Greetings, and welcome to the NeoGenomics Second Quarter 2012 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Doug VanOort, Chairman and Chief Executive Officer for NeoGenomics. Thank you, sir, you may begin.

Thank you and good morning. I'd like to welcome everyone to NeoGenomics' Second Quarter 2012 Conference Call and introduce you to the team that's here with me today. Joining me this morning are Steven Jones, our Executive Vice President for Finance; George Cardoza, our Chief Financial Officer; Fred Weidig, our Director of Finance and Principal Accounting Officer; Jerry Dvonch, our Director of External Reporting; and Rob Horel, our Vice President of Sales and Marketing. In addition, Dr. Maher Albitar, our Chief Medical Officer, is joining us from Irvine, California, by phone. Bob Gasparini, our Chief Scientific Officer, is traveling on business today and unable to join us. Before we begin our prepared remarks, Steve will read the standard language about forward-looking statements.

This conference call may contain forward-looking statements, which represent our current expectations and beliefs about our operations, performance, financial condition and growth opportunities. Any statements made on this call that are not statements of historical fact are forward-looking statements. These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our 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 statements speak only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Thank you, Steve. I'll begin our call today with some brief remarks about our results for the second quarter and then comment on a variety of ongoing and upcoming initiatives that support our strategies of volume growth and operating productivity. I'll then turn the meeting back over to Steve to discuss our financial results in more detail. NeoGenomics performed very well in the second quarter. Revenue continued to show strong year-over-year gains. Service levels remained outstanding. Productivity improvements were very strong, and we generated solid incremental earnings despite making significant investments in future growth initiatives. Revenue for the second quarter was a record $15.6 million, an increase of $5.1 million or 49% compared with last year's second quarter. Test volume grew 57% compared with last year's second quarter, driven by strong growth in our core business and by significant expansion of molecular and immunohistochemistry testing. As you know, our test volumes grew rather dramatically from quarter 1 of last year through quarter 1 of this year, averaging a sequential growth rate of almost 17% over each of those 4 quarters. We expected sequential growth to slow in the second quarter of this year as a result of redirecting our sales force to prepare for the TC Grandfather issue and to normal seasonal patterns. Overall, we're pleased with our 9% sequential growth versus quarter 1. Our operations generated significantly more EBITDA than ever, with adjusted EBITDA of $1.9 million in the second quarter compared with $500,000 in Quarter 2 of last year. Bottom line, we earned $0.01 a share as productivity improvements drove solid incremental earnings despite the significant growth investments we made. I'd like to comment now on the results from some of our growth initiatives. Volumes grew over last year in all types of testing we performed. Expansions into…

Thanks, Doug. I'll start by reviewing some of our financial and operating metrics, and then we will open it up for questions. Since Doug has already reviewed our revenue metrics, I will start with our operating metrics. The total number of tests reported in the second quarter increased by 57% over Q2 last year. Average revenue per test was $541, a 5.1% or $29 decline from the $570 recorded in Q2 last year. This decrease was almost entirely due to a continuation of the shift in our revenue mix that we discussed in Q1. Lower priced molecular and histology tests now make up a greater percentage of our total revenue, and higher priced flow cytometry tests have decreased as a percentage of revenue over the last year. Molecular and traditional pathology testing are now the fastest growing components of our revenue mix. Gross margin improved by approximately 270 basis points in the second quarter to 47.2% from 44.5% in Q2 last year. This improvement came despite the reduction in unit prices I just mentioned and is directly attributable to the improved lab productivity compared with the second part of last year. Our average cost of goods sold per test decreased by $31 or 9.7% in the quarter compared to Q2 of last year. Thus, when netted against the average revenue per test decrease, we still had an increase in average gross margin per test. The biggest single component of this margin increase came from increases in productivity per lab employee. As Doug mentioned, we had a 15.4% year-over-year improvement in the number of tests completed per lab FTE from Q2 2011. We also saw nice reductions in our contract labor, lab sendouts and logistics cost in the quarter. Turning now to SG&A. Total sales and marketing expenses increased just $250,000…

[Operator Instructions] Our first question comes from Keith Markey of Griffin Securities.

A couple of questions, if I could. I was wondering, do you expect productivity to increase much more in the second half of this year and in 2013?

Yes, we do. We have a variety of initiatives to improve productivity. I've mentioned the best practice teams that we have working in all our major laboratory disciplines. We are implementing the bar coding and scanning technology. We're doing a whole lot of things to allow us to improve our process. The way we're reducing cost is all about process management and continuous improvement, and we're very focused on that. So we believe we'll get results.

Yes, I would also add here, just the fact that our IHC molecular labs are now profitable gives us an enormous amount of operating leverage that we didn't have before. They used to be a drag on gross margins and now they'll be contributions. And when the line start to cross, when you're bringing up a new lab division like that, once you get to a certain critical mass, then you start to get a lot more profitable on each incremental test. And we're pretty much at that place for both of those tests.

That's great. Do you have a sense as to what's reasonable, I don't know, how -- maybe number of tests per employee? Might sort of give a sense of where a goal for you to reach or where you think you might reach in 2013?

I would tell you that we don't typically give out that level of detail in the data because it can be construed in a lot of different ways and be misunderstood. We have seen substantial increases in a number of lab tests completed per laboratory FTE. And I would envision that we'll be, with the advent of bar coding and the other process improvements, we'll be able to get similar types of productivity increases over the next year.

Great. And how much of the growth in the recent quarter could you attribute to new clients?

When we look at our growth figures, the question of what is the client is something we look at really carefully. We don't call a client a client until they've sent 3 consecutive -- 3 tests per month for 3 consecutive months. So we have a number of clients that are active accounts, but not "clients" yet. And so we measure it a lot of different ways. I would tell you that most of the growth in Q2 year-over-year was from new clients that have achieved that 3 by 3 status. We do usually get some what we call same-store sales year-over-year. We're getting a little bit more same-store sales than we used to now because the molecular activity is growing nicely. But it's mostly going to be from new client activity.

Okay. And then I just had a couple of questions related to the new molecular tests. I was just wondering the nature of the readout from those tests, is it a qualitative and quantitative in the sense of, yes, this gene is being over-expressed, or do you give out a quantitative measure of, in some sense, as just to what extent it being over-expressed. And in the case where you may have a couple of genes that are being expressed that signal a problem, do they -- does that readout also provide some sort of guidance for the physician in terms of drug therapy that would be appropriate based upon either historical evidence or guidelines in place already for the industry?

I'd like to ask Dr. Albitar to field this question.

[indiscernible] The testing is mainly to detect the mutation, so it is qualitative whether the sample of the cancer has specific mutation or not in the specific gene or not. It is not expressing -- it is not expressing a way, it is mutation detection. We -- in our interpretation, we will try as much as we can to give some guidance to the clinical implication of these mutations that we detect. Yes, we will.

Okay, great. And what is the nature of the competition in the assay market? Are you up against a large number of embedded competitors? Or is it -- it's clearly an evolving field, but how do you stand in that term -- in those terms?

I'm going to ask Dr. Albitar to field that one as well.

I think the way we are opening this testing is unique. As far as I know, there's no other lab that offer this kind of testing as extensive as it is, using standard -- gold standard technologies as a sequencing. I think there are multiple assays or multiple laboratories offering kinds of comprehensive profiling of cancer, but usually the results you get not as comprehensive as we are offering it currently.

Very good. And...

And the thing that -- to sort of layman's terms to think about is what the labs are doing point mutation specific molecular analysis, we are sequencing -- we're using bidirectional sequencing. So rather than picking up one allele-specific mutation along a gene, which might have 1 million to 2 million base pairs of DNA on it, we're actually starting on either end of the gene and sequencing in and picking up all of the mutations along the gene. So it's quite a comprehensive approach that Dr. Albitar has put in. And we're not aware of a lot of labs doing that.

Yes. Yes, that's great. And then just one last question. Do you have any sort of a test at this point or perhaps in the near future, do you anticipate having one that would help to identify cancer -- circulating cancer cells in the blood, for instance, as a monitor for a person's disease or perhaps even for screening patients that might be at high risk.

So I'm going to ask Dr. Albitar to talk about that as well, but we got to get to some other questions, so we're going to keep our answer brief.

Indeed, we are extremely interested in this. We are working on it, just stay tuned.

Our next question is from Thomas Spicer [ph] of RC Research [ph].

I just had a question here about the TC Grandfather Clause. Has that changed your guys' investment strategy at all or maybe what type of tests you're looking to investing further?

No, we, pretty well, are staying the course on our strategy. We have, for years, planned to have one of the most advanced molecular labs in the United States and have been investing in it for years. With Dr. Albitar joining the team, we were able to accelerate those plans quite substantially. And we're at the place now where what we think we're going to be investing in hasn't really changed in the last couple of years. We're opportunistically exploring new things. We're looking at using the Health Discovery Corporation technology we licensed with some of our existing platforms to make it more efficient. But -- so we'll be tweaking what we're doing already and staying the course on what our general strategy has been.

And then I guess just one more question for me here and I'll hop back into the queue. You guys, I think in your release, said you are planning on opening a new laboratory facility in California by the end of the third quarter. Can you just give some color maybe on how's that could improve productivity going forward?

Yes, I'll take a crack at that. So right now, we've totally outgrown the existing facility that we're in, and it's not set up to be a lean laboratory. It's pretty cut up. There are a number of different buildings and so forth. So the new laboratory is going to be set up to help us to drive toward lean manufacturing, if you will, in our laboratory operations. We are building a state-of-the-art molecular facility out there. We're building an IHC facility out there, and we'll have a lot more space and the layout will be much more conducive to productivity gains.

Our next question is from Mike Petusky of Noble Financial.

Can I just ask, in terms of the technical component issue, does this affect client relationship? In other words, the ongoing nature, hopefully, of client relationships. Or is this purely just a reimbursement, pricing-type issue?

No, it actually does impact client relationships and in our case, usually for the better. We have used this as an opportunity to reexamine our -- all of our client relationships, not just those that have been impacted by the Grandfather Clause. And one of the things we found is that some of these hospitals are significantly more price sensitive and they perhaps would have been when we were billing third-party payers. And so we've taken the opportunity with our largest and best clients to go in and say, "We'd be delighted to give you great pricing, but we'd like to have a semi-exclusive relationship with you and do all of your flow cytometry, FISH, molecular testing and cytogenetics." And much to our pleasure, a lot of our largest clients have accepted our proposal on that. And so we are locking up client relationships, written contractual format that we think will help us just stay focused on continually asking -- helping them get better and better in their own process and deliver more value instead of worrying about some lab coming in and dropping some cut-rate, lowball, non-apples-to-apples comparison test on things. One of the things we've heard over and over again from our clients is how much further out in front we are on this issue than all the other labs out there. We've gone to extensive lengths to educate the community about the impacts. We held conference calls with all of our clients. On the first conference call like that, we had over 200 clients on the phone. We even had 3 or 4 of our competitor sales force members on these calls because they weren't getting the information from their own companies. And so we've really kind of carved out a niche as being the lab that's most proactive. We went in front of all of our client relationships and -- the larger ones, at least -- and gave them pro forma analysis of what the impact would be, and we did a lot of modeling and stuff. We help them get ready for this months before the thing went into effect. And as a result of that now, we're just sort of cleaning up some loose ends, but we're largely through the process of this.

But -- and so it sounds like you're expecting to retain the bulk and perhaps the very, very large bulk of your client relationship and all the key relationships going forward? Is that the takeaway there?

I am only aware of one client that we lost on price, and to be brutally frank, that was a client we probably wanted to lose on price because it wasn't a good revenue mix for us. And we've actually got some opportunities to increase the business where when you offer exclusive pricing for getting it all, it gives people something to think about. So we're going to pick up some business. I'm hopeful that we'll pick up more than we'll lose, but it's just too early in the quarter to say for sure if that will happen.

Okay. And just another question, Steve, as you guys think about this -- we'll just call it approximately $1 million at the operating line, that will -- essentially, you'll have to find a way to mitigate that loss. I mean, is it mostly going to be found in just kind of continued growth or are you guys going to do a little bit -- try to do a little bit more on the SG&A. It seems that you kind of alluded to trying to do some things with processes. But just -- if we're looking at the million dollars, I mean, essentially and the attempt to mitigate that impact. I mean, I guess, how much of that would come from the company growth and how much of that would come from more processes and managing on the SG&A line?

Well, we have opportunities in both. And I think as we pro forma it out, we think it's about half-and-half. We are still growing as we redirect our sales force back toward growth initiatives. We think we've got plenty of growth out there in the pipeline over the next several quarters. And in addition, we've got a whole host of initiatives on the process cost control front, so I think it's about half-and-half.

Operator, we're ready for the next question.

Our next question comes from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid of Wedbush Securities. Just curious, how should we be thinking about the CapEx spend and further many build-out over the next few quarters and years, perhaps?

So we're generally on about a $5 million to $6 million per year CapEx run rate right now. That will dip a little bit in the fourth quarter because we're just coming through a big [indiscernible] now, but I would expect it to, at this point then, to be somewhat similar next year. To be a bigger company, there's a lot of growth CapEx and replacement CapEx necessary every year. Mature labs generally will settle out at around 4% or 5% of the revenue each year it will be in CapEx. I think we're at about 7%. We'll continue coming down, but the numbers are going to, on an aggregate basis, go up. Again, we lease finance about 85% of that in a typical quarter.

Our the next question comes from Kevin DeGeeter of Ladenburg Thalmann.

Maybe 1 or 2 just quick operational questions here. You talk about growth rate from molecular and IHC to sort of back out new products. Sort of what -- what was sort of the baseline year-over-year portfolio core growth rate?

The answer to that question is actually not as straightforward as you think. There's 3 general kinds of molecular tests. There's something called PCR, polymerase chain reaction, and that would incorporate real-time PCR. There's something called fragment length analysis, and then there's something called sequencing. This year, we have relaunched most of the tests that we could relaunch with a sequencing platform. And so, when we talk about year-over-year for the new test versus the old test, we've relaunched the platform. We no longer do PCR-based tests in a number of cases. Instead, we're doing bidirectional sequencing now. So we have a much comprehensive approach to our testing. And so our revenue growth in the molecular area was 185% year-over-year. So you can get a feel for how much faster growing that is in the rest of our overall tests. Now molecular is still only up to 6.1% of our revenue, but we would envision that molecular will continue to zoom up as time goes on. And across the board, our molecular average revenue per test is still only $235, so we have an opportunity to really move the average revenue per test in the molecular side up considerably because we are able to get an up charge for the sequencing-based tests.

All right. Just to build on that very quickly by saying that many of the tests that Steve referred to weren't even introduced until later in the quarter, so we believe as our sales force becomes more familiar with the nature of these tests that there's some uptake there in the demand. The other thing is that in some cases, we are sending these tests out to other labs and so there's a natural cost reduction for us as we bring these in house.

Fair enough. And can you just give a sense here and to how to think about revenue per test, which is one of the metrics the company is traditionally focused on given the shift in mix here to IHC and molecular, they have different revenue characteristics. Should we think about, like, have shift moves for the next couple of quarters being 1% to 2% reduction typically in price per test just on a pure shift issue? Or is it more like the 5% in this quarter? Any -- just qualitative sense would be helpful there.

So you had several factors working at odds with one another there. The new panels we introduced yesterday, which actually are going to be commercially available for ordering this coming Monday, we're still finalizing all the list prices on those panels, but we're expecting somewhere on the order of $1,500 to $2,000 unit price per panel for those new panels. Obviously, that will do wonders for bringing up our overall average if we can make those panels a significant mix. On the other hand, the IHC testing that we do is typically much lower revenue per test unless it's combined with other traditional molecular -- I mean, anatomic pathology testing. And so we've got IHC, will probably drag it down. We've got some of the new molecular tests, will probably drag it up. HemeFISH continues to be growing faster than the overall average in the company, and HemeFISH is one of our highest revenue per test. What has stagnated for us and sort of interesting is our flow cytometry volumes are not growing anywhere near as fast the overall corporate average are still growing. But a part of that is a reflection of the power of our business model. More and more, we're working with partnering with our pathology customers in our hospital path labs where they already do the flow cytometry in-house. And so we like to be able to be a wraparound laboratory and fill in whatever holes our customers need. And so it's not altogether unexpected that our flow cytometry wouldn't grow as fast as some of our other tests. So I guess the short answer is stay tuned. I'm not prepared to give a number on what to expect per average revenue per test. I would say over the next couple of quarters, the bias would be a slight downward trend instead of an upward trend until we can get some of these more higher priced molecular tests out into the system.

And then just finally maybe one more housekeeping question. What portion of revenue currently is or was in the second quarter flow cytometry ?

Flow cytometry was around 20%.

[Operator Instructions] Our next question comes from Mark Zinski of 21st Century Equity Advisors Corporation.

Just a few questions, I guess, number one, transitioning to offering solid tumor tests, are there any unique challenges? Given that your operating history has been more focused on the blood cancers, do you expect any challenges, or is this transition going to be relatively smooth?

I think the transition will be relatively smooth. Our clients have been asking us to bring up these tests for quite some time. And as we mentioned, I think a couple quarters ago, we've built out our medical team to include now a surgical pathologist and people that have surgical pathology experience. And so we're positioned now -- we've built out our menu, we've built out our team. We've added, as I mentioned, this digital image analysis product line. So we're going to have the capability to do this. We essentially have the capability now. And many of our clients, because they've asked us for this, are beta testing our products, and we think the transition will be relatively smooth.

Okay. And then in the terms of the tech-only business model, can you comment on how the industry is perceiving this lately? Is there more interest in doing the interpretation aspect themselves as a revenue generator, so hence your model is increasingly attractive?

Yes, there's a lot of demand for our tech-only product lines. In the FISH area, it's been one of the drivers of our growth, but we offer a very comprehensive [indiscernible] menu, and that's been a key driver for our growth, particularly in the pathology space, where we spend a lot of time. In this era where everyone is focused on participating more in the care cycle diagnostic process and that -- in trying to [indiscernible] economics for the work they've done, this is a very important and powerful product line. So if anything it's picking up momentum as we get out there in the marketplace.

Okay, and then just lastly, any opinion on how current health care reform may ultimately impact your industry just in terms of demand for tests and the reimbursement of the prognosis?

Well, I think there's some uncertainty out there. But generally speaking, we think the demand for our products is going to increase for a lot of reasons. One is if the current health care law proceeds, more people will be covered by insurance. Demographics is obviously in our favor relative to the cancer testing that we do. So there's going to be continued demand, no question, for our product line. I think everyone in this industry is going to be mindful that we have an obligation to offer our services at the lowest cost and offer the most medically necessary products to continue to help drive the cost of health care down overall. And in that respect, what we do, we think, is very powerful. We have a very powerful value-added product line, because the laboratory testing that we do influences a great deal of the medical decisions. It's very cost effective. Particularly in this era, personalized medicine is important, prescribing the right therapies depends on the right diagnostic, and that depends on the work that we do. So we've got to be mindful of costs in this new environment, but we think we should be in pretty good shape as the landscape changes.

It appears we have no further questions at this time. I would now like to turn the floor back to management for closing comments.

Okay, thank you, Dan. As we end the call here, I'd like to recognize all 260 of the NeoGenomics team members around the United States for their dedication and commitment to building a world-class cancer genetics testing program. On behalf of our NeoGenomics team, I want to thank you for your time in joining us this morning for our second quarter 2012 earnings call and let you know that our quarter 3 2012 earnings call will be held on or around Thursday, October 25 of this year. For those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your interest in our company. Good bye.

This concludes today's teleconference. You may now disconnect your lines at this time, and thank you for your participation.