Welcome to the NeoGenomics' First Quarter 2016 Financial Results. [Operator Instructions]. It is now my pleasure to turn the conference over to your host, Mr. Douglas VanOort, please begin.

Thank you, Rob. Good morning, everyone. I would like to welcome you all to NeoGenomics' first quarter 2016 conference call and introduce you first to the NeoGenomics team that's here with us today. Joining me in our Fort Myers headquarters, we have Steve Jones, our Executive Vice President for Finance, George Cardoza, our Chief Financial Officer, Fred Weidig, our Controller and Principal Accounting Officer and Jessica King, our Manager of SEC Reporting. Also joining us here is Steve Ross, our Chief Information Officer and Mark Machulcz, our Vice President of Operations. Dr. Maher Albitar, our Chief Medical Officer and Director of Research and Development is joining us from our Irvine Lab in California. 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 facts 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.

Thank you, Steve. I'm going to comment briefly on first quarter performance. The status of our integration Clarient, growth initiatives and conclude with our expectations for the remainder of 2016. This morning's quarter one earnings press release is the first time we're reporting combined Neogenomics and Clarient results for our full quarter and we're very pleased with the company's financial performance. Revenue growth was very strong and exceeded our own expectations. Similarly adjusted EBITDA also exceeded our projections as we drove cost per test down in part because of earlier realization of Clarient acquisition synergies. Cash flow from operations was also very strong as we began to realize improvements in the Clarient billing process. Steve will describe this more fully but I'd like to give you a high level review of our performance and comment on some trends and dynamics. Revenue and volume growth were excellent. Separate industry and distinct comparisons of the old Neogenomics and the old Clarient will become less appropriate for us in the future as we integrate customers and lab systems but we still have fairly good visibility to those separate results for the first quarter. Clinical genetic testing volume growth at old Neogenomics in the first quarter was outstanding. It was up about 36% compared with last year. Perhaps just as important we were able to stabilize the Clarient volume which had been on a steady decline over the last three years. We're all pleased to report that the volume of test processed per day increased each month during quarter one. So there is good solid momentum in the business. Our new combined sales team is performing even better than we expected. We evaluated, restructured and organized the entire sales organization within three weeks of closing the Clarient acquisition. The team then had to understand…

Thanks, Doug. Before we open it up for questions, I would like to briefly touch on a few financial highlights from the quarter. We're pleased to report $59.7 million of revenue in quarter one, a 159% increase over the prior year, driven by the inclusion of Clarient in the results. Approximately $52.7 million of this revenue was derived from the core molecular and genetic testing business, $1.9 million from PathLogic and $5.1 million from biopharma and research. Consolidated gross margin was 45.5%, a 400 basis point increase from the 41.5% reported in Q1 2015. This increase in gross margin was driven by the 12.7% decrease in average cost per clinical genetic test. Gross margin in the core molecular and genetic testing business was a very strong 47.2% and PathLogic gross margin was 10.4%. Consolidated SG&A costs increased by $15.2 million or 150% from quarter-one 2015. However, as we discussed in the press release, $2.2 million of this increase was due to non-cash variable stock-based compensation and non-cash amortization of intangibles directly related to the acquisition. Importantly, SG&A as a percentage of total revenue fell to 42.3% from 43.9% in Q1 2015. Given the reduction in cost per test and the economies of scale we achieved on the cash portion of our SG&A expenses, consolidated adjusted EBITDA increased by 442% to a record $8.2 million as compared to the prior year. First quarter GAAP net loss available to common shareholders was negative $5.4 million and GAAP diluted EPS was negative $0.07 per share. This compares to GAAP net loss available to common shareholders of negative $761,000 and diluted EPS of negative $0.01 per share in Q1 2015. As we discussed in the press release and on our last earnings call, we believe that in order to compare the net income related…

[Operator Instructions]. Our first question is from Bill Bonello with Craig-Hallum. Please proceed with your question.

You were really thorough with the information, but just a couple of follow-ups. I'm wondering, first of all, are you finding that you're adding customers that are new to both NeoGenomics and Clarient, given the combined product offering? And any color you can add around that. And then, if I can, I had a couple others.

Yes, we're still adding customers, although I must say that there was some disruption in the sales team during the first quarter, as I mentioned. But we added good customers, new customers. And we stabilized the decline at Clarient which we really feel very good about. So the pipeline of opportunities is very strong. We review that rigorously. And I think we're going to see continued market share gains as we look forward now.

And on the synergy side, now that you are in it a few months, is there anything that you've discovered that -- sort of an unexpected opportunity in either cost or revenue synergy relative to what your initial plans were?

Well, I must say that we're lucky we haven't really experienced any surprises so far. I think we did a pretty good analysis and the planning was pretty good and pretty comprehensive. If anything, in each of the areas I think we're finding that we were maybe a bit conservative. For example, test send-outs. I think that's a little bit better than we thought. And we're finding through best practices, as our teams get together and work with one another, we're finding a lot of little opportunities. So we hope to mine those opportunities over time.

And then I guess the last thing is just -- obviously the test growth on the legacy core Neo business is pretty phenomenal. And you're saying that you had some sales force disruption in the quarter and you had this sort of record growth despite that. Can you give us any sense of, one, why has the growth accelerated so much over the last couple of quarters? And two, sort of the sustainability of, you know, if not this kind of growth, maybe 20%-ish plus growth?

So I think in the last quarter, we had mentioned to everyone that we had very strong pipelines at NeoGenomics and we had a number of customers that were starting. We also had made some very good progress with some large oncology groups which were very healthy and very much helped our volume growth in the first quarter and we had a fairly large customer start in/around -- beginning of February or so. So that helped. But I think that we can't expect that kind of volume growth going forward. And we would be quite pleased, I think, in the 20% area as we get the sales force fully on board and build the pipelines back and so forth. But I think we've got a very good team and we've got an opportunity to sustain that kind of growth.

There's one other sort of contributing factor. We mentioned on our last conference call that the large oncology practice that had been insourcing FISH was largely annualized at the end of Q4. So we don't have the same sort of drag on the organic volume growth that we've had throughout 2015 and so that's a contributing factor as well.

Our next question is from Amanda Murphy with William Blair. Please proceed with your question.

I just actually had a follow-up to Bill's question. I'm wondering if maybe, just given the acquisition and all the dynamics of the customers that you're adding and different types of customers that you're bringing online now -- could you just take a step back for us and just kind of review your value proposition for clients? So obviously you're becoming one of the lowest-cost providers of FISH, have a broader test menu, et cetera. You know, you also have a growing test menu that perhaps pathologists can't directly participate in terms of revenue. I'm thinking about the TC/PC split. So I think it would be helpful just to kind of reiterate how you all think about yourselves in the overall lab market.

So one of our key value propositions is that we offer the most comprehensive oncology-focused test menu, we think, anywhere potentially in the world. And so we're very much a one-stop shop for clients. And increasingly we're getting work not only from pathology groups but from hospitals, oncology groups, academic centers, research centers and others. So that's one thing. The second thing is that we're highly focused on service. So in this business, it really is about delivering consistently every single day good service to clients and when that happens, not only do you retain clients but this is a small community. Our customer survey results the other day -- we measure something call the Net Promoter Score. Many of our clients rated us very, very highly and are essentially promoters of our service. So good service leads to word-of-mouth referrals in some respects. And I think that's very important to us. So I think those are two key drivers of our value proposition. Now, pathologists use us as their laboratory. And we allow them to perform their professional interpretation of a wide range of FISH tests as well as digital pathology now and flow cytometry. And our offering in each of those areas is very, very strong. And pathologists are able to participate in the diagnostic process and be relevant to their local oncologists as a result of using us as their reference lab. So I would say those are three important value proposition drivers that is affecting our ability to grow and do well in this market.

Are you able to provide a perspective on what the breakdown is now between pathologists, hospitals, oncology groups, something to that extent?

We haven't really looked at that yet, Amanda. The systems are still separate. Clarient is still running their LIS system and billing system separate from Neo's systems. We will be integrating those later this year. And in order to give you combined statistics, we'd really need to have everything on an apples-to-apples basis. So we're going to gently demure on answering that for a few more quarters. I don't expect it will be too different from where Neo was on a stand-alone basis, though.

And then, Doug, just given your comments, then, one of the things we get asked a lot about is competition. Just given your success and the growth that you are experiencing, maybe you could address sort of how difficult would it be for existing players to develop the offering that you have and then new players as well?

Competition in our industry is fierce. There are a lot of very good, capable laboratories out there. The big laboratories, obviously, are among the best competitors, but there are a lot of others. I think what we have is difficult to replicate in many ways. One is that it's not easy to develop the comprehensive test menu that we've developed. That takes a lot of time and it takes a lot of effort. So that's not something that is easy to replicate, but there are 100 other things in this business that are difficult to replicate. It's not easy to have a world-class sales team that's really experienced. It's not easy to have laboratories that have the kind of capabilities and service levels that we have. You know, we've got a team of experienced people; they don't fall off the trees. You know, it's difficult to hire and train and develop those people. The other thing that we mentioned in the script was we have a managed care and large account portfolio of contracts that are about 175 in total. And that's something that doesn't happen very easily as well. So I'm not sure I could point to one thing. But I would say it is the cumulative number of these barriers that we've, I think, created which give us, I think, a sustainable competitive advantage.

And then just, actually, on the managed-care contract point, two questions there. One, as you integrate the two companies, anything there that is a positive or negative just in terms of, one, managed-care and Neo managed-care contracts vis-a-vis legacy Clarient's that has been helpful or hurtful? And then also just wondering how the private side of handling the FISH changes this year.

We're working very closely with the payors. I know the sales team was extremely excited when we brought them together in terms of the Clarient reps seeing the list of hospital -- you know, large purchasing groups that Doug mentioned that NeoGenomics has. So that's already been a positive in terms of them being able to go out to hospitals they had relationships with and now be in the purchasing agreement. So we're working with the managed-care plans, but I'd already say I think it's helping our volume growth in terms of -- especially the large hospital systems.

Okay. And then just last one for me on the billing side. Did you give a timing for when you expect to complete the Clarient billing conversion? I don't know if that's correct word, and then is there anything to think about over the course of that time from a modeling perspective, even in terms of revenue rec dynamics that maybe just temporal in nature?

Well, I guess I'll start with the second one. In terms of the revenue recognition, we focus a lot of energy around revenue recognition. So I really don't expect that to be a change. In terms of actually potentially picking up more cash and Doug mentioned we're working hard on Clarient's billing processes to try to get them to match NeoGenomics. We've already modified several policies and we're putting quality control and other things in place. So I do believe long term there will be an improvement there. The full billing conversion is really going to go hand-in-hand with the laboratory conversion, because as clients migrate from the Clarient laboratory system over to the NeoGenomics laboratory system, de facto, the billing conversion is going to happen at that point as well. So they're really linked together. And certainly the goal, as Doug mentioned, is to complete them by the end of the year.

Our next question is from Drew Jones with Stephens Incorporated. Please proceed with your question.

Kind of dialing into the legacy Neo growth a little bit further, is it safe to assume that there was really no headwind for you guys in terms of customers maybe insourcing some FISH tests as a result of the improving reimbursement environment there?

Yes, it's pretty safe to assume that. We had that one large customer, I think, is down to a couple hundred thousand dollar impact in Q1. And so that one has largely annualized and nobody else is insourcing FISH or has ever indicated that they are even thinking about it. I need to emphasize here that that large customer is a multibillion-dollar amalgamation of oncology practices. In fact, it's the largest independently owned oncology practice in the United States and so they have kind of scale that you would need in order to insource FISH testing. Most clients, including pathology groups, just simply don't have the scale to do that, because the equipment is expensive; the techs are very specialized and they're not easy to hire; and there is a lot of process around doing FISH. And doing multiple FISH menus, like we have over 60 different FISH probes on our menu and panels, it's very difficult to put that together. And so we don't expect to really see any additional insourcing of FISH testing.

And then, Doug, you touched on kind of re-energizing maybe the sales effort on CRO side. You added four reps. Can you tell us where, how experienced and kind of impact maybe you expect this year?

Sure. Yes. So we were very fortunate, Drew, to have added four very experienced sales reps. I think the team in our biopharma group did a very good job of servicing good people, good talent out there. And we have very strong capabilities in biopharma. So these people have a lot of experience in contracts and they were excited about our portfolio of products. And we're pretty hopeful and confident that we can re-energize the quarter-one performance was, as we said, not up to our expectations there.

And then last one for me, will you have any presence at AUA next month for NeoLAB?

Dr. Albitar, I'm not sure if you are able to answer that question and I don't know the answer.

We'll be at AUA, but I don't that we're doing anything specific for the prostate test. Go ahead.

Simply because -- remember, we're doing prospective studies. The data is not ready. We didn't present abstracts or a scientific presentation, but we're going to have our salespeople for the prostate at the meetings, talking to various urologists and getting some feedbacks on our tests and talking about our tests, but we didn't really submit scientific abstracts for this meeting because of the data. It wasn't there for the deadline for the abstract submission.

Our next question is from Raymond Myers with Benchmark. Please proceed with your question.

Let me just pick it up right there about the prostate cancer study. When do you expect to be releasing that data?

Again, this is very difficult study, because it is prospective. And it was designed to be unbiased. So not all the patients that we collected samples and tested will have the biopsy results, because performing biopsy might take longer times. So, for 2005 [indiscernible] samples, it might take us longer time; but we might do, like, early analysis of the data currently. I think hopefully within a few weeks, I can have 400 or 500 samples with data on them, so we can publish it and announce the results. But as Doug said, you know, so far we looked at 250 samples of patients that we tested and the results really look very good. And based on that we feel very comfortable with the tests. And this is why it is being offered as a clinical test. But for publications, as soon as I have about 400, 500 samples, I'm going to try to publish it as well.

So can I have a better sense of time frame there? Do you mean in a few weeks, a few months? Or can we just expect it this year?

Definitely this year.

And then moving on, Doug, there was excellent gross margin leverage exhibited in the first quarter. Can you give us a sense of how much more leverage might we expect throughout the course of 2016? Or was that leverage primarily driven by a one-time effect of the combination of the businesses?

Well, Ray, there's no one-time effect of the combination of the businesses. There's no one-timers in there. So I think the quarter-one gross margin levels should be relatively sustainable. If anything, we should realize more cost synergy as we go through the integration. Now, we mentioned that this is not going to happen overnight. We've got to combine laboratory systems; we've got to make changes in our LIS system. We've got to integrate the labs around the end of the year. And that's when we'll start to see some more significant gross margin improvement.

And then let's talk about your synergy guidance for a moment. You've increased the synergy guidance from $6 million to $8 million for 2016. And in some of your past presentations, you had given guidance for 2017 and 2018 synergies. Could you give us a sense of how the improvements that you've seen so far would directionally affect the guidance that you had given for synergies in 2017 and 2018?

Yes, they don't, really. We've just accelerated the realization. The total amount of cost synergies that we provided is still what we believe.

Our next question is from Jeff Bernstein with Cowan Prime Advisors. Please proceed with your question.

My congratulations on a good start. When you talked about the competitive moat, you didn't mention the cost per test reductions that you guys have been able to do which seems like one of the more important ones. And I know part of that is the kind of management practice, but you're also trying to bring some technology to bear there. Can you just talk about both of those?

Sure. So we're very, very focused on automation, quality and we're on a quality journey which is we're continuously improving our -- everything we do. And so we expect that our cost per test is going to continue to decline as we go through that. I didn't list that as a competitive moat because we don't really compete on price that much. We compete on service and we're not the low-priced guy in the marketplace. And we don't intend to be.

We have a question from James de Bangler with Boenning & Scattergood. Please proceed with your question.

I just was wondering if you had any kind of an idea what you think the impact of flow cytometry would be in your future revenues. Could you comment at all on that? Thank you.

Yes, we can. So flow cytometry is a very important part of our product mix. We think we've got a terrific capability in flow cytometry. We're actually adding some capability through work that we've done with the support vector machine capability that we have. But we have very high service levels. We're continuing to offer new testing ideas for flow cytometry clients. And we expect that it's going to be -- continue to be a very important part of our product mix.

Operator, we have one more analyst who's trying to get in and can't get into the queue for some reason. Is it star one is the command?

That is correct; it is star one to ask a question in the queue.

Maybe just give it a minute. I know Paul Knight is trying to get into the queue and has had some trouble.

Absolutely.

I don't have any other comments on via email questions at this point, either. So after we hear from Paul, we'll go ahead and wrap it up. I guess we will wrap it up, then. So here he is now. Operator?

Our next question is from Bill Marsh with Janney Montgomery Scott. Please proceed with your question.

This is Bill filling in for Paul. Maybe if you could, as you think about the sales volume growth, how do you think about it maybe from new tests versus existing tests? How does -- you know, you guys have been very innovative with new product rollouts. How does that help support future volume growth? Could you put some color around that?

We have not broken out new test growth from other growth. It's a little bit difficult for us to do now this early with the Clarient and NeoGenomics numbers coming together. I will say this, that the comprehensive nature of the menu is driving growth in all the testing modalities. So a client may come to us because of a unique test that we have and discover our service and then begin to use us in other testing areas. That's been a very important driver of our growth. So while individual new tests may not appear as very significant, the significance of our offering and innovation that we have is very important to our overall test growth.

And then maybe just on the cost per test reduction that we saw from core Neo declining 11% -- with Clarient now 3 to 4 months into the integration, how do you think about the opportunities there to kind of integrate practices and maybe drive similar types of test reduction pricing for their test menu? Or since it's kind of a different test profile, is it maybe not as easy?

Well, it's difficult to say what the cost per test decline will be on an individual basis, because we're combining the operations. But on a combined basis, we have internal goals that are in the 10% range this year for cost per test reduction. We think that that's doable. There are, as you point out, a lot of best practices that are available. We've got a whole laundry list of IT enhancements that can help us automate. We're on the journey for quality improvements. There are a lot of things that we're doing to improve our cost per test and that affects the combined business.

I need to emphasize something we have talked a lot about in the past. Cost per test improvements tend to be a little bit lumpy. It's not going to be a smooth trend. There are -- the areas where we unlock some synergies and we unlock some productivity gains in one quarter and might be less the next quarter and whatnot. So our internal goal is 10%. I hope that when you guys model this, don't use anything close to that. Because we really try to set expectations and meet or exceed them, not just meet them. That's a very big stretch goal and there are a lot of labs that wouldn't come anywhere close to that. I think Steve just told me I shouldn't have said that.

There are no further questions at this time. I would like to turn the call back over to Douglas VanOort for closing remarks.