10QSB: Optional form for quarterly and transition reports of small business issuers
Published on November 14, 2003
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D. C. 20549 FORM 10-QSB (X) Quarterly report pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934. For the quarterly period ended September 30, 2003. ( ) Transition report pursuant to Section 13 or 15(d) of the Exchange Act for the transition period from ____________ to ____________ . Commission File Number: 333-72097 NeoGenomics, Inc. (Exact name of registrant as specified in charter) Nevada 74-2897368 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 12701 Commonwealth Drive, Suite 9, Fort Myers, FL 33913 (Address of principal executive offices) (239) 768-0600 (Registrant's Telephone Number, Including Area Code) Check 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 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. YES (X) NO ( ) State the number of shares outstanding of each of the issuer's classes of common equity, as of October 31, 2003. 18,449,416 Transitional Small Business Disclosure Format: YES ( ) NO (X) 1 NeoGenomics, Inc. INDEX TO FORM 10-QSB PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements (unaudited) Consolidated Balance Sheet as of September 30, 2003.................. 4 Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and the three and nine months ended September 30, 2002............................................. 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and the nine months ended September 30, 2002...... 6 Notes to Consolidated Financial Statements........................... 7 Management's Discussion and Analysis of Financial Condition and Item 2. Results of Operations (including cautionary statement)............... 10 Item 3. Controls and Procedures 15 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................... 16 Item 2. Changes in Securities................................................ 16 Item 3. Defaults Upon Senior Securities...................................... 16 Item 4. Submission of Matters to a Vote of Securities Holders................ 16 Item 5. Other Information.................................................... 16 Item 6. Exhibits and Reports on Form 8-K..................................... 16 Signatures 17 2 PART I FORWARD-LOOKING STATEMENTS This Form 10-QSB, press releases and certain information provided periodically in writing or orally by our officers or our agents contain statements which constitute forward-looking statements within the meaning of Section 27A of the Securities Act, as amended; Section 21E of the Securities Exchange Act of 1934; and the Private Securities Litigation Reform Act of 1995. The words "may", "would", "could", "will", "expect", "estimate", "anticipate", "believe", "intend", "plan", "goal", and similar expressions and variations thereof are intended to specifically identify forward-looking statements. These statements appear in a number of places in this Form 10-QSB and include all statements that are not statements of historical fact regarding the intent, belief or current expectations of us, our directors or our officers, with respect to, among other things: (i) our liquidity and capital resources; (ii) our financing opportunities and plans; (iii) trends affecting our future financial condition or results of operations; (iv) our growth strategy and operating strategy; and (v) the declaration and payment of dividends. Investors and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially from those projected in the forward-looking statements as a result of various factors. The factors that might cause such differences include, among others, the following: (i) we have incurred significant losses since our inception, and have experienced and continue to experience negative operating margins and negative cash flows from operations (see Note B to the financial statements); (ii) any material inability of us to successfully internally develop our products; (iii) any adverse effect or limitations caused by Governmental regulations; (iv) any adverse effect on our cash flow or on our ability to obtain acceptable financing in connection with our growth plans; (v) any increased competition in our business; (vi) any inability of us to successfully conduct our business in new markets; and (vii) other risks including those identified in our filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise the forward looking statements made in this Form 10-QSB to reflect events or circumstances after the date of this Form 10-QSB or to reflect the occurrence of unanticipated events. 3 NeoGenomics, Inc. CONSOLIDATED BALANCE SHEET AS OF September 30, 2003 (unaudited) ________________________________________________________________________________ ASSETS CURRENT ASSETS: Cash $ 39,742 Accounts receivable (net of allowance for doubtful accounts of $10,835) 48,870 Inventory 13,539 Other current assets 7,315 Total current assets 109,466 PROPERTY AND EQUIPMENT (net of accumulated depreciation of $75,195) 374,662 TOTAL $ 484,128 ============= LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES: Accounts payable $ 56,483 Deferred revenue 100,000 Accrued and other liabilities 57,734 Total current liabilities 214,217 LONG TERM LIABILITIES: Due to affiliates 493,666 Total Liabilities 707,883 STOCKHOLDERS' DEFICIT: Common stock, $.001 par value, 100,000,000 shares authorized; 18,449,416 shares issued and outstanding 18,449 Additional paid-in capital 8,818,002 Deficit accumulated during the development stage (8,668,490) Deficit (391,716) Total stockholders' deficit (223,755) TOTAL $ 484,128 ============= ________________________________________________________________________________ See notes to consolidated financial statements. 4 NeoGenomics, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) _______________________________________________________________________________________________ For the For the For the For the Nine-Months Nine-Months Three-Months Three-Months Ended Ended Ended Ended Sept 30, 2003 Sept 30, 2002 Sept 30, 2003 Sept 30, 2002 REVENUE $ 233,418 $ 36,353 $ 90,240 $ 27,869 COST OF REVENUE 335,634 136,762 127,418 61,033 GROSS (DEFICIT) PROFIT (102,216) (100,409) (37,178) (33,164) OPERATING EXPENSES: Stock based compensation - 1,535,748 - 491,916 General and administrative 263,730 412,522 88,390 206,207 Interest expense 25,769 4,608 12,546 911 Total operating expenses 289,499 1,952,878 100,936 699,034 NET INCOME (LOSS) $ (391,715) $(2,053,287) $ (138,114) $ (732,198) ============ ============ ============ =========== NET INCOME (LOSS) PER SHARE - Basic and Diluted $ (0.03) $ (0.50) $ (0.01) $ (0.17) ============ ============ ============ =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - Basic and Diluted 13,015,319 4,138,064 18,449,416 4,287,841 ============ ============ ============ =========== _______________________________________________________________________________________________ See notes to consolidated financial statements. 5 NeoGenomics, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) ________________________________________________________________________________________ For the For the Nine-Months Nine-Months Ended Ended Sept 30, 2003 Sept 30, 2002 CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (391,715) $(2,053,287) Adjustments to reconcile net loss to net cash provided by(used in) operating activities: Depreciation 36,831 31,504 Amortization of deferred stock compensation - 1,475,748 Stock-based compensation and consulting - 176,769 Provision for bad debts 12,299 710 Non-cash expenses 30,346 2,075 Changes in assets and liabilities, net: (Increase) decrease in accounts receivables, net of write-offs (21,088) (31,592) (Increase) decrease in inventory 5,767 (16,347) (Increase) decrease in pre-paid expenses (7,315) - (Increase) decrease in other receivables 2,000 - (Increase) decrease in deposits 3,916 (2,616) Increase (decrease) in due to bank (13,518) - Increase (decrease) in deferred revenues - - Increase (decrease) in accounts payable and other liabilities (54,428) 126,671 NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (396,905) (290,365) CASH FLOWS FROM INVESTING ACTIVITIES- Purchases of property and equipment (28,958) (338,817) CASH FLOWS FROM FINANCING ACTIVITIES: Advances from affiliates, net 351,334 575,529 Issuances of common stock, net of transaction expenses 114,271 - NET CASH PROVIDED BY FINANCING ACTIVITIES 465,605 575,529 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 39,742 (53,653) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD - 77,216 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 39,742 $ 23,563 =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Interest paid $ 3,695 $ 643 =========== ============ Income taxes paid $ - $ - =========== ============ ________________________________________________________________________________________ See notes to consolidated financial statements. 6 NeoGenomics, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ________________________________________________________________________________ NOTE A - ORGANIZATION AND DESCRIPTION OF BUSINESS NeoGenomics, Inc. ("NEO") was incorporated under the laws of the state of Florida on June 1, 2001 and on November 14, 2001 agreed to be acquired by American Communications Enterprises, Inc., a Nevada corporation ("ACE"). As a result of the acquisition, NEO became the operating subsidiary of ACE. ACE was formed in 1998 and succeeded to NEO's name on January 3, 2002 (collectively NEO and ACE are referred to as "NeoGenomics", the "Company", "we", "us", or "our" throughout this Form 10-QSB). On April 4, 2003, we amended our articles of incorporation to (1) effect a one-for-100 reverse split of our common stock, (2) reduce the authorized number of common shares from 500,000,000 to 100,000,000, and (3) authorize 10,000,000 shares of preferred stock for future issuance, with such terms, restrictions and limitations as may be established by the Board of Directors. As a result of the above, all references to the number of shares and par value in the accompanying consolidated financial statements and notes thereto have been adjusted to reflect the April 2003 reverse stock split as though it had been completed as of June 1, 2001. Basis of Presentation Our accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the instructions to Form 10-QSB and Rule 10-1 of Regulation S-X of the Securities and Exchange Commission (the "SEC"). Accordingly, these consolidated financial statements do not include all of the footnotes required by accounting principles generally accepted in the United States of America. In our opinion, all adjustments (consisting of normal and recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The accompanying consolidated financial statements and the notes thereto should be read in conjunction with our audited consolidated financial statements as of and for the year ended December 31, 2002 contained in our Form 10-KSB. Principles of Consolidation The accompanying consolidated financial statements include the accounts of NEO and ACE. All significant intercompany accounts and balances have been eliminated in consolidation. Revenue Recognition Net revenues are recognized in the period when tests are performed and consist primarily of net patient revenues that are recorded based on established billing rates less estimated discounts for contractual allowances principally for patients covered by Medicare, Medicaid and managed care and other health plans. These revenues also are subject to review and possible audit by the payers. We believe that adequate provision has been made for any adjustments that may result from final determination of amounts earned under all the above arrangements. There are no known material claims, disputes or unsettled matters 7 with any payers that are not adequately provided for in the accompanying consolidated financial statements. 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 our accounts receivable and our historical collection experience for each type of payer. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions we are required to make. Estimates that are critical to the accompanying consolidated financial statements include estimates related to contractual adjustments, and the allowance for doubtful accounts. It is at least reasonably possible that our estimates could change in the near term with respect to these matters. NOTE B - 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 debt, and we expect to continue to seek additional funding through private or public equity and debt. As discussed in Note D, 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 (the "Credit Facility"). In addition, we recently moved to a larger laboratory facility and are still in the process of ramping up our operations in order to perform a greater number of cytogenetics and molecular biology tests, which we expect will lead to an increase in 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. Our consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. NOTE C - RELATED PARTY TRANSACTIONS Prior to the establishment of the Credit Facility, we occasionally borrowed funds from the Naples Women's Center ("NWC"), a company owned by our president, to meet our short-term cash needs. In total, approximately $117,300 was advanced to us during 2002 with a stated interest rate of 8% and was due upon demand. Approximately half of this amount was repaid in April 2003 in connection with 8 the financing transaction described in Note D, and we executed an agreement that called for the remaining half to be repaid in 18 months with accrued interest at a stated rate of 8.0% per annum. In addition, in order to meet short term cash needs during late 2002 and early 2003 prior to the establishment of the Credit Facility, we borrowed approximately $177,000 from three individuals who are affiliates of Medical Venture Partners, LLC ("Medical Venture Partners"), a venture capital firm with whom we were negotiating a financing transaction (see Note D). These amounts, plus accrued interest at a stated interest rate of 8% per annum, were repaid in April 2003 in connection with the consummation of the financing transaction described in Note D. NOTE D - FINANCING TRANSACTION On April 15, 2003, we entered into equity and debt financing agreements with Medical Venture Partners and its principals. Under the terms of the equity agreements, affiliates of Medical Venture Partners purchased 13,927,062 shares of our common stock for $0.01/share which resulted in net proceeds to the company of $114,271 after deducting transaction expenses of approximately $25,000. As a result of these equity transactions, the Company experienced a change of control and Medical Venture Partners and its affiliates, in the aggregate, own approximately 75% of our outstanding common stock. Under the terms of the debt financing agreements, MVP 3, LP, a partnership controlled by Medical Venture Partners, agreed to make available up to $1.5 million of debt financing in the form of a revolving credit facility (the "Credit Facility"). Under the terms of the Credit Facility, NEO will be able to borrow up to 80% of "eligible" accounts receivable, 50% of the net property, plant and equipment balance, and up to $500,000 on an unsecured basis. As a condition to these transactions, the Company, 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 into 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 net cash provided by operations of 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. NOTE E - SUBSEQUENT EVENTS On October 14, 2003, shareholders controlling approximately 89% of the Company's common stock determined the following by way of written consent: o To elect John E. Elliott, Steven C. Jones and Lawrence R. Kuhnert to the Company's Board of Directors to hold office until the next annual meeting of shareholders; o To re-elect Michael T. Dent, M.D. and Kevin J. Lindheim as Directors to hold office until the next annual meeting of shareholders; and o To approve the Company's 2003 Equity Incentive Plan. 9 On October 14, 2003, during a meeting of the Company's Board of Directors, the Company adopted the following resolutions, among others: o Thomas H. White was elected to the position of Chief Executive Officer, effective October 20, 2003, and an employment agreement with Mr. White was approved that specifies an annual salary for Mr. White of $100,000; and o Michael T. Dent was elected to the position of Chairman of the Board; and o The Company's 2004 Equity Incentive Plan was approved and adopted, and 2,000,000 shares of common stock were reserved for issuance of stock awards thereunder (together with a formula for increasing that amount as necessary). 10 Item 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview NeoGenomics, Inc. operates a medical testing laboratory and research facility based in Fort Myers, Florida that is targeting the rapidly growing genetic and molecular testing segment of the medical laboratory market. Our common stock is listed on the NASDAQ Bulletin Board (OTCBB) under the symbol "NGNM." Our business plan features two concurrent objectives: 1. Development of a clinical laboratory to offer routine cytogenetics and molecular biology testing services; and 2. Development of a research laboratory to offer sponsored research services to other companies that are seeking to develop genomic products that will determine the genetic basis for female and neonatal diseases, cancers and other forms of disease (See "Research and Development"). The vision of NeoGenomics is to merge a high-end genetic and molecular testing laboratory with ongoing research activities to help bridge the gap between clinical medicine and genomic research. We believe that this combination will allow the Company to speed the process of discovery and innovation and develop new advanced testing methods to identify the genetic and molecular causes of disease. Over the last 2-3 years, advances in technology and genetic research, including the complete sequencing of the human genome, have made possible a whole new set of tools to diagnose and treat diseases. This has opened up a vast opportunity for laboratory companies that are positioned to address this growing market segment. The medical testing laboratory market can be broken down into three primary segments: o clinical lab testing, o anatomic pathology testing, and o genetic/molecular testing. Clinical labs typically are engaged in high volume, high automation tests on blood and urine. Clinical lab tests often involve testing of a less urgent nature, for example, cholesterol testing and testing associated with routine physical exams. This type of testing yields relatively low average revenue per test. Anatomic pathology ("AP") testing involves evaluation of tissue, as in surgical pathology, or cells as in cytopathology. AP testing typically seeks to answer the question: is it cancer? The most widely known AP tests are Pap smears, skin biopsies, and tissue biopsies. AP tests are typically more labor and technology intensive than clinical lab tests and thus typically have higher average revenue per test than clinical lab tests. We believe genetic/molecular testing is the newest and fastest growing subset of the laboratory market. Genetic testing or "cytogenetics" involves analyzing chromosomes taken from the nucleus of cells for abnormalities in a process called karyotyping. A karyotype evaluates the entire 46 human chromosomes by number, and banding patterns to identify abnormalities associated with diseases. Examples of cytogenetics testing include amniocentesis testing of pregnant women to screen for genetic anomalies such as Down's syndrome in a fetus and bone marrow testing to screen for types of leukemia. Molecular biology involves testing for even more specific causes of diseases based on very small alterations in cellular biology and DNA. Examples of common molecular biology 11 testing include screening for paternity, cystic fibrosis or Tay-Sachs disease. Both cytogenetics and molecular biology have become important and accurate diagnostic tools over the last five years and new tests are being developed rapidly, thus this market segment is expanding rapidly. Genetic/molecular testing requires very specialized equipment and credentialed individuals (typically PhD level) to certify the results. As a result of the sophistication involved in performing these tests, we believe that genetic/molecular testing typically has the highest average revenue/test of the medical laboratory sub segments. Comparison of the Medical Testing Laboratory Market Segments: ____________________________________________________________________________________________________________________ Attributes Clinical Anatomic Pathology Genetic/Molecular Testing Performed On Blood, Urine Tissue/cells Chromosomes/ 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 Primarily 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 Estimated Annual Growth Rate of Market 4.0 -5.0% 6.0 - 7.0% 25.0 - 40+% ____________________________________________________________________________________________________________________ Source: Research Analysts and Company Estimates We compete in the marketplace based on the quality and accuracy of our test results, our turn-around times and our ability to provide after-test support to those physicians requesting consultation. We believe our average three day turn-around times on oncology-related cytogenetics tests is among the best in the industry and is helping to increase the usage patterns of cytogenetics tests by our referring oncologists and hematopathologists. Based on anecdotal information, we believe that most competing cytogenetics labs typically have 7-21 day turn-around times on average. Traditionally, longer turn-around times for cytogenetics tests have resulted in fewer tests being ordered since there is an increased chance that the test results will not be returned within an acceptable diagnostic window when other adjunctive diagnostic test results are available. We believe our turn-around times are resulting in our referring physicians requesting more of our testing services in order to augment or confirm other diagnostic tests, thereby giving us a significant competitive advantage in marketing our services against those of other competing laboratories. The cytogenetics and molecular biology testing markets in general are seasonal and the volumes of such tests tend to decline somewhat in the summer months as referring physicians and their patients are vacationing. In southern Florida, currently our primary referral market for lab tests, this seasonality is further exacerbated because a meaningful percentage of the population returns to homes in the Northern U.S. to avoid the hot summer months. We estimate that our growth rates during the second and third quarter of each year will be somewhat impacted by these seasonality factors. The following discussion and analysis should be read in conjunction with the financial statements for the three and nine months ended September 30, 2003, included with this Form 10-QSB. Readers are also referred to the cautionary statement, which addresses forward-looking statements made by us. 12 Critical Accounting Policies Our critical accounting policies, including the assumptions and judgments underlying them, are disclosed in the Notes to the Financial Statements for the fiscal year ended December 31, 2002 included in our Form 10-KSB. We have consistently applied these policies in all material respects. At this stage of our development, these policies primarily address matters of revenue and expense recognition. Management does not believe that our operations to date have involved uncertainty of accounting treatment, subjective judgment, or estimates, to any significant degree. Results of Operations for the Three Months ended September 30, 2003 as Compared to the Three Months ended September 30, 2002 During the three months ended September 30, 2003, we generated revenues and costs of revenues of approximately $90,000 and $127,000, respectively, versus revenues and costs of revenues of approximately $28,000 and $61,000, respectively for the three months ended September 30, 2002. This resulted in a gross margin deficit of approximately $37,000 for the three months ended September 30, 2003, which is a 12% increase over the gross margin deficit of $33,000 reported for the three months ended September 30, 2002. This change is primarily attributable to costs associated with moving to a new laboratory facility in August 2003 and costs of additional laboratory personnel required to handle the substantial increase in testing volumes versus the three months ended September 30, 2002. We believe our gross margin will continue to improve as we perform more tests. During the most recent quarter, we further increased our penetration into existing referral sources for cytogentics tests and added a number of new referral sources, which helped to offset the historical reduction in testing volumes attributable to seasonality issues associated with our geographic market. Our operating expenses for the most recent quarter were approximately $101,000, which was an 86% reduction from the approximately $699,000 of operating expenses reported for the three months ended September 30, 2002. This reduction was primarily due to the elimination of certain stock based compensation as well as other cost-savings initiatives. Interest expense for the most recent quarter was approximately $13,000, compared to approximately $1,000 of interest reported for the three months ended September 30, 2002. Interest expense is primarily comprised of interest payable on advances under our Credit Facility as well as interest payable on advances from other related parties and the increase is primarily a result of our increased borrowing. Results of Operations for the Nine Months ended September 30, 2003 as Compared to the Nine Months ended September 30, 2002 During the nine months ended September 30, 2003, we generated revenues and costs of revenues of approximately $233,000 and $336,000, respectively, versus revenues and costs of revenues of approximately $36,000 and $137,000, respectively, for the nine months ended September 30, 2002. This resulted in a gross margin deficit of approximately $102,000 for the nine months ended September 30, 2003, which is a 2% increase over the gross margin deficit of approximately $100,000 reported for the three months ended September 30, 2002. Since we did not begin laboratory testing operations until May 2002, revenue and gross margin comparisons with the nine months ended September 30, 2002 are not relevant. Our operating expenses for the nine months ended September 30, 2003 were approximately $289,000, which was an 85% reduction from the approximately $1,953,000 of operating expenses reported for the nine months ended September 30, 2002. This reduction was primarily due to the elimination of certain stock based compensation as well as other cost-savings initiatives. Interest expense for the nine months ended September 30, 2003 was approximately $26,000, compared to approximately $5,000 of interest reported for the nine months ended September 13 30, 2002. Interest expense is primarily comprised of interest payable on advances under our Credit Facility as well as interest payable on advances from other related parties and the increase is primarily a result of our increased borrowing. Liquidity and Capital Resources During the nine months ended September 30, 2003, our operating activities used approximately $397,000 in cash. This amount primarily represented cash used to pay general and administrative expenses associated with our operations. We also spent approximately $29,000 on new equipment and leasehold improvements. We were able to finance operations and equipment purchases primarily through the sale of equity securities to affiliates and net advances under our Credit Facility, which together provided approximately $466,000 over the nine month period ended September 30, 2003. At September 30, 2003, we had cash and cash equivalents of approximately $40,000. On April 15, 2003, we entered into equity and debt financing agreements with Medical Venture Partners and its principals. Under the terms of the equity agreements, affiliates of Medical Venture Partners purchased 13,927,062 shares of our common stock for $0.01 per share which resulted in net proceeds to the company of $114,271 after deducting transaction expenses of approximately $25,000. As a result of these equity transactions, the Company experienced a change of control and Medical Venture Partners and its affiliates, in the aggregate, own approximately 75% of our outstanding common stock. Under the terms of the debt financing agreements, MVP 3, LP, a partnership controlled by Medical Venture Partners, agreed to make available up to $1.5 million of debt financing in the form of a revolving credit facility (the "Credit Facility"). Under the terms of the Credit Facility, our advances are limited, at any given time, to the sum of i) 50% of our net property, plant and equipment; (ii) 80% of our accounts receivable that are less than 90 days old; and (iii) $500,000 that is not tied to any specific collateral. Interest under the revolving credit agreement is payable monthly at the prime rate plus 8.0%. As of September 30, 2003, we had approximately $435,000 in principal amount outstanding under the Credit Facility. Over the next twelve months, we plan to finance our operations through borrowings under the Credit Facility with MVP 3. While we believe that, based on our current business plan, the Credit Facility will be sufficient to finance our operations over the next twelve months, advances under this Credit Facility are limited, at any given time, based on a formula contained in the loan agreement. There can be no assurance that we will be eligible to obtain all of our working capital funding needs from MVP 3, LP or another source. If we are unable to obtain such funding, we will be required to curtail or discontinue operations. Capital Expenditures We currently forecast capital expenditures for the coming year in order to execute on our business plan. We plan to fund these expenditures through borrowings under our Credit Facility with MVP 3, LP and through traditional lease financing from equipment lessors. There can be no assurance that we will be eligible to obtain all of our capital equipment funding needs from MVP 3, LP or another source. If we are unable to obtain such funding, we will be required to curtail our equipment purchases, which may have an impact on our ability to generate revenues. Staffing We plan to increase our work force. Currently, we have six 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 14 perform sponsored research projects. In addition, we intend to continue building our sales force in an effort to sustain our sales growth, as well as add personnel in management, accounting, and administrative functions. Item 3 - CONTROLS AND PROCEDURES We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this report, our Chief Executive and Principle Financial Officer evaluated the effectiveness of our disclosure controls and procedures. Based on the evaluation, which disclosed no significant deficiencies or material weaknesses, our Chief Executive and Principle Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report. There were no changes in our internal control over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 15 PART II. - OTHER INFORMATION Item 1. Legal Proceedings NONE Item 2. Changes in Securities On October 14, 2003, we granted options to purchase 1,000,000 shares of common stock to certain officers and directors of the Company, pursuant to a board resolution duly adopted by the Board of Directors. Item 3. Defaults Upon Senior Securities NONE Item 4. Submission of Matters to a Vote of Securities Holders NONE Item 5. Other Information NONE Item 6. Exhibits and Reports on Form 8-K (a) Exhibits The following exhibits are filed as part of this Form 10-QSB. Exhibit Number Description 3.2.1 Amended and Restated By-Laws of the Company, dated October 14, 2003. 10.24 The NeoGenomics 2004 Equity Incentive Plan. 10.25 Employment Agreement between NeoGenomics, Inc and Thomas H. White, dated October 15, 2003. 31.1 Certification of NeoGenomics, Inc. Chief Executive and Principal Financial Officer, Thomas H. White, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of NeoGenomics, Inc. Chief Executive and Principal Financial Officer, Thomas H. White, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K. No reports on Form 8-K were filed with the SEC during the period covered by this report. 16 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. Date: November 14, 2003 /s/ Thomas H. White Thomas H. White Chief Executive and Principle Financial Officer