Greetings and welcome to the NeoGenomics' Second Quarter 2016 Conference Call. [Operator Instructions]. And I would like to turn the call over to your host, Mr. Douglas VanOort, Chairman and CEO of NeoGenomics', Mr. VanOort you may begin.

Thank you, Tim and good morning. I would like to welcome everyone to NeoGenomics' second quarter 2016 conference call and introduce you 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, Rob our Chief Growth Officer, Steve Ross, and our Chief Information Officer. We also have 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.

Thanks, Steve. And in this mornings conference call I will make some brief comment about our second quarter performance. Update you on status of our integration, and conclude by sharing some of our plans as we look forward to the remainder of this year and into 2017. Neogenomics reported very strong financial results in quarter two. We were particularly pleased with our performance, because we are in the midst of a significant integration initiative. And our people are extremely busy with those activities. Once again revenue growth continue to be excellent driven by market share gains in our clinical business, and by strong growth in our -- in our Biopharma and research business. Adjusted EBITDA was about three times higher than last year, as a result of revenue growth and strong employee productivity. We're also pleased that our integration activities are moving forward exactly as planned. And we are on track to achieve our key integration milestone. After nearly seven months of Clarient ownership we can still say; so far so good. And now with greater visibility about the integration and the reimbursement environment for 2017. We're excited about our prospects, as we look ahead to the future. Steve will describe our financial performance in more detail in a few minutes, but I would like to give you a high level review and comment on some trends and dynamics. Revenue and volume growth dynamics in the second quarter were excellent. Clinical tests volumes in the business excluding Clarient and PathLogic grew by about 32% which exceeded our expectations. The NeoGenomics volume growth was driven mostly by new clients. Clarient tests volumes stabilized and reflect the last year. As you know new products are important for our growth and Clarient volume stabilized partly due to the recently introduced immunotherapy related testing…

Thanks, Doug. Before we open up for questions, I want to briefly touch on a few financial highlights. We're pleased to report $63.1 million of revenue, a 159% increase over the prior year and this was driven primarily by the inclusion of Clarient end results but also by strong growth in the quarter of base NeoGenomics clinical business. Approximately $54.2 million of this revenue was derived from clinical genetic testing, $2.1 million from pathologic and $6.8 million from biopharma and research. Incidentally, this will be the last quarter that we're able to breakout the base NeoGenomics growth rate separately because we are now actively migrating the clearing clients and joint accounts onto the NeoGenomics LIS System. Consolidated gross margin was 45.3%, a 90 basis point increase from the 44.4% recorded in Q2 last year. This increase in gross margin was driven by the 4.4% decrease in average cost per clinical genetic test as well as strong margin growth in the biopharma business. Consolidated SG&A cost increased by $15.6 million or 145% from quarter two last year. However as we discuss in the press release, $2.5 million of this increase was due to non-cash stock based compensation and non-cash amortization of intangibles directly related to the Clarient acquisition. Importantly, SG&A the percentage of total revenue fell to 41.8% from 44.3% in quarter two 2015. Given the reductions in cost per test in the economy for the scale we achieved on the cash portion of our SG&A expenses, consolidated adjusted EBITDA increased by 281% to a record $9.2 million. Importantly, adjusted EBITDA margin grew by 460 basis points year-over-year from 9.9% in quarter two last year to a record 14.5% this year. This levels also $1 million higher than the $8.2 million of adjusted EBITDA we recorded from Q1. Second quarter GAAP…

[Operator Instructions] Our first question comes from the line of Bill Bonello of Craig-Hallum. Please proceed with your question.

Good morning guys. Just a couple of quick questions. You covered most everything in the quarter. Just wondering any color on cross-selling activities that you can give in particular. Are you having any success yet capturing IHC revenue from Legacy Neo customers?

Good morning, Bill. Thanks for the question. We have not begun in earnest selling and cross-selling the Clarient book of business to NeoGenomics customers or vice versa except that we are getting some traction in the molecular space and in the IHC area for things like PD-L1 and PD-1. So Clarient has a very strong reputation and product offering in IHC. We're starting to take advantage of that but we've got a lot of room to grow with digital pathology products and other IHC related products with the Neo clients, and we have started selling to Clarient clients the molecular menu of NeoGenomics. I think we've got a long way to go there to grow our volume in both areas.

Perfect. And then any chance you would give us a sense of how much of the $20 million to $30 million of synergies are yet to be realized versus what's already reflected in the results?

Well we've said that we expect $68 million of synergies this year and we've also said that we expect sort of 80% of the total synergies will be cost related and another 20% or so will be revenue synergy. It's really hard to isolate what a pure synergy versus what's increase in productivity that resulted in deductions in cost per test. But I think just knowing an entry point I think probably fair to say we're approaching half of what we said we'd do for this year through the first half of this year.

Sorry, I cut you off.

Well obviously the bulk of the $20 million to $30 million is ahead of us.

Excellent, that's all we have. Thank you.

Thanks, Bill.

Our next question comes from the line of Amanda Murphy of William Blair. Please proceed with your question.

Hi, good morning. I just had a question on the comments you made about kind of where the source of the growth was for the Legacy business. I guess can you step back for a second if you think about that only as a market. How penetrated are you in that phase and can you also talk a bit about kind of underlying same store sales growth that you're seeing as well.

Sure Amanda, thanks for the question. So the growth in the base neo-business was quite wide-ranging. So it occurred in most of our geographies, it occurred in most of our product line; it was not just tech only, it was really almost every product -- the economy grew very well, molecular continue to grow very well, and I think that in terms of penetration of our tech-only products we have a long ways to go. I mean, I think we've got a good market share but this is a big, big market; as you now it is a $5.5 million market and we think that between our flow cytometry immunohistochemistry and FISH tech-only programs, we've got a very good product line and we're trying to make it better all the time and we think we can continue to penetrate accounts. Not only with that but with our comprehensive menu.

Got it, okay. Is there -- when you think about geographical sense or penetration is there particular area that you feel is underpenetrated that may see a near-term opportunity for you?

Well, I think that our opportunities are continued to be a community based, Healthcare systems but increasingly as a result of larger GEO kinds of arrangements, we're being able to penetrate these larger hospital systems are part of buying group, we're also beginning to penetrate academic centers portfolio. This is not really a geographic focus, but it's rather a type of client. So if you step back and think about the evolution of our company, we were in the past more focused on smaller community based pathology practices of hospitals, well we continue to have that as a focus, we are moving upstream and because of that graph of our menu, we're able to add value to even some very sophisticated academic centers and -- and that's you know that's where we're growing as well.

Got it. And then just a couple more, one on the I think you implied that you have not yet last declined, is that fair [ph] I decline I understood the commentary?

Our client retention is very, very strong. I don't know really of a client that we've lost as a result of integration activities. You know there are always one of cases where there have been through the last years were in the -- you lose one client for reason that they're acquires something that I don't know one client that we've lost as a result of the integration.

And so is it fair to say than -- I guess maybe reverting it, are you still maintaining -- I think you said originally $6 million in terms of a synergy? Are you still maintaining that or do you think that might still conservative?

Well, that's a sort of vague into our revenue guidance for the year overall, and clearly our sales team is distracted, I mean they've been distracted in the first quarter early, then distracted the second quarter distracted now because what we're doing is we're changing our LIS Systems and products and so you're seeing the distraction in our numbers right now. So I guess you could say that we would have had even better growth you know, had our team not been distressed. I think it's important for us to understand that we're migrating all of the Clarient clients and the joint client to use both our systems, from having to use the Clarient LIS system at all, on to a new NeoGenomics system which have been fairly significantly improved to incorporate the best functionality of Clarient had to offer. But when you're teaching clients the new system, there is a period where the sales reps needs to go talk to the pathologist and the accounts and get some problem with it and answer the questions and those are some time intensive activities that we think will be a distraction for the balance of this year, and we hope to complete this activity later in the fall maybe in November timeframe, but this is what we're entering a period where the most customer facing activities are going to occur in the less important piece of this. So what we're very bullish about the growth prospects we also need to be very focused as Doug mentioned as retaining clients first and foremost.

Yes. Okay, thanks very much.

Okay, thank you Amanda.

Our next question is from the line of Drew Jones of Stephens Inc. Please proceed with your question.

Thanks, good morning guys. A little bit more into see our growth strength in the quarter, with that legacy you know when you say pro forma growth and -- and I guess were we thinking new customers is it more FISH based, is it more like -- in flow like what you've seen with Clarient, and then could you just remind us that we have talked about it a while a little bit, what is the pricing and margin structure look like for these relationships relative to the rest of the business?

Okay, thanks for the question Drew. So I would step back for a minute and say we'd really like to buy a Pharma business. And we started to invest in NeoGenomics' a couple years ago and we believe that it's a good diversification and we are investing in it as we speak. We find the of the current business was a -- was a much more sizeable business that we have in NeoGenomics'. And we like it because it keeps us at the leading edge of innovation. We did have to refill the sales team that came with the business at the beginning of the year from Clarient and we've -- we've done that now. As you know salespeople take a little while to generate a good pipelines and forecasts, but activities going on right now. So in quarter two we did have some business that's we're able to execute, from a wide range of product lines, now that the biggest I would say was some contracts relative to immunotherapeutics, this is the PDR-1, PD-1 which is a really growing area for us in the biopharma area as it is in the clinical business. But we also had product lines like multiomics which is something I mean we've talked about in the past, which we've had some good projects and revenue activity with. But the key thing I want everyone to understand about the biopharma businesses this is a terrific business we love it, but it is a little bumpy, and I said in the comments that we had a good bump in quarter two. And we hope we have a lot of good bumps, but it is now about 10% revenue until we have more critical mass, it may be a good bump in the future as well.

So taking what you said about 2Q, you talked a little bit about distractions from the integration. Is there any reason to think that the second half of the year we would see that normal seasonal strength where that's -- that's meaningfully larger than the second -- first half of the year of the revenue.

No we don't see anything in our business that causes and -- causes us any pause. Now you know from covering us for a while that quarter three is usually a lot like quarter two, there seasonal patterns in the business, and we don't expect that those would be any different this year, but the business is strong we don't see anything that – that causes us pause. We had the benefit of having two great quarters of exceeding guidance, and you know we like to exceed guidance.

Okay. And the last question from me, I believe as far the guidance is concerned you got to say it was about 50% of your commercial payers would -- would eventually follow-up and the FISH remarked increase this year, where do we stand on that front?

We said that that was a long term exercise, I mean commercial payers do not move very quickly when it's upto their disfavorite you would. So initially many of our contracts, particularly, the Medicare advantage plan, and there is directly tied to the Medicare rates, those we said immediately but some of the others particularly perhaps in the BlueCross world were actually having to talk to one of the time. I think right now it is happening a lot as we expected, but it still take time.

Thank you.

Our next question comes from the line of Bill Marsh of Janney Montgomery. Please proceed with your question.

Hi, congratulations on the quarter. Where you think the CMS is on their view of codes, usually have a pretty good run away for the next 12 months that -- Is this I think you mentioned 2% kind of normalized growth. Something that's visible beyond this year?

Yes. so we actually think that everybody should just assume modest price decreases every year, even though we think we're entering into a period of relative price stability, the 2% increase on a pro forma basis with average revenue per test this year is being driven by the pretty pronounced increase in FISH testing that they put through in 2016 and they increase the technical component of FISH, 87% this year to fix an error that they made in 2015. And so I don't think you are going to see many 87% increases moving forward basis. We are expecting a 19.3% cut in the technical component of flow next year and we are actually expecting another 19.3% cut in flow cytometry and 2018 as well. But when you look at our reimbursement levels for flow cytometry, the commercial players and even the hospitals are well below the CMS levels and one can argue that Medicare probably should reduce the flow cytometry reimbursement if they want to be consistent with where the commercial players which is where Medicare wants to go. We would never like to see that of course, but we are prepared to deal with it as it comes and given that Medicare is only 16% of our overall paramex, it doesn't have anywhere near the impact on us that it used to have when Medicare was 57% of our paramex 6 or 7 years ago.

And then you have mentioned LIMS in the California lab build out of past initiatives of building margin visibility of next year, what are the other pieces of low hanging fruit that you see safe?

Yes, this is Doug, let me try that, address that so, we made a lot of changes to our LIS system and I must say our team did a great job. I think we have a very good IT system now which we are migrating clients to and just having all of our clients on one single LIS system and one single billing system and one single offering is going to allow us to be a lot more efficient. Now, in addition when we put the LIS together, there was going to be a lot of efficiencies, and even though we are growing we think we can manage the change to our employment base through attrition and good growth, I think we need a lot of cost reductions. But in addition to those things, there's areas like supplies, savings so having a much bigger critical mass allows us to work with suppliers who try to get the best prices and the best processes for procurement systems. I think that is a huge opportunity but when we are able to have everything under one roof and a couple of big labs we are going to be able to leverage the best practices and the cost for test reductions that Steve mentioned that we have been enjoying and trying to generate for years, we are going to have that ability when we are all together to start doing that same thing again. But it's going to take a while. We are going to have the labs integrated and everything in the same systems and that will happen this year.

Thank you, Doug.

Thank you, Bill.

Our next question comes from the line of Raymond Myers of Benchmark. Please proceed with your question.

Thank you, my first question is for Doug. Doug you talked about the reduction in costs for tests despite an increase in temporary inefficiencies for the validation work involved in integration process, can you give us some sense of modifying how much of these inefficiencies were felt in Q2 and give us some sense of when you feel that those costs would be complete?

Yes, thanks Ray, it's a good question. So let me first explain what we are doing with this activity so for supplies usage what we are doing is find ahead certain prophecies and certain supplies and cash and Neogenomics has certain prophecies and cash and now we are creating one centralized way to do this and so when we move to one single way to process these tests, we get to revalidate as a part of our quality process all of these new tests using new supplies and we are just burning reagents and burning time and we are generally inefficient local supplies usage and people productivity during the timeframe. Now, I am not sure I should quantify this for you but this activity should be carrying of August by the timeframe and we should be pretty much fully done with this activity in the third quarter so I think we should start to see some benefits of that reduction in excess validation and integration related inefficiencies starting here in the third quarter.

Okay, thanks that helps. And one thing as you go through your remarks is that results were very good can you discuss how business was able to grow despite all this integration work?

Well, yes thanks for that Ray but we have a really good team. I think our sales team is terrific. Our medical team is terrific. Everyone in our company is focused on growth and doing the right thing for clients. And unfortunately I think quality and service do matter in our business and I think we have good quality and service and there is a lot of word to mouth that goes on in our business and we are certainly getting the benefits of that in terms of market share gains and we are trying to keep our heads down and do the right thing for patients and clients.

And, is this something that you think can continue that wasn't just a one quarter thing, this trend of organic growth that continued even through this LIS integration you would anticipate over the next several months?

Well, Ray what we said was that we expected a distraction because lot of the things we have talked about here. Now we have been fortunate that in quarter one and quarter two the distraction maybe wasn't as significant as we expected but we were cautious. We wanted to make sure people know that we are integrating but we think that same kind of dynamic that has occurred over the past has allowed us to gain market share, will continue.

Okay, well that's great and then let me connect with this question. It's the one I get the most from investors, either in the story or new to the story when they ask about the risks of the LIS integration that's probably the factor that concerns them the most. What can you say to alleviate concerns that when you convert to the new information systems, you are not going to uncover or encounter issues and problems?

Well, I could say this that we have already made the changes. Most of the changes in our LIS systems, we have already migrated the first wave of clients and so far so good.

Yes, I would also add that Clarient uses a very similar LIS system in fact, the original kernel of the Clarient system was the same original kernel from Neogenomics and we diverged from the vendor that we were using four or five years ago. They diverged two to three years ago. The look and feel of the system was very similar between the two and so, the amount of client re-education work is sort of more of intuitive camp, it's not something that they are going to have to call customer service and say how do I do this? It's something they should be able to figure out pretty readily.

Okay, great thank you very much.

Okay, thank you.

[Operator Instructions] Our next question comes from the line of Chris Lewis of ROTH Capital. Please proceed with your question.

Hey guys, thanks for taking the questions. I wanted to follow up on some of the LIS migration. Just a couple of things. When id the migration began and I know it's early but do you have any early feel from the clients who have been converted over in terms of the reception, thus far and when do you expect that to be completed?

Okay, Chris one thing I want to make sure everyone understands is we are not moving to a brand new system that's untested. We are moving to a system that we have been using at Neogenomics for a long time. I mean the system has been revised but it's fundamentally the same system. So the risk is not by moving everything to a brand new system, that's not been time-tested. That's the first thing. Funny thing is the bulk of the changes to allow for the wave of migration has been completed about six weeks ago and so now we are going to migrate the company's Clarients clients in waves, we have a series of those and we have about completed the first wave which we spent a little bit more time on to allow for us to make sure that we are doing the right thing and getting the clients feedback which we are serving clients as well as getting real-time feedback. So far it has gone very well. Robert Shovlin is here who is our Chief Growth Officer, so I will ask Rob if he wants to make any comment. But overall the migration has gone, it is going well and we've got six or seven waves ahead of us to migrate over the next couple of months. Rob, do you have any?

Yes, I would add that it's a very deliberate process. We did a lot of planning and testing, preparing for wave one and we did a lot of communicating. So as we rolled out wave one with changes that had been implemented as I've said weeks before, it's been a very deliberate measured process, so we've gotten some client feedback and then most of it is just some things are slightly different so you have to answer questions for changes. But it's not something that's drastically new as Doug and Steve pointed out. So the process is going very smoothly and we've learned some things in wave one that we'll apply to future waves and we should be complete over the next few months.

Great, I appreciate the color, and then switching over to the lab consolidation. I guess can you just elaborate on how that process is going? What are the key milestones that we should look for over the remainder of this year? And I believe you kind of targeted end of year for that consolidation to be completed, are you still on track for that? Thanks.

Yes, Chris, thanks for the question. Yes, we are on track. Right now what we're doing is we are renovating the Aliso Viejo laboratory. We're making a lot changes to it. During this process it's a bit of a choreography because we're moving some departments to Irvine, we're consolidating some testing in Irvine in anticipation to moving it back to Aliso Viejo. So there are a lot of moving parts on this one but it's really just construction. We're fortunate that the Irvine and Aliso Viejo labs are eight miles apart. So we're bringing up the road moving specimens back and forth a bit and will so for the next few months. But the construction is going just as planned. We are going to have one heck of nice looking lab in Aliso Viejo once we're done and that ought to be around the end of the year.

Great, and then can you quantify just the amount of cost savings you expect from the impact of that consolidation in 2017?

Well, the total cost savings, we said, I guess I'm going to our script here on this one. So we've got $20 million to $30 million of general synergies, the bulk of which are cost savings. The bulk of those will happen in 2017.

Understood.

The facilities opportunity is not anywhere near in sight as the reduction in cost per test opportunity comes just more scaling, having people operate on the same platform.

Great, okay, thanks for the time.

Okay, thanks, Chris.

Our next question comes from the line of Scott Billeadeau of Walrus Partners. Scott. Please proceed with your question.

Thanks for taking mine, most of mine have been answered. I guess just one question, anything new with your partner GE and what their status is?

I can tell that we have a representative from GE Healthcare Life Sciences serving on our board is terrific. We have had great cooperation and support and encouragement from the people at GE. We are moving off of we call it the transition services agreement, TSAs, so we're moving off of the support for IT systems and other things that GE provided us during this transition period, and by the way we're going to save some money as we complete the transition away from this TSA agreements. But that has been terrific. GE has been really really supportive of us. They've helped us and are helping us to open doors and in the healthcare community, and we're really appreciative of their ownership.

Great, and then most of my questions were asked were already answered. Good quarter, guys. Thanks so much.

Okay, thanks, Scott.

We have one follow up question from the line of Raymond Myers. Please proceed with your question.

Yes, thanks for taking the follow up. I just wanted to touch on the tax rate. Can you give us a sense of what the normalized tax rate is likely to be over the next several quarters or years as you become hopefully increasingly profitable?

Keep in mind our book tax rate will be between 45% to 50%. However right now we are not a cash taxpayer except for various state. We still have an NOL and we're not a cash taxpayer at the federal level yet. However for book tax you will continue to see about 45% to 50%, majority of which will affect [ph] our different tax balance.

And would that stay at that rate as you become more profitable in the years to come or is that fixed to some other factor?

No it will stay on that range. We expect 45% to 50% to be a range moving forward.

Unless the administration lowers business tax which is a lot to talk about.

Assuming it all stays the same in Washington which is a good wild card, and that's a combined state, local, federal tax.

Okay, we have one question that came in over at e-mail related to the comments about with having a vision to be the leading cancer testing and information company in the world, and asking if we had any plans to grow internationally. The answer is yes, we do. And what we will do is try to grow internationally first in our biopharma and research area. We think that our pharmaceutical clients would enjoy very much having us have a worldwide capability to perform clinical trials not just in the U.S. but outside the U.S. as well. Many of them have asked us to do that, and we will likely grow our footprint outside the U.S. first in that area.

We have one other question here to address the preferred stock and what our plans to take that out. Under the terms of our agreement with General Electric Corporation, we can review the preferred stock at any time over its tenure like we've been given ample incentives to do that sooner rather than later. As we've discussed before, the peak interest rate is 0% this year and then it goes up to 4% in years three to four, and then it increases 1% a year [00:52:41.14]. And in addition to that they gave us a $10 million discount if we take it out this year which reduces to $7.5 million next year and then $2.5 million the year after. The way we think about our opportunity with the preferred stock is that we definitely think that it is in the interest of our shareholders to take that out at an appropriate point in time. Factors that we'll consider when doing that is how much bank debt should we use to take it out versus how much of an equity instrument. Keep in mind the Company is actually generating quite a bit of quarterly cash flow from operations and so our debt capacity is going up. Other things to keep in mind are what's going on with the overall market. The markets have been extremely volatile in recent history. In fact the discount rates that follow on offerings are being priced materially higher this year than they were last year. And so we look at all these things and there's a lot that goes into a decision like this. But I think from our perspective we don't really feel like we have to take out the preferred stock and in great hurry. We view that just a 3% difference in discount rate would more than offset the incremental discount that we get from GE this year. And so from our perspective we want to time it so when we can maximize bank debt and maximize the market receptivity of the offering. And I expect we'll do something in the next three years but we don't have any definitive plans at this point in time. And keep in mind when we do do this we're likely going to remove 14.7 million shares of preferred stock with something significantly less. So we think we have the opportunity on a per share basis to have whatever take on would be actually acuitive, if we took this out with seven, eight, nine million shares of common stock and some bank debt, that would be a very good thing for all the per share metrics moving forward.

Okay, we don't have any further questions that haven't already been addressed. So Doug, I'll turn it over to you to wrap this up.

Okay, thanks, Steve. So as we end the call I want to take time to recognize the approximately 925 NeoGenomics team members around the country for their dedication and commitment to building a world-class cancer genetics assessing program, and on behalf of our NeoGenomics Team, I want to thank you all for your time in joining us this morning for our second quarter, 2016 conference call. We want to let you know that our third quarter, 2016 earnings call will be held on or around October 25, 2016. And for those who are listening that are investors or are considering an investment in NeoGenomics, we thank you very much for your interest in our company. Goodbye.

This concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time.