Mrs. Dent has direct ownership of 1,202,471 shares
which she received in a spousal transfer from Dr. Dent in February
2007. Mrs. Dent’s beneficial ownership also includes (i)
900,000 shares held in a trust for the benefit of Dr. Dent’s children (of
which Dr. Dent and his attorney are the sole trustees), (ii) warrants
exercisable by Dr. Dent within 60 days of March 31, 2009 to purchase
145,909 shares and (iii) options exercisable by Dr. Dent within 60 days of
March 31, 2009 to purchase 400,000
shares.
|
(5)
|
Steven
C. Jones is the Acting Principal Financial Officer of the Company and a
member of the Company’s Board of Directors. Mr. Jones and his
spouse have direct ownership of 710,626 shares. Mr. Jones also has
warrants exercisable within 60 days of March 31, 2009 to purchase an
additional 100,215 shares. Mr. Jones’ beneficial ownership also
includes (i) 107,143 shares owned by Jones Network, LP, a family limited
partnership that Mr. Jones controls, (ii) 250,000 warrants exercisable
within 60 days of March 31, 2009 owned by Aspen Capital Advisors, LLC, a
company that Mr. Jones controls, (iii) 83.333 warrants exercisable within
60 days of March 31, 2009 owned by Gulf Pointe Capital, LLC, a company
that Mr. Jones and Mr. Peterson control and (iv) 31,757 shares held in
certain individual retirement and custodial accounts. In
addition, as a managing member of the general partner of Aspen, he has the
right to vote all shares controlled by Aspen, thus all Aspen shares and
currently exercisable warrants have been included in his beneficial
ownership totals (see Note 3). The shares to be sold in this
offering were received in a distribution from
Aspen.
|
(6)
|
Jones
Network, LP is a family limited partnership controlled by Steven C.
Jones. The shares to be sold in this offering were received in
a distribution from Aspen.
|
(7)
|
Marvin
Jaffe is a member of the Company’s Board of Directors and has direct
ownership of 21,429 shares and warrants exercisable within 60 days of
March 31, 2009 to purchase 47,917 shares. The shares to be sold
in this offering were received in a distribution from
Aspen.
|
(8)
|
The
shares being sold in this offering were received in a distribution from
Aspen.
|
(9)
|
Peter
M. Peterson is a member of the Company’s board of directors and has direct
ownership of 12,500 shares and warrants exercisable within 60 days of
March 31, 2009 to purchase an additional 72,917 shares. In
addition, as a managing member of the general partner of Aspen, he has the
right to vote all shares controlled by Aspen, thus all Aspen shares and
currently exercisable warrants have been added to his beneficial ownership
totals (see Note 3). Mr. Peterson’s beneficial ownership also
includes 83,333 warrants exercisable within 60 days of March 31, 2009
owned by Gulf Pointe Capital, LLC, a company that Mr. Jones and Mr.
Peterson control. The shares to be sold in this offering were
received in a distribution from
Aspen.
|
(10)
|
The
total number of shares listed does not double count the shares that may be
beneficially attributable to more than one
person.
|
THE
FUSION TRANSACTION
General
On
November 5, 2008, the Company and Fusion Capital Fund II, LLC, an Illinois
limited liability company (“Fusion Capital”),
entered into a Common Stock Purchase Agreement (the “Purchase Agreement”),
and a Registration Rights Agreement (the “Registration Rights
Agreement”). Under the Purchase Agreement, Fusion Capital is
obligated, under certain conditions, to purchase shares from us in an aggregate
amount of $8.0 million from time to time over a thirty (30) month
period. Under the terms of the Purchase Agreement, Fusion Capital has
received a commitment fee consisting of 400,000 shares of our common
stock. As of March 31, 2008, there were 33,056,021 shares outstanding
(19,879,295 shares held by non-affiliates) excluding the 3,000,000 shares
offered by Fusion Capital pursuant to this prospectus which it has not yet
purchased from us. If all of such 3,000,000 shares offered hereby
were issued and outstanding as of the date hereof, the 3,000,000 shares would
represent 8.3% of the total common stock outstanding or 13.1% of the
non-affiliates shares outstanding as of the date hereof.
Under
the Purchase Agreement and the Registration Rights Agreement we are required to
register and have included in the offering pursuant to this prospectus (1)
400,000 shares which have already been issued as a commitment fee, (2) 17,500
shares which we have issued to Fusion Capital as an expense reimbursement and
(3) at least 3,000,000 shares which we may sell to Fusion Capital in the
future. All 3,417,500 shares, 10.6% of our outstanding on November 5,
2008, the date of the Purchase Agreement, are being offered pursuant to this
prospectus. Under the Purchase Agreement, we have the right but not
the obligation to sell more than the 3,000,000 shares to Fusion
Capital. As of the date hereof, we do not currently have any plans or
intent to sell to Fusion Capital any shares beyond the 3,000,000 shares offered
hereby. However, if we elect to sell more than the 3,000,000 shares
(which we have the right but not the obligation to do), we must first register
such additional shares under the Securities Act before we can elect to sell such
additional shares to Fusion Capital. In the event we elect to do so,
this could cause substantial dilution to our shareholders. The number
of shares ultimately offered for sale by Fusion Capital is dependent upon the
number of shares purchased by Fusion Capital under the Purchase
Agreement.
We do
not have the right to commence any sales of our shares to Fusion Capital until
the SEC has declared effective the registration statement of which this
prospectus is a part. The registration statement was declared
effective on February 5, 2009 and the conditions to commence funding were
satisfied. Generally, we have the right but not the obligation from
time to time to sell our shares to Fusion Capital in amounts between $50,000 and
$1.0 million depending on certain conditions. We have the right to
control the timing and amount of any sales of our shares to Fusion
Capital. The purchase price of the shares will be determined based
upon the market price of our shares without any fixed discount at the time of
each sale. Fusion Capital shall not have the right nor the obligation
to purchase any shares of our common stock on any business day that the price of
our common stock is below $0.45. There are no negative covenants,
restrictions on future fundings, penalties or liquidated damages in the Purchase
Agreement or the Registration Rights Agreement. The Purchase
Agreement may be terminated by us at any time at our discretion without any cost
to us. The Purchase Agreement provides that neither party has the
ability to amend the Purchase Agreement and the obligations of both parties are
non-transferable.
Purchase
Of Shares Under The Purchase Agreement
Under the
Purchase Agreement, on any business day selected by us, we may direct Fusion
Capital to purchase up to $50,000 of our common stock. The purchase
price per share is equal to the lesser of:
|
•
|
the
lowest sale price of our common stock on the purchase date;
or
|
|
•
|
the
average of the three lowest closing sale prices of our common stock during
the twelve consecutive business days prior to the date of a
purchase by Fusion Capital.
|
The
purchase price will be equitably adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the business days used to compute the purchase price. We may
direct Fusion Capital to make multiple purchases from time to time in our sole
discretion; no sooner than every four business days.
Our
Right To Increase the Amount to be Purchased
In addition to purchases of up to
$50,000 from time to time, we may also from time to time elect on any single
business day selected by us to require Fusion Capital to purchase our shares in
an amount up to $100,000 provided that our share price is not below $0.75 during
the three business days prior to and on the purchase date. We may
increase this amount to up to $250,000 if our share price is not below $1.20
during the three business days prior to and on the purchase
date. This amount may also be increased to up to $500,000 if our
share price is not below $2.40 during the three business days prior to and on
the purchase date. This amount may also be increased to up to $1.0
million if our share price is not below $5.00 during the three business days
prior to and on the purchase date. We may direct Fusion Capital to
make multiple large purchases from time to time in our sole discretion; however,
at least two business days must have passed since the most recent large purchase
was completed. The price at which our common stock would be purchased
in this type of larger purchases will be the lesser of (i) the lowest sale price
of our common stock on the purchase date and (ii) the lowest purchase price (as
described above) during the previous seven business days prior to the purchase
date.
Minimum
Purchase Price
Under the
Purchase Agreement, we have set a minimum purchase price (“floor price”) of
$0.45. However, Fusion Capital shall not have the right nor the
obligation to purchase any shares of our common stock in the event that the
purchase price would be less the floor price. Specifically, Fusion Capital shall
not have the right or the obligation to purchase shares of our common stock on
any business day that the market price of our common stock is below
$0.45.
Events
of Default
Generally,
Fusion Capital may terminate the Purchase Agreement without any liability or
payment to the Company upon the occurrence of any of the following events of
default:
|
•
|
the
effectiveness of the registration statement of which this prospectus is a
part of lapses for any reason (including, without limitation, the issuance
of a stop order) or is unavailable to Fusion Capital for sale of our
common stock offered hereby and such lapse or unavailability continues for
a period of 20 consecutive business days or for more than an aggregate of
60 business days in any 365-day
period;
|
|
•
|
suspension
by our principal market of our common stock from trading for a period of
three consecutive business days;
|
|
•
|
the
de-listing of our common stock from our principal market provided our
common stock is not immediately thereafter trading on the American Stock
Exchange, the Nasdaq Global Market, the Nasdaq Capital Market, the Nasdaq
Global Select Market or the New York Stock
Exchange;
|
|
•
|
the
transfer agent‘s failure for five business days to issue to Fusion Capital
shares of our common stock which Fusion Capital is entitled to under the
Purchase Agreement;
|
|
•
|
any
material breach of the representations or warranties or covenants
contained in the Purchase Agreement or any related agreements which has or
which could have a material adverse effect on us subject to a cure period
of five business days;
|
|
•
|
any
participation or threatened participation in insolvency or bankruptcy
proceedings by or against us; or
|
|
•
|
a
material adverse change in our
business.
|
Our
Termination Rights
We have
the unconditional right at any time for any reason to give notice to Fusion
Capital terminating the Purchase Agreement without any cost to us.
No
Short-Selling or Hedging by Fusion Capital
Fusion
Capital has agreed that neither it nor any of its affiliates shall engage in any
direct or indirect short-selling or hedging of our common stock during any time
prior to the termination of the Purchase Agreement.
Effect
of Performance of the Purchase Agreement on Our Stockholders
All 3,417,500 shares registered in this
offering are expected to be freely tradable. It is anticipated that
shares registered in this offering will be sold over a period of up to 30 months
from the date of this prospectus. The sale by Fusion Capital of a
significant amount of shares registered in this offering at any given time could
cause the market price of our common stock to decline and to be highly
volatile. Fusion Capital may ultimately purchase all, some or none of
the 3,000,000 shares of common stock not yet issued but registered in this
offering. After it has acquired such shares, it may sell all, some or
none of such shares. Therefore, sales to Fusion Capital by us under the Purchase
Agreement may result in substantial dilution to the interests of other holders
of our common stock. However, we have the right to control the timing and amount
of any sales of our shares to Fusion Capital and the Purchase Agreement may be
terminated by us at any time at our discretion without any cost to
us.
In
connection with entering into the Purchase Agreement, we authorized the sale to
Fusion Capital of up to 3,000,000 shares of our common stock or 9.3% of our outstanding
common stock on November 5, 2008 (the date of the Purchase
Agreement). We estimate that we will sell no more than 3,000,000
shares to Fusion Capital under the Purchase Agreement all of which are included
in this offering. We have the right to terminate the Purchase
Agreement without any payment or liability to Fusion Capital at any time,
including in the event that all 3,000,000 shares are sold to Fusion Capital
under the Purchase Agreement. Subject to approval by our board of
directors, we have the right but not the obligation to sell more than 3,000,000
shares to Fusion Capital. In the event we elect to sell more than the
3,000,000 shares offered hereby, we will be required to file a new registration
statement and have it declared effective by the U.S. Securities and Exchange
Commission. The number of shares ultimately offered for sale by
Fusion Capital under this prospectus is dependent upon the number of shares
purchased by Fusion Capital under the Purchase Agreement. The
following table sets forth the amount of proceeds we would receive from Fusion
Capital from the sale of shares at varying purchase prices:
Assumed
Average
Purchase
Price
|
|
Number
of Shares to be
Sold
if Full Purchase
|
|
|
Percentage
of Outstanding Shares After Giving Effect to the Issuance to Fusion
Capital(1)
|
|
|
Proceeds
from the Sale of Shares
to
Fusion Capital Under the
Purchase
Agreement
|
|
$0.45
|
|
|
3,000,000 |
|
|
|
8.3 |
% |
|
$ |
1,350,000 |
|
$1.00(2)
|
|
|
3,000,000 |
|
|
|
8.3 |
% |
|
$ |
3,000,000 |
|
$1.50
|
|
|
3,000,000 |
|
|
|
8.3 |
% |
|
$ |
4,500,000 |
|
$2.00
|
|
|
3,000,000 |
|
|
|
8.3 |
% |
|
$ |
6,000,000 |
|
$2.50
|
|
|
3,000,000 |
|
|
|
8.3 |
% |
|
$ |
7,500,000 |
|
$2.67
|
|
|
3,000,000 |
|
|
|
8.3 |
% |
|
$ |
8,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The
denominator is based on 33,056,021 shares outstanding as of March 31,
2009, which includes the 417,500 shares previously issued to Fusion
Capital. The numerator is based on the number of shares issuable under the
Purchase Agreement at the corresponding assumed purchase price set forth
in the adjacent column.
|
|
(2)
|
Closing
sale price of our shares on April 17,
2009.
|
USE
OF PROCEED
This prospectus relates to shares of
our common stock that may be offered and sold from time to time by the selling
stockholders. We will receive no proceeds from the sale of shares of
common stock in this offering. However, we may receive up to $8.0
million in proceeds from the sale of our common stock to Fusion Capital under
the Purchase Agreement. Any proceeds from Fusion Capital we receive
under the Purchase Agreement will be used for working capital and general
corporate purposes.
PLAN
OF DISTRIBUTION
The
common stock offered by this prospectus is being offered by the selling
stockholders. The common stock may be sold or distributed from time
to time by the selling stockholders directly to one or more purchasers or
through brokers, dealers, or underwriters who may act solely as agents at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or at fixed prices, which may be
changed. The sale of the common stock offered by this prospectus may
be effected in one or more of the following methods:
|
•
|
ordinary
brokers’ transactions;
|
|
•
|
transactions
involving cross or block trades;
|
|
•
|
through
brokers, dealers, or underwriters who may act solely as
agents
|
|
•
|
“at
the market” into an existing market for the common
stock;
|
|
•
|
in
other ways not involving market makers or established business markets,
including direct sales to purchasers or sales effected through
agents;
|
|
•
|
in
privately negotiated transactions; or
|
|
•
|
any
combination of the foregoing.
|
In order to comply with the securities
laws of certain states, if applicable, the shares may be sold only through
registered or licensed brokers or dealers. In addition, in certain
states, the shares may not be sold unless they have been registered or qualified
for sale in the state or an exemption from the registration or qualification
requirement is available and complied with.
Brokers, dealers, underwriters, or
agents participating in the distribution of the shares as agents may receive
compensation in the form of commissions, discounts, or concessions from the
selling stockholders and/or purchasers of the common stock for whom the
broker-dealers may act as agent. The compensation paid to a
particular broker-dealer may be less than or in excess of customary
commissions.
One of the selling stockholders, Fusion
Capital, is an “underwriter” within the meaning of the Securities
Act.
Neither we nor the selling stockholders
can presently estimate the amount of compensation that any agent will
receive. We know of no existing arrangements between the selling
stockholders, any other stockholder, broker, dealer, underwriter, or agent
relating to the sale or distribution of the shares offered by this
prospectus. At the time a particular offer of shares is made, a
prospectus supplement, if required, will be distributed that will set forth the
names of any agents, underwriters, or dealers and any compensation from the
selling stockholders, and any other required information.
We will pay all expenses incident to
the registration, offering, and sale of the shares to the public other than
commissions or discounts of underwriters, broker-dealers, or
agents. We have also agreed to indemnify certain selling
stockholders, including Fusion Capital, and related persons against specified
liabilities, including liabilities under the Securities Act.
Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to our directors,
officers, and controlling persons, we have been advised that in the opinion of
the SEC this indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
Fusion Capital and its affiliates have
agreed not to engage in any direct or indirect short selling or hedging of our
common stock during the term of the Purchase Agreement.
We have advised the selling
stockholders that while they are engaged in a distribution of the shares
included in this prospectus they are required to comply with Regulation M
promulgated under the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes the selling
stockholders, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is
complete. Regulation M also prohibits any bids or purchases made in
order to stabilize the price of a security in connection with the distribution
of that security. All of the foregoing may affect the marketability of the
shares offered by this prospectus.
This offering will terminate on the
date that all shares offered by this prospectus have been sold by the selling
stockholders.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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. See “Forward-Looking Statements.” Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed below and
elsewhere in this prospectus, particularly under the heading “Risk
Factors.”
Overview
NeoGenomics
operates a network of cancer-focused testing laboratories whose mission is to
provide high quality testing services to pathologists, oncologists, urologists,
hospitals, and other laboratories throughout the United States under the mantra
“When time matters and results count”. The Company’s laboratory
network currently offers the following types of testing
services:
|
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;
|
|
d)
|
immunohistochemistry
testing, which analyzes the distribution of tumor antigens in specific
cell and tissue types, and
|
|
e)
|
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, prognosis, and
prediction for response to therapy of various types of cancers.
Market Opportunity
The
medical testing laboratory market can be broken down into three primary
segments:
• clinical
lab testing,
• anatomic
pathology testing, and
• genetic
and molecular testing.
Clinical
laboratories are typically engaged in high volume, highly automated, lower
complexity tests on easily procured specimens such as blood and
urine. Clinical lab tests often involve testing of a less urgent
nature, for example, cholesterol testing and testing associated with routine
physical exams.
Anatomic
pathology (“AP”) testing involves
evaluation of tissue, as in surgical pathology, or cells as in
cytopathology. The most widely performed AP procedures include the
preparation and interpretation of pap smears, skin biopsies, and tissue
biopsies.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or DNA/RNA
sequences for abnormalities. New tests are being developed at an
accelerated pace, thus this market niche continues to expand
rapidly. Genetic and molecular testing requires highly specialized
equipment and credentialed individuals (typically MD or PhD level) to certify
results and typically yields the highest reimbursement levels of the three
market segments.
The
market for cancer testing is growing rapidly. Key factors influencing
this growth are: (i) cancer is primarily a disease of the elderly and
now that the baby boomer generation has started to turn sixty, the U.S. is
experiencing a significant increase in the number of senior citizens, (ii) The
American Cancer Society estimates that one in four senior citizens will develop
some form of cancer during the rest of their lifetime, and (iii) every year more
and more genes are discovered to have a specific link to cancer, which then
enables a genetic or molecular test to be developed. We
estimate that the Company addresses a $5-6 billion total market opportunity,
about half of which is derived from genetic and molecular testing with the other
half derived from more traditional anatomic pathology testing services that are
complementary to and often ordered with the genetic testing services we
offer.
Our Focus
NeoGenomics’
primary focus is to provide high complexity laboratory testing for
community-based pathology, oncology and urology markets in the United
States. 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 due to ease of local
access. We currently provide our services to pathologists and
oncologists that perform bone marrow and/or peripheral blood sampling for the
diagnosis of blood and lymphoid tumors (leukemias and lymphomas) and archival
tissue referred for analysis of solid tumors such as breast
cancer. We also serve community-based urologists by providing a
FISH-based genetic test for the diagnosis of bladder cancer and early detection
of recurrent disease.
The
high complexity cancer testing services we offer to community-based pathologists
are designed to be a natural extension of and complementary to the services that
our pathologist clients perform within their own
practices. Since fee-for-service pathologists derive a
significant portion of their annual revenue from the interpretation of cancer
biopsy specimens, they represent an important market segment to
us. We believe our relationship as a non-competitive partner to the
community-based pathologist empowers these pathologists 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
also believe that we can provide a competitive choice to those larger oncology
practices that prefer to have a direct relationship with a laboratory for cancer
genetic testing services. Our regionalized approach allows us strong
interactions with clients and our innovative Genetic Pathology Solutions (“GPS
TM”) report summarizes all relevant case data on one
page.
Competitive
Strengths
Turnaround
Times
At
NeoGenomics we strive to provide industry leading turnaround times to our
clients nationwide and to provide information so that patients can get the
correct treatment quickly.
We
believe our average 4-5 day turn-around time for our cytogenetics
testing services and our average 3-4 day turn-around time for FISH testing
services continue to be industry-leading benchmarks for national
laboratories. The consistent timeliness of results is a competitive
strength in cytogenetics and FISH testing and a driver of additional testing
requests by our referring physicians. Quick turn-around times for
cytogenetics and FISH tests allow for the performance of other tests to augment
or confirm results and improve patient care. Without rapid turnaround
times 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 required. We believe our turn-around times result in our
referring physicians requesting more of our testing services and give us a
significant competitive advantage in marketing our services against those of
other competing laboratories.
National
Direct Sales Force
NeoGenomics
has assembled a strong direct sales force. Our sales representatives
(“Territory Business
Managers”) are organized into three regions (Northeast, Southeast and
West). These sales representatives are trained extensively in cancer
genetic testing and consultative selling skills. As of March 31,
2009, we had 17 Territory Business Managers and three Regional
Managers.
Client
Care
NeoGenomics Client Care Specialists
(“CCS”) are
organized by region into territories that service not only our external clients,
but also work very closely with and support our sales team. A client
receives personalized assistance when dealing with their dedicated CCS because
each CCS understands their clients’ specific needs. CCS’s handle
everything from arranging specimen pickup to delivering the results to fulfill
NeoGenomics’ objective of delivering exceptional services to our
clients.
Geographic
Locations
In
2008, we continued an aggressive campaign to regionalize our laboratory
operations around the country to be closer to our clients. Many 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. We believe that our clients and prospects desire
to do business with a laboratory with national breadth and a local
presence. NeoGenomics’ three laboratory locations in Fort Myers,
Florida; Irvine, California; and Nashville Tennessee each have the appropriate
state, Clinical Laboratory Improvement Act, as amended (“CLIA”), and College
of American Pathologists (“CAP”) licenses and
accreditations and are currently receiving specimens. As situations
dictate and opportunities arise, we will continue to develop and open new
laboratories, linked together by our optimized Laboratory Information System
(“LIS”), to
better meet the regionalized needs of our clients.
Laboratory
Information System
NeoGenomics has a state of the art
LIS that interconnects our locations and provides flexible reporting options to
clients. This system allows us to deliver uniform test results
throughout our network, regardless of where the lab that performs any specific
test is located. This allows us to move specimens between locations
to better balance our workload. Our LIS also allows us to offer
highly specialized services to certain sub-segments of our client
base. For instance, our tech-only NeoFISHTM and
NeoFLOWTM
applications allow our community-based pathologist clients to tailor individual
reports to their own customizable report templates. This feature has
been extremely well-received by our tech-only clients.
Scientific
Pipeline
The
field of cancer genetics is rapidly evolving, and we are committed to developing
and offering new tests to meet the needs of the market place based on the latest
scientific discoveries. During 2008, the Company made significant
strides in broadening our product line-up by developing the capability to
perform molecular diagnostic testing and immunohistochemistry testing
in-house. We believe that by adding additional types of tests to our
product offering, we will be able to increase our testing volumes through our
existing client base as well as more easily attract new clients via the ability
to package our testing services more appropriately to the needs of the
market.
Our
common stock is listed on the Over-the-Counter Bulletin Board under the symbol
“NGNM.OB.”
Critical
Accounting Policies
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. For a complete description of our
significant accounting policies, see Note B to our Consolidated Financial
Statements included herein.
Our
critical accounting policies are those where we have made difficult, subjective
or complex judgments in making estimates, and/or where these estimates can
significantly impact our financial results under different assumptions and
conditions. Our critical accounting policies are:
|
·
|
Stock
Based Compensation
|
Revenue
Recognition
The Company recognizes revenues in
accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition”,
when the price is fixed or determinable, persuasive evidence of an arrangement
exists, the service is performed and collectability of the resulting receivable
is reasonably assured.
The
Company’s specialized diagnostic services are performed based on a written test
requisition form and revenues are recognized once the diagnostic services have
been performed, the results have been delivered to the ordering physician, the
payor has been identified and eligibility and insurance have been
verified. These diagnostic services are billed to various payors,
including Medicare, commercial insurance companies, other directly billed
healthcare institutions such as hospitals and clinics, and
individuals. The Company reports revenues from contracted payors,
including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of Medicare,
published fee schedules. The Company reports revenues from
non-contracted payors, including certain insurance companies and individuals,
based on the amount expected to be collected. The difference between
the amount billed and the amount expected to be collected from non-contracted
payors is recorded as a contractual allowance to arrive at the reported
revenues. The expected revenues from non-contracted payors are based
on the historical collection experience of each payor or payor group, as
appropriate. In each reporting period, the Company reviews its
historical collection experience for non-contracted payors and adjusts its
expected revenues for current and subsequent periods accordingly.
Trade
Accounts Receivable and Allowance For Doubtful Accounts
We
record accounts receivable net of estimated discounts, contractual allowances
and allowances for bad debts. We provide for accounts receivable that
could become uncollectible in the future by establishing an allowance to reduce
the carrying value of such receivables to their estimated net realizable
value. We estimate this allowance based on the aging of our
accounts
receivable
and our historical collection experience for each type of
payer. Receivables are charged off to the allowance account at the
time they are deemed uncollectible. In the event that the actual
amount of payment received differs from the previously recorded estimate of an
account receivable, an adjustment to revenue is made in the current period at
the time of final collection and settlement. During 2008, we recorded
approximately $259,000 of net total incremental revenue from tests in which we
underestimated the revenue in 2007 relative to the amounts that we ultimately
received in 2008. This was approximately 1.3% of our total FY 2008
revenue and 2.3% of our FY 2007 revenue. During 2007, we recorded
approximately $24,000 of net total incremental revenue from tests in which we
underestimated the revenue in 2006 relative to the amounts that we ultimately
received in 2007. This was less than 1% of our total FY 2007 revenue
and less than 1% of our FY 2006 revenue. These adjustments are not material to
the Company’s results of operations in any period presented. Our
estimates of net revenue are subject to change based on the contractual status
and payment policies of the third party payers with whom we deal. We
regularly refine our estimates in order to make our estimated revenue for future
periods as accurate as possible based on our most recent collection experience
with each third party payer.
The
following tables present the dollars and percentage of the Company’s net
accounts receivable from customers outstanding by aging category at December 31,
2008 and 2007. All of our receivables were pending approval by
third-party payers as of the date that the receivables were
recorded:
NEOGENOMICS
AGING OF RECEIVABLES BY PAYOR GROUP
December
31, 2008
Payor
Group
|
|
|
0-30 |
|
|
%
|
|
|
|
30-60 |
|
|
%
|
|
|
|
60-90 |
|
|
%
|
|
|
|
90-120 |
|
|
%
|
|
|
|
120-150 |
|
%
|
|
|
>150
|
|
|
%
|
|
|
Total
|
|
|
%
|
|
Client
|
|
$ |
280,002 |
|
|
|
9 |
% |
|
$ |
189,811 |
|
|
|
6 |
% |
|
$ |
285,126 |
|
|
|
9 |
% |
|
$ |
176,406 |
|
|
|
5 |
% |
|
$ |
144,897 |
|
|
4 |
% |
|
$ |
26,762 |
|
|
|
1 |
% |
|
$ |
1,103,004 |
|
|
|
34 |
% |
Commercial
Insurance
|
|
|
350,009 |
|
|
|
11 |
% |
|
|
217,741 |
|
|
|
7 |
% |
|
|
137,210 |
|
|
|
4 |
% |
|
|
104,836 |
|
|
|
3 |
% |
|
|
70,959 |
|
|
2 |
% |
|
|
287,272 |
|
|
|
9 |
% |
|
|
1,168,027 |
|
|
|
36 |
% |
Medicaid
|
|
|
434 |
|
|
|
0 |
% |
|
|
7,312 |
|
|
|
0 |
% |
|
|
14,861 |
|
|
|
1 |
% |
|
|
12,124 |
|
|
|
0 |
% |
|
|
8,078 |
|
|
0 |
% |
|
|
42,145 |
|
|
|
1 |
% |
|
|
84,954 |
|
|
|
2 |
% |
Medicare
|
|
|
530,833 |
|
|
|
16 |
% |
|
|
56,334 |
|
|
|
2 |
% |
|
|
33,149 |
|
|
|
1 |
% |
|
|
12,054 |
|
|
|
0 |
% |
|
|
23,378 |
|
|
1 |
% |
|
|
53,993 |
|
|
|
2 |
% |
|
|
709,741 |
|
|
|
22 |
% |
Private
Pay
|
|
|
25,341 |
|
|
|
1 |
% |
|
|
35,004 |
|
|
|
1 |
% |
|
|
29,354 |
|
|
|
1 |
% |
|
|
15,969 |
|
|
|
0 |
% |
|
|
13,114 |
|
|
0 |
% |
|
|
27,142 |
|
|
|
1 |
% |
|
|
145,924 |
|
|
|
4 |
% |
Unbilled
Revenue
|
|
|
60,523 |
|
|
|
2 |
% |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
60,523 |
|
|
|
2 |
% |
Total
|
|
$ |
1,247,142 |
|
|
|
39 |
% |
|
$ |
506,202 |
|
|
|
16 |
% |
|
$ |
499,700 |
|
|
|
16 |
% |
|
$ |
321,389 |
|
|
|
8 |
% |
|
$ |
260,426 |
|
|
7 |
% |
|
$ |
437,314 |
|
|
|
14 |
% |
|
$ |
3,272,173 |
|
|
|
100 |
% |
December
31, 2007
Payor
Group
|
|
|
0-30 |
|
|
%
|
|
|
|
30-60 |
|
|
%
|
|
|
|
60-90
|
|
|
%
|
|
|
|
90-120 |
|
|
%
|
|
|
|
120-150 |
|
%
|
|
|
>150
|
|
|
%
|
|
|
Total
|
|
|
%
|
|
Client
|
|
$ |
159,649 |
|
|
|
4 |
% |
|
$ |
148,909 |
|
|
|
4 |
% |
|
$ |
200,073 |
|
|
|
6 |
% |
|
$ |
69,535 |
|
|
|
2 |
% |
|
$ |
34,701 |
|
|
1 |
% |
|
$ |
88,053 |
|
|
|
2 |
% |
|
|
700,920 |
|
|
|
19 |
% |
Commercial
Insurance
|
|
|
427,876 |
|
|
|
12 |
% |
|
|
184,761 |
|
|
|
5 |
% |
|
|
126,477 |
|
|
|
4 |
% |
|
|
66,922 |
|
|
|
2 |
% |
|
|
107,095 |
|
|
3 |
% |
|
|
380,292 |
|
|
|
10 |
% |
|
|
1,293,423 |
|
|
|
36 |
% |
Medicaid
|
|
|
918 |
|
|
|
0 |
% |
|
|
904 |
|
|
|
0 |
% |
|
|
2,331 |
|
|
|
0 |
% |
|
|
1,292 |
|
|
|
0 |
% |
|
|
5,522 |
|
|
0 |
% |
|
|
6,370 |
|
|
|
0 |
% |
|
|
17,337 |
|
|
|
0 |
% |
Medicare
|
|
|
662,560 |
|
|
|
18 |
% |
|
|
293,870 |
|
|
|
8 |
% |
|
|
94,755 |
|
|
|
3 |
% |
|
|
70,579 |
|
|
|
2 |
% |
|
|
103,111 |
|
|
3 |
% |
|
|
382,891 |
|
|
|
11 |
% |
|
|
1,607,766 |
|
|
|
45 |
% |
Private
Pay
|
|
|
9,745 |
|
|
|
0 |
% |
|
|
6,324 |
|
|
|
0 |
% |
|
|
6,889 |
|
|
|
0 |
% |
|
|
3,238 |
|
|
|
0 |
% |
|
|
1,926 |
|
|
0 |
% |
|
|
3,731 |
|
|
|
0 |
% |
|
|
31,853 |
|
|
|
0 |
% |
Total
|
|
$ |
1,260,748 |
|
|
|
34 |
% |
|
$ |
634,768 |
|
|
|
17 |
% |
|
$ |
430,525 |
|
|
|
13 |
% |
|
$ |
211,566 |
|
|
|
6 |
% |
|
$ |
252,355 |
|
|
7 |
% |
|
$ |
861,337 |
|
|
|
23 |
% |
|
$ |
3,651,299 |
|
|
|
100 |
% |
During
2008, we were able to clean-up the billing issues that we experienced during
2007 by replacing our entire billing and collections team and implementing a new
billing system in March 2008. The result was a 10% decline in
accounts receivable greater than 120 days. We also were able to
reduce our accounts receivable balance by 9% while growing revenues by 74% and
were able to reduce our days-sales-outstanding to 45 days at December 31, 2008
from 78 days at December 31, 2007.
Based
on a detailed analysis, we believe that our $359,000 allowance for doubtful
accounts, which represents approximately 11% of our receivables balance, is
adequate as of December 31, 2008. At December 31, 2007, our allowance
for doubtful accounts was $415,000 or 11% of accounts
receivable. During 2008 we wrote off $250,000 of our accounts
receivable pertaining to 2007 in excess of the $415,000 allowance for doubtful
accounts we had at December 31, 2007 or 7% of our accounts receivable balance at
December 31, 2007.
Stock
Based Compensation.
The
Company accounts for stock-based compensation in accordance with SFAS No. 123R
“Share-Based Payment” (“SFAS No.
123(R)”). SFAS No. 123(R) requires recognizing compensation
costs for all share-based payment awards made to employees and directors based
upon the awards’ grant-date fair value.
For
stock options, the Company uses a Trinomial Lattice option-pricing model to
estimate the grant-date fair value of stock option awards, and recognizes
compensation cost on a straight-line basis over the awards’ vesting
periods. The Company estimates an expected forfeiture rate, which is
factored into the determination of the Company’s quarterly
expense. In addition, effective January 1, 2007, the Company began
sponsoring an Employee Stock Purchase Plan (“ESPP”), whereby
eligible employees may purchase Common Stock monthly, by means of limited
payroll deductions, at a 5% discount from the fair market value of the Common
Stock as of specific dates. The Company’s ESPP plan is considered
exempt from fair value accounting under SFAS No. 123(R) because the discount
offered to employees is only 5%.
See
Note B – Summary of Significant Accounting Policies - Stock-Based Compensation
and Note F – Stock Based Compensation in the Notes to Consolidated Financial
Statements for more information regarding the valuation of stock-based
compensation.
Results
Of Operations For The Twelve Months Ended December 31, 2008 As Compared With The
Twelve Months Ended December 31, 2007
Revenue
During
the fiscal year ended December 31, 2008, our revenues increased approximately
74% to $20,015,000 from $11,505,000 during the year ended December 31, 2007.
This was the result of an increase in testing volume of 55% and a 12% increase
in average revenue per test. This volume increase is the result of wide
acceptance of our product offerings and our industry leading turnaround times
resulting in new clients. The increase in average revenue per test is
primarily the result of certain Medicare fee schedule increases in 2008 for a
number of our tests and to a lesser extent price increases to client bill
customers based on the increase in the Medicare fee schedule and changes in our
product and payer mixes.
During
the year ended December 31, 2008, our average revenue per client requisition
increased by approximately 15% to $808 from $702 in 2007. Our average
revenue per test increased by approximately 12% to $615 in 2008 from $548 in
2007. Revenues per test are a function of both the type of the test
and the payer. 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, 2008, our allowance for doubtful accounts was approximately
$359,000, a 13% decrease from our balance at December 31, 2007 of
$415,000. The allowance for doubtful accounts was approximately 10.9%
and 11.3% of accounts receivables as of December 31, 2008 and 2007,
respectively.
Cost
of Revenue
Our
cost of revenue, as a percentage of gross revenue, decreased from 48% for the
year ended December 31, 2007 to 47% for the twelve months ended December 31,
2008. This decrease was primarily the result of the revenue per test
increase explained above partially offset by increased expenses from increases
in the number of employees and related benefits as well as increased lab supply
and postage/delivery costs from opening new lines of business and meeting the
increase in testing volumes.
Gross
Profit
As a
result of the 74% increase in revenue and our 47% cost of revenue, our gross
profit increased 78% to $10,661,000 for the twelve months ended December 31,
2008, from a gross profit of $5,982,000 for the twelve months ended December 31,
2007. When expressed as a percentage of revenue, our gross margins increased
from 52.1% for the twelve months ended December 31, 2007 to 53.3% for the twelve
months ended December 31, 2008. The increase in gross profit was
largely a result of the increase in revenue per test partially offset by the
increased costs in 2008 for employee labor and benefits, lab supplies, and
postage and delivery costs.
General
and Administrative Expenses
During
2008, our general and administrative expenses increased by approximately 27% to
$11,545,000 from approximately $9,123,000 in 2007. General and administrative
expenses as a percentage of revenues were 58% for 2008,
compared
with
79% for 2007, a decrease of 21%. Although revenues increased 74%, the
Company was able to minimize the growth of our general and administrative
expenses to 27% as we continue to scale our business and recognize economies of
scale with our higher volumes. The 21% decrease as a percentage of
revenue was also aided by the decrease in significant expenses associated with
the litigation with US Labs that was settled in 2008 (see Note G to our
consolidated financial statements) partially offset by $318,000 of transaction
related expenses for business combinations which we decided were not in the best
interests of our shareholders to consummate. Bad debt expense for the
years ended December 31, 2008 and 2007 was $1,790,000 and $1,014,000,
respectively. This increase was necessitated by the significant
increase in revenues noted above and the write off in 2008 of approximately
$250,000 of accounts receivable included in our December 31, 2007 accounts
receivable balance in excess of our allowance for doubtful accounts at December
31, 2007.
Other
Income/Expense
Net
other income/expense, which primarily consists of interest expense, increased
approximately 109% during the year ended December 31, 2008 to approximately
$499,000 from approximately $239,000 for the comparable period in
2007. This increase is primarily attributable to the $200,000 write
down of our investment associated with a potential joint venture, as discussed
in Note L to our consolidated financial statements. Apart from this
item, other income/expense for the year ending December 31, 2008 is primarily
comprised of interest payable on advances under our revolving credit facility
with CapitalSource and interest paid for capital lease obligations, while other
income/expense for the year ending December 31, 2007 is primarily comprised of
interest payable on our advances under our credit facility with Aspen and
interest paid for capital lease obligations.
Net
Loss
As a
result of the foregoing, our net loss decreased from approximately ($3,380,000)
or $(0.11) per share for the year ended December 31, 2007 to approximately
($1,383,000) or $(0.04) per share for the year ended December 31, 2008, a
decrease of approximately 59%.
Liquidity
and Capital Resources
During
the year ended December 31, 2008, our operating activities used approximately
$138,000 of cash compared with $2,643,000 of cash used in the fiscal year ended
2007. This improvement primarily relates to the reduction in net
losses in 2008 as compared to 2007, but also to the significant improvements in
collections we experienced in 2008 as a result of replacing our billing system
and augmenting our billing and collections team. Our cash used in
investing activities was approximately $501,000 in 2008 compared with $716,000
in 2007. In 2008, our net cash flow provided by financing activities
was approximately $898,000 which was primarily derived from amounts borrowed
from our revolving credit facility, offset by payments made on capital lease
obligations. In 2007, our net cash flow provided by financing
activities was approximately $3,443,000 which was primarily derived from the
sale of $5,287,000 of equity securities, a portion of which was used to retire
the $1,675,000 due on the Aspen Credit facility and finance
operations. At December 31, 2008 and 2007, we had cash and cash
equivalents of approximately $468,000, and $211,000
respectively.
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,
2008 and 2007, we had stockholders’ equity of approximately $1,501,000 and
$2,322,000, respectively.
On
November 5, 2008, we entered into a common stock purchase agreement (the “Purchase Agreement”)
with Fusion Capital Fund II, LLC, an Illinois limited liability company (“Fusion
Capital”). The Purchase Agreement, which has a term of 30 months,
provides for the future funding of up to $8.0 million from sales of our common
stock to Fusion Capital on a when and if needed basis as determined by us in our
sole discretion,
depending on, among other things, the market price of our common
stock. As of March 31, 2009, we had not drawn on any amounts under
the Purchase Agreement.
On
February 1, 2008, we entered into a revolving credit facility with CapitalSource
Finance, LLC, which allows us to borrow up to $3,000,000 based on a formula
which is tied to our eligible accounts receivable that are aged less than 150
days. As of March 31, 2009, we had approximately $850,000 in cash on
hand and $1,054,000 of availability under our credit facility. As
such, we believe we have adequate resources to meet our operating commitments
for the next twelve months and accordingly our consolidated financial statements
do not include any adjustments relating to the recoverability and classification
of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should we be unable to continue as a going
concern.
We
currently forecast capital expenditures in order to execute on our business
plan. The amount and timing of such capital expenditures will be determined by
the volume of business, but we currently anticipate that we will need to
purchase approximately $1.5 million to $2.0 million of additional capital
equipment during the next twelve months. We plan to fund these
expenditures through capital lease financing arrangements and through our master
lease agreement with Leasing Technology International., Inc.
(“LTI”). 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.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 159 “The
Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS
159”). SFAS 159 provides companies with an option to
irrevocably elect to measure certain financial assets and financial liabilities
at fair value on an instrument-by-instrument basis with the resulting changes in
fair value recorded in earnings. The objective of SFAS 159 is to
reduce both the complexity in accounting for financial instruments and the
volatility in earnings caused by using different measurement attributes for
financial assets and financial liabilities. SFAS 159 became effective
for the Company as of January 1, 2008 and as of this effective date, the Company
has elected not to apply the fair value option to any of its financial assets
for financial liabilities.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157
provides a new single authoritative definition of fair value and provides
enhanced guidance for measuring the fair value of assets and liabilities and
requires additional disclosures related to the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS
157 became effective for the Company as of January 1, 2008 for financial assets
and financial liabilities within its scope and it did not have a material impact
on our consolidated financial statements. In February 2008, the FASB
issued FASB Staff Position No. FAS 157-2 “Effective Date of FASB Statement No.
157” (“FSP FAS
157-2”) which defers the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually), for fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years for items within the scope of FSP FAS
157-2. The Company is currently assessing the impact, if any, of SFAS
157 and FSP FAS 157-2 for non-financial assets and non-financial liabilities on
its consolidated financial statements.
In
December 2007, the FASB issued SFAS No. 141(R) (Revised 2007), “Business
Combinations” (“SFAS
No. 141(R)”). SFAS No. 141(R) establishes principles and
requirements for how the acquirer in a business combination (i) recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any non-controlling interest in the acquire, (ii)
recognizes and measures the goodwill acquired in the business combination or a
gain from a bargain purchase, and (iii) determines what information to disclose
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS No. 141(R) became effective
for the Company on January 1, 2009. The impact of the standard on the
Company’s financial position and results of operations will be dependent upon
the number of and magnitude of the acquisitions that are consummated once the
standard is effective.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51.” (“SFAS 160”). SFAS 160
requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. Its intention
is to eliminate the diversity in practice regarding the accounting for
transactions between an entity and noncontrolling interests. This Statement
became effective for the Company as of January 1, 2009 and we do not expect it
to have a material impact on the Company’s financial
statements.
In May
2008, the FASB issued SFAS No. 162 “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS 162”). This
statement identifies the sources of accounting principles and the framework for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with GAAP. While
this statement formalizes the sources and hierarchy of GAAP within the
authoritative accounting literature, it does not change the accounting
principles that are already in place. SFAS 162 had no affect on the
Company’s financial statements.
Subsequent
Events
Employment
Contract
On
March 16, 2009, the Company entered into an employment agreement with Douglas M.
VanOort (the “Employment
Agreement”) to employ Mr. VanOort in the capacity of Executive Chairman
and interim Chief Executive Officer. The Employment Agreement
has an initial term from March 16, 2009 through March 16, 2013, which initial
term automatically renews for one year periods. Mr. VanOort will
receive a salary of $225,000 per year for so long as he spends not less than 2.5
days per week on the affairs of the Company. He will receive an
additional $50,000 per year while serving as the Company’s interim Chief
Executive Officer; provided that he spends not less than 3.5 days per week on
average on the affairs of the Company. Mr. VanOort is also eligible
to receive an annual cash bonus based on the achievement of certain performance
metrics of at least 30% of his base salary (which includes amounts payable with
respect to serving as Executive Chairman and interim Chief Executive
Officer). Mr. VanOort is also entitled to participate in all of the
Company’s employee benefit plans and any other benefit programs established for
officers of the Company.
The
Employment Agreement also provides that Mr. VanOort will be granted an option to
purchase 1,000,000 shares of the Company’s common stock under the Company’s
Amended and Restated Equity Incentive Plan (the “Amended
Plan”). The exercise price of such option is $0.80 per
share. 500,000 shares of common stock subject to the option will vest
according to the following schedule (i) 200,000 shares will vest on March 16,
2010 (provided that if Mr. VanOort’s employment is terminated by the Company
without “cause” then the pro rata portion of such 200,000 shares up until the
date of termination shall vest); (ii) 12,500 shares will vest each month
beginning on April 16, 2010 until March 16, 2011; (iii) 8,000 shares will vest
each month beginning on April 16, 2011 until March 16, 2012 and (iv) 4,500
shares will vest each month beginning on April 16, 2012 until March 16,
2013. 500,000 shares of common stock subject to the option will vest
based on the achievement of certain performance metrics by the
Company. Any unvested portion of the option described above shall
vest in the event of a change of control of the Company.
Either
party may terminate Mr. VanOort’s employment with the Company at any time upon
giving sixty days advance written notice to the other party. The
Company and Mr. VanOort also entered into a Confidentiality, Non-Solicitation
and Non-Compete Agreement in connection with the Employment
Agreement.
On
March 16, 2009, the Company and the Douglas M. VanOort Living Trust entered into
a Subscription Agreement (the “Subscription
Agreement”) pursuant to which the Douglas M. VanOort Living Trust
purchased 625,000 shares of the Company’s common stock at a purchase price of
$0.80 per share (the “Subscription
Shares”). The Subscription Shares are subject to a two year
lock-up that restricts the transfer of the Subscription Shares; provided,
however, that such lock-up shall expire in the event that the Company terminates
Mr. VanOort’s employment. The Subscription Agreement also provides
for certain piggyback registration rights with respect to the Subscription
Shares.
On
March 16, 2009, the Company and Mr. VanOort entered into a Warrant Agreement
(the “Warrant
Agreement”) pursuant to which Mr. VanOort, subject to the vesting
schedule described below, may purchase up to 625,000 shares of the Company’s
common stock at an exercise price of $1.05 per share (the “Warrant
Shares”). The Warrant Shares vest based on the following
vesting schedule:
|
(i)
|
20%
of the Warrant Shares vest
immediately,
|
|
(ii)
|
20%
of the Warrant Shares will be deemed to be vested on the first day on
which the closing price per share of the Company’s common stock has
reached or exceeded $3.00 per share for 20 consecutive trading
days,
|
|
(iii)
|
20%
of the Warrant Shares will be deemed to be vested on the first day on
which the closing price per share of the Company’s common stock has
reached or exceeded $4.00 per share for 20 consecutive trading
days,
|
|
(iv)
|
20%
of the Warrant Shares will be deemed to be vested on the first day on
which the closing price per share of the Company’s common stock has
reached or exceeded $5.00 per share for 20 consecutive trading days
and
|
|
(v)
|
20%
of the Warrant Shares will be deemed to be vested on the first day on
which the closing price per share of the Company’s common stock has
reached or exceeded $6.00 per share for 20 consecutive trading
days.
|
In the
event of a change of control of the Company in which the consideration payable
to each common stockholder of the Company in connection with such change of
control has a deemed value of at least $4.00 per share, then the Warrant Shares
shall immediately vest in full. In the event that Mr. VanOort resigns
his employment with the Company or the Company terminates Mr. VanOort’s
employment for “cause” at any time prior to the time when all Warrant Shares
have vested, then the rights under the Warrant Agreement with respect to the
unvested portion of the Warrant Shares as of the date of termination will
immediately terminate.
Asset Purchase
Agreements
On February 2, 2009, we issued
300,000 shares of restricted stock, valued at $186,000, in connection with two
agreements to purchase the assets (primarily laboratory equipment) of two
laboratories, including settlement of certain amounts due to the owner of such
laboratories.
Amended and Restated Master
Lease
On
September 30, 2008, the Company entered into a master lease agreement (the
“Master Lease”)
with Gulf Pointe Capital, LLC (“Gulf Pointe”) which
allows us to obtain lease capital from time to time up to an aggregate of
$130,000 of lease financing after it was determined that the lease facility with
LTI described in Footnote J would not allow for the leasing of certain used and
other types of equipment. The terms under this lease are consistent
with the terms of our other lease arrangements. Three members of our
Board of Directors Steven Jones, Peter Petersen and Marvin Jaffe, are affiliated
with Gulf Pointe and recused themselves from both sides of all negotiations
concerning this transaction. In consideration for entering into the
Master Lease with Gulf Pointe, the Company issued 32,475 warrants to Gulf Pointe
with an exercise price of $1.08 and a five year term. Such warrants
vest 25% on issuance and then on a pro rata basis as amounts are drawn under the
Master Lease. The warrants were valued at approximately $11,000 using
the Black-Scholes option pricing model, and the warrant cost is being expensed
as it vests. At the end of the term of any lease schedule under the Master
Lease, the Company’s options are as follows: (a) purchase not less
than all of the equipment for its then fair market value not to exceed 15% of
the original equipment cost, (b) extend the lease term
for a
minimum of six months, or (c) return not less than all the equipment at the
conclusion of the lease term. On September 30, 2008, we also entered
into the first lease schedule under the Master Lease which provided for the
sale/leaseback of approximately $130,000 of used laboratory equipment (“Lease Schedule
#1”). Lease Schedule #1 has a 30 month term and a lease
rate factor of 0.0397/month, which equates to monthly payments of $5,154.88
during the term.
On
February 9, 2009, we amended our Master Lease with Gulf Pointe to increase the
maximum size of the facility to $250,000. As part of this
amendment, we terminated the original warrant agreement, dated September 30,
2008, and replaced it with a new warrant to purchase 83,333 shares of our common
stock. Such new warrant has a five year term, an exercise price of
$0.75/share and the same vesting schedule as the original
warrant. On February 9, 2009, we also entered into a second
schedule under the Master Lease for the sale/leaseback of approximately $118,000
of used laboratory equipment (“Lease Schedule
#2”). Lease Schedule #2 was entered into after it was
determined that LTI was unable to consummate this transaction under the lease
facility described in Footnote J. Lease Schedule #2 has a 30 month
term at the same lease rate factor per month as Lease Schedule #1, which equates
to monthly payments of $4,690.41 during the term.
Amended and Restated Equity
Incentive Plan
On
March 3, 2009, the Company’s Board of Directors approved the Amended and
Restated Equity Incentive Plan (the “Amended Plan”), which
amends and restates the NeoGenomics, Inc. Equity Incentive Plan, originally
effective as of October 14, 2003, and amended and restated effective as of
October 31, 2006. The Amended Plan allows for the award of equity
incentives, including stock options, stock appreciation rights, restricted stock
awards, stock bonus awards, deferred stock awards, and other stock-based awards
to certain employees, directors, or officers of, or key advisers or consultants
to, the Company or its subsidiaries. Revised provisions included in
the Amended Plan include, among others, (i) provision that the maximum aggregate
number of shares of the Company’s common stock reserved and available for
issuance under the Amended Plan shall be 6,500,000 shares of common stock, (ii)
deletion of provisions governing the grant of “re-load options” and (iii) that
the Amended Plan shall expire on March 3, 2019.
Second Amendment to Revolving Credit
and Security Agreement
On
April 14, 2009, the Parent Company, NeoGenomics Laboratories, Inc. (the wholly
owned subsidiary of the Parent Company) (“Borrower”) and
CapitalSource Finance LLC (“CapitalSource”) (as
agent for CapitalSource Bank) entered into a Second Amendment to Revolving
Credit and Security Agreement (the “Loan
Amendment”). The Loan Amendment, among other things, amends
that certain Revolving Credit and Security Agreement dated February 1, 2008 as
amended by that certain First Amendment to Revolving Credit and Security
Agreement dated November 3, 2008 (as amended, the “Loan Agreement”) to (i)
provide that through December 31, 2009, the Borrower must maintain Minimum
Liquidity (as defined in the Loan Agreement) of not less than $500,000, (ii)
amend the definitions of “Fixed Charge Coverage Ratio” and “Fixed Charges”,
(iii) amend the definition of “Permitted Indebtedness” to increase the amount of
permitted capitalized lease obligations and indebtedness incurred to purchase
goods secured by certain purchase money liens and (iv) amend and update certain
representations, warranties and schedules. In addition, pursuant to
the Loan Amendment, CapitalSource waived the following events of default under
the Loan Agreement: (i) the failure of the Borrower to comply with
the fixed charge coverage ratio covenant for the test period ending December 31,
2008, (ii) the failure of the Borrower to notify CapitalSource of the change of
Borrower’s name to NeoGenomics Laboratories, Inc. and to obtain CapitalSource’s
prior consent to the related amendment to Borrower’s Articles of Incorporation,
(iii) the failure of the Parent Company and the Borrower to obtain
CapitalSources prior written consent to the amendment of the Parent Company’s
bylaws to allow for the size of the Parent Company’s Board of Directors to be
increased to eight members and (iv) the failure of the Borrower to notify
CapitalSource of the filing of an immaterial complaint by the Borrower against a
former employee of the Borrower . The Company paid
CapitalSource Bank a $25,000 amendment fee in connection with the Loan
Amendment.
DESCRIPTION
OF BUSINESS
Overview
NeoGenomics
operates a network of cancer-focused testing laboratories whose mission is to
provide high quality testing services to pathologists, oncologists, urologists,
hospitals, and other laboratories throughout the United States under the mantra
“When time matters and results count”. The Company’s laboratory
network currently offers the following types of testing
services:
|
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;
|
|
d)
|
immunohistochemistry
testing, which analyzes the distribution of tumor antigens in specific
cell and tissue types, and
|
|
e)
|
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, prognosis, and
prediction for response to therapy of various types of cancers.
Market Opportunity
The
medical testing laboratory market can be broken down into three primary
segments:
• clinical
lab testing,
• anatomic
pathology testing, and
• genetic
and molecular testing.
Clinical
laboratories are typically engaged in high volume, highly automated, lower
complexity tests on easily procured specimens such as blood and
urine. Clinical lab tests often involve testing of a less urgent
nature, for example, cholesterol testing and testing associated with routine
physical exams.
Anatomic
pathology (“AP”) testing involves
evaluation of tissue, as in surgical pathology, or cells as in
cytopathology. The most widely performed AP procedures include the
preparation and interpretation of pap smears, skin biopsies, and tissue
biopsies.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or DNA/RNA
sequences for abnormalities. New tests are being developed at an
accelerated pace, thus this market niche continues to expand
rapidly. Genetic and molecular testing requires highly specialized
equipment and credentialed individuals (typically MD or PhD level) to certify
results and typically yields the highest reimbursement levels of the three
market segments.
The
market for cancer testing is growing rapidly. Key factors influencing
this growth are: (i) cancer is primarily a disease of the elderly and
now that the baby boomer generation has started to turn sixty, the U.S. is
experiencing a significant increase in the number of senior citizens, (ii) The
American Cancer Society estimates that one in four senior citizens will develop
some form of cancer during the rest of their lifetime, and (iii) every year more
and more genes are discovered to have a specific link to cancer, which then
enables a genetic or molecular test to be developed. We
estimate that the Company addresses a $5-6 billion total market opportunity,
about half of which is derived from genetic and molecular testing with the other
half derived from more traditional anatomic pathology testing services that are
complementary to and often ordered with the genetic testing services we
offer.
Our Focus
NeoGenomics’
primary focus is to provide high complexity laboratory testing for
community-based pathology, oncology and urology markets in the United
States. 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 due to ease of local
access. We currently provide our services to pathologists and
oncologists that perform bone marrow and/or peripheral blood sampling for the
diagnosis of blood and lymphoid tumors (leukemias and lymphomas) and archival
tissue referred for analysis of solid tumors such as breast
cancer. We also serve community-based urologists by providing a
FISH-based genetic test for the diagnosis of bladder cancer and early detection
of recurrent disease.
The
high complexity cancer testing services we offer to community-based pathologists
are designed to be a natural extension of and complementary to the services that
our pathologist clients perform within their own
practices. Since fee-for-service pathologists derive a
significant portion of their annual revenue from the interpretation of cancer
biopsy specimens, they represent an important market segment to
us. We believe our relationship as a non-competitive partner to the
community-based pathologist empowers these pathologists 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
also believe that we can provide a competitive choice to those larger oncology
practices that prefer to have a direct relationship with a laboratory for cancer
genetic testing services. Our regionalized approach allows us strong
interactions with clients and our innovative Genetic Pathology Solutions (“GPS
TM”) report summarizes all relevant case data on one
page.
Competitive
Strengths
Turnaround
Times
At
NeoGenomics we strive to provide industry leading turnaround times to our
clients nationwide and to provide information so that patients can get the
correct treatment quickly.
We
believe our average 4-5 day turn-around time for our cytogenetics
testing services and our average 3-4 day turn-around time for FISH testing
services continue to be industry-leading benchmarks for national
laboratories. The consistent timeliness of results is a competitive
strength in cytogenetics and FISH testing and a driver of additional testing
requests by our referring physicians. Quick turn-around times for
cytogenetics and FISH tests allow for the performance of other tests to augment
or confirm results and improve patient care. Without rapid turnaround
times 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 required. We believe our turn-around times result in our
referring physicians requesting more of our testing services and give us a
significant competitive advantage in marketing our services against those of
other competing laboratories.
National
Direct Sales Force
NeoGenomics
has assembled a strong direct sales force. Our sales representatives
(“Territory Business
Managers”) are organized into three regions (Northeast, Southeast and
West). These sales representatives are trained extensively in cancer
genetic testing and consultative selling skills. As of March 31,
2009, we had 17 Territory Business Managers and three Regional
Managers.
Client
Care
NeoGenomics Client Care Specialists
(“CCS”) are
organized by region into territories that service not only our external clients,
but also work very closely with and support our sales team. A client
receives personalized assistance when dealing with their dedicated CCS because
each CCS understands their clients’ specific needs. CCS’s handle
everything from arranging specimen pickup to delivering the results to fulfill
NeoGenomics’ objective of delivering exceptional services to our
clients.
Geographic
Locations
In
2008, we continued an aggressive campaign to regionalize our laboratory
operations around the country to be closer to our clients. Many 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. We believe that our clients and prospects desire
to do business with a laboratory with national breadth and a local
presence. NeoGenomics’ three laboratory locations in Fort Myers,
Florida; Irvine, California; and Nashville Tennessee each have the appropriate
state, Clinical Laboratory Improvement Act, as amended (“CLIA”), and College
of American Pathologists (“CAP”) licenses and
accreditations and are currently receiving specimens. As situations
dictate and opportunities arise, we will continue to develop and open new
laboratories, linked together by our optimized Laboratory Information System
(“LIS”), to
better meet the regionalized needs of our clients.
Laboratory
Information System
NeoGenomics
has a state of the art LIS that interconnects our locations and provides
flexible reporting options to clients. This system allows us to
deliver uniform test results throughout our network, regardless of where the lab
that performs any specific test is located. This allows us to move
specimens between locations to better balance our workload. Our LIS
also allows us to offer highly specialized services to certain sub-segments of
our client base. For instance, our tech-only NeoFISHTM and
NeoFLOWTM
applications allow our community-based pathologist clients to tailor individual
reports to their own customizable report templates. This feature has
been extremely well-received by our tech-only clients.
Scientific
Pipeline
The
field of cancer genetics is rapidly evolving, and we are committed to developing
and offering new tests to meet the needs of the market place based on the latest
scientific discoveries. During 2008, the Company made significant
strides in broadening our product line-up by developing the capability to
perform molecular diagnostic testing and immunohistochemistry testing
in-house. We believe that by adding additional types of tests to our
product offering, we will be able to increase our testing volumes through our
existing client base as well as more easily attract new clients via the ability
to package our testing services more appropriately to the needs of the
market.
Competition
We
operate in segments of the medical testing laboratory industry that are highly
competitive. Competitive factors in the genetic and molecular testing
business generally include the reputation of the laboratory, range of services
offered, pricing, convenience of sample collection and pick-up, quality of
analysis and reporting, timeliness of delivery of completed reports
(i.e. turnaround times) and post-reporting follow-up for
clients.
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 genetic and molecular testing is
divided among approximately 300 laboratories. Approximately 80% of these
laboratories are attached to academic institutions and primarily provide
clinical services to their affiliate university hospitals. We believe that the
remaining 20% is quite fragmented and that less than 20 laboratories market
their services nationally. We estimate that the top 20 laboratories
account for approximately 50% of market revenues for genetic and molecular
testing.
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 through our direct sales force. In addition, we
have a fully integrated and interactive internet-enabled LIS that enables us to
report real time results to clients in a secure environment.
Global
Products
We
offer a full set of global services to meet the needs of our clients to improve
patient care. In our global service offerings, our lab performs the
technical component of tests, and our M.D.s and Ph.D.’s interpret the test
results for our clients. This product line provides a comprehensive
testing service to those clients who are not credentialed and trained in
interpreting genetic and molecular tests. Global products also allow
NeoGenomics to derive a higher level of reimbursement than would otherwise be
possible with a tech-only test.
We
increased our professional level staffing for global requisitions requiring
interpretation in 2008. Importantly, in April 2008 we recruited two
well-known hematopathologists to NeoGenomics at our Irvine, California
laboratory location, enabling this west coast facility to become the mirror
image of our main facility in Fort Myers, Florida. We currently
employ three full-time MDs as our medical directors and pathologists, two PhDs
as our scientific directors and cytogeneticists, and one part-time MD acting as
a consultant and backup pathologist for case sign out purposes. We
have plans to hire several more pathologists in 2009 as our product mix
continues to expand beyond tech-only services and more sales emphasis is focused
on our ability to issue consolidated reporting with case interpretation under
our GPSTM product
line.
Tech-Only
Products
In
2006, NeoGenomics launched a technical component only (“tech-only”) FISH
product offering. Tech-only products allow our community-based
pathology clients that are properly trained and credentialed to provide services
to clinicians based on established and trusted relationships. These pathologist
clients perform the professional interpretation of results themselves and bill
for such work under the physician fee schedule. For tech-only FISH,
NeoGenomics performs the technical component of the test (specimen set-up,
staining, sorting and categorization of cells, chromosomes, genes or DNA, etc)
and the pathology client performs the professional component. This
allows NeoGenomics to partner with its pathology clients and provides for close
collaboration in meeting market needs. Prior to the advent of
tech-only products, pathologists who did not have a genetic lab would have had
to send all of the work out to a reference lab. Utilizing
NeoFISHTM,
pathologist clients are empowered to extend the outreach efforts of their
practices and exert a high level of involvement in the delivery of high quality
patient care.
NeoFLOWTM
tech-only flow cytometry was launched as a companion service to NeoFISHTM in late
2007. While not a first to market product line for NeoGenomics, the
additional service offering allowed our flow cytometry testing services to be
the fastest growing segment of our business in 2008. We believe the
NeoFLOWTM service
offering will continue to be a key growth driver for the Company in
2009. Moreover, the combination of NeoFLOWTM and
NeoFISHTM
strengthens and differentiates NeoGenomics and allows us to compete more
favorably against larger, more entrenched competitors in our testing
niche.
Contract
Research Organization
Our
Contract Research Organization (“CRO”) division, based
at our Irvine, California facility, was formed in 2007. 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. This division also handles all of our internal research
and development and acts as a conduit for the validation of new tests that are
developed for our clients. We believe our CRO will allow us to infuse
some intellectual property into our mix of our services and help us to create a
more “vertically integrated” laboratory that can offer proprietary tests and
other product extensions over time. 2008 saw the NeoGenomics’ CRO
division continue to ramp up. Although CRO revenue in 2008 was modest
as a percentage of our total revenue, we believe our CRO will continue to grow
in size and scope and it is an important component of our overall
business.
Response
Genetics
In October 2008, NeoGenomics signed
an agreement with Response Genetics, Inc. (NASDAQ: RGDX) to distribute their
proprietary molecular tests nationwide. This agreement named
NeoGenomics as the exclusive national reference laboratory authorized to offer
these predictive tests that can help medical oncologists make optimal treatment
decisions for patients with non-small cell lung cancer (“NSCLC”) and
colorectal cancer (“CRC”). This
partnership continues to benefit both companies and has allowed NeoGenomics to
establish new accounts, further differentiate our services, and increase our
footprint in the expanding field of molecular cancer genetics.
Sales
and Marketing
We
continue to grow our testing volumes and revenue due to our expanding field
sales footprint. As of March 31, 2009, NeoGenomics’ sales and
marketing team totaled 28 individuals, including 17 Territory Business Managers
(sales representatives), 3 Regional Managers, 5 marketing, and 3 senior level
positions. This is up from 16 sales and marketing representatives as
of March 31, 2008. As of March 31, 2007, NeoGenomics’ sales
organization totaled nine individuals. Key hires in 2008 included
territory business managers in the Northeastern, Southeastern, and Western
states, with a disproportionally higher number hired in the Western states as
the Company continues to scale our Irvine, California based operations to handle
higher testing volumes. We intend to continue to add additional sales
and marketing personnel throughout FY 2009. As more sales
representatives are added, we believe that the base of our business outside of
Florida will continue to grow and ultimately eclipse that generated within the
state of Florida, which historically has been our largest
market.
As a
result of our expanding sales force, we experienced 74% year-over-year revenue
growth to $20.0M in 2008 from $11.5M in 2007. Our average
revenue/requisition increased 15% to $808 in 2008 from $702 in 2007 due to a
higher mix on global products with interpretation and an increase of higher
revenue flow cytometry testing as a percentage of our total
revenue.
|
|
FY 2008
|
|
|
FY 2007
|
|
|
% Increase
|
|
|
|
|
|
|
|
|
|
|
|
Client
Requisitions Received (Cases)
|
|
|
24,780 |
|
|
|
16,385 |
|
|
|
51.2 |
% |
Number
of Tests Performed
|
|
|
32,539 |
|
|
|
20,998 |
|
|
|
55.0 |
% |
Average
Number of Tests/Requisition
|
|
|
1.31 |
|
|
|
1.28 |
|
|
|
2.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$ |
20,015,319 |
|
|
$ |
11,504,725 |
|
|
|
74.0 |
% |
Average
Revenue/Requisition
|
|
$ |
808 |
|
|
$ |
702 |
|
|
|
15.0 |
% |
Average
Revenue/Test
|
|
$ |
615 |
|
|
$ |
548 |
|
|
|
12.2 |
% |
Within
the subspecialty field of hematopathology, our scientific expertise and product
offering allows us to be able to perform multiple tests on each specimen
received. Many physicians believe that a comprehensive approach to
the diagnosis and prognosis of blood and lymph node disease to be the standard
of care throughout the country. As the average number of tests
performed per requisition increases, we believe this will help to generate
significant synergies and efficiencies in our operations and our sales and
marketing activities.
Seasonality
The cancer testing markets in
general are seasonal and “same customer sales” tend to decline somewhat in the
summer months as referring physicians are vacationing. In Florida,
this seasonality is further exacerbated because a meaningful percentage of the
population returns to homes in the Northern U.S. to avoid the hot summer
months. Although, we have made great strides in diversifying
our business on a national basis over the last few years, our revenue derived
from the state of Florida still represented about 43% of our total revenue in
2008. As a result, our test volumes and sequential growth rates
during the second and third quarter of each year have historically been impacted
by these seasonality factors.
Distribution
Methods
The
Company currently performs the vast majority of its testing services at each of
its three main clinical laboratory locations: Fort Myers, Florida, Nashville,
Tennessee and Irvine, California, and then produces a report for the requesting
physician. Services performed in-house include cytogenetics, FISH,
flow cytometry, morphology, immunohistochemistry, and some molecular
testing. The Company currently outsources approximately half of its
molecular testing to third parties, but expects to validate and perform the
majority of this testing in-house during 2009 to better meet client demand and
quality requirements.
Suppliers
The
Company orders its laboratory and research supplies from large national
laboratory supply companies such as Abbott Laboratories, Fisher Scientific,
Invitrogen, Cardinal Health, Ventana and Beckman Coulter. Other than
as discussed below, we do 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 there was a disruption in the supply of these probes, and we
did 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 Clients
We
currently market our services to pathologists, oncologists, urologists,
hospitals and other clinical laboratories. During 2008, we performed
32,539 individual tests. Ongoing sales efforts have decreased
dependence on any given source of revenue. Notwithstanding this fact,
one key client still accounts for a disproportionately large case volume and
revenue total. For the years ended December 31, 2008 and 2007, one
client with multiple locations accounted for 22% and 25% respectively, of total
revenue. All others were less than 5% of total revenue
individually. In the event that we lost this client, the Company
would potentially lose a significant percentage of revenues.
Payor Mix
In
2008, approximately 47% of our revenue was derived from Medicare claims, 28%
from commercial insurance companies, 21% from clients such as hospitals and
other reference laboratories, and 4% from all others including
patients. As of December 31, 2008, Medicare and one commercial
insurance provider accounted for 22% and 14% of the Company’s total accounts
receivable balance, respectively. There is no other significant
concentration in our payor mix.
Trademarks
The
“NeoGenomics” name and logo has been trademarked with the United States Patent
and Trademark Office.
Number
of Employees
As of
December 31, 2008, we had 114 full-time equivalent employees. In
addition, six other individuals, including three pathologists and a Ph.D.
cytogenetics director, serve as consultants to the Company on a regular
basis. On December 31, 2007, we had 92 full-time equivalent employees
and three consultants serving on a regular basis. On December 31, 2006, we had
48 employees. Our employees are not represented by any union and we
believe our employee relations are good.
Government
Regulation
Our
business is subject to government regulation at the federal, state and local
levels, some of which regulations are described under "Clinical Laboratory
Operations," "Anti-Fraud and Abuse Laws," “The False Claims Act,”
"Confidentiality of Health Information," and "Food and Drug
Administration" below.
Clinical
Laboratory Operations
Licensure
and Accreditation
The
Company operates clinical laboratories in Fort Myers, Florida, Nashville,
Tennessee, and Irvine, California. All locations have obtained CLIA
licensure under the federal Medicare program, the Clinical Laboratories
Improvement Act of 1967 and the Clinical Laboratory Amendments of 1988 and other
amendments (collectively “CLIA”) as well as
state licensure as required in Florida, New York, Tennessee, and California.
CLIA 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 and the clinical
laboratory licensure laws of the various states affect our testing laboratories.
All locations are also accredited by the College of American Pathologists and
actively participate in CAP’s proficiency testing programs and educational
challenges for all tests offered by the Company. Proficiency testing programs
involve actual testing of specimens that have been prepared by an entity running
an approved program for testing by a clinical laboratory.
The
federal and state certification and licensure programs establish standards for
the operation of clinical laboratories, including, but not limited to, personnel
and quality control. Compliance with such standards is verified via periodic
inspections by inspectors employed by federal or state regulatory agencies as
well as routine internal inspections conducted by the Company’s Quality
Assurance team which is comprised of representatives of all departments of the
Company.
Quality
of Care
The
quality of care provided to clients is of paramount importance to
us. We maintain strong quality processes, including standard
operating procedures, controls, performance measurement and reporting
mechanisms. All employees are committed to providing accurate,
reliable, and consistent services at all times. Any concerns regarding the
quality of testing or services provided by the Company are immediately
communicated to Company management and if necessary, the Compliance Department
or Human Resources Department. All employees are responsible for the Company’s
commitment to quality and immediately communicating activities that do not
support quality.
Compliance
Program
The
healthcare industry is one of the most highly regulated industries with respect
to federal and state oversight of fraud, waste, and abuse. As such the Company
has implemented a compliance program that is overseen by the senior management
of the Company to assure compliance with the vast regulations and governmental
guidance. Our program consists of training / education of the employees and
monitoring / audits of Company practices. The Company actively discusses with
the Board of Directors any compliance related findings as well as any compliance
related issues that may have a material effect on the Company. The
Board of Directors actively discusses with the appropriate management personnel
any compliance related issues that may have an effect on the
Company.
Hotline
The
Company provides a hotline for employees who wish to anonymously or
confidentially report suspected violations of our codes of conduct,
policies/procedures, or laws and regulations. Employees are strongly encouraged
to report any suspected violation if they do not feel the problem can be
appropriately addressed through the normal chain of command. The hotline does
not replace other resources available to employees, including supervisors,
managers and human resources staff, but is an alternate channel available 24
hours a day, 365 days a year. The Company does not allow any retaliation against
an employee who reports a compliance related issue.
Anti-Fraud
and Abuse Laws
Existing
federal laws governing Medicare and Medicaid, as well as some other state and
federal laws, also regulate certain aspects of the relationship between
healthcare providers, including clinical and anatomic laboratories, and their
referral sources, including physicians, hospitals and other laboratories. One
provision of these laws, known as the “anti-kickback law,” contains extremely
broad proscriptions. Violation of this provision may result in criminal
penalties, exclusion from participation in Medicare and Medicaid programs, and
significant civil monetary penalties.
In
January 1990, following a study of pricing practices in the clinical laboratory
industry, the Office of the Inspector General (“OIG”) of HHS issued a
report addressing how these pricing practices relate to Medicare and Medicaid.
The OIG reviewed the industry’s use of one fee schedule for physicians and other
professional accounts and another fee schedule for patients/third-party payors,
including Medicare, in billing for testing services, and focused specifically on
the pricing differential when profiles (or established groups of tests) are
ordered.
Existing
federal law authorizes the Secretary of HHS to exclude providers from
participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees “substantially in excess” of their “usual and
customary charges.” On September 2, 1998, the OIG issued a final rule in which
it indicated that this provision has limited applicability to services for which
Medicare pays under a Prospective Payment System or a fee schedule, such as
anatomic pathology services and clinical laboratory services. In several
Advisory Opinions, the OIG has provided additional guidance regarding the
possible application of this law, as well as the applicability of the
anti-kickback laws to pricing arrangements. The OIG concluded in a 1999 Advisory
Opinion that an arrangement under which a laboratory offered substantial
discounts to physicians for laboratory tests billed directly to the physicians
could potentially trigger the “substantially in excess” provision and might
violate the anti-kickback law, because the discounts could be viewed as being
provided to the physician in exchange for the physician’s referral to the
laboratory of non-discounted Medicare business, unless the discounts could
otherwise be justified. The Medicaid laws in some states also have prohibitions
related to discriminatory pricing.
Under
another federal law, known as the “Stark” law or “self-referral prohibition,”
physicians who have an investment or compensation relationship with an entity
furnishing clinical laboratory services (including anatomic pathology and
clinical chemistry services) may not, subject to certain exceptions, refer
clinical laboratory testing for Medicare patients to that entity. Similarly,
laboratories may not bill Medicare or Medicaid or any other party for services
furnished pursuant to a prohibited referral. Violation of these provisions may
result in disallowance of Medicare and Medicaid claims for the affected testing
services, as well as the imposition of civil monetary penalties and application
of False Claims submissions penalties. Some states also have laws similar to the
Stark law.
The
False Claims Act
The Civil False Claims Act -
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 the 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
seek to structure our arrangements with physicians and other clients 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 thereunder.
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 are 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 and which also pertains to the proper uses
and disclosures of PHI by healthcare providers in written and verbal formats.
The Electronic Health Care Transactions and Code Sets Standards established
standard data content and formats for submitting electronic claims and other
administrative healthcare transactions. CMS also requires compliance with the
Security Standards, which establish standards for electronic uses and
disclosures of PHI. We have also adopted the National Provider Identification
number, which replaced all previously issued provider (organizational and
individual) identification numbers. This number is issued by CMS and must be
used on all covered transactions.
We
have also taken necessary steps to comply with HIPAA regulations on adoption of
national provider identifiers, or NPIs. These regulations require the adoption
of the national provider identifier as the standard unique health identifier for
healthcare providers to use in filing and processing healthcare claims and other
transactions. We were required either to comply with this standard by May 23,
2007, or to implement contingency plans for an additional twelve-month period
through May 23, 2008. During this period, CMS did not impose penalties on
covered entities who implemented contingency plans provided they made
reasonable
and
diligent efforts to become compliant with the rule. We applied for and received
our NPI number, as well as, updated our billing system with the NPIs of our
customer heme/oncs to ensure compliance with these CMS filing and processing
requirements.
On May
23, 2002, the Federal Trade Commission issued the Red Flag Rules designed to
protect against identity theft. Effective May 1, 2009, we will be required to
comply with the Red Flag Rules, which require financial institutions and
creditors with covered accounts to have identity theft prevention programs in
place to identify, detect and respond to patterns, practices or specific
activities that could indicate identity theft. A creditor includes any entity
that regularly extends, renews or continues credit or which defers payment for
goods or services. Since we routinely extend credit by billing for our services
after such services are provided, we meet the definition of a “creditor” under
the Red Flag Rules. Accordingly, we have been developing a written program
designed to identify and detect the relevant warning signs – or “red flags” – of
identity theft and describe appropriate responses to prevent and mitigate
identity theft in order to comply with the Red Flag Rules. We are also
developing a plan to update the program. In accordance with the Red Flag Rules,
the program will be managed by our Board of Directors or senior employees,
include appropriate staff training and provide for appropriate
oversight.
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.
History
On
October 29, 1998, the Parent Company was incorporated in the State of Nevada as
American Communications Enterprises, Inc. The Parent
Company changed its name to Neogenomics, Inc. on December 14, 2001.
Properties
We
have our headquarters and a laboratory located in approximately 25,700 square
feet of leased office space in Fort Myers, Florida. In addition, we
maintain approximately 12,500 square feet of laboratory and office space in
Irvine and Chatsworth, California and 5,400 square feet in Nashville,
Tennessee. All our facilities are leased and we believe that they are
sufficient to meet our needs for the foreseeable future and that, if needed,
additional space will be available at a reasonable cost.
Legal
Proceedings
As of
the date of the registration statement of which this prospectus is a part, a
civil lawsuit was pending between the Company and its liability insurer, FCCI
Commercial Insurance Company ("FCCI") in the 20th
Judicial Circuit Court in and for Lee County, Florida (Case No.
07-CA-017150). FCCI filed the suit on December 12, 2007 in response
to the Company's demands for insurance benefits with respect to an underlying
action involving US Labs (a settlement agreement has since been reached in the
underlying action, and thus that case has now
concluded). Specifically, the Company maintains that the underlying
plaintiff's allegations triggered the subject insurance policy's personal and
advertising injury coverage. In the lawsuit, FCCI seeks a court
judgment that it owes no obligation to the Company regarding the underlying
action (FCCI does not seek monetary damages). The Company has
counterclaimed against FCCI for breach of the subject insurance policy, and
seeks recovery of defense costs incurred in the underlying matter, amounts paid
in settlement thereof, and fees and expenses incurred in litigating with
FCCI. The court recently denied a motion by FCCI for judgment on the
pleadings, and the parties are proceeding with discovery. We intend
to aggressively pursue all remedies in this matter and believe that the courts
will ultimately find that FCCI had a duty to provide coverage in the US Labs
litigation.
MANAGEMENT
Officers
And Directors
The
following table sets forth the names, ages, and titles of each of our directors
and executive officers and employees expected to make a significant contribution
to us as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
Douglas
M. VanOort
|
|
53
|
|
Chairman
of the Board of Directors, Executive Chairman and Interim Chief Executive
Officer
|
Robert
P. Gasparini
|
|
54
|
|
President
and Chief Science Officer, Board
Member
|
Steven
C. Jones
|
|
45
|
|
Acting
Principal Financial Officer, Board
Member
|
Michael
T. Dent
|
|
44
|
|
Board
Member
|
George
G. O’Leary
|
|
46
|
|
Board
Member
|
Peter
M. Peterson
|
|
52
|
|
Board
Member
|
Marvin
E. Jaffe
|
|
71
|
|
Board
Member
|
William
J. Robison
|
|
72
|
|
Board
Member
|
|
|
|
|
|
Robert
J. Feeney
|
|
41
|
|
Vice
President of Sales and Marketing
|
Matthew
William Moore
|
|
35
|
|
Vice
President of Research and Development
|
Jerome
J. Dvonch
|
|
40
|
|
Principal
Accounting Officer
|
|
|
|
|
|
Family
Relationships
There are
no family relationships between or among the members of the Board of Directors
or other executives. With the exception of Mr. Robison, Dr. Jaffe and Mr.
O’Leary, the directors and other executives of the Company are not directors or
executive officers of any company that files reports with the
SEC. Mr. Robison also serves on the Board of MWI Veterinary Supply
Inc. (NASDAQ GM: MWIV) and Dr. Jaffe serves on the board of Immunomedics, Inc.
(NASDAQ GM: IMMU). Mr. O’Leary also serves on the Boards of NeoMedia
Technologies Inc. (OTC:NEOM.OB), Smartire Systems Inc. (OTC:SMTR.OB),
NS8 Corp. (OTC:NSEO.OB) and Futuremedia Plc (NASDAQ: FMDA).
Legal
Proceedings
None of
the members of the Board of Directors or other executives has been involved in
any bankruptcy proceedings, criminal proceedings, any proceeding involving any
possibility of enjoining or suspending members of our Board of Directors or
other executives from engaging in any business, securities or banking
activities, and have not been found to have violated, nor been accused of having
violated, any federal or state securities or commodities laws.
Elections
Members
of our Board of Directors are elected at the annual meeting of stockholders and
hold office until their successors are elected. Our officers
are appointed by the Board of Directors and serve at the pleasure of the Board
and are subject to employment agreements, if any, approved and ratified by the
Board.
The
Company, Michael Dent, Aspen, John Elliot, Steven Jones and Larry Kuhnert are
parties to the Amended and Restated Shareholders’ Agreement dated March 21,
2005, as amended, that, among other provisions, gives Aspen, our largest
stockholder, the right to elect three out of the eight directors authorized for
our Board of Directors, and to nominate one mutually acceptable independent
director. In addition, Michael Dent and the executive management of
the Company has the right to elect one director for our Board of Directors,
until the earlier of (i) Dr. Dent’s resignation as an officer or director of the
Company or (ii) the sale by Dr. Dent of 50% or more of the number of
shares of our common stock that he held on March 21, 2005.
Douglas M. VanOort – Chairman of the Board of Directors,
Executive Chairman and Interim ChiefExecutive
Officer
Mr.
VanOort has served as the Chairman of the Board of Directors, Executive Chairman
and Interim Chief Executive Officer of NeoGenomics since March
2009. He has been an Operating Partner with Summer Street Capital
Partners since 2004 and a Founding Partner of Conundrum Capital Partners since
2000. From 1995 to 1999, he served as the Senior Vice President
Operations for Quest Diagnostics, Incorporated. During this period
Quest Diagnostics grew to approximately $1.5 billion in annual revenue through
both organic growth and mergers and acquisitions. From 1982 to 1995,
Mr. VanOort served in various positions at Corning Incorporated and ultimately
held the position of Executive Vice President and CFO of Corning Life Sciences,
Inc. In 1995, Corning spun off Corning Life Sciences, Inc. into two
companies, Quest Diagnostics and Covance, Inc. Mr. VanOort serves as
a member of the Board of Directors of Palladian Health, International Climbing
Machines, Inc. and Bio HiTech, Inc. In addition, since 2000, Mr.
VanOort has served as the Chairman, Co-Founder and Co-Owner of Vision Ace
Hardware, LLC, a retail hardware chain. Mr. VanOort is a graduate of
Bentley College.
Robert
P. Gasparini, M.S. - President and Chief Science Officer, Board
Member
Mr.
Gasparini has served as the President and Chief Science Officer of NeoGenomics
since January 2005. Prior to assuming the role of President and Chief Science
Officer, Mr. Gasparini was a consultant to the Company beginning in May 2004.
Prior to NeoGenomics, Mr. Gasparini was the Director of the Genetics Division
for US Pathology Labs, Inc. (“US Labs”) from
January 2001 to December 2004. During this period, Mr. Gasparini started the
Genetics Division for US Labs and grew annual revenues of this division to $30
million over a 30 month period. Prior to US Labs, Mr. Gasparini was the
Molecular Marketing Manager for Ventana Medical Systems from 1999 to 2001. Prior
to Ventana, Mr. Gasparini was the Assistant Director of the Cytogenetics
Laboratory for the Prenatal Diagnostic Center from 1993 to 1998 an affiliate of
Massachusetts General Hospital and part of Harvard University. While at the
Prenatal Diagnostic Center, Mr. Gasparini was also an Adjunct Professor at
Harvard University. Mr. Gasparini is a licensed Clinical Laboratory Director and
an accomplished author in the field of Cytogenetics. He received his BS degree
from The University of Connecticut in Biological Sciences and his Master of
Health Science degree from Quinnipiac University in Laboratory
Administration.
Steven
C. Jones - Acting Principal Financial Officer, Board Member
Mr.
Jones has served as a director of NeoGenomics since October 2003. He
is a Managing Director in Medical Venture Partners, LLC, a venture capital firm
established in 2003 for the purpose of making investments in the healthcare
industry. Mr. Jones is also the co-founder and Chairman of the Aspen
Capital Group and has been President and Managing Director of Aspen Capital
Advisors since January 2001. Prior to that Mr. Jones was a chief
financial officer at various public and private companies and was a Vice
President in the Investment Banking Group at Merrill Lynch &
Co. Mr. Jones received his B.S. degree in Computer Engineering from
the University of Michigan in 1985 and his MBA from the Wharton School of the
University of Pennsylvania in 1991. He is also Chairman of the Board of Quantum
Health Systems, LLC and T3 Communications, Inc. and serves on the Board of
Directors of Disc Motion Technologies, Inc.
Michael
T. Dent M.D. – Board Member
Dr.
Dent is our founder and a director. Dr. Dent was our President and Chief
Executive Officer from June 2001, when he founded NeoGenomics, to April 2004.
From April 2004 until April 2005, Dr. Dent served as our President and Chief
Medical Officer. Dr. Dent founded the Naples Women’s Center in 1996 and
continues his practice to this day. He received his training in Obstetrics and
Gynecology at the University of Texas in Galveston. He received his M.D. degree
from the University of South Carolina in Charleston, S.C. in 1992 and a B.S.
degree from Davidson College in Davidson, N.C. in 1986. He is a member of the
American Association of Cancer Researchers and a Diplomat and fellow of the
American College of Obstetricians and Gynecologists. He sits on the Board of the
Florida Life Science Biotech Initiative.
George
G. O’Leary - Board Member
Mr.
O’Leary is a director of NeoGenomics and is currently running his own consulting
firm, SKS Consulting of South Florida Corp., where he consults for NeoGenomics
as well as several other companies. Prior to that he was President of
US Medical Consultants, LLC. Prior to assuming his duties with US Medical, he
was a consultant to the Company and acting Chief Operating Officer. Prior to
NeoGenomics, Mr. O’Leary was the President and CFO of Jet Partners, LLC from
2002 to 2004. During that time he grew annual revenues from $12 million to $17.5
million. Prior to Jet Partners, Mr. O’Leary was CEO and President of
Communication Resources Incorporated (“CRI”) from 1996 to
2000. During that time he grew annual revenues from $5 million to $40 million.
Prior to CRI, Mr. O’Leary held various positions including Vice President of
Operations for Cablevision Industries from 1987 to 1996. Mr. O’Leary was a CPA
with Peat Marwick Mitchell from 1984 to 1987. Mr. O’Leary is also a
board member of NeoMedia Technologies, Inc, SmarTire Systems, Inc, NS8
Corporation, Future Media Plc, and Isonics Corporation. He
received his BBA in Accounting from Siena College in Albany, New
York.
Peter
M. Peterson - Board Member
Mr.
Peterson is a director of NeoGenomics and is the founder of Aspen Capital
Partners, LLC which specializes in capital formation, mergers &
acquisitions, divestitures, and new business start-ups. Prior to
forming Aspen Capital Partners in 2001, Mr. Peterson was Managing Director of
Investment Banking with H. C. Wainwright & Co. Prior to H.C.
Wainwright, Mr. Peterson was president of First American Holdings and Managing
Director of Investment Banking. Prior to First American, he served in
various investment banking roles and was the co-founder of ARM Financial
Corporation. Mr. Peterson was one of the key individuals responsible
for taking ARM Financial public on the OTC market and the American Stock
Exchange. Under Mr. Peterson’s financial leadership, ARM Financial
Corporation was transformed from a diversified holding company into a national
clinical laboratory company with 14 clinical laboratories and ancillary services
with over $100 million in assets. He has also served as an officer or
director for a variety of other companies, both public and
private. Mr. Peterson earned a Bachelor of Science degree in Business
Administration from the University of Florida.
William
J. Robison – Board Member
Mr.
Robison, who is retired, spent his entire 41 year career with Pfizer,
Inc. At Pfizer, he rose through the ranks of the sales organization
and became Senior Vice President of Pfizer Labs in 1986. In 1990, he
became General Manager of Pratt Pharmaceuticals, a then-new division of the U.S.
Pharmaceuticals Group, and in 1992 he became the President of the Consumer
Health Care Group. In 1996 he became a member of Pfizer’s Corporate
Management Committee and was promoted to the position of Executive Vice
President and head of Worldwide Corporate Employee Resources. Mr.
Robison retired from Pfizer in 2001 and currently serves as a consultant and
board member to various companies. Mr. Robison is a board member and
an executive committee member of the USO of Metropolitan New York,
Inc. He is also on the board of directors of the Northeast Louisiana
University foundation, a member of the Human Resources Roundtable Group, the
Pharmaceutical Human Resource Council, the Personnel Round Table, and on the
Employee Relations Steering Committee for The Business Round
Table.
Marvin
E. Jaffe – Board Member
Dr.
Jaffe, who is also retired, spent his entire working career in the
pharmaceutical industry and has been responsible for the pre-clinical and
clinical development of new drugs and biologics in nearly every therapeutic
area. He began his career at Merck & Co and spent 18 years
with Merck, rising to the position of Senior Vice-President of Medical
Affairs. After leaving Merck, Dr. Jaffe became the founding President
of the R.W. Johnson Pharmaceutical Research Institute (“PRI”), a Johnson
& Johnson Company. PRI was established for the purpose of
providing globally integrated research and development support to several
companies within the J&J pharmaceutical sector including Ortho
Pharmaceutical, McNeil Pharmaceutical, Ortho Biotech and Cilag. Dr.
Jaffe retired from Johnson & Johnson in 1994 and currently serves as a
consultant and board member to various companies in the biopharmaceutical and
biotechnology industries. He is currently a director of Immunomedics,
Inc.. He was also on the Boards of Genetic Therapy, Inc., Vernalis
Group, plc., Celltech Group, plc. and Matrix Pharmaceuticals which were acquired
by other companies. He is on the Scientific Advisory Boards of Health
Care Ventures, Endpoint Merchant Group, Newron Pharmaceuticals and PenWest
Pharmaceuticals.
Robert
J. Feeney, Ph.D. - Vice President of Sales and Marketing
Mr.
Feeney has served as Vice President of Sales and Marketing since January 3,
2007. Prior to NeoGenomics, he served in a dual capacity as the
Director of Marketing and the Director of Scientific & Clinical Affairs for
US Labs, a division of Laboratory Corporation of America (LabCorp). Prior to
that, Dr. Feeney held a variety of roles including the National Manager of
Clinical Affairs and the Central Regional Sales Manager position where he
managed up to 33% of the sales force. In his first full year with US Labs, he
grew revenue from $1 million to $17 million in this geography. Prior to US Labs,
Dr. Feeney was employed with Eli Lilly and Company as an Associate Marketing
Manager and with Impath Inc., now a wholly owned division of Genzyme Genetics,
where he held various positions including Regional Sales Manager and District
Sales Manager assignments. Dr. Feeney has over 14 years of sales and marketing
experience with 17 years in the medical industry. Dr. Feeney received his
Bachelors of Science degree in Biology from Dickinson College and his doctoral
degree in Cellular and Developmental Biology from the State University of New
York.
Matthew
William Moore, Ph.D. - Vice President of Research and Development
Mr. Moore
has served as Vice President of Research and Development since July 2006. Prior
to that he served as Vice President of Research and Development for Combimatrix
Molecular Diagnostics, a subsidiary of Combimatrix Corporation, a biotechnology
company, developing novel microarray, Q-PCR and Comparative Genomic
Hybridization based diagnostics. Prior to Combimatrix Molecular Diagnostics, he
served as a senior scientist with US Labs, a division of Laboratory Corporation
of America (LabCorp) where he was responsible for the initial implementation of
the Molecular in Situ
Hybridization and Molecular Genetics programs. Mr. Moore received his
Bachelors of Science degree in Biotechnology, where he graduated with honors and
his doctoral degree from the University of New South Wales,
Australia.
Jerome
J. Dvonch - Director of Finance, Principal Accounting Officer
Mr.
Dvonch has served as Director of Finance since August 2005 and as Principal
Accounting Officer since August 2006. From June 2004 through July
2005, Mr. Dvonch was Associate Director of Financial Planning and Analysis with
Protein Design Labs, a bio-pharmaceutical company. From September
2000 through June 2004, Mr. Dvonch held positions of increasing responsibility
including Associate Director of Financial Analysis and Reporting with Exelixis,
Inc., a biotechnology company. He also was Manager of Business
Analysis for Pharmchem Laboratories, a drug testing laboratory. Mr.
Dvonch is a Certified Public Accountant and received his M.B.A. from the Simon
School of Business at the University of Rochester. He received his
B.B.A. in accounting from Niagara University.
Audit
Committee
Currently,
the Audit Committee of the Board of Directors is comprised of Steven C. Jones
and George O’Leary. The Board of Directors believes that both Mr. Jones and Mr.
O’Leary are “audit committee financial experts” as defined by Item 407 of
Regulation S-K of the Securities Act of 1933, as
amended. Neither Mr. Jones nor Mr. O’Leary are considered to be
“independent” pursuant to Rule 4350(d) of the Marketplace Rules of The Nasdaq
Stock Market.
Compensation
Committee
The
Compensation Committee is responsible for establishing the Company’s executive
officer compensation policies and administering such policies. The Compensation
Committee studies, recommends and implements the amount, terms and conditions of
payment of certain forms of compensation. The Company’s executive officers,
other than Mr. Jones, do not play a role in determining or recommending the
amount or form of executive or director compensation. Currently, the
Compensation Committee is comprised of all of the Company’s directors other than
Mr. Gasparini. Mr. Jones, Mr. Peterson, Dr. Dent and Dr. Jaffe are
not considered “independent” as that term is defined by Rule 4200(a)(15) of the
Marketplace Rules of The Nasdaq Stock Market. However, Mr. O’Leary
and Mr. Robison are considered to be independent. The Compensation Committee
does not have a written charter.
Independent
Directors
Mr. O’Leary and Mr. Robinson are
considered to be “ independent” as that term is defined by Rule 4200(a)(15) of
the Marketplace Rules of The Nasdaq Stock Market.
Code
of Ethics
We
adopted a Code of Ethics for our senior financial officers and the principal
executive officer during 2004, which was filed with the SEC as an exhibit to the
Company’s Annual Report on Form 10-KSB dated April 15, 2005. A copy
of the Code of Ethics may be obtained, free of charge, by writing to the
Secretary of NeoGenomics, Inc., 12701 Commonwealth Drive, Suite 9, Fort Myers,
Florida 80215.
Executive
Compensation
The
following Summary Compensation Table sets forth all compensation earned and
accrued, in all capacities, during the fiscal years ended December 31, 2008 and
2007, by our Named Executive Officers.
Name
and
Principal
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
Incentive Plan Compen-sation
|
|
|
Non-qualified
Deferred Compen-sation Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
P. Gasparini
|
|
2008
|
|
$ |
235,872 |
|
|
$ |
35,000 |
|
|
$ |
- |
|
|
$ |
89,985 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
360,857 |
|
President
and Chief
|
|
2007
|
|
|
209,061 |
|
|
|
10,000 |
|
|
|
- |
|
|
|
46,000 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
265,061 |
|
Science
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
J. Feeney
|
|
2008
|
|
|
188,146 |
|
|
|
5,000 |
|
|
|
- |
|
|
|
37,228 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
230,374 |
|
V.P.of
Sales and
|
|
2007
|
|
|
161,192 |
|
|
|
12,375 |
|
|
|
- |
|
|
|
39,593 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
213,160 |
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
and
Principal
Position
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity
Incentive Plan Compen-sation
|
|
|
Non-qualified
Deferred Compen-sation Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
W. Moore
|
|
2008
|
|
|
173,250 |
|
|
|
5,000 |
|
|
|
- |
|
|
|
4,517 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
182,767 |
|
V.
P. of Research
|
|
2007
|
|
|
167,221 |
|
|
|
- |
|
|
|
- |
|
|
|
9,534 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
176,755 |
|
and
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerome
J. Dvonch
|
|
2008
|
|
|
141,035 |
|
|
|
10,000 |
|
|
|
- |
|
|
|
21,039 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
172,074 |
|
Principal
|
|
2007
|
|
|
123,077 |
|
|
|
6,000 |
|
|
|
- |
|
|
|
31,759 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
160,836 |
|
Accounting
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven
C. Jones
|
|
2008
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
176,313 |
|
|
|
176,313 |
|
Acting
Principal Financial
|
|
2007
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
127,950 |
(2) |
|
|
127,950 |
|
Officer
and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
See
Item 8, Note F for a description on the valuation methodology of stock
option awards.
|
(2)
|
Mr.
Jones acts as a consultant to the Company and the amounts indicated
represent the consulting expense accrued for the periods indicated for his
services as our Acting Principal Financial
Officer.
|
Outstanding
Equity Awards at Fiscal Year End
The
following table sets forth information with respect concerning outstanding
equity awards held by our named executive officers as of December 31,
2008.
|
|
Option
Awards
|
Name
and
Principal
Position
|
|
Number
of Securities Underlying Unexercised Options
Exercisable
|
|
|
Number
of Securities Underlying Unexercised Options
Un-exercisable
|
|
|
Equity
Incentive Plan Awards-Number of Securities Underlying Unexercised &
Unearned Options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
P. Gasparini
|
|
|
575,000 |
|
|
|
- |
|
|
|
- |
|
|
|
0.25 |
|
1/1/2015
|
President
and Chief
|
|
|
100,000 |
|
|
|
- |
|
|
|
- |
|
|
|
1.47 |
|
2/13/2017
|
Science
Officer
|
|
|
146,000 |
|
|
|
588,000 |
(1) |
|
|
- |
|
|
|
0.80 |
|
3/12/2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
J. Feeney
|
|
|
68,750 |
|
|
|
168,750 |
(2) |
|
|
- |
|
|
|
1.50 |
|
12/31/2016
|
V.P.
of Sales and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Matthew
W. Moore
|
|
|
43,750 |
|
|
|
37,500 |
(3) |
|
|
- |
|
|
|
0.71 |
|
8/1/2016
|
V.P.
of Research
|
|
|
8,125 |
|
|
|
- |
|
|
|
- |
|
|
|
1.47 |
|
2/13/2017
|
and
Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jerome
J. Dvonch
|
|
|
22,500 |
|
|
|
- |
|
|
|
- |
|
|
|