UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20459
FORM 10-KSB
( X ) Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934.
FOR THE YEAR ENDED DECEMBER 31, 2002
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the transition period from __________ to __________.
COMMISSION FILE NUMBER: 333-72097
NEOGENOMICS, INC.
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F/K/A
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AMERICAN COMMUNICATIONS ENTERPRISES, INC.
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(Exact name of Registrant as specified in its charter)
NEVADA 74-2897368
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(State or other jurisdiction of (IRS Employer I.D. No.)
incorporation or organization)
1726 MEDICAL BLVD, SUITE 101, NAPLES, FL 34109
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Address of Principal Executive Offices:
(239) 513-1992
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Registrant's telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such other shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
X YES _ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by referencing Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. X
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The issuer's revenues for the most recent fiscal year were $93,491.
The aggregate market value of the voting stock held by non-affiliates of the
registrant at May 15, 2003 was $ 139,151 (Based on 1,987,875 shares held by
non-affiliates and a closing share price of $0.07/share on May 15, 2003).
Shares of common stock held by each officer and director and by each person who
owns more than 10% of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of May 15, 2003, 18,409,416 common shares were outstanding.
Documents Incorporated By Reference - NONE
Transitional small business disclosure format. _ Yes X No
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PART I
FORWARD-LOOKING STATEMENTS
Certain statements contained in this filing are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995, such as statements relating to financial results and plans for future
business development activities, and are thus prospective. These statements
appear in a number of places in this Form 10-KSB and include all statements that
are not statements of historical fact regarding intent, belief or our current
expectations, with respect to, among other things: (i) our financing plans; (ii)
trends affecting our financial condition or results of operations; (iii) our
growth strategy and operating strategy; and (iv) the declaration and payment of
dividends. The words "may," "would," "could," "will," "expect," "estimate,"
"anticipate," "believe," "intend," "plan," and similar expressions and
variations thereof are intended to identify forward-looking statements.
Investors and prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, many of which are beyond our ability to control. Actual
results may differ materially from those projected in the forward-looking
statements as a result of various factors. The factors that might cause such
differences include, among others, the following: (i) any material inability of
us to successfully internally develop our products; (ii) any changes in
technology that might affect the competitive positioning of our products and
services; (iii) any inability to manage our growth; (iv) any adverse effect or
limitations caused by Governmental regulations; (v) any adverse effect on our
cash flow and abilities to obtain acceptable financing in connection with our
growth plans; (vi) any increased competition in business; (vii) any inability of
us to successfully conduct our business in new markets; and (viii) other risks
including those identified in our filings with the Securities and Exchange
Commission. We undertake no obligation to publicly update or revise the forward
looking statements made in this Form 10-KSB to reflect events or circumstances
after the date of this Form 10-KSB or to reflect the occurrence of unanticipated
events.
ITEM 1. DESCRIPTION OF BUSINESS
NeoGenomics, Inc., a Nevada corporation (referred to individually or
collectively with all of its subsidiaries as the "Company" in this Form 10-KSB)
is the registrant for SEC reporting purposes and was originally incorporated as
American Communications, Enterprises, Inc. in October 1998. In November 2001,
following a reverse acquisition of NeoGenomics, Inc, a Florida company (referred
to as "NeoGenomics" or the "Operating Subsidiary" in this Form 10-KSB), the
registrant changed its name to NeoGenomics, Inc. as well. All share references
in this Form 10-KSB have been adjusted to reflect a 1:100 reverse stock split
which was effected by the Company on April 16, 2002.
NeoGenomics, Inc. owns and operates a medical testing laboratory and
research facility based in Naples, Florida that is targeting the rapidly growing
genetic and molecular testing subsegment of the medical laboratory market. Our
common stock is listed on the NASDAQ Bulletin Board (OTCBB) under the symbol
"NGNM." Our business plan features two concurrent objectives:
1. Development of a clinical laboratory to offer routine cytogenetics and
molecular biology testing services; and
2. Development of a research laboratory to offer sponsored research services
to other companies that are seeking to develop genomic products that will
determine the genetic basis for female and neonatal diseases, cancers and other
forms of disease (See "Research and Development").
The vision of NeoGenomics is to merge a high-end genetic and molecular
testing laboratory with ongoing research activities to help bridge the gap
between clinical medicine and genomic research. We believe that this
combination will allow the Company to speed the process of discovery and
innovation and develop new advanced testing methods to identify the genetic and
molecular causes of disease. Over the last 2-3 years, advances in technology
and genetic research, including the complete sequencing of the human genome,
have made possible a whole new set of tools to diagnose and treat diseases.
This has opened up a vast opportunity for laboratory companies that are
positioned to address this growing market segment.
The medical testing laboratory market can be broken down into three primary
segments: clinical lab testing, anatomic pathology testing, and
genetic/molecular testing. Clinical labs typically are engaged in high volume,
high automation tests on blood and urine. Clinical lab tests often involve
testing of a less urgent nature, for example, cholesterol testing and testing
associated with routine physical exams. This type of testing yields relatively
low average revenue per test. Anatomic pathology ("AP") testing involves
evaluation of tissue, as in surgical pathology, or cells as in cytopathology.
AP testing typically seeks to answer the question: is it cancer? The most
widely known AP tests are Pap smears, skin biopsies, and tissue biopsies. AP
tests are typically more labor and technology intensive than clinical lab tests
and thus typically have higher average revenue per test than clinical lab tests.
Genetic/molecular testing is the newest and fastest growing subset of the
laboratory market. Genetic testing or "cytogenetics" involves analyzing
chromosomes taken from the nucleus of cells for abnormalities in a process
called karyotyping. A karyotype evaluates the entire 46 human chromosomes by
number, and banding patterns to identify abnormalities associated with diseases.
Examples of cytogenetics testing include amniocentesis testing of pregnant women
to screen for genetic anomalies such as Down's syndrome in a fetus and bone
marrow testing to screen for types of leukemia. Molecular biology involves
testing for even more specific causes of diseases based on very small
alterations in cellular biology and DNA. Examples of common molecular biology
testing include screening for cystic fibrosis or Tay-Sachs disease. Both
cytogenetics and molecular biology have become important and accurate diagnostic
tools over the last five years and new tests are being developed monthly, thus
this market segment is expanding rapidly. Genetic/molecular testing requires
very specialized equipment and credentialed individuals (typically PhD level) to
certify the results. As a result of the sophistication involved in performing
these tests, we believe that genetic/molecular testing typically has the highest
average revenue/test of the medical testing sub segments.
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Comparison of the Medical Testing Laboratory Market Segments:
ATTRIBUTES CLINICAL ANATOMIC PATHOLOGY GENETIC/MOLECULAR
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Testing Performed On Blood, Urine Tissue/cells Chromosomes/
molecules
Volume High Low Low
Physician Involvement Low High - Pathologist Low
Malpractice Insur. Required Low High Low
Other Professionals Req. None None Cyto Geneticist/
Molecular Geneticist
Level of Automation High None moderate
Diagnostic in Nature Usually Not Yes Yes
Types of Diseases Tested Many Possible Cancer Rapidly Growing
Estimated Revenue/Test $5 - $35/Test $25 - $100/Test $200 - $800/Test
Estimated Size of Market $25 - $30 Billion $6.0 - $7.0 Billion $1.0 - $2.0 Billion
Annual Est. Growth Rate of
Market 4.0 -5.0% 6.0 - 7.0% 25.0 - 40+%
Source: Wall Street Research Analysts and Company Estimates
HISTORICAL DEVELOPMENT OF THE COMPANY
NeoGenomics, Inc. (f/k/a American Communications Enterprises, Inc.) was
incorporated in Nevada in 1998 and became publicly-traded in August 1999.
The original purpose of the Company was to acquire and operate radio
stations in Texas and other geographic regions of the United States and to
develop related Internet services to complement the planned regional clusters of
radio stations in such markets. However, the Company was unable to raise the
capital necessary to implement this business plan and began to pursue different
opportunities.
In November 2000, after a change in control of the Company, a new
management team reevaluated the Company's strategic plan. At that time, the
then management concluded that shareholder value could be augmented by
broadening the Company's focus from the radio industry to the broader
telecommunications industry. After serious difficulties in the entire
telecommunications industry became apparent, management concluded that it should
focus on opportunities relating to the genomics industry.
In the second half of 2001, we entered into negotiations to acquire NeoGenomics,
Inc., a Florida corporation ("NeoGenomics"). NeoGenomics, which was incorporated
in Florida on June 1, 2001, traces its roots back to its founder Dr. Michael
Dent's 10 years of clinical experience in women's healthcare. Dr. Dent realized
the potential for a multi-specialty approach to studying diseases in women and
neonates; therefore, Dr. Dent sought to combine a group of research scientists
from different fields including oncology, molecular biology, cytogenetics,
oncogenomics and proteinomics for the purposes of creating a state-of-the-art
clinical and research laboratory dedicated to genetic issues in medicine.
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The Company acquired NeoGenomics on November 14, 2001 in a reverse
acquisition transaction that resulted in another change in control of the
Company. From a legal perspective, the Company was the surviving company and
thus continues its public reporting obligations. However, from an accounting
perspective using generally accepted accounting principles, NeoGenomics acquired
the Company. Therefore, all financial information presented in this 10-KSB
includes NeoGenomics' standalone results from the period June 1, 2001 to
November 13, 2001 and the combined companies' results from November 2001 to
December 31, 2002. Pursuant to the reverse acquisition, we entered into a Plan
of Exchange with NeoGenomics, Tampa Bay Financial, Inc. ("TBF") and Michael T.
Dent, M.D. This transaction had the following principal terms:
- The Company acquired 100% of the outstanding shares of NeoGenomics, which
became a wholly-owned subsidiary of the Company (hereinafter referred to as the
"Operating Subsidiary"). In January 2002, the name of the parent company was
changed to "NeoGenomics, Inc." as well.
- Dr. Dent received 1,192,500 shares of our common stock. He also received
the right to receive an additional 1,192,500 shares based upon the achievement
of certain milestones by NeoGenomics.
- Dr. Dent was appointed President of the Company and received the right to
appoint a majority of the directors of the Company. Dr. Dent subsequently
appointed Kevin J. Lindheim as a director.
- Tampa Bay Financial, Inc. agreed to purchase 450,000 shares of the
Company's common stock for a price of $3.333 cents per share, or a total of
$1,500,000, payable upon the achievement of certain milestones.
- The Company agreed to engage Tampa Bay Financial to provide consulting
services to the Company. Under this agreement, the Company agreed to pay TBF
$10,000 per month for an initial term of one year. The agreement was renewable
at TBF's option for two additional terms of one year each. Under the consulting
agreement, Tampa Bay Financial also had the right of first refusal with respect
to any future issuance of shares by the Company at a price per share which was
50% of the price per share paid by any third party.
- The Company agreed that it would not engage in any reverse stock split
without the consent of Tampa Bay Financial for a period of two (2) years.
- Dr. Dent received options to purchase up to 1,350,000 shares of the
Company's common stock, which were to vest upon the achievement of certain
milestones set forth in the option agreement.
On May 16, 2002, the Company, Dr. Dent and Tampa Bay Financial entered into
a letter agreement amending the terms of the Plan of Exchange and certain of the
related documents (collectively referred to as the "Modification Agreement").
Under the terms of the Modification Agreement, the parties agreed as follows:
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1. The parties restructured the obligation of Tampa Bay Financial to
purchase 450,000 shares of the Company's common stock. In particular, the
Company agreed that TBF would immediately purchase 90,000 shares of common stock
at a price of $3.333 per share, or $300,000. This amount was paid through the
cancellation of $190,000 of advances made by TBF to the Company together with
the additional payments of $110,000 during May 2002. Tampa Bay Financial agreed
to purchase the remaining 360,000 shares at a price of $3.333 per share, or an
aggregate price of $1.2 million, payable in 12 equal installments over a period
of 12 months commencing on June 15, 2002.
2. The Company agreed to issue 715,500 shares to Dr. Dent based upon
his fulfillment of the first three milestones set forth in the Plan of Exchange.
The Company agreed to deliver the remaining 477,000 shares to Dr. Dent upon the
fulfillment of the last two milestones set forth in the Plan of Exchange.
3. The Company agreed that Tampa Bay Financial would have the right
to receive the fees payable under its consulting agreement through the issuance
of shares rather than the payment of cash. In connection with this, the Company
agreed to issue 60,000 shares to TBF in exchange for $60,000 of consulting fees
accrued through May 16, 2002. The Company further agreed to issue shares in lieu
of consulting fees during the next six months based upon the Company's current
stock price, provided, that in no event would Tampa Bay Financial receive more
than 10,000 shares per month.
The Company also agreed to amend the employment agreement with Dr. Dent to
provide that Dr. Dent would have the right to receive his salary under the
employment agreement in the form of shares of common stock. In connection with
this, the Company agreed to issue 62,496 shares to Dr. Dent in exchange for
$62,496 of salary accrued through May 16, 2002. The Company further agreed that
Dr. Dent, at his option, could receive shares of the Company in lieu of a cash
salary during the next six months, based upon the current stock price, provided,
that in no event would Dr. Dent receive more than 10,416 shares per month.
4. The Company agreed to file a Form S-8 to cover any resale of shares
received by Dr. Dent under his employment agreement or by Tampa Bay Financial
under their consulting agreement.
5. The Company agreed that upon the occurrence of a "substitution
event," the Company would promptly issue to Tampa Bay Financial or its designees
the balance of the 450,000 to be purchased by TBF under the Plan of Exchange.
Tampa Bay Financial would pay the purchase price for the shares pursuant to a
non-recourse promissory note payable over a period of three years without
interest. Tampa Bay Financial's financial obligations under the promissory note
would be secured by a pledge on the shares purchased by TBF. Additionally, the
consulting agreement with Tampa Bay Financial would be terminated.
For purposes of the Modification Agreement, a "substitution event" was
defined to mean the acquisition of any person of more than 20% of the
outstanding shares of the Company (other than an acquisition by Tampa Bay
Financial or Dr. Dent), the sale of all or substantially all of the assets of
the Company, or a merger, share exchange or similar transaction, unless the
beneficial owners of the Company prior to the transaction continue to own at
least 80% of the outstanding shares of the Company after the transaction.
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6. The Company agreed to release Tampa Bay Financial for any failure to
fulfill its funding obligations in the original Plan of Exchange. TBF agreed to
release Dr. Dent and the Company from any failure to complete the any of the
stages set forth in the Plan of Exchange.
During the Fall of 2002, Tampa Bay Financial failed to provide the agreed
upon funding at the times and in the amounts set forth in the Modification
Agreement. As a result the Company was unable to implement important parts of
its business plan and encountered severe liquidity problems. To assist the
Company, Dr. Dent arranged for his Medical practice to advance approximately
$117,000 to the Company and he further agreed to defer all of his salary.
On November 25, 2002, the Company notified Tampa Bay Financial that it was in
breach of its obligations under the Plan of Exchange and Modification Agreement
due to TBF's failure to provide the Company with $100,000 of funding due on
October 15, 2002 and an additional $100,000 of funding due on November 15, 2002.
The Company also immediately began to seek a new source of funding. In late
December 2002, the Company's Board of Director's, based on feedback from funding
sources, determined that it would be infeasible to attract the amount of capital
needed for the Company's business plan unless it formally terminated its
relationship with Tampa Bay Financial and secured a full release of all of its
obligations there under, and specifically its obligations to TBF with respect to
a "substitution event" (as defined above), TBF's right of first refusal to
purchase securities at a 50% discount to the price paid by any third parties,
and the Company's restriction on effecting a reverse stock split.
On December 23, 2002, the Company and Tampa Bay Financial agreed to formally
terminate all of their agreements with one another in order to facilitate
attracting new capital to the Company and Carl L. Smith, an affiliate of
Tampa Bay, resigned from the Company's Board of Directors. As part of this
termination agreement the Company and Tampa Bay Financial fully released one
another from any claims arising out of any breaches of the Plan of Exchange
or the Modification Agreement.
On April 15th, 2003, the Company entered into agreements with MVP 3 LP, a fund
controlled by Medical Venture Partners, LLC, and its principals to provide
approximately $139,000 of equity financing and up to $1.5 million of debt
financing in the form of a revolving credit facility to the Company. Under the
terms of the equity agreements, MVP 3 LP purchased 9,303,279 shares and each of
the three principals of Medical Venture Partners LLC purchased 1,541,261 shares
of the Company at a price per share of $0.01 per share. As a result of theses
equity purchases, the Company experienced another change of control and MVP 3 LP
and its affiliates received approximately 75% of the outstanding common stock
of the Company.
As a condition to these transactions, the Company, Dr. Michael Dent, MVP 3
LP and the principals of Medical Venture Partners have entered into a
shareholders agreement that provides that MVP 3, LP will have the right to
appoint up to four of seven directors of the Company. The Company has also
entered into a Registration Rights Agreement with MVP 3 LP and the principals of
Medical Venture Partners granting them certain demand and piggyback registration
rights.
As a precondition to closing these transactions, Medical Venture Partners
required the Company to undertake a 1 for 100 reverse stock split, and cancel
Dr. Dent's existing option agreement and employment agreement. The reverse
stock split became effective on April 16, 2003 and all share references in this
Form 10-KSB have been adjusted to reflect this stock split. Dr. Dent agreed to
terminate his option agreement effective as of October 1, 2002 and his
employment agreement effective as of December 31, 2002. Simultaneous with the
closing of the equity and debt transactions with MVP 3 LP and its affiliates,
Dr. Dent and the Company entered into a new employment agreement appointing Dr.
Dent as President and Chief Medical Officer of the Company for an initial term
of 12 months, subject to renewal. Dr. Dent's salary under the new employment
agreement will be equal to 20% of net cash flow provided by operating
activities, up to a maximum of $20,000 per month, plus an incentive bonus.
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BUSINESS OF NEOGENOMICS
SERVICES
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We operate a medical testing and research laboratory located in Naples,
Florida. We provide genetic and molecular testing services for the following
purposes:
- To find out if a person is a carrier for a certain disease.
- To learn if a person has an inherited predisposition to a certain disease,
like breast or ovarian cancer (also known as susceptibility testing).
- To help expecting parents know whether their unborn child will have a
genetic disease or disorder (prenatal testing).
- To confirm diagnosis of certain diseases or disorders (for example,
Leukemia and Down's Syndrome).
We currently offer three types of services: cytogenetics testing,
molecular biology testing and sponsored research services:
CYTOGENETICS TESTING. Cytogenetics testing is routinely used to identify
genetic abnormalities in pregnancy, as well as hematologic cancers. Most of our
cytogenetics testing is chromosome analysis done through a process called
karyotyping, which is an analysis of the chromosomes in a single cell from
one individual. Currently, we offer the following types of cytogenetics tests,
each of which is performed on different types of biological samples: bone
marrow tests to assist in the diagnosis of leukemia and lymphoma, amniocentesis
tests to assist in the diagnosis of pre-natal genetic anomalies such as Down's
syndrome, products of conception tests to assist in determining the causes
of miscarriage during pregnancy, and various other specialty tests.
We believe that historically cytogenetics testing by large national laboratories
and other competitors has taken anywhere from 5-12 days on average to obtain a
complete diagnostic report. We believe that as a result of this, many
practitioners have refrained from ordering such tests because the results
traditionally were not returned within an acceptable diagnostic window. We have
designed our business operations in order to complete our cytogenetics tests for
most types of biological samples and produce a complete diagnostic report and
make it available electronically with 2-3 days. We believe these turn around
times are among the best in the industry. Furthermore, we believe that as we
continue to demonstrate these turnaround times to customers and the awareness of
the benefits of cytogenetics testing continues to increase, more and more
practitioners will incorporate cytogenetics testing into their diagnostic
regimes and thus drive incremental growth in our business.
As an adjunct to traditional chromosome analysis, we plan to offer Fluorescence
In Situ Hybridization (FISH) technology to expand the capabilities of routine
chromosome analysis in prenatal testing. FISH technology permits preliminary
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identification of the most frequently occurring numerical chromosomal
abnormalities in a relatively rapid manner. FISH, already commonly used as an
additional staining method (the colorization of chromosomes to highlight markers
and abnormalities) for metaphase analysis (cells in a divided state after they
are cultured), is now being applied to interphase chromosome analysis
(uncultured, single cells). During the past 5 years, FISH has begun to
demonstrate its considerable diagnostic potential. The development of molecular
probes by using DNA sequences of differing sizes, complexity, and specificity,
coupled with technological enhancements (direct labeling, multicolor probes,
computerized signal amplification, and image analysis) make FISH a powerful
investigative tool. Although FISH has great potential in a variety of
cytogenetics studies, particular attention has been focused on its use in
prenatal diagnosis of chromosomal anomalies, because of the speed with which
results are attainable (traditional amniocentesis tests take 6-7 days to
complete). However, as with all emerging technologies, the transition from the
developmental phase to application as a standard diagnostic procedure must be
accompanied by assurance of reliability, reproducibility, and accuracy, as well
as by guidelines for appropriate use.
MOLECULAR BIOLOGY TESTING. Molecular biology testing involves testing DNA
and other molecular structures to screen for and diagnose single gene disorders
and hematological cancers such as cystic fibrosis and Tay-Sachs disease. Today
there are tests for about 450 genetic diseases. However, the majority of these
tests remain available only to research laboratories and are only offered on a
limited basis to family members of someone who has been diagnosed with a genetic
condition. About 50 genetic tests are more widely available for clinical use.
We currently provide these tests on an outsourced basis. We anticipate in the
near future performing these tests within our facility as the number of requests
we receive for these types of tests continues to increase and we expand our
clinical staff. Molecular biology testing is a growing market with many new
diagnostic tests being developed every year. The Company is committed to
providing the latest and most accurate testing to its clients, where demand
warrants it.
SPONSORED RESEARCH. Our research initiatives are currently focused on
discovering the underlying genetic causes of female diseases. Cancers and other
diseases of the ovary, uterus, cervix, and breast all have an underlying genetic
basis. Identifying the genetic sequences unique to these diseases will allow us
to develop tests to identify which individuals are at increased genetic risk of
developing these diseases. We plan to collaborate with pharmaceutical and other
healthcare companies to develop intellectual property that can be a source of
revenue. In addition, we believe that we have the ability to develop
proprietary tests that will allow for accurate screening and early detection of
various female and other genetic diseases.
In order to facilitate our research initiatives, we have formed alliances
with Naples Women's Center, Naples Community Hospital, and Florida Gynecologic
Oncology for the purpose of collecting blood and tissue study samples. We are
collecting these samples at no charge to the Company through an informed consent
process with each patient. Naples Women's Center is a medical practice
controlled by Dr. Michael Dent, our President and currently has over 8,000
active patients.
We are using these samples to compile a genetic database which ultimately will
link phenotypic (medical history) data with patients' genetic material. We plan
to use this information as a resource for our ongoing research projects as well
as in the bio/genetic-informatics arena. We believe that our collection of
genetic samples and our genetic database will be a significant attraction for
companies that are desirous of studying the underlying causes of disease. We
expect to protect our genetic database, as well as any future testing
methodology discovered in order to sell the proprietary rights to such
information and tests to various other research and clinical laboratories and
pharmaceutical companies.
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Currently, the Company's primary sponsored research project is a
collaboration with Ciphergen BioSystems, Inc. to discover a bio-marker for
pre-eclampsia. Pre-eclampsia is a disease that only effects pregnant mothers
and typically is indicated by elevated blood pressure, edema, and proteinuria.
Pre-eclampsia is a very serious disease and is the most common cause of fetal
and maternal mortality during pregnancy. Pre-eclampsia is also fairly
widespread, affecting some 10-15% of first time pregnant mothers worldwide.
Unfortunately, a definitive diagnosis for pre-eclampsia is generally not
possible until the third trimester of pregnancy and the only known cure for the
disease is to deliver the fetus prematurely. Currently the determination as to
when to induce labor is very difficult and fraught with risks to both mothers
and infants. If the infant is delivered too early, there are significant risks
of complications from premature delivery. If obstetricians wait too long to
induce labor, there are significant risks to both the mother and the infant from
pre-eclampsia, including the risk of death.
Bio-markers are unique sequences of proteins which categorically indicate the
presence of a disease condition and provide a mechanism for measuring the
severity of the condition. In the event, we are able to discover this
bio-marker, we believe that we can develop a test that will verify and quantify
the pre-eclampsia disease state. We believe such a test would have a
potentially wide application for obstetricians and gynecologists worldwide to
help them determine when to optimally induce labor for pre-eclamptic mothers and
thereby reduce the risk of death to both mother and baby. We have purchased a
protein chip mass spectrometer to facilitate our discovery of potential proteins
that may be associated with the disease. We expect to have completed this
project over the next six to nine months.
TARGET MARKETS AND CUSTOMERS
-------------------------------
We have initially targeted all oncologists in southwest Florida that perform
bone marrow sampling. In addition, we are currently servicing a few select
obstetricians that perform amniocentesis testing. We expect to continue to
expand our client base in this area over the next six months and to gradually
expand our market presence into southeastern Florida and central Florida.
Within this geography, we currently serve the following types of testing
markets:
CANCER TESTING: Historically, the majority of cytogenetics testing has
been performed on bone marrow samples in testing for leukemia and lymphomas.
Cells obtained from bone marrow are grown in culture and used to determine if
certain genetic anomalies exist in patients with leukemia. This information is
used to determine the nature of the cancer and determine an appropriate
treatment regimen. In addition to cytogenetics testing, oncologists routinely
use flow cytometry of bone marrow samples to diagnose cancers. Flow cytometry
is a method of separating blood into its different cell types. This methodology
is used to determine what cell types within the blood of leukemia and cancer
patients is abnormal. Flow cytometry is important in developing an accurate
diagnosis and defining what treatment options are best for specific patients.
The combination of the two types of tests allows the findings from one test to
confirm the findings of another test, which leads to an even more accurate
diagnosis.
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The Company currently offers cytogenetics testing and plans to begin offering
flow cytometry sometime later this year. Management believes that by offering
both of these tests together as a bundled product while maintaining its industry
leading turnaround times, the Company can significantly increase its testing
volumes. Management estimates that flow cytometry tests are performed on
approximately three times as many bone marrow samples as are cytogenetics tests.
Furthermore, we believe that many of the local oncologists that send samples to
us for cytogenetics testing, would welcome the convenience of having a local
laboratory perform both types of tests. Thus we believe that by offering flow
cytometry we can derive significant increases in our testing volumes through our
existing customer base, thereby affording the Company significant synergies and
efficiencies in our sales and marketing process.
PRENATAL TESTING: A prenatal genetic test is an optional medical test available
to people who are considered to be at increased risk for having children with a
chromosomal abnormality or an inherited genetic condition. Prenatal testing is
often used to look for conditions such as Down's Syndrome, spina bifida, cystic
fibrosis, Tay-Sachs disease and others that would show up in early childhood.
Two procedures are used in prenatal testing. Amniocentesis, which involves
taking a sample of amniotic fluid from the womb for analysis, can be done during
the 16th through 20th weeks of pregnancy. Another procedure, chorionic villus
sampling (CVS), can be done earlier, at nine to 12 weeks. Currently these tests
carry a risk of miscarriage. Depending on the mother's age and other factors,
amniocentesis causes miscarriage in between 1 in 200 and 1 in 400 cases, and CVS
has a risk of 1 in 100. We believe that new genetic tests will be developed
over the next three years that will significantly reduce this risk of
miscarriage and that prenatal genetic testing will increase as a result. In
fact, as part of the Company's planned research initiatives, we intend to
conduct research in support of developing a non-invasive amniocentesis test,
which we believe could virtually eliminate miscarriage as a result of this type
of test.
Historically, prenatal testing is offered to pregnant women over age 35,
because their babies are at greater risk for having abnormal chromosomes. For
example, a 35-year-old woman has about a 1 in 200 chance of having a baby with a
chromosomal abnormality like Down's syndrome. A 40-year-old woman has closer to
1 in 50 chance. But prenatal testing is increasingly being offered to pregnant
women of all ages. In the third quarter of 2001, the American College of
Obstetricians and Gynecologists (ACOG) issued new guidelines recommending that
all caucasian women who are pregnant and couples considering pregnancy be
offered a genetic test to determine if they are carriers of cystic fibrosis.
Current advances in genetic research make it possible to determine more and more
conditions through prenatal testing, and we expect more institutional
sponsorship of such prenatal testing in the coming years.
In addition to oncologists and obstetricians, we have identified the
following other potential customers for our cytogenetics and molecular biology
testing services:
1. Local perinatologists (specialists in high risk pregnancies) and
genetics counselors;
2. Hospitals needing karyotyping performed on tissue and blood samples;
3. Hematologists who need the use of diagnostic molecular biology,
cytogenetics testing and flow cytometry testing.
4. Regional reference labs or other larger laboratory companies that
can benefit by our industry leading turnaround times and/or by bundling our
services with their own in order to offer a more complete menu of services.
DISTRIBUTION METHODS
---------------------
The Company performs all of its genetic testing at its clinical laboratory
facility located in Naples, Florida, and then produces a report for the
requesting practitioner. The Company currently out sources all of its molecular
biology testing to third parties, but expects to purchase the equipment for such
testing in the coming year.
11
COMPETITION
-----------
We are engaged in segments of the medical testing laboratory industry that
are competitive. Competitive factors in the genetic and molecular biology
testing business generally include reputation of the laboratory, range of
services offered, pricing, convenience of sample collection and pick-up, quality
of analysis and reporting and timeliness of delivery of completed reports.
Our competitors in the United States are numerous and include major medical
testing laboratories and biotechnology research companies. Some of these
competitors may have more extensive research and development, regulatory, and
production capabilities. Some competitors may have greater financial resources.
These companies may succeed in developing products and services that are more
effective than any that we have or may develop and may also prove to be more
successful than we are in marketing such products and services. In addition,
technological advances or different approaches developed by one or more of our
competitors may render our products obsolete, less effective or uneconomical.
We estimate that the United States market for cytogenetics and molecular
biology testing is divided among approximately 500 laboratories, many of which
offer both types of testing. Of this total group, less than 20 laboratories
market their services nationally. We believe that the industry as a whole is
still quite fragmented, with the top 20 laboratories accounting for
approximately 50% of market revenues.
Currently there are no other cytogenetics and molecular biology testing
facilities in the Southwest Florida region. Most large labs currently have
their customers in this area send their samples via an express mail service to
regional centers, which can be as far away as California. We expect to gain a
significant market presence in the Southwest Florida region by offering faster
turn-around times due to the proximity to our customers and high-quality test
reports. In addition, we are developing a fully integrated and interactive web
site that will enable us to report real time results to customers in a secure
environment.
SUPPLIERS
---------
The Company orders its laboratory and research supplies from large national
laboratory supply companies such as Fisher Scientific, Inc. and Physicians Sales
and Service Corp. and does not believe any disruption from any one supplier
would have a material effect on its business.
DEPENDENCE ON MAJOR CUSTOMERS
--------------------------------
We currently market our services to major hospitals and doctor's practices in
the Southwest Florida area. During 2002, we performed 215 individual
cytogenetics and molecular biology tests. Approximately 54% or 117 of these
tests were performed on bone marrow specimens. Of these Bone Marrow tests, 95
were performed by 23 different doctors on patients in the Naples Community
Hospital system. In the event the Naples Community Hospital system started
offering a competing cytogenetics test capability in-house that could match our
industry leading turn-around times at a competitive price, we could potentially
lose a large referral source for customers.
12
TRADEMARKS
----------
Our NeoGenomics logo has been filed for trademark with the United States
Patent and Trademark Office.
GOVERNMENT REGULATION
----------------------
Our business is subject to government regulation at the federal, state and
local levels, some of which regulations are described under "Laboratory
Operations," "Anti-Fraud and Abuse," "Confidentiality of Health Information,"
"Food and Drug Administration" and "Other" below.
LABORATORY OPERATIONS
Cytogenetics and, Molecular Biology Testing. The Company's laboratory
is located in the state of Florida. Our laboratory has obtained certification
under the federal Medicare program, the Clinical Laboratories Improvement Act of
1967, as amended by the Clinical Laboratory Improvement Amendments of 1988
(collectively, "CLIA `88"), and the respective clinical laboratory licensure
laws of the state of Florida, where such licensure is required. The Clinical
Laboratories Improvement Act provides for the regulation of clinical
laboratories by the U.S. Department of Health and Human Services. Regulations
promulgated under the federal Medicare guidelines, the CLIA and the clinical
laboratory licensure laws of the state of Florida affect our genetics
laboratory.
The federal and state certification and licensure programs establish standards
for the operation of medical laboratories, including, but not limited to,
personnel and quality control. Compliance with such standards is verified by
periodic inspections by inspectors employed by federal or state regulatory
agencies. In addition, federal regulatory authorities require participation in a
proficiency testing program approved by HHS for many of the specialties and
subspecialties for which a laboratory seeks approval from Medicare or Medicaid
and certification under CLIA `88. Proficiency testing programs involve actual
testing of specimens that have been prepared by an entity running an approved
program for testing by a laboratory.
A final rule implementing CLIA `88, published by HHS on February 28, 1992,
became effective September 1, 1992. This rule has been revised on several
occasions and further revision is expected. The CLIA `88 rule applies to
virtually all clinical laboratories in the United States, including our
laboratory. We have reviewed our operations as they relate to CLIA `88,
including, among other things, the CLIA `88 rule's requirements regarding
laboratory administration, participation in proficiency testing, patient test
management, quality control, quality assurance and personnel for the types of
testing we undertake, and believe we are in compliance with these requirements.
No assurances can be given that our laboratory will pass inspections conducted
to ensure compliance with CLIA `88 or with any other applicable licensure or
certification laws. The sanctions for failure to comply with CLIA `88 or state
licensure requirements might include the inability to perform services for
compensation or the suspension, revocation or limitation of the labs' CLIA `88
certificate or state license, as well as civil and/or criminal penalties.
Regulation of Genetic Testing. In 2000, the Secretary of Health and Human
Services Advisory Committee on Genetic Testing published recommendations for
increased oversight by the Centers for Disease Control and the FDA for all
genetic testing. This committee continues to meet and discuss potential
regulatory changes, but no additional formal recommendations have been issued.
13
With respect to genetic therapies, which may become part of our business in the
future, in addition to FDA requirements, the National Institutes of Health has
established guidelines providing that transfers of recombinant DNA into human
subjects at NIH laboratories or with NIH funds must be approved by the NIH
Director. The NIH has established the Recombinant DNA Advisory Committee to
review gene therapy protocols. We expect that all of our gene therapy protocols
will be subject to review by the Recombinant DNA Advisory Committee.
ANTI-FRAUD AND ABUSE LAWS
Existing federal laws governing Medicare and Medicaid, as well as some
other state and federal laws, also regulate certain aspects of the relationship
between healthcare providers, including clinical and anatomic laboratories, and
their referral sources, including physicians, hospitals and other laboratories.
One provision of these laws, known as the "anti-kickback law," contains
extremely broad proscriptions. Violation of this provision may result in
criminal penalties, exclusion from Medicare and Medicaid, and significant civil
monetary penalties.
In January 1990, following a study of pricing practices in the clinical
laboratory industry, the Office of the Inspector General ("OIG") of HHS issued a
report addressing how these pricing practices relate to Medicare and Medicaid.
The OIG reviewed the industry's use of one fee schedule for physicians and other
professional accounts and another fee schedule for patients/third-party payors,
including Medicare, in billing for testing services, and focused specifically on
the pricing differential when profiles (or established groups of tests) are
ordered.
Existing federal law authorizes the Secretary of HHS to exclude providers
from participation in the Medicare and Medicaid programs if they charge state
Medicaid programs or Medicare fees "substantially in excess" of their "usual
charges." On September 2, 1998, the OIG issued a final rule in which it
indicated that this provision has limited applicability to services for which
Medicare pays under a Prospective Payment System or a fee schedule, such as
anatomic pathology services and clinical laboratory services. In several
Advisory Opinions, the OIG has provided additional guidance regarding the
possible application of this law, as well as the applicability of the
anti-kickback laws to pricing arrangements. The OIG concluded in a 1999 Advisory
Opinion that an arrangement under which a laboratory offered substantial
discounts to physicians for laboratory tests billed directly to the physicians
could potentially trigger the "substantially in excess" provision and might
violate the anti-kickback law, because the discounts could be viewed as being
provided to the physician in exchange for the physician's referral to the
laboratory of non-discounted Medicare business, unless the discounts could
otherwise be justified. The Medicaid laws in some states also have prohibitions
related to discriminatory pricing.
Under another federal law, known as the "Stark" law or "self-referral
prohibition," physicians who have an investment or compensation relationship
with an entity furnishing clinical laboratory services (including anatomic
pathology and clinical chemistry services) may not, subject to certain
exceptions, refer clinical laboratory testing for Medicare patients to that
entity. Similarly, laboratories may not bill Medicare or Medicaid or any other
party for services furnished pursuant to a prohibited referral. Violation of
these provisions may result in disallowance of Medicare and Medicaid claims for
the affected testing services, as well as the imposition of civil monetary
penalties. Some states also have laws similar to the Stark law.
We will seek to structure our arrangements with physicians and other
customers to be in compliance with the anti-kickback, Stark and state laws, and
to keep up-to-date on developments concerning their application by various
means, including consultation with legal counsel. However, we are unable to
predict how these laws will be applied in the future, and no assurances can be
given that its arrangements will not become subject to scrutiny under them.
14
In February 1997 (as revised in August 1998), the OIG released a model
compliance plan for laboratories that is based largely on corporate integrity
agreements negotiated with laboratories that had settled enforcement action
brought by the federal government related to allegations of submitting false
claims. We have adopted aspects of the model plan that we deem appropriate to
the conduct of our business. We are unable to predict whether, or to what
extent, these developments may have an impact or the utilization of our
services.
CONFIDENTIALITY
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA")
contains provisions that affect the handling of claims and other patient
information that are, or have been, transmitted electronically. These
provisions, which address security and confidentiality of patient information as
well as the administrative aspects of claims handling, have very broad
applicability and they specifically apply to healthcare providers, which include
physicians and clinical laboratories. Rules implementing various aspects of
HIPAA are continuing to be developed. National standards for electronic
healthcare transactions were published by HHS on August 17, 2000. The
regulations establish standard data content and formats for submitting
electronic claims and other administrative health transactions. All healthcare
providers will be able to use the electronic format to bill for their services
and all health plans and providers will be required to accept standard
electronic claims, referrals, authorizations, and other transactions. Under the
regulation, all electronic claims transactions must follow a single standardized
format. All health plans, providers and clearinghouses must comply with the
standards by October 2003. Failure to comply with this rule could result in
significant civil and/or criminal penalties. Despite the initial costs, the use
of uniform standards for all electronic transactions could lead to greater
efficiency in processing claims and in handling health care information.
On December 28, 2000, HHS published rules governing the use of individually
identifiable health information. The regulation protects certain health
information ("protected health information" or "PHI") transmitted or maintained
in any form or medium, and requires specific patient consent for the use of PHI
for purposes of treatment, payment or health care operations. For most other
uses or disclosures of PHI, the rule requires that covered entities (healthcare
plans, providers and clearinghouses) obtain a valid patient authorization. For
purposes of the criminal and civil penalties imposed under Title XI of the
Social Security Act, the current date for compliance is 2003. Complying with
the Standards, Security and Privacy rules under HIPAA will require significant
effort and expense for virtually all entities that conduct healthcare
transactions electronically and handle patient health information. We are
unable to accurately estimate the total cost or impact of the regulations at
this time. Those costs, however, are not expected to be material.
In addition to the HIPAA rules described above, we are subject to state
laws regarding the handling and disclosure of patient records and patient health
information. These laws vary widely, and many states are passing new laws in
this area. Penalties for violation include sanctions against a laboratory's
licensure as well as civil or criminal penalties. We believe we are in
compliance with applicable state law regarding the confidentiality of health
information.
15
FOOD AND DRUG ADMINISTRATION
The FDA does not currently regulate laboratory testing services, which is
our principal business. However, we plan to perform some testing services using
test kits purchased from manufacturers for which FDA premarket clearance or
approval for commercial distribution in the United States has not been obtained
by the manufacturers ("investigational test kits"). Under current FDA
regulations and policies, such investigational test kits may be sold by
manufacturers for investigational use only if certain requirements are met to
prevent commercial distribution. The manufacturers of these investigational test
kits are responsible for marketing them under conditions meeting applicable FDA
requirements. In January 1998, the FDA issued a revised draft Compliance Policy
Guide ("CPG") that sets forth FDA's intent to undertake a heightened enforcement
effort with respect to investigational test kits improperly commercialized prior
to receipt of FDA premarket clearance or approval. That draft CPG is not
presently in effect but, if implemented as written, would place greater
restrictions on the distribution of investigational test kits. If we were to be
substantially limited in or prevented from purchasing investigational test kits
by reason of the FDA finalizing the new draft CPG, there could be an adverse
effect on our ability to access new technology, which could have a material
adverse effect on our business.
We also may perform some testing services using reagents, known as analyte
specific reagents ("ASRs"), purchased from companies in bulk rather than as part
of a test kit. In November 1997, the FDA issued a new regulation placing
restrictions on the sale, distribution, labeling and use of ASRs. Most ASRs are
treated by the FDA as low risk devices, requiring the manufacturer to register
with the agency, list its ASRs (and any other devices), conform to good
manufacturing practice requirements, and comply with medical device reporting of
adverse events.
A smaller group of ASRs, primarily those used in blood banking and/or
screening for fatal contagious diseases (e.g., HIV/AIDS), are treated as higher
risk devices requiring premarket clearance or approval from the FDA before
commercial distribution is permitted. The imposition of this regulatory
framework on ASR sellers may reduce the availability or raise the price of ASRs
purchased by laboratories like ours. In addition, when we perform a test
developed in-house, using reagents rather than a test kit cleared or approved by
the FDA, we are required to disclose those facts in the test report. However, by
clearly declining to impose any requirement for FDA premarket approval or
clearance for most ASRs, the rule removes one barrier to reimbursement for tests
performed using these ASRs. We have no plans to perform testing in these high
risk areas.
OTHER
Our operations currently are, or may be in the future, subject to various
federal, state and local laws, regulations and recommendations relating to data
protection, safe working conditions, laboratory and manufacturing practices and
the purchase, storage, movement, use and disposal of hazardous or potentially
hazardous substances used in connection with our research work and manufacturing
operations, including radioactive compounds and infectious disease agents.
Although we believe that our safety procedures comply with the standards
prescribed by federal, state and local regulations, the risk of contamination,
injury or other accidental harm cannot be eliminated completely. In the event of
an accident, we could be held liable for any damages that result and any
liabilities could exceed our resources. Failure to comply with such laws could
subject an entity covered by these laws to fines, criminal penalties and/or
other enforcement actions.
16
Pursuant to the Occupational Safety and Health Act, laboratories have a general
duty to provide a work place to their employees that is safe from hazard. Over
the past few years, the Occupational Safety and Health Administration ("OSHA")
has issued rules relevant to certain hazards that are found in the laboratory.
In addition, OSHA has promulgated regulations containing requirements healthcare
providers must follow to protect workers from blood borne pathogens. Failure to
comply with these regulations, other applicable OSHA rules or with the general
duty to provide a safe work place could subject employers, including a
laboratory employer such as the Company, to substantial fines and penalties.
NUMBER OF EMPLOYEES
---------------------
As of May 15, 2003, we had seven employees, of which five were full-time
employees. Our President and one other person serve on a part-time basis.
Unions represent none of our employees and we believe our employee relations are
good.
ITEM 2. PROPERTIES
Our executive offices are located at the offices the Naples Women's Center
located at 1726 Medical Blvd, Suite 101, Naples, Florida. Dr. Michael Dent,
our President, provides this space to us without charge.
Our laboratory is currently located in a 2200 square foot facility at 1085
Business Lane, #8, Naples, Florida, 34108. We lease this space from an
unaffiliated third party on a month to month basis at a cost of $2,500/month.
On May 13, 2003, we entered into a new three year lease agreement with an
unaffiliated third party to relocate our laboratory to a 5,175 square foot
facility located at 12701 Commonwealth Drive, #8, Fort Myers, Florida 33913.
This lease will become effective in July 2003 and will have an annual cost of
approximately $72,000.
ITEM 3. LEGAL PROCEEDINGS
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our common stock is quoted on the OTC Bulletin Board. Set forth below is a
table summarizing the high and low bid quotations for our common stock during
its last two fiscal years adjusted for the 1:100 reverse stock split consummated
on April 16, 2003. All other share references in this Form 10-KSB have also
been adjusted to reflect this 1:100 reverse stock split.
17
QUARTER HIGH BID LOW BID
---------------- --------- --------
1st Quarter 2001 $ 17.50 $ 2.50
2nd Quarter 2001 $ 5.00 $ 1.20
3rd Quarter 2001 $ 3.90 $ 0.70
4th Quarter 2001 $ 3.50 $ 1.20
1st Quarter 2002 $ 2.50 $ 0.90
2nd Quarter 2002 $ 2.00 $ 0.90
3rd Quarter 2002 $ 1.40 $ 0.70
4th Quarter 2002 $ 1.50 $ 0.60
1st Quarter 2003 $ 1.00 $ 0.35
The above table is based on over-the-counter quotations. These quotations
reflect inter-dealer prices, without retail mark-up, markdown or commissions,
and may not represent actual transaction. All historical data was obtained from
the BigCharts.com web site.
As of March 31, 2003 there were 344 stockholders of record of the common
stock. We have never declared or paid cash dividends on our common stock. We
intend to retain all future earnings to finance future growth and therefore, do
not anticipate paying any cash dividends in the foreseeable future.
SALES OF UNREGISTERED SECURITIES
-----------------------------------
In 2001, we issued 78,358 shares of common stock to Tampa Bay Financial,
Inc. in settlement of debts in the amount of $156,410. The transaction was
valued at $2.00 per share based on the trading value of our stock at the time of
the transaction. The transaction involved the issuance of unregistered stock to
a small group of sophisticated investors in a transaction that we believed was
exempt from registration under Section 4(2) of the Securities Act of 1933.
In 2001, we issued 2,385,000 shares of common stock in connection with the
reverse acquisition transaction with NeoGenomics. The transaction involved the
issuance of unregistered stock to a single sophisticated investor (Dr. Michael
Dent) in a transaction that we believed was exempt from registration under
Section 4(2) of the Securities Act of 1933.
In 2002, we issued 222,385 shares of common stock in exchange for
employment and consulting services valued at $229,021, and 210,000 shares of
common stock in exchange for the cancellation of $700,000 in cash advances from
Tampa Bay Financial, Inc. All of the stock was issued to a small group of
sophisticated investors in a transaction that the Company believes was exempt
from registration under Rule 506 promulgated under the Securities Act of 1933.
In April 2003, we issued 13,927,062 shares of common stock to MVP 3, LP and
three individuals who are principals of MVP 3, LP in exchange for $139,271.
This transaction involved the issuance of unregistered stock to accredited
investors in transactions that we believed were exempt from registration under
Section 4(2) of the Securities Act of 1933.
18
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
-------------------------------------------------------------------------
Number of securities to be issued Weighted average exercise Number of securities
upon exercise of outstanding price of outstanding options, remaining available for
Plan Category options, warrants and rights warrants and rights future issuance
-------------------- --------------------------------- ----------------------------- ------------------------
Equity compensation
plans approved by 0 (a) N/A 1,000,000
security holders
-------------------- --------------------------------- ----------------------------- ------------------------
Equity compensation
plans not approved. N/A N/A None
by security holders
-------------------- --------------------------------- ----------------------------- ------------------------
Total 0 N/A 1,000,000
-------------------- --------------------------------- ----------------------------- ------------------------
(a) Currently there are no awards outstanding under the Company's 2001 Stock
Plan.
ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW.
--------
The following discussion should be read in conjunction with the financial
statements for the period ended December 31, 2002 included with this Form
10-KSB.
Information related to our predecessor entity, American Communications
Enterprises, Inc. ("ACE"), has been omitted. ACE was formed in 1998 for the
purpose of operating radio stations and businesses within the communications
industry. ACE later changed its focus to genomics, which included acquiring
NeoGenomics, Inc. ("NeoGenomics"), a private company desiring to become public,
in a reverse acquisition in November 2001. From a legal perspective, the
Company was the surviving company and thus continues its public reporting
obligations. However, from an accounting perspective, NeoGenomics acquired the
Company. Therefore, all financial information presented in this 10-KSB includes
NeoGenomics' standalone results from the period June 1, 2001 (date of
incorporation) to November 13, 2001 and the combined companies' results from
November 2001 to December 31, 2002.
Certain information included herein contains statements that constitute
"forward-looking statements" containing certain risks and uncertainties.
Readers are referred to the cautionary statement at the beginning of this
report, which addresses forward-looking statements made by us.
NeoGenomics, Inc. is considered to be in the development stage as defined
in Financial Accounting Standards Board Statement No. 7. The Company is
currently focused on genetic and molecular biology laboratory testing and
genomic research.
CRITICAL ACCOUNTING POLICIES
------------------------------
Our critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the Notes to the Financial Statements. We
have consistently applied these policies in all material respects. At this
stage of our development, these policies primarily address matters of expense
recognition. Although we anticipate that revenue recognition issues will become
critical in future years, the small amount of revenue that we have earned at
this stage minimizes the impact of any judgments regarding revenue recognition.
Management does not believe that our operations to date have involved
uncertainty of accounting treatment, subjective judgment, or estimates, to any
significant degree.
19
RESULTS OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2002
-----------------------------------------------------------------------------
We commenced revenue operations in May of 2002, thus comparisons to the
prior year is not meaningful.
During the twelve months ended December 31, 2002, we generated revenues of
approximately $93,500, of which approximately $57,000 occurred in the fourth
quarter of 2002. Our costs of revenue approximated $190,000, which resulted in
a negative gross margin of approximately $96,500 primarily as a result of costs
incurred to obtain our laboratory certification and start our operations. We
expect our gross margin to improve significantly in 2003 as our sales increase
and we no longer have the costs associated with the laboratory certification.
Our general and administrative expenses were approximately $482,000 and are
mainly comprised of administrative service expenses, wages and depreciation.
Research and development expenses were approximately $46,500 and are mainly
comprised of wages and other expenses to put our research program into place.
Interest expenses were approximately $7,000 and are mainly comprised of interest
payable on advances from Naples Women's Center, a company owned by our
president.
As a result of the foregoing, we incurred a net loss of approximately
$590,500 for the year ended December 31, 2002. This loss is significantly lower
then our reported net loss of approximately $2,053,000 for the nine months ended
September 30, 2002 resulting primarily from the reversal of approximately
$1,721,000 in stock based compensation charges, during the fourth quarter of
2002 related to the cancellation of an option agreement with our president
during that quarter. We also increased our revenues to approximately $57,000
during the fourth quarter of 2002 compared to approximately $36,000 in revenues
during the previous nine months of 2002.
We received our clinical laboratory certification under the Clinical
Laboratories Improvement Act ("CLIA") in April 2002. CLIA provides for the
regulation of clinical laboratories by the U.S. Department of Health and Human
Services. Regulations promulgated under the CLIA act, among other government
regulations, govern the operations of our genetics laboratory. We commenced our
genetics and molecular biology testing operations in May 2002. Between May 1,
2002 and December 31, 2002, we billed approximately $93,500 for 215 cytogenetics
and molecular biology tests, of which approximately $57,000 was billed for 120
cytogenetics and molecular biology tests in the fourth quarter.
Revenues per test are a function of both the nature of the test and the
payer (Medicare, Medicaid, third party insurer, etc.). Our policy is to record
as revenue amounts that we expect to collect based on published or contracted
amounts and prior experience with the payer. We have established a reserve for
uncollectible amounts based on estimates of what we will collect from
co-payments and those procedures performed that are not covered by insurance.
On December 31, 2002, our Allowance for Doubtful Accounts reserve was $12,762.
20
RESULTS OF OPERATIONS FOR THE PERIOD FROM JUNE 1, 2001 TO DECEMBER 31, 2002.
--------------------------------------------------------------------------------
During the period from June 1, 2001 to December 31, 2002, we generated
revenues and costs of revenue of approximately $94,000 and $190,000, and we
incurred a net loss of approximately $8,668,000. Our net loss included non-cash
stock-based compensation expense of approximately $7,944,000. This expense
included $7,715,000 of compensation expense incurred in connection with our
reverse acquisition of NeoGenomics in November 2001 and other stock based
compensation and consulting expenses since that time. Our general and
administrative expenses were approximately $600,000 and are mainly comprised of
administrative service expenses, wages and depreciation. Research and
development expenses were approximately $46,500 and are mainly comprised of
wages and other expenses to put our research program into place. Interest
expenses were approximately $7,000 and are mainly comprised of interest payable
on advances from our President.
LIQUIDITY AND CAPITAL RESOURCES
----------------------------------
During the twelve months ended December 31, 2002, our operating activities
used approximately $385,000 in cash. This amount primarily represented cash
used to pay general and administrative expenses associated with our operations.
We also spent approximately $418,000 on new equipment. We were able to finance
operations and equipment purchases primarily through net advances of
approximately $726,000 received from significant shareholders and other
affiliates. At December 31, 2002, we had no cash or cash equivalents and owed
approximately $13,500 to our bank.
On May 16, 2002, Tampa Bay Financial, Inc. ("TBF") agreed in a letter
agreement to purchase 450,000 shares of our common stock for a price of $3.33
per share, or a total of $1,500,000. Through October 2002, TBF had advanced
$700,000 under this agreement. In November 2002, a dispute arose between the
Company and TBF with respect to the parties obligations to each other. On
November 25, 2002, the Company notified TBF that it was in breach of its
obligations under the agreement due to TBF's failure to provide the Company with
$100,000 of funding due on October 15, 2002 and an additional $100,000 of
funding due on November 15, 2002. The Company also immediately began to seek a
new source of funding. In late December 2002, the Company's Board of
Director's, based on feedback from funding sources, determined that it would be
infeasible to attract the amount of capital needed for the Company's business
plan unless it formally terminated its relationship with Tampa Bay Financial and
secured a full release of all of its obligations thereunder, and specifically
its obligations to TBF with respect to selling a significant stake in the
Company, TBF's right of first refusal on such sales to purchase stock at a 50%
discount, and the Company's restriction on effecting a reverse stock split.
On December 23, 2002, the Company and Tampa Bay Financial agreed to formally
terminate all of their agreements with one another in order to facilitate
attracting new capital to the Company and Carl L. Smith, an affiliate of TBF,
resigned from the Company's Board of Directors. As part of this termination
agreement the Company and Tampa Bay Financial fully released one another from
any claims arising out of any breaches of the original Plan of Exchange, dated
November 14, 2001 or the subsequent Letter Agreement, dated May 16, 2002 which
amended the terms of the original Plan of Exchange and various other documents.
On April 15th, 2003, the Company entered into agreements with MVP 3 LP ("MVP
3"), a fund controlled by Medical Venture Partners, LLC, and its principals to
provide approximately $139,000 of equity financing and up to $1.5 million of
debt financing in the form of a revolving credit facility to the Company. On
April 16, 2003, under the terms of the equity agreements, MVP 3 purchased
9,303,279 shares and each of the three principals of Medical Venture Partners
LLC purchased 1,541,261 shares of the Company at a price per share of $0.01 per
share for a total of approximately $139,000 and the Company drew down an initial
advance of $225,000 under the revolving credit facility. As a result of the
equity purchases, the Company experienced a change of control and MVP 3 and its
affiliates received approximately 75% of the outstanding common stock of the
Company.
21
Under the terms of the revolving credit agreement, advances to the Company are
limited, at any given time, to the sum of i) 50% of our net property, plant and
equipment; (ii) 80% of our accounts receivable that are less than 90 days old;
and (iii) beginning on July 1, 2003, $500,000 that is not tied to any specific
collateral. Interest under the revolving credit agreement is payable monthly at
the prime rate plus a spread of 8.0%. In order to facilitate the administration
of this revolving credit facility and fund the Company, MVP 3, arranged a
similar credit facility with Fifth Third Bank. The Company has provided a
guaranty of MVP 3's obligations to Fifth Third Bank for all amounts that are
directly passed through MVP 3 and further loaned to the Company and has pledged
all of its business assets to both Fifth Third Bank and MVP 3, LP.
As a condition to these transactions, the Company, Dr. Michael Dent, MVP 3
and the principals of Medical Venture Partners have entered into a shareholders
agreement that provides that MVP 3 will have the right to appoint up to four of
seven directors of the Company. The Company has also entered into a
Registration Rights Agreement with MVP 3 and the principals of Medical Venture
Partners granting them certain demand and piggyback registration rights.
As a precondition to closing these transactions, Medical Venture Partners
required the Company to undertake a 1 for 100 reverse stock split, and cancel
Dr. Dent's existing option agreement and employment agreement. The reverse
stock split became effective on April 16, 2003 and Dr. Dent agreed to terminate
his option agreement effective as of October 1, 2002 and his employment
agreement effective as of December 31, 2002. Simultaneous with the closing of
the equity and debt transactions with MVP 3 and its affiliates, Dr. Dent and the
Company entered into a new employment agreement appointing Dr. Dent as President
and Chief Medical Officer of the Company for an initial term of 12 months,
subject to renewal. Dr. Dent's salary under the new employment agreement will
be equal to 20% of net cash flow provided by operating activities, up to a
maximum of $20,000 per month, plus an incentive bonus.
Also, in September 2002, we entered into an agreement to perform
collaborative research with Ciphergen Biosystems, Inc. ("Ciphergen"). If a
patented product or service results from this research, the patenting party will
be obligated to pay a 4% royalty to the other party. In addition, each of us
are to own 50% of any inventions developed jointly as a result of this research.
In October 2002, Ciphergen awarded us with a $100,000 research grant, which we
have agreed to use to purchase supplies, labor and equipment for the research.
As of December 31, 2002, we had not performed any of the testing, nor spent any
of the $100,000; accordingly, such amount has been recorded as a deferred
revenue liability in the accompanying consolidated balance sheet.
At the present time, we have very limited cash resources. We do not
anticipate that we will generate significant cash flow from operating activities
until 2004. As a result, we anticipate that we will require at least $700,000
of additional working capital financing during the next 12 months in order to
meet our working capital requirements during this period. We currently plan to
finance our operations through borrowings under our revolving credit facility
with MVP 3. Advances under this revolving credit facility are limited, at any
given time, based on a formula contained in the loan agreement. There can be no
assurance that the Company will be eligible to obtain all of its working capital
funding needs from MVP 3, LP or another source. If the Company is unable to
obtain such funding, the Company will be required to curtail or discontinue
operations.
22
CAPITAL EXPENDITURES
---------------------
Management currently forecasts capital expenditures for the coming year to
be approximately $500,000. We plan to fund these expenditures through
borrowings under our revolving credit facility with MVP 3, LP and through
traditional lease financing from equipment lessors. There can be no assurance
that the Company will be eligible to obtain all of its capital equipment funding
needs from MVP 3, LP or another source. If the Company is unable to obtain such
funding, the Company will be required to curtail its equipment purchases which
may have an impact on the Company's ability to generate revenues.
STAFFING
--------
We plan to increase our work force. Currently, we have five full-time and
two part-time employees. We plan to add additional laboratory technicians and
research scientists to assist us in handling a greater volume of tests and to
perform sponsored research projects. We also plan to continue building our
sales force to continue to increase our sales to customers and we intend to add
personnel in the management, accounting, and administrative areas. Management
added six employees during 2002 and expects to add further personnel during the
balance of 2003. We expect the cost of these additional employees will be
approximately $300,000 in 2003.
CAUTIONARY STATEMENT
This Form 10-KSB, press releases and certain information provided
periodically in writing or orally by our officers or our agents contain
statements which constitute forward-looking statements within the meaning of
Section 27A of the Securities Act, as amended and Section 21E of the Securities
Exchange Act of 1934. The words expect, anticipate, believe, goal, plan, intend,
estimate and similar expressions and variations thereof if used are intended to
specifically identify forward-looking statements. Those statements appear in a
number of places in this Form 10-KSB and in other places, particularly,
Management's Discussion and Analysis or Results of Operations, and include
statements regarding the intent, belief or current expectations of our directors
or our officers with respect to, among other things: (i) our liquidity and
capital resources; (ii) our financing opportunities and plans and (iii) our
future performance and operating results. Investors and prospective investors
are cautioned that any such forward-looking statements are not guarantees of
future performance and involve risks and uncertainties, and that actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors. The factors that might cause such differences
include, among others, the following: (i) any material inability of us to
successfully internally develop our products; (ii) any changes in technology
that might affect the competitive positioning of our products and services;
(iii) any inability to manage our growth; (iv) any adverse effect or limitations
caused by Governmental regulations; (v) any adverse effect on our positive cash
flow and abilities to obtain acceptable financing in connection with our growth
plans; (vi) any increased competition in business; (vii) any inability of us to
successfully conduct our business in new markets; and (viii) other risks
including those identified in our filings with the Securities and Exchange
Commission. We undertake no obligation to publicly update or revise the forward
looking statements made in this Form 10-KSB to reflect events or circumstances
after the date of this Form 10-KSB or to reflect the occurrence of unanticipated
events.
23
ITEM 7. FINANCIAL STATEMENTS
NEOGENOMICS, INC.
-----------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR
VARIOUS PERIODS ENDED
DECEMBER 31, 2002 AND 2001,
AND
INDEPENDENT AUDITORS' REPORT
TABLE OF CONTENTS
-----------------
Page
Independent Auditors' Report 25
Consolidated Financial Statements:
Balance Sheet as of December 31, 2002 26
Statements of Operations for the year ended December 31, 2002
and for the periods June 1, 2001 (date of incorporation) to
December 31, 2001 and 2002 27
Statements of Stockholders' Equity (Deficit) for the year
ended December 31, 2002 and for the periods June 1, 2001
(date of incorporation) to December 31, 2001 and 2002 28
Statements of Cash Flows for the year ended December 31, 2002
and for the periods June 1, 2001 (date of incorporation) to
December 31, 2001 and 2002 29
Notes to Financial Statements 30
24
INDEPENDENT AUDITORS' REPORT
------------------------------
To the Board of Directors and stockholders of NeoGenomics, Inc. and subsidiary:
We have audited the accompanying consolidated balance sheet of NeoGenomics, Inc.
and subsidiary (collectively the "Company"), a development stage enterprise, as
of December 31, 2002, and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year then ended, and for
the periods June 1, 2001 (date of incorporation) to December 31, 2001 and 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the Company as of December 31,
2002, and the results of its operations and its cash flows for the year then
ended and for the periods June 1, 2001 (date of incorporation) to December 31,
2001 and 2002, in conformity with accounting principles generally accepted in
the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Notes A and
B to the consolidated financial statements, the Company has suffered recurring
losses from operations and will require a significant amount of capital
to implement its business plan. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note B. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Kingerly, Crouse & Hohl, P.A.
May 16, 2003
Tampa, FL
25
------
NEOGENOMICS, INC.
-----------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 2002
ASSETS
----------------------------------------------------------------------------------------
CURRENT ASSETS:
Accounts receivable (net of allowance for doubtful accounts of $12,762) . . . . . . $ 40,082
Lab supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,306
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61,388
FURNITURE AND EQUIPMENT (net of accumulated depreciation of $38,364) . . . . . . . . . . 382,535
OTHER ASSETS - Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,916
---------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,839
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
----------------------------------------------------------------------------------------
CURRENT LIABILITIES:
Due to bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,518
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,840
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Due to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142,332
Accrued and other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,804
---------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 424,494
---------
STOCKHOLDERS' EQUITY:
Common stock, $.001 par value, (100,000,000 shares authorized; 4,482,354
shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,482
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,687,353
Deficit accumulated during the development stage. . . . . . . . . . . . . . . . . . (8,668,490)
----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 23,345
----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,839
==========
See notes to consolidated financial statements.
26
NEOGENOMICS, INC.
-----------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
For the period For the Period
June 1, 2001 June 1, 2001
For the Year (date of (date of
Ended incorporation) incorporation)
December to December to December
31, 2002 31, 2001 31, 2002
-------------- -------------- -------------
NET REVENUE. . . . . . . . . . . . . . . . . . . . . . $ 93,491 $ 1,000 $ 94,491
COST OF REVENUE. . . . . . . . . . . . . . . . . . . . 189,958 - 189,958
-------------- -------------- -------------
GROSS MARGIN (DEFICIT) . . . . . . . . . . . . . . . . (96,467) 1,000 (95,467)
-------------- -------------- -------------
OTHER OPERATING EXPENSES:
Stock based compensation, net of option cancellations. (41,177) 7,960,600 7,919,423
General and administrative . . . . . . . . . . . . . . 481,969 118,366 600,335
Research and development . . . . . . . . . . . . . . . 46,414 - 46,414
Interest expense . . . . . . . . . . . . . . . . . . . 6,851 - 6,851
-------------- -------------- -------------
Total other operating expenses. . . . . . . . . . . 494,057 8,078,966 8,573,023
-------------- -------------- -------------
NET LOSS . . . . . . . . . . . . . . . . . . . . . . . $ (590,524) $ (8,077,966) $ (8,668,490)
============== ============= =============
NET LOSS PER SHARE - Basic and
Diluted . . . . . . . . . . . . . . . . . . . . . . $ (0.14) $ (2.14)
============== ============= =============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING -
Basic and Diluted . . . . . . . . . . . . . . . . . 4,212,894 3,771,101
============== ============= =============
See notes to consolidated financial statements.
27
NEOGENOMICS, INC.
-----------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2002 AND
THE PERIODS JUNE 1, 2001 (DATE OF INCORPORATION) TO DECEMBER 31, 2001 AND 2002
Deficit
accumulated
Additional Deferred during the
Common Stock Paid-In Stock development
Shares Amount Capital Compensation stage Total
--------- ---------- ----------- -------------- -------------- -----------
BALANCES, JUNE 1, 2001. . . . . . . . - $ - $ - $ - $ - $ -
Common stock issued to founders at
Inception . . . . . . . . . . . . . . 2,385,000 2,385 7,126,115 - - 7,128,500
Services and office space contributed
by founding stockholder . . . . . . . - - 26,500 - - 26,500
Common stock issued Nov 14, 2001
for acquisition of American
Communications Enterprises, Inc. . . . 1,317,339 1,317 (172,240) - - (170,923)
Common stock issuances for services:
at $3.00 per share on November 5, 2001 47,897 48 143,642 - - 143,690
at $2.00 per share on November 20,2001 221,406 222 442,590 - - 442,812
Conversion of stockholder advances
on November 21, 2001. . . . . . . . . 78,358 78 156,838 - - 156,916
Deferred stock compensation related
to stock option grants. . . . . . . . - - 4,036,500 (4,036,500) - -
Amortization of deferred stock
compensation. . . . . . . . . . . . . - - - 245,598 - 245,598
Net loss. . . . . . . . . . . . . . . - - - - (8,077,966) (8,077,966)
--------- ---------- ----------- -------------- -------------- -----------
BALANCES, DECEMBER 31, 2001 . . . . . 4,050,000 4,050 11,759,945 (3,790,902) (8,077,966) (104,873)
Contribution of services and office
space . . . . . . . . . . . . . . . . - - 9,759 - - 9,759
Common stock issuances for services:
at $1.00 per share on July 23, 2002 . 138,339 138 140,276 - - 140,414
at $1.00 per share on September 3, 2002 38,431 38 39,569 - - 39,607
at $1.00 per share on November 22, 2002 45,612 46 48,953 - - 48,999
Conversion of stockholder advances:
at $3.33 per share on June 7, 2002. . 90,000 90 299,910 - - 300,000
at $3.33 per share on August 30, 2002 90,000 90 299,910 - - 300,000
at $3.33 per share on November 22, 2002 30,000 30 99,970 - - 100,000
Contribution of stockholder advances
on December 23, 2002. . . . . . . . . - - 25,561 - - 25,561
Cancellation of stock option. . . . . - - (4,036,500) 3,790,902 - (245,598)
Adjustment for fractional shares in
connection with reverse stock split . (28) - - - - -
Net loss. . . . . . . . . . . . . . . - - - - (590,524) (590,524)
--------- ---------- ----------- -------------- -------------- -----------
BALANCES, DECEMBER 31, 2002 . . . . . 4,482,354 $ 4,482 $ 8,687,353 $ - $(8,668,490) $ 23,345
========== ========== =========== ============== ============= ===========
See notes to consolidated financial statements.
28
NEOGENOMICS, INC.
-----------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Period For the Period
June 1, 2001 June 1, 2001
For the Year (date of (date of
Ended incorporation) incorporation)
December 31, to December to December
2002 31, 2001 31, 2002
-------------- ---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (590,524) $ (8,077,966) $(8,668,490)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . 38,291 73 38,364
Amortization of deferred stock compensation. . . . . . . . . . . (245,598) 245,598 -
Stock based compensation and consulting. . . . . . . . . . . . . 204,421 7,715,002 7,919,423
Provision for bad debts. . . . . . . . . . . . . . . . . . . . . 22,120 - 22,120
Other non-cash expenses. . . . . . . . . . . . . . . . . . . . . 9,759 26,500 36,259
Changes in assets and liabilities, net:
Increase in accounts receivable, net. . . . . . . . . . . . . . (62,202) - (62,202)
Increase in lab supplies. . . . . . . . . . . . . . . . . . . . (19,306) - (19,306)
Increase in other current assets. . . . . . . . . . . . . . . . (2,000) - (2,000)
Increase in deposits. . . . . . . . . . . . . . . . . . . . . . (2,616) (1,300) (3,916)
Increase in due to bank . . . . . . . . . . . . . . . . . . . . 13,518 - 13,518
Increase in deferred revenues . . . . . . . . . . . . . . . . . 100,000 - 100,000
Increase in accounts payable and accrued
and other liabilities . . . . . . . . . . . . . . . . . . . . . 149,341 14,686 164,027
-------------- ---------------- -------------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . . . . (384,796) (77,407) (462,203)
-------------- ---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . (417,999) (2,900) (420,899)
Cash acquired in acquisition. . . . . . . . . . . . . . . . . . . . - 209 209
-------------- ---------------- --------------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . . . . (417,999) (2,691) (420,690)
-------------- ---------------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES-
Advances from affiliates, net . . . . . . . . . . . . . . . . . . . . . 725,579 157,314 882,893
-------------- ---------------- --------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . (77,216) 77,216 -
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77,216 - -
-------------- ---------------- --------------
CASH AND CASH EQUIVALENTS, END OF
PERIOD. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 77,216 $ -
============== ================ ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 924 $ - $ 924
============== ================ ==============
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ - $ -
============== ================ ==============
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stock issued in acquisition of American
Communications Enterprises:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 14,216 $ 14,216
Advances from stockholder . . . . . . . . . . . . . . . . . . . . . . . - 156,916 156,916
-------------- ---------------- --------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 171,132 $ 171,132
============== ================ ==============
Stockholder advances converted to common stock. . . . . . . . . . . . . $ 725,561 $ 156,916 $ 882,477
============== ================ ==============
Deferred compensation on grants of stock options. . . . . . . . . . . . $ (4,036,500) $ 4,036,500 $ -
============== ================ ==============
See notes to consolidated financial statements.
29
------
NEOGENOMICS, INC.
-----------------
(A DEVELOPMENT STAGE ENTERPRISE)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - FORMATION AND OPERATIONS OF THE COMPANY
NeoGenomics, Inc. ("NEO") was incorporated under the laws of the state of
Florida on June 1, 2001 and on November 14, 2001 agreed to be acquired by
American Communications Enterprises, Inc. ("ACE"). ACE was formed in 1998 and
succeeded to NEO's name on January 3, 2002 (collectively referred to as "we",
"us", "our").
For financial statement purposes, the acquisition was treated as a reverse
acquisition and a recapitalization with NEO being treated as the acquirer. In
connection therewith, ACE issued 2,385,000 shares of its common stock to NEO's
founder and sole stockholder in exchange for all of NEO's issued and outstanding
common shares. The value of these shares, which was based on the number, and
fair value, of shares issued ($3.00 per share based on the price at which ACE's
shares were trading at that time) was included in stock based compensation in
the accompanying 2001 consolidated statement of operations. Immediately before
the acquisition, ACE had 1,317,339 shares outstanding and liabilities in excess
of assets of approximately $170,000. Since the transaction was accounted for as
a purchase, the deficiency of $170,000 was reflected as an adjustment to
stockholders' equity as of the acquisition date. On November 21, 2001, we
settled approximately $157,000 of these liabilities through the issuance of
approximately 78,000 shares of our common stock at approximately $2.00 per
share, which approximated the quoted market price of our common shares on that
date.
On April 4, 2003, we amended our articles of incorporation to (1) effect a
one-for-100 reverse split, (2) reduce the authorized number of common shares
from 500,000,000 to 100,000,000, and (3) authorize 10,000,000 shares of
preferred stock for future issuance, with such terms, restrictions and
limitations as may be established by the Board of Directors.
As a result of the above, all references to the number of shares and par value
in the accompanying consolidated financial statements and notes thereto have
been adjusted to reflect the reverse acquisition and April 2003 reverse stock
split as though all such changes had been completed as of June 1, 2001.
At December 31, 2002, we were considered to be a development stage (as defined
in Financial Accounting Standards Board Statement No. 7), bio-tech company
organized for the principal purpose of developing a genetic and molecular
biology testing and genomic research center. We commenced our planned principal
operations in 2003.
Principles of Consolidation
-----------------------------
The accompanying consolidated financial statements include the accounts of NEO
and ACE. All significant intercompany accounts and balances have been
eliminated in consolidation.
Revenue Recognition
--------------------
Net revenues are recognized in the period when tests are performed and consist
primarily of net patient revenues that are recorded based on established billing
rates less estimated discounts for contractual allowances principally for
patients covered by Medicare, Medicaid and managed care and other health plans.
These revenues also are subject to review and possible audit by the payors. We
believe that adequate provision has been made for any adjustments that may
result from final determination of amounts earned under all the above
arrangements. There are no known material claims, disputes or unsettled matters
with any payors that are not adequately provided for in the accompanying
consolidated financial statements.
30
Allowance for Doubtful Accounts
----------------------------------
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 its accounts receivable and our historical collection experience for
each type of payor.
Concentrations of Credit Risk
--------------------------------
We grant credit without collateral to our patients, most of whom are local
residents and are insured under third-party payor agreements. At of December
31, 2002, approximately 31.1% and 18.6% of our receivables were from Medicare
and Blue Cross/Blue Shield, respectively.
Use of Estimates
------------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make certain
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements. The reported amounts of revenues and expenses during
the reporting period may be affected by the estimates and assumptions we are
required to make. Estimates that are critical to the accompanying consolidated
financial statements include estimates related to contractual adjustments, and
the allowance for doubtful accounts. It is at least reasonably possible that
our estimates could change in the near term with respect to these matters
Financial Instruments
----------------------
We believe the book value of our current assets and liabilities approximates
their fair values due to their short-term nature.
Furniture and equipment
-------------------------
Furniture and equipment are stated at cost. Major additions are capitalized,
while minor additions and maintenance and repairs, which do not extend the
useful life of an asset, are expensed as incurred. Depreciation is provided
using the straight-line method over the assets' estimated useful lives of five
years.
Long-Lived Assets
------------------
Statement of Financial Accounting Standards (SFAS) 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" requires that long-lived assets,
including certain identifiable intangibles, be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying value of the
assets in question may not be recoverable. We evaluated our long-lived assets
during 2002 and determined that they were not impaired at of December 31, 2002.
Accordingly, the adoption of SFAS 144 did not have a significant impact on our
consolidated financial statements.
31
Income Taxes
-------------
We compute income taxes in accordance with Financial Accounting Standards
Statement No. 109 "Accounting for Income Taxes" ("SFAS 109"). Under SFAS 109,
deferred taxes are recognized for the tax consequences of temporary differences
by applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. Also, the effect on deferred taxes of a change in tax
rates is recognized in income in the period that included the enactment date.
There were no significant temporary differences as of December 31, 2002.
Stock-Based Compensation
-------------------------
We account for equity instruments issued to employees for services based on the
fair value of the equity instruments issued and account for equity instruments
issued to those other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable.
We have adopted SFAS No 123, "Accounting for Stock-Based Compensation" which
requires us to recognize as expense the fair value of all stock-based awards on
the date of grant, or continue to apply the provisions of Accounting Principles
Board Opinion No. 25 and provide pro-forma net income (loss) earnings per share
disclosure for employee stock option grants and all other stock-based
compensation as if the fair-value-based method defined in SFAS 123 had been
applied. We have elected to continue to apply APB 25 in accounting for our
stock option plan.
Statement of Cash Flows
--------------------------
For purposes of the statement of cash flows, we consider all highly liquid
investments purchased with an original maturity of three months or less to be
cash equivalents.
Net Loss Per Common Share
-----------------------------
We compute loss per share in accordance with Financial Accounting Standards
Statement No. 128 "Earnings per Share" ("SFAS 128") and SEC Staff Accounting
Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98,
basic net loss per share is computed by dividing the net loss available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted net loss per share is computed by dividing the net
loss for the period by the weighted average number of common and common
equivalent shares outstanding during the period. Common equivalent shares
outstanding as of December 31, 2001, which consisted of employee stock options,
were excluded from diluted net loss per common share calculations as of such
date because they were anti-dilutive. There were no such options outstanding at
December 31, 2002. Accordingly, basic and diluted net loss per share are
identical for the year ended December 31, 2002 and the period June 1, 2001 (date
of acquisition) to December 31, 2001.
Advertising Costs
------------------
We expense advertising costs as they are incurred. Advertising costs
approximated $2,300 and $200, respectively, during the year ended December 31,
2002, and the period June 1, 2001 (date of incorporation) to December 31, 2001.
32
Recent Pronouncements
----------------------
In July 2001 the Financial Accounting Standards Board (FASB) issued SFAS 141,
"Business Combinations", and SFAS 142, "Goodwill and Intangible Assets". SFAS
141 is effective for all business combinations completed after June 30, 2001.
SFAS 142 is effective for the year beginning January 1, 2002; however certain
provisions of that Statement apply to goodwill and other intangible assets
acquired between July 1, 2001, and the effective date of SFAS 142. Because we
had no goodwill as of December 31, 2001, the adoption of SFAS 142 did not have a
significant material impact on our consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred, and to capitalize a corresponding amount by increasing the carrying
amount of the related long-lived asset. The liability is accreted to its
present value each subsequent period, and the capitalized cost is depreciated
over the useful life of the related long-lived asset. SFAS No. 143 will be
effective for exit or disposal activities initiated after December 31, 2002. We
do not anticipate that our adoption of SFAS No. 143, as required on January 1,
2003, will have a material impact on our consolidated financial position or
results of operations
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires that the liability for
a cost associated with an exit or disposal activity be recognized at its fair
value when the liability is incurred. Under previous guidance, a liability for
certain exit costs was recognized at the date that management committed to an
exit plan, which was generally before the actual liability has been incurred.
SFAS No. 146 will be effective for exit or disposal activities initiated after
December 31, 2002. We do not anticipate that our adoption of SFAS No. 146, as
required on January 1, 2003, will have a material impact on our consolidated
financial position or results of operations.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of SFAS No. 123." This
standard provides alternative methods of transition for companies that
voluntarily change to the fair value based method of accounting for stock-based
employee compensation. It also requires prominent disclosure about the effects
on reported net income of the company's accounting policy decisions with respect
to stock based employee compensation in both annual and interim financial
statements. The transition provisions and annual disclosure requirements are
effective for all fiscal years ending after Dec. 15, 2002, while the interim
period disclosure requirements are effective for all interim periods beginning
after Dec. 15, 2002. The adoption of SFAS No. 148 did not have a significant
impact on our consolidated financial position or results of operations.
NOTE B - GOING CONCERN
Our consolidated financial statements were prepared using accounting principles
generally accepted in the United States of America applicable to a going
concern, which contemplates the realization of assets and liquidation of
liabilities in the normal course of business. We have incurred significant
losses since our inception, and have experienced and continue to experience
negative operating margins and negative cash flows from operations. In
addition, we expect to have ongoing requirements for substantial additional
capital investment to implement our business plan. Since our inception, our
operations have been funded through private equity, and we expect to continue to
seek additional funding through private or public equity. As discussed at Note
G, in connection with this matter, in April 2003, we secured a commitment from a
related entity to provide us with $1.5 million of debt financing in the form of
a revolving credit facility. In addition, we have recently completed laboratory
facilities to run scientific tests that we believe will begin to generate
operating revenues. However, there can be no assurance that we will be
successful in these efforts, or that the credit facility will be adequate to
meet our needs. These factors, among others, indicate that we may be unable to
continue as a going concern for a reasonable period of time.
33
Our consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should we be unable to
continue as a going concern.
NOTE C - INCOME TAXES
We recognized losses for both financial and tax reporting purposes during each
of the periods in the accompanying consolidate statements of operations.
Accordingly, no provision for income taxes and/or deferred income taxes payable
have been provided for in the accompanying consolidated financial statements.
Since our incorporation, we have incurred net operating losses for income tax
purposes of approximately $724,500 (the significant difference between this
amount, and our deficit of $8,668,490, arises primarily from certain stock based
compensation that is considered to be a permanent difference). Assuming that
the transaction discussed at Note G does not trigger certain "change in control"
provisions of the Internal Revenue Code, these net operating loss carryforwards
will expire in various years through the year ended December 31, 2022. However,
we have established a valuation allowance to fully reserve the related deferred
income tax asset as such asset did not meet the required asset recognition
standard established by SFAS 109.
At December 31, 2002 we had no deferred tax liabilities and our non-current
deferred income tax asset (assuming an effective income tax rate of
approximately 39%) consisted of the following:
Non-current deferred income tax asset: Amounts
--------
Net operating loss carryforwards . . . $282,600
Less valuation allowance . . . . . . . (282,600)
---------
Total. . . . . . . . . . . . . . . . . $ -
=========
The income tax benefit consists of the following for the year ended December 31,
2002:
Current . . . . . . . . . . . $ -
Deferred. . . . . . . . . . . 156,600
Change in valuation allowance (156,600)
---------
$ -
==========
NOTE D - INCENTIVE STOCK OPTIONS AND AWARDS
In October 2002 our president agreed to cancel his option to purchase 1.35
million shares of our common stock that he was granted in 2001.
34
The status of our stock options is summarized as follows:
Number
Of Weighted Average
Shares Exercise Price
---------- --------------
Outstanding at June 1, 2000. . . - -
Granted. . . . . . . . . . . . . 1,350,000 $ 0.01
Exercised. . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . - -
---------- -------------
Outstanding at December 31, 2001 1,350,000 0.01
Granted. . . . . . . . . . . . . - -
Exercised. . . . . . . . . . . . - -
Canceled . . . . . . . . . . . . (1,350,000) 0.01
---------- -------------
Outstanding at December 31, 2002 - $ -
========== =============
We account for our stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees". With respect to stock options granted during 2001, we
initially recorded deferred stock compensation of $4,036,500, for the difference
between the exercise price and the fair value of the common stock underlying the
options on the date of the grant. This amount was being amortized consistent
with the method described in FASB Interpretation No. 28 over the vesting period
of the individual options, estimated to be 13-38 months. During 2002, as a
result of the cancellations of the options, we reversed all previously recorded
amortization of the deferred stock compensation.
Had our compensation expense for stock-based compensation plans been determined
based upon fair values at the grant dates for awards under this plan in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our net
loss and pro forma net loss per share amounts would have been reflected as
follows:
2002 2001
---------- ------------
Net loss:
As reported $(590,524) $(8,077,966)
Pro forma . $(590,524) $(8,083,966)
Loss per share:
---------------
As reported $(0.14) $(2.14)
--------------- ------- -------
Pro forma . $(0.14) $(2.14)
--------------- ------- -------
The weighted average fair value of options granted during 2001, estimated on the
date of grant using the Black-Scholes option-pricing model, was approximately
$3.00. The fair value of options granted was estimated on the date of the
grants using the following approximate assumptions: dividend yield of 0 %,
expected volatility of 5.32%, risk-free interest rate of 4%, and an expected
life of 3 years.
35
In addition to the above, we have a stock option plan that provides for the
granting of stock options and awards to officers, directors, employees and
consultants. We are authorized to grant awards for up to 1 million shares of
our common stock, none of which have been granted as of December 31, 2002.
Vesting and exercise price provisions will be determined by the board of
directors at the time the awards are granted.
NOTE E - COMMITMENT
During September 2002, we entered into an agreement to perform collaborative
research with Ciphergen Biosystems ("Ciphergen"). If a patented product or
service results from this research, the patenting party will be obligated to pay
a 4% royalty to the other party. In addition, each of us are to own 50% of any
inventions developed jointly as a result of this research. In October 2002,
Ciphergen awarded us with a $100,000 research grant, which we have agreed to use
to purchase supplies, labor and equipment for the research. As of December 31,
2002, we have not performed any of the testing, or spent any of the $100,000;
accordingly, such amount has been recorded as deferred revenue in the
accompanying consolidated balance sheet.
In May 2003, we entered into a three year lease for our operating facility. The
lease, which is scheduled to commence on July 1, 2003, requires average monthly
rental payments of approximately $6,000 during the lease term (including
estimated operating and maintenance expenses and sales tax). The lease
contains a provision that allows us to extend the lease for two terms of three
years each. Rent expense under our previous lease arrangement approximated
$25,000 and $5,500 during the year ended December 31, 2002 and the period June
1, 2001 (date of incorporation) to December 31, 2001, respectively.
NOTE F- OTHER RELATED PARTY TRANSACTIONS
During 2002 and 2001 we received net advances of approximately $625,000 and
$100,000, respectively, from Tampa Bay Financial, Inc., ("TBF") one of our
stockholders. These advances, which were non-interest bearing, unsecured and
due on demand, were converted to approximately 210,000 shares of our common
stock in 2002 using a conversion price of $3.33 per share (which amount was
greater than the approximate quoted market price of our common shares on the
conversion dates).
During November 2001, we entered into an agreement with TBF to provide us with
consulting services and pay certain of our expenses, including the salary of our
chief financial officer and costs incurred in preparing required filings under
securities laws. The term of this agreement was for one year and was terminated
in 2002. During 2002 and 2001, we incurred expenses of approximately $105,000
and $15,000, respectively, related to this agreement. In 2002 the related
liability was settled through three separate issuances (totaling 117,000
shares) of our common stock using a conversion price of approximately $1.00 per
share (which amount approximated the quoted market price of our common shares on
the settlement dates).
During 2002, we issued approximately 105,000 shares of our common stock in
settlement of approximately $110,000 of our president's accrued salary. The
conversion price of approximately $1.00 per share approximated the quoted market
price of our common shares on the settlement dates.
We occasionally borrow funds from the Naples Women's Center ("NWC"), a company
owned by our president, to meet our short-term cash needs. These amounts have
been advanced to us with a stated interest rate of 8% and are due upon demand.
At December 31, 2002, we owed NWC approximately $117,000. Approximately
$58,700 of this amount was repaid in April 2003 in connection with the financing
transaction described in Note G.
36
In December 2002, in order to meet short term cash needs, we borrowed $25,000
from two individuals who are affiliates of Medical Venture Partners, LLC
("Medical Venture Partners"), a venture capital firm with whom we were
negotiating a financing transaction (see Note G). These amounts, having a
stated interest rate of 8%, were repaid in April 2003 in connection with the
financing transaction described in Note G.
NOTE G - OTHER SUBSEQUENT EVENTS
On April 15, 2003, we entered into debt and equity financing agreements with
Medical Venture Partners and its principals. Under the terms of the agreements,
affiliates of Medical Venture Partners purchased approximately 75% of our
outstanding common stock and agreed to make available up to $1.5 million of debt
financing in the form of a revolving credit facility. The debt financing and
approximately 50.5% of the equity investment are being made through MVP 3, LP, a
fund controlled by Medical Venture Partners. The remainder of the equity
investment was made by the three principals of Medical Venture Partners acting
individually.
Under the terms of the loan agreement, we will be able to borrow up to 80% of
"eligible" accounts receivable, 50% of our net furniture and equipment balance,
and up to $500,000 on an unsecured basis. As a condition to these transactions,
NEO, our President, MVP 3 LP and the principals of Medical Venture Partners
entered into a shareholders agreement that provides that MVP 3, LP will have the
right to appoint up to four of seven of our directors. We also entered into a
Registration Rights Agreement with MVP 3 LP and the principals of Medical
Venture Partners granting them certain demand and piggyback registration rights.
At the time of the closing of this transaction, we entered a one year employment
agreement with our President. The agreement, which renews automatically for an
unlimited number of terms of one year (unless a "Notice of Termination" is
delivered), provides for a base salary equal to 20% of the cash flow generated
by NEO (subject to a monthly cap of $20,000). In addition, the agreement
provides for a bonus of 10% of any amount by which our quarterly net revenues
exceed certain targets as established by our Board of Directors.
End of Financial Statements
37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 18, 2002, we engaged Kingery, Crouse & Hohl, P.A., as our
principal independent accountant to audit our financial statements beginning
with the fiscal year ending December 31, 2001. The decision to change our
principal accountant was recommended by our Board of Directors. Accordingly,
the engagement of Sprouse & Anderson, LLP, our prior independent accountants was
not renewed, effective March 18, 2002.
During our two most recent fiscal years, and during the period from January 1,
2002 to March 18, 2002, there was no disagreement with Sprouse & Anderson, LLP,
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreement, if not solved
to their satisfaction would have caused them to make reference in connection
with their opinion to the subject matter of the disagreement.
The audit reports on our financial statements as of and for the years ended
December 31, 2000 and December 31, 1999 did not contain any adverse opinion or
disclaimer opinion, nor were they qualified or modified as to uncertainty, audit
scope or accounting principles. However, such reports contained an explanatory
paragraph regarding the uncertainty about our ability to continue as a going
concern.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding our executive
officers and directors as of May 15, 2003:
Name Age Position
--------------- -------- --------
Michael T. Dent 38 President, Chief Medical Officer, and Chairman
Kevin Lindheim. 43 Director
Michael T. Dent M.D. - President, Chief Medical Officer and Chairman
Dr. Dent has been our President and Chief Medical Officer since April 2003.
Prior to that Dr. Dent was our President and Chief Executive Officer from June
2001, when he founded NeoGenomics, to April 2003. Dr. Dent founded the Naples
Women's Center in 1996. He received his training in Obstetrics and Gynecology at
the University of Texas in Galveston. He received his M.D. degree from the
University of South Carolina in Charleston, S.C. in 1992 and a B.S. degree from
Davidson College in Davidson, N.C. in 1986. He is a member of the American
Association of Cancer Researchers and a Diplomat and fellow of the American
College of Obstetricians and Gynecologists. He sits on the Board of the Florida
Life science Biotech Initiative.
38
Kevin Lindheim - Director
Mr. Lindheim has served as a director since February, 2002. He is the
President and Chief Executive Officer of Florida Valuation and Consultants,
Inc., a full service commercial real estate advisory firm, a position he has
held since 1992. He holds a B.S. Degree in Accounting from Louisiana
University, and a postgraduate degree in Real Estate from Tulane University.
ITEM 10. EXECUTIVE COMPENSATION
The following table provides certain summary information concerning
compensation paid by the Company to or on behalf of our most highly compensated
executive officers for the fiscal years ended December 31, 2001, 2000 and 1999:
SUMMARY COMPENSATION TABLE
----------------------------
Name and Principal Capacity Year Salary Other Compensation
---------------------------------------------------- ------ ------- -------------------
2002 $130,669(1) -
Dr. Michael T. Dent 2001 9,600(1) $ 0 (2)
President, Chief Medical Officer, and Chairman . . . 2000 - -
Matthew Veal (3) 2002 $ - 44,000 (4)
Former Chief Financial Officer, and Former Director. 2001 $ 0 $99,679 (4)
2000 - -
------ ------- -------------------
(1) During 2002, Dr. Dent Received 105,636 shares of the Company's common
stock in lieu of cash salary payments due to him for salary earned in
2001 and the first nine months of 2002. Such shares were collectively
valued at $109,021 at the various times of issue and were issued
pursuant to a Registration Statement on Form S-8. As of May 14, 2003,
Dr. Dent had not sold any of this stock or any other stock in the
Company. The remaining $31,248 of salary earned by Dr. Dent was earned
in the fourth quarter of 2002 and has been accrued as a cash obligation
of the Company. As of May 15, 2003, it had not yet been paid.
(2) In November, 2001, Dr. Dent received options to purchase 1,350,000
shares of common stock at $0.01 per share pursuant to an Option
Agreement. This Option Agreement was terminated effective October 1,
2002 and Dr. Dent gave up any right or claim to such options.
(3) Mr. Veal resigned Chief Financial Officer on November 22, 2002 and
resigned as a Director on May 22, 2002.
(4) Paid in shares of Company common stock issued pursuant to Registration
Statement on Form S-8.
EMPLOYMENT AGREEMENTS.
-----------------------
We entered into a new Employment Agreement with Dr. Michael Dent on April
15, 2003 to serve as our President and Chief Medical Officer.
39
The employment agreement has an initial term of one year and will be
automatically renewed for an unlimited number of additional terms of one year
each unless either party elects to terminate the agreement. During the term of
employment, Dr. Dent will serve as the President and Chief Medical Officer of
the Company. Dr. Dent has agreed to devote at least 20% of his business time
and efforts to the business affairs of the Company during the term of the
agreement with such percentage subject to increase in certain instances. During
the term of his employment Dr. Dent will be eligible to receive a base salary in
any given month equal to 20% of the Operating Subsidiary's cash flow from
operating activities for the preceding month (as reported on Operating
Subsidiary's Statement of Cash Flows) subject to a $20,000 cap for any given
month. Dr. Dent is also eligible to receive a bonus, on a quarterly basis,
equal to 10% of the amount by which the Company's quarterly net revenues exceed
targets established by the Company's Board of Directors. For the fiscal year
2003, such quarterly targets are as follows:
For the quarter ending June 30, 2003 $125,000
For the quarter ending September 30, 2003 $250,000
For the quarter ending December 31, 2003 $500,000
The new employment agreement also provides that once Dr. Dent is devoting
50% or more of his time to the business, the Company will pay for heath
insurance for Dr. Dent and his family.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of May 15, 2003, with respect to
each person known by the Company to own beneficially more than 5% of the
Company's outstanding common stock, each director and officer of the Company and
all directors and executive officers of the Company as a group. The Company has
no other class of equity securities outstanding other than common stock.
Name And Address Of Beneficial Owner Amount and Nature Of Beneficial Ownership Percent Of Class
------------------------------------- ------------------------------------------ -----------------
MVP 3, LP (1)
1740 Persimmon Drive
Naples, FL 34109 9,303,279 50.5%
------------------------------------- ------------------------------------------ -----------------
John E. Elliott (2)
2709 Buckthorn Way
Naples, FL 34105 10,844,540 58.9%
------------------------------------- ------------------------------------------ -----------------
Steven C. Jones (3)
1740 Persimmon Drive
Naples, FL 34109 10,844,540 58.9%
------------------------------------- ------------------------------------------ -----------------
Lawrence R. Kuhnert (4)
5120 Timberview Terrace
Orlando, FL 32819 10,844,540 58.9%
------------------------------------- ------------------------------------------ -----------------
Michael T. Dent M.D.
1726 Medical Blvd.
Naples, FL 34110 2,490,634 13.5%
------------------------------------- ------------------------------------------ -----------------
Kevin Lindheim
9220 Bonita Beach Road
Bonita Springs, FL 34135 3,845 *
--------------------------------------- ------------------------------------------ -----------------
Directors and Officers
as a Group (2 persons) 2,494,479 13.6%
------------------------------------- ------------------------------------------ -----------------
40
less than 1.0%
(1) MVP 3, LP has direct ownership of 9,303,279 shares. The general partner
of MVP 3, LP is Medical Venture Partners, LLC, which has John E. Elliott,
Steven C. Jones and Larry R. Kuhnert as its members.
(2) John E. Elliott has direct ownership of 1,541,261 shares, but as a
member of the general partner of MVP 3, LP, he has the right to vote all
shares held by MVP 3, LP, thus 9,303,279 shares have been added
to his total.
(3) Steven C. Jones has direct ownership of 1,541,261 shares, but as a
member of the general partner of MVP 3, LP, he has the right to vote all
shares held by MVP 3, LP, thus 9,303,279 shares have been added
to his total.
(4) Larry R. Kuhnert has direct ownership of 1,541,261 shares, but as a
member of the general partner of MVP 3, LP, he has the right to vote all
shares held by MVP 3, LP, thus 9,303,279 shares have been added
to his total.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The executive offices of the Company share space, on a rent-free basis,
with Naples Women's Center ("NWC"), a company owned by Dr. Michael Dent, our
Chairman and President. In addition, Naples Women's Center provides
bookkeeping services to the Company free of charge.
During 2001 and 2002, we borrowed funds from the Naples Women's Center to meet
our short-term cash needs. At December 31, 2002, we owed NWC approximately
$117,332. $58,666 of this amount was repaid on April 17, 2003.
During the period December 2002 to April 2003, AMI Holdings Corp. (a company
controlled by John E. Elliott), Steven C. Jones and Lawrence R. Kuhnert advanced
$177,000 under various short term bridge loan agreements. Messrs. Elliott,
Jones and Kuhnert are the three principals of MVP 3, LP, which consummated debt
and equity financing transactions with the Company on April 15, 2003. All of
these advances, plus $2,493 of accrued interest, were repaid to these
individuals on April 17, 2003.
In order to facilitate the administration of MVP 3's revolving credit
facility with the Company and fund it, MVP 3 arranged a similar credit facility
with Fifth Third Bank. On April 15, 2003, the Company provided a guaranty of
MVP 3's obligations to Fifth Third Bank for all amounts that are directly passed
through MVP 3 and further loaned to the Company and has pledged all of its
business assets to both Fifth Third Bank and MVP 3, LP.
41
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) EXHIBITS
The following exhibits are filed (or incorporated by reference herein) as
part of this Form 10-KSB.
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1.2 Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on January 3, 2002.
3.1.3 Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on April 11, 2003.
3.2.1 Amended & Restated Bylaws, dated April 15, 2003.
10.1 American Communications Enterprises, Inc. 2000 Stock Plan (previously
filed as Exhibit 10.7 to Form 10-KSB filed April 16, 2001).
10.2 Plan of Exchange, dated as of November 14, 2001, among the Company,
Tampa Bay Financial, Inc., Dr. Dent, M.D. and NeoGenomics, Inc.
(Previously filed as Exhibit 2.1 to Form 10-QSB on November 19,
2001).
10.3 Employment Agreement, dated as of November 16, 2001, between the
Company and Michael T. Dent, M.D. (previously filed as Exhibit 10.16
to Form 10-QSB on November 19, 2001).
10.4 Stock Option Agreement, dated as of November 16, 2001, between the
Company and Michael T. Dent, M.D. (previously filed as Exhibit 10.15
to Form 10-QSB on November 19, 2001).
10.5 Consulting Agreement, dated as of November 16, 2001, between the
Company and Tampa Bay Financial, Inc. (previously filed as Exhibit
10.14 to Form 10-QSB on November 19, 2001).
10.6 Shareholders Agreement, dated as of November 16, 2001, between the
Company, the Operating Subsidiary, selected Company shareholders,
Tampa Bay Financial, Inc and Michael T. Dent, M.D. (previously filed
as Exhibit 10.15 to Form 10-QSB on November 19, 2001).
10.7 Letter Agreement, dated as of November 16, 2001, between the Company
and Tampa Bay Financial, Inc. (previously filed as Exhibit 10.7 to Form
10-KSB on May 21, 2002).
10.8 Research and License Agreement Between the Company and Ciphergen
Biosystems, Inc. (previously filed as Exhibit 10.8 to Form 10-QSB on
November 20, 2002)
42
10.9 Employment Agreement, dated as of April 15, 2003, between the Company
and Michael T. Dent, M.D.
10.10 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and MVP 3, L.P.
10.11 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and John E. Elliott.
10.12 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and Steven C. Jones.
10.13 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and Lawrence R. Kuhnert.
10.14 Shareholders Agreement, dated as of April 15, 2003, by and between the
Company, MVP 3 LP, John E. Elliott, Steven C. Jones, Larry R.
Kuhnert and Michael T. Dent.
10.15 Registration Rights Agreement, dated as of April 15, 2003, by and
between the Company, MVP 3 LP, John E. Elliott, Steven C. Jones,
Larry R. Kuhnert and Michael T. Dent.
10.16 Loan and Security Agreement, dated as of April 15, 2003, between the
Company, the Operating Subsidiary and MVP 3, LP.
10.17 Security Agreement, dated as of April 15, 2003, between the Operating
Subsidiary and MVP 3, LP.
10.18 Guaranty, dated as of April 15, 2003, by the Company in favor of MVP
3, LP.
10.19 Stock Pledge Agreement, dated as of April 15, 2003, between the
Company, the Operating Subsidiary and MVP 3, L.P.
10.20 Loan and Security Agreement, dated as of April 15, 2003, by and
between MVP 3 LP, Fifth Third Bank Florida, the Operating Subsidiary,
John Elliott, Steven Jones, and Larry Kuhnert.
10.21 Security Agreement, dated as of April 15, 2003, between the Operating
Subsidiary and Fifth Third Bank, Florida.
10.22 Guaranty, dated as of April 15, 2003, by the Operating Subsidiary in
favor of Fifth Third Bank, Florida.
10.23 Real Estate Lease Agreement, dated as of May 13, 2003, between the
Operating Subsidiary and Cambridge Management Associates LP.
21 The Company's only subsidiary is NeoGenomics, Inc., a Florida
corporation (the "Operating Subsidiary").
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(B) REPORTS ON FORM 8-K.
The following reports on Form 8-K were filed with the SEC during the period
from September 30, 2002 until the date of this report on Form 10-KSB.
1) On April 4,2003, we filed a Report of Form 8-K announcing that a majority of
our shareholders had consented to amending our articles of incorporation to
reduce the authorized number of shares of common stock from 500,000,000 shares
to 100,000,000 shares and to authorize 10,000,000 shares of a new class of
preferred stock. The shareholders also consented to effecting a 1:100 reverse
stock split of our common stock.
43
2) On April 17, we filed a Report of Form 8-K announcing that the Company
had experienced a change of control by virtue of the fact that MVP 3, LP and its
affiliates had purchased 13,927,062 shares of our stock at a price of $0.01 per
share.
ITEM 14. CONTROLS AND PROCEDURES
Within 90 days prior to the date of filing of this report, we carried out
an evaluation, under the supervision and with the participation of our
management, including the Chief Executive Officer, of the design and operation
of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer concluded that our disclosure controls and procedures are
effective for the gathering, analyzing and disclosing the information we are
required to disclose in the reports we file under the Securities Exchange Act of
1934, within the time periods specified in the SEC's rules and forms. There
have been no significant changes in our internal controls or in other factors
that could significantly affect internal controls subsequent to the date of this
evaluation.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NeoGenomics, Inc.
By: /S/ Michael T. Dent
----------------------
Michael T. Dent, M.D.
President and Chief Medical Officer
Date: May 16, 2003
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
/S/ Michael T. Dent Director, Principal May 16, 2003
Accounting Officer
/S/ Kevin J. Lindheim Director May 16, 2003
CERTIFICATION
I, Michael T. Dent, M.D., certify that:
1. I have reviewed this annual report on Form 10-KSB of Neogenomics, Inc;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact, or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial position, results of operations, and cash flows of the
registrant as of, and for, the periods presented in this annual report.
4. I am responsible for establishing and maintaining disclosure controls and
procedures for the registrant and I have:
(i) designed such disclosure controls and procedures to ensure that material
information relating to the issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this annual report is being prepared;
(ii) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
(iii) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of the board of directors (or persons
fulfilling the equivalent function):
(i) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(ii) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
May 16, 2003
_/s/ Michael T. Dent, M.D_
------------------------------
Michael T. Dent, M.D.
President, Chief Medical Officer and
Principal Accounting Officer
8
EXHIBIT INDEX
-------------
EXHIBIT
NUMBER DESCRIPTION
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3.1.2 Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on January 3, 2002.
3.1.3 Amendment to Articles of Incorporation filed with the Nevada Secretary
of State on April 11, 2003.
3.2.1 Amended & Restated Bylaws, dated April 15, 2003.
10.9 Employment Agreement, dated as of April 15, 2003, between the
Company and Michael Dent, M.D.
10.10 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and MVP 3, L.P.
10.11 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and John E. Elliott.
10.12 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and Steven C. Jones.
10.13 Stock Purchase Agreement, dated as of April 15, 2003, between the
Company and Lawrence R. Kuhnert.
10.14 Shareholders Agreement, dated as of April 15, 2003, by and between the
Company, MVP 3 LP, John E. Elliott, Steven C. Jones, Larry R.
Kuhnert and Michael T. Dent.
10.15 Registration Rights Agreement, dated as of April 15, 2003, by and
between the Company, MVP 3 LP, John E. Elliott, Steven C. Jones,
Larry R. Kuhnert and Michael T. Dent.
10.16 Loan and Security Agreement, dated as of April 15, 2003, between the
Company, the Operating Subsidiary and MVP 3, LP.
10.17 Security Agreement, dated as of April 15, 2003, between the Operating
Subsidiary and MVP 3, LP.
10.18 Guaranty, dated as of April 15, 2003, by the Company in favor of MVP
3, LP.
10.19 Stock Pledge Agreement, dated as of April 15, 2003, between the
Company, the Operating Subsidiary and MVP 3, L.P.
10.20 Loan and Security Agreement, dated as of April 15, 2003, by and
between MVP 3 LP, Fifth Third Bank Florida, the Operating Subsidiary,
John Elliott, Steven Jones, and Larry Kuhnert.
10.21 Security Agreement, dated as of April 15, 2003, between the Operating
Subsidiary and Fifth Third Bank, Florida.
10.22 Guaranty, dated as of April 15, 2003, by the Operating Subsidiary in
favor of Fifth Third Bank, Florida.
10.23 Real Estate Lease Agreement, dated as of May 13, 2003, between the
Operating Subsidiary and Cambridge Management Associates, LP.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.