POS AM: Post-effective amendment to a registration statement that is not immediately effective upon filing
Published on July 5, 2006
DOCUMENT
BASICALLY CLEANED
IMPORTED
E-MAIL DOCUMENT
DOCUMENT
NOT CLEANED BY DOCX
As
filed
with the U.S. Securities and Exchange Commission on June 30, 2006
Registration
No. 333-126754
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
POST-EFFECTIVE
AMENDMENT TO
FORM
SB-2
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
__________
|
Nevada
|
NeoGenomics,
Inc.
|
74-2897368
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(Name
of Registrant in Our
Charter)
|
(I.R.S.
Employer
Identification
No.)
|
|
Robert
P Gasparini
|
||
|
12701
Commonwealth Drive, Suite 9
Fort
Myers, Florida 33913
(239)
768-0600
|
8731
|
12701
Commonwealth Drive, Suite 9
Fort
Myers, Florida 33913
(239)
768-0600
|
|
(Address
and telephone number of Principal Executive Offices
and
Principal Place of Business)
|
(Primary
Standard Industrial Classification Code Number)
|
(Name,
address and telephone number
of
agent for service)
|
|
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
Facsimile:
(305) 358-7095
|
||
Approximate
date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes
effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. /X/
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act of 1933, 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 of 1933, check the following box and list the Securities Act
of
1933 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. /_/
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.
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,”
“NeoGenomics,”
or
“we,” “us,” or “ours”) common stock by certain persons who are stockholders of
the Company. The selling stockholders consist of:
|
·
|
Selling
stockholders who intend to sell up to 4,265,185 shares of common
stock
previously issued by the Company in private
placements;
|
|
·
|
Other
selling stockholders who may sell up to 325,649 shares of common
stock
underlying previously issued
warrants;
|
|
·
|
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;
and
|
|
·
|
Spartan
Securities Group, Ltd. (“Spartan
Securities”),
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 15.
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 June 21, 2006, the last reported sale price of our common
stock was $0.60 per share. Our common stock is quoted on the Over-the-Counter
Bulletin Board (the “OTCBB”)
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, as amended (the “1933
Act”)
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, pursuant to the Standby Equity Distribution Agreement.
In addition, on June 6, 2005, we issued a one year promissory note to Cornell
Capital Partners for an additional commitment fee of $50,000, which was
cancelable in the event we terminated the Standby Equity Distribution Agreement
prior to it becoming due on June 6, 2006. We have elected not to cancel the
Standby Equity Distribution Agreement and thus this additional commitment fee
of
$50,000 is currently due. The 2% discount, the 5% retainage fee, commitment
fee
shares and the additional commitment fee are underwriting discounts payable
to
Cornell Capital Partners.
-1-
The
Company engaged Spartan Securities, an unaffiliated registered broker-dealer,
to
advise us in connection with the Standby Equity Distribution Agreement. Spartan
Securities was paid a fee of $10,000 through 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.
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 U.S. Securities and Exchange Commission (the
“SEC”)
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 1933 Act, no other underwriter or person has been engaged to
facilitate the sale of shares of common stock in this offering. This offering
will terminate on August 1, 2007. None of the proceeds from the sale of stock
by
the selling stockholders will be placed in escrow, trust or any similar
account.
The
SEC 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 June ___ , 2006.
-2-
-3-
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
operates a cancer genetics laboratory based in Fort Myers, Florida that is
targeting the rapidly growing genetic and molecular testing segment of the
medical laboratory market. The Company currently offers the following types
of
testing services to oncologists, pathologists, urologists, hospitals, and other
laboratories that do not perform genetic testing throughout the United States:
a) cytogenetics testing, which analyzes human chromosomes, b) Fluorescence
In-Situ Hybridization (FISH) testing, which analyzes abnormalities at the gene
level, c) flow cytometry testing services, which analyzes clusters of
differentiation on cell surfaces and d) molecular testing which involves testing
DNA and other molecular structures to screen for and diagnose single gene
disorders. All of these testing services are widely used in the diagnosis of
various types of cancer. Our common stock is listed on the NASDAQ
Over-the-Counter Bulletin Board (the “OTCBB”) under the symbol
“NGNM.”
The
genetic and molecular testing segment of the medical laboratory industry is
the
most rapidly growing segment of the market. Approximately five years ago, the
World Health Organization reclassified cancers as being genetic anomalies.
This
growing awareness of the genetic root behind most cancers combined with advances
in technology and genetic research, including the complete sequencing of the
human genome, have made possible a whole new set of tools to diagnose and treat
diseases. This has opened up a vast opportunity for laboratory companies that
are positioned to address this growing market segment.
The
medical testing laboratory market can be broken down into three primary
segments:
• clinical
lab testing,
• anatomic
pathology testing, and
• genetic/molecular
testing.
Clinical
labs typically are engaged in high volume, high automation tests on blood and
urine. Clinical lab tests often involve testing of a less urgent nature, for
example, cholesterol testing and testing associated with routine physical exams.
This type of testing yields relatively low average revenue per test. Anatomic
pathology (“AP”) testing involves evaluation of tissue, as in surgical
pathology, or cells as in cytopathology. The most widely known AP tests are
Pap
smears, skin biopsies, and tissue biopsies. AP tests are typically more labor
and technology intensive than clinical lab tests and thus typically have higher
average revenue per test than clinical lab tests.
Genetic/molecular
testing typically involves analyzing chromosomes, genes or base pairs of DNA
for
disorders. Whereas anatomic pathology testing is focused from the cell surface
outward, genetic and molecular testing is focused from the cell surface inward.
Both genetic and molecular testing 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 MD or PhD level) to certify the results and typically yields the
highest average revenue per test of the three market segments. The following
chart shows the differences between the genetic/molecular segment and other
segments of the medical laboratory industry. 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.
-4-
COMPARISON
OF THE MEDICAL LABORATORY MARKET SEGMENTS (1)
|
Attributes
|
Clinical
|
Anatomic
Pathology
|
Genetic/Molecular
|
|
Testing
Performed On
Testing
Volume
Physician
Involvement
Malpractice
Ins. Required
Other
Professionals Req.
Level
of Automation
Diagnostic
in Nature
Types
of Diseases Tested
Typical
Revenue Per Test
Estimated
Size of Market
Estimated
Growth Rate
|
Blood,
Urine
High
Low
Low
None
High
Usually
Not
Many
Possible
$5
- $35/Test
$25
- $30 Billion
4.0
-5.0%
|
Tissue/Cells
Low
High
- Pathologist
High
None
Low-Moderate
Yes
Typically
Cancer
$25
- $500/Test
$10.0
- $12.0 Billion
6.0
- 7.0% Annually
|
Chromosomes/Genes/DNA
Low
Low
- Medium
Low
Cyto/Molecular
geneticist
Moderate
Yes
Rapidly
Growing
$200
- $1,000/Test
$3.0
- $4.0 Billion (2)
25.0+%
Annually
|
|
Established
Competitors
|
Quest
Diagnostics
LabCorp
Bio
Reference Labs
DSI
Laboratories
Hospital
Labs
Regional
Labs
|
Quest
Diagnostics
LabCorp
Genzyme
Genetics
Ameripath
Local
Pathologists
|
Genzyme
Genetics
Quest
Diagnostics
LabCorp
Major
Universities
|
(1)
Derived from industry analyst reports and company estimates.
(2)
Includes flow cytometry testing, which historically has been classified under
Anatomic Pathology testing.
Our
primary focus is on the oncology market. We target oncologists that perform
bone
marrow sampling and treat patients with leukemia, lymphoma and other forms
of
cancer as well as urologists that treat patients with bladder cancer.
Historically, our clients were predominantly located in Florida. Beginning
in
January 2005, we began targeting large institutional clients throughout the
United States. This was successful and we landed several clients outside of
the
State of Florida. During the third quarter of 2005 we began testing for
cervical, breast and bladder cancer. Our bladder cancer program focused around
the UroVysion test has grown significantly since it started in the third quarter
of 2005. As we grow, we anticipate offering additional tests that broaden our
focus from genetic and molecular testing to more traditional types of anatomic
pathology testing that are complementary to our current test offerings.
-5-
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 empirical data, we believe that cytogenetics labs
typically have 7-14 day turn-around times on average with some labs running
as
high as 21 days. Traditionally, longer turn-around times for cytogenetics tests
have resulted in fewer tests being ordered since there is an increased chance
that the test results will not be returned within an acceptable diagnostic
window when other adjunctive diagnostic test results are available. We believe
our turn-around times result in our referring physicians requesting more of
our
testing services in order to augment or confirm other diagnostic tests, thereby
giving us a significant competitive advantage in marketing our services against
those of other competing laboratories.
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. Until December 2004, we only performed one type of
test, cytogenetics, in-house, which resulted in only one test being performed
per customer requisition for most of FY 2004 and average revenue per requisition
of approximately $490 in FY 2004. In December 2004, we added FISH testing to
our
product offering, and in February 2005, we began offering flow cytometry testing
services. With the addition of these two new testing platforms, our average
revenue/requisition increased by 35.6% in FY 2005 to approximately $632 per
requisition. This trend continued into the first quarter of FY 2006 with average
revenue/requisition increasing to $690 per requisition. We believe that we
can
continue to increase our average revenue per customer requisition with the
addition of additional testing platforms and more focused
marketing.
|
Q1
2005
|
Q1
2006
|
%
Inc (Dec)
|
|
|
Customer
Requisitions Rec’d (Cases)
|
367
|
1,948
|
430.8%
|
|
Number
of Tests Performed
|
467
|
2,664
|
470.4%
|
|
Average
Number of Tests/Requisition
|
1.27
|
1.37
|
7.5%
|
|
Total
Testing Revenue
|
$230,192
|
$1,343,800
|
483.8%
|
|
Avg.
Revenue/Requisition
|
$627.23
|
$689.84
|
10.0%
|
|
Avg.
Revenue/Test
|
$492.92
|
$504.43
|
2.3%
|
We
believe our strategy of bundling complementary types of tests together to better
service the needs of our clients will continue to drive increases in our revenue
and afford the Company significant synergies and efficiencies in our operations
and sales and marketing activities. For instance, initial testing for most
hematological cancers may yield total revenue ranging from approximately $1,700
- $2,800 per case and is generally comprised of one or more of the following
tests: cytogenetics, fluorescence in-situ hybridization (FISH), flow cytometry,
and morphology testing. Whereas in FY 2004, we only addressed approximately
$500
of this potential revenue per case, we now address approximately $1,200 - $1,900
of this potential revenue per case.
-6-
Avg.
Rev/Test
Cytogenetics $400-$600
Fluorescence
In Situ Hybridization (FISH) $400-$600
Flow
cytometry
-
Technical component $400-$700
-
Professional component $100-$200
Morphology $400-$700
Total $1,700-$2,800
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. Our website
can be accessed at www.neogenomics.org.
-7-
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:
|
·
|
Selling
stockholders who intend to sell up to 4,265,185 shares of common
stock
previously issued by the Company in private
placements;
|
|
·
|
Other
selling stockholders who may sell up to 325,649 shares of common
stock
underlying previously issued
warrants;
|
|
·
|
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;
|
|
·
|
Spartan
Securities, 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 $0.5880 per share (calculated based on a recent stock
price of $0.60 by taking into account the 2% discount to Cornell Capital
Partners), we would be able to receive gross proceeds of $2,708,000 using the
5,000,000 shares being registered in this registration statement under the
Standby Equity Distribution Agreement. We would be required to register
3,503,401 additional shares at this assumed price to obtain the entire $5.0
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. In addition, on June 6, 2005,
we issued a one year promissory note to Cornell Capital Partners for an
additional commitment fee of $50,000, which was cancelable in the event the
Company terminated the Standby Equity Distribution Agreement prior to it
becoming due on June 6, 2006. We have elected not to cancel the Standby Equity
Distribution Agreement and thus this additional commitment fee of $50,000 is
currently 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.
-8-
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 $0.60 per share
and
25%, 50% and 75% discounts to the recent price.
Net
Cash To the Company Assuming all 5.0 Million Shares Registered Under this
Prospectus are Sold:
|
Market
Discount:
|
2%
|
25%
|
50%
|
75%
|
|
Market
Price:
|
$0.6000
|
$0.60000
|
$0.6000
|
$0.60000
|
|
Purchase
Price:
|
$0.5880
|
$0.4410
|
$0.2940
|
$0.1470
|
|
No.
of Shares(1):
|
5,000,000
|
5,000,000
|
5,000,000
|
5,000,000
|
|
Total
Outstanding(2):
|
31,328,365
|
31,328,365
|
31,328,365
|
31,328,365
|
|
Percent
Outstanding(3):
|
15.96%
|
15.96%
|
15.96%
|
15.96%
|
|
Net
Cash to the Company(4):
|
$2,708,000
|
$2,009,750
|
$1,311,500
|
$613,250
|
|
(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 is
currently due and payable.
|
-9-
Number
of Shares To Be Issued Assuming the Company Raises Gross Proceeds of $5.0
Million:
|
Market
Discount:
|
2%
|
25%
|
50%
|
75%
|
|
Market
Price:
|
$0.6000
|
$0.60000
|
$0.6000
|
$0.60000
|
|
Purchase
Price:
|
$0.5880
|
$0.4410
|
$0.2940
|
$0.1470
|
|
No.
of Shares(1)(2):
|
8,503,401
|
11,337,868
|
17,006,803
|
34,013,605
|
|
Total
Outstanding (3):
|
34,831,766
|
37,666,233
|
43,335,168
|
60,341,970(4)
|
|
Percent
Outstanding (5):
|
24.11%
|
37.47%
|
43.05%
|
59.77%
|
|
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 is
currently due and payable.
|
-10-
-11-
We
initially filed this Registration Statement with the SEC on July 20, 2005 (No.
333-126754) and it was declared effective on August 1, 2005 (the “Initial
Registration Statement”). As of June 30, 2006, the Company had received
$75,000 of gross proceeds since the Initial Registration Statement was declared
effective through the issuance and sale of 305,555 shares to Cornell Capital
Partners pursuant to the Standby Equity Distribution Agreement.
|
Common
Stock Offered
|
10,000,000
shares by selling stockholders
|
|
Offering
Price
|
Market
price
|
|
Common
Stock Outstanding Before the Offering(1)
|
26,328,365
shares as of June 30, 2006
|
|
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
|
_______________
|
1
|
Excludes
up to 4,694,445 remaining shares of common stock to be issued under
this
Prospectus pursuant to the Standby Equity Distribution Agreement,
4,770,000 shares of common stock issuable upon the exercise of warrants,
and up to 2,203,500 shares of common stock issuable upon the exercise
of
stock options.
|
-12-
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
ended March 31, 2006, as filed with the SEC.
|
For
the Three-Months Ended March 31,
|
|||||||
|
2006
|
2005
|
||||||
|
Statement
of Operations Data:
|
|||||||
|
Revenue
|
$
|
1,343,800
|
$
|
230,192
|
|||
|
Cost
of Revenue
|
576,795
|
164,614
|
|||||
|
Gross
Profit
|
767,003
|
65,578
|
|||||
|
Total
other operating expenses
|
660,569
|
280,752
|
|||||
|
Net
Income (Loss)
|
$
|
106,434
|
$
|
(215,174
|
)
|
||
|
Net
Income (Loss) Per Share - Basic and Diluted
|
$
|
(0.00
|
)
|
$
|
(0.01
|
)
|
|
|
Weighted
Average Number of Shares Outstanding - Basic
|
24,752,033
|
21,744,273
|
|||||
|
Weighted
Average Number of Shares Outstanding - Diluted
|
25,512,363
|
21,744,273
|
|||||
|
|
As
of March 31,
|
||||||
|
2006
|
2005
|
||||||
|
Balance
Sheet Data:
|
|||||||
|
Assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
260,081
|
$
|
112,959
|
|||
|
Accounts
receivable (net of allowance for doubtful accounts of $47,712 as
of
March 31, 2006 and $9,496 as of March 31, 2005)
|
898,095
|
141,602
|
|||||
|
Inventories
|
46,704
|
27,843
|
|||||
|
Other
current assets
|
77,953
|
32,559
|
|||||
|
Total
current assets
|
1,282,833
|
314,963
|
|||||
|
Property
and Equipment (net of accumulated depreciation of $301,002 as of
March 31, 2006 and $163,727 as of March 31, 2005)
|
736,611
|
378,327
|
|||||
|
Other
Assets
|
12,638
|
33,898
|
|||||
|
Total
assets
|
$
|
2,032,082
|
$
|
727,188
|
|||
|
Liabilities
& Stockholders’ Deficit:
|
|||||||
|
Total
current liabilities
|
$
|
764,726
|
$
|
289,170
|
|||
|
Long
term portion of equipment leases
|
111,208
|
-
|
|||||
|
Long
term liabilities (net of unamortized discount of $79,700 as of March
31,
2006 and $129,925 as of March 31, 2005)
|
1,420,300
|
765,526
|
|||||
|
Total
liabilities
|
2,296,234
|
1,054,696
|
|||||
|
Common
Stock, $.001 par value, 100,000,000 shares authorized; 26,218,843
as of
March 31, 2006; 22,017,657 shares issued and outstanding as of March
31,
2005
|
26,219
|
22,018
|
|||||
|
Additional
paid in capital
|
10,683,399
|
9,888,886
|
|||||
|
Deficit
|
(10,913,965
|
)
|
(10,238,412
|
)
|
|||
|
Total
stockholders’ deficit
|
(264,152
|
)
|
(327,508
|
)
|
|||
|
Total
Liabilities and Stockholders’ Deficit
|
$
|
2,032,082
|
$
|
727,188
|
|||
-13-
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
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 the Company
From
Being 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 continue to implement and improve its operational and
financial systems and to expand, train and manage its employee base. We may
not
be able to effectively manage the expansion of its 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 effect on our business, results
of
operations, potential profitability and financial condition.
-14-
Part
of
our business strategy may be to acquire assets or other companies that will
complement our business. At this time, we are unable to predict whether or
when
any material transaction will be completed should negotiations commence. If
we
proceed with any such transaction, we may not effectively integrate the acquired
operations with our own operations. We may also seek to finance any such
acquisition by debt financings or issuances of equity securities and such
financing may not be available on acceptable terms or at all.
We
May Incur Greater Costs Than Anticipated, Which Could Result in Sustained
Losses
We
used
reasonable efforts to assess and predict the expenses necessary to pursue our
business plan. However, implementing our business plan may require more
employees, capital equipment, supplies or other expenditure items than
management has predicted. Similarly, the cost of compensating additional
management, employees and consultants or other operating costs may be more
than
we estimate, which could result in sustained losses.
We
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. for the spring and summer months. 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.
-15-
We
Substantially Depend Upon Third Parties for Payment of Services, Which Could
Have A Material Adverse Affect On Our Cash Flows And Results Of Operations
The
Company is a clinical medical laboratory that provides medical testing services
to doctors, hospitals, and other laboratories on patient specimens that are
sent
to the Company. In the case of most specimen referrals that are received for
patients that are not in-patients at a hospital or institution or otherwise
sent
by another reference laboratory, the Company generally has to bill the patient’s
insurance company or a government program for its services. As such it relies
on
the cooperation of numerous third party payers, including but not limited to
Medicare, Medicaid and various insurance companies, in order to get paid for
performing services on behalf of the Company’s clients. Wherever possible, the
amount of such third party payments is governed by contractual relationships
in
cases where the Company is a participating provider for a specified insurance
company or by established government reimbursement rates in cases where the
Company is an approved provider for a government program such as Medicare.
However, the Company does not have a contractual relationship with many of
the
insurance companies with whom it deals, nor is it necessarily able to become
an
approved provider for all government programs. In such cases, the Company is
deemed to be a non-participating provider and there is no contractual assurance
that the Company is able to collect the amounts billed to such insurance
companies or government programs. Currently, the Company is not a participating
provider with the majority of the insurance companies it bills for its services.
Until such time as the Company becomes a participating provider with such
insurance companies, there can be no contractual assurance that the Company
will
be paid for the services it bills to such insurance companies, and such third
parties may change their reimbursement policies for non-participating providers
in a manner that may have a material adverse affect on the Company’s cash flow
or results of operations. Our Business Is Subject To Rapid Scientific Change,
Which Could Have A Material Adverse Affect On Our 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.
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.
-16-
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.
-17-
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.
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. 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
may
seek to exploit business opportunities that require more capital than what
is
currently planned. 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
procedures 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 the Clinical
Laboratories Improvement Act of 1967, as amended by the Clinical Laboratory
Improvement Amendments of 1988 (collectively, “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.
-18-
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 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 the 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, the Company and
shareholders owning 14,281,345 shares as of May 31, 2006, or approximately
54%
of our common shares outstanding as of such date have executed a Shareholders’
Agreement that, among other provisions, gives Aspen Select Healthcare, LP,
our
largest shareholder, the right to elect three out of the seven directors
authorized for our Board, and nominate one mutually acceptable independent
director. Accordingly, it is anticipated that Aspen Select Healthcare, LP and
other parties to the Shareholders’ Agreement will continue to have the ability
to elect a controlling number of the members of our Board of Directors and
the
minority shareholders of the Company may not be able to elect a representative
to our Board of Directors. Such concentration of ownership may also have the
effect of delaying or preventing a change in control..
-19-
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.
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 26,328,365
shares of common stock outstanding as of June 29, 2006, 9,481,141 shares
are freely tradable without restriction, unless held by our “affiliates.” The
remaining 16,847,224 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, 2006, at an assumed offering price of $0.5880 per share (98% of a
recent lowest volume weighted average price of $0.60 per share), the new
stockholders would experience an immediate dilution in the net tangible book
value of $0.5097 per share. Dilution per share at prices of $0.4410, $0.2940
and
$0.1470 per share would be $0.3851, $0.2605 and $0.1358,
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.
-20-
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 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.
-21-
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 OTCBB 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 OTCBB. 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 $0.5880 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 $2,708,000 with the 5,000,000 shares being registered for issuance
under the Standby Equity Distribution Agreement. We would be required to
register 3,503,401 additional shares at this assumed price to obtain the entire
$5 million available under the Standby Equity Distribution
Agreement.
-22-
We
May Not Be Able To Draw Down Under The Standby Equity Distribution Agreement
If
The Investor Holds More Than 9.99% Of Our Common Stock
In
the
event Cornell Capital Partners 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 Partners has beneficial ownership of
1.45%
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 Partners
beneficial ownership remains below 9.99%. If Cornell Capital Partners 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.
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, as
amended (the “1934
Act”).
Penny
stocks are stocks:
|
·
|
With
a price of less than $5.00 per
share;
|
|
·
|
That
are not traded on a “recognized” national
exchange;
|
|
·
|
Whose
prices are not quoted on the Nasdaq automated quotation
system;
|
|
·
|
Nasdaq
stocks that trade below $5.00 per share are deemed a “penny stock” for
purposes of Section 15(b)(6) of the 1934
Act;
|
|
·
|
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.
-23-
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.
-24-
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.
|
Selling
Stockholder
|
Shares
Beneficially Owned Before Offering(1)
|
Percentage
of Outstanding Shares Beneficially Owned Before
Offering(1)
|
Shares
To Be Acquired Under the Standby Equity Distribution
Agreement
|
Percentage
of Outstanding Shares To Be Acquired Under the Standby Equity Distribution
Agreement
|
Shares
To Be Sold In The Offering
|
Percentage
of Outstanding Shares Beneficially Owned After The
Offering
|
|
Cornell
Capital Partners, LP
|
0(2)
|
*
|
5,000,000
|
15.96%
|
5,381,888(3)
|
*
|
|
Spartan
Securities Group, Ltd.
|
0(2)
|
*
|
--
|
--
|
27,278
|
*
|
|
George
O’ Leary
|
300,000(4)
|
1.13%
|
--
|
--
|
244,000(4)
|
*
|
|
Dr.
Phillip D. Cotter
|
319,520
|
1.21%
|
--
|
--
|
81,649
|
*
|
|
Dr.
Michael T. Dent(5)
|
2,857,992
|
10.67%
|
--
|
--
|
129,006
|
8.68%
|
|
Steven
C. Jones(6)
|
14,755,172
|
49.35%
|
--
|
--
|
573,797
|
41.57%
|
|
2004
Private Placement
|
||||||
|
Competitive
Capital Partners, LP(7)
|
800,000
|
3.04%
|
--
|
--
|
400,000
|
1.30%
|
|
The
Craigmore Corporation Defined Benefit
Pension
Plan(8)
|
699,000
|
2.06%
|
--
|
--
|
400,000
|
*
|
|
National
Investor Services Corp. FBO Lynn
N.
Edelman IRA Account(9)
|
400,000
|
1.52%
|
--
|
--
|
200,000
|
*
|
|
Stillman
Limited Partnership(10)
|
400,000
|
1.52%
|
--
|
--
|
200,000
|
*
|
|
White
Financial Money Purchase Plan(11)
|
200,000
|
*
|
--
|
--
|
100,000
|
*
|
|
Teddy
P. Elett, Trustee
|
0(2)
|
*
|
--
|
--
|
800,000
|
*
|
|
Adam
Fueredi, M.D.
|
100,000
|
*
|
--
|
--
|
100,000
|
*
|
|
Edwin
Goldberg, M.D.
|
100,000
|
*
|
--
|
--
|
100,000
|
*
|
|
Suzanne
T. Hale
|
100,000
|
*
|
--
|
--
|
100,000
|
*
|
|
John
M. O’Neill
|
200,000
|
*
|
--
|
--
|
200,000
|
*
|
|
Jeffrey
S. Place
|
0(2)
|
*
|
--
|
--
|
100,000
|
*
|
|
James
R. Rehak and Joann M. Rehak - Joint
Tenants
In Common
|
320,000
|
1.22%
|
--
|
--
|
300,000
|
*
|
|
January
2005 Private Placement
|
||||||
|
OK
Enterprises, Inc.(12)
|
170,000
|
*
|
--
|
--
|
170,000
|
*
|
|
January
2005 / 2004 Private Placement
|
||||||
|
Thomas
P. Hale
|
106,667
|
*
|
--
|
--
|
106,667
|
*
|
|
March
2005 Private Placement
|
||||||
|
James
J. O’ Reilley
|
71,429
|
*
|
--
|
--
|
71,429
|
*
|
|
Don
E. Haney and Mary E. Haney - Joint
Tenants
in Common
|
142,857
|
*
|
--
|
--
|
142,857
|
*
|
|
May
2005 Private Placement
|
||||||
|
Jennifer
Dana Deane Trust(13)
|
72,000
|
*
|
--
|
--
|
71,429
|
*
|
|
Total
|
22,114,637
|
72.46%
|
5,000,000
|
15.96%
|
10,000,000
|
61.25%
|
-25-
|
*
|
Less
than 1%.
|
|
(1)
|
Applicable
percentage of ownership is based on 26,328,365 shares of common stock
outstanding as of June 29, 2006 together with securities exercisable
or convertible into shares of common stock within 60 days of June 29,
2006, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting
or
investment power with respect to securities. Shares of common stock
are
deemed to be beneficially owned by the person holding such securities
for
the purpose of computing the percentage of ownership of such person,
but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Note that affiliates are subject to
Rule
144 and Insider trading regulations - percentage computation is for
form
purposes only.
|
|
(2)
|
The
shares of stock that were beneficially owned by this entity were
previously sold or transferred under this
prospectus.
|
|
(3)
|
Includes
the shares that could be 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. As of June 30, 2006, Cornell Capital Partners
had sold under this prospectus: (a) 305,555 shares acquired from
the
Company pursuant to the Standby Equity Distribution Agreement; and
(b) all
of the 381,888 commitment fee
shares.
|
|
(4)
|
As
of June 30, 2006, Mr. O’Leary had sold 144,000 of the shares registered
under this prospectus.
|
|
(5)
|
Consists
of 2,385,000 founders shares issued in conjunction with starting
the
Company. Dr. Dent also has warrants to purchase 72,992 shares, which
are
currently exercisable and options to purchase 400,000 shares which
are
currently exercisable.
|
|
(6)
|
Mr.
Steven Jones acts as Managing Member of Medical Venture Partners,
LLC,
which is the general partner of Aspen Select Healthcare, LP. 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.
Aspen Select Healthcare, LP owns 10,003,279 shares of the Company
and has
3,550,000 warrants, which are currently exercisable. Mr. Jones also
personally owns 1,174,595 shares and 27,298 warrants, which are currently
exercisable.
|
|
(7)
|
All
investment decisions of Competitive Capital Partners, LP are made
by its
General Partner, Financial Management Corporation, which is controlled
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. As of June 30, 2006,
this
shareholder had sold 1,000 shares under this
prospectus.
|
|
(9)
|
All
investment decisions of National Investor Services Corp. with respect
to
this account are made by Lynn N.
Edelman.
|
-26-
|
(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 us 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 us,
except as follows:
Shares
Acquired In Transactions With The Company
Cornell
Capital Partners, LP.
Cornell
Capital Partners 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 (“Yorkville
Advisors”).
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:
|
·
|
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 OTCBB 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 us 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 us on June 6, 2005 as a commitment
fee
in the amount of $140,000. We are also registering these shares in
this
offering. We initially filed a Registration Statement with the SEC
on July
20, 2005 (No. 333-126754), which was declared effective on August
1, 2005
(the “Initial Registration Statement”). As of June 30, 2006, we have
received $75,000 of gross proceeds since the Initial Registration
Statement was declared effective through the issuance and sale of
305,555
shares to Cornell Capital Partners pursuant to the Standby Equity
Distribution Agreement.
|
-27-
There
are certain risks related to sales by Cornell Capital Partners,
including:
|
·
|
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 Capital
Partners is issued shares, the greater chance that Cornell Capital
Partners gets more shares. This could result in substantial dilution
to
the interests of other holders of common
stock.
|
|
·
|
To
the extent Cornell Capital 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.
|
|
·
|
The
significant downward pressure on the price of the common stock as
Cornell
Capital Partners sells material amounts of common stocks could encourage
short sales by third parties. This could place further downward pressure
on the price of the common stock.
|
Spartan
Securities Group, Ltd.
Spartan
Securities 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
was
paid by the issuance of 27,278 shares of common stock of the Company on June
6,
2005. These shares are being registered in this offering. All investment
decisions of Spartan Securities are made by its President, Micah Eldred.
Subsequent to the Initial Registration Statement, Spartan Securities transferred
all of these shares to one of their employees under this
prospectus.
George
O’ Leary.
We
issued warrants to Mr. O’Leary, a director of the Company, 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 to March 31, 2005. The exercise
price for 100,000 of these shares is $0.25 per share and the exercise price
for
144,000 of these shares is $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. Subsequent to the Initial Registration Statement,
Mr.
O’Leary exercised warrants to purchase 144,000 shares and sold such shares under
this prospectus.
Dr.
Phillip D. Cotter.
We
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 between
October 1, 2004 and June 30, 2005. 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 these warrants in this offering. As of June
30, 2006, Dr. Cotter had not sold any of the shares registered in this
prospectus.
Dr.
Michael T. Dent.
In June
2001, we issued 2,385,000 founders shares to Dr. Dent, a director of the
Company, in connection with his formation of the Company. We are registfering
129,006 of such founders shares in this offering. As of June 30, 2006, Dr.
Dent
had not sold any of the shares registered in this prospectus.
-28-
Steven
C. Jones.
In April
2003, we conducted a private placement to Aspen Select Healthcare, LP and its
affiliates in which we received net proceeds of $114,271 (after deducting
certain transaction expenses) through the issuance of 13,927,062 shares of
common stock. Mr. Steven Jones acts as Managing Member of Medical Venture
Partners, LLC, which is the general partner of Aspen Select Healthcare, LP.
In
the April 2003 transaction, Mr. Jones purchased 1,541,261 shares in his own
name, of which 366,666 were subsequently transferred to other entities. We
are
registering 573,797 of Mr. Jones’ remaining shares in this offering. As of June
30, 2006, Mr. Jones had not sold any of the shares registered in this
prospectus.
Other
Selling Shareholders
2004
Private Placement
During
2004, we conducted a private placement offering to the investors listed under
this heading in the selling stockholders table above. We 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, we conducted a private placement offering to the investors listed
under this heading in the selling stockholders table above. We
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, we conducted a private placement offering to the investors listed
under this heading in the selling stockholders table above. We raised a total
of
$75,000 through the issuance of 214,286 shares of common stock. These shares
are
being registered in this offering.
May
2005 Private Placement
During
May 2005, We conducted a private placement offering to the investor listed
under
this heading in the selling stockholders table above. We 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
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.
-29-
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 OTCBB for the five days immediately following the notice date.
We
will pay Cornell Capital Partners 5% of each advance as an additional
fee.
Pursuant
to the Standby Equity Distribution Agreement, we 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(1)
|
|
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 $0.5880
|
1,700,680
|
3,401,361
|
5,102,041
|
8,503,401
|
|
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)
|
We
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 $0.5880. We would be required to register
3,503,401 additional shares at this price to obtain the entire $5
million
available under the Standby Equity Distribution
Agreement.
|
-30-
The
Standby Equity Distribution Agreement limits our 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 Distribution
Agreement is subject to a 9.99% 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 9.99% 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 9.99% 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.
-31-
Our
net
tangible book value as of March 31, 2006 was $(264,152) or $(0.0101) per share
of common stock. Net tangible book value per share is determined by dividing
the
tangible book value (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
us,
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 $0.5880 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 $0.5880 per share
(i.e., the number of shares registered in this offering under the Standby Equity
Distribution Agreement), less retention fees of $147,000 and offering expenses
of $85,000, our net tangible book value as of March 31, 2005 would have been
$2,443,848 or $0.0783 per share. Note that at an offering price of $0.5880
per
share, we would receive gross proceeds of $2,708,000 and net proceeds of
$2,708,000 of the $5,000,000 available under the Standby Equity Distribution
Agreement. At an assumed offering price of $0.5880, Cornell Capital Partners
would receive a discount of $147,000 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 $0.0884 per share and an
immediate dilution to new stockholders of $0.5097 per share.
The
following table illustrates the per share dilution:
|
Assumed
public offering price per share
|
$
|
0.5880
|
|||||
|
Net
tangible book value per share before this offering
|
$
|
(0.0101
|
)
|
||||
|
Increase
attributable to new investors
|
$
|
0.0884
|
|||||
|
Net
tangible book value per share after this offering
|
$
|
0.0783
|
|||||
|
Dilution
per share to new stockholders
|
$
|
0.5097
|
|||||
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, 2006, as adjusted for
the shares sold to Cornell Capital Partners under the Standby Equity
Distribution Agreement
-32-
|
ASSUMED
OFFERING PRICE
|
NO.
OF SHARES TO BE ISSUEDTO NEW INVESTORS
|
PER
SHARE
|
|
$0.5880
|
5,000,000(1)
|
$0.5097
|
|
$0.4410
|
5,000,000
|
$0.3851
|
|
$0.2940
|
5,000,000
|
$0.2605
|
|
$0.1470
|
5,000,000
|
$0.1358
|
|
(1)
|
This
represents the maximum number of shares of common stock that are
being
registered under the Standby Equity Distribution Agreement at this
time.
|
-33-
Summary
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 98% of, or a 2% discount to, the lowest volume
weighted average price of our common stock on the OTCBB 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. 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 SEC 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 SEC, 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 $0.5880, 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 3,503,401 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 SEC. We filed a Registration Statement
with the SEC on July 20, 2005 (No. 333-126754), which was declared effective
on
August 1, 2005. As of June 30, 2006, we have received $75,000 of gross proceeds
since the Initial Registration Statement was declared effective through the
issuance and sale of 305,555 shares to Cornell Capital Partners pursuant to
the
Standby Equity Distribution Agreement. Thereafter, we may continue to request
advances until Cornell Capital Partners has advanced $5.0 million until August
1, 2007.
-34-
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 stock price of $0.60,
Cornell Capital Partners’ beneficial ownership of the Company’s common stock is
0.0% and would only be permitted to make 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 in which case we would be precluded from
making such an advance.
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 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 $0.60 per share, we would issue 5,000,000 shares of common
stock
to Cornell Capital Partners for gross proceeds of $2,708,000.
These
shares would represent 15.96% 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 $0.60 per share
and
25%, 50% and 75% discounts to the recent price.
-35-
Net
Cash To the Company
Assuming all 5.0 Million Shares Registered Under this Prospectus are
Sold:
|
Market
Discount:
|
2%
|
25%
|
50%
|
75%
|
|
Market
Price:
|
$0.6000
|
$0.60000
|
$0.6000
|
$0.60000
|
|
Purchase
Price:
|
$0.5880
|
$0.4410
|
$0.2940
|
$0.1470
|
|
No.
of Shares(1):
|
5,000,000
|
5,000,000
|
5,000,000
|
5,000,000
|
|
Total
Outstanding(2):
|
31,328,365
|
31,328,365
|
31,328,365
|
31,328,365
|
|
Percent
Outstanding(3):
|
15.96%
|
15.96%
|
15.96%
|
15.96%
|
|
Net
Cash to the Company(4):
|
$2,708,000
|
$2,009,750
|
$1,311,500
|
$613,250
|
|
(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 is
currently due and payable.
|
-36-
Number
of Shares To Be Issued
Assuming the Company Raises Gross Proceeds of $5.0
Million:
|
Market
Discount:
|
2%
|
25%
|
50%
|
75%
|
|
Market
Price:
|
$0.6000
|
$0.60000
|
$0.6000
|
$0.60000
|
|
Purchase
Price:
|
$0.5880
|
$0.4410
|
$0.2940
|
$0.1470
|
|
No.
of Shares(1)(2):
|
8,503,401
|
11,337,868
|
17,006,803
|
34,013,605
|
|
Total
Outstanding (3):
|
34,831,766
|
37,666,233
|
43,335,168
|
60,341,970(4)
|
|
Percent
Outstanding (5):
|
24.11%
|
37.47%
|
43.05%
|
59.77%
|
|
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)
|
Our
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 is
currently due and payable.
|
-37-
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 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
us. 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 In
addition, on June 6, 2005, we issued a one year promissory note to Cornell
Capital Partners for an additional commitment fee of $50,000, which was
cancelable in the event we terminated the Standby Equity Distribution Agreement
prior to it becoming due on June 6, 2006. We have elected not to cancel the
Standby Equity Distribution Agreement and thus this additional commitment fee
of
$50,000 is currently due.
-38-
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 1933 Act 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 OTCBB 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. In addition, on June 6, 2005, we issued
a
one year promissory note to Cornell Capital Partners for an additional
commitment fee of $50,000, which was cancelable in the event we terminated
the
Standby Equity Distribution Agreement prior to it becoming due on June 6, 2006.
We have elected not to cancel the Standby Equity Distribution Agreement and
thus
this additional commitment fee of $50,000 is currently 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,
a
registered broker-dealer, to advise us in connection with the Standby Equity
Distribution Agreement. For its services, Spartan Securities 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.
-39-
We
will
pay all of 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, we expect 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, we engaged Spartan
Securities, 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 our common stock on June 6, 2005 under
the
Standby Equity Distribution Agreement. The offering expenses consisted of:
a SEC
registration fee of $471, paid in July, 2005, 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 1934 Act,
as
amended, and its regulations, including, Regulation M. Under Regulation 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, we 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.
-40-
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 And Estimates
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain.
Our
critical accounting policies are those where we have made difficult, subjective
or complex judgments in making estimates, and/or where these estimates can
significantly impact our financial results under different assumptions and
conditions. Our critical accounting policies are:
|
·
|
Revenue
Recognition
|
|
·
|
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.
-41-
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
SFAS
123(R) 'Share-Based Payments'
In
December 2004, the Financial Accounting Standards Board issued Statement
Number 123 (“FAS 123 (R)”), Share-Based Payments, which is effective for the
reporting period beginning on January 1, 2006. The statement will require the
Company to recognize compensation expense in an amount equal to the fair value
of share-based payments such as stock options granted to employees. The Company
has the option to either apply FAS 123 (R) on a modified prospective method
or
to restate previously issued financial statements, and chose to utilize the
modified prospective method. Under this method, the Company is 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. The impact of adopting this statement is expected to increase
our expense by approximately $30,000 in 2006.
SFAS
155 - ‘Accounting For Certain Hybrid Financial Instruments—An Amendment Of FASB
Statements No. 133 And 140’
In
February 2006, the Financial Accounting Standards Board (“FASB”)
issued
this Statement, which amends FASB Statements No. 133, Accounting for
Derivative Instruments and Hedging Activities, and No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.
This Statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets.”
This
Statement:
a. Permits
fair value remeasurement for any hybrid financial instrument that contains
an
embedded derivative that otherwise would require bifurcation.
b. Clarifies
which interest-only strips and principal-only strips are not subject to the
requirements of Statement 133.
-42-
c. Establishes
a requirement to evaluate interests in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring
bifurcation.
d. Clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives.
e. Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains to a
beneficial interest other than another derivative financial
instrument.
This
Statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15,
2006.
The
fair
value election provided for in paragraph 4(c) of this Statement may also be
applied upon adoption of this Statement for hybrid financial instruments that
had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
of
this Statement. Earlier adoption is permitted as of the beginning of our fiscal
year, provided we have not yet issued financial statements, including financial
statements for any interim period, for that fiscal year. Provisions of this
Statement may be applied to instruments that we hold at the date of adoption
on
an instrument-by-instrument basis.
We
are
currently reviewing the effects of adoption of this statement but it is not
expected to have a material impact on our financial statements.
SFAS
154 ‘Accounting Changes And Error Corrections--A Replacement Of APB Opinion
No. 20 And FASB Statement No. 3
In
May
2005, the FASB issued Statement No. 154. This Statement replaces APB
Opinion No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements, and changes the
requirements for the accounting for, and reporting of, a change in accounting
principle. This Statement applies to all voluntary changes in accounting
principle. It also applies to changes required by an accounting pronouncement
in
the unusual instance that the pronouncement does not include specific transition
provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed.
SFAS
154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. It will only affect our financial
statements if we change any of our accounting principles. At this time, no
such
changes are contemplated or anticipated.
-43-
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 being measured 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 June
15,
2005. The adoption of this statement did not have a material impact on our
financial statements.
SFAS
151 ‘Inventory Costs--An Amendment Of ARB No. 43, Chapter
4’
Issued
by
the FASB in November 2004, this Statement amends the guidance in ARB
No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated
that “. . . under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and re-handling costs may be so abnormal
as
to require treatment as current period charges. . . .” This Statement requires
that those items be recognized as current-period charges regardless of whether
they meet the criterion of “so abnormal.” In addition, this Statement requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities.
The
provisions of this statement are effective for inventory costs incurred during
fiscal periods beginning after June 15, 2005. The adoption of this
statement did not have a material impact on our financial
statements.
In
December 2004, the FASB issued Statement Number 123 (“FAS 123 (R)”),
Share-Based Payments, which is effective for the reporting period beginning
on
January 1, 2006. The statement will require the Company to recognize
compensation expense in an amount equal to the fair value of share-based
payments such as stock options granted to employees. The Company has the option
to either apply FAS 123 (R) on a modified prospective method or to restate
previously issued financial statements, and chose to utilize the modified
prospective method. Under this method, the Company is 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. The impact of adopting this statement is $30,156 in 2006.
FIN
47 “Accounting For Conditional Asset Retirement Obligations - An Interpretation
Of FASB Statement No. 143”
FASB
Interpretation No. 47, issued in March 2005, clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
Accounting for Asset Retirement Obligations, refers to a legal condition to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within
the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Thus, the timing and (or) method of settlement may be conditional
on a future event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated.
This
Interpretation is effective no later than the end of fiscal years ending after
December 15, 2005 (our fiscal year ended December 31, 2005). Adoption of this
Interpretation did not have any material impact on our financial
statements.
-44-
FIN
46(R) “Consolidation Of Variable Interest Entities--An Interpretation Of ARB
No. 51”
In
December 2003, FASB Interpretation No. 46(R) was issued. This
Interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, which replaces FIN 46, Consolidation of Variable Interest
Entities, addresses consolidation by business enterprises of variable interest
entities, which have one or more of the following characteristics:
1. The
equity investment at risk is not sufficient to permit the entity to finance
its
activities without additional subordinated financial support provided by any
parties, including the equity holders.
2. The
equity investors lack one or more of the following essential characteristics
of
a controlling financial interest:
a. The
direct or indirect ability to make decisions about the entity’s activities
through voting rights or similar rights.
b. The
obligation to absorb the expected losses of the entity.
c. The
right
to receive the expected residual returns of the entity.
3. The
equity investors have voting rights that are not proportionate to their economic
interests, and the activities of the entity involve or are conducted on behalf
of an investor with a disproportionately small voting interest.
The
adoption of FIN 46(R) had no effect on our financial statements.
-45-
Results
of Operations
Results
Of Operations For The Three Months Ended March 31, 2006 Compared To The Three
Months Ended March 31, 2005
During
the three months ended March 31, 2006, our revenues increased by $1,113,000
(approximately 484%) to $1,344,000 from approximately $230,000 during the three
months ended March 31, 2005, 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 ended March 31, 2006, our cost of revenue
increased approximately 250% to approximately $577,000 from $165,000 during
the
three months ending March 31, 2005, 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 an increase in our gross profit to approximately
$767,000 for the three months ended March 31, 2006 from approximately $66,000
during the three months ended March 31, 2005, which represents a 1,060%
increase. This change is primarily attributable to our increased revenues and
testing volumes and associated economies of scale for the period ended March
31,
2006 as compared to the three month period ended March 31, 2005. As a result,
our gross margin for the three months ended March 31, 2006 compared to 28%
for
the three months ended March 31, 2005.
During
the three months ended March 31, 2006, our selling, general and administrative
expenses increased by $337,000 (approximately 133%) to approximately $591,000
from approximately $254,000 in the three months ended March 31, 2005. This
increase was primarily as a result of higher personnel and personnel-related
expenses associated with increased levels of staffing (an increase of 18 people
from March 31, 2005). 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
by
$43,000 (approximately 159%) to approximately $70,000 from approximately $27,000
for the three months ended March 31, 2005. Interest expense is mainly comprised
of interest payable on increased advances under our Aspen Credit
Facility.
As
a
result of the foregoing, our net income for the three months-ended March 31,
2006 increased approximately $321,000 to approximately $106,000 from a loss
of
approximately $215,000 during the three months-ended March 31,
2005.
Results
Of Operations For The Year Ended December 31, 2005 Compared To The Year Ended
December 31, 2004
During
the fiscal year ended December 31, 2005, our revenues increased by $1,327,000
(approximately 238%) to $1,885,000 from $558,000 during the fiscal year ended
December 31, 2004, primarily as a result of attracting new customers to our
services and increasing the volume of services sold to existing customers.
During 2005, our cost of revenue increased approximately 106% to $1,188,000
from
$577,000 in 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 from opening new lines of business. This resulted in
a
gross margin of approximately $697,000 in 2005 versus a gross margin (deficit)
of approximately $19,000 for 2004. In percentage terms, our gross margin deficit
increased from negative 3% of revenue in 2004 to 37% of revenue in 2005. This
increase in gross margin was largely a result of completing an additional 2,197
tests in 2005 and the economies of scales related to such higher
volumes.
-46-
During
2005, our general and administrative expenses increased by $786,000
(approximately 110%) to $1,497,000 from approximately $711,000 in 2004,
primarily as a result of higher personnel related expenses associated with
increased levels of staffing (an increase of 16 people from December 31, 2004)
including the hiring of our senior management team. The increase for 2005 also
included one-time expenses of $50,000 for an impairment of asset charge related
to a write down of a mass spectrometer, approximately $47,000 for the recruiting
fees associated with hiring our senior management team, and approximately
$26,000 for the implementation of our Laboratory Information System. 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 121% during 2005 to $197,000 from $89,000 in
2004. Interest expense is mainly comprised of interest payable on advances
from
our credit facility from Aspen Select Healthcare, which increased in 2005 to
fund our operating losses and working capital needs. During 2005 approximately
$40,500 of such interest expense was non-cash as it resulted from the
amortization of the Credit Facility discount, which resulted from the allocation
of part of the proceeds received to the warrants issued in conjunction with
the
Aspen Credit Facility.
As
a
result of the foregoing, our net loss increased by approximately 22% or $178,000
to $997,000 in 2005 from $819,000 in 2004.
During
the year ended December 31, 2005, our average revenue per customer requisition
increased by approximately 29% to $632 from $489 in 2004, primarily as a result
of performing more tests per customer requisition in 2005 than we did in 2004.
Our average revenue per test decreased by approximately 5% to $461 from $484
in
2004 primarily as a result of an increase in the percentage of lower priced
tests into our overall testing mix. 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) co-payments directly
from patients, and b) those procedures that are not covered by insurance or
other third party payers. On December 31, 2005, our Allowance for Doubtful
Accounts was approximately $37,800.
Liquidity
And Capital Resources
2005
During
the fiscal year ended December 31, 2005, our operating activities used
approximately $902,000 in cash compared to $658,000 used in 2004. 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 $118,000 and $86,000 on new equipment in 2005 and 2004,
respectively. We were able to finance operations and equipment purchases
primarily through net advances on our Aspen Credit Facility and through sales
of
our common stock. This resulted in net cash from financing activities of
approximately $918,000 and $832,000 in 2005 and 2004, respectively. At December
31, 2005 we had cash or cash equivalents of approximately $11,000.
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.
-47-
During
the period from January 1, 2005 to May 31, 2005, we sold 522,382 shares of
our common stock in a series of private placements at $0.30 per share and $0.35
per share to unaffiliated third party investors. These transactions generated
net proceeds to the Company of approximately $171,000.
On
March
23, 2005, we entered into an agreement with Aspen Select Healthcare 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, made available up to $1.5 million of debt financing in the form
of a
revolving credit facility (the “Aspen
Credit Facility”)
with
an initial maturity of March 31, 2007. Aspen Select Healthcare is managed by
its
General Partner, Medical Venture Partners, LLC, which is controlled by a Steven
C. Jones, director of NeoGenomics. As part of this transaction, we issued a
five
year warrant to Aspen to purchase up to 2,500,000 shares of common stock at
an
initial exercise price of $0.50 per share, all of which are currently vested.
Steven C. Jones our Acting Principal Financial Officer and Director is the
general partner of Aspen Select Healthcare.
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 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 will pay us 98% of the lowest volume weighted average
price of our common stock as quoted by Bloomberg, LP on the OTCBB or other
principal market on which our common stock is traded for the 5 days immediately
following the notice date. The total number of shares issued to Cornell Capital
Partners under each advance request will be equal to the total dollar amount
of
the advance request divided by the purchase price determined during the five
day
pricing period. Cornell Capital Partners will also retain 5% of each advance
under the Standby Equity Distribution Agreement as a transaction fee. Cornell
Capital Partners’ obligation to purchase shares of the Company’s common stock
under the Standby Equity Distribution Agreement is subject to certain
conditions, including us maintaining an effective registration statement for
shares of common stock sold under the Standby Equity Distribution Agreement
and
is limited to $750,000 per weekly advance. The amount and timing of all advances
under the Standby Equity Distribution Agreement are at our discretion and we
are
not obligated to issue and sell any securities to Cornell Capital Partners,
unless and until it decides to do so. Upon execution of the Standby Equity
Distribution Agreement, Cornell Capital Partners received 381,888 shares of
the
Company’s common stock as a commitment fee under the Standby Equity Distribution
Agreement. We also issued 27,278 shares of our common stock to Spartan
Securities under a placement agent agreement relating to the Standby Equity
Distribution Agreement.
On
July
1, 2005, we issued 14,947 shares of our common stock under the Company’s 2003
Equity Incentive Plan to two employees of the Company in satisfaction of $4,933
of accrued, but unpaid vacation.
On
August
29, 2005, we requested a $25,000 advance on our Standby Equity Distribution
Agreement with Cornell Capital Partners. The advance was completed on September
8, 2005 and resulted in the sale of 63,776 shares of common stock. Our net
proceeds were $23,250 after deducting $1,250 in fees to Cornell Capital Partners
and a $500 escrow agent fee to Yorkville Advisors.
On
December 10, 2005, we requested a $50,000 advance on our Standby Equity
Distribution Agreement with Cornell Capital Partners. The advance was completed
on December 18, 2005 and resulted in the sale of 241,779 shares of common stock.
Our net proceeds were $47,000 after deducting $2,500 in fees to Cornell Capital
Partners and a $500 escrow agent fee to Yorkville Advisors.
-48-
2006
On
January 18, 2006, we entered into a binding letter agreement (the “Aspen
Agreement”)
with
Aspen Select Healthcare, which provides, among other things, that (a) Aspen
Select Healthcare has waived certain pre-emptive rights in connection with
the
sale of $400,000 of common stock at a purchase price of $0.20/share and the
granting of 900,000 warrants with an exercise price of $0.26/share to SKL
Limited Partnership, LP (“SKL”),
a New
Jersey limited partnership, as more fully described below), in exchange for
five
year warrants to purchase 150,000 shares at an exercise price of $0.26/share;
(b) Aspen had the right, up to April 30, 2006, to purchase up to $200,000 of
restricted shares of our common stock at a purchase price per share of
$0.20/share (1.0 million shares) and receive a five year warrant to purchase
up
to 450,000 shares of our common stock at an exercise price of $0.26/share in
connection with such purchase (the “Equity
Purchase Rights”);
(c)
in the event that Aspen did not exercise its Equity Purchase Rights in total,
we
had the right to sell the difference to SKL at terms no more favorable than
Aspen Select Healthcare’s Equity Purchase Rights; (d) Aspen and us will amend
that certain Loan Agreement, dated March 23, 2005 (the “Loan
Agreement”)
between the parties to extend the maturity date until September 30, 2007 and
modify certain covenants (such Loan Agreement as amended, the “Credit
Facility Amendment”);
(e)
Aspen Select Healthcare shall have the right, until April 30, 2006, to provide
up to $200,000 of additional secured indebtedness to us under the Credit
Facility Amendment and receive a five year warrant to purchase up to 450,000
shares of our common stock with an exercise price of $0.26/share (the
“New
Debt Rights”);
(f)
the Company has agreed to amend and restate that certain warrant agreement,
dated March 23, 2005 to provide that all 2,500,000 warrant shares (the
“Existing
Warrants”)
shall
be vested and the exercise price per share shall be reset to $0.31 per share;
and (g) we agreed to amend that certain Registration Rights Agreement, dated
March 23, 2005 (the “Registration
Rights Agreement”),
between the parties to incorporate the Existing Warrants and any new shares
or
warrants issued to Aspen Select Healthcare in connection with the Equity
Purchase Rights or the New Debt Rights.
During
the period from January 18 to January 21, 2006, we entered into agreements
with
four other shareholders who are parties to that certain Shareholders’ Agreement,
dated March 23, 2005, to exchange five year warrants to purchase 150,000 shares
of stock in the aggregate at an exercise price of $0.26/share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
January 21, 2006 we entered into a subscription agreement (the “Subscription”)
with
SKL, whereby SKL purchased 2.0 million shares (the “Subscription
Shares”)
of our
common stock at a purchase price of $0.20/share for $400,000. Under the terms
of
the Subscription, the Subscription Shares are restricted for a period of 24
months and then carry piggyback registration rights to the extent that
exemptions under Rule 144 are not available to SKL. In connection with the
Subscription, we also issued a five year warrant to purchase 900,000 shares
of
the Company’s common stock at an exercise price of $0.26/share. SKL has no
previous affiliation with us.
On
March
14, 2006, Aspen exercised its Equity Purchase Rights and we issued to Aspen
1,000,000 restricted shares of common stock at a purchase price of $0.20/share
for $200,000. In connection with this transaction, we also issued a five year
warrant to purchase 450,000 shares of common stock at an exercise price of
$0.26/share.
Also
on
March 30, 2006, Aspen Select Healthcare exercised its New Debt Rights and
entered into the definitive transaction documentation for the Credit Facility
Amendment and other such documents required under the Aspen Agreement, dated
January 18, 2006. As part of the Credit Facility Amendment, we have the right,
but not the obligation, to borrow an additional $200,000 from Aspen Select
Healthcare. In connection with Aspen making such debt capital available to
us,
we issued a five year warrant to purchase 450,000 shares of common stock at
an
exercise price of $0.26/share.
-49-
During
the three months ended March 31, 2006, our operating activities used
approximately $278,000 in cash. This amount primarily resulted from cash tied-up
in receivables as a result of increased revenues and to a lesser extent cash
used to pay the expenses associated with our operations as well as fund our
working capital needs. We
also
spent approximately $87,000 on new equipment. We were able to finance operations
and equipment purchases primarily through the sale of equity securities which
provided approximately $613,600 during the three months ended March 31, 2006.
At
March 31, 2006 and May 31, 2006, we had cash and cash equivalents of
approximately $260,100 and $143,000, respectively.
At
the
present time, we anticipate that based on our current business plan, operations
and the financing package we announced in January 2006 that we have sufficient
cash to become profitable and further manage our business for at least the
next
12 months. This estimate of our cash needs does not include any additional
funding which may be required for growth in our business beyond that which
is
planned, strategic transactions or acquisitions. To the extent we need
additional capital beyond our current cash resources, the amended Aspen Credit
Facility allows us to draw an additional $200,000 and we still have $4,925,000
of availability under our Standby Equity Distribution Agreement with Cornell
Capital Partners.. In the event that we grow faster than we currently anticipate
or we engage in strategic transactions or acquisitions and our cash on hand
and
availability under our Credit Facility and Standby Equity Distribution
Agreements is not sufficient to meet our financing needs, we may need to raise
additional capital from other resources. In such event, we may not be able
to
obtain such funding on attractive terms or at all and we may be required to
curtail its 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 $300,000 to $400,000 of additional capital
equipment during the next twelve months. We plan to fund these expenditures
through borrowings under our Aspen Credit Facility and through traditional
lease
financing from equipment lessors. 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.
-50-
DESCRIPTION
OF BUSINESS
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.
NeoGenomics
operates a cancer genetics laboratory based in Fort Myers, Florida that is
targeting the rapidly growing genetic and molecular testing segment of the
medical laboratory market. The Company currently offers the following types
of
testing services to oncologists, pathologists, urologists, hospitals, and other
laboratories that do not perform genetic testing throughout the United States:
a) cytogenetics testing, which analyzes human chromosomes, b) Fluorescence
In-Situ Hybridization (“FISH”)
testing, which analyzes abnormalities at the gene level, c) flow cytometry
testing services, which analyzes clusters of differentiation on cell surfaces
and d) molecular testing which involves testing DNA and other molecular
structures to screen for and diagnose single gene disorders. All of these
testing services are widely used in the diagnosis of various types of cancer.
Our common stock is listed on the OTCBB under the symbol “NGNM.OB”
The
genetic and molecular testing segment of the medical laboratory industry is
the
most rapidly growing segment of the market. Approximately five years ago, the
World Health Organization reclassified cancers as being genetic anomalies.
This
growing awareness of the genetic root behind most cancers combined with advances
in technology and genetic research, including the complete sequencing of the
human genome, have made possible a whole new set of tools to diagnose and treat
diseases. We believe this has opened up a vast opportunity for laboratory
companies that are positioned to address this growing market
segment.
The
medical testing laboratory market can be broken down into three primary
segments:
|
·
|
clinical
lab testing,
|
|
·
|
anatomic
pathology testing, and
|
|
·
|
genetic/molecular
testing.
|
Clinical
labs typically are engaged in high volume, high automation tests on blood and
urine. Clinical lab tests often involve testing of a less urgent nature, for
example, cholesterol testing and testing associated with routine physical exams.
This type of testing yields relatively low average revenue per test. Anatomic
pathology (hereinafter referred to as “AP”)
testing involves evaluation of tissue, as in surgical pathology, or cells as
in
cytopathology. The most widely known AP tests are Pap smears, skin biopsies,
and
tissue biopsies. AP tests are typically more labor and technology intensive
than
clinical lab tests and thus typically have higher average revenue per test
than
clinical lab tests.
-51-
Genetic/molecular
testing typically involves analyzing chromosomes, genes or base pairs of DNA
for
disorders. Whereas anatomic pathology testing is focused from the cell surface
outward, genetic and molecular testing is focused from the cell surface inward.
Both genetic and molecular testing 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 MD or PhD level) to certify the results and typically yields the
highest average revenue per test of the three market segments. The following
chart shows the differences between the genetic/molecular segment and other
segments of the medical laboratory industry. Up until about five years ago,
the
genetic/molecular segment was considered to be part of the AP 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
Testing
Volume
Physician
Involvement
Malpractice
Ins. Required
Other
Professionals Req.
Level
of Automation
Diagnostic
in Nature
Types
of Diseases Tested
Typical
Revenue Per Test
Estimated
Size of Market
Estimated
Growth Rate
|
Blood,
Urine
High
Low
Low
None
High
Usually
Not
Many
Possible
$5
- $35/Test
$25
- $30 Billion
4.0
-5.0%
|
Tissue/Cells
Low
High
- Pathologist
High
None
Low-Moderate
Yes
Typically
Cancer
$25
- $500/Test
$10.0
- $12.0 Billion
6.0
- 7.0% Annually
|
Chromosomes/Genes/DNA
Low
Low
- Medium
Low
Cyto/Molecular
geneticist
Moderate
Yes
Rapidly
Growing
$200
- $1,000/Test
$3.0
- $4.0 Billion (2)
25.0+%
Annually
|
|
Established
Competitors
|
Quest
Diagnostics
LabCorp
Bio
Reference Labs
DSI
Laboratories
Hospital
Labs
Regional
Labs
|
Quest
Diagnostics
LabCorp
Genzyme
Genetics
Ameripath
Local
Pathologists
|
Genzyme
Genetics
Quest
Diagnostics
LabCorp
Major
Universities
|
(1)
Derived from industry analyst reports and company estimates.
(2)
Includes flow cytometry testing, which historically has been classified under
Anatomic Pathology testing.
-52-
Our
primary focus is on the oncology market. We target oncologists that perform
bone
marrow sampling and treat patients with leukemia, lymphoma and other forms
of
cancer as well as urologists that treat patients with bladder cancer.
Historically, our clients were predominantly located in Florida. Beginning
in
January 2005, based on the experience of our new President, we began targeting
large institutional clients throughout the United States. This was successful
and we landed several clients outside of the State of Florida. During the third
quarter of 2005 we began testing for cervical, breast and bladder cancer. Our
bladder cancer program focused around the UroVysion test has grown significantly
since it started in the third quarter of 2005. As we grow, we anticipate
offering additional tests that broaden our focus from genetic and molecular
testing to more traditional types of anatomic pathology testing that are
complementary to our current test offerings.
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 to 5 days
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 empirical data, we believe that cytogenetics labs
typically have 7 to 14 days 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. Until December 2004, we only performed one type of
test, cytogenetics, in-house, which resulted in only one test being performed
per customer requisition for most of FY 2004 and average revenue per requisition
of approximately $490 in FY 2004. In December 2004, we added FISH testing to
our
product offering, and in February 2005, we began offering flow cytometry testing
services. With the addition of these two new testing platforms, our average
revenue/requisition increased by 35.6% in FY 2005 to approximately
$632/requisition. This trend continued into the first quarter of FY 2006 with
average revenue/requisition increasing to $690/requisition. We believe that
we
can continue to increase our average revenue per customer requisition with
the
addition of additional testing platforms and more focused
marketing.
|
Q1
2005
|
Q1
2006
|
%
Inc (Dec)
|
|
|
Customer
Requisitions Rec’d (Cases)
|
367
|
1,948
|
430.8%
|
|
Number
of Tests Performed
|
467
|
2,664
|
470.4%
|
|
Average
Number of Tests/Requisition
|
1.27
|
1.37
|
7.5%
|
|
Total
Testing Revenue
|
$230,192
|
$1,343,800
|
483.8%
|
|
Avg.
Revenue/Requisition
|
$627.23
|
$689.84
|
10.0%
|
|
Avg.
Revenue/Test
|
$492.92
|
$504.43
|
2.3%
|
-53-
We
believe our strategy of bundling complementary types of tests together to better
service the needs of our clients will continue to drive increases in our revenue
and afford the Company significant synergies and efficiencies in our operations
and sales and marketing activities. For instance, initial testing for most
hematological cancers may yield total revenue ranging from approximately $1,700
- $2,800 per case and is generally comprised of one or more of the following
tests: cytogenetics, FISH, flow cytometry, and morphology testing. Whereas
in FY
2004, we only addressed approximately $500 of this potential revenue per case,
we now address approximately $1,200 - $1,900 of this potential revenue per
case.
|
Avg.
Rev./Test
|
||||
|
Cytogenetics
|
$
|
400-$600
|
||
|
Fluorescence
In Situ Hybridization (FISH)
|
$
|
400-$600
|
||
|
Flow
Cytometry
|
||||
|
-
Technical component
|
$
|
400-$700
|
||
|
-
Professional component
|
$
|
100-$200
|
||
|
Morphology
|
$
|
400-$700
|
||
|
Total
|
$
|
1,700-$2,800
|
||
Business
of NeoGenomics
Services
We
currently offer four types of testing services: cytogenetics testing, flow
cytometry testing, FISH testing, and molecular testing:
Cytogenetics
Testing. Cytogenetics
testing involves analyzing chromosomes taken from the nucleus of cells and
looking for abnormalities in a process called karyotyping. A karyotype evaluates
the entire 46 human chromosomes by number and banding patterns to identify
abnormalities associated with disease. In cytogenetics testing, we typically
analyze the chromosomes of 20 different cells. Examples of 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. 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,
peripheral blood tests and various other specialty tests.
Analogy. Cytogenetics
provides the equivalent of a detailed picture of a neighborhood with 46 houses
from 1000 feet up. Each house is analogous to a human chromosome.
-54-
We
believe that historically cytogenetics testing by large national laboratories
and other competitors has taken anywhere from 10 to 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
practitioners will incorporate cytogenetics testing into their diagnostic
regimes and thus drive incremental growth in our business.
Flow
Cytometry Testing. Flow
cytometry testing analyzes clusters of differentiation on cell surfaces. Most
cancers have by-products which create clusters of differentiation on the cell
surfaces that can then be traced back to a specific type of cancer. 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. Flow cytometry testing is performed using sophisticated lasers and
will typically analyze over 100,000 individual cells in an automated fashion.
Flow cytometry testing is highly complementary with cytogenetics and the
combination of these two testing methodologies allows the findings from one
test
to complement the findings of the other test, which leads to an even more
accurate diagnosis.
Analogy. Flow
cytometry provides a snapshot of the shrubbery, walkways and trim around a
single house from 500 feet up. The trim around the house is analogous to
the cell surface markers.
FISH
Testing. As
an
adjunct to traditional chromosome analysis, we offer FISH testing to expand
the
capabilities of routine chromosome analysis in cancer. FISH testing permits
preliminary identification of the most frequently occurring numerical
chromosomal abnormalities in a relatively rapid manner by looking at specific
genes that are implicated in cancer. There are approximately 25,000 genes spread
across the chromosomes in the nucleus of each cell. FISH testing allows us
to
look more closely at the functioning of approximately 2-10 of the specific
genes associated with various types of cancers. FISH testing is typically
performed on 100-200 cells. FISH was originally used as an additional staining
method (the colorization of genes to highlight markers and abnormalities) for
metaphase analysis (cells in a divided state after they are cultured), but
is
now being applied to interphase analysis (non, 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.
Analogy.
FISH
provides a close-up view of the doors and windows from one house on one street
in that neighborhood. The doors and windows are analogous to a gene located
on a
chromosome. FISH allows us to see if a door is open (i.e., the gene is
up-regulated) and it should be closed (i.e., the gene should be
down-regulated).
Molecular
Testing. Molecular
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. There are approximately 1.0 - 2.0 million base
pairs of DNA in each of the 25,000 genes located across the 46 chromosomes
in
the nucleus of every cell. Molecular testing allows us to look for variations
in
this DNA that are associated with specific types of diseases. Today there are
molecular tests for about 500 genetic diseases. However, the majority of these
tests remain available 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 molecular tests are more widely available for clinical
use.
We currently provide these tests on an outsourced basis. We anticipate in the
near future performing some of 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 testing is a growing market with many new
diagnostic tests being developed every year. We are committed to providing
the
latest and most accurate testing to its clients, where demand warrants
it.
-55-
Analogy.
Molecular testing provides the equivalent of a close-up view of the serial
number on the lock of the front door of one house in the neighborhood as viewed
under a magnifying glass. The serial number is analogous to a DNA
sequence.
Target
Markets And Customers
We
initially targeted oncologists, pathologists and hospitals in southern and
central Florida that perform bone marrow sampling. During 2005, we took steps
to
establish a national presence and also began marketing our services to
urologists and other laboratories that did not offer our types of testing
services. These strategies have allowed us to gain customers from around the
country. We intend to continue to increase our testing volumes from customers
around the U.S. in addition to continuing to grow our volumes from within the
State of Florida. We market our services primarily through our direct
salesforce. We plan to continue to increase the numbers of salespeople and
the
geographies in which we cover. We estimate our current and total potential
market for Florida, the Southeastern United States and the entire United States
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)
|
45
|
%
|
45
|
%
|
45
|
%
|
||||
|
NGNM
Current Addressable Market ($, MMs)
|
$
|
262.7
|
$
|
714.7
|
$
|
3,693.7
|
||||
|
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.
|
-56-
Distribution
Methods
We
currently perform all of its genetic testing at its clinical laboratory facility
located in Fort Myers, Florida, and then produces a report for the requesting
practitioner. We currently out-source all of its molecular testing to third
parties, but expects to begin bringing some of this testing in-house during
the
next few years.
Recent
Developments
On
April
18, 2006, our Operating Subsidiary entered into a certain Merger Agreement
(the
“Merger
Agreement”),
by and
among Center for Cytogenetics, a Tennessee corporation (the “CFC”),
and
certain individuals who were the shareholders of CFC, pursuant to which
Operating Subsidiary acquired CFC. CFC operates in Nashville, Tennessee. Through
this acquisition, the Company consolidates its position in the private genetics
industry, and adds to the Company acquiring additional capacity, faster growth
potential and a second site to mitigate the risk of weather-related phenomena
common to Southwest Florida
Competition
We
are
engaged in segments of the medical testing laboratory industry that are
competitive. Competitive factors in the genetic and molecular testing business
generally include reputation of the laboratory, range of services offered,
pricing, convenience of sample collection and pick-up, quality of analysis
and
reporting and timeliness of delivery of completed reports.
Our
competitors in the United States are numerous and include major medical testing
laboratories and biotechnology research companies. Many of these competitors
have greater financial resources and production capabilities. These companies
may succeed in developing service offerings that are more effective than any
that we have or may develop and may also prove to be more successful than we
are
in marketing such services. In addition, technological advances or different
approaches developed by one or more of our competitors may render our products
obsolete, less effective or uneconomical.
We
estimate that the United States market for genetics and molecular testing is
divided among approximately 300 laboratories, 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.
We
intend
to continue to gain market share by offering faster turnaround times and
high-quality test reports and post test consultation services. In addition,
we
have a fully integrated and interactive virtual Lab Information System (“LIS”)
that enables us to report real time results to customers in a secure
environment.
-57-
Suppliers
We
order
our laboratory and research supplies from large national laboratory supply
companies such as Fisher Scientific, Inc., Invitrogen and Beckman Coulter and
do
not believe any disruption from any one of these supplier would have a material
effect on its business. We order the majority of our FISH probes from
Abbott/Vysis and as a result of their dominance of that marketplace and the
absence of any competitive alternatives if they were to have a disruption and
not have inventory available it could have a material effect on our business.
This risk cannot be completely offset due to the fact that Abbott/Vysis patent
protection limits other vendors from supplying these probes.
Dependence
On Major Customers
We
currently market our services to other laboratories, major hospitals and
doctor’s practices nationwide. During 2005, we performed 4,082 individual tests.
Four customers represented approximately 65% of our volume with each party
representing greater than 10% of our volume. In the event that we lost one
of
these customers we would potentially lose a significant percentage of our
revenues. In 2004, one customer made up approximately 16% of our total
volume.
Trademarks
Our
NeoGenomics logo has been trademarked with the United States Patent and
Trademark Office.
Number
Of Employees
As
of
June 30, 2006, we had 42 employees, all of which were full-time employees.
In
addition, our principal financial officer and our pathologist serve as
consultants to the Company on a part-time basis. None of our employees are
represented by unions.
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.
-58-
Laboratory
Operations
Cytogenetics
and, Molecular Testing.
Our
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 CLIA ’88 and the respective
clinical laboratory licensure laws of the state of Florida, where such licensure
is required. The Clinical Laboratories Improvement Act provides for the
regulation of clinical laboratories by the U.S. Department of Health and Human
Services. Regulations promulgated under the federal Medicare guidelines, the
CLIA and the clinical laboratory licensure laws of the state of Florida affect
our genetics laboratory.
The
federal and state certification and licensure programs establish standards
for
the operation of medical laboratories, including, but not limited to, personnel
and quality control. Compliance with such standards is verified by periodic
inspections by inspectors employed by federal or state regulatory agencies.
In
addition, federal regulatory authorities require participation in a proficiency
testing program approved by HHS for many of the specialties and subspecialties
for which a laboratory seeks approval from Medicare or Medicaid and
certification under CLIA `88. Proficiency testing programs involve actual
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.
-59-
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 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, the OIG released a model compliance plan (later revised in August
1998) 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
The
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.
-60-
On
December 28, 2000, HHS published rules governing the use of individually
identifiable health information. The regulation protects certain health
information (“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 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.
-61-
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
Florida laboratory and executive offices are located in a 10,000 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 at a cost of approximately $11,400/month. We also lease two laboratory
facilities in Nashville, TN. The first is a 760 square foot facility with a
lease cost of $1,170/month. The second is a 5,300 square foot facility with
a
lease cost of $5,160/month. We believe that the above properties are suitable
for our current and projected needs.
Legal
Proceedings
We
are
currently a defendant in one lawsuit from a former employee relating to
compensation related claims. We do not believe the resolution of this lawsuit
will be material to our operations or financial results and intends to
vigorously pursue our defense of the matter.
-62-
MANAGEMENT
Officers
And Directors
The
following table sets forth the names, ages, and titles of each of our directors
and executive officers and employees expected to make a significant contribution
to us.
|
Name
|
Age
|
Position
|
|
Board
of Directors:
|
||
|
Robert
P. Gasparini
|
51
|
President
and Chief Science Officer, Board Member
|
|
Steven
C. Jones
|
43
|
Acting
Principal Financial Officer, Board Member
|
|
Michael
T. Dent
|
41
|
Chairman
of the Board
|
|
Thomas
D. Conrad
|
75
|
Board
Member
|
|
George
G. O’Leary
|
43
|
Board
Member
|
|
Peter
M. Peterson
|
49
|
Board
Member
|
|
Other
Executives:
|
||
|
Jimmy
W. Bryan
|
36
|
Director
of Sales
|
|
Jerome
J. Dvonch
|
37
|
Director
of Finance
|
|
Thomas
J. Schofield
|
27
|
Director
of Operations
|
Family
Relationships
There
are
no family relationships between or among the members of the Board of Directors
or other executives. With the exception of Mr. Peterson, the directors and
other
executives of the Company are not directors or executive officers of any company
that files reports with the SEC. Mr. Peterson also serves as Chairman of the
Board of Innovative Software Technologies, Inc. (OTCBB: INIV.OB).
Legal
Proceedings
None
of
the members of the Board of Directors or other executives has been involved
in
any bankruptcy proceedings, criminal proceedings, any proceeding involving
any
possibility of enjoining or suspending members of our Board of Directors or
other executives from engaging in any business, securities or banking
activities, and have not been found to have violated, nor been accused of having
violated, any federal or state securities or commodities laws.
-63-
Elections
Members
of our Board of Directors are elected at the annual meeting of stockholders
and
hold office until their successors are elected. Our officers are appointed
by
the Board of Directors and serve at the pleasure of the Board and are subject
to
employment agreements, if any, approved and ratified by the Board.
Robert
P. Gasparini, M.S.
- President and Chief Science Officer, Board Member
Mr.
Gasparini is the President and Chief Science Officer of NeoGenomics. Prior
to
assuming the role of President and Chief Science Officer, Mr. Gasparini was
a
consultant to the Company since May 2004. Prior to NeoGenomics, Mr. Gasparini
was the Director of the Genetics Division for US Pathology Labs, Inc.
(“US
Labs”)
from
January 2001 to December 2004. During this period, Mr. Gasparini started the
Genetics Division for US Labs and grew annual revenues of this division to
$30
million over a 30 month period. Prior to US Labs, Mr. Gasparini was the
Molecular Marketing Manager for Ventana Medical Systems from 1999 to 2001.
Prior
to Ventana, Mr. Gasparini was the Assistant Director of the Cytogenetics
Laboratory for the Prenatal Diagnostic Center from 1993 to 1998 an affiliate
of
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
The University of Connecticut in Biological Sciences and his Master of Health
Science degree from Quinnipiac University in Laboratory
Administration.
Steven
C. Jones
- Acting Principal Financial Officer, Board Member
Mr.
Jones
has served as a director since October 2003. He is a Managing Director in
Medical Venture Partners, LLC, a venture capital firm established in 2003 for
the purpose of making investments in the healthcare industry. Mr. Jones is
also
the co-founder and Chairman of the Aspen Capital Group and has been President
and Managing Director of Aspen Capital Advisors since January 2001. Prior to
that Mr. Jones was a chief financial officer at various public and private
companies and was a Vice President in the Investment Banking Group at Merrill
Lynch & Co. Mr. Jones received his B.S. degree in Computer Engineering from
the University of Michigan in 1985 and his MBA from the Wharton School of the
University of Pennsylvania in 1991. He is also Chairman of the Board of Quantum
Health Systems, LLC and T3 Communications, LLC.
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 2004.
From April 2004 until April 2005, Dr. Dent served as our President and Chief
Medical Officer. Dr. Dent founded the Naples Women’s Center in 1996 and
continues his practice to this day. He received his training in Obstetrics
and
Gynecology at the University of Texas in Galveston. He received his M.D. degree
from the University of South Carolina in Charleston, S.C. in 1992 and a B.S.
degree from Davidson College in Davidson, N.C. in 1986. He is a member of the
American Association of Cancer Researchers and a Diplomat and fellow of the
American College of Obstetricians and Gynecologists. He sits on the Board of
the
Florida Life science Biotech Initiative.
-64-
Thomas
D. Conrad, PhD. - Board Member
Dr.
Conrad is a Director of NeoGenomics. During his 50-year professional career,
he
has been involved in starting and operating numerous businesses. He is currently
and for the last five years has been 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 from the University of Maryland
and received his PhD. in Business from the American University.
George
G. O’Leary - Board Member
Mr.
O’Leary is a Director of NeoGenomics and is currently the President of US
Medical Consultants, LLC. Prior to assuming his duties with US Medical, he
was a
consultant to the company and acting Chief Operating Officer. Prior to
NeoGenomics, Mr. O’Leary was the President and CFO of Jet Partners, LLC from
2002 to 2004. During that time he grew annual revenues from $12 million to
$17.5
million. Prior to Jet Partners, Mr. O’Leary was CEO and President of
Communication Resources Incorporated (CRI) from 1996 to 2000. During that time
he grew annual revenues from $5 million to $40 million. Prior to CRI, Mr.
O’Leary held various positions including 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 in Accounting from Siena College in
Albany, New York.
Peter
M. Peterson - Board Member
Mr.
Peterson is a Director of NeoGenomics and is the founder of Aspen Capital
Partners, LLC which specializes in capital formation, mergers &
acquisitions, divestitures, and new business start-ups. 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. 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.
Jimmy
W. Bryan -
Director of Sales
Mr.
Bryan
has served as director of sales since August 2005. Prior to joining NeoGenomics,
Mr. Bryan was National Director of Sales with American Esoteric Laboratories,
a
nationwide reference laboratory from March 2005 to May 2005. From January 1997
to March 2005, Mr. Bryan was employed with Dianon/Labcorp, where he held various
positions including Divisional Manager for Anatomic Pathology Sales, Senior
Regional Sales Manager, National Sales Trainer & Recruiter and Senior Sales
Representative Mr. Bryan has managed a sales force of 32 people, has had
responsibility for approximately $38 million in annual revenue and has been
a
strategic team member of with 6 laboratory acquisitions. Mr. Bryan has over
13
years of sales and marketing experience with 9 years in the medical industry.
Mr. Bryan received his bachelor degree from Union University in
Tennessee.
-65-
Jerome
J. Dvonch -
Director of Finance
Mr.
Dvonch has served as director of finance since August 2005. From June 2004
through July 2005, Mr. Dvonch was Associate Director of Financial Planning
and
Analysis with Protein Design Labs, a bio-pharmaceutical company. From September
2000 through June 2004, Mr. Dvonch held positions of increasing responsibility
including Associate Director of Financial Analysis and Reporting with Exelixis,
Inc., a biotechnology company. He also was Manager of Business Analysis for
Pharmchem Laboratories, a drug testing laboratory. Mr. Dvonch has extensive
experience in strategic planning, SEC reporting and accounting in the life
science industry. He also has experience in mergers and acquisitions and with
debt/equity financing transactions. Mr. Dvonch is a Certified Public Accountant
and received his M.B.A. from the Simon School of Business at the University
of
Rochester. He received his B.B.A. in accounting from Niagara
University.
Thomas
J. Schofield -
Director of Operations
Mr.
Schofield has served as the Director of Operations since June 2005. Prior to
NeoGenomics, Mr. Schofield was the Distribution Manager for Specialty
Laboratories where he was responsible for the movement of more than 10,000
specimens daily. From June 2001 to August 2004, Mr. Schofield held several
operational positions at US Pathology Labs, Inc. He was primarily responsible
for establishing laboratory support teams by hiring, training and implementing
new processes. During this period, US Labs grew revenue from $7 million to
$70
million over a three year period. Mr. Schofield received an honorable discharge
from the United States Marine Corps after eight total years of
service.
Audit
Committee
Currently,
the our Audit Committee of the Board of Directors is comprised of Steven C.
Jones and George O’Leary. The Board of Directors believes that both Mr. Jones
and Mr. O’Leary are ‘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, a partnership which controls approximately 38% 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 1934 Act. However, Mr.
O’Leary would be considered an “independent” director under Item 7(d)(3)(iv) of
Schedule 14A of the 1934 Act.
Compensation
Committee
Currently,
our Compensation Committee of the Board of Directors is comprised of all the
Board Members, except for Mr. Gasparini.
-66-
Code
of Ethics
We
adopted a Code of Ethics for our senior financial officers and the principal
executive officer during 2004, which was filed with the SEC as an exhibit to
the
Annual Report on Form 10KSB dated April 15, 2005.
Executive
Compensation
The
following table provides certain summary information concerning compensation
paid by the Company to or on behalf of our most highly compensated executive
officers for the fiscal years ended December 31, 2005, 2004, and
2003:
Summary
Compensation Table
|
Name
and Principal Capacity
|
Year
|
Salary
|
Other
Compensation
|
|||||||
|
Robert
P. Gasparini
|
2005
|
$
|
162,897
|
$
|
28,128(1
|
)
|
||||
|
President
& Chief Science Officer
|
2004
|
$
|
22,500(2
|
)
|
$
|
--
|
||||
|
2003
|
$
|
--
|
$
|
--
|
||||||
|
Steven
Jones
|
2005
|
$
|
51,000(3
|
)
|
$
|
--
|
||||
|
Acting
Principal Financial Officer and
|
2004
|
$
|
72,500(3
|
)
|
$
|
--
|
||||
|
Director
|
2003
|
$
|
52,000(3
|
)
|
$
|
--
|
||||
|
Dr.
Michael T. Dent
|
2005
|
$
|
--
|
$
|
--
|
|||||
|
Chairman,
President and
|
2004
|
$
|
37,334(5
|
)
|
$
|
--
|
||||
|
Chief
Medical Officer(4)
|
2003
|
$
|
--
|
$
|
--
|
|||||
-67-
|
1.
|
Mr.
Gasparini moved to Florida from California during 2005 and these
represent
his relocation expenses paid by the
Company.
|
|
2.
|
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.
|
|
3.
|
Mr.
Jones has 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 2004. 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.
|
Employment
Agreements
Robert
P. Gasparini
We
entered into an employment agreement with Robert P. Gasparini on December 14,
2004 (the “Gasparini
Employment Agreement”),
to
serve as our President and Chief Science Officer. The Gasparini 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. It also specifies an initial base salary
of $150,000/year, with specified salary increases to $185,000/year over the
first 18 months of the contract. Mr. Gasparini is also
entitled
to receive cash bonuses for any given fiscal year in an amount equal to 15%
of
his base salary if he meets certain targets established by the Board of
Directors. In addition, Mr. Gasparini was granted 1,000,000 Incentive Stock
Options that have a ten year term so long as Mr. Gasparini remains an employee
of the Company. Such options vest according to the following
schedule:
-68-
|
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 outlined
by the
Board of Directors as part of the FY 2005 budget;
|
|
50,000
|
if
the Company achieves the net income projections for FY 2005 outlined
by
the Board of Directors as part of the FY 2005 budget;
|
|
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.
|
The
Gasparini 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 us, we have agreed
to pay Mr. Gasparini’s base salary and maintain his employee benefits for a
period of six months.
-69-
Securities
Authorized for Issuance Under Equity Compensation Plans(1)
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options,
warrants
and rights
|
Weighted
average exercise price of outstanding options, warrants and
rights
|
Number
of securities remaining available for future
issuance
|
|||||||
|
Equity
compensation plans approved by security holders (2)
|
2,203,500
|
$
|
0.29
|
327,580
|
||||||
|
Equity
compensation plans not approved by security holders (3)
|
4,770,000
|
$
|
0.29
|
N/A
|
||||||
|
Total
|
6,973,500
|
$
|
0.29
|
327,580
|
||||||
|
(1)
|
As
of June 30, 2006.
|
|
(2)
|
Currently,
the Company’s 2003 Equity Incentive Plan is the only equity compensation
plan in effect.
|
|
(3)
|
The
Company currently has 4,770,000 warrants outstanding, all of which
are
currently vested.
|
-70-
PRINCIPAL
STOCKHOLDERS
The
following table sets forth information as of June 30, 2006, with respect to
each
person known by us to own beneficially more than 5% of our outstanding common
stock, each director and officer of the Company and all directors and executive
officers of us as a group. We have no other class of equity securities
outstanding other than common stock.
|
Title
of Class
|
Name
And Address Of Beneficial Owner
|
Amount
and Nature Of Beneficial Ownership
|
Percent
Of Class(1)
|
|
Common
|
Aspen
Select Healthcare, LP (2)
1740
Persimmon Drive
Naples,
Florida 34109
|
13,553,279
|
45.36%
|
|
Common
|
Steven
C. Jones (3)
1740
Persimmon Drive
Naples,
Florida 34109
|
14,755,172
|
49.34%
|
|
Common
|
Michael
T. Dent M.D. (4)
1726
Medical Blvd.
Naples,
Florida 34110
|
2,857,992
|
10.66%
|
|
Common
|
Thomas
D. Conrad (5)
81
Seagate Avenue, #1501
Naples,
Florida 34103
|
800,000
|
3.04%
|
|
Common
|
George
O’Leary (6)
6506
Contempo Lane
Boca
Raton, Florida 33433
|
300,000
|
1.13%
|
|
Common
|
Robert
P. Gasparini (7)
20205
Wildcat Run
Estero,
FL 33928
|
300,000
|
1.13%
|
|
Common
|
Peter
M. Peterson (8)
2402
S. Ardson Place
Tampa,
FL 33629
|
13,553,279
|
45.36%
|
|
Common
|
SKL
Family Limited Partnership (9)
984
Oyster Court
Sanibel,
FL 33957
|
2,900,000
|
10.65%
|
|
Common
|
Directors
and Officers as a Group
|
19,013,164
|
61.67%
|
-71-
|
(1)
|
Applicable
percentage of ownership is based on 26,328,365 shares of common stock
outstanding as of June 30, 2006 together with securities exercisable
or convertible into shares of common stock within 60 days of June
30,
2006, for each stockholder. Beneficial ownership is determined in
accordance with the rules of the SEC and generally includes voting
or
investment power with respect to securities. Shares of common stock
are
deemed to be beneficially owned by the person holding such securities
for
the purpose of computing the percentage of ownership of such person,
but
are not treated as outstanding for the purpose of computing the percentage
ownership of any other person. Note that affiliates are subject to
Rule
144 and Insider trading regulations - percentage computation is for
form
purposes only.
|
|
(2)
|
Aspen
Select Healthcare has direct ownership of 10,003,279 shares and warrants
to purchase 3,550,000 shares, all of which are currently exercisable.
The
general partner of Aspen Select Healthcare is Medical Venture Partners,
LLC, an entity controlled by Steven C.
Jones.
|
|
(3)
|
As
of June 30, 2006, Steven C. Jones, a director of the Company, has
direct
ownership of 1,174,595 shares and currently exercisable warrants
to
purchase an additional 27,298 shares. However, as a member of the
general
partner of Aspen Select Healthcare, he has the right to vote all
shares
held by Aspen Select Healthcare. Thus 10,003,279 shares and 3,550,000
currently exercisable warrant shares have been added to his total.
|
|
(4)
|
Michael
T. Dent, a director of the Company, has direct ownership of 2,385,000
shares, currently exercisable warrants to purchase 72,992 shares,
and
currently exercisable options to purchase 400,000 shares.
|
|
(5)
|
Thomas
D. Conrad, a director of the Company, is President of the General
Partner
of Competitive Capital Partners, which owns 800,000 shares. Since
Mr.
Conrad has the right to vote all shares held by Competitive Capital
Partners, these shares have been added to his
total.
|
|
(6)
|
George
O’Leary, a director of the Company, has direct ownership of 150,000
shares, currently exercisable warrants to purchase 100,000 shares,
and
currently exercisable options to purchase 50,000 shares.
|
|
(7)
|
Robert
Gasparini, President of the Company, has 1,000,000 options to purchase
shares, of which 300,000 are currently
exercisable.
|
|
(8)
|
Peter
M. Peterson is a member of the general partner of Aspen Select Healthcare
and has the right to vote all shares held by Aspen. Thus 10,003,279
shares
and 3,550,000 currently exercisable warrant shares have been added
to his
total. Mr. Peterson does not own any other stock of the Company except
through his affiliation with Aspen Select
Healthcare.
|
|
(9)
|
SKL
Family Limited Partnership has direct ownership of 2,000,000 shares
and
currently exercisable warrants to purchase 900,000
shares.
|
-72-
MARKET
PRICE OF AND DIVIDENDS
ON
THE REGISTRANT’S COMMON EQUITY AND OTHER STOCKHOLDER
MATTERS
Our
common stock is currently listed on the OTCBB 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.
|
YEAR
2006
|
High
Bid
|
Low
Bid
|
|||||
|
Quarter
Ended March 31, 2006
|
$
|
0.72
|
$
|
0.12
|
|||
|
Quarter
Ended June 30, 2006
|
$
|
0.78
|
$
|
0.45
|
|||
|
YEAR
2005
|
High
Bid
|
Low
Bid
|
|||||
|
Quarter
Ended March 31, 2005
|
$
|
0.70
|
$
|
0.70
|
|||
|
Quarter
Ended June 30, 2005
|
$
|
0.60
|
$
|
0.60
|
|||
|
Quarter
Ended September 30, 2005
|
$
|
0.59
|
$
|
0.59
|
|||
|
Quarter
Ended December 31, 2005
|
$
|
0.35
|
$
|
0.35
|
|||
|
YEAR
2004
|
High
Bid
|
Low
Bid
|
|||||
|
Quarter
Ended March 31, 2004
|
$
|
1.22
|
$
|
0.05
|
|||
|
Quarter
Ended June 30, 2004
|
$
|
0.74
|
$
|
0.30
|
|||
|
Quarter
Ended September 30, 2004
|
$
|
0.45
|
$
|
0.20
|
|||
|
Quarter
Ended December 31, 2004
|
$
|
0.70
|
$
|
0.18
|
|||
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
June 30, 2006, there were 379 stockholders of record of the common
stock.
-73-
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
2005
During
2005 and 2004, Steven C. Jones, a director of the Company, earned $51,000 and
$72,500, respectively, in cash for various consulting work performed connection
with his duties as Acting Principle Financial Officer.
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 laboratory network, the Company
saved approximately $152,000 in up front licensing fees. Under the terms of
the
agreement, the Company paid $22,500 over three months to customize this software
and will pay an annual membership fee of $6,000 per year and monthly transaction
fees of between $2.50 - $10.00 per completed test, depending on the volume
of
tests performed. The eTelenext system is an elaborate laboratory information
system (LIS) that is in use at many larger 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 (formerly
known as MVP3) to refinance our existing indebtedness of $740,000 and provide
for additional liquidity of up to $760,000 to us. Mr. Steven Jones, a director
of the Company, is a managing member of Medical Venture Partners, LLC, which
serves as the General Partner to Aspen Select Healthcare, LP. Under the terms
of
the agreement, Aspen Select Healthcare made available up to $1.5 million of
debt
financing in the form of the Aspect Credit Facility with an initial maturity
of
March 31, 2007. Aspen Select Healthcare 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. As part of this transaction, we issued
a
five year warrant to Aspen Select Healthcare to purchase up to 2,500,000 shares
of common stock at an initial exercise price of $0.50 per share, all of which
are currently vested. We 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. We are amortizing such discount to interest expense over the [24
month] of the Aspen Credit Facility. As of May 31, 2006, $1,700,000 was
available for use and $1,600,000 had been drawn. In addition, as a condition
to
these transactions, the Company, Aspen Select Healthcare and certain individual
shareholders agreed to amend and restate their shareholders’ agreement to
provide that Aspen Select Healthcare 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 a Registration Rights Agreement, dated March 23,
2005
with Aspen Select Healthcare and certain individual shareholders, which grants
to Aspen Select Healthcare certain demand registration rights and which grants
to all parties to the agreement, piggyback registration rights.
-74-
During
2005, we paid Aspen Capital Advisors, a company owned by Mr. Steven C.
Jones, $51,000 in cash for various consulting work performed in connection
with
managing the financial affairs of the Company.
2006
On
January 18, 2006, George O’Leary, a director of the Company, received from us
50,000 incentive stock options, exercisable at $0.26 per share, in compensation
for services related to the Equity and Debt Financing we negotiated in January
2006.
On
January 18, 2006, we entered into the Aspen Agreement with Aspen Select
Healthcare, which provided, among other things, that (a) Aspen Select Healthcare
waived certain pre-emptive rights in connection with the sale of $400,000 of
common stock at a purchase price of $0.20/share and the granting of 900,000
warrants with an exercise price of $0.26/share to a SKL in exchange for five
year warrants to purchase 150,000 shares at an exercise price of $0.26/share;
(b) Aspen Select Healthcare would have the right, up to April 30, 2006, to
purchase up to $200,000 of restricted shares of our common stock at a purchase
price per share of $0.20/share (1.0 million shares) and receive a five
year warrant to purchase up to 450,000 shares of the our common stock at an
exercise price of $0.26/share in connection with such purchase (the “Equity
Purchase Rights”); (c) in the event that Aspen Select Healthcare did not
exercise its Equity Purchase Rights in total, we had the right to sell the
difference to SKL at terms no more favorable than Aspen Select Healthcare’s
Equity Purchase Rights; (d) Aspen Select Healthcare and we would amend the
certain Loan Agreement between the parties to extend the maturity date until
September 30, 2007 and enter into the Aspen Credit Facility Amendment; (e)
Aspen
Select Healthcare would have the right, until April 30, 2006, to provide up
to
$200,000 of additional secured indebtedness to us under the Aspen Credit
Facility Amendment and receive a five year warrant to purchase up to 450,000
shares of our common stock with an exercise price of $0.26/share; (f) we agreed
to amend and restate that certain warrant agreement, dated March 23, 2005 to
provide that all 2,500,000 warrant shares were vested and the exercise price
per
share of such warrants was reset to $0.31 per share; and (g) we agreed to amend
the certain Registration Rights Agreement between the parties to incorporate
the
Existing Warrants and any new shares or warrants issued to Aspen Select
Healthcare in connection with the Equity Purchase Rights or the New Debt
Rights.
During
the period from January 18 to 21, 2006, we entered into agreements with four
other shareholders who are parties to that certain Shareholders’ Agreement,
dated March 23, 2005, to exchange five year warrants to purchase 150,000 shares
of stock in the aggregate at an exercise price of $0.26 per share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
March
14, 2006, Aspen Select Healthcare exercised its Equity Purchase Rights and
we
issued to Aspen Select Healthcare 1,000,000 restricted shares of common stock
at
a purchase price of $0.20/share for $200,000. In connection with this
transaction, we also issued a five year warrant to purchase 450,000 shares
of
common stock at an exercise price of $0.26 per share.
Also
on
March 30, 2006, Aspen Select Healthcare exercised its New Debt Rights and
entered into the definitive transaction documentation for the Aspen Credit
Facility Amendment and other such documents required under the Aspen Agreement,
dated January 18, 2006. As part of the Credit Facility Amendment, we have the
right, but not the obligation, to borrow an additional $200,000 from Aspen
Select Healthcare. In connection with Aspen Select Healthcare making such debt
capital available to us, we issued a five year warrant to purchase 450,000
shares of common stock at an exercise price of $0.26/share.
During
2006 up until the date of this prospectus, we paid Aspen Capital Advisors,
a
company owned by Mr. Steven C. Jones, $23,150 in cash for various
consulting work performed in connection with managing the financial affairs
of
the Company.
-75-
Common
Stock
We
are
authorized to issue 100,000,000 shares of Common Stock, $0.001, of which
26,328,365 shares were issued and outstanding at June 30, 2006.
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
We
are
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 June 30, 2006,
no
such shares have been designated.
Warrants
As
of
June 30, 2006, we had 4,770,000 warrants outstanding, all of which were vested.
The exercise price of these warrants range from $0.01to $0.68 per share.
-76-
Options
As
of
June 30, 2006, we had 2,203,500 options outstanding. The exercise price of
these
options range from $0.16 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.
Indemnification
Of Directors And Executive Officers And Limitation On
Liability
Our
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.
-77-
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:
|
·
|
By
the stockholders;
|
|
·
|
By
the board of directors by majority vote of a quorum consisting of
directors who were not parties to that act, suit or
proceeding;
|
|
·
|
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
|
|
·
|
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;
|
|
·
|
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.
|
|
·
|
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 1933 Act, 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 SEC such indemnification is against public
policy as expressed in the 1933 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
1933 Act and will be governed by the final adjudication of such
issue.
-78-
EXPERTS
The
consolidated financial statements included in this prospectus and elsewhere
in
the registration statement as of December 31, 2005 and for the years ended
December 31, 2005 and December 30, 2004 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 has been opined on for us by Burton,
Bartlett & Glogovac.
AVAILABLE
INFORMATION
We
have
filed with the SEC 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
100 F Street, N.E., 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.
-79-
FINANCIAL
STATEMENTS
|
PAGE
|
|
|
FINANCIAL
REPORT FOR THE THREE MONTHS ENDED MARCH 31, 2006 AND MARCH 31,
2005
|
|
|
Consolidated
Balance Sheet as of March 31, 2006
|
F-1
|
|
Consolidated
Statements of Operations for the three months ended March 31, 2006
and
2005
|
F-2
|
|
Consolidated
Statements of Cash Flows for the three months ended March 31, 2006
and
2005
|
F-3
|
|
Notes
to Consolidated Financial Statements
|
F-4
|
|
FINANCIAL
REPORT FOR THE YEAR ENDED DECEMBER 31, 2005 AND
DECEMBER 31, 2004
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-7
|
|
Consolidated
Balance Sheet as of December 31, 2005.
|
F-8
|
|
Consolidated
Statements of Operations for the years ended December 31, 2005 and
2004.
|
F-9
|
|
Consolidated
Statements of Stockholders’ Deficit for the years ended December 31, 2005
and 2004.
|
F-10
|
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2005 and
2004.
|
F-11
|
|
Notes
to Financial Statements
|
F-12
|
NEOGENOMICS,
INC.
CONSOLIDATED
BALANCE SHEET AS OF
March
31, 2006
(unaudited)
|
ASSETS
|
||||
|
CURRENT
ASSETS:
|
||||
|
Cash
and cash equivalents
|
$
|
260,081
|
||
|
Accounts
receivable (net of allowance for doubtful accounts of
$47,712)
|
898,095
|
|||
|
Inventories
|
46,704
|
|||
|
Other
current assets
|
77,953
|
|||
|
Total
current assets
|
1,282,833
|
|||
|
PROPERTY
AND EQUIPMENT
(net of accumulated depreciation of $301,002)
|
736,611
|
|||
|
OTHER
ASSETS
|
12,638
|
|||
|
TOTAL
|
$
|
2,032,082
|
||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||
|
CURRENT
LIABILITIES:
|
||||
|
Accounts
payable
|
$
|
449,776
|
||
|
Deferred
revenue
|
100,000
|
|||
|
Short-term
portion of equipment lease
|
22,996
|
|||
|
Accrued
compensation
|
102,222
|
|||
|
Accrued
and other liabilities
|
89,732
|
|||
|
Total
current liabilities
|
764,726
|
|||
|
LONG
TERM LIABILITIES:
|
||||
|
Line
of credit (net of unamortized discount of $79,700)
|
1,420,300
|
|||
|
Long-term
portion of equipment lease
|
111,208
|
|||
|
Total
long term liabilities
|
1,531,508
|
|||
|
TOTAL
LIABILITIES
|
2,296,234
|
|||
|
STOCKHOLDERS’
DEFICIT:
|
||||
|
Common
stock, $.001 par value, 100,000,000 shares authorized; 26,218,843
shares
issued and outstanding
|
26,219
|
|||
|
Additional
paid-in capital
|
10,683,399
|
|||
|
Deferred
Stock Compensation
|
(59,805
|
)
|
||
|
Accumulated
deficit
|
(10,913,965
|
)
|
||
|
Total
stockholders’ deficit
|
(264,152
|
)
|
||
|
TOTAL
|
$
|
2,032,082
|
||
See
notes
to consolidated financial statements.
F-1
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(unaudited)
|
For
the Three-Months Ended March 31, 2006
|
For
the Three-Months Ended March 31, 2005
|
||||||
|
REVENUE
|
$
|
1,343,800
|
$
|
230,192
|
|||
|
COST
OF REVENUE
|
576,797
|
164,614
|
|||||
|
GROSS
PROFIT
|
767,003
|
65,578
|
|||||
|
OTHER
OPERATING EXPENSES:
|
|||||||
|
Selling,
general and administrative
|
590,684
|
253,570
|
|||||
|
Interest
expense
|
69,885
|
27,182
|
|||||
|
Total
other operating expenses
|
660,569
|
280,752
|
|||||
|
NET
INCOME (LOSS)
|
$
|
106,434
|
$
|
(215,174
|
)
|
||
|
NET
INCOME (LOSS) PER SHARE:
|
|||||||
|
Basic
|
$
|
0.00
|
$
|
(0.01
|
)
|
||
|
Diluted
|
$
|
0.00
|
$
|
(0.01
|
)
|
||
|
WEIGHTED
AVERAGE NUMBER OF
SHARES OUTSTANDING:
|
|||||||
|
Basic
|
24,752,083
|
21,744,273
|
|||||
|
Diluted
|
25,512,363
|
21,744,273
|
|||||
See
notes
to consolidated financial statements.
F-2
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(unaudited)
|
For
the Three-Months Ended March 31, 2006
|
For
the Three-Months Ended March 31, 2005
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
income (loss)
|
$
|
106,434
|
$
|
(215,174
|
)
|
||
|
Adjustments
to reconcile net income (loss) to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
39,691
|
26,414
|
|||||
|
Equity-based
compensation
|
21,833
|
31,923
|
|||||
|
Provision
for bad debts
|
63,158
|
8,814
|
|||||
|
Amortization
of debt issue costs
|
5,359
|
576
|
|||||
|
Amortization
of relocation expenses
|
9,482
|
-
|
|||||
|
Changes
in assets and liabilities, net:
|
|||||||
|
Accounts
receivables, net of write-offs
|
(410,154
|
)
|
(93,926
|
)
|
|||
|
Inventory
|
13,296
|
(12,721
|
)
|
||||
|
Pre-paid
expenses
|
(28,928
|
)
|
2,883
|
||||
|
Other
current assets
|
-
|
3,474
|
|||||
|
Deposits
|
-
|
(5,000
|
)
|
||||
|
Accounts
payable and other liabilities
|
(97,907
|
)
|
10,515
|
||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(277,736
|
)
|
(242,222
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES -
|
|||||||
|
Purchases
of property and equipment
|
(86,755
|
)
|
(11,704
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Advances
from affiliates, net
|
-
|
155,451
|
|||||
|
Debt
issue costs
|
-
|
(53,587
|
)
|
||||
|
Issuances
of common stock, net of transaction expenses
|
613,628
|
152,473
|
|||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
613,628
|
254,337
|
|||||
|
NET
INCREASE IN CASH AND CASH EQUIVALENTS
|
249,137
|
411
|
|||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
10,944
|
112,548
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$
|
260,081
|
$
|
112,959
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
|
Interest
paid
|
$
|
50,561
|
$
|
30,569
|
|||
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH INVESTING AND S:
FINANCING ACTIVITIES:
|
|||||||
|
Equipment
leased under capital lease
|
$
|
134,204
|
$
|
-
|
|||
See
notes
to consolidated financial statements.
F-3
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY
NeoGenomics,
Inc. (“NeoGenomics” 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 NeoGenomics’s name on January 3, 2002 (NEO and
ACE are collectively referred to as “we”, “us”, “our” or the
“Company”).
Basis
of Presentation
Our
accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and pursuant to
the
instructions to Form 10-QSB and Article 10 of Regulation S-X of the Securities
and Exchange Commission (“SEC”). Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In our opinion all adjustments (consisting
of
normal recurring adjustments) considered necessary for a fair statement of
the
results for the fiscal period have been included. Operating results for the
three-month period ended March 31, 2006 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2006, or for
any future period. These financial statements and notes should be read in
conjunction with our audited consolidated financial statements and notes thereto
for the year ended December 31, 2005 included in our Annual Report on Form
10-KSB.
Accounts
Receivable
We
record
accounts receivable net of contractual discounts. We provide for accounts
receivable that could become uncollectible in the future by establishing an
allowance to reduce the carrying value of such receivables to their estimated
net realizable value. We estimate this allowance based on the aging of our
accounts receivable and our historical collection experience for each type
of
payer. Receivables are charged off to the allowance account at the time they
are
deemed uncollectible.
Stock
Options Expensed
Prior
to
March 2006, we used Statement of Financial Accounting Standards No. 148
“Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No.
148) to account for our stock based compensation arrangements. This statement
amended the disclosure provision of FASB statement No. 123 to require prominent
disclosure about the effects on reported net income of an entity’s accounting
policy decisions with respect to stock-based employee compensation. As permitted
by SFAS No. 123 and amended by SFAS No. 148, we continued to apply the intrinsic
value method under Accounting Principles Board (“APB”) Opinion No. 25,
“Accounting for Stock Issued to Employees,” to account for our stock-based
employee compensation arrangements.
In
December 2004, the Financial Accounting Standards Board issued Statement Number
123 (“FAS 123 (R)”), Share-Based Payments, which is effective for the reporting
period beginning on January 1, 2006. The statement will require us to recognize
compensation expense in an amount equal to the fair value of share-based
payments such as stock options granted to employees. We have the option to
either apply FAS 123 (R) on a modified prospective method or to restate
previously issued financial statements, and chose to utilize the modified
prospective method. Under this method, we are required to record compensation
expense (as previous awards continue to vest) for the unvested portion of
previously granted awards that remain outstanding at the date of
adoption.
F-4
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY (CONTINUED)
In
January 2006, we adopted the expense recognition provisions of SFAS No. 123,
and
for the three months ended March 31, 2006 recorded approximately $7,700 in
stock
compensation expense. If we had expensed stock options for the three months
ended March 31, 2005 the stock compensation expense would have been
approximately $4,500.
Net
Income (Loss) Per Common Share
We
compute net income (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 income (loss) per share is computed by dividing the net income
(loss) available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted net loss per share is computed
by
dividing the net loss for the period by the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares outstanding as of March 31, 2005, which consisted of employee stock
options and certain warrants issued to consultants and other providers of
financing to the Company, were excluded from diluted net income (loss) per
common share calculations as of such date because they were
anti-dilutive.
NOTE
B - EQUITY AND DEBT FINANCING TRANSACTIONS
On
January 18, 2006, the Company entered into a binding letter agreement (the
“Aspen Agreement”) with Aspen Select Healthcare, which provides, among other
things, that (a) Aspen has waived certain pre-emptive rights in connection
with
the sale of $400,000 of common stock at a purchase price of $0.20/share and
the
granting of 900,000 warrants with an exercise price of $0.26/share to a SKL
Limited Partnership, LP (“SKL” as more fully described below) in exchange for
five year warrants to purchase 150,000 shares at an exercise price of
$0.26/share; (b) Aspen shall have the right, up to April 30, 2006, to purchase
up to $200,000 of restricted shares of the Company’s common stock at a purchase
price per share of $0.20/share (1.0 million shares) and receive a five year
warrant to purchase up to 450,000 shares of the Company’s common stock at an
exercise price of $0.26/share in connection with such purchase (the “Equity
Purchase Rights”); (c) in the event that Aspen does not exercise its Equity
Purchase Rights in total, the Company shall have the right to sell the
difference to SKL at terms no more favorable than Aspen’s Equity Purchase
Rights; (d) Aspen and the Company will amend that certain Loan Agreement, dated
March 23, 2005 (the “Loan Agreement”) between the parties to extend the maturity
date until September 30, 2007 and modify certain covenants (such Loan Agreement
as amended, the “Aspen Credit Facility Amendment”); (e) Aspen shall have the
right, until April 30, 2006, to provide up to $200,000 of additional secured
indebtedness to the Company under the Aspen Credit Facility Amendment and
receive a five year warrant to purchase up to 450,000 shares of the Company’s
common stock with an exercise price of $0.26/share (the “New Debt Rights”); (f)
the Company has agreed to amend and restate that certain warrant agreement,
dated March 23, 2005 to provide that all 2,500,000 warrant shares (the “Existing
Warrants”) shall be vested and the exercise price per share shall be reset to
$0.31 per share; and (g) the Company has agreed to amend that certain
Registration Rights Agreement, dated March 23, 2005 (the “Registration Rights
Agreement”), between the parties to incorporate the Existing Warrants and any
new shares or warrants issued to Aspen in connection with the Equity Purchase
Rights or the New Debt Rights.
During
the period from January 18 - 21, 2006, the Company entered into agreements
with
four other shareholders who are parties to that certain Shareholders’ Agreement,
dated March 23, 2005, to exchange five year warrants to purchase 150,000 shares
of stock in the aggregate at an exercise price of $0.26/share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
January 21, 2006 the Company entered into a subscription agreement (the
“Subscription”) with SKL, a New Jersey limited partnership, whereby SKL
purchased 2.0 million shares (the “Subscription Shares”) of the Company’s common
stock at a purchase price of $0.20/share for $400,000. Under the terms of the
Subscription, the Subscription Shares are restricted for a period of 24 months
and then carry piggyback registration rights to the extent that exemptions
under
Rule 144 are not available to SKL. In connection with the Subscription, the
Company also issued a five year warrant to purchase 900,000 shares of the
Company’s common stock at an exercise price of $0.26/share. SKL has no previous
affiliation with the Company.
F-5
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE
B - EQUITY AND DEBT FINANCING TRANSACTIONS (CONTINUED)
On
March
14, 2006, Aspen exercised its Equity Purchase Rights and we issued to Aspen
1,000,000 restricted shares of common stock at a purchase price of $0.20/share
for $200,000. In connection with this transaction, the Company also issued
a
five year warrant to purchase 450,000 shares of common stock at an exercise
price of $0.26/share.
Also
on
March 30, 2006, Aspen exercised its New Debt Rights and entered into the
definitive transaction documentation for the Aspen Credit Facility Amendment
and
other such documents required under the Aspen Agreement, dated January 18,
2006.
As part of the Aspen Credit Facility Amendment, the Company has the right,
but
not the obligation, to borrow an additional $200,000 from Aspen. Interest on
amounts outstanding under this $1.7 million note will be charged at the rate
of
prime plus 6%. In connection with Aspen making such debt capital available
to
the Company, we issued a five year warrant to purchase 450,000 shares of common
stock at an exercise price of $0.26/share. As of March 31, 2006, $1,500,000
has
been drawn and $200,000 is available for use.
NOTE C - OTHER RELATED PARTY TRANSACTIONS
During
the three months ending March 31, 2006 and 2005, we incurred consulting expenses
from a director of $13,500 and $22,500, respectively, for various consulting
work performed in connection with managing the financial affairs of the Company
and acting as the Principal Financial Officer.
NOTE
D - COMMITMENTS AND EQUIPMENT LEASES
Operating
Leases
In
August
2003, we entered into a three year operating lease for 5,200 square feet at
our
laboratory facility in Fort Myers, Florida. The lease, which commenced on August
8, 2003, currently requires average monthly rental payments of approximately
$6,300 during the lease term. Such amount includes estimated operating and
maintenance expenses and sales tax and is subject to annual increases. Rent
expense for the three months ended March 31, 2006 was approximately
$19,500.
The
lease
is due to expire on August 31, 2006. The lease contains a provision that allows
us to extend the lease for two terms of three years each. We are currently
in
negotiations on a new lease for our facility including the lease of an
additional 4,000 square feet adjacent to our current facility. This space will
allow for future expansion of our business in 2006.
Capital
Lease
During
March 2006 we entered into a 5 year lease agreement for equipment. The cost
of
the equipment was approximately $134,200 and requires monthly lease payments
of
approximately $2,500, with an effective interest rate of 8% per annum. At March
31, 2006 the entire principal balance is still outstanding on this
lease.
NOTE
E - SUBSEQUENT EVENTS
On
April
18, 2006 we completed the purchase and merger of The Center for Cytogenetics,
a
private genetics testing company located in Nashville, Tennessee into
NeoGenomics, Inc. The merger is of strategic importance and results in the
Company acquiring additional capacity, faster growth potential and a second
site
to mitigate the risk of weather-related phenomena common to Southwest Florida.
The merger is not material to the financial statements of NeoGenomics,
Inc.
F-6
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, 2005, and the
related consolidated statements of operations, stockholders’ deficit and cash
flows for the years ended December 31, 2005 and 2004. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States of America). Those standards
require that we plan and perform the audits to obtain reasonable assurance
about
whether the financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well
as evaluating the overall financial statement presentation. We believe that
our
audits provide a reasonable basis for our opinion.
In
our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31,
2005, and the results of its operations and its cash flows for the years ended
December 31, 2005 and 2004, in conformity with accounting principles generally
accepted in the United States of America.
/s/
Kingery & Crouse, P.A.
March
30,
2006
Tampa,
FL
F-7
NEOGENOMICS,
INC.
CONSOLIDATED
BALANCE SHEET AS OF DECEMBER 31, 2005
|
ASSETS
|
||||
|
CURRENT
ASSETS:
|
||||
|
Cash
|
$
|
10,944
|
||
|
Accounts
receivable (net of allowance for doubtful accounts of
$37,807)
|
551,099
|
|||
|
Inventories
|
60,000
|
|||
|
Other
current assets
|
58,509
|
|||
|
Total
current assets
|
680,552
|
|||
|
FURNITURE
AND EQUIPMENT
(net of accumulated depreciation of $261,311)
|
381,556
|
|||
|
OTHER
ASSETS
|
17,996
|
|||
|
TOTAL
|
$
|
1,080,104
|
||
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||
|
CURRENT
LIABILITIES:
|
||||
|
Accounts
payable
|
$
|
463,637
|
||
|
Accrued
compensation
|
42,547
|
|||
|
Accrued
and other liabilities
|
59,665
|
|||
|
Deferred
revenue
|
100,000
|
|||
|
Total
current liabilities
|
665,849
|
|||
|
LONG
TERM LIABILITY - Due to Affiliates (net
of discount of $90,806)
|
1,409,194
|
|||
|
TOTAL
LIABILITIES
|
2,075,043
|
|||
|
STOCKHOLDERS’
DEFICIT:
|
||||
|
Common
stock, $.001 par value, (100,000,000 shares authorized;
22,836,754
|
||||
|
shares
issued and outstanding)
|
22,836
|
|||
|
Additional
paid-in capital
|
10,005,308
|
|||
|
Deferred
stock compensation
|
(2,685
|
)
|
||
|
Accumulated
deficit
|
(11,020,398
|
)
|
||
|
Total
stockholders’ deficit
|
(994,939
|
)
|
||
|
TOTAL
|
$
|
1,080,104
|
||
See
notes
to consolidated financial statements.
F-8
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
|
2005
|
2004
|
||||||
|
NET
REVENUE
|
$
|
1,885,324
|
$
|
558,074
|
|||
|
COST
OF REVENUE
|
1,188,402
|
576,867
|
|||||
|
GROSS
MARGIN (DEFICIT)
|
696,922
|
(18,793
|
)
|
||||
|
OTHER
OPERATING EXPENSES:
|
|||||||
|
General
and administrative
|
1,497,286
|
710,771
|
|||||
|
Interest
expense
|
196,796
|
89,421
|
|||||
|
Total
other operating expenses
|
1,694,082
|
800,192
|
|||||
|
NET
LOSS
|
$
|
(997,160
|
)
|
$
|
(818,985
|
)
|
|
|
NET
LOSS PER SHARE -
Basic
and Diluted
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
|
|
WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING -
Basic
and Diluted
|
22,264,435
|
19,901,028
|
|||||
See
notes
to consolidated financial statements.
F-9
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
|
Common
Stock
|
Common
Stock
|
||||||||||||||||||
|
Shares
|
Amount
|
Additional
Paid-In
Capital
|
Deferred
Stock
Compensation
|
Accumulated
Deficit
|
Total
|
||||||||||||||
|
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
|
|||||||||||||
|
Options
exercised and warrants issued for services
|
50,000
|
50
|
9,674
|
-
|
-
|
9,724
|
|||||||||||||
|
Transaction
fees and expenses
|
-
|
-
|
(23,272
|
)
|
-
|
-
|
(23,272
|
)
|
|||||||||||
|
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
|
)
|
||||||||||
|
Common
stock issuances
|
1,237,103
|
1,237
|
394,763
|
-
|
-
|
396,000
|
|||||||||||||
|
Transaction
fees and expenses
|
(191,160
|
)
|
-
|
-
|
(191,160
|
)
|
|||||||||||||
|
Options
issued to Scientific Advisory Board members
|
-
|
-
|
-
|
2,953
|
-
|
2,953
|
|||||||||||||
|
Value
of non-qualified stock options
|
-
|
-
|
5,638
|
(5,638
|
)
|
-
|
-
|
||||||||||||
|
Warrants
issued for services
|
-
|
-
|
187,722
|
-
|
-
|
187,722
|
|||||||||||||
|
Stock
issued for services
|
60,235
|
60
|
15,475
|
-
|
-
|
15,535
|
|||||||||||||
|
Deferred
stock compensation related to warrants issued for services
|
-
|
-
|
(10,794
|
)
|
10,794
|
-
|
-
|
||||||||||||
|
Amortization
of deferred stock compensation
|
-
|
-
|
-
|
17,826
|
-
|
17,826
|
|||||||||||||
|
Net
loss
|
-
|
-
|
-
|
-
|
(997,160
|
)
|
(997,160
|
)
|
|||||||||||
|
BALANCES,
DECEMBER 31, 2005
|
22,836,754
|
$
|
22,836
|
$
|
10,005,308
|
$
|
(2,685
|
)
|
$
|
(11,020,398
|
)
|
$
|
(994,939
|
)
|
|||||
See
notes
to consolidated financial statements.
F-10
NEOGENOMICS,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED DECEMBER 31, 2005 AND 2004
|
2005
|
2004
|
||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
|
Net
loss
|
$
|
(997,160
|
)
|
$
|
(818,985
|
)
|
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|||||||
|
Depreciation
|
123,998
|
90,583
|
|||||
|
Impairment
of fixed assets
|
50,000
|
-
|
|||||
|
Amortization
of credit facility warrants and debt issue costs
|
57,068
|
-
|
|||||
|
Stock
based compensation and consulting
|
85,877
|
19,904
|
|||||
|
Provision
for bad debts
|
132,633
|
28,959
|
|||||
|
Other
non-cash expenses
|
29,576
|
-
|
|||||
|
Changes
in assets and liabilities, net:
|
|||||||
|
Accounts
receivable, net
|
(627,241
|
)
|
(21,589
|
)
|
|||
|
Inventory
|
(44,878
|
)
|
(4,529
|
)
|
|||
|
Other
current assets
|
(54,529
|
)
|
(9,495
|
)
|
|||
|
Deposits
|
300
|
4,540
|
|||||
|
Deferred
revenues
|
(10,000
|
)
|
-
|
||||
|
Accounts
payable and accrued and other liabilities
|
352,305
|
52,479
|
|||||
|
NET
CASH USED IN OPERATING ACTIVITIES
|
(902,051
|
)
|
(658,133
|
)
|
|||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
|
Purchases
of property and equipment, net
|
(117,628
|
)
|
(85,932
|
)
|
|||
|
NET
CASH USED IN INVESTING ACTIVITIES
|
(117,628
|
)
|
(85,932
|
)
|
|||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
|
Advances
from affiliates, net
|
760,000
|
91,334
|
|||||
|
Debt
issue costs
|
(53,587
|
)
|
-
|
||||
|
Issuances
of common stock for cash, net of transaction expenses
|
211,662
|
740,228
|
|||||
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
918,075
|
831,562
|
|||||
|
NET
CHANGE IN CASH AND CASH EQUIVALENTS
|
(101,
604
|
)
|
87,497
|
||||
|
|
|||||||
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
112,548
|
25,051
|
|||||
|
CASH
AND CASH EQUIVALENTS, END OF YEAR
|
$
|
10,944
|
$
|
112,548
|
|||
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
|
Interest
paid
|
$
|
136,936
|
$
|
119,777
|
|||
|
Income
taxes paid
|
$
|
-
|
$
|
-
|
|||
See
notes
to consolidated financial statements.
F-11
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY
NeoGenomics,
Inc. (“NEO” or the “Subsidiary”) was incorporated under the laws of the state of
Florida on June 1, 2001 and on November 14, 2001 agreed to be acquired by
American Communications Enterprises, Inc. (“ACE”, or the “Parent”). ACE was
formed in 1998 and succeeded to NEO’s name on January 3, 2002 (NEO and ACE are
collectively referred to as “we”, “us”, “our” or the “Company”).
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the
Parent and the Subsidiary. All significant intercompany accounts and balances
have been eliminated in consolidation
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 contractual discounts. We provide for accounts
receivable that could become uncollectible in the future by establishing an
allowance to reduce the carrying value of such receivables to their estimated
net realizable value. We estimate this allowance based on the aging of our
accounts receivable and our historical collection experience for each type
of
payer. Receivables are charged off to the allowance account at the time they
are
deemed uncollectible.
Concentrations
of Credit Risk
We
grant
credit without collateral to our customers, most of who are either covered
by
Medicare or insured under third-party payer agreements, or are other
laboratories or hospitals whom we direct bill for services. As of December
31,
2005, approximately 36% and 40% of our receivables were from Medicare and other
direct bill clients, respectively, and during the year ended December 31, 2005,
four customers represented approximately 65% of revenue with each party
representing greater than 10% of such revenues. In the event that we lost one
of
these customers we would potentially lose a significant percentage of our
revenues. In 2004, one customer made up approximately 16% of our total
volume.
Inventories
Inventories,
which consist principally of supplies, are valued at the lower of cost (first
in, first out method) or market.
F-12
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY (continued)
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires us to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements. The reported amounts of
revenues and expenses during the reporting period may be affected by the
estimates and assumptions we are required to make. Estimates that are critical
to the accompanying consolidated financial statements include estimates related
to the allowances discussed under Accounts Receivable above as well as
estimating depreciation periods of tangible assets, and long-lived impairments,
among others. The markets for our services are characterized by intense price
competition, evolving standards and changes in healthcare regulations, all
of
which could impact the future realizability of our assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined
to be
necessary. It is at least reasonably possible that our estimates could change
in
the near term with respect to these matters.
Financial
Instruments
We
believe the book value of our financial instruments included in our current
assets and liabilities approximates their fair values due to their short-term
nature.
We
also
believe the book value of our long-term liability approximates its fair value
as
the consideration (i.e. interest and warrants) on such obligation approximates
the consideration at which similar types of borrowing arrangements could be
currently obtained.
Furniture
and equipment
Furniture
and equipment are stated at cost. Major additions are capitalized, while minor
additions and maintenance and repairs, which do not extend the useful life
of an
asset, are expensed as incurred. Depreciation is provided using the
straight-line method over the assets’ estimated useful lives, which range from 3
to 5 years.
Long-Lived
Assets
Statement
of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” requires that long-lived assets, including
certain identifiable intangibles, be reviewed for impairment whenever events
or
changes in circumstances indicate that the carrying value of the assets in
question may not be recoverable. Because of our losses from operations, we
evaluated our long-lived assets during 2005 and determined that a piece of
equipment had a remaining net book value in excess of its fair value (as
determined by our management). Accordingly, we recorded an impairment loss
of
$50,000 during the year ended December 31, 2005.
Income
Taxes
We
compute income taxes in accordance with Financial Accounting Standards Statement
No. 109 “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109,
deferred taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases of existing
assets and liabilities. Also, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that included the enactment date.
Temporary differences between financial and tax reporting arise primarily from
the use of different depreciation methods for furniture and equipment as well
as
impairment losses and the timing of recognition of bad debts.
F-13
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY (continued)
Stock-Based
Compensation
Prior
to
December 31, 2005, the Company used Statement of Financial Accounting Standards
No. 148 “Accounting for Stock-Based Compensation - Transition and
Disclosure” (SFAS No. 148) to account for its stock based compensation
arrangements. This statement amended the disclosure provision of FASB statement
No. 123 to require prominent disclosure about the effects on reported net
income of an entity’s accounting policy decisions with respect to stock-based
employee compensation. As permitted by SFAS No. 123 and amended by SFAS
No. 148, the Company continued to apply the intrinsic value method under
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock
Issued to Employees,” to account for its stock-based employee compensation
arrangements.
In
December 2004, the Financial Accounting Standards Board issued Statement
Number 123 (“FAS 123 (R)”), Share-Based Payments, which is effective for the
reporting period beginning on January 1, 2006. The statement will require the
Company to recognize compensation expense in an amount equal to the fair value
of share-based payments such as stock options granted to employees. The Company
has the option to either apply FAS 123 (R) on a modified prospective method
or
to restate previously issued financial statements, and chose to utilize the
modified prospective method. Under this method, the Company is 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. The impact of adopting this statement is expected to increase
our expense by approximately $30,000 in 2006.
Statement
of Cash Flows
For
purposes of the statement of cash flows, we consider all highly liquid
investments purchased with an original maturity of three months or less to
be
cash equivalents.
Unamortized
Discount
Net
Loss Per Common Share
We
compute loss per share in accordance with Financial Accounting Standards
Statement No. 128 “Earnings per Share” (“SFAS 128”) and SEC Staff
Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS
No. 128 and SAB 98, basic net loss per share is computed by dividing the
net loss available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted net loss per share is
computed by dividing the net loss for the period by the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares outstanding as of December 31, 2005 and December 31, 2004,
which consisted of employee stock options and certain warrants issued to
consultants and other providers of financing to the Company, were excluded
from
diluted net loss per common share calculations as of such dates because they
were anti-dilutive.
F-14
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY (continued)
Other
Recent Pronouncements
SFAS
155 - ‘Accounting for Certain Hybrid Financial Instruments—an amendment of FASB
Statements No. 133 and 140’
This
Statement, issued in February 2006, amends FASB Statements No. 133,
Accounting
for Derivative Instruments and Hedging Activities,
and
No. 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities.
This
Statement resolves issues addressed in Statement 133 Implementation Issue
No. D1, “Application of Statement 133 to Beneficial Interests in
Securitized Financial Assets.”
This
Statement:
|
a.
|
Permits
fair value remeasurement for any hybrid financial instrument that
contains
an embedded derivative that otherwise would require
bifurcation.
|
|
b.
|
Clarifies
which interest-only strips and principal-only strips are not subject
to
the requirements of Statement 133.
|
|
c.
|
Establishes
a requirement to evaluate interests in securitized financial assets
to
identify interests that are freestanding derivatives or that are
hybrid
financial instruments that contain an embedded derivative requiring
bifurcation.
|
|
d.
|
Clarifies
that concentrations of credit risk in the form of subordination are
not
embedded derivatives.
|
|
e.
|
Amends
Statement 140 to eliminate the prohibition on a qualifying special-purpose
entity from holding a derivative financial instrument that pertains
to a
beneficial interest other than another derivative financial
instrument.
|
This
Statement is effective for all financial instruments acquired or issued after
the beginning of our first fiscal year that begins after September 15,
2006.
The
fair
value election provided for in paragraph 4(c) of this Statement may also be
applied upon adoption of this Statement for hybrid financial instruments that
had been bifurcated under paragraph 12 of Statement 133 prior to the adoption
of
this Statement. Earlier adoption is permitted as of the beginning of our fiscal
year, provided we have not yet issued financial statements, including financial
statements for any interim period, for that fiscal year. Provisions of this
Statement may be applied to instruments that we hold at the date of adoption
on
an instrument-by-instrument basis.
We
are
currently reviewing the effects of adoption of this statement but it is not
expected to have a material impact on our financial statements.
F-15
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY (continued)
SFAS
154 ‘Accounting Changes and Error Corrections--a replacement of APB Opinion
No. 20 and FASB Statement No. 3
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued Statement
No. 154. This Statement replaces APB Opinion No. 20, Accounting
Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim
Financial Statements, and changes the requirements for the accounting for,
and
reporting of, a change in accounting principle. This Statement applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be
followed.
SFAS
154
is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. It will only affect our financial
statements if we change any of our accounting principles. At this time, other
than SFAS 123® which has specific transaction provisions, no such changes
are contemplated or anticipated.
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 being measured 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 June
15,
2005. The adoption of this statement is not expected to have a material impact
on our financial statements.
SFAS
151 ‘Inventory Costs--an amendment of ARB No. 43, Chapter
4’
Issued
by
the FASB in November 2004, this Statement amends the guidance in ARB
No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted
material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated
that “. . . under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so abnormal
as
to require treatment as current period charges. . . .” This Statement requires
that those items be recognized as current-period charges regardless of whether
they meet the criterion of “so abnormal.” In addition, this Statement requires
that allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities.
The
provisions of this statement are effective for inventory costs incurred during
fiscal periods beginning after June 15, 2005. The adoption of this statement
is
not expected to have a material impact on our financial statements.
F-16
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
A - FORMATION AND OPERATIONS OF THE COMPANY (continued)
Recently
adopted accounting standards
FIN
47 “Accounting for Conditional Asset Retirement Obligations - an interpretation
of FASB Statement No. 143”
FASB
Interpretation No. 47, issued in March 2005, clarifies that the term
conditional asset retirement obligation as used in FASB Statement No. 143,
Accounting for Asset Retirement Obligations, refers to a legal condition to
perform an asset retirement activity in which the timing and (or) method of
settlement are conditional on a future event that may or may not be within
the
control of the entity. The obligation to perform the asset retirement activity
is unconditional even though uncertainty exists about the timing and (or) method
of settlement. Thus, the timing and (or) method of settlement may be conditional
on a future event. Accordingly, an entity is required to recognize a liability
for the fair value of a conditional asset retirement obligation if the fair
value of the liability can be reasonably estimated.
This
Interpretation is effective no later than the end of fiscal years ending after
December 15, 2005 (our fiscal year ended December 31, 2005). Adoption of this
Interpretation did not have any material impact on our financial
statements.
FIN
46(R) “Consolidation of Variable Interest Entities--an interpretation of ARB
No. 51”
In
December 2003, FASB Interpretation No. 46(R) was issued. This
Interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, which replaces FIN 46, Consolidation of Variable Interest
Entities, addresses consolidation by business enterprises of variable interest
entities, which have one or more of the following characteristics:
|
1.
|
The
equity investment at risk is not sufficient to permit the entity
to
finance its activities without additional subordinated financial
support
provided by any parties, including the equity
holders.
|
|
2.
|
The
equity investors lack one or more of the following essential
characteristics of a controlling financial
interest:
|
|
a.
|
The
direct or indirect ability to make decisions about the entity’s activities
through voting rights or similar
rights
|
|
b.
|
The
obligation to absorb the expected losses of the
entity
|
|
c.
|
The
right to receive the expected residual returns of the
entity.
|
|
3.
|
The
equity investors have voting rights that are not proportionate to
their
economic interests, and the activities of the entity involve or are
conducted on behalf of an investor with a disproportionately small
voting
interest.
|
The
adoption of FIN 46(R) had no effect on our financial statements.
F-17
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
B - LIQUIDITY
Our
consolidated financial statements are prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplate the realization of assets and liquidation of
liabilities in the normal course of business. At December 31, 2005, we had
a
stockholders’ deficit of approximately $995,000. However, subsequent to December
31, 2005, we enhanced our working capital by issuing 3,000,000 shares of common
for $600,000. We also have the ability to draw $200,000 of debt capital through
unused availability on our Credit Facility with Aspen Select Healthcare and
draw
on up to $4,925,000 of availability under our Standby Equity Distribution
Agreement with Cornell Capital. As such, we believe we have adequate cash
resources to meet our operating commitments for the next twelve months and
accordingly our consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts
or
the amounts and classification of liabilities that might be necessary should
we
be unable to continue as a going concern.
NOTE
C - FURNITURE AND EQUIPMENT, NET
Furniture
and equipment consists of the following at December 31, 2005:
|
Equipment
|
$
|
595,579
|
||
|
Furniture
& Fixtures
|
47,278
|
|||
|
Subtotal
|
642,867
|
|||
|
Less
accumulated depreciation and amortization
|
(261,311
|
)
|
||
|
Furniture
and Equipment, net
|
$
|
381,556
|
||
NOTE
D - INCOME TAXES
We
recognized losses for both financial and tax reporting purposes during each
of
the years 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.
At
December 31, 2005, we have net operating loss carryforwards of approximately
$2,150,000 (the significant difference between this amount, and our accumulated
deficit of $11 million arises primarily from certain stock based compensation
that is considered to be a permanent difference). Assuming our net operating
loss carryforwards are not disallowed because of certain “change in control”
provisions of the Internal Revenue Code, these net operating loss carryforwards
expire in various years through the year ended December 31, 2025. However,
we have established a valuation allowance to fully reserve our deferred income
tax assets as such assets did not meet the required asset recognition standard
established by SFAS 109. Our valuation allowance increased by $16,000 during
the
year ended December 31, 2005.
F-18
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
D - INCOME TAX (continued)
At
December 31, 2005 our current and non-current deferred income tax assets
(assuming an effective income tax rate of approximately 40%) consisted of the
following:
|
Net
current deferred income tax asset:
|
Amounts
|
|||
|
Allowance
for doubtful accounts
|
$
|
14,500
|
||
|
Less
valuation allowance
|
(14,500
|
)
|
||
|
Total
|
$
|
-
|
||
|
Net
non-current deferred income tax asset:
|
Amounts
|
|||
|
Net
operating loss carryforwards
|
$
|
836,500
|
||
|
Accumulated
depreciation and impairment
|
(70,000
|
)
|
||
|
Subtotal
|
766,500
|
|||
|
Less
valuation allowance
|
(766,500
|
)
|
||
|
Total
|
$
|
-
|
||
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 2,283,675 shares of our common stock as of December 31, 2005. As of December
31, 2005, option and stock awards totaling 1,800,000 shares were outstanding.
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 and stock awards are summarized as
follows:
|
Number
Of
Shares
|
Weighted
Average
Exercise
Price
|
||||||
|
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
|
|||||
|
Granted
|
1,442,235
|
0.27
|
|||||
|
Exercised
|
(42,235
|
)
|
0.00
|
||||
|
Canceled
|
(482,329
|
)
|
0.09
|
||||
|
Outstanding
at December 31, 2005
|
1,800,000
|
$
|
0.27
|
||||
|
Exercisable
at December 31, 2005
|
525,000
|
$
|
0.26
|
||||
F-19
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
E - INCENTIVE STOCK OPTIONS AND AWARDS (continued)
The
following table summarizes information about our options outstanding at December
31, 2005:
|
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining Contractual Life
(in
years)
|
Options
Exercisable
|
Weighted
Average
Exercise
Price
|
|
0.00-0.30
|
1,485,000
|
8.9
|
469,000
|
0.25
|
|
0.31-0.40
|
305,000
|
8.1
|
51,000
|
0.35
|
|
0.41-0.50
|
10,000
|
9.4
|
5,000
|
0.46
|
|
1,800,000
|
525,000
|
|||
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:
|
2005
|
2004
|
||||||
|
Net
loss:
|
|||||||
|
As
reported
|
$
|
(997,160
|
)
|
$
|
(818,985
|
)
|
|
|
Pro
forma
|
$
|
(1,018,632
|
)
|
$
|
(848,777
|
)
|
|
|
Loss
per share:
|
|||||||
|
As
reported
|
$
|
(0.04
|
)
|
$
|
(0.04
|
)
|
|
|
Pro
forma
|
$
|
(0.05
|
)
|
$
|
(0.04
|
)
|
|
The
weighted average fair value of incentive stock options granted during 2005,
which were not expensed, estimated on the date of grant using the Black-Scholes
option-pricing model, was approximately $21,472 or $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
12.0 - 20.0% (depending on the date of issue), risk-free interest rate of 4.0
-
4.5% (depending on the date of issue), and an expected life of 3
years.
NOTE
F - COMMITMENTS AND CONTINGENCIES
Operating
Lease
In
August
2003, we entered into a three year lease for 5,200 square feet at our laboratory
facility in Fort Myers, Florida. The lease, which commenced on August 8, 2003,
currently requires average monthly rental payments of approximately
$6,300 during the lease term. Such amount includes estimated operating and
maintenance expenses and sales tax and is subject to annual increases. Rent
expense for 2005 and 2004 was $76,303 and $73,103, respectively.
The
lease
is due to expire on August 31, 2006. The lease contains a provision that allows
us to extend the lease for two terms of three years each. We are currently
in
negotiations on a new lease for our facility including the lease of an
additional 4,000 square feet adjacent to our current facility. This space will
allow for future expansion of our business in 2006.
F-20
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
F - COMMITMENTS AND CONTINGENCIES (continued)
Capital Lease
During
March 2006 we entered into a 5 year capital lease with Beckman Coulter for
a
flow cytometer. The lease is for the useful life of the equipment and title
to
the equipment will remain with Beckman Coulter. The agreement contains no
purchase option at the end of the lease term. The equipment cost is $125,064.30
and the monthly lease payment will be $2,538.81. This is an effective interest
rate of 8% per annum.
Employment
Contract
On
December 14, 2004, we entered into an employment agreement with Robert P.
Gasparini to serve as our President and Chief Science Officer. The employment
agreement has an initial term of three years, effective January 3, 2005;
provided, however that either party may terminate the agreement by giving the
other party sixty days written notice. The employment agreement specifies an
initial base salary of $150,000/year, with specified salary increases to
$185,000/year over the first 18 months of the contract. Mr. Gasparini is also
entitled to receive cash bonuses for any given fiscal year in an amount equal
to
15% of his base salary if he meets certain targets established by the Board
of
Directors. In addition, Mr. Gasparini was granted 1,000,000 Incentive Stock
Options that have a ten year term so long as Mr. Gasparini remains an employee
of the Company (these options, which vest according to the passage of time
and
other performance-based milestones, have and will continue to result in us
recording stock based compensation expense). 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.
Litigation
We
are
potentially subject to various claims and litigation arising out of the ordinary
course and conduct of our business including product liability, intellectual
property, labour and employment, environmental and tax matters. We do not
consider our exposure to such claims and litigation to be material to the
consolidated financial statements.
NOTE
G- OTHER RELATED PARTY TRANSACTIONS
During
2005 and 2004, Steven C. Jones, a director of the Company, earned $51,000 and
$72,500, respectively, in cash for various consulting work performed in
connection with his duties as Acting Principal 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 to us 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. This obligation was repaid
in
full through a refinancing on March 23, 2005.
F-21
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
G- OTHER RELATED PARTY TRANSACTIONS (continued)
On
March
23, 2005, we entered into an agreement with Aspen Select Healthcare (formerly
known as MVP 3, LP) (“Aspen”) 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, a Naples, Florida-based private investment fund
made available to us 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. As part of this transaction, we issued
a
five year warrant to Aspen to purchase up to 2,500,000 shares of common stock
at
an initial exercise price of $0.50 per share, all of which are currently vested.
We 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 months of the Credit
Facility. As of December 31, 2005, $1,500,000 was available for use and
$1,500,000 had been drawn.
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 a Registration Rights Agreement, dated March 23, 2005
with
Aspen and certain individual shareholders, which grants to Aspen certain demand
registration rights (with no provision for liquidated damages) and which grants
to all parties to the agreement, piggyback registration rights.
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.
Under the terms of the agreement, the Company paid $22,500 over three months
to
customize this software and will pay an annual membership fee of $6,000 per
year
and monthly transaction fees of between $2.50 - $10.00 per completed test,
depending on the volume of tests performed. The eTelenext system is an elaborate
laboratory information system (LIS) that is in use at many larger 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.
F-22
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
G- OTHER RELATED PARTY TRANSACTIONS (continued)
On
January 18, 2006, we entered into a binding letter agreement (the “Aspen
Agreement”) with Aspen Select Healthcare, which provides, among other things,
that Aspen waived certain pre-emptive rights in connection with the sale of
$400,000 of common stock at a purchase price of $0.20/share and the granting
of
900,000 warrants with an exercise price of $0.26/share to a SKL Limited
Partnership, LP (“SKL” as more fully described below) in exchange for five year
warrants to purchase 150,000 shares at an exercise price of $0.26/share. Aspen
was also given the right, and as mentioned below, exercised such right, to
purchase up to $200,000 of restricted shares of our common stock at a purchase
price per share of $0.20/share (1.0 million shares) and receive a five year
warrant to purchase up to 450,000 shares of our common stock at an exercise
price of $0.26/share in connection with such purchase (the “Equity Purchase
Rights”). Aspen and us will amend that certain Loan Agreement, dated March 23,
2005 (the “Loan Agreement”) between the parties to extend the maturity date
until September 30, 2007 and modify certain covenants (such Loan Agreement
as
amended, the “Credit Facility Amendment”); (e) Aspen shall have the right, until
April 30, 2006, to provide up to $200,000 of additional secured indebtedness
to
us under the Credit Facility Amendment and receive a five year warrant to
purchase up to 450,000 shares of our common stock with an exercise price of
$0.26/share (the “New Debt Rights”); (f) We have agreed to amend and restate
that certain warrant agreement, dated March 23, 2005 to provide that all
2,500,000 warrant shares (the “Existing Warrants”) shall be vested and the
exercise price per share shall be reset to $0.31 per share; and (g) the Company
has agreed to amend that certain Registration Rights Agreement, dated March
23,
2005 (the “Registration Rights Agreement”), between the parties to incorporate
the Existing Warrants and any new shares or warrants issued to Aspen in
connection with the Equity Purchase Rights or the New Debt Rights.
On
March
14, 2006, Aspen exercised its Equity Purchase Rights and we issued to Aspen
1,000,000 restricted shares of common stock at a purchase price of $0.20/share
for $200,000. In connection with this transaction, we also issued a five year
warrant to purchase 450,000 shares of common stock at an exercise price of
$0.26/share.
Also
on
March 30, 2006, Aspen exercised its New Debt Rights and entered into the
definitive transaction documentation for the Credit Facility Amendment and
other
such documents required under the Aspen Agreement, dated January 18, 2006.
As
part of the Credit Facility Amendment, we have the right, but not the
obligation, to borrow an additional $200,000 from Aspen. In connection with
Aspen making such debt capital available to us, we issued a five year warrant
to
purchase 450,000 shares of common stock at an exercise price of
$0.26/share.
During
the period from January 18 - 21, 2006, we entered into agreements with four
other shareholders who are parties to that certain Shareholders’ Agreement,
dated March 23, 2005, to exchange five year warrants to purchase 150,000 shares
of stock in the aggregate at an exercise price of $0.26/share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
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, we agreed to file with the
SEC,
and to cause to be declared effective thereafter, a SB-2 resale registration
statement which includes the shares purchased by such third party investors.
The
company filed a resale registration statement on July 28, 2005, which was
declared effective by the SEC on August 1, 2005.
F-23
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
H - EQUITY FINANCING TRANSACTIONS (continued)
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 from January 1, 2005 to May 31, 2005, we sold 522,382 shares of
our common stock in a series of private placements at $0.30 per share and $0.35
per share to unaffiliated third party investors. These transactions generated
net proceeds to the Company of approximately $171,000.
On
June
6, 2005, we entered into a Standby Equity Distribution Agreement with Cornell
Capital Partners, LP (“Cornell”). Pursuant to the Standby Equity Distribution
Agreement, the Company may, at its discretion, periodically sell to Cornell
shares of common stock for a total purchase price of up to $5.0 million. For
each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell will pay the Company 98% of the lowest volume weighted
average price of the Company’s common stock as quoted by Bloomberg, LP on the
OTCBB or other principal market on which the Company’s common stock is traded
for the 5 days immediately following the notice date. The total number of shares
issued to Cornell Capital Partners under each advance request will be equal
to
the total dollar amount of the advance request divided by the Purchase Price
determined during the five day pricing period. Cornell Capital Partners will
also retain 5% of each advance under the Standby Equity Distribution Agreement.
Cornell’s obligation to purchase shares of the Company’s common stock under the
Standby Equity Distribution Agreement is subject to certain conditions,
including the Company maintaining an effective registration statement for shares
of common stock sold under the Standby Equity Distribution Agreement and is
limited to $750,000 per weekly advance. The amount and timing of all advances
under the Standby Equity Distribution Agreement are at the discretion of the
Company and the Company is not obligated to issue and sell any securities to
Cornell Capital Partners, unless and until it decides to do so. Upon execution
of the Standby Equity Distribution Agreement, Cornell Capital Partners received
381,888 shares of the Company’s common stock as a commitment fee under the
Standby Equity Distribution Agreement. We also issued 27,278 shares of our
common stock to Spartan Securities under a placement agent agreement relating
to
the Standby Equity Distribution Agreement.
On
July
1, 2005, we issued 14,947 shares of our common stock under the Company’s 2003
Equity Incentive Plan to two employees of the Company in satisfaction of $4,933
of accrued, but unpaid vacation.
On
July
28, 2005, we filed an amended SB-2 registration statement with the SEC to
register 10,000,000 shares of our common stock related to the Standby Equity
Distribution Agreement. Such registration statement became effective as of
August 1, 2005.
On
August
29, 2005, we requested a $25,000 advance on our Standby Equity Distribution
Agreement with Cornell Capital Partners. The advance was completed to provide
funding for general corporate purposes. The advance was completed on September
8, 2005 and resulted in the sale of 63,776 shares of common stock. Our net
proceeds were $23,250 after deducting $1,250 in fees to Cornell and a $500
escrow agent fee to Yorkville Advisors Management, LLC.
On
December 10, 2005, we requested a $50,000 advance on our Standby Equity
Distribution Agreement with Cornell Capital Partners. The advance was completed
to provide funding for general corporate purposes. The advance was completed
on
December 18, 2005 and resulted in the sale of 241,779 shares of common stock.
Our net proceeds were $47,000 after deducting $2,500 in fees to Cornell and
a
$500 escrow agent fee to Yorkville Advisors Management, LLC.
On
December 15, 2005, we issued 18,000 shares of common stock under the Company’s
2003 Equity Incentive Plan to employees of the Company as part of a year-end
bonus program. The shares were issued at a price of $0.21/share and resulted
in
an expense to the Company of $3,780.
F-24
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
I - SUBSEQUENT EVENTS
On
January 18, 2006, we entered into a binding letter agreement (the “Aspen
Agreement”) with Aspen Select Healthcare, which provides, among other things,
that (a) Aspen has waived certain pre-emptive rights in connection with the
sale
of $400,000 of common stock at a purchase price of $0.20/share and the granting
of 900,000 warrants with an exercise price of $0.26/share to a SKL Limited
Partnership, LP (“SKL” as more fully described below) in exchange for five year
warrants to purchase 150,000 shares at an exercise price of $0.26/share; (b)
Aspen shall have the right, up to April 30, 2006, to purchase up to $200,000
of
restricted shares of our common stock at a purchase price per share of
$0.20/share (1.0 million shares) and receive a five year warrant to purchase
up
to 450,000 shares of our common stock at an exercise price of $0.26/share in
connection with such purchase (the “Equity Purchase Rights”); (c) in the event
that Aspen does not exercise its Equity Purchase Rights in total, the Company
shall have the right to sell the difference to SKL at terms no more favorable
than Aspen’s Equity Purchase Rights; (d) Aspen and the Company will amend that
certain Loan Agreement, dated March 23, 2005 (the “Loan Agreement”) between the
parties to extend the maturity date until September 30, 2007 and modify certain
covenants (such Loan Agreement as amended, the “Credit Facility Amendment”); (e)
Aspen shall have the right, until April 30, 2006, to provide up to $200,000
of
additional secured indebtedness to us under the Credit Facility Amendment and
receive a five year warrant to purchase up to 450,000 shares of our common
stock
with an exercise price of $0.26/share (the “New Debt Rights”); (f) We have
agreed to amend and restate that certain warrant agreement, dated March 23,
2005
to provide that all 2,500,000 warrant shares (the “Existing Warrants”) shall be
vested and the exercise price per share shall be reset to $0.31 per share;
and
(g) We have agreed to amend that certain Registration Rights Agreement, dated
March 23, 2005 (the “Registration Rights Agreement”), between the parties to
incorporate the Existing Warrants and any new shares or warrants issued to
Aspen
in connection with the Equity Purchase Rights or the New Debt
Rights.
Under
the
terms of the contemplated Credit Facility Amendment, Aspen and the Company
have
agreed as follow:
(1) The
maturity date of the Credit Facility shall be extended to September 30,
2007.
(2) Paragraph
11 of the existing Loan Agreement (Borrower’s Negative Covenants) shall be
amended to allow for Permitted Indebtedness of up to a total of $500,000 of
vendor and lease financing on capital equipment, including straight vendor
financing and both operating and capital lease financing, in the aggregate
at
any given time during the term of the Credit Facility (the “Capital Equipment
Financing Basket”) and allow for Permitted Liens on such equipment.
(3) The
Permitted Indebtedness section of paragraph 11 of the Loan Agreement shall
be
amended to allow for an aggregate of up to $400,000 of convertible draw notes
from Cornell Capital Partners LP during the life of the Credit Facility (unless
the proceeds of such Cornell convertible draw notes are used to repay our
indebtedness to Aspen); provided that such convertible draw notes contain an
option for a fixed price conversion at any time and have a term of no longer
than six months unless the proceeds of such convertible draw notes are used
to
pay-off the Credit Facility.
(4) The
definition of Permitted Indebtedness in paragraph 11 of the Loan Agreement
shall
be amended to allow for real estate leases entered into by us, provided that
such real estate leases have been approved by the Board of Directors and contain
no more than $100,000 of leasehold improvements embedded within the lease
stream.
(5) The
structure of the Credit Facility shall be amended so that it is a draw facility
whereby once principal payments have been made to Aspen by us, we can no longer
draw such amounts and that portion of the availability will expire. The parties
agree that all principal payments from us will retire the unsecured portion
of
the Credit Facility first.
F-25
NEOGENOMICS,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
I - SUBSEQUENT EVENTS (continued)
(6)
The
Company and Aspen agree to such other amendments to the Credit Facility
documents as may be mutually agreed upon, including, but not limited to a
clarification of Paragraph 16 of the Loan Agreement to include a provision
that
if the Company does not properly notify Aspen of an event of default, that
is in
and of itself a default and that the date of such default will be deemed to
be
the first date which circumstances gave rise to the event of default for
purposes of calculating the 30 day cure period, and further that Aspen may
so
notify the Company of this type of default or any other type of default that
may
have occurred.
During
the period from January 18 - 21, 2006, we entered into agreements with four
other shareholders who are parties to that certain Shareholders’ Agreement,
dated March 23, 2005, to exchange five year warrants to purchase 150,000 shares
of stock in the aggregate at an exercise price of $0.26/share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
January 21, 2006 we entered into a subscription agreement (the “Subscription”)
with SKL, a New Jersey limited partnership, whereby SKL purchased 2.0 million
shares (the “Subscription Shares”) of our common stock at a purchase price of
$0.20/share for $400,000. Under the terms of the Subscription, the Subscription
Shares are restricted for a period of 24 months and then carry piggyback
registration rights to the extent that exemptions under Rule 144 are not
available to SKL. In connection with the Subscription, the Company also issued
a
five year warrant to purchase 900,000 shares of the Company’s common stock at an
exercise price of $0.26/share. SKL has no previous affiliation with
us.
On
March
14, 2006, Aspen exercised its Equity Purchase Rights and we issued to Aspen
1,000,000 restricted shares of common stock at a purchase price of $0.20/share
for $200,000. In connection with this transaction, we also issued a five year
warrant to purchase 450,000 shares of common stock at an exercise price of
$0.26/share.
Also
on
March 30, 2006, Aspen exercised its New Debt Rights and entered into the
definitive transaction documentation for the Credit Facility Amendment and
other
such documents required under the Aspen Agreement, dated January 18, 2006.
As
part of the Credit Facility Amendment, we have the right, but not the
obligation, to borrow an additional $200,000 from Aspen. In connection with
Aspen making such debt capital available to us, we issued a five year warrant
to
purchase 450,000 shares of common stock at an exercise price of
$0.26/share.
F-26
|
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:
· except
the common stock offered by this prospectus;
· in
any jurisdiction in which the offer or solicitation is not
authorized;
· in
any jurisdiction where the dealer or other salesperson is not qualified
to
make the offer or solicitation;
· to
any person to whom it is unlawful to make the offer or solicitation;
or
· 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 does not imply
that:
· there
have been no changes in the affairs of NeoGenomics, Inc. after the
date of
this prospectus; or
· the
information contained in this prospectus is correct after the date
of this
prospectus.
Until
_________, 2006, 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.
|
PROSPECTUS
10,000,000
Shares of Common Stock
NEOGENOMICS,
INC.
June
__, 2006
|
-80-
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:
|
·
|
By
the stockholders;
|
|
·
|
By
the board of directors by majority vote of a quorum consisting of
directors who were not parties to that act, suit or
proceeding;
|
|
·
|
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
|
|
·
|
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;
|
|
·
|
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.
|
|
·
|
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.
|
-81-
Insofar
as indemnification for liabilities arising under the 1933 Act, 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 SEC such indemnification is against public
policy as expressed in the 1933 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.
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 1933 Act:
-82-
2006
On
January 18, 2006, the Company entered into the Aspen Agreement with Aspen Select
Healthcare, which provides, among other things, that (a) Aspen Select Healthcare
has waived certain pre-emptive rights in connection with the sale of $400,000
of
common stock at a purchase price of $0.20/share and the granting of 900,000
warrants with an exercise price of $0.26/share to a SKL in exchange for five
year warrants to purchase 150,000 shares at an exercise price of $0.26/share;
(b) Aspen Select Healthcare shall have the right, up to April 30, 2006, to
purchase up to $200,000 of restricted shares of the Company’s common stock at a
purchase price per share of $0.20/share (1.0 million shares) and
receive a five year warrant to purchase up to 450,000 shares of the Company’s
common stock at an exercise price of $0.26/share in connection with such
purchase (the “Equity Purchase Rights”); (c) in the event that Aspen Select
Healthcare does not exercise its Equity Purchase Rights in total, the Company
shall have the right to sell the difference to SKL at terms no more favorable
than Aspen Select Healthcare’s Equity Purchase Rights; (d) Aspen Select
Healthcare and the Company will amend the certain Loan Agreement between the
parties to extend the maturity date until September 30, 2007 and enter into
the
Aspen Credit Facility Amendment; (e) Aspen Select Healthcare shall have the
right, until April 30, 2006, to provide up to $200,000 of additional secured
indebtedness to the Company under the Aspen Credit Facility Amendment and
receive a five year warrant to purchase up to 450,000 shares of the Company’s
common stock with an exercise price of $0.26/share; (f) the Company has agreed
to amend and restate that certain warrant agreement, dated March 23, 2005 to
provide that all 2,500,000 warrant shares, shall be vested and the exercise
price per share shall be reset to $0.31 per share; and (g) the Company has
agreed to amend the certain Registration Rights Agreement between the parties
to
incorporate the Existing Warrants and any new shares or warrants issued to
Aspen
Select Healthcare in connection with the Equity Purchase Rights or the New
Debt
Rights.
During
the period from January 18 to 21, 2006, the Company entered into agreements
with
four other shareholders who are parties to that certain Shareholders’ Agreement,
dated March 23, 2005, to exchange five year warrants to purchase 150,000 shares
of stock in the aggregate at an exercise price of $0.26 per share for such
shareholders’ waiver of their pre-emptive rights under the Shareholders’
Agreement.
On
March
14, 2006, Aspen Select Healthcare exercised its Equity Purchase Rights and
we
issued to Aspen Select Healthcare 1,000,000 restricted shares of common stock
at
a purchase price of $0.20/share for $200,000. In connection with this
transaction, the Company also issued a five year warrant to purchase 450,000
shares of common stock at an exercise price of $0.26 per share.
Also
on
March 30, 2006, Aspen Select Healthcare exercised its New Debt Rights and
entered into the definitive transaction documentation for the Aspen Credit
Facility Amendment and other such documents required under the Aspen Agreement,
dated January 18, 2006. As part of the Aspen Credit Facility Amendment, the
Company has the right, but not the obligation, to borrow an additional $200,000
from Aspen Select Healthcare. In connection with Aspen Select Healthcare making
such debt capital available to the Company, we issued a five year warrant to
purchase 450,000 shares of common stock at an exercise price of
$0.26/share.
On
March
23, 2005, we entered into an agreement with Aspen Select Healthcare 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 will
make
available up to $1.5 million of debt financing in the form of a Aspen Credit
Facility with an initial maturity of March 31, 2007. Aspen Select Healthcare
is
managed by its General Partner, Medical Venture Partners, LLC, which is
controlled by a director of NeoGenomics. Under
the
terms of the Aspen 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 Aspen 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 Select Healthcare, (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 Aspen Credit Facility transaction,
the Company also issued to Aspen Select Healthcare a five year Warrant to
purchase up to 2,500,000 shares of its common stock at an exercise price of
$0.50 per share.
-83-
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.
On
March
23, 2005, the Company entered into a Loan Agreement with Aspen Select Healthcare
to provide up to $1.5 million of indebtedness pursuant to the Aspen Credit
Facility. As part of the Aspen Credit Facility transaction, the Company also
issued to Aspen Select Healthcare a five year Warrant to purchase up to
2,500,000 shares of its common stock at an exercise price of $0.50 per
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 $0.30per share and $0.35per
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
$0.35per 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
1933 Act.
On
June
6, 2005, the Company entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners. 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 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 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.
2004
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
1933
Act.
-84-
2003
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 1933 Act.
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 1933 Act, 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 1933 Act, 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
|
|
3.1
|
Articles
of Incorporation, as amended
|
Incorporated
by reference to the Company’s Registration Statement on Form SB-2 as filed
with the SEC on February 10, 1999
|
|
3.2
|
Amendment
to Articles of Incorporation filed with the Nevada Secretary of State
on
January 3, 2002
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on May
20, 2003
|
|
3.3
|
Amendment
to Articles of Incorporation filed with the Nevada Secretary of State
on
April 11, 2003
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on May
20, 2003
|
|
3.4
|
Amended
and Restated Bylaws, dated October 14, 2003
|
Incorporated
by reference to the Company’s on Form 10-QSB as filed with the SEC on
November 14, 2003
|
|
3.5
|
NeoGenomics,
Inc. 2003 Equity Incentive Plan
|
Incorporated
by reference to the Company’s on Form 10-QSB as filed with the United
States SEC on November 14, 2003
|
|
5.1
|
Opinion
of Counsel
|
Incorporated
by reference to the Company’s Form SB-2 as filed with the SEC on July 28,
2005
|
|
10.1
|
Loan
Agreement between NeoGenomics, Inc. and Aspen Select Healthcare,
L.P.
dated March 23, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on March
30, 2005
|
|
10.2
|
Amended
and Restated Registration Rights Agreement between NeoGenomics, Inc.
and
Aspen Select Healthcare, L.P. and individuals dated March 23,
2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on March
30, 2005
|
|
10.3
|
Guaranty
of NeoGenomics, Inc., dated March 23, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on March
30, 2005
|
|
10.4
|
Stock
Pledge Agreement between NeoGenomics, Inc. and Aspen Select Healthcare,
L.P., dated March 23, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on March
30, 2005
|
|
10.5
|
Warrants
issued to Aspen Select Healthcare, L.P., dated March 23,
2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on March
30, 2005
|
|
10.6
|
Security
Agreement between NeoGenomics, Inc. and Aspen Select Healthcare,
L.P.,
dated March 23, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on March
30, 2005
|
|
10.7
|
Employment
Agreement, dated December 14, 2004, between Mr. Robert P. Gasparini
and
the Company
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 15, 2005
|
|
10.8
|
Standby
Equity Distribution Agreement with Cornell Capital Partners, LP dated
June
6, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on June 8,
2005
|
|
10.9
|
Registration
Rights Agreement with Cornell Capital Partners, LP related to the
Standby
Equity Distribution dated June 6, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on June 8,
2005
|
|
10.10
|
Placement
Agent Agreement with Spartan Securities Group, Ltd., related to the
Standby Equity Distribution dated June 6, 2005
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on June 8,
2005
|
|
10.11
|
Amended
and Restated Loan Agreement between NeoGenomics, Inc. and Aspen Select
Healthcare, L.P., dated March 30, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
10.12
|
Amended
and Restated Warrant Agreement between NeoGenomics, Inc. and Aspen
Select
Healthcare, L.P., dated January 21, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
10.13
|
Amended
and Restated Security Agreement between NeoGenomics, Inc. and Aspen
Select
Healthcare, L.P., dated March 30, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
10.14
|
Registration
Rights Agreement between NeoGenomics, Inc. and Aspen Select Healthcare,
L.P., dated March 30, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
10.15
|
Warrant
Agreement between NeoGenomics, Inc. and SKL Family Limited Partnership,
L.P. issued January 23, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
10.16
|
Warrant
Agreement between NeoGenomics, Inc. and Aspen Select Healthcare,
L.P.
issued March 14, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
10.17
|
Warrant
Agreement between NeoGenomics, Inc. and Aspen Select Healthcare,
L.P.
issued March 30, 2006
|
Incorporated
by reference to the Company’s on Form 10-KSB as filed with the SEC on
April 1, 2006
|
|
14.1
|
NeoGenomics,
Inc. Code of Ethics for Senior Financial Officers and the Principal
Executive Officer
|
Incorporated
by reference to the Company’s on Form 8-K as filed with the SEC on April
15, 2005
|
|
23.2
|
Consent
of Kingery & Crouse, P.A.
|
Provided
herewith
|
-85-
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 Section 10(a)(3) of the 1933 Act;
(ii)
Reflect
in the Prospectus any facts or events which, individually or together, 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 a 20% 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 information on the plan of distribution.
(2)
For
determining liability under the 1933 Act, the Company will treat each such
post-effective amendment as a new Registration Statement of the securities
offered, and the Offering of such securities at that time to be the initial
bona
fide Offering.
(3)
To
remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the
Offering.
(4)
For
determining liability of the undersigned small business issuer under the 1933
Act to any purchaser in the initial distribution of the securities, the
undersigned small business issuer undertakes that in a primary Offering of
securities of the undersigned small business issuer pursuant to this
Registration Statement, regardless of the underwriting method used to sell
the
securities to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the undersigned
small
business issuer will be a seller to the purchaser and will be considered to
offer or sell such securities to such purchaser:
(i) Any
preliminary Prospectus or Prospectus of the undersigned small business issuer
relating to the Offering required to be filed pursuant to Rule 424;
(ii) Any
free
writing Prospectus relating to the Offering prepared by or on behalf of the
undersigned small business issuer or used or referred to by the undersigned
small business issuer;
-86-
(iii) The
portion of any other free writing Prospectus relating to the Offering containing
material information about the undersigned small business issuer or its
securities provided by or on behalf of the undersigned small business issuer;
and
(iv) Any
other
communication that is an offer in the Offering made by the undersigned small
business issuer to the purchaser.
Insofar
as indemnification for liabilities arising under the 1933 Act may be permitted
to our director, officer 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 Commission such indemnification
is
against public policy as expressed in the 1933 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 1933 Act, and will be governed by
the
final adjudication of such issue.
-87-
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 June 30, 2006.
|
Date: June
30, 2006
|
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
|
June
30, 2006
|
|
Michael
T. Dent, M.D.
|
||
|
/s/
Thomas D. Conrad
|
Director
|
June
30, 2006
|
|
Thomas
D. Conrad, PhD.
|
||
|
/s/
Robert P. Gasparini
|
Director
|
June
30, 2006
|
|
Robert
P. Gasparini
|
||
|
/s/
Steven C. Jones
|
Acting
Principal Financial
|
June
30, 2006
|
|
Steven
C. Jones
|
Officer,
Chief Accounting
|
|
|
Officer
and Director
|
||
|
/s/
George G. O’Leary
|
Director
|
June
30, 2006
|
|
George
G. O’Leary
|
||
|
/s/
Peter M. Peterson
|
Director
|
June
30, 2006
|
|
Peter
M. Peterson
|
||
-88-