UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





R
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2010.or£
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the transition period from  to





Commission
File Number: 333-72097





NEOGENOMICS,
INC.


(Exact
name of registrant as specified in its 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,Florida
                  
                  33913(Address
      of principal executive offices)
                  
                  (Zip
      Code)





(239)
768-0600


(Registrant’s
telephone number, including area code)





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 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 R No £





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ No £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act:





Large
      accelerated filer £
            Accelerated
      filer £
            Non-accelerated
      filer £
            Smaller
      reporting company R(Do
      not check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No R





As of
October 26, 2010, the registrant had 37,406,192 shares of common stock, par
value $0.001 per share outstanding.










TABLE
OF CONTENTS





PART
      I FINANCIAL INFORMATIONItem
      1. Financial Statements (unaudited)
                                        4Item 2. Management’s Discussion
      and Analysis ofFinancial Condition and Results
      of Operations
                                        14Item
      3. Quantitative and Qualitative Disclosures About Market
    Risk
                                        22Item
      4. Controls and Procedures
                                        22Item
      4T. Controls and Procedures
                                        22PART
      II OTHER INFORMATIONItem
      1. Legal Proceedings
                                        23Item
      1A. Risk Factors
                                        23Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                                        23Item
      3. Defaults Upon Senior Securities
                                        23Item
      4. Removed and Reserved
                                        23Item
      5. Other Information
                                        23Item
      6. Exhibits
                                        24SIGNATURES
                                        25




2


FORWARD-LOOKING
STATEMENTS





The
information in this Quarterly Report on Form 10-Q contains “forward-looking
statements” relating to NeoGenomics, Inc., a Nevada corporation (referred to
individually as the “Parent Company” or collectively with all of its
subsidiaries as “NeoGenomics” or the “Company”), within the meaning of Section
27A of the Securities Act of 1933, as amended (the “Securities Act”), and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”), which are subject to the “safe harbor” created by those sections. These
“forward looking statements” represent the Company’s current expectations or
beliefs including, but not limited to, statements concerning the Company’s
operations, performance, financial condition and growth. For this purpose, any
statements contained in this Form 10-Q that are not statements of historical
fact are forward-looking statements. Without limiting the generality of the
foregoing, words such as “anticipates,” “believes,” “estimates,” “expects,”
“intends,” “may,” “plans,” “projects,” “will,” “would” or the negative or other
comparable terminology are intended to identify forward-looking statements,
although not all forward-looking statements contain these identifying words.
These statements by their nature involve substantial risks and uncertainties,
such as credit losses, dependence on management and key personnel, variability
of quarterly results, competition and the ability of the Company to continue its
growth strategy, certain of which are beyond the Company’s control. Should one
or more of these risks or uncertainties materialize or should the underlying
assumptions prove incorrect, actual outcomes and results could differ materially
from those indicated in the forward-looking statements.





Any
forward-looking statement speaks only as of the date on which such statement is
made, and the Company undertakes no obligation to update any forward-looking
statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for
management to predict all of such factors, nor can it assess the impact of each
such factor on the business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.


3


PART
I — FINANCIAL INFORMATION


Item 1. Financial
Statements





NEOGENOMICS,
INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands, except share data)




September30,2010
                    
                    
                    December31,2009(unaudited)ASSETSCURRENT
      ASSETSCash
      and cash equivalents
                    
                    $
                    1,555
                    
                    
                    $
                    1,631Restricted
      cash
                    
                    
                    500
                    
                    
                    
                    1,000Accounts
      receivable (net of allowance for doubtful accounts of $1,281 and $589,
      respectively)
                    
                    
                    5,630
                    
                    
                    
                    4,632Inventories
                    
                    
                    768
                    
                    
                    
                    602Other
      current assets
                    
                    
                    732
                    
                    
                    
                    655Total
      current assets
                    
                    
                    9,185
                    
                    
                    
                    8,520PROPERTY AND EQUIPMENT
      (net of accumulated depreciation of $4,084 and $2,787
      respectively)
                    
                    
                    5,010
                    
                    
                    
                    4,340OTHER
      ASSETS
                    
                    
                    86
                    
                    
                    
                    85TOTAL
      ASSETS
                    
                    $
                    14,281
                    
                    
                    $
                    12,945LIABILITIES AND STOCKHOLDERS’
      EQUITYCURRENT
      LIABILITIESAccounts
      payable
                    
                    $
                    1,869
                    
                    
                    $
                    1,969Accrued
      compensation
                    
                    
                    1,083
                    
                    
                    
                    1,308Accrued
      expenses and other liabilities
                    
                    
                    622
                    
                    
                    
                    465Short-term
      portion of equipment capital leases
                    
                    
                    2,043
                    
                    
                    
                    1,482Revolving
      credit line
                    
                    
                    3,900
                    
                    
                    
                    552Total
      current liabilities
                    
                    
                    9,517
                    
                    
                    
                    5,776LONG
      TERM LIABILITIESLong-term
      portion of equipment capital leases
                    
                    
                    1,389
                    
                    
                    
                    1,526TOTAL
      LIABILITIES
                    
                    
                    10,906
                    
                    
                    
                    7,302Commitments
      and contingenciesSTOCKHOLDERS’
      EQUITYCommon
      stock, $.001 par value, (100,000,000 shares authorized; 37,392,130 and
      37,185,078 shares issued and outstanding at September 30, 2010 and
      December 31, 2009, respectively)
                    
                    
                    37
                    
                    
                    
                    37Additional
      paid-in capital
                    
                    
                    24,420
                    
                    
                    
                    23,762Accumulated
      deficit
                    
                    
                    (21,082
                    )
                    
                    
                    (18,156
                    )Total
      stockholders’ equity
                    
                    
                    3,375
                    
                    
                    
                    5,643TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                    
                    $
                    14,281
                    
                    
                    $
                    12,945








4


NEOGENOMICS,
INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(in
thousands, except per share amounts)


(unaudited)





FortheThreeMonthsEnded
                                          September30,
                                        
                                        
                                        FortheNineMonthsEnded
                                          September30,2010
                                        
                                        
                                        2009
                                        
                                        
                                        2010
                                        
                                        
                                        2009NET
      REVENUE
                                        
                                        $
                                        8,708
                                        
                                        
                                        $
                                        7,297
                                        
                                        
                                        $
                                        25,616
                                        
                                        
                                        $
                                        21,670COST
      OF REVENUE
                                        
                                        
                                        4,818
                                        
                                        
                                        
                                        3,672
                                        
                                        
                                        
                                        13,737
                                        
                                        
                                        
                                        10,147GROSS
      PROFIT
                                        
                                        
                                        3,890
                                        
                                        
                                        
                                        3,625
                                        
                                        
                                        
                                        11,879
                                        
                                        
                                        
                                        11,523OPERATING
      EXPENSESGeneral
      and administrative
                                        
                                        
                                        2,919
                                        
                                        
                                        
                                        2,458
                                        
                                        
                                        
                                        8,590
                                        
                                        
                                        
                                        7,013Sales
      and marketing
                                        
                                        
                                        1,983
                                        
                                        
                                        
                                        1,793
                                        
                                        
                                        
                                        5,689
                                        
                                        
                                        
                                        4,850Total
      operating expenses
                                        
                                        
                                        4,902
                                        
                                        
                                        
                                        4,251
                                        
                                        
                                        
                                        14,279
                                        
                                        
                                        
                                        11,863LOSS
      FROM OPERATIONS
                                        
                                        
                                        (1,012
                                        )
                                        
                                        
                                        (626
                                        )
                                        
                                        
                                        (2,400
                                        )
                                        
                                        
                                        (340
                                        )INTEREST
      AND OTHER INCOME (EXPENSE) - NET
                                        
                                        
                                        (186
                                        )
                                        
                                        
                                        (129
                                        )
                                        
                                        
                                        (526
                                        )
                                        
                                        
                                        (374
                                        )NET
      LOSS
                                        
                                        $
                                        (1,198
                                        )
                                        
                                        $
                                        (755
                                        )
                                        
                                        $
                                        (2,926
                                        )
                                        
                                        $
                                        (714
                                        )NET
      LOSS PER SHARE-
      Basic and diluted
                                        
                                        $
                                        (0.03
                                        )
                                        
                                        $
                                        (0.02
                                        )
                                        
                                        $
                                        (0.08
                                        )
                                        
                                        $
                                        (0.02
                                        )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING-
      Basic and diluted
                                        
                                        
                                        37,376,676
                                        
                                        
                                        
                                        36,000,941
                                        
                                        
                                        
                                        37,302,046
                                        
                                        
                                        
                                        33,782,925








5


NEOGENOMICS,
INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(in
thousands)


(unaudited)





For the Nine Months Ended
                  September 30,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      (loss)
                
                $
                (2,926
                )
                
                $
                (714
                )Adjustments
      to reconcile net (loss) to net cash (used in) operating
      activities:Provision
      for bad debts
                
                
                1,746
                
                
                
                1,359Depreciation
                
                
                1,297
                
                
                
                814Amortization
      of debt issue costs
                
                
                38
                
                
                
                46Stock-based
      compensation
                
                
                340
                
                
                
                295Non-cash
      consulting expenses
                
                
                168
                
                
                
                49Changes
      in assets and liabilities, net:(Increase)
      decrease in accounts receivable, net of write-offs
                
                
                (2,744
                )
                
                
                (2,620
                )(Increase)
      decrease in inventories
                
                
                (166
                )
                
                
                (122
                )(Increase)
      decrease in prepaid expenses
                
                
                (25
                )
                
                
                (233
                )(Increase)
      decrease in deposits
                
                
                -
                
                
                
                (42
                )Increase
      (decrease) in accounts payable and other liabilities
                
                
                (141
                )
                
                
                122NET
      CASH USED IN OPERATING ACTIVITIES
                
                
                (2,413
                )
                
                
                (1,046
                )CASH
      FLOWS FROM INVESTING ACTIVITIESPurchases
      of property and equipment
                
                
                (813
                )
                
                
                (432
                )NET
      CASH USED IN INVESTING ACTIVITIES
                
                
                (813
                )
                
                
                (432
                )CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from capital lease obligations
                
                
                146
                
                
                
                97Advances
      on credit facility
                
                
                3,348
                
                
                
                (1,147
                )Repayment
      of capital leases and loans
                
                
                (995
                )
                
                
                (542
                )Decrease
      in restricted cash
                
                
                500
                
                
                
                -Issuance
      of common stock and warrants for cash, net of transaction
      expenses
                
                
                151
                
                
                
                5,730NET
      CASH PROVIDED BY FINANCING ACTIVITIES
                
                
                3,150
                
                
                
                4,138NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (76
                )
                
                
                2,660CASH
      AND CASH EQUIVALENTS, BEGINNING OF PERIOD
                
                
                1,631
                
                
                
                468CASH
      AND CASH EQUIVALENTS, END OF PERIOD
                
                $
                1,555
                
                
                $
                3,128SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATIONInterest
      paid
                
                $
                484
                
                
                $
                335Income
      taxes paid
                
                $
                13
                
                
                $
                —NON-CASH
      INVESTING AND FINANCING ACTIVITIESEquipment
      leased under capital leases
                
                $
                1,419
                
                
                $
                1,064Equipment
      purchased and included in accounts payable
                
                $
                -
                
                
                $
                680Equipment
      purchased and payables settled with issuance of restricted common
      stock
                
                $
                -
                
                
                $
                186





See notes
to unaudited condensed consolidated financial statements.


6


NEOGENOMICS,
INC.




NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




AS
OF SEPTEMBER 30, 2010





NOTE A — NATURE OF BUSINESS AND BASIS
OF FINANCIAL STATEMENT PRESENTATION





Nature of
Business





NeoGenomics,
Inc., a Nevada corporation (the “Parent”), and its subsidiary, NeoGenomics
Laboratories, Inc., a Florida corporation (“NEO”, “NeoGenomics Laboratories” or
the “Subsidiary”) (collectively referred to as “we”, “us”, “our”, “NeoGenomics”,
or the “Company”), operates as a certified “high complexity” clinical laboratory
in accordance with the federal government’s Clinical Laboratory Improvement
Amendments of 1988 (“CLIA”), and is dedicated to the delivery of clinical
diagnostic services to pathologists, oncologists, urologists, hospitals, and
other laboratories throughout the United States.





Basis of
Presentation





The
accompanying condensed consolidated financial statements include the accounts of
the Parent and the Subsidiary. All significant intercompany accounts and
balances have been eliminated in consolidation.





The
accompanying condensed consolidated financial statements are unaudited and
include all adjustments, in the opinion of management, which are necessary to
make the financial statements not misleading. Except as otherwise disclosed, all
such adjustments are of a normal recurring nature. Interim results are not
necessarily indicative of results for a full year.





The
interim condensed consolidated financial statements and notes are presented in
accordance with the rules and regulations of the Securities and Exchange
Commission and do not contain certain information included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009. Therefore, the
interim condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company’s annual report.





Use of
Estimates





The
preparation of condensed consolidated financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
amounts reported in the condensed consolidated financial statements. The most
significant estimates in the Company’s condensed consolidated financial
statements relate to revenue recognition, allowance for doubtful accounts and
stock-based compensation. Actual results could differ from those
estimates.





Revenue
Recognition





The
Company recognizes revenues in accordance with the Securities and Exchange
Commission’s (the “Commission”) Staff Accounting Bulletin Topic 13.A.1 (ASC
605-10-S99-1) No. 104, “Revenue Recognition”, when (a) the price is fixed or
determinable, (b) persuasive evidence of an arrangement exists, (c) the service
is performed and (d) collectability of the resulting receivable is reasonably
assured.





The
Company’s specialized diagnostic services are performed based on a written test
requisition form and revenues are recognized once the diagnostic services have
been performed, the results have been delivered to the ordering physician, the
payor has been identified and eligibility and insurance have been
verified.  These diagnostic services are billed to various payors,
including Medicare, commercial insurance companies, other directly billed
healthcare institutions such as hospitals and clinics, and
individuals.  The Company reports revenues from contracted payors,
including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of Medicare,
published fee schedules.  The Company reports revenues from
non-contracted payors, including certain insurance companies and individuals,
based on the amount expected to be collected.  The difference between
the amount billed and the amount expected to be collected from non-contracted
payors is recorded as a contractual allowance to arrive at the reported
revenues.  The expected revenues from non-contracted payors are based
on the historical collection experience of each payor or payor group, as
appropriate.  In each reporting period, the Company reviews its
historical collection experience for non-contracted payors and adjusts its
expected revenues for current and subsequent periods accordingly.  As
a result of the economic climate in the United States, we have used shorter and
more current time horizons in analyzing historical experience.


7





Accounts Receivable and
Allowance for Doubtful Accounts





Accounts
receivable are reported at realizable value, net of an allowance for doubtful
accounts, which is estimated and recorded in the same period the related revenue
is recorded based on the historical collection experience for each type of
payor.  In addition, the allowance is adjusted periodically, based
upon an evaluation of historical collection experience with specific payors,
payor types, and other relevant factors, including regularly assessing the state
of our billing operations in order to identify issues which may impact the
collectability of receivables or allowance estimates.  Revisions to
the allowance are recorded as an adjustment to bad debt expense within general
and administrative expenses.  After appropriate collection efforts
have been exhausted, specific receivables deemed to be uncollectible are charged
against the allowance in the period they are deemed
uncollectible.  Recoveries of receivables previously written-off are
recorded as credits to the allowance.





Stock-Based
Compensation





The
Company accounts for stock-based compensation in accordance with FASB ASC Topic
718 Compensation – Stock Compensation.  ASC 718 requires recognizing
compensation costs for all share-based payment awards made to employees and
directors based upon the awards’ grant-date fair value.  The standard
covers employee stock options, restricted stock, and other equity
awards.





For stock
options, the Company uses a trinomial lattice option-pricing model to estimate
the grant-date fair value of stock option awards, and recognizes compensation
cost on a straight-line basis over the awards’ vesting periods.  The
Company estimates an expected forfeiture rate, which is factored into the
determination of the Company’s periodic expense.





Research and
Development





Research
and development costs are expensed as incurred. Research and development
expenses consist of compensation and benefits for research and development
personnel, license fees, related supplies, inventory and payment for samples to
complete validation studies.  These expenses were incurred to develop
our melanoma test (MelanoSITE) and to develop other new molecular
tests.





Net Income (Loss) Per Common
Share





We
compute net income (loss) per share in accordance with FASB ASC Topic 260,
Earnings per Share. Under the provisions of ASC 260, basic net income (loss) per
share is computed by dividing the net income (loss) available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and common
equivalent shares outstanding, using the treasury stock method, during the
period. Equivalent shares consist of employee stock options and certain warrants
issued to consultants and other providers of financing to the Company that are
in-the-money based on the weighted average closing share price for the period.
Under the treasury stock method, the number of in-the-money shares that are
considered outstanding for this calculation is reduced by the number of common
shares that theoretically could have been re-purchased by the Company with the
aggregate exercise proceeds of such warrant and option exercises if such shares
were re-purchased at the weighted average market price for the
period.





There
were no common equivalent shares included in the calculation of diluted earnings
per share for the three and nine month periods ended September 30, 2010 and 2009
because the Company had a net loss for such periods and therefore such common
equivalent shares were anti-dilutive.


8


NOTE B — REVOLVING CREDIT AND
SECURITY AGREEMENT





On
February 1, 2008, our Subsidiary, NeoGenomics Laboratories, Inc., a Florida
corporation (“Borrower”), entered into a Revolving Credit and Security Agreement
(the “Credit Facility” or “Credit Agreement”) with CapitalSource, the terms of
which provide for borrowings based on eligible accounts receivable up to a
maximum borrowing of $3.0 million, as defined in the Credit Agreement. Subject
to the provisions of the Credit Agreement, CapitalSource shall make advances to
us from time to time during the three year term, and the Credit Facility may be
drawn, repaid and redrawn from time to time as permitted under the Credit
Agreement.





To secure
the payment and performance in full of the Obligations (as defined in the Credit
Agreement), we granted CapitalSource a continuing security interest in and lien
upon, all of our rights, title and interest in and to our Accounts (as defined
in the Credit Agreement), which primarily consist of accounts receivable and
cash balances held in lock box accounts. Furthermore, pursuant to the Credit
Agreement, the Parent guaranteed the punctual payment when due, whether at
stated maturity, by acceleration or otherwise, of all of the Obligations. The
Parent guaranty is a continuing guarantee and shall remain in force and effect
until the indefeasible cash payment in full of the Guaranteed Obligations (as
defined in the Credit Agreement) and all other amounts payable under the Credit
Agreement are made.





On April
26, 2010, the Parent Company, NeoGenomics Laboratories, Inc., the wholly-owned
subsidiary of the Parent Company (“Borrower”), and CapitalSource entered into an
Amended and Restated Revolving Credit and Security Agreement (the “Amended and
Restated Credit Agreement”).  The Amended and Restated Credit
Agreement amended and restated the Revolving Credit and Security Agreement dated
February 1, 2008, as amended, among the Parent Company, Borrower and
CapitalSource (the “Original Credit Agreement”).  The terms of the
Amended and Restated Credit Agreement and the Original Credit Agreement are
substantially similar except that the Amended and Restated Credit Agreement,
among other things, (i) increases the maximum principal amount of the revolving
credit facility from $3,000,000 to $5,000,000, (ii) provides that the term of
the Amended and Restated Credit Agreement shall end on February 1,
2013,  (iii) increases the amount of the collateral management fee and
unused line fees paid by Borrower to CapitalSource, (iv) modifies the
definitions of “Minimum Termination Fee” and “Permitted Indebtedness”, (v)
provides that the Borrower must maintain a minimum outstanding principal balance
under the revolving facility of at least $2,000,000, (vi) decreases the interest
rate to LIBOR plus 4.25% (provided that LIBOR shall not be less than 2.0%) and
(vii) revises certain covenants and representations and
warranties.   The Amended and Restated Credit Agreement also made
permanent a previously enacted temporary change to the methodology for
calculating the Fixed Charge Coverage Ratio covenant, which permits us to add
amounts of unrestricted cash and cash equivalents and unused availability under
the Credit Facility to Adjusted EBITDA for the purposes of calculating this
covenant.  Borrower paid CapitalSource a commitment fee of $33,500 in
connection with the execution of the Amended and Restated Credit Agreement
(CapitalSource credited $25,000 of an amendment fee previously paid by the
Borrower towards the commitment fee).





On
September 30, 2010, we had an outstanding amount due on the Credit Facility of
approximately $3.9 million and the available credit under the Credit Facility
was approximately $170,000.





NOTE C — COMMON STOCK PURCHASE
AGREEMENT





On
November 5, 2008, we entered into a common stock purchase agreement (the “Stock
Agreement”) with Fusion Capital Fund II, LLC, an Illinois limited liability
company (“Fusion”). The Stock Agreement, which has a term of 30 months, provides
for the future funding of up to $8.0 million from sales of our common stock to
Fusion on a when and if needed basis as determined by us in our sole discretion.
In consideration for entering into this Stock Agreement, on October 10, 2008, we
issued to Fusion 17,500 shares of our common stock (valued at $14,700 on the
date of issuance) and paid $17,500 as a due diligence expense reimbursement. In
addition, on November 5, 2008, we issued to Fusion 400,000 shares of our common
stock (valued at $288,000 on the date of issuance) as a commitment fee.
Concurrently with entering into the Stock Agreement, we entered into a
registration rights agreement with Fusion. Under the registration rights
agreement, we agreed to file a registration statement with the SEC covering the
417,500 shares that have already been issued to Fusion and at least 3.0 million
shares that may be issued to Fusion under the Stock Agreement. Presently, we
expect to sell no more than the initial 3.0 million shares to Fusion during the
term of this Stock Agreement. The Company filed a registration statement on Form
S-1 on November 28, 2008 and on February 5, 2009 the registration statement
became effective and on May 7, 2010, we filed Post Effective Amendment No. 2 to
the registration statement which became effective on May 19, 2010.





Under the
Stock Agreement we have the right to sell to Fusion shares of our common stock
from time to time in amounts between $50,000 and $1.0 million, depending on the
market price of our common stock. The purchase price of the shares related to
any future funding under the Stock Agreement will be based on the prevailing
market prices of our stock at the time of such sales without any fixed discount,
and the Company will control the timing and amount of any sales of shares to
Fusion. Fusion shall not have the right or the obligation to purchase any shares
of our common stock on any business day that the price of our common stock is
below $0.45 per share. The Stock Agreement may be terminated by us at any time
at our discretion without any cost to us. There are no negative covenants,
restrictions on future funding from other sources, penalties, further fees or
liquidated damages in the agreement.


9





NOTE
D — CAPITAL LEASE TRANSACTIONS





On July
28, 2010 NeoGenomics Laboratories and Leasing Technologies, Inc. (LTI) agreed on
the terms and conditions of a new $1.0 million lease line of
credit.  The new line has the same terms and conditions of our
November 5, 2008 Master Lease Agreement with LTI. Advances under the lease line
may be made for one year by executing equipment schedules for each advance. The
lease term of any equipment schedules issued under the lease line will be for 36
months. The lease rate factor applicable for each equipment schedule is
0.0327/month. If the Subsidiary makes use of the entire lease line, the monthly
rent would be $32,700. Monthly rent for the leased equipment is payable in
advance on the first day of each month. The obligations of the Subsidiary are
guaranteed by the Parent Company. At the end of the term of each equipment
schedule the Subsidiary may: (a) renew the lease with respect to such equipment
for an additional 12 months at fair market value; (b) purchase the equipment at
fair market value, which price will not be less than 10% of cost nor more than
14% of cost; (c) extend the term for an additional six months at 35% of the
monthly rent paid by the lessee during the initial term, after which the
equipment may be purchased for the lesser of fair market value or 8% of cost; or
(d) return the equipment subject to a remarketing charge equal to 6% of
cost.





On
September 30, 2010 we had made no draws on the lease line of credit and we had
$1.0 million availability on the line.





NOTE E — RELATED PARTY
TRANSACTIONS





Consulting
Agreements





During
the three and nine months ended September 30, 2010, we incurred expenses of
approximately $45,000 and $147,350, respectively, for various consulting work
performed by Steven C. Jones, a Director of the Company, in connection with his
duties as Executive Vice President of Finance.  During the three and
nine months ended September 30, 2009, Mr. Jones earned approximately $42,000 and
$149,000, respectively, for work performed as our Acting Principal Financial
Officer.





On May 3,
2010, the Company entered into a consulting agreement (the “Consulting
Agreement”) with Steven C. Jones (the “Consultant” or “Mr. Jones”) whereby Mr.
Jones would provide consulting services to the Company in the capacity of
Executive Vice President, Finance.  The Consulting Agreement has an
initial term from May 3, 2010 through April 30, 2013, which initial term
automatically renews for additional one year periods unless either party
provides notice of termination at least three months prior to the expiration of
the initial term or any renewal term.  In addition, the Company has
the right to terminate the Consulting Agreement by giving written notice to the
Consultant twelve months prior to the effective date of
termination.  The Consultant has the right to terminate the Consulting
Agreement by giving written notice to the Company three  months prior
to the proposed termination date, provided, however, the Consultant is required
to provide an additional three  months of transition services to the
Company upon reasonable request by the Company.  Mr. Jones will
receive annual base retainer compensation of $180,000 per year.  Mr.
Jones is also eligible to receive an annual cash bonus based on the achievement
of certain performance metrics with a target of 30% of his base retainer (the
“Target Payout”).  Based on the achievement of certain performance
metrics, Mr. Jones may earn up to 150% of the Target Payout.


10





The
Company also agreed that it would issue to the Consultant a warrant to purchase
450,000 shares of the Company’s common stock.   The warrant has
a) a seven year term, b) an exercise price of $1.50 per share, c) the ability to
do a cashless net exercise, and d) vesting as follows:





i)          225,000
of such warrant shares vested immediately; and





ii)         112,500
of such warrant shares vest according to the passage of time, with 4,687 warrant
shares vesting on the last day of each calendar month for twenty-three (23)
months, beginning with the month ended May 31, 2010 and continuing until the
month ending March 31, 2012 and 4,699 warrant shares vest on April 30, 2012 so
long as Consultant continues to provide services to the Company pursuant to this
Agreement or any successor agreement.





iii)        112,500
of such warrant shares shall vest according to whether or not the Company meets
certain financial targets as specified below for FY 2010 and FY
2011:





-           28,125
will vest if the Company’s actual consolidated revenue for FY 2010, meets or
exceeds the consolidated revenue goal established by the Board of Directors (the
“Board”) for the vesting of performance options and warrants; and





-           28,125
will vest if the Company’s actual Adjusted EBITDA for FY 2010, meets or exceeds
the consolidated Adjusted EBITDA goals established by the Board for the vesting
of performance options and warrants; and





-           28,125
will vest if the Company’s actual consolidated revenue for FY 2011, meets or
exceeds the consolidated revenue goal established by the Board for the vesting
of performance options and warrants; and





-           28,125
will vest if the Company’s actual Adjusted EBITDA for FY 2011, meets or exceeds
the consolidated Adjusted EBITDA goals established by the Board for the vesting
of performance options and warrants; and





iv)        The
Consulting Agreement also provides that the vesting schedule of such warrant
shall also specify that any unvested warrant shares shall vest upon the
occurrence of a change of control.





These
warrants were valued at $191,000 using a trinomial lattice model with the
following assumptions:





Expected
      term in years
                  
                  
                  3.78Risk-free
      interest rate (%)
                  
                  
                  2
                  %Expected
      volatility range (%)
                  
                  54.6%
      to 76.6%Dividend
      yield (%)
                  
                  
                  0
                  %





During
the three and nine months ended September 30, 2010 14,061 and 248,435 warrants
vested, respectively and the compensation expense recorded was approximately
$28,092 and $123,735, respectively.





During
the three and nine months ended September 30, 2010, George O’Leary, a director
of the Company, did not engage in any consulting with the
Company.  During the three and nine month periods ended September 30,
2009, Mr. O’Leary earned approximately $0 and $30,000 for various consulting
work performed for the Company.





Laboratory Information
System





On March
11, 2005, we entered into an agreement with HCSS, LLC and eTelenext, Inc. to
enable NeoGenomics to use eTelenext, Inc’s Accessioning Application, AP Anywhere
Application and CMQ Application.  HCSS, LLC is a holding company
created to build a small laboratory network for the 50 small commercial genetics
laboratories in the United States.  HCSS, LLC was owned 66.7% by Dr.
Michael T. Dent, a member of our Board of Directors.





On June
18, 2009, we entered into a Software Development, License and Support Agreement
with HCSS, LLC and eTelenext, Inc. to upgrade the Company’s laboratory
information system to APvX.  The estimated costs for the development
and migration phase are anticipated to be approximately $150,000 and the system
went live on July 29, 2010.  This agreement has an initial term of
five years from the date of acceptance and calls for monthly fees of
$8,000-$12,000 during the term.


11





During
2010, eTelenext and HCSS were merged to form PathCenter, Inc.  Dr.
Michael T. Dent currently has beneficial ownership of 3% of PathCenter,
Inc.





For the
three and nine month periods ended September 30, 2010, we recorded expense of
approximately $72,800 and $253,700, respectively, for work eTelenext/PathCenter,
Inc. performed on our laboratory information systems.  For the three
and nine month periods ended September 30, 2009 we recorded expense of
approximately $26,000 and $85,000, respectively, for work eTelenext/PathCenter,
Inc. performed on our laboratory information systems.





Research DX,
LLC





During
2009, we contracted with ResearchDX, L.L.C. (“ResearchDX”) to provide clinical
trial management services on our behalf.  For the nine month periods
ended September 30, 2010, we began to receive various specimens for testing from
ResearchDX and we continued to outsource our clinical trial management and
cytogenetic overflow volume to them for processing.  During the three
months ended September 30, 2010, we received specimen testing revenues from
ResearchDX of approximately $3,350 and incurred expenses to ResearchDX of
approximately $80,050.  During the nine months ended September 30,
2010, we received specimen testing revenues of approximately $28,000 and
incurred expenses to Research DX of approximately $201,500.  Research
DX was formed in November 2008 and Dr. Mathew Moore our Vice President of
Research and Development owns 50% of ResearchDX.  Dr. Moore has
recused himself from all transactions between the two entities and we believe
that such transactions are competitive with alternate options.





NOTE
F — Executive Appointments





Effective
as of July 16, 2010, Marydawn Miller, was appointed to the position of Vice
President of Information Technology of the Company.





Effective
as of August 10, 2010, Grant Carlson, has been appointed to the position of Vice
President of Business Development of the Company.





On August
30, 2010, Mark Smits, joined the Company in the role of Vice President of Sales
and Marketing.





As part
of his employment offer letter Mr. Smits salary was set at
$275,000.  Beginning with the fiscal year ending December 31, 2010,
Mr. Smits is also eligible to receive a base incentive bonus payment which will
be targeted at 40% of his base salary based on 100% achievement of goals (the
“Base Bonus Target”) agreed to by Mr. Smits and the CEO of NeoGenomics
Laboratories and approved by the Board of Directors for such fiscal year and is
eligible to be increased up to 150% of the Base Target Bonus in any fiscal year
in which he meets certain outsize performance thresholds established by the CEO
of the Company and approved by the board of directors.  Mr. Smits
targeted bonus for FY 2010 will be prorated for the amount of time served in
2010 and is guaranteed to be a minimum of $25,000.  Mr. Smits is also
entitled to participate in all medical and other benefits that NeoGenomics
Laboratories has established for its employees.  Mr. Smits will also
be eligible for up to four (4) weeks of paid time off per year.  If
Mr. Smits were terminated without cause during the term (as such term is used in
the offer letter) he is eligible to receive his base pay and benefits for a
period of six (6) months.  Mr. Smits also will receive the option to
purchase 425,000 shares of common stock.  The options vest based on
the following schedule:





Time Based
Vesting





-
            25,000
      on December 31, 2010


-
            50,000
      at the first year anniversary


-
            50,000
      at the second year anniversary


-
            50,000
      at the third year anniversary


-
            50,000
      at the fourth year anniversary





Performance Based
Vesting





-
            20,000
      on August 30, 2010


-
            20,000
      if the Company achieves $35.5 million revenue for FY
  2010


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2011


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2012


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2013


12


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2014





These
options were valued at approximately $167,000 using a trinomial lattice model
with the following weighted average assumptions:





Expected
      term in years
                  
                  
                  3.66Risk-free
      interest rate (%)
                  
                  
                  0.95
                  %Expected
      volatility range (%)
                  
                  54.10%
      to 63.07%Dividend
      yield (%)
                  
                  
                  0
                  %





During
the three months ended September 30, 2010, 20,000 options vested and the
compensation expense was approximately $13,271.




NOTE
G — Subsequent Events





On
October 1, 2010 the Company entered into two lease schedules with LTI for an
aggregate of $136,882 which was funded for lab and computer
equipment.  The lease schedules are for 36 months and the monthly
payments are $4,477.





END OF
FINANCIAL STATEMENTS.


13





ITEM 2.
            MANAGEMENT’S DISCUSSION AND
      ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





NeoGenomics, Inc., a Nevada
corporation (referred to individually as the “Parent Company” or collectively
with all of its subsidiaries as “NeoGenomics” or the “Company” in this Form 10-Q)
is the registrant for SEC reporting purposes. Our common stock is listed
on the OTC Bulletin Board under the symbol “NGNM.”





Introduction





The
following discussion and analysis should be read in conjunction with the
unaudited condensed consolidated financial statements, and the notes thereto
included herein. The information contained below includes statements of the
Company’s or management’s beliefs, expectations, hopes, goals and plans that, if
not historical, are forward-looking statements subject to certain risks and
uncertainties that could cause actual results to differ materially from those
anticipated in the forward-looking statements. For a discussion on
forward-looking statements, see the information set forth in the introductory
note to this Quarterly Report on Form 10-Q under the caption “Forward Looking
Statements”, which information is incorporated herein by reference.





Overview





NeoGenomics
operates a network of cancer-focused testing laboratories whose mission is to
improve patient care through exceptional cancer genetic diagnostic, prognostic
and predictive testing services. Our vision is to become America’s premier
cancer testing laboratory by delivering uncompromising quality, exceptional
service and innovative products and solutions. The Company’s laboratory network
currently offers the following types of testing services:





a)
            cytogenetics
      testing, which analyzes human
chromosomes;





b)
            Fluorescence
      In-Situ Hybridization (“FISH”) testing, which analyzes abnormalities at
      the chromosomal and gene levels;





c)
            flow
      cytometry testing, which analyzes gene expression of specific markers
      inside cells and on cell surfaces;





d)
            immunohistochemistry
      testing, which analyzes the distribution of tumor antigens in specific
      cell and tissue types, and





e)
            molecular
      testing which involves analysis of DNA and RNA to diagnose and predict the
      clinical significance of various genetic sequence
    disorders.





All of
these testing services are widely utilized in the diagnosis, prognosis, and
prediction for response to therapy of various types of cancers.





Our
Focus





NeoGenomics’
primary focus is to provide high complexity laboratory testing for
community-based pathology, oncology, dermatology and urology markets in the
United States and the Caribbean. We focus on community-based practitioners for
two reasons. First, academic pathologists and associated clinicians tend to have
their testing needs met within the confines of their university affiliation.
Secondly, most of the cancer care in the United States is administered by
community-based practitioners due to ease of local access. We currently provide
our services to pathologists and oncologists that perform bone marrow and/or
peripheral blood sampling for the diagnosis of blood and lymphoid tumors
(leukemias and lymphomas) and archival tissue referred for analysis of solid
tumors such as breast cancer. We also serve community-based urologists and
dermatologists by providing FISH-based genetic tests for the early diagnosis of
bladder cancer and/or recurrent bladder diseases, and melanoma.





The high
complexity cancer testing services we offer to community-based pathologists are
designed to be a natural extension of and complementary to the services that our
pathologist clients perform within their own practices. Because fee-for-service
pathologists derive a significant portion of their annual revenue from the
interpretation of cancer biopsy specimens, they represent an important market
segment to us. We believe our relationship as a non-competitive partner to the
community-based pathologist empowers these pathologists to expand their testing
breadth and provide a menu of services that matches or exceeds the level of
service found in academic centers of excellence around the
country.


14


We also
believe that we can provide a competitive choice to those larger oncology
practices that prefer to have a direct relationship with a laboratory for cancer
genetic testing services. Our regionalized approach allows us strong
interactions with clients and our innovative Genetic Pathology Solutions (“GPS”)
report summarizes all relevant case data on one summary report.





New FISH Test for
Melanoma





In
February 2010 we launched the first of the three tests developed pursuant to our
2009 Strategic Supply Agreement with Abbott under the trade name
MelanoSITETM.   MelanoSITETM is a four probe FISH test that can be
used as a diagnostic aid to traditional histopathologic evaluation in diagnosing
melanoma.   In conjunction with histopathology, the MelanoSITETM
test can help improve classification of melanocytic neoplasms with conflicting
morphologic criteria and help ensure proper follow-up.  Differential
diagnosis of moderate to severely atypical nevi versus true melanoma is one of
the most challenging areas in dermatopathology.  While most melanomas
can be readily distinguished from nevi on histopathologic examination, we
estimate there are about 5% of cases that are ambiguous and show conflicting
morphologic criteria.  Diagnostic ambiguity has significant adverse
consequences for patients and the healthcare system at large.  Failure
to recognize melanoma is potentially fatal, but labeling a benign lesion as
malignant can lead to unwarranted wide re-excisions, sentinel lymph node
biopsies, adjuvant toxic therapeutic interventions and the emotional strain of
facing a diagnosis of cancer.  Considering the large number of
biopsies done in the U.S. to either confirm or rule out melanoma, diagnostic
uncertainty of this scale represents a significant challenge to the U.S.
healthcare system.  We believe the MelanoSITETM test will help address
this diagnostic uncertainty and help to reduce the medical costs associated with
melanoma by providing a more accurate diagnosis.





Seasonality





The
majority of our testing volume is dependent on patients being treated by
hematology/oncology professionals and other healthcare providers. Volume of
testing generally declines during the vacation seasons, year-end holiday periods
and other major holidays, particularly when those holidays fall during the
middle of the week. In addition, volume of testing tends to decline due to
adverse weather conditions, such as heavy snow, excessively hot or cold spells
or hurricanes, tornados in certain regions, consequently reducing revenues and
cash flows in any affected period. Therefore, comparison of the results of
successive periods may not accurately reflect trends for future
periods.





Critical Accounting
Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires us to make estimates and
assumptions and select accounting policies that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.





While
many operational aspects of our business are subject to complex federal, state
and local regulations, the accounting for our business is generally
straightforward with net revenues primarily recognized upon completion of the
testing process. Our revenues are primarily comprised of laboratory tests, and
approximately one-half of total operating costs and expenses consist of employee
compensation and benefits. Due to the nature of our business, several of our
accounting policies involve significant estimates and judgments. These
accounting policies have been described in our Annual Report on Form 10-K for
the year ended December 31, 2009, and there have been no material changes in the
three and nine months ended September 30, 2010.


15


Results
of Operations for the Three and Nine Months Ended September 30, 2010as
Compared to the Three and Nine Months Ended September 30,
2009





The
following table presents the unaudited condensed consolidated statements of
operations as a percentage of revenue:





For the three months ended
                  September 30.
                
                
                For the nine months ended
                  September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009NET
      REVENUE
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %
                
                
                100
                %COST
      OF REVENUE
                
                
                55
                %
                
                
                50
                %
                
                
                54
                %
                
                
                47
                %GROSS
      PROFIT
                
                
                45
                %
                
                
                50
                %
                
                
                46
                %
                
                
                53
                %OPERATING
      EXPENSES:General
      and administrative
                
                
                33
                %
                
                
                34
                %
                
                
                33
                %
                
                
                33
                %Sales
      and marketing
                
                
                23
                %
                
                
                25
                %
                
                
                22
                %
                
                
                22
                %TOTAL
      OPERATING EXPENSES
                
                
                56
                %
                
                
                59
                %
                
                
                55
                %
                
                
                55
                %LOSS
      FROM OPERATIONS
                
                
                (12
                )%
                
                
                (9
                )%
                
                
                (9
                )%
                
                
                (1
                )%INTEREST
      AND OTHER INCOME (EXPENSE) - NET
                
                
                (2
                )%
                
                
                (1
                )%
                
                
                (2
                )%
                
                
                (2
                )%NET
      LOSS
                
                
                (14
                )%
                
                
                (10
                )%
                
                
                (11
                )%
                
                
                (3
                )%





Revenue





The
Company’s specialized testing services are performed based on a written test
requisition form and revenues are recognized once the testing services have been
performed, the results have been delivered to the ordering physician, the payor
has been identified and eligibility and insurance have been verified. Our
testing services are billed to various payors, including Medicare, commercial
insurance companies, other directly billed healthcare institutions such as
hospitals and clinics, and individuals. We report revenues from contracted
payors, including Medicare, certain insurance companies and certain healthcare
institutions, based on the contractual rate, or in the case of Medicare,
published fee schedules. We report revenues from non-contracted payors,
including certain insurance companies and individuals, based on the amount
expected to be collected. The difference between the amount billed and the
amount expected to be collected from non-contracted payors is recorded as an
allowance to arrive at the reported revenues. The expected revenues from
non-contracted payors are based on the historical collection experience of each
payor or payor group, as appropriate. In each reporting period, we review our
historical collection experience for non-contracted payors and adjust our
expected revenues for current and subsequent periods accordingly.





Revenues
increased approximately 19%, or $1.4 million, to approximately $8.7 million for
the three months ended September 30, 2010 as compared to $7.3 million for the
three months ended September 30, 2009. The revenue increase for the three months
ended September 30, 2010, as compared to the comparable period in 2009, was
primarily driven by increases in the number of tests performed partially offset
by a decline in average revenue per test.  Average revenue per test
decreased by approximately 7.8% for the three months ended September 30, 2010 as
compared to the comparable period in 2009 as a result of contracts signed with
three managed care organizations over the last year that had lower average unit
pricing than what we had previously been experiencing.





Test
volume increased approximately 29% for the three months ended September 30, 2010
as compared to the three months ended September 30, 2009. Increases in test
volumes were primarily driven by the increase in sales and marketing activities
by the Company over the past twelve months.





For the
nine months ended September 30, 2010, revenues increased approximately 18%, or
$3.95 million, to $25.6 million as compared to $21.7 million for the comparable
period in 2009.  This revenue increase was primarily driven by
increases in the number of tests performed partially offset by a decline in
average revenue per test.





Test
volume increased approximately 31% for the nine months ended September 30, 2010
as compared to the nine months ended September 30, 2009.  Increases in
test volumes were primarily driven by the increase in sales and marketing
activities by the Company over the past twelve months.


16


Revenues
per test are a function of both the type of the test (e.g. FISH, cytogenetics,
flow cytometry, etc.) and the payer (e.g., Medicare, Medicaid, third party
insurer, institutional client etc.). Average revenue per test is primarily
driven by our test type mix and our payer mix. The decline in average revenue
per test is the result of changes in test mix, managed care reimbursement, a
slight Medicare reimbursement decrease and modest increases in the amount of
uninsured patients.





We have
established a reserve for uncollectible amounts based on estimates of what we
will collect from: a) third-party payers with whom we do not have a contractual
arrangement or sufficient experience to accurately estimate the amount of
reimbursement we will receive, b) payments directly from patients, and c) those
procedures that are not covered by insurance or other third party payers. The
Company’s allowance for doubtful accounts increased 117%, or approximately
$691,800, to $1,280,800, as compared to $589,000 at December 31, 2009 as a
result of increasing the amount of time we allow claims to be worked before
writing them off. The allowance for doubtful accounts was approximately 19% of
accounts receivable on September 30, 2010 and 11% on December 31,
2009.





Cost of
Revenue





Cost of
revenue includes payroll and payroll related costs for performing tests,
depreciation of laboratory equipment, rent for laboratory facilities, laboratory
reagents, probes and supplies, and delivery and courier costs relating to the
transportation of specimens to be tested.





Cost of
revenue increased approximately 31%, or $1.1 million, to $4.8 million for the
three months ended September 30, 2010 as compared to $3.7 million for the three
months ended September 30, 2009. The increase was primarily attributable to
increases in all areas of costs of revenue as the Company scaled its operations
in order to meet increasing demand. Cost of revenue as a percentage of revenue
was approximately 55% for the three months ended September 30, 2010 as compared
to 50% for the three months ended September 30, 2009.





Accordingly,
gross margin was approximately 45% for the three months ended September 30, 2010
as compared to 50% for the three months ended September 30,
2009.  This decline in gross margin is primarily attributable to the
decline in our average revenue per test as described
previously.  NeoGenomics also made a conversion to a new laboratory
information system (LIS) during the third quarter, which also adversely impacted
productivity due to training time and testing for the new system and thus
impacted gross margin.





For the
nine months ended September 30, 2010, cost of revenue increased approximately
35%, or $3.6 million, to $13.7 million as compared to $10.1 million in the
comparable period in 2009.  The increase was primarily attributable to
increases in all areas of costs of revenue as the Company scaled its operations
in order to meet increasing demand. Cost of revenue as a percentage of revenue
was approximately 54% for the nine months ended September 30, 2010 as compared
to 47% for the nine months ended September 30, 2009. NeoGenomics also made a
conversion to a new laboratory information system (LIS), which also adversely
impacted productivity due to training time and testing of the new system in the
second and third quarters.





Accordingly,
gross margin was approximately 46% for the nine months ended September 30, 2010
as compared to 53% for the nine months ended September 30, 2009.  This
decline in gross margin is primarily attributable to the decline in our average
revenue per test as described previously and to costs related to the conversion
of our new laboratory information system which impacted technologist
productivity.





Sales and
Marketing





Sales and
marketing expenses relate primarily to the employee related costs of our sales
management, sales representatives, sales and marketing consultants, marketing,
and customer service personnel.





For the three months ended
                  September 30.
                
                
                
                
                
                For the nine months ended
                  September 30,2010
                
                
                2009
                
                
                %
                  Change
                
                
                2010
                
                
                2009
                
                
                %
                  ChangeSales
      and marketing
                
                $
                1,983,000
                
                
                $
                1,793,000
                
                
                
                11
                %
                
                $
                5,689,000
                
                
                $
                4,850,000
                
                
                
                17
                %As
      a % of revenue
                
                
                23
                %
                
                
                25
                %
                
                
                
                
                
                
                22
                %
                
                
                22
                %





The
increase in sales and marketing expenses for the three months ended September
30, 2010 as compared to the same period in 2009 is driven primarily by an
increase in the number of sales personnel and sales recruiting
expenses.


17


For the
nine months ended September 30, 2010 as compared to the same period in 2009, the
increase in sales and marketing expenses is primarily the result of adding
substantial numbers of sales and marketing personnel throughout 2009, the full
impact of which was captured in the nine months ending September 30,
2010.





We expect
our sales and marketing expenses to stabilize in the near future. We expect
these expenses to decline as a percentage of revenue as our case volumes
increase and we develop more economies of scale in our sales and marketing
activities.





General and Administrative
Expenses





General
and administrative expenses relate to billing, bad debts, finance, human
resources, information technology, and other administrative functions. They
primarily consist of employee related costs (such as salaries, fringe benefits,
and stock-based compensation expense), professional services, facilities
expense, and depreciation and administrative-related costs allocated to general
and administrative expenses.  In addition, the provision for doubtful
accounts is included in general and administrative expenses.





For the three months ended
                  September 30.
                
                
                
                
                
                For the nine months ended
                  September 30,2010
                
                
                2009
                
                
                %
                  Change
                
                
                2010
                
                
                2009
                
                
                %
                  ChangeGeneral
      and administrative
                
                $
                2,919,000
                
                
                $
                2,458,000
                
                
                
                19
                %
                
                $
                8,590,000
                
                
                $
                7,013,000
                
                
                
                22
                %As
      a % of revenue
                
                
                33
                %
                
                
                34
                %
                
                
                
                
                
                
                34
                %
                
                
                32
                %





The
increase in general and administrative expenses for the three months ended
September 30, 2010 as compared to the comparable period in 2009 is primarily a
result of adding additional information technology management and to a lesser
extent increases in bad debt expense related to additional
revenues.





Bad debt
expense increased by approximately 37%, or $155,000, to $579,000 for the three
months ended September 30, 2010 as compared to $424,000 for the three months
ended September 30, 2009. Bad debt expense as a percentage of revenue for the
three months ended September 30, 2010 was 6.7% as compared to 5.8% for the three
months ended September 30, 2009.





For the
nine months ended September 30, 2010, the increase in general and administrative
expenses as compared to the comparable period in 2009 is primarily a result of
adding additional senior level management and information technology personnel,
bad debt expense related to increased sales and to a lesser extent increases in
insurance cost due to increased revenues and payroll costs.





Bad debt
expense increased by approximately 28%, or $387,000, to $1,746,000 for the nine
months ended September 30, 2010 as compared to $1,359,000 for the nine months
ended September 30, 2009. Bad debt expense as a percentage of revenue for the
nine months ended September 30, 2010 was 6.8% as compared to 6.3% for the nine
months ended September 30, 2009.





The
increase in bad debt expense as a percentage of revenue is the result of managed
care organizations becoming more aggressive in limiting payments to
out-of-network providers and the increase in uninsured patients related to the
United States economy.





We expect
our general and administrative expenses to increase modestly as we increase our
billing and collections activities, incur additional expenses associated with
the expansion of our facilities and backup systems and continue to build our
physical infrastructure to support our anticipated growth. However, we expect
general and administrative expenses to decline as a percentage of our revenue as
our case volumes increase and we develop more operating leverage in our
business.





Interest Expense, net and
Other Expense





Interest
expense net, represents the interest expense we incur on our borrowing
arrangements offset by the interest income we earn on cash deposits. Interest
expense, net increased approximately 39%, or $50,000, to $179,000 for the three
months ended September 30, 2010 as compared to $129,000 for the three months
ended September 30, 2009.





For the
nine months ended September 30, 2010, interest expense, net increased
approximately 37%, or $139,000, to $513,000 as compared to $374,000 for the nine
months ended September 30, 2009.





Interest
expense is primarily related to the amount of our capital leases outstanding and
to a lesser extent to the amount we have outstanding at any given time under our
Credit Facility with CapitalSource. Interest expense increased over the
comparable periods in 2009 primarily as a result of the higher capital lease and
Credit Facility balances.


18





Other
expense for the three and nine months ended September 30, 2010 was approximately
$7,000 and $13,000 which represent minimum state income taxes.





Net Income
(Loss)





As a
result of the foregoing, we reported a net loss of $1,198,000, or $(0.03)/share,
for the three months ended September 30, 2010 as compared to a net loss of
$755,000, or $(0.02)/share, for the three months ended September 30, 2009. We
reported a net loss of $2,926,000, or $(0.08) per share, for the nine months
ended September 30, 2010 as compared to a net loss of approximately $714,000, or
$(0.02) per share, for the nine months ended September 30, 2009.





Liquidity and Capital
Resources





The
following table presents a summary of our cash flows provided by (used in)
operating, investing and finance activities for the nine months ended September
30, 2010 and 2009 as well as the period ending cash and cash equivalents and
working capital.





For the nine months ended
                  September 30,2010
                
                
                2009Net
      cash provided by (used in):Operating
      activities
                
                $
                (2,413,000
                )
                
                $
                (1,046,000
                )Investing
      activities
                
                
                (813,000
                )
                
                
                (432,000
                )Financing
      activities
                
                
                3,150,000
                
                
                
                4,138,000Net
      increase in cash and cash equivalents
                
                
                (76,000
                )
                
                
                2,660,000Cash
      and cash equivalents, beginning of period (1)
                
                
                1,631,000
                
                
                
                468,000Cash
      and cash equivalents, end of period (1)
                
                $
                1,555,000
                
                
                $
                3,128,000Working
      Capital (2), end of period
                
                $
                (332,000
                )
                
                $
                2,744,000





(1)
              This
      excludes restricted cash of
$500,000


(2)
            Defined
      as current assets - current
liabilities.





The large
increase in cash used in operations for the nine months ended September 30, 2010
as compared to the comparable period in 2009 is primarily the result of our loss
from operations, and increases in our accounts receivable from increased
revenues.  As of September 30, 2010 we had a working capital deficit
of $332,000.





The
increase in cash used in investing activities was primarily the result of paying
cash for various leasehold improvements, capitalizable costs of our new
Laboratory Information System and certain equipment upgrades, none of which
could be lease financed.





The
increase in net cash flow provided by financing activities was primarily the
result of increases in funding from our Credit Facility with Capital
Source.  This funding was partially offset by payments on our capital
lease facilities.





On
November 5, 2008, we entered into a common stock purchase agreement (the “Stock
Agreement”) with Fusion Capital Fund II, LLC, an Illinois limited liability
company (“Fusion”). The Stock Agreement, which has a term of 30 months, provides
for the future funding of up to $8.0 million available from sales of our common
stock to Fusion on a when and if needed basis as determined by us in our sole
discretion, depending on, among other things, the market price of our common
stock. As of September 30, 2010, we had not drawn on any amounts under the
Fusion Stock Agreement.





On
February 1, 2008, we entered into a revolving credit facility with
CapitalSource, which allows us to borrow up to $3,000,000 based on a formula
which is tied to our eligible accounts receivable that are aged less than 150
days.


19


On April
26, 2010, the Parent Company, NeoGenomics Laboratories, Inc., the wholly-owned
subsidiary of the Parent Company (“Borrower”), and CapitalSource entered into an
Amended and Restated Revolving Credit and Security Agreement (the “Amended and
Restated Credit Agreement” of the “Credit Facility”).  The Amended and
Restated Credit Agreement amended and restated the Revolving Credit and Security
Agreement dated February 1, 2008, as amended, among the Parent Company, Borrower
and CapitalSource (the “Original Credit Agreement”).  The terms of the
Amended and Restated Credit Agreement and the Original Credit Agreement are
substantially similar except that the Amended and Restated Credit Agreement,
among other things, (i) increases the maximum principal amount of the revolving
credit facility from $3,000,000 to $5,000,000, (ii) provides that the term of
the Amended and Restated Credit Agreement shall end on February 1,
2013,  (iii) increases the amount of the collateral management fee and
unused line fees paid by Borrower to CapitalSource, (iv) modifies the
definitions of “Minimum Termination Fee” and “Permitted Indebtedness”, (v)
provides that the Borrower must maintain a minimum outstanding principal balance
under the revolving facility of at least $2,000,000, (vi) increases the interest
rate to LIBOR plus 4.25% (provided that LIBOR shall not be less than 2.0%) and
(vii) revises certain covenants and representations and
warranties.   The Amended and Restated Credit Agreement also made
permanent a previously enacted temporary change to the methodology for
calculating the Fixed Charge Coverage Ratio covenant, which permits us to add
amounts of unrestricted cash and cash equivalents and unused availability under
the Credit Facility to Adjusted EBITDA for the purposes of calculating this
covenant.  Borrower paid CapitalSource a commitment fee of $33,500 in
connection with the execution of the Amended and Restated Credit Agreement
(CapitalSource credited $25,000 of an amendment fee previously paid by the
Borrower towards this commitment fee).





On
September 30, 2010, we had an outstanding amount due on the Credit Facility of
approximately $3.9 million and had availability of approximately $170,000 based
on eligible accounts receivable.  The credit facility has three
financial covenants, a fixed charge coverage covenant, a cash velocity covenant
and a minimum liquidity requirement.





The fixed
charge coverage covenant is calculated by dividing 1) the sum of our Adjusted
EBITDA during the previous three month period, our period ending unrestricted
cash and cash equivalents, and period ending unused availability under the
Credit Facility, by 2) the sum of our debt service charges plus the amount of
cash paid for capital expenditures less any equity contributions received in
cash during such three month period, and it must equal a ratio of at least 1.25x
in all three month test periods.  Adjusted EBITDA, a non-GAAP measure
is calculated by taking three month GAAP net income plus three months
depreciation, amortization, interest, taxes, non-cash stock based compensation,
other non-cash and non-recurring charges.  We were in compliance with
this fixed charge coverage covenant as of September 30, 2010.





The cash
velocity covenant stipulates that during each rolling three month period, we
must collect 87.5% of the amount of revenue we booked in the three month period
beginning fourth months prior to the covenant test date and ending on the end of
the month directly preceding the covenant test date.  The minimum
liquidity covenant stipulates that we must have at least $500,000 of
unrestricted cash and/or unused availability under our Credit Facility at any
covenant test date.  We were in compliance with both the cash velocity
covenant and the minimum liquidity covenant as of September 30,
2010.





On July
28, 2010 NeoGenomics Laboratories, Inc., the primary operating subsidiary of the
Parent Company (the “Operating Company”), and Leasing Technologies, Inc. (“LTI”)
agreed on the terms and conditions of an additional $1.0 million lease line of
credit with a draw down period of one year.  The new line has the same
terms and conditions as our November 5, 2008 Master Lease Agreement with LTI.
Advances under the lease line may be made for one year by executing equipment
schedules for each advance. The lease term of any equipment schedules issued
under the lease line will be for 36 months. The lease rate factor applicable for
each equipment schedule is 0.0327/month. If the Operating Company makes use of
the entire lease line, the monthly rent would be $32,700. Monthly rent for the
leased equipment is payable in advance on the first day of each month. The
obligations of the Operating Company are guaranteed by the Parent Company. At
the end of the term of each equipment schedule, the Operating Company may: (a)
renew the lease with respect to such equipment for an additional 12 months at
fair market value; (b) purchase the equipment at fair market value, which price
will not be less than 10% of cost nor more than 14% of cost; (c) extend the term
for an additional six months at 35% of the monthly rent paid by the lessee
during the initial term, after which the equipment may be purchased for the
lesser of fair market value or 8% of cost; or (d) return the equipment subject
to a remarketing charge equal to 6% of cost. As of September 30, 2010 we had
made no draws on the LTI lease line of credit and we had $1.0 million of
availability on such line.





On
September 1, 2010, in order to improve our operating results and liquidity we
had a reduction in force which we expect to result in annual savings
of approximately $1.5 million on a going forward basis and in the current
quarter we took an immaterial charge as the result of this action.





As of
September 30, 2010, we had approximately $1.55 million in unrestricted cash on
hand, up to $1.1 million of availability under our Credit Facility, which is
dependent upon eligible accounts receivable, and up to $8.0 million available
under the Fusion Stock Agreement.  As such, our consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.  We believe we have adequate access to capital to meet our
operating commitments over the next twelve months from our cash on hand,
availability under our Credit Facility, and availability under our Fusion Stock
Agreement.  In the event that the Company grows at a rate that is
different from what we currently anticipate or we engage in strategic
transactions or acquisitions and our cash on hand and availability under our
Credit Facility and/or our availability under the Fusion Stock Agreement is not
adequate, we may need to raise additional debt or equity capital from other
sources.  In such event, the Company may not be able to obtain such
funding on attractive terms or at all and the Company may be required to curtail
its operations.


20




Capital
Expenditures





We
currently forecast capital expenditures in order to execute on our business
plan. The amount and timing of such capital expenditures will be determined by
the volume of business, but we currently anticipate that we will need to
purchase approximately $3.0 million to $4.0 million of additional capital
equipment during the next twelve months. We plan to fund these expenditures with
cash, through bank loan facilities, and through capital lease financing
arrangements including the LTI lease line of $1.0 million. If we are unable to
obtain such funding, we will need to pay cash for these items or we will be
required to curtail our equipment purchases, which may have an impact on our
ability to continue to grow our revenues.





Addition and Appointment of
Executive Officers





Effective
as of July 16, 2010, Marydawn Miller, was appointed to the position of Vice
President of Information Technology of the Company.





Effective
as of August 10, 2010, Grant Carlson, has been appointed to the position of Vice
President of Business Development of the Company.





On August
30, 2010, Mark Smits, joined the Company in the role of Vice President of Sales
and Marketing.





As part
of his employment offer letter Mr. Smits salary was set at
$275,000.  Beginning with the fiscal year ending December 31, 2010,
Mr. Smits is also eligible to receive a base incentive bonus payment which will
be targeted at 40% of his base salary based on 100% achievement of goals (the
“Base Bonus Target”) agreed to by Mr. Smits and the CEO of NeoGenomics
Laboratories and approved by the Board of Directors for such fiscal year and is
eligible to be increased up to 150% of the Base Target Bonus in any fiscal year
in which he meets certain outsize performance thresholds established by the CEO
of the Company and approved by the board of directors.  Mr. Smits
targeted bonus for FY 2010 will be prorated for the amount of time served in
2010 and is guaranteed to be a minimum of $25,000.  Mr. Smits is also
entitled to participate in all medical and other benefits that NeoGenomics
Laboratories has established for its employees.  Mr. Smits will also
be eligible for up to four (4) weeks of paid time off per year.  If
Mr. Smits were terminated without cause during the term (as such term is used in
the offer letter) he is eligible to receive his base pay and benefits for a
period of six (6) months.  Mr. Smits also will receive the option to
purchase 425,000 shares of common stock.  The options vest based on
the following schedule:





Time Based
Vesting





-
            25,000
      on December 31, 2010


-
            50,000
      at the first year anniversary


-
            50,000
      at the second year anniversary


-
            50,000
      at the third year anniversary


-
            50,000
      at the fourth year anniversary





Performance Based
Vesting





-
            20,000
      on August 30, 2010


-
            20,000
      if the Company achieves $35.5 million revenue for FY
  2010


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2011


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2012


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2013


-
            40,000
      if the Company achieves the board-approved budgeted revenue for FY
      2014





These
options were valued at approximately $167,000 using a trinomial lattice model
with the following weighted average assumptions:





Expected
      term in years
                  
                  
                  3.66Risk-free
      interest rate (%)
                  
                  
                  0.95
                  %Expected
      volatility range (%)
                  
                  54.10%
      to 63.07%Dividend
      yield (%)
                  
                  
                  0
                  %


21


During
the three months ended September 30, 2010, 20,000 options vested and the
compensation expense was approximately $13,271.





Mr. Smits
did not exercise his option to purchase up to $100,000 of unregistered
NeoGenomics common stock at the average closing price for the previous 5 days
prior to the purchase and received no warrants as a result.





Subsequent
Events





On
October 1, 2010 the Company entered into two lease schedules with LTI for an
aggregate of $136,882 which was funded for lab and computer
equipment.  The lease schedules are for 36 months and the monthly
payments are $4,477.





ITEM 3 — Quantitative and Qualitative
Disclosures About Market Risk





We are a
smaller reporting company as defined by Rule 12b-2 of the Securities Exchange
Act of 1934 and are not required to provide information under this
item.





ITEM 4 — Controls and
Procedures





Disclosure 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
time periods specified in the SEC’s rules and forms, and that such information
is accumulated and communicated to our management, including our principal
executive officer, principal financial officer, and principal accounting
officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives.





As
required by SEC Rule 15d-15(e), our management carried out an evaluation, under
the supervision and with the participation of our principal executive officer,
principal financial officer, and principal accounting officer, of the
effectiveness of our disclosure controls and procedures as of the end of the
period covered by this report. Based on that evaluation, our principal executive
officer, principal financial officer, and principal accounting officer concluded
that our disclosure controls and procedures were effective at a reasonable
assurance level as of the end of the period covered by this report.





Changes in Internal Control
Over Financial Reporting





There
were no changes in our internal control over financial reporting that occurred
during the three months ended September 30, 2010 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.





ITEM 4T — Controls and
Procedures





Not
applicable.


22


PART
II — OTHER INFORMATION





ITEM
1 — LEGAL PROCEEDINGS





On
November 9, 2009, the Company was notified by the Civil Division of the U.S.
Department of Justice (“DOJ”) that a “Qui Tam” Complaint (“Complaint”) had been
filed under seal by a private individual against a number of health care
companies, including the Company. The Complaint is an action to recover damages
and civil penalties arising from alleged false or fraudulent claims and
statements submitted or caused to be submitted by the defendants to Medicare.
The DOJ has not made any decision whether to join the action. The Company
believes the allegations in the Complaint are without merit and intends to
vigorously defend itself if required to do so.





ITEM 1A — RISK
FACTORS





We are a
smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are
not required to provide information under this item.





ITEM 2 — UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS





None





ITEM 3 — DEFAULTS UPON SENIOR
SECURITIES





Not
Applicable





ITEM
4 — REMOVED AND RESERVED





None





ITEM 5 — OTHER
INFORMATION





On
October 28, 2010 Kevin C. Johnson, age 55, was appointed to the board of
directors of NeoGenomics.  Mr. Johnson is currently
retired.  From May 1996 to January 2003, Mr. Johnson was Chairman,
Chief Executive Officer and President of DIANON Systems, Inc., a publicly-traded
cancer diagnostic services company providing anatomic pathology and molecular
genetic testing services to physicians nationwide.  During that time,
DIANON grew annual revenues from approximately $56 million in 1996 to
approximately $200 million in 2002, and DIANON’s market capitalization grew from
$45 million to approximately $600 million when it was sold to Laboratory
Corporation of America (NYSE:  LH) in January of
2003.   Prior to joining DIANON in 1996, Mr. Johnson was employed
by Quest Diagnostics and Quest’s predecessor, the Life Sciences Division of
Corning, Inc., for 18 years, and held numerous management and executive level
positions.  Mr. Johnson is Chairman of the Board of Aureon
Biosciences, Inc. a medical technology company integrating clinical history,
unique tissue patterns and molecular characteristics, to help determine the
likely path of a patient's cancer.  He also serves on the Board of
Precision Therapeutics, a diagnostics services company, using a proprietary live
tumor cell-based platform to measure patient's tumor sensitivity and resistance
to a range of therapeutic alternatives under consideration for cancer treatment,
with initial focus on gynecologic cancers.





As of the
date of this filing of this Quarterly Report on Form 10-Q with the Securities
and Exchange Commission, Mr. Johnson had not been named to any committee of the
Company’s
board of directors.





Mr.
Johnson will receive a $25,000 annual stipend paid quarterly in arrears and will
receive $1,000 for each board meeting attended in person and $500 for each
telephonic board meeting.





On
October 28, 2010 George O’Leary resigned from the Company’s board of
directors.


23


ITEM 6 — EXHIBITS





EXHIBITNO.
                      DESCRIPTION10.48
                      Offer
      Letter between NeoGenomics Laboratories, Inc. and Mark Smits dated July
      26, 2010 (Incorporated by reference to the Company’s Current Report on
      Form 8-K filed with the SEC on August 12, 2010)31.1
                      Certification
      by Principal Executive Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
                      Certification
      by Principal Financial Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.3
                      Certification
      by Principal Accounting Officer pursuant to Rule 13a-14(a)/ 15d-14(a), as
      adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
                      Certification
      by Principal Executive Officer, Principal Financial Officer and Principal
      Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
      to Section 906 of the Sarbanes-Oxley Act of
2002




24


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.





Date:
      October 29, 2010
              NEOGENOMICS,
      INC.By:
              /s/ Douglas M. VanOortName:
              Douglas
      M. VanOortTitle:
              Chairman
      andChief
      Executive OfficerBy:
              /s/ George CardozaName:
              George
      CardozaTitle:
              Chief
      Financial OfficerBy:
              /s/ Jerome J. DvonchName:
              Jerome
      J. DvonchTitle:
              Director
      of Finance andPrincipal
      Accounting Officer




25