Greetings and welcome to the NeoGenomics' First Quarter 2017 Financial Results Conference Call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Douglas VanOort, Chairman and Chief Executive Officer of NeoGenomics. Thank you, Mr. VanOort, you may begin.

Thank you, Michelle, and good morning, everyone. I'd like to welcome everyone to NeoGenomics' first quarter 2017 conference call. To begin, I would like to introduce you to the NeoGenomics team here with us today. Joining me in our Fort Myers headquarters is Steve Jones, our Executive Vice President; George Cardoza, our Senior Vice President and Chief Financial Officer; Fred Weidig, our Vice President of Finance; Jessica King, our Director of External Reporting; and Rob Shovlin, President of our Clinical Services Division. Dr. Maher Albitar, our Senior Vice President, Chief Medical Officer and Director of R&D is joining us from our Aliso Viejo Lab in California. And importantly, I would like to welcome Bill Bonello, who has been on many of these calls, but who is joining us for the first time on this side of the line as our recently appointed Vice President, Treasurer and Director of Corporate Development. Before we begin our prepared remarks, Steve Jones 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 statement speaks only as of today and we undertake no obligation to update any such statements to reflect events or circumstances after today. Before turning it back to Doug, I want to let everyone know that based on popular demand beginning with this call, we will be making a copy of our transcript for this morning's call available on the Investor Relations section of our Web site shortly after the call is completed. We also want to let everyone know that we are going to limit the number of questions to two per person in order that we give everyone a chance to ask questions within the one hour we have allotted for this call.

Thank you, Steve. In this morning's conference call, I will comment briefly on the company's first quarter performance discuss the completion of our significant integration activities and review our initiatives, opportunities, and expectations for the rest of the year. Quarter one financial performance was largely inline with our expectations, although certainly was not what we would expect to deliver under normal operating conditions. During the quarter, we were laser focused on completing the important remaining integration activities all while maintaining high service levels. I'm pleased to report that the integration of Clarient is now 100% complete. However, the intensive integration work affected each month of the quarter and temporarily disrupted our business more than we would have liked. Despite the fact that our sales force devoted a significant amount of their attention to helping clients manage through the integration change process, test volume grew by over 15% compared with last year to our highest levels ever. The mix of testing was less profitable though with a 40% increase in histology testing driven partly by significant increases in the immuno-oncology test for PD-L1. As a result of the product mix change, average revenue per test was down 9% and consolidated revenue was only 3% higher than last year. Since, we closed the Clarient acquisition, revenue has been relatively stable. Growth for new clients has been subdued as our efforts had been primarily focused on transitioning all our existing clients to a single laboratory process rather than our new growth. However, now that the integration is behind us, we expect to more aggressively convert the customers in our pipeline and return to more normal and balanced test mixed growth. Aided by the higher mix of lower cost histology testing, cost per test declined by 10% to the lowest levels ever achieved. However,…

Thanks Doug. Before we open it up for questions, I would like to briefly touch a few financial highlights from the quarter. First quarter revenue was $61.7 million, a 3% increase over the prior year and inline with our expectations for the quarter. Clinical genetic testing revenue increased 4.5% over the prior year to approximately $55.1 million, Path Logic revenue decreased 16% to approximately $1.6 million and pharma services revenue decreased 2% to approximately $5 million. Average revenue per test was $354, a 9.5% reduction from the prior year and 3% below the quarter four level. This was slightly below our expectations and with the result of continued mixed changes. In addition, quarter one was the first quarter that we had all test being build out of the same billing systems for the entire quarter. When we migrated the Clarient clients to the Neo billing system, we had to standardize pricing with the Neo pricing. In many cases we had to bring certain Clarient prices up to where the Neo pricing was. In other cases, we had to bring certain prices down. Now, that we have a good baseline from where our overall average revenue per test is settled. We believe it is prudent to reset expectations for average revenue per test in the clinical genetic testing business to $345 to $355. Recall, that on our last call, we thought that we would be somewhere in the $355 to $360 range for the full year 2017. Consolidated gross margin was 44.1%, a 140 basis point decrease from the 45.5% reported in Q1 2016. This decrease in gross margin was driven primarily by the negative gross margin at Path Logic, but also by under utilization in the pharma services division. It is important to note that our gross margin in the…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Kevin Ellich with Craig-Hallum Capital Group. Please proceed with your question.

Good morning and thanks for taking the questions. Congratulations again to Bill for joining the company. I guess going back to the guidance Steve and your comments about lower average revenue per test. Is that all driven by IHC and PD-L1? And then, how much of the reduced revenue guidance is due to the delay in pharma services revenue? And kind of a follow-on to that is, that backlog is going pretty nicely up to $41.5 million, how long will it take to recognize those revenues and kind of what's the incremental quarterly flow through or drag through that we should see on that business?

Thanks Kevin. Thank you also for picking up coverage. We look forward to working with you. I will take the first couple of these and then I will pass it to Doug to address the pharma services book-to-bill issues. With respect to the average revenue per test, we are basically coming down about $5 per test in our expectations for the year. You recall we were sort of $355 to $360; we are now at $345 to $355. So, analyst should bring in their ranges to somewhere around the order of $350. Most of the reduction in the clinical genetic revenue comes from that. We do believe, we are going to continue to see some pressure on Path Logic, so we may get a few hundred thousand dollar further reduction in Path Logic. With respect to pharma services, we are probably shaved about $0.5 million off of the revenue at the mid-point of the range bringing the growth rates down to about 18% as I mentioned. And that's just a reflection of the fact that revenue in Q1 came in a little bit softer than we thought and it's going to take a little bit longer than we thought to get the backlog to flow through into the revenue stream. And I will let Doug address his thoughts on when that will start to happen?

Great, Kevin. Thanks for the question. Relative to pharma services backlog and revenue, I would say that we are encouraged very much by the backlog. We have a very strong team in pharma services, we have very strong client relationships, which I think are getting stronger, because of our service levels. But, it does take some time, once we have signed contracts to realize the revenue, these contracts range in duration from three months to three years, I think as we said before. It sometimes takes nine months before a patient recruitment fully starts and gets into full rhythm. And so, these bookings we think will result in revenue starting -- later in quarter two and in quarter three. We just put in place some good management tools to be able to track this better. And we will have even better visibility into the backlog and as that -- how that's going to be realized as revenue as we go forward.

Great. And then, just one follow-up question. So DSO shot-up to 90 days, I heard the comments about expecting it to come down in Q2 back to normalized levels in the back half of the year. I guess, what should we expect for a normalized levels and kind of in relation of that, free cash flow was negative $4.5 million this quarter largely due -- it looks to be to -- the working capital changes. What's really behind that was that the integration of Clarient and the move or can you give us anymore color on the working capital changes?

Sure. Certainly in terms of the DSOs, if you look back to the pre sort of integration levels when Clarient-Neo were first combined, we were in the low 80s. So, certainly I think that would be our target. It probably would be, I think 82 to 85 would be at least a good range, obviously we are waiting to do better than that. And yes, with the quarter obviously, it does mention we did spent significant amount of money on the Aliso Viejo facility. It's also the first quarter's when all of the year end bonuses are paid out. So, there was a drag on cash for both of those items. And then, certainly the fact that DSOs went up contributed as well. Our expectation as DSOs should start to come down in the second quarter and hopefully by the third quarter, we are completely back to where we think we should be.

Great. Thanks guys.

Thank you.

Thank you. Our next question comes from Drew Jones with Stephens Inc. Please proceed with your question.

Thanks. I wanted to dig back into maybe pricing per test a little bit. Was there a group of testing -- group of tests that you saw a little more pressure than you had anticipated that you could call out as you consolidated everything on to the same billing system?

Drew, we had a big increase in histology test generally but PD-L1 testing was the test that grew the fastest among the histology test. Histology as you probably know carries a much lower average revenue per test. And that's what really drove down the averages.

And PD-L1 testing as we mentioned on the last call is about $100 test, so it's even below the average histology test.

Okay. So, it really was all with IC and not a matter of maybe lower billing on a FISH or somewhere else that…

No. The only other test Drew that declined somewhat was flow cytometry and that was because of a Medicare decline. But as you know that was a very small impact on our overall average revenue per test because Medicare is a relatively low percentage of our revenue mix at about 16% or 17%.

Okay. And then, there was a pretty meaningful up tick in G&A in the first quarter, does that sustain at this level or do we need to think about maybe decreasing it a little bit, now we got to consolidate that?

We did incur quite a bit of over time in relation to the move and you also saw the move costs in the G&A about $351,000 the move cost that we broke out in the adjusted net income piece. And we also saw bad debt levels stay right around that 6.1% level that they were at in Q4 as for a normalizing thing and that was a higher amount of bad debt and higher percentage as well than we had in Q1 2016.

Okay. Thanks guys.

Thank you.

Thank you. Our next question comes from Bryan Brokmeier with Cantor Fitzgerald. Please proceed with your question.

Hi, good morning. You mentioned in the prepared remarks that you relatively -- though you retained nearly all of your clients last quarter you discussed one small client that you had lost. Have you lost any others?

We are not aware of any other clients that have lost. And we have a lot of efforts being expended to make sure that client retention stays very high. We do have some client relationships that are -- that we are watching very carefully that so far our client retention has been very high.

Great. And lab consolidation is completed at the end of March as you mentioned. So, you are now about a month passed, the real heavy lifting of that integration, as the sales force began targeting the 100 Clarient IHC only accounts and when do you expect to start to see revenue benefit from those benefit?

Sales team as a very, very strong pipeline, the pipeline includes cross-selling, existing accounts and it includes also a number of new accounts. We are working with the sales team to build those pipelines and get ready when we are feel that we can handle more volume particularly in histology and other areas, we will unleash the sales team. I think we are about ready. The service levels have returned over the last several weeks to more normal levels, all the metrics are moving in the right direction and we are feeling very good about where we are and about ready to start to manage those sales pipelines more suitably.

Okay. Thank you very much.

Thank you. Our next question comes from Joe Munda with First Analysis. Please proceed with your question.

Yes. Good morning. Thanks for taking the questions. First of all, Steve, you had mentioned some lab personnel numbers I think you had said, 32 added in the quarter and nine sales people, can you give us a sense of what the total number is for both as it stands today or at the end of the quarter?

I know the sales and marketing organization which includes some of the customer care people is right around 61, 62 people. The total lab headcounts are -- it's the single biggest department in the company. George do you have feel for what those are? We will get back to you on that one Joe. But, we added a lot of people to deal with the bottlenecks that had been created through the integration activities and to make sure the move went smoothly and certainly added a lot of people, we had 10 people at IHC alone in Q1 another five at the end of the quarter, after the quarter was ended. And I believe, we are still going to add another five on top of that. And so, everything starts with IHC, when it comes in, you got to cut the blocks, and we are not in, if you get a backlog in IHC, it will create ripple through the rest of your lab and so getting that fixed was really, really important to us.

Lab fees are right around 650 in terms of 1000. So, again, almost 2/3rds of our staff actually are in the COGS area.

Okay. That's helpful. Thank you. Steve, just real quick as well Doug, listening to the Labcore call, they had talked a little bit about some issues about converting revenue on the Covant side particular oncology trials, some issues there, some delays, are you guys seeing any of that as far as you guys are concerned in dealing with pharma perhaps insourcing some of the diagnostic components involved with those trials?

Joe, we haven't seen any insourcing from our perspective. Every pharmaceutical company is different. Some are moving very fast; some tend to move a little bit slower. But, we haven't seen as if we had any cancellations of any contracts we have. In fact, we see a lot of interest in area that we have a particular expertise in, which is immuno-oncology and it's not just PD-L1 testing, it's other forms of testing and other biomarkers. So we haven't really seen that.

Okay. Helpful. As far as the Geneva lab is concerned, you expect it to come online later this year, is that reflected in the guidance, in the current guidance or is there possible upside from a contribution from that lab?

We believe we've reflected it in the current guidance.

Okay. That's helpful. And I think that's all I had. I will hop back in the queue. Thank you.

Thanks Joe.

Thank you. Our next question comes from Carolina Ibanez Ventoso with Janney Montgomery Scott. Please proceed with your question.

Hi, good morning.

Good morning.

You mentioned the lab headcount, you have dedicated, now exceed this intermediate demand. Could you also speak for the capacity of your consolidated lab for testing capability given the [indiscernible] that you are experiencing, now you in see both the clinical genetic orders and also in oncology with your pharma customers?

I will try to comment on that Carolina. We have capacity in our network. So, right now in Aliso Viejo frankly our histology lab is pretty darn full. Now, some of that is because we haven't leaned it out. And we expect to get more capacity out of that lab in histology as we lean things out. But, also as we move work around our network. You also know that we have a Houston lab which we have capability to perform both pharmaceutical testing as well as clinical testing in that lab. We are growing that lab or actually moving that lab and creating more capacity there as well. So because we have a network of laboratories, we can move work around and in the system we have capacity and we will continue to grow that capacity.

Okay. That's helpful. Then, I was also wondering if you could give us a sense on like stage of your different projects with pharma or [indiscernible] are they like early stage Phase 1 or more advanced?

Our testing and our services pharma really range from a biomarker discovery to phase 2 and phase 3 testing a lot of it is, as I said has been recently focused in immuno-oncology. And we feel like we are one of the few companies that have a capability to provide all forms of testing to pharma in a lot of different phases. So we do a lot of immunohistochemistry, but we also do a lot of next generation sequencing. We are performing some FISH test, some flow cytometry test. So, we have wide range of test that we offer, testing capabilities that we offer to the pharma industry. And we think its relatively unique.

Okay. That's great. Thank you.

Thank you. Our next question comes from Scott Billeadeau with Walrus Partners. Please proceed with your question.

Oh, hi, guys. Thanks for taking my question. Just a quick one with PD-L1, how many clients are PD-L1 only. And there lies the opportunity to upsell and cross-sell. Do you have a pretty good sense of that and maybe give us a little sense?

Scott, we don't have a lot of strictly PD-L1 only clients, we have a few. But, we have a quite a few histology only clients, which includes PD-L1. And that's what we have as an opportunity in front of us to cross-sell to offer our comprehensive menu in FISH and flow cytometry and molecular testing and other things and that's what we are going to be working on.

Okay. And then, maybe just a follow-up to that. I think you said you are running pretty hot on histology, what about the capacity for FISH, flow, molecular and so forth? How is the capacity for that -- for those types of things, if you get successful with some cross-selling?

Yes. We have capacity in FISH, flow, cytometry, molecular testing, we just built one heck of a molecular lab in Aliso Viejo, we hope you can come see it on an Investor Day. We have a lot capacity in those areas.

Okay. And maybe just one quick last question, about competitive certainly trying to be the lab that works with the local oncologist instead of trying to take their business. Was that still -- maybe talk a little bit about that strategy or is that still a key to the company and have the other guys, is there any change in the competitive environment out there?

Competitively, this is a tough industry and we feel like we have a very, very strong business model. We are very happy with our franchise serving hospitals and pathologists in community settings as well as in academic centers and cancer centers. So we think we got a broad client base. We are very happy with our ability to provide services to pathologists to help them grow their business and to help them compete in the marketplace. So, we feel like, we like our business model as much or more than we ever had.

Thank you. Our next question comes from Kevin Ellich with Craig-Hallum. Please proceed with your question.

Thanks for taking the follow-up. Just wanted to follow-up on the growth that you talked about, you said histology was up 40%, did I hear you correctly, did you say PD-L1 is growing faster than that and if so how fast?

We said that Kevin that histology was up about 40%. We didn't comment on the component of PD-L1 except that was a major component for the growth.

Got it. Okay. Thanks for clarifying that. And then, for the increase in DSO was unbilled claims, the only reason that has been increasing or was there anything else behind that.

You have to think about it. A, the claims have to go out the door, but then if you have a backlog of unbilled claims, even if three quarters of those get paid in the first around through, you are going to have more denials to work as well. So, you have the claims by and large gone out the door, but we will have more denials to work in the second quarter than normal as well.

Got it. That makes sense. And then, going back to the Geneva lab, you said its reflected in current guidance, I guess are we accounting for revenue contribution, or is it more on the cost side. And if going to that point, what is the cost of [sand] [ph] of that lab in Geneva?

Yes. I mean, we are talking about a massive investment here. We are only talking about probably 10 to 12 people and even now, I mean, we just been trading emails back and forth with the landlords. But, we still haven't even signed the lease yet. So, we do think we can have it up and running probably late third, early fourth quarter, but in terms of actually having it fully staffed and handling work and that's the reason why the revenue contribution will be de minimis this year. But, we are really trying to get it stood up, so that we can win some trials that are already talking to pharamaceutical clients about, but really we are expecting it to contribute fully to revenue in 2018.

Got you. More of an 2018. Understood. Thank you.

Thank you. Our next question is a follow-up from Drew Jones with Stephens Inc. Please proceed with your question.

Thanks guys. Just wanted to follow-up on a couple of different things, trying to get a feel for how this growth is going to shake out in the second half and beyond. With the sales force is largely being handcuffed here for the past, let's say 15 months. There is a standard reason that the PD-L1 growth in demand has largely been inbound?

Yes. Drew actually that's exactly right.

Because we have the capability and we initially we're one of the few labs that had the capability for PD-L1 and we had a distribution system, we benefited from a lot of PD-L1 testing. The sales team as we said, I'm not sure, I would use the word handcuffed, but they were very, very business working with clients, training clients on our new products helping them to transition to -- the new service offerings. And now, we have a process, every month we review every sales representative in the country's pipeline. And I can tell you we just had to review a week or two ago and the pipeline is very, very strong. They haven't been sitting around just working with clients on transition. They have been building their pipelines. And so, the growth we feel very confident and it is going to happen in the second half and as we move forward.

And so it's not unreasonable to assume as you are losing the range there on the sales force maybe some of that growth comes in higher ASP areas?

Yes. That's what we are targeting Drew. I said we are going to target a better mix of business. We are going more assertively manage that mix. And if there are clients that are -- very low price histology only clients, they are going to be de-prioritized.

Okay. All right. Great, guys. And so just to sum it all up, I'm sorry keep harping on this, but you guys have not been doing PD-L1 at the expense of anything else. This is just kind of something that dropped into your lab?

Yes. That's correct. I would say though that the huge increase in histology as put a stress on our laboratory operations and that has caused us to work very hard on service levels and that's affected things.

Thanks guys.

Thank you.

Thank you. Our final question is a follow-up from Joe Munda with First Analysis. Please proceed with your question.

Thank you. Two real quick ones here, first of half, if I hear this right, growth rate biopharma 18% for the year, is that correct?

Yes. That's the mid-point of the range. Again, we think there is upside to that. We are still getting a fix-on, how much of the backlog will pull through how quickly, the oncology trials are more complex and your normal trial and generally take longer to get moving. Our sales force has done great job of selling new clients. And the backlog consists only of the signed contracts and signed payments of what works. But, we are still getting our arms around, how quickly those will pull through.

Okay. And then, my last one, on Path Logic, I mean, it's been a little bit, it's been a drag on the business from my perspective, at least, both on revenue and on the cost side. I guess, what are your thoughts on that business going forward, could you diverse that business, is would somebody buy it. I guess what options do you think are on the table to right-size that business. Thank you.

It's been a drag on the business from our perspective as well. Path Logic has consistently under performed and it hasn't met our expectations in the few years now. And we are currently evaluating all of our strategic alternatives there, and we would expect to report more on that soon.

Okay. Thank you.

Thank you. There are no further questions at this time. I would like to turn the call…

We have got a couple of email questions I want to interject here. How big is PD-L1 now and how sticky was that business, how much this test get reimbursed versus the other test you have, most of your customers sending you this now that's PD-L1 account for growth. The company -- what are the categories are growing. We have talked about a lot of these, I will just give you some numbers, the PD-L1 test, our revenue per test is about $100 per test. Our average IHC test is about $166 per ton. So, it is quite a bit below the other average IHC test. With respect to what's growing, as Doug mentioned, our sales force hasn't been selling new accounts in earnest, and so, the FISH, the flow, the cyto the stuff that wasn't being sold a new account has had more subdued growth more in the single-digit areas versus the PD-L1 and IHC testing which is coming in inbound as through Drew mentioned and some of the molecular test were just coming in more on the inbound basis, technologies evolve and people want to get into that. So we are seeing an unbalanced growth in the last quarter or two and we expect to get back to the more balanced growth profile as sales force becomes more unleashed. We also have some questions on PD-L1, why hasn't this been a driver up side to the revenue, greater internal focus, we kind of answer these and lastly we had another one here, is there any cannibalization going on with PD-L1 and other test and I would answer, no. We should not. This is just PD-L1 testing was additive to what we are doing. We just haven't been selling new clients on the other core business items. Doug, that's it for the questions we received via email.

Okay. Good. Thank you, Steve. As we end the call here, I want to thank everyone for their questions and also like to recognize the approximately 1,000 NeoGenomics team members around the United States for their dedication and commitment to building a world-class cancergenetics testing company. And on behalf of our NeoGenomics team, I want to thank you for your time and joining us this morning, when let you know that our second quarter 2017 earnings call will be on or around July 25, 2017. Thank you for those of you listening who are investors or are considering an investment in the NeoGenomics, we thank you for your interest in our company.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.