SB-2/A: Optional form for registration of securities to be sold to the public by small business issuers
Published on July 28, 2005
As filed with the Securities and Exchange Commission on July 28 , 2005
Registration No. 333-126754
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Nevada NeoGenomics, Inc. 74-2897368
(State or Other Jurisdiction of (Name of Registrant in Our (I.R.S. Employer
Incorporation Charter) Indentification No.)
or Organization)
Robert P Gasparini
12701 Commonwealth Drive, Suite 9 12701 Commonwealth Drive, Suite 9
Fort Myers, Florida 33913 Fort Myers, Florida 33913
(239) 768-0600 8731 (239) 768-0600
(Address and telephone number of Principal (Primary Standard Industrial (Name, address and telephone number
Executive Offices and Principal Place of Classification Code Number) of agent for service)
Business)
With a copy to:
Clayton E. Parker, Esq.
Kirkpatrick & Lockhart Nicholson Graham LLP
201 S. Biscayne Boulevard, Suite 2000
Miami, Florida 33131
Telephone: (305) 539-3300
Telecopier: (305) 358-7095
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Proposed Maximum Aggregate Amount Of
Title Of Each Class Of Amount To Be Offering Price Offering Registration
Securities To Be Registered Registered Per Share (1) Price (1) Fee (3)
Common Stock, par value $0.001 per share 10,000,000 shares (2) $0.40 $4,000,000 $471.00
TOTAL 10,000,000 shares (2) $0.40 $4,000,000 $471.00
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933. For the purposes
of this table, we have used the average of the closing bid and asked prices
as of a recent date.
(2) Of these shares, 4,265,185 shares are being registered pursuant to private
placement transactions, 325,649 are being registered under warrants,
5,000,000 are being registered under the Standby Equity Distribution
Agreement, 381,888 shares were received as a commitment fee under the
Standby Equity Distribution Agreement, and 27,278 shares were received as a
placement agent fee.
(3) Registration fee has been previously paid.
___________________
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
NEOGENOMICS, INC.
10,000,000 shares of Common Stock
This prospectus relates to the sale of up to 10,000,000 shares of
NeoGenomics, Inc. (referred to individually as the "Parent Company" or,
collectively with all of its subsidiaries, as the "Company") common stock by
certain persons who are stockholders of the Company. The selling stockholders
consist of:
o Selling stockholders, who intend to sell up to 4,274,394 shares of common
stock previously issued by the Company in private placements.
o Other selling stockholders, who may sell up to 316,440 shares of common
stock underlying previously issued warrants.
o Cornell Capital Partners, LP ("Cornell Capital Partners"), which intends to
sell up to 5,381,888 shares of common stock, 5,000,000 of which are under
the Standby Equity Distribution Agreement and 381,888 were received from
the Company on June 6, 2005 as a commitment fee in the amount of $140,000
under the Standby Equity Distribution Agreement
o Spartan Securities Group, Ltd., which intends to sell up to 27,278 shares
of common stock issued as a placement agent fee on June 6, 2005, under the
Standby Equity Distribution Agreement.
Please refer to "Selling Stockholders" beginning on page 14.
The Company is not selling any shares of common stock in this offering and
therefore will not receive any proceeds from this offering. All costs associated
with this registration will be borne by the Company. All costs associated with
this registration will be borne by us.
The shares of common stock are being offered for sale by the selling
stockholders at prices established on the Over-the-Counter Bulletin Board during
the term of this offering. On July 15, 2005, the last reported sale price of our
common stock was $0.40 per share. Our common stock is quoted on the
Over-the-Counter Bulletin Board under the symbol "NGMN.OB." These prices will
fluctuate based on the demand for the shares of common stock.
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay the
Company 98% of, or a 2% discount to, the lowest volume weighted average price of
the common stock during the five consecutive trading day period immediately
following the notice date. In addition, Cornell Capital Partners will retain 5%
of each advance under the Standby Equity Distribution Agreement. Cornell Capital
Partners also received a commitment fee in the form of 381,888 shares of common
stock in the amount of $140,000 on June 6, 2005 under the Standby Equity
Distribution Agreement and will receive an additional $50,000 commitment fee on
the earlier of (i) June 6, 2006, or (ii) the date the Company receives advances
under the Standby Equity Distribution Agreement in an amount greater than or
equal to $2,500,000. The Company issued a promissory note to Cornell Capital
Partners for such additional commitment fee, which is cancelable in the event
the Company terminates the Standby Equity Distribution Agreement prior to such
promissory note becoming due. The 2% discount, the 5% retainage fee, commitment
fee shares and commitment fee promissory note are underwriting discounts payable
to Cornell Capital Partners.
The Company engaged Spartan Securities Corporation, an unaffiliated
registered broker-dealer, to advise us in connection with the Standby Equity
Distribution Agreement. Spartan Securities Group, Ltd. was paid a fee of $10,000
by the issuance of 27,278 shares of the Company's common stock on June 6, 2005
under the Standby Equity Distribution Agreement.
Brokers or dealers effecting transactions in these shares should confirm
that the shares are registered under the applicable state law or that an
exemption from registration is available.
These securities are speculative and involve a high degree of risk.
Please refer to "Risk Factors" beginning on page 5.
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The information in this prospectus is not complete and may be changed. We
and the selling stockholders may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale
is not permitted.
With the exception of Cornell Capital Partners, which is an "underwriter"
within the meaning of the Securities Act of 1933, no other underwriter or person
has been engaged to facilitate the sale of shares of common stock in this
offering. This offering will terminate twenty-four months after the accompanying
registration statement is declared effective by the Securities and Exchange
Commission. None of the proceeds from the sale of stock by the selling
stockholders will be placed in escrow, trust or any similar account.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is _____ , 2005.
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TABLE OF CONTENTS
PROSPECTUS SUMMARY..........................................................1
THE OFFERING................................................................2
SUMMARY CONSOLIDATED FINANCIAL INFORMATION..................................4
RISK FACTORS................................................................5
FORWARD-LOOKING STATEMENTS..................................................13
SELLING STOCKHOLDERS........................................................14
USE OF PROCEEDS.............................................................17
DILUTION....................................................................19
STANDBY EQUITY DISTRIBUTION AGREEMENT.......................................20
PLAN OF DISTRIBUTION........................................................23
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION...................25
DESCRIPTION OF BUSINESS.....................................................30
MANAGEMENT..................................................................39
PRINCIPAL STOCKHOLDERS......................................................44
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS.........................................................45
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................45
DESCRIPTION OF CAPITAL STOCK................................................47
EXPERTS.....................................................................49
LEGAL MATTERS...............................................................49
AVAILABLE INFORMATION.......................................................49
FINANCIAL STATEMENTS........................................................F-1
PART II ....................................................................II-2
EXHIBIT 5.1.................................................................5.1-1
EXHIBIT 23.2................................................................23.2-1
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PROSPECTUS SUMMARY
The following is only a summary of the information, financial statements
and the notes included in this prospectus. You should read the entire prospectus
carefully, including "Risk Factors" and our Financial Statements and the notes
to the Financial Statements before making any investment decision.
Our Company
General
NeoGenomics, Inc., a Nevada corporation (referred to individually as the
"Parent Company" or, collectively with all of its subsidiaries, as the
"Company"), was originally incorporated as American Communications, Enterprises,
Inc. in October 1998. In November 2001, following a reverse acquisition of
NeoGenomics, Inc, a Florida corporation (referred to as "NeoGenomics" or the
"Operating Subsidiary"), the Parent Company changed its name to NeoGenomics,
Inc. as well.
The Company 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 business plan
features two concurrent objectives:
1. Development of a clinical laboratory to offer cytogenetics, flouresence
in-situ hybridization, Flow Cytometry 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.
NeoGenomics' vision is to merge a high-end genetics and molecular testing
laboratory with ongoing research activities to help bridge the gap between
clinical medicine and genomic research. We believe that this combination could
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 5 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 an
opportunity for laboratory companies that are positioned to address this growing
market segment.
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 and looking for
abnormalities in a process called karyotyping. A karyotype evaluates the entire
46 human chromosomes by number and banding patterns to identify abnormalities
associated with disease. Examples of cytogenetic testing include bone marrow
testing to diagnose various types of leukemia and lymphoma, and amniocentesis
testing of pregnant women to diagnose genetic anomalies such as Down syndrome in
a fetus. 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.
About Us
Our principal executive offices are located at 12701 Commonwealth Drive,
Suite 9, Fort Myers, Florida 33913. Our telephone number is (239) 768-0600.
1
THE OFFERING
This offering relates to the sale of common stock by certain persons who
are, or will become, our stockholders. The selling stockholders consist of:
o Selling stockholders, who intend to sell up to 4,265,185 shares of common
stock previously issued by the Company in private placements.
o Other selling stockholders, who may sell up to 325,649 shares of common
stock underlying previously issued warrants.
o Cornell Capital Partners, LP ("Cornell Capital Partners"), which intends to
sell up to 5,381,888 shares of common stock, 5,000,000 of which are under
the Standby Equity Distribution Agreement and 381,888 were received from
the Company on June 6, 2005 as a commitment fee in the amount of $140,000
under the Standby Equity Distribution Agreement
o Spartan Securities Group, Ltd., which intends to sell up to 27,278 shares
of common stock issued as a placement agent fee on June 6, 2005, under the
Standby Equity Distribution Agreement.
The commitment amount of the Standby Equity Distribution Agreement is $5.0
million. At an assumed price of $0.49 per share, the Company would be able to
receive gross proceeds of $2,450,000 using the 5,000,000 shares being registered
in this registration statement under the Standby Equity Distribution Agreement.
The Company would be required to register 5,204,082 additional shares at this
assumed price to obtain the entire $5 million available under the Standby Equity
Distribution Agreement.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically issue and sell to Cornell Capital Partners shares of
common stock for a total purchase price of $5.0 million. The amount of each
advance is subject to a maximum advance amount of $750,000, and we may not
submit any advance within five trading days of a prior advance. Cornell Capital
Partners will pay the Company 98% of, or a 2% discount to, the lowest volume
weighted average price of the common stock during the five consecutive trading
day period immediately following the notice date. For each advance made by the
Company, Cornell Capital Partners shall retain 5% of the gross proceeds of such
advance. In addition, Cornell Capital Partners received a one-time commitment
fee in the form of 381,888 shares of common stock in the amount of $140,000 on
June 6, 2005 under the Standby Equity Distribution Agreement and will receive an
additional $50,000 commitment fee on the earlier of (i) June 6, 2006, or (ii)
the date the Company receives advances under the Standby Equity Distribution
Agreement in an amount greater than or equal to $2,500,000. The Company issued a
promissory note to Cornell Capital Partners for such additional commitment fee,
which is cancelable in the event the Company terminates the Standby Equity
Distribution Agreement prior to such promissory note becoming due. Cornell
Capital Partners intends to sell any shares purchased under the Standby Equity
Distribution Agreement at the then prevailing market price. Among other things,
this prospectus relates to the shares of common stock to be issued under the
Standby Equity Distribution Agreement.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following tables, which show the net
cash to be received by the Company and the number of shares to be issued under
the Standby Equity Distribution Agreement at a recent price of $0.50 per share
and 25%, 50% and 75% discounts to the recent price.
Net Cash To the Company:
Market Price: $0.5000 $0.5000 $0.5000 $0.5000
Purchase Price: $0.4900 $0.3675 $0.2450 $0.1225
No. of Shares(1): 5,000,000 5,000,000 5,000,000 5,000,000
Total Outstanding (2): 27,498,252 27,498,252 27,498,252 27,498,252
Percent Outstanding (5): 18.18% 18.18% 18.18% 18.18%
Net Cash to the Company(6): $2,242,500 $1,660,625 $1,078,750 $496,875
(1) Represents the number of shares of common stock registered in the
accompanying registration statement, which could be issued to Cornell
Capital Partners under the Standby Equity Distribution Agreement at the
prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners under the Standby Equity
Distribution Agreement.
2
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
estimated offering expenses and does not take into consideration the value
of the 381,888 shares of common stock issued to Cornell Capital Partners as
a commitment fee and the additional commitment fee in the form of a $50,000
promissory, which may be received in the future.
(5) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(6) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
estimated offering expenses and does not take into consideration the value
of the 381,888 shares of common stock issued to Cornell Capital Partners as
a commitment fee and the additional commitment fee of $50,000, which may
become due and payable in the future.
Number of Shares To Be Issued:
Market Price: $0.5000 $0.5000 $0.5000 $0.5000
Purchase Price: $0.4900 $0.3675 $0.2450 $0.1225
No. of Shares(1)(2): 10,204,082 13,605,443 20,408,164 40,816,327
Total Outstanding (3): 32,702,334 36,103,695 42,906,416 63,314,579(4)
Percent Outstanding (5): 31.20% 37.68% 47.56% 64.47%
Net Cash to the Company(6): $4,665,000 $4,665,000 $4,665,000 $4,665,000
(1) We are only registering 5,000,000 shares of common stock under this
prospectus. We will need to register additional shares of common stock to
obtain the entire $5 million available under the Standby Equity
Distribution Agreement at these stated purchase prices.
(2) Represents that total number of shares of common stock which would need to
be issued at the stated purchase price to receive the entire $5.0 million
available under the Standby Equity Distribution Agreement.
(3) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners under the Standby Equity
Distribution Agreement.
(4) The Company's current Articles of Incorporation, as amended, authorize the
issuance of 100,000,000 shares of common stock.
(5) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(6) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
estimated offering expenses and does not take into consideration the value
of the 381,888 shares of common stock issued to Cornell Capital Partners as
a commitment fee and the additional commitment fee of $50,000, which may
become due and payable in the future.
Common Stock Offered 10,000,000 shares by selling stockholders
Offering Price Market price
Common Stock Outstanding Before the Offering(1) 22,498,252 shares as of July 15, 2005
Use of Proceeds We will not receive any proceeds of the shares offered by
the selling stockholders. Any proceeds we receive from the
sale of common stock under the Standby Equity Distribution
Agreement to Cornell Capital Partners will be used for
general working capital purposes. See "Use of Proceeds."
Risk Factors The securities offered hereby involve a high degree of risk
and immediate substantial dilution. See "Risk Factors" and
"Dilution."
Over-the-Counter Bulletin Board Symbol NGNM.OB
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1 Excludes up to 5,000,000 shares of common stock to be issued under the
Standby Equity Distribution Agreement, 2,825,649 shares of common stock
upon the exercise of warrants and up to 1,585,000 shares of common stock
upon the exercise of options and stock awards.
7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The Summary Consolidated Financial Information set forth below is unaudited and
was excerpted from the Company's Quarterly Report on Form 10-QSB for the period
ending March 31, 2005, as filed with the SEC.
For the Three-Months Ended
March 31,
2005 2004
Statement of Operation Data:
Revenue $ 230,192 $ 178,863
Cost of Revenue 176,838 145,986
Gross Profit 53,354 32,877
Total other operating expenses 268,528 202,486
Net Income (Loss) $ (215,174) $ (169,609)
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Net Income (Loss) Per Share - Basic and Diluted $ (0.01) $ (0.01)
Weighted Average Number of Shares Outstanding
- Basic and Diluted 21,744,273 18,449,416
As of March 31,
Balance Sheet Data: 2005
Assets:
Cash and cash equivalents $ 112,959
Accounts receivable (net of allowance for
doubtful accounts of $9,496) 141,602
Inventories 27,843
Other current assets 32,559
Total current assets 314,963
Property and Equipment (net of accumulated
depreciation of $163,727) 378,327
Other Assets 33,898
Total assets $ 727,188
==============
Liabililities & Stockholders' Deficit:
Total current liabilities $ 289,170
Long term liabilities (net of unamortized discount
of $129,925) 765,526
Total liabilities 1,054,696
Common Stock, $.001 par value, 100,000,000 shares
authorized; 22,017,657 shares issued and outstanding 22,018
Additional paid in capital 9,888,886
Deficit (10,238,412)
Total stockholders' deficit (327,508)
Total Liabilities and Stockholders' Deficit $ 727,188
==============
4
RISK FACTORS
We are subject to various risks that may materially harm our business,
financial condition and results of operations. An investor should carefully
consider the risks and uncertainties described below and the other information
in this filing before deciding to purchase our common stock. If any of these
risks or uncertainties actually occurs, our business, financial condition or
operating results could be materially harmed. In that case, the trading price of
our common stock could decline or we may be forced to cease operations.
Risks Related To Our Business
We Have A Limited Operating History Upon Which You Can Evaluate Our Business
We commenced revenue operations in 2002 and are just beginning to generate
meaningful revenue. Accordingly, we have a limited operating history upon which
an evaluation of us and our prospects can be based. We and our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the rapidly evolving market for healthcare and
medical laboratory services. To address these risks, we must, among other
things, respond to competitive developments, attract, retain and motivate
qualified personnel, implement and successfully execute our sales strategy,
develop and market additional services, and upgrade our technological and
physical infrastructure in order to scale our revenues. We may not be successful
in addressing such risks. Our limited operating history makes the prediction of
future results of operations difficult or impossible. We currently expect to
significantly increase our operating expenses to expand our operations. As a
result of the foregoing factors, we expect that we may incur losses over the
next twelve months and, depending on the success of our products and services in
the marketplace, for potentially an even longer period.
We May Not Be Able To Implement Our Business Strategies Which Could Impair Our
Ability to Continue Operations
Implementation of our business strategies will depend in large part on our
ability to (i) attract a significant number of customers; (ii) effectively
introduce acceptable products and services to our customers; (iii) obtain
adequate financing on favorable terms to fund our business strategies; (iv)
maintain appropriate procedures, policies, and systems; (v) hire, train, and
retain skilled employees; (vi) continue to operate with increasing competition
in the medical laboratory industry; (vii) establish, develop and maintain name
recognition; and (viii) establish and maintain beneficial relationships with
third-party insurance providers and other third party payers. Our inability to
obtain or maintain any or all these factors could impair our ability to
implement our business strategies successfully, which could have material
adverse affect on our results of operations and financial condition.
We May Be Unsuccessful In Managing Our Growth Which Could Prevent Us From
Becoming Profitable
While it may not be realized, we are planning for significant growth for
the foreseeable future. Our growth may place a significant strain on our
management, financial, and operating resources. Failure to manage this growth
effectively could have a material adverse affect on our financial condition or
results of operations. Part of our business strategy may be to acquire assets or
other companies that will complement our existing business. We are unable to
predict whether or when any material transaction will be completed should
negotiations commence. If we proceed with any such transaction, we may not
effectively integrate the acquired operations with our own operations. We may
also seek to finance any such acquisition by debt financings or issuances of
equity securities and such financing may not be available on acceptable terms or
at all.
We May Incur Greater Costs Than Anticipated, Which Could Result in Sustained
Losses
We used reasonable efforts to assess and predict the expenses necessary to
pursue our business plan. However, implementing our business plan may require
more employees, capital equipment, supplies or other expenditure items than
management has predicted. Similarly, the cost of compensating additional
management, employees and consultants or other operating costs may be more than
we estimate, which could result in sustained losses.
5
We May Face Fluctuations in Results of Operations Which Could Negatively Affect
Our Business Operations and We are Subject to Seasonality in our Business
As a result of our limited operating history and the relatively limited
information available on our competitors, we may not have sufficient internal or
industry-based historical financial data upon which to calculate anticipated
operating expenses. Management expects that our results of operations may also
fluctuate significantly in the future as a result of a variety of factors,
including, but not limited to, (i) the continued rate of growth, usage and
acceptance of our products and services; (ii) demand for our products and
services; (iii) the introduction and acceptance of new or enhanced products or
services by us or by competitors; (iv) our ability to anticipate and effectively
adapt to developing markets and to rapidly changing technologies; (v) our
ability to attract, retain and motivate qualified personnel; (vi) the
initiation, renewal or expiration of significant contracts with our major
clients; (vii) pricing changes by us, our suppliers or our competitors; (viii)
seasonality; and (ix) general economic conditions and other factors.
Accordingly, future sales and operating results are difficult to forecast. Our
expenses are based in part on our expectations as to future revenues and to a
significant extent are relatively fixed, at least in the short-term. We may not
be able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in relation to our
expectations would have an immediate adverse impact on our business, results of
operations and financial condition. In addition, we may determine from time to
time to make certain pricing or marketing decisions or acquisitions that could
have a short-term material adverse affect on the our business, results of
operations and financial condition and may not result in the long-term benefits
intended. Furthermore, in Florida, currently our primary referral market for lab
tests, a meaningful percentage of the population returns to homes in the
Northern U.S. This results in seasonality in our business. We estimate that our
operating results during the second and third quarter of each year will be
somewhat impacted by these seasonality factors until such time as we can
generate more clients from outside of Florida. Because of all of the foregoing
factors, our operating results could be less than the expectations of investors
in future periods.
We Substantially Depend Upon Third Parties for Payment of Services, Which Could
Have A Material Adverse Affect On Our Cash Flows And Results Of Operations
We are a clinical medical laboratory that provides medical testing services
to doctors and hospitals on patient specimens that are sent to us. In the case
of most specimen referrals that are received from patients that are not
in-patients at a hospital or institution, we generally have to bill the
patient's insurance company or a government program for our services. As such,
we rely on the cooperation of numerous third party payers, including but not
limited to Medicare, Medicaid and various insurance companies, in order to get
paid for performing services on behalf of our clients. Wherever possible, the
amount of such third party payments is governed by contractual relationships in
cases where we are a participating provider for a specified insurance company or
by established government reimbursement rates in cases where we are an approved
provider for a government program such as Medicare. However, we do not have a
contractual relationship with many of the insurance companies with whom we deal,
nor are we necessarily able to become an approved provider for all government
programs. In such cases, we are deemed to be a non-participating provider and
there is no contractual assurance that we are able to collect the amounts billed
to such insurance companies or government programs. Currently, we are not a
participating provider with the majority of the insurance companies we bill for
our services. Until such time as we become a participating provider with such
insurance companies, there can be no contractual assurance that we will be paid
for the services we bill to such insurance companies, and such third parties may
change their reimbursement policies for non-participating providers in a manner
that may have a material adverse affect on our ash flow or results of
operations.
Our Business Is Subject To Rapid Scientific Change, Which Could Have A Material
Adverse Affect On Our Operations
The market for genetic and molecular biology testing products and services
is characterized by rapid scientific developments, evolving industry standards
and customer demands, and frequent new product introductions and enhancements.
Our future success will depend in significant part on our ability to continually
improve our offerings in response to both evolving demands of the marketplace
and competitive product offerings, and we may be unsuccessful in doing so.
6
The Market For Our Services Is Highly Competitive, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial Condition
The market for genetic and molecular biology testing services is highly
competitive and competition is expected to continue to increase. We compete with
other commercial medical laboratories in addition to the in-house laboratories
of many major hospitals. Many of our existing competitors have significantly
greater financial, human, technical and marketing resources than we do. Our
competitors may develop products and services that are superior to ours or that
achieve greater market acceptance than our offerings. We may not be able to
compete successfully against current and future sources of competition and
competitive pressures faced by us may have a material adverse affect on our
business, results of operations and financial condition.
Our Failure to Manage Potential Growth May Impair Our Ability To Become
Profitable
Our recent growth has placed, and is expected to continue to place, a
significant strain on our managerial, operational and financial resources. To
manage our potential growth, we must continue to implement and improve our
operational and financial systems and to expand, train and manage our employee
base. Most of our management has joined us within the last twelve months or
plans to join us shortly. These individuals have not previously worked together
and are in the process of integrating as a management team. We may not be able
to effectively manage the expansion of our operations and our systems,
procedures or controls may not be adequate to support our operations. Our
management may not be able to achieve the rapid execution necessary to fully
exploit the market opportunity for our products and services. Any inability to
manage growth could have a material adverse affect on our business, results of
operations, potential profitability and financial condition.
We Face The Risk of Capacity Constraints, Which Could Have A Material Adverse
Affect On Our Business, Results Of Operations And Financial Condition
We compete in the market place primarily on three factors: (a) the quality
and accuracy of our test results; (b) the speed or turn-around times of our
testing services; and (c) our ability to provide after-test support to those
physicians requesting consultation. Any unforeseen increase in the volume of
customers could strain the capacity of our personnel and systems, which could
lead to inaccurate test results, unacceptable turn-around times, or customer
service failures. In addition, as the number of customers and cases increases,
our products, services, and infrastructure may not be able to scale accordingly.
Any failure to handle higher volume of requests for our products and services
could lead to the loss of established customers and have a material adverse
affect on our business, results of operations and financial condition.
If we produce inaccurate test results, our customers may choose not to use
us in the future. This could severally harm our operations. In addition, based
on the importance of the subject matter of our tests, inaccurate results could
result in improper treatment of patients, and potential liability for us.
We May Fail to Deliver Timely Results to Customers, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial Condition
Our operations are dependent in part upon our ability to protect our
laboratory operations against physical damage from fire, floods, hurricanes,
earthquakes, power loss, telecommunications failures, break-ins and similar
events. We do not presently have redundant, multiple site capacity in the event
of any such occurrence, nor do we have an emergency back-up generator in place
at our main laboratory location that can mitigate the effects of a prolonged
power outage. The occurrence of any of these events could result in
interruptions, delays or cessations in service to customers, which could have a
material adverse affect on our business, results of operations and financial
condition.
The Steps Taken By Us To Protect Our Proprietary Rights May Not Be Adequate,
Which Could Have A Material Adverse Affect On Our Business, Results Of
Operations And Financial Condition
We regard our copyrights, trademarks, trade secrets and similar
intellectual property as critical to our success, and we rely upon trademark and
copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. The steps taken by us to protect our proprietary rights may
not be adequate and third parties could infringe on or misappropriate our
copyrights, trademarks, trade dress and similar proprietary rights, which could
have a material adverse affect on our business, results of operations and
financial condition. In addition, other parties may assert infringement claims
against us.
7
We are Dependent on Key Personnel and Need to Hire Additional Qualified
Personnel
Our performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success depends
substantially on the continued efforts of our senior management team, which
currently is composed of a small number of individuals who only recently joined
us. We do not carry key person life insurance on any of our senior management
personnel. The loss of the services of any of our executive officers, our
laboratory director or other key employees could have a material adverse affect
on the business, results of operations and our financial condition. Our future
success also depends on our continuing ability to attract and retain highly
qualified technical and managerial personnel. Competition for such personnel is
intense and we may not be able to retain our key managerial and technical
employees or that it will be able to attract and retain additional highly
qualified technical and managerial personnel in the future. The inability to
attract and retain the necessary technical and managerial personnel could have a
material and adverse affect upon our business, results of operations and
financial condition.
The Failure to Obtain Necessary Additional Capital to Finance Growth and Capital
Requirements, Could Adversely Affect Our Business, Financial Condition and
Results of Operations
We anticipate that it will require additional capital to meet out business
plan. Additionally, we may seek to exploit business opportunities that require
more capital than what is currently planned. In the event our existing credit
facility is not sufficient to meet our capital needs, we may be forced to raise
additional capital from equity or debt sources. We may not be able to raise such
capital on favorable terms or at all. If we are unable to obtain such additional
capital, we may be required to reduce the scope of our anticipated expansion,
which could adversely affect our business, financial condition and results of
operations.
The Failure to Comply With Significant Government Regulation and Laboratory
Operations May Subject Us to Liability, Penalties or Limitation of Operations
We are subject to extensive state and federal regulatory oversight. Our
laboratory may not pass inspections conducted to ensure compliance with CLIA `88
or with any other applicable licensure or certification laws. The sanctions for
failure to comply with CLIA `88 or state licensure requirements might include
the inability to perform services for compensation or the suspension, revocation
or limitation of the labs' CLIA `88 certificate or state license, as well as
civil and/or criminal penalties. In addition, any new legislation or regulation
or the application of existing laws and regulations in ways that we do not
anticipate could have a material adverse affect on our business, results of
operations and financial condition.
In addition, existing federal laws governing Medicare and Medicaid, as well
as some other state and federal laws, also regulate certain aspects of the
relationship between healthcare providers, including clinical and anatomic
laboratories, and their referral sources, including physicians, hospitals and
other laboratories. Certain provisions of these laws, known as the
"anti-kickback law" and the "Stark Laws", contain extremely broad proscriptions.
Violation of these laws may result in criminal penalties, exclusion from
Medicare and Medicaid, and significant civil monetary penalties. We will seek to
structure our arrangements with physicians and other customers to be in
compliance with the anti-kickback, Stark and state laws, and to keep up-to-date
on developments concerning their application by various means, including
consultation with legal counsel, when necessary. However, we are unable to
predict how these laws will be applied in the future and the arrangements into
which we enter may become subject to scrutiny thereunder.
Furthermore, the Health Insurance Portability and Accountability Act of
1996 ("HIPAA") and other state laws contain provisions that affect the handling
of claims and other patient information that are, or have been, transmitted
electronically and regulate the general disclosure of patient records and
patient health information. These provisions, which address security and
confidentiality of patient information as well as the administrative aspects of
claims handling, have very broad applicability and they specifically apply to
healthcare providers, which include physicians and clinical laboratories. While
we believe we have complied with the Standards, Security and Privacy rules under
HIPAA and state laws, an audit of our procedures and systems could find
deficiencies. Such deficiencies, if found, could have a material adverse affect
on our business, results of operations and financial condition and subject us to
liability.
We Are Subject to Security Risks Which Could Harm Our Operations
Despite the implementation of various security measures by us, our
infrastructure is vulnerable to computer viruses, break-ins and similar
disruptive problems caused by our customers or others. Computer viruses,
break-ins or other security problems could lead to interruption, delays or
cessation in service to our customers. Further, such break-ins whether
electronic or physical could also potentially jeopardize the security of
confidential information stored in our computer systems of our customers and
8
other parties connected through us, which may deter potential customers and give
rise to uncertain liability to parties whose security or privacy has been
infringed. A significant security breach could result in loss of customers,
damage to our reputation, direct damages, costs of repair and detection, and
other expenses. The occurrence of any of the foregoing events could have a
material adverse affect on our business, results of operations and financial
condition.
We Are Controlled by Existing Shareholders And Therefore Other Shareholders Will
Not Be Able to Direct Our Company
The majority of our shares and thus voting control of our Company is held
by a relatively small group of shareholders. Because of such ownership, those
shareholders will effectively retain control of our Board of Directors and
determine all of our corporate actions. In addition, shareholders owning
15,630,931 shares, or approximately 65.9% of our shares outstanding as of June 30,
2005 have executed a Shareholders' Agreement that, among other provisions, gives
Aspen Select Healthcare, LP, our largest shareholder, the right to elect three
out of the seven directors authorized for our Board, and nominate one mutually
acceptable independent director. Accordingly, it is anticipated that Aspen
Select Healthcare, LP and other parties to a Shareholders' Agreement will
continue to have the ability to elect a controlling number of the members of our
Board of Directors and the minority shareholders of our Company may not be able
to elect a representative to the Board of Directors. Such concentration of
ownership may also have the effect of delaying or preventing a change in control
of our Company.
No Foreseeable Dividends
We do not anticipate paying dividends on our common shares in the
foreseeable future. Rather, we plan to retain earnings, if any, for the
operation and expansion of our business.
There Is No Guarantee of Registration Exemption for Recently Completed Sales of
Unregistered Stock, Which Could Result In The Liquidation of the Company
Over the last twelve months, we have sold approximately 3.6 million shares
of unregistered stock in various private placements to accredited investors.
These sales were made in reliance upon the "private placement" exemption from
registration provided by Section 4(2) of the Securities Act of 1933, as amended,
and Rule 506 of Regulation D promulgated pursuant thereto. Reliance on this
exemption does not, however, constitute a representation or guarantee that such
exemption is indeed available.
If for any reason these sales are deemed to be a public offering of our
shares (and if no other exemption from registration is available), the sale of
the offered shares would be deemed to have been made in violation of the
applicable laws requiring registration of the offered shares and the delivery of
a prospectus. As a remedy in the event of such violation, each purchaser of the
offered shares would have the right to rescind his or her purchase of the
offered shares and to have his or her purchase price returned. If such a
purchaser requests a return of his or her purchase price, funds might not be
available for that purpose. In that event, liquidation of our Company might be
required. Any refunds made would reduce funds available for our working capital
needs. A significant number of requests for rescission would probably cause us
to be without funds sufficient to respond to such requests or successfully to
proceed with our activities successfully.
We Do Not Have Any Specific Plans to Use Proceeds of Recently Sold Securities
And Therefore The Funds May Not Improve Our Operations
We have not designated any specific use for the net proceeds from the
recent sales by us of restricted equity securities or for the proceeds received
by us from advances under our revolving credit facility. Rather, we intend to
use the net proceeds primarily for general corporate purposes, including working
capital and potential investments in new revenue producing activities.
Accordingly, management will have significant flexibility in applying the net
proceeds of such equity sales or advances under the revolving credit facility
and this application may not increase revenue or otherwise lead to
profitability.
9
Risks Related To This Offering
Future Sales By Our Stockholders May Adversely Affect Our Stock Price And Our
Ability To Raise Funds In New Stock Offerings
Sales of our common stock in the public market following this offering
could lower the market price of our common stock. Sales may also make it more
difficult for us to sell equity securities or equity-related securities in the
future at a time and price that our management deems acceptable or at all. Of
the 22,498,252 shares of common stock outstanding as of June 30, 2005, 4,443,426
shares are freely tradable without restriction, unless held by our "affiliates."
In addition, 4,674,351 previously issued restricted shares and 325,649 shares
underlying previously issued warrants are being registered in this registration
statement and thus will become freely tradeable upon the effectiveness of this
registration statement. The remaining 13,380,475 shares of common stock which
are held by existing stockholders, including the officers and directors, are
"restricted securities" and may be resold in the public market only if
registered or pursuant to an exemption from registration. Some of these shares
may be resold under Rule 144.
New Shareholders Will Experience Significant Dilution From Our Sale Of
Shares Under The Standby Equity Distribution Agreement
The sale of shares pursuant to the Standby Equity Distribution Agreement
will have a dilutive impact on our stockholders. For example, if the offering
occurred on March 31, 2005, at an assumed offering price of $0.49 per share (98%
of a recent lowest volume weighted average price of $0.50 per share), the new
stockholders would experience an immediate dilution in the net tangible book
value of $0.4191 per share. Dilution per share at prices of $0.3675, $0.2450 and
$0.1225 per share would be $0.3182, $0.2172 and $0.1162, respectively.
As a result, our net income per share could decrease in future periods, and
the market price of our common stock could decline. In addition, the lower our
stock price, the more shares of common stock we will have to issue under the
Standby Equity Distribution Agreement to draw down the full amount. If our stock
price is lower, then our existing stockholders would experience greater
dilution.
Under The Standby Equity Distribution Agreement Cornell Capital Partners Will
Pay Less Than The Then-Prevailing Market Price Of Our Common Stock
The common stock to be issued under the Standby Equity Distribution
Agreement will be issued at a 2% discount to the lowest volume weighted average
price for the five days immediately following the notice date of an advance. In
addition, Cornell Capital Partners will retain 5% from each advance. Based on
this discount, Cornell Capital Partners will have an incentive to sell
immediately to realize the gain on the 2% discount. These discounted sales could
cause the price of our common stock to decline, based on increased selling of
our common stock.
The Selling Stockholders Intend To Sell Their Shares Of Common Stock In The
Market, Which Sales May Cause Our Stock Price To Decline
The selling stockholders intend to sell in the public market 5,000,000
shares of common stock being registered in this offering and we may issue up to
another 5,000,000 shares being registered in this offering to Cornell Capital
Partners under the Standby Equity Distribution Agreement. That means that up to
10,000,000 shares may be sold pursuant to this registration statement. Such
sales may cause our stock price to decline. Our officers and directors and those
shareholders who are significant shareholders as defined by the SEC will
continue to be subject to the provisions of various insider trading and rule 144
regulations.
Cornell Capital Partners Will Have An Incentive To Sell Shares During the
Pricing Period Under the Standby Equity Distribution Agreement, Which May Cause
our Stock Price to Decline.
Cornell Capital Partners will purchase shares of our common stock pursuant
to the Standby Equity Distribution Agreement at a purchase price that is less
than the then-prevailing market price of our common stock. Cornell Capital
Partners will have an incentive to sell any shares of our common stock that it
purchases pursuant to the Standby Equity Distribution Agreement to realize a
gain on the difference between the purchase price and the then-prevailing market
price of our common stock. The terms of the Standby Equity Distribution
Agreement do not provide Cornell Capital Partners the ability to sell shares of
our common stock corresponding to a particular put if those shares have not been
delivered by us to Cornell Capital Partners. To the extent Cornell Capital
10
Partners sells its common stock, the common stock price may decrease due to the
additional shares in the market. This could allow Cornell Capital Partners to
sell greater amounts of common stock, the sales of which would further depress
the stock price.
In addition, Cornell Capital Partners is deemed to beneficially own the
shares of common stock corresponding to a particular advance on the date that we
deliver an advance notice to Cornell Capital Partners, which is prior to the
date the stock is delivered to Cornell Capital Partners. Cornell Capital
Partners may sell such shares any time after we deliver an advance notice.
Accordingly, Cornell Capital Partners may sell such shares during the pricing
period. Such sales may cause our stock price to decline.
The Sale Of Our Stock Under Our Standby Equity Distribution Agreement Could
Encourage Short Sales By Third Parties, Which Could Contribute To The Future
Decline Of Our Stock Price
In many circumstances the provision of a Standby Equity Distribution
Agreement for companies that are traded on the Over-the-Counter Bulletin Board
has the potential to cause a significant downward pressure on the price of
common stock. This is especially the case if the shares being placed into the
market exceed the market's ability to take up the increased stock or if we have
not performed in such a manner to show that the equity funds raised will be used
to grow our Company. Such an event could place further downward pressure on the
price of common stock. Under the terms of our Standby Equity Distribution
Agreement, we may request numerous draw downs pursuant to the terms of the
Standby Equity Distribution Agreement. Even if we use the Standby Equity
Distribution Agreement to grow our revenues and profits or invest in assets
which are materially beneficial to us the opportunity exists for short sellers
and others to contribute to the future decline of our stock price. If there are
significant short sales of stock, the price decline that would result from this
activity will cause the share price to decline more so which in turn may cause
long holders of the stock to sell their shares thereby contributing to sales of
stock in the market. If there is an imbalance on the sell side of the market for
the stock the price will decline.
It is not possible to predict those circumstances whereby short sales could
materialize or to what the share price could drop. In some companies that have
been subjected to short sales the stock price has dropped to near zero. This
could happen to our stock price.
The Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower
Than The Prices Paid By Other People Participating In This Offering
The price in this offering will fluctuate based on the prevailing market
price of the common stock on the Over-the-Counter Bulletin Board. Accordingly,
the price you pay in this offering may be higher or lower than the prices paid
by other people participating in this offering.
We May Not Be Able To Access Sufficient Funds Under The Standby Equity
Distribution Agreement When Needed
We are dependent on external financing to fund our operations. Our
financing needs are expected to be partially provided from the Standby Equity
Distribution Agreement. No assurances can be given that such financing will be
available in sufficient amounts or at all when needed, in part, because we are
limited to a maximum draw down of $750,000 during any seven trading day period.
In addition, the number of shares being registered may not be sufficient to draw
all funds available to us under the Standby Equity Distribution Agreement. Based
on the assumed offering price of $0.49 and the 5,000,000 shares we are
registering, we would not be able to draw the entire $5 million available under
the Standby Equity Distribution Agreement. At this assumed price, we will be
able to draw $2,450,000 with the 5,000,000 shares being registered for issuance
under the Standby Equity Distribution Agreement. We would be required to
register 5,204,082 additional shares at this assumed price to obtain the entire
$5 million available under the Standby Equity Distribution Agreement.
We May Not Be Able To Draw Down Under The Standby Equity Distribution Agreement
If The Investor Holds More Than 9.9% Of Our Common Stock
In the event Cornell Capital holds more than 9.99% of our then-outstanding
common stock, we will be unable to draw down on the Standby Equity Distribution
Agreement. Currently, Cornell Capital has beneficial ownership of 1.7% of our
common stock and therefore we would be able to make limited draw downs on the
Standby Equity Distribution Agreement so long as Cornell Capital's beneficial
ownership remains below 9.99%. If Cornell Capital Partner's beneficial ownership
becomes 9.99% or more, we would be unable to draw down on the Standby Equity
Distribution Agreement. In that event, if we are unable to obtain additional
external funding or generate revenue from the sale of our products, we could be
forced to curtail or cease our operations.
11
Our Common Stock Is Deemed To Be "Penny Stock," Which May Make It More Difficult
For Investors To Sell Their Shares Due To Suitability Requirements
Our common stock is deemed to be "penny stock" as that term is defined in
Rule 3a51-1 promulgated under the Securities Exchange Act of 1934. Penny stocks
are stocks:
o With a price of less than $5.00 per share;
o That are not traded on a "recognized" national exchange;
o Whose prices are not quoted on the Nasdaq automated quotation system
o Nasdaq stocks that trade below $5.00 per share are deemed a "penny stock"
for purposes of Section 15(b)(6) of the Exchange Act
o In issuers with net tangible assets less than $2.0 million (if the issuer
has been in continuous operation for at least three years) or $5.0 million
(if in continuous operation for less than three years), or with average
revenues of less than $6.0 million for the last three years.
Broker/dealers dealing in penny stocks are required to provide potential
investors with a document disclosing the risks of penny stocks. Moreover,
broker/dealers are required to determine whether an investment in a penny stock
is a suitable investment for a prospective investor. These requirements may
reduce the potential market for our common stock by reducing the number of
potential investors. This may make it more difficult for investors in our common
stock to sell shares to third parties or to otherwise dispose of them. This
could cause our stock price to decline.
12
FORWARD-LOOKING STATEMENTS
Information included or incorporated by reference in this prospectus may
contain forward-looking statements. This information may involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may," "should," "expect," "anticipate," "estimate," "believe,"
"intend" or "project" or the negative of these words or other variations on
these words or comparable terminology.
This prospectus contains forward-looking statements, including statements
regarding, among other things, (a) our projected sales and profitability, (b)
our growth strategies, (c) anticipated trends in our industry, (d) our future
financing plans and (e) our anticipated needs for working capital. These
statements may be found under "Management's Discussion and Analysis or Plan of
Operations" and "Description of Business," as well as in this prospectus
generally. Actual events or results may differ materially from those discussed
in forward-looking statements as a result of various factors, including, without
limitation, the risks outlined under "Risk Factors" and matters described in
this prospectus generally. In light of these risks and uncertainties, there can
be no assurance that the forward-looking statements contained in this prospectus
will in fact occur.
13
SELLING STOCKHOLDERS
The following table presents information regarding the selling
stockholders. The selling shareholders are the entities who have assisted in or
provided financing to the Company. A description of each selling shareholder's
relationship to the Company and how each selling shareholder acquired the shares
to be sold in this offering is detailed in the information immediately following
this table.
Percentage
of
Percentage Outstanding Percentage
of Shares to be Shares to of
Outstanding Acquired be Acquired Outstanding
Shares Under the Under the Shares
Beneficially Standby Standby Beneficially
Shares Owned Equity Equity Shares Owned
Beneficially Owned Before Distribution Distribution to be Sold in After
Selling Stockholder Before Offering(1) Offering(2) Agreement Agreement the Offering Offering
Cornell Capital Partners, LP 381,888(2) 1.70% 5,000,000 18.18% 5,381,888(3) 0%
Spartan Securities Group, Ltd. 27,278 * -- -- 27,278 0%
George O' Leary 244,000(4) 1.07% -- -- 244,000 0%
Dr. Phillip D. Cotter 81,649(4) * -- -- 81,649 0%
Dr. Micheal T. Dent (5) 2,720,535 11.96% -- -- 129,006 9.27%
April 2003 Private Placement
Steven C. Jones (6) 12,969,252 53.18% -- -- 573,797 42.54%
2004 Private Placement
Competitive Capital Partners,
LP (7) 800,000 3.56% -- -- 400,000 1.46%
The Craigmore Corporation
Defined Benefit Pension Plan(8) 400,000 1.78% -- -- 400,000 0%
National Investor Services
Corp. (9) 200,000 * -- -- 200,000 0%
Stillman Limited Partnership(10) 200,000 * -- -- 200,000 0%
White Financial Money Purchase
Plan (11) 100,000 * -- -- 100,000 0%
Teddy P. Elett, Trustee 800,000 3.56% -- -- 800,000 0%
Adam Fueredi, M.D. 100,000 * -- -- 100,000 0%
Edwin Goldberg, M.D. 100,000 * -- -- 100,000 0%
Suzanne T. Hale 100,000 * -- -- 100,000 0%
John M. O'Neill 200,000 * -- -- 200,000 0%
Jeffrey S. Place 100,000 * -- -- 100,000 0%
James R. Rehak and Joann M.
Rehak - Joint Tenants In Common 300,000 1.33% -- -- 300,000 0%
January 2005 Private Placement
OK Enterprises, Inc. (12) 170,000 * -- -- 170,000 0%
January 2005 / 2004 Private
Placement
Thomas P. Hale 106,667 * -- -- 106,667 0%
March 2005 Private Placement
James J. O' Reilley 71,429 * -- -- 71,429 0%
Don E. Haney and Mary E.
Haney - Joint Tenants in
Common 142,857 * -- -- 142,857 0%
May 2005 Private Placement
Jennifer Dana Deane Trust(13) 71,429 * -- -- 71,429 0%
Total 20,386,984 81.66% 5,000,000 18.18% 10,000,000 60.94%
========== ====== ========= ====== ========== ======
____________________________________________
* Less than 1%.
14
(1) Applicable percentage of ownership is based on 22,498,252 shares of common
stock outstanding as of June , 20, 2005 together with securities
exercisable or convertible into shares of common stock within 60 days of
June 20, 2005, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of common stock are deemed to be beneficially owned by the person
holding such securities for the purpose of computing the percentage of
ownership of such person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Note
that affiliates are subject to Rule 144 and Insider trading regulations -
percentage computation is for form purposes only.
(2) Consists of the 381,888 shares of common stock received as a commitment fee
under the Standby Equity Distribution Agreement on June 6, 2005 in the
amount of $140,000.
(3) Includes the shares acquired by Cornell Capital Partners under the Standby
Equity Distribution Agreement and the 381,888 shares of common stock
received as a commitment fee under the Standby Equity Distribution
Agreement on June 6, 2005.
(4) Consists of shares underlying warrants which are currently exercisable.
(5) Consists of 2,385,000 founders shares issued in conjunction with starting the
Company, 85,535 S-8 shares issued in connection with the provision of certain
services to the Company, and 250,000 options which are currently exercisable
within 60 days.
(6) Steven Jones acts as Managing Member of Medical Venture Partners, LLC,
which is the general partner of Aspen Select Healthcare, LP. Aspen Select
Healthcare owns 9,903,279 shares of the Company and has 1,891,378 warrants,
which are currently exercisable within 60 days. Mr. Jones also owns
1,174,595 shares personally. Since Mr. Jones has voting and investment
power of the shares held by Aspen Select Healthcare, he is deemed to have
beneficial ownership of such shares.
(7) All investment decisions of Competitive Capital Partners, LP are made by
its principal, Thomas D. Conrad.
(8) All investment decisions of The Craigmore Corporation Defined Benefit
Pension Plan are made by its Trustee, Gary L. Shapiro.
(9) All investment decisions of National Investor Services Corp. are made by
Lynn N. Edelman.
(10) All investment decisions of Stillman Limited Partnership are made by its
General Partner, Andrew Stillman.
(11) All investment decisions of White Financial Money Purchase Plan are made by
its Trustee, Kevin White.
(12) All investment decisions of OK Enterprises, Inc. are made by its President,
William B. Larson.
(13) All investment decisions of the Jennifer Dana Deane Trust are made by its
Trustee, Jennifer Deane.
The following information contains a description of each selling
shareholder's relationship to the Company and how each selling shareholder
acquired the shares to be sold in this offering is detailed below. None of the
selling stockholders have held a position or office, or had any other material
relationship, with the Company, except as follows:
Shares Acquired In Transactions With The Company
Cornell Capital Partners, LP. Cornell Capital Partners, LP is the investor
under the Standby Equity Distribution Agreement. All investment decisions of,
and control of, Cornell Capital Partners are held by its general partner,
Yorkville Advisors, LLC. Mark Angelo, the managing member of Yorkville Advisors,
makes the investment decisions on behalf of and controls Yorkville Advisors.
Cornell Capital Partners acquired or will acquire all shares being registered in
this offering in financing transactions with the Company. Those transactions are
explained below:
o Standby Equity Distribution Agreement. On June 6, 2005, we entered into a
Standby Equity Distribution Agreement with Cornell Capital Partners.
Pursuant to the Standby Equity Distribution Agreement, we may, at our
discretion, periodically sell to Cornell Capital Partners shares of common
stock for a total purchase price of up to $5.0 million. For each share of
common stock purchased under the Standby Equity Distribution Agreement,
Cornell Capital Partners will pay the Company 98% of, or a 2% discount to,
the lowest volume weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our
common stock is traded for the five days immediately following the notice
date. Further, Cornell Capital Partners will retain 5% of each advance
under the Standby Equity Distribution Agreement. We are registering
5,000,000 shares in this offering which may be issued under the Standby
Equity Distribution Agreement. For the Company to receive gross proceeds of
$5.0 million using the 5,000,000 shares being registered in this
prospectus, the price of our common stock would need to average $1.00 per
share. In connection with the Standby Equity Distribution Agreement,
Cornell Capital Partners received 381,888 shares of common stock from the
Company on June 6, 2005 as a commitment fee in the amount of $140,000. We
are also registering these shares in this offering.
There are certain risks related to sales by Cornell Capital Partners, including:
o The outstanding shares will be issued based on discount to the market rate.
As a result, the lower the stock price around the time Cornell is issued
shares, the greater chance that Cornell gets more shares. This could result
in substantial dilution to the interests of other holders of common stock.
o To the extent Cornell sells its common stock, the common stock price may
decrease due to the additional shares in the market. This could allow
Cornell to sell greater amounts of common stock, the sales of which would
further depress the stock price.
15
o The significant downward pressure on the price of the common stock as
Cornell sells material amounts of common stocks could encourage short sales
third parties. This could place further downward pressure on the price of
the common stock.
Spartan Securities Group, Ltd. Spartan Securities Group, Ltd. is an
unaffiliated registered broker-dealer that has been retained by us. For its
services in connection with the Standby Equity Distribution Agreement, Spartan
Securities Corporation received a fee of $10,000, which were paid by the
issuance of 27,278 shares of common stock of the Company on June 6, 2005 under
the Standby Equity Distribution Agreement. These shares are being registered in
this offering. All investment decisions of Spartan Securities Group, Ltd. are
made by its President, Micah Eldred.
George O' Leary. The Company issued warrants to Mr. O'Leary to purchase
244,000 shares of common stock of the Company for consulting services rendered
by Mr. O'Leary to the Company from October 1, 2004 - March 31, 2005. The
exercise price is 100,000 shares at $0.25 per share and 144,000 shares at $0.01
per share. The warrants expire on June 14, 2010. We are registering the 244,000
shares of common stock underlying the warrants in this offering.
Dr. Phillip D. Cotter. The Company issued warrants to Dr. Cotter to
purchase 72,440 shares of common stock of the Company for consulting services
rendered by Dr. Cotter to the Company. The exercise price of the warrants is
$0.01 per share. The warrants expire on June 14, 2008. We are registering the
72,440 shares of common stock underlying the warrants in this offering.
Dr. Michael T. Dent. The Company issued 2,385,000 founders shares in
connection with Dr. Dent's formation of the Company. The Company also issued
105,635 shares under an S-8 Registration Statement in connection with services
provided to the Company by Dr. Dent during 2002, of which 20,100 of such shares
have been sold. Dr. Dent also has 250,000 options shares which are currently
exercisable within 60 days.
Other Selling Shareholders
April 2003 Private Placement
In April 2003, the Company conducted a private placement to the investor
listed under this heading in the selling stockholders table above. The Company
received net proceeds of $114,271 (after deducting certain transaction expenses)
through the issuance of 13,927,062 shares of common stock. 712,012 of these
shares are being registered in this offering.
2004 Private Placement
During 2004, the Company conducted a private placement offering to the
investors listed under this heading in the selling stockholders table above. The
Company received net proceeds of $740,000 (after deducting certain transaction
expenses) through the issuance of 3,040,000 shares of common stock. These shares
are being registered in this offering.
January 2005 Private Placement
During January 2005, the Company conducted a private placement offering to
the investors listed under this heading in the selling stockholders table above.
The Company raised a total of $71,000 through the issuance of 236,667 shares of
common stock. These shares are being registered in this offering.
March 2005 Private Placement
During March 2005, the Company conducted a private placement offering to
the investors listed under this heading in the selling stockholders table above.
The Company raised a total of $75,000 through the issuance of 214,286 shares of
common stock. These shares are being registered in this offering.
16
May 2005 Private Placement
During May 2005, the Company conducted a private placement offering to the
investor listed under this heading in the selling stockholders table above. The
Company raised a total of $25,000 through the issuance of 71,429 shares of
common stock. These shares are being registered in this offering.
With respect to the sale of unregistered securities referenced above, all
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 (the "1933 Act"), and Regulation D promulgated under the
1933 Act. In each instance, the purchaser had access to sufficient information
regarding the Company so as to make an informed investment decision. More
specifically, we had a reasonable basis to believe that each purchaser was an
"accredited investor" as defined in Regulation D of the 1933 Act and otherwise
had the requisite sophistication to make an investment in our securities.
USE OF PROCEEDS
This prospectus relates to shares of our common stock that may be offered
and sold from time to time by certain selling stockholders. There will be no
proceeds to us from the sale of shares of common stock in this offering.
However, we will receive the proceeds from the sale of shares of common stock to
Cornell Capital Partners under the Standby Equity Distribution Agreement. The
purchase price of the shares purchased under the Standby Equity Distribution
Agreement will be equal to 98% of the lowest volume weighted average price of
our common stock on the Over-the-Counter Bulletin Board for the five days
immediately following the notice date. The Company will pay Cornell Capital
Partners 5% of each advance as an additional fee.
Pursuant to the Standby Equity Distribution Agreement, the Company cannot
draw more than $750,000 every five trading days or more than $5.0 million over
twenty-four months.
For illustrative purposes only, we have set forth below our intended use of
proceeds for the range of net proceeds indicated below to be received under the
Standby Equity Distribution Agreement. The table assumes estimated offering
expenses of $85,000, plus 5% retainage payable to Cornell Capital Partners under
the Standby Equity Distribution Agreement. The figures below are estimates only,
and may be changed due to various factors, including the timing of the receipt
of the proceeds.
Gross Proceeds $ 1,000,000 $ 2,000,000 $ 3,000,000 $ 5,000,000
Net Proceeds $ 865,000 $ 1,815,000 $ 2,765,000 $ 4,665,000
No. of shares issued
under the Equity
Distribution Agreement
at an assumed offering
price of $0.4900 2,040,817 4,081,633 6,122,449 (1) 10,204,082 (2)
USE OF PROCEEDS:
General Corporate
Purposes 865,000 1,815,000 2,765,000 4,665,000
Total $ 865,000 $ 1,815,000 $ 2,765,000 $ 4,665,000
============ ============ ============ ============
(1) The Company would need to register additional shares of common stock to
faccess this amount of proceeds under the Standby Equity Distribution Agreement
at an assumed offering price of $0.49. The Company would be required to register
1,122,449 additional shares at this price to obtain the entire $5 million
available under the Standby Equity Distribution Agreement.
(2) The Company would need to register additional shares of common stock to
access this amount of proceeds under the Standby Equity Distribution Agreement
at an assumed offering price of $0.49. The Company would be required to register
5,204,082 additional shares at this price to obtain the entire $5 million
available under the Standby Equity Distribution Agreement.
The Standby Equity Distribution Agreement limits the Company's use of
proceeds to general corporate purposes and prohibits the use of proceeds to pay
any judgment or liability incurred by any officer, director or employee of the
Company, except under certain limited circumstances. The number of shares of our
common stock issuable to Cornell Capital Partners under the Standby Equity
17
Distribution Agreement is subject to a 9.9% cap on the beneficial ownership that
Cornell Capital Partners and its affiliates may have at the time of each
installment. The amount of funds we can actually draw down under the Standby
Equity Distribution Agreement is limited based upon how many shares of our
common stock are beneficially owned by each of Cornell Capital Partners and its
affiliates at the time of the draw request. In the event Cornell Capital
Partners and its affiliates hold more than 9.9% of our then-outstanding common
stock, we will be unable to obtain a cash advance under the Standby Equity
Distribution Agreement. A possibility exists that Cornell Capital Partners and
its affiliates may own more than 9.9% of our outstanding common stock at a time
when we would otherwise plan to make an advance under the Standby Equity
Distribution Agreement. In that event, if we are unable to obtain additional
external funding or generate revenue from the sale of our products and services,
we could be forced to curtail or cease our operations.
18
DILUTION
The net tangible book value of the Company as of March 31, 2005 was
$(327,508) or $(0.0149) per share of common stock. Net tangible book value per
share is determined by dividing the tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
our common stock. Since this offering is being made solely by the selling
stockholders and none of the proceeds will be paid to the Company, our net
tangible book value will be unaffected by this offering. Our net tangible book
value and our net tangible book value per share, however, will be impacted by
the common stock to be issued under the Standby Equity Distribution Agreement.
The amount of dilution will depend on the offering price and number of shares to
be issued under the Standby Equity Distribution Agreement. The following example
shows the dilution to new investors at an offering price of $0.49 per share,
which is in the range of the recent share price.
If we assume that we had issued 5,000,000 shares of common stock under the
Standby Equity Distribution Agreement at an assumed offering price of $0.49 per
share (i.e., the number of shares registered in this offering under the Standby
Equity Distribution Agreement), less retention fees of $122,500 and offering
expenses of $85,000, our net tangible book value as of March 31, 2005 would have
been $1,914,992 or $0.0709 per share. Note that at an offering price of $0.49
per share, we would receive gross proceeds of $2,450,000 and net proceeds of
$2,242,500 of the $5,000,000 available under the Standby Equity Distribution
Agreement. At an assumed offering price of $0.49, Cornell Capital Partners would
receive a discount of $122,500 on the purchase of 5,000,000 shares of common
stock. Such an offering would represent an immediate increase in net tangible
book value to existing stockholders of $0.0858 per share and an immediate
dilution to new stockholders of $0.4191 per share.
The following table illustrates the per share dilution:
Assumed public offering price per share $0.4900
Net tangible book value per share before this offering $(0.0149)
Increase attributable to new investors $ 0.0858
Net tangible book value per share after this offering $0.0709
Dilution per share to new stockholders $0.4191
=======
The offering price of our common stock is based on the then-existing market
price. In order to give prospective investors an idea of the dilution per share
they may experience, we have prepared the following table showing the dilution
per share at various assumed offering prices, using the tangible book value of
the Company and the shares outstanding as of March 31, 2005, as adjusted for the
shares sold to Cornell Capital Partners under the Standby Equity Distribution
Agreement:
DILUTION
ASSUMED NO. OF SHARES TO BE PER SHARE
OFFERING PRICE ISSUED TO NEW INVESTORS
$0.4900 5,000,000(1) $0.4191
$0.3675 5,000,000 $0.3182
$0.2450 5,000,000 $0.2172
$0.1225 5,000,000 $0.1162
(1) This represents the maximum number of shares of common stock that are being
registered under the Standby Equity Distribution Agreement at this time.
19
STANDBY EQUITY DISTRIBUTION AGREEMENT
Summary
On June 6, 2005, we entered into a Standby Equity Distribution Agreement
with Cornell Capital Partners, LP Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners shares of common stock for a total purchase price of up to $5.0
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay 98% of, or a 2%
discount to, the lowest volume weighted average price of our common stock on the
Over-the-Counter Bulletin Board or other principal market on which our common
stock is traded for the five days immediately following the notice date. The
number of shares purchased by Cornell Capital Partners for each advance is
determined by dividing the amount of each advance by the purchase price for the
shares of common stock. Further, Cornell Capital Partners will retain 5% of each
advance under the Standby Equity Distribution Agreement. Cornell Capital
Partners is a private limited partnership whose business operations are
conducted through its general partner, Yorkville Advisors, LLC. The
effectiveness of the sale of the shares under the Standby Equity Distribution
Agreement is conditioned upon us registering the shares of common stock with the
Securities and Exchange Commission and obtaining all necessary permits or
qualifying for exemptions under applicable state law. The costs associated with
this registration will be borne by us. There are no other significant closing
conditions to draws under the equity line.
Standby Equity Distribution Agreement Explained
Pursuant to the Standby Equity Distribution Agreement, we may periodically
sell shares of common stock to Cornell Capital Partners to raise capital to fund
our working capital needs. The periodic sale of shares is known as an advance.
We may request an advance every five trading days. A closing will be held six
trading days after such written notice at which time we will deliver shares of
common stock and Cornell Capital Partners will pay the advance amount. There are
no closing conditions imposed on the Company for any of the draws other than
that we have filed our periodic and other reports with the Securities and
Exchange Commission, delivered the stock for an advance, the trading of the
Company common stock has not been suspended, and we have given written notice
and associated correspondence to Cornell Capital Partners. We are limited
however, on our ability to request advances under the Standby Equity
Distribution Agreement based on the number of shares we have registered in this
registration statement. For example, at an assumed offering price of $0.49, we
would not be able to draw the entire gross proceeds of $5,000,000 available
under the Standby Equity Distribution Agreement with the 5,000,000 shares we are
registering. The Company would be required to register 5,204,082 additional
shares at this assumed price to obtain the entire $5 million available under the
Standby Equity Distribution Agreement. In order to access all funds available to
us under the Standby Equity Distribution Agreement with the 5,000,000 shares
being registered in this offering, the average price of shares issued under the
Standby Equity Distribution Agreement would need to be $1.00.
We may request advances under the Standby Equity Distribution Agreement
once the underlying shares are registered with the Securities and Exchange
Commission. Thereafter, we may continue to request advances until Cornell
Capital Partners has advanced $5.0 million or 24 months after the effective date
of the this registration statement, whichever occurs first.
The amount of each advance is subject to a maximum amount of $750,000, and
we may not submit an advance within seven trading days of a prior advance. The
amount available under the Standby Equity Distribution Agreement is not
dependent on the price or volume of our common stock. Our ability to request
advances is conditioned upon us registering the shares of common stock with the
SEC. In addition, we may not request advances if the shares to be issued in
connection with such advances would result in Cornell Capital Partners owning
more than 9.99% of our outstanding common stock. Based on a recent average stock
price of $0.50 Cornell Capital Partners' beneficial ownership of the Company's
common stock is 1.7% and therefore we would be permitted to make limited draws
on the Standby Equity Distribution Agreement so long as Cornell Capital
Partners' beneficial ownership of our common stock remains lower than 9.99%. A
possibility exists that Cornell Capital Partners may own more than 9.99% of the
Company's outstanding common stock at a time when we would otherwise plan to
make an advance under the Standby Equity Distribution Agreement.
We do not have any agreements with Cornell Capital Partners regarding the
distribution of such stock, although Cornell Capital Partners has indicated that
it intends to promptly sell any stock received under the Standby Equity
Distribution Agreement.
We cannot predict the actual number of shares of common stock that will be
issued pursuant to the Standby Equity Distribution Agreement, in part, because
the purchase price of the shares will fluctuate based on prevailing market
20
conditions and we have not determined the total amount of advances we intend to
draw. Nonetheless, we can estimate the number of shares of our common stock that
will be issued using certain assumptions. Assuming we issued the number of
shares of common stock being registered in the accompanying registration
statement at a recent price of $0.50 per share, we would issue 5,000,000 shares
of common stock to Cornell Capital Partners for gross proceeds of $2,450,000.
These shares would represent 18.18% of our outstanding common stock upon
issuance. In order to access all funds available to us under the Standby Equity
Distribution Agreement with the 5,000,000 shares being registered in this
offering, the average price of shares issued under the Standby Equity
Distribution Agreement would need to be $1.00.
There is an inverse relationship between our stock price and the number of
shares to be issued under the Standby Equity Distribution Agreement. That is, as
our stock price declines, we would be required to issue a greater number of
shares under the Standby Equity Distribution Agreement for a given advance. This
inverse relationship is demonstrated by the following tables, which show the net
cash to be received by the Company and the number of shares to be issued under
the Standby Equity Distribution Agreement at a recent price of $0.50 per share
and 25%, 50% and 75% discounts to the recent price.
Net Cash To the Company:
Market Price: $0.5000 $0.5000 $0.5000 $0.5000
Purchase Price: $0.4900 $0.3675 $0.2450 $0.1225
No. of Shares(1): 5,000,000 5,000,000 5,000,000 5,000,000
Total Outstanding (2): 27,498,252 27,498,252 27,498,252 27,498,252
Percent Outstanding (3): 18.18% 18.18% 18.18% 18.18%
Net Cash to the Company(4): $2,242,500 $1,660,625 $1,078,750 $496,875
(1) Represents the number of shares of common stock registered in the
accompanying registration statement, which could be issued to Cornell
Capital Partners under the Standby Equity Distribution Agreement at the
prices set forth in the table.
(2) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners under the Standby Equity
Distribution Agreement.
(3) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(4) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
estimated offering expenses and does not take into consideration the value
of the 381,888 shares of common stock issued to Cornell Capital Partners as
a commitment fee and the additional commitment fee of $50,000, which may
become due and payable in the future.
Number of Shares To Be Issued:
Market Price: $0.5000 $0.5000 $0.5000 $0.5000
Purchase Price: $0.4900 $0.3675 $0.2450 $0.1225
No. of Shares(1)(2): 10,204,082 13,605,443 20,408,164 40,816,327
Total Outstanding (3): 32,702,334 36,103,695 42,906,416 63,314,579(4)
Percent Outstanding (5): 31.20% 37.68% 47.56% 64.47%
Net Cash to the Company(6): $4,665,000 $4,665,000 $4,665,000 $4,665,000
(1) We are only registering 5,000,000 shares of common stock under this
prospectus. We will need to register additional shares of common stock to
obtain the entire $5 million available under the Standby Equity
Distribution Agreement at these stated purchase prices.
(2) Represents that total number of shares of common stock which would need to
be issued at the stated purchase price to receive the entire $5.0 million
available under the Standby Equity Distribution Agreement.
(3) Represents the total number of shares of common stock outstanding after the
issuance of the shares to Cornell Capital Partners under the Standby Equity
Distribution Agreement.
(4) The Company's current Articles of Incorporation, as amended, authorize the
issuance of 100,000,000 shares of common stock.
(5) Represents the shares of common stock to be issued as a percentage of the
total number shares outstanding.
(6) Net cash equals the gross proceeds minus the 5% retainage and $85,000 in
estimated offering expenses and does not take into consideration the value
of the 381,888 shares of common stock issued to Cornell Capital Partners as
a commitment fee and the additional commitment fee of $50,000, which may
become due and payable in the future.
Proceeds used under the Standby Equity Distribution Agreement will be used
in the manner set forth in the "Use of Proceeds" section of this prospectus. We
cannot predict the total amount of proceeds to be raised in this transaction
21
because we have not determined the total amount of the advances we intend to
draw. Cornell Capital Partners has the ability to permanently terminate its
obligation to purchase shares of common stock from the Company under the Standby
Equity Distribution Agreement if there shall occur any stop order or suspension
of the effectiveness of this registration statement for an aggregate of fifty
(50) trading days other than due to acts by Cornell Capital Partners or if the
Company fails materially to comply with certain terms of the Standby Equity
Distribution Agreement, which remain uncured for thirty (30) days after notice
from Cornell Capital Partners.
All fees and expenses under the Standby Equity Distribution Agreement will
be borne by the Company. We expect to incur expenses of approximately $85,000 in
connection with this registration, consisting primarily of professional fees. In
connection with the Standby Equity Distribution Agreement, Cornell Capital
Partners received 381,888 shares of common stock from the Company on June 6,
2005 as a commitment fee in the amount of $140,000 under the Standby Equity
Distribution Agreement and Cornell Capital Partners will receive an additional
$50,000 commitment fee on the earlier of (i) June 6, 2006, or (ii) the date the
Company receives advances under the Standby Equity Distribution Agreement in an
amount greater than or equal to $2,500,000. The Company issued a promissory note
to Cornell Capital Partners for such additional commitment fee, which is
cancelable in the event the Company terminates the Standby Equity Distribution
Agreement prior to such promissory note becoming due.
22
PLAN OF DISTRIBUTION
The selling stockholders have advised us that the sale or distribution of
our common stock owned by the selling stockholders may be effected directly to
purchasers by the selling stockholders as principals or through one or more
underwriters, brokers, dealers or agents from time to time in one or more
transactions (which may involve crosses or block transactions) (i) on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted or (ii) in transactions otherwise than on the
over-the-counter market or in any other market on which the price of our shares
of common stock are quoted. Any of such transactions may be effected at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at varying prices determined at the time of sale or at negotiated
or fixed prices, in each case as determined by the selling stockholders or by
agreement between the selling stockholders and underwriters, brokers, dealers or
agents, or purchasers. If the selling stockholders effect such transactions by
selling their shares of common stock to or through underwriters, brokers,
dealers or agents, such underwriters, brokers, dealers or agents may receive
compensation in the form of discounts, concessions or commissions from the
selling stockholders or commissions from purchasers of common stock for whom
they may act as agent (which discounts, concessions or commissions as to
particular underwriters, brokers, dealers or agents may be in excess of those
customary in the types of transactions involved).
Cornell Capital Partners is an "underwriter" within the meaning of the
Securities Act of 1933 in connection with the sale of common stock under the
Standby Equity Distribution Agreement. Cornell Capital Partners will pay us 98%
of, or a 2% discount to, the lowest volume weighted average price of our common
stock on the Over-the-Counter Bulletin Board or other principal trading market
on which our common stock is traded for the five days immediately following the
advance date. In addition, Cornell Capital Partners will retain 5% of the
proceeds received by us under the Standby Equity Distribution Agreement, and
received 381,888 shares of common stock from the Company on June 6, 2005 as a
commitment fee in the amount of $140,000 under the Standby Equity Distribution
Agreement and Cornell Capital Partners will receive an additional $50,000
commitment fee on the earlier of (i) June 6, 2006 or (ii) the date the Company
receives advances under the Standby Equity Distribution Agreement in an amount
greater than or equal to $2,500,000. The Company issued a promissory note to
Cornell Capital Partners for such additional commitment fee, which is cancelable
in the event the Company terminates the Standby Equity Distribution Agreement
prior to such promissory note becoming due. The 2% discount, the 5% retainage,
commitment fee shares and the $50,000 promissory note are underwriting
discounts. In addition, the Company engaged Spartan Securities Group, Ltd., a
registered broker-dealer, to advise us in connection with the Standby Equity
Distribution Agreement. For its services, Spartan Securities Group, Ltd.
received 27,278 shares of the Company's common stock under the Standby Equity
Distribution Agreement.
Cornell Capital Partners was formed in February 2000 as a Delaware limited
partnership. Cornell Capital Partners is a domestic hedge fund in the business
of investing in and financing public companies. Cornell Capital Partners does
not intend to make a market in our stock or to otherwise engage in stabilizing
or other transactions intended to help support the stock price. Prospective
investors should take these factors into consideration before purchasing our
common stock.
Under the securities laws of certain states, the shares of common stock may
be sold in such states only through registered or licensed brokers or dealers.
The selling stockholders are advised to ensure that any underwriters, brokers,
dealers or agents effecting transactions on behalf of the selling stockholders
are registered to sell securities in all fifty states. In addition, in certain
states the shares of common stock may not be sold unless the shares have been
registered or qualified for sale in such state or an exemption from registration
or qualification is available and is complied with.
We will pay all the expenses incident to the registration, offering and
sale of the shares of common stock to the public hereunder other than
commissions, fees and discounts of underwriters, brokers, dealers and agents. If
any of these other expenses exists, the Company expects the selling stockholders
to pay these expenses. We have agreed to indemnify Cornell Capital Partners and
its controlling persons against certain liabilities, including liabilities under
the Securities Act. We estimate that the expenses of the offering to be borne by
us will be approximately $85,000, as well as retention of 5% of the gross
proceeds received under the Standby Equity Distribution Agreement. In addition,
the Company engaged Spartan Securities Group, Ltd., a registered broker-dealer,
to advise us in connection with the Standby Equity Distribution Agreement. For
its services, Spartan Securities Corporation received 27,278 shares of the
Company's common stock on June 6, 2005 under the Standby Equity Distribution
Agreement. The offering expenses consist of: a SEC registration fee of $471,
printing expenses of $2,500, accounting fees of $15,000, legal fees of $50,000
and miscellaneous expenses of $17,029. We will not receive any proceeds from the
sale of any of the shares of common stock by the selling stockholders. We will,
however, receive proceeds from the sale of common stock under the Standby Equity
Distribution Agreement.
The selling stockholders are subject to applicable provisions of the
Securities Exchange Act of 1934, as amended, and its regulations, including,
23
Regulation M. Under Registration M, the selling stockholders or their agents may
not bid for, purchase, or attempt to induce any person to bid for or purchase,
shares of our common stock while such selling stockholders are distributing
shares covered by this prospectus. Pursuant to the requirements of Item 512 of
Regulation S-B and as stated in Part II of this Registration Statement, the
Company must file a post-effective amendment to the accompanying Registration
Statement once informed of a material change from the information set forth with
respect to the Plan of Distribution.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion of the financial condition and results of
operations should be read in conjunction with the consolidated financial
statements and related notes thereto. The following discussion contains certain
forward-looking statements that involve risk and uncertainties. Our actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, risks
and uncertainties related to the need for additional funds, the rapid growth of
the operations and our ability to operate profitably after the initial growth
period is completed. We undertake no obligation to publicly release the results
of any revisions to those forward-looking statements that may be made to reflect
any future events or circumstances.
Critical Accounting Policies
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires our management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Our management routinely makes judgments and estimates about the effects of
matters that are inherently uncertain.
Our critical accounting policies are those where we have made difficult,
subjective or complex judgments in making estimates, and/or where these
estimates can significantly impact our financial results under different
assumptions and conditions. Our critical accounting policies are:
o Revenue Recognition
o Accounts Receivable
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. 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.
Recent Accounting Pronouncements
FIN 46 - Consolidation of Variable Interest Entities
In January 2003, the FASB issued FIN 46, (revised in December 2003 as
FIN46R) "Consolidation of Variable Interest Entities," which clarifies the
application of Accounting Research Bulletin ("ARB") 51, Consolidated Financial
Statements, to certain entities (called variable interest entities) in which
equity investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The disclosure requirements of this Interpretation are effective for all
financial statements issued after January 31, 2003. The consolidation
requirements apply to all variable interest entities created after January 31,
2003. In addition, public companies must apply the consolidation requirements to
variable interest entities that existed prior to February 1, 2003 and remain in
existence as of the beginning of annual or interim periods beginning after June
15, 2003. The adoption of FIN 46R had no impact on our financial statements as
we do not have any variable interests in variable interest entities.
25
SFAS 150 - Accounting for Certain `Financial Instruments with
Characteristics of Both Liabilities and Equity
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity," was issued to establish
new standards for how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an entity classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of these instruments were
previously classified as equity. This statement was effective when issued for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for calendar year public companies for the third quarter of 2003.
The adoption of SFAS 150 had no impact on our financial statements.
SFAS 132 - Employers' Disclosures about Pensions and Other Postretirement
Benefits
In December 2003, FASB Statement No. 132 (revised) was issued which
prescribes the required employers' disclosures about pension plans and other
postretirement benefit plans; but it does not change the measurement or
recognition of those plans. The Statement retains and revises the disclosure
requirements contained in the original Statement 132. It also requires
additional disclosures about the assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other postretirement
benefit plans. The Statement generally is effective for fiscal years ending
after December 15, 2003. Since we do have any types of pension plans or other
postretirement benefits, the adoption of this Statement did not have an effect
on our financial statements.
SFAS 123(R) Share-Based Payments
In December 2004, the Financial Accounting Standards Board issued Statement
Number 123 ("FAS 123 (R)"), Share-Based Payments. FAS 123 (R) requires all
entities to recognize compensation expense in an amount equal to the fair value
of shared-based payments such as stock options granted to employees. We will be
required to apply FAS 123 (R) on a modified prospective method. Under this
method, we are required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. In addition, we may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in the pro forma
disclosures that had been required by FAS 123. FAS 123 (R) is effective for the
first reporting period beginning after June 15, 2005, unless such date of
adoption is delayed by the SEC. We intend to adopt FAS 123(R) when it becomes
required to do so. Since the majority of options and warrants outstanding as of
December 31, 2004 were vested, we believe that the biggest impact from this
change in accounting treatment will come from expensing newly awarded options
and warrants (including options issued pursuant to the employment agreement
discussed at Note F)
SFAS 153 - Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29
In December 2004, FASB Statement No. 153 was issued amending APB Opinion
No. 29 to eliminate the exception allowing nonmonetary exchanges of similar
productive assets to be measured based on the carrying value of the assets
exchanged as opposed to at their fair values. This exception was replaced with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if the
future cash flows of the entity are expected to change significantly as a result
of the exchange. The provisions of this statement are effective for nonmonetary
asset exchanges occurring in fiscal periods beginning after the June 15, 2005.
The adoption of this statement did not have a material impact on our financial
statements.
SFAS - 146 Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002. SFAS 146
had no impact on our financial statements.
26
FIN- 45 Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued FASB Interpretation ("FIN") 45
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others," which elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of
the guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applied prospectively to guarantees issued
or modified after December 31, 2002. The adoption of these recognition
provisions will result in recording liabilities associated with certain
guarantees provided by us. The disclosure requirements of this Interpretation
are effective for financial statements of interim or annual periods ending after
December 15, 2002. FIN 45 has no impact on the Company's financial statements.
Results of Operations for the Three Months ended March 31, 2005 as Compared
to the Three Months ended March 31, 2004
During the three months ended March 31, 2005, our revenues increased
approximately 29% to approximately $230,000 from approximately $179,000 during
the three months ending March 31, 2004, primarily as a result of attracting new
customers to our services and increasing the volume of services sold to existing
customers. During the three months ending March 31, 2005, our cost of revenue
increased approximately 21% to approximately $177,000 from approximately
$146,000 during the three months ending March 31, 2004, 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 opening new
lines of business. This resulted in a 62% increase in our gross profit to
approximately $53,000 for the three months ended March 31, 2005 from
approximately $33,000 during the three months ended March 31, 2004. This change
is primarily attributable to our increased revenues and testing volumes for the
period ended March 31, 2005 as compared to the three month period ended March
31, 2004. We believe our gross margin will continue to improve as we perform
more tests.
During the three months ended March 31, 2005, our selling, general and
administrative expenses increased by approximately 33% to approximately $241,000
from $182,000 in the three months ended March 31, 2004. This increase was
primarily as a result of higher personnel and personnel-related expenses
associated with increased levels of staffing. Selling, 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 for the
most recent quarter increased approximately 28% to approximately $27,000 from
approximately $21,000 for the three months ended March 31, 2004. Interest
expense is mainly comprised of interest payable on advances under our Credit
Facility from Aspen, which have increased as a result of our increased
borrowing. In connection with our new credit facility, discussed below in
"Liquidity and Capital Resources," we recorded $131,337 of a debt discount for
the issuance of warrants and we incurred $53,587 of financing costs. These
amounts will be amortized to interest expense over the 24 month period of the
new credit facility.
As a result of the foregoing, our net loss for the three months-ended March
31, 2005 increased approximately 27% to approximately $215,000 from $170,000
during the three months-ended March 31, 2004.
Results of Operations for the year ended December 31, 2004 as compared to
the year ended December 31, 2003
During the fiscal year ended December 31, 2004, our revenues increased
approximately 51% to approximately $558,000 from approximately $370,000 during
the fiscal year ended December 31, 2003, primarily as a result of attracting new
customers to our services and increasing the volume of services sold to existing
customers. During 2004, our cost of revenue increased approximately 20% to
approximately $577,000 from approximately $482,000 in 2003, primarily as a
result of additional costs associated with hiring additional laboratory
personnel to support our increased testing volumes as well as increased costs as
a result of opening new lines of business. This resulted in a gross margin
deficit of approximately $19,000 in 2004 versus a gross margin deficit of
approximately $112,000 for 2003. In percentage terms, our gross margin deficit
decreased from negative 30% of revenue in 2003 to negative 3% of revenue in
2004. We expect our gross margin to improve and turn positive in 2005 as a
result of our expected increase in sales and as we begin to experience the
benefit of economies of scale on our costs.
During 2004, our general and administrative expenses increased by
approximately 86% to approximately $711,000 from approximately $383,000 in 2003,
primarily as a result of higher personnel and personnel-related expenses
associated with increased levels of staffing. 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 117% during 2004 to approximately $89,000 from approximately
27
$41,000 in 2003. Interest expense is mainly comprised of interest payable on
advances from our credit facility from MVP 3, LP, which have increased to fund
our losses.
As a result of the foregoing, our net loss increased by 53% or $283,000 to
$819,000 in 2004 from $536,000 in 2003. Our net loss per share was $0.04 for the
year ended December 31, 2004 and the year ended December 31, 2003.
During the twelve months ended December 31, 2004, our average revenue per
test increased by 8% from approximately $448 to approximately $484. Revenues per
test are a function of both the nature of the test and the payer (Medicare,
Medicaid, third party insurer, institutional client etc.). Our policy is to
record as revenue the amounts that we expect to collect based on published or
contracted amounts and/or prior experience with the payer. We have established a
reserve for uncollectible amounts based on estimates of what we will collect
from (a) third-party payers with whom we do not have a contractual arrangement
or sufficient experience to accurately estimate the amount of reimbursement we
will receive, (b) co-payments directly from patients, and (c) those procedures
that are not covered by insurance or other third party payers. On December 31,
2004, our Allowance for Doubtful Accounts reserve was approximately $8,700.
Liquidity and Capital Resources
During the three months ended March 31, 2005, our operating activities used
approximately $243,000 in cash. This amount primarily represented cash used to
pay general and administrative expenses associated with our operations and fund
our working capital needs. We also spent approximately $12,000 on new equipment.
We were able to finance operations and equipment purchases primarily through the
sale of equity securities and net advances under our Credit Facility, which
together provided approximately $254,000 during the three months ended March 31,
2005. At March 31, 2005, we had cash and cash equivalents of approximately
$113,000.
During the fiscal year ended December 31, 2004, our operating activities
used approximately $658,000 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 $86,000 on new equipment We were able
to finance operations and equipment purchases primarily through net advances on
our credit facility of approximately $91,000 and equity sales to third parties,
net of transaction expenses, of approximately $740,000. This resulted in net
cash from financing activities of approximately $832,000 for the year ended
December 31, 2004. At December 31, 2004, we had cash or cash equivalents of
approximately $113,000.
During 2004, we sold 3,040,000 shares of our common stock in a series of
private placements at $0.25/share to unaffiliated third party investors. These
transactions generated net proceeds to the Company of approximately $740,000
after deducting certain transaction expenses. Under the terms of the stock
purchase agreements used in these transactions, the Company agreed to use its
reasonable best efforts to file with the SEC within 180 days of any transaction,
and to cause to be declared effective thereafter, a resale registration
statement which includes the shares purchased by such third party investors. We
have registered these shares in this offering; however, we are still in breach
of such provision under certain of the stock purchase agreements executed with
third party investors until such time as this registration statement is declared
effective by the SEC. There were no penalties stipulated for failing to meet
this registration deadline.
On April 15, 2003, we entered into a revolving credit facility with MVP 3,
LP ("MVP 3"), a partnership controlled by certain of our shareholders. Under the
terms of the agreement MVP 3, LP agreed to make available up to $1.5 million of
debt financing with a stated interest rate of prime + 8% and such credit
facility had an initial maturity of March 31, 2005. At December 31, 2004, we
owed MVP 3, approximately $740,000 under this loan agreement, which is
classified as "Due to affiliates" under the current liabilities section of our
balance sheet. This obligation was repaid in full on March 23, 2005
On January 3, 2005, we issued 27,288 shares of common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $6,822 of accrued, but unpaid vacation.
During the period January 3, 2005 to March 31, 2005, we sold 450,953 shares
of our common stock in a series of private placements at $0.30/share and
$0.35/share to unaffiliated third party investors. These transactions generated
net proceeds to the Company of approximately $146,000. Under the terms of the
stock purchase agreements used in these transactions, the Company agreed to use
its reasonable best efforts to file with the SEC within 180 days of any
transaction, and to cause to be declared effective thereafter, a resale
registration statement which includes the shares purchased by such third party
investors. We have registered these shares in this offering.
On March 23, 2005, we entered into an agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) to refinance our existing
indebtedness of $740,000 and provide for additional liquidity of up to $760,000
28
to the Company. Under the terms of the agreement, Aspen Select Healthcare, LP
("Aspen"), a Naples, Florida-based private investment fund will make available
up to $1.5 million of debt financing in the form of a revolving credit facility
(the "Credit Facility") with an initial maturity of March 31, 2007. Aspen is
managed by its General Partner, Medical Venture Partners, LLC, which is
controlled by Steven C. Jones, a director of the Company.
Under the terms of the Credit Facility, 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 until April 30, 2005 and up to $1,000,000 on an unsecured basis after
April 30, 2005. The interest rate on the Credit Facility is prime + 6.0%,
payable monthly in arrears. 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
Aspen, (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. As part of the Credit Facility transaction, the Company also issued to
Aspen a five year Warrant to purchase up to 2,500,000 shares of its common stock
at an exercise price of $0.50/share.
On June 6, 2005, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners. Pursuant to the Standby Equity
Distribution Agreement, we may, at our discretion, periodically issue and sell
to Cornell Capital Partners shares of common stock for a total purchase price of
$5.0 million. The amount of each advance is subject to a maximum advance amount
of $750,000, and we may not submit any advance within five trading days of a
prior advance. Cornell Capital Partners will pay the Company 98% of, or a 2%
discount to, the lowest volume weighted average price of the common stock during
the five consecutive trading day period immediately following the notice date.
Of each advance made by the Company, Cornell Capital Partners shall retain 5% of
each advance. In addition, Cornell Capital Partners received a one-time
commitment fee in the form of 381,888 shares of common stock in the amount of
$140,000 on June 6, 2005, under the Standby Equity Distribution Agreement and
will receive an additional commitment fee in the form of a $50,000 promissory
note on the earlier of (i) June 6, 2005, or (ii) the date the Company receives
advances under the Standby Equity Distribution Agreement in an amount greater
than or equal to $2,500,000.
At the present time, we have limited cash resources. We do not anticipate
that we will generate significant cash flow from operating activities until late
2005. As a result, we anticipate that we will require approximately $200,000 to
$300,000 of additional working capital financing during the next twelve months
in order to meet our working capital requirements during this period. We
currently plan to finance our operations through borrowings under our Credit
Facility with Aspen and under the Standby Equity Distribution Agreement.
Advances under the Credit Facility are limited, at any given time, based on a
formula contained in the loan agreement. The Company may not be eligible to
obtain all of its working capital funding needs from Aspen or under the Standby
Equity Distribution Agreement. 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, but we currently anticipate that
we will need to purchase approximately $200,000 to $300,000 of additional
capital equipment during the next twelve months. We plan to fund these
expenditures through borrowings under our Credit Facility with Aspen and through
traditional lease financing from equipment lessors. We may not be eligible to
obtain all of our capital equipment funding needs from Aspen 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.
29
DESCRIPTION OF BUSINESS
The Company 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 Over-the Counter Bulletin Board (the "OTCBB") under the
symbol "NGNM." Our business plan features two concurrent objectives:
1. Development of a clinical laboratory to offer cytogenetics, flouresence
in-situ hybridization (FISH), Flow Cytometry 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.
NeoGenomics' vision is to merge a high-end genetics and molecular testing
laboratory with ongoing research activities to help bridge the gap between
clinical medicine and genomic research. We believe that this combination could
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 5 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 an
opportunity for laboratory companies that are positioned to address this growing
market segment.
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 and looking for
abnormalities in a process called karyotyping. A karyotype evaluates the entire
46 human chromosomes by number and banding patterns to identify abnormalities
associated with disease. Examples of cytogenetic testing include bone marrow
testing to diagnose various types of leukemia and lymphoma, and amniocentesis
testing of pregnant women to diagnose genetic anomalies such as Down syndrome in
a fetus. 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
highly-accurate diagnostic tools over the last five years. 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. The following chart
shows the differences between the genetic/molecular segment and other segments
of the medical laboratory testing market. Up until about five years ago, the
genetic/molecular segment was considered to be part of the Anatomic Pathology
segment, but given its rapid growth, many industry veterans now break
genetic/molecular testing out into its own segment.
COMPARISON OF THE MEDICAL LABORATORY MARKET SEGMENTS (1)
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 Ins. Required Low High Low
Other Professionals Req. None None Cyto/Molecular geneticist
Level of Automation High Low-Moderate Moderate
Diagnostic in Nature Usually Not Yes Yes
Types of Diseases Tested Many Possible Primarily to Rule out Rapidly Growing
Cancer
Typical per Price/Test $5 - $35/Test $25 - $500/Test $200 - $1,000/Test
Estimated Size of Market $25 - $30 Billion $8.0 - $10.0 Billion $3.0 - $4.0 Billion
Est. Growth Rate of Market 4.0 -5.0% Annually 6.0 - 7.0% Annually 25.0+% Annually
Established Competitors Quest Diagnostics Quest Diagnostics Genzyme Genetics
LabCorp LabCorp/US Labs Quest Diagnostics
Bio Reference Lab Genzyme/Impath LabCorp/Esoterics
Specialty Labs Ameripath Major Universities
DSI Laboratories Local Pathologists
Hospital Labs
(1) Derived from industry analyst reports and Company estimates.
30
Our initial focus is on the oncology and advanced natology testing markets.
We target oncologists that perform bone marrow sampling and obstetricians and
perinatologists that perform amniocentesis testing and other natology screening
tests. Historically, our clients have been predominantly located in Florida.
Beginning in January 2005, based on the experience of our new President, we
began targeting large institutional clients in the Eastern United States. As we
grow, we anticipate offering additional tests that will allow us to more broadly
penetrate the oncology and advanced natology testing markets as well as broaden
our focus from genetic and molecular biology testing to more traditional types
of anatomic pathology testing that are complementary to our current test
offerings. We estimate our current and total potential market for each of the
above mentioned geographies and sectors is as follows:
Florida Southeast U.S. Total U.S.
Total Oncology Testing Market
Population over 55 years old (millions) (1) (2) 4.6 11.5 60.6
Total Cancer Testing Market ($, MMs) (3) $583.7 $1,588.2 $8,208.2
Approx % of Market NGNM Currently Addresses (4) 40% 40% 40%
NGNM Current Addressable Market ($, MMs) $233.5 $ 635.3 $3,283.3
Advanced Natology Testing Market (5)
Total # of New Births (1) 210,122 704,163 4,026,538
Total Natology Advanced Testing Market ($, MMs) (3) $ 42.0 $ 140.8 $ 805.3
Approx % of Market NGNM Currently Addresses (4) 35% 35% 35%
NGNM Current Addressable Market ($, MMs) $ 14.7 $ 49.3 $ 281.9
________________________________________
1. US Census Bureau estimates for 2002
2. 76% of all new cancers are reported in people age 55 or older. Source:
American Cancer Society.
3. Company estimate
4. NeoGenomics intends to increase the % of the overall market it can address
by offering more types of tests.
5. Does not include all prenatal testing, just those tests that are applicable
to NeoGenomics strategy.
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 3-5 day
turn-around time on oncology-related cytogenetics tests is helping to increase
the usage patterns of cytogenetics tests by our referring oncologists and
hematopathologists. Based on anecdotal information, we believe that cyotgenetics
labs typically have 10-21 day turn-around times on average with some labs
running as high as 21 days. Traditionally, longer turn-around times for
cytogenetics tests have resulted in fewer tests being ordered since there is an
increased chance that the test results will not be returned within an acceptable
diagnostic window when other adjunctive diagnostic test results are available.
We believe our turn-around times result in our referring physicians requesting
more of our testing services in order to augment or confirm other diagnostic
tests, thereby giving us a significant competitive advantage in marketing our
services against those of other competing laboratories.
We have an opportunity to add additional types of tests to our product
offering. We believe that by doing so we may be able to capture increases in our
testing volumes through our existing customer base as well as more easily
attract new customers via the ability to bundle our testing services more
appropriately to the needs of the market. For instance, initial testing for most
hematological cancers yields total revenue ranging from approximately $1,500 -
$2,500/case and is generally comprised of cytogenetic, FISH, flow cytometry, and
morphology testing. Until recently, we only performed cytogenetic testing
in-house, which averaged approximately $500 of revenue per case. In December
2004, we added FISH testing to our product offering, and in February 2005, we
began offering flow cytometry testing services. We believe that with the
addition of these two new testing platforms, we will nearly double our average
revenue per oncology case.
We believe this bundled offering approach could drive large increases in
our revenue and afford the Company significant synergies and efficiencies in our
operations, sales and marketing activities.
Avg. Rev/Test
Cytogenetics $400-$600
Fluorescence In Situ Hybridization (FISH) $200-$400
31
Flow cytometry
- Technical component $400-$600
- Professional component $100-$200
Morphology $400-$700
Total $1,500-$2,500
==============
In addition to clinical testing, we also engage in sponsored research
activities. Our planned research initiatives are focused on the 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 changes 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.
NeoGenomics was founded by Dr. Michael T. Dent in June of 2001. Dr. Dent is
the founder and primary physician of an OB/GYN practice in Southwest Florida. In
November of 2001, NeoGenomics became a publicly-traded company by reverse
merging into American Communications Enterprises, Inc, which was a shell
corporation at the time. During 2002, we assembled our initial staff and began
clinical testing operations. In 2003, we obtained new venture capital
sponsorship through Medical Venture Partners, LLC, a related entity, and moved
to a much larger, state-of-the art laboratory facility in Fort Myers, Florida.
In January 2005, we hired our President, Robert Gasparini. Mr. Gasparini has
considerable experience in building genetic and molecular laboratory companies.
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:
|X| To find out if a person is a carrier of a certain disease.
|X| To learn if a person has an inherited predisposition to a certain disease,
like breast or ovarian cancer (also known as susceptibility testing).
|X| To help expecting parents identify whether their unborn child will have a
genetic disease or disorder (prenatal testing).
|X| To confirm the diagnosis of certain diseases or disorders (for example,
leukemia and Down 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
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 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 10-14 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 3-5 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
32
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 offer Fluorescence In
Situ Hybridization (FISH) testing and flow cytometry testing to expand the
capabilities of routine chromosome analysis in cancer and prenatal testing. FISH
testing permits preliminary identification of the most frequently occurring
numerical chromosomal abnormalities in a relatively rapid manner. FISH, was
originally 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), but is now being applied to
interphase chromosome analysis (uncultured, single cells). During the past 5
years, FISH testing has begun to demonstrate its considerable diagnostic
potential. The development of molecular probes by using DNA sequences of
differing sizes, complexity, and specificity, coupled with technological
enhancements (direct labeling, multicolor probes, computerized signal
amplification, and image analysis) make FISH a powerful investigative and
diagnostic tool. 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 7-10 days to complete).
Molecular Biology Testing. Molecular biology testing involves testing DNA
and other molecular structures to screen for and diagnose single gene disorders
such as cystic fibrosis and Tay-Sachs disease as well as hematological cancers.
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. The planned focus of our research initiatives is on the
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 to perform research projects and help identify bio-markers for the
underlying presence of disease states. We plan to begin collecting such samples
during 2005.
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 disease specific
bio-markers, we believe that we can develop tests that will verify and quantify
the relevant disease states. We believe such tests would have a potentially wide
application for obstetricians and gynecologists worldwide to help them reduce
risks 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 such female diseases.
Target Markets and Customers
We have initially targeted all oncologists in southern and central Florida
that perform bone marrow sampling. Recently, we started serving clients outside
of Florida. In addition, we are currently servicing a few select obstetricians
that perform amniocentesis testing. We intend to continue to expand our client
base in this area over the next six months and to gradually expand our market
presence into northern Florida and continue our expansion along the East Coast.
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
33
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. Management believes that by offering both of these tests together as a
bundled product while maintaining its industry leading turnaround times, the
Company can 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 women 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 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 non-invasive
genetic tests will be developed over the next 3-5 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
they have increased risks of having children with chromosomal abnormalities. For
example, a 35-year-old woman has about a 1 in 200 chance of having a baby with a
chromosomal abnormality like Down syndrome. A 40-year-old woman has closer to 1
in 50 chance. 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
genetic 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. Many of these
competitors have more extensive research and development, regulatory, and
production capabilities. Many competitors have greater financial resources.
These companies may succeed in developing products and services that are more
34
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 300 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 intend to gain a
significant market presence in the Southwest Florida region by offering faster
turnaround times due to the proximity to our customers and high-quality test
reports. In addition, we are in the process of 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 Invitrogen
Corporation 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 as well as selected other accounts on the East
Coast. During 2004, we performed 1,152 individual cytogenetics and molecular
biology tests. Approximately 91% of these tests were performed on bone marrow
specimens. In addition, approximately 16.6% 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 turnaround times at a competitive
price, we would potentially lose a significant percentage of our revenues. -
Trademarks
Our NeoGenomics logo has been trademarked with the United States Patent and
Trademark Office.
Number of Employees
As of June 30, 2005, we had thirteen full-time employees and four part-time
consultants. During 2005, we plan to add additional laboratory technologists and
laboratory assistants 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.
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.
35
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
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.
Our laboratory may not pass inspections conducted to ensure compliance with CLIA
`88 or with any other applicable licensure or certification laws. The sanctions
for failure to comply with CLIA `88 or state licensure requirements might
include the inability to perform services for compensation or the suspension,
revocation or limitation of the 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. Although we do not currently offer any gene
therapy services, if we decide to enter this business in the future, we would
expect that all of our gene therapy protocols will be subject to review by the
Recombinant DNA Advisory Committee.
Anti-Fraud and Abuse Laws
Existing federal laws governing Medicare and Medicaid, as well as some
other state and federal laws, also regulate certain aspects of the relationship
between healthcare providers, including clinical and anatomic laboratories, and
their referral sources, including physicians, hospitals and other laboratories.
One provision of these laws, known as the "anti-kickback law," contains
extremely broad proscriptions. Violation of this provision may result in
criminal penalties, exclusion from 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
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
36
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 the arrangements into
which we enter could become subject to scrutiny thereunder.
In February 1997 (as revised in August 1998), the OIG released a model
compliance plan for laboratories that is based largely on corporate integrity
agreements negotiated with laboratories that had settled enforcement action
brought by the federal government related to allegations of submitting false
claims. We have adopted aspects of the model plan that we deem appropriate to
the conduct of our business. This adoption may have an impact on the utilization
of our services.
Confidentiality of Health Information
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains provisions that affect the handling of claims and other patient
information that are, or have been, 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 had to 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 is leading to greater
efficiency in processing claims and in handling health care information.
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 requires significant effort
and expense for virtually all entities that conduct healthcare transactions
electronically and handle patient health information. We believe we are in
compliance with applicable HIPAA regulations regarding the confidentiality of
protected health information.
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
37
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
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.
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 $6,300/month. The Company
believes that its property is suitable for the Company's current and projected
needs.
Legal Proceedings
The Company is currently a defendant in one lawsuit from a former employee
relating to compensation related claims. The Company does not believe this
lawsuit is material to its operations or financial results and intends to
vigorously pursue its defense of the matter.
38
MANAGEMENT
Officers And Directors
The following table sets forth the names, ages, and titles of each of our
directors and executive officers and employees expected to make a significant
contribution to the Company.
Name Age Title
Robert P Gasparini 50 President, Principal Executive Officer Chief
Science Officer and Director
Michael T. Dent 41 Chairman of the Board of Directors
Thomas D. Conrad 74 Director
Steven C. Jones 42 Acting Chief Financial Officer and Director
George G. O'Leary 42 Director
Peter M. Peterson 48 Director
There are no family relationships between or among the directors, executive
officers or any other person. The directors and executive officers of the
Company are not directors or executive officers of any company that files
reports with the SEC, nor have they been involved in any bankruptcy proceedings,
criminal proceedings, any proceeding involving any possibility of enjoining or
suspending the Company's directors and officers from engaging in any business,
securities or banking activities, and has not been found to have violated, nor
been accused of having violated, any federal or state securities or commodities
laws.
The Company's directors are elected at the annual meeting of stockholders
and hold office until their successors are elected. The Company's officers are
appointed by the Board of Directors and serve at the pleasure of the Board and
are subject to employment agreements, if any, approved and ratified by the
Board.
Certain biographical information of our directors and officers is set forth
below.
Robert P. Gasparini, M.S. - President, Principal Executive Officer and Chief
Science Officer
Mr. Gasparini is the President and Chief Science Officer of the Company.
Prior to assuming the role of President, Principal Executive Officer and Chief
Science Officer, Mr. Gasparini was a consultant to the Company since August
2004. Prior to NeoGenomics, Mr. Gasparini was the Director of the Genetics
Division for US Pathology Labs, Inc. ("US Labs") from January 2001 to December
2003. During this period, Mr. Gasparini started the Genetics Division for US
Labs and grew annual revenues of this division to $30 million over a 30 month
period. Prior to US Labs, Mr. Gasparini was the Molecular Marketing Manager for
Ventana Medical Systems from 1999 to 2001. Prior to Ventana, Mr. Gasparini was
the Assistant Director of the Cytogenetics Laboratory for the Prenatal
Diagnostic Center from 1993 to 1998 an affiliate of Mass General Hospital and
part of Harvard University. While at the Prenatal Diagnostic Center, Mr.
Gasparini was also an Adjunct Professor at Harvard University. Mr. Gasparini is
a licensed Clinical Laboratory Director and an accomplished author in the field
of Cytogenetics. He received his BS degree from University of Connecticut in
Biological Sciences and his Master of Health Science degree from Quinnipiac
College in Medical Laboratory Sciences.
Michael T. Dent M.D. - Chairman of the Board
Dr. Dent is our founder and Chairman of the Board. Dr. Dent was our
President and Chief Executive Officer from June 2001, when he founded
NeoGenomics, to April 2003. From April 2003 until April 2004, Dr. Dent served as
our President and Chief Medical Officer. Dr. Dent founded the Naples Women's
Center in 1996 and continues his practice to this day. He received his training
39
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.
Thomas D. Conrad, PhD. - Director
Dr. Conrad has been involved in starting and operating numerous businesses
during his 50-year professional career. He is currently the President of
Financial Management Corporation, which acts as the General Partner for
Competitive Capital Partners, LP, a Naples, Florida-based hedge fund. Prior to
his involvement in the fund management business, Dr. Conrad was involved with,
among others The Military Benefit Association and The Government Employees
Association, both large life insurance companies. Dr. Conrad has taught at five
universities, been a cattleman, an Army pilot and a restaurateur. Before coming
to Florida he was a member of the Reagan Administration as an Assistant
Secretary of the United States Air Force. Dr. Conrad has a BS and an MBA Degree
from the University of Maryland and received his PhD. in Business from the
American University.
Steven C. Jones - Director and Acting Principal Financial Officer
Mr. Jones has served as a director since October 2003. He is the co-founder
and Chairman of Aspen Capital Group, LLC, a diversified financial services
company. He is also 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. Prior 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 a founder and Chairman of the Board of Directors of T3
Communications, LLC, a privately held telecommunications company.
George G. O'Leary - Director
Mr. O'Leary is currently the Chief Executive Officer of US Medical
Consultants, LLC. Prior to assuming his duties with US Medical, he was a
consultant to the company and acting Chief Operating Officer since October 2004.
Prior to NeoGenomics, Mr. O'Leary was the President and CFO of Jet Partners, LLC
from 2002 to 2004. During that time he grew annual revenues from $12 million to
$17.5 million. Prior to Jet Partners, Mr. O'Leary was CEO and President of
Communication Resources Incorporated (CRI) from 1996 to 2000. During that time
he grew annual revenues from $5 million to $40 million. Prior to CRI, Mr.
O'Leary held various positions including VP of Operations for Cablevision
Industries from 1987 to 1996. Mr. O'Leary was a CPA with Peat Marwick Mitchell
from 1984 to 1987. He received his BBA degree in Accounting from Siena College
in Albany, New York.
Peter M. Peterson - Director
Mr. Peterson is the founder of Aspen Capital Partners, LLC which
specializes in capital formation, mergers & acquisitions, divestitures, and new
business start-ups. Mr. Peterson is also the Chairman and Founder of CleanFuel
USA and the Chairman of Innovative Software Technologies (OTCBB: INIV). Prior to
forming Aspen Capital Partners, Mr. Peterson was Managing Director of Investment
Banking with H. C. Wainwright & Co. Prior to Wainwright, Mr. Peterson was
president of First American Holdings and Managing Director of Investment
Banking. Previous to First American, he served in various investment banking
roles and was the co-founder of ARM Financial Corporation. Mr. Peterson was one
of the key individuals responsible for taking ARM Financial public on the OTC
market and the American Stock Exchange. Under Mr. Peterson's financial
leadership, ARM Financial Corporation was transformed from a diversified holding
company into a national clinical laboratory company with more than 14 clinical
laboratories and ancillary services with over $100 million in assets. Mr.
Peterson also served as President and founder of the Paramount Group, Inc., a
privately held real estate company specializing in financing and project
consulting. He has also served as an officer or director for a variety of other
companies, both public and private. Mr. Peterson earned a Bachelor of Science
degree in Business Administration from the University of Florida.
40
Audit Committee
Currently, the Company's Audit Committee of the Board of Directors is
comprised of Mr. Jones and Mr. O'Leary. The Board of Directors believes that
both Mr. O'Leary and Mr. Jones are "financial experts" (as defined in Regulation
228.401(e)(1)(i)(A) of Regulation S-B). Mr. Jones is a Managing Member of
Medical Venture Partners, LLC, which serves as the general partner of Aspen
Select Healthcare LP, a partnership which controls approximately 44% of the
voting stock of the Company. Thus Mr. Jones would not be considered an
"independent" director 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 for its senior financial
officers and the principal executive officer.
Executive Compensation
Summary Compensation Table
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, 2004, 2003, and 2002:
Other
Name and Principal Capacity Year Salary Compensation
Thomas H. White 2004 $125,000 (2) $27,150 (2)
Chief Executive Officer (1) 2003 $ 20,139 $6,330
2002 - --
Robert P. Gasparini 2004 $ 22,500 (3) -
President & Chief Science Officer 2003 - -
2002 - -
Dr. Michael T. Dent 2004 $ 37,334 (5) -
Chairman, President and 2003 - -
Chief Medical Officer (4) 2002 $130,669 (6) -
(1) Mr. White became the Company's Chief Executive Officer on October 20, 2003
but was subsequently terminated as CEO on December 31, 2004.
(2) 2004 amounts for Mr. White reflect $29,167 and $1,500 of accrued severance
compensation as of December 31, 2004.
(3) Mr. Gasparini was appointed as President and Chief Science Officer on
January 3, 2005. During 2004, he acted as a consultant to the Company and
the amounts indicated represent his consulting income.
(4) Dr. Dent served as the Company's Chief Executive Officer from June 2001
until April 2003. From April 2003 until April 2004, Dr. Dent served as the
President and Chief Medical Officer. Dr. Dent has been Chairman of the
Board since October 2003.
(5) During 2004, Dr. Dent acted as a consultant to the Company. The amounts
indicated, represent his consulting income.
(6) During 2002, Dr. Dent received 105,635 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. The remaining $31,248 of salary earned
by Dr. Dent was earned in the fourth quarter of 2002 and was accrued as a
cash obligation of the Company on its financial statements. As of December
31, 2004, all of these amounts had been paid.
Employment Agreements
Robert P. Gasparini
We entered into an employment agreement with Robert P. Gasparini December
14, 2004, to serve as our President and Chief Science Officer. The employment
agreement has an initial term of three years, effective January 3, 2005;
provided, however that either party may terminate the agreement by giving the
other party sixty days written notice. The employment agreement specifies an
initial base salary of $150,000/year, with specified salary increases to
$185,000/year over the first 18 months of the contract. Mr. Gasparini is also
41
entitled to receive cash bonuses for any given fiscal year in an amount equal to
15% of his base salary if he meets certain targets established by the Board of
Directors. In addition, Mr. Gasparini was granted 1,000,000 Incentive Stock
Options that have a ten year term so long as Mr. Gasparini remains an employee
of the Company. Such options vest according to the following schedule:
Time-Based Vesting
75,000 on the Effective Date;
100,000 on the first anniversary of the Effective Date;
125,000 on the second anniversary of the Effective Date;
12,500 per month from the 25th to 36th month from the Effective Date;
Performance-Based Vesting
25,000 revenues generated from FISH by December 15, 2004
25,000 revenues generated from FLOW by January 31, 2005
25,000 revenues generated from Amniocentesis by January 31, 2005
25,000 hiring a lab director by September 30, 2005
25,000 bringing in 4 new clients to the lab by June 30, 2005
25,000 closing on first acquisition by December 31, 2005
In addition:
50,000 if the Company achieves the consolidated revenue for FY 2005 of $2.5 million;
50,000 if the Company achieves the net income projections for FY 2005 of $150,000;
50,000 if the Company achieves the consolidated revenue goal for FY 2006 outlined by the
Board of Directors as part of the Employee's FY 2006 bonus plan;
50,000 if the Company achieves the consolidated net income goal for FY 2006 outlined by the
Board of Directors as part of the Employee's FY 2006 bonus plan;
50,000 if the Company achieves the consolidated revenue goal for FY 2007 outlined by the
Board of Directors as part of the Employee's FY 2007 bonus plan;
50,000 if the Company achieves the consolidated net income goal for FY 2007 outlined by the
Board of Directors as part of the Employee's FY 2007 bonus plan;
50,000 when the Company's stock maintains an average closing bid price (as quoted on NASDAQ
Bulletin Board) of $0.75/share over the previous 30 trading days;
50,000 when the Company's stock maintains an average closing bid price (as quoted on NASDAQ
Bulletin Board) of $1.50/share over the previous 30 trading days;
Mr. Gasparini's employment agreement also specifies that he is entitled to
four weeks of paid vacation per year and other health insurance and relocation
benefits. In the event that Mr. Gasparini is terminated without cause by the
Company, the Company has agreed to pay Mr. Gasparini's base salary and maintain
his employee benefits for a period of six months.
Thomas H. White
We entered into an employment agreement with Thomas H. White on October 14,
2003, to serve as our Chief Executive Officer. The employment agreement had an
initial term of three years; provided, however that either party could terminate
the agreement by giving the other party sixty days written notice. The
employment agreement specified 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 had a ten year term so long as Mr. White remains an employee
of the Company. Mr. White's employment agreement also specified that in the
event that Mr. White was terminated without cause by the Company, the Company
would 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). On
December 14, 2004, the Company notified Mr. White that it was terminating his
employment and was providing the 60 day notice period specified in his
agreement. Mr. White's effective date of termination with the Company was
February 15, 2005, however, pursuant to his Employment Agreement, he was entitled
to receive base pay and benefits through April 15, 2005.
42
Securities Authorized for Issuance Under Equity Compensation Plans (1)
Number of securities to be Weighted average exercise Number of securities
issued upon exercise of price of outstanding remaining available
Plan Category outstanding options, warrants options, warrants and for future issuance
and rights rights
Equity compensation plans
approved by security 587,537
holders (2) 1,585,000 $0.26
Equity compensation plans
not approved by security N/A
holders (3) 2,825,649 $0.45
Total 4,410,649 $0.38 587,537
(1) As of June 30, 2005.
(2) Currently, the Company's 2003 Equity Incentive Plan is the only equity
compensation plan in effect.
(3) The Company currently has 2,825,649 warrants outstanding, of which
2,217,027 warrants are currently vested.
43
PRINCIPAL STOCKHOLDERS
The following table sets forth information as of July 15, 2005, 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(1)
Class Beneficial Ownership
Aspen Select Healthcare, LP (2) 11,794,657 48.36%
Common 1740 Persimmon Drive
Naples, Florida 34109
Steven C. Jones (3)
Common 1740 Persimmon Drive
Naples, Florida 34109 12,969,252 53.18%
Michael T. Dent M.D. (4)
Common 1726 Medical Blvd.
Naples, Florida 34110 2,720,535 11.96%
Common Directors and Officers as a Group (6 16,928,887 67.48%
persons)
(1) Applicable percentage of ownership for Aspen Select Healthcare, LP and
Steven C. Jones is based on 22,498,252 shares of common stock outstanding and
1,891,378 warrants exercisable within 60 days of July 15, 2005. Applicable
percentage of ownership for Michael T. Dent is based on 22,498,252 shares of
common stock outstanding and 250,000 options exercisable within 60 days as of
July 15, 2005. Beneficial ownership is determined in accordance within the rules
of the Commission and generally includes voting of investment power with respect
to securities. Shares of common stock subject to securities exercisable or
convertible into shares of common stock that are currently exercisable or
exercisable within 60 days of July 15, 2005 are deemed to be beneficially owned
by the person holding such options for the purpose of computing the percentage
of ownership of such persons, but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(2) Aspen Select Healthcare, LP ("Aspen") has direct ownership of 9,903,279
shares and has a warrant with 1,891,378 shares currently exercisable within 60
days of July 15, 2005. The general partner of Aspen is Medical Venture Partners,
LLC, an entity controlled by Steven C. Jones.
(3) Steven C. Jones has direct ownership of 1,174,595 shares, but as a member of
the general partner of Aspen, he has the right to vote all shares held by Aspen,
thus 9,903,279 shares and 1,891,378 warrant shares which are currently
exercisable within 60 days of July 15, 2005 have been added to his total.
(4) Michael T. Dent has direct ownership of 2,470,535 shares and has options to
purchase 250,000 shares from the Company which are currently exercisable within
60 days of July 15, 2005.
44
MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND OTHER STOCKHOLDER MATTERS
Our common stock is currently listed on the Bulletin Board System under the
symbol "NGMN.OB." 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 prospectus have also been adjusted to reflect this 1:100
reverse stock split.
2005 High Bid Low Bid
First Quarter $0.60 $0.25
Second Quarter $0.60 $0.26
2004 High Bid Low Bid
First Quarter $1.22 $0.05
Second Quarter $0.74 $0.30
Third Quarter $0.45 $0.20
Fourth Quarter $0.70 $0.18
2003 High Bid Low Bid
First Quarter $1.00 $0.35
Second Quarter $0.55 $0.04
Third Quarter $0.10 $0.06
Fourth Quarter $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.
As of July 14, 2005, there were 360 stockholders of record of the common
stock.
Dividend Policy
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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 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 of the Board. In addition, NWC
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 approximately $117,332 from the Naples
Women's Center to meet our short-term cash needs. In 2003, we repaid
approximately $58,666 of this amount, and in 2004, we repaid the remaining
$58,666, plus accrued interest at a rate of 8.0% per annum.
During the period from December 2002 to April 2003, Steven C. Jones
advanced $32,000 under a short term bridge loan agreement. Mr. Jones is a
principal of Aspen Select Healthcare, LP (formerly known as MVP 3, LP), which
consummated debt and equity financing transactions with the Company on April 15,
2003 and refinanced the debt portion of the transaction on March 23, 2005. These
advances, plus accrued interest at a rate of 8.0% per annum, were repaid to Mr.
Jones on April 17, 2003.
During 2004 and 2003, the Company paid Mr. Jones $72,500 and $52,000,
respectively, in cash for various consulting work performed in connection with
assisting in organizing and managing the financial affairs of the Company.
On April 15, 2003, we entered into a revolving credit facility with MVP 3,
LP ("MVP 3"), a partnership controlled by certain of our shareholders. Under the
terms of the agreement MVP 3, LP agreed to make available up to $1.5 million of
debt financing with a stated interest rate of prime + 8% and such credit
facility had an initial maturity of March 31, 2005. At December 31, 2004, we
45
owed MVP 3, approximately $740,000 under this loan agreement, which is
classified as "Due to affiliates" under the current liabilities section of our
balance sheet as of December 31, 2004. This obligation was repaid in full on
March 23, 2005.
On March 23, 2005, we entered into an agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) to refinance our existing
indebtedness of $740,000 and provide for additional liquidity of up to $760,000
to the Company. Under the terms of the agreement, Aspen Select Healthcare, LP
("Aspen"), a Naples, Florida-based private investment fund will make available
up to $1.5 million of debt financing in the form of a revolving credit facility
(the "Credit Facility") with an initial maturity of March 31, 2007. Aspen is
managed by its General Partner, Medical Venture Partners, LLC, which is
controlled by a director of NeoGenomics.
Under the terms of the Credit Facility, 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 until April 30, 2005 and up to $1,000,000 on an unsecured basis after
April 30, 2005. The interest rate on the Credit Facility is prime + 6.0%,
payable monthly in arrears. 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
Aspen, (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. As part of the Credit Facility transaction, the Company also issued to
Aspen a five year Warrant to purchase up to 2,500,000 shares of its common stock
at an exercise price of $0.50/share.
During 2005 up to the date of this prospectus, the Company paid Aspen Capital
Advisors, a company owned by Mr. Steven C. Jones $32,500 in cash for various consulting
work performed in connection with assisting in organizing and managing the financial
affairs of the Company.
46
DESCRIPTION OF CAPITAL STOCK
Common Stock
The Company is authorized to issue 100,000,000 shares of Common Stock,
$0.001, of which 22,498,252 shares were issued and outstanding at June 30, 2005.
The securities being offered hereby are common stock. The outstanding shares of
common stock are fully paid and non-assessable. The holders of common stock are
entitled to one vote per share for the election of directors and with respect to
all other matters submitted to a vote of stockholders. Shares of common stock do
not have cumulative voting rights, which means that the holders of more than 50%
of such shares voting for the election of directors can elect 100% of the
directors if they choose to do so. Our common stock does not have preemptive
rights, meaning that the common shareholders' ownership interest in the Company
would be diluted if additional shares of common stock are subsequently issued
and the existing shareholders are not granted the right, in the discretion of
the Board of Directors, to maintain their ownership interest in our company.
Upon an liquidation, dissolution or winding-up of the Company, our assets, after
the payment of debts and liabilities and any liquidation preferences of, and
unpaid dividends on, any class of preferred stock then outstanding, will be
distributed pro-rata to the holders of the common stock. The holders of the
common stock do not have preemptive or conversion rights to subscribe for any
our securities and have no right to require us to redeem or purchase their
shares. The holders of Common Stock are entitled to share equally in dividends,
if, as and when declared by our Board of Directors, out of funds legally
available therefor, subject to the priorities given to any class of preferred
stock which may be issued.
Preferred Stock
The Company is authorized to issue 10,000,000 shares of preferred stock,
having a par value of $.001 per share (the "Preferred Stock"). The Preferred
Stock may be issued from time to time in one or more series. The Board of
Directors is authorized to fix or alter the dividend rights, dividend rate,
conversion rights, voting rights, rights and terms of redemption (including
sinking fund provisions), the redemption price or prices, the liquidation
preferences of any wholly unissued series of Preferred Stock, and the number of
shares constituting any such series and the designation thereof, or any of them;
and to increase or decrease the number of shares of any series subsequent to the
issue of shares of that series, but not below the number of shares of such
series then outstanding and which the Company may be obligated to issue under
options, warrants or other contractual commitments. In case the number of shares
of any series shall be so decreased, the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series. As of the date of this
prospectus, no such shares have been designated.
Warrants
The Company currently has 2,825,649 warrants outstanding of which 2,217,027
warrant shares are vested. The exercise price of these warrants range from
$0.01to $0.50per share.
Options
The Company currently has 1,585,000 options outstanding. The exercise price
of these options range from $0.25 to $0.50 per share.
Transfer Agent
The Company's transfer agent is Standard Registrar & Transfer Company 12528
South 1840 East Draper, Utah 84020. The transfer agent's telephone number is
(801) 571-8844.
Reports To Shareholders
We intend to furnish our shareholders with annual reports which will
describe the nature and scope of our business and operations for the prior year
and will contain a copy of our audited financial statements for its most recent
fiscal year.
47
Indemnification Of Directors And Executive Officers And Limitation On Liability
The Company's Articles of Incorporation eliminate liability of its
directors and officers for breaches of fiduciary duties as directors and
officers, except to the extent otherwise required by the Nevada Revised Statutes
and where the breach involves intentional misconduct, fraud, or a knowing
violation of the law.
Nevada Revised Statutes 78.750, 751, and 752 have similar provisions that
provide for discretionary and mandatory indemnification of officers, directors,
employees, and agents of a corporation. Under these provisions, such persons may
be indemnified by a corporation against expenses, including attorney's fees,
judgment, fines and amounts paid in settlement, actually and reasonably incurred
by him in connection with the action, suit or proceeding, if he acted in good
faith and in a manner which he reasonably believed to be in or opposed to the
best interests of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to any action, suit or proceeding, had no
reasonable cause to believe his conduct was unlawful.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter, he must be indemnified
by a corporation against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the defense.
Any indemnification, unless ordered by a court or advanced by a
corporation, must be made only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances. The determination must be made:
o By the stockholders;
o By the board of directors by majority vote of a quorum consisting of
directors who were not parties to that act, suit or proceeding;
o If a majority vote of a quorum consisting of directors who were not
parties to the act, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion; or
o If a quorum consisting of directors who were not parties to the act, suit
or proceeding cannot be obtained, by independent legal counsel in a written
opinion;
o Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by the corporation as they are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by a corporation.
o To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, a corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person
connected with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
48
EXPERTS
The audited financial statements included in this prospectus and elsewhere
in the registration statement for the fiscal years ended December 31, 2004 and
December 30, 2003 have been audited by Kingery & Crouse, P.A.. The reports of
Kingery & Crouse, P.A., are included in this prospectus in reliance upon the
authority of this firm as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares offered herein will be opined on for us by
Burton, Bartlett & Glogovac.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form SB-2 under the Securities Act with respect to the securities
offered by this prospectus. This prospectus, which forms a part of the
registration statement, does not contain all the information set forth in the
registration statement, as permitted by the rules and regulations of the
Commission. For further information with respect to us and the securities
offered by this prospectus, reference is made to the registration statement.
Statements contained in this prospectus as to the contents of any contract or
other document that we have filed as an exhibit to the registration statement
are qualified in their entirety by reference to the exhibits for a complete
statement of their terms and conditions. The registration statement and other
information may be read and copied at the Commission's Public Reference Room at
450 Fifth Street N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the Commission at
1-800-SEC-0330. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission.
49
FINANCIAL STATEMENTS
PAGE
Consolidated Balance Sheet as of March 31, 2005 (Unaudited) F-2
Consolidated Statements of Operations For theThree Months
Ended March 31, 2005 and 2004 (Unaudited) F-3
Consolidated Statements of Cash Flows For the Three Months
Ended March 31, 2005 and 2004 (Unaudited) F-4
Notes to Consolidated Financial Statements(Unaudited) F-5 - F-7
Report of Independent Registered Public Accounting Firm F-8
Consolidated Balance Sheet as of December 31, 2004 F-9
Consolidated Statements of Operations For theYears Ended
December 31, 2004 and 2003 F-10
Consolidated Statements of Stockholders' Equity (Deficit)
For the Years Ended December 31, 2004 and 2003 F-11
Consolidated Statements of Cash Flows For the Years Ended
December 31, 2004 and 2003 F-12
Notes to Consolidated Financial Statements F-13 - F-21
F-1
NeoGenomics, Inc.
CONSOLIDATED BALANCE SHEET AS OF
March 31, 2005
(unaudited)
________________________________________________________________________________
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 112,959
Accounts receivable (net of allowance for
doubtful accounts of $9,496) 141,602
Inventories 27,843
Other current assets 32,559
Total current assets 314,963
PROPERTY AND EQUIPMENT (net of accumulated
depreciation of $163,727) 378,327
OTHER ASSETS 33,898
TOTAL $ 727,188
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 138,097
Deferred revenue 110,000
Accrued and other liabilities 41,073
Total current liabilities 289,170
LONG TERM LIABILITIES (net of unamortized discount
of $129,925) 765,526
TOTAL LIABILITIES 1,054,696
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, 100,000,000 shares
authorized; 22,017,657 shares issued and outstanding 22,018
Additional paid-in capital 9,888,886
Deficit (10,238,412)
Total stockholders' deficit (327,508)
TOTAL $ 727,188
=============
________________________________________________________________________________
See notes to consolidated financial statements.
F-2
NeoGenomics, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
________________________________________________________________________________
For the For the
Three-Months Three-Months
Ended Ended
March 31, 2005 March 31, 2004
REVENUE $ 230,192 $ 178,863
COST OF REVENUE 176,838 145,986
GROSS PROFIT 53,354 32,877
OTHER OPERATING EXPENSES:
Selling, general and administrative 241,346 181,770
Interest expense 27,182 20,716
Total other operating expenses 268,528 202,486
NET INCOME (LOSS) $ (215,174) $ (169,609)
============== ==============
NET INCOME (LOSS) PER SHARE - Basic and
Diluted $ (0.01) $ (0.01)
============== ==============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
Basic and Diluted 21,744,273 18,449,416
============== ==============
________________________________________________________________________________
See notes to consolidated financial statements.
F-3
NeoGenomics, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
_______________________________________________________________________________________
For the For the
Three-Months Three-Months
Ended Ended
March 31, 2005 March 31, 2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (215,174) $ (169,609)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 26,414 15,194
Equity-based compensation 31,923 -
Provision for bad debts 8,814 5,382
Amortization of debt issue costs 576 -
Changes in assets and liabilities, net:
(Increase) decrease in accounts receivables,
net of write-offs (93,926) (9,594)
(Increase) decrease in inventory (12,721) 1,306
(Increase) decrease in pre-paid expenses 2,883 1,375
(Increase) decrease in other current assets 3,474 1,023
(Increase) decrease in deposits (5,000) 5,000
Increase (decrease) in accounts payable and
other liabilities 10,515 21,007
NET CASH USED IN OPERATING ACTIVITIES (242,222) (128,916)
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property and equipment (11,704) (13,437)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net 155,451 125,000
Debt issue costs (53,587) -
Issuances of common stock, net of transaction
expenses 152,473 47,434
NET CASH PROVIDED BY FINANCING ACTIVITIES 254,337 172,434
NET INCREASE IN CASH AND CASH EQUIVALENTS 411 30,081
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 112,548 25,051
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 112,959 $ 55,132
=========== =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 30,569 $ 6,987
=========== =============
Income taxes paid $ - $ -
=========== =============
_______________________________________________________________________________________
See notes to consolidated financial statements.
F-4
NeoGenomics, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
________________________________________________________________________________
NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS
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., a Nevada corporation ("ACE"). As a
result of the acquisition, NEO became the operating subsidiary of ACE. ACE was
formed in 1998 and succeeded to NEO's name on January 3, 2002 (collectively NEO
and ACE are referred to as "NeoGenomics", the "Company", "we", "us", or "our"
throughout this Form 10-QSB).
On April 4, 2003, we amended our articles of incorporation to (1) effect a
one-for-100 reverse split of our common stock, (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 April 2003 reverse stock split as though it
had been completed as of January 1, 2003.
Basis of Presentation
Our accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and the instructions
to Form 10-QSB and Rule 10-1 of Regulation S-X of the Securities and Exchange
Commission (the "SEC"). Accordingly, these consolidated financial statements do
not include all of the footnotes required by accounting principles generally
accepted in the United States of America. In our opinion, all adjustments
(consisting of normal and recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 2005 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2005. The accompanying consolidated
financial statements and the notes thereto should be read in conjunction with
our audited consolidated financial statements as of and for the year ended
December 31, 2004 contained in our Form 10-KSB.
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. 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 and Allowance for Doubtful Accounts
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
F-5
each type of payer. Bad debts are charged off to the allowance account at the
time they are deemed uncollectible.
Use of Estimates
The preparation of 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 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.
NOTE B - LIQUIDITY
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. At December 31, 2004, we had
working capital and stockholders' deficits of approximately $822,000 and
$426,000 respectively. However, subsequent to December 31, 2004, we enhanced our
working capital as we refinanced our short-term indebtedness of $740,000
included in current liabilities with indebtedness that does not mature until
March 31, 2007 (see Note C). We believe this debt facility, which allows for
unsecured borrowings of $1,000,000 after April 30, 2005, and improving
operations, will provide adequate capital to fund our operations and growth for
2005 and beyond. At March 31, 2005, we had a working capital surplus of $25,800.
As such, 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 - RELATED PARTY TRANSACTIONS
During 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 of the Board. In addition, NWC
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 approximately $117,332 from the Naples
Women's Center to meet our short-term cash needs. In 2003, we repaid
approximately $58,666 of this amount, and in 2004, we repaid the remaining
$58,666, plus accrued interest at a rate of 8.0% per annum.
During the period from December 2002 to April 2003, Steven C. Jones, one of
our directors, advanced $32,000 under a short term bridge loan agreement. Mr.
Jones is a principal of Aspen Select Healthcare, LP (formerly known as MVP 3,
LP), which consummated debt and equity financing transactions with the Company
on April 15, 2003 and refinanced the debt portion of the transaction on March
23, 2005. These advances, plus accrued interest at a rate of 8.0% per annum,
were repaid to Mr. Jones on April 17, 2003.
During the three months ending March 31, 2005, and 2004 and 2003, the
Company incurred consulting expenses from a director of $22,500 and $52,000,
respectively, for various consulting work performed in connection with managing the
financial affairs of the Company and acting as the Principle Financial Officer.
On April 15, 2003, we entered into a revolving credit facility with MVP 3,
LP ("MVP 3"), a partnership controlled by certain of our shareholders. Under the
terms of the agreement MVP 3, LP agreed to make available up to $1.5 million of
debt financing with a stated interest rate of prime + 8% and such credit
facility had an initial maturity of March 31, 2005. At December 31, 2004, we
owed MVP 3, approximately $740,000 under this loan agreement, which is
classified as "Due to affiliates" under the current liabilities section of our
balance sheet. This obligation was repaid in full through a refinancing on March
23, 2005.
On March 11, 2005 we entered into an agreement with HCSS, LLC and
eTelenext, Inc. to provide eTelenext, Inc's Accessioning Application, AP
Anywhere Application and CMQ Application. HCSS, LLC is a holding company created
to build a small laboratory network for the 50 small commercial genetics
laboratories in the United States. HCSS, LLC is owned 66.7% by Dr. Michael T.
Dent, our Chairman. By becoming the first customer of HCSS in the small
F-6
laboratory network, the Company is saving approximately $152,000 in up front
licensing fees. Under the terms of the agreement, the Company is required to pay
$22,500 over three months to customize this software and will pay an annual
membership fee of $6,000 per year and monthly transaction fees of between $10.00
- - $2.50 per completed test, depending on the volume of tests performed. The
eTelenext system is an elaborate laboratory information system (LIS) that is in
use at many larger labs. By assisting in the formation of the small laboratory
network, the Company will be able to increase the productivity of its
technologists and have on-line links to other small labs in the network in order
to better manage its workflow.
On March 23, 2005, we entered into an agreement with Aspen Select
Healthcare, LP (formerly known as MVP 3, LP) to refinance our existing
indebtedness of $740,000 and provide for additional liquidity of up to $760,000
to the Company. Under the terms of the agreement, Aspen Select Healthcare, LP
("Aspen"), a Naples, Florida-based private investment fund will make available
up to $1.5 million of debt financing in the form of a revolving credit facility
(the "Credit Facility") with an initial maturity of March 31, 2007. Aspen is
managed by its General Partner, Medical Venture Partners, LLC, which is
controlled by a director of NeoGenomics. We incurred $53,587 of transaction
expenses in connection with establishing the Credit Facility, which have been
capitalized and are being amortized to interest expense over the term of the
agreement.
Under the terms of the Credit Facility, 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 until April 30, 2005 and up to $1,000,000 on an unsecured basis after
April 30, 2005. The interest rate on the Credit Facility is prime + 6.0%,
payable monthly in arrears. 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
Aspen, (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, the Company, Aspen and
certain individual shareholders agreed to amend and restate their shareholders'
agreement to provide that Aspen will have the right to appoint up to three of
seven of our directors and one mutually acceptable independent director. We also
amended and restated the Registration Rights Agreement with Aspen and certain
individual shareholders, which grants to Aspen certain demand registration
rights and which grants to all parties to the agreement, piggyback registration
rights. As part of the Credit Facility transaction, the Company also issued to
Aspen a five year Warrant to purchase up to 2,500,000 shares of its common stock
at an exercise price of $0.50/share (which we anticipate will result in us
recording stock based interest expense in 2005 and beyond). We have accrued
$131,337 for the value of such Warrant as of the original commitment date as a
discount to the face amount of the Credit Facility. The Company is amortizing
such discount to interest expense over the 24 month of the Credit Facility.
NOTE D - EQUITY FINANCING TRANSACTIONS
During 2004, we sold 3,040,000 shares of our common stock in a series of
private placements at $0.25/share to unaffiliated third party investors. These
transactions generated net proceeds to the Company of approximately $740,000
after deducting certain transaction expenses. Under the terms of the stock
purchase agreements used in these transactions, the Company agreed to use its
reasonable best efforts to file with the SEC within 180 days of any transaction,
and to cause to be declared effective thereafter, a resale registration
statement which includes the shares purchased by such third party investors. As
of March 31, 2005, the Company had not filed such resale registration statement
with the SEC and is in breach of such provision under certain of the stock
purchase agreements executed with third party investors. There were no penalties
stipulated for failing to meet this registration deadline. The Company currently
anticipates filing such resale registration statement shortly.
On January 3, 2005, we issued 27,288 shares of common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $6,822 of accrued, but unpaid vacation.
During the period January 3, 2005 to March 31, 2005, we sold 450,953 shares
of our common stock in a series of private placements at $0.30/share and
$0.35/share to unaffiliated third party investors. These transactions generated
net proceeds to the Company of approximately $146,000. Under the terms of the
stock purchase agreements used in these transactions, the Company agreed to use
its reasonable best efforts to file with the SEC within 180 days of any
transaction, and to cause to be declared effective thereafter, a resale
registration statement which includes the shares purchased by such third party
investors.
End of Financial Statements
F-7
[Letterhead of Kingery & Crouse, P.A.]
REPORT INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and stockholders of NeoGenomics, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of NeoGenomics, Inc.
and subsidiary (collectively the "Company"), as of December 31, 2004, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 2004 and 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. 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,
2004, and the results of its operations and its cash flows for the years ended
December 31, 2004 and 2003, in conformity with accounting principles generally
accepted in the United States of America.
Kingery & Crouse, P.A.
April 14, 2005
Tampa, FL
F-8
NEOGENOMICS, INC.
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2004
________________________________________________________________________________
ASSETS
CURRENT ASSETS:
Cash $ 112,548
Accounts receivable (net of allowance for doubtful
accounts of $8,707) 56,491
Inventory 15,122
Other 12,121
Total current assets 196,282
FURNITURE AND EQUIPMENT (net of accumulated depreciation of
$137,313) 393,036
OTHER ASSETS - Deposits 2,681
TOTAL $ 591,999
==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 96,210
Accrued and other liabilities 72,444
Deferred revenue 110,000
Due to affiliates 740,000
Total current liabilities 1,018,654
STOCKHOLDERS' DEFICIT:
Common stock, $.001 par value, (100,000,000 shares
authorized; 21,539,416 shares issued and outstanding) 21,539
Additional paid-in capital 9,603,664
Deferred stock compensation (28,620)
Accumulated deficit (10,023,238)
Total stockholders' deficit (426,655)
TOTAL $ 591,999
==============
________________________________________________________________________________
See notes to consolidated financial statements.
F-9
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
_________________________________________________________________________________
2004 2003
NET REVENUE $ 558,074 $ 369,972
COST OF REVENUE 576,867 481,593
GROSS MARGIN (DEFICIT) (18,793) (111,621)
OTHER OPERATING EXPENSES:
General and administrative 710,771 382,711
Interest expense 89,421 41,431
Total other operating expenses 800,192 424,142
NET LOSS $ (818,985) $ (535,763)
=============== ==============
NET LOSS PER SHARE - Basic and
Diluted $ (0.04) $ (0.04)
=============== ==============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
Basic and Diluted 19,901,028 14,385,009
=============== ==============
_________________________________________________________________________________
See notes to consolidated financial statements.
F-10
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
____________________________________________________________________________________________________________________________________
Common Common Additional Deferred
Stock Stock Paid-In Stock Accumulated
Shares Amount Capital Compensation Deficit Total
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 13,927,062 13,927 125,344 - - 139,271
Transaction fees and expenses - - (27,800) - - (27,800)
Common stock issuance for service 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 - (9,204,253) (367,802)
Common stock issuances 3,040,000 3,040 756,960 - - 760,000
Transaction fees and expenses - - (23,272) - - (23,272)
Options exercised 50,000 50 3450 - - 3,500
Warrants issued for services - - 6,224 - - 6,224
Deferred stock compensation related to
warrants issued for services - - 42,300 (42,300) - -
Amortization of deferred stock compensation - - - 13,680 - 13,680
Net loss - - - - (818,985) (818,985)
BALANCES, DECEMBER 31, 2004 21,539,416 $ 21,539 $ 9,603,664 $ 28,620 $ (10,023,238) $ (426,655)
============ ========= ============ ========= =============== ============
____________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
F-11
NEOGENOMICS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
________________________________________________________________________________
2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (818,985) $ (535,763)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 90,583 48,037
Amortization of deferred stock compensation 13,680 -
Stock based compensation and consulting 6,224 -
Provision for bad debts 28,959 16,378
Other non-cash expenses - 30,346
Changes in assets and liabilities, net:
(Increase) Decrease in accounts receivable, net (21,589) (40,158)
(Increase) Decrease in Inventory (4,529) 8,713
(Increase) Decrease in other current assets (9,495) (627)
(Increase) Decrease in deposits 4,540 (3,305)
Increase (Decrease) in due to bank - (13,518)
Increase (Decrease) in deferred revenues - 10,000
Increase (Decrease) in accounts payable and
accrued and other liabilities 52,479 (52,469)
NET CASH USED IN OPERATING ACTIVITIES (658,133) (532,366)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (85,932) (63,188)
NET CASH USED IN INVESTING ACTIVITIES (85,932) (63,188)
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances from affiliates, net 91,334 506,334
Issuances of common stock for cash, net of
transaction expenses 740,228 114,271
NET CASH PROVIDED BY FINANCING ACTIVITIES 831,562 620,605
NET INCREASE IN CASH AND CASH EQUIVALENTS 87,497 25,051
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 25,051 -
CASH AND CASH EQUIVALENTS, END OF YEAR $ 112,548 $ 25,051
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid $ 119,777 $ 9,456
=========== ===========
Income taxes paid $ - $ -
=========== ===========
________________________________________________________________________________
See notes to consolidated financial statements.
F-12
NEOGENOMICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
________________________________________________________________________________
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
NeoGenomics, Inc. ("NEO" or the "Subsidiary") was incorporated under the laws of
the state of Florida on June 1, 2001 and on November 14, 2001 agreed to be
acquired by American Communications Enterprises, Inc. ("ACE", or the "Parent").
ACE was formed in 1998 and succeeded to NEO's name on January 3, 2002 (NEO and
ACE collectively referred to as "we", "us", "our" or the "Company").
Through December 31, 2002, we were considered to be a development stage (as
defined in Financial Accounting Standards Board Statement No. 7), 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.
However, we also have customers outside of the state of Florida.
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 April 2003 reverse stock split as though all such
changes had been completed as of June 1, 2001.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Parent and the Subsidiary. All significant intercompany accounts and balances
have been eliminated in consolidation.
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.
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 either
covered by Medicare or insured under third-party payer agreements or are
patients at hospitals whom we institutionally bill for services. As of December
31, 2004, approximately 37% and 13% of our receivables were from Medicare and
Naples Community Hospital System ("NCHS"), respectively.
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
F-13
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 financial instruments included in our current
assets and liabilities approximates their fair values due to their short-term
nature.
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.
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 2004 and determined that they were not impaired at of December 31, 2004.
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.
Temporary differences between financial and tax reporting arise primarily from
the use of different depreciation methods for furniture and equipment.
Stock-Based Compensation
We account for equity instruments issued to employees for services based on the
intrinsic 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 provisions 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
F-14
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, 2004 and December 31, 2003, which consisted of
employee stock options and certain warrants issued to consultants, were excluded
from diluted net loss per common share calculations as of such date because they
were anti-dilutive.
Recent Pronouncements
FIN 46 - Consolidation of Variable Interest Entities
In January 2003, the FASB issued FIN 46, (revised in December 2003 as FIN46R)
"Consolidation of Variable Interest Entities," which clarifies the application
of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements,
to certain entities (called variable interest entities) in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
disclosure requirements of this Interpretation are effective for all financial
statements issued after January 31, 2003. The consolidation requirements apply
to all variable interest entities created after January 31, 2003. In addition,
public companies must apply the consolidation requirements to variable interest
entities that existed prior to February 1, 2003 and remain in existence as of
the beginning of annual or interim periods beginning after June 15, 2003. The
adoption of FIN 46R had no impact on our financial statements as we do not have
any variable interests in variable interest entities.
SFAS 150 - Accounting for Certain `Financial Instruments with Characteristics of
Both Liabilities and Equity
In May 2003, SFAS No. 150 "Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity," was issued to establish new
standards for how an entity classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires
that an entity classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of these instruments were
previously classified as equity. This statement was effective when issued for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective for calendar year public companies for the third quarter of 2003.
The adoption of SFAS 150 had no impact on our financial statements.
SFAS 132 - Employers' Disclosures about Pensions and Other Postretirement
Benefits
In December 2003, FASB Statement No. 132 (revised) was issued which prescribes
the required employers' disclosures about pension plans and other postretirement
benefit plans; but it does not change the measurement or recognition of those
plans. The Statement retains and revises the disclosure requirements contained
in the original Statement 132. It also requires additional disclosures about the
assets, obligations, cash flows, and net periodic benefit cost of defined
benefit pension plans and other postretirement benefit plans. The Statement
generally is effective for fiscal years ending after December 15, 2003. Since we
do have any types of pension plans or other postretirement benefits, the
adoption of this Statement did not have an effect on our financial statements.
SFAS 123(R) `Share-Based Payments'
In December 2004, the Financial Accounting Standards Board issued Statement
Number 123 ("FAS 123 (R)"), Share-Based Payments. FAS 123 (R) requires all
entities to recognize compensation expense in an amount equal to the fair value
of shared-based payments such as stock options granted to employees. We will be
required to apply FAS 123 (R) on a modified prospective method. Under this
method, we are required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. In addition, we may elect to adopt
FAS 123 (R) by restating previously issued financial statements, basing the
amounts on the expense previously calculated and reported in the pro forma
disclosures that had been required by FAS 123. FAS 123 (R) is effective for the
first reporting period beginning after June 15, 2005, unless such date of
adoption is delayed by the SEC. We intend to adopt FAS 123(R) when it becomes
required to do so. Since the majority of options and warrants outstanding as of
December 31, 2004 were vested, we believe that the biggest impact from this
change in accounting treatment will come from expensing newly awarded options
and warrants (including options issued pursuant to the employment agreement
discussed at Note F).
F-15
SFAS 153 - Exchanges of Nonmonetary Assets an Amendment of APB Opinion No. 29
In December 2004, FASB Statement No. 153 was issued amending APB Opinion No. 29
to eliminate the exception allowing nonmonetary exchanges of similar productive
assets to be measured based on the carrying value of the assets exchanged as
opposed to at their fair values. This exception was replaced with a general
exception for exchanges of nonmonetary assets that do not have commercial
substance. A nonmonetary exchange has commercial substance if the future cash
flows of the entity are expected to change significantly as a result of the
exchange. The provisions of this statement are effective for nonmonetary asset
exchanges occurring in fiscal periods beginning after the June 15, 2005. The
adoption of this statement did not have a material impact on our financial
statements.
SFAS - 146 Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity," under which a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. SFAS No. 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized at fair value when the liability
is incurred. The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002. SFAS 146 had no impact on
our financial statements.
FIN- 45 Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others
In November 2002, the FASB issued FASB Interpretation ("FIN") 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which elaborates on the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of the guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. The initial recognition and initial measurement provisions of this
Interpretation are applied prospectively to guarantees issued or modified after
December 31, 2002. The adoption of these recognition provisions will result in
recording liabilities associated with certain guarantees provided by us. The
disclosure requirements of this Interpretation are effective for financial
statements of interim or annual periods ending after December 15, 2002. FIN 45
has no impact on the Company's financial statements
NOTE B - LIQUIDITY
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. At December 31, 2004, we had
working capital and stockholders' deficits of approximately $822,000 and
$426,000 respectively. However, subsequent to December 31, 2004, we enhanced our
working capital as we replaced the due to affiliate of $740,000 included in
current liabilities with indebtedness that does not mature until March 31, 2007
(see Note I). We believe this debt facility, which allows for unsecured
borrowings of $1,000,000 after April 30, 2005, and improving operations, will
provide adequate capital to fund our operations and growth for 2005 and beyond.
As such, 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, 2004:
Equipment $ 486,739
Furniture & Fixtures 33,110
Leasehold Improvements 10,500
Subtotal 530,349
Less accumulated depreciation and amortization (137,313)
Property and Equipment, net $ 393,036
==========
F-16
NOTE D - INCOME TAXES
We recognized losses for both financial and tax reporting purposes during each
of the periods in the accompanying consolidated 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.
Since our incorporation, we have incurred net operating losses for income tax
purposes of approximately $2,150,000 (the significant difference between this
amount, and our deficit of $10,023,000, arises primarily from certain stock
based compensation that is considered to be a permanent difference). Because of
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, 2024. 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, 2004 our net non-current deferred income tax asset (assuming an
effective income tax rate of approximately 39%) consisted of the following:
Net non-current deferred income tax asset: Amounts
Net operating loss carryforwards $ 841,000
Accumulated depreciation (76,000)
Less valuation allowance (765,000)
Total $ -
============
The income tax benefit consists of the following for the years ended December
31, 2004 and 2003:
2004 2003
Current $ - $ -
Deferred 274,000 208,800
Change in valuation allowance (274,000) (208,800)
$ - $ -
=========== ==========
F-17
NOTE E - INCENTIVE STOCK OPTIONS AND AWARDS
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 10% of our issued and outstanding common stock, which
equated to 2,153,942 shares of our common stock as of December 31, 2004. As of
December 31, 2004, option and stock awards totaling 882,329 shares were
outstanding and there were commitments to grant additional awards totaling
1,027,288 shares. 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:
Number Weighted
Of Average
Shares Exercise Price
Outstanding at December 31, 2002 - $ -
Granted 1,100,000 0.07
Exercised - -
Canceled - -
Outstanding at December 31, 2003 1,100,000 0.07
Granted 810,000 0.17
Exercised (50,000) 0.07
Canceled (977,671) 0.07
Outstanding at December 31, 2004 882,329 $ 0.16
=========== ==========
Exercisable at December 31, 2004 432,329 $ 0.07
=========== ==========
The following table summarizes information about the Company's options
outstanding at December 31, 2004:
Weighted Average
Remaining Contractual Weighted
Exercise Number Life (in years) Options Average
Price Outstanding Exercisable Exercise Price
$ 0.07 432,329 0.3 432,329 $ 0.07
$ 0.23 50,000 9.9 - $ 0.23
$ 0.25 400,000 9.6 100,000 $ 0.25
882,329 532,329
========= =========
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". 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:
2004> 2003
Net loss:
As reported $ (818,985) $ (535,763)
============ ============
Pro forma $ (848,777) $ (557,763)
============ ============
Loss per share:
As reported $ (0.04) $ (0.04)
============ ============
Pro forma $ (0.04) $ (0.04)
============ ============
F-18
The weighted average fair value of options granted during 2004, estimated on the
date of grant using the Black-Scholes option-pricing model, was approximately
$0.05 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 3.5 to 4.0%
(depending on the date of issue), 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,
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,
2004, 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
2005 $ 72,000
2006 48,000
2007 0
Total $ 120,000
=========
Rent expense for 2004 and 2003 approximated $73,103 and $46,350, respectively.
In October 2003, we entered into an employment agreement with Thomas H. White to
be our Chief Executive Officer. The employment agreement had an initial term of
three years; provided, however that either party could terminate the agreement
by giving the other party sixty days written notice. The employment agreement
specified 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 had a ten year term so long as Mr. White remains an employee of the
Company. Mr. White's employment agreement also specified that in the event that
Mr. White was terminated without cause by the Company, the Company would 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). On December 14, 2004,
the Company notified Mr. White that it was terminating his employment and was
providing the 60 day notice period specified in his agreement. Mr. White's
effective date of termination with the Company was February 15, 2005, however,
pursuant to his Employment Agreement, he is entitled to receive base pay and
benefits through April 15, 2005. As a result of this termination, the Company
has accrued $33,418 of severance expense on its financial statements as of
December 31, 2004. This accrual represents three and a half months of additional
base pay and benefits up to April 15, 2005.
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, 2004, we had not performed any of the research; accordingly, such
amount has been recorded as deferred revenue in the accompanying consolidated
balance sheet.
On December 14, 2004, we entered into an employment agreement with Robert P.
Gasparini to serve as our President and Chief Science Officer. The employment
agreement has an initial term of three years, effective January 3, 2005;
provided, however that either party may terminate the agreement by giving the
other party sixty days written notice. The employment agreement specifies an
initial base salary of $150,000/year, with specified salary increases to
$185,000/year over the first 18 months of the contract. Mr. Gasparini is also
entitled to receive cash bonuses for any given fiscal year in an amount equal to
15% of his base salary if he meets certain targets established by the Board of
F-19
Directors. In addition, Mr. Gasparini was granted 1,000,000 Incentive Stock
Options that have a ten year term so long as Mr. Gasparini remains an employee
of the Company (these options, which vest according to the passage of time and
other performance-based milestones,will result in us recording stock based
compensation expense beginning in 2005). Mr. Gasparini's employment agreement
also specifies that he is entitled to four weeks of paid vacation per year and
other health insurance and relocation benefits. In the event that Mr. Gasparini
is terminated without cause by the Company, the Company has agreed to pay Mr.
Gasparini's base salary and maintain his employee benefits for a period of six
months.
NOTE G- OTHER RELATED PARTY TRANSACTIONS
During 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 of the Board. In addition, NWC
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 approximately $117,332 from the Naples
Women's Center to meet our short-term cash needs. In 2003, we repaid
approximately $58,666 of this amount, and in 2004, we repaid the remaining
$58,666, plus accrued interest at a rate of 8.0% per annum.
During the period from December 2002 to April 2003, Steven C. Jones, one of
our directors, advanced $32,000 under a short term bridge loan agreement. Mr.
Jones is a principal of Aspen Select Healthcare, LP (formerly known as MVP 3,
LP), which consummated debt and equity financing transactions with the Company
on April 15, 2003 and refinanced the debt portion of the transaction on March
23, 2005. These advances, plus accrued interest at a rate of 8.0% per annum,
were repaid to Mr. Jones on April 17, 2003.
During 2004 and 2003, the Company paid a director $72,500 and $52,000,
respectively, in cash for various consulting work performed connection with
assisting in organizing and managing the financial affairs of the Company.
On April 15, 2003, we entered into a revolving credit facility with MVP 3,
LP ("MVP 3"), a partnership controlled by certain of our shareholders. Under the
terms of the agreement MVP 3, LP agreed to make available up to $1.5 million of
debt financing with a stated interest rate of prime + 8% and such credit
facility had an initial maturity of March 31, 2005. At December 31, 2004, we
owed MVP 3, approximately $740,000 under this loan agreement, which is
classified as "Due to affiliates" under the current liabilities section of our
balance sheet. This obligation was repaid in full through a refinancing on March
23, 2005.
NOTE H - EQUITY FINANCING TRANSACTIONS
During 2004, we sold 3,040,000 shares of our common stock in a series of private
placements at $0.25/share to unaffiliated third party investors. These
transactions generated net proceeds to the Company of approximately $740,000
after deducting certain transaction expenses. Under the terms of the stock
purchase agreements used in these transactions, the Company agreed to use its
reasonable best efforts to file with the SEC within 180 days of any transaction,
and to cause to be declared effective thereafter, a resale registration
statement which includes the shares purchased by such third party investors. As
of March 31, 2005, the Company had not filed such resale registration statement
with the SEC and is in breach of such provision under certain of the stock
purchase agreements executed with third party investors. There were no penalties
stipulated for failing to meet this registration deadline. The Company currently
anticipates filing such resale registration statement shortly.
NOTE I - SUBSEQUENT EVENTS
On March 23, 2005, we entered into an agreement with Aspen Select Healthcare, LP
(formerly known as MVP 3, LP) to refinance our existing indebtedness of $740,000
and provide for additional liquidity of up to $760,000 to the Company. Under the
terms of the agreement, Aspen Select Healthcare, LP ("Aspen"), a Naples,
Florida-based private investment fund will make available up to $1.5 million of
debt financing in the form of a revolving credit facility (the "Credit
Facility") with an initial maturity of March 31, 2007. Aspen is managed by its
General Partner, Medical Venture Partners, LLC, which is controlled by a
director of NeoGenomics.
Under the terms of the Credit Facility, 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 until April 30, 2005 and up to $1,000,000 on an unsecured basis after
April 30, 2005. The interest rate on the Credit Facility is prime + 6.0%,
F-20
payable monthly in arrears. 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
Aspen, (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, the Company, Aspen and
certain individual shareholders agreed to amend and restate their shareholders'
agreement to provide that Aspen will have the right to appoint up to three of
seven of our directors and one mutually acceptable independent director. We also
amended and restated the Registration Rights Agreement with MVP 3 LP and certain
individual shareholders, which grants to Aspen certain demand registration
rights and which grants to all parties to the agreement, piggyback registration
rights. As part of the Credit Facility transaction, the Company also issued to
Aspen a five year Warrant to purchase up to 2,500,000 shares of its common stock
at an exercise price of $0.50/share (which we anticipate will result in us
recording stock based interest expense in 2005 and beyond).
During the period January 3, 2005 to March 31, 2005, we sold 450,953 shares of
our common stock in a series of private placements at $0.30/share and
$0.35/share to unaffiliated third party investors. These transactions generated
net proceeds to the Company of approximately $146,000. Under the terms of the
stock purchase agreements used in these transactions, the Company agreed to use
its reasonable best efforts to file with the SEC within 180 days of any
transaction, and to cause to be declared effective thereafter, a resale
registration statement which includes the shares purchased by such third party
investors.
On January 3, 2005, we issued 27,288 shares of common stock under the Company's
2003 Equity Incentive Plan to two employees of the Company in satisfaction of
$6,822 of accrued, but unpaid vacation.
End of Financial Statements
F-21
We have not authorized any dealer, salesperson or other person to
provide any information or make any representations about
NeoGenomics, Inc. except the information or representations
contained in this prospectus. You should not rely on any
additional information or representations if made.
This prospectus does not constitute an offer to sell, or ______________________
a solicitation of an offer to buy any securities:
PROSPECTUS
o except the common stock offered by this ______________________
prospectus;
o in any jurisdiction in which the offer or
solicitation is not authorized;
o in any jurisdiction where the dealer or other 10,000,000 Shares of Common Stock
salesperson is not qualified to make the offer
or solicitation;
o to any person to whom it is unlawful to make the NEOGENOMICS, INC.
offer or solicitation; or
o to any person who is not a United States
resident or who is outside the jurisdiction of
the United States.
The delivery of this prospectus or any accompanying sale ____________ __, 2005
does not imply that:
o there have been no changes in the affairs of
NeoGenomics, Inc. after the date of this
prospectus; or
o the information contained in this prospectus is
correct after the date of this prospectus.
_______________________
Until _________, 2005, all dealers effecting transactions
in the registered securities, whether or not
participating in this distribution, may be required to
deliver a prospectus. This is in addition to the
obligation of dealers to deliver a prospectus when acting
as underwriters.
II-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation eliminate liability of its
directors and officers for breaches of fiduciary duties as directors and
officers, except to the extent otherwise required by the Nevada Revised Statutes
and where the breach involves intentional misconduct, fraud, or a knowing
violation of the law.
Nevada Revised Statutes 78.750, 751, and 752 have similar provisions that
provide for discretionary and mandatory indemnification of officers, directors,
employees, and agents of a corporation. Under these provisions, such persons may
be indemnified by a corporation against expenses, including attorney's fees,
judgment, fines and amounts paid in settlement, actually and reasonably incurred
by him in connection with the action, suit or proceeding, if he acted in good
faith and in a manner which he reasonably believed to be in or opposed to the
best interests of the corporation and with respect to any criminal action or
proceeding, had no reasonable cause to any action, suit or proceeding, had no
reasonable cause to believe his conduct was unlawful.
To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action, suit or
proceeding, or in defense of any claim, issue or matter, he must be indemnified
by a corporation against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the defense.
Any indemnification, unless ordered by a court or advanced by a
corporation, must be made only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances. The determination must be made:
o By the stockholders;
o By the board of directors by majority vote of a quorum consisting of
directors who were not parties to that act, suit or proceeding;
o If a majority vote of a quorum consisting of directors who were not
parties to the act, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion; or
o If a quorum consisting of directors who were not parties to the act, suit
or proceeding cannot be obtained, by independent legal counsel in a written
opinion;
o Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding must be paid by the corporation as they are
incurred and in advance of the final disposition of the action, suit or
proceeding, upon receipt of an undertaking by the director or officer to repay
the amount if it is ultimately determined by a court of competent jurisdiction
that he is not entitled to be indemnified by a corporation.
o To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, a corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers, and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer, or controlling
person of the registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person
connected with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-2
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth estimated expenses expected to be incurred
in connection with the issuance and distribution of the securities being
registered. The Company will pay all expenses in connection with this offering.
Securities and Exchange Commission Registration Fee $ 471.00
Printing and Engraving Expenses $ 2,500.00
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 50,000.00
Miscellaneous $ 17,029.00
TOTAL $ 85,000.00
ITEM 26. SALES OF UNREGISTERED SECURITIES
During the past three years, the Company has issued the following
securities without registration under 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
sophisticated investors in a transaction that the Company believes was exempt
from registration under Rule 506 promulgated under 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. This
transaction involved the issuance of unregistered stock to accredited investors
in transactions that we believed were exempt from registration under Section
4(2) of the Securities Act of 1933.
During 2004, we sold 3,040,000 shares of our common stock in a series of
private placements at $0.25/share to unaffiliated third party investors. These
transactions generated net proceeds to the Company of approximately $740,000
after deducting certain transaction expenses. These transactions involved the
issuance of unregistered stock to accredited investors in transactions that we
believed were exempt from registration under Rule 506 promulgated under the
Securities Act of 1933.
On January 3, 2005, we issued 27,288 shares of common stock under the
Company's 2003 Equity Incentive Plan to two employees of the Company in
satisfaction of $6,822 of accrued, but unpaid vacation.
On March 23, 2005, the Company entered into a Loan Agreement with Aspen
Select Healthcare, LP ("Aspen") to provide up to $1.5 million of indebtedness
pursuant to a credit facility (the "Credit Facility"). As part of the Credit
Facility transaction, the Company also issued to Aspen a five year Warrant to
purchase up to 2,500,000 shares of its common stock at an exercise price of
$0.50/share.
During the period January 1, 2005 to March 31, 2005, we sold 450,950 shares
of our common stock in a series of private placements at $0.30/share and
$0.35/share to unaffiliated third party investors. These transactions generated
net proceeds to the Company of approximately $146,000. These transactions
involved the issuance of unregistered stock to accredited investors in
transactions that we believed were exempt from registration under Rule 506
promulgated under the Securities Act of 1933.
On May 25, 2005, we sold 71,429 shares of our common stock in a private
placement at $0.35/share to an unaffiliated third party investor. This
transaction generated net proceeds to the Company of $25,000. This transaction
involved the issuance of unregistered stock to an accredited investor in a
transaction that we believe was exempt from registration under Rule 506
promulgated under the Securities Act of 1933.
On June 6, 2005, the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, LP. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $5.0 million. For each share of common stock purchased under the Standby
Equity Distribution Agreement, Cornell Capital Partners, LP will pay the Company
98% of, or a 2% discount to, the lowest volume weighted average price of our
common stock on the Over-the-Counter Bulletin Board or other principal market on
which the Company's common stock is traded for the five days immediately
following the notice date. Cornell Capital Partners will retain 5% of each
II-3
advance under the Standby Equity Distribution Agreement. In connection with the
Standby Equity Distribution Agreement, Cornell Capital Partners received 381,888
shares of common stock from the Company on June 6, 2005 as a commitment fee in
the amount of $140,000 under the Standby Equity Distribution Agreement and
Cornell Capital Partners will receive an additional commitment fee in the form
of a $50,000 promissory note on the earlier of (i) June 6, 2006, or (ii) the
date the Company receives advances under the Standby Equity Distribution
Agreement in an amount greater than or equal to $2,500,000. The Company also
engaged a placement agent to advise the Company in connection with the Standby
Equity Distribution Agreement. The placement agent was paid a fee of $10,000 by
the issuance of 27,278 shares of the Company's common stock on June 6, 2005,
under the Standby Equity Distribution Agreement.
Unless otherwise specified above, the Company believes that all of the
above transactions were transactions not involving any public offering within
the meaning of Section 4(2) of the Securities Act of 1933, as amended, since (a)
each of the transactions involved the offering of such securities to a
substantially limited number of persons; (b) each person took the securities as
an investment for his/her/its own account and not with a view to distribution;
(c) each person had access to information equivalent to that which would be
included in a registration statement on the applicable form under the Securities
Act of 1933, as amended; (d) each person had knowledge and experience in
business and financial matters to understand the merits and risk of the
investment; therefore no registration statement needed to be in effect prior to
such issuances.
ITEM 26. EXHIBITS
Exhibit No. Description of Exhibit Location
Incorporated by reference to the Company's
Registration Statement on Form SB-2 as filed with
the United States Securities and Exchange
3.1 Articles of Incorporation, as amended Commission on February 10, 1999
Incorporated by reference to the Company's on Form
3.2 Amendment to Articles of Incorporation filed with the 10-KSB as filed with the United States Securities
Nevada Secretary of State on January 3, 2002. and Exchange Commission on May 20, 2003
Incorporated by reference to the Company's Form
3.3 Amendment to Articles of Incorporation filed with the 10-KSB as filed with the United States Securities
Nevada Secretary of State on April 11, 2003. and Exchange Commission on May 20, 2003
Incorporated by reference to the Company's Form
10-QSB as filed with the United States Securities
3.4 Amended and Restated Bylaws, dated October 14, 2003. and Exchange Commission on November 14, 2003
Incorporated by reference to the Company's Form
3.5 NeoGenomics, Inc. 2003 Equity Incentive Plan 10-QSB as filed with the United States Securities
and Exchange Commission on November 14, 2003
5.1 Opinion of Counsel Provided herewith
Incorporated by reference to the Company's on Form
10.1 Loan Agreement between NeoGenomics, Inc. and Aspen Select 8-K as filed with the United States Securities and
Healthcare, L.P. dated March 23, 2005 Exchange Commission on March 30, 2005
Amended and Restated Registration Rights Agreement between Incorporated by reference to the Company's on Form
10.2 NeoGenomics, Inc. and Aspen Select Healthcare, L.P. and 8-K as filed with the United States Securities and
individuals dated March 23, 2005 Exchange Commission on March 30, 2005
Incorporated by reference to the Company's on Form
10.3 Guaranty of NeoGenomics, Inc., dated March 23, 2005 8-K as filed with the United States Securities and
Exchange Commission on March 30, 2005
II-4
Stock Pledge Agreement between NeoGenomics, Inc. and Aspen Incorporated by reference to the Company's on Form
10.4 Select Healthcare, L.P., dated March 23, 2005 8-K as filed with the United States Securities and
Exchange Commission on March 30, 2005
Incorporated by reference to the Company's on Form
10.5 Warrants issued to Aspen Select Healthcare, L.P., dated 8-K as filed with the United States Securities and
March 23, 2005 Exchange Commission on March 30, 2005
Incorporated by reference to the Company's on Form
10.6 Security Agreement between NeoGenomics, Inc. and Aspen 8-K as filed with the United States Securities and
Select Healthcare, L.P., dated March 23, 2005 Exchange Commission on March 30, 2005
Incorporated by reference to the Company's on Form
10.7 Employment Agreement, dated December 14, 2004, between Mr. 10-KSB as filed with the United States Securities
Robert P. Gasparini and the Company and Exchange Commission on April 15, 2005
Incorporated by reference to the Company's on Form
10.8 Standby Equity Distribution Agreement with Cornell Capital 8-K as filed with the United States Securities and
Partners, LP dated June 6, 2005 Exchange Commission on June 8, 2005
Registration Rights Agreement with Cornell Capital Incorporated by reference to the Company's on Form
10.9 Partners, LP related to the Standby Equity Distribution 8-K as filed with the United States Securities and
dated June 6, 2005 Exchange Commission on June 8, 2005
Placement Agent Agreement with Spartan Securities Group, Incorporated by reference to the Company's on Form
10.10 Ltd., related to the Standby Equity Distribution dated 8-K as filed with the United States Securities and
June 6, 2005 Exchange Commission on June 8, 2005
Incorporated by reference to the Company's on Form
14.1 NeoGenomics, Inc. Code of Ethics for Senior Financial 10-KSB as filed with the United States Securities
Officers and the Principal Executive Officer and Exchange Commission on April 15, 2005
23.1 Consent of Burton, Bartlett & Glogovac Incorporated by reference to Exhibit 5.1.
23.2 Consent of Kingery & Crouse, P.A. Incorporated by reference to Exhibit 23-2.
99.1 Correspondence to the Securities & Exchange Commission Provided herewith
II-5
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Sections 10(a)(3) of the
Securities Act of 1933 (the "Act");
(ii) Reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective Registration Statement;
(iii) Include any additional or changed material information on the
plan of distribution;
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small business
issuer pursuant to the foregoing provisions, or otherwise, the small business
issuer has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on our behalf by the undersigned, on July 27 , 2005.
Date: July 27 , 2005 NEOGENOMICS, INC.
By: /s/ Robert P. Gasparini
Name: Robert P. Gasparini
Title: President, Chief Executive Officer and Director
By: /s/ Steven C. Jones
Name: Steven C. Jones
Title: Acting Principal Financial Officer
and Chief Accounting Officer
In accordance with the Securities 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.
Signatures Title Date
/s/ Michael T. Dent Chairman of the Board July 27 , 2005
Michael T. Dent, M.D.
/s/ Thomas D. Conrad Director July 27 , 2005
Thomas D. Conrad, PhD.
/s/ Robert P. Gasparini Director July 27 , 2005
Robert P. Gasparini
/s/ Steven C. Jones Acting Principal Financial July 27 , 2005
Steven C. Jones Officer, Chief Accounting
Officer and Director
/s/ George G. O'Leary Director July 27 , 2005
George G. O'Leary
/s/ Peter M. Peterson Director July 27 , 2005
Peter M. Peterson
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