10KSB: Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]
Published on February 24, 2004
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934.
For the Year Ended December 31, 2003
( ) 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 74-2897368
(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
12701 Commonwealth Drive, Suite 9, Fort Myers, FL 33913
Address of Principal Executive Offices:
(239) 768-0600
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 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 other shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X Yes _ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by referencing Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
The issuer's revenues for the most recent fiscal year were approximately $370,000.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at February 9, 2004 was approximately $567,805 (Based on 2,027,875
shares held by non-affiliates and a closing share price of $0.28/share on
February 9, 2004). Shares of common stock held by each officer and director and
by each person who owns more than 10% of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 9, 2004, 18,449,416 common shares were outstanding.
Documents Incorporated By Reference - NONE
Transitional small business disclosure format. _ Yes X No
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PART I
FORWARD-LOOKING STATEMENTS
This Form 10-KSB, press releases and certain information provided
periodically in writing or orally by our officers or our agents contain
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended; Section 21E of the Securities
Exchange Act of 1934; and the Private Securities Litigation Reform Act of 1995.
The words "may", "would", "could", "will", "expect", "estimate", "anticipate",
"believe", "intend", "plan", "goal", and similar expressions and variations
thereof are intended to specifically identify forward-looking statements. These
statements appear in a number of places in this Form 10-KSB and include all
statements that are not statements of historical fact regarding the intent,
belief or current expectations of us, our directors or our officers, with
respect to, among other things: (i) our liquidity and capital resources; (ii)
our financing opportunities and plans; (iii) our ability to attract customers to
generate revenues, (iv) market and other trends affecting our future financial
condition or results of operations; (v) our growth strategy and operating
strategy; and (vi) the declaration and payment of dividends.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various
factors. The factors that might cause such differences include, among others,
the following: (i) we have incurred significant losses since our inception, and
have experienced and continue to experience negative operating margins and
negative cash flows from operations (see Note B to our consolidated financial
statements); (ii) any material inability of us to successfully internally
develop our products; (iii) any adverse effect or limitations caused by
governmental regulations; (iv) any adverse effect on our cash flow or on our
ability to obtain acceptable financing in connection with our growth plans; (v)
any increased competition in our business; (vi) any inability of us to
successfully conduct our business in new markets; and (vii) other risks
including those identified in our filings with the Securities and Exchange
Commission. We undertake no obligation to publicly update or revise the forward
looking statements made in this Form 10-KSB to reflect events or circumstances
after the date of this Form 10-KSB or to reflect the occurrence of unanticipated
events.
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ITEM 1. DESCRIPTION OF BUSINESS
NeoGenomics, Inc., a Nevada corporation (referred to individually as the
"Parent Company" or collectively with all of its subsidiaries as the "Company"
in this Form 10-KSB) is the registrant for SEC reporting purposes and was
originally incorporated as American Communications, Enterprises, Inc. in October
1998. In November 2001, following a reverse acquisition of NeoGenomics, Inc, a
Florida company (referred to as "NeoGenomics" or the "Operating Subsidiary" in
this Form 10-KSB), the registrant changed its name to NeoGenomics, Inc. as well.
All share references in this Form 10-KSB have been adjusted to reflect a 1:100
reverse stock split which was effected by the Company on April 16, 2003. Also,
because this was a reverse acquisition, the Operating Subsidiary is considered
to have acquired the Parent Company for financial reporting purposes. Thus, all
consolidated financial information includes the accounts of the Operating
Subsidiary since its inception on June 2, 2001 and the accounts of the Parent
Company since the reverse acquisition on November 14, 2001.
NeoGenomics, Inc. operates a medical testing laboratory and research
facility based in Fort Myers, Florida that is targeting the rapidly growing
genetic and molecular testing segment of the medical laboratory market. Our
common stock is listed on the NASDAQ Bulletin Board (OTCBB) under the symbol
"NGNM." Our business plan features two concurrent objectives:
1. Development of a clinical laboratory to offer routine
cytogenetics and molecular biology testing services; and
2. Development of a research laboratory to offer sponsored research
services to other companies that are seeking to develop genomic
products that will determine the genetic basis for female and
neonatal diseases, cancers and other forms of disease (See
"Research and Development").
The vision of NeoGenomics is to merge a high-end genetic and molecular
testing laboratory with ongoing research activities to help bridge the gap
between clinical medicine and genomic research. We believe that this combination
will allow the Company to speed the process of discovery and innovation and
develop new advanced testing methods to identify the genetic and molecular
causes of disease. Over the last 2-3 years, advances in technology and genetic
research, including the complete sequencing of the human genome, have made
possible a whole new set of tools to diagnose and treat diseases. This has
opened up a vast opportunity for laboratory companies that are positioned to
address this growing market segment.
The medical testing laboratory market can be broken down into three primary
segments:
o clinical lab testing,
o anatomic pathology testing, and
o genetic/molecular testing.
Clinical labs typically are engaged in high volume, high automation tests on
blood and urine. Clinical lab tests often involve testing of a less urgent
nature, for example, cholesterol testing and testing associated with routine
physical exams. This type of testing yields relatively low average revenue per
test. Anatomic pathology ("AP") testing involves evaluation of tissue, as in
surgical pathology, or cells as in cytopathology. AP testing typically seeks to
answer the question: is it cancer? The most widely known AP tests are Pap
smears, skin biopsies, and tissue biopsies. AP tests are typically more labor
and technology intensive than clinical lab tests and thus typically have higher
average revenue per test than clinical lab tests.
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We believe genetic/molecular testing is the newest and fastest growing
subset of the laboratory market. Genetic testing or "cytogenetics" involves
analyzing chromosomes taken from the nucleus of cells for abnormalities in a
process called karyotyping. A karyotype evaluates the entire 46 human
chromosomes by number, and banding patterns to identify abnormalities associated
with diseases. Examples of cytogenetics testing include amniocentesis testing of
pregnant women to screen for genetic anomalies such as Down's syndrome in a
fetus and bone marrow testing to screen for types of leukemia. Molecular biology
involves testing for even more specific causes of diseases based on very small
alterations in cellular biology and DNA. Examples of common molecular biology
testing include screening for paternity, cystic fibrosis or Tay-Sachs disease.
Both cytogenetics and molecular biology have become important and accurate
diagnostic tools over the last five years and new tests are being developed
rapidly, thus this market segment is expanding rapidly. Genetic/molecular
testing requires very specialized equipment and credentialed individuals
(typically PhD level) to certify the results. As a result of the sophistication
involved in performing these tests, we believe that genetic/molecular testing
typically has the highest average revenue/test of the medical laboratory sub
segments.
Comparison of the Medical Testing Laboratory Market Segments:
Attributes Clinical Anatomic Pathology Genetic/Molecular
Testing Performed On Blood, Urine Tissue/cells Chromosomes/
molecules
Volume High Low Low
Physician Involvement Low High - Pathologist Low
Malpractice Insur. Required Low High Low
Other Professionals Req. None None Cyto Geneticist/
Molecular Geneticist
Level of Automation High None Moderate
Diagnostic in Nature Usually Not Yes Yes
Types of Diseases Tested Many Possible Cancer Rapidly Growing
Estimated Revenue/Test(1) $5 - $35/Test $25 - $500/Test $200 - $1,000/Test
Estimated Size of Market $25 - $30 Billion $6.0 - $7.0 Billion $1.0 - $2.0 Billion
Estimated Annual Growth Rate of
Market 4.0 -5.0% 6.0 - 7.0% 25.0 - 40+%
Source: Research Analysts and Company Estimates
(1) Estimated Revenue/Test is for the technical component of such tests and does
not include revenue for the professional component or interpretation of such
tests.
We compete in the marketplace based on the quality and accuracy of our test
results, our turn-around times and our ability to provide after-test support to
those physicians requesting consultation. We believe our average three day
turn-around times on oncology-related cytogenetics tests is among the best in
the industry and is helping to increase the usage patterns of cytogenetics tests
by our referring oncologists and hematopathologists. Based on anecdotal
information, we believe that most competing cytogenetics labs typically have
7-21 day turn-around times on average. Traditionally, longer turn-around times
for cytogenetics tests have resulted in fewer tests being ordered since there is
an increased chance that the test results will not be returned within an
acceptable diagnostic window when other adjunctive diagnostic test results are
available. We believe our turn-around times are resulting in our referring
physicians requesting more of our testing services in order to augment or
confirm other diagnostic tests, thereby giving us a significant competitive
advantage in marketing our services against those of other competing
laboratories.
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Historical Development of the Company
NeoGenomics, Inc. (f/k/a American Communications Enterprises, Inc.) was
incorporated in Nevada in 1998 and became publicly-traded in August 1999.
The original purpose of the Company was to acquire and operate radio
stations in Texas and other geographic regions of the United States and to
develop related Internet services to complement the planned regional clusters of
radio stations in such markets. However, the Company was unable to raise the
capital necessary to implement this business plan and began to pursue different
opportunities.
In November 2000, after a change in control of the Company, a new
management team reevaluated the Company's strategic plan. At that time, the then
management concluded that shareholder value could be augmented by broadening the
Company's focus from the radio industry to the broader telecommunications
industry. After serious difficulties in the entire telecommunications industry
became apparent, management concluded that it should focus on opportunities
relating to the genomics industry.
In the second half of 2001, we entered into negotiations to acquire
NeoGenomics, Inc., a Florida corporation ("NeoGenomics"). The Company acquired
NeoGenomics on November 14, 2001 in a reverse acquisition transaction that
resulted in another change in control of the Company. From a legal perspective,
the Company was the surviving company and thus continues its public reporting
obligations. However, from an accounting perspective using generally accepted
accounting principles, NeoGenomics acquired the Company.
Pursuant to the reverse acquisition, we entered into a Plan of Exchange
with NeoGenomics, Tampa Bay Financial, Inc. ("TBF") and Michael T. Dent, M.D.,
the founder of NeoGenomics ("Dr. Dent"). As part of this Plan of Exchange, TBF
agreed, among other things, to purchase 450,000 shares of the Company's common
stock for a price of $3.333 cents per share, or a total of $1,500,000, payable
upon the achievement of certain milestones.
On May 16, 2002, the Company, Dr. Dent and Tampa Bay Financial entered into
a letter agreement amending the terms of the Plan of Exchange and certain of the
related documents (collectively referred to as the "Modification Agreement").
Under the terms of the Modification Agreement, the parties agreed, among other
things, to restructure TBF's remaining stock purchases of 360,000 shares at a
price of $3.333 per share, or an aggregate price of $1.2 million, so that it was
payable in 12 equal installments over a period of 12 months commencing on June
15, 2002.
During the Fall of 2002, TBF failed to provide the agreed upon funding at
the times and in the amounts set forth in the Modification Agreement. As a
result the Company was unable to implement important parts of its business plan
and encountered severe liquidity problems. To assist the Company, Dr. Dent
arranged for his Medical practice to advance approximately $117,000 to the
Company and he further agreed to defer all of his salary.
On November 25, 2002, the Company notified TBF that it was in breach of its
obligations under the Plan of Exchange and Modification Agreement due to TBF's
failure to provide the Company with $100,000 of funding due on October 15, 2002
and an additional $100,000 of funding due on November 15, 2002. The Company also
immediately began to seek a new source of funding. In late December 2002, the
Company's Board of Director's, based on feedback from funding sources,
determined that it would be infeasible to attract the amount of capital needed
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for the Company's business plan unless it formally terminated its relationship
with TBF and secured a full release of all of its obligations thereunder, and
specifically its obligations to TBF with respect to TBF's right of first refusal
to purchase securities at a 50% discount to the price paid by any third parties,
and the Company's restriction on effecting a reverse stock split.
On December 23, 2002, the Company and TBF agreed to formally terminate all
of their agreements with one another in order to facilitate attracting new
capital to the Company and Carl L. Smith, an affiliate of TBF, resigned from the
Company's Board of Directors. As part of this termination agreement the Company
and TBF fully released one another from any claims arising out of any breaches
of the Plan of Exchange or the Modification Agreement.
On April 15th, 2003, the Company entered into agreements with MVP 3 LP, a
fund controlled by Medical Venture Partners, LLC, and its principals to provide
approximately $139,000 of equity financing and up to $1.5 million of debt
financing in the form of a revolving credit facility to the Company. Under the
terms of the equity agreements, MVP 3 LP purchased 9,303,279 shares and each of
the three principals of Medical Venture Partners LLC purchased 1,541,261 shares
of the Company at a price per share of $0.01 per share. As a result of theses
equity purchases, the Company experienced another change of control and MVP 3 LP
and its affiliates received approximately 75% of the outstanding common stock of
the Company.
As a condition to these transactions, the Company, Dr. Dent, MVP 3 LP and
the principals of Medical Venture Partners have entered into a shareholders
agreement that provides that MVP 3, LP will have the right to appoint up to four
of seven directors of the Company. The Company has also entered into a
Registration Rights Agreement with MVP 3 LP and the principals of Medical
Venture Partners granting them certain demand and piggyback registration rights.
In addition, Medical Venture Partners required the Company to undertake a
1-for-100 reverse stock split. The reverse stock split became effective on April
16, 2003 and all share references in this Form 10-KSB have been adjusted to
reflect this stock split.
Business of NeoGenomics
Services
We operate a medical testing and research laboratory located in Fort Myers,
Florida. We provide genetic and molecular testing services for the following
purposes:
o To find out if a person is a carrier for a certain disease.
o To learn if a person has an inherited predisposition to a certain
disease, like breast or ovarian cancer (also known as
susceptibility testing).
o To help expecting parents know whether their unborn child will
have a genetic disease or disorder (prenatal testing).
o To confirm diagnosis of certain diseases or disorders (for
example, Leukemia and Down's Syndrome).
We currently offer three types of services: cytogenetics testing, molecular
biology testing and sponsored research services:
Cytogenetics Testing. Cytogenetics testing is routinely used to identify
genetic abnormalities in pregnancy, as well as hematologic cancers. Most of our
cytogenetics testing is chromosome analysis done through a process called
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karyotyping, which is an analysis of the chromosomes in a single cell from one
individual). Currently, we offer the following types of cytogenetics tests, each
of which is performed on different types of biological samples: bone marrow
tests to assist in the diagnosis of leukemia and lymphoma, amniocentesis tests
to assist in the diagnosis of prenatal genetic anomalies such as Down's
syndrome, products of conception tests to assist in determining the causes of
miscarriage during pregnancy, and various other specialty tests.
We believe that historically cytogenetics testing by large national
laboratories and other competitors has taken anywhere from 7-21 days on average
to obtain a complete diagnostic report. We believe that as a result of this,
many practitioners have refrained from ordering such tests because the results
traditionally were not returned within an acceptable diagnostic window. We have
designed our business operations in order to complete our cytogenetics tests for
most types of biological samples and produce a complete diagnostic report and
make it available electronically within 2-3 days. We believe these turnaround
times are among the best in the industry. Furthermore, we believe that as we
continue to demonstrate these turnaround times to customers and the awareness of
the benefits of cytogenetics testing continues to increase, more and more
practitioners will incorporate cytogenetics testing into their diagnostic
regimes and thus drive incremental growth in our business.
As an adjunct to traditional chromosome analysis, we plan to offer
Fluorescence In Situ Hybridization (FISH) technology to expand the capabilities
of routine chromosome analysis in prenatal testing. FISH technology permits
preliminary identification of the most frequently occurring numerical
chromosomal abnormalities in a relatively rapid manner. FISH, already commonly
used as an additional staining method (the colorization of chromosomes to
highlight markers and abnormalities) for metaphase analysis (cells in a divided
state after they are cultured), is now being applied to interphase chromosome
analysis (uncultured, single cells). During the past 5 years, FISH has begun to
demonstrate its considerable diagnostic potential. The development of molecular
probes by using DNA sequences of differing sizes, complexity, and specificity,
coupled with technological enhancements (direct labeling, multicolor probes,
computerized signal amplification, and image analysis) make FISH a powerful
investigative tool. Although FISH has great potential in a variety of
cytogenetics studies, particular attention has been focused on its use in
prenatal diagnosis of chromosomal anomalies, because of the speed with which
results are attainable (traditional amniocentesis tests take 6-7 days to
complete). However, as with all emerging technologies, the transition from the
developmental phase to application as a standard diagnostic procedure must be
accompanied by assurance of reliability, reproducibility, and accuracy, as well
as by guidelines for appropriate use.
Molecular Biology Testing. Molecular biology testing involves testing DNA
and other molecular structures to screen for and diagnose single gene disorders
and hematological cancers such as cystic fibrosis and Tay-Sachs disease. Today
there are tests for about 450 genetic diseases. However, the majority of these
tests remain available only to research laboratories and are only offered on a
limited basis to family members of someone who has been diagnosed with a genetic
condition. About 50 genetic tests are more widely available for clinical use. We
currently provide these tests on an outsourced basis. We anticipate in the near
future performing these tests within our facility as the number of requests we
receive for these types of tests continues to increase and we expand our
clinical staff. Molecular biology testing is a growing market with many new
diagnostic tests being developed every year. The Company is committed to
providing the latest and most accurate testing to its clients, where demand
warrants it.
Sponsored Research. Our research initiatives are currently focused on the
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underlying genetic causes of female diseases. Cancers and other diseases of the
ovary, uterus, cervix, and breast all have an underlying genetic basis.
Identifying the genetic sequences unique to these diseases will allow us to
develop tests to identify which individuals are at increased genetic risk of
developing these diseases. We plan to collaborate with pharmaceutical and other
healthcare companies to develop intellectual property that can be a source of
revenue. In addition, we hope to develop proprietary tests that will allow for
accurate screening and early detection of various female and other genetic
diseases.
In order to facilitate our research initiatives, we have formed alliances
with Naples Women's Center, Naples Community Hospital, and Florida Gynecologic
Oncology for the purpose of collecting blood and tissue study samples. We expect
to begin collecting these samples during 2004 at no charge to the Company
through an informed consent process with each patient. Naples Women's Center is
a medical practice controlled by Dr. Michael Dent, our President and currently
has over 8,000 active patients.
We plan to use these samples to compile a genetic database which ultimately
will link phenotypic (medical history) data with patients' genetic material. We
plan to use this information as a resource for our ongoing research projects as
well as in the bio/genetic-informatics arena. We believe that our collection of
genetic samples and our genetic database will be a significant attraction for
companies that are desirous of studying the underlying causes of disease. We
expect to protect our genetic database, as well as any future testing
methodology discovered in order to sell the proprietary rights to such
information and tests to various other research and clinical laboratories and
pharmaceutical companies.
Currently, the Company's primary sponsored research project is a
collaboration with Ciphergen BioSystems, Inc. to discover a bio-marker for
pre-eclampsia. Pre-eclampsia is a disease that only effects pregnant mothers and
typically is indicated by elevated blood pressure, edema, and proteinuria.
Pre-eclampsia is a very serious disease and is the most common cause of fetal
and maternal mortality during pregnancy. Pre-eclampsia is also fairly
widespread, affecting some 10-15% of first time pregnant mothers worldwide.
Unfortunately, a definitive diagnosis for pre-eclampsia is generally not
possible until the third trimester of pregnancy and the only known cure for the
disease is to deliver the fetus prematurely. Currently the determination as to
when to induce labor is very difficult and fraught with risks to both mothers
and infants. If the infant is delivered too early, there are significant risks
of complications from premature delivery. If obstetricians wait too long to
induce labor, there are significant risks to both the mother and the infant from
pre-eclampsia, including the risk of death.
Bio-markers are unique sequences of proteins which categorically indicate
the presence of a disease condition and provide a mechanism for measuring the
severity of the condition. In the event we are able to discover this bio-marker,
we believe that we can develop a test that will verify and quantify the
pre-eclampsia disease state. We believe such a test would have a potentially
wide application for obstetricians and gynecologists worldwide to help them
determine when to optimally induce labor for pre-eclamptic mothers and thereby
reduce the risk of death to both mother and baby. We have purchased a protein
chip mass spectrometer to facilitate our discovery of potential proteins that
may be associated with the disease. We expect to have completed this project
over the next twelve to eighteen months.
Target Markets and Customers
We have initially targeted all oncologists in southern and central Florida
that perform bone marrow sampling. In addition, we are currently servicing a few
select obstetricians that perform amniocentesis testing. We expect to continue
to expand our client base in this area over the next six months and to gradually
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expand our market presence into northern Florida. Within this geography, we
currently serve the following types of testing markets:
Cancer Testing: Historically, the majority of cytogenetics testing has been
performed on bone marrow samples in testing for leukemia and lymphomas. Cells
obtained from bone marrow are grown in culture and used to determine if certain
genetic anomalies exist in patients with leukemia. This information is used to
determine the nature of the cancer and determine an appropriate treatment
regimen. In addition to cytogenetics testing, oncologists routinely use flow
cytometry of bone marrow samples to diagnose cancers. Flow cytometry is a method
of separating blood into its different cell types. This methodology is used to
determine what cell types within the blood of leukemia and cancer patients is
abnormal. Flow cytometry is important in developing an accurate diagnosis and
defining what treatment options are best for specific patients. The combination
of the two types of tests allows the findings from one test to confirm the
findings of another test, which leads to an even more accurate diagnosis.
The Company currently offers cytogenetics testing and flow cytometry
testing; however, flow cytometry is currently performed on an outsourced basis.
We plan to acquire the equipment and hire the personnel to bring flow cytometry
in house sometime during the first half of 2004. Management believes that by
offering both of these tests together as a bundled product while maintaining its
industry leading turnaround times, the Company can significantly increase its
testing volumes and its average revenue per case. Management estimates that flow
cytometry tests are performed on approximately 2-3 times as many bone marrow
samples as are cytogenetics tests. Furthermore, we believe that many of the
local oncologists that send samples to us for cytogenetics testing would welcome
the convenience of having a local laboratory perform both types of tests. Thus
we believe that by offering flow cytometry we can derive significant increases
in our testing volumes through our existing customer base, thereby affording the
Company significant synergies and efficiencies in our sales and marketing
process.
Prenatal Testing: A prenatal genetic test is an optional medical test
available to people who are considered to be at increased risk for having
children with a chromosomal abnormality or an inherited genetic condition.
Prenatal testing is often used to look for conditions such as Down's Syndrome,
spina bifida, cystic fibrosis, Tay-Sachs disease and others that would show up
in early childhood. Two procedures are used in prenatal testing. Amniocentesis,
which involves taking a sample of amniotic fluid from the womb for analysis, can
be done during the 16th through 20th weeks of pregnancy. Another procedure,
chorionic villus sampling (CVS), can be done earlier, at nine to 12 weeks.
Currently these tests carry a risk of miscarriage. Depending on the mother's age
and other factors, amniocentesis causes miscarriage in between 1 in 200 and 1 in
400 cases, and CVS has a risk of 1 in 100. We believe that new genetic tests
will be developed over the next three years that will significantly reduce this
risk of miscarriage and that prenatal genetic testing will increase as a result.
In fact, as part of the Company's planned research initiatives, we are exploring
whether to conduct research in support of developing a non-invasive
amniocentesis test, which we believe could virtually eliminate miscarriage as a
result of this type of test.
Historically, prenatal testing is offered to pregnant women over age 35,
because their babies are at greater risk for having abnormal chromosomes. For
example, a 35-year-old woman has about a 1 in 200 chance of having a baby with a
chromosomal abnormality like Down's syndrome. A 40-year-old woman has closer to
1 in 50 chance. But prenatal testing is increasingly being offered to pregnant
women of all ages. In the third quarter of 2001, the American College of
Obstetricians and Gynecologists (ACOG) issued new guidelines recommending that
all Caucasian women who are pregnant and couples considering pregnancy be
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offered a genetic test to determine if they are carriers of cystic fibrosis.
Current advances in genetic research make it possible to determine more and more
conditions through prenatal testing, and we expect more institutional
sponsorship of such prenatal testing in the coming years.
In addition to oncologists and obstetricians, we have identified the
following other potential customers for our cytogenetics and molecular biology
testing services:
1. Local perinatologists (specialists in high risk pregnancies) and
genetics counselors;
2. Hospitals needing karyotyping performed on tissue and blood
samples;
3. Hematologists who need the use of diagnostic molecular biology,
cytogenetics testing and flow cytometry testing.
4. Regional reference labs or other larger laboratory companies that
can benefit by our industry leading turnaround times and/or by
bundling our services with their own in order to offer a more
complete menu of services.
Distribution Methods
The Company performs all of its genetic testing at its clinical laboratory
facility located in Fort Myers, Florida, and then produces a report for the
requesting practitioner. The Company currently out sources all of its molecular
biology testing to third parties, but expects to begin bringing some of this
testing in-house during the coming year.
Competition
We are engaged in segments of the medical testing laboratory industry that
are competitive. Competitive factors in the genetic and molecular biology
testing business generally include reputation of the laboratory, range of
services offered, pricing, convenience of sample collection and pick-up, quality
of analysis and reporting and timeliness of delivery of completed reports.
Our competitors in the United States are numerous and include major medical
testing laboratories and biotechnology research companies. Some of these
competitors have more extensive research and development, regulatory, and
production capabilities. Some competitors have greater financial resources.
These companies may succeed in developing products and services 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 products and 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 cytogenetics and molecular
biology testing is divided among approximately 500 laboratories, many of which
offer both types of testing. Of this total group, less than 20 laboratories
market their services nationally. We believe that the industry as a whole is
still quite fragmented, with the top 20 laboratories accounting for
approximately 50% of market revenues.
Currently there are no other cytogenetics and molecular biology testing
facilities in the Southwest Florida region. Most large labs currently have their
customers in this area send their samples via an express mail service to
regional centers, which can be as far away as California. We expect to gain a
significant market presence in the Southwest Florida region by offering faster
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turnaround times due to the proximity to our customers and high-quality test
reports. In addition, we are developing a fully integrated and interactive web
site that will enable us to report real time results to customers in a secure
environment.
Suppliers
The Company orders its laboratory and research supplies from large national
laboratory supply companies such as Fisher Scientific, Inc. and Physicians Sales
and Service Corp. and does not believe any disruption from any one supplier
would have a material effect on its business.
Dependence on Major Customers
We currently market our services to major hospitals and doctor's practices
in southern and central Florida. During 2003, we performed 825 individual
cytogenetics and molecular biology tests. Approximately 90% or 739 of these
tests were performed on bone marrow specimens. In addition, approximately 26% of
our total tests were ordered by Doctors with patients in the Naples Community
Hospital system. In the event the Naples Community Hospital system started
offering a competing cytogenetics test capability in-house that could match our
industry leading turnaround times at a competitive price, we would potentially
lose a significant percentage of our revenues.
Trademarks
Our NeoGenomics logo has been filed for trademark with the United States
Patent and Trademark Office.
Government Regulation
Our business is subject to government regulation at the federal, state and
local levels, some of which regulations are described under "Laboratory
Operations," "Anti-Fraud and Abuse," "Confidentiality of Health Information,"
"Food and Drug Administration" and "Other" below.
Laboratory Operations
Cytogenetics and, Molecular Biology Testing. The Company's laboratory is
located in the state of Florida. Our laboratory has obtained certification under
the federal Medicare program, the Clinical Laboratories Improvement Act of 1967,
as amended by the Clinical Laboratory Improvement Amendments of 1988
(collectively, "CLIA `88"), and the respective clinical laboratory licensure
laws of the state of Florida, where such licensure is required. The Clinical
Laboratories Improvement Act provides for the regulation of clinical
laboratories by the U.S. Department of Health and Human Services. Regulations
promulgated under the federal Medicare guidelines, the CLIA and the clinical
laboratory licensure laws of the state of Florida affect our genetics
laboratory.
The federal and state certification and licensure programs establish
standards for the operation of medical laboratories, including, but not limited
to, personnel and quality control. Compliance with such standards is verified by
periodic inspections by inspectors employed by federal or state regulatory
agencies. In addition, federal regulatory authorities require participation in a
proficiency testing program approved by HHS for many of the specialties and
subspecialties for which a laboratory seeks approval from Medicare or Medicaid
and certification under CLIA `88. Proficiency testing programs involve actual
11
testing of specimens that have been prepared by an entity running an approved
program for testing by a laboratory.
A final rule implementing CLIA `88, published by HHS on February 28, 1992,
became effective September 1, 1992. This rule has been revised on several
occasions and further revision is expected. The CLIA `88 rule applies to
virtually all clinical laboratories in the United States, including our
laboratory. We have reviewed our operations as they relate to CLIA `88,
including, among other things, the CLIA `88 rule's requirements regarding
laboratory administration, participation in proficiency testing, patient test
management, quality control, quality assurance and personnel for the types of
testing we undertake, and believe we are in compliance with these requirements.
No assurances can be given that our laboratory will pass inspections conducted
to ensure compliance with CLIA `88 or with any other applicable licensure or
certification laws. The sanctions for failure to comply with CLIA `88 or state
licensure requirements might include the inability to perform services for
compensation or the suspension, revocation or limitation of the labs' CLIA `88
certificate or state license, as well as civil and/or criminal penalties.
Regulation of Genetic Testing. In 2000, the Secretary of Health and Human
Services Advisory Committee on Genetic Testing published recommendations for
increased oversight by the Centers for Disease Control and the FDA for all
genetic testing. This committee continues to meet and discuss potential
regulatory changes, but no additional formal recommendations have been issued.
With respect to genetic therapies, which may become part of our business in
the future, in addition to FDA requirements, the National Institutes of Health
has established guidelines providing that transfers of recombinant DNA into
human subjects at NIH laboratories or with NIH funds must be approved by the NIH
Director. The NIH has established the Recombinant DNA Advisory Committee to
review gene therapy protocols. We expect that all of our gene therapy protocols
will be subject to review by the Recombinant DNA Advisory Committee.
Anti-Fraud and Abuse Laws
Existing federal laws governing Medicare and Medicaid, as well as some
other state and federal laws, also regulate certain aspects of the relationship
between healthcare providers, including clinical and anatomic laboratories, and
their referral sources, including physicians, hospitals and other laboratories.
One provision of these laws, known as the "anti-kickback law," contains
extremely broad proscriptions. Violation of this provision may result in
criminal penalties, exclusion from Medicare and Medicaid, 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
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
12
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. Some states also have laws similar to the Stark law.
We will seek to structure our arrangements with physicians and other
customers to be in compliance with the anti-kickback, Stark and state laws, and
to keep up-to-date on developments concerning their application by various
means, including consultation with legal counsel. However, we are unable to
predict how these laws will be applied in the future, and no assurances can be
given that the arrangements into which we enter will not 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 have adopted aspects of the model plan that we deem appropriate to
the conduct of our business. We are unable to predict whether, or to what
extent, these developments may have an impact or the utilization of our
services.
Confidentiality
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, transmitted electronically. 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. Rules implementing various aspects of
HIPAA are continuing to be developed. National standards for electronic
healthcare transactions were published by HHS on August 17, 2000. The
regulations establish standard data content and formats for submitting
electronic claims and other administrative health transactions. All healthcare
providers will be able to use the electronic format to bill for their services
and all health plans and providers will be required to accept standard
electronic claims, referrals, authorizations, and other transactions. Under the
regulation, all electronic claims transactions must follow a single standardized
format. All health plans, providers and clearinghouses must comply with the
standards by October 2003. Failure to comply with this rule could result in
significant civil and/or criminal penalties. Despite the initial costs, the use
of uniform standards for all electronic transactions could lead to greater
efficiency in processing claims and in handling health care information.
13
On December 28, 2000, HHS published rules governing the use of individually
identifiable health information. The regulation protects certain health
information ("protected health information" or "PHI") transmitted or maintained
in any form or medium, and requires specific patient consent for the use of PHI
for purposes of treatment, payment or health care operations. For most other
uses or disclosures of PHI, the rule requires that covered entities (healthcare
plans, providers and clearinghouses) obtain a valid patient authorization. For
purposes of the criminal and civil penalties imposed under Title XI of the
Social Security Act, the current date for compliance is 2003. Complying with the
Standards, Security and Privacy rules under HIPAA will require significant
effort and expense for virtually all entities that conduct healthcare
transactions electronically and handle patient health information. We are unable
to accurately estimate the total cost or impact of the regulations at this time.
Those costs, however, are not expected to be material.
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 applicable state law regarding the confidentiality of health
information.
Food and Drug Administration
The FDA does not currently regulate laboratory testing services, which is
our principal business. However, we plan to perform some testing services using
test kits purchased from manufacturers for which FDA premarket clearance or
approval for commercial distribution in the United States has not been obtained
by the manufacturers ("investigational test kits"). Under current FDA
regulations and policies, such investigational test kits may be sold by
manufacturers for investigational use only if certain requirements are met to
prevent commercial distribution. The manufacturers of these investigational test
kits are responsible for marketing them under conditions meeting applicable FDA
requirements. In January 1998, the FDA issued a revised draft Compliance Policy
Guide ("CPG") that sets forth FDA's intent to undertake a heightened enforcement
effort with respect to investigational test kits improperly commercialized prior
to receipt of FDA premarket clearance or approval. That draft CPG is not
presently in effect but, if implemented as written, would place greater
restrictions on the distribution of investigational test kits. If we were to be
substantially limited in or prevented from purchasing investigational test kits
by reason of the FDA finalizing the new draft CPG, there could be an adverse
effect on our ability to access new technology, which could have a material
adverse effect on our business.
We also may perform some testing services using reagents, known as analyte
specific reagents ("ASRs"), purchased from companies in bulk rather than as part
of a test kit. In November 1997, the FDA issued a new regulation placing
restrictions on the sale, distribution, labeling and use of ASRs. Most ASRs are
treated by the FDA as low risk devices, requiring the manufacturer to register
with the agency, list it's ASRs (and any other devices), conform to good
manufacturing practice requirements, and comply with medical device reporting of
adverse events.
A smaller group of ASRs, primarily those used in blood banking and/or
screening for fatal contagious diseases (e.g., HIV/AIDS), are treated as higher
risk devices requiring premarket clearance or approval from the FDA before
commercial distribution is permitted. The imposition of this regulatory
framework on ASR sellers may reduce the availability or raise the price of ASRs
purchased by laboratories like ours. In addition, when we perform a test
14
developed in-house, using reagents rather than a test kit cleared or approved by
the FDA, we are required to disclose those facts in the test report. However, by
clearly declining to impose any requirement for FDA premarket approval or
clearance for most ASRs, the rule removes one barrier to reimbursement for tests
performed using these ASRs. We have no plans to perform testing in these high
risk areas.
Other
Our operations currently are, or may be in the future, subject to various
federal, state and local laws, regulations and recommendations relating to data
protection, safe working conditions, laboratory and manufacturing practices and
the purchase, storage, movement, use and disposal of hazardous or potentially
hazardous substances used in connection with our research work and manufacturing
operations, including radioactive compounds and infectious disease agents.
Although we believe that our safety procedures comply with the standards
prescribed by federal, state and local regulations, the risk of contamination,
injury or other accidental harm cannot be eliminated completely. In the event of
an accident, we could be held liable for any damages that result and any
liabilities could exceed our resources. Failure to comply with such laws could
subject an entity covered by these laws to fines, criminal penalties and/or
other enforcement actions.
Pursuant to the Occupational Safety and Health Act, laboratories have a
general duty to provide a work place to their employees that is safe from
hazard. Over the past few years, the Occupational Safety and Health
Administration ("OSHA") has issued rules relevant to certain hazards that are
found in the laboratory. In addition, OSHA has promulgated regulations
containing requirements healthcare providers must follow to protect workers from
blood borne pathogens. Failure to comply with these regulations, other
applicable OSHA rules or with the general duty to provide a safe work place
could subject employers, including a laboratory employer such as the Company, to
substantial fines and penalties.
Number of Employees
As of February 23, 2004, we had ten employees, of which eight were
full-time employees. Our President and a billing manager serve on a part-time
basis. Unions represent none of our employees and we believe our employee
relations are good.
ITEM 2. PROPERTIES
Our laboratory and executive offices are located in a 5,200 square foot
facility at 12701 Commonwealth Drive, Suite 9, Fort Myers, FL 33913. We lease
this space from an unaffiliated third party under a three year lease agreement
on a month to month basis at a cost of approximately $6,000/month.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
15
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock is quoted on the OTC Bulletin Board. Set forth below is a
table summarizing the high and low bid quotations for our common stock during
its last two fiscal years adjusted for the 1:100 reverse stock split consummated
on April 16, 2003. All other share references in this Form 10-KSB have also been
adjusted to reflect this 1:100 reverse stock split.
QUARTER HIGH BID LOW BID
1st Quarter 2002 $2.50 $0.90
2nd Quarter 2002 $2.00 $0.90
3rd Quarter 2002 $1.40 $0.70
4th Quarter 2002 $1.50 $0.60
1st Quarter 2003 $1.00 $0.35
2nd Quarter 2003 $0.55 $0.04
3rd Quarter 2003 $0.10 $0.06
4th Quarter 2003 $0.13 $0.045
The above table is based on over-the-counter quotations. These quotations
reflect inter-dealer prices, without retail mark-up, markdown or commissions,
and may not represent actual transaction. All historical data was obtained from
the BigCharts.com web site.
As of February 4, 2004 there were 352 stockholders of record of the common
stock. 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, do
not anticipate paying any cash dividends in the foreseeable future.
Sales of Unregistered Securities
In 2001, we issued 78,358 shares of common stock to Tampa Bay Financial,
Inc. in settlement of debts in the amount of $156,410. The transaction was
valued at $2.00 per share based on the trading value of our stock at the time of
the transaction. The transaction involved the issuance of unregistered stock to
a small group of sophisticated investors in a transaction that we believed was
exempt from registration under Section 4(2) of the Securities Act of 1933.
In 2001, we issued 2,385,000 shares of common stock in connection with the
reverse acquisition transaction with NeoGenomics. The transaction involved the
issuance of unregistered stock to a single sophisticated investor (Dr. Michael
Dent) in a transaction that we believed was exempt from registration under
Section 4(2) of the Securities Act of 1933.
In 2002, we issued 222,385 shares of common stock in exchange for
employment and consulting services valued at $229,021, and 210,000 shares of
common stock in exchange for the cancellation of $700,000 in cash advances from
Tampa Bay Financial, Inc. All of the stock was issued to a small group of
16
sophisticated investors in a transaction that the Company believes was exempt
from registration under Section 4(2) of the Securities Act of 1933.
In April 2003, we issued 13,927,062 shares of common stock to MVP 3, LP and
three individuals who are principals of MVP 3, LP in exchange for $139,271.
These transactions involved the issuance of unregistered stock to accredited
investors in transactions that we believed were exempt from registration under
Rule 506 promulgated under the Securities Act of 1933.
In June 2003, we issued 40,000 shares of common stock to Technology Capital
Group, Inc. in satisfaction of a finder's fee agreement. The transaction
involved the issuance of unregistered stock to a single sophisticated investor
in a transaction that we believed was exempt from registration under Section
4(2) of the Securities Act of 1933.
Securities Authorized for Issuance Under Equity Compensation Plans(a)
Number of securities to be Weighted average exercise
issued upon exercise of price of outstanding Number of securities
outstanding options, warrants options, warrants and remaining available
Plan Category and rights rights for future issuance
Equity compensation plans
approved by security holders 1,100,000 $0.07 900,000
Equity compensation plans
not approved by security
holders N/A N/A None
Total 1,100,000 N/A 900,000
(a) Currently, the Company's 2003 Equity Incentive Plan is the only equity
compensation plan in effect.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview.
The following discussion should be read in conjunction with the financial
statements for the period ended December 31, 2003 included with this Form
10-KSB.
Information prior to November 14, 2001 (the date of the reverse
acquisition) related to our predecessor entity, American Communications
Enterprises, Inc. ("ACE"), has been omitted. ACE was formed in 1998 for the
purpose of operating radio stations and businesses within the communications
industry. ACE later changed its focus to genomics, which included acquiring
NeoGenomics, Inc. ("NeoGenomics"), a private company desiring to become public,
in a reverse acquisition in November 2001. From a legal perspective, ACE was the
surviving company and thus continues its public reporting obligations. However,
from an accounting perspective, NeoGenomics acquired ACE. Therefore, all
financial information presented in this 10-KSB includes NeoGenomics' standalone
results from the period June 1, 2001 (date of incorporation) to November 13,
17
2001 and the combined companies' results from November 2001 to December 31,
2003.
Certain information included herein contains statements that constitute
"forward-looking statements" containing certain risks and uncertainties. Readers
are referred to the cautionary statement at the beginning of this report, which
addresses forward-looking statements made by us.
Critical Accounting Policies
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Notes to the Financial Statements. We have
consistently applied these policies in all material respects. At this stage of
our development, these policies primarily address matters of expense
recognition. Although we anticipate that revenue recognition issues will become
critical in future years, the small amount of revenue that we have earned at
this stage minimizes the impact of any judgments regarding revenue recognition.
Management does not believe that our operations to date have involved
uncertainty of accounting treatment, subjective judgment, or estimates, to any
significant degree.
Results of Operations for the twelve months ended December 31, 2003 as compared
to the twelve months ended December 31, 2002
During the twelve months ended December 31, 2003, our revenues increased
approximately 298% to $370,000 from $93,000 during the twelve months ended
December 31, 2002, primarily as a result of attracting new customers to our
services and increasing the volume of services sold to existing customers.
During 2003, our cost of revenue increased approximately 154% to $482,000 from
$190,000 in 2002 primarily as a result of additional costs associated with
hiring more laboratory personnel to support our increased testing volumes as
well as increased costs as a result of moving to a larger laboratory facility.
This resulted in a gross margin deficit of approximately $112,000 in 2003 versus
a gross margin deficit of approximately $96,000 for 2002. In percentage terms,
our gross margin deficit decreased from negative 103% of revenue in 2002 to
negative 30% of revenue in 2003. We expect our gross margin to improve
significantly and turn positive in 2004 as our sales continue to increase and we
begin to experience the benefit of economies of scale on our costs.
During 2003, our general and administrative expenses decreased by
approximately 21% to $383,000 from approximately $482,000 in 2002, primarily as
a result of lower personnel expenses and other cost cutting measures. General
and administrative expenses include all of our overhead and technology expenses
as well as the cost of our management and sales personnel. Interest expense
increased approximately 486% during 2003 to $41,000 from $7,000 in 2002.
Interest expense is mainly comprised of interest payable on advances from Naples
Women's Center, a company owned by our president as well on interest payable on
our credit facility from MVP 3, LP.
As a result of the foregoing, our net loss decreased by 9% or $55,000 to
negative $536,000 in 2003 from negative $591,000 in 2002.
We commenced our genetics and molecular biology testing operations in May
2002. Between May 1, 2002 and December 31, 2002, our average revenue per test
was approximately $435. During the twelve months ended December 31, 2003, our
average revenue per test increased by 3% to approximately $448. Revenues per
test are a function of both the nature of the test and the payer (Medicare,
Medicaid, third party insurer, institutional client etc.). Our policy is to
18
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 payer. On December 31, 2003, our
Allowance for Doubtful Accounts reserve was $3,770.
Liquidity and Capital Resources
During the twelve months ended December 31, 2003, our operating activities
used approximately $532,000 in cash. This amount primarily represented cash used
to pay the expenses associated with our operations as well as fund our working
capital needs. We also spent approximately $63,000 on new equipment. We were
able to finance operations and equipment purchases primarily through net
advances on our Credit Facility of approximately $506,000 and equity sales to
affiliates, net of transaction expenses, of approximately $114,000. At December
31, 2003, we had cash or cash equivalents of approximately $25,000.
On April 15, 2003, we entered into equity and debt financing agreements
with Medical Venture Partners and its principals. Under the terms of the equity
agreements, affiliates of Medical Venture Partners purchased 13,927,062 shares
of our common stock for $0.01 per share which resulted in net proceeds to the
company of $114,271 after deducting transaction expenses of approximately
$25,000. As a result of these equity transactions, the Company experienced a
change of control and Medical Venture Partners and its affiliates, in the
aggregate, own approximately 75% of our outstanding common stock. Under the
terms of the debt financing agreements, MVP 3, LP, a partnership controlled by
Medical Venture Partners, agreed to make available up to $1.5 million of debt
financing in the form of a revolving credit facility (the "Credit Facility").
Under the terms of the Credit Facility, our advances are limited, at any
given time, to the sum of i) 50% of our net property, plant and equipment; (ii)
80% of our accounts receivable that are less than 90 days old; and (iii)
$500,000 that is not tied to any specific collateral. Interest under the
revolving credit agreement is payable monthly at the prime rate plus 8.0%. As of
December 31, 2003, we had approximately $590,000 in principal amount outstanding
under the Credit Facility.
At the present time, we have very limited cash resources. We do not
anticipate that we will generate significant cash flow from operating activities
until late 2004. As a result, we anticipate that we will require additional
working capital financing during the next 12 months in order to meet our working
capital requirements during this period. We currently plan to finance our
operations through borrowings under our revolving credit facility with MVP 3.
Advances under this revolving credit facility are limited, at any given time,
based on a formula contained in the loan agreement. There can be no assurance
that the Company will be eligible to obtain all of its working capital funding
needs from MVP 3, LP or another source. If the Company is unable to obtain such
funding, the Company will be required to curtail or discontinue operations.
Capital Expenditures
We currently forecast capital expenditures for the coming year in order to
execute on our business plan. The amount and timing of such capital expenditures
will be determined by the volume of business we are generating and the
availability of adequate financing for such capital expenditures. We plan to
19
fund these expenditures through borrowings under our Credit Facility with MVP 3,
LP and through traditional lease financing from equipment lessors. There can be
no assurance that we will be eligible to obtain all of our capital equipment
funding needs from MVP 3, LP or another source. If we are unable to obtain such
funding, we will be required to curtail our equipment purchases, which may have
an impact on our ability to generate revenues.
Staffing
Currently, we have seven full-time and three part-time employees. During
2004, We plan to add additional laboratory technicians and research scientists
to assist us in handling a greater volume of tests and to perform sponsored
research projects. In addition, we intend to continue building our sales force
in an effort to sustain our sales growth, as well as add personnel in
management, accounting, and administrative functions. The number of such
additional personnel and their salaries will be determined by the volume of
business we are generating and the availability of adequate financial resources
to pay the salaries of such personnel.
20
ITEM 7. FINANCIAL STATEMENTS
NEOGENOMICS, INC.
Consolidated Financial Statements as of
December 31, 2003 and for the years ended
December 31, 2003 and 2002 and
Independent Auditors' Report
TABLE OF CONTENTS
________________________________________________________________________________
Page
Independent Auditors' Report 22
Consolidated Financial Statements:
Balance Sheet as of December 31, 2003. 23
Statements of Operations for the years ended December 31, 2003
and 2002. 24
Statements of Stockholders' Equity (Deficit) for the years ended
December 31, 2003 and 2002. 25
Statements of Cash Flows for the years ended December 31, 2003
and 2002. 26
Notes to Financial Statements 27
________________________________________________________________________________
21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and stockholders of NeoGenomics, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of NeoGenomics, Inc.
and subsidiary (collectively the "Company"), as of December 31, 2003, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 2003 and 2002. 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 auditing standards generally accepted
in the 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. 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,
2003, and the results of its operations and its cash flows for the years ended
December 31, 2003 and 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes A and B
to the consolidated financial statements, the Company has suffered recurring
losses from operations and will require a significant amount of capital to
implement its business plan. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note B. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Kingery, Crouse & Hohl, P.A.
February 23, 2004
Tampa, FL
22
NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2003
________________________________________________________________________________
ASSETS
CURRENT ASSETS:
Cash $ 25,051
Accounts receivable (net of allowance for doubtful
accounts of $3,770) 63,861
Inventory 10,593
Other 2,627
Total current assets 102,132
FURNITURE AND EQUIPMENT (net of accumulated depreciation
of $85,740) 397,686
OTHER ASSETS - Deposits 7,221
TOTAL $ 507,039
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 70,343
Deferred revenue 110,000
Due to affiliates 58,666
Accrued and other liabilities 45,832
Total current liabilities 284,841
LONG TERM LIABILITIES - Due to affiliates 590,000
Total Liabilities 874,841
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, (100,000,000 shares
authorized; 18,449,416 shares issued and outstanding) 18,449
Additional paid-in capital 8,818,002
Deficit accumulated during the Development Stage (8,668,490)
Accumulated deficit (535,763)
Total stockholders' deficit (367,802)
TOTAL $ 507,039
============
________________________________________________________________________________
See notes to consolidated financial statements.
23
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
________________________________________________________________________________
2003 2002
NET REVENUE $ 369,972 $ 93,491
COST OF REVENUE 481,593 189,958
GROSS MARGIN (DEFICIT) (111,621) (96,467)
OTHER OPERATING EXPENSES:
Stock based compensation, net of
option cancellations - (41,177)
General and administrative 382,711 481,969
Research and development - 46,414
Interest expense 41,431 6,851
Total other operating expenses 424,142 494,057
NET LOSS $ (535,763) $ (590,524)
============= ============
NET LOSS PER SHARE - Basic and
Diluted $ (0.04) $ (0.14)
============= ============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
Basic and Diluted 14,385,009 4,212,894
============= ============
________________________________________________________________________________
See notes to consolidated financial statements.
24
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
______________________________________________________________________________________________________________________________________________________________________
Deficit
accumulated Accumulated
Common Common Additional Deferred during the Deficit since
Stock Stock Paid-In Stock Development Development
Shares Amount Capital Compensation Stage Stage Total
BALANCES, DECEMBER 31, 2001 4,050,000 $ 4,050 $ 11,759,945 $(3,790,902) $ (8,077,966) $ - $ (104,873)
Contribution of services and office space - - 9,759 - - - 9,759
Common stock issuances for services:
at $1.00 per share on July 23, 2002 138,339 138 140,276 - - - 140,414
at $1.00 per share on September 3, 2002 38,431 38 39,569 - - - 39,607
at $1.00 per share on November 22, 2002 45,612 46 48,953 - - - 48,999
Conversion of stockholder advances:
at $3.33 per share on June 7, 2002 90,000 90 299,910 - - - 300,000
at $3.33 per share on August 30, 2002 90,000 90 299,910 - - - 300,000
at $3.33 per share on November 22, 2002 30,000 30 99,970 - - - 100,000
Contribution of stockholder advances on
December 23, 2002 - - 25,561 - - - 25,561
Cancellation of stock option - - (4,036,500) 3,790,902 - - (245,598)
Adjustment for fractional shares in connection
with reverse stock split (28) - - - - -
Net loss - - - - (590,524) - (590,524)
BALANCES, DECEMBER 31, 2002 4,482,354 $ 4,482 $ 8,687,353 $ - $ (8,668,490) $ - $ 23,345
Contribution of services and office space - - 30,345 - - - 30,345
Common stock issuances at $0.01 per share on
April 15, 2003 13,927,062 13,927 125,344 - - - 139,271
Transaction fees and expenses - - (27,800) - - - (27,800)
Common stock issuance for service at $0.07 per
share on 6/27/03 40,000 40 2,760 - - - 2,800
Net loss - - - - - (535,763) (535,763)
BALANCES, DECEMBER 31, 2003 18,449,416 $ 18,449 $ 8,818,002 $ - $ (8,668,490) $ (535,763) $ (367,802)
============ ========= ============== ============ ============= =========== ============
______________________________________________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
25
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003 AND 2002
_______________________________________________________________________________________________
2003 2002
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (535,763) $ (590,524)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 48,037 38,291
Amortization of deferred stock compensation - (245,598)
Stock based compensation and consulting - 204,421
Provision for bad debts 16,378 22,120
Other non-cash expenses 30,346 9,759
Changes in assets and liabilities, net:
(Increase) Decrease in accounts receivable, net (40,158) (62,202)
(Increase) Decrease in Inventory 8,713 (19,306)
(Increase) Decrease in other current assets (627) (2,000)
(Increase) Decrease in deposits (3,305) (2,616)
Increase (Decrease) in due to bank (13,518) 13,518
Increase (Decrease) in deferred revenues 10,000 100,000
Increase (Decrease) in accounts payable and accrued
and other liabilities (52,469) 149,341
NET CASH USED IN OPERATING ACTIVITIES (532,366) (384,796)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (63,188) (417,999)
NET CASH USED IN INVESTING ACTIVITIES (63,188) (417,999)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net 506,334 725,579
Issuances of common stock for cash, net of transaction
expenses 114,271 -
NET CASH PROVIDED BY FINANCING ACTIVITIES 620,605 725,579
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 25,051 (77,216)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 77,216
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,051 $ -
============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 9,456 $ 924
============ =============
Income taxes paid $ - $ -
============ =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Stockholder advances converted to equity $ - $ 725,561
============ =============
Deferred compensation on grants of stock options $ - $ (4,036,500)
============ =============
_______________________________________________________________________________________________
See notes to consolidated financial statements.
26
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
NeoGenomics, Inc. ("NEO") was incorporated under the laws of the state of
Florida on June 1, 2001 and on November 14, 2001 agreed to be acquired by
American Communications Enterprises, Inc. ("ACE"). ACE was formed in 1998 and
succeeded to NEO's name on January 3, 2002 (collectively referred to as "we",
"us", "our").
For financial statement purposes, the acquisition was treated as a reverse
acquisition and a recapitalization with NEO being treated as the acquirer. In
connection therewith, ACE issued 2,385,000 shares of its common stock to NEO's
founder and sole stockholder in exchange for all of NEO's issued and outstanding
common shares. The value of these shares, which was based on the number, and
fair value of shares issued ($3.00 per share based on the price at which ACE's
shares were trading at that time) was included in stock based compensation in
the accompanying 2001 consolidated statement of operations. Immediately before
the acquisition, ACE had 1,317,339 shares outstanding and liabilities in excess
of assets of approximately $170,000. Since the transaction was accounted for as
a purchase, the deficiency of $170,000 was reflected as an adjustment to
stockholders' equity as of the acquisition date. On November 21, 2001, we
settled approximately $157,000 of these liabilities through the issuance of
approximately 78,000 shares of our common stock at approximately $2.00 per
share, which approximated the quoted market price of our common shares on that
date.
On April 4, 2003, we amended our articles of incorporation to (1) effect a
one-for-100 reverse split, (2) reduce the authorized number of common shares
from 500,000,000 to 100,000,000, and (3) authorize 10,000,000 shares of
preferred stock for future issuance, with such terms, restrictions and
limitations as may be established by the Board of Directors.
As a result of the above, all references to the number of shares and par value
in the accompanying consolidated financial statements and notes thereto have
been adjusted to reflect the reverse acquisition and April 2003 reverse stock
split as though all such changes had been completed as of June 1, 2001.
Through December 31, 2002, we were considered to be a development stage (as
defined in Financial Accounting Standards Board Statement No. 7), bio-tech
company organized for the principal purpose of developing a genetic and
molecular biology testing and genomic research center. We commenced our planned
principal operations in 2003, which include operating a medical testing and
research laboratory in Fort Myers, Florida. We currently market our services to
major hospitals and doctors' practices principally in southern and central
Florida.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of NEO
and ACE. All significant intercompany accounts and balances have been eliminated
in consolidation.
Revenue Recognition
Net revenues are recognized in the period when tests are performed and consist
primarily of net patient revenues that are recorded based on established billing
rates less estimated discounts for contractual allowances principally for
patients covered by Medicare, Medicaid and managed care and other health plans.
27
These revenues also are subject to review and possible audit by the payers. We
believe that adequate provision has been made for any adjustments that may
result from final determination of amounts earned under all the above
arrangements. There are no known material claims, disputes or unsettled matters
with any payers that are not adequately provided for in the accompanying
consolidated financial statements.
Accounts Receivable
We record accounts receivable net of estimated and contractual discounts. We
provide for accounts receivable that could become uncollectible in the future by
establishing an allowance to reduce the carrying value of such receivables to
their estimated net realizable value. We estimate this allowance based on the
aging of our accounts receivable and our historical collection experience for
each type of payer. Bad debts are charged off to the allowance account at the
time they are deemed uncollectible.
Concentrations of Credit Risk
We grant credit without collateral to our customers, most of whom are local
residents and are insured under third-party payer agreements or who are patients
at hospitals whom we institutionally bill for services. As of December 31, 2003,
approximately 26.3% and 25.0% of our receivables were from Medicare and Naples
Community Hospital System ("NCHS"), respectively. In addition, during 2003,
approximately 26% of our total testing revenue was derived from tests ordered by
doctors with patients in NCHS.
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires us to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements. The reported
amounts of revenues and expenses during the reporting period may be affected by
the estimates and assumptions we are required to make. Estimates that are
critical to the accompanying consolidated financial statements include estimates
related to contractual adjustments, and the allowance for doubtful accounts. It
is at least reasonably possible that our estimates could change in the near term
with respect to these matters.
Financial Instruments
We believe the book value of our current assets and liabilities approximates
their fair values due to their short-term nature. Our "due to affiliates"
liabilities represent notes payable to certain affiliates. It was not practical
to estimate the fair market value of our "due to affiliates" liabilities because
of the lack of similar type arrangements in the marketplace, thus these
liabilities are carried at the face amount of such notes. The terms of all "due
to affliates" notes payable are disclosed at Note G.
Furniture and equipment
Furniture and equipment are stated at cost. Major additions are capitalized,
while minor additions and maintenance and repairs, which do not extend the
useful life of an asset, are expensed as incurred. Depreciation is provided
using the straight-line method over the assets' estimated useful lives.
28
Long-Lived Assets
Statement of Financial Accounting Standards (SFAS) 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" requires that long-lived assets,
including certain identifiable intangibles, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of the
assets in question may not be recoverable. We evaluated our long-lived assets
during 2003 and determined that they were not impaired at of December 31, 2003.
Income Taxes
We compute income taxes in accordance with Financial Accounting Standards
Statement No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis 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.
There were no significant temporary differences as of December 31, 2003.
Stock-Based Compensation
We account for equity instruments issued to employees for services based on the
fair value of the equity instruments issued and account for equity instruments
issued to those other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable.
We have adopted Statement of Financial Accounting Standards No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure" (SFAS No. 148). This
statement amends FASB statement No. 123, "Accounting for Stock Based
Compensation". It provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for employee
stock based compensation. It also amends the disclosure provision of FASB
statement No. 123 to require prominent disclosure about the effects on reported
net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. As permitted by SFAS No. 123 and amended by
SFAS No. 148, we continue to apply the intrinsic value method under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," to account for our stock-based employee compensation arrangements.
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.
Net Loss Per Common Share
We compute loss per share in accordance with Financial Accounting Standards
Statement No. 128 "Earnings per Share" ("SFAS 128") and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98,
basic net loss per share is computed by dividing the net loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
outstanding as of December 31, 2003, which consisted of employee stock options,
were excluded from diluted net loss per common share calculations as of such
29
date because they were anti-dilutive. There were no such options outstanding at
December 31, 2002.
Recent Pronouncements
We do not expect that the adoption of any recent accounting pronouncements will
have a material impact on our consolidated financial statements.
NOTE B - GOING CONCERN
Our consolidated financial statements were 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. We have incurred significant
losses since our inception, and have experienced and continue to experience
negative operating margins and negative cash flows from operations. In addition,
we expect to have ongoing requirements for additional capital investment to
implement our business plan. Since our inception, our operations have been
funded through private equity and debt financing, and we expect to continue to
seek additional funding through private or public equity and debt financing. As
discussed at Note F, in connection with this matter, in April 2003, we secured a
commitment from a related entity to provide us with $1.5 million of debt
financing in the form of a revolving credit facility. While we have recently
begun to ramp up our laboratory operations and generate operating revenues,
there can be no assurance that we will be successful in these efforts, or that
the credit facility will be adequate to meet our needs. These factors, among
others, indicate that we may be unable to continue as a going concern for a
reasonable period of time.
Our consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should we be unable to
continue as a going concern.
NOTE C - PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at December 31, 2003:
Equipment $439,816
Furniture & Fixtures $ 33,110
Leasehold Improvements $ 10,500
Subtotal $483,426
Less accumulated depreciation and amortization ($85,740)
Property and Equipment, net $397,686
=========
NOTE D - INCOME TAXES
We recognized losses for both financial and tax reporting purposes during each
of the periods in the accompanying consolidate statements of operations.
Accordingly, no provision for income taxes and/or deferred income taxes payable
have been provided for in the accompanying consolidated financial statements.
30
Since our incorporation, we have incurred net operating losses for income tax
purposes of approximately $1,260,000 (the significant difference between this
amount, and our deficit of $8,668,490, arises primarily from certain stock based
compensation that is considered to be a permanent difference). Because the
transaction discussed at Note G triggered certain "change in control" provisions
of the Internal Revenue Code, a portion of these net operating loss
carryforwards will be limited as they expire in various years through the year
ended December 31, 2022. However, we have established a valuation allowance to
fully reserve the related deferred income tax asset as such asset did not meet
the required asset recognition standard established by SFAS 109.
At December 31, 2003 we had no deferred tax liabilities and our non-current
deferred income tax asset (assuming an effective income tax rate of
approximately 39%) consisted of the following:
Non-current deferred income tax asset: Amounts
Net operating loss carryforwards $ 491,400
Less valuation allowance (491,400)
Total $ -
===========
The income tax benefit consists of the following for the years ended December
31, 2003 and 2002:
2003 2002
Current $ - $ -
Deferred 208,800 156,600
Change in valuation allowance (208,800) (156,600)
$ - $ -
=========== ===========
NOTE E - INCENTIVE STOCK OPTIONS AND AWARDS
In October 2002 our president agreed to cancel his option to purchase 1.35
million shares of our common stock that he was granted in 2001.
Our 2003 Equity Incentive Plan provides for the granting of stock options and
awards to officers, directors, employees and consultants. We are authorized to
grant awards for up to 2.0 million shares of our common stock, 1.1 million of
which had been granted as of December 31, 2003. Vesting and exercise price
provisions are determined by the board of directors at the time the awards are
granted.
The status of our stock options is summarized as follows:
Weighted
Number Average
of Exercise
Shares Price
Outstanding at December 31, 2001 1,350,000 $ 0.01
31
Granted - -
Exercised - -
Canceled (1,350,000) 0.01
Outstanding at December 31, 2002 - -
Granted 1,100,000 0.07
Exercised - -
Canceled - -
Outstanding at December 31, 2003 1,100,000 $ 0.07
=========== ==========
Exercisable at December 31, 2003 150,000 $ 0.07
=========== ==========
We account for our stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". With respect to stock options granted during 2001, we
initially recorded deferred stock compensation of $4,036,500, for the difference
between the exercise price and the fair value of the common stock underlying the
options on the date of the grant. This amount was being amortized consistent
with the method described in FASB Interpretation No. 28 over the vesting period
of the individual options, estimated to be 13-38 months. During 2002, as a
result of the cancellations of the options, we reversed all previously recorded
amortization of the deferred stock compensation. The 2001 Stock Plan was
terminated in 2003.
Had our compensation expense for stock-based compensation plans been determined
based upon fair values at the grant dates for awards under this plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net
loss and pro forma net loss per share amounts would have been reflected as
follows:
2003 2002
Net loss:
As reported $ (535,763) $ (590,524)
============ =============
Pro forma $ (557,763) $ (590,524)
============ =============
Loss per share:
As reported $ (0.04) $ (0.14)
============ =============
Pro forma $ (0.04) $ (0.14)
============ =============
The weighted average fair value of options granted during 2003, estimated on the
date of grant using the Black-Scholes option-pricing model, was approximately
$0.02 per option share. The fair value of options granted was estimated on the
date of the grants using the following approximate assumptions: dividend yield
of 0 %, expected volatility of 20.0%, risk-free interest rate of 4%, and an
expected life of 5 years.
NOTE F - COMMITMENTS
During September 2002, we entered into an agreement to perform collaborative
research with Ciphergen Biosystems ("Ciphergen"). If a patented product or
service results from this research, the patenting party will be obligated to pay
a 4% royalty to the other party. In addition, each of us are to own 50% of any
inventions developed jointly as a result of this research. In October 2002,
32
Ciphergen awarded us with a $100,000 research grant, which we have agreed to use
to purchase supplies, labor and equipment for the research. As of December 31,
2003, we have not performed any of the testing, or spent any of the $100,000;
accordingly, such amount has been recorded as deferred revenue in the
accompanying consolidated balance sheet.
In August 2003, we entered into a three year lease for our laboratory facility.
The lease, which commenced on August 8, 2003, requires average monthly rental
payments of approximately $6,000 during the lease term (including estimated
operating and maintenance expenses and sales tax). The lease contains a
provision that allows us to extend the lease for two terms of three years each.
Future minimum payments required are approximately as follows:
Years ending December 31, Amounts
2004 $ 72,000
2005 $ 72,000
2006 $ 48,000
Total $ 192,000
=========
Rent expense for 2003 and 2002 approximated $46,350 and $28,200, respectively.
In October 2003, we entered into an employment agreement with our CEO, Thomas H.
White. The employment agreement has an initial term of three years; provided,
however that either party may terminate the agreement by giving the other party
sixty days written notice. The employment agreement specifies an initial base
salary of $100,000/year with salary increases and bonuses at the discretion of
the compensation committee of the Board of Directors. In addition, Mr. White was
granted 900,000 Incentive Stock Options that have a ten year term so long as Mr.
White remains an employee of the Company. Mr. White's employment agreement also
specifies that he is entitled to various other benefits we do not believe to be
signficant. In the event that Mr. White is terminated without cause by the
Company, the Company has agreed to pay Mr. White's base salary and maintain his
employee benefits for a period that is equal to one month for every full year of
his employment by the Company (subject to a minimum of two months and a maximum
of six months).
In December 2003, we received a $10,000 research grant from the Ovarian Cancer
Alliance of Florida. As part of this grant we have agreed to research the
potential causes of Ovarian Cancer in a limited number of tissue samples. As of
December 31, 2003, we had not performed any of the research; accordingly, such
amount has been recorded as deferred revenue in the accompanying consolidated
balance sheet.
NOTE G- OTHER RELATED PARTY TRANSACTIONS
During 2002 we received net advances of approximately $625,000 from Tampa Bay
Financial, Inc., ("TBF") one of our stockholders. These advances and advances of
$100,000 from 2001, which were non-interest bearing, unsecured and due on
demand, were converted to approximately 210,000 shares of our common stock in
2002 using a conversion price of $3.33 per share (which amount was greater than
the approximate quoted market price of our common shares on the conversion
dates).
During November 2001, we entered into an agreement with TBF to provide us with
consulting services and pay certain of our expenses, including the salary of our
chief financial officer and costs incurred in preparing required filings under
33
securities laws. The term of this agreement was for one year and was terminated
in 2002. During 2002, we incurred expenses of approximately $105,000, related to
this agreement. In 2002 the related liability, including $15,000 from 2001, was
settled through three separate issuances (totaling 117,000 shares) of our common
stock using a conversion price of approximately $1.00 per share (which amount
approximated the quoted market price of our common shares on the settlement
dates).
During 2002, we issued approximately 105,000 shares of our common stock in
settlement of approximately $110,000 of our president's accrued salary. The
conversion price of approximately $1.00 per share approximated the quoted market
price of our common shares on the settlement dates.
During 2003, we paid $72,500 to an individual who is a Director of the Company
for various consulting work in connection with helping to organize and manage
the financial affairs of the company.
We occasionally borrow funds from the Naples Women's Center ("NWC"), a company
owned by our president, to meet our short-term cash needs. These amounts have
been advanced to us with a stated interest rate of 8% and are due in October of
2004. At December 31, 2003, we owed NWC approximately $58,700.
In Late 2002 and early 2003, in order to meet short term cash needs, we borrowed
$177,000 from three individuals who are affiliates of Medical Venture Partners,
LLC ("Medical Venture Partners"), a venture capital firm with whom we were
negotiating a financing transaction (see below). These amounts, having a stated
interest rate of 8%, were repaid in April 2003 in connection with the financing
transaction described below.
On April 15, 2003, we entered into debt and equity financing agreements with
Medical Venture Partners and its principals. Under the terms of the agreements,
affiliates of Medical Venture Partners purchased approximately 75% of our
outstanding common stock and agreed to make available up to $1.5 million of debt
financing in the form of a revolving credit facility, with a stated interest
rate of prime + 8%. The debt financing and approximately 50.4% of the equity
investment are being made through MVP 3, LP, a fund controlled by Medical
Venture Partners. The remainder of the equity investment was made by the three
principals of Medical Venture Partners acting individually.
Under the terms of the loan agreement, we are able to borrow up to 80% of
"eligible" accounts receivable, 50% of our net furniture and equipment balance,
secured by substantially all of our assets, and up to $500,000 on an unsecured
basis. With respect to this agreement, we are subject to the following
restrictive covenants: (i) we are not to incur indebtedness outside of this
agreement in excess of $50,000 without written authorization of MVP 3, L.P.,
(ii) we cannot declare or pay any dividend on our common stock, and (iii) we are
also subject to other general covenants typical of an instrument of this kind.
In addition, as a condition to these transactions, NEO, our President, MVP 3 LP
and the principals of Medical Venture Partners entered into a shareholders
agreement that provides that MVP 3, LP will have the right to appoint up to four
of seven of our directors. We also entered into a Registration Rights Agreement
with MVP 3 LP and the principals of Medical Venture Partners granting them
certain demand and piggyback registration rights. At December 31, 2003, we owed
MVP 3 , L.P. approximately $590,000 under this loan agreement, which is
classified as "Due to affiliates" under the long-term liabilities section of our
balance sheet. This obligation matures on March 31, 2005 and all amounts
outstanding thereunder (including any unpaid interest) are due at that time.
________________________________________________________________________________
End of Financial Statements
34
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer, of the design and operation
of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer concluded that our disclosure controls and procedures are
effective for the gathering, analyzing and disclosing the information we are
required to disclose in the reports we file under the Securities Exchange Act of
1934, within the time periods specified in the SEC's rules and forms. There have
been no significant changes in our internal controls or in other factors that
could significantly affect internal controls subsequent to the date of this
evaluation.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding our executive
officers and directors as of February 9, 2004:
Name Age Position
Thomas H. White 56 Chief Executive Officer, Director
Michael T. Dent 39 Chairman of the Board, President
and Chief Medical Officer
John E. Elliott 47 Director
Steven C. Jones 40 Director
Lawrence R. Kuhnert 55 Director
Kevin Lindheim 44 Director
Thomas H. White - Chief Executive Officer
Mr. White has been our Chief Executive Officer since October 2003 and a
Director since February 2004. Prior to NeoGenomics, Mr. White was the Chief
Operating Officer of SmartPill Diagnostics, Inc., a company focused on the
development of a swallowable telemetry capsule to assist physicians in the
diagnosis of GI disorders. Prior to that, Mr. White was the Chief Executive
Officer of SmartPill Corporation where he completed the early development work
and merged the company with APPRO Healthcare, Inc. to form SmartPill
Diagnostics, Inc. Prior to that, among other positions, Mr. White was Chief
Executive Officer of Conpharma Home Healthcare, Inc. a provider of infusion
therapy and respiratory services, and Senior Vice President of Beverly Home
Healthcare, Inc. He received his Bachelors and Masters degree from Western
Michigan University in Kalamazoo, Michigan.
35
Michael T. Dent M.D. - Chairman of the Board, President and Chief Medical Officer
Dr. Dent has been our President and Chief Medical Officer since April 2003.
Prior to that Dr. Dent was our President and Chief Executive Officer from June
2001, when he founded NeoGenomics, to April 2003. Dr. Dent founded the Naples
Women's Center in 1996. He received his training in Obstetrics and Gynecology at
the University of Texas in Galveston. He received his M.D. degree from the
University of South Carolina in Charleston, S.C. in 1992 and a B.S. degree from
Davidson College in Davidson, N.C. in 1986. He is a member of the American
Association of Cancer Researchers and a Diplomat and fellow of the American
College of Obstetricians and Gynecologists. He sits on the Board of the Florida
Life science Biotech Initiative.
John E. Elliott - Director
Mr. Elliott became a director of the Company in October 2003. He is also
presently chairman of AMI Holdings, Inc., a major shareholder in Fidlar
Doubleday, Inc., SSAC, LLC, and the Company. Mr. Elliott has been involved in
the healthcare industry since 1978, when he founded Allied Medical, Inc.
("Allied Medical"), a private label manufacturer of products such as
wheelchairs, hospital beds, respiratory equipment, among many others. While Mr.
Elliott served as Chief Executive Officer, Allied Medical grew to 16 regional
warehouses in the U.S. and sales revenues of over $60 million before it was sold
to Graham Field in 1992. Following the sale of Allied Medical, Mr. Elliott
purchased Guardian Medical Supplies, Inc. and Medical Equipment Providers, Inc.
both DME dealers, which were sold in 1997 to Rotech Medical, Inc. Contractually
restricted in the healthcare business following this sale, Mr. Elliott formed a
new business group in the education/governmental marketplace and lead an
investment group in 1998 in the purchase of Doubleday Bros. & Co., the
publishing unit of Standard Publishing Inc. (Standex) and Vista Business Forms,
and in 1999, together with the financing from General Electric Capital,
purchased Fidlar Chambers forming Fidlar Doubleday, Inc., of which he served as
Chairman through 2002. Fidlar Doubleday, Inc. is a market leader in governmental
software and holds a substantial share of the election business in the U.S. Mr.
Elliott also served as CEO and Chairman of Standard Automotive Corporation from
2002-2004 in connection with a financial workout for that company. Mr. Elliott
has a Bachelor of Science degree in Business Administration from Lawrence
University.
Steven C. Jones - Director
Mr. Jones has served as a director since October 2003. He is a Managing
Director in Medical Venture Partners, LLC, a venture capital firm established in
2003 for the purpose of making investments in the healthcare industry. Mr. Jones
has also been President and a Managing Director of Aspen Capital Advisors since
January 2001. Prior to that Mr. Jones was Executive Vice President and Chief
Financial Officer of The Fiera Group, Inc., a technology-based, commerce
enabling company. P:rior to that, among other positions, Mr. Jones was a Vice
President in the Telecommunications, Media and Technology Investment Banking
Group at Merrill Lynch & Co. Mr. Jones received his B.S. degree in Computer
Engineering from the University of Michigan in 1985 and his MBA from the Wharton
School of the University of Pennsylvania in 1991. He is also on the Board of
Directors of T3 Communications, LLC, Aspen Capital Advisors, Inc. and C&S
Capital Funding Corp.
Lawrence R. Kuhnert - Director
Mr. Kuhnert became a director of the Company in October 2003. He is
currently an active venture and real estate investor. From 2000 to 2002, Mr.
Kuhnert served as a Division Director for Rotech Healthcare Inc. ("Rotech"), a
home healthcare equipment supplier. Since 1996, he had previously served Rotech
as director of acquisitions in connection with a very active acquisition and
corporate development campaign that took sales from approximately $230 million
in 1996 to approximately $600 million in 2000. Mr. Kuhnert earned a B.A degree
in 1973 from Michigan State University.
36
Kevin J. Lindheim - Director
Mr. Lindheim has served as a director since February, 2002. He is the
President and Chief Executive Officer of Florida Valuation and Consultants,
Inc., a full service commercial real estate advisory firm, a position he has
held since 1992. He holds a B.S. Degree in Accounting from Louisiana University,
and a postgraduate degree in Real Estate from Tulane University.
Audit Committee
Currently, the Company's Audit Committee of the Board of Directors is
comprised of all the Directors. The Board of Directors believes that it has two
"financial experts" (as defined in Regulation 228.401(e)(1)(i)(A) of Regulation
S-B) serving on its Audit Committee. These two "financial experts" are Mr.
Steven Jones and Mr. Larry Kuhnert, both of which are members of the general
partner of MVP 3, L.P., a partnership which controls 50.4% of the voting stock
of the Company. Thus neither Mr. Jones nor Mr. Kuhnert would be considered as
"independent" directors under Item 7(d)(3)(iv) of Schedule 14A of the Securities
Exchange Act of 1934.
Code of Ethics
The Company has adopted the Code of Ethics attached as Exhibit 14 to this
Form 10-KSB for its senior financial officers and the principal executive
officer.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid by the Company to or on behalf of our most highly compensated
executive officers for the fiscal years ended December 31, 2003, 2002 and 2001:
Summary Compensation Table
Name and Principal Capacity Year Salary Other Compensation
Thomas H. White 2003 $ 20,139 (1) -
Chief Executive Officer
Dr. Michael T. Dent 2003 - -
Chairman, President and 2002 $130,669 (2) -
Chief Medical Officer 2001 9,600 (2) $0 (3)
(1) Mr. White became the Company's Chief Executive Officer on October 20, 2003.
(2) During 2002, Dr. Dent Received 105,636 shares of the Company's common stock
in lieu of cash salary payments due to him for salary earned in 2001 and the
first nine months of 2002. Such shares were collectively valued at $109,021 at
the various times of issue and were issued pursuant to a Registration Statement
on Form S-8. As of February 6, 2004, Dr. Dent had not sold any of this stock or
any other stock in the Company. The remaining $31,248 of salary earned by Dr.
Dent was earned in the fourth quarter of 2002 and has been accrued as a cash
obligation of the Company. As of February 6, 2004, $11,131 had been paid.
(3) In November, 2001, Dr. Dent received options to purchase 1,350,000 shares of
common stock at $0.01 per share pursuant to an Option Agreement. This Option
Agreement was terminated effective October 1, 2002 and Dr. Dent gave up any
right or claim to such options.
37
Employment Agreements.
We entered into a new Employment Agreement with Dr. Michael Dent on April
15, 2003 to serve as our President and Chief Medical Officer. The employment
agreement has an initial term of one year and will be automatically renewed for
an unlimited number of additional terms of one year each unless either party
elects to terminate the agreement. During the term of employment, Dr. Dent will
serve as the President and Chief Medical Officer of the Company. Dr. Dent has
agreed to devote at least 20% of his business time and efforts to the business
affairs of the Company during the term of the agreement with such percentage
subject to increase in certain instances. During the term of his employment Dr.
Dent will be eligible to receive a base salary in any given month equal to 20%
of the Operating Subsidiary's cash flow from operating activities for the
preceding month (as reported on Operating Subsidiary's Statement of Cash Flows)
subject to a $20,000 cap for any given month. Dr. Dent is also eligible to
receive a bonus, on a quarterly basis, equal to 10% of the amount by which the
Company's quarterly net revenues exceed targets established by the Company's
Board of Directors. For the fiscal year 2003, such quarterly targets are as
follows:
For the quarter ending June 30, 2003 $125,000
For the quarter ending September 30, 2003 $250,000
For the quarter ending December 31, 2003 $500,000
The new employment agreement also provides that once Dr. Dent is devoting 50% or
more of his time to the business, the Company will pay for heath insurance for
Dr. Dent and his family.
We entered into an employment agreement with Thomas H. White on October 14,
2003, to serve as our Chief Executive Officer. The employment agreement has an
initial term of three years; provided, however that either party may terminate
the agreement by giving the other party sixty days written notice. The
employment agreement specifies an initial base salary of $100,000/year with
salary increases and bonuses at the discretion of the compensation committee of
the Board of Directors. In addition, Mr. White was granted 900,000 Incentive
Stock Options that have a ten year term so long as Mr. White remains an employee
of the Company. Such options vest according to the following schedule:
Time-Based Vesting
75,000 on 10/20/03;
100,000 on 10/20/04;
100,000 on 10/20/05;
100,000 on 10/20/06;
Performance-Based Vesting
125,000 when the Company reaches $2.5 million of consolidated revenue
for the preceding twelve months;
125,000 when the Company reaches $5.0 million of consolidated revenue
for the preceding twelve months;
125,000 when the Company's stock maintains an average closing bid price
(as quoted on NASDAQ Bulletin Board) of $0.50/share
over the previous 30 trading days.
150,000 when the Company's stock maintains an average closing bid price
(as quoted on NASDAQ Bulletin Board) of $1.00/share
over the previous 30 trading days.
38
Mr. White's employment agreement also specifies that he is entitled to a
$500/month car allowance, four weeks of paid vacation per year and other health
insurance and relocation benefits. In the event that Mr. White is terminated
without cause by the Company, The Company has agreed to pay Mr. White's base
salary and maintain his employee benefits for a period that is equal to one
month for every full year of his employment by the Company (subject to a minimum
of two months and a maximum of six months).
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 15, 2003, with respect
to each person known by the Company to own beneficially more than 5% of the
Company's outstanding common stock, each director and officer of the Company and
all directors and executive officers of the Company as a group. The Company has
no other class of equity securities outstanding other than common stock.
Title of Name And Address Of Beneficial Owner Amount and Nature Of Percent Of Class
Class Beneficial Ownership
MVP 3, LP (1) 9,303,279 50.4%
Common 1740 Persimmon Drive
Naples, FL 34109
John E. Elliott (2)
Common 2709 Buckthorn Way
Naples, FL 34105 10,844,540 58.8%
Steven C. Jones (3)
Common 1740 Persimmon Drive
Naples, FL 34109 10,844,540 58.8%
Lawrence R. Kuhnert (4)
Common 5120 Timberview Terrace
Orlando, FL 32819 10,844,540 58.8%
Michael T. Dent M.D.
Common 1726 Medical Blvd.
Naples, FL 34110 2,490,634 13.5%
Kevin Lindheim
Common 9220 Bonita Beach Road
Bonita Springs, FL 34135 3,845 *
Common Directors and Officers as a Group 2,494,479 13.6%
2 persons)
* less than 1.0%
39
(1) MVP 3, LP has direct ownership of 9,303,279 shares. The general partner of
MVP 3, LP is Medical Venture Partners, LLC, which has John E. Elliott, Steven C.
Jones and Larry R. Kuhnert as its members.
(2) John E. Elliott has direct ownership of 1,541,261 shares, but as a member of
the general partner of MVP 3, LP, he has the right to vote all shares held by
MVP 3, LP, thus 9,303,279 shares have been added to his total.
(3) Steven C. Jones has direct ownership of 1,541,261 shares, but as a member of
the general partner of MVP 3, LP, he has the right to vote all shares held by
MVP 3, LP, thus 9,303,279 shares have been added to his total.
(4) Larry R. Kuhnert has direct ownership of 1,541,261 shares, but as a member
of the general partner of MVP 3, LP, he has the right to vote all shares held by
MVP 3, LP, thus 9,303,279 shares have been added to his total.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2002 and the first eight months of 2003, the executive offices of
the Company shared space, on a rent-free basis, with Naples Women's Center
("NWC"), a company owned by Dr. Michael Dent, our Chairman and President. In
addition, Naples Women's Center provided bookkeeping services to the Company
free of charge. An estimate of the fair market value of these services has been
expensed and added to paid in capital as a capital contribution.
During 2001 and 2002, we borrowed funds from the Naples Women's Center to
meet our short-term cash needs. At December 31, 2003, we owed NWC approximately
$58,666.
During the period December 2002 to April 2003, AMI Holdings Corp. (a
company controlled by John E. Elliott), Steven C. Jones and Lawrence R. Kuhnert
advanced $177,000 under various short term bridge loan agreements. Messrs.
Elliott, Jones and Kuhnert are the three principals of MVP 3, LP, which
consummated debt and equity financing transactions with the Company on April 15,
2003. All of these advances, plus $2,493 of accrued interest, were repaid to
these individuals on April 17, 2003.
In order to facilitate the administration of MVP 3's revolving credit
facility with the Company and fund it, MVP 3 arranged a similar credit facility
with Fifth Third Bank. On April 15, 2003, the Company provided a guaranty of MVP
3's obligations to Fifth Third Bank for all amounts that are directly passed
through MVP 3 and further loaned to the Company and has pledged all of its
business assets to both Fifth Third Bank and MVP 3, LP.
During 2003, we also paid Mr. Steven Jones $72,500 in cash for various
consulting work in connection with helping to organize and manage the financial
affairs of the company.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Exhibits
40
The following exhibits are filed (or incorporated by reference herein) as
part of this Form 10-KSB.
Exhibit
Number Description
14 NeoGenomics, Inc. Code of Ethics for Senior Financial Officers
and the Principal Executive Officer
31.1 Certification of NeoGenomics, Inc. Chief Executive and Principle
Financial Officer, Thomas H. White, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of NeoGenomics, Inc. Chief Executive and Principle
Financial Officer, Thomas H. White, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
21 The Company's only subsidiary is NeoGenomics, Inc., a Florida
corporation (the "Operating Subsidiary").
(b) Reports on Form 8-K.
No reports on Form 8-K were filed with the SEC during the period from
September 30, 2003 until the date of this report on Form 10-KSB.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Summarized below is the aggregate amount of various professional fees
billed by our principal accountants with respect to our last two fiscal years:
2003 2002
Audit fees $ 11,028 $ 20,621
Audit-related fees $ -- $ --
Tax fees $ -- $ --
All other fees, including tax consultation $ -- $ --
and preparation
All audit fees are approved by our audit committee and board of directors.
Kingery, Crouse & Hohl, P.A. does not provide any non-audit services to the
Company.
41
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NeoGenomics, Inc.
By: /s/ Thomas H. White
Thomas H. White
Chief Executive and
Principal Financial Officer
Date: February 23, 2004
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/s/ Michael T. Dent Director, President and February 23, 2004
Michael T. Dent, M.D. Chief Medical Officer
/s/ John E. Elliott Director February 23, 2004
John E. Elliott
/s/ Steven C. Jones Director February 23, 2004
Steven C. Jones
/s/ Lawrence R. Kuhnert Director February 23, 2004
Lawrence R. Kuhnert
/s/ Kevin J. Lindheim Director February 23, 2004
Kevin J. Lindheim
42
EXHIBIT INDEX
Exhibit
Number Description
14 NeoGenomics, Inc. Code of Ethics for Senior Financial Officers
and the Principal Executive Officer
31.1 Certification of NeoGenomics, Inc. Chief Executive and Principle
Financial Officer, Thomas H. White, pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of NeoGenomics, Inc. Chief Executive and Principle
Financial Officer, Thomas H. White, pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.