Good morning. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the NeoGenomics Third Quarter 2012 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Doug VanOort, Chairman and Chief Executive Officer, you may begin your conference.

Thank you, Melissa, and good morning. I'd like to welcome everyone to the Neogenomics' Third Quarter 2012 Conference Call and introduce you to the NeoGenomics team that's here with me today. Joining me this morning are Steve Jones, our Executive Vice President for Finance; and George Cardoza, our Chief Financial Officer. In addition, Dr. Maher Albitar, our Chief Medical Officer, is joining us from our Irvine, California office by phone. 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 statement speaks only as of today, and we undertake no obligation to update any such statements to reflect events or circumstances after today.

Okay. Thanks, Steve. I'll begin our call today with some remarks about our results for the third quarter, including an update on the key initiatives we are executing to drive growth and profitability. I'll then turn the meeting back over to Steve to discuss our financial results in more detail. Quarter 3 was a tale of 2 cities. The first is a tale about Washington D.C., where the decades-old practice of billing Medicare for the technical component of certain hospital testing was changed, effective July 1. This expiration of the TC Grandfather Clause, which we have described at length in previous quarterly investor calls, reduced Neogenomics' revenue and profit by approximately $1.3 million in the quarter. Although the impact of the TC Grandfather Clause was at the higher end of our estimated range, I am personally relieved that this massive change and disruption to our business is now behind us. Steve will provide a full recap of the change and the impact to our company in a few minutes. The other story is about the core business of NeoGenomics, where our revenue -- our volume grew by 42%. Our sales pipeline is healthy. Our service levels are strong. Our new product portfolio and plans are excellent. Our cost reduction and productivity activities continue at a strong pace. Our teams are executing our strategies well, and our people are optimistic about our prospects. In my opinion, NeoGenomics is increasingly becoming a leader in the growing cancer genetics testing market here in America. Revenue for the third quarter was $14.2 million. Despite the regulatory change, revenue grew by $2.9 million or 26%, compared with quarter 3 last year. Test volume grew 42% compared with last year's third quarter, driven by strong growth in our core business, with particularly significant growth in hematological…

Thanks, Doug. I'll start by reviewing some of our financial and operating metrics, and then we want to open it up for questions. Since Doug has already reviewed our revenue metrics, I'll start with the operating metrics. The total number of tests reported in the third quarter increased by 42% over Q3 last year. For comparison, a number of other laboratory testing companies recently reported flat to negative growth in their volumes; thus, it is extremely gratifying that we continue to gain market share. Average revenue per test was $502, an 11.5% decrease from Q3 last year and a 7.3% decrease sequentially from Q2 this year. This decrease was almost entirely due to the expiration of the TC or Technical Component Grandfather Clause, and was in line with our previous guidance relating to this regulatory change. For those of you that are new to our story, the TC Grandfather expiration was a major regulatory change that went into effect on July 1, that relates to the way in which independent laboratories are reimbursed for the technical component of certain hospital inpatient and outpatient tests, reimbursable off the Medicare Physician Fee Schedule. For decades, independent labs were able bill Medicare directly for these hospital-originated technical component tests, which in our case, include TC, FISH, flow cytometry and IHC testing. Although CMS attempted to eliminate this practice in 1999, Congress grandfathered any hospitals that had a previous relationship with an independent lab prior to July 22, 1999, from the new TC billing rules. For the last 12 years, the TC Grandfather Clause was extended each year. However, on February 14, unbeknownst to the lab industry, language was inserted into a piece of legislation that became the Middle Class Tax Relief Act, which only extended the TC Grandfather Clause until June 30. Middle…

[Operator Instructions] Your first question comes from the line of Matt Hewitt.

First up, congratulations on navigating what I'm sure was a relatively challenging quarter, given the expiration of TC Grandfather Clause. A few questions for me and then I'll jump back in the queue. First, given the recent launch of some these newer tests, I'm curious if you have any anecdotal responses from your customers. Are these areas where they were in dire need of assistance? Or they're really excited about the launch of these tests? What can you tell us from an anecdotal point?

Well, let me try to answer that, and then I may turn it over to Dr. Albitar for further comment. Our clients are excited about these molecular tests. We are also educating them about the tests, what they do, their purpose, and how they can be used effectively in cancer care. I just talked with, this morning, one of our key clients, and he's very excited about our expanded menu. In terms of the menu, our molecular testing is -- we're, as Steve said, growing it dramatically. We've just educated our sales force, and so they're now better positioned to sell it. We've also included a number of panels we call NeoTYPE panels, which are getting -- beginning to get some traction in the marketplace. So very good customer response, but it's a learning process for many of our pathology clients, and we're in that process right now. Dr. Albitar, you have any comments about that?

I'd just like to add that we hear a lot from our clients that they are very excited about what we are offering. However, they need more flyers. They need more education. They need algorithms to help them determine how to order and what to order. At the same time, we are catching up in terms of providing an easy way for our requisitions to be updated. It's very difficult, as you can imagine, to keep all our requisitions up-to-date as we keep on adding new tests on a weekly basis almost. So it's a process and we have very good positive feedback from all our clients.

That's great. And I guess, along those lines -- and I think you mentioned the NeoARRAYs you plan to launch here it sounds like in the fourth quarter. Are there any other tests? I know previously, you had talked about maybe launching a new Abbot test out of your Abbot partnership. Are those coming here in the fourth quarter? Or what should -- how should we be thinking about the new test launches?

Well, we continue to work on a number of test launches. We mentioned a number of them in our remarks. The next test, as a result of our strategic supply agreement with Abbott, we continue to work on, we continue to get samples in, we continue to test those samples. And we're very deliberate about our test rollout process and validation process. So we're using our support vector machine tool to get us as strong performance characteristics as we can, and we are in the process. But there are a number of other proprietary tests that we're making pretty good progress on, and in the validation process of those as well.

Okay. One last one for me, and then I'll jump back in the queue. The test volume, obviously, was very strong here in the quarter, 42%. I'm curious, it has declined here the last couple of quarters. Still remarkably strong, but where do you think that, that growth maybe shakes out in the fourth quarter, and more specifically, 2013? And maybe you don't want to necessarily guide, but how should we be thinking about it for 2013?

So we haven't actually announced any guidance yet for 2013. We will be doing that in our Q4 call, which will take place in late February, on or around February 21. With respect to Q4, if you were to just take our Q4 range of revenue, $14.3 million to $15 million that we outlined, take the midpoint of that range and divide it by 500, that's the volume we expect. We generally begin to see some seasonality rebound in Q4, sequentially from Q3. This year, as I mentioned in my remarks, we are expecting a modest hit from the storm. We have a number of large clients along the Jersey Turnpike area and some even on the Jersey shore. We have a lot of clients in the Connecticut area, and we have a number of clients in the Philadelphia area of Pennsylvania. It's hard to really quantify weather-related impacts, but we know, for instance, our night flight from Newark Airport has been canceled the last couple of nights, and so there will be a modest impact on that. All in all, though, we do expect revenues and volumes to increase, Q3 to Q4, and we think it will be sort of along the lines of how it's been in previous years, although last year was probably more pronounced than the year before that. But overall, we should begin to see some rebound.

Your next question comes from the line of Kevin DeGeeter.

Just on guidance -- in terms of the guidance for the fourth quarter, how do you characterize the level of confidence and visibility you feel you have in that guidance in the context of the TC Grandfather changes? Do you feel like you have your arms fully wrapped around the changes and how they impact the business? Or is there still a fair amount of learning to be done, and should we think about that when we think about the guidance you provided for the fourth quarter?

No, we think we've got our arms all the way around this. We got way out in front of the industry on this, and had quantified the impacts in the March, April timeframe. We had meetings with all of our senior -- with the senior members of our client hospitals in the, really, May, June and July timeframe. The prices were all sort of put in place mostly by the end of July, in time for the July bills. Any resistance or pushback we had from any of that activity happened in the July and August timeframe. I guess a few might have happened in September. But we feel real good about where we are. We expect average revenue per test to settle out in the 495 to 505 area. There's always some variability each quarter with respect to how many CRO tests were included in that number and what their average revenue was, and then whether or not the mix is changing. For instance, our mix has been changing with more lower-priced molecular tests over the last few quarters. But we feel really good about it. So the TC Grandfather, I think, is behind us, and we're focused on growth initiatives. And indeed, the number of [inaudible] price list that we're authorizing now is beginning to pick up again as the sales force focuses in on growth initiatives. Doug, you want to add anything to that?

No. I think that's well said, Steve. I will say that there are a lot of changes affecting our industry, but our pipelines are very strong, and we're trying to take advantage of the changes affecting our industry, but there are a lot of reimbursement challenges that our hospital clients and our pathology clients are facing and many of our competitors. So I think we're confident. We are continuing to build a very, very healthy pipeline of accounts. I think we're continuing to take market share as well. But the TC Grandfather Clause expiration is behind us.

Okay. Terrific. And on a different note, over the last 12 months, the company's moved aggressively to expand capacity both in Florida, now out in California with the new Irvine facility. How should we think about sort of the current levels of growth or the projected levels of growth for the future? How much time do you think this buys before you think you -- you make sort of the next round of investments here? And just how do you think about staffing and capacity utilization in the context of the current infrastructure footprint?

Well, in terms of our facility capacity, we've got enough capacity right now for a while. We've got very good capacity in California. We have good capacity in Tampa and in Fort Myers, and we're looking to enjoy squeezing more volume in, quite frankly. So no problem with facility capacity. In terms of hiring people, I think that we're better positioned to attract talent now than we ever have been, both from a location, a geographic location standpoint and as a result of our momentum. So I think acquiring the people capacity is not as big of a problem as it has been maybe in the past. In terms of investment, we will continue to invest particularly in the molecular area, but I think we -- we've added a lot of investment this year for Flow Cytometry, for our image analysis platform, for our molecular facility, for our California facility, and I don't really see that level of investment continuing into 2013.

Okay, great. And maybe one more for me and then I'll jump back in the queue. In light of disruption, dislocation in the industry, particularly the portion of the industry focused on a TC-oriented business model, does that change your appetite for kind of tuck-in acquisitions or opportunistic acquisitions? Or should we think about the NeoGenomics business model as being driven primarily from internal growth here in the near term?

Yes, so we're working very hard to have very high growth rates from organic growth, but we would like to -- and we are looking at smart acquisitions. Now we believe what's happening in the industry is causing some disruption. We think we're competitively stronger than we were before. We anticipate that we are going to get an opportunity to look at a number of different companies in a variety of fronts. But let me explain what's important to us. What's important to us is growth and profitability. So we'll look at acquisitions where we have cost synergies, primarily, where there's some market synergy also, but we're not looking to buy something that's going to cause our profitability to be under pressure.

Your next question comes from the line of Lauren McGuigan.

I want to ask if you could provide an update on your plans to use the SVM technology to automate testing that currently has large manual components, specifically cytogenetics and whether you're considering sub-licensing the FISH automation software that you created and launched earlier? I think it was in September.

Excellent questions. We continue to make good solid progress on this. I sort of want to divide your question into 2 parts. With respect to the FISH application we announced in September, we are beginning to use that in selective cases. We anticipate that we will be able to extend the SVM technology into other FISH applications. We have prioritized that by looking first at those tests we currently use a manual FISH process for because when you move from a manual to an automated process, it does open up a little bit more reimbursement. However, having said that, we've long ago moved most of our FISH testing into the automated arena so there won't be a lot of opportunities where we'll get increased reimbursement. So we view it, really, more from the perspective of productivity improvements, and we think that there's a lot of potential for it to increase our productivity in the FISH lab and in the cytogenetics lab. The cytogenetics system that we licensed a working prototype for is in development now. We've spent money with mathematicians and various technologists every month, validating it. In order to have this system be used in a clinical setting, we need to validate it for all of the various types of cytogenetics carrier types that we see in any given month, and so there is an extensive amount of validation that has to go in. And basically, when you get the algorithms set up to the point where it can read and distinguish the various different types of cytogenetics images, you then have to train it, using preferably 50, 100 different images per type of test, and so it is a pretty significant undertaking. I would say that we continue to believe that we can, at least, begin using this internally at some point next year. With respect to sublicensing it to others, I think that will depend on how we feel the system works and the ease-of-use, but we continue to have high hopes that we'll be able to do just that.

Okay, great. Thanks for the color on that. And then maybe just a more general question, if I could. Any thoughts or commentary you have on the election next week and whether you think there will be a significant difference in terms of implications to the laboratory business, depending on which candidate ends up in the office, maybe both near-term and in the longer-term?

Laura, we wish we knew. We watch the same news as you do and everyone else. We don't know, frankly. There is a lot of current reimbursement pressure in the industry. Fortunately, NeoGenomics is -- other than the TC Grandfather issue, we don't think we're going to be impacted significantly or really at all by some of the things that are currently pending in the industry. But I don't think there's a lot more they can do, to be honest, to our industry. You've seen what's happened with some of our competitors. There have been some layoffs and there is some pressure there. So I think we're a little lucky at NeoGenomics. I have no idea who's going to win or what the impact is going to be going forward, but our products and services are very valuable. Our tests are cost effective. They're all reimbursable. We're not selling $5,000 tests. I think we're in a pretty good spot relative to offering good value to the healthcare system.

So Laura, just to piggyback on that a little bit. Obamacare, if it stays in place, really only has contemplated cuts in it to the clin lab fee schedule. There's a 2% reduction next year if it stays in place, and then a further 2% reduction on the inflation adjustment. We only have about 21% of our revenue built off the clin lab fee schedule, and 9 percentage points of that is molecular and they're coming out with new codes for molecular anyways. So that's not going to be impacted. So really, if Obamacare goes through, any of the reductions that would happen, would happen on about 13% of our revenue or 12% to 13% of our revenue. And again, we don't think that they're going to be that meaningful to us. On the other side, there's an opportunity in that theoretically, there'll be another 30 million people insured over some 2- to 3-year period here, and so there certainly could be some upside in terms of volume. Net-net, in the absence of any further data, I think we feel like it's probably a push for us.

Your next question comes from the line of [indiscernible].

In terms of -- when I look at your requisition numbers and tests per requisition, that was down sequentially for the first time. Now is that an anomaly or is that going to be the new normal going forward?

Well, it's -- the test per requisition was flat at 1.55 in both June and September. The number of requisitions was down around 253, and the number of tests was down around 530. We usually see a small decrease or maybe flat volume from Q2 to Q3 because of seasonality. Last year, it was masked because we were in the process of on-boarding several new locations as part of a large group of affiliated oncology practices. But if you go back to Q2 to Q3 trends and years before last year, you'll see that it's typically down 1% or 2% or flat. And sometimes, it might be up 0% to 1%. So last year, it was just a little unusual. We don't see anything to be alarmed about in this. As Doug mentioned in his remarks, the volumes were soft in July, but they picked up in August, and we ended September with pretty much the surge in volume that we normally start to see at the end of September. And we're -- so far, the things -- trends are good so far in October. So we've got to wait and see what those impacts of the storm are, but we believe we will have growth in Q4 on a sequential basis.

Now as you launch more of these NeoTYPE panels and arrays, so how do you differentiate yourselves with these homebrew tests versus some of the FDA-cleared prognostic markets being introduced?

Well, we do both at NeoGenomics. We always have. The common methodology used for a lot of molecular tests is to use polymerase chain reaction analysis, which is a point mutation analysis. We moved away from that in the early part of this year into bidirectional Sanger sequencing because it's a much more robust test. In PCR-based tests, you might get one single point that you're looking at along the base pairs of DNA. In a sequencing tests, you're probably looking at somewhere between 200 to 300 base pairs of DNA along the -- along an entire exon. And you're literally sequencing it from each direction and finding all of the mutations along that, so you get a lot more data. What we've seen, so far, in the molecular area is that there are a few approved molecular tests. There's one, BRAF test, that's FDA approved. That works on the V600E codon, but there was a big paper at ASCO in June that talked about how the FDA approved test missed 11% of the mutations because it only looked at V600, and there were other mutations that were implicated in melanoma. And so because the test is FDA approved doesn't necessarily mean it's better. We feel like we're using the most robust technology that you can use. All of the Sanger sequencing tests that we currently use are what we would classically call a laboratory developed test, but they all go through extensive validation before we offer them clinically.

In terms of Sanger sequencing, I mean, what fraction of your test volume is currently going through the bidirectional Sanger sequencing? And how does that impact your margins going forward?

Dr. Albitar, I'd like you to comment on the first aspect of that, and then I'll take the margin aspect of it.

I would say more than 80% of our testing is Sanger sequencing, and the rest is quantitative PCR-based, like the BCR/ABL and so on. For mutation detection, all our testing, 100% of our testing is based on sequencing. However, I like to add to what Steve said. What distinguish us from the rest is innovation. We developed a methodology to increase the sensitivities of our sequencing, and our sequencing is not a routine sequencing. It is high-sensitivity sequencing. It is way better than the average, and I believe that's what distinguish us.

Indeed, we use some proprietary processes on the front end of our processes that make them much more sensitive and specific, and you may actually see us file some patent applications on those processes moving forward here. To get at your question on margin, you've got to understand the dynamic in the industry. The molecular industry is sort of early on in its fledgling state. The PCR tests that are out there are -- the test kits are sold by box manufacturers and have a razor/razor-blade strategy, where they sell a cheap box, but an expensive test kit. And so we found that we couldn't make a whole lot of money using PCR-based test kits, and I would venture to bet that other labs are finding the same thing. When we started moving to bidirectional Sanger sequencing, instead of buying test kits, we bought our own primers and we're making our own reagents and validating them. This has probably taken our cost of supplies down to maybe 40% of what it had been prior to that, and so it does make a meaningful impact on molecular margin moving forward. If you recall, in Q2, we announced that for the first time, our molecular lab had a positive gross margin. That was largely the result of moving toward the Sanger sequencing platforms. In Q3, as I mentioned in my remarks, we took a 5% margin in Q2 up to 20%, and we believe that we will be able to get between a 40% and 50% incremental margin on molecular tests in fairly short order, as our volume continues to grow. Molecular testing was somewhere on the order of 6% of our volume -- or 6% of our revenue in Q2. In Q3, that was 8.2% of our total revenue. And so at the end of the day, we've seen pronounced growth in molecular. Again, we had a 150% year-over-year increase. We expect the growth in molecular to continue, which makes it a lot easier to get economies of scale. And the new California lab that we have now put in place is set up and purpose-built, as Doug mentioned, for molecular testing, and we think we're going to be able to get real good efficiencies out of that.

In terms of your -- the NeoTYPE arrays that are being launched, so how does that fit in the current diagnostic continuum, and what are physicians doing without it and how is that impacting -- how is your array impacting their treatment decisions?

Dr. Albitar, we'd like to ask you to take that one.

Yes, that's a very good question actually. It's -- our goal is to make our clients, the practicing pathologists, offer the most accurate details. The NeoARRAYs compliment our cytogenetic and FISH testing. Frequently, you speculate on your report for the cytogenetics and you say, "Well, there's this abnormality in this chromosome or that chromosome." The NeoARRAY will define these abnormalities. And as you know, in cytogenetics, the abnormalities can have very significant impact on how you risk classify the patients. That's one thing. The other thing seen is there are a lot of scenario where the cells will not grow, and you cannot get data from routine cytogenetics so you can do the NeoARRAY on these cases. So the NeoARRAY complement our cytogenetics and our FISH testing, provide more precise characterization for the abnormalities that's in the genome of the cancer, and add another level of better understanding of the disease that the clinician is dealing with and there a lot of criteria and clinical practice guidelines out there to help the clinician how to use these information.

I mean, is there an alternative treatment paradigm available even [inaudible] clarity in terms of information? Would that really impact outcomes? And if it doesn't really impact outcomes, what is the reception that you're getting from the physician community?

We have numerous requests for asking for this type of service. There are in some situation, where there is -- the finding may impact how you manage the patient, but there are a lot of cases or scenarios, where the field is evolving and the information are being used and digested and looked at, but there is no strict guideline what to do, but there are situation where the clinical decision would be changed.

One last question...

We've got one more caller here. Can we take this one offline? And we'll get you whatever clarity you need in a call with Dr. Albitar. I do want to try to wrap this up within the hour we've got.

Your next question comes from the line of Mark Zinski.

I just wanted to go back to that operating metric average number of test per requisition. Is it fair to infer that the new molecular test you're issuing should, if effectively cross-sold, increase that statistic going forward? Or are the new molecular tests kind of being ordered separate from existing tests?

We certainly hope that it will increase that metric. We position all of our molecular tests as adjuncts to existing tests, not replacements of existing tests.

Okay. So the fact that it was kind of flat year-over-year doesn't in anyway kind of indite your cross-selling abilities?

We don't think so. We've seen some mix changes over time. Our cytogenetics mix has -- the growth has slowed down, as has our flow cytometry mix. And so I think the reason why it hasn't gone up yet is just because we're still settling into the new cytogenetics and flow cytometry ordering patterns more so than -- the molecular hasn't kicked in yet.

Okay. Since your sales are going to materially increase here going forward, are you feeling good about your working capital position over the next 12 months?

So we get asked this question probably 5 times a week from institutional investors. I'm going to sort of translate this question into, do we have any plans to do any kind of equity transaction in the near future? We get asked this all the time. Our answer really hasn't changed. Absent a specific need for a lot of cash, we're not likely to do a large equity transaction anytime soon. We actually believe our stock is still relatively undervalued relative to any meaningful comp in the industry. Having said all that, however, we were notified recently that one of our long-time shareholders would like to exercise part of their registration rights, and has asked the company to assist them with completing a secondary offering by year end. We believe that a few other long-time shareholders may participate in such transactions as well. Depending on the timing of this secondary offering and whether the NASDAQ listing has been achieved and where the stock is trading at that time, the company may elect to participate in the offering, and issue of modest number of shares to increase its liquidity. Thus, you may see us make a, what I call a provisional S-1 filing sometime in the next couple, 3 to 4 weeks, to give us the flexibility to participate in this offering if we so choose, but we have not committed to it. It's not a guaranteed thing. It's going to be subject to market conditions at the time. I think we think of our liquidity right now as adequate for our current book of business. But when we look at all the growth coming our way next year, if we have an opportunistically -- if we have a way to opportunistically increase our liquidity, we can. Keep in mind, also, that we have the ability to take our accounts receivable line of credit up by another $1 million, and we have the ability to issue as much as $2 million of unsecured debt under that facility. So we have a lot of liquidity options open to us. Obviously, if we thought that this was something that was going to impinge on us in the near term, you'd see us commit to doing something much more definitively. But as of right now, anyway, we're okay. We believe we're okay with where we are.

Okay. And then last question in terms of sales by geography, I think -- you kind of seem to indicate that you think that there's more kind of upside potential out west in terms of client acquisition, especially with the Irvine facility. Is that -- am I reading that correctly?

Yes, that's true. We think there's a lot growth opportunity for us in the west.

We have not gotten any questions by e-mail yet. So Doug, I'll turn it back over to you to wrap us up.

Okay. Thanks, Steve. So as we end this call, I would like to recognize all 265 of the NeoGenomics team members around the country 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 Quarter 3 2012 earnings call, and let you know that our Quarter 4 2012 earnings call will be on or around Thursday, February 21 of the next year. For those of you listening that are investors or thinking about investing in NeoGenomics, we thank you for your interest in our company. Goodbye.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.