UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended December 31, 2008
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period
from to
Commission
File Number: 333-72097
NEOGENOMICS,
INC.
(Exact
name of registrant as specified in its charter)
Nevada
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74-2897368
|
(State
or other jurisdiction of
|
(IRS
Employer Identification No.)
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incorporation
or organization)
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12701 Commonwealth Drive,
Suite 9, Fort Myers, FL 33913
(Address
of principal executive offices, Zip code)
(239)
768-0600
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None.
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.
Yes ¨ No x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer ¨
|
Accelerated
Filer ¨
|
|
|
Non-accelerated filer
¨ (Do not check if
smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the Company is a shell company (as defined in Rule 12b-2
of the Act): ¨ Yes
x
No
As of
June 30, 2008, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was approximately $24.2 million, based on
the closing price of the registrant’s common stock of $1.20 per share on June
30, 2008.
The
number of shares outstanding of the registrant’s Common Stock, par value $0.001
per share, as of March 31, 2009: 33,056,021
NEOGENOMICS,
INC.
FORM
10-K ANNUAL REPORT
For
the Fiscal Year Ended December 31, 2008
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Page
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PART
I
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Item
1.
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Business
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4
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Item
1A.
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Risk
Factors
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13
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Item
1B.
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Unresolved
Staff Comments
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23
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Item
2.
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Properties
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23
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Item
3.
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Legal
Proceedings
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23
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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23
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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24
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Item
6.
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Selected
Financial Data
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26
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Item
7.
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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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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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38
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Item
8.
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Financial
Statements and Supplementary Data
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39
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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64
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Item
9A.
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Controls
and Procedures
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64
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Item
9B.
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Other
Information
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66
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PART
III
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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67
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Item
11.
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Executive
Compensation
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71
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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75
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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78
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Item
14.
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Principal
Accountant Fees and Services
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81
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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82
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Signatures
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PART
I
FORWARD-LOOKING
STATEMENTS
The information in this Annual Report
on Form 10-K contains “forward-looking statements” and information within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), which are subject to the “safe harbor” created by
those sections. These forward-looking statements include, but are not
limited to, statements concerning our strategy, future operations, future
financial position, future revenues, projected costs, prospects and plans and
objectives of management. The words “anticipates,” “believes,”
“estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would”
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying
words. We may not actually achieve the plans, intentions or
expectations disclosed in our forward-looking statements and you should not
place undue reliance on our forward-looking statements. These
forward-looking statements involve known and unknown risks and uncertainties
that could cause our actual results, performance or achievements to differ
materially from those expressed or implied by the forward-looking statements,
including, without limitation, the risks set forth in Part I, Item 1A, “Risk
Factors” in this Annual Report on Form 10-K and in our other filings with the
Securities and Exchange Commission.
Forward-looking
statements include, but are not limited to, statements about:
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·
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The
expected reimbursement levels from governmental payors and private
insurers;
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·
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The
application, to our business and the services we provide, of existing
laws, rules and regulations, including without limitation, Medicare laws,
anti-kickback laws, Health Insurance Portability and Accountability Act of
1996 (“HIPAA”) regulations, state medical privacy laws, federal and state
false claims laws and corporate practice of medicine
laws;
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·
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Regulatory
developments in the United States;
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·
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Our
ability to maintain our license under Clinical Laboratory Improvement
Amendments of 1988 (“CLIA”);
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·
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Our
ability to expand our operations and increase our market
share;
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·
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Our
ability to expand our service offerings by adding new testing
capabilities;
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·
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Our
ability to compete with other diagnostic
laboratories;
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·
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Our
ability to hire and retain sufficient managerial, sales, clinical and
other personnel to meet our needs;
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·
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Our
ability to successfully scale our business, including expanding our
facilities, our backup systems and infrastructure;
and
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·
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The
accuracy of our estimates regarding reimbursement, expenses, future
revenues and capital requirements.
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These
forward-looking statements represent our management’s beliefs and assumptions
only as of the date of this Annual Report on Form 10-K. You should
read this Annual Report on Form 10-K, and the documents that we reference in
this Annual Report on Form 10-K and have filed as exhibits, completely and with
the understanding that our actual future results may be materially different
from what we expect.
Except as
required by law, we assume no obligation to update these forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in these forward-looking statements, even if
new information becomes available in the future.
ITEM
1.
|
DESCRIPTION
OF BUSINESS
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NeoGenomics,
Inc., a Nevada corporation (referred to individually as the “Parent Company” or
collectively with all of its subsidiaries as “NeoGenomics” or the “Company” in
this Form 10-K) is the registrant for SEC reporting purposes. Our
common stock is listed on the OTC Bulletin Board under the symbol
“NGNM.”
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:
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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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d)
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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:
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•
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anatomic
pathology testing, and
|
|
•
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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 Genetic Pathology Solutions (“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, CA
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. 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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|
|
|
|
|
|
|
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Client
Requisitions Received (Cases)
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|
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24,780 |
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|
16,385 |
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|
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51.2 |
% |
Number
of Tests Performed
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|
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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. 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 and audits of Company practices. 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 payers, including Medicare, in billing for
testing services, and focused specifically on the pricing differential when
profiles (or established groups of tests) are ordered.
Existing
federal law authorizes the Secretary of HHS to exclude providers from
participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees "substantially in excess" of their "usual and
customary charges." On September 2, 1998, the OIG issued a final rule in which
it indicated that this provision has limited applicability to services for which
Medicare pays under a Prospective Payment System or a fee schedule, such as
anatomic pathology services and clinical laboratory services. In several
Advisory Opinions, the OIG has provided additional guidance regarding the
possible application of this law, as well as the applicability of the
anti-kickback laws to pricing arrangements. The OIG concluded in a 1999 Advisory
Opinion that an arrangement under which a laboratory offered substantial
discounts to physicians for laboratory tests billed directly to the physicians
could potentially trigger the "substantially in excess" provision and might
violate the anti-kickback law, because the discounts could be viewed as being
provided to the physician in exchange for the physician's referral to the
laboratory of non-discounted Medicare business, unless the discounts could
otherwise be justified. The Medicaid laws in some states also have prohibitions
related to discriminatory pricing.
Under
another federal law, known as the "Stark" law or "self-referral prohibition,"
physicians who have an investment or compensation relationship with an entity
furnishing clinical laboratory services (including anatomic pathology and
clinical chemistry services) may not, subject to certain exceptions, refer
clinical laboratory testing for Medicare patients to that entity. Similarly,
laboratories may not bill Medicare or Medicaid or any other party for services
furnished pursuant to a prohibited referral. Violation of these provisions may
result in disallowance of Medicare and Medicaid claims for the affected testing
services, as well as the imposition of civil monetary penalties and application
of False Claims submissions penalties. Some states also have laws similar to the
Stark law.
The False Claims
Act
The
Civil False Claims Act - pertains to any federally funded program and
defines “Fraudulent” as: knowingly submitting a false claim, i.e. actual
knowledge of the falsity of the claim, reckless disregard or deliberate
ignorance of the falsity of the claim. These are the claims to which criminal
penalties are applied. Penalties include permissive exclusion in federally
funded programs by 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 hem/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.
We are subject to various risks that
may materially harm our business, financial condition and results of operations.
An investor should carefully consider the risks and uncertainties described
below and the other information in this filing before deciding to purchase our
common stock. If any of these risks or uncertainties actually occurs, our
business, financial condition or operating results could be materially harmed.
In that case, the trading price of our common stock could decline or we may be
forced to cease operations.
We
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 in 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.
On
November 5, 2008, we entered into a common stock purchase agreement (the “Stock
Agreement”) with Fusion Capital Fund II, LLC (“Fusion”). The Stock
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. Although sales of our
common stock are on a when and if needed basis as determined by us in our sole
discretion, we have the right to sell to Fusion shares of our common stock from
time to time in amounts between $50,000 and $1.0 million, depending on the
market price of our common stock. The extent we rely on Fusion 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. Fusion is not obligated to purchase any
shares of our common stock if the market price of our common stock is less than
$0.45. If obtaining sufficient financing from Fusion 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 Stock Agreement with Fusion, 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, 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 Funding, LLC will depend primarily on our success in generating
substantial operating cash flow. Our credit agreement contains numerous
financial and other restrictive covenants, including restrictions on purchasing
and selling assets, paying dividends to our shareholders, and incurring
additional indebtedness. Our failure to meet these covenants could result in a
default and acceleration of repayment of the indebtedness under our credit
facility. If the maturity of our indebtedness were accelerated, we may not have
sufficient funds to pay such indebtedness. In such event, our lenders would be
entitled to proceed against the collateral securing the indebtedness, which
includes substantially our entire accounts receivable, to the extent permitted
by our credit agreements and applicable law.
We
Have Potential Conflicts Of Interest Relating To Our Related Party Transactions
Which Could Harm Our Business.
We have
potential conflicts of interest relating to existing agreements we have with
certain of our directors, officers, principal shareholders, shareholders and
employees. Potential conflicts of interest can exist if a related party director
or officer has to make a decision that has different implications for us and the
related party. If a dispute arises in connection with any of these agreements,
if not resolved satisfactorily to us, our business could be
harmed. There can be no assurance that the above or any future
conflicts of interest will be resolved in our favor. If not resolved, such
conflicts could harm our business.
We
Have Material Weaknesses In Our Internal Control Over Financial Reporting That
May Prevent The Company From Being Able To Accurately Report Its Financial
Results Or Prevent Fraud, Which Could Harm Its Business And Operating
Results.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and prevent fraud. In addition, Section 404 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 Item 9A – Controls and Procedures, of this 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.
Our
Common Stock Is Deemed To Be A “Penny Stock”, Subject To Special Requirements
and Conditions, and may not be a suitable investment.
Our common stock is deemed to be “penny
stock” as that term is defined in Rule 3a51-1 promulgated under the Exchange
Act. Penny stocks are stocks:
|
·
|
With
a price of less than $5.00 per
share;
|
|
·
|
That
are not traded on a “recognized” national exchange;
or
|
|
·
|
In
issuers with net tangible assets less than $2.0 million (if the issuer has
been in continuous operation for at least three years) or $5.0 million (if
in continuous operation for less than three years), or with average
revenues of less than $6.0 million for the last three (3)
years.
|
Broker/dealers
dealing in penny stocks are required to provide potential investors with a
document disclosing the risks of penny stocks. Moreover, broker/dealers are
required to determine whether an investment in a penny stock is a suitable
investment for a prospective investor. These requirements may reduce the
potential market for our common stock by reducing the number of potential
investors. This may make it more difficult for investors in our common stock to
resell shares to third parties or to otherwise dispose of them. This could cause
our stock price to decline.
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS.
|
None
ITEM
2.
|
DESCRIPTION
OF PROPERTY
|
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.
ITEM
3.
|
LEGAL
PROCEEDINGS
|
A civil
lawsuit is currently 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.
We are also subject to legal
proceedings, claims and litigation arising in the ordinary course of
business. We do not expect the ultimate costs to resolve these
matters to have a material adverse effect on our consolidated financial
position, results of operations or cash flows.
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
No matters were submitted
to a vote of security holders during the quarter ended December 31,
2008.
PART
II
ITEM
5.
|
MARKET
FOR THE COMPANY’S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
|
Our
common stock is quoted on the OTC Bulletin
Board under the symbol “NGNM”. Set forth below is a
table summarizing the high and low bid quotations for our common stock during
the last two fiscal years.
QUARTER
|
|
HIGH BID
|
|
|
LOW BID
|
|
4th
Quarter 2008
|
|
$ |
1.05 |
|
|
$ |
0.56 |
|
3rd
Quarter 2008
|
|
$ |
1.15 |
|
|
$ |
0.83 |
|
2nd
Quarter 2008
|
|
$ |
1.35 |
|
|
$ |
0.86 |
|
1st
Quarter 2008
|
|
$ |
1.15 |
|
|
$ |
0.72 |
|
|
|
|
|
|
|
|
|
|
4th
Quarter 2007
|
|
$ |
1.59 |
|
|
$ |
1.02 |
|
3rd
Quarter 2007
|
|
$ |
1.70 |
|
|
$ |
1.05 |
|
2nd
Quarter 2007
|
|
$ |
1.90 |
|
|
$ |
1.41 |
|
1st
Quarter 2007
|
|
$ |
1.79 |
|
|
$ |
1.39 |
|
The above
table is based on over-the-counter quotations. These quotations reflect
inter-dealer prices, without retail mark-up, markdown or commissions, and may
not necessarily represent actual transactions. All historical data
was obtained from the www.NASDAQ.com web site.
Holders
of Common Stock
As of
March 31, 2009, there were 459 stockholders of record of our common stock,
excluding shareholders who hold their shares in brokerage accounts in “street
name”.
Dividends
We have
never declared or paid cash dividends on our common stock. We intend
to retain all future earnings to finance future growth and therefore we do not
anticipate paying any cash dividends in the foreseeable future. In
addition, certain financing agreements entered into by the Company may limit our
ability to pay dividends in the future.
Securities
Authorized for Issuance Under Equity Compensation Plans (a)
Plan Category
|
|
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
|
|
|
Weighted average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
|
|
Equity
compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
Amended
and Restated Equity Incentive Plan (“Equity Incentive
Plan”)
|
|
|
3,374,422
|
|
|
$ |
0.79
|
|
|
|
594,138 |
(c) |
Employee
Stock Purchase Plan (“ESPP”)
|
|
|
-
|
|
|
|
N/A
|
|
|
|
292,555
|
|
Equity
compensation plans not approved by security holders
|
|
|
350,000 |
(b) |
|
$ |
0.80
|
|
|
|
- |
|
Total
|
|
|
3,724,422 |
|
|
$ |
0.79 |
|
|
|
886,693 |
|
|
(a)
|
As
of December 31, 2008.
|
|
(b)
|
Represents
outstanding options to purchase 350,000 shares of common stock granted to
Robert P. Gasparini, our President and Chief Science Officer, outside the
Company’s Equity Incentive Plan on March 12, 2008. The option
has an exercise price of $0.80 per share and vests based on the
achievement of certain performance milestones. In the event of
a change of control of the Company, all unvested portions of the option
will vest in full. Unless sooner terminated pursuant to the
terms of the stock option agreement, the option will terminate on March
12, 2015.
|
|
(c)
|
The
Company’s Equity Incentive Plan was amended and restated on March 3, 2009,
and subsequently approved by shareholders holding a majority of the shares
outstanding, to allow for the issuance of an aggregate of up to 6,500,000
shares under the plan.
|
Currently,
the Company’s Equity Incentive Plan, as amended and restated on October 31, 2006
and again amended and restated on March 3, 2009, and the Company’s ESPP, dated
October 31, 2006, are the only equity compensation plans in effect.
Recent
Sales of Unregistered Securities
On March 12, 2008, the Company granted
an option to purchase 400,000 shares of common stock to Robert P. Gasparini, our
President and Chief Science Officer, pursuant to the terms of his employment
agreement with the Company. The option has an exercise price of $0.80
per share and vests based on the achievement of certain performance
milestones. In the event of a change of control of the Company, all
unvested portions of the option will vest in full. Unless sooner
terminated pursuant to the terms of the stock option agreement, the option will
terminate on March 12, 2015. This transaction was effected under
Section 4(2) of the Securities Act.
On
September 30, 2008, the Company issued a warrant to Gulf Pointe Capital LLC to
purchase up to 32,475 shares of our common stock. The warrant has an exercise
price of $1.08 per share and a five year term. This transaction was
effected under Section 4(2) of the Securities Act.
On
October 10, 2008, the Company issued to Fusion Capital Fund II, LLC (“Fusion
Capital”) 17,500 shares of our common stock as a due diligence expense
reimbursement. In addition, pursuant to the terms of a common stock purchase
agreement between the Company and Fusion Capital, on November 5, 2008, we issued
to Fusion Capital 400,000 shares of our common stock as a commitment
fee. These transactions were effected under Section 4(2) of the
Securities Act.
Item
6. Selected Financial Data
We are a
“smaller reporting company” as defined by Regulations S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
NeoGenomics,
Inc., a Nevada corporation (referred to individually as the “Parent Company” or
collectively with all of its subsidiaries as “NeoGenomics” or the “Company” in
this Form 10-K) is the registrant for SEC reporting purposes. Our
common stock is listed on the OTC Bulletin Board under the symbol
“NGNM.”
The following discussion and analysis
should be read in conjunction with the Consolidated Financial Statements, and
the Notes thereto included herein. The information contained below includes
statements of the Company’s or management’s beliefs, expectations, hopes, goals
and plans that, if not historical, are forward-looking statements subject to
certain risks and uncertainties that could cause actual results to differ
materially from those anticipated in the forward-looking statements. For a
discussion on forward-looking statements, see the information set forth in the
Introductory Note to this Annual Report under the caption “Forward Looking
Statements”, which information is incorporated herein by reference.
Overview
NeoGenomics
operates a network of cancer-focused testing laboratories 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
|
|
d)
|
molecular
testing which involves analysis of DNA and RNA to diagnose and predict the
clinical significance of various genetic sequence
disorders.
|
All of
these testing services are widely utilized in the diagnosis, 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.
Critical Accounting
Policies
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. For a complete description of our
significant accounting policies, see Note B to our Consolidated Financial
Statements included in this Annual Report on Form 10-K.
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 to2007 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 $548in
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 Capital Source 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”). 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 on a when and if needed basis as determined by us in
our sole discretion. As of March 31, 2009, we had not drawn on any
amounts under the Fusion 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.
Capital
Expenditures
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. 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.
Related Party
Transactions
During
2008 and 2007, Steven C. Jones, a director of the Company, earned $176,000 and
$128,000, respectively, for various consulting work performed in connection with
his duties as Acting Principal Financial Officer.
During
2008 and 2007, George O’Leary, a director of the Company, earned $22,200 and
$9,500, respectively, in cash for various consulting work performed for the
Company. On March 15, 2007, Mr. O’Leary was also awarded 100,000
warrants for certain consulting services performed on behalf of the
Company. These warrants had an exercise price of $1.49/share and a
five year term. Half of these warrants were deemed vested on issuance
and the other half vest ratably over a 24 month period.
On
February 18, 2005, we entered into a binding agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) (“Aspen”) to refinance our existing
indebtedness of $740,000 owed to Aspen and provide for additional liquidity of
up to $760,000 to the Company. Under the terms of the agreement,
Aspen agreed to make available to us up to $1.5 million (subsequently increased
to $1.7 million) of debt financing in the form of a revolving credit facility
(the “Aspen Credit Facility”) with an initial maturity of March 31,
2007. Aspen is managed by its General Partner, Medical Venture
Partners, LLC, which is controlled by a director of NeoGenomics. As
part of this agreement, we also agreed to issue to Aspen a five year warrant to
purchase up to 2,500,000 shares of common stock at an initial exercise price of
$0.50/share. An amended and restated loan agreement for the Aspen
Credit Facility and other ancillary documents, including the warrant agreement,
which more formally implemented the agreements made on February 18, 2005 were
executed on March 23, 2005. All material terms were identical to the
February 18, 2005 agreement. These warrants as amended were valued at
approximately $133,000 using the Black-Scholes option pricing
model. We incurred $53,587 of transaction expenses in
connection with refinancing the Aspen Credit Facility, which were capitalized
and amortized to interest expense over the term of the agreement. The
Aspen Credit Facility was paid in full on June 7, 2007 with the proceeds from
the Private Placement described below, and it expired on September 30,
2007.
On March
11, 2005, we entered into an agreement with HCSS, LLC and eTelenext, Inc. to
enable NeoGenomics to use eTelenext, Inc’s Accessioning Application, AP Anywhere
Application and CMQ Application. HCSS, LLC is a holding company
created to build a small laboratory network for the 50 small commercial genetics
laboratories in the United States. HCSS, LLC is owned 66.7% by Dr.
Michael T. Dent, a member of our Board of Directors. Under the terms
of the agreement, the Company paid $22,500 over three months to customize this
software and will pay an annual membership fee of $6,000 per year and monthly
transaction fees of between $2.50 - $10.00 per completed test, depending on the
volume of tests performed. The eTelenext system is an elaborate
laboratory information system (LIS) that is in use at many larger
laboratories. By assisting in the formation of the small laboratory
network, the Company will be able to increase the productivity of its
technologists and have on-line links to other small laboratories in the network
in order to better manage its workflow. During the years ended
December 31, 2008 and 2007 HCSS earned $99,893 and $77,177, respectively, for
transaction fees related to completed tests.
On June 6, 2007, we issued to the six
non-employees director’s of our board of director’s a total of 550,000
warrants. These warrants are valued at approximately $280,000 using the
Black-Scholes option pricing model and our being
expensed over the vesting period.
In June 2007, as noted in Note I, we
issued warrants to purchase
250,000 shares at $1.50 per share and paid ACA a
cash fee of $52,375 in consideration for ACA’s services to the Company in connection
with the Private Placement. The warrants were valued at
approximately $145,000
using the Black-Scholes option pricing
model.
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.
Subsequent
Events
Employment
Contracts
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
February 9, 2009, we amended our Master Lease with GulfPointe 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.
ITEM
7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a
“smaller reporting company” as defined by Regulations S-K and as such, are not
required to provide the information contained in this item pursuant to
Regulation S-K.
ITEM
8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
Report
of Independent Registered Public Accounting Firm.
|
|
40
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007.
|
|
41
|
|
|
|
Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007.
|
|
42
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the years ended December 31, 2008
and 2007.
|
|
43
|
|
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007.
|
|
44
|
|
|
|
Notes to Consolidated Financial
Statements.
|
|
45
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and Stockholders of NeoGenomics, Inc.:
We have audited the accompanying
consolidated balance sheets of NeoGenomics, Inc. (the “Company”), as of December 31, 2008 and 2007, and the related
consolidated statements of operations, stockholders’ equity and cash flows for the years
then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements
based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement. The Company is
not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly,
we express no such opinion. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In
our opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2008
and 2007, and the results of its operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Kingery & Crouse,
P.A
Tampa, FL
April 14,
2009
NEOGENOMICS,
INC.
CONSOLIDATED
BALANCE SHEETS AS OF DECEMBER 31, 2008 and 2007
|
|
2008
|
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
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 AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
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, $.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 |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
NET
REVENUE
|
|
$ |
20,015,319 |
|
|
$ |
11,504,725 |
|
|
|
|
|
|
|
|
|
|
COST
OF REVENUE
|
|
|
9,353,852 |
|
|
|
5,522,775 |
|
|
|
|
|
|
|
|
|
|
GROSS
MARGIN
|
|
|
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 |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS’ EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2008
AND 2007
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances,
December 31, 2006
|
|
|
27,061,476 |
|
|
$ |
27,061 |
|
|
$ |
11,177,512 |
|
|
$ |
(11,150,059 |
) |
|
$ |
54,514 |
|
Common
stock issuances for cash
|
|
|
3,654,684 |
|
|
|
3,655 |
|
|
|
5,445,182 |
|
|
|
- |
|
|
|
5,448,837 |
|
Transaction
fees and expenses
|
|
|
- |
|
|
|
- |
|
|
|
(346,110 |
) |
|
|
- |
|
|
|
(346,110 |
) |
Exercise
of stock options
|
|
|
175,500 |
|
|
|
175 |
|
|
|
53,619 |
|
|
|
- |
|
|
|
53,794 |
|
Exercise
of warrants
|
|
|
500,000 |
|
|
|
500 |
|
|
|
129,500 |
|
|
|
- |
|
|
|
130,000 |
|
Warrant
amortization and stock issued for services
|
|
|
- |
|
|
|
- |
|
|
|
159,153 |
|
|
|
- |
|
|
|
159,153 |
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
202,098 |
|
|
|
- |
|
|
|
202,098 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,380,172 |
) |
|
|
(3,380,172 |
) |
Balances,
December 31, 2007
|
|
|
31,391,660 |
|
|
|
31,391 |
|
|
|
16,820,954 |
|
|
|
(14,530,231 |
) |
|
|
2,322,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issuances for cash
|
|
|
49,260 |
|
|
|
49 |
|
|
|
45,094 |
|
|
|
- |
|
|
|
45,143 |
|
Transaction
fees and expenses
|
|
|
- |
|
|
|
- |
|
|
|
(8,411 |
) |
|
|
- |
|
|
|
(8,411 |
) |
Warrant
amortization
|
|
|
- |
|
|
|
- |
|
|
|
132,584 |
|
|
|
- |
|
|
|
132,584 |
|
Exercise
of stock options
|
|
|
88,500 |
|
|
|
89 |
|
|
|
23,656 |
|
|
|
- |
|
|
|
23,745 |
|
Shares
issued to Fusion Capital, net of issuance costs (Note
I)
|
|
|
417,500 |
|
|
|
418 |
|
|
|
(48,266 |
) |
|
|
- |
|
|
|
(47,848 |
) |
Shares
issued for registration penalties
|
|
|
170,088 |
|
|
|
170 |
|
|
|
170,019 |
|
|
|
- |
|
|
|
170,189 |
|
Stock
compensation expense
|
|
|
- |
|
|
|
- |
|
|
|
246,180 |
|
|
|
- |
|
|
|
246,180 |
|
Net
loss
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,382,586 |
) |
|
|
(1,382,586 |
) |
Balances,
December 31, 2008
|
|
|
32,117,008 |
|
|
$ |
32,117 |
|
|
$ |
17,381,810 |
|
|
$ |
(15,912,817 |
) |
|
$ |
1,501,110 |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2008 AND 2007
|
|
2008
|
|
|
2007
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
Net
Loss
|
|
$ |
(1,382,586 |
) |
|
$ |
(3,380,172 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
740,564 |
|
|
|
451,459 |
|
Impairment
of assets
|
|
|
- |
|
|
|
2,235 |
|
Loss
on investments
|
|
|
200,000 |
|
|
|
- |
|
Amortization
of credit facility warrants and debt issue costs
|
|
|
54,006 |
|
|
|
54,900 |
|
Stock
based compensation
|
|
|
246,180 |
|
|
|
202,098 |
|
Non-cash
consulting expenses
|
|
|
132,584 |
|
|
|
159,153 |
|
Other
non-cash expenses
|
|
|
8,862 |
|
|
|
29,423 |
|
Provision
for bad debts
|
|
|
1,789,577 |
|
|
|
1,013,804 |
|
Changes
in assets and liabilities, net:
|
|
|
|
|
|
|
|
|
(Increase)
decrease in accounts receivable, net of write-offs
|
|
|
(1,466,357 |
) |
|
|
(2,700,797 |
) |
(Increase)
decrease in inventories
|
|
|
(186,709 |
) |
|
|
(187,388 |
) |
(Increase)
decrease in prepaid expenses
|
|
|
(63,057 |
) |
|
|
(343,032 |
) |
(Increase)
decrease in other current assets
|
|
|
(3,934 |
) |
|
|
(26,671 |
) |
Increase
(decrease) in legal contingency
|
|
|
(375,000 |
) |
|
|
375,000 |
|
Increase
(decrease) in accounts payable and other liabilities
|
|
|
167,564 |
|
|
|
1,707,397 |
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(138,306 |
) |
|
|
(2,642,591 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(501,781 |
) |
|
|
(516,144 |
) |
Investment
in other assets (Power 3)
|
|
|
- |
|
|
|
(200,000 |
) |
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(501,781 |
) |
|
|
(716,144 |
) |
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Advances
(repayments) from/to affiliates, net
|
|
|
- |
|
|
|
(1,675,000 |
) |
Advances
(repayments) from/to revolving credit facility
|
|
|
1,146,850 |
|
|
|
- |
|
Notes
payable
|
|
|
- |
|
|
|
(2,000 |
) |
Repayment
of capital lease obligations
|
|
|
(377,641 |
) |
|
|
(166,479 |
) |
Proceeds
from issuance of capital lease on owned assets
|
|
|
67,999 |
|
|
|
- |
|
Issuance
of common stock and warrants for cash , net of transaction
expenses
|
|
|
60,477 |
|
|
|
5,286,521 |
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
897,685 |
|
|
|
3,443,042 |
|
|
|
|
|
|
|
|
|
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
|
|
257,598 |
|
|
|
84,307 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
210,573 |
|
|
|
126,266 |
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
|
$ |
468,171 |
|
|
$ |
210,573 |
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$ |
256,323 |
|
|
$ |
204,670 |
|
Equipment
leased under capital leases
|
|
$ |
1,207,863 |
|
|
$ |
703,145 |
|
Income
taxes paid
|
|
$ |
- |
|
|
$ |
- |
|
See notes
to consolidated financial statements.
NEOGENOMICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
NOTE A – NATURE OF BUSINESS AND BASIS OF
PRESENTATION
NeoGenomics,
Inc., a Nevada Company, was formed in 1998 under the name of American
Communications Enterprises, Inc. (“ACE”, the “Parent”, or the “Parent
Company”).
NeoGenomics,
Inc., a Florida company, doing business as NeoGenomics Laboratories (“NEO”,
“NeoGenomics” or “Subsidiary”) was formed in June 2001, and agreed to
be acquired by ACE in a reverse acquisition in November 2001. On
March 3, 2009, we changed the name of the Subsidiary from NeoGenomics Inc, to
NeoGenomics Laboratories, Inc. NeoGenomics operates as a certified
“high complexity” clinical laboratory in accordance with the federal
government’s Clinical Laboratory Improvement Amendments of 1988 (“CLIA”), and is
dedicated to the delivery of clinical diagnostic services to pathologists,
oncologists, urologists, hospitals, and other laboratories throughout the United
States.
ACE
succeeded to NEO’s name in January, 2002, and NeoGenomics remains a wholly-owned
subsidiary of the Parent Company. (NEO and ACE are collectively referred to as
“we”, “us”, “our” or the “Company”).
The
accompanying consolidated financial statements include the accounts of the
Parent and the Subsidiary. All significant intercompany accounts and
balances have been eliminated in consolidation.
Certain
amounts in the prior year’s consolidated financial statements have been
reclassified to conform to the current year presentation.
NOTE B – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Use of
Estimates
The
Company prepares its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of
America. These principles require management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, together with amounts disclosed in the
related notes to the consolidated financial statements. Actual
results and outcomes may differ from management’s estimates, judgments and
assumptions. Significant estimates, judgments and assumptions used in
these consolidated financial statements include, but are not limited to, those
related to revenues, accounts receivable and related reserves, contingencies,
useful lives and recovery of long-term assets, income and other taxes, and the
fair value of stock-based compensation. These estimates, judgments,
and assumptions are reviewed periodically and the effects of material revisions
in estimates are reflected in the consolidated financial statements
prospectively from the date of the change in estimate.
Revenue
Recognition
The
Company recognizes revenues in accordance with the Securities and Exchange
Commission’s (the “Commission”) Staff Accounting Bulletin No. 104, “Revenue
Recognition”, when the price is fixed or determinable, persuasive evidence of an
arrangement exists, the service is performed and collectability of the resulting
receivable is reasonably assured.
The
Company’s specialized diagnostic services are performed based on a written test
requisition form and revenues are recognized once the diagnostic services have
been performed, the results have been delivered to the ordering physician, the
payor has been identified and eligibility and insurance have been
verified. These diagnostic services are billed to various payors,
including Medicare, commercial insurance companies, other directly billed
healthcare institutions such as hospitals and clinics, and
individuals. The Company reports revenues from contracted payors,
including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of 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.
NEOGENOMICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Cost of
Revenue
Cost of
revenue consists primarily of lab related materials and supplies, salaries
related to laboratory personnel, transportation of patient samples to and from
our laboratories, allocated facility costs, and depreciation of equipment used
to deliver the Company’s services.
Accounting for
Contingencies
When
involved in litigation or claims, in the normal course of our business, we
follow the provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 5, Accounting for
Contingencies, to record litigation or claim-related expenses. We
evaluate, among other factors, the degree of probability of an unfavorable
outcome and the ability to make a reasonable estimate of the amount of loss. We
accrue for settlements when the outcome is probable and the amount or range of
the settlement can be reasonably estimated. In addition to our judgments and use
of estimates, there are inherent uncertainties surrounding litigation and claims
that could result in actual settlement amounts that differ materially from
estimates.
Accounts Receivable and
Allowance for Doubtful Accounts
Accounts
receivable are reported at realizable value, net of allowance for doubtful
accounts (the “Allowance”), which is estimated and recorded in the period the
related revenue is recorded based on the historical collection experience for
each type of payor. In addition, the Allowance is adjusted
periodically, based upon an evaluation of historical collection experience with
specific payors, payor types, and other relevant factors, including regularly
assessing the state of our billing operations in order to identify issues which
may impact the collectability of receivables or reserve
estimates. Revisions to the Allowance are recorded as an adjustment
to bad debt expense within general and administrative expenses. After
appropriate collection efforts have been exhausted, specific receivables deemed
to be uncollectible are charged against the Allowance in the period they are
deemed uncollectible. Recoveries of receivables previously
written-off are recorded as credits to the Allowance.
Statement of Cash
Flows
For purposes of the statement of cash
flows, we consider all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Fair Value of Financial
Instruments and Concentrations of Credit Risk
The
carrying value of cash and cash equivalents, accounts receivable, accounts
payable, accrued expenses and liabilities, credit lines, and other current
assets and liabilities are considered reasonable estimates of their respective
fair values due to their short-term nature. The Company maintains its
cash and cash equivalents with domestic financial institutions that the Company
believes to be of high credit standing. The Company believes that, as
of December 31, 2008, its concentration of credit risk related to cash and cash
equivalents was not significant. The carrying value of the Company’s
long-term debt approximates its fair value based on the current market
conditions for similar debt instruments.
Concentrations
of credit risk with respect to revenue and accounts receivable are primarily
limited to certain clients to whom the Company provides a significant volume of
its services, and to specific payors of our services such as Medicare and
individual insurance companies. The Company’s client base consists of
a large number of geographically dispersed clients diversified across various
customer types. The Company continues to focus its sales efforts to
decrease the dependency on any given source of revenue and decrease its credit
risk from any one large client or payor type, and these efforts continue to
decrease of our credit risk. For the years ended December 31, 2008
and 2007, one client accounted for 22% and 25% of total revenue and all others
were less than 10% of total revenue individually. In the event that
we lost this client, we would potentially lose a significant percentage of our
revenues. 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.
NEOGENOMICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
The
Company orders the majority of its FISH probes from one vendor and as a result
of their dominance of that marketplace and the absence of any competitive
alternatives, if they were to have a disruption and not have inventory available
it could have a material effect on our business. This risk cannot be
completely offset due to the fact that they have patent protection which limits
other vendors from supplying these probes.
Inventories
Inventories,
which consist principally of testing supplies, are valued at the lower of cost
or market, using the first-in, first-out method (FIFO).
Property and
Equipment
Property
and equipment are recorded at cost, net of accumulated depreciation and
amortization. Property and equipment generally includes purchases of
items with a cost greater than $1,000 and a useful life greater than one
year. Depreciation and amortization are computed on a straight line
basis over the estimated useful lives of the assets.
Leasehold
improvements are amortized over the shorter of the related lease terms or their
estimated useful lives. Property and equipment acquired under capital
leases are depreciated over the shorter of the related lease terms or the useful
lives of the assets. The Company periodically reviews the estimated
useful lives of property and equipment. Changes to the estimated useful lives
are recorded prospectively from the date of the change. Upon
retirement or sale, the cost of the assets disposed of and the related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is included in income (loss) from operations. Repairs and
maintenance costs are expensed as incurred.
Income
Taxes
We
compute income taxes in accordance with SFAS No. 109 "Accounting for Income
Taxes" ("SFAS 109"). Under SFAS 109, deferred taxes are recognized
for the tax consequences of temporary differences by applying enacted statutory
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities. Also, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that included the enactment
date. Temporary differences between financial and tax reporting arise
primarily from the use of different depreciation methods for property and
equipment as well as impairment losses and the timing of recognition of bad
debts.
Stock-Based
Compensation
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. The standard
covers employee stock options, restricted stock, and other equity
awards.
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%.
NEOGENOMICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
See Note F for a detailed description of
the Company’s plans.
Tax Effects of Stock-Based
Compensation
We will only recognize a tax benefit
from windfall tax deductions for stock-based awards in additional paid-in
capital if an incremental tax benefit is realized after all other tax attributes
currently available have
been utilized.
Net Loss Per Common
Share
We
compute loss per share in accordance with SFAS No. 128 “Earnings per Share”
(“SFAS 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB
98”). Under the provisions of SFAS No. 128 and SAB 98, basic net loss
per share is computed by dividing the net loss available to common stockholders
by the weighted average number of common shares outstanding during the
period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent
shares outstanding as of December 31, 2008 and 2007, which consisted of employee
stock options and certain warrants issued to consultants and other providers of
financing to the Company, were excluded from diluted net loss per common share
calculations as of such dates because they were anti-dilutive. During
the years ended December 31, 2008 and 2007, we reported net loss per share and
as such basic and diluted loss per share were equivalent.
Recent
Pronouncements
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 provides
companies with an option to irrevocably elect to measure certain financial
assets and financial liabilities at fair value on an instrument-by-instrument
basis with the resulting changes in fair value recorded in
earnings. The objective of SFAS 159 is to reduce both the complexity
in accounting for financial instruments and the volatility in earnings caused by
using different measurement attributes for financial assets and financial
liabilities. SFAS 159 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.
NEOGENOMICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
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.
NOTE C – LIQUIDITY
Our consolidated financial statements
are prepared using accounting principles generally accepted in the United States of America
applicable to a going concern, which contemplates 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”). 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 on a when and if needed basis as determined by us in our sole
discretion. On February 1, 2008, we entered into a
revolving credit facility with CapitalSource Finance, LLC, which
allows us to borrow up to $3,000,000 based on a formula which is tied to our
eligible accounts receivable that are aged less than 150 days (see Note H). We believe we have adequate resources to
meet our operating commitments for the next twelve months and
accordingly our consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities that might be necessary should we be unable to
continue as a going concern.
NOTE D – PROPERTY AND EQUIPMENT,
NET
Property and equipment consisted of the
following at December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
|
Estimated
Useful Lives
in Years
|
|
Equipment
|
|
$ |
3,450,449 |
|
|
$ |
2,319,601 |
|
|
|
3-7
|
|
Leasehold
improvements
|
|
|
111,114 |
|
|
|
51,989 |
|
|
|
3-5
|
|
Furniture
& fixtures
|
|
|
247,366 |
|
|
|
163,324 |
|
|
|
7
|
|
Computer
hardware
|
|
|
276,520 |
|
|
|
152,405 |
|
|
|
3
|
|
Computer
software
|
|
|
382,154 |
|
|
|
209,134 |
|
|
|
3
|
|
Assets
not yet placed in service
|
|
|
10,288 |
|
|
|
73,660 |
|
|
|
-
|
|
Subtotal
|
|
|
4,477,891 |
|
|
|
2,970,113 |
|
|
|
|
|
Less
accumulated depreciation and amortization
|
|
|
(1,602,594 |
) |
|
|
(862,030 |
) |
|
|
|
|
Property
and equipment, net
|
|
$ |
2,875,297 |
|
|
$ |
2,108,083 |
|
|
|
|
|
Depreciation
and amortization expense on property and equipment, including leased assets, for
the years ended December 31, 2008 and 2007, was $740,564 and $451,459,
respectively.
NEOGENOMICS,
INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
Property
and equipment under capital leases, included above, consists of the following at
December 31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
Equipment
|
|
$ |
2,273,864 |
|
|
$ |
1,127,889 |
|
Furniture
& fixtures
|
|
|
106,119 |
|
|
|
22,076 |
|
Computer
hardware
|
|
|
120,821 |
|
|
|
49,086 |
|
Computer
software
|
|
|
142,814 |
|
|
|
94,963 |
|
Subtotal
|
|
|
2,643,618 |
|
|
|
1,294,014 |
|
Less
accumulated depreciation and amortization
|
|
|
(656,797 |
) |
|
|
(248,711 |
) |
Property
and equipment under capital leases, net
|
|
$ |
1,986,821 |
|
|
$ |
1,045,303 |
|
NOTE
E – INCOME TAXES
We
recognized losses for financial reporting purposes for the years ended December
31, 2008 and 2007, in the accompanying consolidated statements of
operations. Accordingly, no provisions for income taxes and/or
deferred income taxes payable have been provided in the accompanying
consolidated financial statements.
At
December 31, 2008 and 2007, we had net operating loss carryforwards of
approximately $7,520,000 and $4,700,000, respectively. The
significant difference between this amount, and our accumulated deficit arises
primarily from certain stock based compensation that is considered to be a
permanent difference. Assuming our net operating loss carryforwards
are not disallowed because of certain “change in control” provisions of the
Internal Revenue Code, these net operating loss carryforwards expire in various
years through the year ending December 31, 2028. However, we
have established a valuation allowance to fully reserve our deferred income tax
assets as such assets did not meet the required asset recognition standard
established by SFAS 109. Our valuation allowance increased by approximately
$366,000 during the year ended December 31, 2008.
At
December 31, 2008 and 2007, our current and non-current deferred income tax
assets (assuming an effective income tax rate of approximately 39%) consisted of
the following:
|
|
2008
|
|
|
2007
|
|
Net
current deferred income tax asset:
|
|
|
|
|
|
|
Allowance
for doubtful accounts
|
|
$ |
138,300 |
|
|
$ |
159,000 |
|
Less
valuation allowance
|
|
|
(138,300 |
) |
|
|
(159,000 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
Net
non-current deferred income tax asset:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$ |
2,933,000 |
|
|
$ |
1,830,450 |
|
Accumulated
depreciation and impairment
|
|
|
(881,000 |
) |
|
|
(166,000 |
) |
Subtotal
|
|
|
2,052,000 |
|
|
|
1,664,450 |
|
Less
valuation allowance
|
|
|
(2,052,000 |
) |
|
|
(1,664,450 |
) |
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
F – INCENTIVE STOCK OPTIONS, WARRANTS AND AWARDS
Stock Option
Plan
In
October, 2006 (and on March 3, 2009, see Note N Subsequent Events), our
shareholders and Board of Directors amended and restated the NeoGenomics Equity
Incentive Plan, which was originally approved in October 2003 (the
“Plan”). The Plan permits the grant of stock awards and stock options
to officers, directors, employees and consultants. Options granted
under the Plan are either outright stock awards, Incentive Stock Options
(“ISOs”) or Non-Qualified Stock Options (“NQSO’s). As part of the
October, 2006 amendment and restatement, the shareholders and Board of Directors
approved an increase in the shares reserved under the Plan from 10% of our
outstanding common stock at any given time to 12% of our Adjusted Diluted Shares
Outstanding, as defined, which equated to 4,554,609 and 4,463,643 shares of our
common stock as of December 31, 2008 and 2007, respectively. As
amended on March 3, 2009, the Plan now provides that the maximum aggregate
number of shares of the Company’s common stock reserved and available for
issuance under the Plan is 6,500,000 shares.
As of
December 31, 2008, option and stock awards totaling 3,724,422 shares were
outstanding, including 350,000 options issued outside of the Plan to Robert
Gasparini, the Company’s President and Principal Executive Officer, and 586,049
option and stock awards had been exercised, leaving a total of 594,138 options
and stock awards available for future issuance. Options typically
expire after 5 or 10 years and vest over 3 or 4 years, but each grant’s vesting
and exercise price provisions are determined at the time the awards are granted
by the Compensation Committee of the Board of Directors or by the President by
virtue of authority delegated to him by the Compensation Committee.
In
addition, effective January 1, 2007, the Company began sponsoring an Employee
Stock Purchase Plan (“ESPP”), where eligible employees may purchase Common
Stock, by means of limited payroll deductions, at a 5% discount from the fair
market value of the Common Stock as of specific dates. The ESPP plan
is considered exempt from fair value accounting under SFAS No. 123(R) because
the discount offered to employees is only 5%.
We
account for stock-based compensation expense in accordance with SFAS 123(R),
which requires the measurement and recognition of compensation expense in the
Company’s statement of operations for all share-based payment awards made to our
employees and directors, including employee stock options and employee stock
purchases related to all our stock-based compensation plans based on estimated
grant-date fair values.
SFAS
123(R) requires companies to estimate the fair value of stock-based compensation
on the date of grant using an option-pricing model. The fair value of
the award is recognized as expense over the requisite service periods in our
consolidated statement of operations using the straight-line
method. Under SFAS 123(R), the estimated stock-based compensation
expense is reduced by an estimate of the annualized rate of stock option
forfeitures.
We
estimate the grant-date fair value of stock-based awards using the trinomial
lattice model. This model is affected by our stock price on the date
of the grant as well as assumptions regarding a number of highly complex and
subjective variables. These variables include expected term, expected
risk-free rate of return, expected volatility, and expected dividend yield, each
of which is more fully described below. The assumptions for
expected term and expected volatility are the two assumptions that significantly
affect the grant date fair value.
Expected Term: The
expected term of an option is the period of time that such option is expected to
be outstanding. The average expected term is determined using a
trinomial lattice simulation model.
Risk-free Interest
Rate: We base the risk-free interest rate used in the
trinomial lattice valuation method on the implied yield at the grant date of the
U.S. Treasury zero-coupon issue with an equivalent term to the stock-based award
being valued. Where the expected term of a stock-based award does not
correspond with the term for which a zero coupon interest rate is quoted, we use
the nearest interest rate from the available maturities.
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Expected Stock Price
Volatility: Effective January 1, 2006, we evaluated the
assumptions used to estimate volatility and determined that, under SAB 107, we
should use a blended average of our volatility and the volatility of certain
peer companies. We believe that the use of this blended average peer
volatility is more reflective of market conditions and a better indicator of our
expected volatility due to the limited trading history available for our Company
since its last change of control, prior to which we operated under a different
business model.
Dividend
Yield: Because we have never paid a dividend and do not expect
to begin doing so in the foreseeable future, we have assumed a 0% dividend yield
in valuing our stock-based awards.
The fair
value of stock option awards granted during the years ended December 31, 2008
and 2007 was estimated as of the grant date using a trinomial lattice model
with the following weighted average assumptions:
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Expected
term (in years)
|
|
|
3.5 |
|
|
|
4.7 |
|
Risk-free
interest rate (%)
|
|
|
2.0 |
% |
|
|
4.6 |
% |
Expected
volatility (%)
|
|
|
42 |
% |
|
|
35 |
% |
Dividend
yield (%)
|
|
|
0 |
% |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
Weighted
average fair value/share at grant date
|
|
$ |
0.22 |
|
|
$ |
0.45 |
|
The
status of our stock options and stock awards are summarized as
follows:
|
|
Number
|
|
|
Weighted
Average
|
|
|
|
Of
Shares
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
2,107,000 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,232,583 |
|
|
|
1.48 |
|
|