Unassociated Document
As
filed with the U.S. Securities and Exchange Commission on November 28,
2008
Registration
No. 333-
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
S-1
REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933
Nevada
|
NeoGenomics,
Inc.
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74-2897368
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(State or Other Jurisdiction of Incorporation or
Organization)
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(Name of Registrant in Our Charter)
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(I.R.S. Employer Identification No.)
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|
|
|
|
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Robert P. Gasparini
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12701 Commonwealth Drive, Suite 9
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12701 Commonwealth Drive, Suite 9
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Fort Myers, Florida 33913
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Fort Myers, Florida 33913
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(239) 768-0600
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8731
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(239) 768-0600
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(Address and Telephone Number
of Principal Executive Offices and
Principal Place of Business)
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(Primary Standard Industrial
Classification Code Number)
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(Name, Address and Telephone Number
of Agent for Service)
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With
copies to:
Clayton
E. Parker, Esq.
Mark
E.
Fleisher, Esq.
K&L
Gates, LLP
200
S.
Biscayne Boulevard, Suite 3900
Miami,
Florida 33131
Telephone:
(305) 539-3300
Facsimile:
(305) 358-7095
Approximate
date of commencement of proposed sale to the public: As
soon as practicable after this registration statement becomes
effective.
If
any of
the securities being registered on this Form are to be offered on a delayed
or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, as
amended, check the following box. x
If
this
Form is filed to register additional securities for an offering pursuant to
Rule
462(b) under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
If
this
Form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Accelerated
filer ¨
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Non-accelerated
filer ¨
(Do not check if a smaller reporting company)
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Smaller
reporting company x
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CALCULATION
OF REGISTRATION FEE
Proposed Maximum
|
|
Title Of Each Class
Of Securities To Be Registered
|
|
Amount
To Be
Registered(1)
|
|
Proposed
Maximum
Offering Price
Per Share(2)
|
|
Maximum
Aggregate
Offering
Price(2)
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Amount
Of Registration Fee
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Common
Stock, par value $0.001
per
share
|
|
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7,000,000 shares
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$
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0.72
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$
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5,040,000
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$
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199
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TOTAL
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7,000,000
shares
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$
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0.72
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$
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5,040,000
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$
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199
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(1)
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The
shares of our common stock being registered hereunder are being registered
for sale by the selling stockholders named in the prospectus.
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(2)
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Estimated
solely for the purpose of calculating the registration fee pursuant
to
Rule 457(c) under the Securities Act of 1933. For the purposes of
this
table, we have used the average of the closing bid and asked prices
as of
November 25, 2008.
|
The
Registrant hereby amends this Registration Statement on such date or dates
as
may be necessary to delay its effective date until the Registrant shall file
a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
SUBJECT
TO COMPLETION, DATED NOVEMBER
28, 2008.
The
information in this prospectus is not complete and may be changed. We may not
sell these securities until the registration statement filed with the Securities
and Exchange Commission is effective. This prospectus is not an offer to sell
these securities and we are not soliciting offers to buy these securities in
any
state where the offer or sale is not permitted.
PROSPECTUS
NEOGENOMICS,
INC.
7,000,000
Shares of Common Stock
This
prospectus relates to the sale of up to 7,000,000 shares of the common stock,
par value $0.001 per share, of NeoGenomics, Inc., a Nevada corporation, by
the
selling stockholders named in this prospectus in the section “Selling
Stockholders”. In this prospectus we refer to NeoGenomics, Inc., a Nevada
corporation, individually as the “Parent
Company”
and
collectively with all of its subsidiaries as "Company,"
"we,"
"us,"
"our"
and
"NeoGenomics".
The
Company is not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. All costs associated with
this
registration will be borne by the Company. The prices at which the selling
stockholders may sell the shares will be determined by the prevailing market
price for the shares or in negotiated transactions.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol “NGNM.OB”. On November 25, 2008, the last reported sale price of our
common stock on the Over-The-Counter Bulletin Board was $0.74 per
share.
One
of
the selling stockholders, Fusion Capital Fund II, LLC, is an "underwriter"
within the meaning of the Securities Act of 1933, as amended (the “Securities
Act”).
The
other selling stockholders may be "underwriters" within the meaning of the
Securities Act.
These
securities are speculative and involve a high degree of
risk. Please
refer to “Risk Factors” beginning on page 10 for a discussion of these
risks.
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved of these securities or determined if this prospectus
is
truthful or complete. Any representation to the contrary is a criminal
offense.
The
date
of this prospectus is________, 2008.
TABLE
OF CONTENTS
PROSPECTUS
SUMMARY
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1
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THE
OFFERING
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4
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SUMMARY
CONSOLIDATED FINANCIAL INFORMATION
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6
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RISK
FACTORS
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10
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FORWARD-LOOKING
STATEMENTS
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21
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SELLING
STOCKHOLDERS
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22
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THE
FUSION TRANSACTION
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23
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USE
OF PROCEEDS
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26
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PLAN
OF DISTRIBUTION
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27
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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28
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DESCRIPTION
OF BUSINESS
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40
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MANAGEMENT
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49
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PRINCIPAL
STOCKHOLDERS
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56
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MARKET
PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND OTHER
STOCKHOLDER MATTERS
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59
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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60
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DESCRIPTION
OF CAPITAL STOCK
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62
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LEGAL
MATTERS
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64
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EXPERTS
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64
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AVAILABLE
INFORMATION
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64
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CONSOLIDATED
FINANCIAL STATEMENTS OF NEOGENOMICS, INC.
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F-i
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The
following is only a summary of the information, Financial Statements and the
Notes thereto included in this prospectus. You should read the entire prospectus
carefully, including “Risk Factors” and our Financial Statements and the Notes
thereto before making any investment decision.
Our
Company
NeoGenomics
operates a network of cancer-focused genetic testing
laboratories. The Company’s growing network of laboratories currently
offers the following types of testing services to pathologists, oncologists,
urologists, hospitals, and other laboratories throughout the United
States:
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a)
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cytogenetics
testing, which analyzes human
chromosomes;
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b)
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Fluorescence
In-Situ Hybridization (“FISH”)
testing, which analyzes abnormalities at the chromosomal and gene
levels;
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c)
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flow
cytometry testing, which analyzes gene expression of specific markers
inside cells and on cell surfaces;
and
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d)
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molecular
testing which involves analysis of DNA and RNA to diagnose and predict
the
clinical significance of various genetic sequence
disorders.
|
All
of
these testing services are widely utilized in the diagnosis and prognosis of
various types of cancer.
The
medical testing laboratory market can be broken down into three segments:
clinical lab testing, anatomic pathology testing, and genetic and molecular
testing. Clinical lab testing is typically done by laboratories that specialize
in high volume, highly automated, lower complexity tests on easily procured
specimens such as blood and urine. Clinical lab tests often involve
testing of a less urgent nature, for example, cholesterol testing and testing
associated with routine physical exams.
Anatomic
pathology (“AP”)
testing involves evaluation of tissue, as in surgical pathology, or cells as
in
cytopathology. The most widely performed AP procedures include the
preparation and interpretation of pap smears, skin biopsies, and tissue
biopsies.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or base
pairs of DNA or RNA for abnormalities. New tests are being developed
at an accelerated pace, thus this market niche continues to expand
rapidly. Genetic and molecular testing requires highly specialized
equipment and credentialed individuals (typically MD or PhD level) to certify
results and typically yields the highest average revenue per test of the three
market segments. The estimated size of this market and the
related parts of the AP testing market that we address is approximately $4-$5
Billion.
Our
primary focus is to provide high complexity laboratory testing for the
community-based pathology and oncology marketplace. Within these key
market segments, we currently provide our services to pathologists and
oncologists in the United States that perform bone marrow and/or peripheral
blood sampling for the diagnosis of blood and lymphoid tumors (leukemias and
lymphomas) and archival tissue referral for analysis of solid tumors such as
breast cancer. A secondary strategic focus targets community-based
urologists due to the availability of a new FISH-based test for the initial
diagnosis of bladder cancer and early detection of recurrent
disease. We focus on community-based practitioners for two reasons.
First, academic pathologists and associated clinicians tend to have their
testing needs met within the confines of their university
affiliation. Secondly, most of the cancer care in the United States
is administered by community based practitioners, not in academic centers,
due
to ease of local access. Moreover, within the community-based
pathologist segment it is not our intent to willingly compete with our customers
for testing services that they may seek to perform
themselves. Fee-for-service pathologists for example, derive a
significant portion of their annual revenue from the interpretation of biopsy
specimens. Unlike other larger laboratories, which strive to perform
100% of such testing services themselves, we do not intend to compete with
our
customers for such specimens. Rather, our high complexity cancer testing focus
is a natural extension of and complementary to many of the services that our
community-based customers often perform within their own
practices. As such, we believe our relationship as a non-competitive
consultant, empowers these physicians to expand their testing breadth and
provide a menu of services that matches or exceeds the level of service found
in
academic centers of excellence around the country.
We
continue to make progress growing our testing volumes and revenue beyond our
historically focused effort in Florida due to our expanding field sales
footprint. As of November 25, 2008, NeoGenomics’ sales and marketing
organization had 14 territory business managers, three regional managers, a
National Director of Sales and three team members in business development and
marketing, and we have received business from 30 states throughout the
country. Recent, key hires included various territory business
managers (sales representatives) in the Northeastern, Southeastern, and Western
states. We expect to hire one more account manager during 2008 and to
continue to scale our sales team rapidly during 2009. As more sales
representatives are added, we believe that the base of our business outside
of
Florida will continue to grow and ultimately eclipse that which is generated
within the state.
We
are
successfully competing in the marketplace based on the quality and
comprehensiveness of our test results, and our innovative flexible levels of
service, industry-leading turn-around times, regionalization of laboratory
operations and ability to provide after-test support to those physicians
requesting consultation.
2007
saw
the refinement of our industry leading NeoFISHTM
technical component-only FISH service offering. Upon the suggestion
of our installed customer base, we made numerous usability and technical
enhancements throughout last year. The result has been a product line
for NeoGenomics that continues to resonate very well with our client
pathologists. Utilizing NeoFISHTM,
such
clients are empowered to extend the outreach efforts of their practices and
exert a high level of sign out control over their referral work in a manner
that
was previously unobtainable.
NeoFLOWTM
tech-only flow cytometry was launched as a companion service to
NeoFISHTM
in late
2007. NeoFLOWTM
has been
a key growth driver in 2008. Moreover, the combination of
NeoFLOWTM
and
NeoFISHTM
serves
to strengthen the market differentiation of each product line for NeoGenomics
and allows us to compete more favorably against larger, more entrenched
competitors in our testing niche.
We
increased our professional level staffing for global requisitions requiring
interpretation in 2007 and 2008. We currently employ three full-time
MDs as our medical directors and pathologists, two PhDs as our scientific
directors and cytogeneticists, and two part-time MDs acting as consultants
and
backup pathologists for case sign out purposes. We have plans to hire
several more hematopathologists as our product mix continues to expand beyond
tech-only services and more sales emphasis is focused on our ability to issue
consolidated reporting with case interpretation under our Genetic Pathology
Solutions (GPSTM)
product
line.
We
believe NeoGenomics’ average 3-5 day turn-around time for our cytogenetics
services continues to remain an industry-leading benchmark for national
laboratories. The timeliness of results continues to increase the
usage patterns of cytogenetics and acts as a driver for other add-on testing
requests by our referring physicians. Based on anecdotal information,
we believe that typical cytogenetics labs 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 FISH
and
other molecular 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.
High
complexity laboratories within the cancer testing niche have frequently operated
a core facility on one or both coasts to service the needs of their customers
around the country. Informal surveys of customers and prospects
uncovered a desire to do business with a laboratory with national breadth but
with a more local presence. In such a scenario, specimen integrity,
turnaround-time of results, client service support, and interaction with our
medical staff are all enhanced. We currently operate three laboratory
locations in Fort Myers, Florida, Irvine, California and Nashville, Tennessee,
each of which has received the appropriate state, Clinical Laboratory
Improvement Amendments (“CLIA”),
and
College of American Pathologists (“CAP”)
licenses and accreditations. As situations dictate and opportunities
arise, we will continue to develop and open new laboratories, seamlessly linked
together by our optimized Laboratory Information System (“LIS”),
to
better meet the regionalized needs of our customers.
2007
brought progress in the NeoGenomics Contract Research Organization
(“CRO”)
division based at our Irvine, California facility. This division was
created to take advantage of our core competencies in genetic and molecular
high
complexity testing and act as a vehicle to compete for research projects and
clinical trial support contracts in the biotechnology and pharmaceutical
industries. The CRO division will also act as a development conduit
for the validation of new tests which can then be transferred to our clinical
laboratories and be offered to our clients. We envision the CRO as a
way to infuse some intellectual property into the mix of our services and in
time create a more “vertically integrated” laboratory that can potentially offer
additional clinical services of a more proprietary nature. 2007 brought the
first revenue to NeoGenomics’ CRO division. This initial revenue
stream was small due to the size of the contracts closed. During 2008 we began
to scale revenues from the CRO division and we currently expect to grow this
business significantly during 2009.
During
2008, we began offering additional tests that broaden our focus from genetic
and
molecular testing to more traditional types of anatomic pathology testing (i.e.
immunohistochemistry) that are complementary to our current test
offerings. At no time do we expect to intentionally compete with
fee-for-service pathologists for services of this type, and Company sales
efforts will operate under a strict “right of first refusal” philosophy that
supports rather than undercuts the practice of community-based
pathology. We believe that by adding additional types of tests to our
product offering we will 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 package our testing services more appropriately to the needs
of the market.
The
above
market strategy continues to bear fruit for the Company, resulting in strong
year over year growth of 78% in FY 2007 versus FY 2006. For the nine
months ended September 30, 2008, we experienced even stronger year over year
revenue growth of 83% versus the comparable period in FY 2007. Our average
revenue/requisition in FY 2007 was approximately $702, which was an increase
of
approximately 4% from FY 2006. For the nine months ended September 30, 2008,
our
average revenue/requisition was approximately $803 which was an increase of
approximately 16% from the comparable period in 2007. Our average revenue/test
in FY 2007 was approximately $548, which was an increase of approximately 9%
over FY 2006. Our average revenue/test for the nine months ended
September 30, 2008 was approximately $612, which was an increase of
approximately 14% over the comparable period in FY 2007. FY 2007 saw a slight
erosion of average tests per requisition due to the overwhelming success of
our
bladder cancer FISH product line, which tends to be a singly ordered test
request. New sales hires and a new focus on global workups with
interpretation and our integrated GPS product line allowed us to increase
average number of tests per requisition for the nine months ended September
30,
2008 from the comparable period in FY 2007. For the three months ended September
30, 2008, average number of tests per requisition was 1.33 and we expect this
number to continue to increase during 2009.
For
the twelve months ended December 31
|
|
FY
2007
|
|
FY
2006
|
|
%
Inc (Dec)
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Received (Cases)
|
|
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16,385
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|
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9,563
|
|
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71.3
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%
|
Number
of Tests Performed
|
|
|
20,998
|
|
|
12,838
|
|
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63.6
|
%
|
Average
Number of Tests/Requisition
|
|
|
1.28
|
|
|
1.34
|
|
|
(4.5
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$
|
11,504,725
|
|
$
|
6,475,996
|
|
|
77.7
|
%
|
Average
Revenue/Requisition
|
|
$
|
702.15
|
|
$
|
677.19
|
|
|
3.7
|
%
|
Average
Revenue/Test
|
|
$
|
547.90
|
|
$
|
504.44
|
|
|
8.6
|
%
|
For
the nine months ended September 30
|
|
FY
2008
|
|
FY
2007
|
|
%
Inc (Dec)
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Received (Cases)
|
|
|
17,758
|
|
|
11,123
|
|
|
59.7
|
%
|
Number
of Tests Performed
|
|
|
23,049
|
|
|
14,332
|
|
|
60.8
|
%
|
Average
Number of Tests/Requisition
|
|
|
1.31
|
|
|
1.29
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$
|
14,094,959
|
|
$
|
7,709,408
|
|
|
82.8
|
%
|
Average
Revenue/Requisition
|
|
$
|
802.77
|
|
$
|
693.01
|
|
|
15.8
|
%
|
Average
Revenue/Test
|
|
$
|
611.52
|
|
$
|
537.91
|
|
|
13.7
|
%
|
We
believe this bundled approach to testing represents a clinically sound practice
that is medically valid. Within the subspecialty field of hematopathology,
such
a bundled approach to the diagnosis and prognosis of blood and lymph node
diseases has become the standard of care throughout the country. In
addition, as the average number of tests performed per requisition increases,
we
believe this should drive increases in our revenue and afford the Company
significant synergies and efficiencies in our operations and sales and marketing
activities.
About
Us
Our
principal executive offices are located at 12701 Commonwealth Drive, Suite
5,
Fort Myers, Florida 33913. Our telephone number is (239)
768-0600. Our website can be accessed at www.neogenomics.org.
THE
OFFERING
This
prospectus relates to the offer and sale of up to 7,000,000 shares of our common
stock by the selling stockholders described below.
Fusion
Capital
On
November 5, 2008, the Company and Fusion Capital Fund II, LLC, an Illinois
limited liability company (“Fusion
Capital”),
entered into a Common Stock Purchase Agreement (the “Purchase
Agreement”),
and a
Registration Rights Agreement (the “Registration
Rights Agreement”).
Under
the Purchase Agreement, Fusion Capital is obligated, under certain conditions,
to purchase shares from us in an aggregate amount of $8.0 million from time
to
time over a thirty (30) month period. Under the terms of the Purchase Agreement,
Fusion Capital has received a commitment fee consisting of 400,000 shares of
our
common stock. As of November 25, 2008, there were 32,112,546 shares outstanding
(20,028,487 shares held by non-affiliates) excluding the 3,000,000 shares
offered by Fusion Capital pursuant to this prospectus which it has not yet
purchased from us. If all of such 3,000,000 shares offered hereby were issued
and outstanding as of the date hereof, the 3,000,000 shares would represent
8.5%
of the total common stock outstanding or 13.0% of the non-affiliates shares
outstanding as of the date hereof.
Under
the
Purchase Agreement and the Registration Rights Agreement we are required to
register and have included in the offering pursuant to this prospectus (1)
400,000 shares which have already been issued as a commitment fee, (2) 17,500
shares which we have issued to Fusion Capital as an expense reimbursement and
(3) at least 3,000,000 shares which we may sell to Fusion Capital after the
registration statement of which this prospectus is a part is declared effective.
All 3,417,500 shares, 10.6% of our outstanding on November 5, 2008, the date
of
the Purchase Agreement, are being offered pursuant to this prospectus. Under
the
Purchase Agreement, we have the right but not the obligation to sell more than
the 3,000,000 shares to Fusion Capital. As of the date hereof, we do not
currently have any plans or intent to sell to Fusion Capital any shares beyond
the 3,000,000 shares offered hereby. However, if we elect to sell more than
the
3,000,000 shares (which we have the right but not the obligation to do), we
must
first register such additional shares under the Securities Act before we can
elect to sell such additional shares to Fusion Capital. In the event we elect
to
do so, this could cause substantial dilution to our shareholders. The number
of
shares ultimately offered for sale by Fusion Capital is dependent upon the
number of shares purchased by Fusion Capital under the Purchase Agreement.
We
do not
have the right to commence any sales of our shares to Fusion Capital until
the
SEC has declared effective the registration statement of which this prospectus
is a part. After the SEC has declared effective such registration statement,
generally we have the right but not the obligation from time to time to sell
our
shares to Fusion Capital in amounts between $50,000 and $1.0 million depending
on certain conditions. We have the right to control the timing and amount of
any
sales of our shares to Fusion Capital. The purchase price of the shares will
be
determined based upon the market price of our shares without any fixed discount
at the time of each sale. Fusion Capital shall not have the right nor the
obligation to purchase any shares of our common stock on any business day that
the price of our common stock is below $0.45. There are no negative covenants,
restrictions on future fundings, penalties or liquidated damages in the Purchase
Agreement or the Registration Rights Agreement. The Purchase Agreement may
be
terminated by us at any time at our discretion without any cost to us. The
Purchase Agreement provides that neither party has the ability to amend the
Purchase Agreement and the obligations of both parties are
non-transferable.
Other
Selling Stockholders
|
· |
Aspen
Select Healthcare, LP (“Aspen”),
which intends to sell up to 2,540,585 shares of common stock previously
issued and sold by the Company to Aspen on April 15, 2003 (the
“2003
Aspen Placement”).
Aspen received registration rights with respect to these shares
and therefore, such shares are being registered
hereunder;
|
|
· |
Mary
S. Dent, the spouse of Dr. Michael Dent, who is our Chairman of the
Board
and founder, who intends to sell up to 643,267 shares of common stock
previously issued and sold by the Company to Dr. Dent as founder
shares.
Such shares were subsequently transferred to Mary Dent in February
2007.
Dr. Dent received registration rights with respect to these shares
and
therefore, such shares are being registered hereunder;
and
|
|
· |
Those
shareholders other than Aspen and Mary Dent who are set forth in
the
section herein entitled “Selling Stockholders” who intend to sell up to an
aggregate of 398,648 shares of common stock which they received in
a
distribution from Aspen in September 2007. All of such shares were
originally purchased by Aspen in the 2003 Aspen Placement. Aspen
received
registration rights with respect to these shares and has assigned
such
rights to these selling stockholders and therefore, such shares are
being
registered hereunder.
|
Please
refer to “Selling Stockholders” beginning on page 22.
The
Company is not selling any shares of common stock in this offering and therefore
will not receive any proceeds from this offering. All costs associated with
this
registration will be borne by the Company. The prices at which the selling
stockholders may sell the shares will be determined by the prevailing market
price for the shares or in negotiated transactions.
Our
common stock is quoted on the Over-The-Counter Bulletin Board under the
symbol “NGNM.OB”. On November 25, 2008, the last reported sale price of our
common stock on the Over-The-Counter Bulletin Board was $0.74 per
share.
Common
Stock Offered
|
|
7,000,000
shares by selling stockholders
|
|
|
|
Offering
Price
|
|
Market
price
|
|
|
|
Common
Stock Currently Outstanding
|
|
32,112,546
shares as of November 25, 2008
|
|
|
|
Use
of Proceeds
|
|
We
will not receive any proceeds of the shares offered by the selling
stockholders. See “Use of Proceeds”.
|
|
|
|
Risk
Factors
|
|
The
securities offered hereby involve a high degree of risk. See “Risk
Factors” beginning on page 10 for a discussion of these
risks.
|
|
|
|
Over-the-Counter Bulletin Board Symbol
|
|
NGNM.OB
|
The
Summary Consolidated Financial Information set forth below was excerpted from
the Company’s unaudited Quarterly Report on Form 10-Q for the nine months ended
September 30, 2008 and 2007, as filed with the SEC.
Statement
of Operations Data
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
14,094,959
|
|
$
|
7,709,408
|
|
Cost
of Revenue
|
|
|
6,577,549
|
|
|
3,623,860
|
|
Gross
Profit
|
|
|
7,517,410
|
|
|
4,085,548
|
|
Other
Operating Expenses:
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
7,706,284
|
|
|
5,664,053
|
|
Interest
expense, net
|
|
|
199,336
|
|
|
205,806
|
|
Total
Operating Expenses
|
|
|
7,905,620
|
|
|
5,869,859
|
|
Net
Loss
|
|
$
|
(388,210
|
)
|
$
|
(1,784,311
|
)
|
Net
Loss Per Share - Basic And Fully Diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.06
|
)
|
Weighted
Average Number Of Shares Outstanding – Basic and Fully
Diluted
|
|
|
31,414,065
|
|
|
29,221,778
|
|
Balance
Sheet Data
|
|
As of
|
|
|
|
September 30,
|
|
December 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
631,365
|
|
$
210,573
|
Accounts
receivable (net of allowance for doubtful accounts of $283,111 and
$414,548, respectively)
|
|
|
3,381,066
|
|
3,236,751
|
Inventories
|
|
|
344,608
|
|
304,750
|
Other
current assets
|
|
|
900,146
|
|
400,168
|
Total
current assets
|
|
|
5,257,185
|
|
4,152,242
|
Property
and equipment (net of accumulated depreciation of $1,374,942 and
$862,030,
respectively)
|
|
|
2,495,146
|
|
2,108,083
|
|
|
|
|
|
|
Other
assets
|
|
|
275,087
|
|
260,575
|
Total
Assets
|
|
$
|
8,027,418
|
|
$
6,520,900
|
|
|
|
|
|
|
Liabilities
And Stockholders’ Equity:
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,904,694
|
|
$
1,799,159
|
Accrued
expenses and other liabilities
|
|
|
955,405
|
|
1,319,580
|
Revolving
credit line
|
|
|
1,176,221
|
|
-
|
Short-term
portion of equipment capital leases
|
|
|
449,776
|
|
242,966
|
Total
current liabilities
|
|
|
4,486,096
|
|
3,361,705
|
Long
Term Liabilities
|
|
|
|
|
|
Long-term
portion of equipment capital leases
|
|
|
1,054,321
|
|
837,081
|
Total
Liabilities
|
|
|
5,540,417
|
|
4,198,786
|
|
|
|
|
|
|
Stockholders’
Equity
|
|
|
|
|
|
Common
stock, $.001 par value, (100,000,000 shares authorized; 31,686,355
and
31,391,660 shares issued and outstanding, respectively)
|
|
|
31,686
|
|
31,391
|
Additional
paid-in capital
|
|
|
17,373,756
|
|
16,820,954
|
Accumulated
deficit
|
|
|
(14,918,441
|
)
|
(14,530,231)
|
Total
stockholders’ equity
|
|
|
2,487,001
|
|
2,322,114
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
8,027,418
|
|
$
6,520,900
|
The
Summary Consolidated Financial Information set forth below was excerpted from
the Company’s Annual Reports on Form 10-KSB for the years ended December 31,
2007 and 2006, as filed with the SEC.
Statement
of Operations Data
|
|
For the Years Ended
December 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
Revenue
|
|
$
|
11,504,725
|
|
$
|
6,475,996
|
|
Cost
of Revenue
|
|
|
5,522,775
|
|
|
2,759,190
|
|
Gross
Profit
|
|
|
5,981,950
|
|
|
3,716,806
|
|
|
|
|
|
|
|
|
|
Other
Operating Expense:
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
9,122,922
|
|
|
3,576,812
|
|
Income
/ (Loss) from Operations
|
|
|
(3,140,972
|
)
|
|
139,994
|
|
|
|
|
|
|
|
|
|
Other
Income / (Expense):
|
|
|
|
|
|
|
|
Other
income
|
|
|
24,256
|
|
|
55,.970
|
|
Interest
expense
|
|
|
(263,456
|
)
|
|
(325,625
|
)
|
Other
income / (expense) – net
|
|
|
(239,200
|
)
|
|
(269,655
|
)
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(3,380,172
|
)
|
$
|
(129,661
|
)
|
|
|
|
|
|
|
|
|
Net
Loss Per Share – Basic and Diluted
|
|
$
|
(0.11
|
)
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding – Basic and
|
|
|
|
|
|
|
|
Diluted
|
|
|
29,764,289
|
|
|
26,166,031
|
|
Balance
Sheet Data
|
|
As of
|
|
|
|
December 31,
2007
|
|
December 31,
2006
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
210,573
|
|
$
|
126,266
|
|
Accounts
receivable (net of allowance for doubtful accounts of $414,548 and
103,463, respectively)
|
|
|
3,236,751
|
|
|
1,549,758
|
|
Inventories
|
|
|
304,750
|
|
|
117,362
|
|
Other
current assets
|
|
|
400,168
|
|
|
102,172
|
|
Total
current assets
|
|
|
4,152,242
|
|
|
1,895,558
|
|
|
|
|
|
|
|
|
|
Property
and equipment (net of accumulated depreciation of $862,030 and $494,942,
respectively)
|
|
|
2,108,083
|
|
|
1,202,487
|
|
Other
assets
|
|
|
260,575
|
|
|
33,903
|
|
Total
Assets
|
|
$
|
6,520,900
|
|
$
|
3,131,948
|
|
|
|
|
|
|
|
|
|
Liabilities
& Stockholders’ Equity:
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
Account
payable
|
|
$
|
1,799,159
|
|
$
|
697,754
|
|
Accrued
compensation
|
|
|
370,496
|
|
|
133,490
|
|
Accrued
expenses and other liabilities
|
|
|
574,084
|
|
|
67,098
|
|
Legal
contingency
|
|
|
375,000
|
|
|
-
|
|
Due
to affiliates (net of discount of $39,285)
|
|
|
-
|
|
|
1,635,715
|
|
Short-term
portion of equipment capital leases
|
|
|
242,966
|
|
|
94,430
|
|
Total
current liabilities
|
|
|
3,361,705
|
|
|
2,628,487
|
|
|
|
|
|
|
|
|
|
Long-Term
Liabilities
|
|
|
|
|
|
|
|
Long-term
portion of equipment capital leases
|
|
|
837,081
|
|
|
448,947
|
|
|
|
|
|
|
|
|
|
Total
Liabilities:
|
|
|
4,198,786
|
|
|
3,077,434
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Common
Stock, $0.01 par value, (100,000,000 shares authorized;
And
31,391,660 and 27,061,476 shares issued and outstanding
at
December 31, 2007 and 2006, respectively)
|
|
|
31,391
|
|
|
27,061
|
|
Additional
paid-in capital
|
|
|
16,820,954
|
|
|
11,300,135
|
|
Deferred
stock compensation
|
|
|
-
|
|
|
(122,623
|
)
|
Accumulated
deficit
|
|
|
(14,530,231
|
)
|
|
(11,150,059
|
)
|
Total
stockholders’ equity
|
|
|
2,322,114
|
|
|
54,514
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
6,520,900
|
|
$
|
3,131,948
|
|
|
|
|
|
|
|
|
|
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 And
Unforeseen Risks May Harm The Success Of 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 and maintain a significant number of customers; (ii) effectively provide
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 payors. Our
inability to obtain or maintain any or all these factors could impair our
ability to implement our business strategies successfully, which could have
material adverse effects on our results of operations and financial
condition.
We
May Be Unsuccessful In Managing Our Growth Which Could Prevent The Company
From
Becoming Profitable
Our
recent growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. To
manage our potential growth, we must continue to implement and improve our
operational and financial systems and to expand, train and manage our employee
base. We may not be able to effectively manage the expansion of our
operations and our systems, procedures or controls may not be adequate to
support our operations. Our management may not be able to achieve the
rapid execution necessary to fully exploit the market opportunity for our
products and services. Any inability to manage growth could have a
material adverse effect on our business, results of operations, potential
profitability and financial condition.
Part
of
our business strategy may be to acquire assets or other companies that will
complement our existing business. At this time, we are unable to predict whether
or when any material transaction will be completed should negotiations
commence. If we proceed with any such transaction, we may not
effectively integrate the acquired operations with our own
operations. We may also seek to finance any such acquisition by debt
financings or issuances of equity securities and such financing may not be
available on acceptable terms or at all.
We
May Incur Greater Costs Than Anticipated, Which Could Result In Sustained
Losses
We
used
reasonable efforts to assess and predict the expenses necessary to pursue our
business plan. However, implementing our business plan may require more
employees, capital equipment, supplies or other expenditure items than
management has predicted. Similarly, the cost of compensating
additional management, employees and consultants or other operating costs may
be
more than we estimate, which could result in sustained losses.
We
Rely On A Limited Number Of Third Parties For Manufacture And Supply Of Certain
Of Our Critical Laboratory Instruments And Materials, And We May Not Be Able
To
Find Replacement Suppliers Or Manufacturers In A Timely Manner In The Event
Of
Any Disruption, Which Could Adversely Affect Our
Business.
We
rely
on third parties for the manufacture and supply of some of our critical
laboratory instruments, equipment and materials that we need to perform our
specialized diagnostic services, and rely on a limited number of suppliers
for
certain laboratory materials and some of the laboratory equipment with which
we
perform our diagnostic services. We do not have long-term
contracts with our suppliers and manufacturers that commit them to supply
equipment and materials to us. Because we cannot ensure the actual production
or
manufacture of such critical equipment and materials, or the ability of our
suppliers to comply with applicable legal and regulatory requirements, we may
be
subject to significant delays caused by interruption in production or
manufacturing. If any of our third party suppliers or manufacturers were to
become unwilling or unable to provide this equipment or these materials in
required quantities or on our required timelines, we would need to identify
and
acquire acceptable replacement sources on a timely basis. While we have
developed alternate sourcing strategies for the equipment and materials we
use,
we cannot be certain that these strategies will be effective and even if we
were
to identify other suppliers and manufacturers for the equipment and materials
we
need to perform our specialized diagnostic services, there can be no assurance
that we will be able to enter into agreements with such suppliers and
manufacturers or otherwise obtain such items on a timely basis or on acceptable
terms, if at all. If we encounter delays or difficulties in securing necessary
laboratory equipment or materials, including consumables, we would face an
interruption in our ability to perform our specialized diagnostic services
and
experience other disruptions that would adversely affect our business, results
of operations and financial condition.
We
May Face Fluctuations In Results Of Operations Which Could Negatively Affect
Our
Business Operations And We Are Subject To Seasonality In Our
Business
As
a
result of our limited operating history and the relatively limited information
available on our competitors, we may not have sufficient internal or
industry-based historical financial data upon which to calculate anticipated
operating expenses. Management expects that our results of operations
may also fluctuate significantly in the future as a result of a variety of
factors, including, but not limited to: (i) the continued rate of growth, usage
and acceptance of our products and services; (ii) demand for our products and
services; (iii) the introduction and acceptance of new or enhanced products
or
services by us or by competitors; (iv) our ability to anticipate and effectively
adapt to developing markets and to rapidly changing technologies; (v) our
ability to attract, retain and motivate qualified personnel; (vi) the
initiation, renewal or expiration of significant contracts with our major
clients; (vii) pricing changes by us, our suppliers or our competitors; (viii)
seasonality; and (ix) general economic conditions and other
factors. Accordingly, future sales and operating results are
difficult to forecast. Our expenses are based in part on our
expectations as to future revenues and to a significant extent are relatively
fixed, at least in the short-term. We may not be able to adjust spending in
a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in relation to our
expectations would have an immediate adverse impact on our business, results
of
operations and financial condition. In addition, we may determine
from time to time to make certain pricing or marketing decisions or acquisitions
that could have a short-term material adverse affect on our business, results
of
operations and financial condition and may not result in the long-term benefits
intended. Furthermore, in Florida, currently our primary referral
market for lab testing services, a meaningful percentage of the population,
returns to homes in the Northern U.S. to avoid the hot summer
months. This may result in seasonality in our
business. Because of all of the foregoing factors, our operating
results could be less than the expectations of investors in future
periods.
We
Substantially Depend Upon Third Parties For Payment Of Services, Which Could
Have A Material Adverse Affect On Our Cash Flows And Results Of
Operations
The
Company is a clinical medical laboratory that provides medical testing services
to doctors, hospitals, and other laboratories on patient specimens that are
sent
to the Company. In the case of most specimen referrals that are
received for patients that are not in-patients at a hospital or institution
or
otherwise sent by another reference laboratory, the Company generally has to
bill the patient’s insurance company or a government program for its
services. As such it relies on the cooperation of numerous third
party payors, including but not limited to Medicare, Medicaid and various
insurance companies, in order to get paid for performing services on behalf
of
the Company’s clients. Wherever possible, the amount of such third
party payments is governed by contractual relationships in cases where the
Company is a participating provider for a specified insurance company or by
established government reimbursement rates in cases where the Company is an
approved provider for a government program such as Medicare. However,
the Company does not have a contractual relationship with many of the insurance
companies with whom it deals, nor is it necessarily able to become an approved
provider for all government programs. In such cases, the Company is
deemed to be a non-participating provider and there is no contractual assurance
that the Company is able to collect the amounts billed to such insurance
companies or government programs. Currently, the Company is not a
participating provider with the majority of the insurance companies it bills
for
its services. Until such time as the Company becomes a participating
provider with such insurance companies, there can be no contractual assurance
that the Company will be paid for the services it bills to such insurance
companies, and such third parties may change their reimbursement policies for
non-participating providers in a manner that may have a material adverse effect
on the Company’s cash flow or results of operations.
Our
Business Is Subject To Rapid Scientific Change, Which Could Have A Material
Adverse Affect On Our Business, Results of Operations And Financial
Condition
The
market for genetic and molecular testing services is characterized by rapid
scientific developments, evolving industry standards and customer demands,
and
frequent new product introductions and enhancements. Our future
success will depend in significant part on our ability to continually improve
our offerings in response to both evolving demands of the marketplace and
competitive service offerings, and we may be unsuccessful in doing
so.
The
Market For Our Services Is Highly Competitive, Which Could Have A Material
Adverse Affect On Our Business, Results Of Operations And Financial
Condition
The
market for genetic and molecular testing services is highly competitive and
competition is expected to continue to increase. We compete with other
commercial medical laboratories in addition to the in-house laboratories of
many
major hospitals. Many of our existing competitors have significantly
greater financial, human, technical and marketing resources than we
do. Our competitors may develop products and services that are
superior to ours or that achieve greater market acceptance than our
offerings. We may not be able to compete successfully against current
and future sources of competition and in such case, this may have a material
adverse effect on our business, results of operations and financial
condition.
We
Face The Risk of Capacity Constraints, Which Could Have A Material Adverse
Affect On Our Business, Results Of Operations And Financial
Condition
We
compete in the market place primarily on three factors: a) the
quality and accuracy of our test results; b) the speed or turn-around times
of
our testing services; and c) our ability to provide after-test support to those
physicians requesting consultation. Any unforeseen increase in the
volume of 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 effect 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 severely harm our business, results of operations
and financial condition. In addition, based on the importance of the
subject matter of our tests, inaccurate results could result in improper
treatment of patients, and potential liability for us.
We
May Fail to Protect Our Facilities, Which Could Have A Material Adverse Affect
On Our Business, Results Of Operations And Financial
Condition
The
Company’s operations are dependent in part upon its ability to protect its
laboratory operations against physical damage from fire, floods, hurricanes,
power loss, telecommunications failures, break-ins and similar
events. The Company does not presently have an emergency back-up
generator in place at its Fort Myers, Florida, Nashville, Tennessee or Irvine,
California laboratory locations that can mitigate to some extent the effects
of
a prolonged power outage. The occurrence of any of these events could
result in interruptions, delays or cessations in service to customers, which
could have a material adverse effect on our business, results of operations
and
financial condition.
The
Steps Taken By The Company To Protect Its Proprietary Rights May Not Be
Adequate, Which Could Result In Infringement Or Misappropriation By
Third-Parties
We
regard
our copyrights, trademarks, trade secrets and similar intellectual property
as
critical to our success, and we rely upon trademark and copyright law, trade
secret protection and confidentiality and/or license agreements with our
employees, customers, partners and others to protect our proprietary
rights. The steps taken by us to protect our proprietary rights may
not be adequate or third parties may infringe or misappropriate our copyrights,
trademarks, trade secrets and similar proprietary rights. In
addition, other parties may assert infringement claims against us.
We
Are Dependent On Key Personnel And Need To Hire Additional Qualified Personnel
In Order For Our Business To Succeed
Our
performance is substantially dependent on the performance of our senior
management and key technical personnel. In particular, our success
depends substantially on the continued efforts of our senior management team,
which currently is composed of a small number of individuals. The
loss of the services of any of our executive officers, our laboratory director
or other key employees could have a material adverse effect on our business,
results of operations and our financial condition.
Our
future success also depends on our continuing ability to attract and retain
highly qualified technical and managerial personnel. Competition for
such personnel is intense and we may not be able to retain our key managerial
and technical employees or may not be able to attract and retain additional
highly qualified technical and managerial personnel in the
future. The inability to attract and retain the necessary technical
and managerial personnel could have a material adverse effect upon our business,
results of operations and financial condition.
The
Failure to Obtain Necessary Additional Capital To Finance Growth And Capital
Requirements, Could Adversely Affect Our Business, Financial Condition And
Results of Operations
We
may
seek to exploit business opportunities that require more capital than 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.
We
only
have the right to receive $50,000 every four business days under the Purchase
Agreement unless our stock price equals or exceeds $0.75, in which case we
can
sell greater amounts to Fusion Capital as the price of our common stock
increases. Fusion Capital shall not have the right nor the obligation to
purchase any shares of our common stock on any business day that the market
price of our common stock is less than $0.45. Since we are registering 3,000,000
shares for sale under the Purchase Agreement by Fusion Capital pursuant to
the
registration statement of which this prospectus is a part, the selling price
of
our common stock to Fusion Capital will have to average at least $2.67 per
share
for us to receive the maximum proceeds of $8.0 million. Assuming a purchase
price of $0.74 per share (the closing sale price of the common stock on November
25, 2008) and the purchase by Fusion Capital of the full 3,000,000 shares under
the Purchase Agreement, proceeds to us would only be $2,220,000 unless
we
choose to register more than 3,000,000 shares, which we have the right, but
not
the obligation, to do. Subject to approval by our board of directors, we have
the right but not the obligation to sell more than 3,000,000 shares to Fusion
Capital. In the event we elect to sell more than 3,000,000 shares offered
hereby, we will be required to file a new registration statement and have it
declared effective by the U.S. Securities & Exchange Commission.
The
extent we rely on Fusion Capital as a source of funding will depend on a number
of factors, including the prevailing market price of our common stock and the
extent to which we are able to secure working capital from other sources.
Specifically, Fusion Capital shall not have the right nor the obligation to
purchase any shares of our common stock on any business days that the market
price of our common stock is less than $0.45. If obtaining sufficient financing
from Fusion Capital were to prove unavailable or prohibitively dilutive and
if
we are unable to sell enough of our products, we will need to secure another
source of funding in order to satisfy our working capital needs. Even if we
are
able to access the full $8.0 million under the Purchase Agreement with Fusion
Capital, we may still need additional capital to fully implement our business,
operating and development plans. Should the financing we require to sustain
our
working capital needs be unavailable or prohibitively expensive when we require
it, the consequences could be a material adverse effect on our business,
operating results, financial condition and prospects.
Our
Net Revenue Will Be Diminished If Payors Do Not Adequately Cover Or Reimburse
Our Services
There
has
been and will continue to be significant efforts by both federal and state
agencies to reduce costs in government healthcare programs and otherwise
implement government control of healthcare costs. In addition, increasing
emphasis on managed care in the U.S. may continue to put pressure on the pricing
of healthcare services. Uncertainty exists as to the coverage and reimbursement
status of new applications or services. Third party payors, including
governmental payors such as Medicare and private payors, are scrutinizing new
medical products and services and may not cover or may limit coverage and the
level of reimbursement for our services. Third party insurance coverage may
not
be available to patients for any of our existing assays or assays we discover
and develop. However, a substantial portion of the testing for which we bill
our
hospital and laboratory clients is ultimately paid by third party payors. Any
pricing pressure exerted by these third party payors on our customers may,
in
turn, be exerted by our customers on us. If government and other third party
payors do not provide adequate coverage and reimbursement for our assays, our
operating results, cash flows or financial condition may decline.
Third
Party Billing Is Extremely Complicated And Will Result In Significant Additional
Costs To Us
Billing
for laboratory services is extremely complicated. The customer refers the tests;
the payor is the party that pays for the tests, and the two are not always
the
same. Depending on the billing arrangement and applicable law, we need to bill
various payors, such as patients, insurance companies, Medicare, Medicaid,
doctors and employer groups, all of which have different billing requirements.
Additionally, our billing relationships require us to undertake internal audits
to evaluate compliance with applicable laws and regulations as well as internal
compliance policies and procedures. Insurance companies also impose routine
external audits to evaluate payments made. This adds further complexity to
the
billing process.
Among
many other factors complicating billing are:
|
· |
pricing
differences between our fee schedules and the reimbursement rates
of
the payors;
|
|
· |
disputes
with payors as to which party is responsible for payment;
and
|
|
· |
disparity
in coverage and information requirements among various
carriers.
|
We
incur
significant additional costs as a result of our participation in the Medicare
and Medicaid programs, as billing and reimbursement for clinical laboratory
testing are subject to considerable and complex federal and state regulations.
The additional costs we expect to incur include those related to: (1)
complexity added to our billing processes; (2) training and education of our
employees and customers; (3) implementing compliance procedures and oversight;
(4) collections and legal costs; and (5) costs associated with, among other
factors, challenging coverage and payment denials and providing patients with
information regarding claims processing and services, such as advanced
beneficiary notices.
Our
Operations Are Subject To Strict Laws Prohibiting Fraudulent Billing And Other
Abuse, And Our Failure To Comply With Such Laws Could Result In Substantial
Penalties
Of
particular importance to our operations are federal and state laws prohibiting
fraudulent billing and providing for the recovery of non-fraudulent
overpayments, as a large number of laboratories have been forced by the federal
and state governments, as well as by private payors, to enter into substantial
settlements under these laws. In particular, if an entity is determined to
have
violated the federal False Claims Act, it may be required to pay up to three
times the actual damages sustained by the government, plus civil penalties
of
between $5,500 to $11,000 for each separate false claim. There are many
potential bases for liability under the federal False Claims Act. Liability
arises, primarily, when an entity knowingly submits, or causes another to
submit, a false claim for reimbursement to the federal government. Submitting
a
claim with reckless disregard or deliberate ignorance of its truth or falsity
could result in substantial civil liability. A trend affecting the healthcare
industry is the increased use of the federal False Claims Act and, in
particular, actions under the False Claims Act’s “whistleblower” or “qui tam”
provisions to challenge providers and suppliers. Those provisions allow a
private individual to bring actions on behalf of the government alleging that
the defendant has submitted a fraudulent claim for payment to the federal
government. The government must decide whether to intervene in the lawsuit
and
to become the primary prosecutor. If it declines to do so, the individual may
choose to pursue the case alone, although the government must be kept apprised
of the progress of the lawsuit. Whether or not the federal government intervenes
in the case, it will receive the majority of any recovery. In addition, various
states have enacted laws modeled after the federal False Claims
Act.
Government
investigations of clinical laboratories have been ongoing for a number of years
and are expected to continue in the future. Written “corporate compliance”
programs to actively monitor compliance with fraud laws and other regulatory
requirements are recommended by the Department of Health and Human Services’
Office of the Inspector General.
The
Failure To Comply With Significant Government Regulation And Laboratory
Operations May Subject The Company To Liability, Penalties Or Limitation Of
Operations
As
discussed in the Government Regulation section of our business description,
we
are subject to extensive state and federal regulatory oversight. Our
laboratory locations may not pass inspections conducted to ensure compliance
with CLIA `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 laboratory location’s 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 have not
anticipated could have a material adverse effect on the Company’s business,
results of operations and financial condition.
Existing
federal laws governing Medicare and Medicaid, as well as some other state and
federal laws, also regulate certain aspects of the relationship between
healthcare providers, including clinical and anatomic laboratories, and their
referral sources, including physicians, hospitals and other laboratories.
Certain provisions of these laws, known as the "anti-kickback law" and the
“Stark Laws”, contain extremely broad proscriptions. Violation of these laws may
result in criminal penalties, exclusion from Medicare and Medicaid, and
significant civil monetary penalties. We 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 may become
subject to scrutiny thereunder.
Furthermore,
the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”),
and
other state laws contains provisions that affect the handling of claims and
other patient information that are, or have been, transmitted electronically
and
regulate the general disclosure of patient records and patient health
information. These provisions, which address security and confidentiality of
patient information as well as the administrative aspects of claims handling,
have very broad applicability and they specifically apply to healthcare
providers, which include physicians and clinical laboratories. Although we
believe we have complied with the Standards, Security and Privacy rules under
HIPAA and state laws, an audit of our procedures and systems could find
deficiencies. Such deficiencies, if found, could have a material
adverse effect on the Company’s business, results of operations and financial
condition and subject us to liability.
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 effect on our business, results of operations and financial
condition.
We
Are Controlled By Existing Stockholders And Therefore Other Stockholders Will
Not Be Able To Direct The Company
Voting
control of the Company is held by a relatively small group of
stockholders. These stockholders effectively retain control of our
Board of Directors and determine all of our corporate actions. In
addition, the Company and stockholders owning and/or having the right to vote
11,987,417 shares, or approximately 37.3% of the Company’s voting shares
outstanding as of November 25, 2008 have executed a Shareholders’ Agreement
that, among other provisions, gives Aspen, our largest stockholder, 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 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 stockholders 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 of the Company.
No
Foreseeable Dividends
We
do not
anticipate paying dividends on our common stock in the foreseeable
future. Rather, we plan to retain earnings, if any, for the operation
and expansion of our business.
There
May Not Be A Viable Public Market For Our Common
Stock
We
cannot
predict the extent to which investor interest in our Company will sustain an
active trading market for our common stock on the Over-The-Counter Bulletin
Board or any other stock market or how liquid any such market might remain.
If
an active public market is not sustained, it may be difficult for our
stockholders to sell their shares of common stock at a price that is attractive
to them, or at all.
We
May Become Involved In Securities Class Action Litigation That Could Divert
Management's Attention And Harm Our Business.
The
stock
markets have from time to time experienced significant price and volume
fluctuations that have affected the market prices for the common stock of
diagnostic companies. These broad market fluctuations may cause the market
price
of our common stock to decline. In the past, securities class action litigation
has often been brought against a company following a decline in the market
price
of its securities. This risk is especially relevant for us because clinical
laboratory service companies have experienced significant stock price volatility
in recent years. We may become involved in this type of litigation in the
future. Litigation often is expensive and diverts management's attention and
resources, which could adversely affect our business.
If
We Are Not The Subject Of Securities Analyst Reports Or If Any Securities
Analyst Downgrades Our Common Stock Or Our Sector, The Price Of Our Common
Stock
Could Be Negatively Affected.
Securities
analysts may publish reports about us or our industry containing information
about us that may affect the trading price of our common stock. There are many
publicly traded companies active in the healthcare industry, which may mean
it
will be less likely that we receive analysts' coverage, which in turn could
affect the price of our common stock. In addition, if a securities or industry
analyst downgrades the outlook for our common stock or one of our competitors'
stocks or chooses to terminate coverage of our common stock, the trading price
of our common stock may also be negatively affected.
Changes
In Regulations, Payor Policies Or Contracting Arrangements With Payors Or
Changes In Other Laws, Regulations Or Policies May Adversely Affect Coverage
Or
Reimbursement For Our Specialized Diagnostic Services, Which May Decrease Our
Revenues And Adversely Affect Our Results Of Operations And Financial
Condition.
Governmental
payors, as well as private insurers and private payors, have implemented and
will continue to implement measures to control the cost, utilization and
delivery of healthcare services, including clinical laboratory and pathology
services. Congress has from time to time considered and implemented changes
to
laws and regulations governing healthcare service providers, including
specialized diagnostic service providers. These changes have adversely affected
and may in the future adversely affect coverage for our services. We also
believe that healthcare professionals will not use our services if third party
payors do not provide adequate coverage and reimbursement for them. These
changes in federal, state, local and third party payor regulations or policies
may decrease our revenues and adversely affect our results of operations and
financial condition. We will continue to be a non-contracting provider until
such time as we enter into contracts with third party payors for whom we are
not
currently contracted. Because a portion of our revenues is from third-party
payors with whom we are not currently contracted, it is likely that we will
be
required to make positive or negative adjustments to accounting estimates with
respect to contractual allowances in the future, which may adversely affect
our
results of operations, our credibility with financial analysts and investors,
and our stock price.
We
Must Hire And Retain Qualified Sales Representatives To Grow Our
Sales.
Our
ability to retain existing customers for our specialized diagnostic services
and
attract new customers is dependent upon retaining existing sales representatives
and hiring new sales representatives, which is an expensive and time-consuming
process. We face intense competition for qualified sales personnel and our
inability to hire or retain an adequate number of sales representatives could
limit our ability to maintain or expand our business and increase sales. Even
if
we are able to increase our sales force, our new sales personnel may not commit
the necessary resources or provide sufficient high quality service and attention
to effectively market and sell our services. If we are unable to maintain and
expand our marketing and sales networks or if our sales personnel do not perform
to our high standards, we may be unable to maintain or grow our existing
business and our results of operations and financial condition will likely
suffer accordingly. If a sales representative ceases employment, we risk the
loss of customer goodwill based on the impairment of relationships developed
between the sales representative and the healthcare professionals for whom
the
sales representative was responsible. This is particularly a risk if the
representative goes to work for a competitor, as the healthcare professionals
that are our customers may choose to use a competitor's services based on their
relationship with the departed sales representative.
We
Are Currently Expanding Our Infrastructure, Including Through The Acquisition
And Development Of Additional Office Space And The Expansion Of Our Current
Laboratory Capacity At Our Existing Facilities, And We Intend To Further Expand
Our Infrastructure By Establishing A New Laboratory Facility Which, Among Other
Things, Could Divert Our Resources And May Cause Our Margins To
Suffer.
In
November 2007, we entered into a lease which expires on June 30, 2010 for
additional office space in Fort Myers, Florida to house our expanding Florida
laboratory, administrative, sales, billing and client services departments.
During the first half of 2008, we initiated construction to expand our current
laboratory capacity by building out unimproved areas within our existing Florida
facility. Each expansion of our facilities or systems could divert resources,
including the focus of our management, away from our current business. In
addition, expansions of our facilities may increase our costs and potentially
decrease operating margins, both of which would, individually or in the
aggregate, negatively impact our business, financial condition and results
of
operations.
Performance
Issues, Service Interruptions Or Price Increases By Our Shipping Carrier Could
Adversely Affect Our Business, Results Of Operations And Financial Condition,
And Harm Our Reputation And Ability To Provide Our Specialized Diagnostic
Services On A Timely Basis.
Expedited,
reliable shipping is essential to our operations. One of our marketing
strategies entails highlighting the reliability of our point-to-point transport
of patient samples. We rely heavily on a single carrier, Federal Express, and
also our local courier, for reliable and secure point-to-point transport of
patient samples to our laboratory and enhanced tracking of these patient
samples. Should Federal Express encounter delivery performance issues such
as
loss, damage or destruction of a sample, it may be difficult to replace our
patient samples in a timely manner and such occurrences may damage our
reputation and lead to decreased demand for our services and increased cost
and
expense to our business. In addition, any significant increase in shipping
rates
could adversely affect our operating margins and results of operations.
Similarly, strikes, severe weather, natural disasters or other service
interruptions by delivery services we use would adversely affect our ability
to
receive and process patient samples on a timely basis. If Federal Express or
we
were to terminate our relationship, we would be required to find another party
to provide expedited, reliable point-to-point transport of our patient samples.
There are only a few other providers of such nationwide transport services,
and
there can be no assurance that we will be able to enter into arrangements with
such other providers on acceptable terms, if at all. Finding a new provider
of
transport services would be time-consuming and costly and result in delays
in
our ability to provide our specialized diagnostic services. Even if we were
to
enter into an arrangement with such provider, there can be no assurance that
they will provide the same level of quality in transport services currently
provided to us by Federal Express. If the new provider does not provide the
required quality and reliable transport services, it could adversely affect
our
business, reputation, results of operations and financial
condition.
We
Use Biological And Hazardous Materials That Require Considerable Expertise
And
Expense For Handling, Storage Or Disposal And May Result In Claims Against
Us.
We
work
with hazardous materials, including chemicals, biological agents and compounds,
blood samples and other human tissue that could be dangerous to human health
and
safety or the environment. Our operations also produce hazardous and
biohazardous waste products. Federal, state and local laws and regulations
govern the use, generation, manufacture, storage, handling and disposal of
these
materials and wastes. Compliance with applicable environmental laws and
regulations may be expensive, and current or future environmental laws and
regulations may impair business efforts. If we do not comply with applicable
regulations, we may be subject to fines and penalties. In addition, we cannot
entirely eliminate the risk of accidental injury or contamination from these
materials or wastes. Our general liability insurance and/or workers'
compensation insurance policy may not cover damages and fines arising from
biological or hazardous waste exposure or contamination. Accordingly, in the
event of contamination or injury, we could be held liable for damages or
penalized with fines in an amount exceeding our resources, and our operations
could be suspended or otherwise adversely affected.
Our
Failure To Comply With Governmental Payor Regulations Could Result In Our Being
Excluded From Participation In Medicare, Medicaid Or Other Governmental Payor
Programs, Which Would Decrease Our Revenues And Adversely Affect Our Results
Of
Operations And Financial Condition.
Billable
tests which are reimbursable from Medicare and Medicaid accounted for
approximately 46.9% and 51.6% of our revenues for the nine months ended
September 30, 2008 and 2007, respectively. The Medicare program imposes
extensive and detailed requirements on diagnostic services providers, including,
but not limited to, rules that govern how we structure our relationships with
physicians, how and when we submit reimbursement claims and how we provide
our
specialized diagnostic services. Our failure to comply with applicable Medicare,
Medicaid and other governmental payor rules could result in our inability to
participate in a governmental payor program, our returning funds already paid
to
us, civil monetary penalties, criminal penalties and/or limitations on the
operational function of our laboratory. If we were unable to receive
reimbursement under a governmental payor program, a substantial portion of
our
revenues would be lost, which would adversely affect our results of operations
and financial condition.
Our
Business Could Be Harmed By Future Interpretations Of Clinical Laboratory
Mark-Up Prohibitions.
Our
laboratory currently uses the services of outside reference laboratories to
provide certain complementary laboratory services to those services provided
directly by our laboratory. Although Medicare policies do not prohibit certain
independent-laboratory-to-independent-laboratory referrals and subsequent
mark-up for services, California and other states have rules and regulations
that prohibit or limit the mark-up of these laboratory-to-laboratory services.
A
challenge to our charge-setting procedures under these rules and regulations
could have a material adverse effect on our business, results of operations
and
financial condition.
Failure
To Comply With The HIPAA Security And Privacy Regulations May Increase Our
Operational Costs.
The
HIPAA
privacy and security regulations establish comprehensive federal standards
with
respect to the uses and disclosures of Protected Health Information, or PHI,
by
health plans and healthcare providers, in addition to setting standards to
protect the confidentiality, integrity and availability of electronic PHI.
The
regulations establish a complex regulatory framework on a variety of subjects,
including the
circumstances under which uses and disclosures of PHI are permitted or required
without a specific authorization by the patient, including but not limited
to
treatment purposes, activities to obtain payments for services and healthcare
operations activities; a patient's rights to access, amend and receive an
accounting of certain disclosures of PHI; the content of notices of privacy
practices for PHI; and administrative, technical and physical safeguards
required of entities that use or receive PHI electronically. We have implemented
policies and procedures related to compliance with the HIPAA privacy and
security regulations, as required by law. The privacy regulations establish
a
uniform federal "floor" and do not supersede state laws that are more stringent.
Therefore, we are required to comply with both federal privacy regulations
and
varying state privacy laws. The federal privacy regulations restrict our ability
to use or disclose patient identifiable laboratory data, without patient
authorization, for purposes other than payment, treatment or healthcare
operations (as defined by HIPAA), except for disclosures for various public
policy purposes and other permitted purposes outlined in the privacy
regulations. The privacy and security regulations provide for significant fines
and other penalties for wrongful use or disclosure of PHI, including potential
civil and criminal fines and penalties. Although the HIPAA statute and
regulations do not expressly provide for a private right of damages, we also
could incur damages under state laws to private parties for the wrongful use
or
disclosure of confidential health information or other private personal
information.
Our
Ability To Comply With The Financial Covenants In Our Credit Agreements Depends
Primarily On Our Ability To Generate Substantial Operating Cash
Flow.
Our
ability to comply with the financial covenants under the agreement with
CapitalSource Funding, LLC will depend primarily on our success in generating
substantial operating cash flow. Our credit agreement contains numerous
financial and other restrictive covenants, including restrictions on purchasing
and selling assets, paying dividends to our shareholders, and incurring
additional indebtedness. Our failure to meet these covenants could result in
a
default and acceleration of repayment of the indebtedness under our credit
facility. If the maturity of our indebtedness were accelerated, we may not
have
sufficient funds to pay such indebtedness. In such event, our lenders would
be
entitled to proceed against the collateral securing the indebtedness, which
includes substantially our entire accounts receivable, to the extent permitted
by our credit agreements and applicable law.
We
Have Potential Conflicts Of Interest Relating To Our Related Party Transactions
Which Could Harm Our Business.
We
have
potential conflicts of interest relating to existing agreements we have with
certain of our directors, officers, principal shareholders, shareholders and
employees. Potential conflicts of interest can exist if a related party director
or officer has to make a decision that has different implications for us and
the
related party. If a dispute arises in connection with any of these agreements,
if not resolved satisfactorily to us, our business could be harmed. There can
be
no assurance that the above or any future conflicts of interest will be resolved
in our favor. If not resolved, such conflicts could harm our
business.
We
Have Material Weaknesses In Our Internal Control Over Financial Reporting That
May Prevent The Company From Being Able To Accurately Report Its Financial
Results Or Prevent Fraud, Which Could Harm Its Business And Operating
Results.
Effective
internal controls are necessary for us to provide reliable and accurate
financial reports and prevent fraud. In addition, Section 404 under the
Sarbanes-Oxley Act of 2002 requires that we assess the design and operating
effectiveness of internal control over financial reporting. If we cannot provide
reliable and accurate financial reports and prevent fraud, our business and
operating results could be harmed. We have discovered, and may in the future
discover, areas of internal controls that need improvement. We identified four
material weaknesses in our internal controls as of December 31, 2007. These
matters and our efforts regarding remediation of these matters, as well as
efforts regarding internal controls generally are discussed in detail in our
Annual Report on Form 10-KSB. However, as our material weaknesses in internal
controls demonstrate, we cannot be certain that the remedial measures taken
to
date will ensure that we design, implement, and maintain adequate controls
over
financial processes and reporting in the future. Remedying the material
weaknesses that have been presently identified, and any additional deficiencies,
significant deficiencies or material weaknesses that we may identify in the
future, could require us to incur significant costs, hire additional personnel,
expend significant time and management resources or make other changes.
Disclosure of our material weaknesses, any failure to remediate such material
weaknesses in a timely fashion or having or maintaining ineffective internal
controls could cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading price of our
common stock and access to capital.
Risks
Related To This Offering
The
Sale Of Our Common Stock To Fusion Capital May Cause Dilution And The Sale
Of
The Shares Of Common Stock Acquired By Fusion Capital Could Cause The Price
Of
Our Common Stock To Decline
In
connection with entering into the Purchase Agreement, we authorized the sale
to
Fusion Capital of up to 3,000,000 shares of our common stock. The number of
shares ultimately offered for sale by Fusion Capital under this prospectus
is
dependent upon the number of shares purchased by Fusion Capital under the
Purchase Agreement. The purchase price for the common stock to be sold to Fusion
Capital pursuant to the Purchase Agreement will fluctuate based on the price
of
our common stock. All 3,417,500 shares registered in this offering on behalf
of
Fusion Capital are expected to be freely tradable. It is anticipated that shares
registered in this offering on behalf of Fusion Capital will be sold over a
period of up to 30 months from the date of this prospectus. Depending upon
market liquidity at the time, a sale of shares under this offering at any given
time could cause the trading price of our common stock to decline. Fusion
Capital may ultimately purchase all, some or none of the 3,000,000 shares of
common stock not yet issued but registered in this offering. After it has
acquired such shares, it may sell all, some or none of such shares. Therefore,
sales to Fusion Capital by us under the Purchase Agreement may result in
substantial dilution to the interests of other holders of our common stock.
The
sale of a substantial number of shares of our common stock under this offering,
or anticipation of such sales, could make it more difficult for us to sell
equity or equity-related securities in the future at a time and at a price
that
we might otherwise wish to effect sales. However, we have the right to control
the timing and amount of any sales of our shares to Fusion Capital and the
Purchase Agreement may be terminated by us at any time at our discretion without
any further cost to us.
Future
Sales By Our Stockholders May Adversely Affect Our Stock Price And Our Ability
To Raise Funds In New Stock Offerings
Sales
of
our common stock in the public market following this offering could lower the
market price of our common stock. Sales may also make it more difficult for
us
to sell equity securities or equity-related securities in the future at a time
and price that our management deems acceptable or at all. Of the
32,112,546 shares of common stock outstanding as of November 25, 2008,
22,609,980 shares are freely tradable without restriction, unless held by our
“affiliates”. The remaining 9,502,566 shares of our common
stock which are held by existing stockholders, including the officers and
directors, are “restricted securities” and may be resold in the public market
only if registered or pursuant to an exemption from registration. Some of these
shares may be resold under Rule 144.
The
Selling Stockholders May Sell Their Shares Of Common Stock In The Market, Which
Sales May Cause Our Stock Price To Decline
The
selling stockholders may sell in the public market 7,000,000 shares of our
common stock being registered in this offering. That means that up to 7,000,000
shares may be sold pursuant to this prospectus. Such sales may cause our stock
price to decline.
The
Price You Pay In This Offering Will Fluctuate And May Be Higher Or Lower Than
The Prices Paid By Other People Participating In This
Offering
The
price
in this offering will fluctuate based on the prevailing market price of our
common stock on the Over-The-Counter Bulletin Board. Accordingly, the
price you pay in this offering may be higher or lower than the prices paid
by
other people participating in this offering.
The
Market Price Of Our Common Stock Is Highly Volatile.
The
market price of our common stock has been and is expected to continue to be
highly volatile. Factors, including announcements of technological innovations
by us or other companies, regulatory matters, new or existing products or
procedures, concerns about our financial position, operating results,
litigation, government regulation, developments or disputes relating to
agreements, patents or proprietary rights, may have a significant impact on
the
market price of our common stock. In addition, potential dilutive effects of
future sales of shares of common stock by stockholders and
by
the Company, including Fusion Capital and the other selling stockholders
pursuant to this prospectus, and subsequent sale of common stock by the holders
of warrants and options could have an adverse effect on the market price of
our
shares.
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
“Exchange
Act”). Penny
stocks are stocks:
|
· |
With
a price of less than $5.00 per
share;
|
|
· |
That
are not traded on a “recognized” national
exchange;
|
|
· |
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 Exchange
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.
|
Information
included or incorporated by reference in this prospectus may contain
forward-looking statements. This information may involve known and unknown
risks, uncertainties and other factors which may cause our actual results,
performance or achievements to be materially different from the future results,
performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by
use
of the words “may”, “should”, “expect”, “anticipate”, “estimate”, “believe”,
“intend” or “project” or the negative of these words or other variations on
these words or comparable terminology.
This
prospectus contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our growth
strategies, (c) anticipated trends in our industry, (d) our future financing
plans and (e) our anticipated needs for working capital. These statements may
be
found under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and “Description of Business”, as well as in this
prospectus generally. Actual events or results may differ materially from those
discussed in forward-looking statements as a result of various factors,
including, without limitation, the risks outlined under “Risk Factors” and
matters described in this prospectus generally. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this prospectus will in fact occur.
SELLING
STOCKHOLDERS
The
following table presents information regarding our selling stockholders who
intend to sell up to 7,000,000 shares of our common
stock.
Selling Stockholders
|
|
Shares Beneficially
Owned Before
Offering(1)
|
|
Percentage of
Outstanding
Shares
Beneficially
Owned Before
Offering(1)
|
|
Shares To Be
Sold In The
Offering
|
|
Percentage of
Outstanding
Shares
Beneficially
Owned After
The Offering
|
|
Fusion
Capital Fund II, LLC(2)
|
|
|
417,500
|
|
|
1.3
|
%
|
|
3,417,500
|
|
|
0.0
|
%
|
Aspen
Select Healthcare, LP(3)
|
|
|
12,065,220
|
|
|
34.3
|
%
|
|
2,540,585
|
|
|
26.7
|
%
|
Mary
S. Dent(4)
|
|
|
2,640,046
|
|
|
8.1
|
%
|
|
643,267
|
|
|
5.7
|
%
|
Steven
C. Jones(5)
|
|
|
13,303,302
|
|
|
37.4
|
%
|
|
238,826
|
|
|
29.2
|
%
|
Jones
Network, LP(6)
|
|
|
107,143
|
|
|
*
|
|
|
107,143
|
|
|
0.0
|
%
|
Marvin
E. Jaffe(7)
|
|
|
61,012
|
|
|
*
|
|
|
21,429
|
|
|
*
|
|
Steven
C. Jones ROTH IRA(8)
|
|
|
20,450
|
|
|
*
|
|
|
18,750
|
|
|
*
|
|
Peter
M. Peterson(9)
|
|
|
12,174,778
|
|
|
34.5
|
%
|
|
12,500
|
|
|
25.1
|
%
|
Total(10):
|
|
|
16,498,944
|
|
|
45.6
|
%
|
|
7,000,000
|
|
|
35.5
|
%
|
*
|
Less
than one percent (1%).
|
(1)
|
Applicable
percentage of ownership is based on 32,112,546 shares of our common
stock
outstanding as of November 25, 2008, together with securities exercisable
or convertible into shares of common stock within sixty (60) days
of
November 25, 2008, for each stockholder. Beneficial ownership
is determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to
securities. Shares of common stock are deemed to be
beneficially owned by the person holding such securities for the
purpose
of computing the percentage of ownership of such person, but are
not
treated as outstanding for the purpose of computing the percentage
ownership of any other person. Note that affiliates are subject
to Rule 144 and insider trading regulations - percentage computation
is
for form purposes only.
|
(2)
|
Steven
G. Martin and Joshua B. Scheinfeld, the principals of Fusion Capital,
are
deemed to be beneficial owners of all of the shares of common stock
owned
by Fusion Capital. Messrs. Martin and Scheinfeld have shared voting
and
disposition power over the shares being offered under this prospectus.
As
of the date hereof, 417,500 shares of our common stock have been
previously acquired by Fusion Capital, consisting of 400,000 shares
we
issued to Fusion Capital as a commitment fee and 17,500 shares
that were
issued as an expense reimbursement. The Company may elect in its
sole
discretion to sell to Fusion Capital up to an additional 3,000,000
shares
under the Purchase Agreement. Fusion Capital does not presently
beneficially own those shares as determined in accordance with
the rules
of the SEC.
|
(3)
|
Aspen
Select Healthcare, LP (“Aspen”)
has direct ownership of 6,488,279 shares and has certain warrants
to
purchase 3,050,000 shares, all of which are currently
exercisable. Aspen’s beneficial ownership also includes
2,526,941 shares to which Aspen has received a voting
proxy. The general partner of Aspen is Medical Venture
Partners, LLC, an entity controlled by Steven C. Jones and Peter
M.
Peterson.
|
(4)
|
Mary
S. Dent is the spouse of Dr. Michael T. Dent, our chairman and
founder.
Mrs. Dent has direct ownership of 1,202,471 shares which she received
in a
spousal transfer from Dr. Dent in February 2007. Ms. Dent’s beneficial
ownership also includes (i) 900,000 shares held in a trust for
the benefit
of Dr. Dent’s children (of which Dr. Dent and his attorney are the sole
trustees), (ii) warrants exercisable by Dr. Dent within 60 days
of
November 25, 2008 to purchase 137,575 shares and (iii) options
exercisable
by Dr. Dent within 60 days of November 25, 2008 to purchase 400,000
shares.
|
(5)
|
Steven
C. Jones is the Acting Principal Financial Officer of the Company
and a
member of the Company’s Board of Directors. Mr. Jones and his spouse have
direct ownership of 724,826 shares. Mr. Jones also has warrants
exercisable within 60 days of November 25, 2008 to purchase an
additional
91,881 shares. Mr. Jones’ beneficial ownership also includes
(i) 107,143 shares owned by Jones Network, LP, a family limited
partnership that Mr. Jones controls, (ii) 250,000 warrants exercisable
within 60 days of November 25, 2008 owned by Aspen Capital Advisors,
LLC,
a company that Mr. Jones controls, (iii) 32,475 warrants exercisable
within 60 days of November 25, 2008 owned by Gulf Pointe Capital,
LLC, a
company that Mr. Jones and Mr. Peterson control and (iv) 31,757
shares
held in certain individual retirement and custodial
accounts. In addition, as a managing member of the general
partner of Aspen, he has the right to vote all shares controlled
by Aspen,
thus all Aspen shares and currently exercisable warrants have been
included in his beneficial ownership totals (see Note 3). The shares
to be
sold in this offering were received in a distribution from
Aspen.
|
(6)
|
Jones
Network, LP is a family limited partnership controlled by Steven
C. Jones.
The shares to be sold in this offering were received in a distribution
from Aspen.
|
(7)
|
Marvin
Jaffe is a member of the Company’s Board of Directors and has direct
ownership of 21,429 shares and warrants exercisable within 60 days
of
November 25, 2008 to purchase 39,583 shares. The shares to be sold
in this
offering were received in a distribution from
Aspen.
|
(8)
|
The
shares being sold in this offering were received in a distribution
from
Aspen.
|
(9)
|
Peter
M. Peterson is a member of the Company’s board of directors and has direct
ownership of 12,500 shares and warrants exercisable within 60 days
of
November 25, 2008 to purchase an additional 64,583 shares. In addition,
as
a managing member of the general partner of Aspen, he has the right
to
vote all shares controlled by Aspen, thus all Aspen shares and
currently
exercisable warrants have been added to his beneficial ownership
totals
(see Note 3). Mr. Peterson’s beneficial ownership also includes
32,475 warrants exercisable within 60 days of November 25, 2008
owned by
Gulf Pointe Capital, LLC, a company that Mr. Jones and Mr. Peterson
control. The shares to be sold in this offering were received in
a
distribution from Aspen.
|
(10) |
The
total number of shares listed does not double count the shares
that may be
beneficially attributable to more than one person.
|
THE
FUSION TRANSACTION
General
On
November 5, 2008, the Company and Fusion Capital Fund II, LLC, an Illinois
limited liability company (“Fusion
Capital”),
entered into a Common Stock Purchase Agreement (the “Purchase
Agreement”),
and a
Registration Rights Agreement (the “Registration
Rights Agreement”).
Under
the Purchase Agreement, Fusion Capital is obligated, under certain conditions,
to purchase shares from us in an aggregate amount of $8.0 million from time
to
time over a thirty (30) month period. Under the terms of the Purchase Agreement,
Fusion Capital has received a commitment fee consisting of 400,000 shares of
our
common stock. As of November 25, 2008, there were 32,112,546 shares outstanding
(20,028,487 shares held by non-affiliates) excluding the 3,000,000 shares
offered by Fusion Capital pursuant to this prospectus which it has not yet
purchased from us. If all of such 3,000,000 shares offered hereby were issued
and outstanding as of the date hereof, the 3,000,000 shares would represent
8.5%
of the total common stock outstanding or 13.0% of the non-affiliates shares
outstanding as of the date hereof.
Under
the
Purchase Agreement and the Registration Rights Agreement we are required to
register and have included in the offering pursuant to this prospectus (1)
400,000 shares which have already been issued as a commitment fee, (2) 17,500
shares which we have issued to Fusion Capital as an expense reimbursement and
(3) at least 3,000,000 shares which we may sell to Fusion Capital after the
registration statement of which this prospectus is a part is declared effective.
All 3,417,500 shares, 10.6% of our outstanding on November 5, 2008, the date
of
the Purchase Agreement, are being offered pursuant to this prospectus. Under
the
Purchase Agreement, we have the right but not the obligation to sell more than
the 3,000,000 shares to Fusion Capital. As of the date hereof, we do not
currently have any plans or intent to sell to Fusion Capital any shares beyond
the 3,000,000 shares offered hereby. However, if we elect to sell more than
the
3,000,000 shares (which we have the right but not the obligation to do), we
must
first register such additional shares under the Securities Act before we can
elect to sell such additional shares to Fusion Capital. In the event we elect
to
do so, this could cause substantial dilution to our shareholders. The number
of
shares ultimately offered for sale by Fusion Capital is dependent upon the
number of shares purchased by Fusion Capital under the Purchase Agreement.
We
do not
have the right to commence any sales of our shares to Fusion Capital until
the
SEC has declared effective the registration statement of which this prospectus
is a part. After the SEC has declared effective such registration statement,
generally we have the right but not the obligation from time to time to sell
our
shares to Fusion Capital in amounts between $50,000 and $1.0 million depending
on certain conditions. We have the right to control the timing and amount of
any
sales of our shares to Fusion Capital. The purchase price of the shares will
be
determined based upon the market price of our shares without any fixed discount
at the time of each sale. Fusion Capital shall not have the right nor the
obligation to purchase any shares of our common stock on any business day that
the price of our common stock is below $0.45. There are no negative covenants,
restrictions on future fundings, penalties or liquidated damages in the Purchase
Agreement or the Registration Rights Agreement. The Purchase Agreement may
be
terminated by us at any time at our discretion without any cost to us. The
Purchase Agreement provides that neither party has the ability to amend the
Purchase Agreement and the obligations of both parties are
non-transferable.
Purchase
Of Shares Under The Purchase Agreement
Under
the
Purchase Agreement, on any business day selected by us, we may direct Fusion
Capital to purchase up to $50,000 of our common stock. The purchase price per
share is equal to the lesser of:
|
•
|
the
lowest sale price of our common stock on the purchase date;
or
|
|
•
|
the
average of the three lowest closing sale prices of our common stock
during
the twelve consecutive business days prior to the date of a purchase
by
Fusion Capital.
|
The
purchase price will be equitably adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the business days used to compute the purchase price. We may
direct Fusion Capital to make multiple purchases from time to time in our sole
discretion; no sooner than every four business days.
Our
Right To Increase the Amount to be Purchased
In
addition to purchases of up to $50,000 from time to time, we may also from
time
to time elect on any single business day selected by us to require Fusion
Capital to purchase our shares in an amount up to $100,000 provided that our
share price is not below $0.75 during the three business days prior to and
on
the purchase date. We may increase this amount to up to $250,000 if our share
price is not below $1.20 during the three business days prior to and on the
purchase date. This amount may also be increased to up to $500,000 if our share
price is not below $2.40 during the three business days prior to and on the
purchase date. This amount may also be increased to up to $1.0 million if our
share price is not below $5.00 during the three business days prior to and
on
the purchase date. We may direct Fusion Capital to make multiple large purchases
from time to time in our sole discretion; however, at least two business days
must have passed since the most recent large purchase was completed. The price
at which our common stock would be purchased in this type of larger purchases
will be the lesser of (i) the lowest sale price of our common stock on the
purchase date and (ii) the lowest purchase price (as described above) during
the
previous seven business days prior to the purchase date.
Minimum
Purchase Price
Under
the
Purchase Agreement, we have set a minimum purchase price (“floor price”) of
$0.45. However, Fusion Capital shall not have the right nor the obligation
to
purchase any shares of our common stock in the event that the purchase price
would be less the floor price. Specifically, Fusion Capital shall not have
the
right or the obligation to purchase shares of our common stock on any business
day that the market price of our common stock is below $0.45.
Events
of Default
Generally,
Fusion Capital may terminate the Purchase Agreement without any liability or
payment to the Company upon the occurrence of any of the following events of
default:
|
•
|
the
effectiveness of the registration statement of which this prospectus
is a
part of lapses for any reason (including, without limitation, the
issuance
of a stop order) or is unavailable to Fusion Capital for sale of
our
common stock offered hereby and such lapse or unavailability continues
for
a period of 20 consecutive business days or for more than an aggregate
of
60 business days in any 365-day
period;
|
|
•
|
suspension
by our principal market of our common stock from trading for a period
of
three consecutive business days;
|
|
•
|
the
de-listing of our common stock from our principal market provided
our
common stock is not immediately thereafter trading on the American
Stock
Exchange, the Nasdaq Global Market, the Nasdaq Capital Market, the
Nasdaq
Global Select Market or the New York Stock
Exchange;
|
|
•
|
the
transfer agent‘s failure for five business days to issue to Fusion Capital
shares of our common stock which Fusion Capital is entitled to under
the
Purchase Agreement;
|
|
•
|
any
material breach of the representations or warranties or covenants
contained in the Purchase Agreement or any related agreements which
has or
which could have a material adverse effect on us subject to a cure
period
of five business days; or
|
|
•
|
any
participation or threatened participation in insolvency or bankruptcy
proceedings by or against us; or
|
|
• |
a
material adverse change in our business;
|
Our
Termination Rights
We
have
the unconditional right at any time for any reason to give notice to Fusion
Capital terminating the Purchase Agreement without any cost to us.
No
Short-Selling or Hedging by Fusion Capital
Fusion
Capital has agreed that neither it nor any of its affiliates shall engage in
any
direct or indirect short-selling or hedging of our common stock during any
time
prior to the termination of the Purchase Agreement.
Effect
of Performance of the Purchase Agreement on Our
Stockholders
All
3,417,500 shares registered in this offering are expected to be freely tradable.
It is anticipated that shares registered in this offering will be sold over
a
period of up to 30 months from the date of this prospectus. The sale by Fusion
Capital of a significant amount of shares registered in this offering at any
given time could cause the market price of our common stock to decline and
to be
highly volatile. Fusion Capital may ultimately purchase all, some or none of
the
3,000,000 shares of common stock not yet issued but registered in this offering.
After it has acquired such shares, it may sell all, some or none of such shares.
Therefore, sales to Fusion Capital by us under the Purchase Agreement may result
in substantial dilution to the interests of other holders of our common stock.
However, we have the right to control the timing and amount of any sales of
our
shares to Fusion Capital and the Purchase Agreement may be terminated by us
at
any time at our discretion without any cost to us.
In
connection with entering into the Purchase Agreement, we authorized the sale
to
Fusion Capital of up to 3,000,000 shares of our common stock or 9.3%
of
our outstanding common stock on November 5, 2008 (the date of the Purchase
Agreement). We estimate that we will sell no more than 3,000,000 shares to
Fusion Capital under the Purchase Agreement all of which are included in this
offering. We have the right to terminate the Purchase Agreement without any
payment or liability to Fusion Capital at any time, including in the event
that
all 3,000,000 shares are sold to Fusion Capital under the Purchase Agreement.
Subject to approval by our board of directors, we have the right but not the
obligation to sell more than 3,000,000 shares to Fusion Capital. In the event
we
elect to sell more than the 3,000,000 shares offered hereby, we will be required
to file a new registration statement and have it declared effective by the
U.S.
Securities and Exchange Commission. The number of shares ultimately offered
for
sale by Fusion Capital under this prospectus is dependent upon the number of
shares purchased by Fusion Capital under the Purchase Agreement. The following
table sets forth the amount of proceeds we would receive from Fusion Capital
from the sale of shares at varying purchase prices:
Assumed Average
Purchase Price
|
|
Number of Shares to be
Sold if Full Purchase
|
|
Percentage of Outstanding
Shares After Giving Effect to the
Issuance to Fusion Capital(1)
|
|
Proceeds from the Sale of Shares
to Fusion Capital Under the
Purchase Agreement
|
$0.45
|
|
3,000,000
|
|
8.5%
|
|
$1,350,000
|
$0.74(2)
|
|
3,000,000
|
|
8.5%
|
|
$2,220,000
|
$1.00
|
|
3,000,000
|
|
8.5%
|
|
$3,000,000
|
$1.50
|
|
3,000,000
|
|
8.5%
|
|
$4,500,000
|
$2.00
|
|
3,000,000
|
|
8.5%
|
|
$6,000,000
|
$2.50
|
|
3,000,000
|
|
8.5%
|
|
$7,500,000
|
$2.67
|
|
3,000,000
|
|
8.5%
|
|
$8,000,000
|
|
(1)
|
The
denominator is based on 32,112,546 shares outstanding as of November
25,
2008, which includes the 417,500 shares previously issued to Fusion
Capital,. The numerator is based on the number of shares issuable
under
the Purchase Agreement at the corresponding assumed purchase price
set
forth in the adjacent column.
|
|
(2)
|
Closing
sale price of our shares on November 25,
2008.
|
USE
OF PROCEEDS
This
prospectus relates to shares of our common stock that may be offered and sold
from time to time by the selling stockholders. We will receive no proceeds
from
the sale of shares of common stock in this offering. However, we may receive
up
to $8.0 million in proceeds from the sale of our common stock to Fusion Capital
under the Purchase Agreement. Any proceeds from Fusion Capital we receive under
the Purchase Agreement will be used for working capital and general corporate
purposes.
PLAN
OF DISTRIBUTION
The
common stock offered by this prospectus is being offered by the selling
stockholders. The common stock may be sold or distributed from time
to time by the selling stockholders directly to one or more purchasers or
through brokers, dealers, or underwriters who may act solely as agents at market
prices prevailing at the time of sale, at prices related to the prevailing
market prices, at negotiated prices, or at fixed prices, which may be
changed. The sale of the common stock offered by this prospectus may
be effected in one or more of the following methods:
|
•
|
ordinary
brokers’ transactions;
|
|
•
|
transactions
involving cross or block trades;
|
|
•
|
through
brokers, dealers, or underwriters who may act solely as agents
|
|
•
|
“at
the market” into an existing market for the common stock;
|
|
•
|
in
other ways not involving market makers or established business markets,
including direct sales to purchasers or sales effected through agents;
|
|
•
|
in
privately negotiated transactions; or
|
|
•
|
any
combination of the foregoing.
|
In
order
to comply with the securities laws of certain states, if applicable, the shares
may be sold only through registered or licensed brokers or
dealers. In addition, in certain states, the shares may not be sold
unless they have been registered or qualified for sale in the state or an
exemption from the registration or qualification requirement is available and
complied with.
Brokers,
dealers, underwriters, or agents participating in the distribution of the shares
as agents may receive compensation in the form of commissions, discounts, or
concessions from the selling stockholders and/or purchasers of the common stock
for whom the broker-dealers may act as agent. The compensation paid
to a particular broker-dealer may be less than or in excess of customary
commissions.
One
of
the selling stockholders, Fusion Capital, is an “underwriter” within the meaning
of the Securities Act. The other selling stockholders may be "underwriters"
within the meaning of the Securities Act.
Neither
we nor the selling stockholders can presently estimate the amount of
compensation that any agent will receive. We know of no existing
arrangements between the selling stockholders, any other stockholder, broker,
dealer, underwriter, or agent relating to the sale or distribution of the shares
offered by this prospectus. At the time a particular offer of shares
is made, a prospectus supplement, if required, will be distributed that will
set
forth the names of any agents, underwriters, or dealers and any compensation
from the selling stockholders, and any other required information.
We
will
pay all expenses incident to the registration, offering, and sale of the shares
to the public other than commissions or discounts of underwriters,
broker-dealers, or agents. We have also agreed to indemnify certain
selling stockholders, including Fusion Capital, and related persons against
specified liabilities, including liabilities under the Securities Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors, officers, and controlling persons, we have been
advised that in the opinion of the SEC this indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.
Fusion
Capital and its affiliates have agreed not to engage in any direct or indirect
short selling or hedging of our common stock during the term of the Purchase
Agreement.
We
have
advised the selling stockholders that while they are engaged in a distribution
of the shares included in this prospectus they are required to comply with
Regulation M promulgated under the Securities Exchange Act of 1934, as
amended. With certain exceptions, Regulation M precludes the selling
stockholders, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is
the
subject of the distribution until the entire distribution is
complete. Regulation M also prohibits any bids or purchases made in
order to stabilize the price of a security in connection with the distribution
of that security. All of the foregoing may affect the marketability of the
shares offered by this prospectus.
This
offering will terminate on the date that all shares offered by this prospectus
have been sold by the selling stockholders.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
The
following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements, and the Notes thereto included herein. The
information contained below includes statements of the Company’s or management’s
beliefs, expectations, hopes, goals and plans that, if not historical, are
forward-looking statements subject to certain risks and uncertainties that
could
cause actual results to differ materially from those anticipated in the
forward-looking statements. See “Forward-Looking Statements.” Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those discussed below
and
elsewhere in this prospectus, particularly under the heading “Risk
Factors.”
Overview
NeoGenomics
operates a network of cancer testing laboratories that specifically target
the
rapidly growing genetic and molecular testing segment of the medical laboratory
industry. We currently operate in three laboratory locations: Fort Myers,
Florida, Nashville, Tennessee and Irvine, California. We currently offer
throughout the United States the following types of testing services to
oncologists, pathologists, urologists, hospitals, and other laboratories: a)
cytogenetics testing, which analyzes human chromosomes, b) Fluorescence In-Situ
Hybridization (“FISH”)
testing, which analyzes abnormalities at the chromosome and gene levels, c)
flow
cytometry testing services, which analyzes gene expression of specific markers
inside cells and on cell surfaces, d) morphological testing, which analyzes
cellular structures and e) molecular testing which involves analysis of DNA
and
RNA and prediction of the clinical significance of various cancers. All of
these
testing services are widely used in the diagnosis and prognosis of various
types
of cancer.
Our
common stock is listed on the Over-the-Counter Bulletin Board under the symbol
“NGNM.OB.”
Critical
Accounting Policies
The
preparation of financial statements in conformity with United States generally
accepted accounting principles requires our management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Our
management routinely makes judgments and estimates about the effects of matters
that are inherently uncertain. For a complete description of our
significant accounting policies, see Note B to our Consolidated Financial
Statements included herein.
Our
critical accounting policies are those where we have made difficult, subjective
or complex judgments in making estimates, and/or where these estimates can
significantly impact our financial results under different assumptions and
conditions. Our critical accounting policies are:
|
·
|
Accounting
For Contingencies
|
|
·
|
Stock
Based Compensation
|
Revenue
Recognition
The
Company recognizes revenues in accordance with the SEC Staff Accounting Bulletin
No. 104, “Revenue Recognition”, when the price is fixed or determinable,
persuasive evidence of an arrangement exists, the service is performed and
collectability of the resulting receivable is reasonably assured.
The
Company’s specialized diagnostic services are performed based on a written test
requisition form and revenues are recognized once the diagnostic services have
been performed, the results have been delivered to the ordering physician,
the
payor has been identified and eligibility and insurance have been
verified. These diagnostic services are billed to various payors,
including Medicare, commercial insurance companies, other directly billed
healthcare institutions such as hospitals and clinics, and
individuals. The Company reports revenues from contracted payors,
including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of Medicare,
published fee schedules. The Company reports revenues from
non-contracted payors, including certain insurance companies and individuals,
based on the amount expected to be collected. The difference between
the amount billed and the amount expected to be collected from non-contracted
payors is recorded as a contractual allowance to arrive at the reported
revenues. The expected revenues from non-contracted payors are based
on the historical collection experience of each payor or payor group, as
appropriate. In each reporting period, the Company reviews its
historical collection experience for non-contracted payors and adjusts its
expected revenues for current and subsequent periods accordingly.
Trade
Accounts Receivable and Allowance For Doubtful Accounts
We
record
accounts receivable net of estimated discounts, contractual allowances and
allowances for bad debts. We provide for accounts receivable that
could become uncollectible in the future by establishing an allowance to reduce
the carrying value of such receivables to their estimated net realizable
value. We estimate this allowance based on the aging of our accounts
receivable and our historical collection experience for each type of
payor. Receivables are charged off to the allowance account at the
time they are deemed uncollectible. In the event that the actual
amount of payment received differs from the previously recorded estimate of
an
account receivable, an adjustment to revenue is made in the current period
at
the time of final collection and settlement. During 2007, we recorded
approximately $24,000 of net total incremental revenue from tests in which
we
underestimated the revenue in 2006 relative to the amounts that we were
ultimately paid in 2007. This was less than 1% of our total FY 2007
revenue and less than 1% of our FY 2006 revenue. These adjustments are not
material to the Company’s results of operations in any period
presented. Our estimates of net revenue are subject to change based
on the contractual status and payment policies of the third party payor’s with
whom we deal. We regularly refine our estimates in order to make our
estimated revenue for future periods as accurate as possible based on our most
recent collection experience with each third party payor.
The
following tables present the dollars and percentage of the Company’s net
accounts receivable from customers outstanding by aging category at December
31,
2007 and 2006. All of our receivables were pending approval by
third-party payors as of the date that the receivables were
recorded:
NEOGENOMICS
AGING OF RECEIVABLES BY PAYOR GROUP
December
31, 2007
|
|
Payor
Group
|
|
0-30
|
|
%
|
|
30-60
|
|
%
|
|
60-90
|
|
%
|
|
90-120
|
|
%
|
|
>
120
|
|
%
|
|
Total
|
|
%
|
|
Client
|
|
$
|
159,649
|
|
|
4
|
%
|
$
|
148,909
|
|
|
4
|
%
|
$
|
200,073
|
|
|
5
|
%
|
$
|
69,535
|
|
|
2
|
%
|
$
|
122,753
|
|
|
3
|
%
|
$
|
700,919
|
|
|
19
|
%
|
Commercial
Insurance
|
|
|
427,876
|
|
|
12
|
%
|
|
184,761
|
|
|
5
|
%
|
|
126,477
|
|
|
3
|
%
|
|
66,922
|
|
|
2
|
%
|
|
487,387
|
|
|
13
|
%
|
|
1,293,423
|
|
|
35
|
%
|
Medicaid
|
|
|
918
|
|
|
0
|
%
|
|
904
|
|
|
0
|
%
|
|
2,331
|
|
|
0
|
%
|
|
1,292
|
|
|
0
|
%
|
|
11,892
|
|
|
0
|
%
|
|
17,337
|
|
|
0
|
%
|
Medicare
|
|
|
662,560
|
|
|
18
|
%
|
|
293,870
|
|
|
8
|
%
|
|
94,755
|
|
|
3
|
%
|
|
70,579
|
|
|
2
|
%
|
|
486,002
|
|
|
13
|
%
|
|
1,607,766
|
|
|
44
|
%
|
Self
Pay
|
|
|
9,745
|
|
|
0
|
%
|
|
6,324
|
|
|
0
|
%
|
|
6,889
|
|
|
0
|
%
|
|
3,238
|
|
|
0
|
%
|
|
5,658
|
|
|
0
|
%
|
|
31,854
|
|
|
1
|
%
|
Total
|
|
$
|
1,260,748
|
|
|
34
|
%
|
$
|
634,768
|
|
|
17
|
%
|
$
|
430,525
|
|
|
12
|
%
|
$
|
211,566
|
|
|
6
|
%
|
$
|
1,113,692
|
|
|
31
|
%
|
$
|
3,651,299
|
|
|
100
|
%
|
December
31, 2006
|
|
Payor
Group
|
|
0-30
|
|
%
|
|
30-60
|
|
%
|
|
60-90
|
|
%
|
|
90-120
|
|
%
|
|
>
120
|
|
%
|
|
Total
|
|
%
|
|
Client
|
|
$
|
146,005
|
|
|
9
|
%
|
$
|
150,698
|
|
|
10
|
%
|
$
|
79,481
|
|
|
5
|
%
|
$
|
8,606
|
|
|
1
|
%
|
$
|
33,827
|
|
|
2
|
%
|
$
|
418,617
|
|
|
27
|
%
|
Commercial
Insurance
|
|
|
133,333
|
|
|
8
|
%
|
|
105,464
|
|
|
7
|
%
|
|
58,026
|
|
|
4
|
%
|
|
48,847
|
|
|
3
|
%
|
|
35,248
|
|
|
2
|
%
|
|
380,918
|
|
|
24
|
%
|
Medicaid
|
|
|
325
|
|
|
0
|
%
|
|
650
|
|
|
0
|
%
|
|
2,588
|
|
|
0
|
%
|
|
400
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
3,963
|
|
|
0
|
%
|
Medicare
|
|
|
293,298
|
|
|
19
|
%
|
|
282,463
|
|
|
18
|
%
|
|
71,283
|
|
|
5
|
%
|
|
68,830
|
|
|
4
|
%
|
|
56,598
|
|
|
4
|
%
|
|
772,472
|
|
|
49
|
%
|
Self
Pay
|
|
|
135
|
|
|
0
|
%
|
|
2,058
|
|
|
0
|
%
|
|
723
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
-
|
|
|
0
|
%
|
|
2,916
|
|
|
0
|
%
|
Total
|
|
$
|
573,096
|
|
|
36
|
%
|
$
|
541,333
|
|
|
35
|
%
|
$
|
212,101
|
|
|
13
|
%
|
$
|
126,683
|
|
|
8
|
%
|
$
|
125,673
|
|
|
8
|
%
|
$
|
1,578,886
|
|
|
100
|
%
|
The
large
increase in our accounts receivable greater than 120 days as of December 31,
2007 as compared to December 31, 2006 was the result of several
factors. In the fourth quarter of 2006, the Company implemented a new
billing system that was not scalable as our volume continued to grow and this
made accounts receivable management very difficult. In 2007, as we
grew, we determined that we also needed proper management in this
area. Accordingly, in the fourth quarter of 2007, we reorganized our
entire billing department and made a decision to replace the existing billing
system. As a result we discovered an issue with incorrectly filed claims, that
were aged significantly, and the clean-up of these claims was ongoing through
the first half of 2008. At September 30, 2008 only 22% of our Accounts
Receivable was aged greater than 120 days. The new billing system went live
in
March 2008 and is designed specifically for laboratory billing and has been
a
significant improvement over the previous billing system.
Based
on
a detailed analysis, we believe that our $415,000 allowance for doubtful
accounts, which represents approximately 11% of our receivables balance, is
adequate as of December 31, 2007. At December 31, 2006, our allowance
for doubtful accounts was $103,000 or 6% of accounts receivable.
Accounting
for Contingencies
When
involved in litigation or claims, in the normal course of our business, we
follow the provisions of SFAS No. 5, Accounting
for Contingencies, to
record
litigation or claim-related expenses. We evaluate, among other factors, the
degree of probability of an unfavorable outcome and the ability to make a
reasonable estimate of the amount of loss. We accrue for settlements when the
outcome is probable and the amount or range of the settlement can be reasonably
estimated. In addition to our judgments and use of estimates, there are inherent
uncertainties surrounding litigation and claims that could result in actual
settlement amounts that differ materially from estimates. With
respect to claims brought against the Company by Accupath Diagnostics
Laboratories, Inc. (“US
Labs”),
on
April 23, 2008, the Company and US Labs entered into a settlement agreement
and
release (the “Settlement
Agreement”);
whereby, both parties agreed to settle and resolve all claims asserted in and
arising out of the aforementioned lawsuit. Pursuant to the Settlement Agreement,
we are required to pay $500,000 to US Labs, of which $250,000 was paid on May
1,
2008 with funds from the Company’s insurance carrier and the remaining $250,000
shall be paid by the Company on the last day of each month in equal installments
of $31,250 commencing on May 31, 2008. Under the terms of the Settlement
Agreement, there are certain provisions agreed to in the event of default.
As of
October 31, 2008 the remaining amount due was $62,500, and no events of default
had occurred.
Stock
Based Compensation.
Prior
to
January 1, 2006, we accounted for stock-based awards and our Employee Stock
Purchase Plan using the intrinsic method in accordance with APB Opinion
No. 25, “Accounting
for Stock Issued to Employees”,
FASB
Interpretation No. 44 (“FIN
44”)“Accounting
for Certain Transactions Involving Stock-Based Compensation, an Interpretation
of APB Opinion No. 25”,
FASB
Technical Bulletin No. 97-1 (“FTB
97-1”)“Accounting
under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back
Option”,
and
related interpretations and provided the required pro forma disclosures of
SFAS
123 ”Accounting
for Stock-Based Compensation”. In
accordance with APB 25, non-cash, stock-based compensation expense was
recognized for any options for which the exercise price was below the market
price on the actual grant date and for any grants that were modified from their
original terms. The charge for the options with an exercise price below
the market price on the actual grant date was equal to the number of options
multiplied by the difference between the exercise price and the market price
of
the option shares on the actual grant date. That expense was amortized
over the vesting period of the options. The charge for modifications of
options in general was equal to the number of options modified multiplied by
the
difference between the market price of the options on the modification date
and
the grant price. The charge for modified options was taken over the
remaining service period, if any.
Effective
January 1, 2006, we adopted SFAS 123(R), which requires the measurement at
fair value and recognition of compensation expense for all stock-based payment
awards. We selected the modified prospective method of adoption which
recognizes compensation expense for the fair value of all stock-based payments
granted after January 1, 2006 and for the fair value of all awards granted
to employees prior to January 1, 2006 that remain unvested on the date of
adoption. We used the trinomial lattice valuation model to estimate fair
value of stock option grants made on or after January 1, 2006. The
trinomial lattice option-pricing model requires the estimation of highly complex
and subjective variables. These variables include expected volatility,
expected life of the award, expected dividend rate and expected risk-free rate
of return. The assumptions for expected volatility and expected life are
the two assumptions that most significantly affect the grant date fair value.
The expected volatility is a blended rate based on both the historical
volatility of our stock price and the volatility of certain peer company stock
prices. The expected term assumption for our stock option grants was
determined using trinomial lattice simulation model which projects future option
holder behavior patterns based upon actual historical option exercises.
SFAS 123(R) also requires the application of a forfeiture rate to the
calculated fair value of stock options on a prospective basis. Our
assumption of forfeiture rate represents the historical rate at which our
stock-based awards were surrendered prior to vesting over the trailing four
years. If our assumption of forfeiture rate changes, we would have to
make a cumulative adjustment in the current period. We monitor the
assumptions used to compute the fair value of our stock options and similar
awards on a regular basis and we will revise our assumptions as
appropriate. See Note B – Summary of
Significant Accounting Policies section, “Stock-based
compensation” subsection and Note F – Stock Based Compensation in the
Notes to Consolidated Financial Statements of our Annual Report on Form 10-KSB
as filed with the SEC on April 14, 2008 for more information regarding the
valuation of stock-based compensation.
Results
of Operations for the Three and Nine Months Ended September 30, 2008 as Compared
to the Three and Nine Months Ended September 30, 2007
Revenue
Revenues
increased 61.7%, or $1.9 million, to $5.1 million for the three months ended
September 30, 2008 as compared to $3.1 million for the three months ended
September 30, 2007. For the nine months ended September 30, 2008, revenues
increased 82.8%, or $6.4 million, to $14.1 million as compared to $7.7 million
for the nine months ended September 30, 2007. The increase in revenues for
the
three and nine month periods ended September 30, 2008, as compared to the
same periods in the prior year was primarily attributable to increases in case
and testing volume resulting from wide acceptance of our bundled testing product
offering and our industry leading turnaround times, which has resulted in new
customers.
Test
volume increased 48.3%, or 2,730 tests, to 8,384 tests for the three months
ended September 30, 2008 as compared to 5,654 tests for the three months ended
September 30, 2007. For the nine months ended September 30, 2008, test volume
increased 60.8%, or 8,717 tests, to 23,049 tests as compared to 14,332 tests
for
the nine months ended September 30, 2007. Average revenue per test increased
9.1% to $602.43 for the three months ended September 30, 2008 as compared to
$552.30 for the three months ended September 30, 2007. For the nine months
ended
September 30, 2008, average revenue per test increased 13.7% to $611.52 as
compared to $537.91 for the nine months ended September 30, 2007. The increase
in average revenue per test is primarily attributable to an increase in certain
Medicare reimbursements for 2008, and an increase in our test mix of flow
cytometry testing, which has the highest reimbursement rate of any test we
offer. 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 each payer. We
have
established a reserve for uncollectible amounts based on estimates of what
we
will collect from a) third-party payers with whom we do not have a contractual
arrangement or sufficient experience to accurately estimate the amount of
reimbursement we will receive, b) co-payments directly from patients, and c)
those procedures that are not covered by insurance or other third party payers.
The Company’s allowance for doubtful accounts decreased 31.7%, or approximately
$132,000 to $283,000, as compared to $415,000 at December 31, 2007. The
allowance for doubtful accounts was approximately 7.7% and 11.4% of accounts
receivable on September 30, 2008 and December 31, 2007, respectively. This
decrease is primarily attributed to our new billing system that went live in
the
first quarter of 2008, and the strong billings and collections team we built
in
the last year. We expect to return to an allowance between 6%-7% of our gross
receivables by the end of the year, as we continue to resolve claims that are
greater than 150 days outstanding.
Cost
of Revenue
Cost
of
revenue includes payroll and payroll related costs for performing tests,
depreciation of laboratory equipment, rent for laboratory facilities, laboratory
reagents, probes and supplies, and delivery and courier costs relating to the
transportation of specimens to be tested.
Cost
of
revenue increased 66.7%, or $1.0 million, to $2.5 million for the three months
ended September 30, 2008 as compared to $1.5 million for the three months ended
September 30, 2007. For the nine months ended September 30, 2008, cost of
revenue increased 81.5%, or $3.0 million, to $6.6 million as compared to $3.6
million for the nine months ended September 30, 2007. The increase in cost
of
revenue for the three and nine month periods ended September 30, 2008, as
compared to the same periods in the prior year was primarily attributable to
increases in all areas of costs of revenue as the Company scaled its operations
in order to meet increasing demand. Cost of revenue as a percentage of revenue
increased to 50.2% for the three months ended September 30, 2008 as compared
to
48.7% for the three months ended September 30, 2007. For the nine months ended
September 30, 2008 cost of revenue as a percentage of sales decreased to 46.7%
as compared to 47.0% for the nine months ended September 30, 2007.
Accordingly,
this resulted in gross margin decreasing to 49.8% for the three months ended
September 30, 2008 as compared to 51.0% for the three months ended September
30,
2007. For the nine months ended September 30, 2008 gross margin increased to
53.3% as compared to 53.0% for the nine months ended September 30, 2007. The
decrease in gross margins for the three months ended September 30, 2008 as
compared to the three months ended September 30, 2007 is primarily attributable
to increased courier cost and personnel and related expenses as well as certain
one-time charges associated with validating our new Immunohistochemistry test
offerings and the completion of a low margin contract in our contract research
organization. In addition, during the three months ended September 30, 2008,
we
had higher than usual outsourcing fees related to the performance of certain
molecular tests that we have now brought back in house.
General
and Administrative Expenses
General
and administrative expenses increased 21.0%, or $457,000, to $2.6 million for
the three months ended September 30, 2008 as compared to $2.2 million for the
three months ended September 30, 2007. For the nine months ended September
30,
2008 general and administrative expenses increased 36.1%, or $2.0 million,
to
$7.7 million as compared to $5.7 million for the nine months ended September
30,
2007. The increases in general and administrative expenses are primarily a
result of adding sales and marketing personnel as well as corporate personnel
to
generate and support revenue growth. We anticipate general and administrative
expenses will continue to grow as a result of our expected revenue growth.
However, we expect these expenses to decline as a percentage of revenue as
our
infrastructure costs stabilize.
General
and administrative expenses as a percentage of revenue decreased to 52.2% for
the three months ended September 30, 2008 as compared to 69.8% for the three
months ended September 30, 2007. For the nine months ended September 30, 2008
general and administrative expenses as a percentage of revenue decreased to
54.7% as compared to 73.5% for the nine months ended September 30, 2007. These
decreases as compared to the same periods last year were primarily a result
of
greater economies of scale in our business from spreading our wage expense
over
a greater revenue base as well as a decrease in professional fees as a result
of
settling the litigation with US Labs earlier this year.
Bad
debt
expense increased 22.8%, or $52,000, to $280,000 for the three months ended
September 30, 2008 as compared to $228,000 for the three months ended September
30, 2007. For the nine months ended September 30, 2008 bad debt expense
increased 116.4%, or $589,000 to $1,095,000 as compared to $506,000 for the
nine
months ended September 30, 2007. This increase was a result of the significant
increases in revenue. Bad debt expense as a percentage of revenue was 5.6%
for
the three months ended September 30, 2008 as compared to 7.3% for the months
ended September 30, 2007. For the nine months ended September 30, 2008 bad
debt
expense as a percentage of revenue was 7.8% as compared to 6.6% for the nine
months ended September 30, 2007.
The
decrease in bad debt expense as a percentage of revenue for the three months
ended September 30, 2008 as compared to three months ended September 30, 2007
is
the result of many changes we have made in our billing practices as well as
the
implementation of a more effective billing system, which we believe has
corrected the billing issues we experienced towards the end of last year. Moving
forward, we expect that bad debt expense as a percentage of revenue will run
between 5%-7% of revenue.
The
increase in bad debt expense as a percentage of revenue for the nine months
ended September 30, 2008 as compared to the nine months ended September 30,
2007
was a result of the increased reserves that we took earlier this year to address
the previously discussed billing issues we experienced in late
2007.
Interest
Expense, net
Interest
expense net, which primarily represents interest on borrowing arrangements,
increased 423.5%, or $61,000 to $75,000 for the three months ended September
30,
2008 as compared to $14,000 for the three months ended September 30, 2007.
For
the nine months ended September 30, 2008 interest expense, net decreased 3.1%,
or $6,000 to $199,000 as compared to $206,000 for the nine months ended
September 30, 2007. Interest expense for the three and nine months ended
September 30, 2008 is related to our new credit facility with Capital Source,
while interest expense for the three and nine months ended September 30, 2007
was related to our previous credit facility with Aspen Select Healthcare, LP
(“Aspen”),
which
had a higher average balance and higher interest rate, but was paid off in
the
second quarter of 2007, thus resulting in no interest expense in the third
quarter of 2007 as compared to the third quarter of 2008.
Net
Income (Loss)
As
a
result of the foregoing, we reported a net loss of approximately $(195,000)
or
($0.01) per share for the three months ended September 30, 2008 as compared
to a
net loss of approximately ($591,000) or ($0.02) per share for the three months
ended September 30, 2007, an improvement of $396,000. For the nine months ended
September 30, 2008, we reported a net loss of approximately ($388,000) or
($0.01) per share as compared to a net loss of ($1,784,000) or ($0.06) per
share
for the nine months ended September 30, 2007, an improvement of almost $1.4
million.
Results
Of Operations For The Twelve Months Ended December 31, 2007 As Compared With
The
Twelve Months Ended December 31, 2006
Revenue
During
the fiscal year ended December 31, 2007, our revenues increased approximately
78% to $11,505,000 from $6,476,000 during the fiscal year ended December 31,
2006. This was the result of an increase in testing volume of 64% and a 9%
increase in average revenue per test. This volume increase is the result of
wide acceptance of our bundled testing product offering and our industry leading
turnaround times resulting in new customers. The increase in average
revenue per test is a direct result of restructuring arrangements with certain
existing customers that increased average revenue per test and realigning our
pricing policies with new customers.
During
the twelve months ended December 31, 2007, our average revenue per customer
requisition increased by approximately 4% to $702.15 from $677.19 in
2006. Our average revenue per test increased by approximately 9% to
$547.90 in 2007 from $504.44 in 2006. This was primarily a result of
price increases to certain customers as well as product and payor mix
changes. Revenues per test are a function of both the nature of
the test and the payor (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 payor. We have established a reserve for
uncollectible amounts based on estimates of what we will collect from a)
third-party payors with whom we do not have a contractual arrangement or
sufficient experience to accurately estimate the amount of reimbursement we
will
receive, b) co-payments directly from patients, and c) those procedures that
are
not covered by insurance or other third party payors. On
December 31, 2007, our Allowance for Doubtful Accounts was approximately
$414,500, a 301% increase from our balance at December 31, 2006 of
$103,500. The allowance for doubtful accounts was approximately 11.3%
and 6.5% of accounts receivables on December 31, 2007 and December 31, 2006,
respectively. This increase was the result of an increase in
Accounts Receivable due to increased revenues and the increase in the percentage
of our aged accounts receivable greater than 120 days.
Cost
of Revenue
During
2007, our cost of revenue, as a percentage of gross revenue, increased from
43%
in 2006 to 48% in 2007. This was primarily a result of increases in
the number of employees and related benefits as well as increased lab supply
and
postage/delivery costs from opening new lines of business and meeting the
increase in testing volumes.
Gross
Profit
As
a
result of the 78% increase in revenue and our 48% cost of revenue, our gross
profit increased 61% to $5,982,000 in 2007, from a gross profit of $3,717,000
in
2006. When expressed as a percentage of revenue, our gross margins decreased
from 57.4% in 2006 to 52.1% in 2007. The increase in gross profit was
largely a result of higher testing volumes in 2007, and the decrease in gross
profit margin was due to the increased costs in 2007 for employee labor and
benefits, lab supplies, and postage and delivery costs.
General
and Administrative Expenses
During
2007, our general and administrative expenses increased by approximately 155%
to
$9,123,000 from approximately $3,577,000 in 2006. General and administrative
expenses, as a percentage of sales was 79% as of December 31, 2007,
compared with 55% as of December 31, 2006, an increase of 24%. This
increase was primarily a result of higher personnel and personnel-related
expenses associated with the increase in management and sales and administrative
headcount that was necessary to manage the significant increases in test volumes
described above. In addition to management, sales, and administrative personnel,
our general and administrative expenses also include all overhead and technology
expenses as well, which have also increased as a result of higher test
volumes. We also incurred significant expenses related to scaling our
operations to meet our ongoing business plan and significant expenses associated
with the litigation with US Labs that was recently settled (see Note L to our
financial statements). For the year ended December 31, 2007, we
incurred approximately $619,000 of litigation related expenses, net of
reimbursements from our insurance company, as compared to approximately $159,000
of such litigation related expenses for the year ended December 31,
2006. Bad debt expense for the years ended December 31, 2007 and 2006
was $1,013,804 and $444,133, respectively. This increase was
necessitated by the significant increase in revenues noted above and to a lesser
extent by the issues denoted in our critical accounting policies regarding
accounts receivable management.
Other
Income/Expense
Net
other
income/expense, which primarily consists of interest expense, decreased
approximately 11% in 2007 to approximately $239,000 from approximately $270,000
for 2006. Interest expense is comprised of interest payable on
advances under our Credit Facility with Aspen and interest paid for capital
lease obligations. The year-over-year decrease is primarily
attributed to paying off the Aspen credit facility on June 7, 2007.
Net
Loss
As
a
result of the foregoing, our net loss increased from ($130,000) in 2006 to
($3,380,000) in 2007, an increase of approximately 2,500%.
Liquidity
and Capital Resources
During
the fiscal year ended December 31, 2007, our operating activities used
approximately $2,643,000 in cash compared with $694,000 used in the fiscal
year
ended 2006. This amount primarily represented 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 other
working capital. We also spent approximately $516,000 on new
equipment in 2007 compared with $399,000 in 2006. Through the sale of
equity securities, which provided approximately $5,287,000, we were able to
retire the $1,675,000 due on our credit facility with Aspen and finance
operations. This resulted in net cash provided by financing activities of
approximately $3,443,000 in 2007 compared to $1,208,000 in 2006. At
December 31, 2007 and December 31, 2006, we had cash and cash equivalents of
approximately $211,000, and $126,000 respectively.
During
the nine months ended September 30, 2008, our operating activities used
approximately $182,000 in cash compared with approximately $2,189,000 used
in
the nine months ended September 30, 2007. We invested approximately $370,000
on
new equipment during the nine months ended September 30, 2008, compared with
approximately $407,000 for the nine months ended September 30, 2007. As of
November 5, 2008, we had approximately $625,000 in cash on hand and $1,250,000
of availability under our Credit Facility with CapitalSource. On November 5,
2008, we entered into the Purchase Agreement with Fusion Capital, that provides
for future sales of our common stock to Fusion Capital in amounts up to $8.0
million over the next 30 months in amounts and at times that are solely in
our
discretion. If we elect to sell stock to Fusion Capital under the Purchase
Agreement, any proceeds received by us would be used for general corporate
purposes or to pursue strategic opportunities that may arise. On November 5,
2008, we also entered into a master lease agreement with Leasing Technologies
International, Inc. (“LTI”)
which
allows us to draw as much as $1.0 million over the next twelve months to
purchase capital equipment. At the present time, we anticipate that based on
i)
our current business plan and operations, ii) our existing cash balances, iii)
the availability of our accounts receivable credit facility with CapitalSource,
iv) the availability of equity capital under the Purchase Agreement, and v)
the
availability of equipment financing under the master lease agreement with LTI,
we will have adequate liquidity for at least the next twelve 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 or cash that
may be required to pursue strategic transactions or acquisitions. In the event
that the Company grows faster than we currently anticipate or we engage in
strategic transactions or acquisitions and our cash on hand and/or our
availability under the CapitalSource Credit Facility, the Purchase Agreement,
or
the LTI master lease agreement is not sufficient to meet our financing needs,
we
may need to raise additional capital from other sources. In such event, we
may
not be able to obtain such funding on attractive terms, or at all, and the
Company may be required to curtail its operations. In the event that we do
need
to raise additional capital, we would seek to raise this additional money
through issuing a combination of debt and/or equity securities primarily through
banks and/or other large institutional investors. At September 30, 2008, we
had
stockholders’ equity of $2,487,000.
We
currently forecast capital expenditures in order to execute on our business
plan. The amount and timing of such capital expenditures will be determined
by
the volume of business, but we currently anticipate that we will need to
purchase approximately $1.5 million to $2.0 million of additional capital
equipment during the next twelve months. We plan to fund these expenditures
through capital lease financing arrangements and through our master lease
agreement with LTI. If we are unable to obtain such funding, we will need to
pay
cash for these items or we will be required to curtail our equipment purchases,
which may have an impact on our ability to continue to grow our
revenues.
Aspen
Credit Facility
On
March
23, 2005, Aspen and the Company entered into an amended and restated loan
agreement, which provided for a revolving credit facility in an amount of up
to
$1.5 million (which was subsequently increased to $1.7 million) (the
“Aspen
Credit Facility”).
The
Aspen Credit Facility was paid in full in June 2007 and it expired on September
30, 2007.
Standby
Equity Distribution Agreement
On
June
6, 2005, we entered into a Standby Equity Distribution Agreement (the
“SEDA”)
with
Cornell Capital Partners, LP. Pursuant to the SEDA, the Company
could, at its discretion, periodically sell to Cornell Capital Partners shares
of common stock for a total purchase price of up to $5.0
million. On August 1, 2007, the SEDA expired and we
decided not to renew it.
The
following sales of common stock were made under our SEDA with Cornell Capital
Partners since it was first declared effective on August 1, 2005:
Request Date
|
|
Completion Date
|
|
Shares of
Common
Stock
|
|
Gross
Proceeds
|
|
Yorkville
Fee
|
|
Escrow Fee
|
|
Net
Proceeds
|
|
ASP(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/29/2005
|
|
9/8/2005 |
|
|
63,776
|
|
$
|
25,000
|
|
$
|
1,250
|
|
$
|
500
|
|
$
|
23,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/10/2005
|
|
12/18/2005 |
|
|
241,779
|
|
|
50,000
|
|
|
2,500
|
|
|
500
|
|
|
47,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
– 2005
|
|
|
|
|
|
305,555
|
|
$
|
75,000
|
|
$
|
3,750
|
|
$
|
1,000
|
|
$
|
70,250
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/19/2006
|
|
7/28/2006 |
|
|
83,491
|
|
|
53,000
|
|
|
2,500
|
|
|
500
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8/8/2006
|
|
8/16/2006 |
|
|
279,486
|
|
|
250,000
|
|
|
12,500
|
|
|
500
|
|
|
237,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/18/2006
|
|
10/23/2006 |
|
|
167,842
|
|
|
200,000
|
|
|
10,000
|
|
|
500
|
|
|
189,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
– 2006
|
|
|
|
|
|
530,819
|
|
$
|
503,000
|
|
$
|
25,000
|
|
$
|
1,500
|
|
$
|
476,500
|
|
$
|
0.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/29/2006
|
|
1/10/2007 |
|
|
98,522
|
|
|
150,000
|
|
|
7,500
|
|
|
500
|
|
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/16/2007
|
|
1/24/2007 |
|
|
100,053
|
|
|
150,000
|
|
|
7,500
|
|
|
500
|
|
|
142,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/1/2007
|
|
2/12/2007 |
|
|
65,902
|
|
|
100,000
|
|
|
5,000
|
|
|
500
|
|
|
94,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/19/2007
|
|
2/28/2007 |
|
|
166,611
|
|
|
250,000
|
|
|
12,500
|
|
|
500
|
|
|
237,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/28/2007
|
|
3/7/2007 |
|
|
180,963
|
|
|
250,000
|
|
|
12,500
|
|
|
500
|
|
|
237,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/5/2007
|
|
4/16/2007 |
|
|
164,777
|
|
|
250,000
|
|
|
12,500
|
|
|
500
|
|
|
237,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/20/2007
|
|
4/30/2007 |
|
|
173,467
|
|
|
250,000
|
|
|
12,500
|
|
|
500
|
|
|
237,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
– 2007
|
|
|
|
|
|
950,295
|
|
$
|
1,400,000
|
|
$
|
70,000
|
|
$
|
3,500
|
|
$
|
1,326,500
|
|
$
|
1.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Since Inception
|
|
|
|
|
|
1,786,669
|
|
$
|
1,978,000
|
|
$
|
98,750
|
|
$
|
6,000
|
|
$
|
1,873,250
|
|
$
|
1.19
|
|
(1)
|
Average
Selling Price of shares issued.
|
Private
Placement
During
the period from May 31, 2007 through June 6, 2007, we sold 2,666,667 shares
of
our common stock to ten unaffiliated accredited investors (the “Investors”)
at a
price of $1.50 per share in a private placement of our common stock (the
“Private
Placement”). The
Private Placement generated gross proceeds to the Company of $4.0 million,
and
after estimated transaction costs, the Company received net cash proceeds of
approximately $3.8 million. The Company also issued warrants to
purchase 98,417 shares of our Common Stock to Noble International Investments,
Inc. (“Noble”),
in
consideration for its services as a placement agent for the Private Placement
and paid Noble a cash fee of $147,625. Additionally, the Company
issued to Aspen Capital Advisors, LLC (“ACA”) warrants
to purchase 250,000 shares at $1.50 per share and paid ACA a cash fee of
$52,375 in consideration for ACA’s services to the Company in connection with
the Private Placement. The Private Placement involved the issuance
of the aforementioned unregistered securities in transactions that we believed
were exempt from registration under the Securities Act. All of the
aforementioned stockholders received registration rights (“Registration
Rights”)
for
the Private Placement shares so purchased and we filed a registration statement
on Form SB-2 on July 12, 2007 to register these shares (the “Registration
Statement”).
Certain of the Investors also purchased 1,500,000 shares and 500,000 warrants
from Aspen in a separate transaction that occurred simultaneously with the
Private Placement and the Company agreed to an assignment of Aspen’s
registration rights for such shares and warrants, and those shares and warrants
were included in this Registration Statement.
The
Registration Rights contained a provision that if the Registration Statement
was
not declared effective within 120 days of the Private Placement, we would be
responsible for partial relief of the damages resulting from a holder’s
inability to sell the shares covered by the Registration
Statement. Beginning after 120 days from the date that the Private
Placement was consummated, the Company is obligated to pay as liquidated damages
to each holder of shares covered by the Registration Statement (“Registered
Securities”)
an
amount equal to one half percent (0.5%) of the purchase price of the Registered
Securities for each thirty (30) day period that the Registration Statement
is
not effective after the required effective date specified in the Registration
Rights Agreement. Such liquidated damages may be paid, at the
holder’s option, either in cash or shares of our common stock, after demand
therefore has been made.
In
August, 2007, we received a comment letter from the Accounting Staff of the
SEC
regarding certain disclosure and accounting questions with respect to our FY
2006 annual report filed on Form 10-KSB. In September 2007, we
responded to the SEC Staff and filed an amended Form 10-KSB/A that responded
to
the matters raised by the Staff. In October 2007, we received a
follow up comment letter from the Staff that continued to question the
accounting we use in connection with non-cash employee stock-based compensation
and warrants issued under the newly adopted
SFAS 123(R). We responded to the Staff’s October 2007
letter in March 2008, and resolved all open issues in May 2008.
As
a
result of the aforementioned SEC correspondence, the Company was not able to
register the securities issued in the Private Placement within the allowed
120
period, and was thus responsible for damages. Accordingly, as of
December 31, 2007, in accordance with FASB Staff Position 00-19-2,
“Accounting for Registration Payment Arrangements” we had accrued approximately
$282,000 in penalties as liquidated damages from the end of the 120 day period
through May 2008. Such penalties are included in Accrued Expenses and
Other Liabilities. The Registration Statement registering the Private Placement
shares was declared effective by the SEC on July 1, 2008. In September 2008,
the
Company paid $40,500 in cash and issued 170,088 shares of common stock at $1.00
per share (an aggregate value of $170,088) for a total value of $210,588 to
the
holders of the Private Placement shares to settle the penalty amounts due.
The
remaining $71,412 in accrued penalties was reversed in September 2008 as certain
shareholders had previously sold their shares, thus forfeiting their rights
to
any liquidated damages.
On
June
6, 2007, the Company issued to Lewis Asset Management (“LAM”)
500,000 shares of common stock at a purchase price of $0.26 per share and
received gross proceeds of $130,000 upon the exercise by LAM of 500,000 warrants
which were purchased by LAM from Aspen on that day.
On
June
7, 2007, we used part of the net proceeds of the Private Placement to pay off
the $1.7 million principal balance of the Aspen Credit Facility.
On
August
15, 2007 our Board of Directors voted to issue warrants to purchase 533,334
shares of our common stock to the investors who purchased shares in the Private
Placement. Such warrants have an exercise price of $1.50 per share
and are exercisable for a period of two years. Such warrants also
have a provision for piggyback registration rights in the first year and demand
registration rights in the second year.
Revolving
Credit and Security Agreement
On
February 1, 2008, we entered into a Revolving Credit and Security Agreement
(“Credit
Facility”
or
“Credit
Agreement”)
with
CapitalSource Finance LLC (“Lender”)
pursuant to which the Lender shall make available to us a revolving credit
facility in a maximum principal amount at any time outstanding of up to Three
Million Dollars ($3,000,000) (the “Facility
Cap”).
Subject to the provisions of the Credit Agreement, the Lender shall make
advances to us from time to time during the three year term following the
closing date, and the revolving Credit Facility may be drawn, repaid and redrawn
from time to time as permitted under the Credit Agreement. Interest on
outstanding advances under the Credit Facility shall be payable monthly in
arrears on the first day of each calendar month at an annual rate of one-month
LIBOR plus 3.25% in accordance with the terms of the Credit Agreement, subject
to a LIBOR floor of 3.14%. As of September 30, 2008, the effective
annual interest rate of the Credit Agreement was 6.5%. To secure the
payment and performance in full of the Obligations (as defined in the Credit
Agreement), we granted to the Lender a continuing security interest in and
lien
upon, all of our rights, title and interest in and to our Accounts (as such
term is defined in the Credit Agreement), which primarily consist of accounts
receivable. Furthermore, pursuant to the Credit Agreement, the Parent
Company guaranteed the punctual payment when due, whether at stated maturity,
by
acceleration or otherwise, of all of our obligations. The Parent Company’s
guaranty is a continuing guarantee and shall remain in force and effect until
the indefeasible cash payment in full of the Guaranteed Obligations (as defined
in the Credit Agreement) and all other amounts payable under the Credit
Agreement.
On
November 3, 2008 the Company and CapitalSource signed a first amendment to
the
Credit Agreement. This amendment increased the amount allowable under the
Credit Agreement to pay towards the settlement of the US Labs lawsuit to
$250,000 from $100,000 and documented other administrative agreements between
NeoGenomics and CapitalSource.
Common
Stock Purchase Agreement
On
November 5, 2008, we entered into the Purchase Agreement with Fusion
Capital. The Purchase Agreement, which has a term of 30 months, provides
for the future funding of up to $8.0 million from sales of our common stock
to
Fusion Capital on a when and if needed basis as determined by us in our sole
discretion. On October 10, 2008, we issued to Fusion Capital 17,500 shares
of our common stock and $17,500 as a due diligence expense reimbursement. In
addition, on November 5, 2008, we issued to Fusion Capital 400,000 shares of
our
common stock as a non-refundable commitment fee. Concurrently with entering
into
the Purchase Agreement, we entered into the Registration Rights Agreement with
Fusion Capital. Under the Registration Rights Agreement, we agreed to file
a registration statement with the SEC covering the 417,500 shares that have
already been issued to Fusion Capital and at least 3.0 million shares that
may
be issued to Fusion Capital under the Purchase Agreement.
Under
the
Purchase Agreement, after the SEC has declared effective the registration
statement related to the transaction, we have the right to sell to Fusion
Capital shares of our common stock from time to time in amounts between $50,000
and $1.0 million, depending on the market price of our common stock. The
purchase price of the shares related to any future funding under the Purchase
Agreement will be based on the prevailing market prices of our stock at the
time
of such sales without any fixed discount, and the Company will control the
timing and amount of any sales of shares to Fusion Capital. Fusion Capital
shall not have the right or the obligation to purchase any shares of our common
stock on any business day that the price of our common stock is below $0.45
per
share. The Purchase Agreement may be terminated by us at any time at our
discretion without any further cost to us. There are no negative
covenants, restrictions on future funding from other sources, penalties, further
fees or liquidated damages in the agreement.
Given
our
current liquidity position from cash on hand and our availability under our
Credit Facility with CapitalSource, we have no immediate plans to issue common
stock under the Purchase Agreement. If and when we do elect to sell shares
to
Fusion Capital under the Purchase Agreement, we expect to do so
opportunistically and only under conditions deemed favorable by the
Company. Any proceeds received by the Company from sales under the
Purchase Agreement will be used for general corporate purposes, working capital,
and/or for expansion activities.
Equipment
Lease Line
On
November 5, 2008, our wholly-owned subsidiary entered into a master lease
agreement with Leasing Technologies International, Inc. (“LTI”).
The
master lease agreement establishes the general terms and conditions pursuant
to
which the subsidiary may lease equipment pursuant to a $1,000,000 lease line.
Advances under the lease line may be made for one year by executing equipment
schedules for each advance. The lease term of any equipment schedules issued
under the lease line will be for 36 months. The lease rate factor applicable
for
each equipment schedule is 0.0327/month. If the subsidiary makes use of the
entire lease line, the monthly rent would be $32,700. Monthly rent for the
leased equipment is payable in advance on the first day of each month. The
obligations of the subsidiary are guaranteed by the Parent Company. At the
end
of the term of each equipment schedule the subsidiary may:
(a) Renew
the
lease with respect to such equipment for an additional 12 months at fair market
value;
(b) Purchase
the equipment at fair market value, which price will not be less than 10% of
cost nor more than 14% of cost;
(c) Extend
the term for an additional six months at 35% of the monthly rent paid by lessee
during the initial term, equipment may then be purchased for the lesser of
fair
market value or 8% of cost; or
(a) Return
the equipment subject to a remarketing charge equal to 6% of cost.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”
(“SFAS
157”).
SFAS
157 provides a new single authoritative definition of fair value and provides
enhanced guidance for measuring the fair value of assets and liabilities and
requires additional disclosures related to the extent to which companies measure
assets and liabilities at fair value, the information used to measure fair
value, and the effect of fair value measurements on earnings. SFAS 157 was
effective for the Company as of January 1, 2008 for financial assets and
financial liabilities within its scope and did not have a material impact on
our
consolidated financial statements.
In
February 2008, the FASB issued FASB Staff Position No. FAS 157-2 “Effective Date
of FASB Statement No. 157” (“FSP
FAS 157-2”)
which
defers the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed at
fair
value in the financial statements on a recurring basis (at least annually),
to
fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years for items within the scope of FSP FAS 157-2. The Company is
currently assessing the impact, if any, of SFAS 157 and FSP FAS 157-2 for
non-financial assets and non-financial liabilities on its consolidated financial
statements.
In
February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115” (“SFAS
159”).
SFAS 159 permits an entity to measure many financial instruments and
certain other items at fair value that are not currently required to be measured
at fair value. The Company adopted this statement as of January 1, 2008 and
has
elected not to apply the fair value option to any of its financial instruments.
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51” (“SFAS
160”).
SFAS
160 requires all entities to report noncontrolling (minority) interests in
subsidiaries as equity in the consolidated financial statements. Its intention
is to eliminate the diversity in practice regarding the accounting for
transactions between an entity and noncontrolling interests. This statement
is
effective for the Company as of January 1, 2009 and currently, we do not expect
it to have a material impact on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS No. 141R”),
which
replaces SFAS No 141. The statement retains the purchase method of
accounting for acquisitions, but requires a number of changes, including changes
in the way assets and liabilities are recognized in purchase accounting. It
also
changes the recognition of assets acquired and liabilities assumed arising
from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS 141 (revised) is effective for periods beginning on
or after January 1, 2009, and currently, we do not expect it to have a material
impact on the Company’s financial statements unless we engage in any business
combinations. The adoption of this accounting pronouncement will cause us
to expense all previously capitalized expenses related to possible business
combinations and
all
future costs of possible business combinations as they are
incurred.
In
May
2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts—an interpretation of FASB Statement No. 60” (“SFAS
No. 163”).
This Statement interprets FASB Statement No. 60 and amends existing accounting
pronouncements to clarify their application to the financial guarantee insurance
contracts included within the scope of this Statement.
In
March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities” (“SFAS 161”).
SFAS 161 requires expanded disclosures regarding the location and amount of
derivative instruments in an entity’s financial statements, how derivative
instruments and related hedged items are accounted for under SFAS 133,
“Accounting for Derivative Instruments and Hedging Activities,” and how
derivative instruments and related hedged items affect an entity’s financial
position, operating results and cash flows. SFAS 161 is effective for
periods beginning on or after November 15, 2008, and currently, we do not
expect it to have a material impact on the Company’s financial statements..
In
May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS
162”).
This
statement identifies the sources of accounting principles and the framework
for
selecting the principles to be used in the preparation of financial statements
of nongovernmental entities that are presented in conformity with GAAP. While
this statement formalizes the sources and hierarchy of GAAP within the
authoritative accounting literature, it does not change the accounting
principles that are already in place. This statement will be effective 60 days
following the SEC’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, “The Meaning of Present Fairly in Conformity
With Generally Accepted Accounting Principles.” SFAS 162 is not currently
expected to have a material impact on the Company’s financial statements.
US
Labs Settlement
On
April
23, 2008, the Company and US Labs entered into the Settlement Agreement;
whereby, both parties agreed to settle and resolve all claims asserted in and
arising out of US Labs’ lawsuit against the Company and certain of its officers
and employees. Pursuant to the Settlement Agreement, we are required to pay
$500,000 to US Labs, of which $250,000 was paid on May 1, 2008 with funds from
the Company’s insurance carrier and the remaining $250,000 shall be paid by the
Company on the last day of each month in equal installments of $31,250
commencing on May 31, 2008. Under the terms of the Settlement
Agreement, there are certain provisions agreed to in the event of default.
As of
October 31, 2008, the remaining amount due was $62,500, and no events of default
had occurred.
FCCI
Litigation
A
civil
lawsuit is currently pending between the Company and its liability insurer,
FCCI
Commercial Insurance Company ("FCCI")
in the
20th Judicial Circuit Court in and for Lee County, Florida (Case No.
07-CA-017150). FCCI filed the suit on December 12, 2007 in response to the
Company's demands for insurance benefits with respect to an underlying action
involving US Labs (a settlement agreement has since been reached in the
underlying action, and thus that case has now concluded). Specifically, the
Company maintains that the underlying plaintiff's allegations triggered the
subject insurance policy's personal and advertising injury coverage. In the
lawsuit, FCCI seeks a court judgment that it owes no obligation to the Company
regarding the underlying action (FCCI does not seek monetary damages). The
Company has counterclaimed against FCCI for breach of the subject insurance
policy, and seeks recovery of defense costs incurred in the underlying matter,
amounts paid in settlement thereof, and fees and expenses incurred in litigating
with FCCI. The court recently denied a motion by FCCI for judgment on the
pleadings, and the parties are proceeding with discovery. We intend to
aggressively pursue all remedies in this matter and believe that the courts
will
ultimately find that FCCI had a duty to provide coverage in the US Labs
litigation.
Employment
Contracts
On
March
12, 2008, we entered into an employment agreement with Robert Gasparini, our
President and Chief Scientific Officer to extend his employment with the Company
for an additional four year term. This employment agreement was
retroactive to January 1, 2008 and provides that it will automatically renew
after the initial four year term for one year increments unless either party
provides written notice to the other party with their intention to terminate
the
agreement 90 days before the end of the initial term. The employment
agreement specifies an initial base salary of $225,000/year with specified
salary increases tied to meeting revenue goals. Mr. Gasparini is also
entitled to receive cash bonuses for any given fiscal year in an amount equal
to
30% of his base salary if he meets certain targets established by the Board
of
Directors. In addition, Mr. Gasparini was granted 784,000 stock options
that have a seven year term so long as Mr. Gasparini remains an employee of
the
Company. These options are scheduled to vest according to the passage
of time and the meeting of certain performance-based milestones. Mr.
Gasparini’s employment agreement also specifies that he is entitled to four
weeks of paid vacation per year and other insurance 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 twelve months.
On
June
24, 2008, we entered into an employment agreement with Jerome J. Dvonch, our
Director of Finance and Principle Accounting Officer, to extend his employment
with the Company for an additional four year term. This employment
agreement became effective on July 1, 2008 and provides that it will
automatically renew after the initial four year term for one year increments
unless either party provides written notice to the other party of their
intention to terminate the agreement at least one month before the end of the
initial term (or any renewal term). The employment agreement
specifies an initial base salary of $150,000/year. Mr. Dvonch is also
eligible to receive an annual performance based cash bonus at the discretion
of
the Compensation Committee of the Board of Directors. In addition, Mr. Dvonch
was granted an option to purchase 100,000 shares of our common stock at an
exercise price of $1.01 per share. These options are scheduled to vest according
to the passage of time and the meeting of certain performance-based
milestones. Mr. Dvonch’s employment agreement also specifies that he
is entitled to four weeks of paid vacation per year and other insurance
benefits. In the event that Mr. Dvonch is terminated without cause by the
Company, the Company has agreed to pay Mr. Dvonch’s base salary and
maintain his benefits for a period of six months.
DESCRIPTION
OF BUSINESS
NeoGenomics
operates a network of cancer-focused genetic testing
laboratories. The Company’s growing network of laboratories currently
offers the following types of testing services to pathologists, oncologists,
urologists, hospitals, and other laboratories throughout the United
States:
|
a)
|
cytogenetics
testing, which analyzes human
chromosomes;
|
|
b)
|
Fluorescence
In-Situ Hybridization (“FISH”)
testing, which analyzes abnormalities at the chromosomal and gene
levels;
|
|
c)
|
flow
cytometry testing, which analyzes gene expression of specific markers
inside cells and on cell surfaces;
and
|
|
d)
|
molecular
testing which involves analysis of DNA and RNA to diagnose and predict
the
clinical significance of various genetic sequence
disorders.
|
All
of
these testing services are widely utilized in the diagnosis and prognosis of
various types of cancer.
The
medical testing laboratory market can be broken down into three segments:
clinical lab testing, anatomic pathology testing, and genetic and molecular
testing. Clinical lab testing is typically done by laboratories that specialize
in high volume, highly automated, lower complexity tests on easily procured
specimens such as blood and urine. Clinical lab tests often involve
testing of a less urgent nature, for example, cholesterol testing and testing
associated with routine physical exams.
Anatomic
pathology (“AP”)
testing involves evaluation of tissue, as in surgical pathology, or cells as
in
cytopathology. The most widely performed AP procedures include the
preparation and interpretation of pap smears, skin biopsies, and tissue
biopsies.
Genetic
and molecular testing typically involves analyzing chromosomes, genes or base
pairs of DNA or RNA for abnormalities. New tests are being developed
at an accelerated pace, thus this market niche continues to expand
rapidly. Genetic and molecular testing requires highly specialized
equipment and credentialed individuals (typically MD or PhD level) to certify
results and typically yields the highest average revenue per test of the three
market segments. The estimated size of this market and the
related parts of the AP testing market that we address is approximately $4-$5
Billion.
Our
primary focus is to provide high complexity laboratory testing for the
community-based pathology and oncology marketplace. Within these key
market segments, we currently provide our services to pathologists and
oncologists in the United States that perform bone marrow and/or peripheral
blood sampling for the diagnosis of blood and lymphoid tumors (leukemias and
lymphomas) and archival tissue referral for analysis of solid tumors such as
breast cancer. A secondary strategic focus targets community-based
urologists due to a new FISH-based test for the initial diagnosis of bladder
cancer and early detection of recurrent disease. We focus on
community-based practitioners for two reasons. First, academic pathologists
and
associated clinicians tend to have their testing needs met within the confines
of their university affiliation. Secondly, most of the cancer care in
the United States is administered by community based practitioners, not in
academic centers, due to ease of local access. Moreover, within the
community-based pathologist segment it is not our intent to willingly compete
with our customers for testing services that they may seek to perform
themselves. Fee-for-service pathologists for example, derive a
significant portion of their annual revenue from the interpretation of biopsy
specimens. Unlike other larger laboratories, which strive to perform
100% of such testing services themselves, we do not intend to compete with
our
customers for such specimens. Rather, our high complexity cancer testing focus
is a natural extension of and complementary to many of the services that our
community-based customers often perform within their own
practices. As such, we believe our relationship as a non-competitive
consultant, empowers these physicians to expand their testing breadth and
provide a menu of services that matches or exceeds the level of service found
in
academic centers of excellence around the country.
We
continue to make progress growing our testing volumes and revenue beyond our
historically focused effort in Florida due to our expanding field sales
footprint. As of November 25, 2008, NeoGenomics’ sales and marketing
organization had 14 territory business managers, three regional managers, a
National Director of Sales and three team members in business development and
marketing, and we have received business from 30 states throughout the
country. Recent, key hires included various territory business
managers (sales representatives) in the Northeastern, Southeastern, and Western
states. We expect to hire one more account manager during 2008 and to
continue to scale our sales team rapidly during 2009. As more sales
representatives are added, we believe that the base of our business outside
of
Florida will continue to grow and ultimately eclipse that which is generated
within the state.
We
are
successfully competing in the marketplace based on the quality and
comprehensiveness of our test results, and our innovative flexible levels of
service, industry-leading turn-around times, regionalization of laboratory
operations and ability to provide after-test support to those physicians
requesting consultation.
2007
saw
the refinement of our industry leading NeoFISHTM
technical component-only FISH service offering. Upon the suggestion
of our installed customer base, we made numerous usability and technical
enhancements throughout last year. The result has been a product line
for NeoGenomics that continues to resonate very well with our client
pathologists. Utilizing NeoFISHTM,
such
clients are empowered to extend the outreach efforts of their practices and
exert a high level of sign out control over their referral work in a manner
that
was previously unobtainable.
NeoFLOWTM
tech-only flow cytometry was launched as a companion service to
NeoFISHTM
in late
2007. NeoFLOWTM
has been
a key growth driver in 2008. Moreover, the combination of
NeoFLOWTM
and
NeoFISHTM
serves
to strengthen the market differentiation of each product line for NeoGenomics
and allows us to compete more favorably against larger, more entrenched
competitors in our testing niche.
We
increased our professional level staffing for global requisitions requiring
interpretation in 2007 and 2008. We currently employ three full-time
MDs as our medical directors and pathologists, two PhDs as our scientific
directors and cytogeneticists, and two part-time MDs acting as consultants
and
backup pathologists for case sign out purposes. We have plans to hire
several more hematopathologists as our product mix continues to expand beyond
tech-only services and more sales emphasis is focused on our ability to issue
consolidated reporting with case interpretation under our Genetic Pathology
Solutions (GPSTM)
product
line.
We
believe NeoGenomics’ average 3-5 day turn-around time for our cytogenetics
services continues to remain an industry-leading benchmark for national
laboratories. The timeliness of results continues to increase the
usage patterns of cytogenetics and acts as a driver for other add-on testing
requests by our referring physicians. Based on anecdotal information,
we believe that typical cytogenetics labs 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 FISH
and
other molecular 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.
High
complexity laboratories within the cancer testing niche have frequently operated
a core facility on one or both coasts to service the needs of their customers
around the country. Informal surveys of customers and prospects
uncovered a desire to do business with a laboratory with national breadth but
with a more local presence. In such a scenario, specimen integrity,
turnaround-time of results, client service support, and interaction with our
medical staff are all enhanced. We currently operate three laboratory
locations in Fort Myers, Florida, Irvine, California and Nashville, Tennessee,
each of which has received the appropriate state, Clinical Laboratory
Improvement Amendments (“CLIA”),
and
College of American Pathologists (“CAP”)
licenses and accreditations. As situations dictate and opportunities
arise, we will continue to develop and open new laboratories, seamlessly linked
together by our optimized Laboratory Information System (“LIS”),
to
better meet the regionalized needs of our customers.
2007
brought progress in the NeoGenomics Contract Research Organization
(“CRO”)
division based at our Irvine, California facility. This division was
created to take advantage of our core competencies in genetic and molecular
high
complexity testing and act as a vehicle to compete for research projects and
clinical trial support contracts in the biotechnology and pharmaceutical
industries. The CRO division will also act as a development conduit
for the validation of new tests which can then be transferred to our clinical
laboratories and be offered to our clients. We envision the CRO as a
way to infuse some intellectual property into the mix of our services and in
time create a more “vertically integrated” laboratory that can potentially offer
additional clinical services of a more proprietary nature. 2007 brought the
first revenue to NeoGenomics’ CRO division. This initial revenue
stream was small due to the size of the contracts closed. During 2008 we began
to scale revenues from the CRO division and we currently expect to grow this
business significantly during 2009.
During
2008, we began offering additional tests that broaden our focus from genetic
and
molecular testing to more traditional types of anatomic pathology testing (i.e.
immunohistochemistry) that are complementary to our current test
offerings. At no time do we expect to intentionally compete with
fee-for-service pathologists for services of this type, and Company sales
efforts will operate under a strict “right of first refusal” philosophy that
supports rather than undercuts the practice of community-based
pathology. We believe that by adding additional types of tests to our
product offering we will 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 package our testing services more appropriately to the needs
of the market.
The
above
market strategy continues to bear fruit for the Company, resulting in strong
year over year growth of 78% in FY 2007 versus FY 2006. For the nine
months ended September 30, 2008, we experienced even stronger year over year
revenue growth of 83% versus the comparable period in FY 2007. Our average
revenue/requisition in FY 2007 was approximately $702, which was an increase
of
approximately 4% from FY 2006. For the nine months ended September 30, 2008,
our
average revenue/requisition was approximately $803 which was an increase of
approximately 16% from the comparable period in 2007. Our average revenue/test
in FY 2007 was approximately $548, which was an increase of approximately 9%
over FY 2006. Our average revenue/test for the nine months ended
September 30, 2008 was approximately $612, which was an increase of
approximately 14% over the comparable period in FY 2007. FY 2007 saw a slight
erosion of average tests per requisition due to the overwhelming success of
our
bladder cancer FISH product line, which tends to be a singly ordered test
request. New sales hires and a new focus on global workups with
interpretation and our integrated GPS product line allowed us to increase
average number of tests per requisition for the nine months ended September
30,
2008 from the comparable period in FY 2007. For the three months ended September
30, 2008, average number of tests per requisition was 1.33 and we expect this
number to continue to increase during 2009.
For
the twelve months ended December 31
|
|
FY
2007
|
|
FY
2006
|
|
%
Inc (Dec)
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Received (Cases)
|
|
|
16,385
|
|
|
9,563
|
|
|
71.3
|
%
|
Number
of Tests Performed
|
|
|
20,998
|
|
|
12,838
|
|
|
63.6
|
%
|
Average
Number of Tests/Requisition
|
|
|
1.28
|
|
|
1.34
|
|
|
(4.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$
|
11,504,725
|
|
$
|
6,475,996
|
|
|
77.7
|
%
|
Average
Revenue/Requisition
|
|
$
|
702.15
|
|
$
|
677.19
|
|
|
3.7
|
%
|
Average
Revenue/Test
|
|
$
|
547.90
|
|
$
|
504.44
|
|
|
8.6
|
%
|
For
the nine months ended September 30
|
|
FY
2008
|
|
FY
2007
|
|
%
Inc (Dec)
|
|
|
|
|
|
|
|
|
|
Customer
Requisitions Received (Cases)
|
|
|
17,758
|
|
|
11,123
|
|
|
59.7
|
%
|
Number
of Tests Performed
|
|
|
23,049
|
|
|
14,332
|
|
|
60.8
|
%
|
Average
Number of Tests/Requisition
|
|
|
1.31
|
|
|
1.29
|
|
|
1.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Total
Testing Revenue
|
|
$
|
14,094,959
|
|
$
|
7,709,408
|
|
|
82.8
|
%
|
Average
Revenue/Requisition
|
|